Chapter 2

Environmental factors in China’s Financial Accounting Development since 1949
CHAPTER 2
ENRIRONMENTAL INFLUENCE ON
ACCOUNTING DEVELOPMENT
2.1 Introduction
In international accounting research, environmental i

u n d e r s t a inndg o n e c o u n t r y ’ s a c c o u n t i n g s y s t e m . " T o a l a r g e e x t e n t , a c c o u n t i n g
product of its environment. That is, it is shaped by, reflects, and reinforces particular
characteristics unique to its national environment" (Radebaugh and Gray 1997).
F r o m t lhaet e 1 9 6 0 s , r e si en ia nr tc eh renr as t i o n a l a c vc eo tur ni et idn gt o h a
c a t e g o r i z e c o u n t r i e s a c c o r d i n g t o a s e r i e s a,o fwchr i ct ehr ih a v e b e e n d e v e l o p e d o n
a d e d u c t i v e o r c o n d u. cTt hi ve es e b ca rs i ts e r it ao t er xi ep dl a i n t h e fr oe ra s o n s
a c c o u n t i n g d i f f e r e n c e s b; etht ewye ea ni mc eo du nt tor ide es s c r i b e a n d c o
different systemswith each otherin an efficient way. There are several advantages to
c a t e g o r i z e a n d a n a l y z e t h e d i f f ear emnocnegsc o u n t r i e s : F i r s t , i t p r osmi m
o tpe r o v e d
understanding of the complex realities of accountings,practice as well as the factors
t h a t s h a p e a c o u n t r
p r o v i dseu s e f u l i n f o r m a t i o n f o r s o l v i n g s o m e o f t h e i m p o r t a n t a c c o u n t i n g p r o b
that exist in the world. For example, it can help policymakers assess the prospects and
problems of international harmonization; Third, it can
accountants and auditors who operate internationally; And
a d e v e l o p i n g c ot uo nb tertyt e r u n d e r s t a n d t h e a an vd a ai lpapbr loep rt yi aptees o f
financial reporting by seeing other countr ies’ use of particular systems.By looking at
o t h e r c o u n t r i e s i n i t s gitr oi su pp o s s i b l e t o p r e d i c t t h e p r o b l e m s t h a t i t i s a b o u t t o
face, and the solutions that might work.
When classifying international accounting systems, two main forms hav
e m p l o y: eon d e i s t h e d e d u c t i v e a pi np w r ohai cc hht h, e a p p r o a c h e s t o a c c o u n t i n g
d e v e l o p m ae rn et i d e n t i. f iBye dl i n k i n g t h e seec ot on o m i c o r b u s i n e s s f a c t o r s , t h e
i n f l u e n t i a l e n v i r o n m ea nr et rael c of ag cn t.i ozTreshd e e x a m p l e s o f t h i s a p p r o
include the works done by Mueller (1967), Choi and Mueller (1984
(1985); A form
nother i st he inductive a pproach,
w i individual
hich a dentifies ccounting
practices, by analyzing t hep racticest oi dentify a pccounting . An e xample c atterns
b an
f o u n d wNi at ih r a n d G r a n d ( 1 9 8 0 ) , w h o c a r r i e d o u t a s t
14
Chapter 2 Environmental Influence On Accounting Development
international accounting practices using the Price Waterhouse surveys o

1975. N m o w atter m a ehat i ethods
i a re mployed
c n nter
they are all closely related with the environmental factors, especially for the first one.
T h e r e f otrhee a n a l y s i s o n e n v i r o n m e n t a l i n f l u e n t i a l f a c t o r s i s n o t o n l
understanding o nec ountries
’ a ccountings b mystem, i ly uti ti t s bore
he t asis mportant o
classify the accounting and reporting system in international accounting context so as
to further predict the likelihood of changes, and their impact.
I n t e r n a at ci oc no au lnc t l i an sgs i f i c a t i o n r ea st ea an r ce ha r il sy ss tt ia l gl e .
Concerning environmental factors in international accounti
a c o n s e n s u s , o n t h e w h o l e , a b o u t swahr iec hi n fvaocltvoer d i n s h a p i n g f i n a n c i a
report. But there are still some different understandings of which is
e nv i r on m e nt a l f a c t o r t h a t sha p e s on e c o un t r y’ s a c c ou nt i ng d e ve l o pm e n t a nd t o w h
extent each factor affects its accounting development. Some literatu
included C i hina t c ntob c heir Contents,a eut oncerning
a
its accounting development, there still exist s divergent points of view. This may form
a n o b s t a c l e f o r o u t s i
system , a s w e l l afso r t h e p o l i c y m a k e r s o f C h i n a ’ s a c c o u n t i n g s t a n d a r d s t o d e c
which kind of system would be most appropriate for China’s own circumstances.
This chapter will review the literature concerning env
factors o a n dccounting i an international
evelopment a c ccounting
nf E ontext
literature. Based on the review, analysis and evaluation w
environmental influential factor. Then, it will review and
concerning the influential factors on China’s accounting de
English and Chinese literature. The key influential factors on Ch
development will be recognized from the review. Finally, by linking with the factors
evaluated above, further hypothesis will be proposed.
2.2 L iterature
R o E eview I n nvironmental
Factors i n
International Accounting Context
I n i n t e r n a t i o n a l a c c o u n t i n g , r e s e a r c h e r s
a n a l zye a n d c a t e g o r i z e t h e r e af os or ancsc o u n t i n g d i f f e r e n c e s b e t w e e n c o u n t r i e s . A
large list of possible causes can be found in the writings of previous
including Muller (1967), American Accounting Association (1977), N
Arpen and Radebaugh (1981), Belkaoui (1985), Harrison and McKinnon (1986), Gray
(1988), Radebaugh and Gray (1993), Lawrence (1996), and Walton (1998).
Factors, that might be relevant as the causes of international differences include
p o l i s,t i ce c o n o s,m iccu l t u ar ne d, l e g a l s y s,s t eas mw e l l pa rs o v i d e r s o f f i n a n c e ,
15
taxation, the profession, inflation, theory, and other factors such as language, history,
g e o g r a p h y , r e l i ga inodne,d u c a t i .o nA c c o r d i n,g w
l yh i c h f a c t o r f o r m s o n e c o u n t r y ’ s
accounti ng pat tern depends on its own unique environm , and also
ent form s different
p o i n t s o f v i e w i n t h e s p h e r e o f l e a r n i n g . O n e apr og iunets ot fheavctioenwo m i c
factors are the strongest influential factors (e.g. Arpan, 1981). Of increasing interest to
accounting researchers is the impact of culture on accounti
R a de b a ug h, 1 99 3) . “ C u l t u re i s c on si de r e d a n e sse n t i a l e l e m e n t i n t h e f r a m e wo r k f
understanding how social systems change”(Radebaugh, 19
elaborated the link between culture and accounting value.
● Mueller’s classification and its development

P r o f e s s o r M u e l l e r ( 1 9 6 7 ) i n h i s I
the p ioneering w o c ork i i f lassification
a f H pn nternational
f
comparative patterns of accounting development, which include d: accounting within a
m a c r o e c o n o m i c ,f w r ah m
e re ew ob ru ks i n e s s a c c o u nd t ci ln og s ei nl yt e wr ri et lh a t e
n a t i o n a l e c o n o m i c p
a c c o u n t i ,n w
g here accounting is viewed as a branch of business economic polic
accounting as an independent discipline where accounting is view
function; and uniformed accounting, where accounting is viewed as an efficient means
o f a d m i n i s t r a t i o n a n d c o n t r o l . M u
as “sufficient to embrace accounting as it is presently known and practiced in various
parts of the globe”. He also suggested that the fifth pattern,
mathematical approach to accounting, would be separated in the future. He recognized
that accounting evolution and direction of accounting development are determined by
“ v a r i o u s i n d i v i d u a l s o c i a l , e c “o Tn ho ums i cd , i f a f ne dr e
environment s have produced different results in accounting struct ures. In addit ion
environmental relationships, the development process it
v a r i a t i o n s ” . M u e l l e r ’ s
o ft h e i m p o r t a n c e o f e
factors. Yet he failed to explain the methods employed to obtain the groupings.
M u e l l e r ’ s f o u rw pe ar let at et er rn s e m p l o y e d t o c o n c e p t u a l i z e i
accounting developmental patterns among Western natio
e c o n o m i c s y s t e m s b y C h i o a nT dh eMy u se ul m l e mr a (r 1i 9z e8 d4 ) t. h e s e
approaches, or patterns, of accounting development as follows:
1. T he m acroeconomic
p S f n attern. e p erving a or ational
is obviously intervened by the government. Many newer accounting concerns, such as
accounting for corporate social responsibilities , and reporting and auditing the ‘social
16
c o n s c i e n c e ’ o f a f iarlmo ,n g w i t ahc c o u n t i n g f o r h u m a n r e s o u r c e s , a p p e a r t o f i t t h e
macroeconomic pattern of accounting development. Sweden could be an example;
2 . T h e m i c r o e c o n o m i c a p p r o a c h . M a r k e t - o r i e n t e fdo er m c ot hneo m
b ai es si s o f
this approach and the tradition of western economic thought is over
t r a d i t i o n o f m i c r o e c o n o m i c t h o u g h t f. oBr m e ii nc gr o ae ct oo no ol m i c s , a c c o u n t i n g
serves businesse s and business enterprises. An accounting measurement system based
on replacement cost is said to be most suitable formicroeconomic concepts. And the
Netherlands is the most comprehensive example of the microecono
accounting development;
3. I ndependent d A iscipline.a a i ccounting,
d d n n s n ndep
any conceptual support from a discipline like economics, because accounting mainly
se r ve s b us i neess,s a nd i t h a s t o m e e t t he c on di t i on s of pr a c t i c a l bu si ne ss u se f u l ne s s,
t h u s i t c a n c o n s t r u c t i t s e l f a m e a n i n
f rom t h e b u s i n e s s p r o c e s s i t s e r v e s . T h e U n i t e d S t a t e s a n d t h e U n i t e d K i n g d o m
t a k e n a s c o m p r e h e n s i v e e x a m p l
been developed as an independent discipline;
4 . U n i f o r m a c c o u n t i n g .
s i m p ,l ea n d c o n v e n i e n t f o r a d m i n i s t r a t i o n , a c c o u n t i n g p r e s e n t s i t s e l f
e c o n o mm ai nc a g e amn ed n tb u s i n e s s c o n t r o l b y g o v e r n m
approaches, business approach, economic approach, and
distinguished to the uniform accounting development pattern.
governmental regulations and the Swedish ‘M-Chart’ are taken as th
business a pproach,
w t f a hicho t b akes c ull ccount
a b f he
environment under which the data are collected, processed, and communicated; Nazi
Germany between 1939 to 1945 is the example of economic approach, which
accounting to public policy. National economic policy is considered uppermost, while
technical accounting is considered secondarily; France is said to be the exa
technical approach, which by theoretical analysis, uniformity scheme is d
academics.
Choi a M nd (1984)
uelller
d educed
t i hat
a nternational
c l t ccountin
other social sciences, are premised on or derived from e
Th e y a s s“ eA r c t ce od u, n t i n g i n n o v a t i o n a n d d e v
non-accounting factors”. They concluded with a list of environmental factors that they
believe to have direct effect upon accounting development, which include:
1. Legal system;
2. Political system;
3. Nature of business ownership;
4. Differences in size and complexity of business firms;
17
5. Social climate;
6. Level of sophistication of business;
7. Degree of legislative business inference;
8. Presence of specific accounting legislation;
9. Speed of business innovations;
10. Stage of economic development;
11. Growth pattern of an economy;
12. Status of professional education and organization.
Though detailed, this kind of illustration seems vague for grasping an outline of
environmental factors, as some of the factors overlap according to domain.
By a nalyzing t f m he actors
a the a uthor entioned
c t onceives
f actor3
bove,4 6 , hat, ,
9,10,11 c b t an i et d aken o e nto f he f omain 1 a 7 b f t conomic l
factor; factor 5, social climate, attributes to the dimension of culture, thus five aspects
of factors, legal, political, economic, cultural and p
recognized from Cho i and Mueller’s work. Cho i and Mueller did not give much more
attention to the interrelationship of cultural and economic ‘values’, even though they
s u g g e s t e d oi ut l w db e a s i g n i f i c a n t b r e a k t h r o u g h i n t h e d i m e n s i o n o f
research, if international accounting researchers ouldcincorporate cultural analysis in
their studies.
N o b e s( 1 9 8 4 ) e x t e n d e d M u e l l e r ’ s a n a l y s i s a n d b a s e d h i s c l a s s i f i c
evolutionary a H approach.s o M e udaptedt ome
a p f ueller’s
a h ypothesisi w m n hich a m icroeconomics w d nd acroeconomic
U n d e r t h e m i c r o - b a s e d c l a sa s di if si ct ia nt ci ot in o, n h be e m t wa ed ee n b u
e c o n o m i c s a n d b u s i n e s s p r a c t i c e o r i e n t a t i o n s . U n d
c l a s s i f i c a t i o n , h e m ai sdtei ndc t i obne t w e e n a g o v e r n m e n t / t a x / l e g a l o r i e n t a t i o n a n d a
g o v e r n m e n t / e c o n eo r m i e di ec ns t oi fr ii
differentiating accounting systems, which included:
1. Type of users of the listed companies’ published accounts;
2. Degree to which law or standards prescribe in detail and exclude judgment;
3. Importance of tax rules in measurement;
4. Conservatism/prudence;
5. Strictness of application of historic cost;
6 . S u s c e p t i b i l iot fy r e p l a c e m e nf ot r c o s t a d j u s t m e n t s i n m a i n o f s u p p l e m e n t a r y
accounts;
7. Consolidation practices;
8. Ability to be generous with provisions (as opposed to reserves) and to smooth
Income;
9. Uniformity between companies in application of rules.
18
Furthermore h et ested t c his s lassification

