Kwame Nkrumah University of

Science & Technology, Kumasi, Ghana

ACC 559/ACF 655

ACCOUNTING THEORY
LESSON 1
Introduction to Accounting Theory and Overview of
Theories in Accounting

Department of Accounting and Finance

Abukari Salifu Atchulo, (PhD, CPA)
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 Lecture Outline
 What is a Theory?
 Features of a good Theory,
 Distinction between Normative and Positive Theories,
 What is Accounting Theory and What are Its Aims?
 Role of Accounting in Society and the Economy,
 Overview of Theories in Accounting

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 What is a Theory?
• Webster defines theory as: “systematically organised
knowledge, applicable in a relatively wide variety of
circumstances
• A system of assumptions, accepted principles and rules of
procedure to analyse, predict or otherwise explain the nature of
behaviour of a specified set of phenomena”
• The objective of theory is to explain and predict
• Basic goal of theory– provide a frame of reference for future
actions.
• FOR a theory TO BE USEFUL - WIDE ACCEPTANCE
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 What is a Theory?
• “A Scheme or system of ideas or statements held as an explanation or
account of a group of facts or phenomena; (Oxford English Dictionary)
• A hypothesis that has been confirmed or established by observation or
experiment, and is propounded or accepted as accounting for the known
facts;
• A statement of what are held to be the general laws, principles, or causes
of something known or observed”
• “A coherent set of hypothetical, conceptual and pragmatic principles
forming the general framework of reference for a field of inquiry.”
(Hendriksen,1970)

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 What is a Theory?
• “Coherent” implies that components (e.g. assumptions about human
behaviour) of a theory should logically combine together to provide
explanation or guidance in respect of certain phenomena.
• Simply put, theories are not ad hoc in nature and should be based on
logical (systematic and coherent) reasoning.
• Thus, theory is not an idea or a ‘hunch’(A feeling or guess based on
intuition rather than known facts: "acting on a hunch)".
• The objective of theory is to explain and predict.
• Hence, one of the basic goals of the theory of a particular discipline is to
have a well-defined body of knowledge that has been systematically
accumulated, organised, and verified well enough to provide a frame of
reference for future actions.
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 Distinction between Normative and Positive
Theories
NORMATIVE
• What should be…………

POSITIVE
• Explain what is………

DISTINCTION

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 Features of a good Theory
1. explain or predict phenomena that are empirical
2. generate implications that are capable of regulation by empirical testing
3. consistent both internally and externally
4. provide a focus for guiding and directing research into empirical
problems
• Llewelyn (2003) suggests that the term ‘theory’ in accounting not only
applies to ‘grand theories’ which seek to tell us about broad generalisable
issues (like theory of gravity in physics),
• but also applies to any framework which helps us make sense of aspects
of the (social) world in which we live, and which helps provide a structure
to understand our (social) experiences
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 Features of a good Theory

• A well developed theory encompasses both WHAT SHOULD BE AND

WHAT IS
• Provides a set of principles and relationships that explains observed
practices and predicts unobserved practices.
• Should be able to explain why firms elect certain accounting methods
(SLM) over alternatives (RBM)
• Predict the attributes of firms, i.e. firm specific characteristics that elect
various accounting methods.

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 What is Accounting Theory and Its Aims?

• “A logical reasoning in the form of a set of broad principles that:

1) Provides a general frame of reference by which accounting practise can
be evaluated, and
2) guides the development of new practices and procedures”

• The development of a general theory of accounting is important because

of the role accounting plays in our economic society

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 Role of Accounting in Society and the Economy

• Capitalistic society
–-self-regulated market that operates on the forces of demand & supply
• Our economic society: Goods & services are available for purchase in
markets, individuals are free to enter or exit the market to pursue their
economic goals.
– All societies are constrained by scarce resources that limit the attainment
of all individual or group economic goals

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 Role of Accounting in Society and the Economy

