1. ACC4305 Michel Leseure Chapter 2 Causes of International Differences ACC4305

2. Michel Leseure Note Your textbook gives a number of causes of international differences in financial reporting Bear in mind that these differences appear because accounting: –Uses estimation – e.g. net income –Uses valuation – e.g. plant and property –Targets several audiences – investors, bankers, customers, suppliers, etc.

3. ACC4305 Michel Leseure External Environmental & Culture –Individual versus Collectivism degree of interdependence between individuals –Large versus Small Power Distance the relative acceptance of the unequal distribution of power –Strong versus Weak Uncertainty Avoidance the degree to which people feel uncomfortable with uncertainty –Masculinity versus Femininity Masculinity – a preference for achievement, heroism, assertiveness and material success Femininity – a preference for relationships, modesty, caring for the weak, and quality of life

4. ACC4305 Michel Leseure Values in Accounting Practice Gray’s pairs of contrasting accounting values: –professionalism vs. statutory control –uniformity vs. flexibility –conservatism vs. optimism –secrecy vs. transparency

5. ACC4305 Michel Leseure Illustration

6. ACC4305 Michel Leseure Statutory Control Professionalism UniformityFlexibility Anglo-Saxon Asian Colonial Germanic African LD Asian MD Latin Japan Near Eastern LD Latin Nordic Illustration

7. ACC4305 Michel Leseure Linking Cultural and Accounting values Many researchers have tried to link cultural values with accounting values –Examples: High uncertainty avoidance  Conservatism This research stream has only be moderately successful –Declining validity in the context of MNEs and globalization –Other variables have to be considered

8. ACC4305 Michel Leseure Linking Cultural and Accounting values Hofstede Values Gray Sub-ValuesINDUAPDMASC Professionalism Proposed Relationship +--- UniformityProposed Relationship -++- ConservatismProposed Relationship -+-- SecrecyProposed Relationship -++- Notes: IND = Individualism, UA = Uncertainty Avoidance, PD = Power Distance, MASC = Masculinity

9. ACC4305 Michel Leseure The Case of Morocco Individual versus Collectivism Large versus Small Power Distance Strong versus Weak Uncertainty Avoidance Masculinity versus Femininity professionalism vs. statutory control uniformity vs. flexibility conservatism vs. optimism secrecy vs. transparency

10. ACC4305 Michel Leseure Other Sources of Differences Legal systems Providers of finance Taxation The accounting profession Accounting theory Inflation Accidents

11. ACC4305 Michel Leseure Legal Systems –Common Law Limited statute law, Interpreted by the courts, Case law then supplements the statutes, Less abstract than codified law, company laws/commercial codes do not establish specific rules for accounting, assumes flexibility –Codified Law General rules for the future (does not address specific cases as in common law), Uniform company laws/commercial codes establish specific rules for accounting, assumes less flexibility

12. ACC4305 Michel Leseure Providers of Finance Market Based Systems –Large capital market, large constituency of investors, requires broadly distributed investor information Credit Based Systems –Financial resources provided by the state or by banks, limited distribution of selected information

13. ACC4305 Michel Leseure Taxation Taxation regulations determine accounting practice Taxation regulations have little influence on accounting practice

14. ACC4305 Michel Leseure The Accounting Profession The size and strength of the profession does have some influence on the country ’ s accounting system

15. ACC4305 Michel Leseure Inflation Where inflation is relatively high, accounting systems generally adjust (in varying degrees) to account for inflation

16. ACC4305 Michel Leseure Accounting Theory Limited impact Some in the Netherlands Minor influence in the U.S.