b m o aj ystema y ean
of m easurement a v , r eportingp
nd aluationi ractices
f d n c ourteenT evelop
result provided strong support for the classification of countries as either micro-based
or macro-based. Broad support for the hierarchical classification developed by Nobes
l a t e r w a s p r o v i d e d b y D o u p n i k a n d S
i n w h i c h t h e m a c r o / m i c r o c l af sosrif fi if ct ya t ci oo nu n t r i e s , c o m m u n i s t a s w e l l
capitalist, was clearly supported by both measurement and disclosure practices.
N o b e s ’ c l a s s i f i c a t i o n m e n t i o nw e da sa bc o vn ef i n teod t h e w e s t e r n d e v e l o p e d
world and the financial reporting practices of their public companies. The repo
practices were those concerned with measurement and va
b e e n o u g h t o c o v e r et nh tei r ea s p e c t o f o n e c o u n t r y ’ s a c c o u n t i n g d e v e l o p m e n t a n
make a multiple evaluation not onlydeveloped for countries , but also for developing
countries.
R e f e r r i n g t o t h e c a u s e s o f i n t e r n a t i o
8 factors as the influential factors to a country’s accounting development, including:
(1) Legal system;
(2) Providers of finance;
(3) Taxation;
(4) The profession;
(5) Inflation;
(6) Theory;
(7) Culture and;
(8) Accidents
A g a i n t h e s e f a oc ut ol drbs e c f u r t h e r c a t e g o r i z e d i n t o e c o n o m i c ( p r o v
finance, inflation), legal (taxation), profession (theory), culture and accidents.
Nobes had noticed the cultural relevance with accounting, but he conceived “the
major direct cause of the financial reporting difference
countries into:
( 1 ) T h o s e w i t h i m p o r t a n t e q u i t y m a r k e t s a n d m
and;
(2) Those with a credit-based financial system r e laantdi vw
e liyt hu n i m p o r t a n t
outside shareholders.
T h e e q u i t y / o u t s i d e r sads y s tt eoma l see p a r a t i o n b e t w e e n t a x a n d a c c o u n t
rules, and to large auditing professions”(Nobes, 1998).
● AAA’s report
T h e A m e r i c a n A c c o u n t( i1 n9 g7 e7A m) sp sl oo cy ie adt i ‘ omn o r p h o l o
structuring’ method
s to convey the range of factors considered by that committee and
19
t h e s t r u c t u r e p o s t u l a t e d . E v e n
h da n o t s p a w n e d a n y f o l l o w - u p b e c a u s e o f
methods, its a ttempt “ o atom utline f t c ethodology s o a or he
s y s t e m s i n a n i n t e r n a t i o n a l
h ad s o m e r e f e r e n c e v a l u e t o r e s e a r c h e r s . I n t h e r e p o r t e i g h
we r e r e c o g n i z e d a s c h a r a c t e r i z i n g e l e m e n t s t o c l a s s i f y a c c o u n t i n g p r a c
parameters included:
P1: Political System;
P2: Economic System;
P3: Stage of Economic Development;
P4: Objectives of Financial Reporting;
P5: Source of, or Authority for, Accounting Standards;
P6: Education, Training & Licensing;
P7: Enforcement of Ethics & Standards;
P8: Client.
These eight parameters could be grouped even further: economic system, stage of
e c o n o m i c d e v e l o p m e n t , o b j e
c o u l db e g r o u p e d i n t o t h e u s e r s o f t h e f i n a n csoi aulr cr e poofr,t ;o r a u t h o r i t y f o r ,
accounting s a tandards
e o e nd & s nforcement a b r w f l thics
systems. So these eight parameters ould c be summarized into five, including political,
economic, legal, and professional and the user of financial report par
report did not give any attention to the culture factor. It was Hofstede who identified
cultural values in his cross-cultural research and structured dimensions of culture.
● Hofstede’s culture model and his following

Hofstede (1980) c onducted
o o t m e ne cf he s ost a xtensive
at detecting the structural elements of culture and particularly those that most strongly
a f fe cet d k no w n be ha v i o r i n t h e w o rk s i t u a t i o ns o f o rg a ni za t i on s a nd i n st i t u t i o ns . H
developed a model of culture as the collective programm
distinguishes the members of one human group from another. And he distingui
four l evels
a w c t mhich i ulture " l o anifests
s h rtself: a The
values". He conceived "accounting is a field in which the technical imperati
weak; h istorically
b c aased m i onventions t i t l o n re aore mport
"accounting systems to vary along national cultural lines"(1987:2). He d
scored the following four basic dimensions of culture (1984):
“ I n d i v i d u a l i s m v e r s u s c o l l e c. tIinvdi si vmi d u a l i s m s t a n d s f o r a p r e f e r e n c e f o r a
loose k s nit f ocial i s ramework w i n a society t t herein c o ndivi
themselves and their immediate families only. Its opposite, collectivism, stands for the
20
p r e f e r e n c e f o r a t i g h t el yd skonc ii ta l f r a m e w o r k i n w h i c h i n d i v i d u a l s e x p e c t t h
relatives, clan, or other in-group to look after them in exchange for unq
l o y a l t y . T h e f u n d a m e n t a l i s s u e a d d r e s s e d b y t h i s d i
interdependence a society maintains among individuals.
L a r g e v e r s u s s m a l l p o w e r d.i sPtoaw n ce er d i s t a n c e i s t h e e x t e n t t o w h i c h t h e
members of a society accept that power in institutions and organizations is distributed
unequally. This affects the behavior of the less powerful as well as the more powerful
members of society. People in Large Power Distance societies accept a hierarc
order in which everybody has a place that needs no further justification.
Small Power Distance societies strive for power equalization and demand justification
for power inequalities. The fundamental issue addressed by this dimension is how
society handles inequalities among people when they
consequences for the way people build their institutions and organizations.
Strong versus weak uncertainty avoidance . Uncertainty Avoidance is the degree
to which the members of a society feel uncomfortable with uncertainty and ambiguity.
T h i s f e e l i n g l e a d s t h e
maintaining i nstitutionsp c rotecting S U onformity. A s trong n
maintain rigid codes of belief and behavior and are intolerant of deviant persons and
ideas. Weak Uncertainty Avoidance Societies maintain a more relaxed atmosphere in
which practice counts more than principles and deviance is more easily tolerated. The
f u n d a m e n t a l i s s u e a d d r e s s e d b y t h i s d i
to the fact that time runs only one way and that the future is unknown, and whether it
tries to control the future or just lets it happen. Like Power Distance,
A v o i d a n c e h a s c o n s e q u e n c e s f o r t h e w a y p e o p l e
organizations.
M a s c u l i n i t y v e r s u s f e m i n. iM
n iatsyc u l i n i t y s t a n d s f o r t h e p r e f e r e n c e i n s o c i e t y
for a chievement, h a eroism,a m sssertiveness,
I o F nd aterial
stands for the preference for relationships, modesty, caring for the
quality of life. The fundamental issue addressed by this dimension is the way in which
a society allocates social roles to the sexes”.
Later in 1991, Hofstede (1991) identifies the fifth dimension:
Short-term v l ersuso ong-term
(Confucian D rientation
T
ynamism).
hes hort-term
orientation emphasizes respect for tradition; respect for social and status obliga
regardless of cost; social pressure to “keep up with the Joneses”, even i
overspending; s s l mall a s lavings m f evels
i andc ot g ittle one
quick r esults;
ac f a oncern a a c or f ppearances;
t r t v Tnd once
long-term orientation, on the other hand, emphasizes the adaptation of trad
meet modern needs; a respect for social and status obligations within limits; a thrifty
21
a n d s p a r i na pg p r o a c h t o r e s o u r c e s ; l a r g e s a v i n g s l e v e l s a n d s o f u n d s a v a i
investment; p erseverance
t a g roward a w chieving t s radual
personal interests to achieve purpose; and a concern for a virtuous approach to life.
Hofstede’s v d alue l wimensions
a i v ater
a o ere
a pplied
studies.
H a r r i s o n a n d (M1 c9 K8 i6 n) n po rno p o s e d a m e t h o d o l o g
incorporating culture for analyzing changes in corporate financial reporting regulation
a t t h e n a t i o n - s p e c i f i c l e v e l . T h e y c o n s i d ear ne de s cs ue lnttui ra el ea ls e m e n t i n t h e
framework f u or h nderstanding
s s c dueow t ” culturei
o ocial nfluences:
ystems
(
the norms and values of such systems; and (2) the behavior o
interaction within and across systems” (Radebaugh and Gray, 1997: 73)
G r a( y1 9 8 8 ) l i n k e d H o f s t e d e ’ s c u l
l a t e ri n 1 9 9 8 H
. e was the pioneer who brought together constructs from culture and
a c c o u n t ianngdr, e l adt et h e m ian m e a n i n g f u .l Hweapyr o p o s e d q u i t e s p e c i f i e d
hypotheses of the form of these relationships. He linked Hofstede’s dim
cultural value to accounting sub-cultural values and proposed the identification of four
accounting values, derived from a review of accounting literature and prac
claim o a c f i ulturalo a nfluence
r o t f n ccounting
h p w ested
can be shown in figure 2-1:
Figure 2-1: Culture, societal values and the accounting subculture
(Source: S.J. Gray, “Towards a Theory of Cultural Influence on the Development of

Accounting Systems Internationally,” Abacus, March 1988,P7.)
Gray e xpected
that culture, o s r v ocietal
a n l alues,
p tt ational
organizational and occupational subcultures as well, though with varying degree
22
integration. “Accounting systems and practices can influence and reinforc

values” (Radebaugh and Gray, 1997:59).
Later Gray developed his model into international accounting context. Figure 2-2
shows the process of accounting change.
He identified a number of important international pressures affecting accounting
c h a n g e , “ i n c l u d i n g a g r oi w
n tienrgn a t i o n a l e c o n o m i c / p o l i t i c a l i n t e r d e p e n d e n c e , n e
t r e n d s i n F D I , c hmaunl gt ei ns a it ni o n a l c o r p o r a t e s t r a t e g y , t h e
t e c h n o l o g y , t h e r a p i d ignr toewr nt ha t oi of n a l f i n a n c i a l m a r k e t s , t h e e x p a
b u s i n e s s s e r v i c e s a n d t h e a c t i v i t i e s o f i n t e r n
(Radebaugh and Gray, 1997:63).
Having related social values to international accounting va
accounting values to specific accounting system characteristics an
hypotheses on the relationship between identified cultural ch
development of accounting systems. Gray’s accounting values and hypotheses can be
described as follows (Radebaugh and Gray, 1997:76 and Chanchani: 1999):
Figure 2-2: Changes and Development of Accounting Values and Systems Internationally
(Source: S.J. Gray, “international Accounting Research: The Global Challenge,”

International Journal of Accounting 23, No.4, winter 1989, P. 294)
1. Professionalism versus statutory control. This value reflects a preference for

the exercise of individual professional judgment and the maintenance of professional
self-regulation as opposed to compliance with prescriptive legal r
statutory control. Gray summarized his perception of the link between professionalism
and Hofstede’s dimensions of culture and formulated the hypothesis: Th
country ranks in terms of Individualism and the lower it ranks in terms of Uncertainty
23
A v o i d a n c e a n d P o w e r, D t hi es t m
a nocr ee l i k e l y i t i s t o r a n k h i g h l y i n t e r
Professionalism.
2 . U n i f o r m i t y v e r s u. s Tf hl ie sx ivbai ll ui et y r e f l e c t s a p r e f e r e n c
e n f o r c e m e n t o f u n i f o r m a c c o u n t i n g ,p ar an cd t if co er s t bh e t w
consistent use of such practices over time, as opposed to flexibility in accordance with
the perceived circumstances of individual companies. Gray articulated the relationship
of Uniformity with Hofstede’s cultural dimension of Uncertainty Avoidance,
Distance and Individualism as: The higher a country ranks in terms of Unc
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.
3. Conservatism v o ersus
T hisv r alue
ptimism.
a p eflects f a c reference
approach to measurement that enables one to cope with the uncert
e v e , n at ss o p p o s e d t o a m , o rr i es ko - pt ta i kmi in sg t i ac p p r o a c h . G
Conservatism w H ithd ofstede’s
o U A imensions M af ncertainty
proposed t h he theypothesis:
h igher ac r ountry
i t o U anks A n erms f
and t l he i rower i t t o anks I n a erms Masculinity,f t ndividualism
m l he i i tore ikely
nd
rank highly in terms of Conservatism.
4 . S e c r e c y v e r s u .s Tt hr ia sn sv pa al ru ee n rc ey f l e c t s a p
confidentiality andthe disclosure of information about the business only to those who
ar e m ost c l ose l y invol ve d wi th i t s ma nage me nt and ,fiana s opposed
nci ng t o a m ore
t rans pa rent , ope n, and publ ic l y acc ount abl e a pproac
d i m e n s i o n s o f U n c e r t a i n t y A v o i d a n c e , P o w e r D i s t
proposed: “The higher a country ranks in terms of Uncertainty Avoidance and Power
distance a t l nd i r he i tower o I t anks a Mn erms t t f m ndividualism
likely it is to rank highly in terms of Secrecy”.
Gray’s framework led to an increase in studies relating culture and accounting in
later s tudies,
a a a other nd i ncreasei
lso s n na tudies
H pplying
v d ofstede’s
to various aspects of accounting.
Some literature developed and critically evaluated the Hofstede-Gray framework
o n a t h e o r e t i c a l , bsu
a scihs a s P e r e r a ( 1 9 8 9 , c i t e d i n S h a, al innd,P e1 r9e9r9a) a n d
Matthews (1990, cited in Shalin, 1999), who built on Gray’s theory
number o h f rypotheses s v elating
t accounting s ocietal ub-cultural
v alues
P o alu
suggested that a combination of accounting sub-cultural dimensions have considerable
influence on accounting practices, and he further suggested that so
a f f e c t e d b y a b r o a d s e t o f e n v i r o n
v a r i a b ,l easn d a n a l y z e d t h e A n g l o - A m e r i c a n a n d C o n t i n e n t a l E u r o p e a n s y
a c c o u n t i n g . E x t e n d i n g h i s d i s c u s s i o n , t ho e d se uv ge gl oe sp ti en dg tchoaut n t
transferring accounting skills from Anglo-America n countries to developing countries
24
is unlikely to be appropriate , as these countries typically have inadequate professional

subcultures t d so evelop
s a uitable
s 1
; otherstandard
s ucha sB aydoun ccounting
a nd
Willett (1995, cited in Shalin, 1999), and Willett et al. (1997, cited in Shalin, 1999),
critically evaluated Gray’s theory and suggested that although Gray’s dimensions may
possibly help us understand how social factors affect the technology of accou
certain p t ure a echnical o a ,w spects
hicha a pref ccounting
lsot t qertinent o o
cultural relevance, should also be considered more formally.
Some studies attempted to apply Hofstede’s theory and his proposed dimensions
of c ulture t a oo a spects m ft accounting, O side e mployedH ainly wo ofstede’s
spec
dimensions in the context of studying management control syste
Another side applied the Hofstede-Gray framework to a particular country or a set of
c o u n t r i e s t o t e s t t h e v a l i d i t y o f t h e .u O n dn ee r leyx ianmg p tl hG
e eeiohsrryad y
(1990), who attempted to test the Hofstede-Gray frame
accounting s f ystemsi W G ound
y. He f ound n that Gray’s
est t erman was
heory u nablet o
explain the relationship between accounting and cultural valu
e n t i r e l y s a t i s f a c t 2o. rEyd dmi ae n n( 1e 9r 9 1 ) , w h o l o o k e d f o r a s s o c i a t i o
societal values and accounting sub-culture values by studying thirteen countries of the
Asia Pacific region found support for Gray’s theory, confirming all the predicted signs
of a ssociation b s etween
a a vocietal C e and( ccounting
w a alues
Hofstede-Gray m t t c odel o C a o s he tase g ft c hina, s o nd ugge
the accounti ng profession, the andaccounti ng measurement and disclosure in China,
the development of the accounting system will be constrained by the i
China’s culture and its sub-culture; Salter and Niswander (1995
Hof s t e de - G r ay f r a m e w or k b a se d u po n da t a fr o m co un t r i e s d ra w n f r om G r a y (1 99 8
and c oncludedt G m hati t hebray’s estwhen e xplaininga
odel fs ctual r inancial
practices and is relatively weak in explaining extant profess
structures from a cultural base 3.
R a d e b a u g h a n d( 1G9 r9 a7 y: 4 8 ) s t r e s s e d t h e i m p o r t a n c e o f e n
analysis and cultural relativism to explain and understand differenc
b u s i n e s s e s o p e r a t
r e s e ms b il ne t e r n a t i o n a .l Tb hu es yi n pe rs es s e n t e d a m o d e l o f t h e e n v i
influences, which included:
1. The nature of enterprise ownership;
2. The business activities of the enterprise;
3. Sources of finance and the stage of development of capital markets;
4. The nature of taxation system;
1
Cited from Shalin,1999:11
2
Cited from Shalin,1999:19
3
Cited from Shalin, 1999:19
25
5. The state of accounting education and research;

