Implications of Accounting Theories

Implications of Accounting Theories


The following assignment will discuss the implications of the accounting theories which will include one from the following theories the debt-covenant theory, agency theory, stakeholder theory, institutional theory and the legitimacy theory. The project will also highlight how different types of companies are using the above-mentioned theories for being successful in the marketplace. The accounting techniques are regarded as the social norms. The agency theory generally explains the relationship between the agents and principles in a business. In an organization, the agency theory plays an important role by resolving the estimated problems that can be present in a relationship of the agency as a result of the goals which are unaligned or various aversion levels related to the risk. The study will also focus the common relationship with regards to the finance which takes place between the agents of a company and the shareholders. On the other hand, the stakeholder theory is also one of the popular theories in a company because it addresses the values and morale's that are needed to run an organization smoothly.


Stakeholder theory has been taken into account for carrying out this particular study. It has been already mentioned that stakeholder theory is one of the important as well as a popular theory among a lot of companies across the globe. However, the stakeholder's theory mainly came into existence for addressing the morale's and values of an organization with the help of the business ethics and the organizational management. Moreover, the stakeholder's theory was proposed by one of the most well-known economists known as Milton Friedman (Bae, Kang and Wang, 2011). He said that an organization must take care of its own stakeholders as they are one of the most important elements for the organization to be successful in the marketplace. The stakeholder group includes the following: The suppliers, consumers, local communities, employees, financial institutions, media, and etcetera. There is a lot of benefits that are associated with using the stakeholder theory- firstly, it forces an organization to take the social responsibilities and in return present the trust and fairness among the people who are involved in the business of the company. If the company is successful in implementing the stakeholder's theory then they will gradually gain a lot of loyalty from their stakeholders which will also help them to enhance the efficiency level as a result of an increase in interest of the stakeholders. Secondly, the stakeholder's theory is also quite successful in identifying the various groups in an organization who have interest in them and it also tries to describe methods for understanding their expectations and needs to a great extent (Crane and Ruebottom, 2011).
On the contrary, there are several negative side effects of using this particular theory also. There are some of the world-famous philosophers who have criticized the stakeholder's theory. Firstly, it has been greatly observed and witnessed that if stakeholder's theory is applied on a continuous basis in a company and most of the time the assessment of the theory is quite subjective in nature so it is not at all possible that all the interests of the stakeholders will be addressed in a proper manner at the same time. Secondly, some of the great critics also feel that the stakeholder's theory does not offer any kind of decision-making criteria that will act as a guide to the corporate governance (Harrison and Wicks, 2013). On the other hand, there are also some of the world-renowned economists who feel that the stakeholder's theory is quite unrealistic in nature with regards to how a company operates. It is also needless to say that there are a lot of versions related to the stakeholder's theory so it becomes quite difficult for a company which one they should choose. However, there are some of the greatest examples with regards to the stakeholder theory that highlights the fact it is quite successful. In the recent times, it has been greatly observed that there a lot of companies who are prioritizing their stakeholders more than anything. One of the worlds famous companies namely, the Body Shop used and still uses the stakeholder theory for their company. The organization adopted a purpose with regards to the social activist by refusing to test their entire product range on the animals and also taking the necessary measures of recycling. Additionally, the company also sponsored a lot of programs based on the social change. Furthermore, when other people questioned about the commitment of the organization to these goals then they presented a detailed report to their consumers, stakeholders, shareholders, suppliers for assuring that Body Shop is successful in fulfilling their promise of the brand image. It is only an example of the successful implementation of stakeholder theory but there are also other companies who have implemented stakeholder theory and have become immensely successful in the marketplace. The organizations are eBay, Johnson & Johnson, Google (Hörisch, Freeman and Schaltegger, 2014). It can be also said that the stakeholder's theory not only became famous in the field of business ethics but it has also excelled in the other fields also. 
In the present times, the stakeholder theory is also used as one of the important frameworks with regards to the social responsibility methods, for instance, the Global Reporting Instance consists of analyzing the stakeholders. On the other hand, other fields such as human resource, law, and management used the stakeholder theory and succeeded when they put the need of their stakeholders in the first place before starting any kind of task. In case of the business ethics field, the stakeholder theory can be applied for analyzing the stakeholders with regards to the management issues approaches for examining the individual, societal and firm's crisis. Furthermore, the stakeholder theory is also quite helpful and emerged as one of the successful theories in the higher education field in the 21st century. The students of an institution are viewed as an internal stakeholder so their needs are taken care of an institution and the employees in an institution are viewed as the secondary stakeholder.  The theory also challenges the owners of the small business and the corporate leaders also that their earlier traditional approaches towards the management are not all applicable to the changing time. It also helps an organization that they must consider shifting their focus from earning the short-term profits instead they should aim for the long-term profits by catering the needs of their stakeholders. The changing time, globalization and the increase in responsibility about the corporate responsibility is forcing the companies to use the stakeholder theory so that they may keep on shinning in the marketplace among their potential competitors (Laczniak and Murphy, 2012). By identifying the values of the company and the relationship they have with their stakeholders are the vital elements of being successful. The managers of an organization can achieve the desirable profits and they can also benefit the society if the stakeholder's of the firm is addressed carefully. It has been already mentioned that the stakeholder theory has a strong connection with the social responsibilities and it completely means that the company's social value is mainly concerned and it focuses on promoting the potential of all of its stakeholders. The theory always tries to keep together both economics as well as the ethics for achieving the main goals of an organization. Arguably, the theory suggests that a company cannot make a lot of profit for themselves for using the stakeholder's in the long run instead a company aims at making profits for each and every stakeholder. The stakeholder theory also suggests that the director of the company must disclose each and every action of the company to the stakeholder so that the stakeholders can be involved in the entire operation of the company. Additionally, it has been also noticed that a lot of companies in the present times have considered the stakeholder theory over the shareholder theory after witnessing how other companies are immensely successful by applying this theory in their organization. The application of the stakeholder theory in the medical field also has been quite successful and it has grown at an alarming rate since the year 1980. The stakeholder's theory helps the healthcare organizations by the following ways: Firstly, there are certain processes with which the managers of a healthcare company identifies their potential stakeholders and also their interests with regards to the complex healthcare settings which includes the chronic care, medical groups, acute care, and nursing home. Lastly, the stakeholder theory is used by the managers for identifying and analyzing the conditions under which the managers of the healthcare organizations can engage communities for improving the services related to the healthcare.      


