Critically Examine the Role That Cultural Differences Play in the Accounting Differences Found Internationally.

International Accounting and Financial Reporting

Critically examine the role that cultural differences play in the accounting differences found internationally. Answer with reference to at least 2 contrasting countries

Introduction:
Accounting practices tend to hold divergent views in different parts of the world; these differences are caused by various reasons some of which relate to the external environment such as political, social and financial. This paper is addressing these differences in accounting from cultural approach, by combining the cultural factors of a given nation provided by Hofestede with Gray`s Accounting values to reach an understanding of how can these cultural aspect lay effects on the profession of accounting.
Hofestde Cultural values:
Hofestde came up with cultural factors touching the differences in accounting practices, by conducting a research that was based on over 100000 questions to employees in 72 countries (Guan and Pourjalili, 2010, P.101), and he reached four essential factors affecting the accounting profession in different countries. 1-Individualism:
It is the tendency of having loosely interdependence and relationships between the members of a society, in other words having personal freedom and less responsibility towards other people where each person has only to take care of him/herself and the close family (Lau & Mau, 1997, p.69) in (Guan and Pourjalili, 2010, P.101).
2-Power distance:
Represents the extent to which an individual accepts unequal distribution of power that maybe exclusive to few people. What is more, an individual living in large distance community accepts his/her position in the hierarchy while others living in small distance society long for equality in the distribution of power and seek justification otherwise (same source).
3-Uncertainty avoidance:
This dimension of Hofestede examines the level of acceptance of uncertainty or in other words the tolerance of risk. Furthermore, communities with high level of uncertainty avoidance tend to set lots of rules and regulations. While in societies where the risk avoidance level is low and are more flexible have less regulations resulting in more freedom and innovation in businesses (Guan and Pourjalili, 2010, P.101).
4-Masculinity:
The degree to which a society differentiates the role of and individual based on the gender of that person, in communities with high level of masculinity, males are given more power and control based on the traditional belief of man superiority.
Hofestede also identified a fifth cultural factor that affects the practice of accounting which is” the Long term versus short term in life” (Hofestede.1991) in (Guan and Pourjalili, 2010, P.101).This factor is widely witnessed in Asian countries where the Confusion teachings are followed especially in China where people practice a conservative behaviour and tend to have large amounts of savings.
Gray`s theory of cultural relevance (Chanchani, Macgregor .1999):
By using Hofestede cultural values and analyzing their effects on accounting practices globally, gray`s theory defined the accounting subculture values through relating his work with hofestede. Additionally gray clearly presented the concept of how accountants’ performance may vary due wide-ranging factors that will be illustrated in the following figure which was taken from (Gray, 1988, p.7). The factors that are affecting the ecological along with the physical environment are generated by the cultural values in different countries; these values play a major role in defining institutional structure within a given society, such values can be financial, political, legal and educational. Furthermore these factors tend to lay effects and reinforce other influences as shown in the previous figure. This construction is stable in a certain period of time unless other variables took place to change the external environment such as natural events or actions made by man.
Cultural values within a nation leak into other occupational subcultures in different levels, by including the accounting context with accounting conducts that are affected and reinforced by societal values, gray believed that could lead to exploring where the differences in accounting between different nations come from. Last but not least, gray suggested in the previous model that the values of accounting and the accounting system are both affecting and affected by each other depending on the extent to which ecological and external changes are affecting the community (Chanchani, Macgregor ,1999, p.6).
Gray concluded the four accounting values that can be divided into two contrasting pairs the first one is professionalism versus statutory control, and uniformity versus flexibility, these two accounting values are strongly connected to authority and enforcement. Gray has distinguished dissimilarity between two different geographical areas, the Anglo culture countries like the United Kingdom as well as the United States and countries in the Asian area such as China.
The other two values are conservatism against optimism in addition to secrecy in opposition to transparency, these two vales are linked to measurement and disclosure, and again gray has explored a difference between Anglo culture countries like the United Kingdom and Latin Germanic culture in continental Europe (Nobes & Parker, 2004,P.18). Radebaough, Gray and Black (1993) in (Chanchani, Macgregor ,1999, p.14).

Professionalism versus statutory control:
An important accounting value because people who are involved in accounting profession just like any other career, have personal and independent attitudes that have been developed through years of working experience, so that professional intuition is formed, what is more apply these personal and practised approach, in other words to give the individuals some freedom to improvise and solve complicated issues with their judgement.
We can witness working environment where professionalism is appreciated in countries like United Kingdom and United States, where the company`s financial position is attributed to the evaluation of the professional individuals, which is different in other European countries like France and Germany where accountants personal judgement is minimised what is more they are required to follow the rules. Additionally Gray believes that professional judgment is highly affected by social values especially individualism and uncertainty avoidance, also with power distance where professionalism is more likely to be accepted in small power distance (Chanchani, Macgregor ,1999, p.7).
‘The higher the country is ranked in terms of individualism and the lower it ranks in terms of uncertainty avoidance and power distance then the more likely it is to rank highly in terms of professionalism’ Gray (1988) in (Chanchani, Macgregor ,1999, p.7)
Uniformity against flexibility:
This value reflects enforcing unified or similar accounting regulations between companies and making sure that these rules are going to last and apply over accounting practices, and according to gray who divided this dimension into two components ‘Intertemporal consistency in accounting practices and uniformity in the application of accounting policies and rules across companies’(Gray,1988) in (Chanchani & Willett,2004). For instance in France where the national planning is major concern, a unified accounting regulations have been applied over accounting practices, which is exactly the opposite in the United kingdom where more flexible practices have been followed between companies, Gray indicated that Uniformity is correlated with with uncertainty avoidance and individualism for instance an individual may be cautious towards taking risk that endanger his job or make his superior troubled and also linked to power distance(Chanchani & Willett,2004). ’the higher the country ranks in terms of uncertainty avoidance and power distance and the lower it ranks in terms of individualism the more likely it is to rank highly in terms of uniformity’ Gray (1988) in (Chanchani & Maccregor,1999).

