Historical Events that Have Shaped Development of Accounting, Public Interest Theories - Essay Example

ACCOUNTING THEORY ASSIGNMENT By Student’s Name Code + Course Name Professor’s Name University Cite, State Date Part A: Accounting Theories In the course of evaluating numerous corporate social responsibilities, there has been research conducted on a given number of theoretical frameworks like legitimacy, stakeholder, and institutional theory. Legitimacy and stakeholder theories are the mostly used accounting theories in the course of evaluating CSR-based activities. Legitimacy Theory A substantial number of corporate social responsibilities have adopted this theory in order to examine the existing conceptual frameworks. The theory represents a social form of contract to the numerous undertakings of an organisation (Unegbu, 2014). A company is entrusted with consumption of community-based resources whenever the overall society perceives it as being legitimate in executing its activities. The theory ascertains that in the event that a particular society notes an organisation’s operations as being illegitimate, then it reacts in a speedy way to threaten the organisation’s social contract to continue with its daily activities (Unegbu, 2014). This is done in numerous ways including customers boycotting the purchase of products and services offered by the business, factor suppliers withholding their capacities to provide labour and any form of financial services to the business and even stakeholders directing the government to impose more taxes on a business. This accounting theory operates on the assumption that management team will always formulate and implement strategies that conforms’ to the overall societal expectations (Unegbu, 2014). Thus, it is established that legitimacy theory avails a potentially effective theoretical framework needed for evaluation of the underlying relationship between numerous company’s characteristics and their immediate CSR disclosures. Stakeholder Theory The theory has been used to examine the goals of a given organisation, with the fundamental objective being the balancing of possible conflicting interests of numerous stakeholders (Unegbu, 2014). Considering that a firm will always rely on the support of external stakeholders, these stakeholders are bound to demand certain favours from these organisations. The theory ascertains that a firm will be sure of a going concern in case its managers are able to assess and balance conflicting demands of numerous stakeholders as a way of attaining a company’s overall goals (Unegbu, 2014). In particular, it is established that the future prolonged survival of a firm will depend on the immediate support offered by the stakeholders at hand. Following this line of reasoning, it is the dependence of the firm on its immediate external stakeholders for resources that allow these stakeholders authority over a firm and the entire organisation’s behaviour. Some other forms of positive accounting theories that are emerge from positive economics to examine possible market failures and the need for accounting regulation are discussed below; Public Interest Theories The proponents of this theory perceive its focus as being the accomplishment of specific publicly desired outcomes which, in the event that they are left to the market cannot be easily accessed (Unegbu, 2014). The underlying regulation is availed in regards to the numerous responses made to require the public for possible rectifications to all inefficient and inequitable markets. In essence, the theory pursues a regulatory framework that is aimed at pursuing public interest rather than focusing on private interest related goals (Unegbu, 2014). With this theory, attention is pointed towards the regulators in order to determine whether they can act in a disinterested way or that they are sufficiently competent. On the contrary, opponents of this theory argue that it overlooks the possible effects of economic and political power influences on accounting regulation. The Economic Theory of Regulation/ Capture / Private Interest Theory It is a positive economic theory developed by Stigler in order to avail a certain theoretical platforms for earlier perceptions attributed to political theory that regulatory bodies are captured by manufacturers within the economy (Gaffikin, 2005). Since it is a positive theory, it acts on the assumption that regulators, who are mostly political figures, are in action to maximise utility functions. Given that the utility is never specified it will be perceived as focusing on securing and sustaining possible political powers (Gaffikin, 2005). In order to achieve this, these political actors will be in dire need of votes and money, which are resources that can be accessed by groups positively affected by their regulatory formulations. A Criterion for Testing Accounting Theory Validity/Soundness In order to ascertain whether a theory appears sound, I would apply a deductive model or approach. By using this technique, I will be able to comprehend what different stakeholders would like to know in a present net worth of a given company. In fact, through the deductive model, it will be easier to understand that creditors need accounting information because it helps them achieve confidence on whether a given company will repay its loans or not. On the other hand, stockholders will have a different need since they are likely to compare their possessions in a company in relation to other entities while managers require this information to understand whether or not an entity has made profits or losses. A deductive approach develops theory testing from basic elements as propositions, premises and its immediate assumptions that results to underlying accounting principles and logical conclusions about a given subject. It is an efficient criterion because end outcomes are always tested to find out whether they are acceptable in real life scenarios. A perfect example of accounting practice derived from deductive model is the popular historical cost accounting. Applying Deductive Model to Stakeholder’s Theory By using a deductive approach, it is easier to comprehend the fact that managers put more efforts to ensure all conflicting demands are examined and solved to fit in with the company’s overall goals and objectives. For instance, in evaluating the information gathered after public annual report disclosures, the management might use a deductive approach to establish the different need propositions of each involved stakeholder (Gaffikin, 2005). For instance, the model should be used to deduce whether the information serves the need of managers in identifying whether the firm has made profits or losses, whether creditors are able to discern if they can be repaid of their dues and even if the information can be used by potential investors to invest with the firm or not. The model should be able to ascertain that the financial statements can only serve the aforementioned information needs in case they can report present economic values (Gaffikin, 2005). Most importantly, the present economic values of these needs should be estimated in relation to the current replacement costs of