Culture Accounting

Critically examine the role that cultural differences play in the accounting differences found internationally. Answer with reference to at least 2 contrasting countries


Accounting can be viewed as a “technology” that is practised within different political, economic and social context (Nobes & Parker 2008, P.5). It can directly reflect the result of the business operation such as profitable or lost, indicating financial situation to employee, management, shareholder, banker, etc. However, different country may be operating different accounting system, using different accounting method to achieve different purpose (Nobes & Parker 2008, p.25). Those international differences might be caused by local elements such as legal systems, taxation system, level of inflation and, economic and political events (Nobes & Parker 2008, pp.25-37). Another recognised influential factor, on international accounting practice and financial reporting, is culture. The essay will try to access the extent of the cultural influence by means of the evidence of accounting system in China and the United States.

International culture measurement

Culture is customs and behaviours, which are adopted by one group of people (Hofstede 1980, p.25). Also, Hofstede (1980, p. 19) defines Values as a broad tendency of preference of people. Values have been regarded as the important element for accessing the cultural influence on international accounting differences. Hofestede (1984, p.83, 84)) summarized that the culture can be divided into four basic value patterns possessed by various countries after the completion of survey on more than 100,000 IBM employees from 39 countries. The four patterns are:individualism versus collectivism, large versus small power distance, strong versus weak uncertainly avoidance, and masculinity versus femininity.

Gray (1988) accepts Hofestede's conclusions as a reliable and instrumental method for the cultural differences researches. He states that the accountant's behaviours can be used to explain the international accounting differences. Consequently, he concluded that there are four pairs of contrasting basic accounting value:

l Professionalism versus statutory control;

l uniformity versus conformity;

l conservatism versus optimism, and;

l secrecy versus transparency.

Cultural Background of China

Hoferstede and Bond (1988, pp.5-21) observes that Confucianism is the main cultural element of China which encourages people to create an ordered, harmonious and cooperative society. Confucianism put collective (such as country) above the individual, and individual should unequivocally serve to protect the collective and makes “sacrifice” whenever necessary (Solas & ayhan 2007).

This leads to a phenomenon where Chinese state authority tends to take the initiative in public affairs. Traditionally, Chinese society relies on networks of relationships to function. The Chinese business culture is shaped by paternalism, personalism, and high-context communications, while the Western culture is focused on individualism, impersonalism, and formal communications.

Cultural Background of the United States

In the United States, people are expected to care primarily for themselves and their immediate family. Individualists can be expected to experience relatively little pressure from others. Each individual are subjected to the same standards to all. They are relatively broad-minded and more openness in intercultural communication leading to additional risk taking, tolerance toward unorthodox behaviours, and acceptance of innovative ideas. They enjoy expressing their own views and have strong sense of self belief and self reliance. At the same time, they respect equal rights, legitimacy, expertise and management.

The belief in individualism is as old as the United States itself. Individualism is still evolving in the United States (Yankelovich 1998).

Contrasting Chinese and American Accounting using Gray's Dimensions

Gray (1988) argues that shared cultural values within a country lead to shared accounting values, which shape accounting systems. Essentially, cultural factors have directly influence on the development of accounting and financial reporting systems at a country level.

Historically, in 1882, the Institute of Accountants and Bookkeepers of the City of New York (IA) was found by New York accountants (Remeo & Leauby 2004).

American's first Certified Public Accountant (CPA) law was passed in 1896. Remeo and Rigsby(2008) point out that ever since, Accounting and Bookkeeping have been recognised as a respectable profession, which is equivalent to science and technology.

The IA was dominated by the organizational ideal of a competent and self-regulated professional community, which is inline with American's Individualism of self reliance. The IA became the American Institute of Certified Public Accountants (AICPA). Traditionally, the AICPA insists and remains to be a self-governing and self-regulated professional body, in such a way, it enables the AICPA to better server interests of the public and its clients by maintaining its professionalism and independence. This is a reflection of self-belief and self-reliance, a form of Individualism (AICPA).

On the other hand, for centuries, China had been practicing accounting by its native system, namely single entry bookkeeping system. The influence of the government on accountants can be traced back to the early 20th century. During the Republican period (1911 to 1949), many Chinese companies still used to traditional bookkeeping method. Pragmatically, Chinese system was simple to practice and accountants received no higher education but apprentices.

