ABACUS, Vol. 24, No. 1, 1988 S. J. GRAY Towards a Theory of Cultural Influence on the Development of Accounting Systems Internationally Research has shown that accounting follows different patterns in different parts of the world. There have been claims that national systems are determined by environmental factors. In this context, cultural factors have not been fully considered. This paper proposes four hypotheses on the relationship between identified cultural characteristics and the development of accounting systems, the regulation of the accounting profession and attitudes towards financial management and disclosure. The hypotheses are not operationalized, and empirical tests have not been carried out. They are proposed here as a first step in the development of a theory of cultural influence on the development of accounting systems. Key words: Accounting policies; Culture; Financial reporting. This paper explores the extent to which international differences in accounting, with specific reference to corporate financial reporting systems, may be explained and predicted by differences in cultural factors. While prior research has shown that there are different patterns of accounting internationally and that the development of national systems tends to be a function of environmental factors, it is a matter of some controversy as to the identification of the patterns and influential factors involved (Mueller, 1967; Zeff, 1971; Radebaugh, 1975; Nair and Frank, 1980; Nobes, 1983). In this context the significance of culture does not appear to have been fully appreciated and thus the purpose of this paper is to propose a framework which links culture with the development of accounting systems internationally. The first section of the paper reviews prior research on international classification and the influence of environmental factors. The second section addresses the significance of the cultural dimension and its application to accounting. The third section proposes a framework and develops hypotheses linking culture with the development of accounting attitudes and systems internationally, based on the cross- cultural work of Hofstede (1980, 1983). In the fourth section some culture area classifications are proposed. They have been developed on a judgmental basis, in the context of combinations of accounting attitudes or "values' which determine (a) the authority for and enforcement of accounting systems, and (b) the measurement and disclosure characteristics of accounting systems. S. J. GRAY is a Professor of Accounting, University of Glasgow, Scotland.ABACUS conformity and the search for ultimate, absolute truths and values. This value dimension is also consistent with a preference for collectivism, as opposed to individualism, with its tightly knit social framework, a belief in organization and order, and respect for group norms. There would also seem to be a link, if less strong, between uniformity and power distance in that uniformity is more easily facilitated in a large power-distance society in that the imposition of laws and codes of a uniform character are more likely to be accepted. As regards masculinity, however, there does not appear to be any signicant link with uniformity. Following from this analysis it may be hypothesized that: H2: 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. Canservatr'sm versus Optimism This would seem to be a signicant accounting value dimension because it is arguably 'the most ancient and probably the most pervasive principle of accounting valuation' (Sterling, 1967, p. 110). Conservatism or prudence in asset measurement and the reporting of prots is perceived as a fundamental attitude of accountants the world over. Moreover, conservatism varies according to country, ranging from a strongly conservative approach in the Continental European countries, such as France and Germany, to the much less conservative attitudes of accoantants in the U.S.A. and UK. (e.g., Beeny, 1975, 1976; Nobes, 1984; Choi and Mueller, 1984; Arpan and Radebaugh, 1985). , _ The differential impact of conservatism on accounting measurement practices internationally has also been demonstrated empirically (e.g., Gray, 1980; Choi and Mueller, 1984). Such diiferences would seem to be reinforced by the relative development of capital markets, the differing pressures of user interests, and the inuence of tax laws on accountants in the countries concerned. To what extent then can conservatism be linked to societal value dimensions? It is argued here that conservatism can be linked most closely with the uncertainty avoidance dimension. A preference for more conservative measures of prots is consistent with strong uncertainty avoidance following from a concern with security and a perceived need to adopt a cautious approach to cope with the uncertainty of future events. There would also seem to be a link, if less strong, between high levels of individualism and masculinity on the one hand, and weak uncertainty avoidance on the other, to the extent that an emphasis on individual achievement and performance is likely to foster a less conservative approach to measurement. As regards the power distance dimensiou there does not, however, appear to be any signicant link with conservatism. Following from this analysis it may be hypothesized that: H3: 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. lO A THEORY OF CULTURAL INFLUENCE Secrecy versus Transparency This would seem to be a signicant accounting value dimension which stems as much from management as it does from the accountant owing to the inuence of