Critically examine the role that cultural differences play in the accounting differences found internationally. Answer with reference to at least 2 contrasting countries.
Culture can affect accounting standards and practices significantly. The two areas of accounting differences due to cultural differences that command investors/ financial reports users’ attentions include:
- Accounting measurement practices: how company value assets, such as inventory or fixed assets.
- Accounting disclosure practices: what sorts of information is provided by the management in the annual or interim reports for investors
Cultural differences can affect the two dimensions as follow:
- Optimism or conservatism in terms of financial measurement practices.
- Optimism or conservatism in accounting is often referred to the degree of caution by companies in valuing assets or recognizing income.
- Conservative companies tend to understate assets and income; while optimistic companies tend to be more liberal in revenue recognition and assets valuation matters.
- Example of nations with conservative accounting practices/ cultural values include Japan, Germany and French. Among all, French is said to have the most conservative accounting practices (as companies in the country finance primarily from the banks, and banks tend to place greater importance on liquidity. Thus, companies in French tend to understate their revenue to pay fewer taxes, or to declare lesser divided, in order to pile up cash to service bank interest payment.).
- Companies in UK and US are more optimistic in revenue recognition. Particularly in US, companies may engage more often in aggressive revenue recognition practices to impress the many investors in the financial markets.
- Transparency or secrecy in terms of accounting disclosure practices.
- Countries such as Germany and Japan tend to have less disclosure (i.e., indicating a cultural value of secrecy). However, countries such as UK and US have more disclosure (indicating a cultural value of transparency).
- Thus, it can be seen that companies from US tend to disclose more information in the annual reports (as transparency is valued). In contrast, in countries such as Japan, sensitive information will be excluded. The information disclosed will largely determined by statutory requirements.
- Flexibility and Uniformity.
- In US, a high degree of flexibility in financial reporting can be found. Creativity in terms of financial reports presentation is observed. In countries such as Egypt, and many other emerging countries, financial reporting is found to be more uniform, whereby standards format can be easily observed.
- Professionalism and statutory control.
- Financial reporting and disclosure in US and UK is influenced more by professionalism way of accounting practices. However, in many other developing countries, accounting disclosure is purely to comply with the relevant statutory legislation and requirements.