Candidate No: 58679


Candidate Number: 58679

Word Count- 1695


Candidate No: 58679


In the wake of the financial crisis and the increased corporate scandals and failures in Europe and the US, greater attention has been paid to not only corporate governance but the differences in national financial reporting practices and standards (Kothari and Barone 2006). Awareness of these short-falls has not been in vain and has led to the creation of international financial reporting standards by the IASB in the recent past. However, despite the reduction in reporting differences international ly, many still remain and perhaps some of these differences might never change (Nobes, 2008). Nobes (2008) reasons that it is not just the different set of rules that are accountable for these differences but also the different cultures within which financ ial reporting takes place. Accounting to a large extent is dependent on its environment and doesn t develop in a vacuum (Glautier and Underdown, 2001 ; Fleischman and Radcliffe, 2003 ), and understanding the different cultural values would go a long way in s trengthening the IFRS and improving its chances of being accepted worldwide. Of particular interest in this paper is to examine the cultural influences with focus on China. This paper hopes to examine how culture can influence accounting practices and development in some of the Western countries and in China.

One of the basic fundamentals of accounting is that it is a language and it should provide useful financial information to shareholders and stakeholders of businesses (Ainsworth, 1996). But what happens in a world filled with different languages and different twists and styles to it? Is the world truly a global village? Or, like all villages, is ours made up of different quarters with different language styles? Such is the reality of international accounting. Siegel and Shim (2006) in their book capture this: From an accounting standpoint, Global business activities now face new realities. Accounting standards and practices are different from country to country. Accounting is a product of its own economic, legal, political, and socio -cultural environment. Because this environment changes from country to country, the accounting system of each country is unique and different. Dating as far back as 1960s, several researchers in international accounting have attempted to classify countries according to their various theories for the causes of international difference in national accounting standards and practices (Nobes, 1981, 1999; Mueller, 2

Candidate No: 58679 1967; AAA, 1977; Gray, 1988; Belkaoui,1985) as cited in Zhang (2005). Although there are still varying interpretations of which is the more dominant environmental factor that influences one s country s accounting system and how it has an impact on its accounting development, nevertheless, this factors exist. Doupnik and Salter (1995) identified several factors that are relevant as other causes for international differences which includes politics, colonialism, religion, taxation, accounting profession, legal systems, inflation, providers of finance, education, social climate, and other factors such as language and geography as shown in Figure 1.1. These factors were clearly reported by Lau and Mau (1997) citing Doupnik and Salter (1995) as shown in figure 1.2 . This explains how the external environment has a huge influence on both the cultural values and the institutional structure of any given society and how these factors interfere with events (intrusive) that initiate change, not forgetting the institutional structures within which all these responses are made. In order to maintain the focus on cultural influences, political, economic and other influences are not deliberately considered.
Environmental Factors affecting National Accounting Systems


Acco u n tin g Syste m s

n flation Social limates

o litical System s

Figure 1.1 Source: Adapted from Radebaugh and Salter (1993,p.192)



e gal System

Accounting E ucation & esearch






Economic growth an e vels

  ¤ ¦ ¦

eligion Acco u n tin g pro fe ssio n


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Institutional Structure
C U L T U R E Education system Legal system Accounting System Other systems 
regulatory agencies professional organisations business enterprises other culture

Intrusive events ‡pervasive ‡isolated


Accounting Practices
Figure 1.2 A general model of accounting development Source: Lau and Ma (1997, p 57) adapted from Doupnik & Salter (1995, p.192)

Culture has been described as multi-faceted (Austen, 2003), and others have agreed that to a reasonable extent, people are prisoners of their histories (Mackerras, 1997). Cohen et al(1992) agrees that cultural differences holds the key to understanding the differences in financial reporting worldwide because they set apart generally -held beliefs and standards in a country. Zhang (1992, p.3) defines culture as the accumulation of the spiritual wealth and the mental creation of the people or a region over a period of time. It includes languages, social habits, moral standards, ways of thinking, and value concepts in a group . Hofstede (1997) also explains culture as learned and this usually stems from one s social environment and not from one s genes. In China, many researchers have attributed culture as one of the main influences of its accounting development Zhang (2005) citing (Zhang, 1992; Huang and Xun, 1997; Berry, 1998). Culture, in whatever context defined, encompasses the beliefs, values, generally accepted norms language and attitude shared with people within any given social environment (Hofstede, 1991).