6. The nature of the political system;
7. The social climate;
8. The stage of economic growth and development;
9. The rate of inflation;
10. The nature of the legal system;
11. The nature of accounting regulation;
12.The culture and the international factors.
These t welve
f c b factors c an : factor
e 1 urther
2 3 ,8 a , 9 can , ategorized
b s end een
a s ap a r t o f e c o n o m i c f a c t o r s ; f a c t o r 4 ,
f a c ts;o ra n df a c t so 7r a n d 1c2a n b e g r o uupnedde r s p h e r e o f ch uo lwt eu vr e ,r
international factors can be conceived as a single factor. Thus six
r e c o g n i z e d , i n c
professional and international factors.
Radebaugh and Gray(1997:49) conceivedthat “The influence of these factors is
dynamic and will vary both between and within countries over time. Moreo
evolut ionary process of som e compl exity appears to be at work that i s reflected i n
gr o wi ng n um b e r o f i n t e r na t i on a l a n d r eg i o na l i n.flTh
ueenyc es
e l a” bo r a t eup
d on t he
cultural influence on accounting according to Gray’s model (shown in figure2.1), and
c o n c e i v e dw iats p o s s i b l e t o i d e n t i f y k e y a c c o u n t i n g v a l u e s d e r i v e d f r o m
c u l t u r a l i n f l u e n c e s : p r o f e s s i o n a l i s m
Th e ay l sa os s e r t e d t h a t b y l i n k i n g a c c o
systems, an international classification of accounting systems could be made.
There were also other researchers who conceived culture as a dominant factor in
one country’s accounting development:
Lawrence(1996:5)proposedthat a national accounting framework is shaped by
t h e c o m b i n a t i o n o f c u l t u r a l , p of al ic t.t ioDi cr afs lf ,e r l ee ng t a l
c o m b i n a t i o n s o f wfoauc lt do rasl es oa d t o d i f f e r e n t n a t i o n a l f i n a n c i a l r
environments. He explained , “Culture is taken to mean ‘the whole set of social norms
and responses that condition a population's behavior,” and stressed it was “culture that
makes o s ne e ocial d nvironment
f a , a ndo cifferent
ne t ould c romhereforenother
that culture is the dominant influential factor and that the other influences are part of
it”.
Hofstede’s and Gray’s classification of cultural value and accounting value later
was commented by Nobes (1998:17) as to be “particularly useful for examining such
issues as international differences in the behavior of auditors. However, for financial
reporting, the measures of cultural attributes seem vague and indirect, compared to the
26
m easur em ent of c ert a in e l em ent s of t he e xte rna l e nvi ronm ent of a ccount i ng, such
legal systems or equity markets”.
● Economic determinant
A r p e n a n d R a d e (b1a9u8g5h: 1 3 ) e m p l o y e d F a r m e r a n d R i c h m a n ’
e n v i r o n m e n t a l c h a r a c t e r i s t i c s c o n c e p t u a
characteristics were o rganizedi f m nto g oure ajor s roups: l ducationa
and political and economic, to explain the environmental influences on acc
They examined, in great detail, how some of the environmental characteristi
c o u n t r y a f f e c t t h e w a y o f i t s a c c o u n t i n g d e v,eal no dp mc eo n tc l u d e d t h a t e c o n o m i c
c h a r a c t e r iw s tei rcetsh e m o s t i n f l u e n t i a l f a c t o r s . B e c a u s e “ e c o n o m i c d
affects many socio -cultural attitudes and brings about changes in legal, political, and
educational objectives and sophistication, each of which in turn can affect accounting
p r a c t i c e(s1”9 8 5 : 2 3A) d. d i t i o n a tl hl ye ,yp r o p o s e d t w
h ahte n a n a l y z i n g a c o u n t r y ’ s
accounting system, there is a need to consider all the environmental factors.
H a l l e r a n d W a( 1l t9o9n8 : 3 ) c o n d u c t e d a ‘ c o n t i n g e n t ’ m o d e l o f a
e v o l u t i o n t o d e s c r i b e a c c o u n t i n g d e v
d e v e l o p m e n t t o e c o n o sm oi cr ce ivrecnut m s t a n c e s f r o m t h e p o i n t o f v i e w o
evolution of the ensemble accounting rules in a country. They conceived, b
a r t i f i c i a l d et hv ai cta ec ,c o u n t i n g i s c o n s t r u c t e d b y s o c i e t y a n d i s a l s o
legislation, a w a u s ellr ds nwritten
t u . This
ulesl egislation eveloped
i o s hro
triggered b s ey omee o cconomic T i vent o f l ircumstance.
l
is an example to support this judgment. And they concluded that “as a model for the
evolution of accounting in any one country a situation where there is an equilibrium
state which lasts potentially for years, which is disturbed either by some change in the
economic environment or by some unusual event” (Walton, 1998:4).
● Linguistic approach
B e l k a ( o1 u9 i 8 5 ) p r e s e n t e d t h e m o s t i m p o r t a n t d
di fferences in i nternational accounting and by presenting an internati onal account i
c o n t i n g e n c y f r a m e w o r k t o e x p l a i n t h e s e d i f f e r
determinants and main elements of the framework includ
l i n g u i s t i c r e l a t i v i s m , p o l i t i c a l a n d c i v i l r e l a t i v i
relativism, and legal and tax relativism”.
Cultural Relativism “refers to the need to judge any behavior in terms of its own
cultural c aontract,
n f a nd c ot c romA nother
t a ultural
c ontex
relativism rests on the fundamental assumption that accounting concepts in any given
country are as unique as any other cultural traits. Thus the study of cultural
27
cross-cultural research, and their impact on accounting research is fundamental to an

understanding of the determinants of national differences in international accounting”
(Belkaoui, 1985:29).
L i n g u i s t i c - r e l a t i v i s m ar se af e mr se dt ioa tl oa rn ga un ad g es h a p e r o
environment. Appl ied to accounting, this would imply that “accounting language may
predispose ’user’ to a given method of perception and behavior. Fur
affiliation of users with different professional organizations or communities with their
distinct interaction networks may create different accounting langua
Bei ng called t he language of busi ness, accounti ng has (1) ‘meani ngful’ units o
words, such as numerals and words, and debits and credits, as the
respectively accepted and unique to the accounting discipline; (2) the
rules, for example, the general set of procedures used for the creation of all financial
data for the business. Belkaoui argued, “accounting is language and, according to the
Sapir-Whorf h i ypothesis,
l c ats g exical r haracteristics
w a t
l i n g u i s t i c a n d n o n - l i n g u i s t i c
He introduced four propositions derived from the linguistic-relativism
conceptually i r ntegrate
f o t esearchi o a indings
i on t he mpac
user’s behavior. The propositions include:
1. The u t ser m shat c ertainl ake d exical i a istinctionsa e t nt ccounting
a n d / o r s o l v e p r o b l e m s t h a t c
not；
2 . T h e u s e r t h a t m as kcee r t a i n l e x i c a l d i s t i n c t i o n s i n a c c o u n t i n g a r e e n a b l e d t o
perform (non-linguistic) t m r askso m ore c apidly
t t u r t ore d omple
not；
3. The user that possess es the accounting (grammatical) rules are predisposed to
different managerial styles or emphasis than those that do not；
4.The accounting techniques may tend to facilitate or tender
various (non-linguistic) managerial behaviors on the part of users.
U s i n g -l ia n g“ su oi sc ti io c t h e s i s ”
showed t hatv arious
a i affiliations c d d ifferentl
n ccounting ringuistic o reate epertor
codes for intra/inter-group communications:
“Political a C Rnd ivil
r t t elativism
n t j a befers i t o ohe eed
its own political and civil context and not from any other
accounting, political and civil relativism rests on the foundational as
accounting concepts in any given country rest on the political and civil context of that
country” (Belkaoui, 1985:42).
28
T h e p o l i t i c a l f r e e d o m o f a c o u n t r y i s c o n c e i v e d
development of accounting in general and reporting and disclosure in partic
when people cannot choose the members of a government or influence govern
policies, they are less likely to be able to create an accounting profession based on the
principle of full and fair disclosure. The relationship between accounting freedom to
report or to disclose and political freedom is negative.
“Economic and Demographic Relativism refers to the need to judge any behavior
in terms of its own economic and demographic context. Appl
economic and demographic relativism rests on the fundam
accounting concepts in any given country rest on the economic and
cont ext of t ha t c ount (B ry”el kaoui , 1985: 44). B el kaoui m ade seve ral deduc t ions t hat
“the economic environment is important to the development of accounting in general
a n d r e p o r t i n g a n d d i s c l o s u r e.” i “n T ph ae r thi icguhl ea rr t h e l e v e l a n d g r o w t h
income, the higher the political and economic freedom and the better the adequacy of
r e p o r t i n g a n d d i .” s c l” oTshuer eh i g h e r t h e l e v e l o f g o v e r n m e n t e x p e n d i t
higher t l heo d evel .” “ fTheh isclosure t igher
l o e he a evel i t f h xports n
the n eed f b or
r etter
a d eporting
.” “ Thel t nd
arger
p isclosure
het h opulation,
t
number o p ft b eople
i i to a e nterested
p a t n g he t ccounting n
for a well-developed accounting profession and the need for full and fair disclosure”
(Belkaoui, 1985:46,47).
“Legal a T nd R ax r telativism
t n t j a efers
b io t he o i eed o
own legal and tax context. Applied to accounting, legal and tax relativism rests on the
fundamental assumption that accounting concepts in any given country r
legal and tax context of that country” (Belkaoui, 1985:48). Different countries
different l s egal s a ystems,
c l a t uch c l s and ivilthis m awday nd etermine he om
whet he r or not t her e wi l l be di ff ere nt a cc ounti ng syst em s. As a m a tt e r of f act , som e
c o u n t r i e s r e l y c o m p l e t e l y o n t h e l e g a l i s t i c at hpupsraocaccohu, n t i n g h a s e f f e c t i v e l y
b e c o m e a p r o c e s s o f c o m p l i a n c
Also, d ifferentc hountriesd n avet s ifferent
w d m
ationald ax y
and most frequently the conduct of business and hence the practice of accounting.
Belkaoui’s classification later was argued for the relevance of the linguistic with
accounting by Nobes.
E x c e fp ot rt h e d e d u c t i v e m e t h o d m e n t i o n e d a b o v e , s o m
u d s t e h e i n d u c t i v e
a c c o u n. tFoi nr g e x a m p l e , D a C o s t a , B o u g e o i s a n d L a w s o n ’
classification by using Price Waterhouse Survey data; Frank’s (1979) ana
Nair and Frank’s (1980) grouping. For the latter it seems a little irrelevant wit
author’s aim, so it will not be discussed further.
29
The literature review shows that the international accounting classification is still
in its early stage, even studies look at systematic differences, there is still an issue in
terms of the influence of individual thinkers on accounting in particular jurisdictions,
and there are also different points of view for the influenti
a c c o u n t i n g d e v e l o p mIenn at .d d i t i o na ,s e n v i r o n m e n t i s a l w a y s o n a s t a t e o f f l u x , a
dominant factor at one time may change into a weak one to a country’s accoun
d e v e l o p m e n t w i t h t h e c h a n g e o f T ht he er e tcf ho eur en t r y
classification of international accounting maybealso in a state of flux. For example,
the adopting the IAS of EU listing company by 2005, may result in some changes of
national accounting regulation within EU members, and may also cause some changes
on international accounting classification.
I n f a ,c wt ith social and economic development, the environmental
factors, which may play the leading role on accounting at one time, may also change
with the evolution of the society. Besides, there is still a need to con
environmental factors when analyzing a country’s accounting.
In this thesis the author means not to make more comments on the classifications
of international accounting, but to find the dominant influential factors o
accounting development. By far factors recognized as the important env
f a c t o r s b y t h e r e s e a r c h e r s c a n b e s u m m a r i z e d a s
2-1.
It is generally accepted in international accounting resea
objectives, standards, policies, and techniques reflect the particular environment of the
s t a n d a r d s - s e t t i n g b o d y . T h e s e c t i o n b e l o w
e n v i r o n m e n t a l c h a r a c t e r i s t i c s o f a c o u n t r y a f f e cat ctohue nw t rayy’ so af c c o u n t i n g
development and its practice.
Table 2-1: Summarized environmental influence factors
Factors
Political Legal Economic Culture Education Profession International Others
Authors
Political Legal Nature of busi- Social Status of Status of
system system; ness ownership; climate profe- professional
Degree Different size and ssional organization
of Complexity of education
Choi and legislative business firms;
Mueller
business Level of sophisti-
inference; cation of busi-
Presence ness; Speed of
Of specific business
30
accountin innova-
g legislation tions; Stage of
economic deve-
lopment; Growth
pattern of an
economy.
Legal The
Providers of Accid-
Nobes system; Culture profession;
finance; Inflation; ents
Taxation Theory.
Political Source of, Economic system; Education, Licensing
AAA’s
system or auth- Stage of economic training
Factors
Political Legal Economic Culture Education Profession International Others
Authors
ority for, development;
accounting Objectives of
standards; financial reporting;
report Enforce- Client
ment of
Ethics &
Standards
The The nature The nature of The The state of The state of International
nature of of taxation enterprise social accounting accounting factors
political system; The owner-ship; the climate;T education research;
system nature of business activities he
legal of the enterprise; Culture
Rade- system; The Source of finance factors
gaugh and nature of and the stage of
Gray accounting development of
regulation capital market; The
stage of eco-nomic
growth and
development; The
rate of inflation
Belkaoui Political Legal and Economic and Culture
tax
and civil relativism demographic relati-
relati-vism relativism vism;
linguis
31
-
tic
rela-
tivism
Legal Corporate Societal Education Professional Economic/ Reli-
system ownership; Capital values associations Political gional;
markets; Economic; inter- Geogra-
Trade; Investment. dependence; phic;
Foreign direct Demo-
investment; graphic;
Multinational Histori-
corporate Stra- cal;
Gray
tegy; Interna- Techno-
tional financial logical;
markets; Urbanis-
inter-national ation;
regulatory Con-
organization; quest.
business and Genetic/
finance services.hygienic
2.3 Evaluations on the Environmental Influencing Factors