In 1918, at the time of Republic of China, the Ministry of Agriculture and Commerce enacted Provisional Regulations on Accountants which recognised and regulated the accounting profession for the first time. Accountants were required to register with and be licensed by the Ministry. It clearly showed, from the very beginning, that the government was instrumental and significant in regulating and recognizing accounting as a profession in China (Xu & Xu 2003).

In 1996, the time of People's Republic of China, the State Council of China, issued a guideline for all accountants throughout China to rectify company accounts. This was a guideline that had to be strictly implemented by accountants in China in order to strengthen accounting control and restore economic order. This guideline also instructed state authorities to supervise and inspect the quality of registered accountants and their services (AsianLII 1996).

Unlike in the West, the authority for formulating, circulating and administering accounting standards is not the Accounting Society of China (ASC) or the Chinese Institute of Certified Public Accountants (CICPA), but the Ministry of Finance (MOF). The CICPA also assumes administrative authority, delegated by the MOF, to serve as the bridge between the government and practicing accountants (InterChina 2009).

Traditionally, American accounting system is a self-regulated body while Chinese people believe that the authority is assertive in regulating social affairs (Zeff 2003).

Recently, in the US, the Uniform Accountancy Act (UAA) is the state regulation of the model licensing law for the accounting and auditing profession (AICPA 2003). Interstate uniformity of professional standards provides equality among states. Otherwise, without interstate uniformity, complexity will undermine interstate transactions.

Equality and Fairness among individuals are an essential part of American culture. Americans realise equality through legislation. Uniform accounting rules ensure equal playing level where all accountants can follow the same standard in accounting practice.

On the other hand, Chinese cognitive attitudes are shaped by Confucian philosophy. This has impact on the development of Chinese bookkeeping and accounting practices. To maintain social order and stability, Conservatism stresses conformity to the status quo, and also to customs and traditional practices (Solas & Ayhan 2007). Innovation or change is not highly recommended and regarded by Confucian. Chinese traditional accounting method changed very little throughout centuries in order to maintain stability.

For many years in America, accounting guideline that understates assets and revenues and overstates liabilities and expenses. Expenses should be recognised earlier while revenue should be recognised sooner. Thus, net income will result in a lower figure. One can argue that pessimism is needed to counterbalance the optimism of the management (Swärd et al. 2005).

Confucian sees Conservatism as an active approach in dealing with risks. Solas and Ayhan (2007) states that conservatism requires to show losses as soon as possible but deferring gains till they are clearly materialized.

The U.S. is a reflective and reactive society when dealing with financial and accounting transparency and secrecy. The US Congress indicates that financial transparency is essential to prevent spectacular corporate failures. These failures, over the past few years, Swärd et al (2005) think they were largely caused by questionable accounting practices and bad management.

In China, however, Confucian stresses conformity to customs and traditional practices rather than innovative new processes. Nepotism is an important part of Chinese business culture. The combination of Confucianism and Nepotism would result in secrecy and non-disclosure of business accounts (Solas & ayhan 2007).

Nepotism has a tendency of resolving problems from within rather than disclosure to outsiders. Nevertheless, in modern China, Nepotism is an effective way of raising capitals for business development, for example, raising money within the same clan.


Gray's (1988) framework has raised expectations about how culture may influence accounting practice at a national level. This might be true in the early of 20th century when globalisation just began to take shape. Culture could be a barrier for different accounting systems to reconcile with each other. It was important to understand how local values might affect the accounting system and financial disclosure.

Nowadays, Globalisation affects every country in terms of economic integration at an unprecedented level. Inevitably, world economic and business are closely integrated with each other. Multinational companies are expanding towards every corner of the world. It is obvious that multinational companies needs to adopt a uniformity in accounting and reporting practice whist refrain from conformity into local custom or practice to complicated financial reporting and disclosure. Uniformity is about standardization of a system so that every country will practice accounting at the same standard to avoid barriers imposed by local custom and local culture. This will facilitate efficiency and effectiveness of international business auditing and accounting. A widely acceptable ideology is to ensure the comparability of international financial reporting (Radig & Loudermilk 1998).

An important step and a worldwide effort is the International Accounting Harmonisation (IAH). The IAH is a way to reduce the impact of culture on contemporary international accounting practice. The International Accounting Standards Committee (IASC) was formed in 1973 to promote IAH among nations.

However, some challenges remain where IASC standards may not be acceptable worldwide and IASC standards may conflict with local regulations in various countries.


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