Question

Discuss factors affect an accounting system a country familiar with and prepare quick analysis and use perceptions.

Legal system

Providers of financing

Taxation

Inflation

Political and economic ties

Culture

Answer 1

Factors affect an accounting system a country:-

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. 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.

Providers of financing:-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) or a bank (debt-oriented) . In such a context, a capital market, through its attributes, impacts on a country’s 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.

Taxation:-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, 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 with little elasticity . 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.

Inflation:- An economy’s level of inflation can also be considered in the context of its influence on a country’s accounting system, in particular because it affects the asset valuation method and because, in conditions of high inflation, it is essential to have an accounting system suited to inflationary conditions. For example, countries such as the U.S. or Great Britain in which inflation levels are mostly under control apply the historical cost method for the needs of financial reporting. This method, however, cannot be fully applied in countries such as Bolivia or Mexico , which have had or do have a high rate of inflation; instead, these countries use different models that seek to reduce the impact of inflation on financial reporting to obtain relevant information. In other words, accounting for inflation is required, and is therefore more developed and pronounced in economies with high inflation levels, consequently leading to differences in accounting systems as a result of different inflation levels. Regardless of this, there are opinions that the level of inflation is not a crucial influential factor in elucidating the differences between accounting systems, although it could possibly be the cause for differences in accounting practices of those accounting system belonging to the same category . According to this perspective, a certain level of inflation will trigger a reaction in every accounting system, and procedures for accounting inflation will be applied. In this, it is crucial to know who will react and how: will it be the professional accountants or the state within the framework of the tax system.

Political and economic ties:- 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 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.

Culture:- In addition to knowing a country’s legal, political or financing system, it is also necessary to know something about its culture in order to better understand the country’s differences and its accounting practice. Even when financial reports are comprehensible to users with regard to language, monetary unit or the accounting principles applied, culture should be considered as a factor that affects the development of an accounting system. The assertion that culture is interrelated with the environment and that it is, at the same time, affected by other influential factors is the likely reason of its rarely mentioning in the literature as an influential factor. Nonetheless, the influence of culture is considered and mentioned in several articles and studies. Especially interesting is the theory that links some of the structural elements or dimensions of culture to accounting values and systems , and the testing of hypotheses formulated by this theory. Among other things, the justification of considering culture as a criterion in classifying national accounting systems is analysed. Contrary to the model mentioned, there is the opinion that culture is not primarily an influential factor because the use of cultural variables opens up new questions and because the way in which culture may possibly influence an accounting system is not completely obvious. Nevertheless, we are of the opinion that culture can be seen as a factor that indirectly affects those factors whose influences are more direct, such as capital markets or financing systems. The influence of culture may also help in studying the differences in the behaviour of accountants in decision-making or the behaviour of auditors.