ACCOUNTING AND

ENVIRONMENT
Anis CHARIRI
Reference

 Robert, C., Weetman, P., and Gordon, P.,

2005, International Financial Accounting: A
Comparative Approach, 3rd Ed., Essex:
Pearson Education Limited
 Radebaugh, L.H, Gray, S.J and Black, E.L,
2006, International Accounting and
Multinational Enterprises, Wiley

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Think about these issues?
 What is worldwide accounting diversity?
 Why does accounting diversity exist?
 Do the following factors influence accounting
practice? Why?:
 Political and economic system
 Legal system
 Taxation system
 Corporate financing system
 Accounting profession
 Religion

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 What is Worldwide Accounting
Diversity?
 Differences in accounting and financial reporting
practice/rules between countries
 Accounting for Goodwill
 US: goodwill  an asset
 Germany: goodwill  often subtracted from
stockholders’
 Asset revaluation
 US: upward revaluation of fixed assets is not generally
allowed.
 Mexico, Chile, and The Netherlands: upward
revaluations are allowed and sometimes required.

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Accounting and Environment

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Factor Affecting Accounting
Diversity
A. Political and economic system
B. Legal system
C. Taxation system
D. Corporate financing system
E. Accounting profession
F. Other Influences

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A. Political and economic system
Differences in how the economy is organized and
controlled
a. Economic Systems:
 Capitalist Economic VS Socialist Economic Systems
b. The regulation of accounting
 Government vs Profession
c. Types of business organization
 the complexity of business organizations
 the industrial structure of the country
d. The importance of inflation
 High VS Low Inflation countries
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 B. The legal system:
Common VS Code Law
COMMON LAW
 The role of law is to prohibit
undesirable behavior rather
than to prescribe or codify the source of
desirable behaviour accounting
 More interpretation by rules  non-
courts to apply laws to governmental
specific situations.
organizations
 Found most often in Great
Britain and other English-
speaking countries.
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B. The legal system:Common VS
Code Law
CODE LAW
 Laws are generally codified
 the role of law is to describe Accounting
and mandate acceptable rules  to be
behavior. legislated
 Laws consist of rules and (i.e., the
procedures that have to be source is the
followed. government).
 Found more often in non
English-speaking countries.
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C. The taxation system
a. Independent tax and financial reporting
regulations
 Anglo-Saxon Countries: UK, USA, Australia,
Canada & NZ

b. The use of financial reporting rules by the tax

authorities
 many developing Commonwealth countries

c. The use of tax rules for financial reporting

 Western Europe (Continental Europe): France ,
Austria and Germany
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 D. The corporate financing system
 Corporate Financing Patterns
 DEBT Financing (Germany, Italy, The Netherlands,
France and Japan) VS EQUITY Financing (UK, USA,
Australia)

 Market Liquidity and Financial Institutions

 The proportion of listed companies that are actively
traded (UK, USA)
 Dominance of Financial Institutions (Germany)

 Equity Ownership Patterns

 Dispersed Ownership VS Concentrated Ownership

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 E. The accounting profession

 Size of the accounting profession

 UK & USA: more professional accountants
 Germany: more tax experts (Steuerberater) than
accountants(Wirtschaftsprüfer).

 Accountants’ role in regulation

 Code law countries: accounting regulations are set
by the government
 Common law countries: accounting regulation are
set by an independent body

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F. Other Influences
 Religion
 Islamic financial institutions use accounting
standards issued by the Accounting and Auditing
Organization for Islamic Financial Institutions
 Accidents of history
 The exporting or imposition of accounting rules
or practices by more powerful or sophisticated
societies
 Price Waterhouse (from London to NY, Chicago etc)

 The importing of accounting rules or practices

from another country or countries.
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THE INFLUENCE OF CULTURE ON
FINANCIAL REPORTING

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 DEFINITION
 Culture refers to “a set of common ideas, beliefs
and values that shared by the member of a group of
individuals” (Roberts et al., 2002)
 Culture is “the collective programming of the mind
which distinguihes the members of one human
group from another” (Hofstede 1984)
 So what? CULTURE:
 Collective
 Not directly observable but can be inferred from
behaviour
 Helps differentiate groups
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LEVEL of CULTURE
 LEVEL OF CULTURE:
 Symbols—with particular meaning
 Heroes—characters prized by society
 Rituals—routine activities
 Values—general beliefs or social norms

 SUBCULTURE
 Culture exists at many level (ethinic, religious, areas, etc)
 Each group will have its own culture

 Accounting as Subculture (Symbols, Heroes, Ritual,

Values)

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Structural Elements of
Culture
 Hofstede - 4 Underlying societal
dimensions:
 Individualism VS Collectivism
 Power Distance
 Uncertainty Avoidance
 Masculinity VS Feminity

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 Individualism  Collectivism
 How a society views and maintains social
relationship among individuals
Individualism (“I”) Collectivism (“We”)
• Preference for a loosely- • Preference for a tightly-
knit social framework. knit social framework

• Individuals are expected • Individuals can expect

to take care of their relatives or other
themselves and their in-group to look after
immediate families them in exchange for
unquestioning loyalty.
only.
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Power Distance
 How a society handles power inequalities
among people / organizations – distributed
unequally.

Small Power Distance Large Power Distance

People tend to strive for People tend to accept a
power equalization and hierarchical order in
demand justification for which everybody has a
the power inequalities place which needs no
that do exist. further justification.

