The review has been presented as to how the social contract is relevant for the legitimacy theory and how it has been applied in the field of accounting.
History and Purpose – At first, the term social is confined with the group of people and is known as the Government. Government is defined as the statutory body constituted as per the law prevailing in the country for the time being in force whose members are selected from the group of people from the society. Contract on the other hand is defined as the situation where the terms and conditions of any arrangement are accepted by both the parties with mutual consent. The term arrangement is defined as the point where all the parties agree to carry on the particular thing or activity on the basis of given terms and conditions. The contract may be written or oral depending upon the interest and the motive of the parties going to enter in the contract. The written contract is enforceable by law and oral cannot be heard before law as the same cannot be interpreted and analysed by the others as the same can be manipulated many times. Thus, the term contract is defined as the arrangement between two or more parties who agrees to carry on the specific activity on the basis of the defined terms and conditions. The terms and conditions are mentioned in the contract itself as to which activity is to be carried on under this agreement, what are the activities that the parties to the contract are allowed to do and what are the activities that the parties to the contract are not allowed to do, what will be the profit sharing in case of the business agreements, how the dispute will be resolved in case the parties to the contract differs in their opinion in the ongoing business (Elahi, 2005). For instance, Lehman Brothers and Barclays bank enter into the contract for carrying on the investment in real estate sector jointly and the profits generated out of that will be shared on an equal basis. After sometime Lehman brothers think that it is wasteful to invest in real estate sector as the market is constantly going. On this thought Barclays Bank has refused to discontinue the same activity. Therefore, in this case the dispute resolution authority shall be mentioned like arbitration and court, etc. In this way the contract shall be formed and defined between the contracted parties. The contract can be of many forms like marriage contract, employment contract, contracts with embassy to visit out of India, business agreements or contracts, etc (Cruess, 2008 and Dunfee, 2009).
Thus, after combining the two terms – social and the contract, social contract is the term that has been described to locate the contracts that have been entered into with the Government of the country. This contract has been started from the period when this world has come into place. At first the people have the contracts with the nature and the God that in case any damage or harm is caused then God will save the people. With the passage of time, the rich people start becoming the king of the particular area or the country and the community of that area or country makes the social contract with him so that the king can save the community from danger or harm that can be caused to them from the external parties (Baker, 2013). These types of contracts have been entered in all the periods of history whether it is before the death of the Christ or after the death of the Christ. From that era itself social contract has its own pace but is known with different nature and characteristics depending upon the time when it is entered and the reasons for why it is being created. These contracts make the community of the area obliges to do all the things and acts that is required as per the terms and conditions of the contract and in no sense shall violate the terms and conditions of the contract (Friend, 2016 and Frazer, 2017). In the foregoing paragraphs the historical background has been explained with the help of the theories of great philosophers at that time.
The period when the essence and importance of the social contract has been understood and has been laid down has been started from the enlightenment period. This is the period when the era of war has been on the wave and everyone has been in the wave of thinking as to what has happened suddenly and what are the reasons for the same. In this period, though many philosophers have been recognized and mentioned through their theories but in relation to the social contracts two theorists have been considered namely Thomas Hobbes and Jean Jacques Rousseau. Both of these philosophers have been recognized as the enlightenment philosophers and both have given theories that have given separate meaning to the social contracts.
From the period earlier to the beginning of this great enlightenment period, the know philosopher namely Socrates has given his views. He has mentioned the two form of dialogues in his theory. The first dialogues have been known by the name of Crito and second dialogue has been named as Republic. Both the views have presented differently and sustainably. These two dialogues show the historical background of the world and depict how the humans have different thoughts over the same issue prevailing at that time and how much they are attached with emotions with the particular things or actions. In his first dialogue, Socrates have explained that why Crito has happily agreed to accept the imprisonment and also the penalty of death without saying any word for his defense and why he has not opted to escape from the prison. The reasons for such behavior has very close link to the term social contract. It is in the sense that Crito has born and grown up in the Athens only and he has to abide by the law of Athens in any manner. He further claimed that Crito is the result of his father and mother who again has been born in Athens and therefore he is the legitimate child. Crito has detailed that his life is the result of Athens only and it is his duty to abide by the laws of Athens. These compliances with the laws are not under any influence rather they are soliciting the sense of relationship that the law and the citizens of Athens have developed for over the period and in case the death penalty is levied then also the citizens of Athens will not go back (Leeson, 2009). Thus, in this dialogue there is the presence of the social contract between the law of Athens and Citizen of Athens through which the citizens are under an obligation to follow each and every provisions of the law and are ready to bear any penalty in case of non compliance of any sort. Second dialogue that has been given by Socrates is of the Republic. The main demise of this dialogue is that the justice has been arising from the Government only. This argument has been strictly and directly rejected by the Socrates. He dictates that the justice is done when someone has caused any harm to the other party and affecting party goes before the Government to have the equal justice. With this the justice has come and is revolved around the compliance of laws and rules and regulations that have been defined in each and every manner (Jos, 2006). In case the Government verifies that there is the non compliance then the justice will always be given to the affected party. With this consideration the second dialogue has been referenced as Republic.
