Accounting and the Environmental Factors Influencing Accounting in Australia and Sweden - Essay Example

A Comparative Study of Accounting and the Environmental Factors Influencing Accounting in Australia and Sweden Word count - 1907 Table of Contents I. Synopsis…………………………………………………………………………………...3 II. Introduction………………………………………………………………………………..4 III. Accounting Values………………………………………………………………………...4 a. Professionalism versus Statutory Control…………………………………………6 b. Uniformity versus Flexibility……………………………………………………...7 c. Conservatism versus Optimism…………………………………………………...8 d. Secrecy versus Transparency…………………………………………………..….9 e. Short-term versus Long-Term Focus…………………………………………….10 IV. References………………………………………………………………………………..11 Synopsis A hypothesis was formulated by Gray (1988) that depicted the association between the national accounting environment and the cultural dimensions. Many researches conducted have proven the relationship between the changes in accounting environment and cultural dimensions. In a global context, there is an increasing awareness of the differing influences of environmental factors on the growth of accounting. There are also different patterns of accounting behaviours that are applicable to different groups of countries. This paper is aimed at assessing the similarities and differences in the accounting systems of Australia and Sweden. It begins with the discussion of Mueller’s classification of accounting then narrows down to the accounting values within which a comprehensive analysis of the Swedish and Australian accounting environments are based. A Comparative Study of Accounting and the Environmental Factors Influencing Accounting in Australia and Sweden Introduction Gerhard Mueller carried out an environmental analysis which supports the discussion on the accounting classifications. Gerhard identified four different approaches to the accounting development which provide the necessary categorization of countries based on accounting values. This includes the microeconomic pattern, macroeconomic pattern, uniform accounting pattern, and the independent discipline pattern (Mueller, 1967). The macroeconomic pattern is based on the interrelationship between business accounting and the economic policies of the nation. The corporate objectives are usually to follow instead of leading national economic policies. Business and economic stability is promoted through the smoothening of accounting income; to stimulate growth, adjustment of depreciation rates is necessary; to promote investment, the creation of special reserves is necessary; and to meet macroeconomic concerns it is necessary to develop social responsibility accounting. The examples given for this approach included French, Germany and Sweden. The microeconomic pattern on the other hand can be seen as a sub discipline of business economics. This pattern provides the focus directed towards the specific economic entities. In this pattern, economic analysis is the source of accounting concepts. An essential concept is determined by maintaining in real terms the monetary capital invested in the companies. The microeconomic approach is demonstrated by some companies in Netherlands and Australia through replacement-value accounting (Chanchani & Willett, 2004). Accounting is viewed in the light of an efficient method of control and administration derived from the uniform accounting patterns. The Uniform accounting pattern utilizes and is largely based upon the scientific approaches to accounting involving levelled techniques to disclosure, measurements, presentations, tax authorities and governments. Typical examples of the Uniform accounting patterns are those countries with centrally planned economies and those with strong government involvement in economy planning such as Sweden, Germany, France, and Switzerland. Accounting is regarded as a functional service achieved from business practice, in this independent discipline pattern. This pattern has a deeply established observance for pragmatism and judgment. In this respect, accounting has the capacity to develop its own conceptual framework based o successful business practices. Income as a generally accepted and recognized principle of accounting is practical, essential, and complete and a candid disclosure dimension. Mueller gave the examples of the independent discipline pattern to include Australia, United Kingdom and the United States. Based on the above classifications by Mueller, the accounting values developed include professionalism vs. statutory control, uniformity vs. flexibility, conservatism vs. optimism, secrecy vs. transparency and long term vs. short term focus. The accounting values will be used to compare the accounting systems and practices of Australia and Sweden as follows: The professional vs. Statutory control. It indicates the inclination towards the individual professional judgment exercise and professional self regulation maintenance contrast to the conformity with the established and redulative statutory control and legal requirements (Salter &Niswander, 2005). It is an important dimension of accounting value that relates to the view of independent attitudes as most likely to be internalized by accountants conducting professional individual judgements to a large