VENDILLO, Narcy Lyn T.

MS Accountancy

What is a philosophy? What is a theory? I honestly am lost in the definition of these two big words at first. They seem to be too
abstract for a visual learner like me. During the introduction of the course, Philosophy was defined in class in many ways like the love
for wisdom; the rational investigation of the truths and principles of being, knowledge, or conduct; and also the critical study of the basic
principles and concepts of a particular branch of knowledge, especially with a view to improving or reconstituting them. But among those
given, what lingered in my memory was not the definition but this: the heart of philosophy consists in shaping one’s mind, not in filling it
with facts. Afterwards, we moved to Susinth Fernando’s Theoretical Framework for CSR Practices. Fernando cited in his journal the
definition of theory by Gray, Adam, and Owens (2010) who defined theory as a conception of the relationship between things. With
those definitions we can clearly put a line between philosophy and theory which are perpetually linked one way or another.

Philosophy, as mentioned in the previous discussions, shapes one’s mind. It influences how one sees the world. On the other
hand, theory shapes how one purposely interacts with that world. A philosophy influences the explanation of important problems and
theories offer approaches on how to arrive at solutions to those problems. For example, Royal Dutch Shell, a petroleum company
publishes a separate annual report containing details on the corporation’s social, safety and environmental performance during the year.
But why? What drove that choice of publishing an annual sustainability report? Perhaps the Royal Dutch Shell is informed by
stakeholder theory which highlights the organizational accountability beyond simple economic or financial performance. But why does
the corporation think that stakeholder theory is essential to its existence as a business? Stakeholder theory is based on the philosophy that
stakeholders are entitled to consideration in some ways similar to shareholders. Stakeholders may include the customers, local
community, shareholders, employees, suppliers, special interest groups, the government, society, and the environment. Every stakeholder
must know; hence an annual sustainability report is needed.

In the same way as theory is extensively used in other professions, theory is also significant in the practice of accounting.
Among the myriad theories on the list, the notably relevant ones I noted are as follows: decision usefulness theory, institutional theory,
agency theory, stakeholder theory, contingency theory, and positive accounting theory. Decision usefulness theory suggests that the more
accurate users can predict economic and financial events using accounting information, the more useful this information is for them. This
is relevant in the practice because I believe that at the end of the day, what is important for accountants is the impact of a generated report
in coming up with decisions. Next, institutional theory embraces the need for organizations to conform to social norms and practices to
enhance their legitimacy. In connection to the accounting practice, accountants are required to comply with the generally accepted
accounting principles (GAAP) as prescribed by regulatory bodies. This compliance to reportorial requirements is essential to the image of
companies especially publicly-listed corporations. Another is agency theory defined by Jensen (2000) as a contractual relationship in
which one or more persons (principal) employs one or more persons (agent) to perform some action in his favor. This theory identifies
that there may be conflicting interest between the principal (shareholder) and the agent (managers). Some rules and controls are
consequently required in the practice to guarantee the reliability of the financial statements in order to protect shareholders. Next is the
stakeholder theory that highlights the organizational accountability beyond simple economic or financial performance. This theory is
relevant to the disclosures made known in the financial reports. Accountants are answerable to the public who expect us to do our jobs
correctly and honestly in accordance with the standards. Meanwhile, contingency theory submits to the idea that accounting information
systems must be designed to be flexible considering the uncertainties in the environment affecting the organization. This adaptability
translates to unending changes or revisions in the standards or reporting practices that accountants need to comply with. However, it is
but right to align the practice with the environment it caters to. Lastly, another relevant theory is the positive accounting theory which
suggests that external users of accounting information always wish to have relevant, reliable, and comparable reports giving a true and
fair view of the financial position and performance of firms. However, this desire is not always mutual to that of internal users like
managers. This theory is closely-related with the agency theory since the integrity of reports produced is at risk.

As a bottom line, theories help the Accounting practice in setting up standards and regulations to ensure the relevance,
reliability, and comparability of financial information. They provide us with a guiding light to intelligently approach issues we have to
face. What is important is that we are grounded in the philosophy that we must value the integrity, transparency, and fairness of
information.
 VENDILLO, Narcy Lyn T.
MS Accountancy

Sources:
Fernando, S. & Lawrence, S. (2014). A theoretical framework for CSR practices: Integrating legitimacy theory, stakeholder theory and
institutional theory. Journal of Theoretical Accounting Research. 10. 149-178.

Gray, R., Adam, C, & Owens, D. (2010). Some Theories for social accounting?: A Review essay and a tentative pedagogic categorisation
of theorisations around social accounting in Martin Freedman, Bikki Jaggi (ed.) Sustainability, Environmental Performance and
Disclosures (Advances in Environmental Accounting & Management, Volume 4) Emerald Group Publishing Limited, pp.1 - 54

Jensen, M., 2000. Theory of firm: governance, residual claims, and organizational forms. Cambridge: Harvard University Press, 2000

Zoumaro-Djayoon, G. (2011). Usefulness of Financial Accounting Information. Unpublished manuscript. Erasmus University.