A Critique of Gray's Framework On Accounting Values Using Germany As A Case Study

Critical Perspectives on Accounting 22 (2011) 273287
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Critical Perspectives on Accounting
j our nal homepage: www. el sevi er . com/ l ocat e/ cpa
A critique of Grays framework on accounting values using Germany as
a case study
Eva Heidhues
, Chris Patel
Department of Accounting and Finance, Faculty of Business and Economics, Macquarie University, NSW 2109, Australia
a r t i c l e i n f o
Article history:
Received 23 August 2009
Received in revised form 18 April 2010
Accepted 27 August 2010
Keywords:
International accounting
Culture
Accounting subculture
HofstedeGray theory
Germany
a b s t r a c t
In the move towards globalisation and convergence, the inuence of culture on account-
ing has been increasingly recognised as an important and controversial topic. However,
quantied and narrowly focused approaches such as Grays (1988) and various extensions
of Grays framework of accounting values have largely dominated and strongly inuenced
cross-cultural accounting research and education without a critical evaluation of their the-
oretical and methodological limitations. Indeed, a signicant number of studies, curricula
and textbooks in international accounting have uncritically adopted Grays exploratory
framework. As such, the objective of this paper is to show the limitations of Grays
proposed hypotheses and the issues associated with the frameworks largely uncritical
adoptionininternational accountingliterature. Weprovideevidencethat Grays framework
gained authority and prominence in international accounting research largely because of
subsequent researchers unquestioning acceptance and application of this methodology.
Importantly, we propose that international accounting research may be further enhanced
by taking into account contextual factors such as political, legal, social and historical envi-
ronments of countries. Using Germany as a case study, we apply this more holistic approach
toprovide additional insights intothe factors differentiating Germanaccounting fromother
accounting models. We recommend that accounting research will be enhanced by a critical
examination of contextual environments of countries rather than a focus on measurement,
quantication, simplication and categorisation.
2010 Elsevier Ltd. All rights reserved.
1. Introduction
International harmonisation of accounting standards and the move towards convergence have revived an increasing
interest in the inuence of culture in accounting and auditing. The growing number of countries adopting International
Financial Reporting Standards (IFRS) and the increasing acceptance of International Standards on Auditing (ISA) have further
raised researchers attention. For example, more than one hundred countries require or permit the use of IFRS with more
countries suchas Canada, India and Korea planning to adopt IFRS by 2011 (Deloitte Touche Tohmatsu, 2007; IASB, 2007). This
move towards convergence is driven largely on assumptions and assertions based on enhancing international comparability
of accounting and auditing information.
Corresponding author. Fax: +61 0 2 9850 8497.

E-mail addresses: eva.heidhues@efs.mq.edu.au (E. Heidhues), cpatel@efs.mq.edu.au (C. Patel).
1045-2354/$ see front matter 2010 Elsevier Ltd. All rights reserved.
doi:10.1016/j.cpa.2010.08.002
274 E. Heidhues, C. Patel / Critical Perspectives on Accounting 22 (2011) 273287
However, it is important to note that IFRS and IAS strongly rely on the substance-over-form approach with a strong
reliance on professional judgments. Importantly, there is ample evidence that professional judgments are inuenced by
accountants and auditors cultural values. Indeed, a growing number of studies have analysed the inuence of culture
on standard setting (Bloom and Naciri, 1989; Ding et al., 2005; Schultz and Lopez, 2001), auditor independence (Agacer
and Doupnik, 1991; Hwang et al., 2008; Patel and Psaros, 2000) and accountants values and judgments (Doupnik and
Riccio, 2006; Doupnik and Richter, 2003, 2004; Patel, 2003). Although culture has long been recognised as an important and
controversial topic in accounting, a large number of cross-cultural accounting studies have failed to capture the complexity
and richness of cultural inuences (Belkaoui and Picur, 1991; Lindsay, 1992; Patel, 2004; Welton and Davis, 1990). Moreover,
quantied and narrowly focused dimensional approaches such as Hofstedes (1980) and Hofstede and Bonds (1988) cultural
dimensions, Grays (1988) framework of accounting values and the various modications of Grays (1988) framework have
largely dominated cross-cultural accounting research. Indeed, a signicant number of studies such as Williams and Tower
(1998), Schultz and Lopez (2001) and Hope et al. (2008) have tested and applied Grays exploratory (1988) framework
without critically evaluating its relevance and soundness. Additionally, curricula and textbooks in international accounting
such as Mathews and Perera (1991, 1993, 1996), Roberts et al. (2002, 2005) and Doupnik and Perera (2009) have also relied
heavily on Grays (1988) framework often without further questioning its assumptions. In the remainder of the paper Grays
(1988) framework of accounting values and the various modications and extensions of Grays (1988) framework will be
referred to as Grays framework.
BasedonHofstedes (1980) four cultural dimensions, Gray(1988) developedanexploratoryframeworkincorporatingfour
accounting values of professionalism, uniformity, conservatismand secrecy and proposed that these values may be used to
explainandpredict international differences inaccounting systems andpatterns of accounting development internationally
(Gray, 1988, p. 5). Specically, Gray (1988) hypothesises that Hofstedes (1980) cultural dimensions of power distance,
individualism, uncertainty avoidance and masculinity determine accounting values, which explain differences in accounting
systems internationally. Grays (1988) deterministic and componential framework resulted in the formulation of simplistic
and narrowly dened hypotheses such as, the higher a country ranks in terms of uncertainty avoidance and power distance
and the lower it ranks in terms of individualism and masculinity the more likely it is to rank highly in terms of secrecy
(Gray, 1988, p. 11).
SinceHofstede(1980), HofstedeandBond(1988) andGrays frameworks havesignicant inuenceonaccountingresearch
and accounting education, it is important and timely that researchers critically evaluate such deterministic and narrowly
focused frameworks. As such, the objective of this paper is to show the limitations of Grays proposed hypotheses and
the issues associated with the frameworks largely uncritical adoption in international accounting literature. Indeed, we
provide evidence to show that Grays framework gained authority and prominence in international accounting research
largely because of subsequent researchers unquestioning acceptance and application of Grays methodology. In contrast
to this oversimplication we propose that international accounting research can be further enhanced by emphasizing the
importance of contextual factors such as political, legal, social and historical environments of countries. Using Germany as
a case study, we apply this more holistic approach to provide additional insights into the factors differentiating German
accounting and particularly German nancial disclosure fromother accounting models and practices. Of the four accounting
values speciedinGrays framework, the secrecy hypothesis has beenformulatedina signicant number of studies (Doupnik
andTsakumis, 2004; Gray andVint, 1995; Hope, 2003; Hope et al., 2008; Jaggi andLow, 2000; Wingate, 1997; Zarzeski, 1996).
Moreover, Grays secrecyandconservatismhypotheses are consideredtobe the most important accountingvalues because of
their potential to inuence recognition, measurement and disclosure of nancial items (Doupnik and Riccio, 2006; Doupnik
and Tsakumis, 2004).
