Social Contract And Legitimacy Theory In Accounting

Question: Discuss about the Social Contract And Legitimacy Theory In Accounting. Answer: Introduction The idea of the social contract is developed in the late 17th Century and predates the European Enlightenment. English philosopher Thomas Hobbes (15881679) was the first person that detailed account of social contract theory in a series of works and out of these, the most famous of that is The Leviathan (1651). True and fair view (TFV) is an accounting concept that means financial standards are fairly and truly presented with followed the accounting standards. Moreover, Thomas Hobbes, John Locke and Jean-Jacques Rousseau (three thinkers or contributors) those provided an alternative view to regulatory social contract theory that applicant in the TFV principles. This paper explains relevance of Hobbes, Lockes and Rousseau philosophy in the social contract to accounting. Other main aim is to describe the relevance of the social contract in the context of this paper. On the other hand, this paper is also explains the main concept/philosophy of social contract to accounting in the context of application of TFV principle. At the same time, this paper also explains the relevant philosophies and contributions of the main philosophers in the social contract theory. In the context of this research study, the main aim is to identify the TFV principle represents or not a social contract between the accounting professions. This paper conducts literature review to support the position with convincing arguments regarding the relevance and application of the social contract to Legitimacy Theory in accounting. TFV Represents a Social Contract between the Accounting Profession The proper discussion of the social contract theory is essential to understand the TFV (true and fair view) principle represents a social contract between the accounting professions. In this section, conducts critical review and explains the main view of Thomas Hobbes, John Locke and Jean-Jacques Rousseau regarding the social contract theory. This section critically analysis of the TFV principle represents a social contract between the business communities and accounting profession. Historical Background of Social Contract Theory: In the words of Evans, Baskerville and Nara (2015), social contract theory is a philosophy that views present the persons moral and political obligations are dependent upon an agreement/contract among them to form the society in that they residence. Philosophers use a social contract or agreement to explain to the behavior of prison and accept the death penalty. Social contract theory have developed in the late 17th century that rightly associated with political theory and modern moral or values that is firstly fully exposed and explained by Thomas Hobbes. Thomas Hobbes was first proponents then John Locke and Jean-Jacques Rousseau are popular proponents those contributed in social contract theory. Thomas Hobbes (1588-1679) faced the English Civil War (1642-1648) that impacted on their thoughts or views related to moral values and social lives (Evans, Baskerville and Nara, 2015). The war was a clash between the King and his supporters that described by Hobbes in the theory of the Divine Right of Kings. Hobbes' political theory is divided into two parts that are human motivation theory and social contract theory. Hobbes has first that explained a theory of human nature and human motivation that gives rise to a particular view of moral values and political lives of people. In addition, Albu, Albu Alexander (2013) stated that John Locke (1632-1704) uses Hobbes social contract theory to a quite different end as stated that men's uniting into common-wealth. Mens is united for preserving their lives, preservation of their wealth, liberty, and well-being and they resisting the authority of a civil government or King. Jean-Jacques Rousseau (1712-1778) has described two distinct social contract theories these are moral and political evolution of human beings theory and normative or idealized theory of the social contract. Rousseau's social contract theories presented a consistent view of people moral and political situation. According to social contract theory, valid and universally applicable moral or ethical rules can be identified by asking people what rules would voluntarily make if there were no moral or ethical rules. Not everyone would agree on the single rule that can be the subject of universal moral rules (Albu, Albu Alexander, 2013). All member o f society agree to social contract simply by participating in the society and making of universally moral rules. According to Matuszak, R?a?ska Macuda (2015), social contract theory has been one of the most dominant social theories within political theory and moral theory during the modern west history. In the 20th century, political theory and moral theory retained these philosophers view as some modern philosophers such as John Rawl, David Gauthier and others were followed by social contract theory philosophy to explain modern political theory and moral theory. In recent times, philosophers from different views have presented new criticisms of social contract theory. In addition, feminists and race conscious philosophers have argued that this theory is presented incomplete picture of people moral, values, political lives, class and social lives (Matuszak, R?a?ska Macuda, 2015). Social contract theories main principles are moral values and ethical codes that rational people with adopt the rules of social and political lives. Moral and ethical codes are the principles of social contract theor y that indicated it is related to the current accounting standards and principles of business. True and Fair View (TFV) Concept