Culture and international accounting standards

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Understanding the different cultures around the world plays an important role in the adoption of accounting standards for organizations. According to Wikipedia, the term "globalization" refers to an ongoing process by which economies, cultures, and societies become integrated through communication, trade, and migration, to just name a few. Globalization has allowed the world to become "smaller" in a sense, that we are no longer separated by distance through close working relationships in business, as well as travel. As the world becomes more globalized, people bring their different cultures along with them causing business entities to become all-encompassing whether in the home country or a host country. Should a business decide to open operations in another country, one must first understand the culture and tastes of the people who live there in order for the venture to be successful. This paper will explore how culture affects accounting standards and through that how globalization affects it as well. It will also discuss international accounting standards and the problems it continues to face before a set of standards can be established.


Globalization has really impacted every culture in the world because we have moved away from people and businesses staying within their own borders into a global market. Our economies are interrelated with one another and even businesses who primarily market in one geographical region are not completely independent. This means that the materials that a company uses in their businesses can be produced and shipped from another country. All this represents is globalization in action. The way we think of globalization is usually in the economic sense as I had just described, but it also describes the phenomena of one population expanding into another and then incorporating them into current culture.

As our world becomes closer together and we adopt each other nuances, there's no escaping the effect it has in how we conduct business. Globalization has helped corporations grow internationally helping them expand the borders they put around themselves because of physical location. Countries had already established their own accounting standards; however regions are beginning to join together in order to form their own practices, hopefully leading them to the end goal of an established international accounting standard. "International accounting is inextricably linked to the globalization movement that is sweeping all economies. Indeed, the availability of accounting information constitutes an integral and indispensable input to the existence and acceleration of this movement (Manassian 2007)."

Culture & Accounting

In order to understand the effect that culture has on accounting and accounting standards, one may first understand the four value dimensions identified by Geert Hofstede, a Dutch psychologist. He identified four value dimensions that assessed culture: individualism versus collectivism, large versus small power distance, strong versus weak uncertainty avoidance, and masculinity versus femininity. The following descriptions of each value dimension are taken from the text "International Accounting and Multinational Enterprises, 6th edition.

Individualism versus Collectivism: "The fundamental issue addressed by this dimension is the degree of interdependence a society maintains among individuals. It relates to people's self-concept: "I" or "we"." The United States is a very individualistic culture, where the needs of a singular, as it relates to that person, is seen as more important than the needs of the whole. This view is unlike that of cultures in Eastern Asia, such as Japan, where the needs of the many count for more than that of the individual.

Large versus Small Power Distance: "The fundamental issue addressed by this dimension is how a society handles inequalities among people when they occur." An example for a country that has large power distance is India, where even in the country's vast history, people adhered to a caste system they were born into and had no way to move out of. A country with small power distance would be the United States, where everyone is thought of as equal and looked at to have the potential to do anything they put their mind to.

Strong versus Weak Uncertainty Avoidance: "The fundamental issue addressed by this dimension is how a society reacts to the fact that time only runs one way and that the future is unknown, and whether it tires to control the future or just lets it happen." Eastern Asian cultures tend to have strong uncertainty avoidance because they tend to prefer explicit rules and structured activities; whereas in the United States, in order to get what others do not have one must be willing to risk everything.

Masculinity versus Femininity: "The fundamental issue addressed by this dimension is the way in which a society allocates social (as opposed to biological) roles to the sexes." An example of a masculine country would be that of the United States, where attributes such as: competitiveness, assertiveness, ambition, and wealth are strived for. While, the country of Japan has a more feminine value dimension, because the people of that culture tend to strive for relationships and quality of life.

Now that we understand the societal values discussed earlier, we can start to identify accounting values. As one may interpret the information, the societal values have direct influence on accounting values and standards. S.J. Gray was the one who proposed the identification of accounting values based on accounting literature and practice: professionalism versus statutory control, uniformity versus flexibility, conservatism versus optimism, and secrecy versus transparency.

