International Differences in Accounting: The Birth of an Accounting

Harmonization Process?
by Irena Jindrichovska
Charles University, Prague; Anglo-American University, Prague

Abstract
This paper is based on recent academic literature and focuses on international differences in
accounting. A hot topic of the last twenty-five years has been international accounting harmonization.
This paper sees accounting harmonization as a common movement among accounting regulators,
standard setters and educators in different nations towards the same goal. As a result EU companies
working in different accounting environments with different emphases on particular issues using
different accounting concepts with different traditions have been building new common standards of
reporting.
The first part of the paper discusses necessary features of accounting and its purpose, as it is
understood at present. The later part focuses on differences in accounting practice, due to differences
in funding mechanisms, legal systems and tax regulation, as seen through different national
accounting arrangements. The paper presents comparisons of different accounting practices at the start
of a new accounting era. The article provides topics for further research in the area of cultural
differences and their affect on accounting harmonization and hence on the business life of the
community.

Key words: international accounting, differences in accounting, accounting environment,

harmonization

Corresponding author:
Ing. Irena Jindrichovska, CSc.
Institut ekonomickch studi
Fakulta socilnch vd University Karlovy
Opletalova 26
Praha 1

E-mail irenajindrich@tiscali.cz
This short paper was prepared for the conference: Trendy ve vuce etnictv na vysokch
kolch neuniverzitnho smru organized by Soukrom vysok kola ekonomickch studi,
Praha, on 14.1.2004

1. Introduction
Financial reporting now concerns all listed companies in the EU. By the year 2005 all of
them will be reporting according to the International Accounting Standards that are uniform
throughout the EU.
This is quite a radical change from the past. For continental Europe IAS is very much an
Anglo-Saxon inspired reporting model. Applying and understanding IAS in other European
countries requires considerable effort in getting to know the new concepts and the approach
of the standard setters. On the other hand, there is virtually no UK listed company yet that
already applies IAS. (Alexander et al, 2003)
Although the requirement to apply IAS does not extend to small and medium sized
companies (at least not as an EU requirement), many member states of the EU will, as a
result of the modernization of their Accounting Directives, amend their national accounting
legislation in a manner which brings it closer to IAS.

2. A little excursion around the basic requirements of modern financial reporting

Broadly speaking, accounting is about the provision of figures to people about their
resources.
It can be seen mainly as technical manipulation of figures characterizing various points of
interest.1 In accounting much of the emphasis is likely to be on doing things with figures.
But the question arises as to which figure or figures should actually be built into the system.
Or more fundamentally, how is one going to decide which figures to put in?
In general terms, we can answer this question by going back to the original definition of
accounting. The figures the accountants should provide to people are the figures that they
need to know for their own practical purposes. This raises questions about the users of
accounting information, and the purposes for which each particular type of user requires the
information. How can the user be provided with the information best suited to his/her needs.
Having in mind the users of accounting information e.g. equity investors, creditors, company
employees, analysts, and more broadly the government or the public, many of the information
requirements are essentially forward looking. Different users with different purposes require
different information about the same items, and they will require (and be able to understand)
different degrees of complexity and depth. Not all the information required is likely to be
included in financial accounts.
In spite of the fact that accounting information needs to be directed to a particular user,
several general points emerge from the preceding discussion about the necessary features and
general characteristics of accounting.

Eg 1. What people have; 2. What they used to have, 3. The change in what they have got, 4. What
they may get in the future (Alexander at al, 2003).

Again, going back to the drawing board, the information accounting offers needs to be
relevant. The accounting report must give the user what he/she wants. Further requirements
are understandability (different levels of complexity for different users) and reliability
(preferably independently verified by a qualified auditor). The information should be
complete and objective: It should provide a total picture of the reporting business, which
implies a large and complex collection of data that may in the end create a conflict with
understandability. Objectivity is a confused notion with several different possible meanings.
This concept means that reports should not be biased by personal perceptions. A further
requirement is timeliness: the information needs to be conveyed to the user in time for use to
be made from it. Approximate information available on time for decision about some action
is more valuable than precise and accurate information presented after the decision has been
made. Last but not least, the comparability of accounting information is a vital feature.
Consistency of treatment is very important here implying application of generally accepted
regulatory standards. We could state at this place that it was the need for comparability that
brought about the idea of common accounting standards.

