How to society and environment consideration functioning and operations?
Legitimacy theory is focused on the society and environment consideration while functioning and operations. It is comprised of a social contract where society and organizations are bound by an intangible agreement (Omran and Ramdhony, 2015). Organizations employ various natural and community resources which are not entitled to it from inheritance in exchange of utilizing these resources; society needs them to operate with some expectations, norms, policies and beliefs. In the past years, it has been found that organizations are focused on revenue generation and improving the performance of the resources. However, in the recent years, legitimacy theory is being used in a wide number of organizations around the world. Moreover, the legitimacy theory is being researched by many scholars and researchers on its validity and importance to the economy (Omran and Ramdhony, 2015). It is being criticized and accepted by various intellectuals in their different perceptions about the legitimacy and positive theory. The most explored area in the legitimacy is importance of the theory in the financial accounting system of the organization which is being hampered. Simultaneously, the role of legitimacy also forces the organization to manipulate the accounting data which results in huge financial losses.
This research paper is aimed to explore the legitimacy theory integration of social contract in the accounting of organizations. The purpose of this study is to facilitate a brief on the interconnection between the society expectation and legitimacy theory. Legitimacy theory is often being used by the organization as a sustainability strategy plus to increase the competitiveness in the society due to intense competition. Nevertheless, it has also been implemented as it improves the reputation of the organization that indirectly gives financial benefits to the organization (Omran and Ramdhony, 2015). The study explains legitimacy theory and social contract meaning in the reality of organizations accounting. Furthermore, the relevance and significance of social agreement within the legitimacy theory of accounting is being discussed in this study. In addition to this, the application of legitimacy theory is being projected by referencing to scholars and researchers providing strategies and different methods integrating to the accounting of organizations.
Importance and role of Social Contract contained by Legitimacy Theory in Accounting
This section will elucidate the connection between the social contract and legitimacy theory. This research is a significant for revealing the positive accounting theory and its relevance and its application in the society associated with the legitimacy theory. This literature review has been critically examined to view the unbiased information about the importance and role of the legitimacy theory in the financial accounting. Therefore, in the below section advantages, disadvantages, features and strategies to implement and cope-up the legitimacy theory in an organization’s financial accounting has been outlined.
Omran and El-Galfy, (2014) demonstrates that Legitimacy theory is defined as operation of an organization according to the social expectations, perception, values, norms and beliefs. The organizations functions are being constructed in such a way that it fulfills the desire of the society and environment concerns in it (Omran and El-Galfy, 2014). It is one of the most criticized and studied theory in the positive accounting theory. It is the insight of the development in the management of accounting which is based on the ethical literature. It has been found that legitimacy is a bridge between the social and environmental disclosures which drives the powerful mechanism by the organizations which involves public participation in the operations for the betterment of the society and other community issues (Omran and El-Galfy, 2014). Social contract is the agreement with the social of organizations which is determined as a favor or consideration to the society in exchange of utilization of natural and community resources that are not inherited by the company. As per the legitimacy theory, the natural and community resources belong to the society and environment and when organization uses these resources they automatically bind with the obligation to serve the society and environment with the same proportion (Mansell, 2013). The natural resources includes land, machinery, metals and everything, whereas community resources are the labors and workers which has been hired by the company to make their ultimate products and services. The legitimacy theory is pivotal for existence of any business entity. The social acceptance helps an organization in carry on its business smoothly and facilitates the competitive advantage to the organization (Omran and El-Galfy, 2014).
In addition to this, Tilling, (2004) reports that social contract is a powerful element that helps an organization to fulfill the social expectation. The social contract is divided into two parts that is explicit and implicit. When an organization fulfills all the legal and authorized practices to start a business with legitimacy is called as explicit social contract. Rest of all the considerations and practices are included in the implicit social contract (Tilling, 2004). Apart from this, legitimacy theory is influenced by society and environmental elements to a very large extent. The growth of an organization is depended on many factors that are government policies, demands from stakeholders, market situations and condition worldwide. Likewise, markets and growth of society is also influenced with the development of industries in terms of innovation, technology, methods and traditions. Legitimacy theory facilitates various opportunities to the organizations in market to develop and expand their business in new locations and cover wide area geographically (Samkin and Schneider, 2010). It also helps in integrating innovation, creativity and new ideas in the organizational culture which promotes the employees to involve in the operations. The involvement ad engagement of the employee results in the employee’s loyalty and increases the productivity as well as performance of the employee. At the same time, it ensures the profitability and financial support to the organizations. Precisely, it ensures a leading market position to the organization (Tilling, 2004).
