Accounting 6570 Worldwide Accounting Diversity

Accounting Diversity Differences exist everywhere! –Language –Currency –Terminology –Reports required –Report formats –Measurement practices –Disclosure practices –Application of accounting rules –Level of detail

Magnitude of Accounting Diversity Gray’s Conservatism Index 1 - (RA-RD/|RA|) RA = adjusted earnings RD = original earnings Index > 1.00; Original earnings are less conservative than adjusted earnings Index < 1.00; Original earnings are more conservative than adjusted earnings

Magnitude of Diversity Gray’s Conservatism Index –U.K. least conservative –Japan most conservative –Continental European countries more conservative than U.S. but less conservative than Japan There is a trend towards compliance with International Accounting Standards/IFRS or U.S. GAAP by foreign companies

Reasons for Accounting Diversity Accounting reflects characteristics of its national environment Environmental variables influence and help explain why business is conducted differently in different countries Cultural relativism: the rationality of any behavior should be judged in terms of its own cultural context

Environmental Influences Legal system –Civil versus common law Rules based or judgment/precedent oriented –How it affects accounting regulation Standard setting in public or private sector Accounting Profession –How influential the profession is in the business world –Formalization of accounting standards Taxation –Requirements that financial income must equal taxable income

Environmental Influences Providers of Financing –Banks and family members versus public debt and equity –Degree of capital market development –Institutional versus individual investors Inflation –Must be accounted for if it is a problem –Will influence financial reporting if present

Environmental Influences Political and Economic Ties –Political systems Central planning versus private enterprise –Accounting regulation Enforcement of standards –International factors Trade Influences Colonial influences Regional trade blocs

Environmental Influences Social climate –Attitudes toward work, management, employee involvement, wealth –Value systems and attitudes

Problems with Accounting Diversity Cost of preparing financial statements under different standards is great. Access to foreign capital markets may be impaired. International comparability is hindered. Lack of high quality accounting information impedes acquisitions. People often have a home country perspective even when statements are reconciled and translated.

Classification of Accounting Systems Deductive approach –Identifies relevant environmental factors and links them to national practices –Describes accounting systems that should be similar, normative Inductive approach –Looks at accounting practices being used now –Tries to gather similar groupings

Classification Deductive Approach Nobe’s model –Macro-uniform (government/tax/legal vs. government/economics orientations) –Micro-based (business/pragmatic oriented or business/economic theory oriented) –Supported by Doupnik and Salter (1993)

Classification Inductive Approach Describes what is going on in the business world Nair and Frank 1980 studies –1973 and 1975 –Found differences in groupings based on measurement and disclosure practices

Cultural Influences Hofstede’s Study Study conducted in 1980s Looked at the structural elements of culture that affect behavior in work Evaluated values of IBM employees in 50 countries

Cultural Influences Hofstede’s Study Basic Value Systems –Individualism vs. Collectivism –Power Distance (Large vs. Small) –Uncertainty Avoidance (Strong vs. weak) –Masculinity vs. Femininity –Short-term vs. Long-term orientation

Cultural Influences Gray’s Accounting Values Professionalism vs. statutory control Uniformity vs. flexibility Conservatism vs. optimism Secrecy vs. transparency Figure Conservatism and secrecy Next slide (Flexibility and professionalism) There is support for culture as an influential factor in the development of accounting.

Divisions of International Classifications More-developed Latin - France, Italy, Brazil, Spain Less-developed Latin – Mexico, Chile, Venezuela More-developed Asian - Japan Less-developed Asian – Indonesia, Pakistan, India Near Eastern – Arab countries, Greece, Turkey, Iran African – East Africa, West Africa Asian Colonial – Hong Kong, Singapore Germanic – Germany, Austria, Israel and Switzerland Anglo-American - U.S., U.K., Canada, Australia Nordic – Netherlands, Denmark, Finland, Sweden