Accounting Theory Chapter 4

4.1 In the context of financial accounting, what is harmonisation and what is standardisation?

 Harmonisation means efforts to make the accounting standards being released by

different countries as similar as possible to remove all fundamental differences.
 Standardisation of accounting means it standards by a multitude of differnet countries,
with different enforcement mechanisms, different forms of capital markets, different
cultures, and so forth, might be considered to lead to the standardisation of accounting
practice.

4.2 Global standardisation of accounting requires the United States to adopt IFRS. Do you
think it is likely that the United States will embrace IFRS in the near term, and what do you
think are some of the factors that might discourage the country from adopting IFRS?

The United States as we all know, is one of the superpower countries. The US used
GAAP, but since most of the countries switched to IFRS (rules-based) the US needs to address
this matter. It is likely for the United States to adopt IFRS in the near term, but IASB and FASB
has to seek a way where they can converge the two standards. The factors can be like how these
boards must accept that the project they try to accomplish will lead to accounting standards
that are appropriate to US context, and they also need to change some things.

4.3 Identify some factors that might be expected to explain why different countries necessarily
mean that the accounting procedures and practices they adopt will be consistent and
comparable internationally?

 These are some factors:

- It is argued that as countries become more ‘wealthy’ they intended to develop
their own accounting standards. Less developed countries typically adopted the
accounting standards issued by the IASC/IASB.
- It has been argued that the nature of the domestic business ownership and
financing systems can influence the accounting methods being used within a
country.
- It has been argued that the colonial inheritance or history of a company will
impact the accounting methods employed.
 - Invansion is another factor that can affect accounting practices. A country
invaded by another may have a particular method of accounting imposed upon
it.

4.4 Does the adoption of IFRS by different countries necessarily mean that the accounting
procedures and practices they adopt will be consistent and comparable internationally?

 There are several reasons why the standardisation of accounting will not necessarily
lead to standardisation in practice:
- In many countries tax-driven accounting choices flow through to financial
statements compiled pursuant to IFRS.
- Differences in the economic and political forces operating within a country will
have implications for various decisions and judgements made throughout the
accounting process.
- Different countries will have varying levels of expertise in applying IFRS.
 There will always be differences amongst countries’ accounting practices despite of
whatever IASB has been doing.

4.5 After considering the Hofstede-Gray model, briefly explain the hypothesised link between
society values, accounting values and accounting practice.

Grey model developed in the Hofstede model (Hofstede, 1980) in relation to cultural
patterns in which the values and practices of accounting as a subset of social values and
symbolic consequences have been added. Gray believes that the accounting value of a subset
of social values, so they can be considered as a replica of the larger societal value dimensions
in financial reporting and accounting standards appears. Gray (1988) further hypothesised that
relationships can be established between accounting values and the authority and enforcement
of accounting systems (the extent to which they are determined and enforced by statutory
control of professional means), and the measurement and disclosure characteristics of the
accounting systems. One objective of Gray’s research was to explain how differences between
countries in respect of their culture may either impede any moves towards international
harmonisation of accounting standards or bring into question efforts to generate some form of
harmonisation or standardisation.
4.6 Any effort towards standardising accounting practices on an international basis implies a
belief that a globalised ‘one size fits all’ approach is appropriate. Is this naive?

Kind of, and we all agree that no matter what, differences still exist. But, IASB has tried
and keeps trying to improve the standardisation with the implication of ‘one size fits all’. The
standard-setting process in many countries is a political process, when developed in this way,
accounting standards in one country would be developed differently in other countries.
However, IASB operates for a reason, doesn’t it.

4.7 Continental European countries historically relied upon capital provided by the state, banks
or families whereas other countries, such as the United States, the United Kingdom, Canada
and Australia have relied on receiving funding from a large number of external investors. How
would do this difference in funding sources impact the type of reporting undertaken and the
expertise of the local accounting profession?

Again, it is no surprise if a country has different developed accounting system from the
others, different culture, political circumstances and so on. Countries are not isolated so various
external factors actually influence how they undertake their accounting. When a country is
developing economically, foreign institutions might provide accounting ‘assistance’. Thus, we
must appreciate that culture alone cannot be expected to explained the differences because there
are many outside factors that might have influenced accounting methods.

4.8 While it is often argued that within particular countries there should be some association
between various value systems and accounting systems, it is also argued (for example, by
Baydoun and Willett, 1995) that over time many events might confound the expected
relationship?

The theoritical argument about the relationship between societal values, accounting
values, and accounting practice as developed by the Hofstede-Gray analysis might be logical.
Assuming that cultural differences can explain international differences in accounting practices
is perhaps kind of “lazy” because we ignore the other external factors that might have
confounded the finding of thsi theoritical relationship.

4.9 Baydoun and Willetts (1995, p. 72) identify a number of problems in testing the Hofstede-
Gray theory. They emphasise that many accounting systems are imported from other countries
with possibly different cultures. As they state: ‘Due to the inteference in what would otherwose
have been the natural evolution of financial information requirements, there are no
uncontaminated examples of modern accounting practices in developing countries.
Consequently great care has to be taken in using data from developing countries to draw
inferences about relevances on the basis of the Hofstede-Gray framework.’ Explain Baydoun
and Willett’s point of view. Do you believe that they are correct?

Different beliefs would influence people on how they do their business, make decisions,
and the information they use for decision making. They note that how notions in stewardship
are not relevant to Islam as resources are deemed to be held in trust of God, rather that providers
of debt and equity capital. Also, various conceptual framerwork projects developed in Western
countries discuss the objective of financial reporting in terms of assisting with ‘rational
economic decision making’ which such decisions were associated consideration of interest
rates, would be irrelevant within Islamic states.

4.10 As noted in this chapter, Hamid, Craig and Clarke (1993) provide an argument that
religion can have a major impact on the accounting system chosen by a particular country and
that before ‘Western’ methods of accounting are exported to particular countries it must be
determined whether particular religious beliefs will make the ‘Western’ accounting policies
irrelevant. Explain their argument.

Religion can potentially affect how people do business and how the make decisions. As
we will be seen in Chapetr 6 , the conceptual framework projects developed in countries such
as the United States, Australia, Canada, the United Kingdom and New Zealaand and by the
IASB’s predecessor are based on the underlying objective that financial report users require
financial information as the basis for making rational economic decisions also take into account
the time value of money, which necessarily requires considerations of appropriate interest or
discount rates. In some societies, such as Islamic states, this may not be relevant objective.
Further, any claims that particular frameworks of accounting are superior to others should only
be made after considering the environments in which teh frameworks are to be used.