Investigating the influence of culture on accounting

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As accounting moves towards globalization, harmonization and convergence, the influence of culture on accounting is being increasingly recognized as an important and controversial topic.

Accounting, being an artefact, constitutes part of the every-day life of organisations (Tomkins and Grove, 1983). Unavoidably, it's meaning and enactment is culturally derived [html]. It is a social construct which will consequently reflect the society in which it has been developed. Accounting is an artificial device constructed by society to gather and communicate information ( Hence an accounting system can be said to be the methods, procedures and standards followed by an organization or a country in accumulating, recording and reporting business transactions which are used in providing financial information for decision-making.

Culture, on the other hand, is a way of life, a way of doing things, the traditional belief and customs of a group of people. Culture has been defined as the "collective programming of the mind which distinguishes the member of one human group from another" (Hofstede, 1980 pp.25). Every society shares its own unique norms, which include common characteristics like value system, which members of that society adopt. Hofstede (1980, pp.19) defined values as 'a broad tendency to prefer certain states of affairs over others'.

Many studies have been carried out to show how the differences in culture within national and international environment influence accounting practices. Gray's was the first to link societal values and accounting values and he advances that 'accountants value systems are related to and derived from the unique societal values in each country' (Finch, 2001b; pp.2). Also, Mueller et al (1994, pp.1) noted that, "accounting is shaped by the environment in which it operates".

Similarly, Perera (1989) argued that, specific cultures and environments influences the type of accounting system practiced. Furthermore, Dopunik and Tsakumis (2004, pp.1) stated that 'culture is considered to be a powerful environmental factor that affects the accounting system of a country as well as how individuals perceive the use of accounting information'.

This essay examines the probable impact of culture in determining the accounting systems and standards of a country, using countries such as Nigeria, France and Japan and comparing them with what is obtainable in the United Kingdom (UK) as examples. Also, it will consider whether an understanding of the role of culture in accounting can help to understand International Accounting Standards (IAS). Moreover, it will discuss the importance of culture to the harmonization and convergence of IAS.


Hofstede's (1980) work on culture represents the most extensive research on national cultural differences to date (Doupnik & Tsakumis, 2004). From his study, Hofstede (1980) identified four basic value dimensions with which countries could be grouped. These cultural dimensions are individualism versus collectivism, power distance, uncertainty avoidance and masculinity versus femininity. The first two relates to authority and enforcement of accounting practice at a country level while the second two relates to the measurement and disclosure of accounting information at a country level (Nobes and Parker, 2008).

INDIVIDUALISM VERSUS COLLECTIVISM (IDV): measures how self-interested and personal individuals are as opposed to being closely knit and integrated into groups. In an individualist environment, people look after themselves and their immediate families and their rights supercedes that of the groups they may belong to. In a collective environment, people are born into strong cohesive in-groups, often extended family or tribal communities who protect them in exchange for their loyalties

POWER DISTANCE (PD): this is the extent to which the less powerful members of organization and institution expect and accept power to be unequally distributed. High PD cultures usually have centralized top-down control, where a few are being seen as privileged while lower PD cultures imply greater equality and empowerment.

MASCULINITY VERSUS FEMININITY (MAS): focus on how a society allocates "traditional" gender roles to males and females. Masculine society prefers achievement, assertiveness, competitiveness, heroism and material success while feminine society prefers to be more gentle, caring and are concerned with family and quality of life.

UNCERTAINTY AVOIDANCE (UA): this defines the extent to which a country tolerates uncertainty and ambiguity. Strong UA countries have strong traditions and rituals and tend toward formal, bureaucratic structures and rules while weak UA countries are more relaxed and are open to new ideas or concepts.


Hofstede's (1980) study attracted a lot of researchers from different academic disciplines, including accounting. In view of this, Gray (1988) came up with a framework establishing a link between cultural values and accounting values. Similarly, much empirical works has followed. Parera (1989) examined the influence of culture on the accounting practices of developing nations. Furthermore, Fechner and Kilgore (1994) related accounting values to accounting practices and Baydoun and Willet (1995) tried to operationalize accounting values of various countries in terms of GAAP qualitative characteristics of good measurement and reporting practices (cited by Chanchani and Willet, 2004,pp.7).

Based on Hofstede's (1980) four cultural dimensions, Gray (1988) developed a tentative structure of four accounting values that are affected by culture. These values are: professionalism versus statutory control, uniformity versus flexibility, conservatism versus optimism and secrecy versus transparency and proposed that these values "may be used to explain and predict international differences in accounting systems and patterns of accounting development internationally"(Gray 1988, pp. 5).


This is defined by Gray (1988b, pp.8) as "a preference for the exercise of individual professional judgement and the maintenance of professional self-regulation as opposed to compliance with prescriptive legal requirements and statutory control". He argues that the higher a country ranks in terms of Individualism and the lower it ranks in terms of UA and PD then the more likely it is to rank highly in terms of professionalism. Professionalism is considered a core dimension of accounting values because accountants are required to make professional judgments regarding valuation and various aspects of disclosure in financial information. Such judgments are made by accountants to a lesser or greater extent in different parts of the world, depending on various factors including legal and statutory requirements and prevalent professional practice (Belkaoui, 1990, 1995). At an organisational level, the development of accounting bodies in various parts of the world reflects differing degrees of self-regulation with professional bodies (Chanchani and Willet, 2004, pp.5). Nigeria has a huge government intervention and control on the development of its accountancy profession whereas UK possesses a larger degree of autonomy and self-regulation. (Uche, 2002) argued that the manner and process of granting ANAN chartered status was not consistent with professional requirement


This is 'a preference for the enforcement of similar accounting practices between companies and for the consistent use of such practices overtime, as opposed to flexibility in accordance with the perceived circumstances of individual companies' Gray (1988, pp.8). He demonstrated that the higher a country ranks in terms of UA and PD and the lower it ranks in terms of Individualism, then the more likely it is to rank highly in terms of uniformity. Uniformity versus flexibility is a significant accounting value dimension because the fundamental features of accounting principles globally are uniformity, consistency or comparability (Arpan and Radebaugh, 1985). In France, for example, where, traditionally, there has been a concern with facilitating national planning, a uniform accounting plan has been followed. This is in contrast to practices in the UK which allows more flexibility (Chanchani and Willet, 2004, pp.5).


