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Bachelor Thesis

Cultural Impact on Accounting Practices


Does it disappear after the introduction of IFRS?

Supervisors: dr C.D. Knoops and drs H.J. Bouwer


ERASMUS UNIVERSITY ROTTERDAM
Erasmus School of Economics
Section: Accounting, Auditing and Control

Name : Bebi Merinda


Student number : 326348
E-mail address : bebimerinda@gmail.com
Table of Contents
Table of Contents .................................................................................................................................... 2

1. Introduction ..................................................................................................................................... 4

1.1. Background .............................................................................................................................. 4

1.2. Problem definition.................................................................................................................... 5

1.3. Relevance ................................................................................................................................. 5

1.5. Methodology ............................................................................................................................ 8

2. International Financial Reporting Standards ..................................................................................... 9

2.1. Introduction ............................................................................................................................. 9

2.2. History of IFRS .......................................................................................................................... 9

2.3. Characteristics of IFRS standards ............................................................................................ 10

2.4. IFRS adoption ......................................................................................................................... 11

2.5. Conclusion.............................................................................................................................. 12

3. Relationships of culture and accounting ......................................................................................... 13

3.1. Introduction ........................................................................................................................... 13

3.2. Prior the Hofstede-Gray framework........................................................................................ 13

3.3. Hofstede’s cultural dimensions ............................................................................................... 15

3.4. The Hofstede-Gray’s Framework ............................................................................................ 17

3.5. Evaluation of the Hofstede-Gray framework on theoretical basis............................................ 19

3.6. Conclusion.............................................................................................................................. 20

4. Findings ......................................................................................................................................... 21

4.1. Introduction ........................................................................................................................... 21

4.2. No IAS / IFRS in research design.............................................................................................. 21

4.2.1. Authority and enforcement............................................................................................. 21

4.2.2. Measurement practices .................................................................................................. 22


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4.2.3. Disclosure practices ........................................................................................................ 23

4.2.4. Other Findings ................................................................................................................ 24

4.3. IAS / IFRS in research design ................................................................................................... 25

4.3.1. Authority and enforcement............................................................................................. 25

4.3.2. Measurement practices .................................................................................................. 26

4.3.3. Disclosure practices ........................................................................................................ 29

4.3.4. Other findings ................................................................................................................. 30

5. Analysis .......................................................................................................................................... 31

5.1. Introduction ........................................................................................................................... 31

5.2. Analysis of findings ................................................................................................................. 31

5.3. Conclusion.............................................................................................................................. 32

6. Conclusion ..................................................................................................................................... 33

References............................................................................................................................................. 34

Appendix ............................................................................................................................................... 38

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1. Introduction

1.1. Background

Due to the growth of multinational companies and an increasing trend in globalization, there is a
need for a single set of accounting standards that facilitates the process of exchanging, sharing and
reporting financial results for international business activities. The trend towards harmonization of
international accounting standards has evolved in the past three decades. Most common obstacles of
harmonization process are listed by Elnathan and Krlich (1992). The three common obstacles are the
differences in national accounting systems, nationalism and language differences. The first obstacle is
related to the differences in the users of financial reporting and legal systems, the second obstacle is
related to cultural differences and national pride and the third one is related to proper communication
channels in interpretation of different terminology.
Despite of these obstacles, the International Accounting Standards Board (IASB) prevails to
develop a single set of high-quality reporting standards called International Financial Reporting
Standards (IFRS). The publicity of IFRS is an important milestone in the harmonization process of
accounting practices. Nowadays, IFRS is the basis of the financial reporting standards of most countries
and encouraged improvement and convergence of accounting standards.
Several years further away since the introduction of IFRS, it seems that systematic differences in
the accounting practices between countries which applied IFRS still exist (Ball, 2006; Kvaal and Nobes,
2010). It seems that even after IFRS adoption, many companies are still preserved their national
accounting practices in a way that minimizes as far as possible changes in the form of financial reporting
that they applied under their previous national GAAPs (Ernst&Young, 2006).
There are many relevant literatures related to international differences in financial reporting
prior to IFRS adoption. Few reasons of IFRS implementation differences have been suggested such as
legal system, providers of finance, taxation, culture and other external factors (Nobes and Parker, 2004,
ch. 2). Harrison and McKinnon (1986) list some elements of a general theoretical model, but there is no
specification which factors are major explanatory variables for accounting practices. In 1988, Gray
develops a model based on Hofstede’s (1980) cultural / societal values related to accounting practices. In
his model, he draws a link between societal values and accounting values, and how both values reinforce
accounting practices in a particular country. The framework was extended by Doupnik and Salter (1995)
who developed a general model of accounting development which links external environment, culture

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and institutional structures to accounting practices. Culture has been established by former researchers
to be one of the major reasons of differences in accounting practices (Doupnik and Salter, 1995; Nobes,
1998).

1.2. Problem definition


Related to the evidence found in previous investigation of cultural influences on accounting
practices, this paper tries to analyze whether cultural differences across countries can be an explanation
for differences in accounting practices across countries. The goal of this paper is not to examine
accounting differences prior to IFRS adoption, but rather to use evidence found in the previous research
as a guidance to find cultural impacts on IFRS implementation. It aims to answer the research question:
“Does culture have an influence on accounting practices especially IFRS practices?”
Theory suggests that cultural impact on accounting practices will disappear due to the
standardization of accounting practices after the introduction of IFRS (Nobes and Parker, 2004; Deegan,
2009). I will try to answer the question whether the impact of culture is different in studies that
incorporate IFRS in their research design as compared to studies that do not. The focus is on studies
which use the Hofstede-Gray framework (1988) that relates culture and accounting values to accounting
systems and practices. The accounting systems / practices are concerned with four different areas
namely authority, enforcement, measurements and information disclosures. Below are the sub-
questions which help to answer the research question:
1. Do societal and accounting values influence the authority of professional assurance and the
enforcement of accounting standards especially IFRS?
1.2. Do societal and accounting values influence differences in the application of accounting Formatted: Bullets and Numbering

measurements especially IFRS measurement?


1.3. Do societal and accounting values influence the information disclosure especially IFRS
disclosures?

1.3. Relevance
In perspective of financial markets, high quality of financial statements contributes to lowering
cost of capital since trustworthiness of an investor to financial reports appeals them to provide capital at
a lower cost. Therefore countries which adopt an internationally recognized and understood accounting
standard for financial statement will gain significant advantages to those who do not (Sharpe, 1998). The
harmonization of financial reporting is expected to increase market efficiency by reducing monitoring

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costs and decreasing cost of raising capital. Some empirical studies suggest positive effects of IFRS
adoption on financial markets efficiency. Daske et al. (2008) investigate the economic consequences of
compulsory IFRS adoption around the world. Using a large sample of firms which are obligated to adopt
IFRS, they found an increase in average market liquidity around the time of the IFRS introduction, a
decrease in firm’s cost of capital and an increase in equity valuations.

Investors believe that the benefit of IFRS adoption outweighs the implementation cost. This is
affirmed by an empirical study of market reaction to events surrounding the adoption of IFRS in Europe
(Armstrong et al., 2010). They found significant positive market reactions to events that increased the
likelihood of IFRS adoption and vice versa. Another empirical study suggests strong positive abnormal
returns of IFRS adoption and a substantial long-run reduction in the cost of capital (Karamanou et al.,
2005). From an economic point of view, early evidences indicate that the harmonization process
appears to bear its fruit which is to accommodate financial markets with high quality information and
improve capital market efficiency by increasing accessibility of global capital and lowering cost of capital
(Guggiola, 2010).

Despite of the evidence that IFRS adoption has positive economic consequences, there are still
some aspects to be improved in comparability and consistency of financial statements that comply with
IFRS. By focusing on one factor i.e. culture, this paper analyzes the extent of cultural impact, if there is
any, on accounting practices when IFRS is incorporated in the research design. It investigates whether
culture is a possible cause of international differences in the standardization of accounting practices. By
understanding the underlying reason of differences in accounting practices, standard-setting bodies can
take into account the societal and accounting values in the agenda of IFRS implementation. Furthermore,
this paper contributes in informing users that the claim of consistent and full comparability of financial
statements under IFRS standards have not yet been accomplished and culture may be an important
explanatory variable. It also reminds standard setters to take into account that inevitable cultural
differences may influence the implementation of proposed accounting standards.

