Accounting Regulation Financial Development and Economic Growth

Emerging Markets Finance and Trade
ISSN: 1540-496X (Print) 1558-0938 (Online) Journal homepage: https://www.tandfonline.com/loi/mree20
Accounting Regulation, Financial Development,

and Economic Growth
Orhan Akisik
To cite this article: Orhan Akisik (2013) Accounting Regulation, Financial Development,
and Economic Growth, Emerging Markets Finance and Trade, 49:1, 33-67, DOI: 10.2753/
REE1540-496X490103
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Accounting Regulation, Financial Development,
and Economic Growth
Orhan Akisik
ABSTRACT: This paper examines the relationship between accounting regulation, financial
development, and economic growth in fifty-one developed and emerging market economies
over the period 1997–2009. Accounting regulation has been the center of long-lasting de-
bates in the accounting profession. The debates came to the forefront after several spectacu-
lar financial reporting frauds and scandals in the early 2000s damaged public confidence
in capital markets. Using generalized method of moments estimation techniques, this study
provides evidence that accounting regulation has a strong effect on economic growth even
after controlling for a number of macroeconomic and socioeconomic variables.
KEY WORDS: accounting regulation, accounting standards, economic growth, financial
development.
This paper examines the relationship between accounting regulation, financial develop-
ment, and economic growth in fifty-one developed and emerging market economies over
the period 1997–2009. Ongoing debates have been taking place about the impact of regu-
lation on economies. In general, regulation is designed to facilitate the development of
competitive markets and achieve social and public goals. These goals include protection
of the environment, protection of workers’ and consumers’ rights, and enforcement of
competition laws and accounting and auditing rules (Graham and Woods 2006). However,
deregulation has been emphasized in the literature over the past three decades based on
the argument that it allows for competition that benefits consumers and increases eco-
nomic efficiency (Winston 2006). In light of this argument, some developing countries
have remained reluctant to regulate their economies because regulation is believed to
slow down the inflow of foreign investments, which are required both to finance current
account deficits and to offset the negative economic impact of lack of domestic invest-
ment (e.g., Graham and Woods 2006).1
Despite substantial deregulation in many sectors, the accounting profession has been
undergoing reregulation, especially since the 1990s, as a result of both globalization and
financial reporting scandals. The latter, in particular, caused private and public regula-
tory agencies to enhance their efforts to improve accounting regulation to assure public
confidence, which is necessary for financial development (Day 2001; Schaefer and
Zimmer 2003). Financial development refers to an improvement in financial structure that
facilitates the exchange of goods and services, enables efficient allocation of economic
resources among alternative uses, monitors managers effectively, exerts corporate control,
and mobilizes savings. In addition to these functions, financial development helps trad-
ing, diversifying, and pooling of risk (Goldsmith 1969; Levine 1996, 1997; Özatay and
Sak 2002).2 Rajan and Zingales (1998) define financial development as better accounting
Orhan Akisik (akisik@isenberg.umass.edu) is a lecturer in the Department of Accounting and

Information Systems, Isenberg School of Management, University of Massachusetts–Amherst.
The author is grateful to Christopher F. Baum, Anna Blank, Udi Hoitash, Can S. Mugan, Süleyman
Özmucur, Gary J. Previts, Karen Teitel, Erinç Yeldan, and two anonymous referees for thoughtful
suggestions and comments.
Emerging Markets Finance & Trade / January–February 2013, Vol. 49, No. 1, pp. 33–67.
© 2013 M.E. Sharpe, Inc. All rights reserved. Permissions: www.copyright.com
ISSN 1540–496X (print) /ISSN 1558–0938 (online)
DOI: 10.2753/REE1540-496X490103
34 Emerging Markets Finance & Trade
and disclosure rules and better corporate governance, which reduce the spread between
domestic and foreign cost of capital and stimulate economic growth. Financial devel-
opment, which is necessary for economic growth, requires a sound financial reporting
system that produces reliable and transparent accounting information for both domestic
and foreign investors (Larson and York-Kenny 1995; Nobes and Parker 1995). Lack of
credible financial reporting systems is likely to have adverse effects on the ability of
countries, especially developing ones, to attract foreign investments, because it retards
development of equity markets (Saudagaran and Diga 1997).
One of the major areas of accounting regulation is accounting standards. In addition
to developed countries, a number of emerging market countries have recently adopted
the International Financial Reporting Standards (IFRS), a set of high-quality accounting
standards, in order to increase their share of foreign investments. Foreign investments are
considered important for sustaining economic growth. High-quality accounting standards
are likely to play a crucial role in bringing about better-functioning capital markets (Scott
2009). However, adoption of high-quality accounting standards may be insufficient if
they are not supported by an effective regulatory environment. An effective regulatory
environment consists of a legal framework, good auditing and ethical standards, and
competent accounting professionals, whose expertise is closely related to the quality of
education and licensure requirements.
Some prior studies have examined the impact of accounting on economic growth
using disclosure quality, accounting information adequacy, or accounting standards (e.g.,
Bekaert et al. 2005; La Porta et al. 1998; Larson and York-Kenny 1995; Levine et al. 2000;
Rajan and Zingales 1998; Riahi-Belkaoui 2002).3 However, to the best of my knowledge,
there is no study that examines the effect of accounting regulation on economic growth
through its impact on financial development. Essentially, this study aims to fill this gap
in the literature empirically by using a large set of developed and emerging market coun-
tries. In the study, accounting regulation is measured by both accounting standards and
an accounting regulation index constructed based on the responses to survey questions by
member organizations of the International Federation of Accountants (IFAC). A general-
ized method of moments (GMM) estimation procedure indicated that economic growth
is strongly associated with accounting regulation, even after controlling for a number of
macroeconomic and socioeconomic variables, such as government consumption expen-
ditures, tariffs, inflation, trade openness, population growth, and schooling years. The
results show that accounting regulation affects growth not only directly but also indirectly
through its impact on financial development. Although stock market development usu-
ally has a positive effect on growth, its effect turns out to be negative in countries where
accounting practice is highly regulated. Furthermore, domestic credits by the banking
sector are positively related to growth. However, the interaction of domestic credits with
accounting regulation has a negative effect on growth. These findings are important for
a number of parties concerned with accounting regulation and its impact on economic
growth, such as private and public regulatory organizations, investors, creditors, and the
general public.
Theoretical Background and Hypotheses Development

A Historical Perspective on Accounting Regulation
Generally, regulation can be defined as rules designed to control human behavior. It is
argued that today the state has more responsibility for economic and social regulation in
January–February 2013 35
developing countries than in developed ones (Cook and Mosedale 2007). According to
Stigler (1971), regulation is acquired from private and public regulatory agencies by an
industry and is designed and operated primarily for its benefit. However, it can also be
instituted for the protection and benefit of the general public.
Although we live in an era of deregulation, accounting practice is highly regulated to
reduce asymmetric information and protect market participants, in particular investors,
from any wrongdoing of managers (Riahi-Belkaoui 1995; Scott 2009). Essentially, there
are two types of regulation in accounting: private sector and public sector. Private-sector
regulation is based on the idea that the public interest in accounting may be best served
if standards setting is left to the private sector. For example, accounting standards have
been issued by private organizations in the United States for the past sixty years.4 Private
regulation occurs when accounting firms set and enforce their rules and regulations in
order to enhance the efficiency of services rendered and to comply with professional
standards, whereas public regulation refers to the enforcement of laws and regulations
by the state to deal with fraud and gross negligence.
There is consensus among accounting professionals that private regulation is the more
effective form (Riahi-Belkaoui 1985, 1989). In fact, private regulation is an extension
of self-regulation, which is regulation designed and enforced by professional organiza-
tions such as the American Institute of Certified Public Accountants (AICPA). There has
been a trend toward self-regulation in crafts and professions, including the accounting
profession, because self-regulation is designed to render high-quality service to clients.
Another important reason for supporting self-regulation is that it may contribute better to
the development of the profession: Self-regulatory organizations can usually command a
greater degree of expertise and technical knowledge of practices within the relevant area
than a public agency. A second advantage is that the rules issued by a private body are
less formalized than those of public regulatory regimes. This informality reduces the cost
of rule making, facilitates quick adaptation of the rules to new technical knowledge and
changing economic conditions, and permits more flexible enforcement. Another attrac-
tion of self-regulatory organizations is that the administrative costs of self-regulation
are normally internalized in the trade or activity that is subject to regulation, while the
costs of public agencies are typically borne by the taxpayer (Majone 1996). In contrast
to these views that favor self-regulation, Walker (1993) argued that there is evidence in
international accounting history that regulation is more stable and enjoys greater respect
within the community if it results from the joint efforts of both government agencies
and the profession. This implies a disadvantage of self-regulatory organizations, stem-
ming mainly from their unwillingness to publicize and punish wrongdoers. To resolve
this issue, a two-tier system in which a public agency oversees the self-regulatory orga-
nization has been proposed (Caplan et al. 2006; Kay and Vickers 1990; Majone 1996).
For example, Hilary and Lennox (2005) argued that the Public Company Accounting
Oversight Board (PCAOB), created by the Sarbanes–Oxley Act of 2002, resulted from
the idea that self-regulation of the accounting profession failed to protect the investing
public from financial accounting fraud.
Accounting regulation focuses on financial accounting. Financial accounting is an
essential means to provide useful financial information to external users such as inves-
tors, creditors, customers, and government agencies for their own decision making. Since
financial information is provided by managers, they have better information about risk
and returns of activities than users of financial statements. Moreover, there are conflicts
of interest between managers and users of financial statements, and conflicts of interest
are resolved in favor of the former since the latter can neither control a firm’s resources
nor evaluate managerial performance (Jensen and Meckling 1976; Wagenhofer 2004). The
information asymmetry and conflicts of interest between managers and users of financial
information can be alleviated by accounting regulation. From this follows the question
of how the accounting regulation should be structured. To put it differently, what are the
components of accounting regulation?
Areas of Accounting Regulation

