When global accounting standards meet the local context
– insights from an emerging economy
Cătălin Nicolae ALBU*
The Bucharest Academy of Economic Studies
Faculty of Accounting and Management Information Systems
6 Piaţa Romană, sector 1, Bucureşti, Romania, 010374
Tel: +40 21 319 1900/365, Email: catalin.albu@cig.ase.ro
Nadia ALBU
The Bucharest Academy of Economic Studies
Faculty of Accounting and Management Information Systems
6 Piaţa Romană, sector 1, Bucureşti, Romania, 010374
Tel: +40 21 319 1900/365, Email: nadia.albu@cig.ase.ro
and
David ALEXANDER
University of Birmingham
Birmingham Business School
Edgbaston, Birmingham, B15 2TT, United Kingdom
Tel: +44 121 414 8027/6530, Email: D.J.A.Alexander@bham.ac.uk
15/02/12
*corresponding author
Highlights:
 We investigate the process of accounting change with a focus on emerging economies
 We conduct in-depth interviews with actors involved in accounting
 We employ institutional approaches to explain how the global becomes local
 We argue that local actors react to foreign implants via their legitimizing needs
 Therefore different local contexts will react to global standards in different ways
Acknowledgements
Previous versions of this paper have been presented at the IAAER’s 2010 World Congress of
Accounting Educators and Researchers (WCAER) in Singapore, the 2011 American
Accounting Association’s International Accounting Section Mid-Year meeting in Tampa, and
the 2011 Congress of the French Accounting Association Congress in Montpellier, and we
thank all reviewers and participants for their constructive feedback. All remaining infelicities
are the sole responsibility of the authors.
1
When global accounting standards meet the local context
– insights from an emerging economy
Abstract
In this paper we seek to explain the process of accounting change in an emerging economy
(i.e., Romania) through institutional approaches, focusing on the institutions and social
structures affected by the implementation of global accounting standards (i.e., International
Financial Reporting Standards - IFRSs) in a local context. IFRSs represent nowadays a set of
global accounting standards (at least for capital markets), and are increasingly influencing
national standards and regulations globally. Because the evidence regarding the IFRS
application indicates mixed results, understanding how IFRSs work in relation with local
actors/institutions is very important. We argue that the local context will impose its selfdefined ‘truth and reality’, confused though this may be, on the imported regulations.
1. Introduction
This research investigates the process of accounting change in a complex and globalized
environment, particularly in emerging economies. Much literature studies accounting or
accounting reforms in a technical approach, focusing on general notions such as progress,
improvement, and enhanced accountability (Potter, 2005). This technical view offers a
limited understanding of the process of change and of its effects. However, the process of
accounting change is not simple and always successful, and in fact the expected benefits
formulated in terms of improvements of a general order are difficult to quantify (measure).
We are interested to understand especially the complex relationships between various factors
impacting accounting practices, and how these become institutionalized.
Globalization impacts significantly and increasingly the way business is conducted,
proclaiming the uniformization of practices around the world. As a central function of
organizations, accounting parallels the evolutions in the business environment. For example,
there is an important movement towards International Financial Reporting Standards
(hereafter IFRSs) over the last years; some jurisdictions demand their application for listed
companies, others expand the scope to all companies and many standard setters consider
IFRSs as a model when issuing new standards or regulations. This orientation towards IFRSs
is a call for research on the application of these “universal” standards in different national
settings (for example, Erlend and Nobes, 2010; Irvine and Lucas, 2006). However,
accounting is a social and institutional practice (Miller, 1994 as used by Potter, 2005), and the
local context has lately been recognized as a proxy for the actual outcome. There is a link
between accounting and the environment in which it operates, both in the sense that the
environment determines the purpose of accounting, but also that accounting is mutually
interactive with the environment. Literature examining this relationship is scarce. We
examine it at length in this paper to address this gap by investigating the way the international
becomes national at the level of accounting practices.
The theoretical developments framing the IFRSs implementation at a general level are scarce
(see for example Potter, 2005, and Rodrigues and Craig, 2007), and calls have been made to
study in more depth the process of accounting change in specific contexts. For example,
Potter (2005: 283) underlines that “the appropriateness of applying such regulations within
particular domestic settings has largely remained beyond question, and the likely
2
consequences of the reforms for the organizations affected, as well as for society as a whole,
are yet to be fully understood or evaluated”. After the fall or the relaxation of their totalitarian
regimes, emerging countries have been confronted with drastic and rapid changes in their
business and accounting environments. While the various reasons for which emerging
economies embrace IFRSs are already addressed in literature (see for example Zeghal and
Mhedhbi, 2006), little is known about the means (institutions, organizations) through which
these global (western) standards are “imported” and how “the translation and customization”
is realized in these countries (Ezzamel and Xiao, 2011).
The aim of this paper is therefore to explain the process of accounting change in an emerging
economy (i.e. Romania) through institutional approaches, focusing on the institutions and
social structures affected by the implementation of global standards (e.g. IFRSs) in a local
context. Romania is a particularly appropriate setting to study IFRSs implementation in this
approach, because several stages of accounting reform took place over a short period of time
(two decades) after the fall of the communism in 1989: French inspiration regulations,
followed by a IASs orientation, and recently the enactment of European Directives.
“Western” transplants (sometimes advocated as global standards or practices) were
envisaged, thus making Romania a good case to study in order to understand the issues
associated with accounting harmonization/convergence. While this may be viewed as a
limitation of our paper, the condensed and fast paced process of change undergone in
Romania proves to be extremely insightful for all environments experiencing such
transformations.
We build our argument on a theoretical framework mainly derived from the institutional
theory, but we complement it with previous contributions to research on accounting change
and particularly on harmonization (Colasse and Pochet, 2009; Durocher et al., 2007;
Rodrigues and Craig, 2007). We use a qualitative approach based on interviews in order to
deduce the actions, reasons and interplays of different actors (22 in depth semi-structured
interviews with representatives of the regulator, professional bodies, preparers, auditors,
academics and users).
The remainder of this paper is organized as follows. Firstly, we present a depiction of the
global standards and of the local context, to set the stage. The theoretical background
developed to fully capture the complexity of our research follows. The next sections illustrate
the social and institutional Romanian context and accounting practices, focusing on the
understanding of how global standards “meet” the local environment. The last section
provides conclusions and future research.
2. Global accounting (standards)
IFRSs represent nowadays a set of global accounting standards (at least for capital markets),
and are increasingly influencing national standards and regulations globally. One simple
explanation advanced for this process of movement towards IFRSs is globalization. But more
complex arguments are also argued. For example, Rodrigues and Craig (2007) synthesize
them as follows: (i) neo-liberalism – (global) accounting is a support for privatization and
competitive markets; (ii) free culture theory – global standards support the globalization
initiatives; (iii) lower costs and increased benefits; (iv) increased comparability,
comprehensiveness and credibility; (v) more neutrality than renowned (influential) national
standards.
3
Empirical results about the effects of IFRS in practice are mixed. For example, studies in EU
countries document increased comparability, transparency and quality of financial reporting
as a result of IFRS application (for example, Chen et al., 2010). However, more recently it is
argued that only in a few cases accounting information produced under IFRSs has better
quality than that derived using local accounting systems in the context of several EU
countries (Aubert and Grudnitski, 2011). Karampinis and Hevas (2011) describe what they
call the “unfavorable environment” for IFRSs adoption, thus justifying the minor
improvements resulted from the implementation.