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1.4. Research Process

The development of accounting systems in a nation does not happen in a single process. It is an
evolving process wherein accounting values and institutional consequences constantly influence
accounting systems (see figure 1). External influences such as foreign trade and investment have an
impact on the environment / ecology of a nation. Figure 1 shows how societal values receive ecological
influences and forward it to both accounting values and institutional consequences. These accounting
values and institutional consequences are reflected in the accounting systems. The accounting systems
reciprocally influence accounting values and ecological influences, reinforced the consequences of an
accounting system. The reinforcement of accounting systems preserves the accounting practices in a
nation. Consequently, the finding of national IFRS patterns (Nobes, 2006; Ernst&Young, 2006) is not
surprising because accounting values are implanted in the root of accounting practices of a country.

External Influences Institutional Consequences


Forces of nature Legal system
Trade Corporate ownership
Investment Capital markets
Conquest Professional associations
Education
Religion

Ecological Influences
Geographic Societal Values
Economic
Demographic
Genetic / Hygiene
Historical Accounting Values Accounting Systems
Technological

Urbanization REINFORCEMENT

Figure 1: Gray (1988) Culture, societal values and accounting subculture

After the introduction of a new standard, that is IFRS, accounting practices should comply with
that new standard. The development of accounting systems at the sub-cultural level is related to societal
values orientations, since such values pervade a nation’s social system (Gray, 1988). If societal values do
not change, correspondingly it is expected that accounting values also do not change. Since societal
values remain unchanged and likewise accounting values, therefore IFRS practice is inevitably impacted
by the culture of the related country.
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Using three sub-questions which have been mentioned before, a comparison will be made
between accounting practices before and after the introduction of IFRS. However, due to the absence of
empirical literature about cultural influences on IFRS implementation, this kind of comparison cannot be
made. Therefore I review empirical studies that incorporate accounting rules based on IAS / IFRS in their
research design and discuss these studies further in the section of analysis. There are three accounting
practices to be examined: authority and enforcement, measurement practices, and information
disclosure. These three accounting practices are expected to be similar or converged when a uniform set
of accounting standards i.e. IFRS is applied. If convergence in the accounting practices does not happen,
the extent of culture as a possible explanation on this divergence will be investigated. Empirical
literatures are used to identify whether influences of cultural values through accounting values of a
nation appear in these three accounting practices.

1.5. Methodology

The methodology of this thesis is based on literature review. This exploratory study relies on the
work of former researchers and takes logical inferences based on their studies. There are two theories
that will be used i.e. a theory of Hofstede (1980) on societal values and a theory of Gray (1988) that links
Hofstede’s societal values to accounting values and accounting systems / practices. The latter is known
as the so-called Hofstede-Gray framework and my literature review studies consist of studies that make
use of this framework.

The structure of this paper proceeds as follows: section one defines the problem statement and
relevancy of this paper to the readers; section two describes the history of IFRS, its characteristics and
the adoption of IFRS around the world; section three explains the relationship between culture and
accounting using the Hofstede-Gray framework; section four presents some empirical studies that use
the Hofstede-Gray framework since Gray (1988) never did empirical test on his own framework. These
empirical studies are presented in three parts: authority and enforcement, measurement practices and
disclosures; section five provides analysis of empirical findings from section four; finally section six
provides conclusions of the whole thesis and some suggestions for further research.

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2. International Financial Reporting Standards

2.1. Introduction

This section provides a brief description of the history of IFRS, the characteristics of IFRS
standards and the meaning of IFRS as a principle-based standard and the lists of countries which decided
to adopted IFRS as their accounting standards, suggesting the success of IFRS towards its goal as a set of
globally accepted financial reporting standards.

2.2. History of IFRS

The history of accounting standards and rules began in 1966. The objective was to create an
International Study Group containing several accounting groups from different countries such as the
American Institute of Certified Public Accountants, the Canadian Institute of Chartered Accountants and
the Institute of Chartered Accountants of England and Wales. In 1967 the study group was created,
under the name of Accounting International Study Group. Six years later, these groups established an
international body writing accounting standards under the name of International Accounting Standards
Committee (IASC) through an agreement by professional accounting bodies from Australia, Canada,
France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland, and the United
States. The main reason behind the setting up of IASC was to develop accounting standards to be
accepted around the world for the improvement of financial reporting internationally. Throughout the
years, there were some changes to its structure and functioning. The most notable one is the increase in
IASC’s sponsorship from nine original accounting bodies to 152 accounting bodies from 112 countries
(Ankarath et al., 2010). This fundamental change drew the attention of governments, standard-setting
bodies, securities regulators and the business community on the effort of IASC to develop a single set of
accounting standards to be adopted by most countries worldwide. In 2001, the IASC was replaced by the
International Accounting Standard Board (IASB).

The IASB is an independent standard-setting body under the IFRS foundation. The objective of
IFRS foundation is “to develop a single set of high-quality, understandable, enforceable and globally
accepted financial reporting standards based upon clearly articulated principles” (see IASB website). The
new accounting standards published in a set of standards called International Financial Reporting
Standards (IFRS).

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2.3. Characteristics of IFRS standards

In the development of IFRS, the IASB emphasized on sound and clearly stated principles from
which an interpretation is important. It is also referred to as a principle-based standard. In a principle-
based standard, there are fundamental understandings about transactions and economics events which
lead any other rules established in the standard. Because it does not address every accounting issue, the
implementation of a principles-based standard requires professional judgments from accountants in
making estimation of certain events and transactions (Carmona et al., 2008). In contrary a rule-based
standard such as U.S. GAAP consists considerably more application guidance (or rules). In general, IFRS
do not give clear guidelines when distinguishing among circumstances in which different accounting
requirements are specified (Ankarath et al., 2010). This reduces the opportunities to arranging
transactions to attain particular accounting effects, as what happened at the famous accounting scandal
during year 2002 in the United States. The principle-based approach reduces the length of the text of the
IFRS which is about 2000 to 3000 pages in length, in contrast with U.S. GAAP which covers more than
20.000 pages of literatures (Ankarath et al., 2010).

From 1973 until 2000, the IASC has established International Accounting Standards (IAS). Since
the replacement of its predecessor IASC, the IASB has made some amendments to IAS by replacing some
IAS with new IFRS and proposing new IFRS on topic for which has not been covered in the previous IAS.
In broad term, IFRS refers the entire body of IASB publications including standards and interpretations
approved by the IASB and its predecessor IASC. Next to IFRS, the IASB also issued the IASB framework
which addresses accounting issues that are not stated directly in the standards. The framework is the
underlying concepts in the preparation and presentation of financial statements i.e. the objectives,
assumptions, characteristics, definitions and criteria that guide financial reporting. The framework is
referred to as the ‘conceptual framework’ and does not have the force as a standard. Thus in case of a
conflict, the requirements of IFRS prevail over the conceptual framework. The IASB revises the
conceptual framework from time to time according to the new information and future development.

As addressed in IAS 1, the information provided in financial statements should be useful to the
users and has attributes of the qualitative characteristics. In the framework, there are four principal of
qualitative characteristics: understandability, relevance, reliability and comparability. IASB acknowledges
that there is likely a trade-off between different characteristics of information. Therefore in such case, a
proper balance among these characteristics must be pursued in order to satisfy the objective of financial
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statements for example a tradeoff between providing reliable information by taking time to ensure a
right judgment in estimating the transactions and reporting relevant information in a timely manner.
Information may lack of its relevancy to the users if it is not reported in a timely manner. Information
which is subject to measurement uncertainty (e.g. the fair value of financial instruments) is difficult to
present them in a reliable way. It may be represent in a reliable way (e.g. through historical cost of
financial instruments) but not essentially relevant.

