Question

A comparative study of accounting and the Environmental Factors Influencing Accounting in Japan and Australia

You are required to discuss and compare the accounting systems and practices of the chosen countries in terms of proffenialism vs statutory control, uniformity vs flexibity, conservation vs. optimism, secrecy vs transperency, and long-term vs short-term focus.Please give thorough discussion of accounting principles used in Australia verses in Japan.

Answer 1

A Comparative Study of Accounting and the Environmental Factors Influencing Accounting in Japan and Australia

Influences of environmental factors on accounting development around the world have varying effect on different countries. Here the discussion and comparative study is of Japan and Australia regarding these factors.

In 1988, Sidney Gray suggested accounting values are influenced by Hofstede’s cultural dimensions and have an impact on accounting systems. Gray put forward four accounting values (Gray, 1988):

1. Professional vs. Statutory Control

2. Uniformity vs. Flexibility

3. Conservatism vs. Optimism

4. Secrecy vs. Transparency.

In addition to the cultural accounting classifications by Gray, he went on further in 1997 to explain how environmental influences are the key to understanding a country’s counting system. This is done to identify the potential problems and limitations of countries.

Professionalism vs. Statutory control

Professional judgement is an essential skill for preparers, auditors and regulators of financial reporting (Deloitte, 2014, p. 1). The Australian is principle base accounting system provides a framework that reinforces the quality and integrity of these judgements made. Power distance and uncertainty avoidance are low which places the Australia in the professional accounting value (Gray, 1988, p. 9).

The Japanese accounting culture has a high governmental interference, a large distance of social hierarchy and strong culture taboos (Bestor & Hardacre, 2004). There is little freedom of individual professional judgement or self-regulation in Japanese accounting practises places it in the statutory control accounting value. Japan’s accounting values reflect uniformity and conservatism that conform to the statutory control on rules and authority. The views of the government are seen as the highest authority even over professional bodies (Young, 2013, p. 20) Factors such as low individualism, high power distance and high uncertainty avoidance indicates that the Japanese are more statutory controlled.

Uniformity vs. Flexibility

The Australian accounting standards are structured to reflect recognition, measurement, presentation and disclosure of particular aspects of formal reporting. A more flexible accounting system is considered a superior method over a procedural method in that it can provide better data for investors. Low power distance and low uncertain avoidance indicate the flexibility of the accounting practice.

The Japanese have a preference for standardised accounting methods and priority for legal compliance that result in less flexibility in accounting. The strict standards and rules for accounting in Japan reduce the likeliness of taking risks. This compromises judgement and decisions rather than demanding independence necessary to maintain the profession’s reputation (Young, 2013, p. 21). A preference for uniformity is consistent with a preference for high uncertainty avoidance and large power distance (Gray, 1988, p. 9)

Conservatism vs. Optimism

Conservative Japanese accounting practises reflect an underlying conservative trait in Japanese culture in the presentation of data. Japanese tend to undervalue assets, revenue and profit and over value liabilities and expenses. Accounting systems in Japan are based on prudent and conservative concepts (Taman, n.d., p. 8) Japanese accounting values are highly dominated by low individualism and high power distance, with the accounting system based on conservative standards.

Australia tends to overvalue assets, revenue and profit. Liabilities and expenses are under-valued .The factors that make the Australia have a full and fair disclosure approach to accounting plus low conservatism levels are due to the influence of the legal system. The legal system encourages optimism through promoting individualism and self-regulation with minimal government interference .The current structure has a large impact on optimism with the much less conservatism and risk-taking attitude of accountants (Radebaugh, Gray, & Black, 2005, p. 47). High masculinity and low uncertainty avoidance make the AUSTRALIA one of the most optimistic countries.

Secrecy vs. Transparency

Secrecy is closely related to conservatism in that it implies a cautious approach to financial reporting (Gray, 1988, p. 11) a trait of Japanese accounting systems. Japanese primary sources of funding are bank credits from only a few banking institutions. These meet most of the financial needs. Financial reports are based on the needs of the creditors and are focussed on their protection. With high collectivism and power distance, Japanese tend to preserve material information within their groups. Uncertain avoidance is high in Japanese accounting. (refer Appendix E)

In a weak uncertainty avoidance society such as the Australia, information is likely to be more disclosed. This is synonymous in an environment where the capital market plays an important role. Upfront disclosure of financial information aids in encouraging potential investors, (Serafeim, Serafeim, & Horton, 2013, p. 11). The extent of disclosure with companies in the Australia requires them to produce greater detail in financial reporting as opposed to Japanese companies .Australia rates highly on individualism and low uncertainty avoidance that depicts high transparency.

