Worldwide Accounting Diversity

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Worldwide Accounting Diversity

• -Evidence
• -Issues
• -Classification
• Possible Causes

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Questions for Our Discussion

• How much diversity is there?
• Does this diversity seem randomized or are there
  patterns of similarity among different nations
  around the world?
• What appears to be driving this diversity? What
  factors seem to account for it?

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I. Evidence
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At the end of WWII

• There was a great need around the world to
  rebuild and establish peacetime economies.
• The USA emerged from the war with a stable
  government and an intact, industrial base.
• The USA began to finance and support the global
  effort to rebuild and grow.
• US debt and equity markets expanded in response.

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These Changes

• Increased interest in conducting trade and
  business investment across international borders.
  

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Investors quickly learned that

• Financial markets and reporting systems in other
  nations were diverse in form and substance.
• Countries varied greatly in terms of exposure and
  interest in world trade and capital markets.
• Financial intermediary structures prevalent in
  the USA were often weak or missing in other
  global contexts.

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Empirical Evidence

• 2/3 of firms- US GAAP income appears considerably
  lower.
• 1/3 of firms- US GAAP income is higher.
• Differences are spread evenly across countries.
• At the extremes, the differences are huge.

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II. Issues

• Diverse Financial Reporting Systems cause a
  number of problems, including
• Preparation of consolidated statements for MNEs
• Impairment of access to foreign capital markets
• Problems with comparability
• Problems with quality

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III. Classification Causes
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Major Differences In Financial Reporting Systems
Around the World

• Question of True and Fair View
• Subjectivity versus legal compliance
• The use of professional judgement.
• Substance versus form.

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Major Differences In Financial Reporting Systems
Around the World

• Taxation
• massgeblichkeitsprinzip, roughly translated
  tax accounts should be the same as commercial
  accounts.

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Major Differences In Financial Reporting Systems
Around the World

• Conservatism and the Use of Reserves
• Valuation Bases
• Historical Cost (e.g., Germany) versus Current
  cost (e.g., Netherlands).
• Inflation adjustments (e.g., PPI)

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Major Differences In Financial Reporting Systems
Around the World

• Consolidation
• USA lead the way in the practice of (e.g.,
  pooling, purchase methods)
• UK lagged but eventually adopted consolidation,
  mostly as supplements to parent statements.
• Rare in Europe, until recently.

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Major Differences In Financial Reporting Systems
Around the World

• Uniformity of Format and Presentation
• Sometimes even accounts are standardized and
  codified into law
• Balance sheet formats- vary by shape and order of
  liquidity.
• PL statements vary by shape and cost
  characterization (nature versus function).

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Questions Arose About International Accounting
Differences

• Do the differences provide the basis for a
  typology (a classification system)?
• Why do these differences occur?

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Early Research On Accounting Differences Across
the World

• Mueller (1967)- Hypothesizes 4 types of
  accounting and reporting systems
• Macroeconomic (Sweden)
• Practice-based (UK, USA)
• Microeconomic (Netherlands)
• Rigid and Uniform (Germany, Japan)

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Early Efforts to Classify Accounting Systems
Found Around the World

• Spiedler (1967)-Proposes an alternative
  framework- the idea of spheres of influence.
• British
• American
• Continental European

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Early Research

• With the advent, in the late 1960s, of access to
  mainframe computers by major research
  Universities, researchers began to move away from
  simply deducing answers to these questions in
  favor of empirical investigation using
  statistical methods of research.
• Example- Frank (1978)

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Judgemental Classification

• Nobes (1983)

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The Role of Culture

• Hofstede (1980)
• Gray (1988)
• Doupnik and Salter (1993)

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