2.4. IFRS adoption

The collapsed of Enron followed by other accounting fraud cases which erupted in 2002 exposed
the shortcomings of the U.S. ‘rules-based’ standard. The rules-based approach which is common in U.S.
GAAP has been criticized, contrasting it with the principles-based standards such as IFRS. Shortly after
the major accounting scandals in the United States, a Convergence Project between IASB and the U.S.
accounting standards board i.e. Financial Accounting Standards Board (FASB) started which aims to
narrow the differences between U.S. GAAP and IFRS. In 2007, the US Securities and Exchange
Commission (SEC) allowed non-U.S. companies registered in the United States to comply with IFRS
without any necessity to reconcile with U.S. GAAP. SEC also published a proposed roadmap on IFRS
adoption for domestic U.S. companies. The assessment of these convergence milestones will determine
whether to mandate the adoption of IFRS in the United States. The decision of the adoption will be made
in 2011 (see IASB website). The U.S. involvement in the harmonization of accounting standards fosters
the global acceptance of IFRS given that the U.S. constitutes the world’s major capital market (Deegan,
2009, p. 121).

In the past few years, the international accounting standard-setting process has claimed a
number of success in achieving greater recognition and the use of IFRS. Since 2001, many countries have
required or permitted the use of IFRS. Table 1 shows the lists of countries which required some or all
companies to apply IFRS. All remaining major economics have established timelines to converge with or
adopt IFRS in the near future. In the European Union itself, IFRS were adopted in 2005 which applies to
more than 8000 companies in 30 countries (Mirza et al., 2008). This adoption noted as one of the largest
financial reporting changes in the world, as it affected numerous listed firms in the European Union.

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Table 1: Countries that have adopted IFRS
Africa Botswana, Egypt, Ghana, Kenya, Malawi, Mauritius, Mozambique, Namibia,
South Africa, Tanzania
Americas Bahamas, Barbados, Brazil (2010), Canada (2010), Chile (2009), Costa Rica,
Dominican Republic, Ecuador, Guatemala, Guyana, Haiti, Honduras, Jamaica,
Nicaragua, Panama, Peru, Trinidad and Tobago, Uruguay, Venezuela
Asia Armenia, Bahrain, Bangladesh, Georgia, Hong Kong, India (2011), Israel,
Jordan, Kazakhstan, Kuwait, Kyrgyzstan, Lebanon, Nepal, Oman, Philippines,
Qatar, Singapore, South Korea (2011), Tajikistan, United Arab Emirates.
Europe Austria, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, Croatia, Cyprus,
Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece,
Hungary, Iceland, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg,
Macedonia, Malta, Montenegro, Netherlands, Norway, Poland, Portugal,
Romania, Russia, Russia, Serbia, Slovakia, Slovenia, Spain, Sweden, Turkey,
Ukraine, United Kingdom.
Oceania Australia, Fiji, New Zealand, Papua New Guinea
Source: Wiley IFRS: practical implementation guide and workbook. John Wiley & Sons Inc. (Mirza et al., 2008).

2.5. Conclusion
The harmonization of accounting standards was started by the establishment of IASC that strives
for an improvement in financial reporting internationally. The increase in IASC’s sponsorship drew
attention of various parties on the effort of IASC to develop a single set of accounting standards to be
adopted by most countries worldwide. The major accounting scandals in the United States expose the
shortcomings of the U.S. rule-based accounting standards and therefore accelerate the acceptance of
IFRS internationally. The amount of countries which has adopted IFRS indicates the promising future of
IFRS as a single set of globally accepted accounting standards. The next section presents an overview
from international accounting research before the introduction of IFRS. The next section describes the
importance of culture in explaining differences in accounting practices / systems across countries and
how the Hofstede-Gray framework captures adequately the relationships between culture and
accounting.

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3. Relationships of culture and accounting
3.1. Introduction
The impact of culture on financial accounting has become an increasing interest to accounting
researchers. The relevance of culture on accounting practices has been a long debate particularly in the
field of international accounting (Burchell et al., 1980 and Meyer, 1986). Previous research has shown
the existence of different patterns in accounting systems internationally. One of the reasons is the
environmental factors which tend to have great impact on the development of national systems. Many
researchers have tried to identify and establish the environmental factors involved (Radebaugh, 1975;
Nair and Frank, 1980; Nobes, 1983; Doupnik and Salter, 1993). This section gives an overview of
international accounting research associated with culture prior to the Hofstede-Gray framework,
conceptualization of culture based on Hofstede (1980), a brief description of the Hofstede-Gray
framework and some attempts to refine the Hofstede-Gray framework on theoretical basis from
subsequent researchers. Other researcher such as Bik (2010) uses House et al.’ cultural dimensions1
(2004) in his cross-cultural study of assurance professionals behaviors. House et al.’ cultural dimensions
are the outcomes of 10-year research project called GLOBE (Global Leadership and Organizational
Behavior Effectiveness) by measuring cultural practice and cultural values from 62 societies.
Nevertheless, this cultural framework will not be used in this paper since it is not used as a framework in
accounting.

3.2. Prior the Hofstede-Gray framework


Culture is one factor which helps to explain the differences in accounting systems across
countries. Violet (1983) is the earliest author who explicitly recognized culture as a cause of differences
in international accounting. He examined accounting system as a social function (a product of its culture)
and therefore the success of international accounting standards (IAS) is limited by cultural variables
because cultural relativism exists even in the most basic of societies. Cultural relativism implies that one
group should not judge other group’s activities based on its criteria because the fundamental attributes
are different from one society to another (Hofstede and Hofstede, 2005). Nevertheless, Violet (1983) did
not attempt to classify different patterns of culture-specific factors which allow a better understanding
of the influence of environmental factors on accounting development.

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House et al.’ (2004) social dimensions are power distance, uncertainty avoidance, assertiveness, institutional collectivism, in-
group collectivism, future orientation, performance orientation, human orientation, and gender egalitarianism.
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Historically, comparative accounting research has two major directions in its effort on
international classification of accounting systems; they are deductive approach and inductive approach
(Gray, 1988). The deductive approach identifies relevant environmental factors and linking those to
national accounting practices. Based on judgments of different environmental factors, the international
classifications or development patterns are proposed (e.g. Mueller, 1967, 1968; Nobes 1983, 1984). The
environmental analysis by Mueller (1967) considered four categories of accounting development in
western nations with market oriented economic systems: a microeconomics pattern where accounting is
closely interrelated to national policies, a macroeconomic pattern where accounting is viewed as a
separate branch of business economics, the independent discipline approach where accounting is
viewed as a service function of business practice and the uniform accounting approach where accounting
is viewed as part of administration and control.

Mueller’s method was extended by Nobes (1983) who based his classification on an evolutionary
approach. He distinguished between business economics practice orientations under a microeconomic
based classification and government / tax / legal orientations under a macroeconomic based
classification. The major features which are used in the identification of accounting practices are the
importance of tax rules, the use of conservative valuation procedures, the strictness of historical costs
application, the making of replacement cost adjustments, the use of consolidation techniques, the
generous use of provisions, and the uniformity between companies in the application of rules. Based on
judgmental analysis of accounting systems in fourteen countries, his results however did not go beyond
providing support for either microeconomics or macroeconomics based classification.

The inductive approach starts by examining development patterns and analyzing accounting
practices and thereafter proposed explanations by referring to a variety of economic, social, political and
cultural factors (e.g. Frank, 1979; Nair and Frank, 1980). In their analysis, Nair and Frank (1980) discerned
accounting practices between measurement and disclosure practices as they assumed these practices to
have different patterns of development. Using data from Price Waterhouse, they conducted a statistical
analysis of accounting practices in forty-four countries. They identified five groups of countries in terms
of measurement practices and seven groups in terms of disclosure practices. The language variable was
used as a proxy for culture, as it was perceived to capture similarities in legal systems particularly in the
disclosure patterns. Based on a number of explanatory variables including language, they found clear
evidence that there were differences between the measurement and disclosure groupings. Nevertheless

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their hypotheses that (a) cultural and economic variables might be more closely related to disclosure
practices and (b) trading variables might be more closely related to measurement practices were not
supported.

The researches using both approaches are interesting and may provide useful explanations for
international classifications using empirical research. They established relationships, although very
general, between environmental factors and accounting patterns. Each approach notwithstanding has its
own shortcoming. The deductive approach has been criticized of its broad set of influences without
providing precise specification2. The shortcoming of inductive approach is found in its data. The Price
Waterhouse data was criticized for its suitability of purpose, misleading cases and errors (Nobes, 1992).
Nevertheless, most importantly these approaches did not provide explicit recognition on culture as an
explanatory variable but rather apparently incorporated culture in the set of identified environmental
factors.

