Accounting for Corporate Social Responsibilities and Reactions of Capital Markets to Financial Reporting

This article discusses accounting for corporate social responsibilities and reactions of capital markets to financial reporting. It covers legitimacy theory, stakeholder theory, and institutional theory in accounting for corporate social responsibilities. It also explores the efficient market hypothesis, the impact of earnings announcements on share prices, and the usefulness of capital markets research for finance professionals and practicing accountants.

Accounting Theory
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Table of Contents
Accounting for Corporate Social Responsibilities.................................................................................2
Question 1.........................................................................................................................................2
Question 2.........................................................................................................................................2
Question 3.........................................................................................................................................2
Question 4.........................................................................................................................................3
Question 5.........................................................................................................................................3
Question 6.........................................................................................................................................4
Reactions of capital markets to financial reporting................................................................................4
Question 1.........................................................................................................................................4
Question 2.........................................................................................................................................4
Question 3.........................................................................................................................................5
Question 4.........................................................................................................................................5
Question 5.........................................................................................................................................5
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Accounting for Corporate Social Responsibilities
Question 1
(a) Legitimacy theory
The legitimacy theory depicts the extent to which corporate environmental and social
disclosures are being influenced by the boundaries created by society. The management of
the organization should ensure that all the environmental and social related information need
to be disclosed in order to avoid any kind of negative impact on society.
b) Stakeholder theory
The stakeholder theory explains that the main purpose of an organization is to create value
for the stakeholders. Thus, the management of the organization has to carry out its business
and disclose information as per the needs of the employees, suppliers, customers,
shareholders, and communities.
c) Institutional theory
The institutional theory evaluates the mechanisms and processes by which schemas, routines,
structures, and rules become the authoritative guidelines for social behavior. The
management of the organization has to consider the theory in order to create a relationship
between the business activities and the people of the community.
Question 2
Social contact explains how an organization interacts with the people within the community.
It relates to the implicit and explicit expectations of the society about how an organization
should carry out its business in order to survive in the market. A social contract is necessarily
not a written agreement rather it is an understanding of the needs of the people of the society.
Social contract explains the relationship between business and society. On the other hand,
organizational legitimacy depicts the state in which a company met the terms and conditions
of the social contract. The process is explained by the theory in which the social contract is
maintained or gained.
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Question 3
The organizations have to understand and fulfill the needs of the stakeholders. An
organization should disclose the information about different initiatives and programs to the
respective stakeholder groups for clearly showing that they are working as per the
expectations. A balance needs to be created between the expectations of different stakeholder
groups. If the organization is facing difficulties then the management should clearly depict
information and data in their reports about the business processes. The information needs to
be published as per the needs of different stakeholders. If a particular stakeholder group
needs specific information then the organization has to disclose it in an appropriate manner.
Question 4
International integrated reporting applies concepts and principles that focus on bringing
greater efficiency and cohesion to the reporting process. It assists to adopt integrated thinking
in order to decrease duplication and ensuring fairness. The quality of the information is being
improved which enables the organization to allocate its capital funds in an appropriate
manner. The reporting focuses on the utilization of capital and creation of value which
contributes towards the development of a stable global economy. On the other hand, the
current financial reporting system of Australia main aim is to promote investors integrity and
confidence in the economy, capital markets, and corporations. The main difference between
the two reporting system is that the international integrated reporting provides direction to the
organizations all over the world and the financial reporting system provides direction to the
organizations in Australia.
Question 5
An externality is referred to as negative or positive consequences of the economic activities
experienced by the third parties. Example of a negative externality is that an organization
emitting pollution affecting the health of the people and the surrounding environment.
Example of a positive externality is the effect of the efficient and productive labor force on
the organization. The externalities generally occur when the consumption or production of
specific product imposes an impact on the third party who is not related directly to it. The
accounting practices ignore the externalities because of the different way of defining the
financing accounting elements and accounting considers the entity assumption. The
assumption needs that the organization should be treated distinctly from its owner,
stakeholders and other organizations. Thus, if an event or transaction does not impact directly
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the organization then the event or transaction can be ignored for the accounting purpose. The
externalities can also be ignored by the reporting organization.
Question 6
Yes, the profit margin is misleading the same organization that has not placed expenses on
the externalities and imposes a significant impact on sustainability. For the community,
sustainable development had become very much important and there is an increase in the
demand for information about the environmental and social performance. The organizations
have to ensure that the business activities are not imposing a negative impact on the
community and environment. The accounting standards and organizations are also focusing
on addressing the issues. The accounting organization consisted of divisions that consider
environmental and social reporting and accountability issues. The reports of the organization
should take into this question in order to avoid the impacts of the negative externalities. It is
being also seen that many educational institutions are also considering environmental and
social issues.
Reactions of capital markets to financial reporting
Question 1
The capital markets consist of the assumption that the equity markets are considered to be
efficient and swiftly react to the new information related to the cash flows and future earnings
of the organization. The assumption is considered be as the efficient market hypothesis.
Efficiency means that the capital market swiftly reacts to the new information. The capital
markets are developed with the contributions of individuals. There are many reasons that can
show that the price of share did not change. The prices of shares take into accounts the
reactions of only one stakeholder group which is an investor. The information may be useful
to other parties who are not directly participating in the capital market. However, they have
the right to know or have an understanding of the information. The failure to determine the
reaction of the share price does not mean that the information is irrelevant necessarily to all
the stakeholders.
Question 2
The assumptions about market efficiency should not be rejected. The capital market research
relies on the assumptions of the efficient market. The capital market research can only
specify that there is a relationship between the publications of the information of fluctuations
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in the share prices. The disclosure of the requirements becomes redundant if the capital
market becomes efficient. If the capital market is not efficient then it cannot be determined
how and why the prices of shares would change around the published information. It should
not be what kind of securities laws and security management system come to the conclusion
and a descriptive theory should be there about the financial information of the company and
the relationship between the share prices. It is being determined that the capital market does
not behave always as per the efficient market hypothesis.
Question 3
The article depicts that the share prices of many drug organization increased because Vioxx
can sale agreed by FDA in the market. On the basis of the capital market research view, the
price of share reacts to the information from different sources. Thus, the news can impose an
impact on the future flow of cash due to the increase in sales revenues and related assets. The
selling of products by Vioxx allowed the drug organization to increase sales and profits. It
allowed many shareholders to purchase the shares of the company. Apart from this, if there
are no reactions of the share prices then it means that the event or news did not influence the
market for revising any prior expectations about the future flow of cash of these organization.
The information of the drug rule of FAD could have reacted towards the changes in the share
price of these organizations.
Question 4
The main reason for the change in the share price is the announcement of earnings by an
organization. The earnings announcement of an organization within an industry can lead to an
increase or decrease in the share prices of other organization. If the organization announces
that the earnings are high then the prices of the shares will increase. The shareholders will
start purchasing the shares of those organizations. On the other hand, the shares prices of
other organizations will decrease because the investors would start selling the shares. The
share prices of other organizations in the same industry are affected by the increase or
decrease of the share price of a particular organization.
Question 5
The capital markets research results are useful for both finance professionals and practicing
accountants. They are not considered to be useful for the investors and other users of the
financial statements. Brown and Ball examined whether organizations with an unexpected
hike in the accounting earnings consisted of negative abnormal returns. The evidence
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depicted that the information included in the annual report of the organization is useful for
making investment decisions despite the drawback of the historical cost accounting system. It
cannot be said that the historical cost accounting system is very much use because current
cost accounting system or the present value can be more useful. However, it provides some
credence to the continuous use of the historical cost.
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