Critical Perspectives on Accounting and Finance International Differences Lecture 1

Critical Perspectives on Accounting and Finance - Team Caroline Chaffer caroline.chaffer@york.ac.uk - 01904 (32)5058 Room 115 (MBA) Monday 12.30-13.30 and Tuesday 14.30-15.30 Jill Webb jill.webb@york.ac.uk - 01904 (32)5044 Room 117 (MBA) Monday 15.30-16.30 and Tuesday 14:30 – 15:30 NB we are now based in the new Management Building Annex located behind the Management Building.

Objectives of the Module – 20 Credits Critically analyse a range of theories on accounting practice Identify some of the limitations of traditional accounting practice Critically evaluate practical and theoretical initiatives in a specific area e.g. social and environmental reporting, capital market research Critically evaluate the social and political nature of accounting Critically evaluate arguments produced for and against the need for accounting regulation and conceptual framework

Work plan Session number Week commencing Lecture Topic Seminar Topic 1   Lecture Topic Seminar Topic 1 16th January Accounting Regulation: The International Picture 2 23rd January Accounting Regulation: Rules v’s Principles 3 30th January Accounting Choice: Statement of Financial Position 4 6th February Accounting Choice: Earnings Management 5 13th February Corporate Social Responsibility Reporting 6 20th February 7 27th February Assignment Overview Assignment preparation 8 6th March Ethics Assignment preparation: incorporating relevant literature/building an argument 9 13th March Critical perspectives in accounting; Politics of standard setting Assignment feedback

Reading List Deegan C. & Unerman J. (2011) Financial Accounting Theory, 2nd edition. McGraw Hill. London Essential and supplementary reading on the VLE – links to library resources Module built around academic articles, text book provides overview

Assessment Individual assignment – 3,000 words Choice of topic Lecture in week 7 to explain the assignment in more detail Week 10 feedback week - feedback on your assignment plans

Assignment Option 1 Use theory and research evidence to critically evaluate possible management motivations for the manipulation of financial statements.

Assignment Option 2 From a theoretical perspective explain why companies produce Social and Environmental Reports (SERS) and use research evidence to support the theory/theories.

How To be Successful Participate/prepare for seminars Still attend if you haven’t prepared Use the reading list on the VLE as A START. You need to do independent research in addition Use the VLE/Yorkshare Ask – feedback and consultation times Use feedback mechanism for assignment

What you need to master Finding literature relevant to the question Reading literature efficiently – what to ignore and what to include Synthesis – pulling together literature from different sources to address the question Developing your writing style Structuring an essay to address a question Critical evaluation without sitting on the fence EACH SEMINAR WILL LOOK AT ONE OF THESE SKILL AREAS SO YOU NEED TO ATTEND EVEN IF YOU’RE NOT DOING THAT ESSAY.

Attendance is important UKBA tier 4 students must maintain regular attendance at seminars, and meetings with their personal supervisors. A register of attendance for both these events will be made. If you are going to be absent as a result of illness or anything else, you should inform your personal supervisor. Once we report a student to UKBA for non-attendance (as we are obliged to), TYMS will have no further involvement in the process and the question of deportation etc. is solely a matter for the UKBA.

International differences Culture Legal systems Code law vs. common law Providers of finance Capital markets Credit based governmental Credit based financial institution Taxation Strength on link between tax system and accounts Other Convergence project EU Scandals

The effect of culture on accounting systems – for example? ‘an expression of norms, values and customs which reflect typical behavioural characteristics’ Affects the way individuals would like their society to be structured and how they act with its substructure Accounting is one of the substructures International differences in accounting systems may be explained by a framework incorporating culture

Hofstede’s cultural dimensions Four underlying societal dimensions along which countries could be positioned: Individualism Power Distance Uncertainty Avoidance Masculinity

Individualism versus collectivism addresses degree of interdependence a society maintains among individuals individualism refers to a preference for a loosely knit social framework wherein individuals care for themselves and their immediate families collectivism stands for a tightly knit social framework where relatives, clan or other in-group look after each other

Power distance power distance is the extent to which members of a society accept that power in institutions and organisations is distributed unequally large power distance societies accept a hierarchical order in which everyone has a place small power distance societies strive for power equalisation

Uncertainty avoidance The degree to which the members of a society feel uncomfortable with uncertainty and ambiguity strong uncertainty avoidance societies maintain rigid codes of belief and behaviour weak uncertainty avoidance societies maintain a more relaxed atmosphere where practice counts more than principles

Masculinity versus femininity Addresses the way in which a society allocates social roles masculinity stands for a preference for achievement, heroism, assertiveness and material success femininity stands for a preference for relationships, modesty, caring for the weak, and quality of life

Lecture exercise Rate your own “cultural dimensions” In respect of the following questions rate yourself on a 1 -5 scale where 1 indicates full agreement with the (a) and 5 indicates full agreement with (b).

Question 1 What are your views on the government setting a minimum price per unit of alcohol sold? Do you think that : (a) this sort of measure is beyond the remit of the state and that people should be left to make their own mistakes? (b) this is a useful government intervention and that it will improve the nation’s well being and perhaps reduce costs in the long term?