proportion worldwide. In the western countries, a controversial issue is presented by the notion that the liability of the accounting profession to statutory regulations or its permission to maintain jurisdiction over the standards of accounting in the light of it being an issue of private self regulation. For instance, the establishment of professional associations has been more firm in Australia than in Sweden. The true and fair view presentation of results and financial position of a company is to a large extent influenced by the professional accountant judgement as an independent being or entity. This provision allows for the necessity to disclose accounting information beyond and contrary to the specifications by law. This is different from the traditional position held and practiced in Sweden in which an accountant’s duties are increasingly interpreted as to implement the relatively regulative and comprehensive legal requirements. Sweden changed its accounting approach in the 1980s as a result of the implementation of the European Union directive. The change entails a more convergence movement towards the statutory approach. The linkage between professionalism to individualism and uncertainty avoidance dimensions is closer. The inclination is towards the independent professional judgement in line with the loosely mended social framework. The emphasis is laid upon the belief in individual decisions, independence and respect for individual undertaking. Consistency can also be noted in the weak uncertainty avoidance with practice being very essential, coupled with a strong belief in equality and few regulations in place and a toleration of variety of professional judgement. Uniformity vs. Flexibility It has stronger inclination towards the enforcement of uniform practices of accounting between firms and the consistent utilization of the practices overtime contrary to flexibility, according to perceived situations of the individual firms. This forms a very essential accounting value because attitudes that relate to consistency, comparability, and uniformity are the basic features of accounting globally. The value is liable to varying interpretations, which range from a comparatively stringent intertemporal and intercompany uniformity, to consistencies with firms over a period of time; and some concern related to comparability between firms to analogous flexibility of accounting practices to match the situations of individual firms. The enforcement of levelled plan of accounting and the tax regulations as an appropriate measurement tool has been operative in Sweden for a very long time. This is tied to the need to facilitate national planning coupled with the pursuit of the macroeconomic objectives. On the other hand, Australia has demonstrated a more intense need for the facilitation of intercompany comparability and intertemporal consistency as a result of the recognized need for flexibility. There exists a close linkage between individualism dimension and the dimension of uncertainty avoidance. There exists both inclination towards uniformity and uncertainty avoidance with a strong linkage between the two. This brings about the necessity for law and order to restrict behaviour, necessity for inscribed and codified rules and regulations, search for absolute truth and conformity respect and values. This value dimension is also consistent with the inclination towards collectivism, far different from individualism, with the well constructed social framework, respect for group norms and the belief in order and organization. Since the imposed laws and codes that promote uniformity are largely accepted, uniformity is easily facilitated (Jaggi, 2003). Conservatism versus Optimism It represents an inclination towards a discreet measurement technique that enables accountants to manage the uncertainties in future events different from the more laissez-faire and optimistic approach that entails risk taking. It makes up very essential elements of accounting value since arguably conservatism is probably the most pervasive and the most ancient accounting valuation principle. Prudence or conservatism in asset measurement and profit reporting forms a basic attitude of accountants’ worldwide (Sterling, 2007). Conservatism differs among nations. Sweden employs a stronger conservative approach with Australia a much less conservative approach and risk taking attitudes of accountants. The different impacts of conservatism on the practices of accounting measurement have been empirically demonstrated globally. Seemingly the variances are supported by the analogous development of capital markets, differences in pressures of user interests and the impacts of tax laws on the accounting practice between Sweden and Australia (Saudagaran, 2002). Conservatism can more closely be linked with the short term vs. long term focus and the uncertainty avoidance element. There are consistencies between an inclination towards a more conservative measure of assets and profits with the dimension of strong uncertainty avoidance coming from the need for security and the need to adopt a strict approach to manage the uncertainty of future events. There also exist consistency between the less conservative measurement approach with the short term orientation