T h e i n f l u e n c e o f e n v i r o n
mainly, in the literature can be summarized as follows:
2.3.1 Political Factors

Certain political factors can influence accounting systems and practices.
(1978) d pefined r a olitical
t r t p ights
ap i d s he t ight
l a to lay
government of a community. And he developed seven levels of political rights index:
L e v e l s 1t a t et hs a at l m o s t e v e r y b o d y h a s b o t h r i g h t s a n d o p p
participate in the political process, to compete for political office, and to join fr
formed political parties;
Level 2 states that the effectiveness of the open electoral processes is reduced by
factors such as extreme poverty, a feudal social structure, violence, or agreements to
limit opposition;
Level 3 states that the effectiveness of the open electoral processes is reduced by
non-democratic procedures, such as coups;
32
L e v e l 4s t a t e s t h taht e r e i s e i t h e r a c o n s t i t u t i o n a l b l o c k t o t h e f u l l d e m o c
significance of election or the power distribution is not affected by the elections;
Level 5 states thateither elections are closely controlled or limited or the results
have very little significance;
L e v es l t a 6 t ee s i t t h h e a r t t h e r e i s n o
system, or opposition candidates are not allowed to compete;
L e v e l 7s t a t e s t h a t s o m e f amcat yo rbs e c h a r a c t e r i z e d a s t y r a n n i e s w i t h l i t
legitimacy either in a national tradition or a modern ideology.
T h e p o l i t i c a l - s t r u c t u r e i n d e
into five types: (1) multiple-party systems, (2) dominant-party systems, (3) one-party
s y s t e m s , ( 4 ) m i l i t a r y d i c t
The higher the level of political freedom, the lower the rank of a country.
Another u a seful
s ndc ophisticated
o p s ilassification
p b
Edward Shils (1966). He present ed five di fferent types of poli tical systems: politi cal
democracy, tutelary democracy, modernizing oligarchy, totalit
traditional oligarchy. The characteristics of these different types of political sys
can be summarized in table 2-2.
Table 2-2: A Classification of political systems
Systems Political Tutelary Modernizing Totalitarian Traditional
Properties Democracy Democracy Oligarchy Oligarchy Oligarchy
Representative, “Rubber-stamp” Is advisory or Acclamatory & Not needed,
elected. ”Parliament” parliament or serves in ceremonial function performed
ratification
is centre of partisan none at all. But functions. as needed by
Legislature mode.
decision-making. there is the executive
appearance of (“monarch”).
representation.
Systems Political Tutelary Modernizing Totalitarian Traditional

Properties Democracy Democracy Oligarchy Oligarchy Oligarchy
Shares power with Personality-oriented. Centralized Strong, Limited Supreme power,
the legislature. Greater powers, strong sharing of power divine right to
Actions are preponderance of the control by and autocratic. rule.
Executive
modified by party executive. power elite.
ideology, opposition
& electorate.
Judiciary Constitutional and Constitutional & Controlled by No independent No independent
independent. generally the executive. Judiciary. Supports &
judiciary, in-stead
independent but enforces executive there is usually a
33
subject to corruption decrees handpicked

by the executive. retinue of
advisers.
Exist in diverse Coalesced, stable, Well-organized, Party-oriented. Dynastic, coherent,
fields, e.g, competent & cohesive, closed Stringent Restri- extremely
industrial, political, politically military-civilian ctions on conservative,
Power Elite professional are not active. clique. member- fraternal, lineal &
coalesced. ship. Loyalty, reactionary.
coherence and
discipline.
Multi-partied Being, but Suppressed in Suppressed in all Opposition is not
structure. Coherent “visible” opposition. Political form. phases of society. tolerated. Moral
articulate & Restrictions on press.Contrary views “States of crisis” are as well as legal
Opposition responsible. may surface in used to induce pressures are
press, but they cooperation & stifle used to secure
are censored. opposition. cooperation &
stifle opposition.
Politically-detached Competent and Bureaucratic Party supervision Lineal relation-
civil service, detached civil entrenched civil over member, non- ships, fraternal,
independent service. Police/ service. members, & rudimentary and
Mechanism of
judiciary, military are used to Police/military government incapable of dealing
Authority
police, secret service discourage are used to leader & with social change.
& military. dissatisfaction. discourage bureaucracy.
dissatisfaction.
Self-confident and Feeble public Feeble, Loyal intelligentsia Absent. Confined
self-sustaining public institutions press, suppressed substitutes for civic & to advisory
institutions: universities and interest groups, special interest function of the
Public
press, special interest or used to groups. Extensive monarchal
Opinion
universi- groups. A Politi-cal support propaganda. retinue.
ties, special interest or compliant. government.
groups.
34
Homeostasis. Self- National rather than Strong Unity behind party. Maintained by
disciplining. political dependence on Party policies are encouraging
Common belief in loyalties, supine & police & enforced. ignorance,
antitumultous.
political order. military. Absence Prospect of party illiteracy,
Civil
of civility & membership provides and poverty.
Order
public opinion incentive to social None or poor
forums. order as does the education for the
possibility of masses. Rural
non-membership. subsistence.
(Source:” R o t eport
C of I he ommittee
A O n a nternational
E 1 ccounting
The Accounting Review, Supplement to Vol.52, 1977, P.94.)
Political factor exerts influence on accounting most probably via its system and
the level of freedom.
P o l i t i c a l s sy sc taenm d e t e r m i n e o n e c o u n t r y ’ s e c o n o m i c s y s t e m a
determine its accounting patterns:
It seems almost self-evident that an accounting system that is useful to a centrally
controlled economy must be different from an accounting system that is optimal for a
market-oriented economy. In the former, the state owns all fixed assets and land; there
is v ery l o nittlep or o orivate
b e wnership “ a f a susiness qu
government employees from another government agency; and the concept of periodic
profit determination makes no sense.
P o l i t i c a l s y s t e m s a l s o e x p o r t a n d i m
p r a c t i c .e sF o r i n s t a n c e , B r i t i s h a c c o u n t i n g , a s i t e x i s t e d a t t h e t u r n o f t h e t w e n
c e n t u r y , w a s e x p o r t e d i n l a
c o u rin et s . D u t c h d i d t h e s a m e w i t h t h e P h i l i p p i n e s a n d t h
possessions in Africa and Asia. The Germans used political sympathy to
accounting in Japan and Sweden, among others. Modern-day political systems
even larger impacts upon accounting (Choi and Muller, 1984, 1978).
Th e po l i t i c al f r e e d om of a c ou n t r y i s i m p or t an t
a c c o u n t i n, gr e p o r t i n, ga n d p a r t i c u l a r ldyi s c l o s u r eW. h e n p e o p l e c a n n o t c h o o s e t h e
members of a government or influence government policies they are les
create an accounting profession based on the principle of full and fair disclosure. The
degree of political freedom in a given country is generally assumed to depend on the
degree o p f r olitical c l ights,
, a ndt t he ivil o p ype iberties
s f Tolitical
h t ystem.
p o l i t i c a l r i g h t s a n d c i v i l l i bme rotrieef rs e, et dh oe m a n d f il leixt iytbh e a c c o u n t i n g
profession will have, and accounting disclosure will be more honest and balanced:
35
In socialist countries it is often politically expedient and desira

certain information from companies about their social impact. For sim
developing countries may require reports from companies on the balance of payments
impact of their planned operations as a precondition to approving
(Arpen and Radebaugh, 1985:19).
Gastil ( d1978) c r efineda t r ivil
o t i ights a s t he s a ight f
the rights to freedom of expression and a fair trial. Seven levels of civil-liberties index
was developed by Gastil, which include:
1. The rule of the law is not mistaken and which include various news media and
possible and evident freedom of expression;
2 . Ci v i l l i b e r t i e s a r e l e s s e f f e c ti it viesi nt ht ah no s es t a t e s r a n kiend l e v e1,l
because of violence and ignorance or lack of sufficient or free media of expressi
created either by special laws that restrain rights or authoritarian civil tradition or by
the influence of religion;
3. Civil l iberties
e b a hxist buts re i ampered s a r y erious
reliance on martial law, jailing for sedition, or suppression of publications;
4. There a b re a road o f reas
a f pf reedom a w b nd a reeo ublicatio
repression;
5. Civil liberties are often denied and complaints of violation are ignored because
of weak government-controlled or frequently censored media;
6 . Th e r i g h t s o f t h e s t a t e s a n d t h e g o v e r n m e n t a r e g i v e n l e g a l p r i o r i t y o v e r t h
rights of groups and individuals, although a few individuals are allowed considerable
freedom;
7. Citizens have no rights vis-à-vis the state and where internal criticism is only
known to the outside world because of the government’s condemnation of it.
2.3.2 Legal Factors

L e g a l a fr cae oc nte ocd re sw r oni n t eh c o u n t r y ’ s
t a x a t ,i oann d / ao cr c o u n t i n g l e g i s l a t i o n . T h e s e f a c t o r s m a y a f f e c t
So u r c e o f o r A u t h o r i t y f o r A c c o u n t i n g S t a n d a r d s , a c c o u n t i n g f u n c t i o
pattern, as well as the details of accounting regulation.
Legal system
D i f f e r e n ot ucn t r i e s h a v e d i f f e r e n t n a t i o n a l l e g a l s y s t e m s . I t w a s s u g g e s t e d
many countries in the world can be put into one of two categories with respect to their
main legal system: common law and Roman (or civil) law.
Civil l i aw al s s egislativei w c ystem
l o c n chich n ompany
to establish rules in detail for accounting and financial reporting. Fo
36
Germany, company accounting is to a large extent a bran

Accounting becomes effectively a process of compliance with the laws of the country.
S i m i l a r l y , o f f i c i asl ias updeirtf o r m e d b y s t a t u t o r y a u d i t o r s i n o r d e r t o c e r t i f y
financial statements have been prepared in accordance with the law.
C o m m o n l a w i s b a s i c a l l y n o n - l ae w g iws hl aotsiev er us lsee e k t o p r o v i d e a n
answer to a specific case rather than to formulate a general rule for the future. T
naturally influences company law, which traditionally does no
number of detailed, all embracing rules to cover the behaviors of companies and how
t h e y s h o u l d p u b l i s h t h
e x t e n, ta c c o u n t i n g w i t h i n s u c h a c o n t e x t i s n o t d e p e n d e n t u p o n l a w . O t h e r g
differences include the size and sophistication of government and the proliferation of
regulatory agencies and commissions. All these legal differe
accounting practices internationally since accounting may be used to implement some
of these laws.
Legalistic approach
Arpan ( 1985:19)
m ad oade
legalistic a efinition approach
t t c f ws o he o
l a w s d e t e r m i n e a c c o u n t i n g p r a c t i c e s . I n, ts hu ec ihr cgoouvne trrni m
e se n t s p l a y a n
active, even dominant role in the economic sector, and their accounting profession is
often relatively weak. In most of these countries, there is no difference between
accounting and financial accounting. And Arpan asserted, “the legalistic approach t
accounting is found to some degree in all countries of the world, regardless of th
s t a g e o f e c o n o m i c d e v e l o p m e n t o f t h e l e v e l o f t h e
development” (1985:19). He took the United States’ tax law an
p r o m u l g a t e d b y t h e S e c u r i t i e s a n d E x c h a n g e C o m m iasns ei ox na m( S p lEeC t)o a s
d e m o n s t r a t e t h e l e g a l i s t i c a p p r o a c h t o a c c o u n t i n
distinctions among countries are the pervasiveness of the legal approach and whether
other approaches are permitted”(Arpan, 1985:19).
In fact, the legalistic approach to accounting is predominant in most count
with some countries completely relying on it and others permitting other approaches.
Taxation
Concerning t r he b elationship
t a a Setween ( m ax t nd ccou
point:
Worldwide t c ax c ollections
t g s onstitute
o d f a he reatest
services. T t o hei ax
b o nt i ncome, a b oth e n he
l i ndividual
t
largest source of revenue for governments of countries with l
Clearly, the collection of tax revenues, the life-blood of government, outweig
37
niceties of accounting theory. Income tax evasion is frequently grounded in distortions

of records or in absence of records. Therefore, tax collecting governmen
b e c o m e i n v o l v e d i n t h e b o o k k e e p i n g a n d a c c o u n t i
i n d i v i d u a l s a n d c o m p a n i e s , t o p r o v i d e s o
(Seidler, 1981)
Taxation may have a strong influence on one country’s accoun
especially for accounting measurements. Countries have different national tax systems
which define most directly and most frequently the conduct of business and hence the
practice of accounting. In many countries, law, and particularly tax law, is the
reason that accounting is done at all. In these countries accounting rules and practices
ar e spel l ed out i n la ws, oft e n cal l ed c ompa ni es’ a ct s, whi ch a lso c onta i n the gene r
laws for all business operations and activities. In most of these countries, there is no
d i f f e r e n c e b e t w e e n t a x a c c o u n t i n g a n d
Germany, t het a ax s ccountb t s hould a t c e he
a ame
b 1 s he omm
In a ddition, t l i v ax aws
a c n s irtually a p ll ountries
t b u pecify
in the tax area.
I n o t h e r c o u n t r i e s , s u c h a s U n i t e d K i n g d o m , t h
N e t h e r l a n d s , p u b l i s h e d a c c o u n t s a r e d e s i glnaerdl yapsa rpt ei cr fuo r m a n c e i n d i c a t o r s
for i nvestment d w ecisions,
c r o here s ommercial
f t r i a ules
number of accounting areas. In most cases, there is not the degre
between t a f ax rnd inancial
t i f i t eporting
U K hat
i t s s oound n
capital allowances. However, in all such countries the taxation autho
adjust the commercial accounts for their own purposes, after exert
influence directly on them.
A c c o u n t i n g l e g i s l a t i o n i s lsyt ri no nf lgu e n c e d b y t h e l e g a l s y Is n
temc o. u n t r i e s
with legalistic approaches, laws set the details of accounting regulation. Accounting
s t a n d a r d s p o s s e ss , s al neg dgo av le r enfm mf oe scn tt l y d ac e cc i od ue nd t i n g
functions and objectives.
2.3.3 Economic Factors

