Advanced Accounting Assignment 1: Stakeholder Engagement Case Study

This assignment presents a case study analysis of stakeholder engagement and accounting theory, focusing on the National Australian Bank (NAB) and the Commonwealth Bank (CBA). It examines the importance of stakeholder engagement, particularly from the perspective of investors and banking institutions, and the potential consequences of failing to meet their information needs. The report applies positive accounting theory, specifically the political cost hypothesis, to explain corporate behavior. Additionally, it explores how legitimacy theory can be used to manage stakeholder expectations regarding social and environmental activities. The analysis is supported by two research articles: one focusing on NAB's treatment of small businesses and the other on CBA's payout related to "toxic" products. The assignment also highlights factors to consider during information disclosure and the importance of transparency and accuracy in financial reporting.

Advanced Accounting
Assignment

1
By student name
Professor
University
Date: 25 April 2018.
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Executive Summary
A report has been prepared on the concept and the theory of Stakeholder Engagement and how it
is crucial and significant especially from the perspective of the investors and the banking
institutions. A lack of integrity and initiative to fulfil the information needs of the investors can
prove to be detrimental to the interest of the businesses. The report also highlights how positive
accounting theory and how it helps in contributing towards the growth of the small businesses.
The same has been explained using one of the hypothesis called the political cost assumption.
The report also explains how the legitimacy theory helps in meeting the stakeholder engagement
and to keep them informed on the social and environmental activities performed by the company.
To highlight on the above issues, 2 research articles have been studied which are A step too far
crucifies small businesses” on the National Australian Bank and the other one being “CBA in
pay out on “toxic” products” which was published by “The Australian”
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Contents
Executive Summary.....................................................................................................................................2
Introduction.................................................................................................................................................4
Case Study on National Australian Bank......................................................................................................4
If Bank cares about the concerns of the small business sector and regional business communities.......4
Application of political cost hypothesis of Positive Accounting Theory...................................................5
Application of Legitimacy Theory............................................................................................................5
Case Study on Commonwealth Bank...........................................................................................................6
Factors to be kept in mind during disclosure of information...................................................................6
Period of disclosure.................................................................................................................................7
References...................................................................................................................................................8
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Introduction
As per the Stakeholder theory, the needs and requirements of information of the users of
financial statements needs to be satisfied for the survival of the organization. It can be in the
form of financial or non-financial information needs. The legitimacy theory is a concept, which
states that the organizations should always ensure that they operate within the norms and bounds
of the society and they meet the requirement of the society as well. Positive Accounting Theory
has a number of hypothesis to deal with, some of which are bonus plan hypothesis, debt-equity
hypothesis and the political cost hypothesis (Alexander, 2016). This gives rise to a number of
related concepts like the agency relationship, agency cost and agency problems. All these
concepts have been explained in detail in the assignment with the help of two journal articles
from Australia.
Case Study on National Australian Bank
If Bank cares about the concerns of the small business sector and regional
business communities
Introduction of Stakeholder’s theory
As per the stakeholder’s theory, the business must be creating the value for all the groups of the
stakeholders be it internal or external and only then it can sustain and survive for long. The
external stakeholders can be in the form of customers, bank and other financial institutions, the
prospective shareholders, government or tax authorities, on the other hand, the internal
stakeholders can be in the form of employees, management and shareholders of the company,
debtors and creditors, etc. (Axelsen, et al., 2017). It is a give and take relationship with the
stakeholders and as they contribute in value creation directly or indirectly, they expect the
management of company to create value for them. Thus, they can make an impact as well as get
impacted by business decisions for which harmonization amongst both is a necessity.
Application of the Stakeholder’s Theory
In the given case, the National Australian Bank completely ignored the ignored the interest and
failed to meet the expectation of the small businesses sector due to internal issues in the bank.
Some of these issues included internal restructuring within the company, constant change in the
staff of the company who were looking after the accounts of the these small businesses. All these
issues led to the closure of Alan and Wilma McMinn’s childcare centre plan (Chron, 2017). All
this was reported in the financial statements of the bank, which clearly reflected the loss in
market share of small sector businesses for the bank. Furthermore, as part of the centralization of
small scale lending, the company shifted 110 banking partners from field to the capital city
central offices which further impacted the business of the company as it was a barrier to face to
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face communication with the client. In addition to all this, the company also failed to contribute
to the growth of the regional communities, as the expansion plan of Alan and Wilma McMinn
was not met who were already earning to the tune of $250000 from the existing business set up
in the nearby locations (Bumgarner & Vasarhelyi, 2018).
Application of political cost hypothesis of Positive Accounting Theory
Positive Accounting theory and its meaning
Positive Accounting Theory (PAT) may be defined as one of the methods of accounting which is
