17-1ACCOUNTING THEORYTOPIC 6 CHAPTER 7Positive

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7-1
ACCOUNTING THEORY
TOPIC 6
CHAPTER 7
Positive Accounting Theory
Learning objectives
7.1 Understand how a positive theory differs from a normative
theory.
7.2 Be aware of the origins of Positive Accounting Theory
(PAT).
7.3 Understand that PAT uses insights from agency theory and
why agency theory is of relevance to financial accounting
practices.
7.4 Be aware of the central assumptions of PAT.
7.5 Be aware of the meaning and nature of agency costs.
7.6 Understand why an organisation can usefully be referred to
as a ‘nexus of contracts’.
7.7 Understand the perceived role of accounting in minimising
the
transaction costs of an organisation.

continued
Learning objectives (cont.)
7.8 Be aware that accounting policy choices made by
management will be influenced by both efficiency
considerations as well as opportunistic motivations.
7.9 Be able to identify the reasons for the existence of ‘creative
accounting’.
7.10 Be able to explain the meaning of ‘political costs’ and how
accounting can be used to reduce the costs associated with
various political processes.
7.11 Understand the role of accounting-based management
compensation schemes and debt covenants in reducing
potential conflicts (agency costs) within an organisation.
7.12 Understand how particular accounting-based agreements
with parties such as debtholders and managers can provide
incentives for managers to manipulate accounting numbers.
continued
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7.13 Be aware of what constitutes ‘conservative’ accounting
procedures and why conservative accounting procedures
provide efficient mechanisms for minimising the contracting
costs within an organisation.
7.14 Understand the relevance of PAT to current debates about
how assets and liabilities should be measured.
7.15 Be able to identify some of the criticisms of PAT.
Positive theories compared to
normative theories
• A positive theory seeks to explain and predict
particular phenomena
– Positive Accounting Theory (PAT), which we explore in this
lecture, is one example of a positive theory of accounting.
Other examples are covered in the next lecture (when we
consider theories such as Legitimacy Theory and
institutional theories which are positive theories that can be
applied to explain the practice of accounting)
• By contrast, normative theories (which were
considered in Chapters 5 and 6) prescribe how a
particular practice should be undertaken
– the prescription might depart from existing practice
Positive Accounting Theory
defined
• PAT ‘… is concerned with explaining accounting
practice. It is designed to explain and predict which

firms will and which firms will not use a particular
method … but it says nothing as to which method a
firm should use.’ (Watts and Zimmerman 1986, p. 7)
• Again, positive theories do not prescribe what should
occur – they focus on explaining or predicting what
does occur
continued
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Positive Accounting Theory defined
(cont.)
• PAT focuses on relationships between various
individuals and explains how accounting is used to
assist in the functioning of these relationships
• Examples of relationships
– between owners and managers
– between managers and the firm’s debt providers
Assumptions underlying PAT
• All individuals’ action is driven by self-interest and

individuals will act in an opportunistic manner to the
extent that the actions will increase their wealth
– does not incorporate notions of loyalty or morality
Origins of PAT
• Started coming to prominence in mid-1960s
– paradigm shift from normative theories
• PAT became the dominant research paradigm in
1970s and 1980s
– shift resulted from US reports on business education, and
improved computing facilities enabling large-scale statistical
analysis – something common in positive research
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Origins of PAT—capital
markets research
• Development of Efficient Markets Hypothesis (EMH)
by Fama and others provided an environment
suitable for PAT research
– capital markets react in an efficient and unbiased manner to

publicly available information
• Ball and Brown (1968) paper was crucial to the
acceptance of the positive research paradigm
– investigated stock market reaction to accounting earnings
announcements
– sought to explain market reactions
continued
Origins of PAT—capital markets
research (cont.)
• Price of a security based on beliefs about present value of
future cash flows
• Ball and Brown found that earnings announcements impacted
share prices
– evidence that historical cost information is useful to the
market
• But the literature was unable to explain why particular
accounting methods were selected – if the market was efficient
as commonly assumed by researchers, and could understand
how different accounting methods affect accounting numbers,
then why does it matter what accounting method was selected?
PAT addresses this issue
Firms and contracts
• Firms can be characterised as a nexus of contracts
– between consumers of products and the suppliers of factors
of production

• Firms exist because they reduce contracting costs,
– firms provide an efficient means of organising economic
activity
– [consider the alternative, an individual organising the
production of a good: acquiring the raw materials organising
various people to make the good]
• Contracts include all types of agreements between
two or more parties (not necessarily written
contracts)
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Origins of PAT—agency theory
• Agency theory was crucial to the development of
PAT
• Agency theory explained why the selection of
particular accounting methods might matter
• Focused on the relationships between principals and
agents
– e.g. between shareholders (principals) and managers
(agents)

• Information asymmetries create much uncertainty
– transaction costs and information costs exist
Agency relationship
• The ‘agency relationship’ is a central focus of agency
theory
• Defined by Jensen and Meckling (1976)
– a contract under which one or more (principals) engage
another person (the agent) to perform some service on their
behalf which involves delegating some decision-making
authority to the agent
• Agency theory key assumptions from the economics
literature, such as:
– assumptions of self-interest and wealth maximisation
Price protection
• In the absence of contractual mechanisms to restrict
agents’ potentially opportunistic behaviour, the
principal will pay the agent a lower salary
– compensates principals for adverse actions
• Agents will therefore have incentives to enter
contracts which appear to limit actions detrimental to
agents
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The agency problem
• At the core of the analysis is the ‘agency problem’
• The agency problem relates to issues associated
with motivating one party (the agent) to work in the
best interests of another party (the principal)
• Agency problems arise because of inefficiencies
and information asymmetries
• The agency problem leads to ‘agency costs’
Agency costs
• Monitoring costs
– costs of monitoring agents’ behaviour
– e.g. auditing financial statements
• Bonding costs
– costs involved in agents bonding their behaviour to
expectations of principals
– e.g. preparing financial statements
• Residual loss