• Accounting reports how organisations use scare resources and on the

status of resources and claims to resources

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 Aims of Accounting Theory
• Deegan et al (2011) contend that different theories of accounting often have different
objectives
• Theories impose cohesion and stability (Czarniawska, 1977), implying that when life
is ambiguous people will work at confronting this ambiguity through ‘theorizing’.
• Also, because ‘life’ and situations commonly have multiple meanings and give rise
to different assessments of significance, everyone has a need for ‘theory’ to go about
their everyday affairs.
• ‘Theories’ do not just reside in libraries, waiting for academics to ‘dust them down’,
they are used whenever people address ambiguity, contradiction or paradox so that
they can decide what to do (and think) next. Theories generate expectations about the
world.
• “The aim of accounting theory is to provide a coherent set of logical principles that
forms the general frame of reference for the evaluation and development of sound
accounting practices”
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 Aims of Accounting Theory
Primary function:
• Explain-provide reasons for observed practice Example:
1. why some firms use SLM but not RBM,
2. how assets should be valued for external reporting purposes
3. individual cultural background & types of accounting information
disclosures to outsiders
Predict-i.e. the theory predicts unobserved practices/accounting phenomena
including present events which no systematic evidence is collected.
• managers paid bonuses on the basis of profit will seek to adopt those
accounting methods that lead to an increase in reported profits

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 Overview of Theories in Accounting
• Theorising can be viewed as a particular way of seeing (Scapens, 1994).
• Scapens (1994) identified a gap between the theoretical materials intended to show
practitioners how accounting should be done and what happens in practice.
• Researchers and practitioners are admonished not to become unduly concerned about
comparisons of what is done in practice against theoretical ‘ideals’, but rather focus
more closely on the study of what is done practically.
• This admonition does not seem to suggest that theory has no place in accounting and
finance.
• What is of importance is the determination of appropriate theory that would be used
for a particular aspect of what is being studied or practised.
• Bebbington, Brown, Frame and Thompson (2007) suggest that research engagements
in accounting need not be taken in a haphazard manner uninformed by theory.

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 Overview of Theories in Accounting
• According to Scapens (1994), neoclassical economics has largely formed the basis of
accounting and finance’s conventional wisdom.
• He however advocates a focus on institutions so as to provide a basis for
understanding accounting and finance practices as institutionalised routines and for
exploring the interaction between accounting and finance and other social
institutions.
• Though Scapens advocates a shift from neoclassical economics in accounting and
Finance towards an institutional framework, he indicates the position of neoclassical
economic theory as the starting point of theories in accounting.
• This he does by distinguishing between ‘new’ institutional economics that have
developed as an extension of neoclassical economic theory and ‘old’ institutional
economics that developed in opposition to neoclassical analysis.

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 Neoclassical economic framework/theory
• Ryan, Scapens and Theobald (2002), indicate that the essential characteristics of
neoclassical economics that emerged in the second part of the nineteenth century
have changed very little.
• The relatively insignificant changes that have occurred in neoclassical economics
have, according to Ryan et al. (2002), been a translation of some of the rougher edges
of the neoclassical economic framework into mathematics.
• Central to neoclassical theory according to Ryan et al. (2002) is the notion of
economic rationality whereby individuals maximise self-interest usually
conceptualised as utility.
• In the case of firms, the availability of market prices allows economists to talk about
profit maximisation.
• According to Scapens (1994), the main assumption of mainstream neoclassical
economic theory (economic rationality and market equilibrium) raises concerns when
it comes to its use as a basis for the study of accounting practice.
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 Criticisms of neoclassical economic theory
• According to Scapens (1994), the neoclassical theory of the firm was developed for market
and industry analyses and not to provide an understanding of what managers actually do.
• This assertion by Scapens is supported by Ryan et al. (2002) when they note that over the
years, neoclassical economics has been quite successful in predicting economic behaviour at
the market level, but has seen little success when it comes to individual behaviour.
• Ryan et al. (2002) argue that there is a considerable body of empirical evidence mostly
derived from cognitive psychology that suggests that the individual does not possess the
level of rationality and completeness of information required to undertake marginal analysis
needed for utility maximisation in the case of individuals, and profit maximisation in the
case of businesses/organisations.
• Scapens (1994) indicates that neoclassical theory is unable to address fundamental economic
realities.
• Particularly, he noted the inability of neoclassical theory to take into account uncertainty,
bounded rationality, the presence of corporations, institutional complexities or the dynamics
of actual adjustment processes.
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 Criticisms of neoclassical economic theory
• The shortcomings of neoclassical theory not being able to address fundamental economic realities are
largely overcome by institutional theory as described by Burns and Scapens (2000) and Dillard,
Rigsby, and Goodman (2004)……………. These would be discussed later.
• Despite cautioning against the use of neoclassical economic theory in accounting research, Ryan et al.
(2002) indicate that it provides a basis for most of the normative accounting models with a huge
following.
• Scapens (1994) notes that though individual decision-makers may be unable to constantly maximise
their profits (as also acknowledged by Ryan et al. (2002), profits do provide the basis for predictable
managerial behaviour.
• Additionally, Ryan et al. (2002) indicate that modern businesses are profit-seeking organisations, and
that profit-seeking and maximisation do not amount to the same thing, except in a very simplistic view
of the world.
• The shortcomings of neoclassical economic theory according to Ryan et al. (2002) led to many
economists proposing alternative approaches to the study of economic behaviour.
• These alternative approaches are considered next.