Accounting regulation consists of a legal framework, standards, education, and licensure.
A legal framework is fundamental to accounting regulation. It determines the types of
entities available under the law. In addition, the law often imposes statutory requirements
for business entities to prepare financial statements and specifies whether financial state-
ments must be audited. Moreover, the legal framework determines working conditions
of auditors. In many countries, the legal framework influences accounting practices. For
example, laws detail accounting regulations specifying comprehensive accounting rules
and procedures (Iqbal 2002). When there is no legal requirement for companies to comply
with accounting standards, accounting standards are unlikely to have a major influence on
financial reporting systems, since companies use different accounting policies in prepar-
ing and presenting financial statements. As a result, it would be difficult for investors to
meaningfully compare financial statements of different companies (Hossein 2007).
The second area of regulation is standards: accounting, auditing, and ethical. Account-
ing standards are recognized internationally as a way of ensuring the reliability of financial
statements (AlHashim 1980; Buckley and Weston 1980; Day 2001; Riahi-Belkaoui 2002).
For example, the IFRS comprise a comprehensive set of neutral principles that ensure
comparable, consistent, relevant, and reliable financial information that is useful for inves-
tors who make decisions about the allocation of scarce resources in capital markets.
However, it should be noted that good accounting standards may be insufficient if there
are no qualified accountants or auditors who successfully meet education and licensure
requirements (Abraham 1978; Radebaugh and Gray 1993). Iqbal (2002) argued that
accountants in countries with high educational standards are usually better trained and
possess the necessary competencies and skills to satisfactorily complete their professional
assignments. This suggests that in emerging market economies, sustained economic
growth cannot be achieved without having sound accounting regulation along with appro-
priately trained accounting professionals (Johnson 1996; Radebaugh and Gray 1993).
In many emerging economies, accounting regulation became important after the 1990s
as a result of globalization of economic activities (Haller and Walton 1998). The globaliza-
tion process requires that emerging market countries overhaul their accounting systems
in order to better compete with one another to attract foreign investments, which should
ensure the sustainability of economic growth. Globalization also encourages regulators
in many countries to cooperate with one another to reduce information asymmetry and
to better address the needs of investors (Legenzova 2007).
One of the immediate effects of the collapse of communism and of the political and
economic transformation in the former Eastern bloc countries in the 1990s was seen in
accounting regulations and practices. The old accounting practices and methods were
no longer appropriate (Borda and McLeay 1996). Given the weak private sectors in
the Eastern bloc countries, governments attempted to regulate accounting systems by
enacting laws and decrees (Richard 1998). Accounting and economic reforms focused
on transforming a centrally commanded economy into a market economy. Commercial

codes and business entity laws were reintroduced throughout the former Eastern bloc
countries in an attempt to establish the legal framework underlying a sound accounting
system. The goal was to achieve integration of these countries with the rest of the world
and to regulate business activity (Ball et al. 2000; Garrod and McLeay 1996). In addition
to establishing a legal framework, some emerging economies have adopted the IFRS or
harmonized their national accounting standards with the IFRS. There was an increasing
preference in these economies to use the IFRS, as it became mandatory for companies
listed on European stock exchanges to prepare their consolidated financial statements
in compliance with the IFRS starting in 2005 (Chorafas 2006; Hung and Subramanyam
2007).
Several benefits accrue from using the IFRS. First, use of a single set of high-quality
accounting standards enables investors to easily compare financial statements of firms
in different countries. Second, use of the IFRS should reduce investment risk and cost of
capital. Third, the IFRS should facilitate efficient allocation of capital across countries.
Fourth, it should encourage investors to look for investment opportunities abroad by
reducing home-country bias (Benston et al. 2006).
In an effort to make accounting education standards more uniform among countries, as
of 2005 the IFAC required member countries to regulate accounting education in accor-
dance with the education guidelines of the International Accounting Education Standards
Board. Member countries are instructed to design accounting education in such a way
that professionals acquire not only technical knowledge and proficiency but also ethical
standards in order to provide high-quality service (International Education Standard—
IES: 2; www.ifac.org/sites/default/files/publications/files/introduction-to-internation.pdf).
In addition to providing technical knowledge and skills, the formal accounting education
at the college level provides an introduction to the professional culture. The professional
culture consists of the qualities and ideals that accountants possess and the habits they
follow in serving their clients. Observance of the professional culture may also have a
positive effect on the development of capital markets by ensuring that accountants make
every effort to ensure that companies competently provide objective information and
advice to facilitate decision making in market economies (Moehrle et al. 2006).
Ethical standards are an indispensable aspect of accounting regulation. It is inadequate
for members of the profession to become competent in performing their jobs (Abbott
1983); they must also abide by ethical rules and standards in order to maintain their profes-
sional status (Windal and Corley 1980). Society grants professions authority because of
their specialized knowledge and commitment to comply with ethical rules and conduct.
However, ethical codes are generally viewed as minimums, as they do not necessarily
represent the best measure of proper activity in particular circumstances. Reliance on
ethical codes or regulations may not be sufficient. Beyond that, accountants should try
to reach higher ethical standards in order to become “true” professionals. This requires
accountants to not offer any services for which they do not have necessary skills and
competence, although they have a license (Moehrle et al. 2006).
Licensure enables accountants to enjoy formal recognition in society. According to
Colbert and Murray (2003), information asymmetry is one major factor that requires
government intervention in the form of professional licensure. In general, accountants
must pass a licensing examination in order to obtain a license. However, licensure may
not be sufficient, and some countries require members of the profession to participate in
continuing education programs (Moehrle et al. 2006).
Stock Market–Based Financial Development and Growth

Prior research on the relationship between stock market–based financial development
and growth reports contradictory results. For example, in a cross-sectional study for
thirty-nine countries over the period 1980–88, Atje and Jovanovic (1993) found a close
association between stock market–based financial development and growth, suggesting
that stock market activity leads to economic growth. Classifying countries into devel-
oped and developing ones, Harris (1997) found that there is no evidence of a strong
relationship between stock market–based development and growth (see also Filer et al.
2000). Furthermore, Harris showed that stock market activity has a greater impact on
economic growth in developed countries than in developing ones, though this impact is
not statistically significant.
Sedaghat et al. (1994) documented that economic development, which is measured by
real gross domestic product (GDP), is positively and significantly related to stock market
development. They argued that the existence of a well-organized, efficient stock market
depends on (1) the transition from public to private ownership, (2) resolving accounting
and reporting issues, (3) educating the public to prevent a negative effect of a newly estab-
lished stock market on the economy, and (4) maintaining public confidence. In particular,
resolving accounting and reporting issues is important for integration of international
capital markets since this helps reduce or eliminate asymmetric information by ensur-
ing transparency. Larson and York-Kenny (1995) examined the relationship between the
adoption of international accounting standards (IAS), equity market development, and
economic growth in twenty-seven developing countries. They found no evidence that
equity market development due to the adoption of IAS affects economic growth.
According to La Porta et al. (1997), the development of stock markets is closely related
to the efficient protection of shareholders’ rights, meaning that an efficient corporate
governance system is required for financial-sector development (Denis and McConnell
2003). Bekaert et al. (2005) provided evidence that countries with better shareholder rights
or accounting standards achieve higher economic growth. Moreover, they remarked that
accounting standards rated higher than average contribute more to growth than below
average standards. Rajan and Zingales (1998) argued that it would be easier for firms
to raise capital from a wider circle of investors as the standards of financial disclosure
improve in a country.
Stock markets play a crucial role in today’s global economies by providing liquid-
ity to firms to finance their investments (Bencivenga and Smith 1991; Levine 1991). In
addition, stock markets produce and disseminate accounting and financial information
(Demirguc-Kunt and Maksimovic 1996). But no matter how well stock markets are
designed, they may not contribute to financial development sufficiently—or may even
affect it adversely—if they have not garnered public confidence (Sudweeks 1989). Accord-
ing to Demirguc-Kunt and Maksimovic (1996), even if stock markets are an important
aspect of financial and economic development, they have very little positive effect, and
perhaps even a large negative effect on economic growth in developing countries due to
information asymmetry between investors and managers.5 The information asymmetry,
which is closely associated with ineffective regulatory framework and legal infrastruc-
ture, impairs efficient allocation of economic resources (Andersen and Tarp 2003). To
eliminate, or at least to limit, the probable adverse effects of stock markets on economic
growth, a sound accounting infrastructure is important to maintaining the public confi-
dence (Liu and Hsu 2006).
A sound accounting infrastructure contributes to improvement of corporate governance

