Importance of Stakeholder Engagement, Positive Accounting Theory and Legitimacy Theory in Business

This report discusses the importance of Stakeholder Engagement Theory, Positive Accounting Theory and Legitimacy Theory in the business context. It explains how these theories are important for meeting the expectations of investors and financial users for the continuity of the business. The report also includes case studies on National Australian Bank and Commonwealth Bank.

Advanced Accounting
Assignment

1
By student name
Professor
University
Date: 25 April 2018.
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Executive Summary
A financial report has been prepared on the importance and the sue of some of the theories
applied in the business context and how is it important to meet the expectation of the investors
and the financial users for the continuity of the business. The report discusses on the Stakeholder
Engagement Theory and how is it important especially for banking institutions. It also shows the
benefits of positive accounting theory for the business with the help of one of the hypothesis
called the political cost assumption. Finally, the report also focuses on the legitimacy theory and
why it is important to keep the users and the investors informed on the social and environmental
contributions of businesses. All these theories have been explained using two research articles
published in the Australian Journal.
1. “A step too far crucifies small businesses” on one of the Australian Banks called National
Australian Bank
2. “CBA in pay out on “toxic” products” on the Commonwealth bank of Australia.
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Contents
Executive Summary.....................................................................................................................................2
Introduction.................................................................................................................................................4
Question 1: Case Study on National Australian Bank..................................................................................4
Part 1: If Bank cared about small businesses and regional business communities..................................4
Part 2: Application: Political cost hypothesis in Positive Accounting Theory...........................................5
Part 3: Application: Legitimacy Theory....................................................................................................5
Question 2: Case Study on Commonwealth Bank........................................................................................6
Disclosure of information: Critical Points................................................................................................6
Period of disclosure.................................................................................................................................6
References...................................................................................................................................................7
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Introduction
The case study is on three major concepts and the theories, one of which is the Stakeholder’s
Theory as per which all the financial and non-financial information needs to be shared with the
user for decision-making and continuity of the business. The second is the legitimacy theory as
per which the businesses should operate keeping in mind the norms and practices being followed
in the society and should try to meet the needs of society (Belton, 2017). The final theory being
discussed is the positive Accounting Theory, which has a number of hypothesis to deal with like
debt equity hypothesis, the bonus plan hypothesis and the political cost hypothesis. It has a
number of concepts as well like that of agency cost and relationship and agency issues. All of
these has been explained using case study.
Question 1: Case Study on National Australian Bank
Part 1: If Bank cared about small businesses and regional business
communities
Introduction: Stakeholder’s theory
As per this theory, the stakeholders of the business expects that the businesses are going to create
value for them and this is the only way in which the businesses can survive and grow. Both the
financial and non-financial information needs of the users are to be met. The stakeholders can be
internal or external. Internal stakeholders include employees, debtors, creditors, existing
customers, management and shareholders of company, on the other hand, external stakeholders
include government, tax authorities, bank, financial institutions and the prospective investors
(Bizfluent, 2017). Since all the above-mentioned stakeholders contribute in some way or the
other in the growth of business, they expect value creation for them as well by the company.
Thus, it is each other’s actions can affect a two-way impact and both the parties heavily and
therefore harmonization in the goals is required.
Application: Stakeholder’s Theory
In the given case, the childcare centre plan of Alan and Wilma McMinn’s had to be closed
because of inefficiencies of the National Australian Bank and the inadequate support rendered by
them. They failed to meet the expectation and completely ignored the needs of the small
businesses sector due to internal issues like restructuring, constant change in the internal staffing
who were responsible for these small business accounts (Fay & Negangard, 2017). The company
also reported these in the financial statements and it had a huge loss in the market share due to
this. Furthermore, the called 110 of its field officials and banking partners to central offices in
city as part of the small scale lending centralization. This further cut off the face and face
communication and the personal contact with the customers. The bank also faltered in
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contributing to growth of regional community as they failed to meet the loan application of Alan
and Wilma McMinn who were already earning as much as $ 250000 from the existing business
locations (Farmer, 2018).
Part 2: Application: Political cost hypothesis in Positive Accounting Theory
Positive Accounting theory and its meaning
Positive Accounting Theory (PAT) is one where the methods of accounting are being changed
based on the given circumstances such that the information needs of the stakeholders are also