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 Alternatives to neoclassical theory
• Alternative traditions and approaches to research in accounting have to a large extent
avoided the limitations of the neoclassical economic theory that have been mentioned
above according to Ryan et al. (2002).
• Such alternative approaches have also succeeded in bringing to light issues both in
theory and practice.
• Ryan et al. (2002) trace the beginning of behavioural accounting to the 1960s and
indicate that this centred on the individual decision-maker.
• Additionally, they note the emergence of organisational dimensions of accounting
and finance around that period which resulted in organisational theory being used to
guide research and practice.
• The advantage these brought to accounting was providing the discipline of
accounting with some added width and this was further enhanced when researchers
began drawing on social theory.
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 Behavioural Accounting
• Ryan et al. (2002) trace the beginnings of behavioural accounting to Argyris (1952).
• Ryan et al. (2002), note that central to behavioural accounting in the 1960s and early 1970s was the
demonstration of how accounting can have an impact on the behaviour of organisational participants,
their levels of job satisfaction, and most importantly, their individual performance and the
performance of the organisation as a whole.
• Though behavioural accounting research started off with researchers asking how accounting affect
people, by the close of the 1960s, Ryan et al. (2002) indicate that practitioners and academics were
beginning to look at how people affect accounting.
• Noguchi and Boyns (2012) bring the phenomenon of accounting having the ability to influence, and
be influenced when they indicate that the existence of an accounting practice is the result of a contest
between those who want it and those who do not.
• This is an indication that there is the possibility of accounting practice(s) being influenced by other
externalities.

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 Organisational theory

• Scapens (1994), sees accounting practices as institutionalised routines

that enable organisations to reproduce legitimate behaviour to achieve
organisational cohesion.
• Scapens (1994) indicates that the rejection of the core assumptions of
neoclassical economics is the beginning of an institutional economics
approach to accounting.
• This provides a useful theoretical framework for accounting practices
through the introduction of social, political, and cultural elements.

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 Institutional theory
• At the heart of the institutional theory described by Scapens (1994) is the belief that
accounting procedures and techniques introduced by managers and accountants
through their actions would evolve and adapt to environmental conditions.
• This presupposes that new accounting techniques and procedures would inevitably
become established in an organisation through its interaction with existing
organisational conditions over time.
• An advancement of the institutional theory described by Scapens (1994) is provided
by Burns and Scapens (2000).
• An assertion that accounting practices can both shape, and be shaped by the
institutions that govern organisational activity is the starting point of Burns and
Scapens’ institutional theory.

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The process of institutionalisation(Source: Burns
and Scapens (2000) pg. 7.

