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Evaluate the influential contexts that lead to accounting differences


Accounting is a societal pattern that is influenced by different contexts. Due to the diverse contexts among states, assorted signifiers of accounting systems have been developed. This has led to differences in the accounting criterions worldwide. As a consequence, effort to harmonise accounting criterions such as the IASB and FASB convergence undertaking has been made. However, it is besides suggested that the position that it is possible to extinguish the accounting differences reflects the deficiency of grasp of existent universe context. This essay would discourse and measure the influential contexts that lead to accounting differences and their impacts, followed by explicating why the complete riddance of accounting difference would barely be achieved due to the existent universe context.

Influential Context

Political context

Political factor is an indispensable factor that influences the alteration of accounting and coverage system. It affects the manner of a country’s economic system is governed and controlled, which can has of import impacts on fiscal accounting development.

Harmonizing to Lawrence ( 1996 ) ’s positions, those influences can be explained in term of extent of authorities intercession and grade of other states intercession. The extent of province innovation can find the type of regulative construction is used. He argues that the greater province control can beef up the impact of legal system and weaken the influence of accounting profession in the procedure of standard scene. This means that accounting is to a great extent regulated by authorities and there would be less regulation deputation. This statement can be good verified with the illustration of Japan, a state with strong authorities control which has small direct impact from accounting profession ( Doupnik and Perera, 2009 ) .

The degree of foreign states control can be explained through old colonialism ( Nobes, 1998 ) . For illustration, The United Kingdom as the one of major colonial power in history, did non merely export its accounting criterions and patterns, but besides its comptrollers in its colonials ( such as New Zealand and Australia ) through political manner ( Mueller, Gernon and Meek, 1994 ) . Although those states have become independent, there is still British shadow in their fiscal accounting systems.

Legal context

Legal factor is another act uponing factor normally mentioned in many academic documents ( e.g. Nobes, 1998 ; Zeff, 2007 ) . It affects accounting system development through degree of elaborate and specific accounting statute law.

There are two chief types of legal system: Code jurisprudence and common jurisprudence. States that such as Germany and Japan, in Europe and Asia are based on codification jurisprudence system. Those countries’ fiscal coverage regulations are specified and detailed under legal rules. In contrast, common jurisprudence states, such as the United State, their accounting criterions are set up by their ain fiscal accounting criterion board ( Doupnik and Perera, 2009 ) . In add-on, codification jurisprudence states make less revelations and common jurisprudence states care more about whether the revelation of information are ‘true and fair’ ( Jaggi and Low, 2000 ) .

Those illustrations can all explicate that legal system is a important cause of differences in fiscal coverage system.

Furthermore, the legal system besides has a close relationship with revenue enhancement ordinances. Tax jurisprudence is separated from the general accounting ordinance in common jurisprudence states, but codification jurisprudence states are more likely to hold common revenue enhancement and fiscal coverage statute law. This may act upon the development of fiscal accounting system, as different revenue enhancement ordinance affect concerns and single behaviours. ( Sawani, 2009 )

Cultural context

One factor act uponing the development of accounting system is civilization. As defined by ( Hofstede, 1980, p.24 ) , civilization is the “collective scheduling of the human head that distinguishes the members of one human group from those of another” . Hofstede ( 1984, p.83-84 ) so identified four cultural dimensions for measuring cultural differences: Individualism versus Collectivism, Power Distance, Uncertainty turning away and Masculinity versus Femininity.

Widening Hofstede’s survey, Gray ( 1988 ) proposed that cultural values, stemming from external and ecological factors, would take to institutional impacts on political system, capital market etc and make accounting values, which would both determine the accounting system and finally reenforce cultural values and ecological factors. Gray so derived four accounting values to exemplify the accounting subculture: Professionalism versus Statutory control, Uniformity versus Flexibility, Conservatism versus Optimism, and Secrecy versus Transparency.

Salter and Niswander ( 1995 ) analyzed relationship between Hofstede’s and Gray’s work. It is found that, except power distance, all Hofstede’s cultural dimensions relate to certain accounting values. In peculiar, uncertainness turning away has most important influences on the Gray’s accounting values. States with high uncertainness turning away such as Germany would therefore more likely to hold unvarying and conservative accounting systems, with higher statutory control and lower revelation. In contrast, states with low uncertainness turning away tend to hold more optimistic, flexible and crystalline accounting systems, with less statutory control.

Corporate funding context

The following influencing factor is the corporate funding system. Under this context, it refers to the beginnings of finance – whether concerns rely more on equity funding or debt funding and if the fund suppliers are insiders or foreigners of the concerns. Harmonizing to Nobes ( 1998 ) , the equity/debt funding trust could impact the development of accounting system by act uponing businesses’ measuring patterns while the insiders/outsiders funding could impact the accounting system through revelation issues.

In states which equity financing dominates such as the US, fiscal information tends to more be oriented to investors. For case, there would be more forecasting information that aids their determination devising. Meanwhile, in states with strong recognition market, the accounting information such as net income and plus ratings would be more conservative in order to protect creditors. Sing the divide between insider and foreigner fund, Nobes ( 1998 ) suggested that in states that rely more on foreigner fund, concerns would see a higher force per unit area for revelations in published fiscal statement. This is because unlike insiders, foreigners do non hold quality entree to businesses’ internal fiscal information due to their distanced relationship with concerns.