by reducing information asymmetry between management and investors. This arises from
two important functions of accounting infrastructure. First, it allows investors to monitor
management effectively. Second, the accounting infrastructure aids management in signal-
ing the quality of investment opportunities to investors (Hubbard and Dudley 2004). Even
if investors and managers have no agency conflicts, high-quality accounting information
enhances efficiency in allocating economic resources (Bushman and Smith 2003).
However, it has also been argued that accounting regulation may have an adverse
effect on stock markets. For example, Chow (1983) showed that the Securities Act of
1933 and the Securities Exchange Act of 1934 significantly and unexpectedly increased
listed firms’ required financial disclosure while curtailing their accounting alternatives,
thereby leading to a decrease in returns to exchange-listed stocks. Lev (1979) provided
evidence that the exposure draft by the Financial Accounting Standards Board (FASB),
which proposed to put an end to the full-cost accounting method used by oil and gas
companies, led to a decline of about 4.5 percent, on average, in the stock prices of full-cost
companies during the three-day period immediately after the release of the exposure draft.
Examining the usefulness of accounting information prepared under IAS and Chinese
Accounting Standards, Eccher and Healy (2000) documented that financial informa-
tion produced using IAS is not more useful than information produced using Chinese
accounting standards. This finding stems from the challenges of management’s nature
of judgments and enforcing accounting standards in a transitional economy.6 Moreover,
use of high-quality accounting standards may have negative capital market effects if it
reduces management’s ability to signal private information to investors or fails to fit with
the local environment as well as the prior national accounting standards (Daske et al.
2012; Elbannan 2011). Therefore,
Hypothesis 1: Stock market–based financial development has a positive effect
on economic growth. However, accounting regulation may reduce this positive
effect.
Bank-Based Financial Development and Growth

Prior research has produced mixed results regarding the effect of bank-based financial
development on economic growth. According to one view, a bank-based financial system
provides a long-term and stable source of financing by establishing a close relationship
with the management of firms to help prevent financial instability (Darrat et al. 2006;
Poterba and Summers 1992). One major characteristic of bank-based financial devel-
opment is that firms rely heavily on bank credits rather than on equity to achieve their
growth, and banks exercise an important monitoring function on the activities of com-
panies. Levine (1998, 2002) showed a close relationship between bank-based financial
development and the legal system, arguing that countries with legal systems emphasizing
creditors’ rights have better-developed banks than countries with legal systems that do
not give high priority to creditors in case of corporate bankruptcy and reorganization.
Moreover, Levine found that one major determinant of bank-based development—that
is, the legal environment—is positively associated with economic growth. Arestis et al.
(2001) provided evidence that bank-based financial development has a more positive
effect on long-term economic growth in code law countries than in common law countries
because it helps manage agency problems more effectively.7
This is an important finding because managing agency problems effectively contrib-

utes to improvement of corporate governance by effectively protecting shareholders’
rights. Sound accounting regulation may be important for stock market–based financial
development; however, it may not be particularly important for bank-based financial
development. Banks have other nonfinancial tools for evaluating the credibility of their
clients and investment projects rather than just relying on the financial statements of
their clients (Riahi-Belkaoui 1994). For example, establishing a close relationship with
the management of companies would enable banks to effectively monitor the activities
and performance of managers and owners (Schumpeter 1939). According to Lavender
(2004), effective management of customer relationships is critical to both increasing
the volume of business and minimizing risks. Relationship managers at banks obtain
extensive amounts of information on their customers and the industries in which they
operate from a variety of sources, such as business news reports, the trade press, and
industry analyst reports.
It has been argued that accounting regulation may deter firms from using bank cred-
its to finance their business activities. For example, although high-quality international
accounting standards provide uniformity in financial reporting and allow for more accurate
information for bank managers in evaluating credit applications, they may be costly to
companies because use of high-quality accounting standards leads to an increase in prepa-
ration costs of financial statements. If using high-quality accounting standards increases
the preparation cost of financial statements, demand for bank credits will decrease, and
this in turn could have a negative effect on growth. Furthermore, many aspects of gen-
erally accepted accounting principles (GAAP) do not apply to private firms, and many
accounting standards are onerous (Sinnett and de Mesa Graziano 2006).
In spite of these drawbacks to accounting regulation, it can be argued that bank-based
financial development may affect economic growth positively. However, the significant
cost of compliance with high-quality accounting standards can be a deterrent to compa-
nies’ use of credits, which leads to the second hypothesis:
Hypothesis 2: Bank-based financial development has a positive effect on economic
growth. However, accounting regulation may diminish this positive effect.
Empirical Analysis
Data and Econometric Model
The entire data set for this paper was downloaded from the World Development Indicators
(WDI) (World Bank 2010a) and the Worldwide Governance Indicators (WGI) (World
Bank 2010b), with the exception of the accounting standards binary variable and the
accounting regulation scores.
Accounting Standards
One of the major areas of accounting regulation is accounting standards. High-quality
IAS may contribute to better functioning of financial markets. Prior research provides
evidence that use of IFRS leads to higher earnings quality and more foreign investment
(Barth et al. 2005). Although a shift from domestic accounting standards to IFRS benefits
the countries involved, there is still controversy among scholars about whether there is
a qualitative difference between GAAP and the IFRS. Leuz (2003) found that there are
no significant differences between IAS and GAAP in terms of reducing asymmetric