Other studies indicate that local/national practices do not disappear after IFRSs
implementation (Delvaille et al., 2005; Nobes, 2011). Schipper (2005) argues that different
jurisdictions adopt the same standard, but the institutional arrangements and the financial
reporting incentives differ significantly from one country to another. Consequently, there is a
recent call to study accounting practices in their institutional setting (Nobes, 2009).
While an increasing number of countries1 accept IFRSs, some others (as for example, Malta)
move in the reverse direction (Alexander and Micallef, 2011). Also, the newly issued IFRS
for SMEs places many jurisdictions and researchers in the position to reconsider the
applicability of a global standard in local contexts. Consequently, understanding how IFRSs
work in relation with local actors/institutions is very important. While empirical (eventually
multi-country comparative studies) are useful too, they tend to minimize the impact of the
local context. For example, Zeghal and Mhedhbi (2006) identified several factors that could
explain the adoption of IASs by developing countries, but without paying attention to how
these standards were adopted.
For many emerging economies, IFRSs were seen as a part of embracing “the logic and
realities of globalization” in order to “participate in the wealth enjoyed by the developed
nations” (Irvine and Lucas, 2006). The experience with IFRSs is very diverse in literature
and, given the complex features and huge number of emerging and developing economies
worldwide, rather scarce. The process of convergence with IFRSs is presented as successful
in China (Peng and van der Laan Smith, 2010) or Mauritius (Boolaky, 2010), while in
countries such as Fiji, Papua New Guinea, Kuwait or Pakistan, less than successful results
were reported (Irvine and Lucas, 2006; Mir and Rahaman, 2005). Besides the scarcity of
evidence addressing different national contexts, existing literature is mainly descriptive,
limited and lacking an in-depth analysis on how local institutions affect social change and
accounting practices in such a diverse environment.
3. The Romanian (local) context
Between 1947 and 1989, Romania had an accounting system of Russian origins where
“… accounting was used to offer information for statistical purposes and forecasts at national
level” (Calu, 2005: 145). Similarly to other centrally-planned economies, accounting in
Romania was not an instrument at the disposal of the management of an enterprise or other
entity (e.g. institution, organization), but was required to fulfill the needs of the central
institutions of the planned economy (Schroll, 1995).
1
Over 130 jurisdictions are requiring or allowing IFRSs application. For updates visit www.iasplus.com.
4
The economic evolution after the fall of communism was characterized by privatizations and
reforms, with difficulties and a slow development before 2000, and with better prospects
after. The Bucharest Stock Exchange was established in 1996, but it has a small number of
companies listed and a reduced liquidity, being characterized as a medium size stock
exchange in Eastern Europe.
In the accounting reforms, in the early 1990s the Romanian regulator investigated, and
adopted/adapted, the French model. The political aim was the preparation for eventual
membership of the EU, therefore the focus was on the EU Directives, as interpreted by
France. Later in the decade, following direct pressure from the World Bank and International
Monetary Fund, International Accounting Standards (IAS) gradually became a factor in the
accounting reform. In 1999 the Romanian regulator published an Order aiming at
harmonizing the national accounting system of large entities with the Fourth European
Directive and IASs. This Order contained 3 volumes (all in Romanian) – national regulation,
the IASC Framework, and the then extant IASs (with two carve outs: consolidation and
inflation accounting). These changes were not without critics (see Bunea, 2006; Ionaşcu et
al., 2007; Roberts, 2000), the IAS phase being referred to as a “cultural or economical
intrusion” by Delesalle and Delesalle (2000) or as “[…] another case of cultural intrusion?”
by Roberts (2000).
In 2005 another Order of the Minister of Public Finances (hereafter OMFP) was issued for
the enactment of the 4th and 7th European Directives, followed by yet another one
(3055/2009) to be applied starting 2010. The IAS/IFRS influence is still visible in the
regulations, some definitions and accounting policies being kept, because they were not
conflicting with the European Directives. As regards consolidated accounts, IFRS are
mandatory for listed companies starting January 1 2007 (OMFP no. 1221/2006), as well as
for financial institutions, and an option to choose between the 7th European Directive and
IASs is available for non-credit and non-financial unlisted entities for their consolidated
accounts. Starting 2012, banks are bound to apply IFRSs in their individual financial
statements too.
Previous studies (Albu et al., 2011; Bunea, 2006; Ionaşcu et al., 2011; Ionaşcu et al., 2007)
on Romanian data have contrasting findings. Some find cases of reduced level of compliance
with IFRSs (for the cases of mandatory adoption), others find double reporting systems
(although IAS were to be applied mandatorily in Romania, entities reported using the
Romanian regulations and re-treated information under IAS), and cases of compliance with
IFRSs (under mandatory or voluntary adoption). These examples suggest the complexity of
the IFRSs implementation process, and the difficulties related to the generalization of their
results. They can be explained through the complex interplay between actors, interests and
institutions which makes Romania an interesting setting to study accounting change and the
extent of the “accommodation” of Western or global accounting practices or standards.
4. Theoretical issues
Institutional theory explains the process of change and the interplay between practices,
routines, institutions, power and politics (Dillard et al., 2004; Mir and Rahaman, 2005) and it
is a favored framework to study change in accounting. Lounsbury (2008) discusses the
richness of the neo-institutional research, but also encourages new analytical avenues,
including “multiple, competing logics”.
5
Developments of the institutional theory were envisaged in order to facilitate the
understanding of change: new institutional economics focused on efficiency, new
institutional sociology is based on the notions of isomorphism and legitimacy, while
historical institutionalism considers the path dependency (Colasse and Pochet, 2009). Dillard
et al. (2004) develop a framework based on the institutional theory, including Weber’s
notions of capitalistic institutions and Giddens’ structuration theory. Rodrigues and Craig
(2007) develop a framework to study accounting harmonization integrating the Hegelian
dialectic (the concepts of thesis, antithesis and synthesis), the three forms of isomorphism
(coercive, normative and mimetic), and Foucault’s concepts of knowledge and power. Potter
(2005) builds on Miller (1994) a framework to study accounting as a social and institutional
practice. Accounting is discussed as a technique (in the sense of a device for quantifying
activities), as a complex language and set of meanings (the rationales of accounting) and as a
domain under constitution and reconstitution.
Other developments study accounting change and the interplay of powers and interests, more
or less related with institutionalism. Some research focuses on legitimacy (Colasse and
Pochet, 2009; Durocher and Fortin, 2010) or on extended frameworks based on legitimacy
(for example, Durocher et al., 2007 build a framework on legitimacy, including the
expectancy theory and power framework). Also, research concerned with the accounting
regulation might include a framework to study the role of politics (like Bengtsson, 2011).
Considering these developments and given the richness of the institutional theory, in order to
fully understand the complex network of relationships impacting accounting change in
Romania, we follow Lounsbury’s (2008) invitation to use multiple logics.
