Chapter 2

International Accounting Patterns, Culture and Development

Classification of Accounting and Reporting Systems

 Classification aids in    Describing, analyzing, and predicting the development of accounting systems Strategic planning and control decisions International systems integration  The Challenge?

 Adapt past effective techniques to meet the demands of the global market  Must understand international traditions and heritage

International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black

Purposes of International Classification

 Describe and compare international systems  Improved understanding of    Similarities and differences of systems Development of systems and potential for change Dominance of some systems over others  Assess issues of international harmonization  Identify and solve problems

International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black

Purposes of International Classification

 Developing countries will be informed of systems in other countries  Aid international accountants and auditors  Problems with accounting and control systems for MNEs – understood and solved

International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black

Classification Research

 Deductive or judgmental approach  Environmental factors identified and linked to national accounting practices  International groupings or development patterns are proposed  Inductive or empirical approach  Individual practices analyzed   Development patterns or groupings identified Explanations based on economic, social, political, and cultural factors proposed

International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black

Deductive approach

 Mueller’s four approaches to accounting development   Macroeconomic pattern  Business accounting is tied to national economic policies – Examples: Sweden, France, Germany  Goals of Corporation follow rather than lead national economic policies (e.g., might smooth earnings to promote economic stability) Microeconomic pattern  Accounting is a branch of business economics – Example: replacement-value accounting in Holland  Maintenance in real terms of monetary capital invested in entities.

International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black

Mueller’s classification system

 Mueller’s four approaches (continued)    Independent discipline pattern  Accounting is a service function derived from business practice – Examples: U.S. and U.K.

 Accounting is considered to be capable of developing its own conceptual framework from business practice – self regulating like other professions Uniform accounting pattern  Accounting is an efficient means of administration and control – Ex: France, Germany, Sweden, Switzerland In addition, other influences such as the legal system, political system, and social climate impact (Eg. Sarbanes Oxley) – witch hunt for poor practices.

International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black

Cultural Influences on Accounting Systems

 Importance of Culture/Historical roots on accounting systems is increasingly being recognized   Culture is considered an essential element in the understanding norms / values Culture/Societal values at nat’l level permiate organizational/occupational subcultures  Accounting systems and practices can influence/reinforce values

International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black

Structural Elements of Culture

 Hofstede – 4 Underlying societal dimensions    Individualism Power Distance Uncertainty Avoidance   Masculinity Hofstede and Bond – 5 th dimension  Short v. Longterm Orientation: Confucion Dynamism

International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black

Hofstede’s Societal Dimensions

    Individualism versus Collectivism  People’s self-concept: “I” or “we” : U.S. v Europe? Large versus Small Power Distance  How a society handles power inequalities among people / organizations – distributed unequally.  Large power distance: accept hierarchical structure  Small power distance: strive for me equality Masculinity – preference for achievement, heroism, assertiveness, material success Feminism: preference for relationships, modesty, caring  Allocation of social roles (not biological) to the sexes

International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black

Hofstede’s Societal Dimensions - Continued

 Strong v. Weak Uncertainty Avoidance    Degree to which society is OK with ambiguity Strong: demand uniformity, intolerant of deviation Weak: more relaxed, practice > principle, deviance from norm OK  Short v. Long-term Orientation: Confucion Dynamism  ST: respect for tradition, social obligations regardless of cost / quick results  LT: adaptation of traditions to meet modern needs / thrifty sparing approach to resources

International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black

Accounting Values v. Societal Values – Gray

 Professionalism versus statutory control  preference for individual professional judgment / self regulation   Uniformity versus flexibility  Preference for enforcement of uniform practices Conservatism versus optimism  Preference for cautious approach / less risky approach to measurement.

 Secrecy versus transparency  Preference for confidentiality v. transparency

International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black

Professionalism versus Statutory Control

   Accountants are perceived to have independent attitudes throughout the world Public regulation or self regulation   U.K. – rely on judgment of accountant France and Germany – implement detailed legal requirements Link to societal value dimensions – Professionalism  Individualism     Weak uncertainty avoidance Small power distance Masculinity Short-term orientation

International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black

Uniformity versus Flexibility

   Uniform accounting plan and imposition of tax rules for measurement purposes  France and Spain   Facilitate national planning Pursue macroeconomic goals Intertemporal consistency and some degree of intercompany comparability b/c of flexibility  U.S. and U.K.

Link to societal value dimensions – Uniformity   Strong uncertainty avoidance Collectivism  Large power distance

International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black

Authority and Enforcement

International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black

Conservatism versus Optimism

   Conservatism seen as a fundamental value  Strongly conservative  Japan, France, Germany, Switzerland  Less conservative  U.S., U.K., the Netherlands – though changing post Sarbanes Oxley Link to societal value dimensions – Conservatism    Strong uncertainty avoidance Long-term orientation Collectivism  Femininity Sarbanes Oxley – impact: authority enforcement / Measurement disclosure figures 2.5 / 2.6

International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black

Secrecy versus Transparency

    Stems from management and accountants Closely related to conservatism  Secrecy relates to disclosure  Conservatism relates to measurement Secrecy   High – Japan, France, Germany, Switzerland Low – U.S. and U.K.

Link to societal value dimensions – Secrecy  Strong uncertainty avoidance    High power distance Collectivism Femininity

International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black

Accounting Values and Societal Values

International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black

Accounting Values and International Classification

   Accounting values most relevant to professional or statutory authority and enforcement  Professionalism and Uniformity  Both concerned with regulation and degree of enforcement or conformity Accounting values most relevant to measurement and disclosure  Conservatism and secrecy Country groupings  Optimistic and transparent  Conservative and secretive

International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black

International Pressures for Accounting Change

 Growing international interdependencies  Harmonization of the regulatory framework internationally  Centrally planned economies embraces market-oriented approach  Former U.S.S.R., Eastern Europe, China  New opportunities for international investment, joint ventures, and alliances

International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black

Economic Groupings and International Organizations

   European Union  Promotes economic integration/harmonization UN  World Bank    International Monetary Fund UN conference on Trade and Development World Trade Organisation OECD  Foster international economic and social development in industrialized countries  “Code of Conduct” for MNEs

International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black

Impact of MNEs and Globalization

 Cultural and social  Employment and consumption patterns  Significantly influenced  Pressure for more accountability  Environmental impact

International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black

Impact of MNEs and Globalization

 OECD, EU, IOSCO work for harmonization and internationalization of securities markets  IASB and the International Federation of Accountants (IFAC)  Professional organizations involved in harmonization

International Accounting & Multinational Enterprises - Chapter 2 - Radebaugh, Gray, Black