– too costly to remove all opportunistic behaviour
Role of accounting in
contracts
• Accounting information is used to address the
agency problem and to reduce agency costs
• Accounting is used as a monitoring and bonding
mechanism to control the efforts of self-interested
agents (managers)
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Key hypotheses
• Three key hypotheses frequently used in PAT
literature to explain, and predict support or
opposition to, an accounting method
– bonus plan hypothesis
– debt hypothesis
– political cost hypothesis
• Research assumes managers will act

opportunistically when selecting methods
Bonus plan hypothesis
• Managers of firms with bonus plans are more likely
to use accounting methods that increase current
period reported income
– also called management compensation hypothesis
– action increases the present value of bonuses paid to
management
Debt hypothesis
• The higher the firm’s debt/equity ratio, the more likely
managers use accounting methods that increase
income
– also called debt/equity hypothesis
– the higher the debt/equity ratio, the closer the firm is to the
constraints in debt covenants
– covenant violation results in costs of technical default
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Political cost hypothesis
• Large firms rather than small firms are more likely to
use accounting choices that reduce reported profits
– size is a proxy variable for political attention
– reduction of reported income is hypothesised to reduce the
possibility that people will argue that the organisation i s
exploiting other parties
Two perspectives adopted by
PAT research
• Efficiency perspective
• Opportunistic perspective
Efficiency perspective
• Researchers explain how contracting mechanisms
minimise agency costs of the firm
• Known as ex ante perspective
– mechanisms put in place up front to minimise future agency
and contracting costs
• Managers select accounting methods which most
efficiently reflect underlying firm performance
• PAT theorists argue that regulation forcing firms to
use a particular accounting method imposes
unwarranted costs and introduces inefficiencies
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Opportunistic perspective
• Seeks to explain managers’ actions once contracts
are already in place
• That is, particular accounting methods might initially
be selected for efficiency reasons, but once they
have been negotiated/agreed, then managers will
aim to utilise accounting choices in a way that best
serves their own interest
• Not possible to write complete contracts, so
managers are assumed to opportunistically act to
maximise own wealth
• Known as ex post perspective
– considers opportunistic actions after the fact
Owner/manager contracting
• Assuming self-interest, owners expect managers
(agent) to undertake activities not always in the
interest of owners (principal)
• Managers have access to information not always
available to principals

– information asymmetry
– further increases managers’ ability to undertake activities
beneficial to themselves
• Costs of divergent behaviour are agency costs continued
Owner/manager contracting (cont.)
• In the absence of controls to reduce opportunistic
behaviour, agents (managers) expected to undertake
activities disadvantageous to the value of the firm
• Principals price this into the amounts they are
prepared to pay the manager
• Managers may contract themselves not to consume
perks so will receive higher salary
– known as bonding
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Methods of rewarding
managers
• Fixed basis—salary independent of performance

– manager may not take great risks as does not share in
potential gains
• Salary plus remuneration is, in part, tied to firm
performance
– known as bonus schemes
Bonus schemes
• Remuneration can be tied to:
– profits of the firm
– sales of the firm
– return on assets
• All based on output from the accounting system
• May also be rewarded in line with market price of the
firm’s shares
Accounting-based bonus
plans
• Any changes in accounting methods will affect the
bonuses paid
– may occur as a result of a new accounting standard in place
• Contracts in some circumstances may be based on
the old method in place so changes will not affect
bonuses

• Contracts relying on accounting numbers may rely
on ‘floating’ GAAP
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Incentives to manipulate
accounting numbers
• The decision to reward managers on the basis of
accounting profits might initially be introduced for
efficiency reasons (it motivates them to work in a
way that also benefits the principals), but it may
subsequently induce them to manipulate accounting
numbers (the opportunistic perspective)
– a change in accounting numbers will affect their rewards
• Bonuses based on profits cause short-term rather
than long-term focus
– may affect investment in positive NPV projects if returns not
expected to be consistent
Incentives to manipulate
accounting numbers—evidence
• Healy (1985) found:
– managers adopt accounting methods to maximise bonus if

contract rewarded managers after a pre-specified level of
earnings reached
– if income not expected to reach pre-specified minimum,
managers shift earnings to future period (‘take a bath’)
• Lewellen, Loderer and Martin (1987) found:
– US managers approaching retirement are less likely to
undertake R&D expenditure if rewards based on
accounting-based performance measures
– short-term focus
Use of conservative accounting methods
in management bonus schemes
• Conservative accounting methods, which would
include historical cost, tends to delay the recognition
of income, accelerate the recognition of expenses,
and lead to lower asset and higher liability recognition
• Asset and income recognition based on assessments
of fair value would not be considered a ‘conservative’
accounting approach
• Potential conflicts of interest between agents and
principals are better managed when conservative
accounting methods are used as they restrict the
ability of managers to opportunistically use income
and net asset increasing accounting methods
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Market-based bonus schemes
• Apart from accounting-based bonus schemes,
managers are also often provided with capital
market-based bonuses
• May be more appropriate to remunerate managers in
terms of market value of firm’s securities (shares)
where accounting earnings fluctuate greatly
– e.g. mining, or high technology R&D firms
– or where managers are approaching retirement
• Methods include:
– cash bonus based on share price increases
– shares
– options to buy shares continued
Market-based bonus schemes (cont.)
• Providing managers with shares, or share options
creates incentives for managers to increase the
value of the firm – aligns their interests with those of
the owners (principals)
• But, problems include:

– share price also affected by factors beyond the control of
managers (e.g. general market movements)
– only senior managers likely to have a significant impact on
share value
continued
Market-based bonus schemes (cont.)
• But remember, regardless of how managers are rewarded there
is
always a maintained assumption within PAT that managers (and
everybody else) will be opportunistic
• Consider results of Bartov and Mohanram (2004):
– In presence of deteriorating profitability managers are likely
to adopt
income increasing accounting methods to increase share prices
and
therefore the value of their share options. They would then
exercise their
share options thereby acquiring the shares, and fairly quickly
sell the
shares before reported profits ultimately decline and the value
of the
shares fall
• Aboody and Kasnik (2000):
– if managers know that share options were to be granted to
them they will
disclose ‘bad news’ so as to reduce share prices and therefore
the likely

future exercise price of the share options. This w ould mean that
when
they ultimately exercise the granted options, thereby buying the
underlying shares, they will pay less and therefore make greater
financial
gain
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Choice of accounting versus
market-based bonus schemes
• Managers’ bonuses are more likely to be based on
accounting earnings where:
– share returns relatively more sensitive to general market
movements
– earnings have a high association with firm-specific
movement in the firm’s share values
– earnings have a less positive association with market-wide
movements in equity values
Debt contracting—agency
costs of debt
• Moving our attention to the relationship with

