Kwame Nkrumah University of

Science & Technology, Kumasi, Ghana

ACC 559/ACF 655

ACCOUNTING THEORY

Lesson 7: International Accounting

Department of Accounting and Finance

Dr Abukari Salifu Atchulo

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 Lecture Outline

• Evidence of international differences in accounting

• International financial accounting models
• Hofstede’s cultural dimensions
• Gray’s accounting values and Hypothesis
• Some reasons for harmonisation and Standardisation

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 Evidence of International differences in Accounting
• When we apply different countries’ accounting rules to the
same transactions we can find significant differences in profits
and net assets
• (Task: consider two countries with different rules and evaluate
the implications for net assets and profit)
• The sometimes significant differences in accounting profits
have been used by many parties to justify the ongoing efforts
of the IASB to standardise international accounting

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 International Financial Accounting Models
• 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 Differences
1. nature of business ownership and 9. legal systems
financing system 10.culture
2. colonial inheritance 11.history
3. invasions 12.geography
4. taxation 13.language
5. inflation 14.influence of theory
6. level of education 15. political systems, social climate
7. age and size of accountancy 16.religion.
profession
8. stage of economic development
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 Hofstede’s Cultural Dimensions

• 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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 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

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 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

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 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

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 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

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 Societal Dimensions and Accounting subculture
• The value systems of accountants are derived from related
societal values
• The values of the accounting subculture will in turn impact on
the development of the respective accounting systems at a
national level
– should accounting systems be developed in a ‘one-size-fits-all’
approach?

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 Gray’s Accounting Values

• Gray 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

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 Gray’s hypotheses
• 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

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 Gray’s hypotheses
• 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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 Gray’s hypotheses

• Gray further hypothesised relationships between accounting

values and
– the authority and enforcement of accounting systems
– the measurement and disclosure characteristics of accounting
systems

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 Other research using Hofstede’s cultural
dimensions
• 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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 Other research using Hofstede’s cultural
dimensions
• 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

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 The effect of religion on accounting systems
• Religion transcends national boundaries
• Impacts on global harmonisation of accounting standards
• Hamid, Craig and Clarke (1993) examined how Islamic cultures
have failed to embrace ‘Western’ accounting practices
– compliance with Islamic beliefs can affect the structure of business
and finance
– many Western accounting practices are incompatible with Islamic
principles
– relevance of IASB standards to such cultures?

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 The effect of religion on accounting systems
• Religion can affect how people do business and how they make
decisions, for example
– Islam precludes debt financing and prohibits payment of interest
– the Western objective of financial reporting of rational economic
decision making (refer to the conceptual frameworks to be discussed
in lecture 5) may not be a relevant objective in some societies

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 Legal systems

• Can be broadly divided into common law and Roman law

systems
– in Roman Law systems the law tends to be very detailed
– in Common Law systems—which is how Australia can be classified—
law typically evolves from the ruling of judges
• In Common Law countries accounting practices tend to rely
relatively heavily on professional judgment

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 Business ownership and financing system

• At a country level the financing system is relevant to the

purpose of financial reporting
• Three types of financing systems
– capital market-based (e.g. United Kingdom and United States)
– credit-based system: governmental (e.g. France and Japan)
– credit-based system: financial institutions (e.g. Germany)

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 Business ownership and financing system

• Systems relying on equity markets will have greater demand

for public disclosures
• Credit-based systems more concerned with the protection of
creditors
• Colonial inheritance also a major explanatory factor

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 Taxation systems

• Differences in accounting methods internationally have also

been linked to differences in taxation systems
• Where there are ‘insider systems of finance’ (common in
continental European countries) financial accounting practices
have typically been linked to taxation law

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 Impact of international agencies

• Examples of institutions or bodies which can impact on a

country’s accounting policies are
– multinational companies
– international accounting firms
– large monetary organisations e.g. World Bank

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 Approaching international differences

• 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?

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 Harmonisation and Standardisation
• Nobes and Parker (2010, p. 80) distinguish between
‘harmonisation’ and ‘standardisation’ of accounting. They
define harmonisation as ‘a process of increasing the
compatibility of accounting practices by setting bounds to their
degree of variation’.
• Standardisation of accounting is explained as a term that
‘appears to imply the imposition of a more rigid and narrow set
of rules [than harmonisation]’ (p. 80).

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 Reasons for harmonisation and standardisation
• There is a difference between harmonisation and
standardisation
• Harmonisation is ‘a process of increasing the compatibility of
accounting practices by setting bounds to their degree of
variations’
• Standardisation is ‘the imposition of a more rigid and narrow
set of rules
• Internationalisation of accounting - a process of
standardisation?
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 Reasons for harmonisation and standardisation

• Some arguments in support of standardisation include

– 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

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Reasons for harmonisation and standardisation
– companies listed on several stock exchanges would only need to
produce one set of financial statements and this will have
implications for cost savings
– 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

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 Obstacles to standardisation
• Effects on standard setting of different
– business environments
– legal systems
– cultures; and
– political environments in different countries
• IASs and IFRS are strongly Anglo-American influenced
• Relevance of IAS/IFRS to some countries is questioned
• Economic implications of adopting a ‘new’ set of accounting
standards
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 International Accounting Standards Board (IASB)

• The IASB replaced the IASC in 2001 (the IASC was formed in
1973)
• IASB has 14 full-time members who have to sever their
connections with other organisations
• In 2007 a decision was made by the Institute of Chartered
Accountants [ICA] of Ghana through Parliament that Ghana
would adopt standards released by the IASB

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 International Accounting Standards Board (IASB)
• The ICAG’s decision created a great deal of work for
organisations because they had to make quite significant
changes to their accounting practices
• The adoption of IAS/IFRS required companies to write off a
great deal of assets—particularly intangible assets
• Emerging evidence suggests tax liabilities and net worth of
companies became lower under the IFRS
• Worth the effort?

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 Objectives of IASB
• To formulate and publish accounting standards and to promote
their worldwide acceptance
• To work on the improvement and standardisation of
regulations, accounting standards and procedures
• The IASB does not appear to believe that the many reasons
provided as to why different nations should have different
accounting standards (e.g. tied to differences in culture,
religion and so forth) outweigh the benefits of international
standardisation

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 Aims of IASC/IASB
• Short-term aim—for national accounting standards and IASs to
converge
• Long-term aim of global uniformity—a single set of accounting
standards for all listed and economically significant business
enterprises around the world

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 International Organization of Securities
Commissions (IOSCO)

• Working with IASB, has assisted IAS/IFRS to achieve

widespread acceptance
• Developed a plan such that compliance with IAS/IFRS will allow
an organisation to have securities listed in all global markets

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International Federation of Accounting Committee
(IFAC)
• Concentrates on international issues associated with the
practice of auditing and accounting education
• Also issues associated with ethical conduct

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Conclusion

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