Accounting Reforms in China: Cultural Constraints on Implementation and Development

There is considerable theory and evidence to suggest that culture is an important environmental variable influencing the development of accounting systems internationally. According to the Hofstede (1980) and Gray (1988) cultural models, China's accounting development and practice should be in the cluster that supports statutory control, uniform practices, a conservative measurement approach and secrecy in disclosure. A uniform and rigid system of financial reporting has been practised for decades in the People's Republic of China under the centrally controlled economy. The accounting reforms launched since the 1980s aim to establish a new framework for regulating financial reporting which is adaptable to China's recently emerged socialist market economy. The adoption of accounting standards in the later phases of the reforms marks a dramatic turning point in China's accounting history towards a more international Anglo-Saxon orientation in financial reporting. Based on an analysis of the authority for accounting systems, the accounting profession and accounting measurement and disclosure in China, it is argued that this development will be constrained by the influence of China's culture and its accounting subculture. While financial reporting will be governed by accounting standards, their development and enforcement will remain a governmental and legalistic function. Accountants will continue to rely heavily on detailed technical rules. This mixed orientation will constitute China's unique national identity in terms of its accounting and financial reporting system.     

Cultural differences and judgment in financial reporting standards

This instructional resource provides you with the opportunity to explore how cultural differences can impact financial reporting outcomes through the judgments accountants make when interpreting and applying accounting standards. It is intended to draw your attention and awareness to culture’s impact on financial reporting judgments since financial reporting is becoming increasingly international in scope. The instructional resource begins by discussing financial reporting standards and cultural differences and then moves into presenting three accounting scenarios. The three scenarios (lease classification, contingent liability, and revenue recognition) examine how applying accounting standards requires judgment and how cultural differences can influence accountants’ judgments and the resulting financial reporting outcomes. In each scenario, you have the opportunity to identify and consider how different cultural dimensions could impact cross-cultural financial reporting outcomes. The instructional resource content allows you to consider the challenges in using and applying a uniform set of global accounting standards that require judgment across cultures.     

Accounting disclosure and firms' financial attributes: Evidence from the UK stock market

This paper focuses on the disclosure of accounting information in the financial statements of UK firms. The primary objective of the study is to analyse the financial characteristics of firms that provide extensive disclosures, and assess the financial impact of their motives, such as for example the need to raise equity finance. The study examines the financial attributes of firms that disclose information about key accounting issues including risk exposure, changes in accounting policies, use of international financial reporting standards and hedging practices. Firms are inclined to disclose accounting information in order to assure the market participants that their accounting policies are consistent with the accounting regulation and meet the information needs of their stakeholders. The study shows that in order to raise finance in the capital and debt markets, firms tend to provide extensive accounting disclosures. Firms that provide informative accounting disclosures appear to display higher size, growth and leverage measures. The findings also show that the disclosure of sensitive accounting information has not adversely affected firms' profitability. In fact, firms that provide detailed accounting disclosures tend to exhibit higher profitability. The implementation of international financial reporting standards enhances the quality and the comparability of financial statements; hence it promotes consistency and reliability in financial reporting and facilitates companies in raising capital internationally.     

Financial Reporting for Private Companies: The Canadian Experience*

The issue of whether small and/or private companies should be allowed to use simplified accounting standards in financial reports has concerned the accounting profession for decades. It has been argued that preparing financial reports in accordance with the large volume of promulgated standards contained in generally accepted accounting principles (GAAP), some of which are relatively complex, has put a significant strain on the resources of small/private business. Moreover, information produced and presented in accordance with at least some accounting standards within GAAP may not be relevant for the users of small/private companies' financial statements. In this paper we look at differential reporting in Canadian GAAP, which gives nonpublicly accountable enterprises the ability to opt out of certain CICA Handbook requirements with unanimous consent of the shareholders. We look at lobbying activity in response to the proposed differential reporting standard and at nonpublicly accountable company experience with the differential reporting opportunity in the period since the standard was promulgated.     

