Meaning and Origin of Social Contracts
Meaning and Origin- From the beginning of this world everyone has contract with another. As per the common parlance contract is referred to as the arrangement which has been entered into between two or more than two parties to carry or not to carry on particular activity for the defined period of time. These arrangements may be or may not be enforceable in law. These contracts in earlier times were rarely made in written otherwise in the history of world many instances was there where the contracts have been made in oral rather than in written. With the passage of time, the communities who are getting affected by the contracts which are on oral or verbal basis, has start raising the voice as to make the arrangements in the written and there shall be clear and fair considerations for the community at large. With this consideration, the need for giving the written contract has arisen and the importance of the same has been started recognizing in each and every field prevailing at that time (Elahi, 2005). Whether it is related to any business or the performance of any work. All the terms and conditions relating to the agreement if any entered into shall form part of it and is shall be defined and explained in the very common language that each of the party can understand irrespective of the level of the education it possess. The agreements so entered may contain the clause in which the breach clause was incorporated which clearly states that in case any of the party breaches any term or condition of the agreement then the contract will become invalid or broken and the matter then will be resolved by the authority which has been defined in the agreement as the dispute resolving authority. There have been many form of agreements like sale agreement, purchase agreement, merger agreement, marriage agreements, partnership agreement, trust agreement and many others and if looking back into the history there has been the freedom of independence agreement, Zamindari agreement and many other similar agreements or similar arrangements that have developed each nation of the world in itself with adequate technology and sufficient power (Cruess, 2008 and Dunfee, 2009).
Apart from these normal agreements or contracts, the new term has been included and has gained importance across the World is the Social Contracts. The term social is related to the Government. The term social contract highlights all the historical developments that have taken place during all the period whether it is of the ancient period, or during the time of world wars, or during the time when every country was in the urge of getting the freedom. The social contracts have been entered into by the community living in the country with the Government of that country. These contracts are concerned with the moral and other liabilities that each person of the community has to comply with and that too in accordance with the terms and conditions of the social contract that has been entered into (Baker, 2013). It means that through the social contract the acts of each and every people belonging to the community have been made dependent on the same. These contracts have been entered into by the people only on the fact that the government so made will save them from any damage or any danger that may be caused from the external parties or other different countries. In this manner the community surrenders their will and freedom and everything only in lieu of having the protection from the different kinds of damages that may be caused from different external factors (Friend, 2016 and Frazer, 2017).
Social contracts in Accounting and Legitimacy Theory
In the historical period, the great philosopher of the great time has provided two references that he has made to reflect the importance and origin of social contracts in the history. In his first historic reference of Platonic he has incorporated the term of social contract and has very well described as to why Crito shall not escape from the prison in which he has been kept for so long and why he shall accept for not only the imprisonment but also the death penalty instead of going to the other place in Greek. He has described the social contract in the sense that Crito has been born in the city of Athens and has to obey each and every code or conduct that has been prescribed in the law of Athens. He has further referred his birth as the result of the marriage of his father and mother and that too has happened in the Athens only and within the purview of the law of the Athens. It is further mentioned that the life of Crito is only because of the Athens and if the law of Athens requires that the Crito shall be penalized with death penalty then he shall not deny with it and rather comply with the requirements with the full heart (Leeson, 2009). The second historic reference that has been made by the Platonic is of the view that the justice is the result of the acts that have been made by the government of the respective country. The justice was announced on the basis of the citation of the laws, rules, regulations and other relevant circulars or notifications. The justice is generally obtained by the affecting party when someone cause any harm to him. This view has been regarded as the Republic view. But this view has been strictly rejected by the Socrates on the premise that the justice in conjunction with the rules, laws, regulations and statutes allows one person to do any kind of work with his regulated and managed mind and senses and has referred as the democratic view shall prevail (Jos, 2006).
