Contemporary Issues in Accounting Theory - Example

Contemporary Issues in Accounting Theory Name Course Name and Code Instructor’s Name Date Voluntary disclosure Voluntary disclosure can be defined as an accounting process whereby a company’s management provides information that goes beyond normal financial requirements (Zechman, 2008). Some of the normal financial requirements include Securities and Exchange Commission directives and accounting principles. However, the company’s management may provide additional information that it deems important for the relevant decision making of stakeholders who utilize the company’s annual reports. Voluntary disclosure has become an important requirement and many companies have identified it as an important field in financial reporting research (Ling, 2007). Some of the information that can be termed as voluntary disclosures may include nonfinancial information e.g. social responsibilities, strategic information e.g., company strategy and characteristics, and financial data e.g. stock price. The increase in number of companies presenting their voluntary disclosures illustrates there are additional benefits associated with the process. The Three Theories In fulfilling organisation requirements and especially those involving numerous stakeholders, some theories are important in determining the approach in which tasks can be accomplished. Some of these theories are accountability, legitimacy and stakeholder: Accountability theories – the theory states that it is the obligation of a company or individual to account for activities, be responsible for the outcome of the responsibilities and to disclose any information in a transparent manner (Zechman, 2008). It also includes responsibility for entrusted properties or even money. Legitimacy theory – Legitimacy theory states that companies should continually aim to operate within the norms and bounds of their specific societies and they should be viewed as “legitimate”. The theory relies on the idea that, there is a ‘social contract’ between the company in question and the society in which the company operates. This means the society has both explicit and implicit expectation from the company (Zechman, 2008). In addition, the theory states that the company must not consider the rights only of the stakeholders but also to the public at large. If the company cannot comply or maintain these social expectations, the society may institute sanctions such as legal restrictions towards their operations. Stakeholder theory – In the stakeholder theory, there are two braches which are ethical (moral) and managerial (positive) branch (Ling, 2007). According to the moral (ethical) perspective, it is the requirement for the company to treat its stakeholders fairly without factoring into consideration stakeholder power. On the other hand, the managerial perspective states that it is likely for the corporate management to fulfil the requirements and expectations of particular stakeholders especially the powerful ones (Zechman, 2008). This perspective argues that, the society should be viewed from different angles and to determine, which is the most appropriate strategy to ensure the company becomes successful. For example, some stakeholders may demand disclosure of certain social responsibilities compared to other stakeholders. Sustainability Report Disclosures Voluntary disclosure is important and benefits the economy, companies and investors. For example, it is easier for an investor to make decisions on capital allocation and is likely to lower the cost of capital, which translates in benefiting the economy (Zechman, 2008). Moreover, such an approach ensures reduction of conflicts of interests especially in those companies that are widely held. The sustainability report has shown that Santos has elaborate on accomplishments and plans towards ensuring the society is taken care off. Tables of Disclosures by Theory Environmental disclosure (title of disclosure and subject of disclosure) Page number Identified theory/theories Positive or negative CEO’s Message: Management of the environmental impact, working in partnership with the communities, health and wellbeing of the society, personal safety requirements were not met, and considerations to the employees p. 2 Legitimacy theory/Stakeholder theory Positive Our Company: growing domestic business base, transformational portfolio and focused exploration p. 4 Accountability theory/ stakeholder theory Positive Sustainability report: integration of social, environmental, quality and governance p. 6 Accountability theory/stakeholder theory Positive The report; Nick Mitzevich: considering the requirements of community and society e.g. compensation for land, cultural preservation, partnership with local communities and energy efficiency p. 9, p. 12, p. 13, Legitimacy theory Positive The report: giving water to the community, no environmental incidents reported p. 22, p. 24 Legitimacy theory Positive The report: Employees support, fostering resilience and creation of safe working environment, safety management p. 26, p. 28, p. 30 Accountability theory and stakeholder theory Positive Encouraging diversity at the work place, p. 32 Stakeholder theory and legitimacy theory Positive Corporate governance, external auditing, sound governance systems p. 34 Accountability theory Positive The report: net profit after tax in 2012 $519 million, development of resources, p. 39, p. 40 Accountability theory and stakeholder theory Positive From report: partnerships p. 42 Stakeholder theory From report: Local suppliers and aboriginal engagement p. 42 Legitimacy theory Positive Kirsten Simpson: Quality assurance and responsiveness p. 48 Accountability theory Positive Justification of the theories Some of the environmental disclosure affects more than one theory as illustrate in the above table. This section provides summary of the theories relative to environment disclosures by Santos Company based on their 2012 sustainability report: Accountability theory – The board of directors and managers are accountable for all the activities that take place. Their