Firstly, we use legitimacy to interpret the differences in the actions of different groups. There
is a rich literature on legitimacy theory. By synthesizing numerous papers on legitimacy,
Suchman concludes that this concept has “transformed the management theories” (Suchman,
1995). A definition of legitimacy is provided by Dowling and Pfeffer (1975: 122 quoted by
Suchman, 1995: 573): it is the “congruence between the social values associated with or
implied by [organizational] activities and the norms of acceptable behaviour in the larger
social system”. Power (2003) notes that accounting systems function often to legitimate
individual and organizational behavior, and shows that there is a need for understanding how
credibility and legitimacy are accomplished. Organizations intend to extend, maintain or
defend legitimacy (Ashforth and Gibbs, 1990; Suchman, 1995), and the intensity and type of
legitimation activities differ. For example, legitimacy is problematic in the defending
strategy, the intensity of the legitimation activities is high, and they are especially reactive.
Where maintaining legitimacy strategy is employed, legitimacy is nonproblematic and
activities are routinized, mainly substantive and symbolic.
Secondly, we refer to institutions and institutionalization. An institution is “a set of rules that
governs human behavior and shapes social relations” (Lichtenstein, 1996: 244). Also,
institutions are generative of interests, identities and appropriate practice models (Lounsbury,
2008: 349). Institutionalization is the process whereby practices are developed and learned
(Dillard et al., 2004: 508). With respect to institutional practices, the process of change is
usually evolutionary and path dependent, meaning it is shaped by the existing institutions.
The process by which an organization adopts an institutional practice is called isomorphism.
The concept of isomorphism results from the idea that organizations compete for political
power and legitimacy, therefore adopting structures, technologies, techniques and methods
already validated socially. DiMaggio and Powell (1983) (as used by Dillard et al., 2004; Mir
6
and Rahaman, 2005; Rodrigues and Craig, 2007) identify three mechanisms through which
institutional change occurs: coercive, mimetic and normative. Coercive isomorphism results
from external pressure (governments’ pressures, capital markets or the expectations of the
larger society). Mimetic isomorphism is seen as adopting best practices in order to be more
legitimate or successful. Normative isomorphism is given by the professionalization, in that
the members of a profession define methods of work. Decoupling can occur between formal
and informal practices, as a result of the need to impress external parties.
The third element we retain is accounting as a linguistic device (Potter, 2005), a consideration
which we firmly embed in the more general concepts of shared subjective beliefs and
acceptances. According to Searle (1995) people have the ability to share beliefs or desires –
termed “collective intentionality” – that in certain conditions can give rise to a specific type
of social facts, namely, institutional facts. More exactly, institutional facts come into being
by ascribing a status function to a physical object (brute fact) by means of collective
intentionality. We argue that the collective representation is influenced by, or driven by, the
general assumption “that the actions of an entity are desirable, proper or appropriate within
some socially constructed system of norms, values, beliefs and definitions” (Suchman, 1995:
574), meaning the need for legitimacy. Not least, it must not be forgotten that under certain
social conditions, some words do have a certain power, but it is the institution that works, not
the words, by some sort of a magical power; more, for the action to function effectively, it is
necessary that the actor believes in the efficacy of his action (Bourdieu, 1980: 32).
The next three sections discuss each of these three issues in detail. Because language in its
proper philosophical context is fundamental, and in a sense all-pervasive, we discuss this first
(in section 5). Sections 6 and 7 expand on legitimacy and institutionalism respectively.
5. Accounting Concepts, language and meaning – how the “global” becomes “local”
Searle (1995: Ch. 3, 2006: 19) argues for an unavoidable relationship between institutional
facts through collective representation and language. Over and above the intuitively obvious
similarities regarding shared beliefs (institutional facts) and shared meanings (language) is
the more fundamental point that the move from object (e.g. metal) to status function by
means of collective representation (e.g. money) is only possible if there is a mechanism for
creating, and communicating, this collective representation. “The essential thing about human
beings is that language gives them the capacity to represent” (2006: 19, emphasis original).
Languages, therefore, are conceptual schemes. Conceptual schemes are collectively accepted
across a community. Based on this discussion about language as a collective representational
meaning, we want to understand how and why a specific meaning emerges within a certain
context. Global standards are “imported” and “translated”, but their meaning is constructed in
a local context. For example, Doupnik and Riccio (2006) provide evidence that verbal
probability expressions used in IFRSs are interpreted differently in countries with different
cultures. This is in line with Evans (2004) who argues that cultural, linguistic, organizational
and contractual factors determine how concepts contribute to forming judgments.
Several studies (see for example Doupnik and Richter, 2003; Evans, 2004; Evans et al., 2010)
discuss the issues of translating and interpreting accounting concepts across different
cultures. One of the concept transferability cases extensively discussed in literature is true
and fair view (hereafter TFV). Studying how TFV is operationalized in different countries is
useful to understand how local environments influence the way in which (more modern)
7
accounting concepts are interpreted and used within those environments. The advantage of
studying TFV is its long and widely debated history of more than 20 years of implementation,
and its attempts of implementation in countries with very different characteristics. Hence, we
consider the case of TFV to be extremely informative when studying other more topical (yet
with shorter lives) cases of concept transferability such as IFRSs.
Many papers discussed historically the inclusion of TFV in the European Directives and its
implications (Walton, 1991; Alexander, 1993; 1996; Walton, 1997), as well as its meaning
and operationalization in different countries (Burlaud, 1993; Colasse, 1997; Kosmala, 2005;
Kosmala-MacLullich, 2003; Sucher et al., 1996; Walton, 1991). Some authors consider that
each jurisdiction constructed its own meaning of TFV, based on their culture and pre-existing
national GAAP (Alexander, 1993, 1996; Kosmala, 2005; Sucher et al., 1996, etc.). Finally,
TFV is defined by practice and is about professional practice and power more than grammar
and meaning (Hamilton and Ó hÓgartaigh, 2010); also, “the world of the TFV is a subjective
world with which we think we are objectively familiar” (idem: 910).
Many possible interpretations of TFV are found in previous studies. Yet, the essence of the
TFV is that it is undefined. We interpret it as at minimum requiring a presentation which is
not misleading, a negative emphasis explicitly supported by Klee (2009: 907) writing from a
French perspective. It may be regarded as more-or-less meaningless but nice-sounding words.
It may also be regarded as an important high-level objective of financial reporting, which the
detailed rules, standards and regulations are designed and assumed to achieve. It may finally
be regarded as the over-riding and ultimately sole purpose of financial reporting, leading to
the TFV over-ride which if necessary requires (not allows) departure from detailed rules,
standards and regulations (see Alexander, 1999, 2001; Evans, 2003; Nobes, 2000; Walton,
1991, for a deeper discussion of these views). This last over-riding interpretation, explicit in
UK law for many decades, is also explicitly required by Article 2 of the Fourth EU Directive.
The meaning of TFV was analyzed in different countries and derived from the perceptions of
different actors in the accounting field. Several papers (Colasse, 1997; Kosmala, 2005;
Sucher et al., 1996) distinguish between signifier and signified in the context of Saussurean
linguistics. This distinction implies that even if the European Directive and/or national
legislations adopted the concept of TFV, (especially in practice) there are different views and
interpretations, as we need to be aware that “it would be applied specifically in one […of
each] member states, under that state’s national law, in the context of that state’s accounting
traditions, practices and business culture” (Alexander, 1996: 486).
In France, TFV was made compatible with the existent notions of régularité and sincérité
(Burlaud, 1993; Colasse, 1997). In Germany compliance with ‘Grundsätze ordnungsmäβiger
Buchführung’ (GoB) (Alexander, 2006) is of the utmost importance. In former communist
countries such as Poland (Kosmala, 2005) and the Czech Republic (Sucher et al., 1996) TFV
generally is associated with the emphasis on the legal framework, in a generally tax-oriented
accounting system. Outside Europe, TFV evolved in Australia and in New Zealand into
compliance with a set of rules, while in Singapore it received an overriding position (Dean
and Clarke, 2004; Kirk, 2006). Research (for example Shapiro, 1997) shows the potential
problems of introducing TFV in different contexts as different meanings are created in
different settings.