Till the period of Socrates, everyone was having the limited extent of the platonic and republic view but during that no other philosophers have searched in the context of social contracts and rather have been applying in the manner in which it is being mentioned and utilized in the same manner. With the passage of time and with the change of period, the social contracts have been started giving the other definitions and its use has been started in different fields. The theory and ideology of Socrates regarding social contracts have come into force in the ancient period at the time when Mesopotamia conditions were in the wave across the world. The same has been used till the beginning of seventeenth century but after that new era has come which is commonly known in the history of world by the name of Enlightenment era or period which has started in the seventeenth century and has ended up in the eighteenth century. This period has been referred to as the enlightenment period only because of the fact that during this period each and every philosopher who has born has given new ideas, new sources for thoughts and different applications not only in this field but also in the field of science, religious, etc. and during this enlightenment period, two great philosophers have been named in the history of world who has contributed much towards the area of social contracts theory (Leonard and Samantar, 2011). These two philosophers are known by the name of Thomas Hobbes and Jean Jacques Rousseau. These two have been regarded as the great intellectuals of that time who have devoted all their efforts and time to make the importance of social contracts realized across the World.
Philosophical Foundations of Social Contract Theory
Thomas Hobbes, who was born in England, has been in England during the period starting from 1642 and ending on 1648. This period has been referred to as the period when there was the English Civil war. During that period, every person wants to have their life saved from the danger that is being caused daily because of the ongoing wars across the World. At that time two systems was in the move, one is of monarchism and second is of parliamentarianism (Mccarthy and Puffer, 2008). The system of having the monarch has been referred where there will be one ruler or king of the country and will be known by the name of Monarch. Under this system the community consisting of men and women decides to surrender their freedom to one person who will be competent enough to fight on their behalf and will be able to save them from the dangers if any caused to them from the external harms. The system of having the parliament is such that the powers and responsibilities shall be shared between the monarch and the parliament and then the proper regulation will be done. But Thomas Hobbes has given two view one which compromises both the system and one which rejects both the system. He compromises on the urge that ruler will be treated as God has given with all the requisite powers through which can save the community and thus made the community dependent upon their religious and superstitious beliefs and thus rejecting the system of having the half democratic country. He rejects on the urge that the acts of every individual depends upon his or her behavior which is self interested and is therefore totally independent and thus does nit either require the monarch or ruler or the parliament which shares the roles, power and responsibility with the ruler. At the last Thomas Hobbes have finalized that that the period of English Civil war, there are the circumstances or the situations which have led many humans to go for beg to have the single ruler or monarch who can monitors and administer the development and current condition of the country despite of the fact that they have to surrender their freedom to them. This self surrender of freedom will provide them with the protection from harm and danger that is being caused due to war (Smith, 2009).
The second proponent who has favored the development and the emergence of the social contract theory was Jean Jacques Rousseau. The writings and submissions that have been made by him during the enlightenment period have bought the French revolution. In the literature world, his writings have been considered as the major cause for revolution in the France. Jean Jacques Rousseau has begun his theory by throwing the light of the beginning of the earth and the lives of people. He has described the initial stages when there were only two people on this earth. They have lived in the state of nature and not bothered about what is happening or no happening in this world. They are not aware as what to do and how to do and why to do such thing or particular task. They were totally in the state similar to the new born baby. Over the passage of time, the population is increased and the distances among the people have started and slowly they have started shifting to other places with their families. Now they have much intelligence and have started making the comparisons and differences with their immediate neighbors and friends and sometime tend to become such kind of people. This has established the base which makes difference between the people living in the society as rich and poor. Rich people are those who have the building land and have their own businesses running in the country and the poor people have been described as the people who are living and working to become like rich people. This kind of distinction made between the communities has made the necessity of the social contract everywhere. The rich people with this distinction have been running in fear of having the theft or robbery or even murder which may be caused to them from the poor people. It is because poor people can do anything in the way of having the luxurious status and becoming the rich people. With this consideration, the rich people have decided and require Government in place which can save them and their money and belongings from the poor families. This need has itself originated the requirements of the social contract. Though the Government of any country gives equality to all but indeed the Government serves only those people who are rich and ignores the interest of other including poor people. Thus, this type of self contract is the self centered contract and it will motivate and persuade the poor people to go on with the extreme was and thus will create the bad situation in the modern society (Skyrms, 2014). Jean Jacques Rousseau has described that the contract shall be entered into which can details that the interest of both the parties irrespective of the financial status and reputation shall be served and save equally and there will be no injustice to anyone. Continuing with this explanation, he details that every person who is born in the world has not come up with the mark as whether he belongs to the rich family or belongs to the poor family. He or she has come up with the same equality and condition and have same kind of freedom that is available to others. He added that the same has been bifurcated due to the development and the civilizations that have grown with the passage of time. The freedom has been rested in the hands of other persons named as Monarch or the Government. At this time it is not advisable to look at the back history and tries to adopt as per the situation prevailing at that time rather there should be the contract which shall ensure the equality for all and equitable justice for all. Thus, the need for social contract has arisen.