Question 2 What are your views on FTSE 100 companies voluntarily setting a quota which specifies a minimum number of women board members? Do you think: this kind of positive discrimination is unfair and that the board should be chosen without these sort of restrictions that even if this doesn’t result in the “optimal” board in terms of merit in the long term it would be worthwhile as it is this sort of policy that redresses inequality between the sexes by inspiring women further down in the hierarchy

Question 3 I prefer exam questions where there is a single right answer which you can get to be following a pre-determined method? I prefer more open ended written exam questions where you can freely interpret the question and use your creativity and imagination?

Question 4 Compare the following 2 individuals: A Chartered Accountant who successfully advises firms on how to minimise their tax liabilities should be more highly paid than ? A successful social worker who makes a consistently correctly identifies cases of child abuse and works with dysfunctional families to cut crime and decrease reliance on benefits? Who should be the more highly paid? The Chartered Accountant The Social Worker

Gray’s accounting values Gray developed 4 accounting values deemed to relate to the accounting subculture, with the intention of linking them to Hofstede’s four societal values professionalism versus statutory control uniformity versus flexibility conservatism versus optimism secrecy versus transparency

Lecture exercise Part 2 Get into a pair Swap cultural preferences Look at the questions on the sheet and use the answers given to try to predict what type of regulation your partner would prefer When you have made your prediction discuss your answers and most importantly the rationale for your predictions i.e. link the preferences to the predictions

Professionalism A preference for professionalism is linked to the following cultural dimensions: Individualism Weak uncertainty avoidance Small power distance Masculinity

Uniformity vs. flexibility A preference for uniformity is linked to the following cultural dimensions: Strong uncertainty avoidance Collectivism Large power distance

Conservatism vs. optimism A preference for conservatism is linked to the following cultural dimensions: Strong uncertainty avoidance Collectivism i.e. low individualism

Secrecy vs. transparency A preference for secrecy is linked to the following cultural dimensions: Strong uncertainty avoidance High power distance Collectivism Masculinity

An example: The UK Regulation largely professional but some legally based (Companies Acts, EU Directives) All companies required to produce financial statements (private & public) Historical emphasis on backward looking financial statements – existing shareholders, agency theory, stewardship Traditionally conservative Common law system Accounting separate from tax Emphasis on transparency & flexibility

An example: The US Regulation largely professional (FASB) but SEC overall responsibility Only listed companies required to produce financial statements Historical emphasis on decision usefulness to existing and potential investors and creditors Traditionally neutral Common law system Accounting separate from tax Emphasis on transparency but less flexibility than UK (rules based system)

Accounting regulation: the story so far… Countries have developed their own accounting regulation although in many cases influenced by the UK & US Rules developed in a specific context will be unique to that context Over the last 25 years attempts made to harmonise these rules

What is harmonisation? Harmonisation: process of increasing comparability of accounting practices by setting bounds to their degree of variation De Jure : harmonisation of the rules De Facto: harmonisation of practices Standardisation: process which leads to the imposition of a narrow set of rules Uniformity: single set of identical accounting rules Harmonisation can happen without uniformity: convergence

Pressures for harmonisation Accounting & world politics 1978 – 2005 EU harmonisation programme 1989: Collapse of communism – Germany 1997: Financial crisis in East Asia 2001: Collapse of Enron Economic globalisation Foreign trade International Direct Investment

Foreign company listings on major stock exchanges Table 1.7 Foreign company listings on major stock exchanges, January 2011

Uniform accounting standards Against Cost: economies of scale Provide protection to auditors Elimination of externalities caused by lack of comparability Might lead to more accurate, comprehensive and timely information – reduce the cost of capital May result in better quality of standards Might not lead to optimal accounting quality as one size does not fit all Markets remain primarily local not global Standards are expensive - principles based? Application of international standards requires a strong profession Economic consequences Uniform standards (De Jure) do not always lead to uniform practice (De Facto)

Some issues around comparability Inefficient allocation of capital Cost to multinationals Lack of equity between small and large investors Cost for companies of listing on international stock exchanges Lack of flexibility and efficiency in the use of qualified staff – audit and accounting

Convergence or uniformity? May be able to have some of the advantages of uniformity without the drawbacks Converge national standards: best of both worlds Competition between standards?

De facto harmonisation? Can IFRS materially change reporting behaviour – real economic and political factors that are local in nature Different versions of IFRS Different translations of IFRS Overt options in IFRS Vague criteria Role of judgement – different judgements Lack of an enforcement mechanism

Summary You should be able to: Explain uniformity, standardisation and harmonisation Critically evaluate harmonisation and standardisation and outline the alternatives Give an overview of the current position re accounting regulation in the EU Explain why countries have developed different accounting regulations Explain why dejure harmonisation might not lead to defacto harmonisation

Seminar History: what happened when and why? What are the influences on accounting? Current position: Listed companies Unlisted companies Each group should have a country: Germany, Japan and China