Accounting Theory & Standard

Week#8: Accounting Harmonisation

BBA 23rd Batch

Md. Saiful Alam, PhD FCMA

Associate Professor
Dept. of Accounting & Inf. Sys.
University of Dhaka
Harmonisation vs. Standardisation/Convergence
• Commonly used two terms: standardisation and harmonisation

• ‘Harmonisation’ is defined as a process of increasing the compatibility of accounting

practices by setting bounds to their degree of variation

• ‘Standardisation’, by contrast, appears to imply the imposition of a more rigid and

narrow set of rules (than harmonisation)

• Therefore, the term ‘harmonisation’ appears to allow more flexibility than

standardisation

• What is happening through the efforts of the IASB is a process of standardisation

– This is also known as ‘convergence’

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Perceived Benefits of Harmonisation/Standardisation
• international investors are better able to understand the financial
performance and position of local companies
• tied to the above point, there is an expectation that standardisation will
facilitate greater capital inflows
• also tied to the above point, standardisation will make it easier for local
companies to list on foreign stock exchanges
• companies listed on several stock exchanges would only need to
produce one set of financial statements and this will have implications
for cost savings

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Perceived Benefits of Harmonisation/Standardisation
• the accounting and auditing staff employed by international organisations will be
better able to move to other member companies

• there will be cost savings in the accounting-standard setting function—rather than

individual companies duplicating the efforts of others, the majority of functions of the
standard-setting process will be centralised at the IASB

• a perception that IFRS will lead to more accurate, comprehensive and timely financial
statement information, relative to the information that would have been generated
from the national accounting standards they replaced

• to the extent that the resulting financial information would not be available from other
sources, this should lead to more-informed valuations in the equity markets, and
hence lower the risks faced by investors

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Major Forces Leading to Harmonisation/Standardisation
• Emergence of MNCs

• Globalisation

• Regional, Political, and Economic Integration

• Global Integration of Capital Markets

• The Supranational Institutions

– World Bank, IMF, WTO etc.

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International Financial Accounting Model
• Historically there have been two main models of financial accounting adopted
internationally
• Anglo-American model
– strongly influenced by professional accounting bodies rather than government,
emphasises importance of capital markets, emphasises true and fair, considerations
of economic substance over legal form

• Continental European Model

– relatively small input from accounting profession, little reliance on qualitative true and
fair, strong reliance on government

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Reasons for International Accounting Difference
• Underlying laws and political systems
• Tax systems
• Level of education
• Level of economic development
• Nature of business ownership and financing system
• History & Colonial inheritance
• Culture
• Language
• Religion

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Culture and Accounting System
• Differences in national cultures has been used by many researchers to explain why,
prior to the efforts of the IASB, there were fundamental differences between nation’s
accounting practices (although, keep in mind the previous discussion that suggests
that the global use of IFRS will not necessarily standardise accounting practice)
• Culture impacts on legal systems, tax systems and the way businesses are formed
and financed etc.
• Previously used to explain differences in social systems
• Culture can be defined as ‘… an expression of norms, values and customs which
reflect typical behavioural characteristics’ (Takatera & Yamamoto 1987)

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Culture and Accounting System
• ‘Culture’ reserved for societies as a whole or nations
• ‘Subculture’ used for the level of an organisation, profession or family
• International differences in accounting systems may be explained by a framework
incorporating culture
• Hofstede identifies four underlying societal dimensions along which countries could
be positioned
• Individualism versus Collectivism
• Large versus Small Power Distance
• Strong versus Weak Uncertainty Avoidance
• Masculinity versus Femininity

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Culture and Accounting System

• The value systems of accountants is/will be derived from and related

to societal values

• Without the intervention of organisations such as the IASB, these

societal values will in turn impact on the development of accounting
standards at a national level
• should accounting systems be developed in a ‘one-size-fits-all’ approach?

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Culture and Accounting System- Empirical Evidence

• Gray (1988) developed four 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

He developed the following hypothese-

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Culture and Accounting System- Empirical Evidence
• H1: The higher a country ranks in terms of Individualism and the lower it ranks in
terms of Uncertainty Avoidance and Power Distance, the more likely it is to rank
highly in terms of Professionalism
• H2: The higher a country ranks in terms of Uncertainty Avoidance and Power
Distance and the lower it ranks in terms of Individualism, then the more likely it is to
rank highly in terms of Uniformity
• H3: The higher a country ranks in terms of Uncertainty Avoidance and the lower it
ranks in terms of Individualism and Masculinity, then the more likely it is to rank
highly in terms of Conservatism
• H4: The higher a country ranks in terms of Uncertainty Avoidance and Power
Distance and the lower it ranks in terms of Individualism and Masculinity, then the
more likely it is to rank highly in terms of Secrecy

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Culture and Accounting System- Empirical Evidence

• Zarzeski (1996)
• used Hofstede’s dimensions to explain corporate disclosure

• entities with a higher international profile tend to be less secretive

• local enterprises are more likely to disclose information commensurate with the
secrecy of their culture than are international enterprises

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Culture and Accounting System- Empirical Evidence
• Perera (1989)
• used Hofstede’s cultural dimensions and Gray’s accounting subcultural value dimensions to
explain differences in the accounting practices of European and Anglo-American countries

• Baydoun and Willett (1995)

• investigated the use of the French United Accounting System in Lebanon

• Chand and White (2007)

• explored various cultural attributes within the Fijian society to determine whether the recent
adoption of IFRS within the Fijian context made sense. Their view was that rules-based
standards would be more appropriate than the principles-based standards that have been
developed by the IASB.

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So, there are many obstacles !!!
• Hence, to this point we can see that there are many explanations for international
differences
• Given the many factors that explain why international differences in accounting will,
or perhaps should exist, then how logical are efforts towards international
standardisation?
• Do we think that the efforts of the IASB are likely to succeed in the long-run?
• Will diverse countries with different cultures, religions, finance systems and so forth
start to question a ‘one-size-fits-all’ approach emanating from London?
• Time will tell …

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