Use of Legitimacy Theory in the Accounting Literature

underdeveloped theory. There are many gaps in the literature which embraces legitimacy theory (Deegan, 2002). For example, do legitimizing activities actually work and if so, which forms of disclosure media are more successful in changing community views about an organization (see Milne, Patten 2002)? Further, there is still a general lack of knowledge about whether particular groups in society are relatively more influenced by legitimizing disclosures than others, or indeed, whether managers think particular groups are more readily influenced than others. Also, how do managers most effectively become aware of community concerns and therefore, the terms of the “social contract”? How do managers determine which segment of society (referred to as “conferring publics” by O’Donovan 2002 or “relevant publics” by Lindblom, 1993) are conferring the much needed legitimacy? What is the relative explicative power of legitimacy in relation to alternative approaches to accountability such as contingency theory? These questions are for the future literature to answer,

communicated though company reports. More in general, through disclosure organization can seek to (Lindblom, 1994):

− Educate and inform relevant publics about actual changes in the organization's performance and activities;

− Change perceptions of the relevant publics but not change its actual behaviors;

− Manipulate perceptions by deflecting attention from the issue of concern to other related issues through an appeal to, for example, emotive symbols, or

− Change external expectations on its performances.

The legitimacy literature has been mainly focused on the social and environmental accounting and reporting (SEA and SER) issued by the private companies, both incorporate in the annual reports or as a separate document. More recently, the legitimacy approach or related approaches (accountability as managerial fashion tool) has been applied to performance budgeting and reporting issued by domestic public sector organizations (Carlin and Guthrie 2003; P. Aucoin, R. Heintzman 2000; Marcuccio, Steccolini 2005).

The interest of the legitimacy literature on the SEA has been strongly influenced by an early paper from Guthrie and Parker (1989). The authors sought to match the disclosure practices of BHP across the period 1885-1995 with an historical account of major events relating to BHP’s history. The argument was that if corporate disclosure policies are reactive to major social and environmental events, then there should be correspondence between peaks of disclosure and events which are significant in BHP’s history. Whilst the paper does not provide evidence supportive of the legitimacy theory, a large number of subsequent research studies have been used to refine their arguments (Patten, 2002, 1995; Gray 1995; Deegan and Rankin, 1996; Deegan And Gordon, 1996; Walden and Shwarts.

Two main areas of research and interest are the identification of the most effective means of communication managers can use to change societal perspectives on the company (Milne, Patten 2002) and the identification of the most effective groups within the society in conferring legitimacy to the enterprise (this branch of the literature has significant overlapping with the stakeholder theorists, see i.e. Mitchell and others, 1997). Other topic heavily assessed by the literature focusing on quantitative research methodology is the demonstration of the inverse relation between disclosure and social/environmental performance; Patten presents a critical review of this studies, stating that they miss to

consider other important intermediate variables influencing SEA and SE disclosure (industry, scandals and exceptional events, dynamic of societal expectation, change in management, etc.; Halme, Huse, 1997). Another part of the literature build on and try to demonstrate that managers’ legitimizing strategies will conceivably differ depending upon whether they are trying to gain, maintain or repair legitimacy of their organization –to maintain is easier than to repair or to gain- and that different organizations have different levels of legitimacy to maintain with the implication that the more the organization relies on its level of legitimacy to reach its bottom line or institutional goals, the more vigilant it needs to be to potential legitimacy threats (i.e. O’Donovan, 2002). Here it comes the part of the literature closer to the managerial behavior and decision-making process: some scholars concentrated on managers’ and investors’ reaction to particular events (O’Donovan 2002; Milne and Patten 2002). These studies are often simulation of managerial and investment decisions (for which data are from primary or secondary resources) to raise the predictive power of the theory in the causal relation between contingencies and legitimating strategies. A related but independent focus of the literature consists in exploring the managerial perceptions about motivations for corporate societal reporting; these studies are mainly intended to understand the relevance of social pressures and to assess the explicative power of the legitimacy approach (Mohamed and others, 1999; Neu and others, 1998).