Although Grays framework claims to include ecological inuences and institutional consequences, these linkages
are not clearly explained and are largely neglected in the development of his narrowly focused two-dimensional account-
ing values (Gray, 1988, p. 7). Indeed, the importance of political, legal, historical, social and economic factors and their
interdependencies in evaluating national accounting models is not evident in the hypothesis development that specically
focuses on Hofstedes (1980) four societal values. It is our objective to show that valuable insights and greater understand-
ing of national accounting systems can be achieved by using holistic and richer perspectives to provide deeper insights into
culture, accounting values and its interdependencies. Using Germany as a case study, this paper critically examines the inu-
ence of political, legal, historical, social and economic factors on Germanys accounting system and provides explanations
to why German accounting may be perceived to be more secretive relative to accounting in other countries. Specically,
we demonstrate that the largely oversimplied application of Grays framework may have led to misconceptions in the
explanation and prediction of differences and similarities between accounting values and systems internationally. We argue
that international accounting research should not be blinded by the simplicity of Hofstedes (1980) and Grays framework,
but should further focus on capturing the complexity of cultural and contextual inuences on accounting by including more
holistic perspectives.
The remainder of this paper is organised as follows. The rst section introduces Grays framework of accounting values
and evaluates its uncritical adoption and application by subsequent researchers. The second section focuses on examining
nancial disclosure in the German accounting model. In light of this German case study, the nal section concludes the paper
by highlighting various reasons for the popularity of Grays framework in mainstreaminternational accounting research and
recommends that international accounting research will be enhanced by taking into account historical, social, economic and
legal factors in a country rather than a narrow focus on measurement, quantication, simplication and categorisation.
E. Heidhues, C. Patel / Critical Perspectives on Accounting 22 (2011) 273287 275
2. Grays theoretical framework of accounting values
As already discussed, Gray (1988) suggests that the accounting values of professionalism, uniformity, conservatism and
secrecy may be used to explain and predict differences between national accounting models. Gray (1988, p. 8) denes these
four accounting value dimensions as follows:
Professionalism vs. Statutory control: a preference for the exercise of individual professional judgement and the mainte-
nance of professional self-regulation as opposed to compliance with prescriptive legal requirements and statutory control;
Uniformity vs. Flexibility: a preference for the enforcement of uniform accounting practices between companies and the
consistent use of such practices over time as opposed to exibility consistent with the perceived circumstances of individual
companies;
Conservatism vs. Optimism: 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; and
Transparency vs. Secrecy: preference for condentiality andthe restrictionof disclosure of informationabout the business
only to those who are closely involved with its management and nancing as opposed to a more transparent, open and
publicly accountable approach.
Since Grays framework is theoretically based on Hofstedes (1980) four-dimensional culture model, the next section
provides a brief summary and denitions of Hofstedes (1980) societal value dimensions. In a later study, The Chinese
Culture Connection (1987) empirically established a fth dimension, Confucian Dynamism, which Hofstede also referred to
as Long-term versus Short-term Orientation
1
(Hofstede, 1991). However, Grays (1988) framework is completely based on
Hofstedes (1980) study. Therefore we make reference to Hofstedes (1980) four-dimensional model.
Hofstedes (1980) research claims to explore cultural differences and similarities among nations and controversially
denes culture as, the collective programming of the mind that distinguishes one group or category of people fromothers
(Hofstede, 1980, p. 25). Specically, Hofstede (1980) proposes that culture is a system of societal norms that consists of
value systems that are shared by major groups of the population. Importantly, he claims that societal values determine the
development and maintenance of institutions and their way of functioning in society. Based on an extensive international
survey that included data related to perceptions of work-related attitudes of IBM employees in over 50 countries, Hofstede
(1980) concluded that four underlying societal value dimensions supposedly represent elements of common structures in
societies. Hofstede (1980) further claimed that the four value dimensions of power distance, individualism, uncertainty
avoidance and masculinity are useful for measuring and positioning the cultural values of individual countries against
each other and in explaining institutional structures and behaviours. Hofstede (1984) denes and describes the four value
dimensions as follows:
Power Distance refers to the extent to which members of society accept that power in institutions and organizations is
distributed unequally (Hofstede, 1984, p. 83).
Individualism pertains to, a preference for a loosely knit social framework in society wherein individuals are supposed
to take care of themselves and their immediate families only. Its opposite, collectivism, stands for a preference for a tightly
knit social framework in which individuals can expect their relatives, clan or other in-group to look after them in exchange
for unquestioning loyalty (Hofstede, 1984, p. 83).
Uncertainty Avoidance is dened as, the degree to which the members of a society feel uncomfortable with uncertainty
and ambiguity. (. . .) Strong uncertainty avoidance societies maintain rigid codes of belief and behaviour and are intolerant
towards deviant persons and ideas. Weak uncertainty avoidance societies maintain a more relaxed atmosphere in which
practice counts more than principles and deviance is more easily tolerated (Hofstede, 1984, p. 83).
Masculinity and its opposite Femininity address the way in which a society allocates social roles to the sexes. Masculinity
stands for a preference insociety for achievement, heroism, assertiveness and material success. Its opposite, Feminity, stands
for a preference for relationships, modesty, caring for the weak, and the quality of life (Hofstede, 1984).
Based on these four societal values, Gray (1988, p. 911) formulated four directional hypotheses to theoretically link his
four accounting values of professionalism, uniformity, conservatism and secrecy to Hofstedes (1980) four societal value
dimensions:
The higher a country ranks in terms of individualismand 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.
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.
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.
The higher a country ranks in terms of uncertainty avoidance and power distance and the lower it ranks in terms of
individualism and masculinity the more likely it is to rank highly in terms of secrecy.
Gray(1988, p. 5) proposes that these hypotheses, maybe usedtoexplainandpredict international differences inaccount-
ing systems andpatterns of accounting development internationally andfurther classies countries into10Clusters namely,
1
Note that many cross-cultural accounting researchers have mistakenly attributed the development of the Confucianism dimension to Hofstede or
Hofstede and Bond (1988) rather than to the The Chinese Culture Connection (1987).
Anglo, Nordic, Germanic, More Developed Latin, Less Developed Latin, African, Asian-Colonial, Less Developed
Asian, Japan and Near Eastern. Furthermore, Gray (1988) suggests that there is a relationship between professional-
ism/uniformity, the authority of an accounting systems and its enforcement. Moreover, Gray proposes that conservatism is
the most relevant accounting value inuencing measurement practices, while secrecy is the most relevant accounting value
in inuencing disclosure of nancial information. The next sections provide criticisms of Grays framework and Hofstedes
(1980) dimensions and critically evaluates issues with specic reference to their subsequent application by international
accounting researchers and their widespread usage in accounting research and education.
3. Criticisms of Grays model of accounting values and its subsequent application
Inour earlier discussionwestatedthat theinuenceof Grays frameworkhas grownsignicantlyandachieveda dominant
position in international accounting research and accounting education. It becomes clear in the signicant number of studies
that invoke or test Grays framework suchas Askary, 2006; BaydounandWillett, 1995; Chanchani andWillett, 2004; Doupnik
andRichter, 2004; Eddie, 1990; Fechner andKilgore, 1994; Gray andVint, 1995; Hope, 2003; Jaggi andLow, 2000; MacArthur,
1996, 1999, 2006; Marrero and Brinker, 2007; Mathews and Reynolds, 2001; Perera, 1989; Roberts and Salter, 1999; Salter
and Niswander, 1995; Schultz and Lopez, 2001; Sudarwan and Fogarty, 1996; Williams, 1999, 2004; Williams and Tower,
1998; Wingate, 1997; Zarzeski, 1996. More recent examples of publications whichemphasize Grays frameworks continuing
popularity in international accounting research include Askary et al., 2008; Braun and Rodriguez, 2008; Hooi, 2007; Hope
et al., 2008; Noravesh et al., 2007; Rodriguez, 2009. Moreover, most major international accounting textbooks explain Grays
framework to show the inuence of culture on accounting systems. Examples of such texts include Choi and Mueller, 1992;
Choi et al., 1999, 2002; Doupnik and Perera, 2009; Gernon and Meek, 2001; Radebaugh and Gray, 1993, 1997, 2002; Gray
et al., 2001; Mathews and Perera, 1991, 1993, 1996; Nobes and Parker, 2008, 2010; Riahi-Belkaoui, 1994; Roberts et al., 1998,
2002, 2005, 2008; Smith and Gurd, 2000.
