Accounting Theory: Social, Environmental Impact and Accountability

This report analyzes the impact of government legislation aimed at regulating the social and environmental impact of business activities. Part A explores the rationale behind the legislation, the beneficiaries according to capture theory, and its effects from an economic interest group perspective. It examines public interest theory, capture theory, and economic interest group theory to assess the legislation's implications. Part B defines corporate accountability, emphasizing the aspects of corporate performance that businesses should be accountable for, including financial, operational activities, corporate social responsibility, performance, and governance. The report highlights the importance of transparency and responsible practices in achieving accountability, and the need for organizations to address the impact of their activities on society and the environment.

Accounting Theory 1
ACCOUNTING THEORY & CONTEMPORARY ISSUES
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Accounting Theory 2
Accounting Theory & Contemporary Issues
The government seeks to address the corporate performance of business organizations by
introducing a legislation to regulate the impact of social and environmental activities. This report
tries to address the effects of the legislation as well as the accountability of organization of the
effects of their business activities. The paper is divided into two parts. Part A addresses the
theoretical aspects of the new legislation such as; a) the rationale of introducing it; b) the
benefactors; and c) its impact. Part B addresses the accountability aspect of business activities as
well as some performance that business organizations should be accountable for.
PART A:
a) The rationale of introducing the legislation based on public interest theory
Public interest theory believes that the economic market is inefficient and fragile. The economic
market is likely to favour the interest of individuals instead of those of the public. Therefore, the
public interest theory was established to rectify the inefficiency in the economic market. Based
on this theory, the public demand creation of regulations to facilitate efficient and equitable
allocation of resources (Baker, 2005, p. 697). The government has to weigh the benefits and
projected costs associated with the new legislation. The assessment of the new legislation is a
subjective exercise based on two reasons. First, it would favour the public who are likely to
support it. And second, it will harm the business organizations who would oppose it. The
legislation should be introduced if the benefits surpass the costs (Pigou, 2013, p. 112).
Introducing the legislation is a rational decision by the government based on the public interest
theory. Business activities affect both social orientation and the environment. Therefore, business
organizations should be mandated to disclose to the public how their operations impact society

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and the environment. Likewise, the organizations must also tell the public how they plan to
protect the environment and society against the impact of their activities (Croley, 2009, p. 74).
b) Benefactors of social and environmental disclosure legislation based on capture theory
According to the capture theory, government agencies are formed by the past and future
employees of given industries. Although the agencies are supposed to safeguard the public
interest, in essence, they act to the best interest of the industry. Instead of creating an equitable
allocation of resources, the agencies develop legislation that promotes the inefficient distribution
of resources (Balleisen & Moss, 2010, p. 56).
For example, the agencies formulated to regulate the insurance industry is comprised of people
who have previously worked or intend to work in the same industry. The members are attached to
the industry and are likely to form regulations that favour the operations on organizations
operating in the insurance industry. In other words, the agency has been captured by the
insurance industry and the legislation would no longer benefit the public. Consider a scenario
where a captured agency is operating in an oligopolistic industry. The business organizations
operating in the industry would be transformed into monopoly leading to more power and
inefficiency in resource allocation. Based on the captured theory, business organizations would
benefit more from the new legislation compared to society (Baldwin, et al., 2012, p. 234).
c) Impact the legislation based on an economic interest group perspective
According to the economic group theory, an industry comprises of different groups which are
formed to serve various interests which are sometimes conflicting. Some of the groups that have
a self-interest in the new legislation are business organizations, politicians, lobby groups,
environmental activists and community leaders. Each group is likely to support the new

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legislation if their interests are served. Each group would lobby the government by influencing
the content of the legislation in their favour (Carpenter & Moss, 2014, p. 378).
For instance, the economic and organization groups seek to advance their agendas at the expense
of the public interest. Lobby groups and community leaders are interested in promoting public
interests although some of them would take advantage of their position to advance their self-
interest. The regulators are more concerned with improving their self-interest by ensuring their
performance guarantees their re-election in the current position. Regulators are forced to advance
the interests of the economic groups who control the economy. As compared to other groups, the
business organizations and economic groups have a stronger lobbying power which can influence
the government's decision (Levi-Faur, 2011, p. 76).
Based on the economic interest theory, the new legislation might not mandate business
organizations to account for the social and economic impact of their activities. First, economic
groups can easily lobby the government to promote their interest. Second, the lobby group can
easily influence the performance of legislation enforcers and regulators (Moss & Cisternino,
2009, p. 91).
PART B
a) Definition of accountability
In the field of business, accountability refers to evaluating the behaviour or performance of an
organization based on their responsibility. Organizations and their employees are held
responsible for their actions. Corporate accountability requires business organizations to respond
to questions from their stakeholders for their results and actions. Companies use Performance and
Accountability Reporting (PAR) to quantify their activities such as efficiency, and profitability to