information.
Several prior studies have measured dimensions of country-level accounting quality
using a variety of metrics. For example, Ball et al. (2000) classified seven countries based
on legal tradition into code law and common law countries. Bhattacharya et al. (2003)
classified thirty-four countries based on characteristics of financial accounting variables
of firms in each country. Saudagaran and Diga (1997) used disclosure scores for forty-one
countries. Each of these measures is likely to capture different dimensions of accounting
quality. In this paper, accounting regulation is proxied by the accounting standards binary
variable developed by Akisik and Pfeiffer (2009). Compared with other measures, this
measure of accounting quality is quite simple. When GAAP or IFRS is used to classify
countries, a potential source of misclassification is countries that arguably have a high
quality of domestic accounting standards (e.g., Australia, Canada, and Japan). They are
classified as countries with low-quality accounting standards when in fact their standards
may be quite comparable to those of GAAP or IFRS. The accounting standards variable
by Akisik and Pfeiffer rests on the classification of countries into three groups: (1) those
that require use of IFRS or GAAP (2) those that allow for use of IFRS and/or GAAP, and
(3) those that require only use of domestic accounting standards (see Appendix A).8 Con-
sidering that both GAAP and IFRS are high-quality international accounting standards,
they create an accounting standards binary variable based on the classification above as
follows: (1) countries with high-quality accounting standards (countries that require or
allow for use of IFRS or GAAP), and (2) countries with low-quality accounting standards
(countries that require use of domestic accounting standards).
Accounting Regulation
As noted previously, accounting regulation covers all of the significant aspects of the
accounting system, extending from the legal framework, to accounting, auditing, and
ethical standards, to education and licensure requirements. These are all crucial for
accounting professionals to effectively perform their duties. An improvement in account-
ing regulation is likely to affect economic growth. To examine the effect of accounting
regulation on growth, accounting regulation scores were created using the responses to
questions in a survey completed by member bodies of the IFAC either in 2005 or 2006.9
The survey consisted of questions concerning the accounting system in the respondents’
jurisdiction. Survey questions covered various components of accounting regulation,
such as legal framework, stock market regulation, education and licensure requirements,
and accounting, auditing, and ethical standards.10 Two types of questions were used:
dichotomous (yes or no questions) and multipoint questions, which took a value ranging
from 1 to 8.11
Differences in accounting regulations in member countries are reflected in accounting
regulation scores. The accounting regulation scores are constructed based on forty-five
survey questions. The maximum score that a country can obtain is 121. Some questions
have more weight because of the type of regulation. For example, in countries where
the profession is regulated by private organizations rather than the government, the
profession has higher authority. Such countries are assigned more weight. In the United
States, although the Securities and Exchange Commission has the power to regulate the
profession, it has delegated its authority to private professional organizations such as
the FASB and the AICPA. Also, countries that require continuous professional devel-
opment programs receive more weight for the relevant question than countries where
these programs are not mandatory. A higher accounting score refers just to the higher
degree of regulation; it does not necessarily indicate the effectiveness of the accounting
environment.
Appendix B reports the accounting regulation scores for countries included in the
sample. Mexico and South Africa have the highest score (91), followed by the United
States, Indonesia, and Israel.12 Greece and Jordan have the lowest scores, 49 and 48,
respectively. Although these countries obtained the lowest scores, this does not neces-
sarily mean that they have an ineffective accounting system. The primary reason why
these countries received the lowest scores is that the officials of member organizations
in these countries left some questions unanswered and the unanswered questions are
assigned a score of zero.
The model used in the study is as follows:
GROWTHit = α0 + α1 GDP_INITIALit + α2 GROWTH_LAGit + α3 REGQit
+ α4 GOVCit + α5 TARIFFit + α6 SCHOOLINGit + α7 INFLit + α8 OPENNESSit
+ α9 POPGRWit + α10 ACCTit + α11 FINDEVit + α12 ACCTi * FINDEVit + εit ,
where i refers to the country and t refers to the time period. There are fifty-one coun-
tries (twenty-four developed and twenty-seven emerging) for which data are available
on variables in the study covering the period from 1997 through 2009. GROWTHit is
measured by the annual real growth rate of per capita GDP at purchasing power parity
in 2005 constant U.S. dollars. GDP_INITIALit is the per capita real GDP of a country in
the initial year, 1997. GROWTH_LAGit is the growth rate in the previous year. REGQit is
the regulatory quality index, which captures the perceptions of the ability of the govern-
ment to formulate and implement sound policies and regulations that permit and promote
private-sector development (Kaufmann et al. 2010). GOVCit is the annual growth rate
of general government final consumption expenditures. TARIFFit is the log of tariff rate
(simple mean) of all products. SCHOOLINGit is the log of (1 + secondary school years).
INFit is the inflation rate, which is measured by the annual growth rate of the GDP defla-
tor. OPENNESSit captures the effect of openness to international trade and is measured
by the logarithm of the average of exports and imports as a share of GDP. POPGRWit is
the annual growth rate of population. ACCTit is measured either by high-quality (inter-
national) accounting standards (ACCSTD) or the accounting regulation scores (ACCSC).
Two sets of variables are used to measure financial development (FINDEVit). One is the
stock market development and the other is the financial intermediation development.
Stock market development is captured by the ratio of stock market capitalization to GDP
(MRKTC). Financial intermediation development is measured by domestic credits by
banking sector (percent of GDP) (DCRDBANK).
Results of Empirical Analysis

As noted in the literature, there may be endogeneity between financial development and
economic growth (Levine et al. 2000). A Hausman test was conducted to detect whether
or not this was an issue. The results indicate existence of endogeneity. Table 1 presents
the results of the GMM estimation technique used to test the hypotheses. GMM gener-
ates heteroskedasticity robust standard errors and is used widely in studies that examine
Table 1. GMM regression results—Dependent variable: Annual real growth rate per capita GDP (FINDEV = MRKTC)
(1) (2) (3) (4) (5) (6)
Overall Developed Emerging Overall Developed Emerging
GDP_INITIAL –0.000*** –0.000 –0.000* –0.000*** –0.000 –0.000**

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
GDP_LAG –0.000*** –0.000*** –0.000*** –0.000*** –0.000*** –0.000***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
REGQ 0.249* –0.001 0.300** 0.371*** 0.206 0.429***
(0.146) (0.322) (0.123) (0.111) (0.301) (0.102)
GOVC –0.014** 0.019* –0.012*** –0.009 0.018 –0.011*
(0.006) (0.012) (0.004) (0.007) (0.012) (0.006)
TARIFF –0.128** –0.083 –0.101 –0.125*** –0.029 –0.130**
(0.060) (0.085) (0.081) (0.045) (0.075) (0.056)
SCHOOLING 0.659*** 0.579** 0.414 0.493*** 0.677** 0.194
(0.219) (0.246) (0.278) (0.191) (0.264) (0.213)
INFL –0.001*** 0.010 –0.000*** –0.001*** 0.006 –0.001***
(0.000) (0.018) (0.000) (0.000) (0.013) (0.000)
POPGRW –0.143*** –0.019 –0.160** –0.167*** –0.062 –0.172**
(0.046) (0.068) (0.079) (0.048) (0.046) (0.085)
OPENNESS –0.085** 0.062 –0.106 –0.179*** –0.069 –0.151
(0.043) (0.047) (0.075) (0.047) (0.051) (0.092)
ACCSTD 0.191 0.611 0.154
(0.311) (0.470) (0.310)
(continues)
Table 1. Continued
(1) (2) (3) (4) (5) (6)
MRKTC 0.012*** 0.014** 0.010*** 0.034*** 0.022** 0.026***

(0.004) (0.006) (0.003) (0.009) (0.009) (0.009)
ACCSTD * MRKTC –0.005 –0.010* –0.007
(0.005) (0.006) (0.006)
ACCSC 0.020** 0.008 0.022***
(0.008) (0.009) (0.007)
ACCSC * MRKTC –0.000*** –0.000** –0.000***
(0.000) (0.000) (0.000)

Constant –1.827*** –1.619 –1.367** –2.903*** –2.426 –2.637***
(0.675) (1.477) (0.691) (0.746) (1.506) (0.591)
Observations 457 234 223 457 234 223
Kleibergen Paap statistic (p-value) 0.001 0.004 0.210 0.000 0.000 0.000
Hansen J-statistic (p-value) 0.608 0.241 0.318 0.260 0.173 0.031
Endogeneity statistic (p-value) 0.000 0.005 0.005 0.000 0.026 0.020
Marginal effect 0.007 0.004 0.003 0.034 0.022 0.026
p-value 0.000 0.017 0.450 0.000 0.010 0.005
Notes: Variables are defined in the Data and Econometric Model section. Developed countries: Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Greece, Hong Kong, Israel, Italy, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Slovenia, Spain, Sweden, Switzerland, United Kingdom,
United States. Emerging market countries: Argentina, Brazil, Bulgaria, Chile, China, Czech Republic, Egypt, Estonia, Hungary, India, Indonesia, Jordan, Korea,
Latvia, Lithuania, Malaysia, Mexico, Philippines, Peru, Poland, Romania, Russia, Singapore, Slovakia, South Africa, Thailand, Turkey. Robust standard errors are in
parentheses. * p < 0.1; ** p < 0.05; *** p < 0.01.
the relationship of growth and financial development (Baum 2006; Baum et al. 2003;
Beck and Levine 2004).
In all the estimations, the annual real growth rate of per capita GDP at purchasing power
parity in 2005 U.S. dollars is used as the dependent variable, and financial development
is measured by MRKTC. Accounting regulation is represented by either high-quality
(international) accounting standards (ACCSTD) or the accounting regulation scores
(ACCSC). The first-stage estimations use the values of gross domestic product, foreign
direct investment inflows, and indexes of control of corruption and rule of law (the indexes
are drawn from the World Bank’s Worldwide Governance Indicators; Kaufmann et al.
2010). In untabulated results, the instruments were found to be significantly associated
with financial development (Beck et al. 2003).
Column (1) of Table 1 reports the results of regression for the overall sample. ACCSTD
is positively associated with GROWTH, but it is not significant. MRKTC has a signifi-
cant positive effect on GROWTH. Although the interaction of MRKTC with ACCSTD
(ACCSTD * MRKTC) is negative as expected, it is not significant. In column (2), which
displays the results for developed countries, ACCSTD has a positive effect on GROWTH,
but again it is not significant. As in column (1), MRKTC is strongly positively associated
with GROWTH. However, the interaction of ACCSTD with MRKTC (ACCSTD * MRKTC)
has a significant negative effect on GROWTH. In column (3), which reports the results for
emerging market countries, ACCSTD and MRKTC have a positive effect on GROWTH.
Their interactive term turns out to be negative, although it is not significant.
In columns (4), (5), and (6), ACCT is proxied by the accounting regulation scores
(ACCSC). ACCSC appears to be strongly and positively associated with GROWTH in all
the estimations with the exception of column (5). In particular, the effect of ACCSC on
GROWTH is strongly positive in emerging market countries, suggesting that accounting
rules and regulations are crucial for economic growth since they create a better economic
environment (Enthoven 1965). Moreover, MRKTC and its interaction with ACCSC are
strongly related to GROWTH in all the estimations, consistent with H1.13 Of the control
variables, GOVC, TARIFF, INFL, POPGRW, and OPENNESS have a significant nega-
tive effect on GROWTH, and REGQ and SCHOOLING affect GROWTH positively. The
strong negative relation of TARIFF with GROWTH implies that tariff rates imposed on
imports influence growth adversely (Lee 1993). The negative effects of INFL and GOVC
on GROWTH, on the one hand, and the positive effect of SCHOOLING on GROWTH,
on the other hand, are consistent with the findings of previous literature (Barro and Lee
1994; Lee et al. 2004; Levine et al. 2000; Ranciere et al. 2006).
The GMM model reports three statistics. The Kleibergen-Paap rk LM statistic is a test
of underidentification that determines whether the excluded instruments are correlated
with the endogenous variable. The null hypothesis that the equation is underidentified is
rejected, suggesting that the selected instruments are relevant except for estimation (3).
The Hansen J‑statistic is a test of overdentification of all instruments. The results indicate
that the joint hypothesis that the instruments are relevant, that is, uncorrelated with the
error term, and that the excluded instruments are correctly excluded from the estimations
equation is accepted with the exception of estimation (6). Finally, the endogeneity statistic
suggests that financial development is an endogenous variable.
These analyses were replicated using domestic credits by banking sector as a proxy
for financial development (DCRDBANK). The estimation results are presented in Table 2.
Consistent with H2, the results indicate that DCRDBANK has a strong positive effect on
GROWTH. Moreover, ACCSTD is found to be significantly related to GROWTH. Although
Table 2. GMM regression results—Dependent variable: annual real growth rate per capita GDP (FINDEV = DCRDBANK)
(1) (2) (3) (4) (5) (6)
GDP_INITIAL –0.000* –0.000 –0.000 –0.000*** –0.000 –0.000***

