1. Lecture-15 CORPORATE REPORTING REGULATION AND CORPORATE SCANDALS
Topic
Lecture-15
CORPORATE REPORTING REGULATION AND CORPORATE SCANDALS 8
Readings Reference :
Text chapter 8: Unregulated Corporate Reporting Decisions; Financial Accounting Theory; McGraw-Hill; 2nd Edition; 2006; pp

2. Learning Outcome/Objectives
After studying this topic, the students should be able to:
Analyze how community or stakeholders perception can influence the disclosure policies of an organization.
Analyze Legitimacy theory, stakeholder theory, institutional theory and how it can be applied to help explain why an entity might elect to make particular voluntary disclosures.
Use research skills and analyze organizational legitimacy and how corporate disclosures within such places as annual reports can be used as a strategy to maintain or restore the legitimacy of an organization
Analyze how the responsibility power and information demands of particular stakeholder groups can influence corporate disclosure policies
Evaluate that successful organization is one that is able to balance or manage the demands, including information demands of different stakeholder groups.

3. Accounting Scandals

4. 2. Maxwell Communications
Accounting Scandals
2. Maxwell Communications
i, Worldwide global communications
ii, Net debts 1.5bn vs net assets £1bn
iii, Dubious methods
Pledge assets and then sell
Plunder pension funds
Share support
7 out of 10 in creative accounting ‘blob’ index

5. Accounting Scandals 3. Enron collapses, 7th biggest US company.
- uses special purpose vehicles to keep debts off balance sheet
- Treats loans as sales
- Swops assets and treats them as sales
- Creative accounting and fraud
- Auditors’ position uneasy

6. Accounting Scandals 4. Other US Scandals i, Worldcom
- Capitalises revenue expenditures
ii, Xerox
- Premature recognition of leasing
iii, Adelphi Communications
- Rigase’s “looted company” used it as a
“personal piggy bank”
iv, Global Crossing
- Swaps of capacity treated as income
v, Parmalat
Run by charismatic Calisto Tanzi
Creates fictitious sales
e.g., double counts sales e.g., fictitious subsidiaries
Has dubious loans treated as equity
Fake Bank of America account worth 5 billion dollars

7. A system oriented view
Theories’ own values or ideological predisposition may be among the factors that determine which side of the argument they will in respect of disputable connections of a theory with evidence.
Different researchers might study the same phenomenon but elect to adopt alternative theoretical perspectives. The choice of one theoretical prospective in preference to other will, at least in part, be due to particular value judgements of the authors involved.( O’ Leary-1985,p.88)
……a system oriented view of the organisation and society… permits us to focus on the role of information and disclosure in the relationship(s) between organisations, the state, individual and group.

8. A system oriented view
Systems-oriented theories have also been referred to as’ open-systems theories’. Commenting on the use of open-system theorising ( Suchman- 1995,p.571)
Within a systems-based perspective, the entity is assumed to be influenced by, and in tern to have an influence on , the society in which it operates.
Open-system theories have reconceptualised organisationl boundaries as porous and problematic…. Many dynamics in the organisational environment stem not from technological or material imperatives, but rather, from cultural norms, symbols, belief and rituals. Corporate disclosure policies are considered to represent one important means by which management can influence external perceptions about their organisation.

9. Political Economy Theory
Legitimacy Theory, Stakeholder Theory and Institutional Theory derived from Political Economy theory
Political economy is ‘the social, political and economic framework within which human life takes place’ (Gray, Owen & Adams 1996, p.47)
Economic issues cannot be investigated in the absence of considering the political, social and institutional framework within which economic activity takes place
Corporate reports not considered neutral and unbiased, but are a product of the interchange between the corporation and its environment
Two streams of Political Economy theory
classical
bourgeois

10. Classical Political Economy Theory
Related to the works of Marx
Considers class interests, structural conflict, inequity and the role of the state
Accounting reports and disclosures are a means of maintaining the favoured position of those who control scarce resources
Focuses on the structural conflicts within society
Bourgeois Political Economy Theory
Does not explicitly consider structural conflicts and class struggles
Concerned with interactions between groups in an essentially pluralistic world
Legitimacy Theory and Stakeholder Theory derive from this branch
Does not question or study the various class structures within society

11. Legitimacy Theory
Organisations seek to ensure they operate within the bounds and norms of their respective societies
activities are perceived to be ‘legitimate’
Bounds and norms not static so require organisation to be responsive
Relies on the notion of a ‘social contract’

12. Legitimacy versus legitimation
Legitimacy is the status or condition which exists when an entity’s value system is congruent with that of society
Legitimation is the process which leads to an organisation being viewed as legitimate
Legitimacy theory relies upon the notion that there is a ‘social contract’ between the organisation and the society in which it operates
To be considered legitimate it is not the actual conduct of the organisation that is important, it is what society collectively knows or perceives about the organisation’s conduct that shapes legitimacy
Information disclosure is vital to establishing corporate legitimacy

13. Social contract
Represents the implicit and explicit expectations that society has about how the organisation should conduct its operations
legal requirements might provide the explicit terms of the contract, while other non-legislated societal expectations embody the implicit terms
Traditionally the optimal measure of performance was profit maximisation
Public expectations have changed so organisations are now required to address human, environmental and other social issues

14. Implications of not meeting social contract
Society allows the organisation to continue operations to the extent that it meets their expectations
The organisation may find it difficult to obtain the necessary support and resources to continue operations
may lead to sanctions such as legal restrictions on operations, limited resources provided or reduced demand for products

15. Legitimacy and changing community expectations
Community expectations are not static
As community expectations change, organisations must also adapt and change
Legitimacy can be threatened even when the organisation’s performance is not deviating from society’s expectations
perhaps the organisation has failed to make disclosures that show it is complying with community expectations
Or, perhaps previously unknown information about the organisation comes to light (perhaps through the media)
part of the ‘organisation shadow’ is revealed

16. Actions to legitimise activities
Adapt output, goals and methods of operation to conform to definitions of legitimacy
Attempt, through communication, to alter the definition of social legitimacy so it conforms with the organisation’s present practices, output and values
Attempt, through communication, to become identified with symbols or values which imply legitimacy

17. Communication to maintain legitimacy
Seek to educate and inform the community about changes in performance and activities
Seek to change perceptions but not behaviour
Seek to manipulate perception by deflecting attention from the issue to other related issues
Seek to change external expectations

18. Role of public disclosure
Public disclosure in such places as annual reports, sustainability reports and websites can be used to implement each of the previous strategies
Perspective adopted by many researchers of social responsibility reporting
Highlights the strategic nature of financial statements and other related disclosures
Disclosures might be substantive or symbolic
substantive disclosures would reflect actual changes in corporate activities
symbolic disclosures do not reflect ‘real’ change but are made to appear consistent with social values and expectations
To be continued……