The importance of culture was recognized in a methodological framework proposed by Harrison


and McKinnon (1986). The framework was used to evaluate the impact of culture on the form and
functioning of accounting in corporate financial reporting regulation at the nation specific level. In his
framework, culture is an essential factor in explaining how societal systems change since ‘culture
influences (1) the norms and values of such systems; and (2) the behavior of groups in their interactions
within and across systems’ (Harrison and McKinnon, 1986).

3.3. Hofstede’s cultural dimensions


Culture is a complicated topic to address because it has no exact definition, it is continuously
affecting and affected by many contextual factors and it is hard to objectify and assess (Papamarcos et
al., 2006). A research conducted by Hofstede (1980) is one of a path-breaking research in conceptualized
differences between national cultures and suggesting ways in which cultural factors may have
consequences on people and organizations. Hofstede (1980) defines culture as ‘the collective
programming of the mind which distinguishes the members of one human group from another’. He uses
the word “culture” to describe the entire societies and “sub-culture” for groups within societies. His
work appeals to many researchers in social science fields such as behavioral and organizational research.

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Nobes (1992) specified six important factors which may cause international differences between financial reporting systems:
legal systems, business ownership, stock exchanges, tax systems, profession and other factors.
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The data were collected between 1967 and 1973 and again between 1971 and 1973 from about
117.000 attitude surveys which completed by 88,000 employees at a large multinational corporation IBM
from 72 countries (reduced to 40 countries that had more than 50 responses each) in 20 languages
(Hofstede, 1980). The questionnaire which is used in the IBM study called value survey model (VSM)3 has
been revised several times for research purpose. The questions included in the VSM are related to these
following aspects: social inequality comprising the relationship with authority, the relationship between
the individual and the group, concepts of gender equality, and ways of dealing with uncertainty and
ambiguity which related to the control of emotions and aggression (Hofstede and Hofstede, 2005).
Country-level factor analysis led to the identification of four societal values dimensions along which
countries could be positioned. The four societal values (culture) dimensions are as follows:
 Large versus Small Power Distance
Power Distance is the extent to which the members in a society accept that power in organizations is
distributed unequally. People in Large Power Distance societies accept a hierarchical order in which
everybody has a place which needs no further justification. People in Small Power Distance societies
strive for power equalization and demand justification for power inequalities.
 Individualism versus Collectivism
Individualism stands for a preference for a loosely knit social framework in society wherein individuals
should take care of themselves and their immediate families only. Collectivism as its opposite stands for
a preference for a tightly knit social framework in which individuals can expect their relatives or other in-
group to look after them.
 Strong versus Weak Uncertainty Avoidance
Uncertainty Avoidance is the extent to which the members of a society feel towards uncertainty and
ambiguity. A Strong Uncertainty Avoidance society preserves rigid codes of belief and behavior and is
inflexible towards deviant ideas. Weak Uncertainty Avoidance societies maintain a more relaxed
atmosphere where practice counts more than principles and deviance is more easily tolerated.
 Masculinity versus Femininity
Masculinity refers to a preference in society for achievement, heroism, assertiveness, and material
success. Femininity, as opposite, refers to a preference for relationships, modesty, caring for the weak,
and the quality of life.

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Hofstede’s VSM is available at www.geert-hofstede.com and may be freely used for research purposes.
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3.4. The Hofstede-Gray’s Framework

Gray (1988) advanced the idea that culture might have influences on accounting practices by
exploring the extent of cultural differences identified by Hofstede (1980) may explain differences in
accounting systems. He used the societal values dimensions of Hofstede (1980) as cultural factors which
might influence accounting practices through the accounting values. He proposed specific hypothesis to
examine the form of these relationships. His proposition was the first literature which attempted to link
societal values with accounting practices in the international accounting literature (Chanchani and
MacGregor, 1999). Although he did not examine his framework on empirical basis, subsequent
researchers evaluated his framework both from a theoretical basis and empirical evidences.

Gray’s model (1988) which extends the framework of Hofstede provides an apparent link
between societal values and accounting practices. He developed a framework which links accounting
values and practices to Hofstede’s (1980) cultural dimensions. Accounting values refers to accounting
subculture of a society which directly influenced by societal values possessed by that society. On a
judgmental basis, he identified four accounting value dimensions that are reflected in a country’s
accounting system. These four accounting values and his hypotheses of the relationships between
Hofstede’s (1980) culture dimensions and accounting values are as follows (Gray, 1988):

 Professionalism versus Statutory Control:


“A preference for the exercise of individual professional judgment and the maintenance of
professional self-regulation as opposed to compliance with prescriptive legal requirements and
statutory control”. He hypothesized that “The higher a country ranks in terms of individualism and the
lower it ranks in terms of uncertainty avoidance and power distance then the more likely it is to rank
highly in terms of professionalism”.
 Uniformity versus Flexibility:
“A preference for the enforcement of uniform accounting practices between companies and for the
consistent use of such practices over time as opposed to flexibility in accordance with the perceived
circumstances of individual companies”. He hypothesized that “The higher a country ranks in terms of
uncertainty avoidance and power distance and the lower it ranks in terms of individualism then the
more likely it is to rank highly in terms of uniformity”.

17
 Conservatism versus Optimism
“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”. He hypothesized that
“The higher a country ranks in terms of uncertainty avoidance and the lower it ranks in terms of
individualism and masculinity then the more likely it is to rank highly in terms of conservatism”.
 Secrecy versus Transparency
“A 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”. He hypothesized that “The higher a country
ranks in terms of uncertainty avoidance and power distance and the lower it ranks in terms of
individualism and masculinity then the more likely it is to rank highly in terms of secrecy”.

The hypotheses of societal values and accounting values can be summarized as follows:
Table 2: relationships of accounting values with societal values
Societal values Accounting values
Professionalism Uniformity Conservatism Secrecy
Individualism Positive Negative Negative Negative
Large power distance Negative Positive n/a Positive
Strong uncertainty avoidance Negative Positive Positive Positive
Masculinity n/a n/a Positive Negative

After formulated hypotheses relating societal values to accounting values, Gray (1988) stated
that the most important societal values at the level of the accounting subcultures / values are
uncertainty avoidance and individualism. While power distance is significant to some extent and
masculinity appears to be lesser importance in the system of accounting values. Figure 2 represents the
relations of societal values, accounting values and accounting practices.
Furthermore, Gray (1988) proposed cultural area classifications of accounting systems using
combinations of accounting values. He distinguished between authority and enforcement of accounting
systems, that is, the extent to which the systems are enforced by statutory control or professional
judgments on the one hand, and the measurement and disclosure characteristics of accounting systems
on the other. He argued that accounting values professionalism and uniformity are mostly relevant to
the authority and enforcement of accounting system, while accounting values conservatism and secrecy
18
are relevant to the measurement practices used and the extent of information disclosed. On judgmental
basis, Gray (1988) developed the classification of culture areas hypothesized (see figure 1 and 2 in the
appendix). In formulating these cultural areas, he refers to the relevant correlations between value
dimensions and the resultant cluster of countries identified from the statistical analysis carried out by
Hofstede (1980).

Societal values: Professionalism / Authority and


statutory control enforcement
Individualism /
Uniormity / flexibility
collectivism
Power distance Measurement of
Uncertainty Conservatism /
assets and profits
avoidance optimism
Masculinity /
femininty Secrecy / transparency Information
disclsosure

Reinforcement Reinforcement

Figure 2: Gray’s framework: Culture and accounting systems

3.5. Evaluation of the Hofstede-Gray framework on theoretical basis


There have been some literatures that attempt to extend or refine the Hofstede-Gray framework
on a theoretical basis. Perera (1989) and Perera and Matthews (1990) suggest that accounting values
have a considerable influence on accounting practices. He provided an analysis relating accounting
values to certain aspects of accounting practices particularly in the context of developing countries’
accounting systems.
Fechner and Kilgore (1994) proposed a modified framework to explain cultural influence on
accounting. They suggested that culture dimensions (i.e. societal values) and economic factors have
moderating influence on the relationships between accounting values and accounting practices. In their
modified framework, societal values have no direct influence on accounting values which is different
from the Hofstede-Gray framework. Similarly to Gray, these subsequent studies provided no indication
of how the numerous variables in the framework may be operationalized, the extent to which they may
interact, and how statistical test might be conducted to examine the interactions between the variables
(Chanchani and MacGregor, 1999).

