Worldwide accounting diversity
I. Considerable differences exist across countries in the accounting treatment of many items. These differences can result in significantly different amounts being reported in the financial statements prepared by companies using different GAAP.
II. A variety of factors influence a country’s accounting system.
A. Legal system – in code law countries, accounting rules tend to be legislated; common law countries tend to have a non-legislative organization that develops accounting standards.
B. Taxation – financial statements serve as the basis for taxation in many countries. In those countries with a close ...view middle of the document...
B. Companies interested in obtaining capital in foreign countries may be required to provide financial statements prepared in accordance with accounting rules in that country, which are likely to differ from rules in the home country.
C. Investors interested in investing in foreign companies may have a difficult time in making comparisons across potential investments because of differences in accounting rules across countries.
D. There is a lack of quality accounting standards in some parts of the world. The 1997 East Asian financial crisis was at least partially attributable to a lack of high quality accounting in the region.
IV. There are two major classes of accounting systems, the micro-based class and the macro-uniform class.
A. The micro-based class of accounting is found in common law countries, where there is a separation of accounting from taxation, and shareholders are an important source of financing. Information is developed primarily for equity investors, with adequate disclosure serving as a major objective.
B. The macro-uniform class exists in code law countries, where accounting serves as the basis for taxation, and families, banks and government are the major providers of capital. Income measurement is more conservative and disclosure is lower than in the micro-based class of countries.
V. National culture is another factor long thought to influence a country’s accounting system. Using Hofstede’s (1980) societal value dimensions, Gray (1988) developed the following hypotheses:
A. Conservatism hypothesis – countries high on uncertainty avoidance and long-term orientation, and low on individualism and masculinity will foster a more conservative approach to measurement.
B. Secrecy hypothesis – countries high in power distance, uncertainty avoidance, and long-term orientation, and low on individualism and masculinity will exhibit more secrecy (less disclosures) in accounting reports.
C. Research results provide some support for these hypotheses, especially the hypothesis that culture affects the level of disclosure in accounting reports.
VI. Nobes introduced a simplified model of the reasons for international differences in financial reporting in 1998. In this model, the class (A or B) of accounting used in a country is a function of the strength of the equity-outsider financing system, which is a function of a nation’s culture, including its institutional structures.
A. Class A accounting systems are oriented toward providing information to outside shareholders (less conservative, more disclosure). This is consistent with the micro-based class of accounting.
B. Class B accounting systems are geared to taxation and creditors (more conservative, less disclosure, accounting follows tax rules).
C. Nobes suggests that countries in Class B countries that are interested in competing for equity capital will adopt a Class A accounting system if allowed to do so.