ACCOUNTING STANDARDS FOR THE PUBLIC SECTOR IN AUSTRALIA

The need for better financial reporting by public sector entities as a means towards greater accountability has been widely canvassed. This paper discusses the development and application of accounting standards in Australia in this context. The responses of the accounting profession, through its standard setting process, and of the Commonwealth and several State governments are described and the conclusion reached that these developments will mean significant improvement in the information content of public sector financial reports.     

The accounting profession in Egypt: Its origin and development

The purpose of this paper is to present a historical review of the evolution of accounting and the accounting profession in Egypt. Such a review aims at providing the perspectives necessary to understand and evaluate the contemporary scene. The origin of accounting practices in Egypt can be traced to ancient Egyptian civilization, and the temples exhibit paintings of early accounting records and activities. Modern accounting practices can be dated from November 1883, when Egypt adopted the Commerce ACT. In the ensuing 125 years (1883–2008), Egyptian accounting practice can be divided into three stages: record keeping (1883–1939); financial reporting under changing economic regimes (1939–1975); and the move to adopt international accounting standards in an attempt to liberalize and integrate the Egyptian economy into the global economy (1975–). Each one of these stages reflects the impact of the socioeconomic conditions prevailing at the time. The evolution of accounting in Egypt demonstrates its ability to adapt in response to changing conditions. While there are several lessons to be drawn, and their relevance is noted, it is especially important for the accounting profession to anticipate changes in order to be responsive, in a timely manner, to the changing needs of the society.     

International Accounting Standards and Financial Reporting Uniformity: The Case of Trinidad and Tobago

The paper has two purposes. First, it describes the financial reporting environment of Trinidad and Tobago before and after the adoption of International Accounting Standards (IAS) (currently called International Financial Reporting Standards (IFRS)) as the national standards of Trinidad and Tobago. Second, it examines the association between the adoption of IAS as the national standards of Trinidad and Tobago and the degree of uniformity of financial reporting among public companies. This study is useful because of the dearth of research on financial reporting in the English-speaking Caribbean and the effect of IAS on the degree of financial reporting uniformity within a country. Using an ex post facto research design, the financial statements of 18 publicly traded firms for the year immediately prior to the adoption of IAS (1987) and four years during the period following the adoption of IAS (1995, 1999, 2002 and 2003) were subjected to content analysis. Overall, the uniformity of financial reporting practices among publicly traded firms in Trinidad and Tobago increased following the adoption of IAS. This finding was fairly uniform across all the financial statement items examined though the magnitude of the change varied. It was directly attributed to the adoption of IAS for only three financial statement elements.     

Exploring attitudes to financial reporting in the Australian not‐for‐profit sector

The current level of satisfaction among different stakeholders about the current approaches and practises of financial reporting of not‐for‐profit (NFP) entities is underexplored ( Christensen and Mohr, 2003 ; Lee, 2004 ; Gray et al., 2006 ; Parker, 2007 ). This paper uses content analysis to examine submissions to the 2008 Australian Senate Economics Standing Committee for its inquiry into the disclosure regimes of charities and NFP organisations, which aimed to explore attitudes about financial reporting in the NFP sector. Financial reporting is viewed as an important part of accountability, but the sector identifies deficiencies in the current regime in terms of consistency, efficiency and transparency. Respondents to this inquiry believed that a sector‐specific accounting standard was important. Financial reporting standards, regulations and legal structures should be uniform across the entire sector, but with some variation allowed for smaller NFPs. The cost of complying with standards was a significant issue for smaller NFPs.     