3. Evolution of accounting brief overview

Historically, accounting and reporting grew up largely independently, and often very
differently in different countries. Practice, regulation and especially the mode of regulation
differed often very greatly.
Financial reporting in general can be viewed as a part of the communication process. The
nature and functions of reporting with respect to organizations differ depending on the nature
of the sender and the receiver as well as the nature of the information transferred. The sender
and the receiver form an integral part of the environment.
Initially financial reporting was mainly internal reporting. It provided company owners with a
vehicle to manage the company. Later on, in the early 1800s private capital alone was
insufficient to finance business activities. Capital was gathered from sources outside the
company. The owners delegated the managing function to directors and provided them with
the necessary authority. Nowadays the external financial report provides a means of reporting
the results and accounts to owners.
Financial reporting evolved from internal to external reporting, but for a long time external
reporting meant providing information within the borders of a specific country. Thus, because
national authorities perceive that there are alternatives for recognition and measurement and
presentation they have chosen those recognition, measurement, consolidation and
presentation policies which best fitted their national environments. The annual report, for
example, provides information on the financial position of a company and its results.
Although the general purpose is similar in most countries, many differences occur resulting
from different environmental and cultural influences in the individual countries.

4. Differences in accounting
Among the most important causes of differences referred to in the literature are: 1) sources of
finance, 2) the existing legal system, 3) the link between accounting and taxation, and 4)
cultural differences between societies.
Sources of finance (Provision of finance)
This difference in providers of finance (creditors/insiders) versus (equity/owners) is the key
cause for international differences in financial reporting (Nobes and Parker, 1998).
Companies in different countries responded differently to the increased need for finance. In
Germany, France, Italy, Belgium, banks became the major supplier of additional funds. Thus
companies relied more on debt financing. On the contrary, in the UK and in the US
shareholders provided extra funds, which has given rise to active stock exchanges.
Existing legal system
In the past two types of legal system have developed in the West: 1) the common law system
(zvykov prvo), and 2) the code law system (kodifikovan systm).
The common law system originated in England and developed from case law. Common law
is characterized as a legal system which develops case by case and which does not prescribe
general rules, which could be applied to all cases. In common law countries accounting
regulation is in the hands of professional organizations in the private sector. Company law is
kept to a minimum and detailed regulation is produced by the private standard setter.
The code law system originated in Roman law and has developed in continental Europe. It is
characterized by a wide set of rules which attempt to give guidance in all situations. In the
code law countries the company law is very detailed and accounting standards are often
embodied in the company law. Accounting regulation in code law countries is in the hands of
the government and financial reporting is in those circumstances often reduced to complying
with a set of very detailed legal rules. (Alexander et al, 2003)
Link between accounting and taxation
In some countries fiscal authorities use information provided in the financial statements to
determine taxable income. In some countries the costs are only tax deductible if they are also
recognized in the P&L account. This may lead to the danger, that financial reporting becomes
tax influenced or even tax biased. This link is often found in those countries that do not have
an explicit investor approach, e.g. Germany, Belgium, and the Czech Republic.
In the UK, the US and in the Netherlands the link between taxes and accounting is much
weaker. Separate accounts are filed for tax purposes. The measurement and recognition rules
are different from the valuation rules used in financial reporting.
This relation between accounting income and tax income varies over time.

Cultural differences
Cultural differences between nations are identified as an important influencing factor on
reporting and disclosure behavior with regard to financial statements. (E.g. individualism
versus collectivism, strong versus weak uncertainty avoidance, professionalism versus
statutory control, uniformity versus flexibility, secrecy versus transparency.)
5. Recent empirical evidence
As the business community becomes more and more internationalised it might seem that the
differences play a less significant role in financial reporting. For large companies the location
of the company is no longer the sole influencing factor on the reporting behaviour of the
company. However, this is not the case.
The variables pointed out by researchers in the 1970s and 1980s as causes which might
explain differences in national accounting systems and national GAAPs are used in empirical
comparative studies where different aspects of financial reporting practices are researched,
e.g. value relevance of accounting information, earnings management practices,
characteristics of the audit market and process.
For illustration:
Ali and Hwang (2000) researched the value relevance of accounting information and found
that it is less relevant in bank oriented financial systems.
Ball, Kothari and Robin (2000) investigated two properties of accounting income
conservatism and timeliness. Conservatism was for the first time researched by Basu (1997)
and it is defined as the extent to which current period income asymmetrically incorporates
economic losses relative to economic gains. They found that in common law countries
accounting income is significantly more timely than in code law countries.2
Guenther and Young (2000) investigated cross-country differences in legal systems,
differences in legal protection for external shareholders, and differences in the degree of tax
conformity and their impact on the relation between accounting earnings and the real
economic value relevant events that underlie them. They found that there is a high association
for the UK and the US and a lower one for the bank-oriented countries.
6. Summary
This paper strived to characterise from the normative standpoint the major features of
international accounting regulation and explored the differences between the reporting styles
of different nations growing from their traditions. The recent empirical evidence suggests that
the differences in provision of finance, the legal system, the link between accounting and
taxation and cultural values can explain the differences between the financial reporting,
accounting and economic behaviour of companies around the world. A study taking a
longitudinal approach to the development of differences after the institution of accounting
harmonization could be an interesting topic for future research.
2

For examination of these features in the Czech environment see Jindrichovska (2001, 2002).

