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Recent research in comparative accounting has led to a number of interesting theories and models that have attempted to analyse the causal factors behind the evolution of dissimilar accounting and financial systems in different countries. These diverse ways of accounting are in the process of being harmonised because of global business imperatives, and international accounting bodies are trying to bring about convergence between the accounting systems of different countries. The work of Geert Hofstede on cultural effects on accounting development, expanded and elaborated by Gray later in his theory of cultural relevance in the formation of accounting systems is one of the more discussed models of comparative accounting.
It is the purpose of this assignment to elaborate on this model and use it to analyse the differences in the development of accounting in China and Japan in the late nineteenth century.
2. The Hofstede-Gray Framework
The broad framework for this model was created by Hofstede, but later adapted by Gray to explain the influence of culture on accounting systems. While, the normal practice is to treat these two models separately, a joint reference makes it much simpler to explain and use. The Hofstede-Gray model fist lays down the argument and then goes on to elaborate the various premises that support the theory. It is essentially deductive in nature and logical in its approach.
Hofstede, in 1980, developed a model of culture that distinguishes members of one human group from another and stated that culture manifests itself at four levels, symbols, heroes, rituals and values, all of which work towards “ accounting systems to vary along national cultural lines” His theory was further modified during the next ten years. In1984 he expounded the four very interesting dimensions of culture, which vary from one group to another and consist of Individualism V Collectivism, Large V Small Power Distance, Strong V Weak Power Avoidance and Masculinity V Femininity. These, he said are the most common societal preferences that distinguish one society from another.
Societies which prefer individualism consist of people who live in small units and prefer to look after their very own, whereas collectivism represents a social structure where relationships are interlinked and people expect their larger extended clan of relatives to look after them in exchange of loyalty. Power distance represents the extent to which its members accept the inequality in distribution of power. Large power distance societies are thus essentially unquestioningly hierarchical in nature. Uncertainty avoidance represents the degree to which members of society are ready to accept uncertainty and vagueness. The lesser the acceptance of uncertainty the stronger is the rigidity of thought and belief in a particular society and its resistance to change. Masculinity, in a society, stands for its dominant preference for achievement, heroism and similar symbols while femininity is associated with qualities like compassion, care for the weak and quality of life. In 1991, Hofstede added another dimension that dealt with Short Term V Long Term Orientation. Short term orientation stood for values like speedy achievement of social status, overspending and a concern for quick results whereas long term orientation looked at gradual achievement of results, a thrifty approach towards savings and an adaptation of tradition to meet modern needs.
In 1998, Gray took up Hofstede’s cultural hypotheses and linked them to the development of accounting systems in a meaningful way, stating that cultural or societal values permeated through organisational and occupational subcultures, and vice versa, though obviously the degree of integration differed from place to place. “Accounting systems and practices can influence and reinforce societal values”. These basic premises were succeeded by the formulation of four hypotheses on the relationship between specifically identified cultural characteristics and the development of accounting systems.
a) Professionalism versus statutory control: This cultural value denotes an inclination for the exercise of individual professional judgment and self-regulation as opposed to observance of authoritarian lawful needs and legislative writ. As such, the higher a country ranks in terms of individualism and the lower it ranks in terms of uncertainty avoidance and power distance, the more likely it is to rank highly in terms of professionalism.
b) Uniformity versus flexibility: This reflects a preference for the enforcement of standardized accounting practices between firms, and for the unswerving use of such practices, vis a vis flexibility in accordance with the perceived circumstances of individual companies, e.g., the higher a country ranks in terms of uncertainty avoidance and power distance and the lower it ranks in terms of individualism, the more likely it is to rank highly in terms of uniformity. c) Conservatism versus optimism: This value results in an inclination for cautiousness in measurement that enables systems to handle the ambiguity of future events, as opposed to a positive, risk-taking approach, thus implying that the higher a country ranks in terms of uncertainty avoidance, the more likely it is to be conservative and resistant to change. d)Secrecy versus transparency: This premise states that an inclination for confidentiality and revelation of information about businesses only to those who are closely concerned with its administration and financing, is linked to higher societal preferences for uncertainty avoidance, power distance and masculinity,
The Hofstede-Gray model stands out among various models of comparative accounting for its comprehensiveness in linking culture with the development of various economic tools like accounting systems.
