Influence of Culture Element on Accounting - Research Paper Example

Influence of Environmental Element like culture on Accounting Abstract The goal of this paper is to study and research the influence of culture on accounting practice. The uncovering of the accounting motivational measures has added to the agreement of the profundity, prosperity and intricacy of the accounting sub-culture and its consequences on accounting practice. As an entity-level concept, the motivational measures can be enforced to explicate the authority of culture on opinions and determinations in accounting. The reality of cultural variety in the accounting sub-culture renders proof of the significance of intra-country cultural fluctuations. The awareness of the accounting motivational measures and its impact on assessments and determinations has important significances to the worldwide drive for intersection in accounting and auditing patterns, as well as the conceptualization of accounting education and professional growth schemes. This paper examines the relationship between culture and accounting and makes a study as to whether accounting is dependent on a country’s culture. Introduction According to Violet (1983) culture is nothing but an acquired manner and is the result of man's activities. Winthrop (1991) says that culture plays a significant role in every one’s life and forms the character attributes and features of the human being. Accounting is influenced by culture and the want of agreement in accounting patterns between countries is because accounting is not technological but relatively cultural (Fechner and Kilgore 1994). The customs of a country influences the selection of its accounting techniques and the insight of its various accounting developments (Belkaoui and Picur, 1991). On the other hand, countries have recognised their own accounting standard that has inclined to reflect their own specific environments (Evan and Taylor, 1982). According to Hopwood (1991) accounting can be conceived as a technical development formed by the cultures, the socio-historical situations and the institutional forms of the definite societies from which it issues. Wallace and Gernon (1991) have concluded in their follow-up of cross-national accounting literature over the last 25 years, in spite of the fact that a good deal of study and hierarchy building has happened, a complete theory that explicates existent cross-national variations in the arrangement and exercise of financial accounting even now does not exist. As all practices related to accounts is a human activity it will no doubt be affected by the interpreting and assessments in the practical application of accounting conceptions and rationales. Perera (1989, p.42-43) indicates that culture determines accounting practice as it is a human action and not a physical procedure. He further states that, culture as such is a powerful environmental feature which affects the accounting structure of a country. Accounting is a socio-technical activity and involves resources from both human and machine. It is also an interaction between human and machine. Even though the technological facet involved in accounting is not much dependent on culture, the human aspect is more dependent and as the two act together, accounting can not be independent of culture. This paper examines the relationship between culture and accounting and makes a study as to whether accounting is dependent on a country’s culture. Impact of Culture on Accounting Frame work of the Influence of culture on accounting practice. Source: (Foo Yin Fah, 2008, p.145) Belkaoui (1995, p.3) states that: Culture in its real meaning influences the judgment or decision procedure involved in accounting. Culture, by its constituents, factors and proportions, prescribes the organisational construction acquiring the micro-organisational conduct and the psychoanalysis operation of persons, in a way which finally affects their opinion or assessment course when they are confronted with an accounting or auditing development. As accounting is culture reliant, it is essential to comprehend which facets of culture influence accounting practice and how the effect occurs. Doupnik and Salter (1995) propose that the agreement of how culture impacts cross-national accounting diversity can add to the attempts to decrease that diversity and increase comparability of accounting info universally. Perera (1989, p.43) argued two related ways of examining the cultural pressures on accounting patterns. The first implies fixing a set of precise societal values or cultural elements probably to link directly with accounting practice. The second is to authenticate any connection between societal values and exact accounting practices. By surveying Hofstede and Gray’s (1988) reports, Perera (1989) lengthened a theoretical framework for examining the affect of culture on accounting. He reasoned that the accounting practices and arrangements of different countries are shaped by their cultural values thus influencing their accounting practices. He stated that the determinations of former surveys reveal a global diversity of accounting needs and practices that are largely explainable in terms of the national cultural deviations. He also indicated that “any exercise to analyse the cultural influence on accounting should identify a set of specific societal values or cultural factors which are likely to be directly associated with accounting practices.”