Lecturer:

Lawrence Diederich, M.A. (U.S.A)

Head of Business Languages

Department of Business Languages

Catholic University of Eichstaett Ingolstadt

Influence of cultural values on

accounting practices with regard to

International Financial Reporting

Standards (IFRS)

Submitted by:

Ngoc Phuong Linh Bach

Matriculation number: 604693

Major: Master FACT

Email: linhbach@gmail.com

Date: July 18th

2011

Intercultural Communication

Influence of cultural values on accounting

practices with regard to International

Financial Reporting Standards (IFRS)

(SS 2011)

Lecturer:

Lawrence Diederich, M.A. (U.S.A)

Head of Business Languages

Department of Business Languages

Catholic University of Eichstaett Ingolstadt

Submitted by:

Ngoc Phuong Linh Bach

604693

linhbach@gmail.com

August 5th 2011

Page| i

Table of contents

Table of contents ............................................................................................................... i

List of figures .................................................................................................................... ii

List of tables ..................................................................................................................... ii

1. Introduction .............................................................................................................. 1

2. Necessary of adoption of IFRS................................................................................. 1

2.1 Development of IFRS ....................................................................................... 1

2.2 Reasons for adoption ........................................................................................ 2

3. Cross-border observation ......................................................................................... 2

4. Correlation between certain cultural and accounting values .................................... 4

4.1 Cultural values .................................................................................................. 5

4.2 Accounting values ............................................................................................ 6

5. Influences on accounting practices ........................................................................... 9

5.1 Interpretation issue ........................................................................................... 9

5.2 Language issue ............................................................................................... 11

5.3 Convergence and comparability ..................................................................... 11

6. Outlook ................................................................................................................... 11

References ...................................................................................................................... 13

Page | ii

List of figures

Figure 3-1: IFRS adoption by country ............................................................................... 3

Figure 3-2: Culture as an iceberg ...................................................................................... 4

Figure 4-1: Influence of different cultural backgrounds on the comparability of financial

reports .............................................................................................................................. 8

List of tables

Table 4-1: Correlation matrix of cultural and accounting values ..................................... 7

Table 5-1: Information disclose by selected countries in Europe ................................... 10

Page| 1

1. Introduction

This term paper is predominantly concerned with the question, whether cultural values

influence accounting behaviours with regards to the adoption of International Financial

Reporting Standards (IFRS) worldwide. In this context, the homogeneity of applications of

IFRS by different countries is to be surveyed. On that account, two key factors: interpretations

of IFRS by different countries in certain aspects as well as translation of the standards for

example into German will be examined in detail. Different cultural values and thought

patterns lead to different perceptions of the real world and therefore to individual

interpretations of the same standards or conceptions. The translation of standards again

conveys individual interpretations and is consequently more or less subjective. By examining

those two factors, we could come to a conclusion about the influence of value orientations on

accounting values and behaviours. For this inspection, Gray´s research “Towards a theory of

cultural influence on the development of accounting system internationally” and Hofestede´s

cultural dimensions in “Culture´s consequences: Comparing values, behaviours, institutions

and organizations across nations” are deployed.

From this vantage point, we will attempt to make a statement of the convergence of IFRS-

applications and the comparability of financial reports between IFRS-adopters, which are the

ultimate goals of International Accounting Standards Board (IASB).

Briefly, the hypothesis is: “Influence of cultural values on accounting behaviours in the light

of IFRS-adoption”. This leads to a sub-hypothesis: “Convergence and comparability of

financial reports across nations”.

2. Necessary of adoption of IFRS

2.1 Development of IFRS

The origin of international accounting standards is traced back in year 1967, when

Accountants International Study Group (AISG) – the predecessor of International Accounting

Standards Committee (IASC) was established. From 1973 to 2001, the international

accounting standards (IAS) were issued by IASC.1 From 2001 until now, the International

1 cf. Skotarczyk, 2011, p.11.

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Accounting Standards Board (IASB) has been the standard-setter for international accounting

standards. The standards have been also changed into International Financial Reporting

Standards IFRS (earlier: IAS). Before 2002, the application of those standards was based on

voluntariness. With the EU legislation 1606/2002, the application of the standards is legally

binding at the European level.2 That means all listed company located in Europe are obliged

to apply international financial reporting standards IFRS as well as interpretations. The

framework is principally not binding.3

The goal of such standards is to establish the cross-border comparability of financial reports,

which is essential not only for internationally legal enforcement but also for investors in

financial markets with regards to the function of “decision-usefulness” of financial reports.

