Culture has been described as having omnipresent influence on accounting practice via norms and principles held by different members of accounting community. Diverse cultural groups in accounting of the world have resulted in different judgments and interpretations of accounting concepts and relationships. The cultural relativism of accounting has a greater impact on the constant judgments and understanding in the applications of auditing and accounting principles.
Therefore, understanding diverse cultures around the world plays a key role in adoption and practice of accounting principles and concepts for various organizations. In the present world, societies, cultures, and economies become incorporated via trade, communication, and migration. Because of the increasing globalization, people from different cultures integrate these cultures into their businesses hence transforming them to be inclusive. Therefore, before an individual opens a business in a different country, for instance, understanding of people’s, preferences and tastes is paramount as dictated by their diverse cultures. The paper will examine how different cultures around the world affect accounting standards and concepts and how the aspect of globalization affects it. The paper will further explore international accounting standards and the challenges it constantly faces before established standards are put in place (Gray, 1988).
Culture and Accounting
Understanding the effects of culture on accounting and accounting principles will be important to comprehend the four value perspectives put forward by Geert Hofstede, who was a Dutch psychologist. The psychologist identified four perspectives that evaluated culture, which include large versus small distance influence, masculinity versus feminity, strong versus weak uncertainty, and individualism versus collectivism.
Large versus Small Power Influence
The key aspect addressed by this value dimension is how the society treats cases of inequalities among the different people having different cultures. An instance is a country like India, which has large power distance, where its citizens are glued to caste system, with which they grew up and have no alternative but to stay in the system. A nation like United States has small distance power in which everyone is equal and has the potential to do anything (Gray, 1988).
Individualism versus Collectivism
This value dimension addresses the aspect of degree of interdependence a society sustains among its people. It concerns to individual’s self-concept “I” and “We”. The U.S has individualistic kind of culture, where the needs of an individual are valued more than that of the whole. In cultures that exist in Eastern Asia, especially Japan values the needs of majority more than that of individual.
Masculinity versus Femininity
The value dimension addresses the manner in which the society assigns social roles to the sexes. A typical example of a masculine nation is the United States where attributes such as ambition, wealth, competitiveness, and assertiveness are valued. In Japan, for example, people value femininity because they struggle for quality of life and relationships.
Strong versus Weak Uncertainty Avoidance
The value dimension significantly addresses how society responds to the aspect that time only runs one way and that the future is uncertain, and whether it attempts to manage the future or just leave it happen. Eastern Asia cultures have strong uncertainty avoidance since they prefer unambiguous rules and structured activities. In the United States, in order to accommodate those who do not have, one must be able to risk everything in life.
Therefore, it is evident that societal values have a greater impact on accounting principles and standards. Gray (1988) proposed that it would be important to look at accounting values in relation to practice and literature; uniformity versus flexibility, secrecy versus transparency, professionalism versus statutory control, and conservatism versus optimism. Uniformity versus flexibility entails preference of uniformity of accounting principles between firms as opposed to different practices between firms.
Professionalism versus statutory control prefers an accounting system that practice professional self-regulation and judgment, as opposed to the state control. Secrecy versus transparency prefers firms to have confidentiality, as opposed to a more publicly and open accounting system. Conservatism versus optimism prefers a system that undertakes its activities cautiously to be conscious of the future events, as opposed to uncertain approaches (Baydoun &Willett, 2009).
Globalization has greatly impacted every culture in the world because of aspects of economies and societies. Different cultures have resulted in different accounting systems in the world. Different nations have developed and implemented their own accounting standards, however, different regions and individual countries have combined to form their individual accounting practices as they interact. International standards are inextricably related to globalization issue that is influencing all the economies (Gray, 1988). Certainly, the availability of accounting information comprises an integral and essential input to the continuation and acceleration towards uniform accounting system recognized globally.
International Accounting Standards
In practice, in relation to culture and accounting standards, multi-national corporations need to establish and implement international standards. For a long time, financial reporting system of many nations has been guided by national standards that control its operations. The accounting community globally has agreed that there is a need for official and uniform accounting standards to make sure that there is an element of reliability and significance of financial information. Apart from individual country’s national standards; accounting professionals, educators, and officials have emphasized the need for international standards (Gray, 1988). Each company is required to report their figures in line with each nation’s established standards. However, the challenge arises when different accounting standards of the nations they operate are collided. Aspects of transparency and how diverse accounts must be treated and labeled are forwarded. It plays a key role, making it hard for any firm to compromise and satisfy all groups involved. Whilst building up an established set of international accounting standards has taken long time in making, legal and political as well as cultural diversities had complicated the whole process.
Therefore, the role of cultural diversity in development of various accounting practices and systems has been a major concern in the accounting community. With the increasing world efforts towards a set of uniform and constant accounting standards, the impacts of culture on the application and interpretation of accounting aspect promoted the efforts.
Culture has been found to determine the way in which institutions are governed and managed, the behavior of individuals within these institutions as well as how individuals reason. Therefore, the result of the decision process and judgment is directly linked to the type of culture prevailing at these institutions (Chanchani &Willett, 2011).
Gray proposed that accounting preexists as a subculture within a wider national culture or social system. For instance, for one to qualify as a professional accountant, one needs specific education and work experience. This is because accountants are treated as independent and separate profession within the wider society. The accounting education and training indoctrinate one with values and attitudes that are unique to the particular culture existing in that institution. These accounting attitudes and values, which constitute accounting subculture, have influence on the enforcement of accounting standards and authority for as well as system’s disclosure and evaluation of characteristics. Furthermore, culture interacts in a complex manner with a particular nation’s institutional structure like the financing, political, and legal system influence accounting system and practice (Baydoun &Willett, 2009).
With the present efforts by the International Accounting Standards Board (IASB) to harmonize national accounting standards to uniform global financial reporting standards, the aspect of reduction in diversity of accounting comparability and practice of accounting information have become significant. This, however, has been undermined by the different accounting subcultures that exist in different nations. Even if nations adopt single financial reporting standards, there still exist differences in the application of these accounting standards by individual accountants that are guided by different cultural factors.
Religion as a culture has been observed to have some influences on accounting reporting practices of a given country. This is because religion transcends national borders. For instance, Islamic cultures, which are present in many nations, have classically failed to adopt “western” accounting practices and standards. This has made adoption of single accounting system difficult. Therefore, religion being one of the components of culture affects how people undertake their businesses and make accounting decisions (Baydoun &Willett, 2009). For some communities such as Islamic countries, this might not be an appropriate objective. In addition, any claims that any specific structures of accounting are advanced to others must only be made after taking into account the environments in which the structures are to be applied.
Culture has been found to establish the way in which institutions are governed and managed, the behavior of individuals within these institutions as well as how the individuals reason. Therefore, the result of the decision process and judgment is directly linked to the culture prevailing at these institutions. Gray proposed that accounting preexists as a subculture within a wider national culture or social system. The accounting community globally has agreed that there is a need for official accounting standards to make sure that there is an element of reliability and significance of financial information. Apart from individual country’s national standards, accounting professionals, educators, and officials have emphasized the need for international standards (Gray, 1988).
Furthermore, religion as a culture has been observed to have some influences on accounting practices of a given country. This is because religion surpasses national borders. Therefore, culture as a factor has greater influence on accounting practice via the norms and principles held by different members of the accounting community. Diverse cultural groups in the accounting world have resulted in different judgments and interpretations of accounting concepts and relationships.