Chapter 2 Causes of International Differences ACC 4305

Chapter 2 Causes of International Differences ACC 4305 Michel Leseure

Note • Your textbook gives a number of causes of international differences in financial reporting • Bear in mind that these differences appear because accounting: – Uses estimation – e. g. net income – Uses valuation – e. g. plant and property – Targets several audiences – investors, bankers, customers, suppliers, etc. ACC 4305 Michel Leseure

External Environmental & Culture – Individual versus Collectivism • degree of interdependence between individuals – Large versus Small Power Distance • the relative acceptance of the unequal distribution of power – Strong versus Weak Uncertainty Avoidance • the degree to which people feel uncomfortable with uncertainty – Masculinity versus Femininity • Masculinity – a preference for achievement, heroism, assertiveness and material success • Femininity – a preference for relationships, modesty, caring for the weak, and quality of life ACC 4305 Michel Leseure

Values in Accounting Practice • Gray’s pairs of contrasting accounting values: – – professionalism vs. statutory control uniformity vs. flexibility conservatism vs. optimism secrecy vs. transparency ACC 4305 Michel Leseure

Illustration ACC 4305 Michel Leseure

Statutory Control Flexibility Asian Colonial LD Asian Near Eastern African Japan Germanic Nordic Anglo-Saxon LD Latin MD Latin Uniformity Illustration Professionalism ACC 4305 Michel Leseure

Linking Cultural and Accounting values • Many researchers have tried to link cultural values with accounting values – Examples: • High uncertainty avoidance Conservatism • This research stream has only be moderately successful – Declining validity in the context of MNEs and globalization – Other variables have to be considered ACC 4305 Michel Leseure

Linking Cultural and Accounting values Hofstede Values Gray Sub-Values IND UA PD MASC Professionalism Proposed Relationship + - - - Uniformity Proposed Relationship - + + - Conservatism Proposed Relationship - + - - Secrecy Proposed Relationship - + + - Notes: IND = Individualism, UA = Uncertainty Avoidance, PD = Power Distance, MASC = Masculinity ACC 4305 Michel Leseure

The Case of Morocco • Individual versus Collectivism • Large versus Small Power Distance • Strong versus Weak Uncertainty Avoidance • Masculinity versus Femininity • professionalism vs. statutory control • uniformity vs. flexibility • conservatism vs. optimism • secrecy vs. transparency ACC 4305 Michel Leseure

Other Sources of Differences • • Legal systems Providers of finance Taxation The accounting profession Accounting theory Inflation Accidents ACC 4305 Michel Leseure

Legal Systems – Common Law • • Limited statute law, Interpreted by the courts, Case law then supplements the statutes, Less abstract than codified law, company laws/commercial codes do not establish specific rules for accounting, assumes flexibility – Codified Law • General rules for the future (does not address specific cases as in common law), • Uniform company laws/commercial codes establish specific rules for accounting, assumes less flexibility ACC 4305 Michel Leseure

Providers of Finance • Market Based Systems – Large capital market, large constituency of investors, requires broadly distributed investor information • Credit Based Systems – Financial resources provided by the state or by banks, limited distribution of selected information ACC 4305 Michel Leseure

Taxation • Taxation regulations determine accounting practice • Taxation regulations have little influence on accounting practice ACC 4305 Michel Leseure

The Accounting Profession • The size and strength of the profession does have some influence on the country’s accounting system ACC 4305 Michel Leseure

Inflation • Where inflation is relatively high, accounting systems generally adjust (in varying degrees) to account for inflation ACC 4305 Michel Leseure

Accounting Theory • Limited impact • Some in the Netherlands • Minor influence in the U. S. ACC 4305 Michel Leseure