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
GDP_LAG –0.000*** –0.000*** –0.000*** –0.000*** –0.000*** –0.000***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
REGQ 0.331** 1.073*** 0.335** 0.424*** 0.992** 0.386***
(0.154) (0.411) (0.132) (0.139) (0.433) (0.128)
GOVC –0.009* –0.001 –0.016*** –0.012*** –0.040* –0.008*

(0.005) (0.013) (0.005) (0.004) (0.022) (0.005)
TARIFF –0.121*** –0.111 –0.113* –0.204*** –0.271*** –0.226***
(0.044) (0.078) (0.068) (0.057) (0.105) (0.068)
SCHOOLING 0.429*** 0.391** 0.375** 0.247 1.482*** 0.029
(0.154) (0.196) (0.177) (0.193) (0.573) (0.308)
INFL –0.000*** 0.048** –0.000 –0.000** 0.055* –0.000**
(0.000) (0.022) (0.000) (0.000) (0.031) (0.000)
POPGRW 0.061 0.240*** 0.012 0.001 0.517*** –0.092
(0.042) (0.084) (0.049) (0.042) (0.176) (0.066)
OPENNESS 0.048 0.246*** –0.072 –0.104 0.466*** –0.189*
(0.050) (0.072) (0.062) (0.076) (0.165) (0.099)
ACCSTD 0.237 0.644* 0.665*
(0.279) (0.349) (0.394)
DRCDBANK 0.006*** 0.008*** 0.008*** 0.057*** –0.010 0.050**
(0.002) (0.002) (0.002) (0.021) (0.014) (0.025)
ACCSTD * DCRDBANK –0.002 –0.003 –0.011*
(0.003) (0.002) (0.006)
ACCSC 0.060** –0.063** 0.045*
(0.026) (0.032) (0.024)
ACCSC * DCRDBANK –0.001** 0.000 –0.001*
(0.000) (0.000) (0.000)
Constant –2.459*** –7.081*** –1.963*** –5.950*** –4.991* –3.898***
(0.666) (2.315) (0.715) (1.579) (2.796) (1.208)
Observations 385 175 210 385 175 210
Kleibergen Paap statistic (p-value) 0.000 0.001 0.091 0.001 0.041 0.123
Hansen J-statistic (p-value) 0.131 0.142 0.667 0.640 0.780 0.256
Endogeneity statistic (p-value) 0.000 0.000 0.000 0.000 0.000 0.000
Marginal effect 0.004 0.005 –0.003 0.056 –0.010 0.049
p-value 0.000 0.002 0.464 0.007 0.481 0.005
Notes: Variables are defined in the Data and Econometric Model section. Developed countries: Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Greece, Hong Kong, Israel, Italy, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Slovenia, Spain, Sweden, Switzerland, United Kingdom,
United States. Emerging market countries: Argentina, Brazil, Bulgaria, Chile, China, Czech Republic, Egypt, Estonia, Hungary, India, Indonesia, Jordan, Korea,
Latvia, Lithuania, Malaysia, Mexico, Philippines, Peru, Poland, Romania, Russia, Singapore, Slovakia, South Africa, Thailand, Turkey. Robust standard errors are in
parentheses. * p < 0.1; ** p < 0.05; *** p < 0.01.
the interaction terms have negative signs as expected, they turn out to be insignificant
with the exception of estimation (3). As in previous estimations, control variables are
strongly related to GROWTH.
Estimations (4), (5), and (6) examine the effect of ACCSC on GROWTH through its
impact on DCRDBANK. The results are similar to those obtained in previous estimations,
with ACCSC and DCRDBANK having a significant positive effect on GROWTH. However,
this positive effect is diminished in countries where accounting practice is highly regulated,
as indicated by the negative and significant coefficient for ACCSC * DCRDBANK.
Overall, the results of regression analyses provide evidence that accounting regulation
and both stock market–based and bank-based financial development have a strong effect
on economic growth in both developed and emerging market countries (see, e.g., Beck
and Levine 2004). During the sample period, economic growth appears to have been
positively affected by high-quality (international) accounting standards and accounting
regulation (Bekaert et al. 2005). Although stock market development has a significant
positive effect on growth, the interaction of accounting regulation with stock market
development appears to have a negative effect on growth, suggesting that high-quality
accounting standards reduce managers’ ability to signal private information to investors
or fails to fit as well with the local environment as domestic accounting standards. Like-
wise, bank-based financial development has a positive effect on growth as evidenced by
prior research (e.g., Gregorio and Guidotti 1995), but its interactive term with accounting
regulation leads to a decrease in growth. As previously noted, if accounting regulation
increases costs of compliance with GAAP, it can be a deterrent for firms to use credits
through the banking system, thereby affecting growth negatively.
An analysis of marginal effects was also conducted in order to determine the effect
of accounting regulation on growth via financial development. Marginal effects can be
described as follows: ∂GROWTH / ∂MRKTC = α11 + α12 ACCT; ∂GROWTH / ∂DCRDBANK =
α11 + α12 ACCT. The results of analysis of marginal effects are reported in Tables 1 and 2.
In the estimations, in which accounting is measured by ACCSTD, a change in MRKTC
affects GROWTH positively for the overall sample and for developing countries when high-
quality standards are used. However, ACCSTD has a strong negative effect on GROWTH
at the mean of MRKTC for both groups. Although the marginal analysis yields insignifi-
cant results for emerging countries, the effect of ACCSTD on GROWTH is significant at
the mean of MRKTC. When the analysis is repeated using ACCSC instead of ACCSTD,
similar results are obtained: although an increase in MRKTC affects GROWTH positively
with higher accounting regulation for all of the groups, the effect of ACCSC is signifi-
cantly negative for the overall sample and for developed countries at the mean value of
MRKTC but not for emerging countries. The results are not reported, in order to conserve
space. In estimations in which financial development is measured by DCRDBANK, the
effect of DCRDBANK on GROWTH turns out to be significantly positive for the overall
sample and for developed countries. Moreover, ACCSTD has a significant positive effect
on GROWTH at the mean of DCRDBANK for developed countries. In estimations (4)
and (6), the effect of DCRDBANK on GROWTH is significant, implying that bank-based
financial development has a major impact on growth in countries with higher accounting
regulation scores.
Conclusions
In contrast to deregulation of economic activities in many countries, accounting regulation
has been emphasized over the past two decades by public and private regulatory bodies.
This results mainly from globalization and financial reporting frauds, which increased the
importance of high-quality accounting information based on a well-developed accounting
system. This paper examines the relationship between accounting regulation, financial
development, and economic growth in fifty-one developed and emerging countries over
the period 1997–2009. Accounting regulation is measured by both accounting standards
(IFRS and GAAP) variables and accounting regulation scores. The GMM estimation tech-
nique shows that economic growth is strongly related to accounting regulation. Consistent
with the findings of prior research, both stock market–based and bank-based financial
development are found to be positively associated with economic growth. However, their
interactive terms with accounting are negative in countries where accounting practice
is highly regulated. These results are significant and consistent in all of the regression
analyses regardless of whether accounting is measured by the accounting standards binary
variable or accounting regulation scores.
One limitation of the study is lack of sufficient data. Therefore, some developed
and emerging market countries have been excluded from the study. A future study that
examines the relation of accounting regulation with financial development and growth in
different groups of emerging market economies may yield interesting results.
Notes
1. In fact, deregulation is a result of neoliberal capitalist development, which is designed to
create a global economy in which factors of production, with the exception of labor, move freely
across countries. In this process the state is downsized in favor of the private sector, and regulation
of the private sector and economic activity is replaced with a policy of deregulation (Veltmeyer
2004).
2. Calderón and Liu (2003) defined financial development as an improvement in quantity,
quality, and efficiency of financial intermediary services. Financial development is a generic,
multifaceted phenomenon measured by academics using a variety of indicators (Pagano 1993). For
example, market capitalization, value of stocks traded, domestic credits provided by the banking
