Analysis of Accounting Theories and CSR: Commonwealth Bank (ACC706)

This report provides an executive summary of the sustainability approach of Commonwealth Bank, analyzing its corporate social responsibility (CSR) initiatives through the lens of various non-financial accounting theories. The report identifies and discusses the application of institutional theory, legitimacy theory, stakeholder theory, and decision usefulness theory in the bank's operations and reporting practices. It examines Commonwealth Bank's commitment to environmental sustainability, including carbon footprint reduction and investments in renewable energy projects. Furthermore, the report explores the bank's philanthropic activities, such as financial education programs and community contributions, highlighting how these initiatives align with the discussed accounting theories. The report also touches upon positive accounting theory, including bonus plan, debt covenant, and political cost hypotheses. The analysis also highlights the role of signaling theory in conveying the company's social and sustainable activities to its stakeholders.

Running head: ACCOUNTING THEORIES AND ISSUES
ACCOUNTING THEORIES AND ISSUES
Name of Student
Name of University
Author’s Note

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EXECUTIVE SUMMARY:
This report discuss about the sustainability approach of Commonwealth Bank. To identify the
non-financial theories used by the bank, the annual report of Commonwealth Bank has been
considered. The non-financial theories that are mainly highlighted in this report are institutional
theory, legitimacy theory, stakeholder theory and decision usefulness theory. This report also
discusses about the corporate social responsibility activity of Commonwealth Bank. The report
also sheds light on the adoption of non-financial theories by Commonwealth Bank while
performing the corporate social responsibility activity.

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ABOUT COMMONWEALTH BANK:
The commonwealth bank in Australia is one of the most notable banks in the country.
The bank is also considered to be the largest bank in Southern Hemisphere. The bank is a
multinational bank that has existence in New Zealand, United Kingdom, and United States and
even in some countries of Asia. The bank is famous for having numerous services like retail,
business, superannuation, funds management, investment and broking services. Commonwealth
Bank of Australia is also one of the largest banks that is listed with the Australian Stock
Exchange.
The bank was first established in 1911 by the Australian government itself. In 1996, the
bank was fully privatized. The bank has more than 1000 branches in all national locations. The
bank has more than 4000 ATMs all over locations. The bank employs more than 50000
employees around the globe.
SUSTAINABILITY PRACTICES OF COMMONWEALTH BANK:
In 2015, Commonwealth Bank of Australian Group launched a new Corporate
Responsibility strategy in 2015. The company sets two motives behind the sustainability
practices of the bank. The two pillars are the way they do business and the role in society. The
bank planned three year strategy under the wing of corporate social responsibility. The corporate
social responsibility includes effective management of environment, governance and social
issues, risk that are associated with society and environment and to find the opportunities to
improve the society and environment. The bank implemented many new policies regarding the
environment. The bank also concern about the carbon footprint and implementing sufficient time
and source since 2001 (Hiebi 2014). This enables the bank to reduce the carbon emission by

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almost 40%. The usage of carbon for electricity is also being reduced by the bank by using best
alternatives. The bank also involves in the sustainability project like Clean Energy Finance
Corporation. This enables the bank to reduce cost for financing and installing of new energy
efficient renewable energy source. The bank also involved in more than 180 renewable energy
projects. The renewable energy mainly includes wind, landfill gas, geothermal, bio gas power,
and solar and hydro power sectors.
Commonwealth Bank also performs certain sustainable activities that affect the bank’s
non-financial performance. To maintain the non-financial performance, the bank follows
considerable amount of accounting theories that includes legitimacy theory, stakeholder theory,
institutional theory, signaling theory and decision usefulness theory.
NON-FINANCIAL THEORIES:
Stakeholder theory states a wide view that the corporation serves. In stakeholder theory,
stakeholder is considered a person or any business entity or any financial entity that has interests
in the success or failure of the business. The behaviour of the stakeholders of the company have
a huge impact on the decisions of the company regarding the operations of the company and the
financial structures of the company. Stakeholders of the company comprises of larger pool of
entities. As per the stakeholder theory the managers of the company needs to consider all the
stakeholders of the company instead of the shareholder of the company. As per this view point
the company must concentrates on improving the wellbeing of the company. This theory also
states that the company has the obligations to distribute the disadvantaged stakeholders. The only
disadvantaged of the stakeholder theory that can be traced is that it is very difficult for the
company to weigh the importance of all the stakeholders. Thus, stakeholder theory is considered
to be one of the theories that promote the sustainability of the company. The stakeholder theory

