Application Of Stakeholder Theory, Political Cost Hypothesis, And Legitimacy Theory In Financial Decision Making

Introduction of Stakeholder’s theory

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.

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 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 the Stakeholder’s 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).

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.

Positive Accounting theory and its meaning

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.

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).

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).

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

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: https://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.