Long-term vs. Short-term

Japanese businesses are more long-term focused than their AUSTRALIA counterparts. This is demonstrated by Japan’s willingness to defer maximising quick profits in order to maximise market share. Japanese companies focus on growth through product and market development and aggressive financial policies. This increases the likeliness of long-term commercial success (Beldona, Inkpen, & Phatak, 1998). Short-term creditors are acceptable because of the long-term focus and close relationships with powerful banks and suppliers are maintained. Japanese accounting systems often tolerate longer debt collection periods and short-term debt in order to finance long-term investments (Adams, 2006). This strategy enhances the firm’s long-term growth rather than the shareholders (Ito & Nakano, 2014, p. 10).

Economic activity in the AUSTRALIA is considered to be less firmly embedded in societal institutions and have more of a short-term perspective .This is reflected in businesses that aim to maximise the wealth of shareholders in the short term .The pressure to generate quick profits results to the detriment of longterm growth of a firm and has become an entrenched feature of the AUSTRALIA business environment .

ENVIRONMENTAL FACTORS

Environmental factors have an important role in the development of accounting principles and environmental factors differ between countries. For this assignment, the following factors will be used for analysis: · Economic · Capital Markets · Cultural · Legal/ Political

Economic

The structure of the capital markets is dissimilar between the AUSTRALIA and Japan. The AUSTRALIA sources most of its capital from shareholders. Open accounting systems, attract more potential investors (Sawani, 2009). Japan sources most of its capital from its large banks (?erne, 2009, p. 2). Eliminating the need for making the accounting details of companies accessible for public scrutiny (Ligon & Doost, n.d.)

Capital Markets

There are distinct differences in the ownership structure between AUSTRALIA firms and the relationship-orientated Japanese firms (Lee & O'Neill, 2003, p. 212). The AUSTRALIA’s capitalistic approach of securing funds from shareholders is to obtain quick profits to satisfy shareholders through dividends (Adams, 2006, p. 295). Financial reports are designed specifically for the shareholder audience rather than the regulatory bodies (Adams, 2006, p. 213) In contrast, the Japanese develop cooperative links with suppliers and members of business groups (Keiretsu), as well as cross-ownership with other firms that are affiliated with the company. Shareholders of Japanese companies are well informed and participate in important business decisions (Lee & O'Neill, 2003, pp. 212-213). The Japanese are better positioned to exploit interrelationships between business units to achieve and/or maintain a competitive edge (Martin, 1992, p. 6).

Cultural Factors

There is a need to understand a county’s culture in order to understand its differences and its accounting practises (?erne, 2009, p. 8). Gray’s research identified Western cultures such as the AUSTRALIA differs from Japan and are reflected in each country’s accounting standards (Sawani, 2009). Japanese management style is primarily set by the concept of continuous improvement (Kaizen) (Martin, 1992, p. 4). The Japanese are recognised as being loyal to their place of employment (Hofstede, Cultural Survey, n.d.). Fellow employees are respected and tend to form a cohesive social unit. Japan’s strong collectivism values are more likely to develop a well-meaning, compassionate environment that reflects these social tendencies (Praveen Parboteeah, Cullen, Victor, & Sakano, 2005, p. 4

The Japanese refer to this cultural norm - a dantai isbiki or group consciousness (Young, 2013, p. 20). Communication and decisionmaking tend to be from the bottom up (Weihrich, 1990, p. 3). This is also known as the Namawashi approach (Martin, 1992, p. 6) and are driven by excellence (monodAustraliauri) (Hofstede, Cultural Survey, n.d.). The AUSTRALIA represents a culture based on individualism where the relationship between the employee and employer is more business orientated. Either party can terminate the relationship to seek a better deal elsewhere (Hofstede, Cultural Dimensions in Management and Planning, 1984, p. 87). Communication within the firm in the AUSTRALIA tends to be top down where leaders make the decisions (Filev, n.d.). This does limit motivation; have tendencies to be inflexible and bureaucratic. More focused is set on stock market measures such as earnings per share and dividend yield.

Legal/Political Factors

Legal and Political factors have a more direct influence on standards settings and administrating than cultural values. Common law countries such as the AUSTRALIA follow rules which are based on individual decisions, accounting rules and policies set by professional organisations (?erne, 2009, p. 5). Japan is based on code law and thereby the views of the government are seen as the highest authority even over professional bodies (Young, 2013, p. 20). Under code law, Japanese accounting regulations are set and prescribed to be obeyed (Gray, 1988, p. 3). Bank of Japan continues to supervise banks that were formalised in the Bank of Japan Law (Ito, Cargill, & Hutchison, 2000, p. 55).

Table1: Hofstede Six Dimensional Indices

Countries	Power Distance PDI	Individualism IDV	Masculinity MAS	Uncertainty Avoidance UAI	Long-Term Orientation LTO	Indulgence vs. Restraint IVR
Australia	36	90	61	51	21	71
japan	54	46	95	92	88	42