of Accounting: Salihin, Fatima Anam Ousama (2014) explained that accounting standards explained that each companies are prepared and presented the true and fair financial statement to prevent the interest of all stakeholders. Represent the fair and true financial statement is related to moral values and ethics of the accounting profession. The Generally Accepted Accounting Principles (GAAP) explained accounting standard that it is essential for any kinds of firms to apply in their business and prepared or presented the fair and true financial statement in from of stakeholders. It is essential for any kinds of companies are preparation of full, true and fair profit loss statement, balance sheets and cash flow statement to present accurate financial position of business in front of stakeholders and market (Salihin, Fatima and Anam Ousama, 2014). According to Vladu, Salas and Matis (2012), in the late nineteenth, the legal view of a TFV has traditionally favoured principle in financial statement has been shaped by the early twentieth century views of the courts in the audit functions and the purpose of prepare fair and accurate financial statement. In the recent times, fair and true view also consider as a concept of business ethics to prevent the right and interest of all stakeholders while prepare financial statement by present fair, accurate and correct financial position of the company. The business ethics is related to the social contract theory through explained that accountants, financial manager, CFO and auditor all are responsible to present fair and true financial condition of the company through followed accounting standards and business ethics (Vladu, Salas Matis, 2012). TFV indicates a social contract among the accounting profession and the business community: In the words of Alawattage (2011), the social contract theory and TFV principles are researched in the above section that present a social contract among the accounting profession and the business community. In other words, accounting profession does support the social contract as the TFV principle or concept explained the employees related to accounting profession doesn't capture the regulators for any sense of power. Accounting professionals does not right to misuse their power to represent financial misstatement and present unfair or wring financial reporting (Alawattage, 2011). It is essential for professionals those working in accounting profession behaved socially or ethically. Jahn and Brhl (2016) stated differently that the social contract theory is provide an idea that utilized in the accounting theory as it is given attention on employee moral values, ethics and fair work. According to social contract theory, moral, political and ethical obligations adopt as rules of accounting profession to examine business ethics and TFV questions. Social contract theory is used in accounting professional and the business community to evaluate questions in business ethics. Social contract theory has implications throughout several areas of accounting theory such as TFV concept, business ethics, environmental and sustainable reporting, corporate governance, and corporate social responsibility (Jahn Brhl, 2016). Jacobs (2012) presented their viewed in this topic through stated that the social concept theory is a base of philosophy of moral values, ethics and political science that has more recently been utilized to the study of account professional and business ethics. According to social contract theory, fair and universally applicable accounting principles or standards can be determined through evaluate what standards or principles would appropriate to business ethics and beneficial for business community. Every business community would agree to present the fair or true financial statement of the business as it can be subject of universal business ethical rules. Everyone would agree to fairness, transparence and pure financial reporting, so these can be related to social contract theory (Jacobs, 2012). The social contract theory is an unwritten and the strictly hypothesis agreement of moral rules that is not to violate by person or people. All business communities agree to business ethics and TFV rule not to violate by companies in the business world. In addition, Christensen, Nikolaev Wittenberg?Moerman (2016) predicted that three mainstream theories of business ethics application are related to social contract theory. In the past times, the stakeholders theory of accounting is explained the company has earned the largest possible profit for its owners and stakeholders without consider other stakeholders interest and business ethics. In the recent times, the stakeholder theory is applied the social contract theory through explained that profit earning is the main aim of business, but also considered the business ethics and prevent the interest of all stakeholders. The stakeholder theory is related to TFV accounting standards and social contract theory through considered all stakeholders interest while taking business ethical decision and present financial statements of the company. The stockholder theory now changed with stakeholder theory that explained a company is morally obliged to all parties and all stakeholders, including business partners, suppliers, owners or management, employees, distributors, customers, clients, the community and the environment (Christensen, Nikolaev Wittenberg?Moerman, 2016). Social contract theory agrees that all business community operate under an unwritten contract with the society and business world in that the company to do business under the business ethics that is beneficial for society, community and environment. Orij (2010) submitted that ethical decision in business can be strongly