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the stakeholders. Moreover, corporate accountability implies that organizations should explain
any deviation of performance from their values, goals, and objectives. In other words,
accountability requires organizations to follow responsible, sustainable and ethical practices
(Jäger, 2010, p. 7).
Accountability is a fundamental pillar of a good corporate governance. For instance, corporate
accountability requires organizations to take responsibility for the impact their activities bring to
society and the environment. The stakeholders need an organization to explain how their
activities affect society and the environment. Moreover, an organization should offer acceptable
remedies for its negative impact on the society and environment.
b) Aspects of corporate performance that a business organization should be accountable for
Organization managers have to make daily decisions that affect corporate growth and
productivity. The management should develop programs and policies that assist the company to
operate efficiently. The administration should also engage in a measure of significant
performance activities to make sure that daily activities conform to organizational goals and
objectives. The necessary corporate activities that need business should be accountable for are
financial activities, operational activities, corporate social responsibility, performance, and
internal governance (Morgera, 2009, p. 31).
i) Financial activities
Financial activities and processes are essential to the success of a business corporation.
Accountable financial processes help an organization to develop an effective and robust financial
control department. Accountability of the financial process and activities reduces
misappropriations, the risk of errors and fraud. Accountability also helps to enhance effective

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transaction approval and review steps as well as the separation of duties by creating clear
responsibilities. Stakeholders rely on financial statements and reports to make decisions. For
instance, shareholders rely on financial reports to make investment decisions while lenders rely
on the information to make lending decisions (Marchica, 2004, p. 97).
Moreover, the government relies on financial statements to calculate the organization's taxable
income while employees use the same report to demand for more salaries. Stakeholders require
management to account for the financial performance at the end of each financial year. Lack of
effective financial processes and procedures would distrust from the stakeholders.
ii) Operations activities
Operations activities refer to all the activities organizations perform to produce goods and
services that meet the specific needs of the market. The products and services should conform to
the specified quality and quantity. Moreover, the quality and quantity should be consistent in the
long term. However, sometimes operations lead to a negative impact on the community and the
environment without proper operational strategies and processes. For example, a mining
companies are likely to lead to environmental damages which are hazardous to the existence of
human beings and other habitats. Moreover, water pollution would also affect the survival of
aquatic life and the ecosystem. Different stakeholders will hold organizations accountable based
on the cause and effect relationship between their activities and the environment. Organizations
are required to take responsibility for their activities as well as implementing remedies to rectify
the negative impacts caused by their activities (Antonaras, 2019, p. 152).

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iii) Corporate social responsibility (CSR)
The society is slowly becoming healthy and environmentally conscious. Today, most consumers
buy from companies that use environmentally friendly production methods. Corporates are
required to give back to society by engaging in sustainable activities.
Moreover, business invests part of their income back to society to promote societal well-being.
However, organizations must maintain objectivity while engaging in CSR activities. The CSR
programs should sufficiently answer several questions such as;
 Why is the company engaging in CSR?
 How will the CSR activity benefit the activities of the company?
 To whom is the CSR activity directed to?
 How will the established benefactors benefit?
 Is the allocated portion of business income justifiable?
The society will hold the organization accountable and must answer the questions mentioned
above. Accountability of the business activity is assured if the business organization is offering a
considerable portion of its profits to improve the well-being of society. The investment should
also benefit the real people in need (Antonaras, 2019, p. 161). On the other hand, shareholders are
interested in wealth maximization. As such the management will have to justify why investing in
the CSR activity is famous over offering them special dividends.
iv) Performance
The management is under obligation to ensure that the organizational operations and strategies
are in line with the long term goals, values, vision, and mission. The administration should ensure
that the strategic plan is relevant to the stakeholders. The management is also accountable to

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ensure that the outcomes are measurable. Therefore, the management is obliged to provide an
explanation why the business performed against the stakeholders' expectations (Jäger, 2010, p.
90).
v) Governance
Lastly, the management must be held accountable for the governance of an organization. The
administration is required to ensure that the company operates based on long term sustainability
and viability. Organizations should seek and consider reasonable information to make decisions
based on facts. However, the management should maintain high ethical standards and good faith
while executing their mandate (Jäger, 2010, p. 103).
References list
Antonaras, A., 2019. Cases on Corporate Social Responsibility and Contemporary Issues in
Organizations. Hershey, Pennsylvania: IGI Global.

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Baker, C. R., 2005. What is the meaning of ‘the public interest’ Examining the ideology of the
American accounting profession. Accounting, Auditing and Accountability Journal, Volume 18,
pp. 690-703.
Baldwin, R., Cave, M. & Lodge, M., 2012. Understanding Regulation: Theory, Strategy, and
Practice. illustrated, revised ed. Nairobi: OUP Oxford.
Balleisen, E. J. & Moss, . D. A., 2010. Government and Markets: Toward a New Theory of
Regulation. illustrated, reprint ed. Cambridge, England: Cambridge University Press.
Carpenter, D. & Moss, D. A., 2014. Preventing Regulatory Capture: Special Interest Influence
and How to Limit it. Illustrated ed. Cambridge, England: Cambridge University Press.
Croley, S. P., 2009. Regulation and Public Interests: The Possibility of Good Regulatory
Government. Illustrated ed. New Jersey: Princeton University Press.
Jäger, U., 2010. Managing Social Businesses: Mission, Governance, Strategy and Accountability.
illustrated ed. London, Uk: Palgrave Macmillan.
Levi-Faur, D., 2011. Handbook on the Politics of Regulation. Massachusetts, USA: Edward Elgar
Publishing.
Marchica, J., 2004. The Accountable Organization: Reclaiming Integrity, Restoring Trust.
Mountain View, CA ed. illustrated: Davies-Black Publishing.
Morgera, E., 2009. Corporate Accountability in International Environmental Law. Oxford, UK:
Oxford University Press.
Moss, D. & Cisternino, J., 2009. New Perspectives on Regulation. Cambridge, MA: The Tobin
Project.

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Pigou, A., 2013. The Economics of Welfare. First Edition ed. London: Palgrave Macmillan.