After the declaration of the Socrates Views, the citizen of the country is relying on the two dialogues and has been obeying all the provisions of the laws, rules and regulation. This period has been carried forward to the date when the era of other philosopher has not come. Everyone was in the way of obeying the laws and get punishment for the non compliance of the same. Over the time, the war period has been started where one country tries to capture other country and in that wave many countries have become colonies of the acquiring country. This has happened all over the World and many countries have become colonies and are under the possession of the acquiring country. During this period, two great philosophers have come into place and have been known by the name of Thomas Hobbes and Jean Jacques Rousseau. Going forward from the theory of Socrates to theories of the enlightenment period, the society has accepted the new definition of the social contracts and has applied that in the full manner (Leonard and Samantar, 2011). All the ways it has been referred as the enlightenment theories of enlightenment period in the sense that the philosophers have new ideas, new way of thinking and have been able to discover new definition of the social contract and its origin and so on.
Thomas Hobbes, born and bought up in England and has been in the same country when there was the war period and is referred to as English Civil war. During the era of colonialism, every country was in fear of becoming the colony of another and also has fear of getting the slave system. In order to avoid such a problem, the society of the country started engaging one person as their ruler or king or Monarch to whom the citizens surrenders their freedom in return of safety from the danger of the colonialism or the slavery system (Mccarthy and Puffer, 2008). Some citizens of the country urge that there shall be equal distribution of the wealth and the power and responsibilities between the parliament and the ruler or the king. With this equal distribution of the powers and responsibilities, the country will now have dual power country. Thomas Hobbes has given his views by rejecting as well as compromising both the views of the ruler and that of the parliament. On the one hand he has compromised in the sense that the there is only one ruler that rules the World is God and under whom all have to function and comply with the relevant rules and laws. Thus, the king will be God for the citizens of that country and God will save the citizen from any harm that may be caused from the external parties. He on the other hand rejected the view on the premise that there is no need of either of the king or the ruler or monarch or the parliament. It is because each of the individual is self centered and is behavior is such that which does not require the check and non compliance penalties like that of Crito. Thus, the theory of Thomas Hobbes has been successful in providing all the issues and at the last it has been concluded that there is the need of Monarch or ruler as prevalent at that time. It is so because during the period of war someone shall be there who can monitor the functioning of the country and in case of need he can save the life of the country as well as the citizens from the external harms like conquerors or acquirers (Smith, 2009).
Another theory has been provided by Jean Jacques Rousseau. He has been also having the experience of the war period and has given his theory in that period. But in his theory he has reflected the starting of the world by quoting the situation when there was no one on this world except to two people and reaching till the presence of the ruler or king or the parliament. His theory was the only basic reason for the French Revolution. He has began his theory by stating that there were only two persons on this world and are living in this nature only and are least concerned as to what is happening outside the country or inside the country. With the passing of the time, when their family grows they start living in the small and the nuclear families and start making the comparison with other people or families regarding their standard of living and others. This comparison has laid down the platform when the difference in the communities has been started as the people belonging to rich families and the people belonging to the poor families. Now with the growth of this era, the fear of rich families has grown and the major reason for its growth is the higher increase in the number of poor families. They were in the view that poor families can do each and everything to become rich and in actual it has happened. In order to safeguard themselves from this fear, the rich families have approached the selected people to either become the ruler or form the Government. The justice is always delivered in the favor of the influential rich family. He further argues that there shall be equal justice for all as each and every citizen of the world has equal right to freedom and speech and no one can stop him from doing this (Skyrms, 2014). But in actual the freedom rests with some particular hand mainly rich families. He states that it will be vague if is compelled to go back to the starting point and then he has laid down the focus on the importance of the social contract stating that there shall be contract through which equal justice shall be given to all the citizens of the country despite of the citizens who belongs to the rich families or who belongs to the poor families.
The other modern theories have laid down for the social contracts and have been applied uniformly by all the countries like theories of David and Rawls.