management on the quantity of information disclosed to outsiders (e. g'., laggi, 1975). Secrecy, or condentiality, in business relationships is, nevertheless, a fundamental accounting attitude (Arpan and Radebaugh, 1985). Secrecy would also seem to be closely related to conservatism in that both values imply a cautious approach to corporate nancial reporting in general; but with secrecy relating to the disclosure dimension and conservatism relating to the measurement dimension. The extent of secrecy would seem to vary across countries with lower levels of disclosure, including instances of secret reserves, evident in the Continental European countries, for example, compared to the U.S.A. and U.K. (e.g., Barrett, 1976; Choi and Mueller, 1984; Arpan and Radebaugh, 1985). These differences would also seem to be reinforced by the differential development of capital markets and the nature of share ownership which may provide incentives for the voluntary disclosure of information (c.g., Watts, 1977). To what extent, then, can secrecy be linked to societal value dimensions? It is argued here that secrecy can be linked most closely with the uncertainty-avoidance, power- distance and individualism dimensions. A preference for secrecy is consistent with strong uncertainty avoidance following from a need to restrict information disclosures so as to avoid conict and competition and to preserve security. A close relationship with power distance also seems likely in that high power-distance societies are likely to be characterized by the restriction of information to preserve power inequalities. Secrecy is also consistent with a preference for collectivism, as opposed to individualism, with its concern for those closely involved with the rm rather than external parties. A signicant but less important link with masculinity also seems likely to the extent that more caring societies where more emphasis is given to the quality of life, people and the environment, will tend to be more open especially as regards socially related information. Following from this analysis it may be hypothesized that: H4: The higher a country ranks in terms of uncertainty avoidance and power distance and the lower it ranks in terms of individualism and masculinity then the more likely it is to rank highly in terms of secrecy. ACCOUNTING VALUES AND CULTURE AREA CLASSIFICATIONS Having formulated hypotheses relating societal values to accounting values internationally. it is evident that the most important societal values at the level of the accounting subculture would seem to be uncertainty avoidance and individualism. While power distance and masculinity are also signicant to some extent, masculinity appears to be of somewhat lesser importance in the system of accounting values. It is now proposed to hypothesize culture area classications in the context of combinations of accounting values. For this purpose it is argued here that a useful distinction can be made between the authority for accounting systems, that is, the extent to which they are determined and enforced by statutory control or professional ll ABACUS means on the one hand, and the measurement and disclosure characteristics of accounting systems on the other. Accounting values most relevant to the professional or statutory authority for accounting systems and their enforcement would seem to be the professionalism and uniformity dimensions in that they are concerned with regulation and the extent of enforcement or conformity. Accordingly, these can be combined and the classification of culture areas hypothesized on a judgmental basis as shown in Figure 3. In making these judgments reference has been made to the relevant correlations between value dimensions and the resultant clusters of countries identified from the statistical analysis carried out by Hofstede (1980, pp. 223, 316). From this classification it seems clear that the Anglo and Nordic culture areas may be contrasted with the Germanic and more developed Latin culture areas on the one hand, and the Japanese, Near Eastern, less developed Latin, less developed Asian and African culture areas on the other. The Colonial Asian countries are separately classified, representing a mixture of influences. Accounting values most relevant to the measurement practices used and the extent of information disclosed are self-evidently the conservatism and secrecy dimensions. Accordingly, these can be combined and the classification of culture areas hypothesized on a judgmental basis as shown in Figure 4. In making judgments in respect of these FIGURE 3 ACCOUNTING SYSTEMS: AUTHORITY AND ENFORCEMENT Statutory control Less developed Latin Asian- Less Colonial developed Near Eastern Asian Japan African Flexibility Uniformity More Developed Latin Nordic Germanic Anglo Professionalism 12A THEORY OF CULTURAL INFLUENCE classifications reference has also been made to the relevant correlations between value dimensions and the resultant clusters of countries identified from the statistical analysis carried out by Hofstede (1980, pp. 316, 324). Here there would appear to be a sharper division of culture area groupings with the Colonial Asian group relating more closely with the Anglo and Nordic groupings in contrast with the Germanic and more developed Latin groupings which appear to relate more closely to the Japanese, less developed Asian, African, less developed Latin, and Near Eastern area groupings. FIGURE 4 ACCOUNTING SYSTEMS: MEASUREMENT AND DISCLOSURE Secrecy Less developed Latin Germanic Near Eastern Japan Less developed Asian African More developed Latin