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makes sure that the company priories all the stakeholders of the company. This theory also
assists the management of the company to consider the environmental issues and hence this
theory is also one of the most accepted theories for valuing the corporate social responsibility.
As per some analysis it can be determined that there is a relationship between the
stakeholder and business entity. This relationship may expand by analysis of institutionalization
of the social structures. This can be understood by institutional theory. As per the institutional
theory many organizations are influenced by the institutional contexts. The institutional contexts
like norms, myths and rationales (Mwangi, Makau and Kosimbei 2014). These contexts become
organizational guide that decides the company’s behaviour and approach towards something.
These guides assist the company to build new social rules that in long term help the company to
fulfill the corporate social responsibility. The institutional theory also assists the company to
create the sustainability report where the company’s non-financial performance is showcased in
detail.
Positive accounting theories are another kind of theories that assist the company in
creating the non-financial report or the sustainability report. Positive accounting theory is based
on three hypotheses. The theory predicts that managers of the company need to choose the
accounting policies based on the objectives of the company. This is the reason the positive
accounting theory is famous for making good predictions of the real world. Positive accounting
theory considers the real life events. Positive accounting theory first identifies the events and
translates them into accounting transactions. Positive accounting theories mainly predicts the
actuations that the company most probably will choose in future and also predicts how the firms
will react to new accounting standards. To predict, positive accounting theory mainly have three
hypotheses. The three hypothesis of the positive accounting theory are explained in detail:

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 Bonus Plan Hypothesis: As per this hypothesis, managers of the company having bonus
plan are most likely to choose reported earnings from future period to the current period.
This will increase the bonuses for the company in the current year.
 Debt Covenant Hypothesis: When the company is closer to violate the rules and
regulations that are related with the accounting debt covenant then the managers of the
company will shift the earnings from future periods to the current period. It is expected
that if the company increases its current earnings then the company will not violate the
debt covenant rules. During this time the management of the company will also reduce
their constraints for operating the company.
 Political Cost Hypothesis: As per this hypothesis the greater the political cost the more
likely the manager will choose the accounting procedures and will defer the earnings of
the company from the current period to future periods.
To achieve the positive accounting theory the company needs to follow certain procedures.
They are as follows:
 The management of the company needs to reconsider the accounting policies. This
will provide sustainable way for the implementation of the positive accounting.
 The management of the company also needs to consider the discretionally accruals.
 The management of the company also needs well aware about the timing of
adoption new accounting standards (Mansor 2015).
 The company also needs to change real variables like research and development,
advertisement, repairs and maintenance department.
 The management of the company also needs to consider the operating expenses of
the company.

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Legitimacy theory can be expressed as the theory that assumes to be one of the most
accepted accounting theories that showcase the non-financial information about the company. In
general, the legitimacy is a perception that assumes the desirable actions of an entity with some
constructed systems of norms, values and beliefs. Legitimacy theory explains the organization’s
behavior in developing and implementing the social and environmental disclosures to fulfill the
social contract. Legitimacy theory enables the organization to recognize the corporate social
responsibility objectives. The corporate social responsibility objective of the company changes
according to the needs of the society and environment. Legitimacy theory assists the company to
gain interests by the stakeholders (Ioana and Adriana 2014). The shareholders of the company
also get interests fulfilled when the company succeeds to attain the objective of the corporate
social responsibility. The main perspectives of the legitimacy theory are establishing the
relationship between the company and their environment. The involvement of the legitimacy
theory in the corporate social responsibility assists the company to get chance to express their
corporate social activities in their sustainability report, so that the stakeholders of the company
get interests over the operations of the company.
Signaling theory is one of the most useful theories that are used by the company or any
kind of similar type of organization to express their corporate social responsibility activity. This
corporate social responsibility activity is useful for expressing their behaviour when two parties
hold different kinds of information. As per the signaling theory any one of the parties needs to
convey properly or communicate properly, so that the information can safely reach to the
receiver. The receiver, on the other hand, also needs to interpret the signal properly, so that the
whole communication process sets a meaning to the message. The importance of the signaling
theory can be traced in the management and also during the company’s strategic decision. The

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importance of the signaling theory can be traced even in the corporate social responsibility
activity and sustainability activity. This theory plays a major role in conveying the social activity
of the company and other sustainable activity to the stakeholders of the company. The signaling
theory also assists the company to establish a relationship between the company and its
stakeholders.
The approach to showcase the financial information of the company in the financial
report is known as decision usefulness theory. As per this theory the company or any profit
making organization needs to portray their accounting and other financial information in their
annual report (Gonçalves and Lopes 2014). The display of the accounting information and other
financial information can assists the company to keep and maintain the shareholder’s interests.
The fulfillment of the needs of the investors will assists the company to have good name in the
market. The decision usefulness theory also assists the company to display all the non-financial
information in the annual report of the company. The information regarding the non-financial
activities of the company also assists the company to maintain the stakeholder’s needs.
CORPORATE SOCIAL RESPONSIBILITY OF COMMONWEALTH BANK:
Commonwealth Bank is famous for pursuing philanthropic activities in Australia. Some
of the corporate social responsibility activities are financial education, community contribution
and good business practices. The initiatives of commonwealth bank to improve the society
condition are explained below:
Financial Education:
Commonwealth Bank invest considerable amount of fund to support the Australian
youth’s education. The support includes providing scholarship to the students. The main motive