sector, the ratio of the number of banks and branches to the number of workers, and the financial
system’s share of GDP are among the indicators that have been used to measure financial develop-
ment in prior research (Bascom 1994; Graff 2003).
3. In fact, studies investigating the relationship of accounting with economic growth are not
new. Bevis (1958) argued that a high degree of industrialization and economic growth cannot be
achieved without a highly developed accounting function. Accounting is vital to planning, perfor-
mance evaluation, and decision making, which are regarded as major aspects of economic growth
(Enthoven 1967, 1969, 1970; Ndubizu 1984; Prakash and Rappaport 1975). Enthoven (1965)
argued that accounting regulation may have a positive effect on economic growth. Moreover, he
noted that a well-developed accounting profession and accounting system are likely to influence
this process.
4. Although the Securities and Exchange Commission has the legal authority to issue account-
ing standards, it has delegated this authority to private organizations from the very beginning. As a
result, accounting standards in the United States have been issued by private organizations such as
the Committee on Accounting Principles (1936–59), the Accounting Principles Board (1959–72),
and the Financial Accounting Standards Board (1973–present).
5. One major adverse effect of stock markets on growth results from “short-termism,” which
is defined as a situation in which stock market investors have a systematic preference for short-
term gains at the expense of long-term ones. Black and Fraser (2002) showed that evidence of
short-termism exists in the Australian, German, Japanese, UK, and U.S. stock markets. They
report that short-termism is widespread in the United Kingdom, being present in all sectors of the
stock market.
6. Professional judgment is closely associated with knowledge and experience. Even if financial
accounting standards are of a high quality, high quality financial information is not guaranteed unless
there are consistent and appropriate interpretations of rules, and strict enforcement. Therefore, the
International Accounting Standards Board, the European Union, and the International Organization
of Securities Commissions have all reiterated the importance of interpretation and enforcement, and
established various schemes necessary to realize that. Especially, the principles-based IFRS and
their fair value orientation provide challenges to users of financial statements including regulators
and accounting professionals in China because both principles basis and fair value accounting rely
more on judgment than the traditional Chinese approach (Zhang and Lu 2007).
7. There are two prominent legal systems in the Western world: code law and common law.
Code law or civil law, which is articulated in chapters, sections, and the paragraphs, was originally
administered in the Roman empire and is still influential in continental Europe, Latin America, and
other parts of the world. By contrast, common law, which derives from judicial decisions rather
than from statutes or constitutions, is used in Anglo-Saxon countries. The fundamental difference
between these two legal systems is that code law precedes judgments; common law follows them
(Garner and Black 1999).
Basically, there are two types of agency problems. One type refers to the conflict of interests
between managers and shareholders. The other type is between minority and majority sharehold-
ers (Surroca and Tribó 2008). Jensen and Meckling (1976) argue that the agency conflict between
managers and shareholders arises when managers’ actions do not use a firm’s resources so as to
maximize shareholder wealth.
8. Tarca (2004) suggested that both GAAP and IAS be named as international accounting
standards. (In general, both GAAP and IFRS are considered high-quality accounting standards.)
The idea is supported by a survey conducted in 2000 by KPMG with 509 large companies whose
headquarters are located in one of seventeen European countries. The countries also include Swit-
zerland and Norway, in addition to fifteen European Union member countries. More than one-fourth
of respondents reported that they have considered changing the basis of preparing their financial
statements in the short run. A majority of respondents want to adopt IAS, and 29 percent want to
adopt GAAP. More than 50 percent of respondents rated GAAP standards as high quality. The
majority of the other half rated IAS as high-quality standards. Few respondents rated either GAAP
or IAS as poor-quality standards (KPMG 2000).
9. Bronson et al. (2009) used the responses to the audit regulatory environment questions.
10. The IFAC Board established the Member Body Compliance Program to evaluate the perfor-
mance of member countries in meeting membership requirements. Part 1 of the program includes
a questionnaire that requires members to provide information about the regulatory and standards-
setting framework in their countries. Members are also required to periodically update information
about legal and regulatory environments in their jurisdictions (www.ifac.org).
11. Survey questions are not included in the paper because of space limitations. They are avail-
able from the author upon request.
12. In fact, the internationalization of accounting and auditing standards in South Africa has
been, unlike the case in many emerging economies, an ongoing process since the beginning of the
1990s. In addition to its active role in the regulation process, the South African government plays
an important role in helping other African countries to adopt the IFRS in the process of economic
development. As a result, the South African accounting profession has gained prestige relative to
that in other countries (Edwards et al. 2007).
13. In estimations, ACCSC is measured by the raw accounting scores, which are obtained by
simply adding up the scores for each question. To check the sensitivity of the results, the analyses
were repeated using the scaled scores. The results are very close to those obtained using raw scores.
For the sake of brevity, they are not reported.
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Appendix A: Accounting standards
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Argentina 3 3 3 3 3 3 3 3 3 3 3 3 3
Australia 3 3 3 3 3 3 3 3 1 1 1 1 1
Austria 2 2 2 2 1 1 1 1 1 1 1 1 1
Belgium 2 1 1 1 1 1 1 1 1 1 1 1 1
Brazil 3 3 3 3 3 3 3 3 3 3 3 2 2
Bulgaria 2 2 2 2 2 1 1 1 1 1 1 1 1
Canada 3 3 3 3 3 3 3 3 3 3 3 2 2
Chile 3 3 3 3 3 3 3 3 3 3 3 3 1
China 3 3 3 3 3 3 3 3 3 3 3 3 3
Czech Republic 3 3 3 3 3 2 2 2 1 1 1 1 1
Denmark 2 2 2 2 2 2 2 2 1 1 1 1 1
Egypt 2 2 2 2 2 2 2 2 1 1 1 1 1
Estonia 3 3 3 3 3 2 2 2 1 1 1 1 1
Finland 2 2 2 2 2 2 2 2 1 1 1 1 1
France 2 2 2 2 2 2 2 2 1 1 1 1 1
Germany 2 2 2 2 2 2 2 2 1 1 1 1 1
Greece 2 2 2 2 2 2 1 1 1 1 1 1 1
Hong Kong 2 2 2 2 2 2 2 2 2 2 2 2 2
Hungary 1 1 1 1 1 1 1 1 1 1 1 1 1
India 3 3 3 3 3 3 3 3 3 3 3 3 3
Indonesia 3 3 3 3 3 3 3 3 3 3 3 3 3
Israel 2 2 2 2 2 2 2 2 2 2 2 2 2
Italy 2 2 2 2 2 2 2 2 1 1 1 1 1
Japan 3 3 3 3 3 3 3 3 3 3 3 3 3
Jordan 1 1 1 1 1 1 1 1 1 1 1 1 1
Korea 3 3 3 3 3 3 3 3 3 3 3 3 3
Latvia 3 3 3 3 3 2 2 2 1 1 1 1 1
Lithuania 3 3 3 3 3 2 2 2 1 1 1 1 1
Luxembourg 2 2 2 2 2 2 2 2 1 1 1 1 1
Malaysia 3 3 3 3 3 3 3 3 3 3 3 3 3
Mexico 3 3 3 3 3 3 3 3 3 3 3 2 2
Netherlands 2 2 2 2 2 2 2 2 1 1 1 1 1
New Zealand 3 3 3 3 3 3 3 3 1 1 1 1 1
Norway 3 3 3 3 3 3 3 3 1 1 1 1 1
Peru 2 2 2 2 2 2 2 2 1 1 1 1 1
Philippines 3 3 3 3 3 3 3 3 3 3 3 3 3
Poland 3 3 3 3 3 2 2 2 1 1 1 1 1
Portugal 3 3 3 3 3 3 3 3 1 1 1 1 1
Romania 2 2 2 2 2 2 2 2 1 1 1 1 1
Russia 3 3 3 3 3 3 3 3 3 3 3 3 3
Singapore 3 3 3 3 3 3 3 3 3 3 3 3 3
Slovakia 3 3 3 3 1 1 1 1 1 1 1 1 1
Slovenia 2 2 2 2 2 2 2 2 1 1 1 1 1
South Africa 2 2 2 2 2 2 2 2 1 1 1 1 1
Spain 3 3 3 3 3 3 3 3 1 1 1 1 1
Sweden 3 3 3 3 3 3 3 3 1 1 1 1 1
Switzerland 2 2 2 2 2 2 2 2 1 1 1 1 1
Thailand 3 3 3 3 3 3 3 3 3 3 3 3 3
Turkey 2 2 2 2 2 2 2 2 2 2 2 2 2
United Kingdom 2 2 2 2 2 2 2 2 1 1 1 1 1
United States 1 1 1 1 1 1 1 1 1 1 1 1 1
Appendix B: IFAC survey questions and accounting regulation scores
Czech
Argentina Australia Austria Belgium Brazil Bulgaria Canada Chile China Republic Denmark
The Companies Act or Commercial Code