Subsequent researchers have largely ignored the major criticisms of Grays framework. For example, researchers such as
Braun and Rodriguez, 2008; Hope et al., 2008; MacArthur, 1999; Schultz and Lopez, 2001; Williams and Tower, 1998 have
uncritically adopted Grays frameworks conceptual foundation. Recall that Gray (1988) develops his theoretical framework
based on Hofstedes (1980) four cultural dimensions. However, Gray appears to be unaware of signicant early criticisms of
Hofstedes (1980) framework (Cooper, 1982; Roberts and Boyacigiller, 1984; Triandis, 1982; Westwood and Everett, 1987).
For example, Robinson (1985, p. 115) concluded that, In sum given Hofstedes theoretical orientation, sample, and method
of analysis, the outcome of his study is predictable. Once he has electedto consider only between-country differences, chosen
samples that exclude working class people and preclude analysis of within country differences and selected scale items on
the basis of their ability to distinguish between countries rather than between individuals, classes or sexes, it is not at all
surprising that he nds remarkable differences between societies in values. One wonders, in fact, howhe could have reached
any other conclusion.
It is important to note that Gray (1988, p. 6) provides a simplistic explanation regarding the validity of Hofstedes cultural
dimensions by arguing that, if Hofstede has correctly identied Individualism, Power Distance, Uncertainty Avoidance, and
Masculinity as signicant cultural value dimensions then it should be possible to establish their relationship to accounting
values. Accounting researchers have largely failed to recognize the serious limitations of Hofstede (1980) and this lack of
critical analysis signicantly limits the validity of Grays framework. For example, Baskerville (2003) inanappropriately enti-
tled paper, Hofstede never studied culture concluded that, . . .the manner in which Hofstede established the dimensions
of culture, and the subsequent reication of culture as a variable in cross-national studies in accounting, led to dependence
on cultural indices as an explanatory variable in accounting practices and behaviour (p. 2). Indeed, Hofstedes (1980) con-
cept of national culture is highly simplistic and fails to take into account signicant within-country differences and ignores
important contextual factors such as legal, social, political and economic inuences on culture (Roberts and Boyacigiller,
1984; Patel, 2004). This shortcoming has been recognized in a growing body of literature which relates to national diver-
sity and validity of Hofstedes (1980) dimensions in todays globalised world which recognises the importance of conict
and power in understanding culture (Alexander and Seidmann, 1990; Archer, 1989; Baskerville-Morley, 2005; Bock, 1999;
Doupnik and Tsakumis, 2004; Harrison and McKinnon, 1999; Patel, 2004; McSweeney, 2002; Smelser, 1992).
Also note that Hofstede (1980, p. 54) collected his data between 1967 and 1973 and researchers such as Schultz and Lopez
(2001), Williams (2004), DoupnikandRiccio(2006) oftenassume that these outdateddata andconclusions are still applicable
in the 21st century. Finally, Hofstedes deterministic and static view of culture has largely been rejected in cross-cultural
research(Baskerville, 2003; Billig, 1994; Myers andTan, 2002; Patel, 2004). Indeed, anincreasing number of researchers have
progressed beyond deterministic and synchronic versions of culture (Billig, 1994, p. 661) to a view of culture as, contested,
temporal and emergent (Kahn, 1989, p. 13).
Despite the signicant number of criticisms, Hofstedes work has been applied extensively in international accounting
and accountability research (Beugelsdijk and Frijns, 2010; Chan et al., 2003; Chow et al., 2002; Doupnik and Riccio, 2006;
Harrison, 1992; HassabElnaby and Mosebach, 2005; Hope et al., 2008; Hughes et al., 2009; Kachelmeier and Shehata, 1997;
Smith and Gurd, 2000; Smith and Hume, 2005; Soeters and Schreuder, 1988; Sudarwan and Fogarty, 1996). It is argued
that, the use of Hofstedes indices of cultural dimensions appeared to give cross-cultural studies in accounting stature
and scientic legitimacy, and respectability within accounting research (Baskerville, 2003, p. 11). Likewise, we argue that
the uncritical adoption and application of Grays framework provides evidence of an overgeneralisation of theoretical
approaches based on assumptions of scientic legitimacy and respectability. For example, Braun and Rodriguez (2008, p.
4) are critical of Grays framework but conclude that, we build our hypothesis and empirical tests on the presumption
that the framework is effective at explaining nancial reporting outcomes. Indeed, Grays framework does not only reect
the serious limitations and failings of Hofstedes dimensions but its subsequent large scale applications further promoted
the use of theoretically and methodologically questionable approaches in international accounting research. It appears that
international accounting research seems to be driven by a strong impetus to provide classications and categorizations
often without considering whether these categorizations provide relevant insights. This focus on measurement also applies
to other research such as the relevance and value of quantitative corporate governance research (Shapiro, 2006).
2
Similarly,
cross-cultural accounting research appears to be in danger of relying on overgeneralisations and obsession with categoriza-
tions and cultural dimensions that often fail to capture the complexity and dynamics of cultures. Exceptions to this strong
emphasis on positivistic research have been provided by researchers such as Carnegie and Napier (2002) who have shown
the importance of including historical factors and social processes to study accounting change and diffusion. Furthermore,
Patel (2003, 2006) provides evidence of the potential synergies and benets that arise fromcross-cultural accounting studies
combining qualitative and quantitative methodologies and incorporating interdisciplinary perspectives.
Importantly, concerns exist regarding the validity of Grays framework despite numerous attempts to test its validity
(Doupnik and Tsakumis, 2004). In particular Grays (1988) secrecy hypothesis has been subjected to a number of empirical
tests by international accounting researchers. While some studies provide partial support for Grays (1988) hypothesis (Gray
and Vint, 1995; Zarzeski, 1996), these results and specically the methodology of these studies largely based onhypothetico-
deductive paradigm may be questioned. For example, studies examining Grays secrecy hypothesis by taking into account
various contextual factors such as the legal system, do not nd evidence that Hofstedes cultural values inuence secrecy
and transparency in national accounting systems (Jaggi and Low, 2000; Sudarwan and Fogarty, 1996).
Moreover, Gray claims that his explanations of accounting values are derived from a review of accounting literature
and practice and often simply contrast aspects of Anglo-American accounting models to Continental European Accounting
models (Gray, 1988, p. 8). Gray seems to have followedHofstedes clusters by suggesting anAnglo cluster whichincludes the
UK, USA and the Anglophone Commonwealth countries despite early accounting publications such as American Accounting
Association (1977), Frank (1979), Nair and Frank (1980), Nobes (1983), Previts (1975) and Seidler (1967), which challenged
the common assumption of homogeneity between accounting practices in the UK and USA. Furthermore, Gray (1988, p.