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 The process of institutionalisation
• Prior to the institutionalisation of rules and routines, Burns and Scapens (2000) identify the
processes of encoding, enacting, and reproduction as intermediary processes that occur before
institutionalisation.
• The process of encoding indicated as ‘a’ ‘draws on the taken-for-granted assumptions
comprising the institutional principles, through their instantiation in existing meanings,
values and power,’.
• The process of enactment indicated as ‘b’, ‘may involve conscious choice, but will usually
result from reflective monitoring and the application of tacit knowledge about how things are
now,’.
• The process of reproduction indicated as ‘c’, may be conscious or unconscious, and takes
place as repeated behaviour occurs.
• Conscious reproduction is when actors are able to rally the resources and rationales required
to collectively question the existing rules and routines.
• In the situation where systems to monitor the execution of the routines do not exist and the
rules and routines are not sufficiently understood, and/or accepted by the actors, then
unconscious or unintended reproduction is the result.
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 The process of institutionalisation
• A possible limitation about the institutionalisation theory as put forward by Burns and
Scapens (2000), is that it presents the process of institutionalisation as made up of the
‘sub-processes’ of encoding, enacting, reproduction and then institutionalisation.
• These processes are largely portrayed by Burns and Scapens as linear and sequential.
Burns and Scapens’ description of the institutionalisation process seems to suggest that
the occurrence of a particular aspect of the institutionalisation process is dependent on the
completion of the process preceding it.
• However, there is the possibility for these processes to be occurring concurrently.
• Perhaps the most comprehensive and most appropriate theoretical framework for studying
accounting practice or change, is the version of institutional theory provided by Dillard,
Rigsby, and Goodman (2004) and also used by Noguchi and Boyns (2012) in their study.

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 Dillard et al’s. (2004) institutional framework
•Noguchi and Boyns (2012) adopt the lens of the institutional theory provided by
Dillard et al. (2004) in their study.
•Though not the first time, Noguchi and Boyns (2012) refer to the framework
provided by Dillard et al. (2004) as New Institutional Sociology (NIS).
•This nomenclature came up as an ex-post title based on the discourse of Dillard et
al. (2004).
•This is not peculiar to the institutional theory provided by Dillard et al. (2012).
•Theories such as actor-network theory, labour process theory, and transaction cost
theory originating from authors such as Michel Callon, Harry Braverman and
Ronald Coase respectively, came by their nomenclature in a similar ex-post
manner.

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 Dillard et al’s. (2004) institutional framework
• The institutional theory provided by Dillard et al. (2004) is based on institutional
theory as described by Burns and Scapens, (2000).
• However it differs particularly from Burns and Scapens (2000) institutional theory
because it makes use of a set of theories.
• Dillard et al. (2004) make use of theories and concepts such as structuration theory,
duality of structure, as well as rationality borrowed from old institutional economics.
• Dillard et al. (2004) actually acknowledge that the framework they provided was an
extension of the institutional framework provided by Burns and Scapens (2000).
• The concepts of encoding, enacting, reproduction, and institutionalisation as
described by Burns and Scapens (2000) are acknowledged by Dillard et al. (2004).
• However, this framework has been expanded and provides a comprehensive
conceptual basis for exploring accounting practice.

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 Three levels of analysis of accounting practice/
change(Source: Dillard et al. 2004)
Macro factors

