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Chapter 2: 

Chapter 2 International Accounting Patterns, Culture and Development

Classification of Accounting and Reporting Systems: 

Classification of Accounting and Reporting Systems Classification aids in Describing, analyzing, and predicting the development of accounting systems Strategic planning and control decisions International systems integration The Challenge? Adapt past effective techniques to meet the demands of the global market Must understand international traditions and heritage

Purposes of International Classification: 

Purposes of International Classification Describe and compare international systems Improved understanding of Similarities and differences of systems Development of systems and potential for change Dominance of some systems over others Assess issues of international harmonization Identify and solve problems

Purposes of International Classification: 

Purposes of International Classification Developing countries will be informed of systems in other countries Aid international accountants and auditors Problems with accounting and control systems for MNEs – understood and solved

Classification Research: 

Classification Research Deductive or judgmental approach Environmental factors identified and linked to national accounting practices International groupings or development patterns are proposed Inductive or empirical approach Individual practices analyzed Development patterns or groupings identified Explanations based on economic, social, political, and cultural factors proposed

Deductive approach: 

Deductive approach Mueller’s four approaches to accounting development Macroeconomic pattern Business accounting is tied to national economic policies – Examples: Sweden, France, Germany Goals of Corporation follow rather than lead national economic policies (e.g., might smooth earnings to promote economic stability) Microeconomic pattern Accounting is a branch of business economics – Example: replacement-value accounting in Holland Maintenance in real terms of monetary capital invested in entities.

Mueller’s classification system: 

Mueller’s classification system Mueller’s four approaches (continued) Independent discipline pattern Accounting is a service function derived from business practice – Examples: U.S. and U.K. Accounting is considered to be capable of developing its own conceptual framework from business practice – self regulating like other professions Uniform accounting pattern Accounting is an efficient means of administration and control – Ex: France, Germany, Sweden, Switzerland In addition, other influences such as the legal system, political system, and social climate impact (Eg. Sarbanes Oxley) – witch hunt for poor practices.

Cultural Influences on Accounting Systems: 

Cultural Influences on Accounting Systems Importance of Culture/Historical roots on accounting systems is increasingly being recognized Culture is considered an essential element in the understanding norms / values Culture/Societal values at nat’l level permiate organizational/occupational subcultures Accounting systems and practices can influence/reinforce values

Structural Elements of Culture: 

Structural Elements of Culture Hofstede – 4 Underlying societal dimensions Individualism Power Distance Uncertainty Avoidance Masculinity Hofstede and Bond – 5th dimension Short v. Longterm Orientation: Confucion Dynamism

Hofstede’s Societal Dimensions: 

Hofstede’s Societal Dimensions Individualism versus Collectivism People’s self-concept: “I” or “we” : U.S. v Europe? Large versus Small Power Distance How a society handles power inequalities among people / organizations – distributed unequally. Large power distance: accept hierarchical structure Small power distance: strive for me equality Masculinity – preference for achievement, heroism, assertiveness, material success Feminism: preference for relationships, modesty, caring Allocation of social roles (not biological) to the sexes

Hofstede’s Societal Dimensions - Continued: 

Hofstede’s Societal Dimensions - Continued Strong v. Weak Uncertainty Avoidance Degree to which society is OK with ambiguity Strong: demand uniformity, intolerant of deviation Weak: more relaxed, practice > principle, deviance from norm OK Short v. Long-term Orientation: Confucion Dynamism ST: respect for tradition, social obligations regardless of cost / quick results LT: adaptation of traditions to meet modern needs / thrifty sparing approach to resources

Accounting Values v. Societal Values – Gray : 

Accounting Values v. Societal Values – Gray Professionalism versus 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 v. transparency

Professionalism versus Statutory Control : 

Professionalism versus 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

Uniformity versus Flexibility: 

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 b/c of flexibility U.S. and U.K. Link to societal value dimensions – Uniformity Strong uncertainty avoidance Collectivism Large power distance

Authority and Enforcement: 

Authority and Enforcement

Conservatism versus Optimism: 

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 Sarbanes Oxley – impact: authority enforcement / Measurement disclosure figures 2.5 / 2.6

Secrecy versus Transparency: 

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

Accounting Values and Societal Values: 

Accounting Values and Societal Values

Accounting Values and International Classification: 

Accounting Values and International Classification Accounting values most relevant to professional or statutory authority and enforcement Professionalism and Uniformity Both concerned with regulation and degree of enforcement or conformity Accounting values most relevant to measurement and disclosure Conservatism and secrecy Country groupings Optimistic and transparent Conservative and secretive

International Pressures for Accounting Change: 

International Pressures for Accounting Change Growing international interdependencies Harmonization of the regulatory framework internationally Centrally planned economies embraces market-oriented approach Former U.S.S.R., Eastern Europe, China New opportunities for international investment, joint ventures, and alliances

Economic Groupings and International Organizations: 

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

Impact of MNEs and Globalization: 

Impact of MNEs and Globalization Cultural and social Employment and consumption patterns Significantly influenced Pressure for more accountability Environmental impact

Impact of MNEs and Globalization: 

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