- B853_1Introduction: diversity in accounting rules Influences on accounting regulationAbout this free courseThis free course provides a sample of postgraduate study in Business http://www.open.ac.uk/postgraduate/find/businessThis version of the content may include video, images and interactive content that may not be optimised for your device.You can experience this free course as it was originally designed on OpenLearn, the home of free learning from The Open University: www.open.edu/openlearn/money-management/money/accounting-and-finance/influences-on-accounting-regulation/content-section-0.There you’ll also be able to track your progress via your activity record, which you can use to demonstrate your learning.The Open University, Walton Hall, Milton Keynes MK7 6AACopyright © 2016 The Open UniversityIntellectual propertyUnless otherwise stated, this resource is released under the terms of the Creative Commons Licence v4.0 http://creativecommons.org/licenses/by-nc-sa/4.0/deed.en_GB. Within that The Open University interprets this licence in the following way: www.open.edu/openlearn/about-openlearn/frequently-asked-questions-on-openlearn. Copyright and rights falling outside the terms of the Creative Commons Licence are retained or controlled by The Open University. Please read the full text before using any of the content.We believe the primary barrier to accessing high-quality educational experiences is cost, which is why we aim to publish as much free content as possible under an open licence. If it proves difficult to release content under our preferred Creative Commons licence (e.g. because we can’t afford or gain the clearances or find suitable alternatives), we will still release the materials for free under a personal end-user licence.This is because the learning experience will always be the same high quality offering and that should always be seen as positive – even if at times the licensing is different to Creative Commons.When using the content you must attribute us (The Open University) (the OU) and any identified author in accordance with the terms of the Creative Commons Licence.The Acknowledgements section is used to list, amongst other things, third party (Proprietary), licensed content which is not subject to Creative Commons licensing. Proprietary content must be used (retained) intact and in context to the content at all times.The Acknowledgements section is also used to bring to your attention any other Special Restrictions which may apply to the content. For example there may be times when the Creative Commons Non-Commercial Sharealike licence does not apply to any of the content even if owned by us (The Open University). In these instances, unless stated otherwise, the content may be used for personal and non-commercial use.We have also identified as Proprietary other material included in the content which is not subject to Creative Commons Licence. These are OU logos, trading names and may extend to certain photographic and video images and sound recordings and any other material as may be brought to your attention.Unauthorised use of any of the content may constitute a breach of the terms and conditions and/or intellectual property laws.We reserve the right to alter, amend or bring to an end any terms and conditions provided here without notice.All rights falling outside the terms of the Creative Commons licence are retained or controlled by The Open University.Head of Intellectual Property, The Open UniversityThe Open UniversityGreat Britain by Polestar Wheatons Ltd, Exeter978-1-4730-1850-1 (.kdl)
978-1-4730-1082-6 (.epub)IntroductionThis course examines how national practices for financial reporting have evolved and why different rules are in place within different jurisdications. In times past, imperialism and war have both been responsible for expanding financial rules across Europe and the world . More recently the Sarbanes-Oxley Act of 2002 in the United States has had the same, if unintentional, effect.This OpenLearn course provides a sample of postgraduate study in BusinessAfter studying this course, you should be able to:identify factors that have influenced the development of financial reportingprovide examples of how those factors have effected change in particular countrieslist a number of variables that affect the development of accounting rules in different jurisdictionsexplain the contingent model of accounting changeapply the theories of accounting development to new situations.1 How regulation evolves1.1 Reporting international financial informationThis course is not concerned with how accounting information is captured or stored, nor how it is used internally within an international group, although those are certainly significant issues, but rather with how public financial statements are prepared, audited and used. Essentially, we are dealing with how reports on a company's financial situation are compiled for external purposes and how that compilation is constrained and shaped. Reporting rules are not exactly the same in any two countries, and this is a fundamental issue around which much of the study of international accounting revolves.We are focusing on a particular area within international accounting, that of the supply of information to the international capital markets. To understand why there is a need for international rules, we need to know something about the diversity of accounting that exists in the world. After all, if a litre of petrol is the same in Wales, Spain and Australia, why are company profits not measured with the same uniformity? (However, if you look a little closer, you will realise that the litre is a measure that was consciously imposed, and, before liquid measurement