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									                           Lecture Seven

Theories of the impact of culture and the
      environment on financial reporting

   to draw attention to the difference in
    accounting frameworks and practice between
    different countries
   to distinguish in particular between the
    Anglo-American (or Anglo-Saxon) and the
    Continental European models
   to examine a range of possible explanations
    why countries adopt particular accounting
    practices in preference to others

   the same economic transactions may be reported in
    different ways in different countries
   multinational companies often produce several sets
    of accounts in different jurisdictions under different
    rules or standards
   many have argued that scandals such as Enron or
    Parmalat reflect aspects of accounting practice
    particular to the countries in which the scandals
    took place (i.e. the ‘Enron couldn’t have happened
    here’ argument)
   we need to explain the diversity of practice we find
    and consider its implications
numerous explanatory factors have been suggested:
• the nature of legal, political and tax systems including
  the role of government in the economy
• level of education
• level of economic development
• the nature of business ownership and financing
• history and colonial inheritance
• the strength of the accounting profession
• culture, language and religion

    as many of the influences overlap they have
    tended to be simplified (over-simplified?) into two
   1) the Anglo-American (or Anglo-Saxon) Model in
    which accounting:-
     is strongly influenced by professional accounting
      bodies rather than government,
     emphasises the importance of capital markets
     emphasises true and fair and applies considerations
      of economic substance over legal form

2) the Continental European Model in which
 has relatively little input from the accounting
 places little reliance on a qualitative true and fair
 is strongly reliant on government and the legal

Question:    How does Asia fit into this pattern?
             What about the developing world?

   culture has been used to explain differences in social
   an extension of this is therefore to use culture to
    explain differences in accounting systems
   this is logical, as we would expect culture to impact
    e.g. on legal and tax systems and the way businesses
    are formed and financed
   the term ‘culture’ is usually applied to societies as a
    whole or nations
   ‘subculture’ is the term applied to culture at the level
    of an organisation, profession, family etc.
   defining ‘culture’: ‘the norms, values and customs
    which reflect typical behavioural characteristics’
    Hofstede refers to ‘collective programming of
    the mind’, which affects value systems and
    attitudes, and defined four underlying societal
    dimensions, along which countries could be
   individualism
   power distance
   uncertainty avoidance
   masculinity

    addresses the degree of interdependence a society
    maintains among individuals:-
   individualism refers to a preference for a loosely-knit
    social framework wherein individuals care for
    themselves and their immediate families
   collectivism stands for a tightly-knit social framework
    where relatives, clan or other groups look after each

   in accounting, the contrast between individualist and
    group-oriented cultures affects disclosure levels e.g.
    US versus Japan

    the extent to which members of a society accept that
    power in institutions and organisations is distributed
   large power distance societies accept a hierarchical
    order in which everyone has a place
   small power distance societies strive for power

   in accounting, small power distance societies would
    use accounting as a tool for making business
    accountable to other stakeholders

    the degree to which the members of a society feel
    uncomfortable with uncertainty and ambiguity:-
   strong uncertainty avoidance societies maintain rigid
    codes of belief and behaviour
   weak uncertainty avoidance societies maintain a
    more relaxed atmosphere where practice counts
    more than principles

   uncertainty avoidance leads to conservative,
    cautious accounting e.g. Germany

    addresses the way in which a society allocates social
   masculinity stands for a preference for achievement,
    heroism, assertiveness and material success
   femininity stands for a preference for relationships,
    modesty, caring for the weak, and quality of life

   ‘more masculine’ societies would permit more
    ‘aggressive’, less conservative, accounting

   Where does China fit into this picture?

   How does it relate to areas we have looked at
    in the module?–
        eg rule-based vs principle- based
    standards .
        Choice may be influenced by level of
    uncertainty avoidance.

   we would expect accountants to derive their value
    systems - the accounting subculture - from related
    societal values

   the values of the accounting subculture will then
    impact on the development of the respective national
    accounting systems

    Societal           Accounting          Accounting
    values               values             systems

   Gray (1988) developed four accounting values
    deemed to relate to the accounting subculture:-

     professionalism versus statutory control
     uniformity versus flexibility
     conservatism versus optimism
     secrecy versus transparency

   Gray then linked his accounting values to Hofstede’s
    societal dimensions through four hypotheses

   H1: the higher a country ranks in terms of
    individualism and the lower it ranks in terms
    of uncertainty avoidance and power distance,
    the more likely it is to rank highly in terms of
   H2: the higher a country ranks in terms of
    uncertainty avoidance and power distance and
    the lower it ranks in terms of individualism,
    then the more likely it is to rank highly in
    terms of uniformity

