The accounting science is developed with the adoption of social and economic principles with the aim of achieving financial stability by promoting investment in an economy. The conceptual framework of the accounting is developed on the basis of social practices and thus it incorporates the use of social principles for controlling the business activities. The science of accounting plays a major role in for planning and controlling the growth of an economy and thus there is greater need for it emphasize on promoting social welfare. The code of ethics has regarded maintenance of public interest to be highly important in the accounting profession. As such, there is greater need for accounting bodies to integrate the concepts of social theories in the development of accounting practices for meeting societal needs effectively. The social theories have laid the foundation of many accounting theories such as legitimacy theory and stakeholder theory (Mansell, 2013). The present report has been developed in this regard for analyzing and evaluating the relevance and application of social contract to legitimacy theory in accounting. The legitimacy theory is believed to be evolved on the basic idea of social contract theory. The need for accounting bodies to maintain congruence between social needs and accounting practices is illustrated in the present report.
The main purpose of the report is to demonstrate the significance of social theories in accounting profession and the changes introduced in the contemporary accounting practices on account of integrating the concepts of social theories. The report has incorporated the use of qualitative research methodology for achieving its aims and objectives. The qualitative research methodology includes collecting and examining the view and opinions of different authors in relation to the topic of the research. The report has incorporated the use of an exhaustive literature review for demonstrating the relevance and application of social contract to legitimacy theory in accounting.
Significance of Social Contract to Legitimacy theory
According to Laan (2009), the theory of social contract is regarded to be an ancient philosophical theory that has emphasized on the ethical and political obligations of an individual for one’s society. The social contract is an agreement that is said to exist between an individual and the society that guides one’s behavior within the societal norms and customs. The concept of social contract determines the ethical codes for an individual to exist in a society. The contract implies both explicit and implicit rule that should be followed by an individual for continuing the societal existence. The explicit agreement refers to the legal rules that an individual is bound to follow while implicit rule implies complying to societal needs and expectations and acting within acceptable norms of society. Thus, the societal contract is a hypothetical agreement of an individual to not to violate moral and ethical rules of a society. The members of a society are bound to act within the general terms and conditions of this contract for ensuring societal growth and development (Laan, 2009).
Jones (2015) sated that the social theories have laid the foundation of ethical theories such as legitimacy theory. The theory of legitimacy is used by businesses for developing their professional code of ethics. As per the theory, the business activities of corporations are perceived to be ethical and appropriate if they are in accordance with the socially constructed systems of norms, beliefs and values. The theory of legitimacy as such can be regarded to be developed on the basis of social contract concepts as it has stated the obligations that businesses owe to their existing societies. The theory has taken into account the impact of business decisions on the societal welfare and development as per the concept of social contract. As per the concept of social contract, there exists an agreement between business and communities that obliges an organization to conduct their operational activities that maximizes societal benefits. The legitimacy theory integrates the concept of social contract a sit advocates businesses to undertake legitimate actions that provides benefits to the overall society (Jones, 2015).
As stated by Idowu and Filho (2009), the business organizations as such tend to achieve a legitimacy position among the community members in which it conducts their operational activities. The theory of legitimacy states that an organization is morally obliged to all its stakeholders including the employees, community and the environment. As such, it should conduct its operations in legitimate manner that are in accordance with the acceptable societal needs and expectations. Thus, the theory of legitimacy determines the business code of ethics by legitimizing organization operational activities. The businesses are seeking to legitimize their operational activities by undertaking voluntarily disclosure about their social and economic performances. This helps the businesses to promote their goodwill among the society and thus achieve its continuous support for carrying out the business operations. The achievement of societal satisfaction is very important for businesses to continue their ongoing growth and development. Thus, businesses are emphasizing on adopting social and environment performance disclosure for attaining a legitimate position among the society members (Idowu and Filho, 2009).
In the opinion of Dushi and Bërdufi (2015) the theory of legitimacy is being used to a large extent for analyzing and examining the relationships between a business entity and society. The legitimization of an organization process helps it to attain appraisal among the general public for its active involvement in promoting societal welfare. The organization can justify its right if existence in the society through its legitimizing actions such as voluntary disclosure of its social and environment practices. The concept of social contract has pointed out that any social institution can ensure its survival on a society through the development of an expressed or implied contract. As such, businesses tend to promote the adoption of ethical business procedures by legitimizing their operational activities as per the concept of social contract. The social contract has emphasized on providing economic, societal and political benefits to the society by the groups of people who interacts with the society. The concept is well integrated into the theory of legitimacy as it also states organizations to incorporate the business actions that provide political and economic benefits to the society (Dushi and Bërdufi, 2015).