associated with anticipation of quick results; thus, the adoption of a more optimistic approach necessary for the conservation of resources and investments for the long term results (Choi, 2004). Secrecy versus Transparency Here the recognition is on the inclination towards the need to disclosure and confidentiality of information relating to a company to the team comprising of the management and financing different from the transparent, open and public accounting approaches. It forms an important element of accounting value stemming from management in a similar way to the accountant because of the management influence on the quantity and quality of information to disclose to the outsiders. Confidentiality and secrecy in the business relationships marks a very basic and necessary accounting attitude (McKinnon, 2006). There is a close relation between confidentiality and conservatism. Both the values of secrecy and conservatism entail the application of a strict approach to the general corporate financial reporting. Secrecy, however, relates to the disclosure dimension while conservatism is associated with the measurement dimensions. The levels of secrecy and confidentiality values vary significantly among nations. For instance, Sweden demonstrates lower levels of disclosure compared to Australia. The differences in the levels of secrecy values are supported by the public ownership of shares and the differential development of capital markets. They both provide the incentives for voluntary information disclosure (Doupnik & Salter, 2005). There exists consistency between secrecy preference and strong uncertainty avoidance; with the latter emphasizing the need for restriction of information disclosure to external parties to avoid competition and conflict and for security preservation. Secrecy and power distance also demonstrate close relationship. This is as a result of power distance societies being characterized by the information restrictions for preservation of power inequalities (Doupnik, 2005). There are also consistencies between secrecy and collectivism, contrary to individualism, as it relates to the interests of those who are closely involved with the company rather than the outside parties. The long term focus also indicates an inclination towards a consistent secrecy with the requirement to conservation of resources within a firm and to maintain the availability of funds for investments that is comparable to the employee and shareholder demands for higher payments. Short-term vs. Long-Term Focus This is usually referred to as Confucian dynamism. Its description as Confucian as the involved values seems in line with the teachings of Confucius, a legendary Chinese Philosopher. The short term orientation is fundamentally based on respect of status and social obligation regardless of cost; respect for tradition; the need for quick results; need for appearances; and the need for truth instead of virtue (Baydoun, 2005). On the other hand, the long term orientation, is fundamentally premised upon the adaptation of traditions to satisfy the modern requirements; a strict respect and adherence to status and social obligations within the set limits; huge amounts of funds and savings for investments; attainment of gradual results through perseverance; subordination of personal interests to attain a set objective and the need for a virtuous approach to life. Sweden employs a short-term orientation while Australia has the long term focus (Hofstede, 2001). References Baydoun, N., & Willett, R. (2005). Cultural relevance of western accounting systems to developing countries. Abacus, 31(1), 67-92. Chanchani, S., & Willett, R. (2005). An empirical assessment of gray’s accounting value constructs. International Journal of Accounting, 39 (2), 125–54. Choi, F. D. S. (2004). European disclosure: The competitive disclosure hypothesis. Journal of International Business Studies, 5(2), 15-23. Doupnik, T. S., & Salter, S. B. (2005). External environment, culture, and accounting practice: A preliminary test of a general model of international accounting development. International Journal of Accounting, 30(1), 187-209. Hofstede, G. (2001). Culture’s consequences: Comparing values, behaviours, institutions and organizations across nations, 2nd ed. Thousand Oaks, CA: Sage. Jaggi, B. C. (2003). The impact of the cultural environment on financial disclosures. International Journal of Accounting, 10(2), 75–84. McKinnon, J. L. (2006). The historical development and operational form of corporate reporting regulation in Japan. New York: Garland. Mueller, G. (1967). International accounting. New York: Macmillan. Pourjalali & Meek, G. (1995). Accounting and culture: The case of Iran. Research in. Accounting in Emerging Economies, 3, 3-17. Salter, S., & Niswander, F. (2005). Cultural influence on the development of accounting systems internationally: A Test of Gray’s (1988) Theory. Journal of International Business Studies, 26(2), 379-397. Saudagaran, S., & Gary, B. (2002). Financial disclosure levels and foreign stock exchange listing decisions. Journal of International Financial Management and Accounting, 4, 106-148. Sterling, R. R. (2007). Conservatism: The fundamental principle of valuation in traditional accounting. Abacus, 3(2), 109-132. Read More