19
Using Germany as a case study, Heidhues and Patel (2011) criticized the Hofstede-Gray
framework as misleading and fail to enhance the understanding of differences in accounting
practices/systems. Using Hofstede’s value scores for Germany, they evaluated the graphical mapping of
Germany in cultural areas of Gray and concluded it as being imprecise and too simplistic. They apply a
‘more holistic approach’ in examining the factors that distinguished German accounting system from
other accounting models. This approach provides additional insights such as specific characteristics in
Germany accounting systems i.e. strictly confidential which has major complications with the adoption of
IFRS. They recommend that further cultural research should lie on ‘a critical examination of contextual
environments of countries rather than a focus on measurement, quantification, simplification and
categorization’ (Heidhues and Patel, 2011, p. 282).

3.6. Conclusion

Prior to the Hofstede-Gray framework, inductive and deductive approaches have been used to
explain differences in international accounting practices/systems. Both approaches are useful in
identifying some explanatory factors; nevertheless these approaches cannot be used to explain the
mechanism in the relationship between culture and differences in accounting practice/systems. The
Hofstede-Gray framework fills this gap by proposing specific hypothesis, ready to be tested, between
societal values and accounting values. Gray (1988) also developed cultural areas which help subsequent
researchers in choosing country samples and to test his hypotheses empirically. Following researchers
attempt to refine the Hofstede-Gray framework and criticized the framework as being imprecise and too
simplistic. The Hofstede-Gray framework is nevertheless a useful tool in understanding the influence of
culture on accounting practices/systems. The next section provides overview of empirical studies that
use the Hofstede-Gray framework.

20
4. Findings

4.1. Introduction
There are only limited amounts of empirical research which specifically study cultural
implications using the Hofstede-Gray framework. This section provides empirical studies that use the
Hofstede-Gray framework. The first sub-section briefly discusses the empirical research that did not use
IAS or IFRS in their research instrument. The second sub-section provides an overview of the empirical
research that incorporated IAS or IFRS in their research instrument. The researchers try to simulate the
implementation of IFRS on individual professional accountants as the unit of analysis by incorporating
the financial reporting rules based on IAS or IFRS in their research instrument.
Until now, there is no empirical study available that examines the influence of culture after the
implementation of IFRS due to the recentness of IFRS adoption. Therefore analysis is only possible by
comparing empirical research between using and not using IAS or IFRS within their research instrument.
Table 1 and 2 in the appendix provides summary of empirical studies used in this section. For
convenience sake, the sub-section will be divided based on three areas i.e. authority and enforcement,
measurement and disclosure. Comparison based on these three areas will be made in the analysis in
order to examine the implication of including IAS or IFRS in the research instrument on these three
areas. Authority and enforcement of accounting practices are related to accounting values
professionalism / statutory control and uniformity / flexibility. Measurements in accounting practices are
related to accounting value of conservatism. Disclosure practices in accounting are related to accounting
value of secrecy.

4.2. No IAS / IFRS in research design

4.2.1. Authority and enforcement


Robert and Salter (1999) examine the drivers behind accountants’ attitudes towards uniformity
in accounting rules. They hypothesized as follows: (1) ‘The strength of desire for a single mandatory
treatment for an accounting issue in a country is related to the culture of a country and (2) The strength
of desire for a single mandatory treatment for an accounting issue in a country is positively related to the

importance of the stock market in that country’ (Robert and Salter, 1999, p. 6) . They administered a
questionnaire comprised of 14 accounting issues to the sample of auditors employed in the Big 6

21
accounting firms4 in 23 countries5. The countries were selected based on the size of stock markets at the
end of 1993. Each respondent was asked to respond with a yes/no on the statement whether they
wanted a single mandatory treatment respectively for 14 different accounting issues6. The dependent
variable is the response of whether or not a single mandatory method is preferred. The independent
variables consist of the importance of capital market (MKTCAP) and two societal culture dimensions
(CULT 1 and CULT 2). CULT 1 has positive loadings on power distance and negative loadings on
individualism while CULT 2 has positive loadings for both uncertainty avoidance and masculinity.
The results show that the respondents tend to favor a mandatory single treatment in 66% of the
cases analyzed. Related to the first hypothesis, CULT 1 appears to be positively related to preferences for
a single treatment but CULT 2 is negatively related which is in contrast to the expectation. The result of
CULT 1 is consistent with Gray’s (1988) hypothesis that uniformity has a positive relation to power
distance and a negative relation to individualism. In terms of CULT 2, the result is contrary to Gray’s
uniformity hypothesis. Robert and Salter (1999) suggest that the involvement of masculinity component
in CULT2 may distort the relation between uncertainty avoidance and uniformity. Gray (1988) did not
propose any relation between masculinity and uniformity. Moreover, the results provide strong support
related to the second hypothesis means that auditors prefer a single treatment as the role of stock
markets as a source of finance increases. They concluded that the preference of a single mandatory
treatment in accounting is influenced by certain aspects of culture and the importance of stock markets.

4.2.2. Measurement practices


Schultz and Lopez (2001) examine the consistency in the judgments made by accountants in the
United States, France and Germany given same economic facts and similar financial reporting standards.
They hypothesized that (1) ‘American accountants will resolve warranty estimates lower dollar
magnitudes than individual French and German accountants, (2) The warranty estimates of participants

4
The Big 6 accounting firms are Arthur Andersen, Ernst & Young, Coopers and Lybrand, Deloitte & Touche, Peat Marwick
Mitchell (now is KPMG) and Price Waterhouse.

5
The countries included in the sample are Australia, Austria, Belgium, Brazil, Canada, Denmark, France, Germany, Hong Kong,
Italy, Japan, Korea, Malaysia, Mexico, Netherlands, Singapore, Spain, Sweden, Switzerland, Taiwan, Thailand, U.K., and the U.S.

6
The specific issues concern of ‘the initial valuation of property, plant or equipment acquired in exchange for a similar asset;
valuation of investment properties; the correction of fundamental errors, omissions or accounting policy changes; revenue
recognition on construction contracts; the benefit valuation method used when valuing retirement benefits; gains or losses on
long-term monetary items due to exchange rate changes; the exchange rate used to translate income statements; accounts of
subsidiaries located in countries with hyper-inflation; development costs; inventory flow assumptions; borrowing costs on assets
under construction; merger accounting method; positive goodwill; and, negative goodwill’ (Robert and Salter, 1999, p. 9).
22
that were given a low to high order of monetary amounts will be greater for French than German
accountants and greater for German than American accountants’ (Schultz and Lopez, 2001, p. 8-9).
Based on the score of uncertainty avoidance of each country, they speculate that French accountants
will behave more conservatively (i.e. more cautious in their warranty expense estimation and therefore
provide higher number) than German accountants and German accountants will be more conservative
than American accountants respectively.
The samples are professional accountants of a large international accounting firm from each of
the three countries. The respondents were presented with two cases of manufacturing companies and
were asked to calculate the amount of warranty expense they would recognize. Each set of cases
included three levels of probability (i.e. low, medium and high) and two monetary amounts (i.e. large
and small) and each respondent should exercise judgment for each combination of probability level and
monetary amount. In total, each respondent made six judgments for every case.
The results provide support for both hypotheses that French and German accountants recognize
higher amount of warranty estimates (i.e. more cautious or conservative) than the accountants in the
United States. The outcomes suggest that accountants in high uncertainty avoidance countries are more
sensitive to framing effects (i.e. the level of probability and monetary amount) than those in low
uncertainty avoidance. They concluded that the cultural dimension of uncertainty avoidance influences
the process of judgment-making of professional accountants even if same economic facts and uniform
accounting standards are given.