being met and the relevant accounting standards are being followed. The decision to apply one or
the other accounting approach depends on the economic consequences of the method being
followed. Out of the three hypothesis of this theory, the political cost theory states that the
earnings needs to be deferred if the organization is involved in bearing of political costs (Vieira,
et al., 2017).
Application: Political cost hypothesis in Positive Accounting Theory
There was one of the statements in the article, which said, “The banks have promoted studies that
find small-business is getting a better deal from the banks, perhaps in fear that the federal
government might introduce legislation to improve service to the country’s 1.2 million small-
business operators, as has the government in the UK”. The statement depicts that NAB already
perceived and was aware of the fact that it has been ignoring the needs of the small businesses
and as a result, the government may put up a legislation to be followed by bankers to help the
small businesses sector (Kuhn & Morris, 2016). This was in fact a proactive and positive
approach in a bid to avoid the political costs in the future and get involved directly in serving the
sector straightaway. The company did a defensive action to promote and advocate that the small
businesses are getting better deals from the banks or else it would have landed in huge political
costs. This is one of the examples of Positive Accounting Theory where in order to avoid the
unnecessary political costs and reducing profitability, it decided to changes the perception and
way of accounting where the company would no more be perceived as profit making in the eyes
of government and politicians. It further wanted to depict the company as one, which considers
public interest at large as priority rather than profits. With this, political costs and regulations
could be avoided (Marques, 2018).
Part 3: Application: Legitimacy Theory
Legitimacy Theory and its meaning
As per the Legitimacy theory, the company needs to disclose in the annual financial statements,
the social, environmental and community obligations, which has been met by the company to
enable users, understand that the company is meeting the social and economic obligations. It is
one of the requirements of corporate governance and in the given case; the company NAB
should have reported the same in financial statements (Md Khokan Bepari, 2014). It could have
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saved NAB from the allegations imposed by Alan and Wilma McMinn that the company did not
offered loan on time due to which the business and society as a whole suffered.
Question 2: Case Study on Commonwealth Bank
Misleading information in Disclosures
As per AASB 130, it is required for all the listed companies in Australia to disclose all the
material information in the financial statements, which could be critical for decision-making.
Furthermore, the bifurcation of the expenses heads is also required in the annual accounts for
better understanding of the users (Grenier, 2017). As per the given case study, CBA did not
disclose all the material information in the books and thus deceived the investors. Some of that
critical information is mentioned below:
1. The litigation expenses being paid to “International Litigation Partners” amounting to
$1.5 Mn was not disclosed separately in financial statements – notes and disclosures
section.
2. The complete picture of provision and contingent liabilities that the company might incur
in the coming future was not shown (Knechel & Salterio, 2016).
3. The financial and non-financial risks due to above class action and its impact on the
goodwill and reputation of the company and other risks associated with the bank were not
disclosed.
Disclosure of information: Critical Points
There are several things, which need to be taken care off while making financial statements like:
1. If the economic and other investing decision of the investors would be impacted by
disclosure (Sithole, et al., 2017).
2. If a particular item qualifies as material and what is the background that should be shown
in the financial statements.
3. Whether the company adhered to the regulatory requirements and Standards on
Accounting.
4. If the information disclosed is true and is not deceiving for investors (Kangarluie &
Aalizadeh, 2017).
Period of disclosure
In the given case, since the investors have already suffered because of wrong reporting in the
financial statements therefore the company should be reinstating the annual financial statements
for the given period and should be reissuing the same. This is because the given incident resulted
in the financial obligations for the bank.
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References
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat
International ltd.
Bizfluent, 2017. Advantages & Disadvantages of Internal Control. [Online]
Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html
[Accessed 07 december 2017].
Farmer, Y., 2018. Ethical Decision Making and Reputation Management in Public Relations. Journal of
Media Ethics, pp. 1-12.
Fay, R. & Negangard, E., 2017. Manual journal entry testing : Data analytics and the risk of fraud. Journal
of Accounting Education, Volume 38, pp. 37-49.
Grenier, J., 2017. Encouraging Professional Skepticism in the Industry Specialization Era. Journal of
Business Ethics, 142(2), pp. 241-256.
Kangarluie, S. & Aalizadeh, A., 2017. 'The expectation gap in auditing. Accounting, 3(1), pp. 19-22.
Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York: Routledge.
Kuhn, J. & Morris, B., 2016. IT internal control weaknesses and the market value of firms. Journal of
Enterprise Information Management, 30(6).
Marques, R. P. F., 2018. Continuous Assurance and the Use of Technology for Business Compliance.
Encyclopedia of Information Science and Technology, pp. 820-830.
Md Khokan Bepari, S. F. R. A. T. M., 2014. Firms' compliance with the disclosure requirements of IFRS for
goodwill impairment testing: Effect of the global financial crisis and other firm characteristics. Journal of
Accounting & Organizational Change, 10(1), pp. 116-149.
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention
on learning accounting. Journal of Educational Psychology, 109(2), p. 220.
Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance Management Systems.
SAGE Journals, 30(1).
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