was ‘harmonised’, there was a whole range of different measures). The Americans still stick to their gallon, and the British continue to ‘unofficially’ use their (different) pints and gallons.We probably take it for granted that financial reporting is regulated in various ways, but it is not necessarily obvious that it should be regulated, and, if it is regulated, it is not self-evident who should do the regulation. Economists such as Bromwich (1992) point out that those who want to use accounting information in negotiating with others, for example to raise finance, or to sell products, have an interest in providing good quality financial information.The argument is that the market will ‘price in’ doubts about the reliability of the financial information (i.e. will ask a higher price when it is doubtful about the quality of the information) to compensate for the uncertainty. Consequently, the provider of the information has an incentive to provide good information and to reassure users of its quality, through devices such as using a comprehensive basis of accounting, which is perceived to be high quality. For example, it may be better to use International Financial Reporting Standards (IFRS) instead of Zimbabwe GAAP and to have the statements audited by auditors conducting their work under International Standards on Auditing. The counter-argument is that this leaves inefficiencies in the market, because it takes a little while for the poor quality information to be clearly identified, and there will always be those who believe they can deceive the market (e.g. Enron, Worldcom, Parmalat, etc.).1.2 StewardshipThe simplest form of financial reporting has been around, originally unregulated, for thousands of years. Ever since possessors of wealth appointed other people to manage their money, the agents have been reporting back on what they did with it in the form of the stewardship report. If you are familiar with the Bible, you may know a parable about a wealthy man who advances the same amount of money to three employees, and then asks them a year later to say what they did with it – verbal financial reports. The stewardship function is still a very potent force in financial reporting. In the markets, the multinational is presenting its account of past management action as an incitement to investors to continue to invest. The stewardship report establishes a track record.1.3 Managing the national economyThe earliest regulation in Europe was not motivated by stewardship concerns, but was aimed at small businesses whose owners did not take the trouble to measure the success of their business. Consequently they went into liquidation, often, as is the case with small business networks, taking other businesses down with them. The 1673 Savary Ordonnance in France, which is regarded as the first national accounting rule created in the world and was subsequently taken up into the French Commercial Code (more below), was introduced to prevent bankruptcies. The French government required all businesses (but at the time, pre-Industrial Revolution, large businesses were in single digits) to make an annual inventory, in effect, a balance sheet using current market values, to assess the health of their business. The difference in net worth from one year-end to the next showed whether the business was profitable or not.This first example illustrates one of the principal forces for regulation: governments are concerned with the healthy functioning of the economy for which they are responsible. Increasingly, politicians have thought it necessary to step into the markets and introduce controls on corporate behaviour. If you look at any pronouncement by the US Securities and Exchange Commission (SEC), which regulates the US financial markets, you will see that they frequently refer to protecting the smooth operation of the markets and preserving investor confidence, as a reason for almost any measure.The 1673 regulation in France occurred because the government observed that there had been a spate of bankruptcies, leading to a loss of confidence in business and a downturn in economic activity. It wanted to re-build confidence by weeding out the weaker businesses before they took others down. We will look at this pattern again in Section 2.3: the cycle of negative economic events leading to change in regulations.1.4 Information for investorsThe next major evolution in accounting was the impact of the Industrial Revolution, when, in the nineteenth century, much of the infrastructure of financial reporting as we now know it was laid down. The special impact of the Industrial Revolution on accounting sprang from the change in the size of the average business and the capital necessary. Before the revolution, businesses were small scale, involving one owner or a partnership, liability was unlimited and the distinction between the owner's wealth and the business's was not observable. Banks were mostly concerned with financing trade exchanges, not with lending to provide base capital for business.The Industrial Revolution called for large investments in high risk projects, initially such as building canals and railways and then, later, factories. The economy needed to evolve to accommodate the new pattern of business, and it did so with the expansion of the joint stock limited liability company, where many investors could be brought together to share the risks, and their liability was limited to their investment.This new business unit ushered in the rise of the professional manager, hired for expertise in a particular activity, and relegated the owner-manager to the small business. This in turn produced a new sophistication in the stewardship function – there was a