   H3: the higher a country ranks in terms of
    uncertainty avoidance and the lower it ranks
    in terms of individualism and masculinity,
    then the more likely it is to rank highly in
    terms of conservatism
   H4: the higher a country ranks in terms of
    uncertainty avoidance and power distance and
    the lower it ranks in terms of individualism
    and masculinity, then the more likely it is to
    rank highly in terms of secrecy

society values   accounting values      accounting practice

                 professionalism (H1)    authority and
uncertainty      uniformity (H2)         enforcement
power distance
                 conservatism (H3)       measurement
masculinity      secrecy (H4)            and disclosure

   religion transcends national boundaries
   impacts on global harmonisation of accounting
   Hamid, Craig and Clarke (1993) examined how
    Islamic cultures have failed to embrace ‘Western’
    accounting practices:-
     compliance with Islamic beliefs can affect the
      structure of business and finance
     many Western accounting practices are
      incompatible with Islamic principles

   religion can affect how people do business and how
    they make decisions, for example:-
     Islam precludes debt financing and prohibits
      payment of interest
     the Western objective of financial reporting of
      rational economic decision-making may not be a
      relevant objective in some societies

   legal systems based on common law (e.g. UK,
    Canada) tend to stress:-
     the importance of equity and precedent
     the role of judgement and consensus i.e. a laissez-
      faire view - the law only gets involved when
      necessary - allowing accounting practice to be
      shaped by business and the profession
   legal systems based on code (or Roman) law
    (e.g. France, Germany) tend to stress:-
     the importance of codification in the legal framework
      i.e. detailed statutes
     the need for accounting rules to be prescriptive and
      procedural                                           21
   at a country level the financing system is relevant to
    the purpose of financial reporting
   three types of financing systems can be identified:-
     capital market-based (e.g. UK, USA, Australia)
     credit-based: governmental (e.g. France and Japan)
     credit-based: financial institutions (e.g. Germany, Switzerland)
   these distinctions are breaking down under
    globalisation pressures, but we would expect that:-
     capital market-based systems would have greater demand for
      accounting disclosures – in these systems tax calculations and
      financial accounts are usually separate
     credit-based systems will be more concerned with creditor
      protection, and in these systems financial accounting has been
      heavily influenced by tax calculations
   accounting practice has spread through imperial
    routes e.g. former British and French colonies
   global integration of trading and supply chains also
    spreads accounting practice
   economic and political ties include membership of
    international groupings e.g. EU, NAFTA, OECD etc.
   some accounting differences cannot be explained by
    cultural and institutional factors e.g. country specific
    factors such as:-
     SEC legislation following the Wall Street Crash
     Accounting failures in the UK in the 1980s which led to a shift
      towards a ‘principles-based’ system of accounting regulation

   the level of inflation in a country may affect the
    accounting system – high levels of inflation
    undermine the usefulness of historical cost
    accounting and may stimulate the development of
    inflation accounting techniques or more extensive use
    of fair value accounting
   complexity creates difficult accounting problems for
    which solutions need to be found e.g. complex
    financial instruments
   location plays a role – the accounting profession
    tends to be most highly developed in those countries
    where MNCs are headquartered

   despite there being apparently good explanations for
    diversity in accounting practice, it has its
   key ratios such as RONA, gearing, P/E etc. will vary
    across national boundaries
   thus diversity produces problems of comparability for
    investors in different capital markets (and possibly
    within firms operating across national boundaries)
   these problems may impede international capital
   next week, we’ll look at international harmonisation
    and consider arguments for and against it in more
    detail                                                  25
   there are clear differences in accounting
    practice between different countries
   many factors explain these differences
   ‘culture’ has been used as an explanatory
   the differences are diminishing through
    globalisation, but also through
    standardisation and harmonisation of
    accounting standards

   Deegan & Unerman, chapter 4

other suggested reading:-
 Gray, S.J. (1988), ‘Towards a Theory of Cultural
  Influence on the Development of Accounting
  Systems Internationally’, Abacus, Vol. 24, No.
  1, pp. 1-15
 Nobes, C.W. (1998), ‘Towards a General Model
  of the Reasons for International Differences in
  Financial Reporting’, Abacus, Vol. 34, No. 2,
  pp. 162-186
   Doupnik, T.S. and S.B. Salter (1995), ‘External
    Environment, Culture and Accounting Practice: A
    Preliminary Test of a General Model of International
    Accounting Development’, The International Journal of
    Accounting, Vol. 30, no. 3, pp. 189-207
   Hamid, S., R. Craig and F. Clarke (1993), ‘Religion: A
    Confounding Cultural Element in the International
    Harmonization of Accounting’, Abacus, Vol. 24, No. 1,
    pp. 131-48
   Hofstede, G. (1984), ‘Cultural Dimensions in
    Management and Planning’, Asia Pacific Journal of
    Management, January
   Nobes, C.W. (2004), ‘On Accounting Classification and
    the International Harmonisation Debate’, Accounting,
    Organizations and Society, Vol. 29, pp. 189-200        28

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