1213) relies on Hofstedes statistical development of country clusters (1980, p. 223, 316, 324) to formulate accounting
clusters and relevant accounting values. It is also important to note that underpinning Grays framework is the assumption
that accountants in different countries basically represent the same distribution of cultural values as Hofstedes (1980) sam-
ple subjects. If accountants systematically differ fromHofstedes (1980) subjects, thenGrays (1988) applicationof Hofstedes
(1980) scores and rankings to infer accounting values is open to criticism. However, these limitations have not limited the
popularity of Grays (1988) framework and indeed many subsequent researchers have relied on Grays (1988) hypotheses
to simply derive national accounting values from Hofstedes (1980) societal values. As such, Grays framework may have
providedanexcuse tosubsequent researchers fromempiricallyinvestigatingother possible dimensions of accountingvalues.
We further argue that Grays terminology may imply andadvance the perceptionthat Anglo-Americanaccounting models
andprinciples are superior toother accounting models andimportantly that this terminology may increase biases against the
Continental European accounting model. For example, Gray (1988) refers to professionalism to describe Anglo-American
accounting models and statutory control to explain accounting in Continental European accounting models. Profession-
alism is dened as, 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).
Furthermore, professionalism is related to the judgements of accountants whereas statutory control refers to the role of
accountants, who are primarily concerned with the implementation of prescriptive and detailed legal requirements. As
such, Grays (1988) choice of concepts may promote the perception that continental European accountants seem to be infe-
rior in terms of their professionalism. We further suggest that similar judgemental biases can be identied in regard to
Grays other three accounting valuessecrecy vs. transparency, uniformity vs. exibility and conservatism vs. optimism.
Indeed, it would be interesting to examine accountants perceptions of concepts such as transparency, optimism and ex-
ibility that are used to describe Anglo-American accounting models compared to accountants perceptions of concepts such
as secrecy, conservatism and uniformity, which are used to predominantly describe continental European accounting
models.
As discussed previously, Grays framework has also invaded many international accounting texts. As such, students all
over the world are taught Grays framework and hypotheses often without critically discussing its theoretical foundations.
2
Similar concerns may be raised regarding some quantitative cross-cultural management studies. For example, Crossland and Hambrick (2007) aim to
provide evidence on CEO effects on organisational outcomes in Germany, Japan and the U.S. by applying a variance components analysis methodology.
Although providing insights on different national values and institutional structures as part of their theoretical argument, a group of German rms was
excluded from the statistical analysis because of taking executive decisions as a group and thus not fullling the criteria of having a designated CEO.
Moreover, Crossland and Hambrick (2007) mention that some German companies have a speaker rather than a designated chairman, which they recognise
as a weaker executive position. However, these differences were not taken into account in the statistical analysis in which speakers were coded as CEOs.
Although these categorizations allow the authors to run statistical comparisons among CEOs in Germany, Japan and the U.S., the relevance of the results
may be improved by extending such quantitative cross-cultural management studies to include further qualitative data and critical literature.
Table 1
Hofstede cultural dimension scores and ranks by country.
Country Individualism Power distance Uncertainty avoidance Masculinity
Score Rank Score Rank Score Rank Score Rank
Germany 67 15 35 4244 65 29 66 9/10
US 91 1 40 38 46 43 62 15
UK 89 3 35 4244 35 47/48 66 9/10
France 71 10/11 68 15/16 86 1015 43 35/36
Source: Hofstede (1980).
Furthermore, many textbooks uncritically feature Grays graphical mapping of accounting systems and thus give authority
to the existence of cultural clusters based on linkages between Hofstedes societal values and Grays accounting values
(Choi and Mueller, 1992; Choi et al., 1999, 2002; Doupnik and Perera, 2007; Gray et al., 2001; Mathews and Perera, 1991,
1993, 1996; Radebaugh and Gray, 1993, 1997, 2002). This strong emphasis on Grays accounting values and its graphical
demonstrationof cultural clusters ininternational accounting textbooks is of particular concernconsidering that Gray (1988)
did not provide any statistical details on how he used Hofstedes data to calculate the positioning. While it is important and
valuable to introduce international accounting students to various models and their application, we argue that the often
uncritical description of Grays framework may give greater authority to Grays hypotheses and classications than can be
derived from Grays framework. However, it is also important to note that some textbooks have provided a more balanced
discussion of Hofstedes societal dimensions and Grays hypotheses in their recent editions (Gernon and Meek, 2001; Nobes
and Parker, 2008, 2010; Riahi-Belkaoui, 1994; Roberts et al., 1998, 2002, 2005, 2008; Smith and Gurd, 2000).
Grays framework has often been applied to show differences between national accounting models and between the
Anglo-American and the continental European accounting model in particular (Choi and Mueller, 1992; Choi et al., 2002;
Radebaugh and Gray, 1993, 1997, 2002). These categorizations have become more important with increasing convergence of
accounting standards by adopting IFRS as national or regional standards (Flower, 1998; Zeff, 1998). Considering the attention
that has been focusing on Grays framework, it is important and timely to examine its limitations in greater detail.
Thenext sectionprovides adetailedanalysis of theGermanaccountingmodel toshowthelimitations of Grays framework.
In particular, we provide evidence that Grays framework largely fails to provide insights into similarities and differences
between national accounting models. In contrast, we aim to critically judge Grays framework by providing valuable expla-
nations for the structure and development of nancial disclosure in Germany.
4. Germanys accounting model: Grays accounting values applied
As discussed earlier, Gray (1988) proposes that Hofstedes (1980) cultural dimensions determine accounting values,
which then can be used to categorize and predict differences between national accounting systems. Based on Hofstedes
(1980) research, Germanys ranking on Hofstedes (1980) dimensions should predict a comparative positioning of Germanys
accounting values and subsequently the structure and institutionalisation of its accounting model. Based on an extensive
international survey on work-related attitudes of IBM employees, Hofstede (1980, 1983) generated societal values and
rankings for 50countries includingGermany. Table 1shows the scores andrankings of Germanyandfor comparisonpurposes
also the scores and rankings of UK, USA and France. Higher scores and rankings in Table 1 indicate greater strength of the
respective societal value in a country. It is important to note that Hofstedes (1980) dimensions and scores do not provide
absolutescores but arelativepositioningof countries. As such, therankthat GermanyscoredonHofstedes (1980) dimensions
is necessary to predict comparative positionings on Grays (1988) two-dimensional accounting values.
According to Hofstedes (1980) data Germany can be described as an individualistic country, with relatively low power
distance, mediumuncertainty avoidance and high masculinity. Grays classication is used for a comparative prediction and
categorization of the accounting values of professionalism and secrecy in the German context.
According to Grays (1988) professionalism hypothesis and the data provided by Hofstede (1980), a proposition can be
made that Germany is less likely to have a system based on professional judgment than the US or UK, but more likely
than France. However, Grays (1988, p. 12) graphical classication of culture areas shows that both the Germanic
3
and
the Anglo
4
cluster have a very strong emphasis on professionalism. Recall that Gray develops his dimensional accounting
values by contrasting aspects of Anglo-American accounting models to Continental European Accounting models. As such,
the Germanic cluster and Anglo cluster should theoretically be located at opposing ends of the professionalism-statutory
control continuum rather than being relatively closer.