8
As an important input into our investigation we have carried out a total of 22 in-depth
semi-structured interviews of significant Romanian actors. Details, the various categories,
and the way we refer to each interviewee in the paper, are given in the Appendix. It is
important to stress that, whilst our interviewee set is neither random nor large enough for any
statistical analysis, they are in most cases leading influences, and key decision-makers, in
relation to their respective roles.
These interviews with actors in the Romanian context indicate that the perception of TFV in
this setting is different than the UK meaning of the concept. Also, the perception in Romania
depends on the category of actors. For auditors, professional bodies and users TFV is a guide
or a vital concept, closely related to substance over form, relevance and usefulness for users,
while for regulators and preparers, it is primarily compliance with rules. Preparers, even if
they seem knowledgeable of the original meaning of TFV, acknowledge that in practice
things are different. They justify their actions by the necessity to follow the rules, as imposed
by the national regulator. Regarding auditors, a distinction appears to exist in respect with
their knowledge, power and recognized position (legitimacy) between Big 4 and other
international firms on the one hand, and Romanian firms, on the other. The former firms
perceive TFV as linked to the professional judgment and have the power to ask for TFV
override (in accordance with the expectations the environment has from them), while
Romanian firms merely adhere to laws and regulations. Consequently, we assert that because
accounting serves to legitimate behavior of individuals or organizations (Power, 2003),
different actors choose the meaning of the words based on their interests (Zeff et al., 1999).
Our argument and empirical results are rather different from the ones expressed by Evans
(2004). We show very clearly here that speakers of the same language, when faced with TFV
as a new concept, interpret this accounting concept in different ways which appear to be
influenced by their role in relation to the overall accounting function. Our interviewees are
largely uninterested in the translation issue, but very involved in the meaning and
implications of the concept. This seems to justify our emphasis on concept rather than
verbalism in our theoretical exposition. Intertranslatability is therefore suggested here as
arising from 'conceptual relativism, with language connections' rather than from any
'predisposition to particular ways of thinking' caused by language differences. Both our
theoretical exposition and our empirical findings are consistent with this proposition. In this
context, our empirical analysis also provides support for concerns expressed by Zeff (2007:
296) that
“… if one takes a concept embedded in the accounting traditions in one country but that has
never been known or applied in another, even if it is translated as accurately as practicable
into the language of the second country, the concept may not be understood. The words may
be understood, but the concept may not be understood.”
Also, the assertion by Bourdieu (1980) that it is the institution that works, not the words,
proves correct in today’s Romania with respect to the TFV: while words sound the same as
abroad, Romanian practice differs significantly from both the concept expressed by the
words, and the practice of other countries. In Romania (and possibly in many other similar
countries) TFV is generally nothing more than conformity with the existing legislation; yet,
this status quo is maintained in coherence with each actor’s legitimizing purpose.
By this analysis, we overcome the limitations of linguistic studies on the TFV (cf. Hamilton
and Ó hÓgartaigh, 2010: 915), that “by trying to view the TFV objectively, linguistic
approaches ignore the social, cultural, historical and political factors that shaped the function
9
and role of the TFV”. Also, we provide a base of future research using IFRSs concepts, as
research in this area is still scarce (one exception being Doupnik and Riccio, 2006). The
application of IFRSs is just another case of transferring accounting concepts or policies from
one culture to another (especially when cases are of such an application in code-law
countries). Besides being a useful example of concept transferability, the meaning of the TFV
in the local context is also important for the IFRSs application not because TFV is included in
the IFRSs (the words are not), but because TFV implies professional judgment and the
manner in which this principle is operationalized is an indication about the role and use of
professional judgment. And professional judgment is critical in the application of principlebased standards such as IFRSs.
Hamilton and Ó hÓgartaigh (2010) argue that “The meaning of concepts in accounting and
auditing, such as TFV, emanate from the practice of the field” (p. 917). We advance that this
‘practice of the field’ is created by a combination of actions by all the actors such as
regulators, accountants, professional bodies and users, actions that can be explained through
their interests and need for legitimacy. The application of IFRSs has to be analyzed in this
context, and the next sections do so.
6. Actors, interests and legitimacy
6.1 The regulation of accounting in Romania
Differences appear in terms of the structure, functioning and legitimacy of accounting
standard setters between countries. For example, Puxty et al. (1987 cited in Susela, 2010)
advance three directions useful to discuss different regulation styles in relation with the
interactions between different actors/groups: dispersed competition, hierarchical control and
spontaneous solidarity. The legalism implies the unreserved application of State regulations.
The regulations issued by the State generally have a stronger political legitimacy and are
supported by a powerful coercive system, but they may lack technical competence and
therefore technical legitimacy (Colasse and Pochet, 2009). Besides the State regulation,
another ideal type involves the accounting profession, but this regulatory system may lack
technical and usually lacks political legitimacy. These limitations led to regulation by an
independent body (Colasse and Pochet, 2009). It is argued that the degree of the state
intervention is a result of the local context expectations, and more precisely is related to the
institutional types of welfare state (Oehr and Zimmermann, in press).
When analyzing the standard setting/regulation process one has also to consider politics and
legitimacy. Legitimacy is necessary because it ensures the right to set accounting standards
(Durocher and Fortin, 2010). Johnson and Solomon (1984) identify the general conditions for
the legitimacy of the standard setting institution: it has authority (clear mandate, sufficient
expertise, and independence), it follows a substantive due process (justification and rationale
for decisions), and it follows a procedural due process (gives other parties the opportunity to
provide input).
The State’s actions may be viewed as being autonomous from the economic sphere and
acting as protector of a social order (Susela, 2010). For example, in France it was assumed
that the significant role of the State in accounting regulation was the expression of a
“partenerial” tradition, recently replaced by professionalization, a characteristic of AngloSaxon systems (Colasse and Pochet, 2009). But while the regulatory system in many
10
countries is changing as a result of economic changes and international evolutions, little has
changed in Romania since 1989.
The process of accounting regulation in Romania is a public one, the Ministry of Public
Finances (henceforward MPF) being the main actor. Accounting is regulated through the
accounting law (a Parliament act), and practical details are provided afterwards through
means of Ministerial Orders. This regulatory process led by the MPF was considered to be
logical after the fall of the communism, when the influence of the State on the economy was
significant and when accounting reforms had to fulfill political objectives too.
For example, immediately after the communism’s fall, the aim of becoming member of the
European Union influenced Romania’s decisions in terms of financial reporting too – the new
model had to be oriented towards the European Directives. Also, the choice of the French
model as an inspiration source for the Romanian one had many logical arguments (cultural
links with France, logical suitability in terms of the type of financing, relationship with
taxation etc.), but was considered by many “a political choice” because of France’s political
and financial support (as accentuated by the visit of the French president to Bucharest around
that time).
However, the use of models accepted at the international level, e.g. acting through imitation,
was intended by the MPF to create/increase its legitimacy (Colasse and Pochet, 2009).
