Harmonisation of International Accounting Standards - Essay Example

Introduction The international accounting community has been struggling to achieve the goal of harmonizing the accounting standards around the worldand the period of last five years particularly depicts a picture of their continued efforts in convincing the world towards the unification of accounting standards and principles. However, most countries are reluctant to adapt this change because it does not only encompass the transition from a country's national accounting principles to the International Accounting Standards, but it also compels the country into a cultural and political dilemma as these have a profound impact on the accounting techniques and principles embedded into a country's financial system. This, in fact, has made the progress of conversion more inert and indolent for the international community. Japan is one of those countries that are improving its accounting principles in the light of internationally recognized standards. Japan has been currently advancing out of its conventional bank-based economy, under which the Japanese corporations raised funds for their business from banks that used to monitor and regulate the corporation's management and eventually there happened be no need on the part of the companies to disclose their business information. This minimum exposure made the Japanese financial reporting less acceptable to the international community. Therefore, in order to get over the prevailing situation, Japan has been struggling to bring its accounting system in compliance with the international standards to enhance the international credibility of Japanese financial reporting and to improve the Japanese GAAP in compliance with the accounting standards developed by International Accounting Standards Board. Importance of Culture in the Development of Accounting Standards The cultural environment of a country plays a significant role in determining the development of its accounting standards and financial reporting system. Infact, it is supposed to have acted as the foundation stone upon which the origin of accounting rests. As Baladouni (1979, p326-327) points out that "the origin, content, or mode of being of accounting was found to be based on cultural and social forces". The accounting structure of a country depends upon social and cultural values prevailing in a society and hence the environment plays an essential role in the diversification of accounting standards among different countries. Mueller (1968) illustrated that the social and environmental conditions the development of accounting standards and principles are the currency composure and balance, legal and political pressures, segregation of ownership and control, economic development and literacy status etc. Nair and Frank (1980) said that the accounting principles and techniques of a country are influenced by its cultural and economic environment. Baladouni (1979) further commented that the "cultural framework" specifies a group of institutions in the society, representing the most important part of its culture and the feature of general social activities that influence the development of accounting functioning. To assess the basis of distinctness and contrariness lying amongst various cultures, the research carried out by Hofstede (1980, 1983 and 1987) is significant as it studies different dimensions of drawing a comparison and distinction between different cultures prevailing in different nations influencing upon their accounting standards. The four dimensions pointed out by Hofstede (1987, p4-5) best illuminate the ground on which we can rest the reasons behind major cultural differences among various countries. These dimensions are as follows: Power Distance: This refers to the distance or balance of power between the giant and the small dwelling in the society. It is about how responsible a society evaluating the distribution of power among different members of the society. This aspect may vary form nation to nation as not every nation equally distributes the power among its members. Uncertainty Avoidance: This aspect covers the social attitude of different members in the time of dismay and distress. It is about how people form different societies react to the uncertain and ambiguous situations, whether they show rigidity or exhibit flexibility. Individualism and Collectivism: The members in a society act as groups as well as Individuals. As individuals they cherish their immediate families only whereas as groups, they remain embedded into social groups such as extended families. This brings to attention the fact that within different societies prevail different concepts encompassing individualism and collectivism. Masculinity versus Femininity: This dimension refers to different roles played by masculine and feminine genders in a society. These roles and the concepts behind the roles clash with that of any differences prevailing among the members of a different society. Gray (1988) also puts forth the concept that the culture forms a profound impact on the development of accounting standards in a country. Gray (1988, p8) illustrates the four well-known accounting values that are concerned with the regulation of accounting information. These values are discussed below: Professionalism versus Statutory Control: An attitude allowing the individuals to act on their own professional judgement and the concept of self-regulatory behaviour rather than formulating a standard to regulate the individual activities and imposing a legal control. Therefore, this attitude prevailing in some societies make the accounting information less reliable. Uniformity versus Complexity: The concept of applying and imposing uniform practices collectively for all the companies and the requirement of practising them without any consideration for individual state of a company and specific circumstances. Conservatism versus Optimism: Conservatism refers to having a proactive and cautious approach towards future events and uncertainties whereas optimism is about a more positive attitude regarding future events and probabilities. Both these attitudes highly determine the social attitude towards the accounting values. Secrecy versus Transparency: The approach which determines the attitude towards disclosure of individuals towards business information. Secrecy refers to confining or limiting the disclosure of information to the concerned people such as managers and financers whereas transparency is about the concept of transparent and openly disclosed accounting information made available to general public Therefore both the models suggest that cultural and social attitudes do play a significant and considerable role in the formulation and development of accounting standards within a nation and hence this element needs further elaborated investigation if these standards an principles are to be harmonised internationally. References Hofstede, G. (1980), "Cultures consequences", Newbury Park, CA: Sage. Hofstede, G. (1983), "Dimensions of national cultures in fifty countries and three regions", In J Deregowski, S. Dziurawiec, & R. Annis (Eds.), Expiscations in cross-cultural psychology (pp. 335-355), The Netherlands: Swets & Zeitlinger Hofstede, G. (1987), "The cultural context of accounting", In B. Cushing. (Ed.), Accounting and culture: Plenary session papers and discussants' comments from the 1986 Annual Meeting of the American Accounting Association (p 111) Mueller, G. (1968), "Accounting principles generally accepted in the United States versus those generally accepted elsewhere", International Journal of Accounting, spring, 91103 Nair, R., & Frank, W (1980), "The impact of disclosure and measurement practices of international accounting classifications", The Accounting Review, July, 426-450 Gray, S. J. (1988), "Towards a theory of cultural influence on the development of accounting systems internationally", Abacus, 24, 1-15 Baladouni, V. (1979), "The Study of Accounting History", in Coffman, EX (ed.), The Academy of Accounting Historians Working Paper Series, Vol. 1 (The Academy of Accounting Historians): 318-328 Read More