Moreover, Mousa1 and Hassan, (2015) illustrates that there are two main classification of legitimacy theory in the financial accounting which needs to be addressed. First is macro-theory of legitimacy which is also known as legitimacy theory comprising of values, beliefs, perception which has been adopted and integrated by the organization in the operations and functions as a whole to be accepted by the society and to fulfill the social expectations. In this particular class, there are some layers of institutions which are associated with the functions of the organizations (Mousa1 and Hassan, 2015). The institutional level that has an impact on the organizations operations are government, society, religion and capitalism. Furthermore, one layer down which is the second classification is called as organizational level or strategic legitimacy theory involves the organization which has a share based structure and company limited has four interrelated functions that have an influence in the institutions that is establishment, maintenance, extension and defense. In this regard, the organizations always needs to congruent with each of the level that is institutional and organizations (Mullerat, 2010). It will be considered as a social value, beliefs and behavior which facilitate the social acceptance to the organizations. The congruency of these two value system helps in finding the degree of legitimacy in an organization (Mousa1 and Hassan, 2015). Low degree of legitimacy is less pursue of social expectation in the organizational operations and vise-a-versa.
Unerman, et al., (2010) describes that social contract within the legitimacy theory is a significant way to gain the votes and favors of society which will benefit an organization in the long run. It has been identified in the researches that integration of legitimacy in the organization in the accounting facilitates a clear and transparent financial reporting. It helps the stakeholder’s to believe in the organizational operations and invest more money in the organization. In addition to this, it is an essential part of the organization’s operation for the substantial and sustainable growth and development of an organization (Unerman, et al., 2010). Not only it helps in attaining the organization a competitive edge in the intense competitive market but also it helps in improving the image or reputation of the company in the society. With the improvement in the reputation of the company, it becomes easy for any company to raise the fund for the expansion and growth of the company in the market. Legitimacy theory helps in making a strong market position in the industry that helps the company in increasing the investment in the market and raising the capital funds from investors, financers and potential shareholders. Moreover, the government also helps the company in promoting its business if the legitimacy is being implemented in the organization (Unerman, et al., 2010). The legitimacy theory facilitates the legal compliance in the accounting and functions of the organization as well as it provide benefits in various legal aspects too with no extra expenses in the legal battles and no serious social issues. Along with this, legitimacy theory helps in achieving a positive environment in the surrounding of the organization that helps in opportunist cultural environment with affirmative attitude in the employee’s behavior (Unerman, et al., 2010). Thus, it overall helps the company in moving forward and adds several external as well as internal benefits which are crucial for any organization.
On the other hand, Gherardi, et al., (2014) expresses that insufficiency or failure of comply in the social contract by the organization may result in a very serious consequences. The existence of the organization may come into jeopardy and many external or legal hurdles may come into the way of success. The failure of the social contract can be a consequence of many reasons. Nevertheless, it may seriously damage the reputation of the company admittedly as well as certainly responsible for failure of the business (Gherardi, et al., 2014). The survival of the business may hamper, if it does not follow the legitimacy theory effectively. In addition to this, the failure in effective incorporation of social contract may decrease the demand of the products and services in the market. The public will ignore or less purchase products and services from that organization. It will also affect the community resources and decreases the benefits from them. The employees will start walking out of the organization and leave their jobs. Furthermore, the new hiring or job search may face difficulties. The organizational culture will be not healthy and clear due to lack of legitimacy and no transparency in the accounts will create uncertainty and hesitation in stakeholders (Gherardi, et al., 2014). The investors, loan providers and financers will not consent for long-term or short term financial support to the organization. It may also cause the extra expenses, if the proper measures or rules of societal norms are not complied by the organization. The ineffectual expenses will be used for the cases, suits and other legal obligation to settle the social and environmental issues caused by the company (Samkin and Schneider, 2010). Apart from this, the organization will not be able to take the advantage of competitive edge and can face huge competition in the market which can decrease the sale of the products and services offered by the organization. Therefore, it can be identified that the effective implementation of social expectations, belief, norms and bounds is very important without which the existence of the business entity is not possible (Mullerat, 2010). The performance and productivity of overall financial position of the organization will start declining.