related to the social contract theory that explained the ethical decision-making process. Moreover, TFV represents a social contract theory is related to the accounting profession as fair and true value present the accurate financial statement for preventing common interest of stakeholders. Major companies applied stockholders theory and TFV principle to support business ethical decision that was most beneficial for the all stakeholders. Stakeholder theory would require the owner to consider the interest of stakeholders, community and environment. Social contract theory is required the owner to consider the interest of the stakeholders and business decision are impacted on society, community and stakeholders (Orij, 2010). In addition, social contract theory is the concept that applied in the study of business ethics, due to it is associated to broader business ethical issues on many business communities agree. Moreover, Shove (2010) argues that the TFV represents differently a social contract theory related to the accounting profession and the business communities through companies business decision based on ethics, morale and laws. Companies decision is based on provide substantial benefits from society through considered the common interest of stakeholders. In recent times, social contract theory is explained the companies contributed into the society through employing people, providing products or services, developing wealth and enhance living way or standard of the people (Shove, 2010). Jones (2010) presented the totally different viewed from other scholars as stated that changing business climate is also developed the need of implication of social contract in the accounting professional. In 2012, a study on the changing business climate in the America identified that 84% of companies or owners or management believe society and ethics as expects companies played an active role in social, political, environmental and business ethics issues. Most of these not agree that businesses to obey the law and ethics, but they also believed that businesses to reinvest in their communities and helped society or people in meeting their live needs. According to the social contract theory, changing business climate and changing customer expectation from businesses required the companies followed the laws and ethics and focused on corporate governance, sustainability and corporate social responsibility to invest in their communities. Social justice, social benefits and social equali ty are also considered by companies to apply the social contract theory in the business (Jones, 2010). True, fair and accurate financial statements indicate the company has followed the accounting standards or laws to maintain the social value of the business. Social Contract Theory Application in Accounting In order to explain relevance and application of the social contract to legitimacy theory in accounting, first there is need to understand the meaning of the social contract and legitimacy in the accounting. It is important to reach the specific conclusion and make this report is more qualitative. According to Islam (2014), a social contract is an unwritten and tacit agreement that is presented between the member of the society and employee of the organization. A social contract does not indicate to an actual contract. The idea of the social contract is not new, it is old of hundred years. In the simple words, the social contract appears when a group of people meet with individual needs in order to support them for their benefits. Social contract theory is well- known philosophical idea that determines the individuals ethical and political obligations related to an agreement that has in the business environment with others. In this, it is possible that the social contract can be in t he written form of the law (Mkel Nsi, 2010). In the business accounting, the social contract theory refers to the liabilities organizations to communicate in the business world. It also contains that corporate governance, corporate social responsibility and corporate philanthropy. There is a significant role of legitimacy theory in accounting the accounting. The term legitimacy is related to something legitimate that refers to refers to use of valid codes, customers, rules and standard during the accounting practices. The increasing the importance of using the appropriate accounting standard is also raised the concept of legitimacy theory in the accounting standard. The focus on the legitimacy in the accounting minimizes the uncertainties in the business process (Carnegie Napier, 2010). The legitimacy theory in accounting process helps an organization to maintain business risk as well as transparency in the business. In the simple words, the legitimacy theory in the accounting standard is quietly associated with transparency and fairness in the accounting process. The fairness and transparency in the accounting process is also a part of the ethical and social business practices. The legitimacy in the accounting concerns towards overall welfare of the business . The consideration of social contract in the accounting is important for the benefit of organizations and society. Along with this, involvement of social contract in accounting fulfills the necessity of the legitimacy theory through reducing the business risk and maintaining the transparency within the business. In the views of Ieng Chu et al (2012), legitimacy theory is the significant theory that achieves the support through concept of social contract. The social contract to legitimacy theory is an effective tool that motivates the business organizations for the environmental reporting. Along with this, social contract to legitimacy theory provides the excellent depiction to seek