Overarching influence of political, economic and social systems

Emphasises institutional isomorphism for legitimacy

Organisational field

Power of industrial coalitions and groupings

Competitive pressure as a driving force of accounting change

Legitimacy

Intra-organisational imperatives

The role of key reflective organisational participants

Internal sponsor

Change champion

Group dynamics and internal consensus building

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 Three levels of analysis of accounting
practice/change (Macro level)
• Dillard et al. (2004) indicate that at the macro level, laws and regulations are informed by discursively
formulated, subjectively rational norms and values.
• According to Dillard et al. (2004) in such a situation, organisational activities are motivated from the imperative
of legitimacy-seeking behaviour, which is influenced by socially constructed norms.
• They add that for organisations to survive, they must interact with their environment in ways perceived as
acceptable to their various constituents in that environment.
• Dillard et al. (2004) as well as DiMaggio and Powell (1983) describe as institutional isomorphism. DiMaggio
and Powell (1983) as well as Noguchi and Boyns (2012) classify the motivation to adopt institutional practices
into coercive, mimetic and normative isomorphism.
• According to DiMaggio and Powell (1983), coercive isomorphism results from both formal and informal
pressures exerted on an organisation by another party upon which it is dependent, and by expectations of the
society within which it operates.
• Mimetic isomorphism is a process that takes place when an organisation attempts to imitate a more successful
referent organisation, a process that is often due to uncertainty and lack of guidance in its own environment.
• Normative isomorphism stems from professionalization (i.e. the collective struggle of members of an
occupation to define the conditions and methods of work).
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 Three levels of analysis of accounting practice/
change (Organisational field level)
• At the organisational field level, industry norms, regulations and
practices could be directed toward the value-free implementation of
economic efficiency.
• Dillard et al. (2004) acknowledge that industry norms, regulations and
practices could be informed by value-driven criteria derived from the
discursively formulated community norms and values and would be
directed towards community well-being.
• In such a situation issues such as taking into account concerns of
customers, attracting and retaining staff and reputation and brand will
be taken into consideration.
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 Three levels of analysis of accounting practice
(organisational level)
• Dillard et al. (2004) indicate that at the organisational level an organisation could be faced with
legitimising structures requiring the implementation of formal rationality in understanding technical,
administrative and contextual relationships.
• They add that the means by which resources are allocated and controlled in such a system are embodied
within formal, hierarchical administrative structures with the primary evaluative criteria being profit
maximisation and economic wealth accumulation.
• Under such circumstances, decision-making will be done without taking into account other
externalities.
• Dillard et al. (2004) indicate that resources can be allocated and controlled at the organisational level
based on social consensus developed through discussion and debate and actors at this level are held
accountable as members of an ongoing community.
• According to Dillard et al. (2004) the focus at the organisational level in this instance is community
building.
• At this level accounting practice will take into account other externalities.
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 Three levels of analysis of accounting
practice/change
• Dillard et al. (2004) provide that there is a hierarchy of institutional influence where the economic and
political level provides the foundations for organisational field level institutions and the organisational
field provides the context for the institutions confronted by and embedded in organisations.
• The framework explicitly recognises the organisational field as an interactive part of a larger social
system that must be considered when examining the establishment, embedding and deinstitutionalisation
of accounting criteria and practices.
• In recognising the role of the larger social system in the establishment, embedding and
deinstitutionalisation of criteria and practices, Dillard et al. (2004), acknowledge that tensions normally
exist between formal and substantive rationality as ways of knowing and therefore justifications for
actions.
• Dillard et al. (2004) note that formal rationality is calculation oriented, for example, accounting figures
assumed to be value neutral, rational and a universalistic basis for making economic decisions; and
substantive rationality relates to the substance of the values, ends, needs of social groups and the
institutions that promote them.

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 Three levels of analysis of accounting
practice/change
• Formal rationality is in consonance with the tenets of
neoclassical economic theory.
• It is based on economic or financial figures forming the basis of
accounting practice within organisations.
• The concept of substantive rationality as indicated by Dillard et
al. (2004) will largely take into account other externalities the
factors that to be accounted for in assessing organisational
actions and activities.
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 Does a financial / economic focus capture all the
important issues?
• What about so-called ‘externalities’?
– Factors external to economic analysis
– Impacts imposed on those external to the organisation
• This raises two important issues:
– Moral / ethical issues about imposing externalities on others, issues of
corporate social responsibility (CSR)
– Is it plausible to regard these ‘externalities’ as having no economic
impact on an organization?

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 Interaction of social and environmental
‘externalities’ with economic ‘internalities’
Positive and
negative economic
impacts

Feedback of
economic Direct economic
2
nd
order impacts impact on impact of decision 2
nd
order impacts
organization

Decision or
action by an
Direct social organization
Direct ecological
impact of decision impact of decision

Feedback of
Positive and negative Feedback of Positive and negative
social impact
impacts on society environment impacts on the
on
and social cohesion al impact on natural environment
organization
organization

nd
2 order impacts

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 What role(s) can accounting play in sustainable
development?
• Communication of information for sustainability decision
making
– Management decision making
• Help articulate and embed understanding of interconnectedness of social,
environmental & economic aspects of performance
• Financing decisions taking into account all dimensions of sustainability, not
just the economic ones
– 3rd party stakeholder decision-making through corporate reporting

