Convergence of Accounting Standards and cultural differences

The interdependence and convergence between domestic and international economies have increased as a result of globalization. More buyers are expected to transact in international markets. Investors used to receive accounting rules that varied from one another due to cultural variations between countries in the previous century (Ding, Jeanjean and Stolowy 2005). Indeed, international investors can encounter difficulties when reading financial statements from other countries. However, as a result of globalization, International Accounting Standards, the predecessor to IFRS, were developed to standardize the structure of financial reporting. Currently, there are mainly two streams of Accounting Standard namely; US GAAP and IFRS (Tarca, A., 2004). This academic paper discusses how cultural differences affect convergence of the two streams of Accounting Standard. There are numerous businesses partnerships between Hong Kong and United States. Many companies in United States have subsidiaries operating in Hong Kong. The work utilizes Hong Kong and U.S. countries as an example.

HKFRS (Hong Kong Financial Reporting Standards) have been absolutely converged with International Financial Reporting Standards (IFRS) for annual reporting periods. The utilization of International Financial Reporting Standards is becoming popular across the globe. In fact, more than hundred (100) countries globally have permitted use of Financial Statements based on IFRS. There are various suggestions that United States Securities and Exchange Commission should accept financial statements grounded on IFRS for non-American companies since many investors in United States are becoming familiar with IFRS (Barth, Landsman, Lang and Williams 2006). However, Security Exchange Commission (SEC) is concerned that the quality of IFRS-based accounting volumes are not yet high enough to achieve investor protection in U.S. Consequently, U.S sticks with her own U.S Generally Accepted Accounting Principles (US GAAP)

Literature Review

Convergence of IADB and FASB

In October, 2002, the Financial Standard Board (FASB) and International Accounting Standards Board (IASB) declared the issuance of memorandum of understanding termed as ‘’Norwalk Agreement.’’ This signaled a significant step towards formalizing their commitment to convergence of U.S and International Accounting Standards (Daske 2006). The project was temporarily determined in 2010 but was restarted by International Accounting Standard Board in 2012. Currently, FASB is working on Revised Conceptual Framework while FASB is doing consultation about Exposure Draft.





Hofstede’s cultural dimension theory

Geert Hofstede developed cultural dimension theory that provides conceptual structure for cross-cultural communication. The theory uses an arrangement derived from factor analysis to explain the effects of society’s value and how these values relate to behavior. Hofstede established his original model by using factor analysis to evaluate results of worldwide survey of staff values by IBM (1967-1973). The original model identified four perspectives along which cultural norms could be examined. The four dimensions included uncertainty avoidance, strength of social hierarchy (power distance), individualism-collectivism and masculinity-femininity. Holfstede conducted an independent research in Hong Kong which made him add another dimension (long-term orientation) to original model. Long term orientation dimension explored areas of values which were not factored in the original model. Indulgence versus self-restraint dimension was added in 2010 to make total dimensions six.

The work of Hofstede established a big research belief in cross-cultural psychology. Many consultants and researchers have applied Hofstede’s insights in several areas associated with communication and international business. Cultural dimension theory has been broadly applied in various fields such as cross-cultural psychology, cross-cultural communication and international management as a model for research. Furthermore, the theory has inspired numerous significant cross-cultural disciplines of values and research on cultural aspects such as social beliefs.

Comparison

Cultural dimension theory outlines five underlying societal perspective through which a country can be examined. Individualism dimension explores the degree of interdependence between the society and its members (Daske 2006). Actually, it identifies whether the self-image of people is defined as ‘we’ or ‘I.’ Members of society that is individualistic centered are supposed to take care of themselves and families only. In collectivist societies members belong to ‘in groups’ which provide and protect them in exchange for faithfulness (loyalty). Power distance dimension asserts that members of a society are not equal and tries to express the behavior of the culture in regards to inequalities among the individuals (Daske 2006). It can be defined as degree to which powerless individuals of organizations and institutions within a country accept and expect that the distribution of power is not equal.

Uncertainty avoidance dimension is concerned with the manner the society deals with truth that the future is unknown. It explores the question of whether the members should control the future or allow it to occur. Future uncertainty creates anxiety but different cultures have identified various ways to deal with it. In fact, this dimension explores the beliefs and institutions created by members of society to avoid threats of future uncertainties (Leuz 2003). Masculinity determines whether the society will be propelled by achievement, success and competition. Here success is defined by the winner in the field where field represents value system that begins in school and is continued throughout the organizational life-cycle. Feminine dimension holds that the dominant values in the society are concerned of others and quality of life. Feminine society views the quality of life as a symbol of success and thus standing out from crowd is undesirable. The graph below shows performance of Hong Kong and United nations in terms of dimensions discussed above.