3. The Development of Accounting Systems in China and Japan in the Nineteenth Century
Global accounting systems, including the various country GAAPs and the IFRS, is moving towards convergence of accounting systems spurred by the requirements of all transnational players to present one set of financial statements and eliminate multiple reconciliations. Even China, with the introduction of the Chinese Accounting Standards (CAS) is putting its state controlled accounting practices aside and moving towards the IFRS. This assignment deals with a similar historical situation in the nineteenth century when aggressive western businesses had begun to dominate eastern trade and commerce and western accounting systems were establishing their predominance in vastly different business cultures.
At this time both China and Japan had accounting systems that had developed through centuries and served the purposes of businesses in both countries. In China a primitive method of double entry existed, which permitted the extraction of trial balances and the determination of profit on a cash basis. The country had developed a “four-leg” accounting system that allowed for the recording of cash and non cash transactions in journals and subsequent posting in ledgers, using double-entry techniques. Despite their availability, these systems were used mainly by banks and large state enterprises. The bulk of businesses continued to use single entry recording techniques and did not provide for differentiation of private and business accounts. Even though the systems were adequate for the running of normal business operations, the needs changed with the emergence of business enterprises from the west and the establishment of joint stock enterprises for coal mining and iron manufacture. The structure of the new business enterprises required the computation of profit and loss for the purpose of dividends, and asset and depreciation accounting. The indigenous book keeping systems proved to be deficient because of existing practices that depended on trust, the absence of formal source documents, unnumbered books, lack of cross referencing and sequence, lack of differentiation between capital and revenue expenditure and relative unimportance of profit determination. “In view of their weaknesses, the indigenous bookkeeping systems were of limited use as a basis for internal control.” 
The development of accounting in neighbouring Japan, had also developed significantly, though on dissimilar lines. While accountants did use a system of double entry in some of the bigger businesses, there was no uniform method of accounting and “separate bookkeeping methods were developed and kept secret by independent economic powers, such as the Tomiyama, the Tanabes, the Nakais, the Hyogos, the Kondohs, the Honmas, the Hasegawas, the Ishimotos, the Onos, the Kohnoikes, and the Mitsuis.” Methods used thus ranged from the primitive to those that were reasonably adequate.
Although the double-entry concept was applied, most Japanese merchants practiced single-entry bookkeeping, called the daifukucho There was no systematic classification of accounts, nor any distinction between capital and revenue expenditures, and the cash basis of accounting was adopted. As in China, the indigenous accounting systems were adequate in a feudal economy where production and distribution were on a small scale [Nishikawa, 1956; Someya, 1989]. 
The accounting systems of the two countries towards the middle and latter part of the nineteenth century, though developing independently, thus had many things in common. These deficiencies made them inadequate for the purposes of larger joint stock business corporations, brought in by the proliferation of British imperialism in Asia and the commencement of business with the United States.
In subsequent years, the responses of China and Japan to these challenges were vastly different. The Chinese businesses steadfastly refused to adopt western accounting technologies and the majority remained with the single entry, four pillar balancing method until the twentieth century; even in companies that made use of large scale western machinery. This led to numerous difficulties and the emergence of widespread defalcation because of lack of control, and also unfortunately to the gradual takeover of businesses by western companies, because of lack of control. “Not surprisingly, from 1884, the opportunity to gain mercantile support for private investment in kuantu shangpan joint-stock enterprises vanished [Chan, 1996]” 
In Japan, the response was enormously different. Japanese students travelled in large numbers to the west to to imbibe science, technology and entrepreneurial skills. Accounting modernisation occurred rapidly and “western-style double-entry bookkeeping was introduced as the foundation on which a capitalist economy could develop.” A number of western accounting books, adequately translated, found their way into japanese markets and nationalised Banks adopted British balance sheets. Legislation was introduced for businesses to adhere to standardized accounting systems and a number of accounting schools started providing qualified accountants to service businesses.