separation between manager and investor, and financial reporting had to evolve to meet the needs of communicating information between the two.We can call this the capital market function of financial reporting: providing information about the company's economic performance to the financial markets. In the UK, where this form of reporting first developed, the government intervened little at first, only specifying that there should be a ‘full and fair’ balance sheet provided by the company to its shareholders. Although it was recommended that the shareholders nominate one of their number to audit the books, this was not a legal requirement until the twentieth century in the UK. However, many companies did have an audit (reassurance to the market reduces prices) and the new profession of accountants was gradually hired more and more by shareholders to carry out the audit on their behalf.1.5 Borrowed fineryThese examples show how financial reporting has evolved in response to economic evolution, but other influences have occurred also. One of these is ‘borrowing’ legislation from other countries. There is a strong tradition within continental Europe of looking at what the neighbours are doing and adapting their solutions for one's own use. Forrester (1996) discusses how professional accountants from the nineteenth century onwards encouraged exchanges of accounting rules.The Savary Ordonnance (see Section 1.3) spread, ultimately, to many countries and is the original foundation of the accounting elements of the commercial codes encountered in Europe. The German state of Prussia used the Savary Ordonnance in the eighteenth century. At the beginning of the nineteenth century, it was adapted into Napoleon's first Commercial Code (1807), which was forcibly exported to Portugal, Spain, Italy and the Netherlands. Apart from the last, these countries have kept the code in place ever since.When the new country of Germany was founded in 1870, it too built on the Prussian base and developed that into a similar code. Subsequently, Germany developed another corporate vehicle for small business, the GmbH (Gesellschaft mit beschränkter Haftung), which was an idea taken up in other European countries (France: société à responsabilité limitée etc.) and even back to the UK, in the EC Second Company Law Directive.One of the remarkable aspects of the borrowing is that while Japan, for example, did not hesitate to adapt the German Commercial Code for domestic use, the UK remained largely outside the European exchanges of accounting technology until it entered the European Union. This is because the UK and the US have always exerted a strong influence on each other. For example, the technique of producing consolidated accounts was pioneered in the US in the early twentieth century and started to be used in the UK from about 1930, but only became widespread in the rest of Europe following the Seventh Directive, passed in 1983.This fact supports the notion that worldwide there are two ‘families’ of financial reporting, the US/UK one (known as Anglo-Saxon reporting) and the continental European one (sometimes referred to as commercial code accounting).1.6 ImperialismRelated to the idea of transferring regulation across borders, is the influence of colonial tradition and of trade relations. The European colonisers, notably the UK and France, transferred their accounting rules to their colonies, so that Singapore, for example, had the same rules as Cyprus and Nigeria (Walton, 1986), while Cameroon shared rules with Lebanon, Vietnam and Guadeloupe, amongst others.Modern academic notions of ‘imperialism’ include the idea of economic domination, and some people point to countries like Canada and Mexico using accounting heavily modelled on US rules as an example of the export of rules following close trading connections (one could also point to Switzerland's use of European rules). These links have led to countries adopting rules that have not evolved in their own economy and are not therefore necessarily well adapted to that economy.1.7 TaxationAnother function of accounting is to provide the basis on which tax is measured. The link between taxation and financial reporting is stronger in some countries than others, and is typically much more pronounced in the accounting of owner-managed business than multinational groups. However, the tax issue can be a very significant shaper of accounting measurement. The relationship between tax and accounting is, like so many things, partly the result of an accident of history. In commercial code countries, government regulation of accounting was installed in the early nineteenth century, if not before, whereas tax on income was introduced towards the end of the nineteenth century or in the early part of the twentieth century. The sequence of events was that, first, there was a government-mandated set of accounting rules and, later, a government need for agreed measurement rules for tax assessment – so naturally the two became entwined. In some cultures, annual financial statements are perceived to be mostly about taxation, not reporting economic performance.Activity 1Think of three different countries that are separated widely geographically. From what you know about their history and economics, identify which factors may have been important in the development of their accounting regulations.Your answer to this activity will obviously depend on your choice of countries. Hopefully, you have attempted to apply some of the principles discussed in this session to arrive at your answer. Keep your answer to this activity beside you as you work through the next section, and see whether you can add further details in the light of what you read in that