obligations ranges from preserving the environment to ensuring the financial reports are accurate (Zechman, 2008). In addition, the positive factors associated to accountability include quality assurance and responsiveness when it comes to the products and services to the different stakeholders. Moreover, corporate governance and governance systems have been instituted and support by Santos Company has illustrated through the sustainability report (Ling, 2007). Stakeholder theory – in any business, there are numerous stakeholders that includes the media, customers, the community, and the government. The stakeholder theory presents two scenarios, which are ethical and managerial (Zechman, 2008). Santos Company understands that each stakeholder aims to achieve certain goal through their participation and hence the theory has illustrated each benefit to these stakeholders. For example, the shareholders of the organisation are informed on the profits and future strategic plans while the consumers are informed on the benefits, which the company has introduced and supported within their community (Ling, 2007). Legitimacy theory – this is the major theory that plays an important role in sustainability reports. Santos Company has employed the natives and also has encouraged preservation of their cultures. The company in addition has supported diversity in their employment policy ensuring the local communities are employed. Moreover, Santos participates in numerous projects that they come into partnership with the local community to ensure they both benefit at the end of the programme. Hence, Santos has encouraged and proven its legitimacy towards the society whereby they base their projects and operations. Review of Santos Sustainability Report The environment is an important integral in the operations of Santos. The company understands that to sustain and encourage the society to support their activities, Santos has instituted and utilised numerous strategies to ensure the environment is not harmed. This means that the report presents the positive activities associated to Santos and such approaches are beneficial to the numerous stakeholders. Media Coverage AAP, Reuters. (22 February, 2013). Santos 'on target' despite profit slump. The Sydney Morning Herald. Available at http://www.smh.com.au/business/earnings-season/santos-on-target-despite-profit-slump-20130222-2ev5l.html [Accessed 15 August 2013] The media covers the information first illustrating the fall in profits from $753 million in 2011 to $519 million in 2012. However, the other parts of the coverage discuss the rest of the annual report in positive manner and do not review the report negatively. Generally, the media covers the report in a positive manner even though the shortcomings in terms of profits exhibited by the Santos’ operations. Cubby, B. (13 June 2013). Pilliga contamination: Santos to be prosecuted. The Sydney Morning Herald. Available at http://www.smh.com.au/environment/weather/pilliga-contamination-santos-to-be-prosecuted-20130613-2o5rq.html [Accessed 15 August 2013] The article discusses on spillage of contaminated water and failures of the company to lodge environmental management reports. The NSW government aims to prosecute the company because of allegations that dates back to 2010 and 2011. The spillage took place at Pilliga site and the company has stated they have invested millions of dollars to clean up and improve the environment and its operations. The arguments have stated that the government should have not have renewed the licence awarded to Santos for drilling. The report points negatively to environmental concerns of Santos because of the company not lodging formal environmental reports. Financial Review. (20 May 2013). Santos oil well leaks 240,000 litres. Financial review. Available at http://www.afr.com/p/national/santos_oil_well_leaks_litres_UysxzpK1dmvVqMsbrOz2MP [Accessed 15 August 2013] The review analyses the leakage of more than 240,000 litres of oil. The incident took place at Queensland whereby the leakage spilled onto the earth. Santos Company has proposed and taken action in ensuring the environment is cleaned. Even though the coverage shows the leakage, the paper has not negatively criticised the situation but stayed neutral. The approach in which the reporter utilised does not show Santos Company from a negative perspective. Conclusion about Reliability Voluntary disclosures are important in an organisation that aims to succeed in its operations and attract more stakeholders. According to the sustainability report presented by Santos Company, the information explains the social responsibility and some of its accomplishments. The information provided indicates Santos Company operates and champions environmental awareness. In addition, the media coverage from the numerous outlets indicates that each of the organisation views operations of Santos Company from a positive perspective. Moreover, the three theories: stakeholder, legitimacy and accountability have been utilised effectively by Santos Company in its operations. References AAP, Reuters. (22 February, 2013). Santos 'on target' despite profit slump. The Sydney Morning Herald. Available at http://www.smh.com.au/business/earnings-season/santos-on-target-despite-profit-slump-20130222-2ev5l.html [Accessed 15 August 2013] Cubby, B. (13 June 2013). Pilliga contamination: Santos to be prosecuted. The Sydney Morning Herald. Available at http://www.smh.com.au/environment/weather/pilliga-contamination-santos-to-be-prosecuted-20130613-2o5rq.html [Accessed 15 August 2013] Financial Review. (20 May 2013). Santos oil well leaks 240,000 litres. Financial review. Available at http://www.afr.com/p/national/santos_oil_well_leaks_litres_UysxzpK1dmvVqMsbrOz2MP [Accessed 15 August 2013] Ling, Q. (2007). Competitive Strategy, Voluntary Environmental Disclosure Strategy, and Voluntary Environmental Disclosure Quality. Oklahoma: Oklahoma State University Zechman, S. (2008). The Relation between Voluntary Disclosure and Financial Reporting: Evidence from Synthetic Leases. Pennsylvania: University of Pennsylvania Read More