3.3.2.2. The Nature of the Legitimizing Factors Affecting Accountability

Similarly to contingency literature, the strategic branch of the legitimacy theory recognizes that the main factors affecting the extent and the nature of ethical, social and environmental reporting are size, industry, political and social issues, economic context and internal processes (for a review see Adams, 2002; Halme, Huse, 1997). In particular, some scholars as Patten (see the author’s review at 2002) state how societal expectations towards companies in terms of sustainability, corporate social responsibility, etc., which are directly determined by the political and social context where the enterprise operates, can be directly related to the size, the sensitivity of the industry in relation to the main externalities, the peculiar technology, materials and human resources implied in the core operational and support processes. As some scholars suggest (i.e. O’Donovan, 2002) managerial changes and perceptions could also be strongly influential factors to take into consideration, even if difficult to operationalize and measure.

In this sense, as we will see more in depth in the next paragraph, several influencing

variables are the same of the contingency theory, -internal organizational variables, external contingency variables- but the motivating factors for the disclosure are often opposite or alternative.

3.3.2.3. The Attributes of Accounting Systems Affected by Legitimizing Factors

The legitimacy literature has traditionally analyzed the extent of social and environmental disclosure released by the analyzed companies. Some researches used the extent of social and environmental information intended as “other” or residual elements, intended to distract attention on the main economic indicators and performance financial (Deegan, 2002). A considerable amount of researches focus exclusively on the environmental contents of the disclosure and it is often the case that the notion of “social” disclosure encompasses the environmental aspects as well (see for example the analysis by Lindblom, 1984, McGavin, 1991). Several studies drawn from the legitimacy approach uses the content analysis method to identify some sort of accountability indexes (i.e. Van Staden, Hooks, 2007); some of these studies try to link main accountability features to some relevant stakeholders’ information interests and level of technical understanding (see for example Mitchell and others, 1996; Guthrie and others, 2003).

An interesting part of this literature focuses on the content of the disclosure in relation to what is “true” or in relation to the balance between what is said and what reporting avoid to mention (Deegan, Rankin, 1996).

In relation to the process involved in Social Environmental Reporting (SER), scholars analyzed the existence and the depth of a social and environmental accounting system as indicator of substantive strategies as opposed to a cosmetic SER. A further interesting analytical perspective is the effectiveness of the disclosure/communication tool -internet site, paper based, etc.-.

If compared with the contingency theory, legitimacy seems to focus mainly on the SEA and related disclosure, being of main interest both the extent and the kind information provided by the organizations and the balance between substantial disclosure and cosmetic communication strategies to raise stakeholders’ perceptions on the level of transparency of an organization.

3.4 Factors Affecting Accountability: Development of Hypotheses from Contingency and Legitimacy Literature

The two analyzed bodies of literature identify different, sometimes overlapping, categories of factors affecting external reporting and often identify divergent causal relations. As analyzed in the previous paragraphs, literature applying contingency and legitimacy theory to accounting systems categorized in different ways and at different levels of detail the factors influencing the organizational subsystems of an enterprise.

In the present work we try to offer a reasoned and balanced categorization of these factors, re-classifying the factors mentioned by the relevant existing literature in three broad categories:

− Organizational, concerned with general characteristics of an organization;

− Corporate governance, more specifically related to the ownership, the stakeholder access to governance and the main decision making rules;

− External, regarding environmental and technological characteristics outside the organization. As showed further in the paper, these categories can be helpful to systematize factors under both a contingency and a legitimacy perspective.

In the following three sub-sections we will proceed in the following way:

− We will identify and explain the relevant factors affecting reporting features, drawing both by contingency and legitimacy theory;

− We will state the kind of relation – direct or reverse- envisaged by the two theories for each of the identified influencing variables;

− We will formalize the envisaged relations as relevant hypothesis for the present study, with the intent to understand the explicative power of each of them in the analyzed environment.

As a methodological note, it should be noted that in the hypotheses development we do not consider accountability level as a whole, but we follow a more specific distinction between “financial” accountability and “non financial” accountability.