This is "a preference for a cautious approach to measurement so as to cope with the uncertainty of future events as opposed to a more optimistic, laissez-faire, risk-taking approach" (Gray, 1988, pp.8). Sterling, (1967, pp.10) argues that 'it is the most ancient and probably the most pervasive principle of accounting valuation'. Thus, the fundamental attitude of accountants worldwide is discretion in asset management and the reporting of profits (Chanchani and MacGregor, 1999b). Gray (1988) suggested that the higher a country ranks in terms of UA and the lower it ranks in terms of individualism, the more likely it is to rank highly in terms of conservatism. He suggested that such differences are reinforced by the relative development of capital markets, the differing pressures of users' interests, and the influence of tax laws on accountants in the countries concerned.


This is the "preference for confidentiality and the restriction of disclosure of information about the business only to those who are closely involved with its management and financing as opposed to a more transparent, open and publicly accountable approach". The higher a country ranks in terms of UA and PD and the lower it ranks in terms of Individualism and Masculinity then the more likely it is to rank highly in terms of secrecy (Gray, 1988, pp.8). Secrecy has to do with management's control on the quantity of information disclosed to outsiders. These differences may also be reinforced by the differential development of capital markets and the nature of share ownership, which provide incentives for disclosure (Watts, 1977 cited by Chanchani and Willet, 2004, pp.6).

Accounting in Japan is conservative, creditor-oriented and tax-based, with institutional structures that rely on bank financing and close relationships between capital providers and investee firms. The Japanese debt financing system allows tight statutory control rather than a looser professional based approach and places a strong emphasis on collectivism. Japanese companies are largely financed by banks (Black and White, 2003). Because of this, the banks often require a seat in the Board of directors and thus will have information on the company's performance without relying on the published financial statements. Hence, the financial statements do not need high amount of disclosure (Gray, 1980). This is not the case in the UK, where most of their companies are financed through equity, thus require a relatively high level of disclosure (Gray, 1980). Also, more emphasis is placed on the long-term stability of the company rather than the short-term profitability and as a result, much more value is placed on the Balance Sheet rather than the Profit and Loss Account (Black and White, 2003). The Japanese are conservative in their approach to accounting in order to ensure the long-term stability of the company. In view of this, they are legally required by the Commercial Codes to transfer a portion of their income to a reserve each year (Nobes and Parker, 2002). Whereas the UK is well known for its less conservative approach to accounting compared with many other countries (Gray, 1980). The taxation law is one of the sources of accounting regulation in Japan. It stipulates the expenses to be deducted for tax purposes i.e. the items to be included in the financial statements. Hence, companies often apply accounting treatments that will give the highest tax benefit rather than the one that best reflects the underlying economic reality (Nobes and Parker, 2002). This is different from the accounting practice in the UK where the tax system and the accounting system are completely separate.

The difference in the cultural dimension of countries and their effect on accounting practices has presented a major obstacle to the international accounting harmonization and convergence efforts. The norm of these cultures made countries adopt accounting practices suitable to their environment and culture, (Hamid et al 1993, 1996). Ross (1989) argues that given the same data, accountants from different countries will produce different result in line with their country's accounting practices. Given the interdependence of the economy of countries, multinational companies are listed in the stock market of different countries. Thus, there is need for International Accounting Standards (IAS) that would provide a guideline for harmonization since complete unification has so far been difficult.

A major weakness of Hofstede's (1988) methodology is that the sample is not representative because the data are derived from a single company and therefore do not provide reliable information on the cultural values of an entire nation (Papadaki, 2005, pp.354). Also, his concept of national culture is highly simplistic and fails to take into account significant within-country differences and ignores important contextual factors such as legal, social, political and economic influences on culture (Roberts and Boyacigiller, 1984; Mead, 1994, pp.48). Furthermore, the current globalization might have rendered it out of date (Mead, 1994). While Gray's (1988) model has statistically significant explanatory power, it is best at explaining actual financial reporting practices and relatively weak in explaining extant professional and regulatory structures from a cultural base (Salter and Niswander, 1994).

Furthermore the International Accounting Standards Board (IASB) though acknowledged for its efforts, research has criticized that harmonization seems to entail imposing Western accounting practices upon nations that are perceived to be less economically developed than in the West. Little attention is paid to the possibility that the accounting practices of diverse communities might give insights to alternative, theoretically defensible accounting practices (Hamid et al, 1993).


Culture plays a fundamental role in determining the accounting practices of various countries. Cultural values have resulted in the similarities and differences in the accounting practices among countries. With the world becoming a global village, the need for harmonization and convergence of accounting standards with IAS should be given serious attention. An insight into how cultural values may affect the accounting treatment and ultimately impact financial disclosure is important to ensure the comparability of international financial reporting.