Ksenija Černe∗ UDK 675.012
Review
Pregledni rad
INFLUENTIAL FACTORS OF COUNTRY'S ACCOUNTING SYSTEM
DEVELOPMENT
ABSTRACT
The accounting system of each country is affected by different influential factors. As there is a
very small possibility that influential factors of two countries will be equal, they can also be
considered as generators of national specificities. The level of differences of each influential factor
between countries implicates the intensity of accounting differences at the international level. The
actuality of international accounting harmonization issues imposes the need of consideration and
detailed examination of factors that influence the development and accounting system in one country.
Considering the different classification of factors mentioned above, as well as factors which are
extracted or specially emphasised in literature, some of them are described.
JEL: M 41
Key words: accounting system, influential factor, classification
1. INTRODUCTION
As a social science, accounting is affected by the environment in which it operates, but
at the same time, it is one of the factors impacting on this same environment. This is a fact
that points to the interdependency of accounting and its environment. A country’s accounting
system is affected by a variety of historical, economic, socio – cultural, institutional, and other
non – accounting factors, so it is highly unlikely for the influential factors of any two
countries to be exactly the same. Therefore, it can be logically assumed that the factors
affecting the development of a country’s accounting system are also the generators of special
national traits and, thus, the generators of differences between accounting systems at the
international level. After all, just as countries have different histories and political and legal
order or even value systems, so will their accounting systems have more or less differing
development and operating model.
In the literature, affirming or refuting the importance of individual factors from the
environment on the development of a country’s accounting system generally comes down to
citing and describing impact factors, while few efforts have been made to quantifiably assert
these factors or discern their interdependence that would account for the dissimilarities of
accounting systems of countries based on the susceptibility of accounting to diverse business
environments.
Several comments on influential factors can be singled out from the literature. For
example, Saudagaran (Saudagaran, 2004, 3 – 7) lists ten influential factors, while pointing out
that this is not an exhaustive list, and that the intensity of differences in accounting at the
international level depends upon the intensity of dissimilarities of individual factors between
∗
Sveučilište Jurja Dobrile u Puli, Odjel za ekonomiju i turizam «Dr. Mijo Mirković» Pula,
Preradovićeva 1/1, 52100 Pula; e-mail: ksenija.cerne@efpu.hr
Članak primljenu u uredništvo: 18.02.2009.
countries. In this case, he lists the following factors that affect a country’s accounting
development: 1) Type of capital market, 2) Financial reporting system, 3) Types of business
entities, 4) Legislative system, 5) Application degree of legislation, 6) Inflation level, 7)
Political and economic relations with other countries, 8) Status of the accounting profession,
9) Existence of a conceptual framework, 10) Quality of education in accounting.
In addition to the above, influential factors can also be classified as (Choi, Mueller,
1992, 39 – 43): 1) Legal system, 2) Political system, 3) Nature of ownership, 4) Differences in
the size and complexity of business entities, 5) Social climate, 6) Level of sophistication of
administration and the financial community, 7) Level of legislative interference in the
operations of entities, 8) Existence of specific accounting legislation, 9) Speed of business
innovations, 10) Level of economic development, 11) Growth pattern of an economy, 12)
Status of professional education and profession associations.
Other factors of influence also mentioned in the literature include (Mueller, Gernon,
Meek, 1987, 10 – 15) 1) Relationships between business entities and sources of capital, 2)
Political and economic relations with other countries, 3) Legal system, 4) Level of inflation,
5) Size and complexity of business entities, level of sophistication of business management
and the financial community, and the general level of education.
Finally, it is interesting to point out the claim that, notwithstanding all the frequently
cited influential factors, five factors are all that are needed to explain how different reporting
objectives are the cause of international differences in financial and accounting reporting.
Basic models have been established in which the major influential factors are expressed as the
following model variables: 1) A country’s culture, 2) Strength of the system of external
sources of funding, 3) Types of business entities, 4) A country’s level of cultural
independence, 5) Financial reporting system (Nobes, 1998, 177 – 180).
Based on the above classification of influential factors, on factors that repeatedly
appear in individual classifications, as well as on factors that certain authors particularly
emphasise, several influential factors have been singled out and are explained in detail in the
following section. That this paper focuses more on some factors and less on others results
from the fact that the literature reviewed does not deal equally with all factors.
2. CAPITAL MARKET
The literature points to several factors affecting how an accounting system develops
and is shaped that could be grouped under “capital market” as a common denominator1.
Namely, although fundamentally different financing systems are involved, in this case the
term “capital market” encompasses both the level of development of financial instruments and
the globalisation level of a given capital market.