debtholders, in the absence of safeguards to protect
debtholders (creditors), managers are predicted to
adopt strategies to disadvantage the debtholders
• Agency costs of debt created by managers include
– excessive dividend payments, which leave fewer assets to
service debt
– the organisation may take on additional debt, with new
debtholders competing with original debtholders for repayment
(claim dilution)
– investment in high-risk projects may not be beneficial to debt
holders as they have a fixed claim (asset substitution)
– underinvestment
Use of debt contracts
• In the absence of safeguards to protect the interests
of debtholders from strategies such as those on the
previous slide, it is assumed the debtholders will
require the firm to pay higher costs of interest to
compensate for the risks
• That is, they will ‘price protect’
• If firms contract not to pay excess dividends, take on
high levels of debt, invest in risky projects, or under-
invest then they can attract debt at lower cost
• Hence, it is efficient to enter into contracts that
restrict the ability of managers to adversely affect the
wealth of debtholders

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Evidence from Australian debt
contracts
• In relation to Australian debt contracts, Cotter (1998)
found:
– leverage covenants frequently used in bank loan contracts
– leverage most frequently measured as the ratio of total
liabilities to total tangible assets
– prior charges covenants typically included in term loan
agreements of larger firms
– prior charges covenants defined as a percentage of total
tangible assets
continued
Australian debt contracts (cont.)
– debt to assets, interest coverage and current ratio clauses
frequently in use
– interest coverage required to be between 1½ and 4
times

– current ratio clauses required current assets be
between 1 and 2 times the size of current liabilities
continued
Australian debt contracts (cont.)
• Mather and Peirson (2006) provide evidence of a
change in the use of covenants relative to earlier
periods. Their findings include:
– a reduction in the use of debt/asset restrictions;
– greater variety of debt convents being used;
– more common covenants include minimum interest
coverage; minimum dividend coverage; minimum current
ratio; minimum required net worth;
– use of ‘rolling GAAP’ more common – which introduces
risks for the borrower;
– mean number of covenants in public debt contracts less
than private debt contracts – explained from an efficiency
perspective
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The role of conservative accounting methods
in reducing the agency costs of debt
• As with management bonus schemes, it is believed that the use
of conservative accounting methods are relatively more
effective in reducing agency costs of debt
• Zhang (2008) suggests that from an efficiency perspective,
managers might agree to adopt conservative accounting
methods because it allows them to attract debt at a lower price
• The use of conservative accounting procedures means that
debt covenants restricting the amount of debt relative to assets
(or debt to equity), or the amount of times profits must cover
interest (known as an ‘interest coverage’ clause), will tend to be
more restrictive or binding compared to those organisations that
do not adopt conservative accounting methods.
continued
The role of conservative accounting methods in
reducing the agency costs of debt (cont)
• As Zhang (2008) argues, the more binding covenants will
provide an earlier warning of default risk, and will thereby
reduce the risk exposure of the lending party (for
example, a bank)
• The reason for this is that, because management will
have less ability to circumvent restrictive covenants (for
example, by undertaking asset revaluations), such
covenants will create a technical default of a loan
agreement earlier than if management has the scope to
loosen the restrictions

• The earlier the lender can take action to safeguard its
funds, the lower the risk to the lender
Debt contracts—manager’s
incentive to manipulate
• Ex post, the incentive to manipulate accounting numbers
increases as the accounting-based debt covenants approach
violation
• Managers found to manipulate accounting accruals in the
years before and the year after violation of a debt agreement
• Too costly to stipulate all acceptable accounting methods in
contract so managers always have some discretionary ability
• But as we have learned, contracts that require the use of
conservative accounting methods reduce the ability of
managers to opportunistically manipulate accounting numbers
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Role of external auditors
• Auditors arbitrate on the reasonableness of the
accounting method chosen
• Demand for financial statement auditing when:

– management is rewarded on the basis of numbers
generated by the accounting system
– the firm has borrowed funds, and accounti ng-based
covenants are in place to protect the investment of
debtholders
Political costs
• We have already indicated that financial accounting
numbers are important with respect to debt contracting
and management compensation contracting. Financial
accounting also plays a key role in the political process
• Political costs are costs resulting from political attention
from government, lobby groups etc.
• Commonly directed at larger firms
– indication of market power
• May result in increased taxes, increased wage claims,
product boycotts etc.
• Firms likely to adopt accounting methods to reduce profits
to lower political scrutiny
Political actions of individuals
• Limited expected ‘pay-off’ results from the actions of
individuals
• Results in formation of interest groups
• Information costs shared, ability to investigate

government and business action increases
• Given self-interest, representatives of interest groups
predicted to maximise own welfare as constituents
have limited motivation or means to be fully informed
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Actions of politicians
• Politicians know that highly profitable companies
could be unpopular with members of their
constituency
• Politicians (who are assumed to be driven by self-
interest like everybody else) could win votes by
taking actions against the companies
– argue that it is in public interest even though in own interest
• May rely on reported profits to justify actions
– provides incentives for firms to reduce reported profits
Example of how politicians use accounting
numbers as a means of justifying actions
against an organisation

• As reported in the Hobart Mercury on 9 March 2013, the
Australian
Greens political party used the size of bank assets and profits as
the
basis for levying additional taxes on banks. The article stated:
The Greens want a levy of 0.2 per cent on all bank assets above
$100
billion in return for Federal Government guarantees, which the
independent
Parliamentary Budget Office has costed as raising $11 billion
over the next
four years.
“At a time when there's pressures on the budget, and the
government is
looking around for ways of raising revenue, especially in light
of the failed
mining tax, who can afford to pay it the most?" Australian
Greens’ Mr Bandt
said yesterday.
"If we don't stand up to the big banks and the big miners, then
the Labor
Party is going to come after the rest of us, like they have with
single
parents, and like they are threatening with the forthcoming
budget."
• As we can see, ‘profits’ are used to justify the proposed
action. Lower
reported profits would provide less ‘ammunition’ for the
politicians
Relevance of PAT-based research to current
efforts of IASB to promote use of fair values