4.2.3. Disclosure practices


Gray and Vint (1995), Zarzeski (1996), Wingate (1997), Jaggi and Low (2000) and Hope (2003) are
empirical studies that examine only the secrecy hypothesis of Gray (1988). All these studies use countries
as unit of analysis. Gray and Vint (1995) regress mean disclosure scores of 27 countries as the dependent
variable and Hofstede’s (1980) societal values indices as independent variables. The mean disclosure
scores are obtained from a database of a project conducted by Gray et al. (1984). The results show that
masculinity and individualism have a positive relation to the amount of information disclosed and power
distance and uncertainty avoidance have negative relation to the amount of information disclosed.
Zarzeski (1996) examines the influence of both culture and market forces which are measured by
foreign sales, debt ratio and size of a company on disclosure practice. The results provide direction
consistent with Gray’s hypothesis for uncertainty avoidance, masculinity and individualism. The results
indicated that the relation between uncertainty avoidance and disclosure depends upon the
23
internationality of the firm. Uncertainty avoidance has more influence on disclosure when the firm is less
international dependent. He concludes that ‘local firms disclose more like their culture than do
international firms’ (Zarzeski, 1996, p. 35)
Wingate (1997) investigates whether culture has influence on the required amount of disclosure
in 39 sample countries. Using CIFAR’s7 1991disclosure index as the dependent variable and Hofstede’s
cultural indices, she found that uncertainty avoidance and individualism are significantly related to the
disclosure index.
Jaggi and Low (2000) construct an international financial disclosure model which involved
culture, legal systems and accounting disclosures and test it by using CIFAR’s 1993 disclosure index as
dependent variable. Independent variables comprise Hofstede’s indices, legal system and market force
variables (i.e. firm size, debt ratio and market share). Their sample consists of three common law
countries and three code law countries. Four societal values have a significant relation to disclosure in
code law countries but only individualism is in the expected direction. For common law countries, none
of the societal values has significant influence on disclosure. In conformity to their expectation, cultural
values have more influence than market forces on disclosure in code law countries, while in common law
countries market forces dominate culture in influencing disclosure. Jaggi and Low (2000) criticize Gray’s
secrecy hypothesis as invalid and Hofstede’s indices as outdated.
Hope (2000) continued the Jaggi and Low (2000) study using CIFAR’s disclosure indices from
1993 until 1995 as the dependent variable. Using a larger sample from 39 countries, he found a
significant relation of societal values individualism and masculinity to disclosure, but the direction
masculinity is opposite to expectation. When he separated his analysis into common law and code law
countries, he got mixed results contrary to Jaggi and Low (2000). Nonetheless, he concludes that culture
still has explanatory power on disclosure levels.

4.2.4. Other Findings


Eddie (1990) tests all four hypotheses of the Hofstede-Gray framework for thirteen countries of
the Asia-Pacific region. He used Hofstede’s index score (1980) for societal values dimension and
constructed a subjective index for Gray’s values based on information available in 1991. His empirical
study confirmed all predicted signs of association between societal values and accounting values.
Nevertheless, the results should be viewed with caution because his method of measurement was not

7
CIFAR stands for Center for International Financial Analysis and Research.
24
rigorous, the index were subjectively determined, and he used two different sets of data based on
information from twenty years apart (Chanchani and Macgregor, 1998; Finch, 2007).
Salter and Niswander (1995) operationalized Gray’s hypotheses using collected data from 29
countries. A variety of cultures in terms of language, geographical location, colonial antecedents, and
economic development were included in their samples. They found significant support only for six out of
thirteen of Gray’s predicted relationships between societal values dimensions and accounting values.
The correlation between the uncertainty avoidance dimension and uniformity is the only significant
relationship that is in contrast to Gray’s proposition.

4.3. IAS / IFRS in research design

4.3.1. Authority and enforcement


No empirical study has used the Hofstede-Gray framework to examine cultural influence on the
implementation of IFRS in terms of authority and enforcement by incorporating IAS or IFRS in its
research instrument. In terms of IFRS enforcement, not every company that claims compliance to IAS
standards (predecessor of IFRS) in financial reporting is actually in full compliance with IAS (Street and
Bryant, 2000; Asbaugh and Pincus, 2001; Chatham, 2008). The IASB had made some effort to reduce this
possibility in IAS 1 by compelling companies to disclose any material departure from IAS and not to claim
that they are in compliance with IAS unless it is full compliance. Some researchers argued that the level
of enforcement of accounting standards is as necessary as the standards themselves (e.g. Hope, 2003).

Some empirical studies suggest that weak enforcement in the IFRS implementation have caused
lower degree of compatibility and comparability and thus lower quality of financial reports (Byard et al.,
2009; Armstrong et al., 2010). Byard et al. (2009) examine the impact of the mandatory adoption of IFRS
in the European Union on analysts’ information environment8. Their results demonstrate that mandatory
adoption of IFRS enhances analysts’ information environment only when the implementation is
substantial and rigorously enforced. Armstrong et al. (2010) investigate the European equity market
reaction to sixteen events associated with the adoption of IFRS in Europe. Their findings demonstrate a
substantial negative reaction for firms located in code law countries which are consistent with investors’
concern over weaker IFRS enforcement in those countries.

8
Analysts’ information environment was measured by forecast errors, forecast dispersion and analyst following (Byard et al.,
2009).
25
Nevertheless, given that these empirical literatures are useful in revealing and identifying the
importance of rigorous enforcement of IFRS standards, it is still not clear whether accounting values are
the drivers behind these international differences. This area still needs further investigation.

4.3.2. Measurement practices


An Empirical study from Doupnik and Richter (2004) investigated the effect of national culture on
the interpretation of “in context” verbal probability expressions. The hypotheses were tested by using a
survey of accountants in Germany and the United States. They made three hypotheses as follows: (1)
German accountants will assign a higher numerical probability than U.S. accountants to positively framed
verbal probability expressions associated with assets recognition and increases in net income, (2)
German accountants will assign a lower numerical probability than U.S. accountants to positively framed
verbal probability expressions associated with liabilities recognition and decreases in net income, (3)
German accountants will assign a higher numerical probability than U.S. accountants to negatively
framed verbal probability expressions associated with assets recognition and increases in net income.

To test the hypotheses, Doupnik and Richter (2004) selected 14 excerpts from IAS containing 16
verbal probability expressions and included the excerpts in a research instrument. Professional
accountants in the U.S. and Germany were asked to assign a numerical probability from 0% to 100% to
each verbal probability expression. Eleven of the expressions are positively framed (e.g. likely, sufficient
certainty) and five of the expressions are negatively framed (e.g. insufficient certainty). The results
provide support for the first and second hypotheses but not for the third hypothesis. The results were
mixed in terms of negatively framed expressions. These outcomes show that culture affects the
interpretation of positively framed verbal probability expressions9. This study provides evidence that
through accounting value of conservatism, culture affects the interpretation of probability expressions in
IAS by U.S. and German accountants. The outcomes are consistent with Gray’s conservatism hypothesis
(1988) which posits Germanic (Germany) as conservative countries and Anglo (United States) as optimist
countries (see figure 2 in the appendix).

An empirical study from Doupnik and Ricio (2006) examine whether differences in culture cause
accountants in different countries to interpret and apply the same accounting standards differently. To
do that, they use the same approach as Doupnik and Richter (2004). Doupnik and Ricio (2006) asked a

9
Most probability expressions used in IAS are positively framed (Doupnik and Richter, 2004).
26
sample of accountants in the U.S. and Brazil to interpret verbal probability expressions used in IFRS as
thresholds for both recognition and disclosure decisions. In Gray’s (1988) cultural areas, Brazil is
categorized in the more developed Latin area that scores high on conservatism (see figure 2 in the
appendix). They hypothesized that (1) Brazilian accountants will assign a higher numerical probability to
verbal probability expressions that determine the recognition of items that increase net income than
American accountants and (2) Brazilian accountants will assign a lower numerical probability to verbal
probability expressions that determine the recognition of items that decrease income than American
accountants.

Hofstede’s VSM was included in the research instrument to ensure that the U.S. and Brazilian
accountants’ samples differed on Hofstede’s cultural values and in the direction expected. To test the
hypothesis, Doupnik and Ricio (2006) selected 11 excerpts from IFRS containing five different verbal
probability expressions. From the eleven excerpts being used, 6 excerpts are used to test the first
hypothesis (H1) and 3 excerpts to test the second hypothesis (H2). The other two excerpts were used to
test hypothesis related to another topic i.e. disclosure (secrecy). The respondents were asked to assign a
numerical probability expression from 0% to 100% to each verbal probability expression. Doupnik and
Ricio (2006) did not make any distinction in framing verbal probability expression in such a way as
Doupnik and Richter (2004) did.