2.2 Reasons for adoption

There are many reasons for the adoption of IFRS. On the one hand, all listed companies

located in Europe are obliged to apply IFRS. On the other hand, there are a great number of

companies in other continents apply IFRS on a voluntary basis such as Brazil, Canada, US,

Japan, China and Australia4. The motivation for the (voluntary) adoption can be explained by

the “economic theory of networks” (Ramanna/Sletten, 2009, p. 1.). Companies tend to adopt

IFRS when their business partners are also in a (worldwide) network of IFRS-adopters.5

Moreover, the adoption of IRFS opens access to the cross-border financial markets, which

enable competitive financing for companies.

3. Cross-border observation

By and large, there are three major versions of IFRS represented in America, Europe, Oceana

and Asia. The first one is the IASB which indicates that the IFRS-adopters apply IFRS/IAS

issued by IASB. The second one is the EU IFRS, of which standards are adopted by European

2 cf. Großfeld/Luttermann, 2005, p. 41.

3 cf. Petersen/Bansbach/Dornbach, 2009, pp. 4-5.

4 cf. Ramanna/Sletten, 2009, p. 1.

5 cf. Ramanna/Sletten, 2009, p. 1.

Page | 3

Union. Last but not least, the local IFRS with standards adopted locally.6

Figure 3-1: IFRS adoption by country (a summary of "IFRS adoption by country", 2010, PwC)

Figure 3-1 shows the variant adoptions of IFRS all over the world. The choice over a certain

version of IFRS depends first of all upon the business and financial culture, i.g. tax law,

structure of business transactions, business ethic, traditional forms of firm financing.7

Furthermore, the politics and the regulatory culture of a country also contribute to the

different choice of IFRS-adoption.8

However, within a certain adopted version, differences also exist. For example, there are

different interpretations of certain terms with regards to financial reports, such as “probable”

and “remote” in Germany, England and Spain, although they all apply the EU IFRS. Those

can be explained by different accounting cultures9 because the interpretations and applications

of standards to some extent depend on jurisdiction of accountants, which is directed by their

individual characteristics. Those individual characteristics are demonstrated by “intelligence,

education, approach to ethics”, etc. (Cowperthwaite, 2010, p. 182), which are underlain by

cultural backgrounds. In this context, it should also be emphasized that the determinants of

choice over a certain IFRS-versions stated in the previous paragraph are also navigated by a

unique set of value orientations of its society.

6 cf. PwC, 2010, p. 252.

7 cf. A. Zeff, 2007, pp. 291.

8 cf. A. Zeff, 2007, p. 291.

9 cf. A. Zeff, 2007, p. 291.

• IFRS as published by IASB

• mostly used in North America, frequently used in Asia and Africa

IASB

• IFRS adopted by European Union

• only used in Europe, exceptionally MaroccoEU IFRS

• IFRS adopted locally

• used in Oceana, occationally used in Asia Local IFRS

Page | 4

According to Hall10

(1976), culture of a society can be seen as an iceberg. While some aspects

of culture are directly observable, the large portion is below the water. On the assumption of

relation between accounting and cultural values, one needs to undercover the underlying

beliefs, value and thought patterns to find out the reasons for different accounting behaviours

as well as the choice over a certain IFRS-version. Within this term paper, we are going to

focus onto the exploring of accounting values in correlation with cultural values, which

influence accounting behaviours with regard to the interpretation of standards as well as

translations. The differences in interpretation of standards and translation are namely the

product of different perceptions which are underlain by cultural values and thought patterns.

4. Correlation between certain cultural and accounting values

In this chapter, we are going to use Gray´s theory of cultural influence on accounting

behaviours in accordance with Hofstede´s cultural dimensions. In this way, accounting values

bear a relation to social values and different accounting behaviours can be explained by

underlying value and thought patterns of different cultures.

10

The idea of a cultural iceberg was developed by Edward T. Hall in “Beyond culture” (1976).

Doing/

behaviour

s

Beliefs

Value and

thought patterns

Accounting and auditing behaviours

Business and financial structure

Politics and regulatory

Unique set of value

orientations of a

society

Different IFRS- versions Different application of IFRS

Figure 3-2: Culture as an iceberg (based on the idea of a cultural iceberg of Hall)

Page | 5

4.1 Cultural values

Before introducing the dimensions of culture, it is essential to find a proper definition for

culture. There is no universally agreed definition for culture. As we are going to analyze the

influence of cultural values on accounting behaviours by using the cultural dimensions of

Hofstede, it is, therefore, sensible to take the culture definition by Hofstede in account.

