Financial Accounting Theory
Craig Deegan
Chapter 4
International accounting
Slides written by Craig Deegan
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Learning objectives
• In this chapter you will be introduced to:
– an appreciation that there are many differences between
some countries in the accounting policies and practices
adopted
– various explanations about why countries adopt particular
accounting practices in preference to others
– some of the arguments that suggest that it is appropriate
that there are international differences in accounting
practices
– the background to recent actions by the IASB and FASB
to further standardise international accounting
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Learning objectives (cont.)
– what is meant by the terms harmonisation and
standardisation as they apply to international accounting
– some of the perceived benefits of standardising
accounting practices on an international scale
– some of the obstacles to harmonisation and
standardisation, and the criticisms that efforts to
harmonise and standardise accounting internationally
have attracted
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Evidence of international differences
in accounting
• Although many countries now adopt IFRS, if we go back a
few years and apply different countries’ former accounting
rules to the same transactions we can find significant
differences in profits and net assets (consider Accounting
Headline 4.1, p.108)
• The (sometimes significant) differences in accounting profits
have been used by many parties to justify the ongoing efforts
of the IASB to standardise international accounting
• But do we really need to standardise accounting on an
international basis because of these differences, and if we
do, what are some of the costs and benefits? This lecture
covers these issues
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Standardisation versus
harmonisation
• In relation to international accounting, two terms that are
commonly used are standardisation and harmonisation
• We can define ‘harmonisation’ as a process of increasing the
compatibility of accounting practices by setting bounds to
their degree of variation
• ‘Standardisation’, by contrast, appears to imply the
imposition of a more rigid and narrow set of rules (than
harmonisation)
• Therefore, the term ‘harmonisation’ appears to allow more
flexibility than standardisation
• What is happening through the efforts of the IASB is a
process of standardisation
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Does it really matter if different countries
use different accounting methods?
• Many varied views about the costs and benefits of
international standardisation
• Some perceived benefits would include:
– international investors are better able to understand the
financial performance and position of local companies
– tied to the above point, there is an expectation that
standardisation will facilitate greater capital inflows
– also tied to the above point, standardisation will make it
easier for local companies to list on foreign stock
exchanges
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Does it really matter if different countries
use different accounting methods? (cont)
– companies listed on several stock exchanges would only
need to produce one set of financial statements and this
will have implications for cost savings
– the accounting and auditing staff employed by international
organisations will be better able to move to other member
companies
– there will be cost savings in the accounting-standard
setting function—rather than individual companies
duplicating the efforts of others, the majority of functions of
the standard-setting process will be centralised at the IASB
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Does it really matter if different countries
use different accounting methods? (cont)
– a perception that IFRS will lead to more accurate,
comprehensive and timely financial statement information,
relative to the information that would have been generated
from the national accounting standards they replaced
– to the extent that the resulting financial information would
not be available from other sources, this should lead to
more-informed valuations in the equity markets, and hence
lower the risks faced by investors
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But obviously it is very difficult to quantify any
benefits associated with international
standardisation
• There is very little empirical research or theory that
actually provides evidence of the advantages or
disadvantages of uniform accounting rules
nationally, or internationally.
• For example, whilst the FRC in Australia said that
real benefits would flow from Australia adopting
IFRS there is no quantifiable evidence of such
benefits
• Whether the benefits of adopting IFRS are shared
by a majority of corporations within a country, or
whether the benefits are confined to larger multinational corporations, is a matter of conjecture.
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Objectives of IASB
• The body at the centre of international
standardisation is the IASB
– It seeks to formulate and publish accounting standards
and to promote their worldwide acceptance
– It seeks to work on the improvement and standardisation
of regulations, accounting standards and procedures
– The IASB does not appear to believe that the many
reasons provided as to why different nations should have
different accounting standards (e.g. tied to differences in
culture, religion and so forth) outweigh the benefits of
international standardisation (we will consider some
arguments against international standardisation shortly)
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International Accounting Standards
Board (IASB) (cont.)
• The Institute of Chartered Accountants of England and
Wales, the Canadian Institute of Chartered Accountants and
the American Institute of Certified Public Accountants initially
established an Accountants’ International Study Group in
1967.
