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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