Ec o n o m i c e n v i r o n m e n t i s i m p o r t a n t t o t h e d e v e l o p m e n t o
economic environment includes two macro and micro For aspects.
the macro aspect,
factors such as the type of economic system chosen, the level and gro
income, the extent of government intervention and expenditures, inflat
level of exports , etc. may imply a specific impact on accounting development, which
n e e d s t o b e i n v e s t i g aFt eodr . t h em i c r o a s p e c t , f a c t o r s , s u c h a s t h e s o u r c e o f f u n d s ,
differences i s a cn ize o bnd fomplexityl o s f ousiness
b irms,
management and the financial community etc. may also
38
development. Other factors such as ties to other countries, and degree of international
activity may also exert influence on accounting development.
Types of economic systems
Gastil m a akes
d a istinction
t f f e mong s he c ollowing
capitalist-statist, capitalist-socialist, and socialist. Capitalist states are those states that
‘”rely on the operation of the market and on private provision for individual welfare.”
Capitalist-statist states are those states that have “very large government prod
enterprises, e b ither
o a e ecause
d p f n o litist
am d evelopment
on a key resource such as oil.” Capitalist-socialist states are those states that “provide
social s ervices
o al s tn garge ocale
o n hrough i overnment
w
the result that private control over property is sacrificed to egali
Finally, socialist states are those states that “strive programmatically to place an entire
national economy under direct or indirect control” (Belkaoui, 1985:44).
It was conceived that a capitalist system might be more favorable to accounting
development than other economic systems may be:
In a capitalist economic system the survival of private enterprises depends on not
only the production of goods and services but adequate information to various interest
g r o u p s f r o m i n v e s t o r s a n d c r e d i t o r
Basic economic orientation and degree of government involvement
The t ypes
o e f s conomic m d o ystems
c b oay ecide
o t ne
economic system and the degree of government involvement in the economic sector,
and decide the objectives of accounting.
In Communist countries, for example, the state owns all production
makes most of the economic and business decisions, and
operations t a c hroughp a c entral s Tlanningc h nd a h ontrol
standardized and uniform accounting system to facilitate the government’s pla
and control function, and there are few users of accounting information other than the
government. I m n earket-capitalist t i p conomies,
p o here
W i t h g r e a t e r i n d i v i d u a l f r e e d o m i n e c o n o m i c a c t i v
correspondingly greater diversity in accounting practices is permitted
T h e r e a r e a l s o m o r e u s e r s o f a c—c os tu on ct ki nh go l idne fr os r, maaut di oi tno
s u p p l i e r s , a n d —i c rne da idt do ir tsi o n t o t h e g o v e r n m e n t ( A r p e n a n d
1985:21).
Concerning the relationship between government expenditures and acc
Belkaoui ( 1985:67)
d t “ h eclared t l o g hat thee igher t he ev
39
hi gher the level of government i ntervention and t he better the adequacy of report in
and disclosure.” Because government is assumed to be accountable to the people, its
intervention m b f ay b a ee ollowed
t r a d y e, a ndm
n ffort
b ayf eo eport
avorable
to the development of an accounting program and a reporting and disclosure tradition.
This is applicable to any economic system.
The stage of economic development
“S t a g e s o f e c o n o m i c d e v e l o p m e n t m a y d e c i d e t h e c o m p l e x i t y o f
p r a c t i c e a n d .t hTe ho er yh i g h e r t h e l e v e l a n d g r o w t h o f i n c o m e , t h e h
political and economic freedom and the better the ad
disclosure. This may apply to any economic system, since economic growth in some
socialist countries was often followed by an effort to liberalize the regimes”(Belkaoui,
1985:47). “At extremely low levels of economic development, there is few economic
a c t i v ii et s a n d c o r r e s p o n d i n g l y l i t t l e f i n a n c i a l , t a x , o r m a n a g e r i a l a c c o u n t i n g . A
level of economic activity and size of companies increase, there is a correspo
increase in accounting activity. This continues through each
development, a w c lbeitl .” A ith lthougha ertain
L ( s 3ags owen t 1967:
“ 60)
a historical point of view, accounting development i
d e p e n d e n t u p o n a n d i n t e r w o v e n w i t h e c o ,” n o Eml il ci odt e svter leosps m
e de nt th e
“social f unction
o a t m f ccounting,
a c e o easure
d c n b nd omm
considered simply as the effect of economic development, but should be considered a
valuable tool for promoting the development process.”(Elliot et al 1968: 764).
The developing level of exports and imports may have a positive effect on
development of accounting. “The higher the develop level of exports and imports, the
higher the need for better reporting and disclosure. Free-trade policies in general and
export promotion in particular increase cooperation with other countries, the flows of
human and physical capital and the need for comparable reporti
disclosure” (Belkaoui 1985:47).
Inflation
Inflation is often associated with economic growth and is a major influence

accounting where hyperinflation is rife to the extent that alternative syste
t r a d i t i o n a l h i s t o r i c a l c o s t a p p r o a c h a r eThper ecfue m
r rue lda. t i v e e f f e c t o f i n f l a t i o n
over a number of years can render all accounting information meaningless unless it is
appropriately adjusted. Thereforeinflation affects accounting standards and practices.
Thus countries with relatively low levels of inflation have been slower
i n f l a t i o n a c c o u n t i n g r u l e s t h a n h y p e r
or Argentina.
40
Source of funds and working capital
Source of funds and working capital may be decided by economi

a n di n r e t u r n t h e y m a y d e c i d e a c c o u n t i
Source o f f h s unds
t wot ypesofaorientation: c reditora e nd
o quityT m rientation.
influence t d he
o i egree o fv nvestor c o rientation
o t a ersus
system. For the creditor orientated accounting system, the major source of
loans from banks, financial intermediaries, or even wealthy individuals, a
standards, principles, and procedures will tend to be more conservative and reflective
t oc r e d i t o r p r e f e r e n c e s a n d r e q u i r e m e n t s .
predominant in the world, at least in terms of number of countries. On the other hand,
f o r t h e e q u i t y oerdi ae cn ct ao tu n t i n g s y ts ht e m
m a, j oi tr y o f f u ns di s i n v e s t e d b y
investors,and the accounting system will include such important investor information
as earnings per share and more extensive public disclosure. For instance “t
public i nterest
i c s n orporate
i t U S ecurities
h p m n s he nited
“sunshine” accounting standards of wide open disclosure, whereas the virtual absence
of public participation in corporate equities ownership in France has limited effective
financial communications there largely to “insider” communication channels. H
b a n k o w n e r s h i p o f c o r p o r a t e e q u i tyi se ts i li ln pW r oe ds ut cGe es r dm iaf nf e r e
accounting responses. In the United States, the American Institute of Certified Public
A c c o u n t a n t s ( A I C P A ) m a d e s p e c i a l r e c o m m e n
accounting standards and practices to be used by smaller, closely held en
(Choi and Mueller, 1978).
Business innovations and Complexity of business
B u s i n e s s i n n o v a t i o n s m a y b r i n g s o m e n e sw i nc haacl cl eo nu gnet i n g . A s t h e
result, some new accounting policies and methods may improve. For example:
Bu s i n e s s c o m b i n a t i o n b e c a m e p o p u l a r i n E u r o p e o n l y a f e w y e a r s a g o . B e f
that, European countries had little need for accounting standards and practices relating
to m ergers a a nd o gcquisitions c V s f s oing d oncerns.
( ery
“stock dividends”) occurred most generally in the United States.
business innovation that has directly affected U.S. accounting. Examples of this type
abound. For instance, equipment leasing is not practiced a
countries, and consequently there is simply no need for lease accounting standards in
those situations (Choi and Muller, 1984, 1978).
Complexity of business may decide the complexity of accou
Bu s i n e s s fo i fr m idf sf e r e n t s i z e a n d c o m p l e x i t y m a y h a v e d i f
accounting: Self-insurance may be acceptable for a very large firm but not for a small
41
firm. Similarly, a large firm mounting an extensive advertising campaign directed at a

s p e c i f i c m a r k e t o r s e a s o n m a y b e j u s t i f i e d i n d e f e r
expenditure, whereas smaller programs in smaller firms may need to
directly. This dichotomy extends over the entire range of parent company-subsidiary
company accounting and specific technical problems like research and develop
expe ndit ure s or re st ruct uri ng of l ong- te rm debt . The c om ple xi ty a rgum ent i s equal
applicable. Large conglomerate enterprises operating in significantly different lines of
business need financial reporting techniques different from those fo
producing a single product. Similarly, multinational ent
systems d fifferent
t f s romd hose
f P or t trictly( a omestic
for i i t)a d s m ifferent
f aw atter
p or f t orldwide
i i f al f harmaceutica
producing only oil additives in a provincial capital in Mexico (Choi a
1978).
Management level
Levels of sophistication of business management and the financial community

m a y r e s u l t i n t h e d i f f e r e n t n e e d s f o r Tahcec oh ui gnht ienr gd. e vi ne lgol epv e l o f
business m anagement
a t f c nd t heh inancial
t n f a ommunity,
As “ highly r a efined s ccounting
a p h n tandards
p i a e nd ractices
where they are misunderstood and misused. A complex techni
behavior variances is meaningless unless the reader understands cost accounting well.
Statements of changes in financial position are useless unle
competently. Capitalization of leases, consolidation of foreign subsidiaries,
parent company financial statements, or financial forecasts are all counterproduc
accounting techniques in the hands of the unsophisticated” (Choi and Mueller, 1978).
Degree of international business activity
Degrees o fi nternational
b a musiness
a b a ctivity p ay ffect
and methods. “The greater the amount of a country’s international trade, the greater is
its need for accounting practices concerning foreign e
translations. Going a step further, the number and size of a country’s multi
firms is directly related to the development of accounting rules for consolidat
foreign source income (income earned outside the parent company’s country)” (Arpen
and Radebaugh, 1985:22).
2.3.4 International Factors

Economic ties to, and relationships with other countries may have influence on
one country’s accounting system Pr edses vuer tleos pcmh ea n tg.e i n t e r n a t i o n a l
42
accounting h b ave
s er aecomend
s tronger
. T hese
trong
i nternational
p c f ressures
growing international economic/political interdependence, new trends in FDI, changes
in multinational corporate strategy, impact on new techno
international financial markets, expansion in business services, and the act
international regulatory organizations:
“H i s t o r i c a l l y , t h e f i r s t o f s u c h a r r a n g e m e n t s w a s c o l o n
adopted or were forced to adopt the accounting system of their colonial power, even
though it may not have been particularly appropriate a
development. Thus, the accounting systems in the British colonies were significantly
influenced by British accounting, and the influence remains today,
United States, Canada, Jamaica, and the Bahamas” (Arpen and Radebaugh, 1985:23).
S e c o n d l y h, et g l o b a l i z a t i o n a n d h a r m o n i z a t i o n o f m a r k e t s h a v e b e g u n t o a f f e
a c c o u n t i n g oavl el r t h e w o. rAl dl t h o u gshe v e r a l l a r g e m u l t i n a t i o n a l c o m p a n i e s a r
b a s e d i n c o m p a r a t i v e l y s m a l l c o u n t r i e s ( e . g
international influences are likely to be particularly great.
a regional economy calls for the harmonization of accounting also. Formal reg
economic groups, such as the European Union (EU), the Andean Pact group, and the
Central American Common Market (CACM), can significantl
development and practices, as harmonization requires c
historical ways of accounting. This may promote member countries to reconcile their
accounting s s t ottandard
ohe a ne b ccepted t g o b wy he F roups e r y
“t he EU has em ba rked on a m aj or progr am of ha rm oniz at i on, i ncl uding m e asure s t
coordinate the company law, accounting, taxation, capital m
systems i t E nc he AU t r ountries”. t he“ EUh e as s a merged he
a m esult, e s ajor
a n d , t o s o m e e x t e n t , p o l i t i c a l f o r c e i n r e c e n t
The se ha r m o ni zi ng o bj ec t i ve s w e r e m a i nl y a c h i e ve d t h r ou gh E U D i r e c t i v e s. I n Ju ne
2000, European Commission (EC) published a draft regulation, whi
compulsory use of IAS for the consolidated financial statements of European
companies and would have to be effective as from 1 January 2005 onwards and would
imply that 7000 European listed companies, including those listed at the Amsterdam
stock e xchange,
s a I houldf t f pplyr SAa f t or d heir “ E inancial
also provides the member states with the possibility to compel or allow the application
of IAS for the parent company financial statements and for the category no
c o m p a n i e(sD” e l o i t t e & T o u c h e , 2 0 0 2 : 7 ) . T h e N e t h e r l a n d s i s a n e x a m p l
supporting a w h orldwide o a armonization
s D g f h ccounting
laid down a bill statingthat companies must fully adopt IAS regulations and comply
with the legally required ‘true and fair view’. This also
companies in the Netherlands can change to IAS.
43
Thirdly, international organizations, such as the United Nations (U

O r g a n i z a t i o n f o r E c o n o m i c C o - o p e r a t
b e e n d e ei pn lvyo l v e d i n t h e d e v e l o p m e n t o f i n t e r n a t i o n a l b u s
scale:
“The UN is responsible for the emergence of organizations such as the W
Bank G troup,
I he M nternational
F ( t U Conetary o T und
a IMF),
Development (UNCTAD), the Conference on the Law of Sea, the General Agreement
on Tariffs and Trade (GATT), now the World Trade Organization (WTO), a
Economic a S Cnd ( ocial U ouncil n i ECOSOC). t w o f NCTAD
Commission on Transnational Corporations, which was de
effective international framework for the operations of transnational Corporations and
to monitor the nature and effects of activities. In particular, the UNCT
Intergovernmental W G o E orkingo I roupS f o Axperts n n
and Reporting (ISAR) is involved, among other things, in ini
international standards of accounting and reporting a
education in Russia and Africa” (Radebaugh, 1997:61).
At the level of international financial markets, the OECD and e
E u r o p e a n U n i o n h a v e b e e n i n f l u e n t i a l i n e f f o r t s
requirements for the admission of securities to listing and the content of prospectuses.
I n a d d i ,t i tohne I n t e r n a t i o n a l C o o r d i n a t i n g C o m m i t t e e o f F i n a
Societies a t I nd he O nternational o S C rganization
( b f ecuri
private o rganizations,
a s t p re
t i eeking oa i romote o he n
securities markets on a global basis. On May17 , 2000, the International Organization
of Securities Commissions decided to endorse IAS. This endorsement implies that the
IOSCO advised its members (the Securities Commissions) to accept 30 IASC, which
has changed the name into IASB on 1 April 2001, standards as the reporting basis for
companies that are listed at several (national) stock exchanges. In fac
decision w o hether
n t a I r u ot o ccept
w b o c AS i nconditionally
f
the worldwide harmonization of accounting standards.
F i n a l,l M
y NEs may also exert a significant impact on the culture a
development of host countries. Employment and consumptio
significantly influenced by MNEs.
2.3.5 Cultural Factors