Bhattacharyya (2015) stated that the theory of legitimacy is developed on the core concepts and principles of social contract and provides the guidelines to businesses for achieving sustainable growth and development. As per the theory, an organization does not possess the rights to utilize societal benefits until it promotes societal welfare through its operational activities. The businesses tend to operate in a dynamic society and thus the needs of society changes continually and therefore organizations need to again achieve social approval for continuing their operational activities. Thus, as per the legitimacy theory a company operates in a society through developing an agreement that intends to provide various benefits to the society members. The inability of an organization to meet the societal needs and expectations would ultimately lead to revoke the social contract and thus impacting its sustainable growth and development. The theory of legitimacy mainly tends to provide help to business corporations for achieving congruence between the social values and their operational activities. This is necessary as their continuous existence is dependent on the appropriate bond of society thus requiring businesses to act in a socially responsible way (Bhattacharyya, 2015).
According to Campbell (2002), the theory of legitimacy highlights the influence of corporate social and environmental disclosures on its long-term growth and development. The theory advocates an organization to undertake socially responsible practices for achieving appreciation form the society and thus justifying its existence. The theory emphasizes on providing maximum benefits to the stakeholders of an organization rather than achieving maximum benefits for the shareholders. The theory has taken into account the impact of business operations on its non-capital provider stakeholders as well. This has caused a change in the organizational manner of conducting their operations as businesses now not only aim for providing maximum profit shareholders but strives at safeguarding the interests of all its stakeholders (Campbell, 2002).
Importance and Limitations of social contract in legitimacy theory in accounting
In the view of Kuo (2009), Social contract is a very abundant element, if it is implemented suitably in the organization’s operations to pass the legitimacy test. It facilitates the enormous support of community and enables the company to function in the society expediently and easily. The legitimacy theory enables a company in long-term survival and facilitates sustainability in the internal and external environment of the organization. The company has various benefits of co-existence in the society as well as overshadowing the benefits legitimacy in the public. In this context, the organizations are being promised for long term operation and commitment by using the social contract which is guaranteed by the community or society (Kuo, 2009). Not only, it helps the organization to vision the element of growth and development in the society, but also supports their relationship to be strong and mutual understanding. The legitimacy theory applied in the organization helps the organizations in building the strong trust of public in its operations. It facilitates the interconnection of the organization and maintaining the crucial contacts of the organization with the society. The constructive and affirmative relationship with the society helps the company in presenting the financial disclosure to be ethical and values that are accepted by the community. It ensures the financial support to the organization by the society. The company is easily able to raise their funds in the market by the financial institutions, prospective investors and potential stakeholders because it has the validation of operations to be fair and true which are accepted in the society (Kuo, 2009). The investment in the company without any doubt on legitimacy is the result of decision making which is influenced with the financial reporting and representation in a positive note.
Similarly, Stone (2015) discusses that Legitimacy theory also aids the organizations to build the strong reputation and sound image in the market. The reputation of the company increases the sale of the company and helps in expanding its business in other geographical reason. Furthermore, investment in the company becomes easy and attracts the public significantly, if the company is renowned and has a legitimacy approach in the market. Popularity of the company also assists the company in enhancing the market value and position in the investment market. Along with this, stable market is also being facilitated, if the legitimacy theory is being implemented by the organization effectively and efficiently. The company is also ensured with competitive advantage in the market driven by the intense competition and opponents (Stone, 2015). An organization attains the competitive edge when it operates the functions with creativity and innovation and address the issue of environment and community. The creativity and innovation in approach makes effortless for an organization to uniquely build a strong position in the market. The legitimacy theory promotes the employee’s involvement and engagement in the organization. The employee’s involvement helps in fetching loyalty towards the company and reduces the employee’s turnover rate in the organization. It helps in motivating the current employees to work in a prominent organization and supports the intention to expand the labor resource in the market by attracting the potential employees for recruitment process. It overall promotes a healthy environment in the organization and positive culture for the operations in the market. The legitimacy assists the company in legal procedure and law cases filled regarding the discrimination or any ethical issues dealing with environment and society issue (Stone, 2015). The legal formalities and government regulation are being followed easily and unquestionably. The standards and ethical values are augmented when the social contract is being implemented in the organization.
