24 1/ ACCOUNTING INFORMATION, DECISION MAKING, AND THE USES OF FDIANCIAL STATEMENTS

auditor's opinion when deciding to invest in a company or to make loans to a firm

that has been audited. The independent audit is an important factor in the worldwide
/'
growth of financial markets.
trt/ ........
&I?A" ,N1"f0,i">
--",
Factors That Influence Accounting tandards
fiNAN" It(..
While a variety of economic, social, political, legal, and cultural factors influence the
A ,DJ"ftl.k formulation of ac.counting standards, the most important factors would seem to be
the enterprise's sources of finance and the nature of capital markets, taxation, the
(li1f
accounting profession, the nature of accounting regulation, national cultures and tra
ditions, and international economic and political relationships (see Figure 1-6).
110 4M.re' N j111''''-' 1'-/
.
/
- ources ofFinance and Capital Markets
The sources of finance for an enterprise exert an important influence because the
more capital that is raised from the public or external shareholders the more pressure
there will be for public accountability and information disclosure. This is the case
especially In countries such as the United States and the United Kingdom where stock
markets are highly developed and substantial numbers of corporations are owned by
a broad base of shareholders. In this way, investor interests have been perceived by
management to be significant and have become the predominant influence on finan
cial statements. In contrast, banks are a much more important source of finance in
countries such as Germany, Japan, and Switzerland, and hence their concerns have
tended to influence the preparation of financial statements more than those of
investors.
Taxation
Another major influence on accounting standards is taxation, such as in France,
Germany, and Japan, where the financial statements of business enterprises prepared
FIGURE 1-6 Factors That Influence Accounting Standards
International
Sources of Finance
Economic and Political
and Markets
Relationships
National Cultures
and Traditions
..._T_axa_tion_.....
Accounting The Accounting
Regulation Profession
Accounting Standards
25
for shareholders are also used as the basis of taxation, irrespective of the size and
ownership of business. Not surprisingly, the tax rules have tended to dominate the
preparation of financial statements. In the United States, the United Kingdom,
Canada, and Australia, however, the published accounting reports are adjusted to
comply with the tax rules and submitted separately from the reports to shareholders.
The AccountingProfession
Where there is a more developed accounting profession, there tends to be a more
business and decision-making oriented accounting system in place, such as in North
America and western Europe. This can be contrasted with the more government
controlled, centralised, and uniform systems that have been the historical experience,
for example, of Russia, China, and other emerging economies. Where accounting
judgements as a basis for econop-lic decision making are required, the need for profes
sional accountants and their influence on accounting standards tend to be high.
Accounting Regulation
The nature of accounting regulation is an important influence on accounting stan
dards and is linked to the status of the accounting profession. Where the accounting
profession has a high status because it is perceived to contribute to better business
decision making, such as in the Anglo-Saxon countries, accountants tend to have
more influence in the development of accounting regulation. On the other hand,
where government concerns and company law are more influential, such as in France
and Germany, more emphasis is placed on detailed and uniform rules and regulations
to determine accounting standards. In Europe, the company law harmonisation pro
gramme of the EU has meant that legal rules have become relatively more important
in setting accounting standards in recent years. However, the accounting profession in
the form of the International Accounting Standards Committee (IASC) is now lead
ing the process of international accounting harmonisation as more countries have
recognised the importance of financial statements for decision-making purposes and
the useful role that accountants can play in this process.
National Cultures and Traditions
A major influence on accounting standards is national culture. Culture means the val
ues and attitudes which are widely held in a society or by groups in a society, such as
accountants. While accountants around the world have many similarities, they tend to
have different approaches to the measurement of assets and to the disclosure of infor
mation about business activities. In Figure 1-7 the accounting practices of some
groups of countries are shown in a very generalised way in terms of cultural tenden
cies to be more or less cautious in the practice of accounting measurement and more
or less transparent in the disclosure of information to the public. These cultural ten
dencies are ways of accounting which have developed over many years and which
have become the accounting tradition of a country.
While accountants are inherently conservative, some are more so than others.
....~ .
Accountants in countries such as Germany and Japan tend to be more cautious in
recognising profit and the value of assets, reflecting the interests of lenders, in con
trast to the more optimistic approach of the United Kingdom and the United States in
reporting results to shareholders.
~ - - .
As regards information disclosure, countries such as Germany, Japan, and
Switzerland tend to have less disclosure, reflecting their traditional value of secrecy
compared to the Anglo-Saxon countries which are more transparent in response to
"external shareholder and market pressures.
the ethical responsibilities of
accountants
26 11 ACCOUNTING INFORMATION, DECISION MAKING, AND THE USES OF FINANCIAL STATEMENTS
FIGURE 1-7 Cultural Influences on Accounting Standards
-.'
Secrecy
Transparency
Optimism Greater caution in assessment Conservatism
Asian (Japan)
..
Germanic (Germany,
Switzerland)
Latin (France, Italy, Spain)
Nordic (Sweden.
Finland)
Anglo-Saxon (U.S., u.K.)
hI Malaysia and Sillgapore,
llltemntionni Accolllltillg Sttllldards
are /ls/lally adopted as tire basis for
local a,colII/tillg stal/dards. III
Malta, company law II0W requires
Il1fernatiol/al Accountillg Stlll/dnrds
to be followed ill preparillg compallY
jillnll,ial stalelllellts.
OBJECTIVE 8
Define ethics and describe
Source: Adapted from S. ). Gray, "Towards a Theory of Cultural Influence on the Development
of Accounting Systems International", Abacus (March 1988), p. 12.
International Economic and Political Relationships
Accounting traditions have developed over long periods of time and, in many coun
tries such as in Africa and Asia, have incorporated influences arising from periods of
colonisation and war. These traditions are now changing because of the growing
internationalisation of economic and political relationships around the world. The
formation of economic groupings such as the European Union (EU), the North
American Free Trade Agreement (NAFTA), and the Asia Pacific Economic Coop
eration Forum (APEC) coupled with dramatic political changes in Russia and Eastern
Europe, China, South America, and Africa have resulted in tremendous increases in
international trade and foreign direct investment. New stock markets have sprung up
in many countries, and existing markets have been developi'ng rapidly in response to
deregulation, privatisation, and the internationalisation of finance and investment.
Accounting reports in a cross-border context have become more important, together
with the need to promote better international financial understanding. It is in this
context that the International Accounting Standards Committee (lASC) is seeking to
harmonise accounting standards so that financial statements prepared and presented
by companies will be acceptable and understood everywhere in the world irrespective
of their country of origin. It is the purpose of this book to contribute to this process
of developing a common understanding of accounting and financial statements for
decision-making purposes.
PROFESSIO AL ETHICS A D THE Acco TI G
PROFESSIO
Ethics is a code of conduct that applies to everyday life. It addresses the question of
whether actions are right or wrong. Ethical actions are the product of individual deci
sions. You are faced with many ethical situations every day. Some may be potentially