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Towards a theory of cultural influence on the development of accounting systems internationally

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Towards a theory of cultural influence on the development of accounting systems internationally
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  S. J. GRAY Towards a Theory of Cultural Influence on theDevelopment of Accounting SystemsInternationally Research has shown that accounting follows different patterns in differentparts of the world. There have been claims that national systems aredetermined by environmental factors. In this context, cultural factors havenot been fully considered. This paper proposes four hypotheses on therelationship between identified cultural characteristics and the developmentof accounting systems, the regulation of the accounting profession andattitudes towards financial management and disclosure. The hypotheses arenot operationalized, and empirical tests have not been carried out. Theyare proposed here as a first step in the development of a theory of culturalinfluence on the development of accounting systems. Key words: Accounting policies; Culture; Financial reporting. This paper explores the extent to which international diiferences in accounting, withspecific reference to corporate financial reporting systems, may be explained andpredicted by differences in cultural factors.While prior research has shown that there are different patterns of accountinginternationally and that the development of national systems tends to be a functionof environmental factors, it is a matter of some controversy as to the identificationof the patterns and influential factors involved (Mueller, 1967; Zeff, 1971; Radebaugh, 1975; Nair and Frank, 1980; Nobes, 1983). In this context the significance of culturedoes not appear to have been fully appreciated and thus the purpose of this paperis to propose a framework which links culture with the development of accountingsystems internationally.The first section of the paper reviews prior research on international classificationand the influence of environmental factors. The second section addresses thesignificance of the cultural dimension and its application to accounting. The thirdsection proposes a framework and develops hypotheses linking culture with thedevelopment of accounting attitudes and systems internationally, based on the cross-cultural work of Hofstede (1980, 1983). In the fourth section some culture areaclassifications are proposed. They have been developed on a judgmental basis, in thecontext of combinations of accounting attitudes or 'values' which determine (a) theauthority for and enforcement of accounting systems, and (b) the measurement anddisclosure characteristics of accounting systems. S. J. GRAY is a Professor of Accounting, University of Glasgow, Scotland.  ABACUS INTERNATIONAL CLASSIFICATION AND ENVIRONMENTAL FACTORSComparative accounting research has provided an enhanced awareness of the influenceof environmental factors on accounting development (e.g., Mueller, 1967; Zefl', 1971;Radebaugh, 1975; Choi and Mueller, 1984; Nobes, 1984; Arpan and Radebaugh, 1985; Nobes and Parker, 1985). This research has contributed to a growing realizationthat fundamentally different accounting patterns exist as a result of environmentaldifferences and that international classification differences may have significantimplications for international harmonization and the promotion of economicintegration. In this regard it has also been suggested that the identification of patternsmay be useful in permitting a better understanding ofthe potential for change, givenany change in environmental factors; and that policy-makers may be in a betterposition to predict problems that a country may be likely to face and identify solutionsthat may be feasible, given the experience of countries with similar developmentpatterns (e.g., Nobes, 1984).Research efforts in this area have tended to approach the international classificationof accounting systems from two major directions. First, there is the deductive approachwhereby relevant environmental factors are identified and, by linking these to nationalaccounting practices, international classifications or development patterns arcproposed (e.g., Mueller, 1967, 1968; Nobes, 1983, 1984). Second, there is the inductiveapproach whereby accounting practices are analysed, development patterns identified,and explanations proposed with reference to a variety of economic, social, political,and cultural factors (e.g. Frank, 1979; Nair and Frank 1980).As regards the deductive approach to accounting classification, the environmentalanalysis by Mueller (1967) provides a useful starting point. Mueller identified fourdistinct approaches to accounting development in western nations with market-orientated economic systems. These were: 1. the macroeconomic pattern—where business accounting interrelates closely withnational economic policies; 2. the microeconomic pattern - where accounting is viewed as a branch of businesseconomics; 3. the independent discipline approach —where accounting is viewed as a servicefunction and derived from business practice; and 4. the uniform accounting approach — where accounting is viewed as an efficientmeans of administration and control.While all of these approaches were perceived to be closely linked to