Culture is described as “the collective programming of the mind which distinguishes the

members of one group or category of people from another” (Hofstede, 2001, p. 9). Based on

the definition, IFRS-adopters are generally classified in three major accounting cultures:

IASB-culture, EU-IFRS culture and local IFRS culture (see figure 3-1). However, the major

accounting cultures are not the objects of this survey because the different IFRS-adoptions

convey different interpretations and translations of standards as a matter of course. The

examination objects here are the differences in interpreting the same standards or terms of

standards among IFRS-adopters within the same accounting group such as within the EU-

IFRS culture. Thus, it is necessary to divide the whole accounting culture into accounting sub-

cultures according to their set of value orientations.

According to Hofstede (2001), there are five cultural values that direct behaviours of a society

as well as its members: Individualism versus Collectivism, Power distance, Uncertainty

avoidance, Masculinity versus Femininity, Confucian dynamism. In this context, we only

focus on the first three cultural dimensions that could have significant influence on accounting

behaviours.

1. Individualism versus Collectivism: the interrelationship between individual and the

group.

2. Power distance: the degree of equality/inequality of people from different

hierarchies and the distribution of authority within an organization or institution.

3. Uncertainty avoidance: the degree of how a culture and its members tolerate

ambiguous situations and future uncertainty.

Page | 6

4.2 Accounting values

Gray (1988) identifies four following accounting values based on accounting practices as well

as accounting academics:

1. Professionalism versus statutory control – “a preference for the exercise of individual

professional judgement and the maintenance of professional self-regulation as

opposed to compliance with prescriptive legal requirements and statutory control”

(Gray, 1988, p. 8)

2. 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” (Gray, 1988, p. 8)

3. 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” (Gray, 1988, p. 8)

4. Secrecy versus transparency – “a preference for confidentiality and the restriction of

disclose 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” (Gray, 1988, p. 8)

In this framework, the cultural values at national level are transposed into accounting values

at accounting system level. While the cultural values affect the behaviours of a society and its

members, the accounting values direct the accounting behaviours and contribute to the

development of a national accounting system. 11 In his empirical research, Gray drew the

following conclusions with regard to the correlation between cultural and accounting values12

:

1. Positive correlation between individualism and professionalism, negative correlation

between uncertainty avoidance / power index and professionalism: The higher

11

cf. Gray, 1988, p. 5. 12

It is assumed that masculinity versus femininity plays a less significant roll in this context and therefore, is not

taken into consideration.

Page | 7

individualism and the lower uncertainty avoid and power distance, the more likely

professionalism outperforms statutory control.13

2. Positive correlation between uncertainty avoidance / power distance and uniformity,

negative correlation between individualism and uniformity: The higher uncertainty

avoidance and power distance and the lower the individualism, the more likely

uniformity outperforms flexibility.14

3. Positive correlation between uncertainty avoidance and conservatism, negative

correlation between individualism and conservatism: The higher uncertainty avoidance

and the lower individualism, the more likely conservatism outperforms optimism.15

4. Positive correlation between uncertainty avoidance / power distance and secrecy,

negative correlation between individualism and secrecy: The higher uncertainty

avoidance and power distance and the lower the individualism, the more likely secrecy

outperforms transparency.16

The conclusions about cultural and accounting values show that there is a strong correlation

between certain cultural and accounting values, to be more specified, between uncertainty

avoidance, power distance, individualism and professionalism, conservatism and secrecy.

Those correlations display that countries with high uncertainty avoidance and power distance

as well as high collectivism are, by tendency, in favour of statutory control, conservatism and

13

cf. Gray, 1988, p. 9. 14

cf. Gray, 1988, p. 10. 15

cf. Gray, 1988, p. 10. 16

cf. Gray, 1988, p. 11.

Cultural

values

Accounting values

Professionalism Conservatism Secrecy Uniformity

Individualism + - - -

Power

distance - n/a + +

Uncertainty

avoidance - + + +

Table 4-1: Correlation matrix of cultural and accounting values

Page | 8

secrecy about their business. Controversially, countries with low uncertainty avoidance and

power distance as well as high individualism tend to move on in the direction of

professionalism, optimism and transparency.17

In this way, the cultural values on country

level are transposed into accounting values and thus direct accounting practices. It is also

observable that individualism and uncertainty avoidance are the most relevant cultural values

“at the level of the accounting sub-culture” (Gray, 1988, p.11). Individualism correlates

positively with professionalism, while uncertainty avoidance moves in a completely opposite

direction towards professionalism.