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behind such corporate social responsibility activity is to empower youth with education, so that
the future workforce of Australia remain educated and bring more intelligence in the corporate
world. The bank also invests money to educate working people and would-be working people
about effective way to use the money (Commbank.com.au. 2020). The bank conducts such
training under the name of “Start Smart”. The bank also created an app for the students and the
aspirants who want to gain knowledge. This app provides information regarding the real-life
money skills and use of the account balance and also providing information about safe digital
environment. The program for imparting knowledge to the students is done under the banner of
School Banking”. The knowledge is mostly related to the developing saving habits. The way of
imparting knowledge is mostly in fun and rewarding manner. The bank also holds a “Wise”
financial literacy program app. This app assists the users to invest wisely and also provide
knowledge about the financial product. The app is mainly concentrates to educate the woman of
Indonesia. The bank also produces numerous supports for the indigenous students through
internships, scholarships and mentoring. Commonwealth Bank also developed an app that assists
the parents to teach their kids about money that includes video guides and practical tips.
Community Contribution:
Commonwealth Bank also invest considerable amount of money for the well-being of
the society. The bank mainly contributes to the different communities of the country. The bank
conducts many programs that assist the normal person to stay safe from the financial risk. The
bank also provides considerable amount of training to the normal about the available resources
that will increase the financial stability of that individual (Barker and Schulte 2017). The bank
conducts such philanthropic act under the banner name financial inclusion Action Plan. The bank
also notifies the normal people by providing the booklet about the financial abuse. The bank

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normally partnered with Domestic Violence NSW to launch this program, which is known as
Addressing Financial Abuse. The bank wants to convey the full knowledge to the people of the
country. The bank also wants to establish financial independence that in return will assist the
people to not enter into any kind of fraudulent scheme. The bank released the booklet according
to the state language. The bank has a dedicated assistance team that assists their customers and
other people about the financial solutions. The assistance team also provides their assistance
when an individual having a financial crunch. The employees of the bank are also improvised to
provide suffice amount to the charity. The bank encourages the employees through CommBank
Staff Foundation.
Good Business Practice:
The good business practice empowers the people, which in return assist the community to
evolve. Commonwealth Bank follows the most transparent business policies. The bank is also
famous for having balanced and sustainable practices. The bank is considered to be one of the
most philanthropic organizations of Australia, as it takes decisions considering the society and
environmental outcomes (Commbank.com.au. 2020). The bank follows most strict rules while
dealing with individual customers or any small business customers. In maximum time the bank
invest on the individual or small business. The bank follows the code of conduct that is mainly
used by the personnel of the bank while taking any kind of decisions or creating any kind of
strategies. The bank also encourages the customers to speak in case of discrepancies that are
related with the operations of the bank. This program is also known as Customer Advocate. To
reduce the hassle of the customers the bank practices indigenous banking that assist the
customers to establish a better relationship with bank.

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NON-FINANCIAL THEORIES ADOPTED BY COMMONWEALTH BANK:
Commonwealth Bank has used several non-financial theories for representing their non-
financial performance and also the sustainability performance in a single period of time. The
bank mainly uses decision usefulness theory, legitimacy theory, institutional theory and
stakeholder theory for representing the non-financial information in their sustainability report.
The use of theory can be traced from the corporate social responsibility activity of the company
(Commbank.com.au. 2020). Like the company used legitimacy theory and stakeholder theory
while performing the community service and financial education service. The bank also used
institutional theory while imparting knowledge about the fraudulency that exists in finance and
also during the collaboration with Domestic Violence NSW launching of “Addressing Financial
Abuse”.
RECOMMENDATION:
Commonwealth Bank has used many non-financial theories while performing the
corporate social responsibility activity. The companies have used many kinds of theories like
legitimacy theory, stakeholder theory, institutional theory and decision usefulness theory. It is
advisable for the bank to perform a single sustainable activity that will assist the bank to perform
better in that field. It will also enable the bank to invest considerable amount of money in the
single project.
CONCLUSION:
After analyzing the non-financial theories and the sustainability activity of the bank it can
be concluded that the bank spends considerable amount of money in their sustainability activity.
The bank also follows considerable amount of non-financial theories like stakeholder theory,
legitimacy theory, institutional theory and decision usefulness theories.

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