certain assets. Part B a) Historical Events that Have Shaped Development of Accounting i) The Charge and Discharge Accounting Period This period is reflected by the early Greeks and Roman accounts, which were entirely maintained under a charge and discharge principle. This principle is likely comparable to today’s receipt and payment accounts (Unegbu, 2014). During this period, the feudal socio-economic systems demanded that there will be lots of surplus but failed measure its efficiency. This accounting development era is important because it showcased the ability of accounting systems to distinguish elements of honesty of different level of officials in both a stratified and regulated environment (Unegbu, 2014). It also facilitated the development of the double-entry bookkeeping era. ii) The Corollary of Double Entry This significant accounting development emanated from Europe. It occurred in Italy in the period between the 13th and 14th centuries because of the inadequacy developed by single entry system (Unegbu, 2014). The single entry system had failed in its capacity to ensure effective internal control systems, security of assets, revenues determination and, also the ability to separate matters related to private ownership and business functionality. In consequence, the single entry system had failed to provide a platform efficient enough to uphold changes related to sizes and nature of business organisations including all methods attributed to accounting for depreciation (Unegbu, 2014). The development of double entry system helped merchants to comprehend differences resulting in both positive and negative entries and increases or decreases in assets and liabilities. Developers of this accounting era wanted to ensure that each and every transaction had equal and opposite reactions. iii) Regional Grouping Associations This is a recent development in accounting that facilitated the creation and implementation of most of accounting principles. These accounting principles were developed in relation to a group’s culture, religion as well as socio-economic environment (Unegbu, 2014). The era is important because it allowed integration of the accounting principles into International Accounting Standards Committee work plans (Unegbu, 2014). It is important to note that the model allowed for determination and comparability of aspects of profits, revenues and liabilities on an international platform (Unegbu, 2014). Nowadays, the accounting agencies engage in regulation and ensuring compliance to the application of generally accepted accounting principles (GAAPs). iv) Consultative Committee of Accounting Bodies The agency structure that emanated from the accounting profession resulted to the creation and integration of numerous accounting bodies in mid 1960s. By the start of 1970s, the ICAEW had formed ASSC, which is today known as the Accounting Standards Committee (ASC). Other bodies that followed suit include; the SEC and FRSB (Unegbu, 2014). This accounting development era is perceived to be important because it oversaw the delegation of responsibilities of reviewing standards on financial accounting and reporting in order to public consultative documents necessary for sustaining current accounting standards (Unegbu, 2014). It facilitated the process of easier consultation since finance representatives were all kept in the loop of the developments in place. Thus, this development era led to a uniformised accounting standards and practices across the world. v) The Use of Exposure Draft and Letter of Intent This period of accounting development resulted to numerous professional agencies and users of financial information across the globe to engage in the analysis of accounting implication and thereafter, adopt a uniformised position prior to publication of GAAPs (Unegbu, 2014). It was a period that facilitated the accounting concepts related to uniformity, comparability and convertibility of financial statements in different foreign currencies. b) Socially- Constructed Accounting Nowadays, accounting is deemed to be socially constructed as opposed to socially constructing in nature. A socially constructed accounting history means that any developments in accounting emanates from aspects of social, economic and political events (Guttmann, 2013). There are number of reasons that can be given for this line of argument. First, it can be established that the aspect of stewardship was meant to predate the generation of accounts by more than thousands of years (Guttmann, 2013). Initially, this was objective was focused on only attaining elements of honesty and integrity. Secondly, the earliest uses of accounting information have now been transformed into the management accounting settings. Thus, accounting can be classified as being related to internal control mechanisms. Since in the early days accounting was entirely focused on stewardship, it can be perceived that these early times both stewardship and management accounting were interlinked (Guttmann, 2013). The recent development of the double entry accounting system reflects the perfect example of socially constructed historical perspective of accounting. Thirdly, the socially constructed historical perspective of current accounting is fairly manifested in the separation of ownership and management that allowed creation of financial accounts and computation of profits altogether (Guttmann, 2013). c) Other Alternative Perspectives First, there is a presentation and development of algebraic model to the study of early accounting. The model uses an evaluation technique in describing single entities in relation to terms of abstract algebraic objects like automata (Miller & Power, 2013). The perspective focuses on processess adopted of generating information from informational data availed through the existing environment by way of double entry system (Miller & Power, 2013). Personally, i do not agree with this perspective because it has not been fairly emphasised in research studies conducted earlier hence it has little or no validity. Secondly, there has been research ascertaining that accounting resulted through natural language approaches. Formal languages were used to define accounting concepts and terminologies (Miller & Power, 2013). This perspective lacks credibility since little research has been found relating to its views. Thirdly, accounting is deemed to be socially constructing in nature since because of its immediate power, it can influence immediate developments made by the society at large. References List Guttmann, I 2013, 'Discussion of On the Stewardship and Valuation Implications of Accrual Accounting Systems', Journal of Accounting Research, 51, 2, pp. 335-347. Gaffikin, M.2005. Regulation as accounting theory. Faculty of Business-Accounting & Finance Working Papers. University of Wollongong. Miller, P, & Power, M 2013, 'Accounting, Organizing, and Economizing: Connecting Accounting Research and Organization Theory', Academy Of Management Annals, 7, 1, pp. 557-605. Unegbu, A.O. 2014. Theories of accounting: Evolution & Developments, income-determination and diversities in use. Research Journal of Finance and Accounting, 5.19, pp. 1-15. Read More