intended to meet the information needs of the stakeholders considering the circumstances of the
case and which is in adherence to the relevant accounting standards. The decision regarding
selection of any accounting approach is majorly determined by its economic consequences and
impact (Dichev, 2017). Political cost hypothesis is one of the three hypotheses of PAT concept,
which states about deferment of the earnings to future in case the organization is involved in
political cost bearing.
Application of political cost hypothesis of Positive Accounting Theory
The statement as mentioned in the article claimed that “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”. This was done as it was thought that NAB
has already made a projection of the ignorance towards the small business sector, which would
have forced government to initiate legislation to serve these 1.2. Million small business operators
through the banking operands (Zhou, 2018). Therefore, in a bid to avoid the political costs with
the government, it took a positive approach and attitude towards serving them in near future.
This is in fact a defensive approach by the company to advocate and promote the small sector
business operators before the same was imposed on the management of the bank and the
company had to incur the political costs on the same. This is what is called positive accounting
theory where the change in circumstances brought about the change in accounting. All this was
done with the intention that the company is not highlighted as one of the highly profit making
entities and ignoring the public interest in the eyes of the politicians and the public at large rather
it wanted to be showcased as a low profit making entity taking care of the public interest at large
with the intention to avoid the higher regulations by the government, which could have been
imposed (Visinescu, et al., 2017).
Application of Legitimacy Theory
Legitimacy Theory and its meaning
It is one of the theory, which emphasizes on the need to disclose the social community and
environmental engagements by the company voluntarily in the annual report of the company so
that it meets its social and economic objectives and obligations as well. This is one of the basis
for corporate governance and sustainability reporting by the companies.
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In the given case, NAB could have been saved from the allegations posted by Alan and Wilma
McMinn if they would have disclosed in the annual report that what is the action of the company
to support the small sector operators. The bank could have made a public disclosure of the policy
on small sector businesses loan to remain transparent and just and equitable in the case of all
(Meroño-Cerdán, et al., 2017). The allegation was that they were not given requisite loan amount
on time and it was not sanctioned due to which business suffered.
Case Study on Commonwealth Bank
Disclosure of misleading information and inappropriate conduct towards
investors
All the Australian listed companies have to abide by AASB 130 standard as per which they need
to disclose all the material information in the books of accounts. In addition, it is expected that
all the major expense heads would be separately disclosed in the annual report of the company so
that the users can have better understanding of the same.
In the given case, it has been mentioned that CBA deceived its investors by not reporting several
key issues, which are as follows:
1. The litigation expenses of $1.5 MN, which was being made to the funders of the class
action “International Litigation Partners”, should be separately disclosed in the financial
statements (Andiola, et al., 2018).
2. There should be true, proper and complete disclosure of the contingent liabilities and the
provision that the company might face as part of future settlements.
3. A true picture and a complete disclosure of above loss financially and non-financially, the
overall impact on goodwill and reputation of company and the risks associated with the
operations of bank in future (Raiborn, et al., 2016).
Factors to be kept in mind during disclosure of information
There are few factors as well which needs to be kept in mind and taken care off while making
disclosure in annual report:
1. How the financial and economic decisions of the user would be affected by these
disclosures?
2. The extent to which the background is required to be disclosed and therefore the relevant
circumstances (Fukukawa & Mock, 2011).
3. What are the requirements of law as in Corporation Act and the Australian Accounting
Standards
4. Whether the same is relevant and not deceiving and inaccurate (Trieu, 2017).
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Period of disclosure
The company should reinstate or revise the annual report of the period in which such deceptive
and misleading information was being disclosed as the same resulted in financial obligations and
liabilities for the bank off late.
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References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp.
411-431.
Andiola, L., Lambert, T. & Lynch, E., 2018. Sprandel, Inc.: Electronic Workpapers, Audit Documentation,
and Closing Review Notes in the Audit of Accounts Receivable. Issues in Accounting Education, 33(2), pp.
43-55.
Axelsen, M., Green, P. & Ridley, G., 2017. Explaining the information systems auditor role in the public
sector financial audit. International Journal of Accounting Information Systems, 24(1), pp. 15-31.
Bumgarner, N. & Vasarhelyi, M., 2018. Continuous auditing—a new view.. Continuous Auditing: Theory
and Application, 20(1), pp. 7-51.
Chron, 2017. five-common-features-internal-control-system-business. [Online]
Available at: http://smallbusiness.chron.com/five-common-features-internal-control-system-business-
430.html
[Accessed 07 december 2017].
Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business
Research, 47(6), pp. 617-632.
Fukukawa, H. & Mock, T., 2011. Audit risk assessments using belief versus probability. Auditing: A
Journal of Practice & Theory, 30(1), pp. 75-99.
Meroño-Cerdán, A., Lopez-Nicolas, C. & Molina-Castillo, F., 2017. Risk aversion, innovation and
performance in family firms. Economics of Innovation and new technology, pp. 1-15.
Raiborn, C., Butler, J. & Martin, K., 2016. The internal audit function: A prerequisite for Good
Governance. Journal of Corporate Accounting and Finance, 28(2), pp. 10-21.
Trieu, V., 2017. Getting value from Business Intelligence systems: A review and research agenda.
Decision Support Systems, 93(1), pp. 111-124.
Visinescu, L., Jones, M. & Sidorova, A., 2017. Improving Decision Quality: The Role of Business
Intelligence. Journal of Computer Information Systems, 57(1), pp. 58-66.
Zhou, C. &. P. A., 2018. Developing creativity and learning design by information and communication
technology (ICT) in developing contexts. Encyclopedia of Information Science and Technology, pp. 4178-
4188.
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