The framework created by Professor Sidney Gray in 1988 to explain the development of a countrys accounting system is presented in the textbook in Exhibit 2.6. Gray theorized that culture has an impact on a countrys accounting system through its influence on accounting values. In this case, students will further explore this model and apply to analyze the audit procedures for Cancan Enterprises, Inc.
Read the case on page 59 of the textbook and submit a Word document with your response to the questions in Parts I-III.
Case Study (5 Marks) The framework created by Professor Sidney Gray in 1988 to explain the development of a country's accounting system is presented in the chapter in Exhibit 2.8. Gray theorized that culture has an impact on a country's accounting system through its influence on accounting values. Focusing on that part of a country's accounting system comprised of financial reporting rules and practices, the model can be visualized as follows: In short, cultural values shared by members of a socicty influcnce the accounting values shared by members of the accounting subculture. The shared values of the accounting subculture in turn affect the financial reporting rules and practices found within a country. With respect to the accounting value of conservatism, Gray hypothesized that the higher a country ranks on the cultural dimensions of uncertainty avoidance and long-term orientation, and the lower it ranks in terms of individualism and masculinity, then the more likely it is to rank highly in terms of conservatism. Conservatism is a preference for a cautious approach to measurement. Conservatism is manifested in a country's accounting system through a tendency to defer recognition of assets and items that inerease net income and a tendency to accelerate the recognition of liabilities and items that decrease net income. One example of conservatism in practice would be a rule that requires an unrealized contingent liability to be recognized when it is probuble that an outflow of future resources will arise but does not allow the recognition of an unrealized contingent asset under any circumstances. Although Gray's model relates cultural values to the accounting value of conservatism as it is embodied in a country's financial reporting rules, it can be argued that the model is equally applicable to the manner in which a country's accountants apply those rules: Required: a) Using your own words, discuss the implications for the global convergence of financial reporting standards raised by Gray's model. b) Using your own words, discuss the implications this argument has for the comparability of financial statements across countries, even in an environment of substantial international secounting convergence. c) Identify areas in which differences in cultural ditnensions across countries could lead to difference in the application of financial reporting rules