Similar concerns relate to the secrecy and conservatism dimensions, which are supposed to provide insights into mea-
surement and nancial disclosure practices of countries. For example, Gray (1988, p. 13) proposes that the Germanic cluster
emphasizes secrecy to a greater extent than other clusters such as Anglo, Nordic and Asian Colonial. This classication for
3
The Germanic cluster includes Germany, Switzerland, Austria and Israel (Gray, 1988, p. 6).
4
The Anglo cluster includes Australia, Canada, Ireland, New Zealand, U.K., U.S.A. and South Africa (Gray, 1988, p. 6).
Germany contradicts Grays hypothesis. It remains questionable howthese judgmental hypothesis andclusters are supposed
to, explain international differences in accounting systems (Gray, 1988, p. 5). Indeed, Grays propositions and graphical
mapping of accounting dimensions may at times be regardedas misleading rather thanproviding useful claimedexplanation
of differences between accounting values and accounting models.
The theoretical and methodological issues discussed in the previous sections may be partly acceptable for an initial
publicationof anexploratory framework that has beenpublishedto be consideredandtestedby the international accounting
researchers. However, subsequent researchers have largely failed to critically evaluate the frameworks limitations and to
further develop and rene Grays framework. Gray (1988) proposed that cultural differences identied by Hofstedes cross-
cultural research(1980, 1983) may explaininternational differences inaccounting systems. However, our analysis provided
in the sections that followclearly shows that Grays propositions are too simplistic to explain why accounting systems differ
internationally. Indeed, we argue that reliance on simplistic theoretical models of accounting values fails to enhance the
understanding of accounting systems and might lead at times to misleading and dubious classications and predictions. In
contrast, the following sections on the development of Germanys nancial disclosure practices provide greater insights into
the richness and complexity of accounting systems.
5. The legitimacy of secrecy in nancial disclosure
Condentiality and the restriction of nancial disclosure to those that are closely involved with the management of the
business have long been regarded as an important characteristic of the German accounting model (Choi and Meek, 2008;
Choi et al., 1999, 2002). The German emphasis on condentiality and the restriction of nancial disclosure has been deeply
embedded in the German accounting systemand is still supported by a majority of German enterprises and stakeholders (Al
Koni, 1998; Baker andQuick, 1998; Brstler, 2006; Roberts et al., 2005; Rost, 1991). Nevertheless, it is important todistinguish
betweenvarious legal forms of entities suchas sole proprietorships, commercial partnerships andcorporations. For example,
large commercial partnerships and corporations are subject to additional accounting regulations. Similarly, the size of an
entity has been used as a criterion for distinguishing disclosure rules and regulations (Eierle, 2004; Fey and Fladt, 2006).
Since 2005 publicly listed entities are required to prepare their consolidated statements in accordance with International
Financial Reporting Standards (IFRS). However, single entity statements still need to be prepared in accordance with the
German Commercial Code (HGB). The next section provides valuable historical insights into development and long-standing
importance of secrecy in German accounting and refers to differences among various legal forms of entities.
The restriction of nancial disclosure to those that are closely involved with the management of the business has its early
roots in the accounting records of the wealthy merchant families of the 16th century. For example, an examination of the
Fugger merchant family reveals the existence of a secret book, which contained important nancial information. This book
had to be clearly distinguished from other records, because it was written by and restricted to the master of the business
and contained details of prot or loss, commercial terms, interest rates and wages (Penndorf, 1913; Weitnauer, 1931).
Since the time of the Fugger, condentialityandthe principle idea of restrictingsensitive informationtopeople engagedin
the business have been reinforced by a number of factors including the dominant role of government and banks as providers
of private capital (Al Koni, 1998; Denzel, 1983; Rost, 1991). The German capitalist system is based on close relationships
between the state, labour and banks as providers of capital (Casper and Vitols, 1997; Perry and Noelke, 2006). Since the 19th
century banks dominated stock exchanges, had extensive ownership in companies, were represented on supervisory boards
and later established their own audit rms, giving them access to inside information (Quick, 2005; van Dien, 1929). As a
result, accounting regulations emphasized conservative valuation methods and importantly, they were not compelled to
disclose so-called sensitive information. Indeed, restricted nancial disclosure as a result of the specic German capitalism
is still supported by the majority of stakeholders and is incorporated in the current German accounting system (Al Koni,
1998; Baker and Quick, 1998; Brstler, 2006; Deeg, 1997; Radebaugh and Gray, 2002; Roberts et al., 2005; Rost, 1991).
While Gray (1988) argues that a more collectivist society is more likely to have a secretive accounting model, the preference
to restrict disclosure of nancial information is the result of the specic German interdependencies between state, banks
and entities. As such, this supports our argument that accounting should be critically examined in its context rather than
formulating accounting models based on categorisation, simplication and generalisations.
Further insights into Germanys preference for a restriction of nancial disclosure are gained by taking into account the
emphasis on creditor protection and prudence on one hand and balancing this with emphasis on merchants freedom and
privacy on the other hand. While the emphasis on creditor protection may suggest an accounting systemwith greater trans-
parency, the strong focus on merchants privacy has often limited endeavours to increase nancial disclosures. An emphasis
to maintain restrictions to nancial disclosure has been evident since the enactment of the HGB (German commercial code)
in 1900. Specic accounting regulations ensured that documentation and recording relevant information became important
features of German accounting requirements (Moxter, 1976; Schmidt-Busemann, 1977), however, the main focus was on
merchants self-information and not necessarily the right of information by third parties. Third parties only had a right to
this information in the case of bankruptcy (Gareis and Fuchsberger, 1891; Schmidt-Busemann, 1977).
The emphasis on creditor protection and merchants privacy at the same time is the result of the specic German cultural,
social and legal environment. International accounting literature strongly emphasizes creditor protection, prudence and the
reliance on statutes as fundamental characteristics of the German accounting model (Choi and Mueller, 1992; Choi et al.,
1999, 2002; Radebaugh and Gray, 2002). However, the importance of privacy and freedomin the German society has largely
been neglected as an explanation for a tendency to restrict disclosure of nancial information. Enlightenment philosophers
such as Kant (17241804) have promoted the ideal that individuals freedom is the greatest good. Higher authorities and
public legal justicearerequiredtoensurerespect for eachindividuals freedom(Riley, 1983; Saage, 1973). Germanaccounting
regulations are largely consistent with these cultural ideals that attempt to foster prudence and prevent negligence, but also
emphasize privacy over nancial affairs. Grays (1988) hypotheses about the cultural inuences on the secrecy value are too
simplistic and restrictive to explain these distinct cultural features and thus fail to provide relevant insights into differences
between accounting models.
The strong focus on secrecy that is evident in early 20th century German accounting law was modied in the stock
corporation decrees in the 1930s. It is interesting to note that the inter-war period was characterised by a growing interest
in international equity and the perception that the general public has a legitimate interest in accounting information (Barth,
1953; Eierle, 2004; Walker, 2000). For example, content of nancial reports and auditing requirements were modied in
the Aktienrechts(not)verordnung of 1931 (stock corporation emergency decree). With the objective of attracting foreign
investors and equity nancing, the German government adopted a number of Anglo-American principles and perspectives
(Barth, 1953; Eierle, 2005; Klausing, 1931). As such, annual reports had to include explanatory comments, display major
variations from earlier periods and introduce certain sub-categorizations in the balance sheet and prot and loss statement
(Eierle, 2004). Oneof themajor functions of thenewrequirements inthebalancesheet was toensureaclear presentationof an
entitys liquidity (Barth, 1953). Furthermore, the Aktienrechts(not)verordnung of 1931 (stock corporationemergency decree)
codied explicit auditing requirements for stock corporations and associations limited by shares. This was largely because
the governments reaction to pressure from foreign investors for reports by independent auditors. Moreover, spectacular
bankruptcies andbusiness failures hadresultedina questioning of supervisoryboards toeffectivelymonitor nancial reports
(Barth, 1953; Eierle, 2004). Audit requirements were further enhanced by the Aktiengesetz of 1937 (stock corporation law)
which effectively introduced compulsory audits by enacting that annual reports without an external audit were void by law
(Barth, 1953; Doupnik and Perera, 2007).