Figure 4-1 shows that accounting values, which are underlain by cultural values, affect

accounting practices. Therefore, each country has a different accounting system reflecting its

unique set of value orientations. For example, the German accounting system is famous for its

conservatism and prudence, which can be explained by the high uncertainty avoidance as well

as the so-called “Grundsatzdebatte”. However, the differences in cultural values have also

raised the question of the convergence and comparability of financial reports with regard to

the application of IFRS internationally.

17

cf. Marrero, 2007, p. 17.

Cultural values

Individualism/

Collectivism

Power distance

Uncertainty

avoidance

Accounting values

Professionalism

Uniformity/Flexibility

Conservatism/Optimism

Secrecy/Transparency

Convergence of

applications of IFRS?

Comparability of

financial reports across

nations?

Accounting practices/

behaviours

Interpretation

Information

disclose

Translation

etc.

National

level

Across

nations

Figure 4-1: Influence of different cultural backgrounds on the comparability of financial reports (based on S.Doupnik/Riccio, 2006, p. 239)

Page | 9

5. Influences on accounting practices

In this chapter, we are going to analyze the affects of cultural values on the interpretations of

IFRS because the interpretations of accountants influence not only the application of

standards but also translation. In this context, there are three major issues to be concerned:

problems of interpretation as well as of terminology, problem of language and different level

of information disclose.

5.1 Interpretation issue

Although there are official interpretations of IFRS issued by IASB, the application of IFRS

still depends on the jurisdiction of accountants and auditors. The differences in interpretations

across nations are caused by individual traits of accountants. Within a country, value and

thought patterns as well as beliefs of the society form certain major traits of accountants. As a

result, perceptions of facts and circumstances in accounting practices of a country are as

unique as its own underlying cultural values. Differences in perceptions lead to differences in

interpretations and thus different applications of standards among accounting sub-cultures.

And just right there, the convergence of financial statements is in jeopardy. The following

examples could provide an insight into this matter.

The problem of terminology can be exemplified by different interpretations of the verbal

expressions of “probability”/ “probable” among EU IFRS-adopters. “Probability” /

“probable” expression is a very important component in a variety of standards, for example to

determine whether an item or object is to be recognized and disclosed in a balance sheet:

The question is how the probability in this standard is defined because IASB do not give any

interval for the estimation of probability. Does it mean a likelihood of 60%, 80% or 90%?18

That is where the subjective judgement of accountants comes into play – the one that reflects

18

cf. A. Zeff, 2007, pp. 297.

IAS 38 Development costs as an intangible asset

“An intangible asset arising from development (or from the development phase of an

internal project) should be recognized if, an only if, it is probable that future economic

benefits that are attribute to the asset will flow to the enterprise.”

Page | 10

individual perceptions contingent on their own cultural values. For instance, due to the high

level of conservatism in their culture, German accountants would estimate the probability on a

conservative basis, while other countries in Europe such as Greek is more likely to acquire a

lower percentage for the same expression of probability. In this way, the recognition and

disclose are decided differently among EU IFRS-adopters based on their different

interpretations. Thus, different cultural values tend to stimulate differences in application of

standards.19

Another issue is the information disclose. As we found out in the previous chapters, secrecy

correlates positively with uncertainty avoidance as well as power distance and negatively with

individualism. According to Marreror (2007), the positive correlation between individualism

and professionalism as well as the negative correlation between individualism and secrecy can

be demonstrated by the statement that individualistic cultures also implies the high

professionalism and are inclined to be at higher degree of accounting disclose.20

This

statement can be proven by the facts of a cross analysis on disclosure on judgement and

estimate by states published in year 2009 as a “Report to the European Commission”:

19

cf. A. Zeff, 2007, pp. 291; S. Doupnik/T. Tsakumis/R. Campell, 2009, p. 36. 20

cf. Marrero, 2007, p. 17. 21

The Individualism, Power distance index and Uncertainty avoidance index are obtained from Hoftstede score

by countries on August 1st 2011, available at http://www.geert-hofstede.com

22 The percentage of IFRS-adopters of a country disclosing judgements and estimates in their financial reports.

The facts are obtained from the Report to the European Commission „Evaluation oft he Application of IFRS

in the 2006 Financial Statements of EU Companies“, 2008, pp. 62-63.

