Views Regarding the Regulation of Accounting Information - Assignment Example

Accounting Information Name Tutor Course Date Question 1 Views Regarding the Regulation of Accounting Information The fundamentals of free market economy are basically defined by a system in which the costs of purchasing goods and services and services are freely set by the consent of the sellers and buyers. Similarly, the regulations that govern supply and demand have limited or no government control. The free-market accounting perspective regards accounting information as other goods. This implies that the accounting information is viewed as an economic good and optimal production whereby the demand and supply are the determining factors in the marketplace. In other words, such market forces are perceived to have the potential of ensuring optimal disclosure. These aspects raise questions over the need for accounting regulations. Gaffikin (2006) argues that the rationale behind the free-market accounting perspective is that there are private economics based, on incentives that can provide organizations with platforms that which enhance provision of credible information about its operations and performance to external parties even without regulatory systems. In this perspective, regulations are only considered the restrictive to the employed accounting methods. In this instance, it is argued that regulations restrict or bar organization from using the accounting methods which they believe reflect a given position or performance efficiently. Generally, accounting tries to provide a theoretical framework that aim at resolving issues regarding recording and reporting of information (Ma 1997). Essentially, it is often perceived that financial statement must represent a true and fair view of the information and be congruent with the generally accepted principles of accounting. According to Rudzioniene (2010), true and fairness is concept in which true implies that the information that is presented in the financial accounting has been quantified and communicated in a way that tallies with the events, transactions and activities on the market which it intends to represent. The aspect of fairness on the other hand implies that the information has been measured and disclosed in a way that is objective and not marred by prejudice to any specific sectional parties that have the interest in the company. The objective of financial reporting is essentially to avail information about financial position and the financial performance of the reporting company which is useful to various users in making economic decisions. The Institute of Chartered Financial Accountants (2011) point out that a complete financial statement contains information regarding the financial position of a company s recorded on the balance sheets, financial performance which is also the income statement, statement of changes in equity, statement of changes in financial position which basically regards the statements of cash flow and finally the notes on financial statements. The free-market perspective is based on agency theory. The agency advances the relationship between the agents and principles whereby the principles entrust their wealth to be managed by the agents. The information is therefore supplied by the agents who mainly constitute the management of the principles who are the stakeholders. The accounting information is provided to serve two common purposes which include the supervising the behaviors of the agents and to compel the agents to act in the best interest of the agents. This perception is however challenged by the fact that firms enjoy monopolistic supply of the information about themselves. As a result, they are likely to under-produce and sell at high prices. Pro-regulation perspective The perception of the anti-regulation dictates that the desired information about an organization can only be availed to any individual after they have paid for it, and the forces of demand and supply must operate to ensure optimum production of information. The pro-market approach regards the accounting information as the public good. In this instance, once the accounting information is made available, people can access, utilize and share it with other users without incurring any costs. Such persons who use the information without paying any price are referred to as free-raiders. The incentive to supply the information is often decreased, an aspect which results in underproduction of information. It is worth to observe that this perception disorients the functionality of the price system. For instance, the fact that other people can use the information without paying for it tempers with pricing system. Eventually, this is likely to course market failure. In addition, compared to other products, private consumption by a single individual does not necessarily result in a destruction of the information, unlike other goods. This aspect of pro-regulatory perspective further induces market failure. From a critical perspective, the pro-regulation perspective enhances creation of a level playing field. The same information can be accessed by everybody (McAuley, 2005). Question 2 Comparing and Contrasting Organizational Legitimacy and Stakeholder Theory The social accounting entails the processes of communicating the financial, social and environmental effects of the actions of an organization in the societies in which they operate. In essence, social accounting is basically the social and environmental accounting, corporate social responsibility reporting, corporate finance reporting, sustainability accounting, non-finance accounting and employee reporting. Social accounting is often used to ensure accountability in the manner in which companies or business entities execute their corporate social responsibilities (CSR). It puts a lot of emphasis on the notion of corporate responsibilities. For this reason, it can be viewed as term that widely covers a broad field of research and practice. According to Grey (2006), social and environmental accounting is generally taken to present the specific range of issues or reporting to various stakeholders. Organizational legitimacy and stakeholder theory are some of the prevalent theories that can be used to evaluate the social and environmental accounting. Both theories differ significantly. Foremost, by definition both theories have parallel frameworks and are governed by different parameters. Legitimacy theory has gained a lot of significance in the field of social and environmental accounting. Tiling (2004) observes that legitimacy refers to the generalized perception of the which views that action of an organization is proper, desirable, appropriate and in line with established norms, beliefs, values and definitions of socially constructed system. This implies that the theory of organizational legitimacy point out that entities consistently seek to operate within the bounds and norms of the societies in which they are operating. In other words, the theory asserts that companies persistently try to ensure that they have a positive image in their respective societies in which they are viewed by the external parties as legitimate. Stakeholder theory has a totally different context. While the legitimacy theory is concerned with keeping the positive image of a company, the stakeholder theory is majorly concerned with morals