The differences in VSM cultural values scores from both samples provide direction which is
consistent with Hofstede’s scores except for masculinity. Their sample of Brazilian accountants has
higher scores on power distance and uncertainty avoidance and a lower score on individualism than the
sample of U.S. accountants. Nevertheless, due to Gray’s judgments in his proposition that masculinity
has only a weak relation with the accounting values of conservatism, they concluded that the cultural
value scores obtained from the respondents are consistent with their assumptions that Brazil is more
conservative than the United States.

The outcomes provide significant evidence with regard to H1 but not for H2. The differences in
the mean probabilities assigned by the two groups are in the predicted direction for four of the six
excerpts being used to test H1 and indicate significant differences between Brazilian and the U.S.
accountants’ response to the recognition of items that increase net income. Adversely, all probability
expressions related to H2 are not statistically significant and in the opposite direction of what was
predicted.

27
Tsakumis (2007) examines the influence of national culture on accountant’s application of
accounting rules using profession accountants from Greece and the U.S. To test the influence of
accounting value conservatism, he hypothesized that ‘Greek accountants are more likely to recognize
contingent liabilities and less likely to recognize contingent assets than U.S. accountants’ (Tsakumis,
2007, p.33). In Gray’s cultural areas (1988) Anglo countries (the U.S.) score high on optimism and Near
Eastern countries (Greece) rank high on conservatism (see figure 2 in the appendix).

The independent variables of this hypothesis consist of national culture (Greek versus U.S.) and
the nature of contingency (assets versus liability) while dependent variables consist of participants’
recognition (conservatism) and disclosure decisions (secrecy). Each participant received questionnaires
in which two litigation cases were presented and guidelines of an accounting standard that they were
asked to apply in making financial judgments. Each litigation scenario comprises of one recognition
scenario to test the conservatism hypothesis and one disclosure scenario to test another hypothesis
related to secrecy. Conservatism was apprehended as a decision to recognize or not recognize a
contingent asset or liability (and respective gain or loss) and measured on a 10-point scale. The
accounting standard in the questionnaire was formulated after IAS 37 provisions, contingent liabilities
and contingent assets, which addresses both measurement and disclosure of accounting information.
Hofstede’s VSM was included in the questionnaire in order to calculate scores for each subject group’s
societal values dimensions. The research instrument attempted to control for factors other than culture
such as current accounting practice, taxation and litigation risk.

Related to the conservatism hypothesis, the results are insignificant for both independent
variables indicating no support for the hypothesis. In contrast to expectation, the direction in mean
differences indicates that Greek accountants are less conservative than U.S. accountants although not in
a statistically significant level. Tsakumis (2007) further analyzed about this phenomenon by including
additional test in his research instrument. The respondents were asked to indicate their agreement with
six statements associated with conservatism. Three significant differences in the mean responses were
found. The results indicate that U.S. accountants agreed mostly with statements related to recognizing
expenses, losses and liabilities earlier and at higher amounts than Greek accountants. This additional test
provides further confirmation of U.S. participants’ conservatism.

28
4.3.3. Disclosure practices
Doupnik and Ricio (2006) test hypothesis related to the level of secrecy of U.S. and Brazilian
accountants. To test their hypothesis, they use verbal probability expressions in IAS 37 (i.e. remote and
probable) regarding contingent liabilities and contingent assets. The professional accountants both from
the U.S. and Brazil were asked to assign a numerical probability on a scale 0% - 100% to each probability
expression. They hypothesized that Brazilian accountants will assign a higher numerical probability to
verbal probability expressions that determine the disclosure of an item than American accountants.

The results are consistent with the hypothesis. The mean difference assigned to the term
“remote” related to contingent liability is highly significant and to the term “probable” related to
contingent asset is significant. These outcomes indicate significant differences between Brazilian and
U.S. accountants across two expressions related to the hypothesis of secrecy. Consistent with Gray’s
(1988) proposition, Brazilian accountants score higher than American accountants in the level of secrecy
and are less likely to provide disclosures.

The second study comes from Tsakumis (2007) which examines whether Greek accountants are
more likely to exhibit secrecy compared to U.S. accountants. Greece ranks high in secrecy (Gray, 1988)
means that Greek accountants are less likely to disclose the existence of both liabilities and assets in
order to keep inside parties’ confidentiality. Tsakumis (2007) hypothesized that ‘Greek accountants are
less likely to disclose the existence of contingent liabilities and contingent assets than U.S. accountants’
(Tsakumis, 2007, p. 33). Using the same participants and scenarios, as what has been mentioned in the
previous sub-section, the results demonstrate that both independent variables i.e. ‘culture’ and ‘nature
of contingency’ have significant effects on participants’ disclosure decisions as the dependent variable.
The outcomes indicate that ‘culture’ main effect is significant, providing strong support for the
hypothesis. The significant mean differences from a within-groups t-test reveal that Greek accountants
are less likely to disclose both contingent assets and contingent liabilities. These results confirmed the
hypothesis with regard to cultural influence on accounting disclosure practices.

29
4.3.4. Other findings
Ding et al. (2004) examine the role of culture in the way national accounting systems of 52
sample countries10 may differ from IAS. They claim that the difference between national GAAP and IAS
can be classified into: (1) divergence if national GAAP prescribes a different method than IAS and (2)
absence if national GAAP does not cover an accounting issue regulated by IAS. Their study focuses on the
cultural values of each country as the explanatory variables for the differences between each national
GAAP and IAS. With regard to divergence, they hypothesized that a country with a higher level of
individualism and uncertainty avoidance and a lower level of masculinity and power distance is likely to
have accounting standards that diverge from IAS. In terms of absence, they hypothesized that a country
with a higher level of masculinity and uncertainty avoidance and a higher level of individualism and
power distance is likely to have accounting standards that are less extensive than IAS.

The results show that societal values of individualism, power distance and uncertainty avoidance
are significant in explaining divergence from IAS while the level of absence appears to be less related to
cultural factors. Ding et al. (2004) argued that the level of absence is more likely related to economic
development and capital market issues11. They concluded that discrepancy from IAS is ‘not exclusively
driven by contractual motives or a claimed technical superiority but also by diversity in cultural factors’
(Ding et al., 2004, p. 2).

10
The samples of 52 countries are selected based on the study from “GAAP 2001” (Nobes, 2001) executed by several
international accounting firms.

11
An analysis of the items included in IAS but not in national rules shows that these items are depending more on the level of
economic development and the size of capital market rather than national culture (Ding et al, 2004).
30
5. Analysis
5.1. Introduction
In this section, the previous findings will be discussed and relates them to the three sub-
questions in the first chapter. Herewith, cultural impacts are the focus while IFRS can be seen as an
instrument included in the research design to examine if culture still plays a role in the accounting
practices / systems.

5.2. Analysis of findings


In terms of authority and enforcement, no judgment can be made whether culture has an
influence on the implementation of IFRS. Previous findings from Robert and Salter (1999) show that
power distance and individualism dimensions influence the desirability of auditors to have a single
mandatory treatment of accounting issues. It implies that, based on Gray’s (1988) proposition,
enforcement of a set of uniform accounting standards has a higher chance to succeed in a society with
large power distance and a higher level of individualism. Whether societal and accounting values
influence the authority of professional assurance and the enforcement of IFRS standards on the
implementation of IFRS is not clear yet. Due to the lack of empirical research related to accounting
values of professionalism and uniformity by in the area of authority and enforcement of IFRS standards,
cultural influences on authority and enforcement of IFRS cannot be determined. Perhaps because
authority and enforcement of IFRS impacted by variety of institutional consequences (see figure 1
chapter 1) which makes it to control these effects while investigates the influence of culture dimensions.
In terms of conservatism, Schultz and Lopez (1999) find support for the conservatism hypothesis
and when IFRS is included in the research design, Doupnik and Richter (2004) also find support for
conservatism hypothesis. Doupnik and Ricio (2006) find that conservatism influences accountant’s
judgments in determination of items that increase net income but not for items that decrease net
income, indicates the weakening of cultural impacts in measurement practices. Tsakumis (2007) finds no
support for the influence of culture in the application of a common contingency recognition rule. An
interesting fact appears here that the more recent the study is, the less support is found in the influence
of conservatism on accounting practice with regards to measurement. Societal and accounting values
have influences on differences in the application of accounting measurements but declined when IFRS is
implemented. These empirical studies (i.e. Doupnik and Richter, 2004; Doupnik and Ricio, 2006;
Tsakumis, 2007) suggest that conservatism still plays a role in the decision-making of accountants around

