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

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Synopsis

International Accounting is described based on three levels; 1) influence of the International political groups like United Nations on accounting; 2) countries’ differences in accounting, taxation and audit standard and practices; and 3) accounting practices of companies concerning their international business actives. A threefold description is essential because it serves as an acknowledgment of global accounting diversity. Understand these differences help multination corporations to avoid accounting-culture shocks and increase the ease of doing business. Business globalization enthusiasts continue to advocate for convergence and adjustments in national accounting practices with a view of bringing about a worldwide uniformity of the accounting world. Regardless the effort invested in reducing the gaps, still there is a host of obstacles hindering reconciliation of countries’ accounting systems and standards. Cultural values and environmental factors are often cited as the fabrics of unique accounting systems that prevent uniformity.

The paper aims to give comparative analysis and study of varying accounting cultures of U.S and Japan. I will enumerate on Gray’s accounting cultural values and their effect on U.S and Japan. I will also talk about the environmental factors contributing to the distinct accounting systems of the two countries; I will focus on legal systems, financial providers, culture, and political and economic providers. In summary, the U.S has a flexible, transparent, professional/private-self regulate accounting. The legal system is flexible with fewer restrictions. The culture has high individualism, low power distance, and high masculinity; financing is public. Conversely, Japan’s accounting system is highly conservative with low individualism, high power, uniform, high statutory control, secrecy, and long-term focused.

Table of Contents

1. Introduction

The accounting framework developed by Gray (1988) lays bare the influence of culture on accounting practices and standards across different countries. As a result, internationalization and international trade practices continue to result in contradiction and clash of conflicting accounting systems. While convergence in accounting standards and practices taking place per the International Financial Reporting Standards (IFRS), opposing cultural and environmental factors seem like eternal strangling cords. Sufficient evidence exists to suggest that IFRS standards can conflict with municipal law or regulation if not accepted globally because of cultural diversity. In that case, a proper comprehension and appreciation of modern accounting systems require an understanding of effects of values and national factors on accounting. Therefore, this paper will provide insight into the different accounting practices in the U.S and Japan based on Gray-Hofstede’s framework. Gray’s accounting values include professionalism vs. statutory control, uniformity vs. flexibility, conservatism vs. optimism, and secrecy vs. transparency; short-term vs. long-term focus is also accepted as an accounting value. It will show the look at environmental factors like legal systems, culture, economic structure, and financial providers.

2. Professionalism vs. Statutory Control

Gray (1988) defined professionalism as the act of preferring an individual’s professional judgment and private self-regulation as opposed to complying with national legal requirements. United States accounting system depicts professionalism by emphasizing the value of technical observations and recommendations of the accounting profession (Law, 2011). It requires that financial statement should be based on accountants’ judgment. The American accounting profession is a self-regulated body as mandated by the American Institute of Certified Public Accountants (Law, 2011). Therefore, professionalism marks the U.S accounting systems

On the contrary, the Japanese accounting structures and culture witnessed high state involvement and based on systemic social hierarchy (Bestor & Hardacre, 2004). The statutory control of accounting values limits professionalism and self-determination of individual accountants. Available values bring about high level as of uniformity and as a result, lead to conservative conformation to statutory regulations. In Japan, the government is regarded as the ultimate authority, and therefore professional entities play a subsidiary role (Young, 2013). Moreover, in Japan, social engineering created a society that prefers leaving by the book. The culture encourages high-risk avoidance and therefore people following guidelines.

3. Uniformity vs. Flexibility

Law (2011) stated that United States accounting structure reflects a high tendency for flexibility. These practices are visible in the accounting activities of most firms. Professional judgment is revered, encouraged and practiced. It is clear that customs and traditional accounting rules are not an obstacle. As a result, there is high flexibility in the U.S. Since the Japanese have a standardized approach to accounting due to high statutory control and compliance, the system portrays high uniformity. Enforcement of uniform standards and practices reduces the risks associated with flexibility. However, Young (2013) found that this practices compromise professional judgment and decision-making and do not encourage the development of professional reputation. Since hierarchical order is respected in Japan, uniformity seems to work best.

4. Conservatism vs. Optimism

Japanese accounting systems are based on prudent and conservative ideas. Conservatism is a culture deeply rooted in Japanese accounting practices and general culture. Business essentials like revenue, assets, profit are undervalued whereas liabilities and expenses are overvalued (Taman, 2011). In that case, individual involvement is low whereas there is high power. The system demonstrates that there is little risk taking. On the contrary, the U.S. culture discourages conservatism will promoting high levels of optimism. Accounting professionals are inclined toward valuing assets, high revenue and profits while undervaluing liabilities and expenses (Taman, 2011). High optimism in the U.S. may be related to the need to encourage and maintain business growth through risk-taking.

Gray (1988) explained that secrecy emanates from the desires to maintain confidentiality and restraint on disclosure of a business’ information. The information is accessible to persons highly involved in the management and funding of a business. Conversely, transparency is the advocacy openness in disclosing such information. Companies in the United States take a public approach when dealing with their information due to the absence of a closed-up atmosphere (Young, 2013). Accounting standards and practices insist on the necessity of truth, fairness, and transparency (Oluku & Ojeke, 2011). Gray (1988) explained that conservatism often breeds and demanded high levels of secrecy in the accounting practices commonly because funding is by private entities like banks. Therefore, information is only provided to banks because they are creditors and need the information as security; restrictive reporting prevents openness or transparency.