These changes depart fromthe earlier restrictions ondisclosure of nancial informationandreveal the early beginnings of
an adjustment process to implement international investors requirements. Nevertheless, restriction of nancial disclosure
and the merchants privacy were still important features of German accounting and culturally supported (Eierle, 2004).
Indeed, it is important to note that differences existed between public expectations in relation to stock corporations and
other private enterprises, which Grays framework cannot capture.
The differences in public expectations are revealed in the enactment of the Gesetz ber die Prfung von Jahresabschlssen
(audit of annual reports law) in 1937, which emphasizes a perpetuation of condentiality in German accounting require-
ments. The minister of justice was authorised to extend the scope of the requirement for compulsory audits of annual reports
to Gesellschaften mit beschrnkter Haftung (GmbHlimited liability companies). However, the compulsory audit require-
ments were only applicable to banks (Eierle, 2004). This is of particular importance as the ministers decision meant that the
majority of German businesses did not have to audit their annual accounts. Our evaluation of the audit law refers only to
expectations and preferences regarding nancial disclosure rules and it is not describing any Nazi enactments as legitimate.
While condentiality was an important German accounting value, creditor protection and the interest of the general
public in accounting information gained greater importance in German accounting law with the enactment of the Publiz-
ittsgesetz (disclosure law) of 1969. Already in 1930 the government had argued that the general public had a legitimate
interest in information about stock corporations nancial results (Eierle, 2004). This debate was reinforced by a number of
large corporate collapses such as that of the Krupp group in 1966. Suppliers, customers, and employees were not aware of
the companys risky situation as the publication of nancial reports was not required until three years later (Busse von Colbe,
1996). Both government and the public were concerned about this lack of information and questioned the appropriateness
and conceptual basis of existing regulations. This situation led to the enactment of the Publizittsgesetz (disclosure law) of
1969, which required large unincorporated groups and rms
5
to disclose their nancial reports and draw up consolidated
statements independent of their legal form (Busse von Colbe, 1996; Eierle, 2004).
Despite these changes with the Publizittsgesetz (disclosure law) of 1969, condentiality remained an important aspect
of German accounting regulation in particular for Small and Medium sized entities (SMEs) as revealed in the enactment
of the Bilanzrichtliniengesetz in 1985 (accounting directives act). The Bilanzrichtliniengesetz introduced major changes to
GmbHs (limitedliability companies) because of requirements regarding nancial reports, consolidatedreports andauditing.
However SMEs, still regarded as the backbone of the German economy, most often relied on the legal form of GmbH
and were relieved of the above requirements by extensive exceptions based on size (Beisse, 2001; Bundesministerium fr
Wirtschaft und Technologie, 2007; Kayser and Wallau, 2006).
The exemptions for SMEs can also be related to the specic German relationship between SMEs and the wider society
following from the Rhenish system of Capitalism. In contrast to Anglo-American capitalist system, Rhenish capitalism
is based upon close relationships between entities and stakeholders, who are continuously monitoring management and
are involved in long-term strategic decision making (Albert, 1993; Btiz-Lazo et al., 2008; Streeck, 1997). Specically, the
5
The categorization of large groups and rms focused on three key gures: Employees exceeding 5000; balance sheet total exceeding DM 125 million;
sales exceeding DM250 million. A group or rmwas considered large when it fullled at least two criteria on three subsequent balance sheet dates (PublG,
1969, 1).
Rhenish system of capitalism is characterised by largely consensual relationships between labour and capital with an
emphasis on employee participation, a strong focus on bank nancing or internally generated capital, and a supporting
role of the state (Albert, 1993; Albert and Gonenc, 1996; Perry and Noelke, 2006). This form of capitalism has further
contributed to close relationships between SMEs and the public. A large number of SMEs are family-owned businesses,
providing economic and social contributions and exhibiting long-term consensual relationship with employees (Aicher,
2003; Institut fr Mittelstandsforschung, 2010; Rhl, 2008; Wimmer, 2009). This public involvement has for a long time
fostered trust, condence and a sense of security among companies, employees and the public (Perry and Noelke, 2006).
Moreover, many SMEs are characterised by close relationships with banks that are still major providers of capital and
important shareholders. This stable nancial environment has further contributed to long-term consensual relationships
with less reliance on additional nancial disclosure. Although global nancial integration and international expansion have
changed management and nance strategies, many German SMEs still possess elements of the specic German form of
Rhenish capitalism and culture (Aicher, 2003; Crouch, 1999; Deeg, 1997; Institut fr Mittelstandsforschung, 2010; Rhl,
2008; Soskice, 1997).
Noteworthy in regards to the distinct role of SMEs and their inuence on restriction of nancial disclosure is also the
Kapitalgesellschaften und Co.-Richtliniengesetz act of 2000 (KapCoRiLiGqualifying partnerships act) (Deutscher Bundestag,
2000). This act extended the option to prepare consolidated nancial reports consistent with either the US GAAP or Inter-
national Accounting Standards (IAS) to all entities and this requirement now complied with the European Council directive
of January 1993 (KapCoRiLiG) (Bmelburg, 1999; Brinkmann, 2006; Eierle, 2005; Ernst, 2000). The time lag of seven years
between European Council requirement and enforcement in Germany was largely because of the governments intention to
support restricted nancial disclosure that had been a major feature since the beginning of accounting in Germany. Qualify-
ing partnerships (limited partnerships with a limited liability entity as general partner)
6
are a common legal form of SMEs,
which the German government did not want to burden with additional requirements. Specically, the directives nancial
disclosure and ling requirements were seen as an invasion of privacy which would conict with the German value of a
merchants freedom and privacy (Bmelburg, 1999; Eierle, 2004).
7
The enforcement process of the Kapitalgesellschaften und Co.-Richtliniengesetz provides insights into the complex rela-
tionship between the focus on condentiality of German entities and European and international accounting requirements.
Indeed, globalisation and requirements of international capital markets have led to further changes in German accounting
law. Shortly after the Kapitalaufnahmeerleichterungsgesetz (KapAEGCapital Raising Act) in 1998, which allowed prepa-
ration of consolidated statements according to internationally accepted accounting standards (IAS or US GAAP) and was
directed at improving competitiveness on capital markets, the German government also passed the Gesetz zur Kontrolle und
Transparenz imUnternehmensbereich (KonTraGGovernance Act 1998). The KonTraG aimed to improve nancial reporting
disclosure and corporate governance by requiring listed stock corporations to include cash ow statements and segment
reports in their group reports in accordance with international accounting practices (HGB, 297). In 2002, the Transparenz-
und Publizittsgesetz (TransPuGTransparency Act) extended these requirements to all publicly traded groups and also
required additional disclosure on movements in shareholder funds (Eierle, 2004, 2005).