  • Professionalism versus statutory control- reflects a preference to exercise professional judgment and self-regulation as opposed to government control
  • Uniformity versus flexibility- reflects a preference of uniform accounting principles between companies as opposed to differing practices between companies
  • Conservatism versus optimism- reflects a preference to proceed cautiously in order to be wary of future events as opposed to risky approaches
  • Secrecy versus transparency- reflects a preference for confidentiality as opposed to a more open and publicly accountable approach (Radebaugh, et al. 2006)

One of the most important topics concerning culture and accounting standards is that of multi-national corporations' need for the establishment of international standards. "Financial reporting has long been guided by the dictates of national standards. The accounting community has always been in agreement as to the importance of official standards to ensure the reliability and relevance of financial information. In addition to each country's national standards; accounting officials and educators sought the development of international standards (Sawani)." Each corporation is bound to report their numbers in adherence to each country's standard; however the tricky part appears when the differing standards of the countries they operate in collide. Questions on transparency and how different accounts should be labeled and treated are brought forth, making it difficult for any company to come to compromise and make all parties happy. While developing an established set of international accounting standards has been a long time in the making, political and legal, as well as cultural difference has made it difficult.

International Accounting Systems

Using the accounting values we described in the previous section, five accounting systems can be identified based on cultural influence and geographic region: Anglo-American, Nordic, Germanic, Latin, and Asian accounting. Each of the five accounting systems can be described by how they deal with the topic of transparency, which group their focus is on, and what the dominant influences are in their markets.

  • Anglo American: mostly practiced in the United States, the United Kingdom, Australia, and other where the UK had a prominent influence. Characterized as more flexible and transparent compared to the other accounting systems. Focuses largely on corporations and investors, where the securities markets are the dominant influence.
  • Nordic: includes the Netherlands, Denmark, Sweden, Finland, and Norway. Described as less conservative and more transparent, taking a business economic approach to accounting with a focus on creditors, government and tax authorities. It places a heavy significance on taxation.
  • Germanic: include: Germany, Austria, Israel, and Switzerland. Germanic accounting is highly influenced by company law and taxation. The information needs of creditors and tax authorities are given preference, and can be described as conservative and secretive.
  • Latin: can be divided into two groups. The more developed group consists of Argentina, Belgium, France, Portugal, Spain and Italy while the less developed group includes Brazil, Chile, Colombia, Mexico, Peru, and Uruguay. This group is described as conservative and secretive with a regard to company law and taxation. This accounting system places an emphasis on uniformity and a true and fair view concept.
  • Asian (Japan): Asian accounting tends to be conservative and secretive, but some Asian countries seem to have a level of Anglo-American and Germanic influences. It takes into account the needs and priorities of creditors and tax authorities first with a major government influence.

International Accounting Standards

One of the main reasons to establish an international accounting standard is stated in our textbook, International Accounting and Multinational Enterprises, there are "international pressures for improvements in the comparability of accounting and information disclosure by corporations, especially MNEs, arising from the diverse interests and concerns of a wide range of participant groups and organizations. Underlying these pressures is the fundamental belief that improvements in comparability will facilitate more informed international comparisons of corporate performance and prospects, with consequent economic benefits (Radebaugh, et al. 2006)." In order to understand every aspect of this need, we must first identify the major parties and their interests in the matter: governments, trade unions and employees, investors, bankers and lenders, and accountants and auditors. However, in the interests of this paper we will concentrate on accountants and auditors.

International accounting firms have directly grown to the growth of MNEs, developing international professional organizations in order to accommodate harmonization of international accounting and reporting. The most notable of these organizations is the International Accounting Standards Board (IASB). The IASB is an independent entity set to work closely with individual groups who use local accounting standards in order to help merge them into an agreeable solution. The IASB also remains independent in order to serve the interests of the entire community rather than any specific one. According to Radebaugh, the stated objectives of the IASB are:

  1. To formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observance
  2. To work generally for the improvement and harmonization of regulations, accounting standards, and procedures relating to the presentation of financial statements

One of the achievements the IASB is able to boast is the establishment of International

Financial Reporting Standards (IFRS). In the realm of international accounting, there are two individual groups, U.S. Generally Accepted Accounting Principles (GAAP) and IFRS. U.S. GAAP is followed by companies which are formed or operating within the United States, and currently requires the reconciliation of IFRS financial statements to GAAP. While, over 100 countries have already adopted some form of IFRS. The use of two standards is inefficient, costly, and time consuming for global companies who must use both forms of accounting standards in order to comply with the jurisdictions set up in the areas in which they operate (Newman, 2009).