• As already indicated in this lecture, conservative
accounting methods lead to:
– relatively lower revenue recognition
– faster expense recognition
– higher liability recognition
– lower asset recognition
• Historical cost accounting is a conservative approach
to accounting when compared to fair value
accounting
• Conservative accounting methods, such as historical
costs, reduce the ability of managers to manipulate
accounting numbers compared to fair value
accounting
continued
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Relevance of PAT-based research to current efforts
of IASB to promote use of fair values (cont)
• Do the ongoing efforts of the IASB to embrace fair values

make sense from an efficient contracting perspective?
• Because conservative accounting methods reduce the
possibility that management will undertake opportunistic
earnings management, organisations that use
conservative accounting methods might be able to attract
debt and equity capital at a lower cost because of
perceptions about lower risk
• Applying this reasoning, numerous researchers argue
that the IASB and FASB should take note of the
advantages inherent in conservative accounting
procedures before finalising any judgements about
accounting measurement continued
Relevance of PAT-based research to current efforts
of IASB to promote the use of fair values (cont)
• Whilst information about fair values will be useful to
various financial stakeholders in terms of assisting them to
make informed investment/resource allocation decisions,
more conservative accounting methods also provide
benefits in terms of controlling potentially divergent
behaviour of individuals involved in various contractual
arrangements.
• There is a clear-trade-off between the advantages of
having relevant information about current values and the
contracting benefits that more conservative accounting
benefits provide
Criticisms of PAT
• Does not provide prescription
• PAT is not value-free as it asserts assumption that

all action is driven by self-interest
• Argued to be too negative and simplistic a
perspective of humankind
• Issues have not shown great development
• In undertaking large-scale empirical research,
researchers ignore organisational-specific
relationships
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Diagrammatic summary of PAT
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1
ACCOUNTING THEORY
TOPIC 7
CHAPTER 8
Unregulated corporate reporting
decisions: considerations of

systems-oriented theories
Learning objectives
8.1 Understand how community or stakeholders’ perceptions
can influence the disclosure policies of an organisation and,
conversely, how corporate disclosures can influence
community and stakeholder perceptions.
8.2 Understand the fundamentals of Legitimacy Theory,
Stakeholder Theory and Institutional Theory and appreciate
that these theories have much in common with each other.
8.3 Understand that the above theories are, in large part,
derived from Political Economy Theory, and that Political
Economy Theory can be considered as having two
branches.
8.4 Understand how Legitimacy Theory, Stakeholder Theory
and
Institutional Theory can be applied to help explain why an
entity might elect to make particular voluntary disclosures.
8.5 Understand what we mean by ‘organisational legitimacy’
and
how corporate disclosures within such places as annual
reports and corporate websites can be used as a strategy to
maintain or restore the legitimacy of an organisation.
8.6 Understand that the legitimacy attributed to an organisation
can change across time and understand how corporate
disclosures can be used as a means of establishing,
maintaining or repairing legitimacy.

8.7 Understand how, pursuant to Stakeholder Theory, the
respective power and information demands of particular
stakeholder groups can influence corporate disclosure
policies.
8.8 Understand that Stakeholder Theory can be considered as
having an ethical branch and a managerial branch.
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8.9 Understand that corporate disclosure of information can be
used as a means of managing powerful stakeholder groups.
8.10 Understand the view that a successful organisation is one
that is able to balance or manage the demands (sometimes
conflicting), including information demands, of different
stakeholder groups.
8.11 Understand that institutional pressures exist that cause
organisations to take on organisational forms and practices
that are considered ‘legitimate’.
8.12 Understand that due to institutional pressures there can be
a
‘decoupling’ between the way an organisation appears to be
operating and how it is actually operating.

8.13 Be aware of some of the limitations of the theories
discussed
in this chapter.
Systems-oriented theories
• Legitimacy Theory, Stakeholder Theory and
Institutional Theory – the theories we discuss in this
lecture – are all systems-based theories
• These theories focus on the role of information and
disclosure in the relationships between
organisations, the State, individuals and groups
• The entity is perceived as being influenced by, and
influences, the society in which it operates
The organisation viewed as
part of a broader social system
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Political Economy Theory
• Legitimacy Theory, Stakeholder Theory and Institutional
Theory are derived from Political Economy Theory

• The political economy is ‘the social, political and economic
framework within which human life takes place’ (Gray, Owen
& Adams 1996, p.47)
• The argument is that economic issues cannot be investigated
in the absence of considering the political, social and
institutional framework within which economic activity takes
place – must all be considered within ‘context’
continued
Political Economy Theory (cont.)
• 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
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

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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
generally derive from this branch
• Does not question or study the various class
structures within society
Legitimacy Theory
• Legitimacy Theory is a widely used theory
• Within Legitimacy Theory, organisations seek to ensure they
operate within the bounds and norms of their respective
societies
– that is, they want their activities to be perceived as
‘legitimate’

• Bounds and norms are not static so require organisation to be
responsive
• Legitimacy Theory (and Stakeholder Theory and Institutional
Theory) can be used to help explain why an entity might elect
to make particular voluntary disclosures
• Accounting disclosures are a strategy used by the firm to
manipulate the firm’s relationships within the social system
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 theorists often rely upon the notion that
there is a ‘social contract’ between the organisation
and the society in which it operates
continued
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Legitimacy versus legitimisation

(cont.)
• 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 perceived
legitimacy
• Information disclosure is vital to establishing
corporate legitimacy
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
Social contract (cont.)
As Mathews (1993, p.26) states:
The social contract would exist between corporations (usually
limited companies) and individual members of society. Society
(as a collection of individuals) provides corporations with their
legal standing and attributes and the authority to own and use

natural resources and to hire employees. Organisations draw
on community resources and output both goods and services
and waste products to the general environment. The
organisation has no inherent rights to these benefits, and in
order to allow their existence, society would expect the benefits
to exceed the costs to society.
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Implications of not meeting
social contract
• Society allows the organisation to continue operations
to the extent that it meets their expectations – which is
often considered as being the same as being
‘legitimate’
• 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
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
Phases of legitimation
Three broad phases are often identified by researchers,
these being:
• gaining legitimacy phase
– ‘liability of newness’
– acceptance of community won through communication
• maintaining legitimacy phase
– need to anticipate changing community perceptions
– the more the organisation ‘trades’ on its legitimacy, the
more important it is that the organisation protects it
• repairing (defending) lost legitimacy phase