The large scale adoption of western accounting by Japan and its rejection by the Chinese has exercised the curiosity of business historians for many years. The answers are now coming through and are related mostly to differences in culture, as put forward by the Hofstede-Gray model. In China political power was centralised, the society was resistant to change, learning was narrow and restricted to Confucianism, and society was in a state of “bureaucratic feudalism”. The economy was self sufficient and isolationist. In Japan, however, political power was dispersed; the society was open to change and very much dependent on foreign trade. Learning was broad based and the culture pro-merchant. While the continuous political conflict in Japan kept it perpetually unstable it also reduced intolerance and made it much more open to accepting western techniques in accounting. The reasons for the Japanese adoption and Chinese rejection of western accounting principles were largely cultural and social. While, they contributed largely to the flow of foreign capital and formation of much larger companies in Japan, they also inversely led to the gradual impoverishment of the Chinese economy and the emergence of the communist regime.
4. The Relevance of the Hofstede-Gray Model to the Chinese and Japanese Accounting Systems
The Hofstede-Gray model of the influence of culture on the development of accounting systems appears to be perfectly valid in evaluating the divergent behaviour of two different cultures to the same stimuli. Social and cultural patterns in China led to very high levels of Uncertainty Avoidance and Power Distance. The central government had far reaching powers and control. The main activity was agriculture and the primary source of revenue came from land. The scholar bureaucrats were inward looking and not willing to progress beyond Confucian tenets. Bureaucracy was all pervasive and stability in society was maintained despite intermittent conflict. The whole system thus revolved around age old customs and levels of uncertainty avoidance were extremely high. Similarly the land based feudal bureaucracy ensured large levels of power distance and these two factors, along with the isolationist, closed door approach of centuries led to inflexibility, conservatism and secrecy; and the consequent non-adoption, if not downright rejection of modern western accounting principles.
Japan, on the other hand, though not far away from China, had a very different social and cultural milieu. There were a number of economically and politically powerful landowners and these, along with the priesthood that controlled independent Buddhist shrines, were able to successfully disperse political power. The country, unlike China was largely dependent on foreign trade, which resulted in an intellectual open door policy and flexibility towards the requirements of trading partners. The country thus had very low levels of uncertainty avoidance and the dispersion of political power had made people more independent and thereby reduced the power distance. All these factors led to high levels of flexibility, forward thinking optimism and openness to new ideas, as required by the Hofstede-Gray framework, making it much easier to adapt to western accounting systems when the situation demanded.
Research into comparative accounting is a recent phenomenon and still under great discussion and debate. In fact, Gray’s framework is less than a decade old and has been questioned at length by other experts, with people arguing that the conclusions are subjective and capable of different interpretations. The fact remains that accounting systems have grown in divergent ways between countries that, though physically proximal, are culturally quite divergent. Another major example is that of the UK and The Netherlands, where, despite similar trading, commercial and expansionist practices, accounting systems grew differently, and remained so, until the emergence of the EU and globalisation initiated moves for convergence.
The Hofstede-Gray theory thus does appear to give some of the answers to the enigma concerning the adoption of different accounting, financial and even auditing systems between countries which have divergent social and cultural norms.
Doupnik, T.S., Tsakumis, G .T., and George,t, 2004, A critical review of Gray’s Theory of Cultural Relevance and Suggestions for future research, Retrieved November 18, 2006 from findarticles.com/p/articles/mi_qa3706/is_200401/ai_n13602153/pg
Dr. Geert Hofstede, 2006, The International Business center, Retrieved November 18, 2006 from geert-hofstede.international-business-center.com/index.shtml
Gray, S. J. (1988) Towards a Theory of Cultural on the Development of Accounting Influence Systems Internationally. Abacus;, Vol. 24 Issue 1, p1-15 March 1988
Environmental Influence on Accounting Development, 2001, Retrieved November 18, 2006 from https://ep.eur.nl/bitstream/1765/1888/5/Chapter+2.doc.
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