Although no consensus exists in the definition of culture, Kroeber and Kluckhorn
proposed the following definition after reviewing more than 150 year’s
concept:
44
Culture c oonsists
p e f a atterns,
i o a f xplicit
b a nd a mplicit,
transmitted by symbols, constituting the distinctive achievements of human
including their embodiments in artifacts; the essential core of c
traditional ideas and especially their attached values; cultural systems may on the one
hand be considered as products of action, on the other as conditioning elem
further action (Kroeber and Kluckhorn, 1952).
Hundreds of cultural factors influence accounting practice.
importantfactors are society’s degree of conservatism, secrecy, distrust, and fatalism,
coupled with the people’s attitudes toward business and the accountin
i t s e lCf .u l t u r a l f a c t o r s m a y i n f l u e n c e a c c o u n t i n g s t a t u s i n t h e
orientation of accounting standards.
Conservatism
So c i e t y ’ s d e g r e e o f c o n s e r v a t i s m i n f l u e n c e s a n u m b e r o f a c c o u n t i n g p r i n c
and p ractices,
e v speciallya p d aluation F e nd t u rofit o t etermina
lower-of-cost-of market principles,and the allowance for bad debtsboth reflect a high
level of conservatism, a desire to make a firm appear less profitable than it actually is.
Secrecy
So c i e t y ’ s d e g r e e o f s e c r e c y m o s t
disclosure, which an enterpriseis willing to make in its external reporting. The higher
t h e l e v e l o f s e c r e c y o r t od i tsht erouust ts i d e r s , t h e l o w e r t h e l e v e l o f d i s c l o
w o u l d b.e I n t e r n a l l y , a h i g h l e v e l o f d i s t r u s t m a k e s i t m o r e d i f f i c u l t t o i m p l e m e n
system of internal control and performance evaluation, because no one wants to have
h i s o r h e r a c t i v i t i e s
a u d iitn g f u n c t i o n , m a k i n g i t m o r e d i f f i c u l t t o o b t a i n n e c e s s a r y s u p p o r t i n f o r m
verification, and corroboration of the accounting data supplied by the enterprise.
Attitude towards business
Societal attitudes toward business may range from distrust and anta
wholehearted support and trust. Distrust generates demands for more information and
closer scrutiny of business operations, perhaps even regulation of nationalization. The
information requested is likely to encompass far more than mere financial data and to
include the enterprise’s treatment of employees, societal and political activ
contributions, environmental impacts, and so on. However, wh
actually make such disclosure depends largely on their need for public-source fu
and their relationship with the government.
45
G o ve r nm en t su pp or t of soc i e t y’ s w i sh e s c a n l e a d t o e st ab l i s hi ng a n d re g ul at i n
accounting procedures and practices. This appears to be the situation in countries such
as Sweden and France, where social accounting is becoming the order of the day. At
the o there s xtreme,a g ociety m m nd
f i a overnment
d d o ay ak
enterprises. I t s n a his ituation,
i l t b m ccounting
f a m m s a ikely o
the discretion of firms, resulting in considerably less pressure for disclosure. This was
the case in the United States before the Great Depression and remains largely the case
in Switzerland today (Arpen and Radebaugh, 1985:18).
Attitude toward accounting
The attitude toward the accounting profession affects the status of the profession,
the type of person who enters it, its credibility, and the work that accountants perform.
In many countries, accounting is still regarded as a low-status occupation filled wit
thieves and people fit for no meaningful job. In other countries, accountants occupy a
highly respected place in society, and accounting attracts high-caliber individuals as a
result. Accountants in these countries tend to lead the world in the developm
a c c o u n t i n g t h e o r y , p r o c e d u r e s , a n d p r a c t i c e s . G
Un i t e d K i n g d o m , a n d t h e U n i t e d S t a t e s a r e r e p r e s e n t a t i v e e x
Radebaugh, 1985:18).
2.3.6 Educational Factors

The educational characteristics of a country have a si
a c c o u n t i n g p r aT ch tei sc ee se. d u c a t i o n a l c h a r a c t e r i s t i c s e n c o m p a s s
literacy, i ncluding
t a t u s he m bility t op se oimple
p w athematics;
have received formal schooling at various levels (elementary schoo
c ol l e ge ) ; t he ba s i c o r i e nt at i on o f t he e d uc a t i on a l s ys t e m (r e l i gi o n, v oc a t i on a l , l i b
arts, scientific, professional) and the educational mat
educational system’s output for the country’s economic and societal needs (Arpen and
Radebaugh, 1985:15).
Literacy
T h e m o r et h e e d u c a t i o n a l l e va epl oopfu l a t i o n i m p r o v e s , t h e l e s s a c c o u n t i n
probl em s m ay ha ppen, and t he mor e ext e nsive and sophi sti c at ed a ccount i ng syst em
and r eports
b f ecomeB a easible. t a w ecause
a n ccounting
f i a
has relatively little use or significance in a society that is predominan
Meticulous preparation and widespread circulation of corporate financia
such a society obviously would not be a judicious use of corporate time, money, and
effort. Internally, the accounting planning and control system would be more difficult
46
to be used effectively because of the limited ability of employees t

understand budgets and reports. At the same time, the need for budgeting and control
tends t g o i reater
d c n eveloping
t h t h lountries
o i Hhat ave h
the accountant can face many problems in designing an accounting system for either
external or internal use.
Orientation
The orientation of the educational system also plays a p

accounting practices. Perhaps the most obvious relationship is whether mathematics is
t a u g h t s u f f i c i e n t l y t o p e r m i t c o m p i l a t i
F u r t h emr o r e, t h e e x t e nt to w h i c h a c c o u n t i n g i t s e l f i s t a u g h t i n t h e e d u c a t i o n s y s t e m
w i l l i n f l u e n c e t h e n u m b e r o f p e o p l e w h o h a v e s o m, ea nt rda iunni dn egr si nt a n d i n g
o f, b o o k k e e p i n g , b u d g e t i n g , f i n a n c i a l a n a l y s i s , a n d a u d i t i n g . A n d m o r e s p
related to accounting, does an accounting curriculum exist, and if so, wh
entail? Is there a degree in accounting, and for what type of work does the
qu a l i f y so m e o ne ? M or e su bt l y, t h e t e a c h i ng a n d a c c e pt a n c e o f t h e sc i e nt i fi c m e t h
( t he ba s i c l aw of ca u sa l i t y) i n fl ue n ce s p e op l e ’ s a cc e p t a nc e of , a n d ad he r e n c e t o ,
process of planning, budgeting, and control.
Educational match
Finally, the educational match influences accounting system development to the

extent t a hat ccountants
a i u g nd i n nformation
a s asers
t row
economic and social systems need greater and more complex accounting information
and p rocedures.
I o w a nt cther i ords, t s a hem a ountry
b ndustr
firms, more complex business arrangements (credit, leases, poolings, mer
usually an increasing need for outside capital. Each requires more complex accounting
procedures and more people who can use and understand them. The issue is whether
the educational system is producing enough of these
development (Arpen and Radebaugh, 1985:16).
2.3.7 Professional Factors

The s trength,
s a c ize o nd t a ompetence p i a cf hem ccountancy
f ol l ow t o a l a r g e e xt e nt t h e va r i o us f a c t o r s ou t l i n, eadn da bo
t hevet y pe of f i n a nc i al
reporting t h hhey t pave H elped , the n o ature oroduce.
t p f he
a owever
f rofession
back into the type of accounting that is practiced and could be practiced.
Where there is a more developed accounting profession there is likely to be more
developed, j udgmentally
b p a s ased r ublic
t m c ccounting
and uniform systems. Furthermore, the development of professional accounting
47
depend on the existence of a sound infrastructure of acc

research, which is often lacking in, for example, developing countries (Ra
1997:48).
T h e r e a r e a l s o o t ht ehra m tf aa cy t oh ra sv e s o m e i n f l u e n c e o n a c c o
development,which may be insignificant comparedto the other factors discussed. Of
a l l t h e e n v i r o n m e n t a l i n f l
a d i f f e r e n t i n f l u e n c e o n t h e d i f f e r esn to fa sapceccotu n t i n g . F o r t h e p o l i t i c a l f a c t o r ,
p o l i t i c a l s y s tm em ay decide one country’s economic system and hence dec
a c c o u n t i n g p a tatne drpnos l, i t i c a l f r e, ewd ho imc m hay affect the development of
a c c o u n t i n g i n g e n e r a l a n d
p a r t i c u.l aThr e l e g a l s y s t e m m a y d e t e r m i n e t h e m o d e o f o n e c o u n t r y ’ s a c c
legislation and influence its accounting practice , and economic factor s most probably
h a v e a n e f f e c t o nt etchhen i c da el v e l o p m e n t o f a c c o u n t i nt sg oabnjde c t i. vTe hs e
h i g h et rh el e v e l o f o n e c o u n t r y ’ s e c o n m om
e n,i tc t hd ee vme ol torhepen e e d f o r
a c c ,o au nn dt i nt hg e m o r e c o m p l e x t h e
be. The cultural f actorm a ayt a ffect p he towards ccounting
o utsidersa w a olicy is ell
a c c o u n t i n g p r a c t i c e s , a n d m a y d e ct ihdeae c tchoeu ns t ia nt ug s p or of f e s s i o n i n
a p a r t i c u lcaor u n t r wy h i l ee d u c a t i o n a l f a c t o r s m a y h a v e a s t r o n g i n f l u e n c e b o t h
accounting practice and accounting theory . Finally international factorshave an effect
o n ac o u n t r y ’ s a c c o u n t i n g d e v e l o pwmh ee nr te ed sepveecl ioapl il ny g n a t i o n s a
c o n c e r n, eads t h e ra er e i n c r e a s i n sgtlryo n g e r t e n d e n c i e s gt ol owba ar ldisz a t i o n a n d
harmonization, in the international accounting context.
Referring to one country’s accounting development, the compelling for
mainly come from the effect of one of those factors mentioned above, or co-effect of
several of those factors, or even the synthesis effect of all the environmental factors,
depending upon the countries. Concerning China’s accounting development, there are
also different point s of view of what are t he dom inant fact ors in China’s account in
development. The section below will review the literature, both in En
Chinese, concerning influential factors on China’s accounting development.
2.4 Literature Review ConcerningEnvironmental Influencing

Factors on China's Accounting Development
S o f a r , t h e l i t e r a t u r e i n t r o d u c i n g a n d e x p l a i n i
accounting reform is abundant both in international and Chinese accounting literature.
A n u m b e r opf u b l i c a t i os nc a n b e f o u n d c o n c e r n i n g C h i n a ’ s a c c o u n t i n g e n v i r o n m e n t
a n d i t s d e v e l o p m e n t b o t h i n E n g l i s h a n d C h i n e s e
sy st e m at i c a l l y a n a sl yz
t he
e e n vi ro nm e nt a l i n f l ue n c i ng f a c t o r s on C h i n a’ s a c c ou nt i ng
48
d e v e l o p m e n t , i s q u i t e l si pt ea rr as tei us. r dM e eos sc t r i p t i v e w i t h o u t a n y f

a n a l y s i s . E v e n f opru bt hl iec a tsi ot nh a t m a d e s o m e a n a l y s i s o n t h e e n v i r o n m e n
f a c t o r s , t h e y o n l y far no amloynzee o r t w o a s p e c t s o f e n v i r o n m e n t a l i n f l u
factors, such as Zhang (1992), van Hoepen (1995), without making any
analysis a w nd w eighed
i t d f hich a sa t he e ominant f actor
influencing China’s accounting development. A list of authors can be found i
literature, such as Cheng (1980), Lou (1987), Enthoven (1987), Lin and Deng (1992),
Zhang and van Hoepen (1992), van Hoepen (1995) Blake (1995), Gao (1995), Nobes
and Parker (1998), Andy (1999), Liu (2001), and Zhu (2001), etc. Literature revi
reveals that in the existing international accounting literatu
a c c o u n t i n g d e v e l o p m e n t , t h e r ersea roep ianl is oo n ds i ov fe v i e w o f w h i c h f a c t o
driving China’s accounting development. While in Chinese
C h i n a ’ s a c c o u n t i n g d e v e l o,ptm
h e rnet s e e m s c o n s e n s u s t o t h e d i r e c t i o n o f C h i n e s e
a c c o u n t i n g d e v e l o p m e n t . T h e m a i n i d e a s a b o u t i n f
accounting development can be summarized below:
● Culture is the dominant factor