– often a reactive process to unforseen crises
– much of the legitimacy theory-related research relates to
this phase
16
17
18
7
Actions to legitimise activities
• Dowling and Pfeffer (1975) suggest the following
strategies when legitimacy has been threatened:
– 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
Communication to maintain
legitimacy
• Consistent with Dowling and Pfeffer’s strategies,
Lindblom (1993) suggests a number of strategies
managers might adopt when legitimacy is threatened:

– 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
• Again, public disclosure of information is an important
element of all of the above strategies
Abandonment of legitimising
efforts
• There might come a time where legitimising efforts
are deemed to be of limited use
• Consider Tilling and Tilt’s (2010) research of
Rothmans Australia – a tobacco manufacturer
• There came a point where legitimising efforts were
abandoned
19
20
21
8

Phases of the legitimation process
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 legitimation strategies
• This is a 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
Empirical tests of Legitimacy
Theory
• Used by numerous researchers examining social
and environmental reporting practices
• Used to attempt to explain disclosures, and often,
to explain changing patterns of disclosures
• Disclosures form part of the portfolio of strategies
undertaken to bring legitimacy to, or maintain

legitimacy of, the organisation
22
23
24
9
Examples of empirical studies
• Patten (1992):
– examined the change in the extent of environmental
disclosures of US oil firms around the Exxon Valdez oil
spill in Alaska
– Legitimacy Theory suggested that they would increase
disclosure in the annual report after the spill
– found the increase in disclosure occurred across the
industry
continued
Examples of empirical studies (cont.)
• Deegan and Rankin (1996):
– used Legitimacy Theory to explain changes in annual
report, environmental disclosure policies around proven
environmental prosecutions

– prosecuted firms disclosed significantly more environmental
information in the year of prosecution than any other year
– prosecuted firms disclosed more ‘positive’ environmental
information than a matched sample of non-prosecuted firms
continued
• Deegan and Gordon (1996):
– investigated the objectivity of environmental disclosure
practices and trends over time, as well as whether
environmental disclosures related to environmental group
concerns
– found increased disclosure over time associated with
increased environmental group membership
– disclosures mostly positive
– positive relation between environmental sensitivity of
industry and disclosure
continued
25
26
27
10

• Gray, Kouhy and Lavers (1995):
– performed longitudinal study of UK social and environmental
disclosures from 1979 to 1991
– related trends to Legitimacy Theory, with specific reference
to Lindblom’s strategies
• Deegan, Rankin and Voght (2000):
– used Legitimacy Theory to explain how social disclosures in
annual reports changed around the time of major social
incidents or disasters
continued
• Brown and Deegan (1998) emphasised the role of
the media in shaping community expectations and
showed that corporate disclosures responded to
media attention
• Carpenter and Feroz (1992):
– undertook a US study on the government’s choice of an
accounting framework
– related to a desire to increase the legitimacy of an
organisation
continued

How management determines
society’s expectations
• Legitimacy Theory proposes a relationship between
corporate disclosure and community expectations
• Management has been found to rely on the media to
provide an insight into community perceptions, with
the media being observed to shape community
expectations (O’Donovan 1999)
• O’Donovan (1999) provided evidence that corporate
managers believe that:
– the media shapes public concerns
– annual report disclosures are a means of winning back the
support of the community after adverse media coverage
28
29
30
11
Impact of media attention
• Islam and Deegan (2008) reviewed the social and
environmental disclosure practices of Nike and
Hennes & Mauritz from 1987 to 2005
– found a direct relationship between the extent of global

news media coverage of a critical nature directed towards
particular social issues and the extent of social disclosure in
the annual report
• Their findings supported a view that:
– the media is able to influence community concerns in
relation to unobtrusive issues (creates a legitimacy gap)
– managers will make disclosure responses to the media
attention
The difference between
legitimation and accountability
• If a company makes disclosures because of
concerns about its legitimacy then the disclosures
are effectively being motivated by survival or
profitability considerations rather than by a desire to
demonstrate greater accountability
• There is much evidence to suggest that many
corporate disclosures are a legitimation device and
not an accountability mechanism
Issues not currently addressed
by Legitimacy Theory
• Legitimacy Theory is a very widely used theory, particularly
in
the social and environmental accounting area.
• Because of its widespread use it is relevant to consider some
of the ‘apparent gaps’ in the theory
• Gaps include:

– A lack of detail about how ‘legitimacy’ can be measured
subjective exercise. Perhaps consider the
flow of
resources to the organisation as a ‘proxy’ for legitimacy
continued
31
32
33
12
Issues not currently addressed by
Legitimacy Theory (cont.)
– What disclosures are more effective in the legitimation
process?
type of
disclosures that are most effective in establishing, maintaining,
or
repairing legitimacy. More theoretical development is
necessary.
st effective in legitimising
the
organisation?

of
disclosures, or disclosures provided in different media?
• Assumes that disclosure strategies are driven by self interest
– a simplistic assumption
– certain actions become institutionalised rather than be driven
by
legitimation strategies
continued
Issues not currently addressed by
Legitimacy Theory (cont.)
• Researchers who apply Legitimacy Theory typically do not
consider actions that are aimed at legitimising the broader
social system
– A predominant focus on organisational-level legitimacy. More
attention should be given to efforts to legitimise broader social
systems. According to Archel et al (2009):
...researchers should think more broadly about the legitimation
strategies undertaken by organisations. Whilst disclosure
strategies
might be undertaken to inform, educate or even manipulate
society
in a manner intended to provide legitimacy to the organisation,
researchers should also consider whether the disclosures might
have a broader impact in terms of efforts to legitimise particular
economic, social and political systems that potentially

undermine the
interests of particular stakeholders (such as employees).
Stakeholder Theory
• We will now turn our attention to Stakeholder Theory
• There are two broad branches of Stakeholder
Theory, these being the:
– ethical (moral) or normative branch
– positive (managerial) branch
• There are many similarities between Legitimacy
Theory and Stakeholder Theory
– should not be treated as two separate theories but two
(overlapping) perspectives of the issue set within a ‘political
economy’ framework
34
35
36
13
Ethical (normative) branch of
Stakeholder Theory
• All stakeholders have the right to be treated fairly
by an organisation