Accounting narratives and the narrative turn in accounting research: Issues,theory, methodology,methods and a research framework

This plenary address paper traces the development of accounting narratives in external reporting practice and research, focussing on corporate-sourced financial communications to shareholders and analysts. It is written from the personal perspective of a researcher who began in the positivist tradition of disclosure research and is increasingly engaging with the more interpretive/critical tradition of socially-constructed narratives. Whereas early accounting narratives research existed at the margins, modern content-analytic work on disclosures rose to a position of prominence, alongside the rise of non-financial information in the practice domain. In recent years, large-scale linguistic studies have entered the mainstream positivist North American literature, supported by computerised natural language processing. Outside this community, accounting research has witnessed a ‘narrative turn’, similar to many other social science disciplines, marking a shift away from realism and positivism. This paper argues for the importance of both lines of research. Participants' actions in relation to accounting narratives may be understood in terms of, inter alia, both economic explanations based on utility maximisation and behavioural explanations based on psychology and the embeddedness of narrative in social practice. In terms of methodology and methods, the weakening of the deep-surface divide is exemplified by the common combination of corpus linguistics approaches with (critical) discourse analysis in other disciplines. Based on a discussion of key issues, theory, methodology and methods, a framework for thinking about research in accounting narratives is offered. The challenge is to better understand the role of narratives in the increasingly rich, complex information environment of external reporting.     

The Measurement of International Harmonisation in Financial Reporting

Several developments in the harmonisation of accounting standards are described in the accompanying article by Howieson. This article explains how harmonisation can be measured and refers to studies of the harmonisation of accounting standards and of financial reporting in practice. These studies have measured harmonisation in Europe, the US and Japan, as well as comparing accounting standards and reporting practices under Australian accounting standards (AASBs) and international accounting standards (LASS).     

Implications of the ‘IAS Regulation’ for Research into the International Differences in Accounting Systems

Meek and Thomas (2004) call for research on the continued relevance of ‘rediscovered’ dichotomous accounting classifications. We provide such evidence by examining how developments surrounding the ‘IAS Regulation’ (1606/2002) influenced international differences in accounting systems in the European Union. Since a sufficient time series of actual post-2005 International Financial Reporting Standards (IFRS) reporting practice is not yet observable, we propose an initial re-classification of accounting systems based on evidence available to date, that is, the degree of implementation of the IAS Regulation in the Member States. Consistent with Nobes (1998), we find that the degree of public accountability to outside investors (the ‘public/private’ criterion) is becoming the primary differentiator for accounting systems in Europe, surpassing country-level variables such as legal system and culture. The distinction between consolidated and individual financial statements is the second emerging differentiator. While consolidated accounting is becoming more uniform across countries, cross-country cultural differences are most likely to persist in individual accounting. Based on our analysis we highlight two important areas of future research beyond the consolidated financial statements of listed firms (e.g. Nobes, 2005; Schipper, 2005). First, at the country level, the interaction of IFRS and individual financial statements will need to be reassessed. In addition, research could help introduce a degree of differentiation into financial reporting regulation for unlisted firms, because these firms are not a homogeneous group. Also, the convergence of national GAAP systems with IFRS will benefit from fresh research insights. Second, at the firm level, future research could analyze the extent to which the determinants and consequences of IFRS adoption, an area well researched for publicly traded firms (e.g. Cuijpers and Buijink, 2005), generalize to unlisted firms. Such research will help detect emerging patterns of accounting systems within an international context. It will generate insights into the disconnect of consolidated accounts from national influences, the degree of uniformity of consolidated accounts among international firms, the continued relevance of traditional classifications of international accounting systems for individual accounts and accounts of unlisted companies, and the convergence of national standards with IFRS.     

A basic user utility preference to reduce uncertainty: A dissent to reporting and asset measurement

Legitimacy and self-regulation of the accounting profession dictates that it typifies integrity and credibility in both the form and substance of its accounting standards. Unsound and dishonest business practices are not evident in the financial reports, nor are they the responsibility of accounting standard setters. Nevertheless, professional accountability is not enhanced if the financial reporting standards permit a great deal of choices, variation and interpretation, particularly in asset values. In pursuit of professional legitimacy and the credibility, accounting standards can reduce opportunities for intruding bias, inept judgement, or interpretation perspectives adding to user uncertainties. The thesis of this conceptual paper is that key user groups have an intrinsic homogeneous preference utility for information relating to financial risk, which can be satisfied by a simple asset value, based on a market bid. The balance sheet can contain a segregation of asset values, either in supplementary or classification form.     