(p.43). Cultural diversity in the accounting sub-culture of any country shows deviations in the accounting motivational values. These conflicts in the motivational values are linked with differences in the understandings and judgments in financial reporting. As a result, a cross-cultural analysis in accounting that equates cultures on the base of nationality may neglect the significance of intra-country cultural variations (Doupnik & Tsakumis, 2004). Gray (1988) brought in four proposals that speculate relationships between Hofstede’s ethnical properties and his accounting value attributes. Gray reasons that mutual cultural values in a country direct to collective accounting values, which in turn determines the trait of a nation’s accounting system (Doupnik & Tsakumis, 2004). Gray never operationalized the hypothesis or carried on experimental tests to maintain his framework; instead he left this for other accountants to research and to prove the validity of his hypothesis. Gray (1988) recognized four accounting value proportions that can be applied to determine a country’s accounting (sub) culture: uniformity versus conformity; professionalism versus statutory control; secrecy versus transparency and conservatism versus optimism. The first two proportions link to, authority and social control of accounting practice at a national level, and the second two links to, the measurement and disclosure of accounting info at a country level. Secrecy against Transparency is an important accounting value element that stems as much from administration and the accountant due to the authority of management on the quality and quantity of info revealed to outsiders. Confidentiality, in business kinships is yet a basic accounting attitude. Secrecy is also somewhat closely linked to conservatism (Doupnik & Tsakumis, 2004). Both values that are conservatism and secrecy entail a careful approach to business financial reporting in common, but secrecy concerns Societal Values, Culture, and Accounting to the admission dimension, whereas conservatism links to the measurement dimension. The degree of secrecy seems to differ across countries. Lower degrees of revelation includes the examples of secret reserves and is obvious in Japan and continental European countries like France, Germany, and Switzerland than in the United Kingdom and United States. Conservatism against Optimism is a very important accounting value aspect. The reason is that “conservatism” is perhaps “the most ancient and probably the most pervasive principle of accounting valuation” (Sterling, 1967). Prudence in asset measuring and the accounting of profits is seen as a basic approach of accountants all over the world. Furthermore, conservatism changes according to country. The range of change is from a strongly conservative approach like that in Japan and some continental European countries like France, Germany, and Switzerland to a lesser conservative, risk-taking approach of accountants in the United Kingdom, the United States, and, to some degree in the Netherlands. This conservatism has also influenced on the culture of accounting practices of these nations. Such deviations seem to be resistant by the virtual development of capital markets, the conflicting forces of consumer wellbeing, and the pressure of tax laws on accounting exercise in the countries referred (Sterling, 1967). Professionalism against Statutory Control is a chief argument in many Western countries, and links to the issue as to whether the accounting profession should be made subject to public culture and Accounting regulation or statutory control or should be allowed to hold power over accounting standards. In the United Kingdom, for instance the idea of presenting “a true and fair view” of a company’s financial situation and outcome reckons a lot on the judgment of the accountant as a free professional. But France and Germany have a traditional position when it concerns to the professional accountant’s role. They have been basically concerned with the execution of comparatively narrow and exhaustive legal requirements. Uniformity against Flexibility is a significant accounting value dimension as features about homogeny, stability, or comparison are basic characteristics of accounting principles all over the world. This value can be given different interpretations which ranges from a very stern inter-company and inter-temporal uniformity, to stability within companies. Countries like France and Spain, for instance have a uniform accounting plan and the imposition of tax rules for measuring purposes have been in process. In disparity the United Kingdom and the United States have established more apprehension with inter-temporal consistency and a slight degree of inter-company comparability due to an apparent need for plasticity. Nair and Frank (1980) applied an inductive way of addressing and identifying the subsisting accounting patterns established on a study of real accounting practices, differentiating between measurement and revelation practices. Finally there emerged five groupings founded on measurement patterns, principally adopting the “spheres