Political pressures are also advanced as explanations for decisions regarding the evolution of
the accounting model afterward. For example, the regulator’s representatives we interviewed
insisted on the fact that IASs were imposed in Romania because of the World Bank’s
pressures. According to R1, in 1997-1998 the World Bank imposed 4 conditions for granting
its financial assistance to the country: the use of IASs by some (generally large) companies,
the auditing of these companies by auditors applying ISAs, the issuance by the MPF of a
guide for IASs implementation, and the establishment of an institution for financial auditing
(thus the Chamber of Financial Auditors of Romania was established).
MPF’s legitimacy is explained by both its representatives we interviewed through politicallyjustified choices. They underlined that Romania never used the French model or the AngloSaxon one as inspiration sources, it was always the 4th European Directive with a view to join
the EU, and sometimes IAS treatments are/were included in the national legislation because
the World Bank demanded it. In the same line, the TFV override was included in the national
regulations only because it exists in the European Directives: “[...] it exists in the Directive,
therefore we also took it. We cannot remove it […]” (R2), but with a lack of practical
applicability in Romania, at least in the opinion of the Ministry’s representatives. It is
obvious that compliance is very important for the regulator. Actually, R2 made three
interesting and somehow contrasting affirmations at different stages of the interview:
“a) I am interested not only in obeying the rules, but also in giving a correct picture.
b) Companies must account for all transactions in accordance with their substance, and
secondly to obey all rules of preparation, measurement and presentation of financial
statements.
c) As regulations are conceived today, companies have enough provisions and flexibility to
present fairly their activities.”
At a first look, we might conclude that the regulator is not only interested in compliance with
the rules. But the phrase “account for all transactions in accordance with their substance” is
quite debatable for two reasons: it does not mention “economic substance”, and secondly, the
regulations issued to fully enact the European Directives (issued in 2005) demanded that the
11
Substance over Form principle was to be used by large companies, while others would only
apply it for their consolidated financial statements. In a logical analysis of priorities, we may
force the following analysis: A. the most important is the “correct picture” according to the
substance, followed by rules application; B. the rules are conceived to give, if applied, a
correct picture. This reasoning comes to validate other actors’ view, that the regulator expects
compliance and that the rules application is enough.
For us, this is one rationale for the slow development of professional judgment by Romanian
accountants. We argue that this lack of interest the national regulator has shown to the
development of professional judgment by Romanian accountants (as unintentional as it may
have been?) served best the purpose of maintaining the regulator’s legitimacy; that is, it was
always preferred that Romanian accountants be kept away from learning and using to high
extent their professional judgment.
The image presented by the regulator’s representatives leads to the idea that the regulator
followed the public interest in different stages of the accounting reform. This is in line with
the public interest theory according to which “benevolent governments can correct failures
through regulation” (Bushman and Landsman, 2010). The justification for different choices is
argued by the political objectives and by the technical consultancy (provided by international
experts or organizations, and funded by European or international institutions).
However, the technical legitimacy of the Ministry as regulator is lately being questioned. The
critics on the national level come from professional bodies, big accounting firms and even
users, because there is a general view that accounting information is rather fiscally oriented
and provides a reduced utility in decision making. Also, the World Bank (2003, 2008)
suggests that the Ministry should find “a suitable successor” and that the standard setting
process should be expanded to include the other parties involved in accounting. These critics
are generally consistent with the critics to the public interest theory of regulation, which are
synthetized by Bushman and Landsman (2010: 261) as follows: “even if the regulator is
independent and wants to do good by acting in the public interest, they are generally
incompetent and likely to fail.”
Preparers, auditor, and users and the accounting profession at large are interested in and are
affected by the results of the standard setting process, but besides them, society in general is
also considered as a legitimate stakeholder (Durocher and Fortin, 2010). In order to maintain
their legitimacy, standard setters develop strategies to involve these stakeholders. For
example, Durocher and Fortin (2010) and Durocher and Fortin (2011) discuss the
involvement of users and practitioners respectively in the standard setting process in Canada.
The Romanian MPF created in 1992, with further modifications, a consultative body
(functioning under its umbrella). However, Petre (2007) acknowledges that only recently has
this institution taken on a more active role. Therefore, the setting-up and existence of this
consultative body had more of a symbolic role in increasing the regulator’s legitimacy in its
early years of existence. While for almost two decades the legitimacy of the Ministry was not
contested especially because of the State’s power, more recently different stakeholders do not
consider their interests as being represented by the MPF, and question its legitimacy. By
creating a new structure, the standard setter might prove its adherence to the needs of the
environment and might overcome the critics (Durocher and Fortin, 2010). However, this may
also purely be (viewed as) a strategy to improve its legitimacy. In this line, interviews with a
member of this consultative body outline its limited role in the regulatory process, and the
12
authoritative style of the Ministry. These would lead us to argue that it is a formal
involvement of stakeholders, with no real power.
Besides the involvement of other parties in the standard setting/regulatory system, the critics
also refer to the due process. The Ministry usually issues accounting regulations that have to
be applied immediately in practice, without allowing the time to the accounting profession to
prepare, to estimate the costs and the necessary changes of the accounting system. Caught in
this rush, accountants usually do not perceive the differences between regulations anymore.
For example, Bunea (2006) documents that many accountants did not perceive any
significant difference between the Order requiring IASs application and the following one,
enacting the European Directives. Also, pretesting accounting rules before issuing them is not
a habit for the Romanian MPF. Apparently the only pilot testing was made before 2000,
when IASs were considered for large entities. The main issues tested were consolidation and
inflation accounting. Without disclosing the results of these projects, the Ministry carved out
these standards from the IASs package included in the national regulations (Ionaşcu et al.,
2007).
These insights about the Romanian regulatory process point out an increasing need of
technical legitimacy. The institutional system in which accounting regulation takes place
includes power struggles and also values and beliefs which provide power to actors
(Bengtsson, 2011). The coercive objectives and pressures from the political field (EU
membership, World Bank and IMF conditions) maintained a high need for political
legitimacy of the accounting regulator. Some (see Bengtsson, 2011 for a review) consider
that endorsement by public and political actors is necessary for the success of accounting
standards, a model which still is considered valid at the European level. However, the
finalization of these political projects in Romania and the increasing activity and visibility of
other stakeholders would probably lead to transformations in the way in which accounting
regulations in Romania works, because the technical legitimacy is increasingly questioned.
The enactment of European Directives and IFRSs adoption (for some entities) may indicate a
diminished role of national accounting standard setters/regulators. However, Stevenson
(2010) indicates when a standard setter does not have to issue standards anymore, many other
activities have to be added to the agenda (related to communication, research input etc.). For
these activities the need for technical legitimacy is obvious.
6.2 Professional bodies
The development of the accounting profession and the relationship with the State are critical
in the context of emerging economies (Susela, 2010). The actions of accountants and of their
associations are important in order to understand how accounting rules are produced and
transformed into practice (Cooper and Robson, 2006). But in a specific context, the role and
power of the profession are influenced by the institutional alignment in place.
After the fall of communism, the Romanian accountancy profession was re-created in 1992,
by the re-establishment of the Body of Expert and Licensed Accountants of Romania (ro.
Corpul Experţilor Contabili şi Contabililor Autorizaţi din România – hereafter CECCAR).