In the view of Lightstone and Driscoll, (2008) the legitimacy theory is being covered in three stages of legitimacy that is gaining, maintaining and regaining legitimacy. Gaining legitimacy is foremost and beginning of the organizations operations that implement the legitimacy theory. Innovation, newness and creative ideas and lack of traditional beliefs and values is being implemented to develop a new structure or processes in the organization (Lightstone and Driscoll, 2008). This stage provides the significant time and parameters to set the legitimacy in the organization and acts proactively if an issue occurs. In case of maintaining legitimacy, it is an easier task than gaining and repairing legitimacy. The future changes and social expectation is being synchronized and aligned with the current operations and behavior of the organization to minimize the legitimacy gap. The past values, norms and practices are being protected by supporting the legitimacy already practiced by the organization. The forecast of trends, behavior, fashion and perception are being forecasted regarding the maintaining legitimacy and updating the current expectation of the society (Lightstone and Driscoll, 2008). In the end, repairing or regaining legitimacy is the method to react on the unforeseen and future crisis that challenges the growth and development of the organization. There are strategies like strategic restructuring and normalizing the accounts that helps the organization in achieving the legitimacy. accordingly, these stages are very important to be identified by the organization before implementing the legitimacy theory in the operations. These stages will give the perfect solution to the organization faced by the organization (Samkin and Schneider, 2010).
As per the opinion of Idowu and Filho (2009), it has been found in many studies that social expectations are not static in nature they are ever changing and flexible which are trended over time. The social expectations are based on preferences, beliefs, trends, norms and practices in the society which can be influenced by many factors like technology, situations, government policies and market conditions. Thus, these ever changing needs and desires should be closely watched by the organizations to fulfill these social expectations. In addition to this, the social contract and integration of legitimacy in the accounting may cost high at times which cannot be affordable by the medium or small sized organization (Idowu and Filho, 2009). The legitimacy theory also need some research on how to implement it effectively plus how it is being integrated by the fellow organizations. In case of small sized and private organizations, it can be difficult for the management to arrange the sufficient amount to integrate legitimacy theory at a certain time. In multinational and big companies, sometimes the changes are wide and fast plus cannot be notices with light research (Omran and Ramdhony, 2015). These changes with time and actual implementation of the legitimacy have some differences which are known as legitimacy gap. The legitimacy gape occurs due to variable and capricious nature of social expectation and organizations are unable to cope-up with these changes. Thus, the difference between the actions and behavior of the organization is not synchronized with the ever changing and dynamic nature of the social expectation which is not been adjusted within the time frame results in legitimacy gap (Idowu and Filho, 2009). It pressurizes the organizations and business entities to operate and accounting with manipulations.
Besides this, Wangombe, (2013) explains that communication is the most vital element in legitimacy of financial reporting and accounting in an organization. The organizations use manipulative and effective communication skills with the help of professional s and expert to cover up the issues and highlight the beneficial facts about the organization. This procedure is not illegal and acts in accordance with law and order but the intention is to hide the actual information and provide the partial information to manipulate the investors (Wangombe, 2013). Thus, organizations start to manipulate and influence stakeholders with the falseness and pretend the financial reports according to societal expectation and environmental prospective to be accepted by the society. The legitimacy gap becomes substantial problem when in the adverse times or randomly media reveals the past records of the organization which suddenly destroys the business entity in sometime and make its survival very difficult (Dushi and B?rdufi, 2015). In addition to this, this situation withdraws the support of public in the organization and scarcity of financial and management resources s being faced by the organization.
