Influence of Culture on Accounting - Essay Example

Influence of Culture on Accounting Culture can be broadly defined as the art, ideas and way of life of a group of people. It is not something concrete which can be touched or seen yet it is the backbone of any developed society. Just as different cultures have developed different models like, political structure, social hierarchy, occupational patterns, so have accounting norms been influenced by the culture they have developed in. On a basic level we could argue that recording of sale or purchase would be the same the everywhere yet as we know that notes to accounts and disclosure conventions have the power to hide or reveal crucial information which is dependent upon the underlying cultural influence shaping the business patterns, economy, market forces, political influence, bureaucratic dictate, etc. Uniform implementation of International Accounting Standards is taking a long time mainly for this reason. The concerns and constraints of each country are different and most of the countries have well developed accounting norms and standards which they feel are quite adequate for their needs. It is another story that a reader from an alien culture might find the accounts presentation style too elaborate or too brief Dieter Ordelheide (2004 p.269) states that accounting is a social institution. He further states that Accounting is concerned with nothing less than the conceptualization of capital, its concrete expression in numbers, as well as its budgeting and monitoring, and thus with a societal institution that is so central to our economic system that it has given it its name. We might talk of global and market driven economies, the ways and means of determining the income or assets are the core of the entire financial and economic set up. Each cultural group uses these to tray and better their financial position within the culture they belong to. Gary (p.8) suggests 4 commonly prevalent accounting values, acknowledging that they are not necessarily the only values that might be specific to the accounting subculture. "Professionalism versus Statutory Control-a preference for the exercise of individual professional judgment and the maintenance of professional self-regulation as opposed to compliance with prescriptive level requirements and statutory control. Uniformity versus Flexibility-a preference for the enforcement of uniform accounting practices between companies and for the consistent use of such practices over time as opposed to flexibility in accordance with the perceived circumstances of individual companies. Conservatism versus Optimism-a preference for a cautious approach to measurement so as to cope with the uncertainty of future events as opposed to a more optimistic, laissez-faire, risk-taking approach. Secrecy versus Transparency-a preference for confidentiality and the restriction of disclosure of information about the business only to those who are closely involved with its management and financing as opposed to a more transparent, open, and publicly accountable approach." Thus as per this hypothesis each of these conflicting factors have influenced the development of the accounting standards depending upon their prevalence and dominance in the cultures being referred to. To take the example of Greek economy where the businesses tend to be closely held and public participation is indirect at its best mainly in the form of lending by banks, the need for disclosure or window dressing balance sheets is negligent. So the accounting systems which developed were fairly simple such that the limited number of stakeholders can understand the basic numbers. Of course with integration within the EU the disclosure norms have become more complex still not as complex at other developed countries say USA or Canada. In Greece one suspects that the tax bureaucrats have had a strong hand in dictating the shape of accounting conventions which are still followed. The Greek business houses being closely held tend to be wary of disclosing information to competitors so it is uncommon to see segment reporting or other such details. Verma (p. 1) has used this hypothesis in her own research paper in collaboration with Gray and has proposed "a model which views accounting as a social system surrounded by other social systems such as the legal, political and financial systems, all of which are affected by culture. The model involves identifying key change events over a period of time and analysing them into source, diffusion and reaction phases. Each change is then analysed in terms of: change stimulating events; intra-system and trans-system activity encompassing the response of the accounting system and its neighbouring systems to change; and the environment (culture) within which all systems in the country of study operate. It is intended to test the model within a historical analysis of accounting change in India." The model is reproduced below (diagram 1) Diagram 1 - (Shraddha Verma and Sidney Gray 1997, Diagram 5 page 21) One recent example of change in accounting practice is the famous Sarbanes-Oxley Act enacted in USA after the embarrassing fall of Enron. If this act will survive the test of time or be considered too draconian once the sentiments have cooled only time will tell but it has affected all the countries where American business interests are present. Accounting professionals across the globe have tried to master it and is widely publicised. This shows that the globalisation helps in spreading the cultures across the globe like fashion trends, entertainment fads even accounting patterns. Yet unlike other trends accounts cannot change overnight as they are subject to strict control in each country by their governments and professional bodies. Any transformation even if beneficial takes time to be accepted and become operational. Here the culture is not dictator but a certain event which sent the regulators into soul searching mode. It can however be said that the result of this soul searching was based on the American culture of having clear cut and very precise definitions and guidelines and SOX was borne. The result in another culture could have been very different say in a country like India where corruption and manipulation are an accepted fact of life and neither the people nor the regulators would expect a brand new Act to be adopted and put into practise so fast. In India the accounting profession is strictly regulated by a professional body - ICAI (Institute of Chartered Accountants of India),its credibility is also very high, it prides itself in being amongst the forerunners in coming out with standards periodically and aligning them with the International Accounting Standards. Yet they are applicable only to public or very large enterprises, a large chunk of NGOs handling huge resources are mainly outside any kind of regulatory framework, except those receiving large government grants or foreign funds. Interestingly foreign funds started being regulated only post flare up of terrorist activities and strong government suspicion that the funds to the terrorist organisation were being routed through NGOs. Special reports are prescribed even transfer and usage of foreign funds is strictly monitored. Rest of the NGOs are fairly free and not accountable of any kind of standard reporting obligations save to the donors. Similarly other private enterprises adopt the tax reporting