6. Environmental Factors

The business environment varies from continent-to-continent, region-to-region, and country-to-country. Similarly, environmental factors affecting accounting practices and principles differ from country to country. Streamlining the accounting profession, standards, and methods require the standardization to create uniform systems. For this paper, factors like legal systems, cultural values, and political and economic structures will be investigated.

6.1. Legal system

A nation’s legal system has a direct influence on how accounting standards are created. The United States practices a system based on common law; law developed through judicial precedents or case law. The U.S legal system has imposes few limits and therefore allows room for independent judgment. Law (2011) stated that the system allows more flexibility and thus generates an optimistic approach to accounting. Furthermore, transparency, professionalism, and individualism develop. Little statutory control implies that accounting takes little legalistic approach in creating standards (Doupnik & Perera, 2011). It means that accountant and accounting organizations like the American Institute of Certified Public Accounts are empowered to professionally. High independence eventually leads to professional practices that are free from the rigidity of conservatism. However, the Japanese legal system is based on code law making statutory control the basis of accounting standards and practice. According to Young (2013), the decrees of the government are final because the government is the highest authority of the land. Code law sets and prescribes accounting practices that must be followed in a country (Gray, 1988). Therefore statutorily mandated bodies have authority to supervise profession body and provide guidance on how Japanese accounting practices should run.

6.2. Cultural values

Countries’ cultural values are vital when trying to understand their accounting practices and how functions. For instance, Japanese culture is known for encouraging continuous improvement. Loyalty to workplaces, respect for colleagues, and cohesive social units define Japanese people, culture, and accounting. Values like collectivism reflect the goodwill among people and compassionate environment that is a reflection of group consciousness. All key communications originate from the top of the structure (Young, 2013). Apparently, group bonds are strong and act as a driver of excellence. Majority of Asian countries including Japan have a high power gap, and inequalities are accepted. Imposition of rules is natural because people agree that ultimate authority lies with the government (Amat et al. 2002). In that case, Japanese accounting practices correspond to cultural uniformity. Unlike in Japan, U.S has a robust individualistic culture and emphasis is placed on individual success and achievements (Law, 2011). Furthermore, the U.S individualism correlates with low power distance resulting in an inclination towards adoption and innovation as opposed to excellence (Amat et al. 2002). However, a cultural convergence exists between U.S and Japan since both are masculine societies (Hofstede, Hofstede, & Minkov, 2010). The only difference lies in the fact that Japan has a high level of uncertainty avoidance as well as high masculinity that the United States.

6.3. Economic and Political structures

Young (2013) explained that transformation of the Japanese economy brought about privatization and diversification of the economic structure f the country. However, statutory control and uniformity of accounting practices promote collectivism. Admittedly, the private sector has some means of autonomy but are a restricted level. In the U.S, the market I economy encourages private individuals to market independent decision (Hofstede, Hofstede & Minkov, 2010). In that case, emphasis is on the fact that Japanese economic and political structures are not as rigid Chinese structures and allow private sector participation (Young, 2013); however, the government retains the statutory control prerogative. As a result, the system has high conservatism, high uniformity, and less professionalism. The U.S system, on the other hand, encourages an accounting practice that is professional and innovative due to flexibility and individualism. Furthermore, it does not deprive the accounting professionals a chance for self-actualization and professional development because accountants in use do not avoid uncertainties.

References

Amat, O., Blake, J., Wraith, P., & Oliberas, E. (2002). Dimensions of national culture and the accounting environment: The Spanish case. Working Paper. Retrieved May 15, 2018 from: http://www.econ.upf.edu/docs/papers/downloads/394.pdf

Bestor, T., & Hardacre, H. (2004). Contemporary Japan: Culture & Society. Retrieved May 15, 2018 from Asian Topics on Asian for Educators: http://afe.easia.columbia.edu/at_japan_soc/common/all.htm

Dahawy, K., & Conover, T. (2007). Accounting disclosure in companies listed on the Egyptian stock exchange. Middle Eastern Finance and Economics, 1(1), 5-20.

Doupnik, T. S., & Perera, H. (2011). International accounting (3rd ed.). New York, US: McGraw-Hill Irwin

Gray, S. J. (1988). Towards a Theory of Cultural Influence on the Development of Accounting Systems. Abacus, 24(1), 1-15. doi:10.1111/j.1467-6281.1988.tb00200.x

Hofstede, G., Hofstede, G. J., & Minkov, M. (2010). Cultures and Organizations: Software of the Mind: Intercultural cooperation and its importance for survival. New York, US: McGraw-Hill.

Law, A. (2011). International accounting project. Retrieved May 15, 2018 from: http://investment4future.blogspot.co.ke/2011/06/international-accounting-project.html

Oluku, M. D., & Ojeka, S. (2011). The challenge of culture to international financial reporting standards convergence. Interdisciplinary Journal of Contemporary Research in Business, 2(12), 914-925

Taman, A. (2011). Accounting in Asia-Pacific region: Hofstede-Gray theory. Retrieved May 15, 2018 from http://staff.uny.ac.id/sites/default/files/131874173/APCEMAL-TMN.pdf

Young, M. (2013). Cultural Influences on Accounting and Its Practices. Retrieved May 15, 2018, from http://digitalcommons.liberty.edu/honors/382