According to Hayek, (2013), in order to cope-up the situation of legitimacy gap and implementation of effective legitimacy theory, some of the researchers have provided various techniques and strategies that can help an organization in application of social contract within the legitimacy theory. It has been explored by the researchers that the legitimacy concept is related with the favor and majority of any belief, value, norms and behavior which is being accept by the public (Hayek, 2013). In order to apply it effectively, the most important element which should be noted is to communicate with slight alteration, modification to manipulate the stakeholder’s opinion and sense of decision making. Dowling and Pfeffer (1975) declared three way strategies through which a business entity can implement the legitimacy in its operations. The organization should identify and articulate the goals, methods, results, values and mission compliance with the social expectation, values and beliefs (Hayek, 2013). Next, the organization can change the methods and strategies of social acceptance to attempt the legitimacy in the operation which is accepted by the majority of the public. The organizational current practices will be articulated as an ideal example of legitimacy and social contract conformity. Lastly, the attempt of legitimacy is done with the help of symbols, institutions and values in the communication practices that provides the strong validation to the organization (Hayek, 2013).
Similarly, Dushi and B?rdufi, (2015) explored that Lindblom (1994) suggested that there are another four strategies which helps the company in escaping the pressure of social acceptance and legitimacy can be achieved by these ways (Dushi and B?rdufi, 2015). Along with this, the researcher is not concerned with the falseness and pretending the facts, the accounting and financial reports must be articulated to ensure the acceptance of the society as follows:
- Relevant public will be informed and educated regarding the organizational practices which are aligned with the societal values and norms and fulfills the social expectations.
- The disclosure of accounting and financial reports will be presented in such a way that changes the perception of the relevant public about the organizations effort to attain the societal acceptance but not necessarily changes the actual and real behavior, practices and performance of the organization (Ali and Rizwan, 2013).
- The articulation of facts will be done in such a way that the issues/problems will be covered and ignored in front of public and other irrelevant issues are addressed to divert the decision making and manipulate their opinion.
- Lastly, by demonstrating the relevant public about the unreasonable demands and expectations which cannot be fulfilled practically and that changes the external aspects of social expectation (Dushi and B?rdufi, 2015).
The relevant public in the above text is referred to the stakeholders of the company and majority of people who are already in the favor of the company. Relevant public is the most influential people that can be easily manipulated by the company and influences the growth and development of the company very highly. Apart from this, Ali and Rizwan, (2013) states that Deegan and Unerman (2006) also reacted on the legitimacy theory and its application by focusing on the reputation risk management which can be done with the help of active management and reaction of the organization according to the expectation of the society (Ali and Rizwan, 2013). Thus, it can be inferred that the strategies and methods help an organization in incorporating the legitimacy theory plays a vital role in social acceptance. Not only it provides the degree of legitimacy in an organization but also it enables the temporary solutions to the organization to solve the urgent compliance of social contract to minimize the damage. The effective legitimacy theory provides the good relation between the stakeholders and management which automatically responsible for fast services and responses to the clients in the market. It ensures the production and performance of the organization with good potential and in positive environment (Ali and Rizwan, 2013).
From the above discussion it can be implicated that the legitimacy theory and social contract is interrelated and layered aspect of each other. Social contract is the agreement between the society and the organization that provides a beneficial relationship to each other. Society provides the right to the organization to use the natural and community resources to the organization, whereas the organization is obliged in the exchange of using the resources and concerned with the environmental and social challenges. Along with this, every organization has a responsibility to operate complying with society value, norms, behavior and perceptions for a sustainable growth. There are various benefits of integrating the legitimacy in the organization such as competitive advantage, profitability, good relationship establishment between the stakeholders and the organization.
On the other hand, the failure in integration of legitimacy theory because of legitimacy gap which is due to time adjustment and changing needs and desires of the society. Furthermore, the legitimacy theory has three stages that are gaining, maintaining and repairing for the application of legitimacy theory. These stages are very helpful in determining the strategies which should be applied by the organization for the effective integration of social contract and expectation. It has also been found that social expectation is an ever changing process and therefore firms need to watch and forecast values, tastes, trends and behavior one step ahead of the society and adjust the strategies with it. The failure of the adjustment can suffer the company from financial losses as well as hamper the existence of the organization. In addition to this, some of the strategies and methods are being given by the researchers to protect from the failure of the society expectations. These strategies are not concerned with the falseness and pretending the accounting to manipulate the decision of the stakeholders.
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