References:
Alexander, D, Britton, A, and Jorissen A (2003) International Financial Reporting and
Analysis, Thomson Learning, London
Ali, A and Hwang, L (2000) Country specific factors related to financial reporting and the
value relevance of accounting data. Journal of Accounting Research, 38, (1), Spring
Ball, R., Kothari, S.P. and Robin A. (2000) The Effect of International Institutional Factors
on Properties of Accounting Earnings, Journal of Accounting and Economics, 29: 1-51.
Basu, S. (1997) The Conservatism Principle and the Asymmetric Timeliness of Earnings,
Journal of Accounting and Economics, 24: 3-37.
Guenther, D. and Young, D. (2000) The association between financial accounting measures
and real economic activity: A multinational study. Journal of Accounting and Economics, 29,
53-72.
Jindrichovska, I. (2001) The Relationship between Accounting Numbers and Returns: Some
Empirical Evidence from the Emerging Market of the Czech Republic, The European
Accounting Review, 10:1, 107-131.
Jindrichovska, I. (2002) Conservatism and Timeliness of Earnings and Impact of Losses on
the Czech Market: An Empirical Study. Project financed by EC (European Commission) No.
HPRN-CT-2000-00062 "Harmonia" Accounting Harmonisation and Standardisation in
Europe: Enforcement, Comparability and Capital Market Effects.
Nobes, W. and Parker, R. (1998) Comparative International Accounting. 5th ed, Prentice Hall,
London
Sucher, P. and Alexander, D. (2002) IAS: issues of country, sector and audit firm compliance
in emerging economies, London: Centre for Business Performance of the Institute of
Chartered Accountants in England and Wales.

Shrnut

Mezinrodn rozdly v etnictv na potku harmonizanho procesu

Tento lnek se zabv rozdly mezi systmy nrodnho etnictv. Horkm tmatem dnen doby je
harmonizace etnictv. V tto prci srovnvme etn praktiky na potku nov ry. lnek
poskytuje nmty pro dal vzkum nrodnch rozdl ve vztahu k etn harmonizaci a jejho vlivu
na hospodsk ivot spolenosti.
Finann vkaznictv se nyn dotk vech kotovanch spolenost v Evropsk unii. Pestoe se
poadavek vykazovn v mezinrodnm formtu zatm netk malch a stednch podnik, lensk
stty chtt pizpsobit nrodn etn legislativu tak, aby se piblizovala mezinrodnm standardm
IAS/IFRS.
etnictv slou rznm uivatelm a rznm elm, pesto vak se vichni shodnou na spolench
poadavcch, kter by mlo plnit a na charakteristikch jak by mlo mt (m bt: relevantn,
srozumiteln, spolehliv, pln, objektivn, vasn, srovnateln,...)
Historicky se etnictv vyvjelo v tznch zemch nezvisle a asto velmi odlin. Finann
etnictv bylo zprvu komunikanm prostedkem mezi vlastnky a manaery podnik. K tomu dolo
asi na zatku 19. stolet, kdy se v dsledku rozvoje prmyslu oddlila funkce vlastnka a manaera.
Do t doby dily podniky vlastnci sami, ale s rozvojem vroby bylo teba zskat vce kapitlu a tak
vlastnci delegovali dc pravomoci na manaery podnik. A etnictv zskalo novou funkci
informovat vlastnky podnik o vsledcch.
prava etnictv vak nebyla jednotn protoe vroba zdka pesahovala hranice zem nebo sttu.
Proto jsou v etnictv ropzdly kter vznikly v dsledku odlinch vliv prosted a kultury.
Z odborn literatury meme identifikovat nkolik pin tchto rozdl:
1. Zdroje financovn (vritel/insidei versus akcioni/vlastnci)
2. Platn prvn systm (zvykov prvo versus kodifikovan prvn systm)
3. Vztah mezi etnictvm a danmi
4. Kulsturn rozdly (individualismus vs kolektivismus, uniformita vs flexibilita...)
Empirick studie ukzaly, e rozdly stle existuj i pes sbliovn etnictnch systm. Nap. Ali, A
and Hwang, L (2000) - rozdly v dsledku rznch zdroj financovn; Ball, R., Kothari, S. and Robin
A. (2000) rozdly v se stupni konzervativismu a vasnosti v dsledku rozdlnch prvnch systm;
a Guenther, D. and Young, D. (2000) rozdly v reakcch na reln ekonomick udlosti v dsledku
rozdlnch prvnch systm a rznch zdroj financovn.
Pomoc identifikace tchto vliv lze vysvtlit rozdly ve vztahu mezi finannm etnictvm a
ekonomickm chovanm vtiny spolenost. Zajmavm nmtem je sledovat vvoj tchto rozdl v
delm asovm horizontu a ovit zda se etn systmy v dsledku mezinrodn harmonizace
sbliuj.