Evaluate the influential contexts that lead to accounting differences Essay Example

common law states prioritize disclosing "true and fair" information, while civil law states make fewer disclosures. These variations in legal systems greatly contribute to differences in fiscal reporting systems.

Furthermore, the legal system also impacts taxation laws. Common law states have separate taxation laws that differ from general accounting regulations, whereas civil law states often have unified taxation and fiscal reporting legislation. The cultural context also plays a role in influencing the development of accounting systems. According to Hofstede (1980), culture refers to the collective programming of the human mind that distinguishes different human groups.
Hofstede (1984, p.83-84) identified four cultural dimensions: Individualism versus Collectivism, Power Distance, Uncertainty Avoidance, and Masculinity versus Femininity. According to Gray (1988), these cultural values shaped by external factors impact institutions like political systems and capital markets, thus shaping accounting values. These accounting values determine the accounting system and reinforce cultural values and external factors.Gray expanded on Hofstede's study and identified four accounting values: Professionalism versus Statutory control, Uniformity versus Flexibility, Conservatism versus Optimism, and Secrecy versus Transparency.Salter and Niswander (1995) examined the relationship between Hofstede's and Gray's work.They found that all of Hofstede's cultural dimensions except power distance correlate with specific accounting values.Notably, uncertainty avoidance has the most significant influence on Gray's accounting values.Countries with high uncertainty avoidance typically have conservative accounting systems with more statutory control and less disclosure.Germany is an example of such a country.In contrast,countries with low uncertainty avoidance have transparent accounting systems with less statutory control.The characteristics of accounting systems are also determined by the corporate funding system.This focuses on whether companies rely on equity or debt funding,and whether the fund suppliers are insiders or foreigners.According to

Nobes (1998), the choice between equity and debt funding has an impact on a company's measuring practices and accounting systems. The source of funding, whether from insiders or foreigners, also affects accounting systems through disclosure issues. In countries like the US where equity financing dominates, financial information is typically geared towards investors and includes forecasting information for their decision-making process. On the other hand, in countries with strong creditor markets, accounting information such as profit and asset valuations are more conservative to protect creditors' interests.

Nobes (1998) further explains that there is a distinction between insider and foreigner funding, which influences the pressure for disclosure in published financial statements. Companies heavily reliant on foreign funding are more likely to face greater pressure for disclosure because foreigners do not have direct access to internal financial information like insiders do due to their distant relationship with the company. Leuz (2010) supports this idea in his journal where he analyzes the reasons behind regulations for companies' financial reporting. It concludes that different states have accounting patterns reflecting their corporate funding nature as they respond to investor and creditor demands.The following text discusses the impacts of accounting differences and how they are shaped by various contexts. Governments exert political pressure to influence the form, content, and function of accounting systems. This pressure can lead to positive developments in accounting practices, as seen in Germany after the fall of the Berlin Wall. The German government encouraged investment and openness towards the European Union (EU), resulting in companies adopting international standards and improving financial reporting. However, political pressure can also hinder progress, as seen in Britain during the early 1970s when theories

on inflation accounting were appealing but faced resistance due to concerns about power dynamics within companies. Societal and political pressures contribute to variations in accounting practices across different countries. For instance, in Australia, companies have a legal obligation but not a requirement to follow International Financial Reporting Standards (IFRS). Similarly, only listed companies must adhere to IFRS in the Israeli market.The legal system plays a significant role in shaping accounting practices. This is demonstrated by theoretical models proposed by Harrison and McKinnon, Nobes, as well as empirical research conducted by Salter and Doupnik. Countries with a codified legal system are expected to have strict accounting regulations that discourage variability and changes over time. Different types of legal systems will impact accounting regulations in different ways.

Codification laws dictate acceptable behavior and restrict voluntary disclosures, which makes it more challenging for analysts to interpret financial statements. Germany, for example, primarily outlines national regulations for financial statements through the Handelsgesetzbuch (HGB) and tax law. In jurisdictions like Germany with codification jurisprudence, revenue recognition has a greater influence on financial reporting compared to common law jurisdictions like the UK.

Conservatism in codification jurisprudence and stronger tax influences on fiscal reporting in Germany contribute to this situation. In the US, companies can benefit from tax advantages by using long-term rentals to raise funds. In the UK, individual companies can use financial statements for tax reporting based on national requirements, but listed companies must adjust their financial statements if they are believed not to provide a 'true and fair view' for tax purposes.

Culture also influences accounting practices.Germany's accounting culture, which is based on rules, allows for the deduction of taxation in asset

impairments. This has caused controversy in IFRS consolidations and requires judgments in IFRS impairment procedures. Some countries have well-organized lobby groups of finance managers. Certain states have embraced renting because of specific characteristics of their taxation systems.