Performance comparison of U.S. and Hong Kong based on dimensions of cultural dimension theory



(Source: https://geert-hofstede.com/united-states.html)



Individualism

In United States individuals seem to concentrate on their own gain. Indeed, the society is founded on belief that individuals should look after themselves and their close families only and that they should not depend a lot on authorities for help (Glaum and Street 2003). On the other hand Hong Kong is founded on collectivist culture where members of society act on interests of the group at expense of their own interests. Individuals with closer in-group are given priority as it pertains to jobs and promotions. In addition, associations with colleagues are harmonious for in-groups but hostile for out-groups. Nonetheless, personal relationships prevail over duty and firm. Communication is not direct and cooperation of members must be maintained with open conflicts being avoided.

Power distance

In United States the people rarely accept that inequalities among members of society exist. However, it is important to state here that inequalities do exist among individuals. Contrary, in Hong Kong the society believe that inequalities among people are acceptable. Actually, they believe that superior-subordinate relationship seems to be polarized and thus defense against misuse of power by superiors does not exist (Van and Vanstraelen 2005). People are influenced by formal sanctions and authority and are generally optimistic about individual’s capacity for initiative and leadership.

Uncertainty avoidance

People of U.S display a fair degree of acceptance for innovative products, new ideas and willingness to attempt something different or new (Leuz 2000). These new ideas may be in fields such business practices, food and technology. In fact, citizens of America are more tolerant to new ideas and opinions from any person and permit the freedom of expression. In addition, the people of U.S. do not require a lot of regulations and display fewer emotions in regards to expression as compared to other cultures elsewhere.

On the other hand, people of Hong Kong more fore minded to taking risks or try new things. Pragmatism is truth of life in Hong Kong and adherence to rule and law may be adjusted to favor real situation. In summary, the citizens of Hong Kong are comfortable with uncertainties and ambiguities.

Masculinity

In United States, masculinity is reflected in the normal behavioral patterns of her citizens around the world (Glaum and Street 2003). As a matter of fact people of America display their masculine motive individually. Similarly, the society of Hong Kong is also masculine. People of Hong Kong are success oriented and driven. Evidently, the motive of success is illustrated by fact that many people spend long hours at work. For instance, service providers such as hairdressers offer their services till late hours. Furthermore, students in Hong Kong associate success with high examination scores and ranks and therefore they put a lot of effort in excelling in examinations.

Long Term Orientation

In United States businesses performance is evaluated on short-term basis (Ampofo and Sellani 2005). Moreover, profit and loss statements are provided on quarterly basis. The impact is that business people are compelled to work for quick results within work environments.

The society’s culture of Hong Kong is pragmatic and the people believe that facts lean much on context, time and situation. Indeed, the Hong Kong citizens display capability to cope with traditions easily to altered circumstances, invest prudently, strong proclivity to save and determination in attaining results.

Conclusion

Hong Kong and United States are using two different accounting streams. Since stakeholders of both countries have varying culture, history and needs they select their own accounting standard that they think is favorable (Van and Vanstraelen 2005). Now that people of U.S. are not absolutely comfortable with big changes, figuring out the way of converging US GAAP and IFRS may indeed take long time.



References

Ampofo, A.A. and Sellani, R.J., 2005, June. Examining the differences between United States Generally Accepted Accounting Principles (US GAAP) and International Accounting Standards (IAS): implications for the harmonization of accounting standards. In Accounting forum (Vol. 29, No. 2, pp. 219-231). Elsevier.

Barth, M.E., Landsman, W., Lang, M. and Williams, C., 2006. Accounting quality: International accounting standards and US GAAP. Manuscript, Stanford University.

Ding, Y., Jeanjean, T. and Stolowy, H., 2005. Why do national GAAP differ from IAS? The role of culture. The international journal of accounting, 40(4), pp.325-350.

Daske, H., 2006. Economic Benefits of Adopting IFRS or US‐GAAP–Have the Expected Cost of Equity Capital Really Decreased?. Journal of Business Finance & Accounting, 33(3‐4), pp.329-373.

Glaum, M. and Street, D.L., 2003. Compliance with the disclosure requirements of Germany's new market: IAS versus US GAAP. Journal of International Financial Management & Accounting, 14(1), pp.64-100.

Hofstede, G., 1983. National cultures in four dimensions: A research-based theory of cultural differences among nations. International Studies of Management & Organization, 13(1-2), pp.46-74.

Leuz, C., 2003. IAS versus US GAAP: information asymmetry–based evidence from Germany's new market. Journal of accounting research, 41(3), pp.445-472.

Leuz, C., 2000. IAS versus US GAAP: a" new market" based comparison(No. 48). Department of Finance, Goethe University Frankfurt am Main.

Tarca, A., 2004. International convergence of accounting practices: Choosing between IAS and US GAAP. Journal of International Financial Management & Accounting, 15(1), pp.60-91.

Van Tendeloo, B. and Vanstraelen, A., 2005. Earnings management under German GAAP versus IFRS. European Accounting Review, 14(1), pp.155-180.

https://geert-hofstede.com/united-states.html