Besides this, Auchter and Dziewa (2013) reports that the legitimacy is a condition which can be achieved for a fixed time period. Some organization feels pressure of external and internal driving forces to adopt the illegal or pretentious ways to incorporate the legitimacy in the organization. The social expectation and desires of the society are not static in nature and is very capricious. The ever changing needs and concerns of the society due to changing taste, priority, fashion and behavior naturally changes the parameters of legitimacy theory to be implemented in the organization. The legitimacy theory therefore only concerned with the communication to the public and convincing them about the social contract integration (Auchter and Dziewa, 2013). Another major reason is over the time, social expectation changes very fast but some of the organizations are not able to identify the differences in the society desires and behavior. Thus, traditional actions of the organizations are accepting and good in past but present scenario needs different execution regarding the social expectation. These are some factors that increase the legitimacy gap in the organization. The legitimacy gap is the difference between social expectation and behavior compared to the organizational behavior and action over the time (Auchter and Dziewa, 2013). The gap increases with the changing requirements and concerns of the society but organization does not able to cope-up with these complexities.
Apart from this, Orij (2015) determines it pressurizes the organizations to behave unethically and management chooses to pretend and manipulate the facts illegally. The practice of unlawful act and manipulation in the financial accounting gives unethical promotion to the company. At that time, company is able to save its reputation and legal concerns and proves itself to be legitimate to enjoy the social benefits and to use environment resources. However, sometime media reveals the factual and overshadowing information about the past of the company. It makes hard for the company to survive in the market and acquire any positive feedback from the public. The legitimacy failed to incorporate in the organizations make impossible for the company to operate in the market (Orij, 2015). Not only this, the demand of the products and goods become minimal and reputation of the company destroys quickly that hugely impacts the market position and shares of the company. The public also filches the capital resources from the company and it becomes hard for the company to manage financial resources for continuity of the operations. Moreover, the main reason behind the failure of the organizations social contract is improper and ineffective implementation of legitimacy theory. It also discourages employees to work in such an organizational culture and fails to lure the potential employees in hiring process. The company almost suffers financial losses from all the sides as legal battle starts extra expenses in lawsuits and procedures (Orij, 2015). To comply with the market requirement the organization play hard to regain its legitimacy state or situation.
Thus, from the above discussion, it can be significantly contingent that the failure of the implementation of legitimacy theory shut downs the operations of the organization (Pettit, 2012). The support of the public is lost and other financial hurdles start knocking the door of organization. The organizations suffer huge loss of finance and its resources as well. The degree of legitimacy gap decides the treatment of society towards the organization. In order to minimize the risk of failure of legitimacy theory, there are certain strategies that can help the company in application of the social contract in the operations successfully. Therefore, it can be inferred that the above elements are also respond as increase in the profitability and productivity of the company (Pettit, 2012). The integration of legitimacy in the operations of organization helps in transparency and fairness which is responsible for the image building, good relation among stakeholders and employees plus it helps in promoting the innovation and creativity in the functions of organization that helps in goodwill of the company.
Implementation of legitimacy theory
According to Behram (2015), the legitimacy theory can be implemented by various ways in an organization. It has been investigated that the social expectation are not static and thus there is no set parameter that should be followed by the organizations. The major concern while incorporating the social contract in the organization is to make majority of the population in the favor that is executed by the organizations all together (Behram, 2015). Precisely, it is important for the organization to communicate the facts and behavior of the organization according to the social expectation or by changing the definition of the social expectation via manipulating the facts and issue concerning the legitimacy practices in the organization. It has also been identified that the communication is very important even when the organization is already have reached the implementation strategy of the organization as it is the most influencing and mandatory aspect to make the public concerning and accepting the organization as social friendly (Behram, 2015).
In opinion of Frederick (2013), when a company fails to implement the legitimacy theory in the organization the survival of the organization becomes difficult and struggle of existence starts a new hurdle. Thus, before failure of the application of the legitimacy theory it is been advised that measure and protective strategies should be executed, so that the organization can minimize its expenses and legal difficulties. More than that, it will be very beneficial if the facts even manipulated for a short time period to provide the survival of the business (Frederick, 2013). The main aim of the organizations is to communicate effectively and manipulate the facts that build the good image of the company so that large number of people makes correct decision of investment purpose about the legitimacy of the organization positively and conveniently. Likewise, the advantages are very vast and create the positive environment surrounding the organization which can further used to expand the business and entice the potential investors for capital rising (Frederick, 2013). In case of failure, the organization is not able to take benefit of any of the advantages such as freedom of operation and social support in terms of legality.