section.1.8 ConclusionThis section has demonstrated that regulation evolves in response to a number of factors. Some of the more significant ones, such as economic development, ‘borrowed’ legislation, colonisation and imperialism and economic domination, have been discussed here. The consequence of this is that accounting regulation has evolved differently in various countries. The reasons for the diversity in accounting regulations will be considered in more detail in Section 2.2 Why jurisdictions have different rules2.1 Accounting rules and realityIn a seminal article, Hines (1988) demonstrates that when we draw up accounting rules, we determine what view of reality we present. At its simplest, if we decide that internally-generated intangibles should not be measured, we also determine that a whole class of assets owned by a company is not part of the picture given by the balance sheet, and therefore the ‘reality’ that the balance sheet is supposed to reflect is shaped by our decision on the accounting rules.Those who make the accounting rules determine which aspects of the company are highlighted, and which are neglected, in financial reporting. Of course, they do not create something that does not exist (although some companies do try to use the rules that way!), but accounting rules always reflect some perception of which aspects of a company can and should be measured.2.2 Objectives of financial reportingThe International Accounting Standards Board (IASB) has a conceptual framework that aims to set out publicly which qualities should be in the forefront of the standard-setters' minds when making accounting rules. The IASB explains that ‘the objective of financial statements is to provide information about the financial position, performance and changes in the financial position of an entity that is useful to a wide range of users in making economic decisions’ (IASC, 1989, paragraph 12). (This quote originally appeared in the IASC's Framework for the Preparation and Presentation of Financial Statements in 1989. The Framework was later adopted by the IASB in 2001.) Not all regulators have an overt set of objectives like this, and even when they do, there are usually other factors that come into play. This is one of the reasons that accounting rules differ from one jurisdiction to another: what are the objectives of financial reporting that over time have played the most significant role in shaping the accounting rules?We need to be wary of over simplification here. Standard-setters face complex choices, and though they may express them one way, very often decisions are made in a way that tries to strike a balance between different objectives. All standard-setters wish the economy to be enhanced not damaged by their rules, all want those entitled to information about the company to have good quality information, all want the application of the rules not to be too onerous, all want the information to be comparable and consistent, none can ignore that accounting rules will influence tax rules in any jurisdiction, and so on. So the issue when you look at a particular jurisdiction is how they interpret these objectives and which seem to get the most emphasis.If we take Switzerland as an example, the financial reporting regime is changing. (That is another rule of financial reporting: the rules are always changing, but they change more quickly in some jurisdictions than others. One of the reasons that some European countries find it difficult to accept IFRS is that they are used to an environment where the rule changes occur once every 20 years, not one like the US, where several rules are changed each year.) Traditionally, the Swiss rules have been almost exclusively concerned about taxation and a stable economy. The Swiss regulator believes (and it is explicit in the commercial code) that undervaluing the company by creating hidden reserves, gives a positive economic benefit because it means companies have reserves that can be used during a downturn in the economic cycle. The tax rules go along with this, so, in the Canton of Geneva, one third of year-end stock can be written off, as of right, irrespective of its condition. This reduces the value of stock shown in the balance sheet and reduces profit by a corresponding amount. The legislator believes that this is good for the health of the economy, and that users of financial statements are getting good information, precisely because it does not reflect the economic state of the company – they are protected by undervaluation.The Swiss Commercial Code (code des obligations) in the 1990s addressed its rules to the financial statements of individual companies. There was only one line on groups of companies, saying that they should prepare consolidated accounts. Listed companies now have to follow standards for consolidated accounts that are loosely based on International Financial Reporting Standards (IFRS), but the regulation remains extremely light. In practice, listed companies do not necessarily like this because, as we discussed at the start, the markets want reliable information and this comes from following the rules of a high quality comprehensive basis of accounting. Consequently, a number of Swiss companies either use IFRS (famously Nestlé, amongst others) or claim compliance with EU directives.The absence of detail in the code suggests that, for the Swiss legislator, the preparation of financial statements as an essential input to capital markets is just not an important factor in framing rules for financial reporting.At the other extreme, US Generally Accepted Accounting Principles (usually referred to as US GAAP), the main financial reporting rules for the USA, are directed entirely