How Applicable to Field of Accounting and Environment: The social contact not only applies to the period of freedom only but also applies in the today’s current world. In the field of accounting it is applied through the contract between the users of the financial statements of the company and the laws governing the preparation and the presentation of the financial statements of the company. Through this contract it is very much clear that the non compliance if any made by the company can lead to penalty and may sometimes lead to the situation where the companies gets collapsed like that of Lehman Brothers. In the field of environment also, the companies enters into the contracts with the government so as to maintain the environment of the country in which the company is operating.
History and Purpose – The legitimacy derived from the word legitimate which states that the work which is done is true and fair. The term legitimacy works on the presumption that the work which will be done or has been done is purely as per the relevant laws and regulations. It entails that the professionals and the persons engaged in doing the kind of work envisage that the type of work done is true and fair and will not bring the disrepute to the company and in case the company fails to do the work in the predefined manner then the company will soon The example here is also the Lehman Brothers which have conducted the massive accounting fraud and has ultimately led to the closure of the company. Further the legitimacy is well explained by the work of the auditor whose work ensures that the financial statements of the company represent the true and fair view of the state of affairs of the company. The legitimacy theory is based on the three theories namely Stakeholder theory, Institutional theory and Management Theory. All these theories state the basis for the formation and development of Legitimacy Theory. Stakeholder theory denotes that the work shall be done in such a manner so as to increase the net worth of the stakeholder involved in the organization. Institutional theory dictates that the company shall have predefined structures, beliefs and faith in the working of the organization within which each and every employee of the organization shall have to work and perform their functions in the efficient manner (Patten, 2012). The last theory is of management theory which entails that the managers of the company shall be well informed about the objectives of the company along with the repercussions in case the objectives of the company is not achieved within the due time (Burlea, 2013). Thus, stakeholder theory gives the motive to work, institutional theory provides the framework within which the work needs to be performed and the management theory details the objectives of the company. In such manner, the legitimacy theory has come into place (Freeman, Harrison, Wicks, Parmar and Colle, 2010).
How Applicable to Field of Accounting and Environment – In the field of the accounting and the environment, the legitimacy theory is applicable in the sense that the company has been able to present the true and fair view of the financial position and financial performance of the company and also has been able to comply with the Environmental rules and regulations. (Makarkin, 2011).
Following are key points which detailed the relevance of social contracts in legitimacy theory application by the management of the company:-
The legitimacy theory explains the fair and correct disclosures to shareholders of the company who are actually investor in the company and management can increase the investment of these shareholders in the company by having the application of the legitimacy theory. And the agreement between the shareholders and the board of director of the company shows the social contract among them where the management protects the shareholders money in lieu of disclosures (Mäkelä and Näsi, 2010).
The company responsible for fair disclosures to the government of the state in which the company is doing function so that fairs taxes can be calculated and paid by the management of the company. This fair disclosures responsibility is the application of the legitimacy theory and the contracts between the governments of the state to protect the company from the financial disbursement from others in lieu of taxes is the relevance of social contracts in the legitimacy theory (Rosenfeld, 2014).
The consumers are the supreme power for the company for its working and running. The management is liable to present each and every detail about the services and goods provided or produced by the company to its consumer in complete and appropriate manner. The disclosures is the implication of the legitimacy theory in the company and the agreement between consumer and the company is the application of social contracts in the legitimacy theory in terms that the price paid by the consumer in lieu of
It has been analyzed from the afore mentioned points that social contracts are present in every transactions where the legitimacy theory is applied by the top level management and the fair and full details about the company is the motive of the theory which can only achieve by having different social contracts with different users of the accounting.
Conclusion
The development of the complete universe depends on the social contracts present in the world between the people and the government or government authorities. These contracts are essence of the human life including protection rights from ancient time when the life on the earth started. This fact has been supported by many philosophers like Hobbes and they present their arguments about presence of social contracts in life of natural persons like human as well as in the life of artificial person’s likes companies and industry. The philosophers also explained in detail the positives of the social contracts in terms of justice and finance and how they have created milestones in the same fields. The review is done to find the real meaning of the social contracts included how social contracts come into the place in philosophy. The review helps in analyzing the different arguments given by philosophers who support social contracts and its implication in the world. The impact of these in the society and in accounting fields has been discussed in detail to find the significant impact of the same in the working or organizations.