As per Faisal (2012), Downing and pfeffer says that social association of organization should be based on the congruency of activities and behavior of organization with the social expectation. An organization can integrate legitimacy theory by implementing following activities as per Dowling and Pfeffer:
- By defining the legitimacy in the goals and vision of the organization and confirming its adaptation by complying the practices accordingly
- By confirming the organizations current behavior and practices of goals and objectives aligned with the social legitimacy though communication
- By presenting strong presence of legitimacy practices via communicating symbols and values of the organization interconnected (Faisal, 2012).
Along with this, Neysi, et al. (2012) examines that there are some more strategies that can be used to maintain and repair the social contract within the legitimacy theory. Lindbolm defines the four courses of action to integrate the social expectation in the organization as follows:
- To create an environment that articulates by informing and acknowledging the organization’s activities and performance to the ‘relevant publics’
- To communicate the changes of related behavior and activates of the organization about implementing the legitimacy to ‘relevant publics’ beside the point of real execution in the organization (Neysi, et al., 2012)
- To change the external social expectation in front of ‘relevant public’ and manipulate the public through communication about the actual social contract within the legitimacy theory of organization
- To influence the ‘relevant public’ about the changes and application of emotive symbols to divert the real issue and change the topic with handling of facts
The ‘relevant publics’ in the above text are the group of people who are concerned with the organizations performance and has a huge impact with the legitimacy of the organization (Faisal, 2012). Along with this, they can be easily convinced and manipulated by the company through effective communication as they have high influence of organizational growth and development on them. The above theories are used as a solution of legitimacy when the financial disclosers are being made in the books of accounting. It will help the company in articulating the favorable facts that will add the value to the organization. These theories are not concerned with the pretentious of facts and manipulation may be not legitimate in the real sense but are legal in front of public (Neysi, et al., 2012). Thus, manipulation of facts should also be maintained as a short term strategy and the changes should be made in books should lawful and legit.
In addition to this, Mohamed et al. (2014) explains that in researches of Hogner (1982), he stated that the fluctuation in the accounts and financial disclosure is a result of response to the changing social expectation every year with new aspect and method adopted by the organization. Moreover, the environmental concerns and issues will also be disclosed in financial accounts and increasing that disclosure every year makes the legitimate response to the industry. Not only this, media agenda setting theory also discussed by Brown and Deegan that emphasis on the media coverage and only respond to the social changes in front of community through communication in media (Mohamed, et al., 2014). The degree of Salience and topics which are emphasized in the media shares a relationship proposed by the MAS theory as follows:
- The current operations of the organizations are being articulated with the help annual report disclosure as a legitimate tool of management
- Sometimes the disclosures are pertaining to definite industry regarding environment disclosure and performance also influences the industry related organization’s disclosers consequently
- The environmental issues are being considered by the media and such topic impacts on the perception of the community in total (Mohamed, et al., 2014).
These strategies are the guidelines for the execution of accounting disclosure through financial accounting books and records via media coverage. Its aim is to communicate the legitimacy of the organization to the mass with strategic planning of disclosure along with the concerns that are important for the community and addressed as environment issue in a specific industry. Thus, these strategies will help the organization in application of legitimacy theory pertaining to the social contract and its association with the other aspects of financial transparency to gain the majority of favor of community (Mohamed, et al., 2014).
Thus, it has been inferred from the overall discussion held in the report that the concepts of social contract and legitimacy theory have caused large scale changes in the accounting practices of business corporations. The accounting professionals are largely implementing the use of social contract and legitimacy theories for meeting the societal needs and expectations. The legitimacy theory is mainly used by businesses for promoting transparency and reliability in their accounting practices. The accounting science is mainly involved in promoting the financial stability of an economy by attracting foreign investments. Thus, it is highly essential for accounting bodies to develop accounting practices that are in accordance with the public interest. In this context, the theory of social contract and legitimacy theory are providing to be highly significant for accounting bodies in developing standard practice and procedures that helps businesses in legitimizing their financial outcomes and thus achieving goodwill among the society. The accounting bodies are also presently emphasizing on mandating the social and environment disclosures by businesses that will help them to attain a legitimate position in the mind of all its stakeholders including employees, community and environment. The theory of social contract argues that businesses have established a social contract with their society and therefore they have a moral and ethical obligation of promoting societal welfare. The legitimacy theory as such has been developed form the concept of social contract that helps in analyzing and examining the business actions as per the societal norms and expectations. The accounting professions such as auditors can take the help of legitimacy theory in examining the effectiveness of an organizational action in accordance with the socially constructed systems of beliefs and values. The application of social contract to legitimacy theory in accounting is thus regarded to be highly important for businesses to promote their ongoing growth and survival for effectively meeting the societal needs and expectations.
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