at the capital markets. The rules are under the ultimate authority of the Securities and Exchange Commission (SEC), and the announced objective of the standard-setter (the Financial Accounting Standards Board (FASB)) is to create rules that provide information for investors on which to make investment decisions. The standard-setters believe that the economy is protected by transparent information, so that the investor can make economic judgments. There are no mandatory rules for private companies.By contrast, a member of the Comité de réglementation comptable (Accounting Regulatory Committee), which is the committee that decides if standards should be given the force of law in France, says in discussing the French system: ‘The composition and functioning of the standard-setting organization is founded on multi-disciplinary cooperation and the representation of the widest possible range of different users of accounting’ (Hoarau, 1995, p. 225). He describes the standards as being a ‘compromise between competing interests’. He adds: ‘French standard setting tries, without always succeeding, to satisfy a number of unspecified or vaguely known needs of users who are never explicitly recognized’.This issue of different countries perceiving financial reporting as having different objectives is one of the important cultural variables that affect financial reporting. The way in which you represent reality in the financial statements will depend upon what aspects of the company you believe to be most important to convey to the outside world.2.3 Contingent model of accounting changeThe totality of the accounting rules in any one country at any one time represents an accumulation of rules that have been brought in over many years (even centuries, in the French case). In remembering that, it becomes clear why the rules are sometimes inconsistent: they have been put together by different people, at different times, and in the face of different circumstances and priorities. It also makes clear why it would be optimistic to expect close comparability between national sets of rules.When looking at the standards of the International Accounting Standards Committee (IASC) and its successor the IASB, put together over a continuous period of no more than 30 years, it is evident that these different approaches, different priorities, etc., can occur over a very short time. When the IASB, virtually a full-time professional standard-setting committee, started work in 2001, almost their first act was to decide to revise most of the standards inherited from the IASC, because they were internally inconsistent.When the IASB published the revised standards in December 2003, Sir David Tweedie said: ‘The improvements project has raised the quality and enhanced the consistency of international accounting standards’ (IASB, 2003). The IASB press release added that the project had removed a number of options contained in IASs, whose existence had caused uncertainty and reduced comparability.Another example is the Financial Accounting Standards Board (FASB) in the US: when issuing the draft of its standard on Fair Value Measurement in 2004, it recognised that there were 31 standards issued since 1971 by the FASB that mentioned fair value but had inconsistent approaches to how it was defined and how it should be calculated.One of the factors that influences the accounting rules is the way in which they change. Burchell, Clubb and Hopwood (1985) analysed a particular case of accounting change in the UK. This analyses how, in a particular economic context, various interests concerned with financial reporting arrived at a consensus that an additional financial statement, a statement of value added, should be part of the company reporting package. From this detailed analysis we can draw a more general model about how accounting change often takes place. If you consult a history of financial reporting in Europe, such as Walton (1995), you can find plenty of evidence of this model in operation. This model, known as the contingent model, suggests that there is a cycle in accounting regulation which is as follows:The cycle is started when something occurs to disturb the perception that financial reporting, and its associated infrastructure of audit and professional regulation, is operating effectively. Often this will be a financial scandal – companies suddenly announcing major write-offs or big losses etc. The Enron case is a classic: the intrusive event has to be on a sufficiently large scale to convince people that action is necessary. Typically this is followed by the search for a consensus. In some countries this would be a formal process of the regulator issuing a discussion paper or some consultative document, suggesting solutions and inviting comment. In the Enron case, the SEC made a proposal for legislation, as did several individual politicians. A consensus was worked out in Congress by merging two different proposals which ended up as the Sarbanes-Oxley Act of 2002, although the FASB has been working separately in its usual due process to create new rules for special purpose entities (off balance sheet financing vehicles).Under the contingent model, the new rules will simply add to previous ones, and will be absorbed over time, leading to a new equilibrium; however, the new equilibrium may include unintended consequences. Generally, when standards are drawn up, the consensus-seeking process ensures that those potentially affected have the opportunity to point out flaws or other problems. However, people frequently cannot be bothered to review new rule proposals, or the rule change affects people who were not consulted, because no-one realised they would be affected, or people