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 Uncertainty Avoidance
 the degree to which the members of society feel
uncomfortable with uncertainty and ambiguity.
 The fundamental issue is how a society reacts to
the fact that the future is unknown.
Weak Strong
People feel relatively People feel anxious about
secure and do not try to future and create
control future through institutions to add security
laws. More tolerance for and avoid risk. Associated
deviant ideas and behavior with formal and informal
and willingness to take rules to guide behavior.
risks.
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 Masculine  Feminine
 This dimension relates to the division of the
roles between sexes in society.

Masculine
Societal preference for
showing off, achievement,
heroism, assertiveness,
making money, thinking
big, etc. Competitiveness.
Concern for equity rather
than equality.
Feminine
Societal preference for
putting relationships with
people before money, helping
others, caring for the
weaker, the quality of life,
preservation of the
environment, “small is
beautiful” and so on.
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Classification
Dimension A B C D
Power Low High Low High
Distance
Uncertainty Weak Weak Strong Strong
Avoidance

Organ. Type Implicitly Personal Workflow Full

Structured Bureaucracy Bureaucracy Bureaucracy

Model of Market Family Well Oil Pyramid

Organ. Machine
Countries Anglo Saxon South East Germany Latin Med.
(USA, UK, Asian Finland Islamic
Australia, Israel Japan
NZ, Canada)
Scandinavian
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Accounting Values vs Societal
Values – Gray
 Professionalism VS statutory control
 preference for individual professional judgment / self
regulation
 Uniformity versus flexibility
 Preference for enforcement of uniform practices
 Conservatism versus optimism
 Preference for cautious approach / less risky
approach to measurement.
 Secrecy versus transparency
 Preference for confidentiality VS transparency
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 Professionalism Vs Statutory
Control
 Accountants are perceived to have independent
attitudes throughout the world
 Public regulation or self regulation
 U.K. – rely on judgment of accountant
 France and Germany – implement detailed legal
requirements
 Link to societal value dimensions  Professionalism:
 Individualism
 Weak uncertainty avoidance
 Small power distance
 Masculinity
 Short-term orientation
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 Uniformity versus Flexibility
 Uniform accounting plan and imposition of tax
rules for measurement purposes
 France and Spain
 Facilitate national planning
 Pursue macroeconomic goals
 Intertemporal consistency and some degree of
intercompany comparability of flexibility
 U.S. and U.K.

 Link to societal value dimensions – Uniformity:

 Strong uncertainty avoidance
 Collectivism
 Large power distance
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Authority and Enforcement

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Conservatism versus Optimism
 Conservatism seen as a fundamental value
 Strongly conservative
 Japan, France, Germany, Switzerland
 Less conservative
 U.S., U.K., the Netherlands – though changing post
Sarbanes Oxley -

 Link to societal value dimensions –

Conservatism
 Strong uncertainty avoidance
 Long-term orientation
 Collectivism
 Femininity

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Secrecy versus Transparency
 Stems from management and accountants
 Closely related to conservatism
 Secrecy relates to disclosure
 Conservatism relates to measurement
 Secrecy
 High – Japan, France, Germany, Switzerland
 Low – U.S. and U.K.
 Link to societal value dimensions – Secrecy
 Strong uncertainty avoidance
 High power distance
 Collectivism
 Femininity
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Accounting Values and Societal
Values

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 CULTURAL DIMENSION & ACCOUNTING
VALUES
Relationship to accounting Values
Dimension Profess. Uniformity Conservatism Secrecy

Individualism + - - -
Uncertainty
Avoidance - + + +
Power
Distance - + NR +
Masculinity vs
Feminity NR NR + +
Accounting
practice mainly Authority Application Measurement Disclosure
influenced
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Gray’s Accounting Cultural Dimensions affecting the country’s
Values accounting values
Professionalism vs Professionalism  Statutory Control :
Statutory Control Individualism collectivism
Is there any
Weak relationship of Gray’s
uncertainty
avoidance
strong uncertainty avoidance
large power distance
Accounting
Small powerValues
distance and Cultural
Uniformity Unformity : Flexibility :
vs Dimensions?
Strong uncertainty weak uncertainty avoidance
Flexibility avoidance low power distance
Large power distance individualism
Collectivism
Conservatism Conservatism : Optimism  :
vs Strong uncertainty weak uncertainty avoidance
Optimism avoidance individualism
Collectivism masculinity
Feminism
Secrecy Secrecy : Transparency:
vs Strong uncertainy weak uncertainy avoidance
Transparency avoidance low power distance
Large power distance individualism
Collectivism Masculinity
Feminism 31
 International Pressures for
Accounting Change

 Growing international interdependencies

 Harmonization of the regulatory framework
internationally
 Centrally planned economies embraces market-
oriented approach
 Former USSR, Eastern Europe, China
 New opportunities for international investment,
joint ventures, and alliances

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Economic Groupings and
International Organizations

 European Union
 Promotes economic integration/harmonization
 UN
 World Bank
 International Monetary Fund
 UN conference on Trade and Development
 World Trade Organisation
 OECD
 Foster international economic and social development
in industrialized countries
 “Code of Conduct” for MNEs
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Impact of MNEs and
Globalization

 Cultural and social

 Employment and consumption patterns
 Significantly influenced
 Pressure for more accountability
 Environmental impact

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Impact of MNEs and
Globalization
 OECD, EU, IOSCO work for harmonization
and internationalization of securities markets
 IASB and the International Federation of
Accountants (IFAC)
 Professional organizations involved in
harmonization
 Adoption of International Financial Reporting
Standards (IFRS)

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SO WHAT?
 Accounting is a socially constructed reality
 Accounting is influenced by culture,
economic, politics, social forces and interest
 Accounting is not universal practice
applicable anywhere
 Accounting should be developed based on
unique characteristics of environment in
which accounting take place

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