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 What role(s) can accounting play in sustainable
development?
• Stewardship role of corporate investment, financing and reporting is about
discharging duties of accountability
– These duties of accountability derive from responsibilities
• For example, directors have legally defined financial responsibilities to
shareholders and creditors
– Financial reporting is a mechanism used to provide shareholders and
creditors with information to help them judge how well the directors have
carried out these financial responsibilities

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 What role(s) can accounting play in sustainable
development?
• But does accounting and reporting have to be quantitative
and/or financial?

– Also considerable narrative reporting outside of annual

reports
• EG: Investor and CSR websites, stand-alone CSR reports

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 What role(s) can accounting play in sustainable
development?
• Sustainability reporting covers a range of mechanisms whereby
managers report to a range of stakeholders about how they have
discharged the social, environmental and economic responsibilities owed
to these stakeholders
– Increasing prevalence of stand-alone CSR/ sustainability reports in
last 15 years
• But recent move to also reintegrate sustainability reporting in
annual report, with KPIs relevant to investors

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 Role of accounting in sustainable development is
increasingly high profile
• Many multinationals spend considerable resources on external
sustainability or CSR reports
– Many also use internal ‘accounting for sustainability’ practices in
aiding decision making
• Many big firms provide ‘assurance’ services on sustainability
or CSR reports
• Most (all UK) professional accounting bodies are helping to
promote and develop aspects of accounting for
sustainability………..
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 Standardization of sustainability guidelines for
accounting and reporting
Key bodies that have developed sustainability reporting
standards
 The Global Reporting Initiative (GRI)
 The International Standards Organisation (ISO)
 The World Business Council for Sustainable Development (WBCSD)
 The Institute of Social and Ethical AccountAbility (ISEA)
 Sustainability Integrated Guidelines for Management Project (SIGMA)

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 The Global Reporting Initiative (GRI)
Is the most used framework of standards
 An attempt to codify best reporting practice
3 common components in a sustainability report are:
 Strategy and Profile: Disclosures that set the overall context for
understanding organizational performance such as its strategy, profile, and
governance.
 Management Approach: Disclosures that cover how an organization
addresses a given set of topics in order to provide context for
understanding performance in a specific area.
 Performance Indicators: Indicators that elicit comparable information on
the economic, environmental, and social performance of the organization.
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 GRI performance indicators:
• 9 economic performance indicators
• 30 environmental performance indicators
• 40 social performance indicators
– Split into:
• Labour practices and decent work (14 indicators)
• Human rights (9 indicators)
• Society (8 indicators)
• Product responsibility (9 indicators)
• For more detail see: www.globalreporting.org

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 Problems with GRI
• One key problem is that GRI is voluntary
– Thus companies can be selective in what they report
• But can still claim to be GRI compliant
• This is also a problem with the other frameworks

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 AccountAbility, (ISEA) AA1000 Framework
The most important contribution of AA1000 is in terms of
sustainability reporting processes
 Rather than determining/standardising what should be reported (as in
the GRI)
Key aspects of these processes which should be present
include:
 Stakeholder engagement
 Need for transparency, responsiveness and legal compliance
 Quality assurance

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 Comparing GRI and AA1000 with other standards
• GRI and AA1000 have been developed by bodies not directly
under the control of the corporate sector
– Although the corporate sector does have significant influence on the
standard setting process
• Some other bodies, such as WBCSD, lobby for sustainability
reporting standards to help the business case

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 Research in sustainability accounting, and
accountability
• This has become a very popular and active area of research in
recent years
• Many strands of research
– Ian Thomson’s chapter in Unerman, Bebbington & O’Dwyer (chapter
1) outlines the different strands of research interest

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Broad themes addressed by sustainability
accounting and accountability research