Influenced by the increasing interest in cultural influen
international accounting research, some researchers took a asChina caseand tried to
systematically analyze how Chinese culture influences its a
practice. Researchersconceived culture as the dominant influencing factor on China's
accounting development. Examples include Zhang (1992), van Hoepen
Berry (1998).
Zhang (1992:2) cited Hofstede’s (1980) definition of culture and further broadly
defined culture as “the accumulation of the spiritual wealth and the mental creation of
the people of a country or a region over a long time. It includes language
h a b i t s , m o r a l s t a n d a r d s , w a y s o f t h i n k i n g , a n d
(1992:3). He proposed that the relationship between accounting and culture could be
reflected from the following points: accounting language origina
language; accounting reflects social customs; and accounting is institutionalized by a
n a t i o n a l c u l t u r e . A n d e hd e, “ Ca shsi en rets e a c c o u n t i n g s t r o n g l y d e p e n d s u p o
culture” (1992:2).
Zhanm g a d e f u r t h e yr sai nst ao l s u p p o r t h i s a r g u m e n t . H e b r o a d l y c l a
C h i n e s e c u l t u r e i n t o t w o p a r t s : Twh ae s f it rhsaCtt hpi anret s e t r a d i t i o n a l c u l t u r e
w a sr o o t e d i n t h e C o n f u c i a n i s m a n d B u d d h i s t p h i l o s o p h i e s a n d h a n d e d d o w
generation to generation; the second part is the Chinese
was created in the light of the socialist structure where the relationship of production
49
and e conomic
b h c asis r avea t hanged
f o t Padically R fter he
of China (PRC) in 1949.
He generalized the major traditional culture elements a
accounting system, which included:
(1) Theory of Opposing Yi (justices) and Li (profits) 4 ;
(2) Opposition of Trusts and Contracts;
(3) The Dogmatic Attitude;
(4) The Conservative Thought;
(5) Collectivism;
(6) Religions.
And the most predominant modern cultural influences on accounting are:
( 1) The st a te the ory, whi c h deci de s acc ount ing obj ec t ive s, ac count ing f unct i on
and accounting organizations;
(2) The class theory, which lead accounting to political oriented and argu
over accounting with class characteristics;
(3) Marxism, which becomes the basic concept of accounting, the
structure of accounting, and decides the development of accounting;
(4) T Che Rultural w evolution,
s d d a hich
gainsta trongly
ccounting
a iscrim
accountants. As a result accounting education was cut arbitrar
departments were dismissed.
Z h a n cgo n c l u d e d : “ T h e C h i n e s e a c c o u n t i n g t h e o r y , a c c
accounting institution, etc. have been built according to its traditiona
cultural frames. Both the traditional cultural and the modern culture have impacts on
Chinese a ccounting.
H t C owever, a d oday’s n o o hinese
i o ccou
cultures, but also to some extent on culture exchange as well as
c u l t u r e s ” ( 1 9 9 2 : 1 7 ) . H e p r e s e n t e d t h e m a i n a s s o
a c c o u n t i n g , w h i c hd itnhcel uf do el l o:w ai nc cg o u n t i n g l a n g u a g e o r i g i n a t e s f r o
s o c i a l l a n g u a g e ; a c c o u n t i n g r e f l e
institutionalized b ayn cational H e ulture.t r we C xplaineda he ea
has been more or less developed towards the western style is because "the Ch
culture has been merged with the western cultures and the Chinese economy has been
linked with the western market economies to some ." extent
“The difference between
China's a ccounting
a w a nd i b esterno t t ccounting
d o s ecause
culture between the two (1992:21).
4
The culture of opposition between Yi and Li resulted accordingly in discrimination against
merchants in Chinese history. As a result, the recognition of and emphasis on the importance of
profits in accounting world would be criticized publicly.
According to Chinese philosophy, a good understanding and relationship based on mutual trust does
not require legal provisions in order to stipulate the responsibilities and obligations.
50
S e v e r a l a r g u m e n t s c a n b e r a i s e d f r
was a rguedf t l or her inguistic
w a elevance
w B p ith f ccounting,
a n dl a t e r w a s s uesdpfeocr t i t s r e l e v a n c e w i t h a c c o u n t i n g b y N o b e s . A c
language originates from a social language ; it employs social language to explain its
m e a n i nHgo. w e v ae cr c o u n tai lnsgoh a s i t s o w n l a n g u a g e w i t h i n t h e a c c
sphere, which is different from social language . This language is developed more and
more universally without culture boundary. For example, more and more
h a v e a c c e p t e d I A S , a n d C h i n a ’ s a c c o u n t i n g s t a n
a n da r e a l s o d e v e l o p e d a c c o r d i n gd et os ptiht e In A o Su, n a n i m o u s r e q u i r e m e
in details. From this point of view, linguistic relevance with accounting is very weak.
Secondly, i i a th s a rgued i i ow ccounting
b an c s C nstitutionalized
c a n i n f l u e n c e t h e w a y t h i n k i n g , b e h a v i n g
ways, b utf t ora he r ccountingi n s t ob egulation, ee xplicitly
e b t l eed
xpressed
o b
tradition, and it is also influenced by many other factors, such as the
s u p p o r t . I n C h i n a ’ s c a s e , f o r e x a m p l e , t hmee ne tsot fa bt hl ies hu n i f o r m a c c o u n t i n g
system in 1952, was due to the establishment of the new social political and economic
system. The simplific ation of accounting methods in 1958 resulted from new political
a n d e c o n o m i c p o l i, caine ds t h e p r o m u l g a t i n g o f A c c o u n t i n g S t a n d a r d s f o r B u s i n e s
E n t e r p r i s e s ( A S B E ) i n c1a9m9e2f r o mr e s p o n d i n g at on e w l ye s t a b l i s h e d s o c i a l i s t
market economy system. Culture’s influence on accounting in these important events
can h ardly
b f T e i ound. i a “ hird,d b t s Crgued a the a ifference
western accounting is because of the tremendous differences of culture betwee
t w o ” . A c c o r d i n g t o t h i s a s s e r t i o n , if ou nr tschaenr bd e dmu ac dt e t h a t i f C h i n e s e
culture was completely immersed i W esternc n p ulture t n C hinesea atterns, ccounting
he
would be the same as the western accounti ng, no mat ter what poli tical system, wha
l e v e l o f e c o n o m i c d e v e l o p m e n t , a n
This result cannot be accepted.
It is worth noting that most of literature that study culture’s effect on accounting
a r e b a s e d o n w e s t e r n c o u n t r i e s w si ta hn ds i emc io l na or m pi oc l
development. W a thile s iespplying
t oC hina’s s heset ituation,
p tud s he recond
b e c o n s i d e r e d f Api r sat r. t f r o m t h e o t h e r f a c t o rtsh, e oa n al yl y ss io f t h e c u l t u r e ’ s
effect on China’s accounting can lead to a unilateral conclusion.
Besides Z hang,t a hereo r re who
thera noticed
lso
esearcherst c he i ultural nfl
on China’s accounting development.
Van H oepen
( 1995:349)s G upported
p o v H ao’s t t oint “ f iew.
influences, a f a t s a sar o is hey o m re Ctill af nfluences f n o
the influence of religion and traditional Chinese philosophies and a certain degree of
conservatism related thereto”. But further by analyzing the
51
Chinese culture and accounting since 1949, he developed his standpoint and proposed:
"culture influences on accounting diminished in China in the three periods after 1949,
while (quite different) economic influences gained importance".
B e r r y( 1 9 8 8 : 2 5 ) e m pze
h ad s ti h a t “ C u l t u r e r e a s o n i n g ” h a s d i r e c t e d a c c o u n t
developments in China and then conclude d, ”The synergistic effect of pluralism in the
P R C ’ s m a r k e t p l a c e t o d a y c o u l d l e a d t o m o r e e x p e r i
accounting function. However, the PRC will also be s
explanations for the changes now being introduced so that its
management will exist in its appropriate cultural framework”.
● Economic Determinants
S o m e r e s e a r c h e r s tchoanC t che ii nv ae ’ds a c c o u n t i n g s y s t e m , e s p e c
promulgation o t A i f1 hew i SBE b tn r 992, o C as e nfluenced
s y s t e m . tAh sep a r t o f e c o n o m i c s y s t e m r e f o r m , C h i n a ’ s a c c o u n t i n g
reformed in order to meet the demand of socialist market economy system.
L i u a n d E (d1d9 i 9e 5 : 1 3 9 ) r e c o g n i z e d f o r c e s a f f e c t i n g
were t hec onfirmation
o t o o C f he
e bject
r w f whinese d a conomic
the Fourteenth National Congress of the Chinese Communist Party held in 199
develop a socialist market economy, and Deng Xiaoping’s remarks, which established
the new policy direction of carrying out deep economic reform of state enter
to expand the private market economy and to provide a ‘wider open-door’ for foreign
investment in China.
Z h a n g( 1 9 9 6 ) c o n f i r m e d t h e i m p o r t a n t i m p a c t o f e c o n o m i c f a c t o r s o n C h i n
a c c o u n t i n g a n d d e ,c “l aTrheed n e e d f o r a c c o u n t i n g r e f o r m h a s b e e n i n f l u e n c e d
many factors, including a more diversified and less ri
government in macroeconomic management, the increasing complexity
transactions such as leasing of machinery and equipment
business mergers, equity and debt financing, and the expansio
market”. He stressed that China’s accounting is influenced not only by the Ch
government but also by foreign organizations, as “the formulation
accounting s a rystem h bnd t egulationsd o t M as
o F een t he om
industrial ministries and some provincial government agencies. Neither a
committee under the People's Congress, nor any professional organization
actively participated in the decision-making process. A major development
research j c ointly b t onducted M o F ay r he inistry
o o o t f inance
large international accounting firms, under the auspices of a World Bank project”.
Davidson(1996) asserted that “the close ties between accounting and the socio-
economic-political environment can be seen very clearly
52
(1996). China's social-economic structure reform process transformed the e

structure from a centrally planned and controlled economy
economy with a socialist characteristic. As a result the basic function of accoun
information shifted from implementing macroeconomic planning a
national a t dssets m o b ecision e m aking a e y m nterprise H an
r e co gn i z e d t h e f o l l o wi ng e c on om i c r e f or m s h a d i m p
accounting: the separation of ownership and management of enterprises; change in the
banking system since 1978; and the open-door policy.
Field and Pendrill(1998), hypothesized thatthe reason why China’s accounting
s y s t e m n e se dt o b e r e f o r m e d i s b e c a u s e o f t h e r e f o r m o f C h i n a ' s e c o n o m i c s y s t e
w h i c h dh m a o v e d f r ao m c e n t rl ya lp l a n n e d e c o n o m i c s y s t e m t o s o c i a l i s t m
economic s T ystem.
i s hey e llustrated
o e c ome
s a f xamples
i n v e s t m e n t a n d j o i sn tt a tv ee ne tnut reer sp, r i s e s b e i n g g i v e n a u t o n
operational and financing activities, the setting up of the company with share capital
and so on. Such changes in the economy necessitated changes in
system.
Chan (1999), after briefly reviewing China’s accounting history, explicitly stated
that “economic reform mandates changes and developmen
accounting practices, and accounting education”, “China’s accounting develop
have already followed economic reform”. He illustrated that the re-prosper of China’s
accounting profession, accounting professional organization,
and so forth are all the result of response to the economic reforms.
Nobes and Parker(2000:308) conceived that China’s accounting developments
had b eend briven
d ey ramatic
r w bconomic
i 1 a t eforms,
C hich
Revolution e i 1 nded D fn E976. E ifferent
C a rom r astern
had n otb aeen ccompanied
b m p r y C ajor h m olitical
f ap eforms.
socialist model to a socialist market econom y, in order to meet the requirement of the
new economic system, such as the separation of management of business enterprises
from o wnership,
f i oreign
t r o nvestment,
b s t d he eform
o f
s e c u r i t i e s m a r k e t s e t c . , p a r
investors，China’s accounting has moved from the funds based accounting system to
a more Western accounting model.
T a n g( 2 0 0 0 ) c o n f i r m e dt ht eh ant e w 1 9 9 3 f i n a n c i a l r e p o r t i n g a n d a c c o u n t
system w as t h e r e s u l t o f a c o m b i n a t i o n o f f o r e i g n i n f l u e n c e s a n d d o m e s
economic reforms. The pre-reform state control and tax driven finan
s y s t e md hb ae e n g r a d u a l l y t r a n s f o r m e d i n t o a c a p i t a l m a r k e t
re port ing syst em . And t he dri ving f orce s under lyi ng t hese change s are t he ec onom
53
reform of state-owned enterprises, the development of capital market and the increase
in foreign direct investment.
C a r n e g( i2e0 0 0 ) s a w t h a t t h e i s s u i n g o f C h i n a ’ s A c c o u n t i n g
Business Enterprw i saessp a r t o f t h e r e f o r m s n e c e s s a r y t o d e v e l o p C h i n a ’ s s o c i a l i s
market economy.
Y u a n( 2 0 0 0 ) e x p l a i n e d r e a s o n s o f C h i n a ’ s a c c o u n t i n g e v o l u t i o n
of:
( 1 )C h a n g e o f p u b l i c a d m i n i s t r a t i o n f u n c t i o n , w h i c h t h e r o l e o
authorities in economy has changed from the direct controller of economy to indirect
actor; from the enterprise’s operator to one of the owners; and from the only user of
accounting information to one of man;
( 2 )D i v e r s i f i c a t i o n o f e n t e r p r i s e o w n e r s h i p f o r m s a n d i t s o p
include diversity ownership forms such as state-owned and colle
private enterprises, mixed-ownership enterprises and joint ve
operations such as cross-sector and multinational groups, stock operation;
(3)Economic opening to the outside, which resulted in China’s becoming
second destination of international investments after the United States, and
eleventh in import and export activities, and issuing s
international market.
From the literature concerning economic influential factors on accounting, it can
b e r e c o g n i z e d t h a t t h e i n f l u e n c e o f e c o n o m i c f
concentrated on the contents of China’s accounting system and re
works are descriptive statements based on the background of China’s recent economic
reform since 1979 and accounti ng reform since 1992. From t hese st atement s we can
recognize t e he f conomic
i o a actor’s m nfluence
w t i n ccountin
accounting context, which is analyzed above, such factors as the types of econo
s y s t e m , t h e s t a g e o f e c o n o m i c d e v e l o p m e n t , b a s i
government involvement, source of funds and working capital, degree of international
business activity, business innovations and complexity of business, can be fo
China’s contexts. Except economic factors, Zhang (1996) recognized the inf
from the governmental and international forces. There is
encompassing the entire period of China’s accounting developme
factors w a hile i t nalyzed l T s n he
i a iterature.
t f t v he
o t uspect
conclusion while applying it to the whole period of China’s accounting development
since 1949. Further analysis will be needed in order to summarize China’s accounting
development process since 1949.
54
● Ideology a p nda t olitics

d i re fhe oominant
Chinese accounting development
S o m e r e s e a r c h et rhse o r i z e d t hiadt e o l o g y p l a y s a l e a d i n g r o l e i n t h e p r o c e s s o f
China’s accounting development. Representatives include Lou (1987), Lin and Deng
(1992) and, Blake (1995).
Lou ( 1987),f an institutional
rom p o v oint
e that
f t iew, e he
xistenceo xplained
t f he
Department of Administration of Accounting Affairs within the Ministry of Finance,
which is quite different from West, is because of “the outcome of th
thought that finance of state enterprises in a socialist country is one aspect of publi
finance, and that accounting is a m eans to facilit ate efficient functi oning of busine
finance in a narrow sense and thus to contribute to sound public finance in a broader
s e n s e ” . T h e i n f l u e n c e o f t h i s n o t i o n , w h i c h h a s p trhe evPa iRl Ce d f ionr m o r e t h a n
thirty years, can be traced in accounting practices, especially in uniform accou
s y s t e m s ” ( 1 9 8 7 : 3 ) . A n d “ U n i f o r m a c c o u n t i ndg a s y as t reems su l at r oe f e n f o
centralized control exercised over accounting affairs nationwide with the purpos
gathering consistent, comparable, and uniformly measured account
is c loselyc oordinated
w p f itha s lanning,m inancial,
( nd
He highlighted “Both accounting and auditing theories are d
ideological foundation of Marxism-Leninism. Marxist-Leninist po
have f ar-reaching
e o t f ffectsa d n he o a ormation a a nd evelo
theory. Definitions of some basi c account ing t erm s are directl y linked to t he not ion
elaborated in Marxist-Leninist political economics. It is explicit
Marxism-Leninism is the guiding philosophy which should be empl
whether a particular theory is acceptable in accounting” (1987:4).
From Lou’s description, strong governmental and political influences on China’s
accounting can be clearly recognized.
L i n a n d D (e1n9g9 2 ) r e m a r k e d : " T h e n a t u r e o f a c c o u n t i n g
something that is intrinsically ideological"(cited in Blake, 1995).
B l a k( e1 9 9 5 : 6 , 7 ) , i n “A h i s C ah ri tn i ec sl ee , P e r s p e c t i v e o n I n t
Variations i A n ”, d ccounting
rawsa l o i ist f v nternational
i a w ariations
include:
1. Source of finance;
2. Economic environment;
3. Economic consequences;
4. Nationalism;
5. Other countries influences;
6. Tax accounting link;
55
7. Different user groups;