• The Accountants’ International Study Group then formed the
basis for the establishment of the IASC in 1973
• The IASB replaced the IASC in 2001
• Australia decided in the mid-1990s to harmonise its
standards with those of the IASC
• But then in 2002, a decision was made by the Financial
Reporting Council that Australia would adopt standards
released by the IASB
• IFRS still not accepted by the US SEC for US domestic
companies, however the US FASB and the IASB are
currently working on a convergence project which might
ultimately see the US adopt IFRS
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International Accounting Standards
Board (IASB) (cont.)
• The FRC’s decision that Australia would adopt
IFRS created a great deal of work for
organisations in that they had to make quite
significant changes to their accounting practices
• The adoption of IAS/IFRS required companies to
write off a great deal of assets—particularly
intangible assets
• Was it all worth the effort?
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The United States role in the international
standardisation of accounting
• One notable exception to the global adoption of IFRS is the
US
• Within the US, accounting standards are developed by the
FASB
• The SEC has the power to override the standards developed
by the FASB
• US was traditionally strong in its resolve not to adopt IFRS
but this resolve diminished in the light of collapses such as
Enron
• US standards are considered to be more ‘rules-based’
whereas IFRS are more ‘principles-based’
• A belief grew that ‘principles-based’ standards may be more
effective in reducing ‘accounting fraud’
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Does the international standardisation of accounting
standards necessarily lead to the international
standardisation of accounting practice? (cont.)
• Somewhat obviously, the IASB was seeking to
standardise practice.
• However, there are a number of reasons why the
standardisation of accounting standards will not
necessarily lead to standardisation of accounting
practice (there is a difference).
• Hence, consistent with Nobes (2006), we would
argue that the study of international differences in
accounting practice (and the reasons and
motivations therefore) will remain an important
area of research despite the ongoing
standardisation efforts of the IASB.
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Does the international standardisation of accounting
standards necessarily lead to the international
standardisation of accounting practice? (cont.)
• Reasons why international differences in
accounting practice will survive beyond the
introduction of IFRS would include:
– Differences in taxation systems
 Tax driven accounting choices, which are domestic, might
flow through to IFRS statements
– Differences in economic and political influences on
financial reporting
 Powerful local economic and political forces determine how
managers, auditors, courts regulators and other parties
influence the implementation of rules. These forces have
exerted a substantial influence on financial reporting
practice historically, and are unlikely to suddenly cease
doing so, IFRS or no IFRS (Ball, 2006).
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Reasons why international differences will
survive beyond the introduction of IFRS would
include (cont.)
– Modifications made to IFRS at a national level
 the IASB has no ability to enforce the application of its
accounting standards in countries that have made the decision
to adopt IFRS. This is a key limitation.
 Regulatory bodies in particular countries may take the decision
to modify a particular IFRS before it is released (for example,
the EU in relation to their acceptance of IFRS 39).
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Reasons why international differences will
survive beyond the introduction of IFRS would
include (cont.)
– Differences in implementation, monitoring and enforcement
 Unless there is international consistency in the implementation
of accounting standards and subsequent enforcement
mechanisms then we cannot expect accounting practices to be
uniform despite the actions of the IASB.
 Investors might be misled into believing that IFRS adoption
has created a consistency in international accounting
practices. That is, the adoption of IFRS might (incorrectly) be
construed as a signal that a country has improved its quality of
reporting.
 In a sense, the adoption of IFRS brings a level of legitimacy to
a country's financial reporting despite any limitations in the
level of enforcement of the standards.
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International differences in
implementation and enforcement
– Ball discussed the ‘free rider’ problem associated with
IFRS.
 If a 'symbol of legitimacy' - such as IFRS - can be acquired
at low cost then some countries with low accounting
proficiency will make the choice to adopt IFRS because of
the reputational benefits such a choice may generate.
 Such a choice will have costly implications for countries with
higher levels of accounting proficiency and who put in place
appropriate implementation, monitoring and enforcement
mechanisms.
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So is a belief in the international standardisation
of accounting practice realistic?
•
•
•
•
Given the arguments just provided we might question the belief that
the global adoption of IFRS will lead to consistency in international
accounting practices.
There will arguably continue to be international differences in
accounting practice and such differences will continue to provide an
interesting area of research for accounting academics.
However, at a more fundamental level, is it really a good idea that
there should be global consistency in accounting practice anyway?