Consequences of local social norms: A review of the literature in accounting,finance, and corporate governance

We synthesise the empirical archival research on the consequences of local social norms on accounting, finance, and corporate governance outcomes in an international setting. The literature reviewed is premised on the theory that corporations do not make decisions, but managers do, and managers are likely to be influenced by the socioeconomic environment of the region in which they operate and/or by the people with whom they interact. To provide a structure to our review, we identify social capital, religiosity, gambling norms, and corruption culture, as four constructs of local social norms and link these with financial reporting and external auditing, financial, investment, and dividend decisions, capital market consequences and finally, corporate governance and corporate social responsibility behaviour of firms. We highlight some limitations of the existing research and offer some suggestions for future research.     

The role of international auditing in the improvement of international financial reporting

In this paper, we describe the convergence of several forces that underscore the significance of independent auditors as key enablers of the improvement of international financial reporting. This paper is not an empirical research study but is intended to survey the landscape of international auditing. Based on our experience as auditing practitioners and academics, we describe and provide discussions of key conceptual issues surrounding international auditing harmonization and its relation to the implementation of international accounting standards. A matrix framework is presented at the conclusion of the paper to summarize the principal point of the paper that the regulations and control of the quality of audits is the critical factor in achieving high quality financial reporting. The next critical phase of the process is to improve the quality of the individual audits that take place around the world through government regulation, profession self-regulation, and quality assurance in international firms. IFAC has taken significant steps in strengthening its role as the global self-regulatory body for the profession, including improvements in standards and compliance. The establishment of a public oversight board with authority to discipline rather than persuade is a critical component for effective international auditing standards.     

Assessing the effectiveness of financial reporting harmonization for emerging market banks: The case of Banco Serfin

In the last decade there has been a proliferation of financial crises in emerging markets. To some extent, the suddenness and magnitude of some of these crises have been blamed on poor financial reporting standards for bank loan losses. As a result, prior to providing countries with “financial bailout” funds, international investors and international financial organizations have increasingly required that countries harmonize their bank financial reporting standards with international financial reporting standards.Given this trend, this case requires students to assess the effectiveness of efforts to harmonize loan financial reporting (with International Financial Reporting Standards) for Mexican banks during (and after) the country’s financial crisis of the late 1990s. Students are required to assess the extent to which both pre-crisis standards as well as new, post-crisis standards complied with international financial reporting standards. They are also required to assess the impact of the new standards on the reporting practices for loans of one particularly troubled financial institution. Through the examination of this institution’s accounting practices for loans, students obtain a familiarity of the shortcomings of emerging markets’ banks’ loan financial reporting as well as the factors which influence the adoption of international financial reporting standards by emerging market banks.     

Practical Problems In The Reporting Entity Concept

The concept of a reporting entity has been introduced into financial reporting in Australia through a number of statements and standards. These documents require reporting entities to prepare so-called general-purpose financial reports which comply with all statements of accounting concepts and accounting standards, whereas non-reporting entities are not bound to the same level of compliance. Unfortunately, little authoritative guidance on interpretation and application of the reporting entity concept has come from either the Australian Accounting Standards Board or the Auditing Standards Board, despite the fact that the reporting entity concept has applied since 30 June 1992. The solutions proposed here may be temporary, given that the Corporations Law could be amended. It would be in readers' interests to consider any further authoritative guidance which might become available.     