A study by Meek and Gray (1989) found that even when companies voluntarily disclose international information, it still reflects a "national flavor." This presents a significant challenge, particularly in emerging markets, when attempting to establish a unified system.

Although accounting standards harmonization has made progress (Carmona 2008), emerging markets remain challenging in terms of varying corporate finance sources internationally. According to Nobes (2006), the UK and US rely more on outsider shareholders for financing sources, while Germany and France rely on insider bank/state/family ownership. These different funding sources result in information asymmetry and fuel competition.

Nobes' (1998) view suggests that this competition between insiders and foreigners to provide valuable information for investors creates a strong contest regarding accounting and taxation information. Zeff (2007) argues that financial analysts researching different business cultures may not have superior understanding of accounting.Moreover, he emphasizes how the differences in corporate structures between countries significantly impact the understanding of accounting standards for companies. This understanding is crucial for investors when making decisions. The illustration of these disparities can be seen through Daimler Benz AG, a German company that aimed to be listed on the NYSE in 1993. According to German GAAP, the company reported a net income of 615 million. However, under US GAAP, due to variations in accounting practices between the two nations, it transformed into a loss of 839 million. Nevertheless, globalization and rapid business development across countries have led to progress towards a unified

system.

In 2007, the SEC permitted foreign companies to join the NYSE as long as they reconcile their reports with International Financial Reporting Standards (IFRS). Although there were challenges during the harmonization process, the acceptance of IFRS by numerous countries demonstrates a trend towards aligning accounting reporting systems. Shil et al. (2009) proposed that implementing uniform accounting standards can enhance decision-making for businesses, decrease reporting costs, and provide better financial information to markets. Consequently, international organizations are actively working towards reducing national differences in accounting standards (Nair and Frank, 1981). Presently, all participating countries adhere to widely accepted IFRS under a unified set of rules.The IASB closely aligns its standards with Anglo-American standards, which heavily influences IFRS due to the dominance of the US in the global economy. This alignment may benefit countries with economic ties to the US, but it can pose challenges for other countries like India, China, and some EU nations that have conflicts between their national standards and IFRS. Disputes with the IASB may arise during endorsement processes in these countries, as demonstrated by Crawford et al. (2014) in their study on conflicts between civil law and case law systems in the EU's endorsement procedure. Additionally, some European countries have developed anti-American sentiment due to loss of national sovereignty in accounting standards, potentially leading to greater political pressure from the EU on the IASB's involvement in international standard setting. These challenges highlight variations that exist within different versions of IFRS and demonstrate difficulties in achieving global accounting uniformity within this framework.Discrepancies exist between the endorsed IFRS in the EU and those published by the IASB. In early 2005, the IFRS published by

the IASB allowed companies to value liabilities or financial assets at fair value without considering profit or loss. However, this option was eliminated in the endorsed EU version. Similarly, hedge accounting permissions were more stringent in the IASB's version compared to that of the EU's version.

Furthermore, there is diversity within national contexts regarding IFRS adoption. For example, in Australia, there is no requirement for option and equity accounting. However, under IFRS standards, companies have the choice between equity accounting and proportionate consolidation for groups holding joint venture companies.

Despite these differences, it is important to incorporate options within international financial standards due to diverse backgrounds of members and representatives from different countries with varied cultures and political pressures. According to Nobes (2006), overt options - clearly stated options - and covert options - found within obscure rules - both demonstrate variations in national accounting within this standardized criterion.

Overall, while discrepancies exist between endorsed IFRS in different regions like Europe and Australia, incorporating options allows for consensus on international financial standards while accommodating diverse backgrounds and accounting practices across nations.The use of different inventory valuation methods, such as FIFO and weighted average, in UK and German companies can be attributed to the legal systems employed in each country (Kesti, 2005; as cited in Nobes, 2006). These differences in accounting practices highlight the impact of political, legal, cultural, and corporate funding contexts on the development of accounting systems. Discrepancies among nations' accounting standards have led to disagreements worldwide, affecting information exchange, fundraising efforts, and decision-making processes. While converging accounting standards may improve these issues by reducing costs and providing better financial information for decision-making purposes, it is important

to recognize that these contextual differences are deeply ingrained and not easily eliminated.The convergence efforts by IASB and FASB will continue to be hindered by the variations in contexts between countries. Additionally, there is a political struggle for power in harmonizing accounting standards, as shown by the EU's reluctance to adopt a standard that aligns with US GAAP. Therefore, the belief that accounting differences can be completely eliminated fails to acknowledge this reality.