31
the world nevertheless in a lesser extent. This is good news for proponents of accounting standards
harmonization. Nevertheless the generalization of these results to other cultural areas and decision
contexts should be taken with caution because institutional consequences, instead of culture, might be
the reason behind the weakening of conservatism bias in accountants’ judgments. Figure 1 in chapter 1
shows that accounting practices / systems can be influenced through accounting values and institutional
consequences.
In terms of secrecy, five empirical studies without IFRS in the research design find support for
Gray’s secrecy hypothesis however not for every societal value. Every empirical study found different
results for each societal value except for individualism which is always found significantly related to
secrecy. When IFRS is included, both empirical studies (i.e. Doupnik and Ricio, 2006; Tsakumis, 2007) find
support for influence of secrecy on accountant’s decision of disclosure levels. Societal and accounting
values have strong influence on the decision of disclosing information even when IFRS applied.
Eddie (1990) found support for all four hypotheses while Salter and Niswander (1995) found
significant correlation for 6 from 13 relationships in Gray’s hypotheses indicating that some aspects of
Gray’s proposition were valid. Ding et al. (2004), which attempts to understand the divergence between
national GAAP and IAS, found that culture plays a role in the level of divergence but not in the level of
absence. Their result provides more evidence that culture has impact on accounting systems and it will
result in differences in accounting practices across countries. Therefore culture is suspected to affect the
implementation of a uniform set of accounting standards such as IFRS.
The Hofstede-Gray framework helps to simplify analysis of cultural influence on accounting
practice or systems through accounting values. Nevertheless it has both positive and negative
implication; positive because it helps researchers in understanding how culture might impact accounting
practice/systems and negative because it oversimplifies the impact of culture just through these four
culture dimensions and four accounting values.
5.3. Conclusion
No conclusion can be drawn on whether culture has influence on the area of authority and
enforcement of IFRS. This area still needs further research. Cultural dimensions still have influence,
although in a lesser extent, on the application of measurement in IFRS through accounting value of
conservatism. Current empirical studies find strong support of the influence of cultural dimensions on
disclosure practices through accounting value of secrecy. After reviewing some empirical evidences, it
can be anticipated that culture is still playing a role on accounting practices even when IFRS is applied.

32
6. Conclusion

Recall the research question: Does culture have an influence on accounting practices especially
IFRS practices?, it can be concluded that culture, to a certain extent, have an influence on the practices
of IFRS, particularly in disclosure practices. According to the recent empirical studies that involved IFRS
within their research design, culture is likely to influence the level of information disclosed, through
accounting value secrecy, on the IFRS practices. With regards to measurement practices, culture,
through accounting value conservatism, is expected to have less influence on the practice of IFRS,
suggested from a recent study from Tsakumis (2007) that found no support for conservatism hypothesis.
However, it should be noted that the same study using different sample may derive different results.
Institutional consequences such as capital markets and legal systems may be other influencing factors
that explain insignificant mean response differences in accountants’ attitudes of Tsakumis (2007) study.
Conclusion cannot be taken with regards to authority and enforcement and therefore it is important for
future research to investigate the influence of culture in the authority and enforcement of IFRS.

By reviewing recent empirical literatures, this paper demonstrates the importance of culture in
financial reporting practices/systems. A strand of accounting literatures are available with regards to
economic consequences of IFRS adoption i.e. lowering cost of capital and improved market efficiency
(Karamanou et al. 2005; Daske et al., 2008; Guggiola, 2010). It seems that more attentions are given to
the consequences of IFRS rather than investigating the cause of different degrees of compliance across
countries that adopted IFRS.

Mandatory adoption of IFRS in Europe gives access to investigate whether culture still plays a
role in the financial reporting practices under a uniform set of accounting standards. Therefore more
effort is still needed, in the form of empirical studies, from international accounting researchers to
understand how culture influences accounting practices/systems. This can be an interesting research
topic for future master and post-doctoral students to conduct an empirical research related to this field.

33
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Appendix
Figure 1: Accounting values related to authority and enforcement of countries’ accounting systems

Figure 2: Accounting values related to measurement and disclosure of countries’ accounting systems

38
Table 1: No IAS/IFRS in research design
Unit of Independent Dependent # of Results
analysis variables variables countries
Uniformity
Robert and Individual Cultural The 23 Support for Gray’s uniformity
Salter (1999) dimensions desirability hypothesis for PD and IND
Market capital of a single
accounting
standard
Conservatism
Schultz and Individual 3 levels of The amount 3 Support for Gray’s conservatism
Lopez (2001) probability of warranty hypothesis
2 monetary expense
amounts
Secrecy
Gray and Countries Cultural Disclosure 27 Supported all components of
Vint (1995) dimensions index Grey’s secrecy hypothesis

Zarzeski Countries Cultural Disclosure 7 Support for Gray’s secrecy


(1996) dimensions index hypothesis related to IND, UA and
MASC components; PD is
significant but in opposite direction
Wingate Countries Cultural Disclosure 39 Support for Gray’s secrecy
(1997) dimensions index hypothesis related to IND and UA
components; PD and MASC are
insignificant
Jaggi and Countries Cultural Disclosure 6 Support for Gray’s secrecy
Low (2000) dimensions index hypothesis related to IND
Legal system component; PD and MASC are
Market force significant but in opposite
direction; UA is insignificant
Hope (2003) Countries Cultural Disclosure 39 Support for Gray’s secrecy
dimensions index hypothesis related to IND and UA
Legal system (only if UA and IND in model);
MASC is significant but in opposite
direction; PD and UA(if all
dimensions included) are
insignificant
Other Findings
Eddie (1990) Countries Cultural AS attributes 13 Supported all Gray’s hypotheses
dimensions
Salter and Countries Cultural AS attributes 29 Support 6 of 13 Gray’s predicted
Niswander dimensions relationships:
(1995) Market IndSec; UAPro, Uni, Con, Sec;
capitalization MASCCon
Tax rate One significant relationship
contrary to Gray’s proposition:
UAUni
Adapted from A critical review of tests of Gray’s theory of cultural relevance and suggestions for future research. Doupnik and
Tsakumis (2004).

39
Table 2: IAS / IFRS in research instrument

Unit of Independent Dependent # of Results


analysis variables variables countries
Conservatism
Doupnik and Individual “in context” Interpretation 2 Support for Gray’s conservatism
Richter verbal of verbal hypotheses in that German
(2004) probability probability accountants show conservatism
expressions expressions bias in interpreting positively
used in IFRS framed probability expressions
Doupnik and Individual verbal Interpretation 2 Support for Gray’s conservatism
Ricio (2006) probability of verbal hypotheses in that Brazilian
expressions probability accountants show conservatism
used in IFRS expressions bias in determining items that
increase net income but not for
decrease net income
Tsakumis Individual National Decisions 2 No support for Gray’s
(2007) culture whether to conservatism hypothesis.
Nature of recognize Contrary to expectation, mean
contingency contingent differences indicates that Greek
asset or accountants are than U.S.
liability accountants
Secrecy
Doupnik and Individual verbal Interpretation 2 Support for Gray’s secrecy
Ricio (2006) probability of probability hypothesis that Brazilian
expressions expressions accountants are less likely to
used in IFRS that provide disclosure of an item
determine than American accountants
disclosure of
an item
Tsakumis Individual National Decisions 2 Support for Gray’s secrecy
(2007) culture whether to hypothesis in that Greek
Nature of disclose accountants are less likely to
contingency contingent disclose the existence of both
asset or contingent assets and liabilities
liability than U.S. accountants
Other findings
Ding et al. Countries Culture Divergence/ 52 Level of divergence is related to
(2004) dimensions absence/ culture dimensions IND, PD and
conformity UA while the level of absence is
scores more related to economic
development and capital market.

Notes:
AS = Accounting System PD = Power Distance Pro = Professionalism
IND = Individualism MASC = Masculinity Uni = Uniformity
UA = Uncertainty Avoidance Con = Conservatism Sec = Secrecy

40

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