Nobes’ thought was affirmed by Leuz in his diary analyzing the grounds behind different ordinance to companies’ fiscal coverage ( 2010 ) . It is concluded that as concerns would respond to the demands of their investors/creditors, their accounting patterns could reflect the corporate funding nature in their several states.

Evaluation of the cardinal differences with impact

After placing the different contexts that shape the accounting system, this essay would now travel on to measure the accounting differences and discourse their impacts.


Under political force per unit area, states have adapted assorted accounting systems. Accounting’s signifier, content and function are affected by authoritiess that have control of the economic system through cardinal planning. Political force per unit area might promote the developments of accounting in a positive manner. Nobes ( 2006 ) explained that due to demands of developments after the autumn of Berlin Wall, German authorities encouraged investing. Consequently, German companies opened further to EU and the usage of international criterions. This reduced the incommodiousness in fixing the fiscal studies. However, political force per unit area could besides do inefficiency in developments of accounting pattern. In early seventiess with new British Labour Government, the theories of rising prices accounting was perceived as attractive, but due to the fright of new power construction around houses, the alteration of accounting pattern did non go on ( Hopwood, 2000 ) . Therefore, accounting varies because of societal and political force per unit area in different states. In Australia, although companies are lawfully imposed, they are non required to guarantee conformity with IFRS. Similarly, Zeff and Nobes ( 2010 ) found in Israel market, conformity is merely required for listed companies.


The theoretical theoretical accounts of Harrison and McKinnon ( 1986 ) , Nobes ( 1987 ) , and the empirical work of Salter and Doupnik ( 1992 ) ( as cited in Salter and Niswander, 1995 ) all showed that legal system strongly impact the development of accounting. Based on these surveies it was anticipated that states with code legal systems would put down accounting regulations that were likewise stiff and that discouraged inter-company variableness and inter-temporal alteration.

Under legal system, different signifiers of system would impact the accounting ordinances. As mentioned before, codification jurisprudence is to mandate acceptable behavior. Rules and processs have to be followed, taking to fewer voluntary revelations. Analysts will be less able to construe fiscal statements due to the fewer revelations like the instance in Germany ( Nobes, 2006 ) , where the national regulations for accounting statement is largely detailed by the Handelsgesetzbuch ( HGB ) and revenue enhancement jurisprudence.

Besides, accounting income in codification jurisprudence states is less seasonably, peculiarly in integrating economic losingss ( Ball et al. , 2000 ) . However, due to the conservativism in codification jurisprudence states such as Germany, revenue enhancement coverage lateralities over fiscal coverage ( Haller, 1992 ) . Furthermore, Germany has a stronger tax- influence on fiscal coverage than UK ( Lamb et al. , 1998 ) . Sing common jurisprudence states such as the US, companies receive revenue enhancement benefits by raising financess through long-run rentals, ( Zeff, 2007 ) . In UK, IFRS allowed single companies to utilize fiscal statements for revenue enhancement coverage under the national demands. However, the listed companies whose fiscal statements are believed to be non giving a ‘true and just view’ are required to modify their fiscal statement for revenue enhancement intent ( Zeff, 2007 ) .


Culture affects accounting in several ways ( Gray, 1988 ) . Nobes ( 1998 ) suggests that it might be better to see culture’s impact on accounting through legal system or fiscal coverage system. For illustration, in Germany, due to their regulation based accounting civilization, revenue enhancement in plus damages is deductible, doing contention in IFRS consolidations. Therefore, judgements in IFRS damage processs are necessary in this state. Some states have well-organised anteroom groups of finance managers. Some states have appreciated the usage of renting because of peculiar characteristics of their revenue enhancement systems.

Meek and Gray ( 1989 ) found that even companies that are voluntarily unwraping their information on international degree, they still have a “national flavor” attached with the information. This job is of peculiar has a important impact in emerging markets. Hence troubles will originate with the deduction of a incorporate system. While the procedure of harmonisation of accounting criterions has seen major development in the right way ( Carmona 2008 ) , emerging markets still present a challenge.

Corporate finance

Under corporate finance context, the resource of finance varies internationally. For illustration, Nobes ( 2006 ) states that UK and the US rely more on stockholder ‘outsiders’ while bank/state/family ‘insiders’ dominate in Germany and France. The differences in beginning of finance create information dissymmetry and farther lead to the competition. Nobes ( 1998 ) said the intent of giving utile information for investors between insiders and foreigners creates strong competition in accounting and revenue enhancement information.

Zeff ( 2007 ) , when researching the difference between concern civilizations, references that fiscal analysts might non really have superior apprehension of accounting. He besides suggests that corporate construction varies across states. These differences have major impact when it comes down to understanding companies’ concern theoretical account, which is important for investors’ determination devising.

