Accounting 6570

Worldwide Accounting Diversity

Accounting Diversity

• Differences exist everywhere!– Language– Currency– Terminology– Reports required– Report formats– Measurement practices– Disclosure practices– Application of accounting rules– Level of detail

Magnitude of Accounting Diversity

• Gray’s Conservatism Index • 1 - (RA-RD/|RA|)• RA = adjusted earnings• RD = original earnings• Index > 1.00; Original earnings are less

conservative than adjusted earnings• Index < 1.00; Original earnings are more

conservative than adjusted earnings

Magnitude of Diversity

• Gray’s Conservatism Index– U.K. least conservative– Japan most conservative– Continental European countries more conservative than

U.S. but less conservative than Japan

• There is a trend towards compliance with International Accounting Standards/IFRS or U.S. GAAP by foreign companies

Reasons for Accounting Diversity

• Accounting reflects characteristics of its national environment

• Environmental variables influence and help explain why business is conducted differently in different countries

• Cultural relativism: the rationality of any behavior should be judged in terms of its own cultural context

Environmental Influences

• Legal system– Civil versus common law

• Rules based or judgment/precedent oriented

– How it affects accounting regulation• Standard setting in public or private sector• Accounting Profession

– How influential the profession is in the business world– Formalization of accounting standards

• Taxation– Requirements that financial income must equal taxable

income

Environmental Influences

• Providers of Financing– Banks and family members versus public debt and

equity – Degree of capital market development– Institutional versus individual investors

• Inflation – Must be accounted for if it is a problem– Will influence financial reporting if present

Environmental Influences

• Political and Economic Ties– Political systems

• Central planning versus private enterprise

– Accounting regulation• Enforcement of standards

– International factors• Trade Influences• Colonial influences• Regional trade blocs

Environmental Influences

• Social climate– Attitudes toward work, management, employee

involvement, wealth

– Value systems and attitudes

Problems with Accounting Diversity

• Cost of preparing financial statements under different standards is great.

• Access to foreign capital markets may be impaired.

• International comparability is hindered.• Lack of high quality accounting information

impedes acquisitions.• People often have a home country perspective

even when statements are reconciled and translated.

Classification of Accounting Systems

• Deductive approach– Identifies relevant environmental factors and

links them to national practices– Describes accounting systems that should be

similar, normative

• Inductive approach– Looks at accounting practices being used now– Tries to gather similar groupings

ClassificationDeductive Approach

• Nobe’s model– Macro-uniform (government/tax/legal vs.

government/economics orientations)– Micro-based (business/pragmatic oriented or

business/economic theory oriented)– Supported by Doupnik and Salter (1993)

ClassificationInductive Approach

• Describes what is going on in the business world

• Nair and Frank 1980 studies– 1973 and 1975 – Found differences in groupings based on

measurement and disclosure practices

Cultural InfluencesHofstede’s Study

• Study conducted in 1980s

• Looked at the structural elements of culture that affect behavior in work

• Evaluated values of IBM employees in 50 countries

Cultural InfluencesHofstede’s Study

• Basic Value Systems– Individualism vs. Collectivism– Power Distance (Large vs. Small)– Uncertainty Avoidance (Strong vs. weak)– Masculinity vs. Femininity– Short-term vs. Long-term orientation

• http://www.geert-hofstede.com

Cultural InfluencesGray’s Accounting Values

• Professionalism vs. statutory control• Uniformity vs. flexibility• Conservatism vs. optimism• Secrecy vs. transparency

• Figure 3.5 - Conservatism and secrecy• Next slide (Flexibility and professionalism)

• There is support for culture as an influential factor in the development of accounting.

Divisions of International Classifications

• More-developed Latin - France, Italy, Brazil, Spain• Less-developed Latin – Mexico, Chile, Venezuela• More-developed Asian - Japan• Less-developed Asian – Indonesia, Pakistan, India• Near Eastern – Arab countries, Greece, Turkey, Iran• African – East Africa, West Africa• Asian Colonial – Hong Kong, Singapore• Germanic – Germany, Austria, Israel and Switzerland • Anglo-American - U.S., U.K., Canada, Australia• Nordic – Netherlands, Denmark, Finland, Sweden