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 Research topics studied
mar kets
Capital market env ir onm ent
r eaction Impac t of
Ethic al sus a/c
reporting Reputation
financ e theories
risk poli cies

education
soc ial ac countants
res ear ch
Topic media politics

gender

stakeholder s
r egulations
Dec is ion making
Per formance
cos ting
measures
ethic al
audit

Information
accr editation
s ys tems
tax

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 Purpose of articles
pract ice
Purpose of Article
a cade mics p olicy

p rac titioners
regula tion
st ud e nt s unde rs tand

o rga nis at ion s

desc ribe

activi sts st ak eh olde rs

engage others re for m

in stitu tio ns

P ro mo te ne w

E xpl ain ab sen ce

criticis e The ore tica l critique

pra ctise
Ex po se ba d

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 Research methods used
Th eo ret ic al c ritiq ue

C on te nt an al ysis Lit e rat ur e revi ew

qu an tat ive S ta ti stica l testin g

R ev iew othe rs da ta

Ma rke t b ase d

Even t s tu d y
w eb site

D ocu me nt revi ew

C ase stu d ies

su rve ys

i nter view s

Action rese arc h

e xp e rime nt
et h no gra ph ic
histo ric al Eve nt
p ostmo rte m

Re sea rch methods

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 Geographical location researched
uk
usa

europe

canada
Republi c of Ireland
South ameri ca

un
G lobal mar kets International
organi sati on austral i a

New zeal and

Asi an japan
Dev el oping nations malay asi a
fij i

afri ca
bangladesh
Mi ddl e east

Geographic Location

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 Empirical sites researched
Public sector
NGOs
educational
Com munities
Politic al in stitute s
n atio ns

L arge plc

Re gulatory syste m

A ccreditation
sch eme

po llu tan ts

resources
nature
pro duct animals
Trans na tiona l plc

Me dium plc Ac counting

firms
SME s

Entity

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 Theoretical frameworks used
Politic al economy
Informat ion us eful
Mar ket theory
Critical theory
marxis t
f oucault
pragm atics
gramsci Busines s case

postmodern
legitimac y
gender
stakeholder
Ecologic al modernit y agenc y

Deep ecology ac countabi lity

communitarian
Game theor y
institutional
c ont ingency
none

ethics

pedagogic

Liberal democracy behavioural

Media setting
Reflex iv e modern Culture theor y

Ris k theory
const ruc tionism

Evaluatory Frameworks
legal Organisation c hange

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• Sustainability accounting, finance and accountability is a relatively new,
but growing area of research and practice
• The practical importance of the issues covered is becoming widely
acknowledged
• Thus, this area of research has the potential to make a big impact on
practice
• There are a wide variety of research topics, methods, theoretical
frameworks and empirical locations/type of organisations in this research
• But many under-researched areas

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 Voluntarism and motivations for social and
environmental reporting
• The history of social and environmental, or sustainability, reporting is
one of voluntary reporting practices
– Voluntary practices tend to be diverse
• And motivated by diverse factors, insights into which are provided
by:
– Stakeholder theory
– Legitimacy theory
– Institutional theory

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 Links between the 3 theories
All provide some insights on possible motives for organisations
engaging in non-mandatory sustainability reporting
There is some overlap between the theories
 The theories are therefore not mutually exclusive
 They do not provide wholly competing explanations, but are
complementary
Need to distinguish between a holistic/ethical and a
strategic/managerial motive
 In practice a continuum between these positions

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 The 3 motivational theories are at first stage of a 4
stage model of research and practice
A staged hierarchical model of the social and environmental reporting (SER) process
Stage in Issues determined in Example of holistic Example of strategic
model stage accountability accountability

1. W hy Motives for SER and CSR Using SER as a key Using SER as a tool to help
mechanism for social, maximise shareholder value
environmental and economic
sustainability

Stakeholders with the most

2. W ho Range of stakeholders to All stakeholders affected by economic power, who would
be addressed in SER organisation’s actions detract from shareholder value
(including future generations if they withdrew their support
and non-humans)

Stakeholder needs prioritised

3. For what Determining Needs of all stakeholders
responsibilities to, and discussed and weighed via
information needs of, democratic debate leading
stakeholders through to widely accepted
engagement and dialogue consensus of organisation’s
responsibilities and
accountabilities
according to their relative
economic power over the
organisation. Needs and
interests of less powerful
stakeholders largely ignored