• Issues of stakeholder power are not directly
relevant
• Management should manage the organisation for
the benefit of all stakeholders
• Firm is a vehicle for coordinating stakeholder
interests
• Management have a fiduciary relationship to all
stakeholders
continued
Ethical branch of Stakeholder Theory
(cont.)
• Where interests conflict, business managed to
attain optimal balance among them
• Each group merits consideration in its own right
• Also have a right to be provided with information,
even if not used
• This perspective of corporate responsibilities is not
validated (or rejected) on the basis of empirical
observations (that is, these researchers are
providing argument about what should be and not
what is)
Definition of stakeholders
• Any identifiable group or individual who can affect
the achievement of an organisation’s objectives, or

is affected by the achievement of an organisation’s
objectives (Freeman & Reed 1983)
• There are two branches to the above definition
– proponents of the ethical branch of stakeholder theory
would include both branches when identifying
stakeholders
– proponents of a managerial perspective of stakeholder
theory would only consider the first branch (that is, those
stakeholder who can affect the achievement of the firm’s
objectives)
37
38
39
14
Primary versus secondary
stakeholders
• Primary stakeholders
– ones without whose continuing participation the
corporation cannot survive as a going concern
• Secondary stakeholders
– those who influence or affect, or are influenced or affected
by, the corporation, but they are not engaged in
transactions with the corporation and are not essential for

its survival
• Ethical branch does not differentiate between
primary and secondary stakeholders
Right to information—
accountability
• In considering rights to information, accountability is
considered
– the duty to provide an account or reckoning of those actions
for which one is held responsible
• Accountability involves two responsibilities
– to undertake certain actions
– to provide an account of those actions
• Reporting is assumed to be a responsibility rather
than demand driven
Testing of ethical branch of
theory
• As the ethical branch embraces normative
perspectives about how the organisation should act,
it cannot be validated by empirical observation As
Donaldson and Preston (1995, p.67) state:
– In normative uses, the correspondence between the theory
and the observed facts of corporate life is not a significant
issue, nor is the association between stakeholder
management and conventional performance measures a
critical test. Instead a normative theory attempts to interpret

the function of, and offer guidance about, the investor-
owned corporation on the basis of some underlying moral or
philosophical principles.
40
41
42
15
Managerial branch of
Stakeholder Theory
• By contrast, this branch of Stakeholder Theory
attempts to explain when corporate management
will be likely to attend to the expectations of
particular (powerful) stakeholders
• More organisation-centred
– stakeholders identified by the organisation
– extent to which organisation believes relationship needs
to be managed in interests of the organisation
continued
Managerial branch of Stakeholder
Theory (cont.)
• Research undertaken under the managerial branch
of Stakeholder Theory can be tested with empirical

observation
– unlike normative ethical branch
• Specifically considers the different stakeholder
groups within society, and how they should best be
managed
– not society as a whole like Legitimacy Theory
• Expectations of stakeholders considered to impact
on operating and disclosure policies
Stakeholder power
• Organisation will not respond to all stakeholders
equally, but to the most powerful
• Stakeholder power is a function of the stakeholder’s
degree of control over resources required by the
organisation
– e.g. labour, finance, influential media, ability to legislate,
ability to influence consumption of the organisation’s goods
and services
continued
43
44
45

16
Stakeholder power (cont.)
• Major role of management is to assess the
importance of meeting stakeholder demands so as
to achieve strategic firm objectives
• Expectations and power relativities of various
stakeholders change over time
• Organisation must continually adapt operating and
disclosure strategies
The role of information
• Information, including financial accounting and
social performance information, is a major element
employed to manage stakeholders
• Used to gain support or approval
• Also used to distract their opposition or disapproval
Examples of empirical studies
• Roberts (1992)
– found measures of stakeholder power and their related
information
needs can provide some explanation of levels and types of
corporate social disclosures
• Neu, Warsame and Pedwell (1998)
– firms are more responsive (in terms of corporate
environmental

disclosure) to the concerns of financial stakeholders and
government regulators than to environmentalists
• Islam and Deegan (2008)
– garment suppliers in a developing country (Bangladesh) are
responsive to the expectations of multinational buying
companies,
with the multinational buying companies in turn being
responsive
to the expectations of Western consumers (whose expectations
about working conditions, child labour, and so on – which are
unobtrusive events – are influenced by the Western media)
46
47
48
17
Ethical view versus
managerial view
• By separately considering the two perspectives of
Stakeholder Theory, it could be construed that
management might either be ethically aware, or
focused on the survival of the organisation
• Management will arguably be driven by both ethical
and performance considerations
• We need to understand the complementary roles

normative and descriptive research play
Diagrammatic representation of differences between the
ethical and managerial branches of Stakeholder Theory
Institutional Theory
• The last theory we will consider in this lecture is Institutional
Theory.
• Institutional Theory provides an explanation about why
organisations tend to take on similar characteristics, form and
processes (including similar reporting practices)
• Particular organisational forms might be adopted in order to
bring legitimacy to the organisation
– ‘Organisations conform because they are rewarded for doi ng
so
through increased legitimacy, resources and survival
capabilities’
(Scott 1987, p.498)
• Provides a complimentary perspective to both Legitimacy
Theory and Stakeholder Theory
49
50
51
18