Thomas Hobbes and Jean Jacques Rousseau
The further importance has been gained by the social contract theory when the new and modern theorists have cited their theory and applications like John Rawls and David Gauthier. In this way the social contract has come into place.
- Applicability to different fields: The concept of social contract does not have relevance only in the field of freedom and the civilization but the term has been made relevant to all the fields whether it is related to the field of science or to the field of accounting. It has been made relevant and now been consistently applied in every field not only by the Government but also the private undertakings or companies. The social contracts has been applied in the field of accounting in the way that the financial statements ensure the true and fair view of the financial position and performance of the company with the due consideration for the shareholders and the stakeholders of the company. Similarly, the social contract is applicable to environmental and social disclosures made by the company in terms of the provisions of the law keeping in consideration the interest of the stakeholders of the company and the society of the country within which the company is operating. In this way, the social contract is now relevant and applicable in every field.
- Meaning and Origin– The term legitimacy is the assumption that shall be considered while doing any kind of work whether it is professional or personal (Burlea, 2013). The term assured that the work done has been so done in accordance with the pre defined rules, regulations, procedures and the beliefs that have been created for and on behalf of that work. If the work is not done in accordance with the pre defined rules, regulations, procedures and the beliefs then the work shall be treated as invalid and the doer of that work will fail for the future work. The same fact applies to the companies working under different situations and different industries and the respective markets and applies to the Government departments and servants to work on that basis only. The theory has been formed on the basis of three theories namely institutional, management and the stakeholder theory. The existence of legitimacy theory has been based on these theories only and in case any one of it is not included then the assurance that the term provide for any work will fails its existence. Institutional theory is the theory which entails that there should be proper system of standards, beliefs and requirements within which each and every company shall operate and function in the industry (Patten, 2012). These standards ensure that the culture of the organization is governed by the proper policies and procedures which are required to be adhere by the employees of the company working in the organization. Another theory is the management theory which entails that the managers and every employee working in the organization shall be aware of the goals and objectives of the company in which they are working (Donaldson and Preston, 2005. With this aware of the fact, the managers can easily direct the efforts of all the employees of the company towards the achievement of the organizational goals and objectives. Last theory which has further formed the last base for legitimacy theory is the stakeholder theory. This theory entails that the company shall work for increasing or maximizing the value or worth of the stakeholders of the company either providing the higher dividend to the shareholders of the company or by presenting the good results to the banking or financial institutions from whom the company has taken the loan (Laplume, Sonpar and Litz, 2008). If it comes to the notice that the stakeholders of the company are not satisfies with the working or operation of the company then the company will end up with failure as there will be no shareholders who will invest in the company, there will be no stakeholders who will either give loans to the company or no customers who will buy the products of the company (Freeman, Harrison, Wicks, Parmar and Colle, 2010). The presence and application of stakeholder theory also envisage that the official climate with formal behavior with proper internal control system will be in place and the company will have the high value in the eyes of the shareholders. Therefore, these theories have formed the basis of existence of legitimacy theory. Thus, in this way , the legitimacy theory have come into place and have made all the acts and working of the individuals and organization respectively legitimate keeping in view the defined standards and laws.