Report focused on needs of

4. How Mechanisms used to economically powerful
compile and communicate Report focused on stakeholders
reports addressing these consensus of information
stakeholder information needs of broad range of
needs stakeholders

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 Stakeholder theory
• Two opposing views on stakeholder recognition
– Stakeholders are all those who can have an impact upon the business /
organisation
• Implies strategic movie
– Stakeholders are all those upon whom the business / organisation can
have an impact
• Implies holistic motive
• Stakeholder theory implies that we can identify broad motives
from the stakeholders that are focused upon in the SER

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 Stakeholder theory
• Organisations will focus on meeting the information needs of
their prioritised stakeholders
– Strategic motive – focuses on information needs of economically
powerful stakeholders
• These stakeholders will vary from company to company
– Broader ethical, holistic, motive – focuses on info needs of
stakeholders most affected by org’s activities
• Problems with mutually exclusive stakeholder info needs

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 Stakeholder engagement
Either strategic or ethical motive (or any position on
continuum) requires stakeholder engagement
 To indentify information needs of stakeholders
Reporting is then targeted to meeting these information needs
Strategic motive
 Prioritise information needs of economically most powerful
stakeholders
Ethical / holistic motive
 Need democratic debate to arrive at consensus among stakeholders, eg:
Habermassian discourse
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 Legitimacy theory
• Usually assumes a strategic motive
– The role of sustainability reporting is regarded as being to build,
maintain and/or repair the legitimacy of the organisation
• Definition of legitimacy (from Suchman, 1995):
– “a generalised perception or assumption that the actions of an entity
are desirable, proper, or appropriate within some socially constructed
system of norms, values, beliefs and definitions”

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 Role of legitimacy
• Legitimacy in the eyes of mission contingent (powerful)
stakeholders is a condition required for the survival and
prospering of an organisation
• Relies on notions of the social contract
– An informal contract between the organisation and a range of
stakeholders
• How wide this range of stakeholders is depends on balance on continuum
between strategic and ethical/holistic motive

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 Legitimacy gap
• A legitimacy gap will exist if the actions of the organisation are
perceived to be at variance with its social contract
– Key stakeholders may withdraw their consent/ mandate for the
organisation to continue operating
• EG: Consumer boycotts

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 Legitimacy strategies and sustainability reporting
• Theorises what organisations do when their perceived actions /
impacts are out of line with expectations from their social
contract
– 4 key strategies, all of which can involve SER, and indicate what
information should be reported:
• Change activities in line with stakeholder expectations
• Don’t change activities, but use corporate reports to create an impression that
activities have changed
• Deflect stakeholder attention onto other corporate activities
• Educate stakeholders about the unreasonableness of their expectations

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 Identifying sustainability motives using legitimacy
theory
• Most of the strategies on the previous slide allow organisations
to maintain actions which are at variance with their social
contract
– Or try to alter the terms of their social contract so they do not need to
change actions
• This would normally indicate a strategic motive for
sustainability reporting
• Thus, if can identify legitimation strategy used, can infer
motive for sustainability reporting
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 Empirical studies of legitimacy theory
• Legitimacy theory has been a very popular theory in
sustainability finance and reporting
• Most studies have found evidence that companies are adopting
a range of legitimation strategies – beyond changing their
activities to match the expectations of their key stakeholders
– Thus, this provides evidence of strategic motives, indicating attempts
at social construction of a biased picture of ‘reality’

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 Limitations of legitimacy theory
• It is a very broad theory, so many observed behaviours can
seem to fit its explanations
– This could be why it has been so popular!
– But this does limit its explanatory power
• It tends to focus on the level of society as a whole (eg: the
social contract with society) and tends to ignore mutually
exclusive expectations of different powerful stakeholders

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‘It is a long journey, but the best way to complete it is to start and we have
just done that’

Remember!
dratchulo@gmail.com [email]
+233(0)243261240 [mobile]

Thank you
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