CECCAR had been created in 1921 to represent the Romanian accountancy profession
nationally and internationally, but it was dismantled in 1951 (Zelinschi, 2009). It has been
involved ever since its re-creation in the management of the accountancy profession,
claiming continuously, but unsuccessfully, the prerogatives of accounting standard-setter
13
from the MPF: “I have always been in favor of elaborating national standards mostly based
on IASs, as Poland or Hungary do” (PB2).
The Romanian audit profession has been created in 1999 (by the establishment of the
Chamber of Financial Auditors of Romania – ro. Camera Auditorilor Financiari din Romania,
hereafter CAFR), generally later than in other countries in the region 2. The external pressure
(World Bank and IMF) for the creation of these bodies led to an intra-professional conflict, in
terms of exercising the audit functions. Before the setting-up of the CAFR, CECCAR’s
members performed all activities related to the accounting filed, including audit. CAFR’s
creation meant that only its members could perform audit mission to certify financial
statements, much to CECCAR’s discontent. These struggles decreased the power of the
accounting profession. However, both professional bodies act in order to increase their
legitimacy, in Romania and at the international level. Both are IFAC’s members and
developed partnerships and close relations with international institutions.
Even though CECCAR is consulted (along with other stakeholders) by the Romanian
regulator, the professional body’s representatives contest the legitimacy of the regulator, as
well as the due process:
“We do not have standards, we have regulations. Who issues regulations? It is the State, in its
double capacity: regulator and user of its own regulations. It cannot be ‘clean’. The State is
only interested in the fiscal duties.” (PB2)
MPF’s involvement (which end-results in preparing fiscal not accounting financial
statements) is also presented as an excuse for the profession, as PB2 admits that accountants
in practice do not depart from fiscal rules. He criticizes the MPF for its decisions related to
accounting regulations, which he does not consider to serve the public interest, as standards
issued by the CECCAR presumably would. Then, he uses this institutional environment to
justify the need of Romanian accountants to follow the rules: “the Romanian accountants
believe that obeying the rules makes them the best accountants ever”. Another member of the
institutional environment considered liable in his opinion for this situation is the shareholder:
“the business environment should make a fuss, the shareholders, as they are mostly affected”
(PB2).
Unlike the national regulator, professional bodies are committed to developing and
encouraging the use of professional judgment, as part of their role to form and develop
competencies. In this regard, PB2 notices that “education is very important, starting with
higher education and continuing with the continuous one… They (accountants, N.A.) should
expand their capacities to think, to judge, to estimate…” Should professional judgment start
to be regarded as important in Romania, the role of these professional bodies would increase
within the local accounting environment, thus contributing to their legitimacy.
6.3 Auditors
Generally, auditing evolved as a mechanism of control. The audit process is an activity that
reduces agency costs from the economic point of view, and a social mechanism of control
from the social point of view (Richard, 2006: 155). The phenomenon of auditing
internationalization is associated with the emergence of big auditing firms. While auditing
developed in Anglo-Saxon countries, these countries are also the origin of the big firms.
2
For example, the institution of audit experts was created in Poland in 1957 (Kosmala-MacLullich, 2003: 469),
and the creation of the Czech Chamber of Auditors was in 1992 (Sucher et al., 1996: 547).
14
These auditing firms are considered as engines of growth, profitability, and
internationalization (Zeff, 2003: 190); they audit the biggest companies; and they engendered
and still do the major changes in audit, but also in accounting. For example, Big 4 have
always considered that “the traditional roles of a major accounting firm – [are] participating
in standard setting and developing guidance on the application of accounting standards”
(Tokar, 2005: 64).
The large accounting firms have entered quickly the market of ex-communist countries,
understanding the business opportunities and becoming quickly involved in the creation and
reorganization of the profession, and sometimes even in national standard setting processes
(Kisch et al., 2000). Research documented in some countries an intra-professional conflict
between international accounting firms and local ones (Caramanis, 2005).
Especially in ex-communist countries a distinction is usually made between large (and
possibly other foreign) accounting firms and local ones (Sucher and Kosmala-MacLullich,
2004; Sucher and Zelenka, 1998). Previous studies show that local auditors are very
concerned with maintaining their clients, and are hence viewed as less independent.
Therefore, the various actors involved in the accounting process (preparers, professional
bodies, users) consider Big 4 more independent than local firms.
This finding is confirmed in Romania, the interviews adding evidence that it is a general
perception (users, preparers, professional bodies, and even auditors) of a difference between
Big Four and other multinational network firms, and Romanian audit companies. For
example, P1 considers that “the role of the auditor is extremely important especially when it
is one of the Big Four. They do not depart from their principles, while Romanian audit
companies are more willing to do so”. R1 (representatives of the regulator) also
acknowledges the role of the Big Four, arguing that “banks are audited by one of the Big
Four, therefore they prepare more reliable financial statements”.
Therefore, the power of Big 4 and other multinational network firms is recognized. Therefore
they act consistently with the image and role assigned to them by the public. A2 states that
“Romanian audit companies do not have the authority/force to impose such treatments to the
same extent as the Big 4 (they have financial power, prestige)”. The position of Big 4
auditors underlines their perceived role as powerful agents of applying professional
judgment, in contrast with other actors in that environment, which in turn is a statement
legitimizing their position and their competition for big clients. Their critiques regarding the
regulator’s position may also come from the frustration of not being consulted in the
regulation setting process (which is the case in other countries). They insist on having the
technical legitimacy, while the Ministry mainly has the political one.
It is reported (testimonies by A5, A6, and A7) that Romanian audit companies mainly check
the extent to which the financial statements are free of errors, and comply with the rules.
More than that, A7 insisted on the fact that accountants should protect themselves by having
documentary evidence ‘for everything’ (for example, revaluation should be made only based
on an independent valuator’s report). Thus, non-Big 4 auditors legitimate their actions by the
existence of legitimate accounting regulations which should be followed. They agree that
“financial statements in Romania are still focused on taxation issues” (A5), but they do not
interfere with these rules.
15
6.4. Users
The users of accounting information are very diverse (from the State in many countries to
capital markets’ participants and creditors, from managers to commercial partners, from
employees to analysts and general public). Of course, the users’ needs are different and their
expectations in terms of accounting information are different. While in some jurisdictions
accounting information was considered for a time as useful for all the users (France for
example, and even the vision of the IASC’s framework), in others (USA or the new IASB
vision) the investor/creditor is viewed as the main user of such information. It is considered
that this shift towards the capital markets increased the legitimacy of the standard setting
process (Cooper and Robson, 2006).
As perceived by most of our interviewees, the main intended user of accounting information
in Romania is the State. For example, PB3 argues that: “The privileged user is the fiscal
authority […] Other users are the banks, the management… here things should be nuanced
because in a lot of cases administrators do not understand the merits of a reporting system, do
not exploit accounting information and do not require the skills of the accountant to produce
information that could be useful for them.” A banker (U3) says: “Look, we try to make some
studies, some comparative analysis, but we don’t have the data. If you are going to the
Commercial Register, the financial statements are, as I told you, irrelevant for analysis.”
