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Student ID: 0824174

“The accounting profit figure is simply a measure of the true profit of an

organisation. Discuss.” (Part 2)

Profit is not a perfect measurement of a firm’s performance due to the

possibility of extensive use of creative accounting. It is not only a result of
certain calculations, but is also a symbol of growth in the regulation and in the
accounting profession itself. The rules (hence the accounting figures) are
developed under a number of factors such as culture, religion, the type of
business ownership and the financing system of the country. However, I think
that the element of culture is at the heart of the evolution of the Accounting

In this essay I would like to discuss how different cultures influence the
accounting practice in different countries, and explore how creative
accounting relates to culture. In 2000, Anglo-Swedish drug company
AstraZeneca reported a profit of £9,521 million under UK accounting rules and
£29,707 million under the US rules. Different sets of financial statements have
to be prepared if a company is to raise finance in more than one country, each
statements complying with the regulations of the related countries. This notion
supports my statement further on the subjectivity of profit figure.

Hofstede (1980) defined culture as ‘the collective programming of the mind

which distinguishes the members of one human group from one another’.
Culture exists in a wider scope of society or nation, whilst subculture refers to
a smaller group of an organization, profession or family. Four societal values
that exist in a culture are Individualism, Power Distance, Uncertainty
Avoidance, and Masculinity1. However, it is the values at the subcultural level
that have high influence on the advancement of the accounting systems.
Accountants in different countries will share these values and consequently

These dimensions are found in a survey conducted amongst employees in fifty countries for Hoftede’s research
in 1984. Individualism is a type of social framework whereby the individuals are responsible for themselves and
their close relatives only. Power Distance on the other hand measures the extent of acceptance of how power in
institutions is distributed unequally. The third dimension, Uncertainty Avoidance relates to how people feel and
respond to risk and uncertainty while Masculine society is a ‘society that is based on individual achievement,
heroism, and material success’, (Brown, R., 2009)
Student ID: 0824174

the culture will be reflected in how they prepare the financial statements,
hence affecting the profit figure.

Gray (1988) offered a number of ‘accounting’ values at the level of

accounting subculture which are;

• Professionalism versus Statutory Control

• Uniformity versus Flexibility
• Conservatism versus Optimism
• Secrecy versus Transparency

I am going to explain on Professionalism and Conservatism and relate them

to accounting as a profession, because I think that Uniformity and Secrecy
have no direct relation with accounting measurement. Professionalism refers
to the preference of exercising individual judgment instead of relying on rigid
legal requirements. In the UK and US where the level of Professionalism is
high, the concept of ‘true and fair view’ reflects on the professional judgments
of the accountant as an independent professional. Wyatt A. R. (2004) argued
that delivering professional services in a professional manner used to be the
aim of the US audit firms, however in the 1960s, firms started to target for
higher revenues. I personally believe that profit maximization had become
part of the culture in the US. Making personal judgements allow creative
accounting to be done like in the Enron scandal. It distorts the purpose of
accounting as a whole, lowering people’s confidence on the credibility of
financial statements and also accounting as a profession. As a result from the
scandal, the Sarbanes-Oxley legislation was introduced in 2002, hence
proving my statement that culture helps in the growth of accounting
regulations. Even though both the UK and US are examples of countries with
high Professionalism, there are still differences in the regulation in both
countries. It is believed that under UK accounting regulations, Enron’s
‘liabilities would not have been treated as off-balance sheet, thus potentially
producing significant differences between its balance sheet under UK and US
accounting practices’ (Deegan, C., et al., 2006).
Student ID: 0824174

Gray (1988) hypothesized that a high Individualism country with low

Uncertainty Avoidance and Power Distance tend to rank highly in
Professionalism because of the preference in making personal judgement is
consistent with an individualistic society where people prefer to make
individual decisions and respect personal endeavour, without having to
comply with strict regulations.

Accounting figures can be manipulated based on the degree of

Conservatism therefore profit is not a true measure of a company’s
performance. Conservatism is related to the principle of prudence, which is
‘the most ancient and probably the most pervasive principle of accounting
valuation’ (Sterling, 1967). It protects entities from uncertainty of the future.
The level of conservatism varies in different countries, with Continental
European countries being one of the strongest conservative in choosing
accounting measurements. The UK and US are the countries with less
Conservatism. Therefore, we can also relate the case of Enron with this
subculture as the auditors employed a less prudent approach to the
accounting reports. High level of Conservatism is associated with high
Uncertainty Avoidance dimension, with low Individualism and Masculinity.
Gray (1988) argued that ‘individual achievement and performance is likely to
foster a less conservative approach to measurement’.

From the arguments presented above, I totally believe that in order for an
investor to use accounting profit as a tool to measure performance, he needs
to understand that there are many things that shape accounting information
especially the accounting regulation and profession itself, in which its
development is influenced by the culture of the company, and the country as a
whole. Culture seems to be a very significant underlying issue that is
embedded in the development of the accounting system.

Word Count: 858

Student ID: 0824174


1. Brown R. (2009). Accounting Harmonisation and International

Differences. Lecture Slides. University of Warwick
2. Deegan, C., Unerman, J. (2006). Financial Accounting Theory
European Edition. Berkshire : McGraw-Hill Education
3. Gray, S. J., Towards a Theory of Cultural Influence on the
Development of Accounting Systems Internationally. ABASCUS,
24(1), 1988, pp. 1-15
4. Hofstede, G., Culture’s Consequences, (Sage Publication, 1980),
quoted in Gray, S. J., Towards a Theory of Cultural Influence on the
Development of Accounting Systems Internationally. ABASCUS,
24(1), 1988, pp. 1-15
5. Hofstede, G., (1984). Cultural Dimensions in Management and
Planning. Asia Pacific Journal of Management, quoted in Gray, S. J.,
Towards a Theory of Cultural Influence on the Development of
Accounting Systems Internationally. ABASCUS, 24(1), 1988, pp. 1-15
6. Wyatt A. R. (2004). Accounting Professionalism – They Just Don’t Get
It!. Accounting Horizons, 18(1), pp. 45 – 53.

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