The entire project studied the implications of the stakeholder's theory on the various sector. It has been observed and witnessed that the above-mentioned theory is quite popular among the companies in the recent times. The theory has highlighted the stakeholder as one of the main ingredients in an organization and an organization can be successful if they address the need for the stakeholders effectively. On the other hand, it has been also noticed how the Body Shop has used the stakeholder's theory as a part of their social responsibility where the company has not used their products for testing on the animals. It can be also concluded that stakeholder theory is also used in the healthcare organizations at an alarming rate.


Bae, K. H., Kang, J. K., and Wang, J. (2011). Employee treatment and firm leverage: A test of the stakeholder theory of capital structure. Journal of Financial Economics, 100(1), 130-153.
Crane, A., and Ruebottom, T. (2011). Stakeholder theory and social identity: Rethinking stakeholder identification. Journal of business ethics, 102(1), 77-87.
Harrison, J. S., and Wicks, A. C. (2013). Stakeholder theory, value, and firm performance. Business ethics quarterly, 23(1), 97-124.
Hörisch, J., Freeman, R. E., and Schaltegger, S. (2014). Applying stakeholder theory in sustainability management: Links, similarities, dissimilarities, and a conceptual framework. Organization & Environment, 27(4), 328-346.
Laczniak, G. R., and Murphy, P. E. (2012). Stakeholder theory and marketing: Moving from a firm-centric to a societal perspective. Journal of Public Policy & Marketing, 31(2), 284-292.

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