Student ID: 0824174

“The accounting profit figure is simply a measure of the true profit of an

organisation. Discuss.” (Part 2)

Profit is not a perfect measurement of a firm’s performance due to the

possibility of extensive use of creative accounting. It is not only a result of

certain calculations, but is also a symbol of growth in the regulation and in the

accounting profession itself. The rules (hence the accounting figures) are

developed under a number of factors such as culture, religion, the type of

business ownership and the financing system of the country. However, I think

that the element of culture is at the heart of the evolution of the Accounting

system.

In this essay I would like to discuss how different cultures influence the

accounting practice in different countries, and explore how creative

accounting relates to culture. In 2000, Anglo-Swedish drug company

AstraZeneca reported a profit of £9,521 million under UK accounting rules and

£29,707 million under the US rules. Different sets of financial statements have

to be prepared if a company is to raise finance in more than one country, each

statements complying with the regulations of the related countries. This notion

supports my statement further on the subjectivity of profit figure.

Hofstede (1980) defined culture as ‘the collective programming of the mind

which distinguishes the members of one human group from one another’.

Culture exists in a wider scope of society or nation, whilst subculture refers to

a smaller group of an organization, profession or family. Four societal values

that exist in a culture are Individualism, Power Distance, Uncertainty

Avoidance, and Masculinity1. However, it is the values at the subcultural level

that have high influence on the advancement of the accounting systems.

Accountants in different countries will share these values and consequently

1 These dimensions are found in a survey conducted amongst employees in fifty countries for Hoftede’s research in 1984. Individualism is a type of social framework whereby the individuals are responsible for themselves and their close relatives only. Power Distance on the other hand measures the extent of acceptance of how power in institutions is distributed unequally. The third dimension, Uncertainty Avoidance relates to how people feel and respond to risk and uncertainty while Masculine society is a ‘society that is based on individual achievement, heroism, and material success’, (Brown, R., 2009)

Student ID: 0824174

the culture will be reflected in how they prepare the financial statements,

hence affecting the profit figure.

Gray (1988) offered a number of ‘accounting’ values at the level of

accounting subculture which are;

Professionalism versus Statutory Control

Uniformity versus Flexibility

Conservatism versus Optimism

Secrecy versus Transparency

I am going to explain on Professionalism and Conservatism and relate them

to accounting as a profession, because I think that Uniformity and Secrecy

have no direct relation with accounting measurement. Professionalism refers

to the preference of exercising individual judgment instead of relying on rigid

legal requirements. In the UK and US where the level of Professionalism is

high, the concept of ‘true and fair view’ reflects on the professional judgments

of the accountant as an independent professional. Wyatt A. R. (2004) argued

that delivering professional services in a professional manner used to be the

aim of the US audit firms, however in the 1960s, firms started to target for

higher revenues. I personally believe that profit maximization had become

part of the culture in the US. Making personal judgements allow creative

accounting to be done like in the Enron scandal. It distorts the purpose of

accounting as a whole, lowering people’s confidence on the credibility of

financial statements and also accounting as a profession. As a result from the

scandal, the Sarbanes-Oxley legislation was introduced in 2002, hence

proving my statement that culture helps in the growth of accounting

regulations. Even though both the UK and US are examples of countries with

high Professionalism, there are still differences in the regulation in both

countries. It is believed that under UK accounting regulations, Enron’s

‘liabilities would not have been treated as off-balance sheet, thus potentially

producing significant differences between its balance sheet under UK and US

accounting practices’ (Deegan, C., et al., 2006).

Student ID: 0824174

Gray (1988) hypothesized that a high Individualism country with low

Uncertainty Avoidance and Power Distance tend to rank highly in

Professionalism because of the preference in making personal judgement is

consistent with an individualistic society where people prefer to make

individual decisions and respect personal endeavour, without having to

comply with strict regulations.

Accounting figures can be manipulated based on the degree of

Conservatism therefore profit is not a true measure of a company’s

performance. Conservatism is related to the principle of prudence, which is

‘the most ancient and probably the most pervasive principle of accounting

valuation’ (Sterling, 1967). It protects entities from uncertainty of the future.

The level of conservatism varies in different countries, with Continental

European countries being one of the strongest conservative in choosing

accounting measurements. The UK and US are the countries with less

Conservatism. Therefore, we can also relate the case of Enron with this

subculture as the auditors employed a less prudent approach to the

accounting reports. High level of Conservatism is associated with high

Uncertainty Avoidance dimension, with low Individualism and Masculinity.

Gray (1988) argued that ‘individual achievement and performance is likely to

foster a less conservative approach to measurement’.

From the arguments presented above, I totally believe that in order for an

investor to use accounting profit as a tool to measure performance, he needs

to understand that there are many things that shape accounting information

especially the accounting regulation and profession itself, in which its

development is influenced by the culture of the company, and the country as a

whole. Culture seems to be a very significant underlying issue that is

embedded in the development of the accounting system.

Word Count: 858

Student ID: 0824174

Bibliography

1. Brown R. (2009). Accounting Harmonisation and International

Differences. Lecture Slides. University of Warwick

2. Deegan, C., Unerman, J. (2006). Financial Accounting Theory

European Edition. Berkshire : McGraw-Hill Education

3. Gray, S. J., Towards a Theory of Cultural Influence on the

Development of Accounting Systems Internationally. ABASCUS,

24(1), 1988, pp. 1-15

4. Hofstede, G., Culture’s Consequences, (Sage Publication, 1980),

quoted in Gray, S. J., Towards a Theory of Cultural Influence on the

Development of Accounting Systems Internationally. ABASCUS,

24(1), 1988, pp. 1-15

5. Hofstede, G., (1984). Cultural Dimensions in Management and

Planning. Asia Pacific Journal of Management, quoted in Gray, S. J.,

Towards a Theory of Cultural Influence on the Development of

Accounting Systems Internationally. ABASCUS, 24(1), 1988, pp. 1-15

6. Wyatt A. R. (2004). Accounting Professionalism – They Just Don’t Get

It!. Accounting Horizons, 18(1), pp. 45 – 53.