Moreover, it is important to note that the convergence process further differentiated requirements for listed and non-
listed as well as single entity statements and consolidated statements in Germany. The European IAS regulation ((EC) No.
1606/2002) required listed entities to prepare consolidated nancial reports consistent with IAS/IFRS (European Parliament
and Council, 2002) and became effective for reports of nancial years beginning on or after the 1st of January 2005. In
relation to the implementation of international accounting standards by the European IAS regulation, Germany enacted
the Bilanzkontrollgesetz (Financial Reporting Control Act) and the Bilanzrechtsformgesetz (Accounting Law Reform Act)
in 2004 (BilKoG, 2004; BilReg, 2004). These enactments further extended nancial disclosure requirements for large com-
panies and groups. For example, the Bilanzrechtsformgesetz extended the disclosure requirements for notes to nancial
instruments and required additional information in the directors report by including an analysis of risks and opportunities
(Eierle, 2005). While the adaptation of German accounting law to international standards increased nancial disclosures,
it is important to note differences among various legal forms of entities as well as between single entity and consolidated
statements. For example, only publicly traded companies are required to disclose fees paid for audit and non-audit service
and importantly, individual nancial statements still need to be consistent with the German accounting principles of the
HGB (German commercial code) because of their role in the calculation of dividend payments and income tax (Eierle, 2005;
Herzig, 2000; Kahle, 2002). However, companies may voluntarily prepare additional individual statements according to
IFRS. It is important to note that these changes are largely driven by forces of globalisation and European drive towards
convergence rather than developing accounting standards and regulations that are compatible with Germanys social and
cultural environment.It is clear that the convergence process has extendedGermanys disclosure regulations. However, these
6
A very common form of a qualifying partnership is the GmbH & Co. KG. A KG (Kommanditgesellschaft) is similar to the limited partnership in the UK
has at least one general partner with unlimited liability and one partner whose liability is limited. The GmbH (Gesellschaft mit beschrnkter Haftung) is
a private limited company and conceptually comparable to the UK private limited company. In a GmbH & Co KG, the GmbH is the general partner of the
KG, which allows restricting the liability of the general partner to the net assets of the GmbH (Eierle, 2005).
7
The perceived conict has created problems since the enactment of the Bilanzrichtliniengesetz (accounting directives act) of 1985, which gave rise
to a situation where a number of companies refused to le their accounts with the commercial register, believing that their privacy would be extensively
harmed if they did (Bmelburg, 1999; Ernst, 2000; Fischer et al., 2004).
changes largely apply to consolidated statements of publicly listed companies, which need to be differentiated fromentities
that prepare nancial statements in accordance with the HGB (German Commercial Code). Indeed, secrecy is still a major
feature in the German accounting model as evidenced by recent rigorous discussions about implementing IFRS for SMEs
(Deutscher Industrie- undHandelskammertag et al., 2005; Europisches Parlament, 2007; FAZ, 2006; KuhnandStehle, 2006;
Schrmann, 2006). As in the case of the Kapitalgesellschaften und Co.-Richtliniengesetz (KapCoRiLiGqualifying partnerships
act) of 2000, SMEs in Germany fear that they may experience negative consequences if sensitive nancial information were
disclosed in accordance with IFRS (Brstler, 2006; Kuhn and Stehle, 2006).
Stille Reserven (secret reserves) are another aspect that international accounting literature often describes as charac-
teristic of the German accounting model and that supposedly emphasizes the German tendency towards secrecy as an
accounting value (Choi et al., 2002; Choi and Meek, 2008). Consistent with restrictions in nancial disclosure, Stille Reser-
ven (secret reserves) have a long standing tradition dating back to 19th century Germany (Gallhofer and Haslam, 1991;
Klausing, 1931). Importantly, Stille Reserven are not necessarily linked to secrecy as much as to the ideal of ensuring cred-
itor protection and capital maintenance (Brstler, 2006). Since the late 19th century, Stille Reserven have often been the
topic of controversial and rigorous debates, however, these have been generally supported by the German government and
other stakeholders. As early as 1884, with the enactment of the Aktienrechtsnovelle (stock corporation law amendment)
regulations regarding Stille Reserven were discussed. Banks as the main nanciers of the time, the government and also
management saw advantages in restricting excessive capital expenditure by supporting creditor protection. This included
the creation of Stille Reserven to ensure a smooth and regular dividend policy (Gallhofer and Haslam, 1991; Klausing, 1931).
Stille Reserven were further encouraged and created by legal rules that specied the application of the Niederstwertprinzip
(principle of the lower of cost and market) and vague depreciation policies that created Stille Reserven (Dietzen, 1937;
Gallhofer and Haslam, 1991; Klausing, 1931).
It is interesting to note that the emphasis on prudent accounting with the establishment of Stille Reserven was not a
specic German characteristic but is believed to also have been commonplace in the UK in the late 19th and early 20th
centuries (Billings and Capie, 2009; Napier, 1995, p. 266). Largely consistent with the German experience, hidden reserves
in the UK were also used to smooth prots in times of economic uncertainty and political turmoil as well as a protection
against shareholders excessive dividend expectations (Arnold, 1997; Arnold and Collier, 2007; Billings and Capie, 2009).
Moreover, the accounting profession in the UKwas largely supportive of hidden reserves with strong criticisms being evoked
only after the Royal Mail Case in 1931 (Arnold and Collier, 2007). However, these similarities between the UK and Germany
largely came to an end with the UK Companies Act of 1947, which required more comprehensive accounting disclosure
and effectively abolished hidden reserves except for companies in the banking, insurance and shipping industries (Arnold
and Collier, 2007). Indeed, the UK Companies Act of 1947 was principally responsive to needs of shareholders rather than
being concerned about businesses accountability for society at large (Moltby, 2000). These differences between the UK and
Germany clearly show the importance of moving away from the narrow focus on categorization and quantication and
the importance of taking into account historical and other contextual factors in evaluating accounting models in specic
countries (Carnegie and Napier, 2002).
InGermany, Stille Reserven remainedanimportant andcontroversial issueinthesecondhalf of the20thcenturyas evident
in the enactment of the Aktienrechtsreform (stock corporations act) of 1965. In general, the government followed a conser-
vative approach with the Anschaffungskostenprinzip (historic cost approach), Niederstwertprinzip (principle of the lower
of cost and market) and Realisationsprinzip (realisation principle) to ensure creditor protection and capital maintenance.
Nevertheless, the government tried to restrict deliberate overvaluation of liabilities and undervaluation of assets, which
were often used to conceal prots and subsequent capital distribution to shareholders (AktG, Art. 133155). Importantly,
the government did not question the practice of creating Stille Reserven in general. In fact the government argued again
that Stille Reserven established under accounting law were an appropriate element of reasonable commercial risk antici-
pation (Eierle, 2004, 2005). This approach to accounting is consistent with German cultural values that largely emphasize
the importance of reliability and stable development rather than a short-term focus on relevance as advocated by Inter-
national Accounting Standards Board (IASB). This public emphasis on reliability and economic stability has been shaped
by the economic experiences in the 20th century in particular. Major economic crises in the late 1920s and early 1930s
and the devastating economic consequences of hyperination strongly inuenced public perceptions of monetary values,
economic stability and consequently accounting requirements. For example, ination has remained a major concern of the
German public and has further fostered support for conservative accounting rules (Busse von Colbe, 1996; Ferguson, 1997;
Schildbach, 1990). Indeed, studies from 2004 to 2008 have provided evidence that ination has been the greatest fear of
the German public and has ranked consistently higher than fear of war, terror and natural disasters (R+V-Infocenter, 2008).