economic orbusiness factors, a wider set of influences, for example, legal system, political system,social climate were recognized as being relevant, though without precise specification,to accounting development (Mueller, 1968; Choi and Mueller, 1984). Cultural factorsreceived no explicit recognition, however, and were presumably subsumed in the setof environmental factors identified.Mueller's analysis was adapted and extended by Nobes (1983, 1984) who based hisclassification on an evolutionary approach to the identification of measurementpractices in developed Western nations. Nobes adopted a hierarchical scheme of  A THEORY OF CULTURAL INFLUENCE classification in an endeavour to provide more subtlety and discrimination to theassessment of country differences. However, similarly to Mueller, no explicit mentionwas made of cultural factors. A basic distinction between microeconomic andmacroeconomic systems was made together with a disaggregation between businesseconomics and business practice orientations under a micro-based classification, andbetween Government/tax/legal and Government/economics orientations under amacro-uniform based classification. Further disaggregations were then made betweenU.K. and U.S. influences under the business practices orientation and between tax-based and law-based systems under the Government/tax/legal orientation. Thisclassification system was then tested by means of a judgmental analysis of nationalfinancial reporting systems in fourteen countries.A structural approach to the identification of accounting practices was adoptedwhereby major features were assessed, such as, the importance of tax rules, the useof prudent/conservative valuation procedures, the strictness of application of historicalcost, the making of replacement cost adjustments, the use of consolidation techniques,the generous use of provisions, and the uniformity between companies in theapplication of rules. The results of the statistical analysis did not, however, go muchbeyond providing support for the classification of countries as either micro-basedor macro-based. Thus the disaggregated elements ofthe classification scheme, thoughplausible, remain hypothetical accounting patterns subject to further empiricalanalysis.By way of contrast, the inductive approach to identifying accounting patterns beginswith an analysis of accounting practices. Perhaps the most important contributionof this type was by Nair and Frank (1980), who carried out a statistical analysis ofaccounting practices in fourty-four countries. An empirical distinction was madebetween measurement and disclosure practices as these were seen to have differentpatterns of development.The empirical results, using factor analysis applied to individual practices, showedthat in respect of the Price Waterhouse (1975) data it was possible to identify fivegroupings of countries, with Chile as a single-country 'group', in terms of measurementpractices. The number of groupings increased to seven when disclosure practices wereconsidered. The measurement groupings were characterized broadly, following the'spheres-of-influence' classification suggested by Seidler (1967), as the BritishCommonwealth, Latin America/South European, Northern and Central European,and United States models. The disclosure groupings, on the other hand, could notbe described plausibly on a similar 'spheres-of-influence' classification on account oftheir apparent diversity.Subsequent to the identification of groupings, Nair and Frank attempted to assessthe relationships of these groupings with a number of explanatory variables. Whilerelationships were established in respect of some of the variables which includedlanguage (as a proxy for culture), various aspects of economic structure and trading ties, it was clear that there were differences as between the measurement and disclosuregroupings. However, the hypotheses that (a) cultural and economic variables mightbe more closely associated with disclosure practices, and (b) trading variables mightbe more closely associated with measurement practices were not supported. It is curious  ABACUS to note here that the language variable, as a proxy for culture, was perceived to bea means of capturing similarities in legal systems which were thought to be particularlyimportant in the determination of disclosure patterns. This is questionable in itself, but in any event no justification was given for the use of language as a proxy for culture.From this brief review of some of the major studies in international classificationit seems clear that to date only very broad country groupings or accounting patternshave been identified. At the same time, only very general relationships betweenenvironmental factors and accounting patterns have been established.The significance of culture in the context of prior classification research is far fromclear. It may be that cultural influences have been generally subsumed in thepredominant concern with economic factors but this has not been made explicit.Accordingly, the influence of culture on accounting would seem to have been largelyneglected in the development of ideas about international classifications.THE CULTURAL DIMENSIONThe significance of culture in influencing and explaining behaviour in social systemshas been recognized and explored in a wide range of literatures but especially theanthropology, sociology and psychology