Q1 1 1 1 1 1 1 1 1 1 1 1
Q2 2 6 2 2 3 8 2 2 5 5 2
Q3 2 6 3 2 3 6 2 2 4 4 2
Q4 2 5 3 2 3 3 1 2 5 3 2
Q5 1 1 1 1 0 1 1 1 0 0 0
Q6 5 2 2 2 3 2 2 5 5 7 2
Q7 0 0 0 1 0 0 0 0 0 0 0
Q8 0 1 1 0 0 0 0 0 0 0 1
Securities market regulations

Q1 1 1 1 1 1 1 1 1 1 1 1
Q2 0 1 1 1 1 1 1 1 1 1 0
Q3 1 1 1 1 1 0 1 1 1 0 0
Q4 2 2 2 2 7 2 2 5 5 7 2
Q5 1 0 1 1 1 1 1 1 1 0 0
Q6 0 0 0 0 0 0 0 0 0 0 1
Q7 0 1 1 1 1 0 1 0 1 0 1
Education requirements
Q1 1 1 1 1 1 1 1 1 1 1 1
Q2 1 5 5 5 4 4 4 0 4 4 4
Q3 3 2 4 2 3 3 2 0 2 3 4
Q4 4 3 4 4 2 4 3 0 4 4 4
Q5 1 1 1 1 1 1 1 1 1 1 1
Q6 3 2 4 4 3 4 4 3 2 2 4
Q7 1 0 0 1 1 1 1 1 0 1 1
Licensing requirements
Q1 1 1 1 1 1 1 1 1 1 1 1
Q2 1 3 3 4 3 4 3 1 2 4 4
Q3 1 2 2 2 2 1 1 1 1 2 1
Q4 1 1 1 1 1 1 1 1 1 1 1
Q5 1 0 0 0 1 0 1 1 1 0 0
Auditing standards
Q1 1 1 1 1 1 1 1 1 1 1 1
Q2 2 0 0 2 2 2 2 1 1 2 2
Q3 0 1 0 0 0 2 0 0 0 0 0
Q4 5 5 0 1 1 5 5 3 5 1 1
Q5 2 0 0 2 1 2 2 1 1 1 2
Q6 1 0 0 2 1 2 2 1 1 2 2
Private sector accounting standards
Q1 1 1 1 1 1 1 1 1 1 1 1
Q2 2 0 0 0 2 2 2 1 0 0 2
Q3 0 1 0 0 0 2 1 0 2 2 0
Q4 3 5 0 5 0 5 5 3 1 1 1
Q5 1 0 0 0 0 2 2 1 0 0 2
Q6 1 1 0 0 0 2 2 1 1 1 2
Ethical standards
Q1 1 1 1 1 1 1 1 1 1 1 1
Q2 2 1 1 1 2 2 2 2 1 2 2
Q3 1 1 1 1 1 1 1 0 1 1 1
Q4 2 0 1 1 0 0 1 3 5 1 1
Q5 1 0 2 2 0 0 1 1 1 0 2
Q6 1 0 0 1 0 0 1 1 0 0 2
Score 64 67 54 65 61 83 71 55 73 70 66
Hong
Egypt Estonia Finland France Germany Greece Kong Hungary India Indonesia

Q1 1 1 1 1 1 1 1 1 1 1
Q2 4 2 2 4 4 2 4 4 5 2
Q3 2 4 2 5 4 2 2 4 5 4
Q4 2 4 2 4 4 2 2 4 5 4
Q5 1 0 0 1 0 1 1 1 1 1
Q6 2 2 2 3 4 2 2 2 3 2
Q7 0 0 0 1 0 0 0 0 1 0
Q8 0 0 0 1 1 1 1 0 0 1
Q1 1 1 1 1 1 1 1 1 1 1
Q2 1 0 1 0 0 1 1 0 1 0
Q3 1 0 0 0 0 1 0 0 0 0
Q4 2 2 2 2 3 2 2 2 3 6
Q5 1 0 0 1 0 1 1 0 1 1
Q6 0 0 0 1 0 0 0 0 1 0
Q7 0 0 0 1 1 1 1 0 0 1
Q1 1 1 1 1 1 1 1 1 1 1
Q2 4 4 4 5 4 3 4 3 5 4
Q3 4 3 3 4 3 4 2 2 2 4
Q4 3 4 4 4 4 4 2 3 3 3
Q5 1 1 1 1 1 1 0 1 1 1
Q6 4 3 3 3 4 2 2 4 2 2
Q7 1 1 1 1 1 0 0 1 1 0
Q1 1 1 1 1 1 1 1 1 1 1
Q2 2 4 4 4 4 3 3 3 4 3
Q3 0 2 1 2 1 1 3 1 1 1
Q4 1 1 1 1 1 1 1 1 1 1
Q5 1 0 1 0 0 0 0 1 0 1
Auditing standards
Q1 1 1 1 1 1 1 1 1 1 1
Q2 1 2 2 2 2 0 1 2 1 1
Q3 0 1 0 0 1 2 0 0 0 1
Q4 3 1 0 1 5 1 5 4 3 5
Q5 0 1 0 1 2 2 2 2 1 2
Q6 0 2 2 2 0 0 1 2 2 3
Q1 1 1 1 1 1 1 1 1 1 1
Q2 1 2 2 2 2 0 1 2 1 2
Q3 0 2 2 0 1 0 0 2 0 1
Q4 3 1 5 1 5 0 5 5 5 5
Q5 1 2 2 1 2 0 2 2 1 2
Q6 1 2 2 2 1 0 1 2 2 2
Ethical standards
Q1 1 1 1 1 1 1 1 1 1 1
Q2 0 2 2 2 2 1 1 2 1 2
Q3 1 1 1 1 1 1 1 1 1 1
Q4 3 1 0 1 1 0 5 3 3 5
Q5 1 0 0 1 0 0 2 2 2 2
Q6 0 0 2 2 0 0 1 2 0 2
Score 59 64 63 75 76 49 69 77 76 85
Israel Italy Japan Jordan Korea Latvia Lithuania Luxembourg Malaysia Mexico

