Examining the causes for differences in the U.S. accounting system

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A hot topic of the recent years in the aspect of accounting has been the international accounting harmonization. The birth of this topic is due to the diversities of accounting systems in different countries. According to the past literatures, there is a large list of possible factors which can cause the differences in accounting systems. As accounting is influenced by the environment in which it operates, a country's accounting system would be affected by its cultural, economic and institutional factors. Several influential factors have been found by previous researchers (Nobes, 1998), and these factors can be summarised as a list: (1) Nature of business ownership/Financing and stock markets, (2) Legal systems, (3) Political systems/Government influence, (4) Taxation, (5) Profession, (6) Culture, (7) Level of education, (8) Stage of economic development, (9) Geography, (10) Other causes: inflation, theory, 'accidents', religion, and colonialism, etc, while the list would be exhaustive. The accounting system for a particular country would be affected by some factors which are only effective in this country. Therefore there are some factors which play a predominant role on the development of accounting systems. In the following we will take the United States as an example to illustrate three main influential factors which are predominant on the development of the U.S. accounting system.

To begin with the reason that why we use the United States as our observation, it is said that the development of the U.S. economy have a dominant influence on the global financial situation today. This can be testified by tracking back to the financial crisis happened in this year. Consequently, it is worth to discuss which factors have an effective impact on the development of accounting system in the United States.

1. Capital markets

According to Nobes(2006): 'This difference in providers of finance (creditors/insiders) versus (equity/outsiders) is the key cause of international differences in financial reporting.' In addition previous studies have indicated that accounting systems are significant influenced by corporate financial structure and the nature of entities ownership and capital markets (e.g. La Porta and Lopez-de-Silanes, 1998; La Porta et al., 1996). These arguments can be proved correctly when consider our observation - United States.

In the U.S., a large number of companies rely on the external shareholders to raising their funds. It has been defined as 'strong equity market' by comparison with the 'weaker equity markets' which the companies' finance more relied on credit loans from banks or other financial institutions (Nobes and Parker, 2004). There are more than 11,000 firms in the United States which are listed on the stock exchange markets; these companies raise funds mainly by issuing securities. Consequently, it can be said that the structure of the economy of the United States are mainly composed by the listed companies from the perspective of the proportion of the listed firms in the country. Having said that, it is reasonable to think that this economic structure would has a significant impact on the design and development of the U.S. accounting system. It can be examined that the financial reporting system in the U.S. is directly towards or focuses on the information needs of the investors, regardless of whether they are investors in stocks or bonds (ÄŒerne, 2009). This is because the investors treat the financial reports as a crucial source of information about the performance of the businesses. Therefore, the accounting system in the U.S. is designed to provide transparent financial reports which contain a sufficient amount of information to indicate how the businesses operating. It is also worth to mention that the transparent of the financial disclosure in the U.S. accounting system has becoming more and more important after the Enron scandal.

2. Culture value

In 1988, Gray (1988) developed a model which associates with accounting sub- cultural values and cultural dimensions developed by Hofsede (1980). This model illustrates that a country's accounting system would be influenced negatively by cultural dimensions of uncertainty avoidance and power distance, positively by individualism and masculinity. More specifically, cultural diversities between countries are recognised as an important influential factor on financial reporting and disclosure with regard to financial statements (Alexander, 2007).

Based on the Hofsede's model, it can be identified that the characteristics of the U.S. culture are illustrated as following: (1) advocating individualism; (2) small societal power distance, people in the United States have more requirement of equality than that of in the other countries; (3) weak uncertainty avoidance, more easily to accept deviations; (4) masculine society, people live in this country are more regard to the sense of achievement and hero sense and the success in the material. Therefore, these properties of the U.S. culture have a significant influence on the development of the U.S. accounting system.

Firstly, the establishment and the implement of the accounting standards emphasise Professional orientation and flexibility. Because of the feeling comfortable with uncertainty and ambiguity in the whole American society, and the economic activities more advocate to the individualism, but less rely on the government interference. As a result, the accounting in the United States emphasises the professional orientation and flexible management, and less depend on the legislations.

Secondly, the financial disclosure in the U.S. accounting system tends to be more transparent. This is caused by the respect of individualism in the U.S. culture. Most companies in the U.S. raising their funds by issuing securities and bonds to individuals in the society. That will force the companies to provide comprehensive accounting information to the investors and creditors. And the accounting authorities also encourage the companies to publish more information about their performance to the society.

Lastly, the accounting measurement in the U.S. is partial to optimism. The reason behind this is that the weak reaction to the uncertainty in the U.S. society and the emphasis on the true reflection of the companies operation and financial situation in the accounting aspect of the United States. In addition the innovation of the accounting methods and low conservatism also led to this result.

3. Legal system

In addition to the above, Gray's model also pointed out that country's development of accounting system would be strongly affected by its legal system (common law vs code law). The trait of the common law is that is developed from case by case and does not prescribe general rules that could be applied to several cases (Alexander, 2007). In countries which are classified as applying common law, then their accounting regulations are not a part of their law. Moreover, the right of the setting of accounting regulation is in the hands of professional organizations of the private sector. The FASB (Financial Accounting Standards Board) is a standard setting board that creates and publishes accounting standards for foreign and domestic firms in the United States to encouraging the equality of financial statement requirements in their using of U.S. capital markets. Therefore the accounting standard in the United States is the U.S. GAAP (General Accepted Accounting Principles). Consequently, there are several differences exist in the U.S. accounting financial reporting. For instance, the U.S. tends to have some accounting elements such as assets are shown on the left side of a horizontal balance sheet; or the treatment of goodwill in the U.S. is usually capitalised and amortised by charges to earnings by comparison with the UK where companies' goodwill are permitted to write off directly against revenues rather than having to capitalise and amortise it against earnings. In general, the main difference between the U.S. GAAP and the IAFSs (International Accounting Financial Standards) is that the former one is based on rules and specific detailed, whereas the later one is tend to be more broadly based on principles. In addition, theoretically the FASB works as an independent organization. But, if a new standard issued by FASB has a negative impact on the profits of an entity, then some powerful big companies or groups usually exert improper pressure through the congress to the FASB. Unfortunately, it is inevitable for the U.S. to change this situation.


Although there are many other factors which may play an important role in the influence of the accounting system development that are not addressed above. Such as inflation, education, and taxation, etc. Some of them are too vague to be illustrated.

However, the differences in the capital markets and the cultural value and the legal system which are discussed in this paper highly relate to the development of U.S. accounting system. While, because these three factors have strong representative to reflect the differences and characteristics of the American accounting system. While it is necessary to mention that it is impossible to achieve a consensus that which factors have predominant influence on the development of a country's accounting system, because some of factors will interdependence with other factors.

Finally, the international accounting harmonization will continue to be a live issue because of the advantages it will bring. Consequently, the globalisation of accounting will become clearer along with the integration of global economy. For example, in the U.S., collaborative convergence efforts have started between the FASB (Financial Accounting Standards Board) and the IASB (International Accounting Standards Board). But there are many complications exist in the converging the IFRSs and the U.S. GAAP, so this will be a long term process to achieve the final solution. Moreover, during the process, the factor of culture may act as a negative element, as some countries may refuse to accept the accounting globalisation by using the support of cultural diversities, and some others may popularise compulsively their accounting system for the sake of accounting globalisation. Therefore, it is necessary to consider the causes of the differences in accounting systems, and future studies will provide a deeper explanation to this issue.