Candidate No: 58679

Chow et al. (1995) applied the Hofstede cultural dimensions to show how different China s societal values are from the US/UK s as shown in Table 1
Table 1: Hofstede s Societal values-A com arison

Hofstede s Societal Values
Individualism/collectivism Power distance Uncertainty avoidance Masculinity/femininity Long-term/short-term orientation

C ina
Collectivism Large Strong Less masculinity Long Term

Source: Gao and Handley-Schachler (1997) adapted from Chow et al. (1995: 40)

Gao and Handley-Schachler (1997) notes that it is this wide margin in societal values which explains the development of accounting standards and disclosure practices in modern -day China. Hofstede (1991) commented that absolute power sometimes prevailed over right, which in turn creates the high power distance within that soci ety. As a cultural dimension, power distance is the degree to which inequalities are accepted in a society (Hofstede, 1980) Zhang (1992) explains in his state theory, that China s centrally planned economy, which previously decided on all accounting objectives, had a huge influence on its accounting reporting practices. Zhang also listed some other factors as having the most cultural influences on the Chinese accounting:  The class theory (which lead accounting to political oriented argument over accounting with class characteristics);  Marxism (which becomes the basic concept of accounting, the theoretical accounting, and decides the development of accounting);  The Cultural Revolution (which strongly discriminated against accounting and accountants). The impact of national culture (East-West) and economic ideology (capitalist-socialist) values can also be represented by Ralston et al (1997 :181) s matrix model cited in Solas and Ayhan (2007) presented in Table 1.2


Individualism Small Weak More masculinity Short Term


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oriented Ideology

| ----------------------------------- | ---------------------------------- |



Ca italism


Source: Solas and Ayhan (2007)

citing Ralston et al (1997 :181)

For example, the United States has the highest individualist score of any country on Hofstede s cultural dimension , while China lies towards the collectivist end (Hofstede, 1980). In the individualistic society (US/UK) the individual goals supersedes the goals of the group. On the other hand, group-oriented societies, place more value in group goals (Hofstede, 1980). Moustafa et al(2008) draws from this analysis that individualism has been found to create a differential emphasis on goal achievement, dependence of the individual, and communication context, making it a crucial dimension to consider in relation to accounting practices and investment decisions .

Whitcomb et al (1998) concluded that the theoretical foundation of the Chinese is very different in comparison to the Western tradition which emphasizes free will and individual based judgments and decisions.

Religion and Culture Confucian teaching is an ethical tradition based on virtues (Wang, 2002). Confucianism philosophy is the bedrock of Chinese civilization. It is undoubtedly t he basis of the Chinese 6 

1 Individual-oriented Culture Individual-oriented ideology USA 3 Individual-oriented Culture Group-oriented ideology Russia

2 Group-oriented culture Individual-oriented ideology Japan 4 Group-oriented culture Group-oriented ideology C ina 

Table 1.2-Matrix of National Culture and Economic Ideology / C ina: Grou -oriented Culture, Grou 

Candidate No: 58679 dogmatic and conservative attitudes, which influenced the development of its accounting practice. It stresses that humans shouldn t act as individuals but should strive for the greater good of society. Mackerras (1997) noted that, C onfucianism defeated the main purpose of economic development and capitalism and contended with several researchers that it is this Chinese dogmatic approach to business which slowed its accounting and economic developments (Zhang et al., 1992; Van Hoepen, 1995). In Zhang s research, he identified some major cultural factors influencing the financial reporting practices of the Chinese as Conservative Thought, the culture of opposition between Confucius thinking of Yi (justices, right ness) and Li (profits, b enefits)1 , the conservative thought; opposition of trusts and contracts, and religions. In traditional Chinese culture, Confucian philosophy condemns any link between profit making and commercial activities for the virtuous man and any desire for profit (Li) was deemed evil for society (Gao and Schachler, 2004:51).The doctrine of usury 2 is also another example of the influence of religion on accounting. The medieval Christian church forbade the practice of usury in line with the Bible teachings as written "If thou lend money to any of my people that is poor by thee, thou shalt not be to him as a usurer, neither shalt thou lay upon him usury." (Exodus 22:25). This prevented the rise of capitalism both in Catholic countries such as Italy and Protestant countries like Britain, Germany and the Netherlands (Mackerras, 1997).

With globalization taking firm roots in business and the adoption of IFRS increasing widely, the role of culture as an influential factor causing international differences in financial reporting standards and practices worldwide must be understood. However, Culture is and would always remain an influential factor in national accounting developments all over the world (Cohen et al, 1992). Whereas some countries have preferred the capitalist path, others have remained true to the dictates of religion and culture . This paper has focused on cultural and religious values of the Chinese and as opposed to the Capitalist and individual system practiced by the developed western countries. For example, most Chinese accountants comply with the rules rather than accept innovation, because Confucian doctrine said that confidence and certainty are the m ost important virtues in life.

Confucianism (especially the late Confucianism) "stresses righteousness much more than profit" (zhong yi qing li), and takes "righteousness" as something contrary to "profit". The true differences between these two ideas lie in how to understand and define "gaining wealth and rank in moral ways" in practice. Obviously, Confucianism takes this issue as an extremely ethical one, and deals with it even in business relations.


Simply means the practice of charging high interest rates, such as at a bureau de change. After interest became accepted, usury laws were enacted and came to mean the charging of unreasonable or relatively high rates of interest above the amount stipulated by law(Horn, 1999)


Candidate No: 58679 While on the other hand in the Anglo-America world, maximising profit in all ways is the major aim, and capitalism is the watchword. In the end, how effective the process of harmonization would be for a country adopting new international standards depends largely on its cultural histories and values. It is therefore concluded that though the advantages of harmonisation are enormous in the larger scheme of things, the IASB cannot expect its established standards to be acceptable worldwide without taking account of cultural values. Even if all the barriers to harmonization wane, cultural values would still have a strong influence on how accounting information is processed in different countries. This also can lead to different decisions being made in spite of the laid down standards for preparing and presenting financial information defeating the purpose for harmonization (Moustafa et al, 2008).