- Applicability to Environmental and Social Challenges – With the introduction of legitimacy theory with the three theories, it has been made applicable to almost all the fields whether it is science, humanity or accounts. In the case of environmental and social factors the legitimacy theory has gained much value and it is the first field where the legitimacy theory has been applied. It acts as the driving force which will help the companies working in the different industry to disclose all the relevant and material facts relating to the environment and society which is required to be disclosed as per the corporations’ act 2001 and environmental safety measures (Makarkin, 2011). These disclosures are required to made in the directors report of the company which is further incorporated in the annual report of the company and in the sustainability report and also in the corporate social responsibility report. The legitimacy theory helps the managers of the company to disclose all the relevant and material in all these reports and shall be presented to all the users of the financial statements in the clear and implied manner. If the company fails to disclose all the required facts then the company will soon find its place in the liquidation or closure rather than in the industry. Thus, in this way, the legitimacy theory helps the managers to make the disclosures and made available to users through different reports and therefore it is greatly applied in the environmental and social factors.
- Applicability to Accounting – The need for true and fair disclosure of the financial positions and financial performance have arisen during the period of the financial crisis that has happened globally across the world. Many businesses have either collapsed or have gone into the merger at that time like Lehman brothers was collapsed in the year 2008 and many other banks have merged into another bank or acquired by another bank. The accounting of the company in the form of the financial statements describes the financial positions and the financial performance of the company. In order to know the correct picture of the results of the company, there must be the adequate disclosure and information to the users of the financial statements of the company in the annual report of the company. The standards of disclosures and the related guidelines have been incorporated in the Corporations Act 2001 and the Australian Accounting Standards. Each and every company shall disclose with true and fair manner and the auditor thereafter is required to check and verify that whether the financial statements of the company disclose the true and fair view of the affairs and performance of the company. Lehman Brothers would not have collapsed if it would have disclosed the clear picture of the working of the organization rather than showing the manipulated figures. Thus, legitimacy theory in the field of accounting also acts as the motivating force for the managers to make the disclosure in true and fair manner.
The agreement with government made by the people of the country to safeguards their lives along with their family members from cross country disturbances in lieu of certain freedom of people are called the Social Contracts. The parliaments is made of the persons chosen from the society the itself by the members of the society only and they are chosen to create equality among the members of the society. On the other hand legitimacy theory defines true and fair presentation about the affairs of the company by disclosing the social and environmental challenges in the Notes to accounts to the financial statements by enthusiasm in the employees and officers of the company. The legitimacy theory is not governed by any law and statue but it is the discretion of the officers of the company to follow this theory (Mäkelä and Näsi, 2010).
The following point describes the relevance and application of legitimacy theory in Social Contracts:
- The shareholders are people for the company management acting as government for the company. The agreement between shareholders and management of the company is social contracts which emphasis the duty of the management personnel to present and true and correct financial performances consequences about the affairs of the company so that the shareholders can increase their investment in the company in near future and this sense of responsibility among the members of board witness the presence of legitimacy theory in this social contract.
- The agreement between government of the country and the management of the company which is operating the country about existence of the company for long run in lieu of paying taxes and fulfilling certain duties as laid down by the government is the social contract available between them. The obedience by the company in fulfilling the terms lay upon company in the way of rules and regulations or accounting principles by the government is truth of presence of legitimacy theory in the contract.
- The third agreement is between customers and the board members of the company to make customers aware the facts about the different products and services in which the company deals in fair manner. The company if explains wrong information about product and services, then customers base can be lost. So the pressure of maintaining the quality f products and services and their disclosures to customers of the company indicates the presence of legitimacy theory in this social contract.
- The company has to make social contract with public that is with society as a whole to maintain the environment of the society pollution free from its operations. These contracts put certain standards on company which the board has to follow and disclose this fact in their report called board report. The enthusiasm of not hampering by the environment from operations of the company shows the existence of legitimacy theory in the contract.
- The social contract between borrowers and the management of the company is the agreement to pay interest and principal of borrowed funds by the company in due time and disclosures of its liquidity and solvency position to these borrowers time to time. If the management does not disclose the financial data of the working of the company to the borrowers from time to time then there may be chance that the borrowers will not give future funding and leading to liquidity crunch in the company. To avoid this situation, the inspiration of the existence of the disclosure of all the information about the company by the board is application of the legitimacy theory in the social contract of borrowers and company.