legitimize to ensure that business organizations are operating their business according to norms and bounds in relation to their respective societies. The social norms and bounds are being change over the time in relation to social values and norms which is required for the business organizations to modify their business reporting and recording practices. The change in the business reporting practices support the business organization in disclosing their environmental impact with the social perceptions. In support of this, Perks et al (2013) stated that social contract or corporate disclosures are important to legitimize the existence and actions of the business organizations. The legitimacy theory supports the notions of the business organizations that they use in their reporting policies and practices. It also indicates that business operations of the firm are consistent with the societys expectations and priorities. Nicholls (2010) stated that social contact affect the reliability and validity of the of the accounting works. In this way, most of the business organization involves the environmental issues or policies in accounting practices. The comprehensive system of environmental accounting is focused on the social contract to legitimacy theory in accounting. Researcher also find out that business organization should perform or behave in the socially responsible way for the sustainability development and engage with the environmental issues for the protection of business from the external environmental factors. At the same time, involvement of the business organizations in social contract dependent on the societys willingness that allow to business organizations to operate their business effectively. In the views of Jones (2010), social contract is the contract between the business organization and society, in this the main objective of business organization is to make the profits through complying or following the social responsibilities in effective manner. The concept of social contract is an underlying principle and different theories of the corporate disclosure are also based on this concept that provides the framework for reporting and studying the environmental issues and factors through business organizations. At the same time, Aribi Gao (2010) measured that business organizations including the social institutions operates their business in society by the helps of social contract. This helps the business organizations in achieving the business growth and survival of business through distributing the economic, social and political benefits to society people or groups. On the other hand, it is also analyses that if any business organization breaches the social contract the n it may affect the growth and brand image of business organization negatively. Social contract and its relevance to legitimacy theory in accounting: The legitimacy theory is defined that business organization can maintain their business operations to indicate that business organizations are getting the support from the community. Business organizations can get the support from the community in the form of results that society perceived from the business organizations, the business organizations can get the support from the society through complying with expectation of society (Bebbington et al, 2014). In the case, when business organizations does not satisfy the society through business operations in legitimate manner or in an acceptable then society breach the business organization social contract. In the view of Carnegie Napier (2010) the increasing business activities over the world is also increasing the organization regarding the social responsibility. The current business environment, 84 percent organizations are small and medial sizes enterprises that believe that social contract is a way of the growth in the business. It also plays a significant role in managing the social, political and environmental issues. In the accounting, not only documents say to follows the law but also social contract also says to follow legal responsibility regarding the business. Wallenburg Schffler (2014) presented the similar viewed of Carnegie and Napier (2010) and stated that the development in the communication and globalization raised the new opportunities for the business world. Social contract theory applications and relevance in accounting legitimacy theory critically discussed in this section. In this part, discusses the social contract theory application and relevance in the different accounting concepts, including TFV concept, stakeholder theory, business ethics, environmental and sustainable reporting, corporate governance, and corporate social responsibility. Social accounting theory application in TFV concept or principle, stakeholder theory and business ethics are already discussed in the above section, so it not described in this part (Wallenburg Schffler, 2014). The following are the others accounting theories that are relevance and application of the social contract theory: Social contract theory applications in corporate governance: According to Frynas and Stephens (2015), corporate governance is an importance concept of social theory contract in business through making sure that business not harmed community, environment and planet for their operations or functions. Corporate governance is an accounting policy that a company applied to follow the legal and ethical path to ensure sustainability of the business and environment. Corporate governance accounting concept is ensured that corporation follow the code of conduct/ethics to maintain transparence, fairness and accountability for achieving stakeholders trust and creating social value. Transparence, accountability and fairness in financial reporting ensured