Regulations (how they are issued, the regulator’s expectations, and how they are applied) are
considered to be the reason for this situation. While accountants follow the rules, users put a
lot of emphasis on the professional judgment:
“There are a lot of accountants who simply record debits and credits without judging the
implications of those entries on the TFV of the financial statements prepared (information
which can alter debt ratios, smoothing the Income Statement etc.). I believe that they
strictly follow the provisions of the law, and do not apply professional judgment to obey the
spirit of the law; yet, they strongly believe that the financial statements they prepare do give
a TFV” (U1)
Unlike some of the auditors and the national regulator, the users are aware of the unresolved
issues in the accounting regulations. Also, they particularize in respect with the size of the
companies:
“The things changed over time in Romania but especially for large businesses, included in
multinationals. From the SMEs’ perspective, I think the evolution mainly depends on the
quality of the people preparing financial statements. It has not been driven by their business
environment, as accounting is sometimes residual for these businesses. They deal with
recurrent activities and mostly with fiscal issues (VAT, payment declarations etc.)” (U1)
Users understand perfectly that the institutional environment leads to compliance with the
regulations, and believe that “financial statements as prepared under Romanian regulations
are of medium use for the needs of a potential investor”. Although they understand the
position of the companies, they consider also that an educational issue exists:
“I would probably prefer to use financial statements prepared in accordance with IASs, but
this is not essential… What I would really prefer is a change in the mentality of Romanian
accountants… I am not thrilled when seeing financial statements prepared in accordance
with IASs but I know nothing is changed behind… They can say they obey IASs, but in fact
their judgment is the same… for my needs I want a different mentality, not just mere
application of the provisions of the law… but in our culture, if you are not specifically
required to do something, you usually do not take it into account too much…” (U1)
16
As users do not believe that financial statements prepared in accordance with the national
regulations are useful for decision making, their legitimizing strategy involves obtaining
supplementary sources of information “such as business plans, information about the business
environment and budgets” (U2). They are expected (by all the other actors) to act like this,
they view their position justified by this expectation, and act appropriately. Of course our
(proxy) users were professionals, and such supplementary sources of information are unlikely
to be available to individual small investors. They criticize accountants’ lack of emphasis on
professional judgment, the inability of financial statements prepared in accordance with
national regulations to be useful for decision making, and the fiscal bias of the national
regulator when issuing accounting regulations. In this respect, and considering the
expectations of their shareholders, they legitimize themselves (in front of their shareholders
most likely) as the ones making everything to ensure their decisions are informed.
7. Institutionalism and accounting practice - to change or not to change
It is argued that variations in accounting practices occur as an endogenous function of local
political and economic institutions (Ball, 2006). On the same note, Schipper (2005: 110) finds
differences in IFRSs implementation between European Union countries: “all jurisdictions
will adopt the same standards but the institutional arrangements giving rise to financial
reporting incentives differ, in some cases dramatically, across jurisdictions.” Factors such as
the economic development, the history and the culture of the country, the legal and
educational environment influence the process of IFRSs implementation. Also, previous
institutional elements remain in the new way of doing things, because practice is not free
from influences from the past.
The way in which accounting rules (or principles) are applied is contingent upon factors
specific to an environment and to an organization, because there are differences in the
reporting incentives (Leuz, 2010).
The evidence from Romanian entities (Albu et al., 2011; Ionaşcu et al., 2011; Ionaşcu et al.,
2007) suggests that many Romanian entities did not and still do not comply with the legal
requirements in terms of IASs/IFRSs application, while other entities (a few) voluntarily
adopted IASs/IFRSs. For example, the IFRSs as adopted by EU are mandatory in the
consolidated financial statements of listed entities across all member states. However, some
Romanian entities do not comply with this requirement. Despite this lack of compliance, or
the existence of a qualified audit report, the entities remained listed and these accounting
lacks of compliance do not change anything. The explanations for this situation may be found
in the institutional background. On a first hand, the enforcement and monitoring mechanisms
are reduced (World Bank, 2008), so the coercive factor is almost inexistent. On the other
hand, the nature of the accounting information is important only to some users.
Institutions are about “the rules of the game” and about the players (North, 1990 cited in
Colasse and Pochet, 2009). The relationship between players might be different in different
cases, and therefore the rules of the game are applied in different manners. We will illustrate
this statement with two examples.
The first example concerns the entities constrained by the coercive powers of demanding
users or managers to improve their accounting system, even when they felt a reduced
coercive regulatory power. There were a few Romanian entities adopting IASs/IFRSs even if
this was not required by the regulations. For example, Ionaşcu et al. (2007) report that a small
17
number of entities applied IASs before 1999. They also found cases of some entities keeping
a dual reporting system after 1999: one in accordance with the national regulations (which
included IASs, but had carve-outs and included other prescriptions sometimes conflicting
with IASs), and one in accordance with IASs. This evidence and also some of our interviews
reflect the various coercive pressures on some companies: fiscal controllers expected a fiscal
approach in statutory financial statements, while users required information under
IASs/IFRSs.
Additionally, these entities intended to reduce the costs of producing accounting information,
in an efficiency-reduction approach. We consider the case of P1, working in a big company,
controlled by a listed company on a major European Stock Exchange, and prepares financial
statements as close as possible to IASs requirements. In terms of preparing accounting
information, he stated that: “My entity uses IASs extensively as auditors too insist on using
them even if the reporting is in accordance with Romanian regulations” (P1). On the other
hand, he also describes the coercive pressures from fiscal controllers who required the
elimination of some practices which were not conflicting with the national regulations, but
were not detailed in these. For example, the national regulations make reference to an account
for deferred tax, but without any other details on how to recognize and calculate such tax.
Therefore, the fiscal controllers did not approve this entity presenting it in its financial
statements.
Another entity listed on the Bucharest Stock Exchange decided to delist because of the high
costs to maintain IFRSs financial statements (with high pressures for compliance from their
auditors), compared with the benefits of being listed (P5).
The second example concerns the entities required by regulations to apply IFRSs, but without
complying with such a requirement. For 2010, 5 of the groups listed on the BSE’s first
category do not present consolidated financial statements under IFRSs. A special case is
investment funds (ro. Societăţi de Investiţii Financiare). While they argue that they cannot
consolidate because of the statutory financial statements under national regulations, there are
also other reasons for this situation. Some interviews (PB4, PB5 and A4) revealed the
existence of discussions about these cases of noncompliance and about the possible measures
to be taken. Because these are large entities and because only a few entities are listed, the
responsible bodies cannot make the decision to delist the non-compliant ones, especially
investment funds. These entities use their economic power to maintain a lack of compliance
in accounting. This power coming from their ‘reputation’ as large entities, that are not easily
penalized, is enough for their stakeholders. We view this to be indicative and consistent with
the reduced role of accounting information in Romania. The path dependency here is
obvious. A1 stated that:
“Romania is an emergent country. Even if we have gone through the transition phase, we
come from a period of sustained economic growth when the financial information did not
really matter. Accordingly, we may find anomalies here that would not be found anywhere
else in the civilized world”.
For the majority of Romanian entities however, the most powerful forces come from the
State. For example, P2 works in a large unlisted firm, owned by a Romanian citizen; for P2
the fiscal issues and the owner’s requirements are very important. Regarding taxation, P2
believes that fiscal controllers come only to penalize them. P3 also works in a company for
which “the only users are the owners and the State”. “They [the owners, N.A.] told us to have
this amount of profit, this income tax, and we have to manage with the rest…” As regards the
18
accountants in entities such as the one he works for, he says that “It does not matter that what
we prepare is irrelevant” because “if no one asks for more, why do differently? If banks grant
me loans with these financial statements, why do anything else?” This is an
acknowledgement of the little interest in the quality of accounting information in these
companies, justified by the institutional factors: “there must be something wrong with the
fiscal system if we (accountants, N.A.) are so preoccupied with the fiscal matters, and do not
have the time to do anything else” (P3). These testimonies of accountants exemplify the
(external) reasons for their actions: from their point of view, it is the system and the
regulations which are to blame. Accountants adhere to rules and expectations, being in the
situation of “the innocence of wrong doing” (Elsbach, 1994: 68). Also, they insist that this
kind of behavior is beneficial to, and desired by, the company (in order not to pay fines to
fiscal controllers).