Candidate No: 58679

Adhikari, A. & Tondkar, R. H (1992). Environmental factors influencing accounting disclosure requirements of global stock exchange, Journal of International Financial Management & Accounting. 4 (2), pp. 75 105. Ainsworth, P. (1996). Introduction to Accounting: A n Integrated Approach. Vol 2, p.26.Irwin Austen, S. (2003). Culture and the Labour Market. Cheltenham, UK: Edward Elgar Publishing Ltd
Chow L. G. Chau, and S. Gray, (1995) Accounting reforms in China: Cultural Constraints on implementation and development Accounting and Business Research, pp 26-29.

Cohen, R. J., Pant, W.L. and Sharp, D.J. (1992).Cultural and socioeconomic constraints on international code of ethics: Lessons from accounting. Journal of Business Ethics.Vol 11.pp 687-689[online] Available from: . Accessed on February 1, 2010. 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, International Journal of Accounting Education and Research , 30(2), pp. 189-207. Fleischman, R.K, Radcliffe, V. S and Shoemaker, P. A (2003). Doing accounting history: contributions to the development of accounting thought. Studies to the Development of Accounting thoughts. Volume 6, p 31. Oxford, UK:Elsevier Science Gambling, T. E., & Abde-Karim, R. A. (1986) , Islam and 'Social Accounting'. Journal of Business Finance & Accounting , 13(1): pp.39-50. Gao, G. and Handley-Schachler, M. (2003). The influences of Confucianism, Feng Shui and Buddhism in Chinese accounting history: Accounting, Business & Financial History , Volume 13, Issue 1 March 2003 , pp 41 68. [online]Available from: Accessed on February 6, 2010 Glautier, M. W. E. and Underdown, B (2001). Accounting, Theory and Practice, 7th ed, Essex, England. Pearson Education Gray, S.J. (1988). Towards a Theory of Cultural Influence on the Development of Accounting Systems Internationally, Abacus, 24(1), pp. 71-85.
Hofstede, G. (1980). Motivation, Leadership, and Organization: Do American Theories Apply Abroad? Organizational Dynamics, Volume 9, Number 1: 42-63. 




Candidate No: 58679 Hofstede, G. (1991) . Culture and Organization: Software of the Mind , London: McGraw-Hill. Horn, N. ed(1999). German banking law and practice in international perspective. De Gruyter-Recht, Berlin- New York Kothari, J. and Barone, E (2006). Financial Accounting: An International Approach . Essex, England: Pearson Education Lau, A and Ma, R. (1997) A Broad perspective on Financial Reporting in Pacific Asia. In Ma, R. ed. Financial Reporting in the Pacific Asia Region. Singapore: World Scientific Publishing, pp 55-92 Mackerras, C.(1997). Historical and Cultural Influences on the Pacific Asia Region: Some Reflections. In Ma, R. ed. Financial Reporting in the Pacific Asia Region. Singapore: World Scientific Publishing, pp 3 -22 Moustafa L. K., Slaubaugh, M. and Wang, H.C (2008). CULTURAL EFFECTS ON ACCOUNTING PRACTICE AND INVESTMENT DECISIONS. Proceedings of ASBBS. Vol 15(1).pp 536 -540. [online] Available from: Accessed February 10, 2010 Nobes, C. and Parker, R. (2008). Comparative International Accounting , 10th ed, Essex, England: Pearson Education Radebaugh, L.H. and Gray, S.J. (1993), International Accounting and Multinational Enterprises. New York, Wiley Siegel, J.G and Shim, J.K (2 006). Educational Series Accounting handbook . 4th ed, New York: Barrons

Solas, C. and Ayhan, S (2007). The historical evolution of accounting in China: the effects of culture Spanish Journal of Accounting History No . 7 December 2007. [online] Available from Accessed on February 5, 2010 Van Hoepan,M.A. (1995 ). Accounting in China: a case of vanishing cultural influence. In: J. Blake and S. Gao, ed, Perspectives on Accounting and Finance in China, Routledge, London (1995). Wang, R(2002) Globalizing The Heart Of The Dragon: the Impact of Technology on Confucian Ethical Values Journal of Chinese Philosophy , Volume 29, Issue 4 (p 553-569) [online] Available from: Accessed on January 31, 2010


Candidate No: 58679 Whitcomb, L.L., Erdener, C.B. and Li, C. (19 98) Business ethical values in China and the US , Journal of Business Ethics, 17: 839 52. Zhang, D.H. (2005). Environmental Influence on Accounting Development , Environmental Factors in China s Accounting Development since 1949, Unpublished master's thesis.Eramus University, Rotterdam, Netherlands. [online] Available from: :1888/index.html Accessed on January 31, 2010


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