Table 5-1: Information disclose by selected countries in Europe

Cultural values Country

Czech Republic Germany Netherlands

Individualism (IDV) 21

56 62 80

Power distance index (PDI) 40 31 33

Uncertainty avoidance index (UAI) 68 61 50

Ranking of secrecy (concluded

based on IDV, PDI, UAI) 1

st 2

nd 3

rd

Information disclose (percentage of

IFRS-adopters in a country) 22

33% 92% 100%

Page | 11

5.2 Language issue

Last but not least, the convergence and comparability of financial reports could also be

violated by inaccuracy of translations. “The concern was not just the accuracy of the

translation. It was more a matter, in each of the other countries, of whether accountants and

finance directors understood the concept” (A. Zeff, 2007, p. 296). It could lead to confusions,

especially when the terms or concepts have already existed and differently defined in national

accounting systems. The following example should give an insight into this issue. The translation of

“assets” into “Vermögensgegenstände” in German language: The translation is problematic because

the concept of “asset” is not transferred into the translation. “Assets” in the original concept are

“future economic benefits controlled by the entity as a result of past events” (Hellmann/Perera/Patel,

2010, p. 13) and cover from “Vermögensgegenstände” to good will and deferred items, while

“Vermögensgegenstände” in German accounting system simply focus on “its potential to cover

liabilities” (Hellmann/Perera/Patel, 2010, p. 13). Recently the term “assets” has been translated as

“Vermögenswerte”, which had never been existed in German accounting system.23

That makes clear

that the quality of translation depends largely on the perception and interpretation of concept in

accounting sub-culture. The accuracy of translation implies both literally and conceptually.

5.3 Convergence and comparability

The convergence and comparability of financial reports across nations targeted by IASB have

been not at a targeted high level realized. Despite of the official interpretations for standards

issued by IASB, the application of the standards in adopting countries is not convergent

because jurisdiction of accountants which reflects country-specific interpretations are

underlain by their own cultural values. Thus, the comparability of financial reports among

IFRS-adopters is only arrived to some extent.

6. Outlook

Undoubtedly, differences in application of IFRS across nations due to differences in cultural

values can not be bridged in the next few years. On the one hand, cultural values of a society

are handed on from one generation to another and thus deeply ingrained and dynamically

stable. Changes can only be made very slowly together with the up-and-coming of

23

cf. Hellmann/Perera/Patel, 2010, p. 13.

Page | 12

generations.24

On the other hand, there are still “opportunities for the survival of

international differences” (Norbes, 2006, p. 235) due to technical gaps of IFRS such as vague

criteria and definitions as well as unspecific interpretations by IASB. Furthermore, the wide

discretion guaranteed by IASB leads to arbitrary decisions of IFRS-adopters, which are

greatly influenced by jurisdiction of accountants. In this way, cultural values continue to play

a dominant roll in the interpretation and application of standards. Consequently, a high level

of convergence and comparability of financial reports across nations is hardly to be reached.

24

cf. Cowperthwaite, 2010, p. 178.

Page | 13

References

Gray, S.J. (1988). Towards a theory of cultural influence on the development of accounting

system internationally. ABACUS, Vol. 24, No. 1, pp. 1-15.

Hofstede, Geerte (2001). Culture´s consequences: Comparing values, behaviours, institutions

and organizations across nations. 2nd

ed. Sage Publication, California.

Marrero, Jose (2007). Accounting and Taxation. Journal of financial service professional,

January 2007, pp. 16-18.

S. Doupnik, Timothy/Riccio, Edson Luiz (2006). The influence of conservatism and secrecy

on the interpretation of verbal probability expressions in the Anglo and Latin cultural

areas. The International Journal of Accounting, Vol. 41, No. 3, pp. 237-261.

A. Zefl, Stephen (2007). Some obstacles to global financial report comparability and

convergence at a higher level of quality. The British Accounting Review, Vol. 39,

pp. 290-302.

Cowperthwaite, Philip (2010). Culture Matters: How Our Culture Affects the Audit.

Accounting Perspectives, Vol. 9, No. 3, pp. 175-215.

Timothy S. Doupnik/George T. Tsakumis/David R. Campell (2009). IFRS: Beyond the Standards.

Journal of Accountancy, Vol. 297, No. 2, pp. 34-39.

ineum consulting (2008). Report to the European Commission: Evaluation of the Application of

IFRS in the 2006 Financial Statements of EU Companies.

Hellmann, Andreas/Perera, Hector/Patel, Chris (2010). Equivalence of IFRS across

Languages: Translation issues from English to German. Asia Pacific

Interdisciplinary Research in Accounting 2010 conference, Australia, July 2010.

Nobes, Christopher (2006). The survival of international differences under IFRS: towards a

research agenda. Accounting and Business Research, Vol. 36, No. 3, pp. 233-245.