and values that govern the operations within the internal environment. Stakeholder theory is the theory of organizational management which is basically concerned with moral and values in the management of organizations. The stakeholder theory outlines mechanisms through which the management of an entity can fully act in the interest of the stakeholders in a given business (Suchman, 1995). This theory is defined by two aspects which include providing equal rights and ensuring fair treatment of all the stakeholders and addressing the state at which the corporate management attains the expectation of the highly powerful stakeholders. This is where the big difference between the two theirs rests. The stakeholder theory is more organizational centered while the legitimacy theory depends upon the notion that there is a significant social contract between an organization and the society in which it operates in. Suchman (1995) describes legitimacy theory employ communication strategies to inform or educate the relevant societies concerning the changes within the organization and to alter the perception of the public. Similarly, it serves the function of deflecting the attention of the public from the contingent issues to other issues. The theory of stakeholder, on the other hand, serves as a communication tool to relay information about the performance of the company to the investors. Despite the differences, both theories compare significantly. It is noteworthy to observe that the legitimacy theory revolves around the contribution of accountants on the issues of corporate social responsibilities. The frameworks of the theory are characterized by the responsibility and accountability of an organization in all action they undertake and which affect the societies they operate in. The theory of the stakeholders is an extension of the legitimacy theory to include both the society at large and the stakeholders. Therefore, both theories are overlapping perspective of corporate social responsibility. Deegan (2006) argues that stakeholders demand different kinds of information from the firms. This aspect compels the managers to respond in various ways. According to Grey et al. (1996), stakeholders compete for information from firms thus forcing the researchers to consider management of stakeholders as the force behind activities of corporate social responsibilities. In addition, both theories rely on communication to maintain legitimacy either in the eyes of the public or the eyes of the stakeholders. Deficiencies of organizational legitimacy and stakeholder theory in explaining the practice of social and environmental Both theories are disadvantaged by a number of setbacks. For instance, considering the stakeholder theory, the stakeholders of a business company are in most cases diverse. This poses one of the critical challenges and perhaps limits the efficacy of stakeholder theory as a mechanism of evaluating social and environmental accounting. In this case, pleasing the large number of the stakeholders simultaneously is impossible. For instance, one stakeholder may vest interest in the success of an organization. It therefore becomes very difficult for the management to impress the stakeholders who have opposing interests. In addition, this challenge also applies to the stakeholders who have interests that vary slightly. In this case, dissatisfaction may arise between with the contentious issues associated with high costs and returns on investments. Another limitation of stakeholder theory is its inability to determine result and decisions the entire times. Not all groups of stakeholders yield equal influence over the overall decisions taken by the company McGew, M. (2011). Barkemeyer (2007) points out that the organizational legitimacy theory has two significant shortcomings that limit its contribution towards development of CSR. One of the challenges is associated with biasness. For example, an international organization that is orating in remote societies outside their countries is often concerned with gaining legitimacy from the primary stakeholders based in the home country. This aspect creates biasness towards the short-term projects with high visibility as opposed to creating long-term capacity building initiatives. The other limitation of the organizational legitimacy theory is the different perception that is accorded to legitimacy in home country and the host country. This enhances misunderstanding of the kinds of initiatives that would be considered appropriate in the host country. Ultimately, misallocation of resources is likely to occur. List of Reference Antheaume, N. (2007), “Full Cost Accounting. Adam Smith Meets Rachel Carson?” In Unerman, J., Bebbington, J. and O’Dwyer, B. (Eds.), Sustainability Accounting and Accountability, Routledge, London. Barkemeye, R. (2007). Legitimacy as a Key Driver and Determinant of CSR in Developing Countries Retrieved on March 24, 2015, from http://www.2007amsterdamconference.org/Downloads/07SummerSchool%20- %20Barkemeyer.pdf Deegan, C. (2002), “The Legitimising Effect of Social and Environmental Disclosures – A Theoretical Foundation”, Accounting, Auditing and Accountability Journal, (15) 3, 282– 311. Freeman, R.E (2010). Strategic Management: A Stakeholder Approach, New York, Cambridge University Press. Gaffikin, M. (2006). Regulation: Standardizing Accounting Practice, Retrieved on March 24, 2015, from http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1037&context=accfinwp Gray, R. (2006).Social and Environmental Accounting and Reporting: From Ridicule to Revolution? From Hope to Hubris? - A Personal Review of the Field. Retrieved on March 24, 2015, from https://www.st-andrews.ac.uk/media/csear/discussion- papers/CSEAR_dps-socenv-hopehubris.pdf Gray, R., Walters, D., Bebbington, J., and Thomson, I. (1995b), “The Greening of Enterprise: An Exploration of the (Non) Role of Environmental Accounting and Environmental Accountants In Organizational Change”, Critical Perspectives On Accounting, Vol. 6, No. 3, pp. 211–239. Ma, R. (1997). Financial Reporting in the Pacific Asia, London, RegionWorld Scientific. McAuley, S. (2005). Accounting Financial Accounting Regulations, Social Accounting and Principles of Auditing, Retrieved on March 24, 2015, from http://www.educationscotland.gov.uk/Images/accountingah_tcm4-193223.pdf McGew, M. (2011). Limitations of Stakeholders. Retrieved on March 24, 2015, from http://smallbusiness.chron.com/limitations-stakeholders-30965.html Rudzioniene, K. (2010). The ‘True and Fair View’ Concept in Lithuanian Accounting Regulation’, Social sciences / Socialiniai Mokslai, 1 (67), 42-48. Suchman, M. C. (1995) “Managing Legitimacy: Strategic and Institutional Approaches”, Academy of Management Journal, 20(3), 571-610. The institute of Chartered Accountants. (2011). Conceptual and regulatory framework, Retrieved on March 24, 2015, from http://financial.kaplan.co.uk/documents/icaew/financial_accounting_chapter_1.pdf Tilling, M.V. (2004). Refinements to Legitimacy Theory in Social and Environmental Accounting, Retrieved on March 24, 2015, from http://www.flinders.edu.au/sabs/business-files/research/papers/2004/04-6.pdf Tilt, C.A. (2007), “External Stakeholders’ Perspectives on Sustainability Reporting”, In Unerman, J., Bebbington, J., and O’Dwyer, B. (Eds.), Sustainability Accounting and Accountability, Routledge, New York. Read More