Apart from above, the review explains the purpose of the legitimacy theory according to social contracts and its impact on the world by applying both concepts together. The legitimacy theory enhances the quality of the social contracts between shareholders and third party of the organization and employees of the organizations through which the disclosures in the accounting field are modified as per the requirements of the outside party of an entity. Thus, in order to conclude, it has been said from review that the social contracts and the legitimacy theory are inert related where as the social contracts are wider terms and applying the legitimacy theory in the social contracts make the management of an organization.
The report has been prepared considering the different aims which are required to be drawn from the perspective of the investors. The main of the report is find the out correct information in the most appropriate formats so that the investors can understand the information about the affairs of the company and can make decisions regarding the amounts to be invested in the company. Another aim of the review is to analyze the significance of the social contracts in the accounting and its environments and improvements which have been done by usage of the legitimacy theory in the accounting industry. Through these aims the review has been prepared using the appropriate and consistent secondary data from the dependable sources. The review has been prepared as per predefined structure of review which starts with title of the review which is Social Contracts in Accounting and its relevance to legitimacy theory in accounting. The review regarding the topic has been discussed with three major headings. The first heading describes the social contracts along with its purpose and history along with subheadings which describes the role of social contracts in accounting and environment in the world. These part of review is explained the different theories given by different dreamers who have dreamed the relevance of social socials in every part of the world. The next part with appropriate subheadings describes the purpose and history of legitimacy theory and its impact in the accounting and environment in the society. The faithful representation for providing correct information to the depositor of the company is properly reviewed in this heading. Thereafter the importance of legitimacy theory with social contracts has been explained and effect on financial reporting of the same along with reaction of the management towards this concept has been analyzed and reviewed under the report. The review has been closed with proper gist which helps the user to under the purpose and findings of the review. The review contains the introduction which defines the aims and structure of the review along with the summary which describes the key points which have been discussed under review. As a whole, the review has been done using all the proper guidelines of the literature review.
The title or the review is Social Contracts in Accounting and relevance of it to legitimacy theory in accounting. The core points have been discussed in the review which justifies the title of the review. The social contracts and use along with its background has been discussed considering the first core point of the review which explains the impact of the social contracts in the field of accounting. The legitimacy theory with its usage and history has been detailed along with the findings about the legitimacy theory. The difficulty in application of the legitimacy theory in world has been one of the main points of discussion under review. After discussion on legitimacy theory its impact on the social contracts theory has been describes which explains that legitimacy theory contains the social contracts and its application can be done with social contracts in the field of accounting.
The main key point for preparation of the review is to enhance the quality and quantum of reporting to the different investors of the company with the usage of legitimacy theory and social contracts in legitimacy theory. The review has been prepared with most suitable heading and sub- headings and explained in detailed under these different headings. The review has been prepared to give boost to the scholars to research and presents theirs arguments in the new grounds of accounting which contains social contracts and legitimacy theory as their integral part.
References
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Baker E, (2013), “Social Contract, Essays by Locke, Hume and Rousseau” Read Books Ltd., p34 -43
Cruess R L, (2008), “Expectations and obligations: professionalism and medicines social Contract with society. Perspectives in Biology and Medicine”, 51(4), 579-598.
Donaldson T, & Preston, L. E, (2005), “The stakeholder theory of the corporation: Concepts, Evidence, and implications Academy of management Review” 20(1), 65-91.
Dunfee T W, (2009), “Integrative social contracts theory Economics and philosophy”11(01), 85-112.
Elahi M, (2005), “What is Social Contract Theory” available at https://www.google.co.in/url?sa=t&rct=j&q=&edata-src=s&source=web&cd=15&cad=rja&uact=8&sqi=2&ved=0ahUKEwipipyCoO3TAhXIqI8KHXhSBrIQFghzMA4&url=http%3A%2F%2Fwww.sophia- roject.org%2Fuploads%2F1%2F3%2F9%2F5%2F13955288%2Felahi_socialcontract.pdf&usg=AFQjCNEcYcluj-6Uu9cqabXu74HtJmE2pQ&sig2=Fbncb8iwPyPfPXma3NihEA accessed on 28/05/2017.
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Friend C, (2016), “Social Contract Theory”, available at https://www.iep.utm.edu/soc-cont/ accessed on 28/05/2017.
Freeman, R. E., Harrison, J. S., Wicks, A. C., Parmar, B. L., & De Colle, S. (2010). Stakeholder theory: The state of the art. Cambridge University Press.,p 5-10
Jos, P. H. (2006). Social contract theory: implications for professional ethics. The American Review of Public Administration, 36(2), 139-155.
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Leonard, D. K., & Samantar, M. S. (2011). What Does the Somali Experience Teach Us about the Social Contract and the State?. Development and Change, 42(2), 559-584.
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