From the above mentioned points, it has been identified the significance and application of the legitimacy theory in the different social contracts which the company entered for smooth working. Thus, Social contracts helps in understanding the agreement of give and taken between the parties and the management of the company. They direct the working of the company where as legitimacy theory plays the role of getting inspiration to fulfill the requirements of the agreement of the social contracts. (Rosenfeld, 2014)
Conclusion
The Social contracts are the very important agreement of the society and its people which helps in overall growth of the society as whole. These agreements come in the place from the very old times that the times of the starting of human lives when there were only two people on the earth. Greats Scholars likes Hobbes and Jacques Rousseau has given remarkable arguments in favor of social contract theory which states that the social contracts are essence of the world and they are present in every sphere of the world including the industry and entities operating in that industries.
This study includes the social contracts meaning and their origin with historical times and their implications in modern time. The origin of the social contracts has been discussed with proponents given by different Scholars and their relevance in terms justice in modern times. The social contracts has been discussed with Legitimacy theory, stakeholder theory which helps different stakeholders to apply new and innovative ideas while making decisions in relation to the affairs of the company. This theory helps the management to show each and every information whether financial or not to stakeholders so that more reliance can be created among the company and its stakeholders. This theory along with social agreements provides more appropriate results to the accounting information for users of accounting. So for conclusion, the social contract and impact and application of legitimacy theory in the accounting principles creates a boom situation for the stakeholders to protect them from frauds and errors and safeguard their investments in the company.
Criticism and Debate around Social Contracts
For making appropriate decisions by stakeholders of the company in terms of efficiency and effectiveness, the company is require to lay its annual report consisting of financial statements in the manner which is described in different applicable accounting principles that are generally accepted in society as a whole. The things which needs to extract from the company’s financial data and reported to stakeholders are defined under different statutes and acts governing accounting in the society. The social contracts and different theories associated with it are most important development in the field of the accounting. The review contain the intend to highlight the role and significance of the social contracts in accounting and their application which can help the different users of accounting to save themselves from the danger situation. The next intend in the review to assess the role of legitimacy theory in the accounting environment in relation to social contracts along with application of legitimacy theory in presenting the information in relation to financial aspects of the company to different stakeholders, so that they can use this information and can take decisions regarding their investments in the company in more legible manner. The study has been started with understanding the meaning of social contracts and from where the concept comes in picture for different areas of the society as whole. The next part of the study describes the Legitimacy theory meaning to accounting professional and to different people in the society. The study explains the environment, social and accounting challenges that were present before the Legitimacy theory and this theory helps to overcome this challenges. The next part of the review contains the relevance and application of the social contracts and legitimacy theory together and how both helps in making more useful reports about the working of the company. The review has been concluded and the conclusive key points of the research have been laid. The next section of report gives the introduction of the review contain the different mains for which the review has been done along with the roadmap of the research. The review is then ended with the synopsis containing the summarization of the topic and what the key research points found in the review. The review has been prepared using the secondary data available from different trustworthy sources and used as reference in the review.
The topic of the literature review is Social Contracts and Legitimacy Theory. The topic itself suggests about the key points which has been discussed in the review. The main point has been explained in the review is the sense of social contracts and its beginning in the society from ancient times to modern times. The social contracts developed lot of impact on the society in the modern world by having its presence in every field in the society. The meaning and starting of legitimacy theory has been discussed in detailed along with challenges that were encountered in the society and environment. The implications in the field accounting along with significance have been outline in the review to assess the application of legitimacy theory in social contracts along with protection of stakeholder’s rights.
The topic contains the evaluation of the social contracts in stakeholder’s theory in term of legitimacy theory so as presence the true and fair results of the financial transactions of the company. Keeping this thought in mind, the literature review has divided and explained with different headings and subheadings. The review has thrown that the social contracts and legitimacy theory in the field of accounting is new area for researcher to understand the impact of the same in stakeholders’ wealth maximization and removing the hindrances in the going concern of the company.
References
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