Stakeholders can influence a firm's voluntary accounting disclosures according to systems theories like legitimacy theory, stakeholder theory, and institutional theory. These theories view firms as open systems that are influenced by and provide inputs to broader social, economic and legal systems. In contrast to positive accounting theory, which claims managers will disclose only what benefits themselves, systems theories assert that managers will consider how disclosure decisions impact powerful stakeholders in order to maintain the firm's social contract and legitimacy within society.

1. LO 1: Explain how stakeholders can
influence a firm's accounting policy
regarding voluntary disclosures
1 Created by Dr G. L. Ilott, CQUniversity Australia

2. Regulated vs. Unregulated disclosures
Unregulated disclosure is another way of referring to voluntary disclosures.
Voluntary disclosures are what a firm chooses to disclose to its stakeholders
beyond the disclosures that have been mandated by law or accounting standards.
Positive Accounting Theory (from the previous module) tells us that
managers will choose what to voluntarily disclose to stakeholders based on
what is good for them.
The theories in this module take a much broader perspective and place
stakeholders as the dominant influence on what to voluntarily disclose.
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3. Systems theories
The theories in this module are examples of open systems theories. They
are distinguished from other theories by:
• Being more holistic (they take a broad view),
• Being aware that decisions are not taken in isolation. There is in fact a
whole system involved in making decisions,
• Considering society as an open system, and
• They are concerned with inputs and outputs that cross the system
boundary.
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4. Systems theories in business & accounting
In business studies, the firm is a system, but it is also part of larger social systems, such as
• Legal systems
• Economic systems
• Commerce systems
• Society itself as a system
• Global social systems.
Firms provide input into these systems and also receive inputs or feedback from those
same systems.
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5. Examples of "systems
thinking"
The key to systems thinking is to realise that no
decisions or action is taken in isolation.
Example: A firm releases its financial report, with good
profit numbers.
• This is an input for investor decisions. Investor
reaction is an input back into the firm.
• The Tax Office also processes these reports. Their
reaction is also an input back into the firm (e.g. these
could be a tax bill, a tax credit, or a notice of legal
action).
• Shareholders might demand more dividends as a
result. This is a feedback to the firm based on its
decision to make particular disclosures.
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6. 6

7. So, moving along…
In this module we will visit three particular systems theories:
1. Legitimacy Theory,
2. Stakeholder Theory, and
3. Institution Theory.
But fist we need to understand why these particular systems theories
are important. To know that, we need to know what lurks behind them.
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8. The Political Economy Theory
Political Economy Theory is in many ways an antithesis of rational, economic theories of
the firm. Political Economy Theory basically says that everyone wants something in
return.
For example, take a decision whether or not to declare dividends from last year's profits.
• Accounting and economics will provide a rational, neutral risk-based approach to
making that decision.
• Political Economy Theory suggests that if managers think that the shareholders will
revolt and sack the Board of Directors if no dividend is forthcoming, then they will
find a way to pay just enough dividend.
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9. The contrast with Positive Accounting Theory
The Political Economy Theory (PET) is a real contrast to PAT, but also share many
points concerning the motivation of managers.
• PAT says managers will make disclosure decisions that best suit themselves.
• PET suggests that managers will be aware of social and political implications
before making a decision (e.g. they won't want to antagonise powerful
stakeholders).
• If the manager can make a decision that appeases powerful stakeholders while
also making a decision that is in his/her own interests, so much the better!
• Yes, there is overlap, but it comes down to the core motivation for the manager.
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10. The Social Contract
Like PET, the idea of the social contract (is it really a theory? I can't be sure of
that) is outside of accounting research and much, much older.
The origins of the social contract are uncertain, but its first big "splash" was in
the form of Thomas Hobbes' Leviathan, published in 1651.
Hobbes believed that the greater good of society was served by individuals
giving over freedoms to either a monarch or a form of civil government, in
return for protection and civic order. Once the contract was in place, the
citizens then have no right to criticise those who rule them, and those who rule
must not do so in a capricious manner.
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11. How does the social contract apply here?
The social contract idea (again, I use the term "idea" instead of
"theory") sets the framework for the interaction between the firm and
its stakeholders. Some even suggest that the contract is between the
firm and society in general. For a better perspective of that, keep this
in mind when we discuss environmental and social reporting in the
next module.
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12. Why the stakeholder is so important!
The stakeholder is the critical nexus between the firm and the broader (even international)
society. Stakeholders are generally divided into two groups:
1. Primary stakeholders: the shareholders, debt holders, regulators, Tax Office etc. These are
the people who can shut you down if you cheese them off too much.
2. Secondary stakeholders: These are anyone who can't shut you down, but they can
influence those who can. These include trade unions, newspapers, share market analysts
etc.
So, stakeholders don't equate to everyone, but gee, they come close.
For example, are you a stakeholder in BHP?
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13. And coming right up…
Following this is a series of presentations on the three key systems
theories that highlight the influence of stakeholders over accounting
disclosure decisions. I hope you enjoy them.
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