8. Legal context;
9. Language;
10. Influence of theorists and professional bodies;
11. History.
H e t h e na p p l i e d a l l t h e s e f a c t o r s t o C h i n a ’ s a c c o u n t i n g c o n t e x t ; m o
identified a new factor as ideology, which is particularly suited in China’s case. And
further evidence is given that the importance of ideology is emphasized in university
accounting education and admission to the accounting profession. Po
w h i c h i s a c t u a l l y a p o l i t i c a l i n d o c t r i n a t i o n , i s
f a c u l t y i s u s u a l l y c o m pt hr iosseed wohaf or e a s s i g n e d t o d o p o l i t i,c aa nl dw o r k
c o n s is slta r g e l y o f l e a r n i n g a b o u t r e c e n t p o l i t i c s a n d d o c u m e n t s a p
Chinese Communist Party. The candidate sitting for the qualification
administered by a national body approved by the Ministry of Financ
Chinese citizen who loves the People’s Republic of China and support the so
s y s t e m ( 1 9 9 5 : 1 7 ) . H e “ ct ho en cal du od pe tdi :o n o f W e s t e r n a c c o u n t i n g
responds to a development in Chinese political theory and takes pl
context of socialist principles”(1995:18). And he declared, “the Chinese ex
offers a range of insights into Western perceptions of the international enviro
and, in explicit recognition of the role of ideology in the development of accounting
practice, adds a dimension to that perception” (1995:18).
From these arguments political philosophy’s influence on ac
clearly recognized. Cheng (1980), Gao (1995), Ren (1995) and Andy (1999) explicitly
stated China’s accounting is strongly influenced by China’s politics.
C h e n g( 1 9 8 0 : 7 6 ) e m p l o y e d t h e t o p i c o f ' ' p o l i t i c a l a c c o u n t i n g ” i n C
concluded: "The People's R epubli c of Chi na empl oys accounting to achi eve nationa
economic and political goals".
G a o( 1 9 9 5 : 3 1 1 ) d e m o n s t r a t e d t h e p o l i t i c a l i n f l u e n c e o n C h i n
education and accounting research to support Cheng’s “political accounting” in China.
F r o mt h e a s p e c t o f a c c o u n t i n g e d u c a t i o n , G
: Po
a ol isttiactaeld i n f l u e n c e i s e v i d e n t
throughout C a hina’s e ccounting
f t u s ducation, a aw t t rom he
a c c o u n t i n g d e g r e e p r o g r a m ,
research. China’s university is politically influenced and serves ideological as well as
social purpose, which is realized by the Communist Party of China (CPA) structure at
the u niversity, w o phich t t perates a s arallel T C o b he dministra
serves as a vehicle for educating academics in Party beliefs, as a source of in
control t e o t nsure
d a a hat l wecisions t u ta cll evelsw t ithin
goals o t sf ahe t P tate a nd a a ‘ he s arty, h nd t p s t runion afeg
56
of teachers and students by providing an appeal mechanism in and dispute with parties
(Gao, 1995:311).
F r o mt h ea s p e c t o f a c c o u n t i n g r e s e a r c h , G a o i l l u s t r a t e d t h a t h i g
‘pure’ academic journal in China, Accounting Research, the official jo
Chinese A ccounting
A p ssociation,
m p o ublished
p a w a any
speeches by Communist and government officers, which were usually considered
provide the theoretical background to accounting research in Ch
Ac c o u n t i n g r e s e a r c h i n C h i n a h a s r a r e l y e m b r a c e d s c i e n t i f i c m e t h o d s a n d i s l a
based on government policy and simple-minded descriptions of 'what is' and 'what to
do'". M pany a ublished i b a rticles
j a np oth m cademic a ourna
no more than political propaganda”(Gao, 1995:311).
Ren (1995) a sserted
t t e hatc hei C normous e e hanges n
could not happen without political change, especially in China where political control
is e xtremely p It i owerful.
ts true C hat p hinese
m a s colicy a akers re
p o l i t i c a l r ,e fb ou rt mt h e r e h a v e b e e n s o m e c h a n g e s r e g a r d e d a s e s s e n t
i m p l e m e n t a t i o n o f e c o( n1 o9 m 9 5i c: 2 r4e9f )o. r m
He thought accounti
was the natural reaction to a changing socio-economic and political environment. And
“the b alance
b C etween s i hina’s
a i c ocialist
e s deology
w nd
depend on economic reform which, in turn, depends on political reform” (1995:259).
Andy Ng (1999) conceived that China’s accounting standards were incompatible
with i nternational
s , a ndt rtandards
he f easons
t i or l hisi t ncompatibility
p
economic, s a c ocial s ndo t ultural
P H a ystems
" p sf hei RC.
the most significant underlying factor affecting the pace of development of accounting
standards in the PRC"(1999:32). Under the PRC’s socialist accounting system, which
was consistent with the Marxist view that private ownership, ideally, should not exist,
the primary goal of accounting used to be budgetary control of appropriated resources,
rather than the measurement of an enterprises’ operating performance and reporting of
corporate financial condition, the balance sheet emphasizes the all
resources to the entity rather than the reporting of the financial position of the entity.
F r o m m u c h o f t h e C C P ’ s h i s t o r y , t h e e c o n o m y h a s
c e n tr e; a c c o u n t i n g r u l e s w e r e u s e d m o r e a s a m e a n s o f i m p l e m e n t i n
economic policy and maintaining administrative control over production.
Graham ( 1997)a sserted,
from 1 949t the 1980s, o “ economic
a p e nd olitic
had a dram a ti c i nf lue nce on acc ount ing pr act i ce , espe ci al l y in t he 1960s a nd 1970
( 19 97 : 24 9) . H e i l l u st r a t e d s om e ce evit do esup
n po r t t hi s p oi nt of vi ew , s uc h a s “ t h e
dominance of state-owned enterprises in the economy, a
movement of the Great Leap Forward of the late 1950s and the Cultural Revolution of
57
the m id-1960s t a argeted

f r s ccounting a r or a radical implific
existing theory of that time as taught in the universities”(1997:249).
The literature concerning the influence of ideological and politic
C h i n a ’ s a c c o u n t i n ea
g lrse vt h a t i d e o l o g y a n d p oc loi ut il cdas f f e c t n o t o n l y C h i n a ’ s
accounting standards and accounting practice s, but also accounting theory, accounting
research and accounting education. This effect has permeated i
C h i n a ’ s a c c o u n t i n g d e v e l o p m e n t . C h i n a ’ s c a s e m a y
international accounting context.
The a bove
r c esearch a b onclusions
o t e f ore a ased o o n he
p e r i o d , w i t h o u t i n t e g r a t e t h
China’s accounting development, so there still need a systemic and entire illustration
and analysis to conclude the political influence on China’s accounting development.
● Some Chinese points of view

In Chinese literature there are also some articles discussing China's accou
environment a C a nd hina's
c T ccounting
h t i C haracters.
a he
research is the issue of the Chinese accounting theory and practice with di
Chinese c haracteristics.
In D ecember2 the Accounting
000 S o C ociety c f hina
a s e m i n a r , w h o s e t owpai sca c c o u n t i n g t h e o r y a n d m e t h o d s y s t e m s w i t h d i s t i n c t i v
C h i n e s e c h a r a c t e r i s t i c s . IVin c etHe h ea ds eomf i tn ha er , D t eh pe a r t m e n t
Administration of Accounting within the Ministry of Finance, and also the secretary-
general of Accounting Society of China, Liu Yuting concluded, "the environ
influencing factors on characteristics of China's accounting are political and economic
environment, l a i egal e nd nstitution
e d nvironment,
l a c duc
environment" ( 2 ASC,
A Z ( 001:52).c t nd " hu
t m 2001:23)
i n f l u e n c e o f C h i n a ' s p o l i t i c a l , e c o n o m i c , l e g a l
characteristics of Chinese accounting, or the feature of the model of socialist marke
economy should primarily demonstrate these aspects, that is its theoretical basis is the
theory o D fX eng i p iaoping's, d i t s ts olitical
i a sirection s
must be centralized, its accounting work must be continuously
Ministry department of State Council, and its unity of state accounting will be realized
by constrain of law and regulation as well as ethic system and norm o
ideology". Zhu's argument has got consensus in the special seminar.
This seminar set the basic tone of China’s accounting development both from the
Chinese g overnment
a C A nd R hinese
S I i ccountingt C esearc
accounting i s u st ttill c ndero t C he a C ight g ontrol P f he CP
ideology is an ever going highlight during China’s accounting development.
58
T h e l i t e r a t u r e b o t h i n i n t e r n a t si or ne av le aaa ltn dt h i n
environmental factors such as culture, economic, ideology and politics are highlighted
as the influential factors on China’s accounting development. While legal, educational
a n d p r o f e s s i o n a l f a c t o r s a r e n o t r e c o g n i z e d a
the Chinese context.
C u l t u r e ’ s i n f l u e n c e o n
include China’s accounting theory, accounting system and accounting institution. But
t h i s c o n c l u s i o n i s b a s e d o n b o t h C h i n e s e
c u l t u ,r et w o a s p e c t s w i t h o u t c o n s i d e r i n g t h e o t h e r f a c t o r s . M o r e o v e r Z h a n g
referred to the state theory, the class theory, Marxism,the andCultural Revolution as
m o de r n c ul t ur e . T hi s c l a s si f i c a t i on i s q ui t e s us c e pt i bl e ; i t w ou l d be m o re su i t a b l e
classify t f hesei p actorsp nto B olitical
t C hilosophy.
c m eside
p l a ya ver y i m p o r t a n t p a r t i n s h a p i n g C h i n e s e a c c o u n t i n g m e t h o d s , b u t f o r m o
C hi ne s e a c c ou nt i ng t h e r e i s n o e vi d e nc e t o sh ow c ul t ur e ’ s i m p or t a n t r o l e . Th us i t
unilateral t a o c rbitrarily t c p onclude
a i p hati d ulture t lays
accounting system. While quite obviously, various economic factors
accounting can be found in Chinese context, the eviden
contemporary Chi na’s economi c reform. Economi c factors determine the contents o
China’s accounting system.
It is worth note that political philosophy and Chinese politi
C h i n a ’ s a c c o u n t i n dg i hn at ov e e vp e r ym ea as t pe e c t o f C h i n a ’ s
development since 1949, and much evidence can be found in literature.
Based upon the literature review on influential factors on China’s
development, it can b ec oncluded t hatt aheres s re s tilll s b omeetweenp trong olitics ink
and accounting in China. As Hilmy concluded , “there is a close link between political
philosophy and its impact on economic goals, structure and g
p r o v i d e s t h e i n d i c e s a n d p a r a m e t e
(Hilmy, 1999:505).
A s t o w h a t e x t e n t a n d t o w h a t s t r e n g t h e ascihn fflaucet no crh’ea s o nC h i n a ’ s
accounting at different period s, and whether there are other factors that have not been
r e c o g n i z e d , s t i l l n e e ed x fpul ro trha e.t ri Ionn o r d e r t o h a v e a n i n s i g h t o n C h i n a
accounting development, it is important to have a good understandin
political and economic structure first. Just as Enthoven (1987:209) states: "It is hard to
comprehend C a hinesew a cccountingu o b ithout i h a lear nd
r e ce n t (s i n c e 19 49 a n d 19 79 ) e c o -p ol i t i c a l de v e l o pm e n t s. T he s e h i st or i c a l t r e nd s
extremely significant in trying to grasp the current Chinese accounting system, while
Chinese a ccounting
h i o c as r ts wn
f t haracteristics
d T esultin
concept of social consciousness is a line that runs through Chinese accounting". The
59
n e x t c h a p t e r w i l l g i v e a n i n t r o d u c t i o n o f b a c k g r
development.
60

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Environmental factors in China’s Financial Accounting Development since 1949

In international accounting research, environmental i

international accounting practices using the Price Waterhouse surveys o

● Mueller’s classification and its development

Furthermore h et ested t c his s lassification

● Hofstede’s culture model and his following

(Source: S.J. Gray, “Towards a Theory of Cultural Influence on the Development of

integration. “Accounting systems and practices can influence and reinforc

(Source: S.J. Gray, “international Accounting Research: The Global Challenge,”

1. Professionalism versus statutory control. This value reflects a preference for

is unlikely to be appropriate , as these countries typically have inadequate professional

5. The state of accounting education and research;

cross-cultural research, and their impact on accounting research is fundamental to an

2.3 Evaluations on the Environmental Influencing Factors

2.3.1 Political Factors

Systems Political Tutelary Modernizing Totalitarian Traditional

subject to corruption decrees handpicked

In socialist countries it is often politically expedient and desira

2.3.2 Legal Factors

Germany, company accounting is to a large extent a bran

niceties of accounting theory. Income tax evasion is frequently grounded in distortions

2.3.3 Economic Factors

Types of economic systems

Basic economic orientation and degree of government involvement

The stage of economic development

Inflation is often associated with economic growth and is a major influence

Source of funds and working capital

Source of funds and working capital may be decided by economi

Business innovations and Complexity of business

firm. Similarly, a large firm mounting an extensive advertising campaign directed at a

Levels of sophistication of business management and the financial community

Degree of international business activity

2.3.4 International Factors

Thirdly, international organizations, such as the United Nations (U

2.3.5 Cultural Factors

Attitude towards business

Attitude toward accounting

2.3.6 Educational Factors

to be used effectively because of the limited ability of employees t

The orientation of the educational system also plays a p

Finally, the educational match influences accounting system development to the

2.3.7 Professional Factors

depend on the existence of a sound infrastructure of acc

2.4 Literature Review ConcerningEnvironmental Influencing

d e v e l o p m e n t , i s q u i t e l si pt ea rr as tei us. r dM e eos sc t r i p t i v e w i t h o u t a n y f

● Culture is the dominant factor

(1996). China's social-economic structure reform process transformed the e

● Ideology a p nda t olitics

7. Different user groups;

the m id-1960s t a argeted

● Some Chinese points of view

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