Differences in financing systems
Business entities within different accounting systems basically rely on earned capital;
their external sources of funding, however, may differ. Therefore, depending on whether
funds are raised by issuing securities or through credit loans from financial institutions,
accounting systems can be characterised as those whose main source of funding is either the
stock market (equity-oriented) (Saudagaran, 2004, 3) or a bank (debt-oriented) (Saudagaran,
2004, 3)2. In such a context, a capital market, through its attributes, impacts on a country’s
1
For example: Types of capital markets (Saudagaran, S.M., 2004.); The relation between business entities and
capital sources (Mueller, Gernon, Meek, 1987.); Financing systems (Nobes, 1998.)
2
Alike mentioned in the text, Zysman (1983) also distinguishes three types of financing systems: a) Systems
based on capital markets where prices are determined at the competitive markets; b) Credit based systems where
financial reporting system. This impact primarily depends on who are the investors or
creditors (individuals, banks, a state), who are the information users and what are their
information needs, as well as how many of them there are and what is their association to
business entities. Namely, financial reports and the accounting information they hold are an
indispensable and vital source of data on the performance of business entities regardless of the
financing system and its attributes.
For example, in countries whose businesses raise funds by issuing securities, investors
see financial reports as a very important source of information about the performance of these
businesses because investors have limited access to alternative sources of information. Hence
reporting is directed towards and focused at their information need, regardless of whether they
are investors in stocks or bonds, as countries with this type of system also have developed
proprietary securities markets as well as debt securities markets. Because of the large number
of stockholders and the impossibility of contacting each one individually, financial reports
should be transparent and contain a sufficient amount of information to indicate how a
business is performing.
In systems in which the major sources of funding are banks' credits, with usually a few
very powerful banks meeting most financial needs, financial reports are based on the
information needs of creditors and are focused on their protection. The information needs of
banks are often met through personal contacts and/or direct access to reports, which is the
difference when compared to transparent financial reports mentioned above. In a way,
exclusive access to information diminishes the need for developing a more open and
informative reporting system. Although these business entities are also obliged to make public
their financial reports, these reports differ in their scope of information from the ones
previously mentioned.
Level of development of capital markets
In addition to the mode of funding, the level of development of capital markets also
influences a country’s financial reporting. Briefly, in systems with developed securities
markets, new and more complex financial instruments emerge that need to be covered and
monitored in terms of accounting, causing changes to the contents of financial reports.
Conversely, in systems in which long-term indebtedness with banks and simple financial
instruments prevail, there is no need for frequent changes to the method of accounting
coverage and monitoring to keep abreast of any possible financial innovations.
With regard to the importance and strength of the capital market as an influential
factor, it is necessary to mention the proposal for classifying countries according to their
financing system and, concurrently, to their reporting system. This is a classification system
that classifies countries with regard to the relation between prevailing sources of funding
(securities or loans) and information users who have either unlimited (“insiders”) or limited
(“outsiders”) access to information. In this context, “outsiders” (Nobes, 1998, 166) refers to
those information users who are not board members and do not enjoy preferential treatment
within a business. “Outsiders” include stockholders as individuals and some of the institutions
or other business entities that engage in investment. Likewise, “insiders” (Nobes, 1998, 166)
enjoy close-knit and long term-focused relationships with businesses in which they have
invested, and this gives them an exclusive right to frequent and timely financial information.
By placing the types of information users in relation to the sources of funding, four systems
emerge within which countries can be classified3, as illustrated in Table 1.
companies are more reliant on grants credit. It usually means banks, whether under the influence of governments
or not; and c) Credit based systems where financial institutions are dominant (according to Nobes, 1998, 166.)
3
The purpose of classification, or classifying accounting systems into classes or clusters, is grouping of
accounting systems according to common characteristics. The classification should determine and demonstrate
Table 1
Financing systems and financial – report users – Proposal for developing Zysman’s
(1983) classification of financing systems according to Nobes (1998)
Loan-based
financing system
Securities-based
financing system
“Insiders” prevail, i.e. information users
with unlimited access to information
I III
“Outsiders” prevail, i.e. information users
with limited access to information
II IV
Source: Nobes, C.: Towards a General Model of the Reasons for International Differences in
Financial Reporting, ABACUS, Vol.34, 1998, No. 2, p. 166.
If we were to disregard the fact that in any country there probably exist more than just
one of the systems observed (for example, a small family business will be funded through
bank loans, and a large joint-stock company, by issuing stocks) and to assume, in theory, that
in each country only one financing system prevails, then the major portion of countries would
belong to Group I (prevalence of insiders, and loan – based funding) and to Group IV
(prevalence of outsiders, and securities – based funding). Accordingly, the accounting
systems of Group I countries will be more heavily focused on protecting creditors, while the
accounting systems of Group IV countries will be characterised by reporting that focuses on
the owners of securities.
The level of globalisation of capital markets
Finally, accounting systems and financial reporting systems are also influenced by a
capital market’s level of globalisation, viewed in the context of foreign businesses entering
domestic capital markets. If such business entities are from countries whose accounting
system is characterised by high standards in drawing up and publishing financial reports, then
they will exert a direct influence on raising the general level of financial reporting in the
country they are entering. Likewise, a country’s financial reporting systems will not be
influenced by businesses coming from countries in which high standards are not set for
making and publishing financial reports.
