Advanced Financial Accounting and Business Practices

Discuss about the Advanced Financial Accounting and Business Practices.

In the globalization era, sustainable business practices and corporate social responsibility has become essential for the organizations. It requires the business entities to maintain the accounting system with complete disclosures of financial as well as non- financial information on the overall performance of the organizations. These disclosures assist the stakeholders of the organizations and direct impact on environmental, social and economic factors. There are several theories that explain the sustainability accounting and corporate social responsibility (Sierra‐García, Zorio‐Grima and García‐Benau 2015).

Positive Accounting Theory

Positive accounting theory explains accounting decisions by analyzing the relationship between the managers and other stakeholders of the organizations. The theory explains the actions on recognizing the accounting information and transactions according to the new policies and standards. According to this theory, activities of society and environment and the related disclosures in accounting information would occur only if such activities have constructive wealth implications for the organizations and management (Schneider 2015).

The theory of positive accounting was based on the agency relationships, which forms the actions for the best interests of management. However, it also included the actions against the management in the form of loss of efficiency and increase in cost known as agency costs.         These costs are bonding cost, monitoring cost and residual loss that are indirectly incurred by the management for instance, auditing of financial statements, producing quarterly accounting reports etc. However, there are certain limitations of the theory with respect to the means of improvement in accounting practice and other assumptions of wealth creation (Christensen, Nikolaev and Wittenberg‐Moerman 2016). The key hypothesis identified by Watts and Zimmerman to provide the frequent use of PAT for the purpose of business sustainability. It helps the organizations to take better business decisions in consultation with the management and employees. If the activities reflects the positive wealth maximization, then such project would be considered to expand the business.    

Legitimacy Theory

According to this theory, operating and accounting of business activities with respect to social and environmental factors would be considered only if it is allowed by the society. It has been assumed that there are business activities and functions that are allowed by the society in which the organization operates. The theory highlights the business activities must meet the expectations of the society as a whole instead of investors only. The sustainability report of BHP Billiton in the year 2012 presented several references on ‘operating license’ following the legitimacy theory (Bhattacharyya 2016).

It was also noted that the failure in compliance with the expectations of community might lead to experience legal restrictions on the operations of business. The legitimacy theory provides the requirement of maintaining the relationship between corporate disclosures and expectations of society. Starbucks organization one of the best practicing companies in environmental and social sustainability has taken initiative on the management of green supply chain and delivering organic products for the welfare of society (Bhattacharyya 2016). There are certain activities may not be allowed by the society that might affect the safety of the society hence the management is restricted to take such activity. Accordingly, it might hamper the sustainability of the business enterprise.

Stakeholder Theory 

Stakeholder theory depicts the relationship and disclosure requirements based on the management of the organization and ethics of business to present the moral values in managing the companies. In the competitive culture, it is essential to operate the business ethically and morally to create the values and sustainability. Though every business organization has its own ethics and policies but there are some basic ethical factors that each of organization is required to follow. Stakeholder theory provides two main parts while analyzing the disclosure requirements. One part is ethical and another is managerial part (Strand and Freeman 2015).

Ethical part incorporates business functions and benefits to all the stakeholders of the companies including external and internal whereas managerial part involves business functions and benefits in favor of powerful stakeholders. According to the managerial perspective, it is difficult to maintain the ethical issues for large number of people and all the stakeholders. Therefore, the management of the company focuses on the ethical and action benefits for powerful stakeholders (Strand and Freeman 2015). Business sustainability depends on the ethical values and moral values for the investors and members of the organizations. The organization is required to prepare and present the business activities and information with transparency and true and fair view for sustainable growth.

Institutional Theory

This theory states that the organizations undertake certain accounting and other business practices due to the pressure of institutions. It is a complimentary viewpoint to the legitimacy theory and the stakeholder theory with two important dimensions called isomorphism and decoupling. Isomorphism dimension in the theory involves adoption of certain business practices out of force to minimize uncertainty and for competitive advantage. It also involves a change in institutional practices due to the stakeholders’ pressure on which the organization is dependant. However, decoupling is a practice where actual functions of business organizations are different from that of being disclosed in the accounting information (Hoffman and Jennings 2015).

In order to maintain the sustainability and responsibility towards the society and environment organizations adopt the business activities and their accounting even if they are beyond the organizational policy. Companies also undertake these measures on consideration of any particular group with the training to maintain the sustainable growth of business (Hoffman and Jennings 2015). Therefore, management should take the responsibility to undertake the business procedures with true and fair means to maintain the business sustainability.


Apart from the recognition of business information by application of accounting principles and standards, accountants are responsible to provide professional judgment and evaluate the sustainability of accounting practice. Hence, different accounting theories provide guidance on execution of accounting policy and disclosure choices as well as the processes to improve the accounting practices.

Reference List

Bhattacharyya, A., 2016. Corporate Social and Environmental Responsibility in an Emerging Economy: Through the Lens of Legitimacy Theory.Australasian Accounting, Business and Finance Journal, 9(2), p.2015.

Christensen, H.B., Nikolaev, V.V. and Wittenberg‐Moerman, R., 2016. Accounting information in financial contracting: The incomplete contract theory perspective. Journal of Accounting Research, 54(2), pp.397-435.

Hoffman, A.J. and Jennings, P.D., 2015. Institutional Theory and the Natural Environment Research in (and on) the Anthropocene. Organization & Environment, 28(1), pp.8-31.

Schneider, A., 2015. Reflexivity in sustainability accounting and management: Transcending the economic focus of corporate sustainability.Journal of Business Ethics, 127(3), pp.525-536.

Sierra‐García, L., Zorio‐Grima, A. and García‐Benau, M.A., 2015. Stakeholder engagement, corporate social responsibility and integrated reporting: An exploratory study. Corporate Social Responsibility and Environmental Management, 22(5), pp.286-304.

Strand, R. and Freeman, R.E., 2015. Scandinavian cooperative advantage: The theory and practice of stakeholder engagement in Scandinavia. Journal of business ethics, 127(1), pp.65-85.

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