Chapter 2

1. Chapter 2 International accounting differences

2. Contents • Origin of national differences • Differences in accounting systems • Characteristics and differences in national GAAP • Country classification • National Differences: more recent evolutions • National differences: do they still play a role in an era of globalized accounting

3. Learning objectives • Describe and explain how the following elements influenced the development of financial reporting and the existing accounting systems in a country: • provision of finance • the legal system • the system of taxation • cultural values

4. Learning objectives (cont’d) • Explain and appraise the influence of cultural values on accounting values • Explain how different systems of accounting regulation could develop • Describe the purpose of country classification exercises • Appraise whether these country classification exercises are still relevant today

5. International accounting differences obstruct financial communication between countries

6. Origin of national differences • Provision of finance • Existing legal system • Link between accounting and taxation • Cultural differences

8. Provision of finance: consequences • In shareholder countries accounting information provides information to investors • In credit-oriented countries creditors, families and the state receive private information about the financial situation of the company; external financial reporting is less developed

10. Existing legal system: consequences • In common law countries more principles - based accounting standards • In code law countries more detailed legal rules that govern accounting

12. Relationship between accounting and taxation • Dependence leads to tax biased accounting information • Independence leads to accounting information which represents more the underlying economic situation

13. Cultural differences (Hofstede, 1984) • Individualism versus collectivism • Large versus small, power distance • Strong versus weak, uncertainty avoidance • Masculinity versus femininity

14. Accounting values (Gray, 1988) • Professionalism versus statutory control • Uniformity versus flexibility • Conservatism versus optimism • Secrecy versus transparency

15. National differences lead to differences in accounting systems and differences in national accounting standards

16. Types of accounting regulation • In a shareholder oriented country characterized by a common law system, the accounting standard setting process is often in the hands of a private standard setter • In a creditor oriented country characterized by a code law system, the accounting standard setting process is often in the hands of the government

17. Differences in the organization of the accounting profession • In shareholder oriented countries the accounting profession developed earlier • Nowadays stricter regulation worldwide (e.g. EU, US= PCAOB) of the audit profession, tries to wipe out national differences to a certain extent

19. Characteristics and differences in national GAAP • Shareholder orientation versus stakeholder orientation • Fairness versus legality • Conservatism versus accruals • Uniformity, accounting plans and formats • Consolidated accounts • Deferred taxation

20. Research on accounting diversity in the eighties Country classification attempts based on observed differences

21. Criteria used as discriminating variables • Type of user of the published accounts of listed companies • Degree to which law or standards prescribe in detail and exclude judgement • Importance of tax rules in measurement • Conservatism/prudence • Strictness of application of historical cost

22. Criteria used as discriminating variables (cont’d) • Susceptibility to replacement cost adjustments in main or supplementary accounts • Consolidation practices • Ability to be generous with provisions and to smooth income • Uniformity between companies in application of rules

24. National differences: more recent evolutions • Research in the nineties and in the 21st century tries to explain differences in accounting quality between countries through the analysis of institutional differences observed between countries • Major findings of the research is that accounting quality is still influenced by domestic institutional variables

25. High quality accounting information • Definition (Ball & Shivakumar, 2002) • Financial reporting quality relates to the usefulness of financial statements for contracting, monitoring, valuing and other decision making by investors, creditors, managers and all other contracting parties within the firm

26. High quality GAAP versus low quality GAAP • Low quality GAAP allows management to report results when they want to report those results • High quality GAAP provides less discretion for such practices

28. High quality accounting information is a function of the quality of the GAAP and of the quality of the implementation of that GAAP

29. The implementation of the GAAP How GAAP is implemented is influenced by national characteristics such as the degree of investor protection, the degree of enforcement of financial accounting standards, risk of litigation and the legal system.

30. Recent research in relation to the accounting quality of IFRS accounts in the EU • E.g. (Daske et al. 2008; Armstrong et al. 2010; Barth et al. 2008) • Positive capital market reactions mainly in common law countries • A country’s institutional environment still influences accounting quality • Impact of IFRS difficult to single out, a number of countries also change governance regimes and enforcement systems

31. Conclusion: national differences still play a role! National differences influence the implementation of the accounting standards in a country – also in the case of compulsory compliance with IFRS