of influence” categorizations proposed by Seidler (1967). The revelation groupings detected were unlike. The connection among the groupings was measured with reference to economic structure, trading links and language and culture. As Watts (1993) mentions, accounting conservatism can be advanced from its part in debt undertakings or in earnings-dependent return systems, apart from others. Chui et al. (2002) analyzes whether national culture has an impact on corporate capital arrangements. They found that firms resided in countries with more conservative culture have lesser corporate debt ratios. Ahmed et al. (2002) states that “accounting conservatism plays an important role in mitigating the bondholder-shareholder conflicts over dividend policy by reducing the risk to bondholders and by paying excessive dividends to shareholders.” According to Schwartz (1992), the collection of values in the world-wide structure constitutes a round gamut of motivations. He stated that “Because the array of values represents a continuum of motivations, the precise locations of the partition lines are arbitrary. Values found near a partition line express a combination of the related motivational goals associated with the value types on both sides of that partition line” (Schwarz, 1992, p.45). From the solutions of structural scrutiny of the data using multi-dimensional grading, Schwartz (1992) was competent to prove the theoretical social system of the active relationship between the motivational goals or value types as depicted in the Figure as below. Structure of motivational values Sudarwan and Fogarty (1996) severally formulated their own measurement of cultural values deserting the Hofstede (1980) index score. They used structural equation simulating to test Gray’s theories against a lengthwise study of a single country. The results of the study established a substantial convinced relationship among power distance and both conservatism and uniformity. This indicated that change in power distance is connected to the alteration in accounting values Gray and Vint (1995) moved away from trying out all hypotheses, and they tested only one proportion of Gray’s (1988) hypothesis; that of secrecy. The positions of local partners of an international accounting firm were reviewed to realize secrecy with regard to revelation practices. The results addressed 27 countries and applying regression, Gray and Vint (1995) found correlations that affirmed Grays’ (1988) original hypotheses with regard to secrecy. Culture, Societal values and the Accounting subculture Source: (Gray, 1988). Conclusion Realizing the affect that environmental element like culture has on accounting Practice, financial revelation is vital as we march for global accounting harmonization. International financial reporting has to be comparable and this will be possible only if any perceptiveness into how local assessments may seep into the accounting treatment and finally affect financial disclosure is known. The framework of Gray (1988) has invoked anticipations as to how culture may determine accounting pattern at a national level. On the other hand, experimental research into this inquiry has not established satisfactory evidence to back up the hypotheses. Many studies related to the cultural aspects in accounting (Tsui, 2001; Haniffa & Cooke, 2002; Patel, 2003) have probed the control of culture on the opinions and conclusions of accountants. The focus of these analyses was on the single-level opinions and conclusions but with application of the Hofstede-Gray structure, which constitutes the proportions of accounting principles at the cultural or societal-level. In accounting, the importance of culture and its historical roots is now increasingly being recognized. Although there has been a lack of attention to this dimension in the past in the international categorization literature, Harrison and McKinnon (1986) projected a practical structure integrating culture for studying alterations in business financial reporting rule at the nation-specific level. Gray (1988) proposed that a theoretical framework integrating culture could be applied to clarify and forecast international differences in accounting systems and to recognize forms of accounting growth internationally. He further indicated that culture at the nationwide level may be anticipated to instill organizational and occupational subcultures as well, although with changeable degrees of assimilation. Accounting systems and patterns can determine and reward societal values. References 1. Ahmed, A.S., Billings, B.K., Morton, R.M. & Harris, M.S. (2002). The role of accounting conservatism in mitigating bondholder-shareholder conflicts over dividend policy and in reducing debt costs. The Accounting Review, 77 (4), 867-890. 2. Belkaoui, A.R. The cultural shaping of accounting, Quorum Books, Westport, 1995. 3. Belkaoui, A. R., & Picur, R. D. (1991). Cultural Determinism and the Perception of Accounting Concepts, The International Journal of Accounting, 26, 118-130. 4. 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Frameworks for international comparative financial reporting. Journal of Accounting Literature 10, 209-264. 28. Watts, R. (1993). A proposal for research on conservatism. Working paper, University of Rochester. Read More