Institutional Theory – the
meaning of ‘institution’
• According to Scott (2008):
– Institutions are comprised of regulative, normative and
cultural-cognitive elements that, together with associated
activities and resources, provide stability and meaning to
social life.
• Meyer, Boli, and Thomas (1987, p. 13) provide a
slightly different meaning of ‘institution’ but one
which is consistent with the above definition:
– We see institutions as cultural rules giving collective
meaning and value to particular entities and activities,
integrating them into larger schemes.
continued
Institutional Theory (cont.)
• The theory links organisation practices to societal
values
• Organisational form tends towards some form of
homogeneity
– ‘deviants’ will have problems gaining or maintaining
legitimacy
– Certain ways ‘of doing things’ are seen as legitimate – they
become ‘institutionalised’
– Once process become institutionalised they effectively
become ‘beyond the discretion of individuals and
organisations’

continued
Institutional Theory (cont.)
• Formal organisational structures and practices might be
considered by society as legitimate
• However, this does not necessarily mean they are the most
efficient choice in terms of technical efficiency
• Organisations conform to institutionalised approaches (also
referred to as ‘myths’ within the literature) by building gaps or
‘buffers’ between the formal structures which people see (the
‘myths’ that maintain legitimacy) and the actual work processes
that create internal functional and technical efficiency (Meyer
and
Rowan, 1977)
• The formal structures and procedures of an organisation –
which
are the structures and procedures projected to others – reflect
the
rationalised institutional rules of the wider institutional
environments in which organisations operate
• The status of an organisation’s legitimacy reflects the ‘social
fit’ of
the organisation within its environments
52
53
54

19
Isomorphism and decoupling
• Two main dimensions of Institutional Theory are
isomorphism and decoupling
• Isomorphism refers to ‘a constraining process that
forces one unit in a population to resemble other
units that face the same set of environmental
conditions’ (DiMaggio & Powell 1983, p.149)
• Three different isomorphic processes
– coercive
– mimetic
– normative
Coercive isomorphism
• Arises where organisations change their institutional
practices because of pressure from those
stakeholders upon which the organisation is
dependent
• Related to the managerial branch of Stakeholder
Theory
• Because powerful stakeholders might have similar
expectations of other organisations, there will tend to
be conformity in practices across organisations,
including their reporting practices

• Consider how the World Bank has been able to
influence reporting practices in developing countries
(Neu and Ocampo 2007)
Mimetic isomorphism
• Organisations often copy other organisation’s
practices for competitive advantage and to reduce
uncertainty
• ‘Uncertainty is a powerful force that encourages
imitation’ (DiMaggio & Powell 1983, p.151)
• Organisations within a particular sector adopt similar
practices to those adopted by leading
organisations—enhances external stakeholders’
perceptions of the legitimacy of the organisation
continued
55
56
57
20
Mimetic isomorphism (cont.)
• Without coercive pressure from stakeholders, it
would be unlikely that there would be pressure to
mimic others—hence linkage between mimetic

and coercive isomorphism
Normative isomorphism
• Pressures from ‘group norms’ to adopt particular
institutional practices
• Particular groups with particular training will tend to
adopt similar practices—non-compliance could result
in sanctions being imposed by ‘the group’
• Again, provides a rationale for why reporting
approaches, and other corporate processes, tend to
take on similar form
Outcomes of isomorphism
• Tendency towards similar corporate structures and
processes
• Isomorphic processes do not necessarily make the
organisations more efficient
• In practice it is not easy to differentiate between the
three types of isomorphism
• Strategies might be more about ‘show’ or ‘form’,
rather than about substance
58
59
60

21
Decoupling
• Although managers might see a need to be seen to
be adopting particular structures and practices,
actual organisational practices can be very different
from the formally sanctioned and publicly
pronounced processes and practices
• For example, the organisational image constructed
through corporate reports and other disclosures
might be one of social and environmental
responsibility when the actual managerial imperative
is maximisation of profit or shareholder value
Concluding comments
• We can see that there is much overlap between the three
theories
just discussed
• Sometimes a joint consideration of different theoretical
perspectives can provide a more holistic understanding of
particular practices
• With Chapters 7 and 8 in mind we can see that we have a
variety
of different insights into why management might voluntarily
elect
to make particular disclosures or to embrace particular
organisational forms
• However, it should also be appreciated that there are a number
of

other theories ‘out there’ that we have not discussed which also
provide insights into what motivates managers to undertake
particular activities, inclusive of reporting
• Researchers therefore have much choice when selecting
amongst competing theories
61
62
ACT505 Assignment 2, Semester , 2021 Page 1
ACT505 Accounting Theory, Semester 1, 2021
Assignment 2
30 Marks - Weight 20%
Due Date: Sunday 23rd May Midnight (week 11)
Instructions:
➢ This assignment consists of two question. The due date and
time is noted above.

➢ It is your responsibility to ensure you factor in any time
difference between
Darwin and other locations when submitting your assignment.
➢ Please upload your file using the submission point for the
assignment on
Learnline.
➢ Assignments submitted via e-mail will NOT be accepted.
➢ There is no need to complete a university cover sheet but DO
please include your
name, Student Number, and your tutor’s name.
Ethics:
➢ This is not a group assignment; it is an individual assessment.
Your answers will
likely be different from other students. If portions of your
assignment are copied
or very close to copying, all parties will be penalised for
copying. Copying would
be considered plagiarism and CDU has restrict policies in this
regard (please see
https://www.cdu.edu.au/academic-integrity for details).

https://www.cdu.edu.au/academic-integrity
ACT505 Assignment 2, Semester , 2021 Page 2
Question One (15 Marks)
Banks to slash extra 1000 jobs
On 21st August 2002 the Commonwealth Bank (CBA)
announced that it would slash 1550
jobs while creating 550 jobs, a net loss of 1000 jobs. It planned
to reduce inefficient
operations, task duplication & some back-office processing
functions, but stated that it
would not close more branches even where closures had been
planned. The news received
hostile reactions from both unions and consumer advocates like
the Australian
Consumers’ Association (ACA).
Union officials said that the job cuts were scandalous, and that
bank staff were suffering

from uncertainty following previous cuts and closures. ‘ It is
unbelievable’ said Tony Beck,
Finance Sector Union national secretary. ‘ They have just shed
500 jobs, all from the retail
network. Now we get this punch with another 1000 jobs.’
The ACA was equally unimpressed. Its finance policy officer
Catherine Wolthuizen asked
when the losses would stop. ‘ How much profit is enough for
greedy banks like CBA and
how much further will it flout consumer and community
demands before the Government
acts?’
The ACA wants a social charter set up to delineate minimum
standards around access to
banking and affordability. It has been lobbying the Federal
Government to act for
consumers in the face of massive bank profits.
CBA’s annual profit leapt 11percent to $2655 billion in the
previous financial year,
increasing income (over $1.8m) from fees, commissions and
other charges contributing to
the profit surge. The strong housing market contributed to an
increase in lending fees

income: $618m, up 3percent. Commissions and other fees raised
a massive $1.242 billion,
up 6 percent.
Required:
Explain whether you think the banks would or should respond to
the concerns of the
ACSA and/or concerns of the Finance Sector Union. What
theory(s) did you rely on (if
any) to form your judgement?
Question Two (Marks 15)
Explain the efficiency perspective and the opportunistic
perspective of Positive
Accounting Theory. Why is one considered to be ex post and the
other ex ante?
Give two examples to illustrate your answer.
S121 ACT505 ACCOUNTING THEORY
ISSUES ASSESSMENT 2 RUBRIC, VALUE: 20%
Task Case Study: Critical analysis of a given accounting
case(s).