Is it appropriate to have a global ‘one-size-fits-all’ approach to
financial reporting when there are international differences:
–
–
–
–
•
in the nature of capital, labour and product markets;
in monitoring and enforcement mechanisms;
in economic and political influence; and,
differences in cultures?
The next part of this lecture explores various reasons why, in the
absence of globalisation efforts such as those being undertaken by
the IASB, we would expect to find international differences in
accounting practices
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International financial accounting
models
• Historically there have been two main models of
financial accounting adopted internationally
• Anglo-American model
– strongly influenced by professional accounting bodies
rather than government, emphasises importance of
capital markets, emphasises true and fair, considerations
of economic substance over legal form
• Continental European Model
– relatively small input from accounting profession, little
reliance on qualitative true and fair, strong reliance on
government
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Reasons for international accounting
differences
•
•
•
•
•
Underlying laws and political systems
Tax systems
Level of education
Level of economic development
Nature of business ownership and financing
system
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Reasons for international accounting
differences (cont.)
•
•
•
•
•
•
Colonial inheritance
Taxation
Culture
History
Language
Religion
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The effect of culture on accounting
systems
• Differences in national cultures has been used by many
researchers to explain why, prior to the efforts of the IASB,
there were fundamental differences between nation’s
accounting practices (although, keep in mind the previous
discussion that suggests that the global use of IFRS will not
necessarily standardise accounting practice)
• Culture impacts on legal systems, tax systems and the way
businesses are formed and financed etc.
• Previously used to explain differences in social systems
• Culture can be defined as ‘… an expression of norms, values
and customs which reflect typical behavioural characteristics’
(Takatera & Yamamoto 1987)
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The effect of culture on accounting
systems (cont.)
• ‘Culture’ reserved for societies as a whole or
nations
• ‘Subculture’ used for the level of an organisation,
profession or family
• International differences in accounting systems
may be explained by a framework incorporating
culture
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Hofstede’s cultural dimensions
• Four underlying societal dimensions along which
countries could be positioned
–
–
–
–
Individualism versus Collectivism
Large versus Small Power Distance
Strong versus Weak Uncertainty Avoidance
Masculinity versus Femininity
• The value systems of accountants will be derived
from and related to societal values
• Without the intervention of organisations such as
the IASB, these societal values will in turn impact
on the development of accounting standards at a
national level
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Individualism versus Collectivism
• Addresses degree of interdependence a society
maintains among individuals
– Individualism refers to a preference for a loosely knit
social framework wherein individuals care for themselves
and their immediate families
– Collectivism stands for a tightly knit social framework
where relatives, clan or other in-group look after each
other
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Power Distance
• Power Distance is the extent to which members of
a society accept that power in institutions and
organisations is distributed unequally
– Large Power Distance societies accept a hierarchical
order in which everyone has a place
– Small Power Distance societies strive for power
equalisation
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Uncertainty Avoidance
• The degree to which the members of a society feel
uncomfortable with uncertainty and ambiguity
– Strong Uncertainty Avoidance societies maintain rigid
codes of belief and behaviour
– Weak Uncertainty Avoidance societies maintain a more
relaxed atmosphere where practice counts more than
principles
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Masculinity versus Femininity
• Addresses the way in which a society allocates
social roles
– Masculinity stands for a preference for achievement,
heroism, assertiveness and material success
– Femininity stands for a preference for relationships,
modesty, caring for the weak, and quality of life
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Societal dimensions and accounting
subculture
• The value systems of accountants are derived
from related societal values
• The values of the accounting subculture will in turn
impact on the development of the respective
accounting systems at a national level
– should accounting systems be developed in a ‘one-sizefits-all’ approach?
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Gray’s accounting values
• Gray developed four accounting values deemed to
relate to the accounting subculture, with the
intention of linking them to Hofstede’s four societal
values
–
–
–
–
professionalism versus statutory control
uniformity versus flexibility
conservatism versus optimism
secrecy versus transparency
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Gray’s hypotheses
• H1: The higher a country ranks in terms of
Individualism and the lower it ranks in terms of
Uncertainty Avoidance and Power Distance, the
more likely it is to rank highly in terms of
Professionalism
• H2: The higher a country ranks in terms of
Uncertainty Avoidance and Power Distance and
the lower it ranks in terms of Individualism, then
the more likely it is to rank highly in terms of
Uniformity
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Gray’s hypotheses (cont.)