This evidence is suggestive for the manner in which different entities might react to the
application of IFRSs in emerging economies. Also, the Romanian case illustrates all coercive,
mimetic and normative types of isomorphism. While the overall IFRSs enforcement is
reduced, the main pressure for compliance results from demanding users and auditors.
Mimetic isomorphism is usually associated with increasing competition, and has a reduced
significance because of the reduced role assigned to the accounting information in the
Romanian environment. Given the underdeveloped accounting profession, the main sources
of the normative isomorphism are mainly located at the level of large accounting firms.
8. Discussion and conclusion
We discussed the manner in which global accounting standards (IFRSs) are applied and
transformed into accounting practices within (and considering the characteristics of) a
specific context. We have adopted an institutional perspective, according to which the
environment (legal system, regulatory system, capital market, banking system, taxation
system etc.) influences organization’s structures and systems, including accounting. Also, we
adhered to the idea that organizations (actors) act to maintain and increase their legitimacy.
The interests and power of different actors also reflect themselves in the accounting practices.
Therefore, we propose the following framework:
International environment
“Imports” (translation)
Accounting
(language)
Meaning
Pressures
Actors – interests,
legitimacy
Accounting
practices
Power relations
Local environment
Accounting (as a language) is developed in specific (local) instances (Potter, 2005) and the
meaning of this language is a social (local) construct. This meaning impacts the accounting
practices of organizations. The local environment comprises general social, economic,
cultural and political aspects, but also within this environment several actors influence the
19
role and practices of accountants. These actors include regulators, the accounting profession,
auditors, and users. In the local context there is an unstable equilibrium between the powers
and the actions of these actors. However, these actors have the power to influence accounting
practices. Therefore, given their characteristics and relation with these actors, organizations
have different incentives towards reporting and respond by isomorphic change (coercive,
mimetic and normative isomorphism). While the international environment may influence the
accounting language (IFRSs as global standards) or the actors’ position, the accounting
practices remain the results of the local environment.
We attempt to very briefly summarize our paper and its implications and contributions under
three headings.
i) Theoretical foundations
In detail, as discussed in section 4, a multi-faced analysis is required, and the situation seems,
and indeed is, complex. But beneath this complexity, where every argument seems relevant
and no argument seems conclusive, there is a very simple common element. The issues are
social, subjective, and about people. Accounting (as a language), meaning and perceptions of
concepts, institutions, accepted or rejected legitimacy, are all social constructions. In Searle’s
terminology, they become institutional facts by collective construction, within and across,
BUT ONLY WITHIN AND ACROSS, a specific community of like-minded beings. In one
sense, the argument is almost circular or self-fulfilling. A community of like-minded people
will institutionalize and accept words, meanings, propositions and attitudes. Two different
‘communities’ are likely to produce two different and mutually incompatible internally
institutionalized sets of “facts”. Language is a very simple example. Consider ‘chat’ in
English (generally accepted as meaning an informal conversation) and ‘chat’ in French
(generally accepted as meaning a furry feline creature). These two ‘general acceptances’ are
completely incompatible. Crucially, the point is equally valid in much less obvious
applications than the language scenario.
ii) The Romanian case
Romania is an excellent illustration at the micro level of these theoretical foundations.
Coming relatively recently to European Union status and IFRS influence, it is still
demonstrably trying to come to terms with the implications. As considerations of the very
different comments and perceptions across the various ‘categories’ of actors tabulated in the
Appendix indicates, there is no single ‘community of like-minded people’ involved. The
objective of, source of, legitimacy of, and implications of, current accounting regulation is
not a coherent generally-agreed social construction across the business community, even
within the country. Reasons, and trends, can be analyzed and investigated over time in the
context of our multi-faced theoretical foundations. But there seems no reason to expect rapid
change, or breaking down of the barriers between the different (philosophical/perceptual)
communities.
iii) Globalization and the IASB
We briefly and simply refer the reader to our title. This is: “When global accounting
standards meet the local context – insights from an emerging economy”. Our detailed
analysis suggests several propositions:
- Different ‘local contexts’ (usually countries, but also communities within those countries, as
can be seen from our analysis above) will react to global standards in different ways.
- Emerging economies, as illustrated here by Romania, are likely to be more different from
IASB standards (in our socially constructed sense) than more long-standing capitalist nations.
20
It could be argued that this fact might potentially enable a better application of IFRS in
emerging than in developed countries. We argue however that the various existing
communities’ interest and legitimizing needs will not ease the process, as the situation is
more blurry than in developed countries that enjoy a more established regulatory process.
- Countries (local contexts) are likely, within themselves, to be confused and heterogeneous,
containing a variety of inconsistent social constructions, again as certainly illustrated by
Romania.
In the spirit of principles-based thinking rather than detailed rules-based analysis, we think
we can stop here. The local context will impose its self-defined ‘truth and reality’, confused
though this may be, on the imported regulations. Further research, at both conceptual and
illustrative levels, is suggested.
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Appendix List of interviews
1
2
3
4
5
6
7
8
9
10
11
Category
Preparer
Preparer
Preparer
Preparer and academic
Preparer
Auditor Big 4
Auditor Big 4
Auditor Big 4
Auditor Big 4
Auditor non-Big 4
Auditor non-Big 4
Abbreviation
P1
P2
P3
P4
P5
A1
A2
A3
A4
A5
A6
24
Duration
50 min.
70 min.
45 min.
60 min.
55 min.
60 min.
60 min.
65 min.
75 min.
45 min.
60 min.
Date
November 28, 2008
December 1, 2008
December 12, 2008
February 10, 2011
March 14, 2011
December 3, 2008
December 16, 2008
March 15, 2011
January 25, 2012
June 25, 2010
July 9, 2010
12
13
14
15
16
17
18
19
20
21
22
Auditor non-Big 4
Regulator
Regulator
Representative of the Chamber of Financial
Auditors of Romania [Camera Auditorilor din
România - CAFR]
Representative of the Body of Expert and
Licensed Accountants of Romania [Corpul
Experţilor Contabili şi Contabililor Autorizaţi din
România - CECCAR]
Representative of the Body of Expert and
Licensed Accountants of Romania [CECCAR]
and academic
Representative of the Body of Expert and
Licensed Accountants of Romania [CECCAR]
and academic
Representative of the Body of Expert and
Licensed Accountants of Romania [CECCAR]
and academic
User (banker)
User (banker)
User (business analyst and consultant for banks)
25
A7
R1
R2
PB1
40 min.
60 min.
45 min.
75 min.
July 20, 2010
November 26, 2008
December 10, 2008
November 26, 2008
PB2
50 min.
December 22, 2008
PB3
60 min.
February 11, 2011
PB4
35 min.
January 23, 2012
PB5
70 min.
January 26, 2012
U1
U2
U3
50 min.
60 min.
90 min.
August 10, 2009
August 20, 2009
March 15, 2011