There are however some differences between the two standards that have yet to be reconciled and could be the reason for the separation: objectives, qualitative content, elements of financial statements, capital maintenance concepts, and recognition and measurement.

"Although both frameworks focus on providing information that is useful in making economic decisions, the FASB framework establishes the objectives of financial reporting and the IASC framework specifies the objectives of financial statements. This difference may be critical, given the changing nature of business and related pressures to improve the information provided to financial statement users (Campbell, et al. 2002)."

Both developed countries and developing countries are subject to topic of international accounting standards. While there may be a debate whether or not developing countries have any relevance to IFRS, they are at the same time afforded the recognition of participating in the opportunities offered by globalization. "While emerging economies typically enjoy greater wealth than developing countries, and therefore do not face the same financial constraints, they nevertheless face many similar challenges in adopting IFRS in terms of changing culture and developing systems regulation and accountability (Irvine and Lucas 2006)." One of the main concerns for developing countries regarding IFRS is the fact that theses countries face obstacles in reaching their full potential and run the risk of financial crisis. Most IFRS are not suited for small to medium sized entities, meaning they cannot reap the full benefit of these global standards.


I believe that businesses practices are heavily influenced by the cultures and people that surround them. In order for an organization to be successful they need to understand how their employees, suppliers, and customers behave. The way people approach business in Asia is different from how people approach business in the United States, as well as the business etiquette that is expected of them. For example, in Japan where building relationships is very important the simple act of exchanging business cards is extremely important in achieving a good first impression.

Culture affects how a company markets their products or services in certain countries, such as: what to write on the label, the color of the label, the taste of the product if it an edible product, and even the amount of product that is packaged. Culture also affects how the employees are managed in that country: how long breaks and holidays should last, which management style would work best (a work environment with a lot of rules or one where creativity is encouraged), or the kind of structure management should have. In other words culture already affects other areas in business, so of course it should also affect the accounting standards companies/countries use. I believe an organization must decide upon a common business practice and adhere to them throughout all of their global operations. While this may be difficult, I believe it will make it easier for them to conduct business when it comes to stating company affairs to the public and creating new goals for the future.

Differing accounting practices and standards for different countries are acceptable right now, however they have their own disadvantages and as most national financial regulatory and standards setting bodies agree, there are numerous benefits to implementing international standards. In a policy statement, the Securities Exchange Commission stated that, "all securities regulators should work together diligently to create sound international regulatory frameworks that will enhance the vitality of capital markets (Sawani)." There really is no clear cut solution on how to solve the problem of accounting standards with the threat of legal and political issues getting in the way.

Late last year, the IASB provoked international uproar by succumbing to the European Union's pressure to change the rules regarding the reclassification of assets for banks without consultation. However, if the IASB did not regard EU demands then the threat of the creation and adoption of another accounting standard would completely throw away the IASB's theme of convergence. Another problem could have also presented itself if the move looked to a political one because of the fact that the IASB is supposed to remain an independent entity (Nixon 2009). Even with all of their differences, because the common goal for convergence, it may be in the not so distant future where we will see both standards come to an agreeable solution.


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  2. Sawani, Assma, "The Changing Accounting Environment: International Accounting Standards and US Implementation," Journal of Finance and Accountancy, (10 November 2009).
  3. Manassian, Armond, "Globalization and International Accounting Research: An Agenda for the Future," RBGN, 2007, (10 November 2009).
  4. Helen J. Irvine and Natalie Lucas, "The Globalization of Accounting Standards: The Case of the United Arab Emirates," International Conference on Contemporary Business, 2006, (14 November 2009).
  5. Newman, Neal F., "The U.S. Move to International Accounting Standards- A Matter of Cultural Discord- How Do we Reconcile," The University of Memphis Law Review, 2009,;col1 (15 November 2009).
  6. Marius, Gavriletea, "Romania's Adherence to European Directives and International Standards for Financial Accounting in Insurance Companies," Journal of International Business and Economics, 2008,;col1 (15 November 2009).
  7. Nixon, Simon, "Crunch Moment for International Accounting," The Wall Street Journal, 2009, (18 November 2009).
  8. Heather M. Hermanson and John P. McAllister, "Obstacles to International Accounting Standars and Convergence," The CPA Journal, 2002, (18 November 2009).