Capitalist accountability and the British Industrial Revolution: The Carron Company, 1759–circa. 1850

The paper argues that accounting historians can help us to understand the origins of the British Industrial Revolution (BIR) by explaining the contribution of accounting to financial success. It re-examines the archive of the Carron Company (hereafter, ‘Carron’) from its formation in 1759 to around 1850 to explore the theory derived from Marx that class conflict, the capitalist mentality, its social relations of production, and accounts, drove the BIR. It shows that, contrary to the currently accepted view that Carron’s early financial accounts were a ‘shambles’, its partners used integrated financial and management accounts based on double entry bookkeeping to impose capitalist accountability on their managers and workers. The paper argues that zealous accounting was critical to Carron’s financial success because accountability for capital drove organisational and technical innovation and it underlay the partners’ early social solidarity. Carron’s partners worked collectively during the company’s difficult formative period up to the 1780s, using accounts to hold the managing partner and his subordinates accountable to them for the circulation of capital and to conduct class war against their workers. From the 1790s, the managing partner exploited a weakness in Carron’s system of corporate governance to understate its profits to demoralise other partners into selling their shares to give him control, which he used to divert a disproportionate share of its accumulating wealth to him and his family. The paper concludes that Carron’s history supports the Marxist theory that accounts played an important role in fuelling the BIR by giving capitalists a technology for controlling production for profit, what Marx called controlling the ‘valorization process’, and for promoting the social cohesion of capital. It calls on accounting historians to test this theory by revisiting the archives of other leading BIR firms, so that we can construct a history of this pivotal shift in the trajectory of world economic development on solid empirical foundations.     

The role of a crisis in reshaping the role of accounting

Prior to 2001, international accounting standards (IAS) were insufficiently attractive to gain the support of US regulators. The potential role of IAS in the US gained prominence during a period of extreme financial reporting instability in 2001–2002. Emerging opinion increasingly upheld principles-based rather than rules-based accounting standards in the face of the financial reporting crisis. But to promote any active shift in the US position, an institutionally legitimate infrastructure for the international accounting standards setter had to be created. As this was taking shape, the globalisation of business activities grew with inter-organizational linkages and cross-national financial inter-dependencies and flows becoming increasingly complex. Given the extensively uncertain, uneven and constantly evolving nature of global business changes, the aptness of applying judgment in assessing financial performance and position rather than relying on the application of pre-defined rules continued to achieve wider acceptance. The argument is made in the paper that international financial reporting standards are today seen to fulfil a global risk mitigating role founded on a logic that had to first gain political and institutional legitimacy and that also had to be viewed as being responsive to perceived market imperatives.     

The impact of firms' internationalization on financial statement presentation: Some French evidence

Historically, the format of financial statements has varied from one country to another. Recently, due to the attractiveness of their capital markets, the strength of their accounting professions and the influence of their institutional investors, Anglo-American countries have seen a steady increase in the impact of their accounting practices on other nations, even influencing the actual format of financial statements. Given that French accounting regulations allow a certain degree of choice in consolidated balance sheet format (‘by nature’ or ‘by term’) and income statement format (‘by nature’ or ‘by function’), this study examines a sample of 199 large French listed firms in an attempt to understand why some of these firms choose not to use the traditional French formats (‘by nature’ for the balance sheet and ‘by nature’ for the income statement), instead preferring Anglo-American practices that we call ‘alternative’ (‘by term’ format for the balance sheet and ‘by function’ format for the income statement). We first analyze the balance sheet and income statement formats separately using a logit model, then combine the two and enrich the research design with a generalized ordered logit model. Our results confirm that opting for one or two alternative formats is related to internationalization, influenced by several factors: size, international auditor, accounting standards, foreign listing and international sales. When distinguishing the decision to adopt at least one versus two alternative-format financial statements, our findings also provide evidence that not all variables play the same role: ‘Accounting standards’ and ‘Foreign listing’, which are important in explaining the use of at least one alternative format, are irrelevant in explaining the use of two alternative-format financial statements.