requirements for their accounts as well and don't feel the need for more sophisticated form of reporting. The Indian tax man has been instrumental in changing the accounting cultures like starting new financial year in Diwali (October / November) as against uniform April currently, depreciation rates prescribed by the tax are also largely followed by the private enterprises ignoring more rational ones issued by the Company Law Board. There also seems to be a strong correlation between the stage of development of the countries and the complexity of the accounting standards. USA is a leading example where the economy is primarily market driven and publicly financed that the reporting regulations are driven by the capital markets. Writers of Open University UK on their web site state that, "The rules are under the ultimate authority of the Securities and Exchange Commission (SEC), and the announced objective of the standard-setter (the Financial Accounting Standards Board (FASB)) is to create rules that provide information for investors on which to make investment decisions. The standard-setters believe that the economy is protected by transparent information, so that the investor can make economic judgments. There are no mandatory rules for private companies." Switzerland in contrast being a prudent country still ruled by old world wisdom of saving for a rainy day allows 1/3 value of closing stock to be written off so that hidden reserves are created to be used in lean periods. Micro definition of rules does not exist in Switzerland and even implementation of IFRS (International Financial Reporting Standards) is not regulated strictly which sometimes creates confusion in the markets which look for uniform and precise information base. Writers of Open University UK state that, "the absence of detail in the code suggests that, for the Swiss legislator, the preparation of financial statements as an essential input to capital markets is just not an important factor in framing rules for financial reporting." The absence of detail in the code suggests that, for the Swiss legislator, the preparation of financial statements as an essential input to capital markets is just not an important factor in framing rules for financial reporting. French system represented by Comit de rglementation comptable (Accounting Regulatory Committee), tries to satisfy all the explicit and implicit stakeholders through its accounting standards. They do recognize that there are competing demands by the stakeholders and their standards are at best a compromise between them. Experts feel that in this the system does not always succeed as the faces of the stakeholders are hazy at best with their needs also vaguely acknowledged so the standards try to take a middle path or path of least resistance which might or might not be in the best interest of the economy. Another factor responsible in French case is that the standards have evolved over centuries, being set in different time periods with different influences and considerations have let them sometimes with conflicting or ambiguous standards. Writers of Open University UK opine that, "this issue of different countries perceiving financial reporting as having different objectives is one of the important cultural variables that affect financial reporting. The way in which you represent reality in the financial statements will depend upon what aspects of the company you believe to be most important to convey to the outside world." Another factor contributing to the complexity of the reports is the advancement of the professionals by their professional bodies. It has long been suspected that complicated rules and regulations keep the home fires of the practicing professionals burning. It is easier to propose a complex standard where the economy is more evolved and is driven by complex financial structures than a simple economy. Thus we can see a more complex reporting requirement in Canada where the financial pattern is highly evolved than as compared to a European country like Cyprus. Complicated structures are more open to multiple interpretations thus creating an automatic need for expert help than a simple reporting structure. Arguers of the former would say brevity should not come at the cost of sacrificing transparency, but it will be agreed by one and all that expert help is not only need at the preparation stage but also at the interpretation stage by the investors, assuring continuous work to the professionals. A country having culture of complex systems would necessarily have complex accounting standards which need to converge with those of less complex one if enterprises were to spread across them. It is these inherent differences in various accounting standards strongly influenced by their respective cultures that precipitated in the public show of difference of opinion between IASB and the US-the Financial Accounting Standards board. Though the differences have apparently been resolved their implementation is still fraught with road blocks. International Accounting Standards are thought to be based in UK generally accepted accounting procedures with are different say from those of US. In fact many companies which earlier used to claim compliance with IAS have retracted completely in the face of close scrutiny. This shows that even IAS are perceived to be closer culturally to one country over another or they are influenced by the culture of their makers. We can safely conclude that understanding the role of culture in accounts would definitely help in implementation of International Accounting Standards. We have already seen that even the companies of most developed economy have had to retract their claims of adherence to IAS. Also governments / professional bodies of most of the countries believe that IAS would need to "adapt" to their special cultural practices and values which have crept into their accounting standards. This adaptation if done would create large number of similar yet modified standards which in the end would defeat the very purpose for which the IAS have been created. On the other hand if only uniformity were to be the main priority, all members would not agree to the proposed standards as they would suspect stamp of one dominant country in the IAS. The first step in solving any problem is in understanding it, thus the underlying cultural differences would need to be understood to see how they have shaped the systems of a particular country and how best to start the harmonization and integration of the books of the already merged borders. We could even say that ultimately we might find that uniformity is not the only towards harmonisation, it would depend on the willingness and compulsions of all the diverse sometimes conflicting authorities and stakeholders involved in the entire process of acceptance of IAS References The Impact of Culture on Accounting Development and Change: An Exploratory Model www.bbk.ac.uk/manop/research/wpapers/mandocs/shraddha.pdf, accessed on 15-11-2007 Influences on Accounting regulations http://openlearn.open.ac.uk/file.php/2803/formats/print.htm, accessed on 15-11-2007 GRAY, S.J (1988) Towards a Theory of Cultural Influence on the Development of Accounting Systems Internationally Abacus Leuz, C, Pfaff, D, Hopwood, A (2004) The Economics and Politics of Accounting: International Perspectives on Research Trends, Policy, and Practice. Oxford University Press. Oxford Read More