• H3: The higher a country ranks in terms of
Uncertainty Avoidance and the lower it ranks in
terms of Individualism and Masculinity, then the
more likely it is to rank highly in terms of
Conservatism
• H4: The higher a country ranks in terms of
Uncertainty Avoidance and Power Distance and
the lower it ranks in terms of Individualism and
Masculinity, then the more likely it is to rank highly
in terms of Secrecy
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Gray’s hypotheses (cont.)
• Gray further hypothesised relationships between
accounting values and:
– the authority and enforcement of accounting systems
– the measurement and disclosure characteristics of
accounting systems
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Other research using Hofstede’s
cultural dimensions
• Zarzeski (1996)
– used Hofstede’s dimensions to explain corporate
disclosure
– entities with a higher international profile tend to be less
secretive
– local enterprises are more likely to disclose information
commensurate with the secrecy of their culture than are
international enterprises
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Other research using Hofstede’s
cultural dimensions (cont.)
• Perera (1989)
– used Hofstede’s cultural dimensions and Gray’s accounting
subcultural value dimensions to explain differences in the
accounting practices of European and Anglo-American
countries
• Baydoun and Willett (1995)
– investigated the use of the French United Accounting
System in Lebanon
• Chand and White (2007)
– explored various cultural attributes within the Fijian society
to determine whether the recent adoption of IFRS within the
Fijian context made sense. Their view was that rules-based
standards would be more appropriate than the principlesbased standards that have been developed by the IASB.
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The effect of religion on accounting
systems
• Another factor that has been used to explain
differences in accounting is religion
• Religion transcends national boundaries
• Impacts on global harmonisation of accounting
standards
• Hamid, Craig and Clarke (1993) examined how
Islamic cultures have failed to embrace ‘Western’
accounting practices
– compliance with Islamic beliefs can affect the structure of
business and finance
– many Western accounting practices are incompatible with
Islamic principles
– relevance of IASB standards to such cultures?
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The effect of religion on accounting
systems (cont.)
• Religion can affect how people do business and
how they make decisions, for example
– Islam precludes debt financing and prohibits payment of
interest
– the Western objective of financial reporting of rational
economic decision making (refer to the conceptual
frameworks discussed in Chapter 5) may not be a
relevant objective in some societies
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Legal systems
• Another factor that will cause international
differences in accounting is the legal system in
operation
• Legal systems can be broadly divided into
common law and Roman law systems
– in Roman Law systems the law tends to be very detailed
– in Common Law systems—which is how Australia can be
classified—law typically evolves from the ruling of judges
• In Common Law countries accounting practices
tend to rely relatively heavily on professional
judgment
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Business ownership and financing
system
• Another factor is the business ownership and
financing system
• At a country level the financing system is relevant
to the purpose of financial reporting
• Three types of financing systems
– capital market-based (e.g. United Kingdom and United
States)
– credit-based system: governmental (e.g. France and
Japan)
– credit-based system: financial institutions (e.g. Germany)
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Business ownership and financing
system (cont.)
• Systems relying on equity markets will have
greater demand for public disclosures
• Credit-based systems more concerned with the
protection of creditors
• Colonial inheritance also a major explanatory
factor
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Taxation systems
• Differences in accounting methods internationally
have also been linked to differences in taxation
systems
• Where there are ‘insider systems of finance’
(common in continental European countries)
financial accounting practices have typically been
linked to taxation law
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Impact of international agencies
• Various international agencies have also had an
affect on the accounting systems used within
particular countries
• Examples of institutions or bodies which can
impact on a country’s accounting policies are
– multinational companies
– international accounting firms
– large monetary organisations e.g. World Bank
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So there are many forces ‘working
against’ international standardisation
• Hence, to this point we can see that there are many
explanations for international differences
• Given the many factors that explain why international
differences in accounting will, or perhaps should
exist, then how logical are efforts towards
international standardisation?
• Do we think that the efforts of the IASB are likely to
succeed in the long-run?
• Will diverse countries with different cultures, religions,
finance systems and so forth start to question a ‘onesize-fits-all’ approach emanating from London?
• Time will tell …
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