Preparation Additional research in accounting literature.
Criteria High Distinction
> 85%
Distinction
>75%<85%
Credit
>60% <75%
Pass
>50% <60%
Fail
<50%
Weighted Grade >12.75 >11.25 <12.75 >9 <11.25 >7.5 <9 <7.5
Analysis of the
issues / questions
(5%)
Insightful and thorough
analysis of all the
problems/questions.
Thorough analysis of
most of the
problems/questions.

Superficial analysis of
some of the problems/
questions in the case.
Incomplete analysis of
the problems/questions.
Lacks analysis of the
problems/questions.
Knowledge (20%) Ideas are clearly
presented, interesting
and show
understandings of
content and a new take
on the subject.
Focussed and
demonstrates depth and
accuracy of
understanding.
Ideas are clear and
interesting and
demonstrate some
creativity.
Content is potentially

useful in increasing
understandings.
Ideas are not always
clearly presented and
rely heavily on
lecture/textbook.
Content has limited
value in increasing
understandings.
Ideas lack clarity are
not new or interesting
and demonstrate little
evidence of gaining
new understandings.
Content has little or no
value to the discipline.
Ideas are unclear and
undeveloped.
They are merely a
regurgitation of article

facts/others ideas and
demonstrate no
evidence of gaining
new understandings.
Critical Analysis
(25%)
Excellent ability to
summarise and interpret
multi-sourced data, to
appraise evidence,
evaluate arguments and
to formulate and
Good demonstration of
the capacity to
summarise and
critically analyse
information, formulate
own conclusions.
Reasonable summary
and analysis of
information. Able to

draw warranted
conclusions and
generalisations.
Limited ability to
interpret data, appraise
evidence or evaluate
arguments. Inadequate
conclusion. Conclusion
inconsistent with the
No critical analysis of
information, poor
conclusions and no
original thought.
express very sound
conclusions.
argument built in the
analysis.
Connections:
Issues and

Theories
(25%)
Makes appropriate,
insightful and powerful
connections between
the issue/problem and
the theory.
Makes appropriate and
insightful connections
between the issue/
problem and the theory.
Makes appropriate but
somewhat vague
connections between
the issue/problem and
the theory.
Makes little connection
between the
issue/problem and the
theory.

Makes little or no
connection between the
issue/problem and the
theory.
Accessing,
summarising, and
acknowledging
resources (10%)
Evidence of broad,
systematic and creative
research.
Demonstrates skilful
use of high quality,
credible, relevant
sources. Selection of
sources goes beyond
the mainstream
literature.
An excellent summary
of relevant data.

Wide range of sources
accurately reference.
Evidence of controlled
and systematic
research.
Demonstrates selection
of credible, relevant
sources from relevant,
quality literature.
Accurate summary of
relevant data.
Good range of sources
with minor errors in
referencing.
Evidence of good
research skills.
Demonstrates an
attempt to use credible
and/or relevant sources.
Information is gathered
from a good range of

electronic and non-
electronic sources but
could be extended.
Summary of data could
be improved.
Reasonable range of
sources, some
referencing errors.
Research conducted
demonstrates an
attempt to use credible
and/or relevant sources.
Information is gathered
from a limited range of
electronic and non-
electronic sources
Some capacity to
summarise data.
Limited resources with
a number of errors in
referencing.

Limited research skills
demonstrated.
Very limited range of
sources utilised.
Lack of demonstrated
ability to summarise
data.
Insufficient or poor
sources with major
errors in referencing.
Academic Outstanding ability to Good ability to Reasonable
ability to Limited ability to Limited understanding
Communication construct a sound and construct a sound and
construct a sound and construct a sound and of accounting
theory
(10%) consistent argument. consistent argument. consistent
argument. consistent argument. demonstrated. Mainly
Concise writing style Concise writing style Reasonable writing
Writing style should be descriptive report
totally lacking in with little tautology or style. improved.
verbosity of any form. repetition. No Should reduce the Mark-
earning content Lack of assignment
colloquialisms. incidents of padding reduced due to padding
focused content,

with tautology and with tautology and significant verbiage.
repetition. May have repetition. Uses
tendency to use colloquialisms.
colloquialisms.
Overview of Well-constructed Well written and Reasonably
written and Not consistently Simplistic, tends to
English skills assignment: presented assignment: presented:
some logically structured: narrate or merely
Structure appropriate, clear, and distinct units of thought
awkward transitions; narrates; digresses from summarise;
illogical
Logic smooth transitions; in paragraphs; clear some brief,
weakly one topic to another; arrangement of ideas
Mechanics arrangement of
organisational elements
transitions between
developed, coherent,
unified or undeveloped
paragraphs;
awkward use of words,
numerous errors in style
some major
grammatical or
(5%) seems particularly apt.
Uses sophisticated

and logically arranged
paragraphs; a few
arrangement may not
appear entirely natural;
and presentation
including spelling
proofreading errors;
language frequently
sentences effectively; mechanical difficulties contains
extraneous punctuation and weakened by clichés,
usually chooses words or stylistic problems; information; more
grammar. colloquialisms,
aptly; observes may make occasional frequent wordiness;
repeated inexact word
professional problematic word unclear or awkward choices.
conventions of written choices or syntax sentences; imprecise
English and report errors; a few spellings or use of words or
over-
format; free of spelling, punctuation errors or a reliance on
passive
grammatical, cliché; uses appropriate voice; some distracting
punctuation and typing report format. grammatical errors;
errors. some spelling,
punctuation and typing
errors.

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