literatures, (e.g.. Parsons and Shils, 1951;Kluckhohn and Strodtbeck, 1961; Inkeles and Levinson, 1969; Douglas, 1977;Hofstede, 1980).Culture has been defined as 'the collective programming of the mind whichdistinguishes the members of one human group from another' (Hofstede, 1980, p. 25).The word 'culture' is reserved for societies as a whole, or nations, whereas 'subculture'is used for the ievel of an organization, profession or family. While the degree ofcultural integration varies between societies, most subcultures within a society sharecommon characteristics with other subcultures (Hofstede, 1980, p. 26).An essential feature of social systems is perceived to be the inclusion of a systemof societal norms, consisting of the value systems shared by major groups within anation. Values have been defined as 'a broad tendency to prefer certain states of affairsover others' (Hofstede, 1980, p. 19). Values at the collective level, as opposed to theindividual level, represent culture; thus culture describes a system of societal orcollectively held values.In the accounting literature, however, the importance of culture and its historicalroots is only just beginning to be recognized. While there has been a lack of attentionto this dimension in the international classification literature, Harrison and McKinnon(1986) and McKinnon (1986) have recently proposed a methodological frameworkincorporating culture for analysing changes in corporate financial reporting regulationat the nation specific level. The use of this framework to assess the impact of cultureon the form and functioning of accounting is demonstrated with reference to thesystem in Japan. Culture is considered an essential element in the framework forunderstanding how social systems change because 'culture influences: (1) the normsand values of such systems; and (2) the behaviour of groups in their interactions withinand across systems' (Harrison and McKinnon, 1986, p. 239).Complementing Harrison and McKinnon's approach is the suggestion here that  A THEORY OE CULTURAL INFLUENCE a methodological framework incorporating culture may be used to explain and predictinternational differences in accounting systems and patterns of accounting developmentinternationally. More specifically, it is proposed here to explore the extent to whichcultural differences identified by Hofstede's cross-cultural research (1980, 1983) mayexplain international differences in accounting systems. CULTURE, SOCIETAL VALUES AND THE ACCOUNTING SUBCULTURE Hofstede's (1980,1983) research was aimed at detecting the structural elements of cultureand particularly those which most strongly affect known behaviour in work situationsin organizations and institutions. In what is probably one of the most extensive cross-cultural surveys ever conducted, psychologists collected data about 'values' from theemployees of a multinational corporation located in more than fifty countries.Subsequent statistical analysis and reasoning revealed four underlying societal veduedimensions along which countries could be positioned. These dimensions, withsubstantial support from prior work in the field, were labelled Individualism, PowerDistance, Uncertainty Avoidance, and Masculinity. Such dimensions, which areexamined further below, were perceived to represent elements of a common structurein cultural systems. It was also shown how countries could be grouped into cultureareas, on the basis of their scores on the four value dimensions, using cluster analysisand taking into account geographical and historical factors. Figure 1 shows the cultureareas identified and within each group any identifiable sub-groups.The point of reviewing Hofstede's research here is that if societal value orientationsare related to the development of accounting systems at the subcultural level, giventhat such values permeate a nation's social system, then it may be hypothesized thatthere should be a close match between culture areas and patterns of accounting systemsinternationally.In order to explore further the relationship between culture and accounting systemsin an international context it is necessary to identify the mechanism by which valuesat the societal level are linked to values at the accounting subcultural level as it isthese latter values which are likely to influence directly the development of accountingsystems in practice.A model of this process is proposed in Figure 2. This is an adaptation and extensionof the model relating to the formation and stabilizing of societal culture patternsproposed by Hofstede (1980, p. 27). In this model, societal values are determinedby ecological influences modified by external factors such as international trade andinvestment, conquest, and the forces of nature. In turn, societal values haveinstitutional consequences in the form of the legal system, political system, natureof capital markets, pattern of corporate ownership and so on. These institutionsreinforce both ecological influences and societal values.An extension of this model is proposed here whereby societal values are expressedat the level ofthe accounting subculture. Accordingly, the value systems or attitudesof accountants may be expected to be related to and derived from societal valueswith special reference to work-related values. Accounting 'values' will, in turn, impacton accounting systems.

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