Differences in accounting system

An illustration of the impact of differences in accounting can be seen in Carmona ( 2008 ) . There the writers present Daimler Benz AG – a German company, which in 1993 wanted to be listed amongst others on the NYSE. What followed was that under German GAAP the company achieved 615 million net net incomes, but under US GAAP that net income turned into 839 million losingss. Clearly, this incident was caused by differences in the accounting patterns between the two states.

However, with the assistance from globalisation and the fast development of concerns across states advancement towards unified system has been observed. In 2007 US Securities and Exchange Commission ( SEC ) allowed foreign companies to fall in the NYSE every bit long as their studies are reconciled with IFRS ( Carmona 2008 ) .

Differences existed in the harmonisation procedure

The credence of IFRS in SEC is non the lone grounds on the procedure of convergence with IFRS, so does the endorsement procedure of IFRS in European Union and the ulterior acceptance in Canada and Australia. They all show the tendency of harmonisation in accounting coverage system. Besides, Shil, Das and Pramanik ( 2009 ) suggested that the harmonisation on accounting criterions can fix enterprises’ decision- devising procedure ; cut down describing interchanging costs and supply better fiscal information to markets. Therefore, many international organisations are prosecuting to take the national differences in accounting criterions ( Nair and Frank, 1981 ) . Nowadays, IFRS is endorsed lodger and it seems that all the converged states are accounting statement might be the same under one accounting rules.

However, due to the US hegemony in international economic system, IASB seems to force its criterion closer to the Anglo- American criterion ( Crawford et al, 2014 ) . Therefore, the IFRS is extremely influenced by the US GAAP. For case, the IFRS 8 “operating segment” is similar to the US criterion, SFAS 131. This may benefits states that economic activities are similar or high association with the US economic activities. However, other counties, such as India, China, and some in EU may happen it difficult to follow the IFRS due to the struggle with national criterion. Therefore, they may seek to contend with IASB in the indorsement procedure. For illustration, Crawford el Al ( 2014 ) described that EU’s indorsement procedure showed struggles between two diverse legal systems: civil jurisprudence ( regulations approach ) and instance jurisprudence ( principle attack ) . Besides, the loss of national sovereignty on standard scene has led to the uprising anti –Americanism in footings of accounting criterions in some European states. This might let the EU to set more political force per unit area to IASB and acquire involve to the international criterion puting procedure. The above illustration show windows why extinguishing accounting differences worldwide is such a hard undertaking.

Sing IFRS entirely, due to international differences, there is still different version of IFRS. For illustration, the differences in the endorsed IFRS in EU and the IFRS in IASB that described in Nobes ( 2006 ) ’s paper. In early 2005, the IAS 39 in IASB’s IFRS allowed companies to stipulate any liability or fiscal plus at a just value despite any net income or non. Yet, this option has been removed in the EU’s endorsed version ( Nobes, 2006 ) . So was the restriction on the hedge accounting permission in IAS 39, which is more restrict in IASB’s version than the EU’s ( Whittington, 2005 ) . Beside the different in regional context, the diverseness of IFRS is besides found in national context: the conformity with IFRS in Australia. For case, the IAS 31 in IFRS provides a pick to a group that keeping in a joint venture company between the equity accounting and relative consolidation, but in Australia, option and equity accounting is non required ( Nobes, 2006 ) .

Additionally, IFRS allowed companies to maintain national accounting patterns while fixing fiscal describing under IFRS criterions. Nobes ( 2006 ) argued that insert options in the international fiscal criterion is likely the lone manner to acquire the criterion passed. This is because the members and representatives of big companies or audit houses came from difference states with diverse civilizations and political force per unit areas. He besides divided options into two groups: overt ( options show in content ) and covert ( options discovered in obscure rules ) , both show groundss of differences in national accounting in this uniformed criterion. For case, under a pick of utilizing leaden norm or FIFO method to cipher the cost of stock lists in IFRS rule, UK companies will utilize FIFO as usual, but German houses will follow leaden mean method, as the FIFO method is restricted by the revenue enhancement jurisprudence under HGB pattern ( Kesti, 2005 ; cited in Nobes, 2006 ) . This difference is caused by the difference legal systems apply in both states.


To reason, this essay has foremost identified four major contexts that had influenced the development of accounting system: political, legal, cultural and corporate funding. Differences in these contexts among states have created disagreements in accounting criterions around the Earth. After measuring these differences, it is found that the differences in accounting criterions really cause much incommodiousness in footings of information exchange, fund elevation, determination devising etc. In contrast, it is suggested that the convergence of accounting criterions could really be good by bettering determination devising procedure ; cut downing information costs and supplying better fiscal information.

However, with closer scrutiny, it is found that the differences in context are in fact profoundly rooted and could barely be eliminated. Consequently, the differences in contexts among states would go on to stalk the convergence attempt made by IASB and FASB. There is besides political battle for power in harmonising accounting criterions, which can be shown by EU’s reluctance to follow a criterion that assimilate US GAAP. Therefore, the position that it is possible to extinguish accounting differences does miss a realisation of the divide in existent universe contexts. However, while it seems to be impossible to wholly harmonise international accounting patterns, following a principle-based criterion that allows states to add their ain “flavor” might be a much more executable manner.

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