the organization has focused on society and community to consider the interest of the stakeholders (Frynas Stephens, 2015). The board of directors and management of the company are accountable and obliged for corporate governance those ensured t hat the investors and shareholders interests are not jeopardized. In addition, Christensen, Nikolaev Wittenberg, Moerman (2016) stated different viewed that the corporate governance theories cannot fully described the complexity and heterogeneity of corporate business. Corporate governance is different from country to country due to people different culture, moral values, ethics, political and social lives. Cultural, economical, political and social context of countries contribute to vary governance in developing countries and developed countries. The literature has confirmed that business world would bring about different perceptions towards corporate governance and the root of social contract theory is crucial (Christensen, Nikolaev Wittenberg, Moerman, 2016). It is significant to re-visit corporate governance in the conjunction of social contract theory with a new angle that has social and universal view and subjective from the perspective of political and social science. Social contract theory applications in Corporate Social Responsibility (CSR) theory: In the word of Lanis Richardson (2012), CSR is related to the corporate responsibility for the society, community and universe that is related to social contract theory. CSR strategies are applied by the companies to creating sustainable and renewable business solutions that is prevented and not harmed the society, people, and planet. CSR is based on the social contract theory that applied by the companies to fulfill their social responsibility and response to the wants and needs of its stakeholders with considered their interest. The CSR strategy applied by the companies to prevent the people, society, community and environment through apply the waste management as well as reuse and recycle of waste strategy (Lanis Richardson, 2012). The most of the companies focused on reduce waste and reduce carbon emissions that generated during the production under CSR activities/strategies to prevent the peop le and planet from the harmful gases. In addition, Parker (2011) explained similar views of Lanis and Richardson (2012) and described that the CSR strategy is also related to the accounting as it is the social responsibility of any organization to present the fair and true financial statements in front of people. The financial misstatement is affected the investors or shareholders investment decision or returns as well as affected the trust of stakeholders that is not ethical aspect of the business and indicated the company has not followed their social responsibility for the people. In recent times, CSR is becoming the importance business concept that required the all kinds of firms focused on it to maintain people trust and value of firm (Parker, 2011). In addition, Carroll Shabana (2010) stated totally different views from Parker (2011) and expressed that the concept of business ethics in the accounting means the employee of accounting or financial department must behave right and follow morals values or ethics to benefit everyone and all stakeholders in the society or community. The concept of business is different with the concept of corporate governance, sustainability, and CSR as ethics address to the values and morals a person or organization, while others practices involve a small part of each of these ethical areas. Ethics means corporations follow laws, regulations and business ethics to perform different business functions or activities for provide benefits of society, while corporate governance and CSR means corporations have responsibilities to protect the interest of other stakeholder. In addition, business ethics is associated with society or community, while CSR and governance related to people, environment and plane t (Carroll Shabana, 2010). Social contract theory is more related with business ethics as ethics indicated the morality and values relates to an individual person and organization. Social contract theory is also relevant with CSR as this concept represents the social responsibility of corporation to meet the expectation of the people. The above section indicated that the relevance and application of the social contract theory in the different accounting theories such as stakeholders theory, business ethics, corporate governance, CSR and others. The above literature reviewed justified that social contract theory is also applicable in the current accounting concepts and theories through indicated the organizations or managements focused on society and community. Conclusion It can be concluded that TFV (true and fair view) describes a social contract between the accounting profession and the business communities. The finding of the literature indicated that relevance and application of the social contract theory in accounting concepts, principles and standards. The main purpose of this paper was to understand historical background of social contract theory and TFV and its application in the accounting profession. This paper presented many controversies and debates regarding TFV are interrelated to social contract theory in accounting. It is essential to make separate assessment for both TFV and social contract theory in the application of accounting. Furthermore, it can be concluded that social contract theory is the base of TFV, business ethics, and accounting principles/standards, so that companies are agreed to focus or prevent of society, community, environment and planet, while doing business activities or functions. 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