Q1 1 1 1 1 1 1 1 1 1 1
Q2 4 2 2 2 2 3 6 2 3 2
Q3 4 4 2 2 2 4 4 3 2 5
Q4 4 3 2 2 2 3 4 3 3 5
Q5 1 1 1 1 1 1 1 1 1 0
Q6 6 2 2 2 4 2 2 5 2 9
Q7 0 0 1 0 0 0 0 0 0 0
Q8 0 1 1 0 1 1 1 1 0 1
Q1 1 1 1 1 1 1 1 1 1 1
Q2 1 1 1 0 1 0 0 1 1 1
Q3 0 1 1 1 0 0 1 0 1 0
Q4 7 2 2 2 4 2 2 2 2 9
Q5 1 1 1 0 1 1 0 1 1 0
Q6 0 0 0 0 0 0 0 0 0 0
Q7 1 1 1 0 1 1 1 1 1 1
Q1 1 1 1 1 1 1 1 1 1 1
Q2 4 4 4 4 4 4 4 3 5 4
Q3 4 3 4 3 4 4 3 3 4 3
Q4 3 3 4 4 4 4 4 4 3 4
Q5 1 1 1 1 1 1 1 1 1 1
Q6 4 3 2 2 4 4 4 3 4 3
Q7 1 1 1 1 1 1 1 1 0 1
Q1 1 1 1 1 1 1 1 1 1 1
Q2 4 4 2 3 3 3 5 3 3 2
Q3 1 1 1 1 1 1 1 1 2 1
Q4 1 1 1 0 1 1 1 1 1 1
Q5 1 1 0 0 0 1 0 0 0 0
Auditing standards
Q1 1 1 1 1 1 1 1 1 1 1
Q2 1 2 2 2 1 2 1 1 1 2
Q3 0 2 0 0 1 0 0 1 0 0
Q4 5 1 1 0 5 2 5 1 2 5
Q5 1 0 2 0 1 1 1 1 2 1
Q6 1 0 2 2 2 0 0 0 1 1
Q1 1 1 1 1 1 1 1 1 1 1
Q2 2 2 2 2 2 2 0 2 2 2
Q3 1 2 0 0 1 1 1 1 1 2
Q4 5 5 5 0 5 0 2 5 5 5
Q5 2 2 2 0 2 0 1 2 0 2
Q6 2 2 2 0 2 0 1 2 1 2
Ethical standards
Q1 1 1 1 1 1 1 1 1 1 1
Q2 1 0 2 2 1 2 0 1 1 2
Q3 1 1 1 2 1 1 1 1 1 1
Q4 1 2 2 0 5 2 5 1 2 3
Q5 2 1 2 0 1 1 1 1 2 2
Q6 0 0 2 0 0 0 1 1 1 1
Score 85 70 71 48 79 63 73 68 69 91
New
Netherlands Zealand Norway Peru Philippines Poland Portugal Romania Russia Singapore

Q1 1 1 1 1 1 1 1 1 1 1
Q2 3 5 3 7 4 3 2 2 4 3
Q3 4 4 5 6 4 4 5 4 4 3
Q4 4 4 5 6 4 5 5 2 6 3
Q5 0 1 0 1 1 0 1 0 0 1
Q6 2 2 2 3 9 1 2 2 2 2
Q7 0 0 0 0 0 0 0 0 0 0
Q8 1 1 0 1 1 0 1 0 0 0
Q1 1 1 1 1 1 1 1 1 1 1
Q2 0 1 1 0 0 1 1 1 0 0
Q3 0 1 1 0 0 1 1 1 0 1
Q4 2 2 2 3 5 1 2 2 2 2
Q5 0 1 0 1 0 0 1 0 1 1
Q6 0 0 0 1 0 0 0 0 0 0
Q7 1 1 0 0 1 0 0 0 0 1
Q1 1 1 1 1 1 1 1 1 1 1
Q2 4 5 4 2 2 5 4 4 4 4
Q3 3 4 3 1 4 2 2 4 3 2
Q4 3 3 4 1 4 3 3 3 4 3
Q5 1 1 1 0 1 1 1 1 1 1
Q6 4 4 3 3 4 4 2 2 3 3
Q7 1 0 1 1 0 0 1 1 1 0
Q1 1 1 1 1 1 1 1 1 1 1
Q2 3 2 3 3 2 3 4 4 4 3
Q3 1 2 1 1 2 2 1 0 2 2
Q4 1 1 1 1 1 1 1 1 1 1
Q5 0 0 1 1 0 0 1 1 0 0
Auditing standards
Q1 1 1 1 1 1 1 1 1 1 1
Q2 1 1 0 2 0 1 0 1 0 1
Q3 0 0 0 1 0 0 0 1 0 0
Q4 5 5 0 1 0 2 1 2 5 5
Q5 1 1 0 0 0 2 1 1 0 1
Q6 1 2 0 2 0 1 0 1 0 1
Q1 1 1 1 1 1 1 1 1 1 1
Q2 2 1 2 0 1 1 2 0 0 1
Q3 2 0 0 1 0 1 1 2 0 0
Q4 5 5 5 5 0 1 5 1 0 5
Q5 2 1 2 1 0 1 2 1 1 1
Q6 2 2 2 0 0 1 1 1 0 1
Ethical standards
Q1 1 1 1 1 1 1 1 1 1 1
Q2 1 1 2 2 1 1 1 1 1 1
Q3 1 1 0 1 0 1 1 1 1 1
Q4 5 0 1 1 0 2 1 5 4 2
Q5 1 1 1 2 1 1 1 1 1 0
Q6 1 2 0 1 1 0 0 1 1 0
Score 75 75 63 70 60 60 65 62 63 63
South United United
Slovakia Slovenia Africa Spain Sweden Switzerland Thailand Turkey Kingdom States

Q1 1 1 1 1 1 1 1 1 1 1
Q2 4 6 5 3 2 3 3 4 4 2
Q3 6 4 5 4 2 4 4 4 4 2
Q4 6 2 4 4 2 3 4 4 4 2
Q5 0 1 1 1 1 1 1 1 1 0
Q6 6 2 5 4 2 2 9 2 5 6
Q7 0 0 1 0 0 0 0 1 0 0
Q8 0 0 0 1 0 0 1 0 0 1
Q1 1 1 1 1 1 1 1 1 1 1
Q2 1 0 1 0 1 1 0 1 1 1
Q3 1 0 1 1 0 1 1 1 1 0
Q4 6 2 9 4 2 2 9 3 5 6
Q5 0 1 1 1 1 1 1 1 1 0
Q6 0 0 1 0 0 0 0 1 0 0
Q7 0 0 0 1 0 1 1 1 1 1
Q1 1 1 1 1 1 1 1 1 1 1
Q2 3 4 5 4 3 5 4 4 4 4
Q3 4 4 4 3 4 4 0 3 2 4
Q4 4 4 4 4 4 3 0 4 3 4
Q5 1 1 1 1 1 1 1 1 1 1
Q6 4 2 4 4 4 4 0 4 4 4
Q7 1 1 1 1 1 1 0 1 0 1
Q1 1 1 1 1 1 1 1 1 1 1
Q2 3 5 3 4 3 5 4 4 3 4
Q3 1 1 1 1 1 1 1 0 2 2
Q4 1 1 1 1 1 1 1 1 1 1
Q5 0 1 0 0 1 1 1 1 1 1
Auditing standards
Q1 1 1 1 1 1 1 1 1 1 1
Q2 2 2 1 0 2 1 2 2 2 2
Q3 1 0 0 1 0 1 0 0 1 2
Q4 5 0 5 1 5 2 5 5 5 5
Q5 1 2 1 0 2 1 1 1 2 0
Q6 1 2 1 0 2 1 2 2 2 0
Q1 1 1 1 1 1 1 1 1 1 1
Q2 0 1 2 1 0 2 2 2 2 2
Q3 1 0 0 1 1 1 0 0 1 2
Q4 0 2 5 1 5 3 5 5 5 5
Q5 0 0 1 0 1 2 1 2 2 2
Q6 0 1 1 1 1 2 2 1 2 2
Ethical standards
Q1 1 1 1 1 1 1 1 1 1 1
Q2 2 1 1 1 0 1 0 2 1 1
Q3 1 1 1 1 1 1 0 1 1 1
Q4 5 2 5 1 5 4 5 1 1 5
Q5 1 1 1 0 0 1 0 2 1 1
Q6 1 1 1 0 0 1 0 2 1 1
Score 80 65 91 63 68 76 78 82 84 85

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Orhan Akisik (akisik@isenberg.umass.edu) is a lecturer in the Department of Accounting and

Theoretical Background and Hypotheses Development

Areas of Accounting Regulation

on transforming a centrally commanded economy into a market economy. Commercial

Stock Market–Based Financial Development and Growth

A sound accounting infrastructure contributes to improvement of corporate governance

Bank-Based Financial Development and Growth

This is an important finding because managing agency problems effectively contrib-

no significant differences between IAS and GAAP in terms of reducing asymmetric

Results of Empirical Analysis

GDP_INITIAL –0.000*** –0.000 –0.000* –0.000*** –0.000 –0.000**

MRKTC 0.012*** 0.014** 0.010*** 0.034*** 0.022** 0.026***

(0.000) (0.000) (0.000)

GDP_INITIAL –0.000* –0.000 –0.000 –0.000*** –0.000 –0.000***

GOVC –0.009* –0.001 –0.016*** –0.012*** –0.040* –0.008*

The Companies Act or Commercial Code

Securities market regulations

The Companies Act or Commercial Code

The Companies Act or Commercial Code

The Companies Act or Commercial Code

The Companies Act or Commercial Code

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GDP_INITIAL –0.000*** –0.000 –0.000* –0.000* –0.000 –0.000

MRKTC 0.012* 0.014 0.010* 0.034* 0.022 0.026*

GDP_INITIAL –0.000* –0.000 –0.000 –0.000* –0.000 –0.000*

GOVC –0.009* –0.001 –0.016* –0.012* –0.040* –0.008*