An accounting system that emphasizes conservative valuations and economic stability is thus in accordance with German
public perceptions and requirements.
In conclusion, our analysis has shown that condentiality and limited nancial disclosure are still embedded in the
traditional German accounting model for a number of reasons such as merchants privacy, the important role of bank
nancing and the strong support of SMEs that still drive Germanys economy. Indeed, our analysis has provided insights into
Germanys traditional accounting model and its emphasis on condentiality by taking into account the cultural, political,
economic andhistorical inuences onaccounting. Althoughinternational convergence of accounting standards is inuencing
Germanys accounting regulations and has led to a greater emphasis on disclosure, these changes are largely a reaction to
internationalisation and adoption of European directives. Moreover, the recent changes in German accounting law with the
enactment of the Bilanzrechtsmodernisierungsgesetz (Act to Modernise Accounting Law) in May 2009 provide evidence that
Germany still follows a unique approach by combining traditional German accounting principles with generally accepted
principles in IFRS (Hellmann et al., 2009). Indeed, the German commercial code was modernised with the objective of
providing an alternative to IFRS rather than adopting IFRS for all entities (Bundesministerium der Justiz, 2009).
6. Discussion and conclusion
Our evaluation of Grays framework of accounting values has revealed a number of concerns regarding its theoretical and
methodological assumptions and issues associated with its largely uncritical adoption in international accounting research.
Even though Grays work is essentially exploratory, subsequent researchers have often uncritically invoked and applied
Grays framework without any concerns related to its assumptions. Indeed, our major criticisms relate to the uncritical
application of Hofstedes societal dimensions and the subsequent simplistic and judgmental creation of four accounting
values and also Grays development of country clusters. Another problem associated with the simplistic operationalisation
of accounting values and the largely uncritical adoption is the resulting overgeneralisation and the failure of subsequent
researchers to appreciate contextual differences between countries. Many of the issues raised may be acceptable in an initial
publication of an exploratory work, particularly considering that Gray suggested that, much work lies ahead (Gray, 1988,
p. 14). While Grays framework may have even been more prominent in the 1990s, recently published studies (Braun and
Rodriguez, 2008; Hope et al., 2008; Noravesh et al., 2007; Rodriguez, 2009) provide evidence of its continuing popularity
with many accounting researchers. Moreover, Grays framework has led to a proliferation of textbooks, which also have
largely failed to discuss its limitations thus further enhancing Grays popularity. Indeed, we argue that the often uncritical
adoption and application of Grays framework by subsequent researchers has led to an overgeneralisation of the usefulness
of Grays framework in international accounting research.
The wide acceptance of Grays framework despite its limitations raises the important questionof why frameworks suchas
Gray (1988) gain widespread acceptance and support in international accounting research. The widespread use and accep-
tance of Grays accounting values suggests that an application of Grays framework is taken as a token of scientic legitimacy
and respectability in international accounting research. Furthermore, Gray was seen as one of the leading international
accounting researchers and this may have led subsequent researchers to be cautious in challenging Grays hypotheses.
Moreover, we may conclude that the obsession of subsequent accounting researchers may lie in the fact that they found the
use of Grays framework contributing to their career in the competitive and often self-referential environment of accounting
research. Indeed, Hopwood (2007, p. 1371) argues that the strong career focus in accounting research encourages con-
servatism and conformity... with new methodological approaches attracting a large number of followers. Furthermore,
we argue that concerns and inconsistent results in the international accounting literature have not received appropriate
attention and were often dismissed and this further popularised Grays framework.
Another factor contributing to the initial appeal and wide acceptance of Grays framework may be the opportunity for
cross-cultural accounting researchers to employ quantitative, statistical measures to analyse cultural inuences in account-
ing and provide international comparisons of behaviour in accounting. Indeed, Grays exploratory framework with the call
for further research provided international accounting researchers with ample opportunities to engage in simplistic empir-
ical research. Moreover, Grays (1988) reliance on Hofstedes cultural values may have been another contributing factor by
providing international accounting researchers with another set of data for hypotheses testing. These research opportunities
may have beenparticularly appealing to researchstudents who may be more comfortable inapplying hypothetico-deductive
approaches rather than writing richly nuanced critical qualitative narratives. International accounting researchers and
younger academics in particular are undoubtedly under increasing pressure to publish or perish with promotions and
tenure decisions often being dependent on the number and perceived quality of publications. Over the last two decades, a
few researchers have criticised the privileged status of positivistic research in the top accounting journals (Gendron, 2009;
Hopwood, 2007; Reiter and Williams, 2002; Shapiro, 2006; Tinker et al., 1982; Williams et al., 2006). As such, it may not
come as a surprise that comparative international accounting research reects this focus on quantitative studies employing
the hypothetico-deductive method. Indeed, international accounting researchseems to be drivenby a strong impetus to pro-
vide classications and categorizations often without considering whether these categorizations provide relevant insights.
Similarly, cross-cultural accounting research seems to be in danger to rely on overgeneralisations of categorizations and
cultural dimensions that often fail to capture the complexity and dynamics of cultures.
In contrast to the strong focus on quantication, categorisations and measurements evident in the number of publica-
tions related to Grays framework, we argue that international accounting research may be enhanced by taking into account
important contextual factors. Indeed, accounting research is a social and dynamic discipline that requires ontological and
epistemological openness and multiple discourses in its debates rather than being marginalized to categorizations, dimen-
sions and clusters. Our evaluation shows that historically the German accounting model had a tendency to restrict nancial
disclosure and this is in contrast to the Anglo-American accounting models that have a strong emphasis on nancial disclo-
sure. Although Grays model shows differences between the Germanic cluster and the Anglo-American cluster (Gray, 1998,
p. 13) on disclosure, subsequent quantitative research studies have largely failed to provide adequate explanations for these
differences. In contrast, we provide evidence to showthat the German accounting model is the result of the specic German
cultural, economic, social and legal environment. Indeed, Gray and subsequent researchers concepts about accounting val-
ues fail to capture Germanys distinct socio-economic model and capitalist traditionthat has resulted inanaccounting model
that promotes greater stability and restrictions of nancial disclosure. Indeed, the development of secretive tendencies and
other concepts such as conservatismin the German accounting model provides evidence that reliance on simplistic cultural
dimensions and accounting values neglects the distinctiveness of national accounting models and the factors that shape
these models.
In conclusion, our evaluation of Grays framework has clearly shown that reliance on simplistic quantied theoretical
models largely fails to enhance our understanding of accounting systems and may at times result in misleading and dubious
classications. Using Germany as a case study, we apply this more holistic approach to provide additional insights into
the factors differentiating German accounting from other accounting models. We recommend that accounting research
will be enhanced by a critical examination of contextual environments of countries rather than a focus on measurement,
quantication, simplication and categorisation.
Acknowledgements
The authors wishtoacknowledge the helpful comments of participants at the 3rdIAAER-ANPCONTInternational Account-
ing Congress, Sao Paulo, June 2009 and at the Interdisciplinary Perspectives on Accounting Conference, Innsbruck, July 2009.
The authors would also like to thank the editor and two anonymous reviewers for their valuable comments.
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