Conservatism versus optimism:
According to Gray (1988, p.8) conservatism is an approach of measurement of earnings and profits to be prepared against unknown future events and risks, which lead accountants to expect losses in the future rather than making profits. This approach is witnessed in continental Europe and other countries like Japan, while accountants in United Kingdom and Netherland adopt more optimism approach (Chanchani & Willett, 2004).
‘The higher the country is ranked in terms of uncertainty avoidance and the lower it ranks in terms of individualism and masculinity the more like it is to rank highly in terms of conservatism’ Gray (1988) in (Chanchani & Maccregor,1999).

Secrecy against transparency:
This approach is related to the tendency of accountants to disclose the financial information about the company to the external world, Jaggy (1975) in Chanchani and Willett (2004) indicate that the management could influence the accountant to take on such approach by providing less information about the company to the public. Other researcher indicate other factors affecting the adoption of secrecy regarding the disclosure of financial information like location wither it is in continental Europe or United Kingdom (Arpan and Radebaugh, 1985) in (Chanchani and Willett, 2004).
‘The higher the country ranks in terms of uncertainty avoidance and power distance and the less it ranks in terms of individualism and masculinity the more likely it is to rank highly in terms of secrecy’ Gray (1988) in (Chanchani & Maccregor,1999).
The model that gray developed is illustrated in the figure

(Chanchani & Maccregor,1999,p.10)
Example how cultural values can affect earning management: (Guan and Pourjalili, 2010, P.103).
Cultural values can affect the company within a country that has high level of conservatism, in that case individuals tend to use income decreasing accounting standards, similarly when a society has high secrecy levels the disclosure of financial information is minimised, leading to provide less information about the company to the public, consequently giving the opportunity for companies to benefit from the accounting information system by having better earnings management. Uncertainty avoidance has a strong relationship with the earning management, where a low level of uncertainty avoidance leads to comfortable and relaxed environment which embraces the proper conducting the work rather than sticking to rigid rules.

However, Gray`s theory was criticised because the measurement of his hypotheses is not clear and it may be hard to distinguish the links wither they are direct or indirect between cultural variables and accounting practices, and I quote from Chanchani and McGregor (1999, p.9) ‘even if the cultural values and accounting were related in a certain way, how should this effect the qualitative characteristics of financial statements?’
The conclusion: The Gray-Hofestede framework may have some drawbacks and criticisms but it gives good approach about the interaction between the culture and traditions in a nation and the way accounting is practiced and governed, also many researchers have built more modern and endeavours based on the Gray-Hofestede approach like Perera (1989) and Baydoun and Willett (1997).

Bibliography:
Chanchani. S & McGregor. A. 1999. A Synthesis of Cultural Studies in Accounting. Journal of Accounting Literature, Vol. 18, pp.1-30
Chanchani. S & Willett. R. 2004. An empirical assessment of Gray`s accounting value constructs. The International Journal of Accounting, Vol. 39. pp.125 -154
Gray. S.J. 1988. Towards a theory of cultural influence on the development of the accounting system Abacus
Guan. L & Pourjalali. H. 2010. Effect of Cultural Environment and Accounting Regulation on Earnings Managment: A Multiple Year-Country Analysis, University of Hawaii at Manoa
Nobes, C and R.H. Parker. 2004. Comparative International Accounting. Prentice Hall Words Count :1620 without the bibliography and in text referencing.

Bibliography: Chanchani. S & McGregor. A. 1999. A Synthesis of Cultural Studies in Accounting. Journal of Accounting Literature, Vol. 18, pp.1-30 Chanchani. S & Willett. R. 2004. An empirical assessment of Gray`s accounting value constructs. The International Journal of Accounting, Vol. 39. pp.125 -154 Gray. S.J. 1988. Towards a theory of cultural influence on the development of the accounting system Abacus Guan. L & Pourjalali. H. 2010. Effect of Cultural Environment and Accounting Regulation on Earnings Managment: A Multiple Year-Country Analysis, University of Hawaii at Manoa Nobes, C and R.H. Parker. 2004. Comparative International Accounting. Prentice Hall Words Count :1620 without the bibliography and in text referencing.