3. FINANCIAL REPORTING SYSTEM
In explaining the preceding factor, we have explained its influence on financial
reporting. On the other hand, considering a financial reporting system in the context of
individual influential factor primarily implies the existence of singular or dual, that is,
separate or joint reporting for business and taxation needs. In accounting systems in which
rules are set based on individual decisions of precedence (Koletnik, 2001, 6) (Anglo-Saxon
countries), tax reports are independent of financial reports that are external – user oriented,
and are drawn up autonomously and independently of tax regulations. It is different in
countries whose accounting systems are based on Roman law (Austria, Germany), that is,
where accounting rules are stipulated and fixed by a country’s regulations, thus leaving them
the main common attributes of accounting systems in clusters as well as characteristics which are crucial for
their differentiation. Generally, classification is important for understanding and analysing significant facts and
formulating relations between them.
with little elasticity (Koletnik, 2001, 6). In this case, there is a single reporting system, with
minor differences existing between reporting for tax purposes and reporting for business
purposes. In other words, the association or non – association of accounting reporting with
tax and business purposes will impact on and determine the attributes of the financial
reporting system itself.
4. LEGAL SYSTEM
The previously described influential factor implies an understanding of the legal
system as a factor in how an accounting system is created and how it operates. The legal
systems of most countries can be classified as systems marked by strict adherence to laws and
regulations (Code law; legalistic; Roman law) (Saudagaran, 2004, 7; Mueller, Gernon, Meek,
1987, 13; Choi, Mueller, 1992, 40; Buchanan, 2003, 66 – 67), or as systems in which
common law (Common law; non – legalistic) is predominant (Saudagaran, 2004, 7; Mueller,
Gernon, Meek, 1987, 13; Choi, Mueller, 1992, 40; Buchanan, 2003, 66 – 67). Hence, in the
relevant literature, this factor is very frequently mentioned in the context of classifying
accounting systems either under the Anglo-Saxon cluster or the Continental Europe cluster.
Characteristic of an accounting system influenced by Roman law is the legalisation of
accounting standards and procedures. Prescribed by a country’s regulations, accounting rules
are very detailed and comprehensive, leaving a very small margin for interpretation and no
possibility for improvising. In this type of conservative and inadaptable system, the role of the
accountant consists in literary applying prescribed and detailed legal requirements, with
special emphasis on protecting creditors.
Conversely, in accounting systems, which are under the influence of Anglo – Saxon
rules and in which rules are set based on individual decisions, accounting rules and policies
are set by professional organisations operating in the private sector. This type of legal system
is more adaptable, more innovative and more topical than the system described above, and it
focuses on transparent and timely financial reports, as well as on the information needs and
protection of investors.
5. POLITICAL SYSTEM, POLITICAL AND ECONOMIC RELATIONS AMONG
COUNTRIES
The political system as an influential factor is often mentioned in the literature under
the term of colonial inheritance (Nobes, 1998, 170) and as such, it is considered a major
influential factor of accounting systems and reporting systems alike. The impact of this factor
is also evident through history, with invading countries imposing their political, as well as
their accounting system on the countries they have conquered and colonised. It is also a fact
that many countries, upon gaining independence, have continued to use the same political and
accounting system even though it no longer suits their current needs and economic situation,
whereas others have opted for a different political and accounting system4. The influence of a
political system is reflected in the strong effect of other cultures on certain countries because
of their size (small), low level of their development or their previous colonial status.
4
Just as an example, Commonwealth nations’ accounting systems are under great influence of British
accounting system (Saudagaran, 2004, 8). In fact, the accounting system of almost every former British colony
has its roots in British accounting model (Australia, New Zealand, Malaysia, Pakistan, India, and South Africa).
The influence of Dutch accounting system is also evident in the Indonesian accounting, as well as German and
French in their former colonies, or American accounting system influence to Canada, Mexico or Filipinas.
(Mueller, Gernon, Meek, 1987, 12)
The influence of economic relations among countries on developing and designing an
accounting system is the result of developed international exchange. Accordingly, a country’s
accounting system can be affected by the accounting system of another country because its
geographical position makes it a neighbour, and also because the former represents a large
export market for the latter, with many of its businesses going over to the other’s securities
market (Canada and the U.S., for example).
6. QUALITY OF ACCOUNTING EDUCATION AND THE STATUS OF THE
ACCOUNTING PROFESSION
In the literature, the quality of education in the field of accounting is often referred to
as a factor in the development and design of an accounting system. Various authors agree that
this factor, if lacking, can represent a constraining factor in accounting system development5.
While the quality of accounting education is directly influenced by a society’s general level of
knowledge, it is also affected by other factors such as the