just do not see the possible consequences, or estimate them to be unimportant. It happens, therefore, that unintended consequences frequently arise from rule changes.An example of this in the Sarbanes-Oxley Act is that the act aimed to tighten the scrutiny of audit firms in the US. (Enron was perceived to have been allowed to get away with fraudulent financial statements because the auditor was weak and internal quality control in the firm was not good enough.) The Act therefore created a new oversight body (Public Company Accounting Oversight Board) with powers, amongst other things, to inspect the working papers of auditors and check their quality control procedures. However, no-one really appreciated that this measure to enhance audit supervision of companies listed in the US would apply to non-US companies listed in the US, and therefore to their non-US auditors. For example, Cadbury Schweppes has only a relatively small percentage of its turnover in the US (the company's segment information provides a figure only for ‘The Americas’), but because it is listed in the US, it is audited by the UK partnership of Deloitte & Touche thereby opening the door to US supervision of the UK firm. (Those who perceive the major international audit firms as multinationals might find this unsurprising, but the firms are actually confederations of independent national partnerships trading under the same name, and normally supervised by national bodies). A US financial reporting scandal had the unintended consequence of opening up US supervision of audit all over the world.Awareness of the contingent model cycle is useful in terms of understanding future evolution in accounting standards, but the immediate point in discussing it is that all countries experience the cycle, but it swings into action as a result of different events in each country, taking place at different times. So, even if two countries start out with the same basic rules (e.g. based on the French 1807 Commercial Code), very soon they are moved away by events in their own country.2.4 Means of regulationWe have started to draw attention to cultural variables already when talking about the perceived objectives of financial reporting. In this next section, cultural issues can be seen to have a considerable impact on the methods used in each country to regulate its accounting, and indeed on whether regulation is perceived to be necessary.One of the fundamentals in this area is the underlying legal system. The literature recognises two models: the common law model and the Roman law model. As with all these analytical simplifications, we need to bear in mind that all countries use varying shades and varying combinations, however, the simplification is useful as a tool. Under common law, a great deal of latitude is left to the courts in determining how the law is applied. The law says what its objectives are, people try to meet these, and the courts decide whether they have been successful. Put into a UK accounting context, in the nineteenth century company law required a full and fair balance sheet and left it to accounting practitioners to work out what that was, and the courts to assess whether this had been done. Consequently, court decisions (jurisprudence) build up alongside professional experience to create generally accepted accounting principles, but the technical detail comes from the practitioner, not the statute.Under Roman law, for which Napoleon was a great enthusiast and proselytiser, the law sets out the procedures that have to be followed to meet the legislator's objectives. Typically, the practitioner has little input and exercises little judgement in following the procedures. To take a French example, the accountant has only to follow the rules of the plan comptable général (General Accounting Plan), which specify which ledger accounts are to be used for different transactions and how the account balances are to appear in the financial statements, to provide an acceptable set of annual accounts.Over the centuries different societies have built up different ways of working with the law, and this tends to impact on the way in which their financial reporting regulation is articulated. In common law countries (and English-speaking countries generally follow this tradition), the standard setting for most of the twentieth century was carried out by professional accounting bodies, against a framework provided by company law. To this day, standard setting in Canada, New Zealand and South Africa is provided by committees of, respectively; the Canadian Institute of Chartered Accountants, the New Zealand Institute of Chartered Accountants and the South African Institute of Chartered Accountants.In Roman law countries, standard setting is usually in government hands. In France the major standard-setter, which traces its origins to 1946, is the Conseil national de la comptabilite, a Ministry of Finance agency. Its standards now have to be endorsed by the Comité de réglementation comptable, whose chairman is the Finance Minister. There are many accounting rules in the tax statutes as well. In Germany, although it has recently created a standard-setter for consolidated accounts, accounting regulation is in the hands of the Ministry of Justice, which is responsible for the accounting rules in the Handelsgesetzbuch (Commercial Code). However, in Germany, accounting is also influenced by decisions of the tax courts and by tax measurement rules.These different ways of articulating regulation are another source of variations between countries. They have a number of effects on accounting rules. The Anglo-Saxon common law model has rules emanating from (a) infrequently changed company law, and (b) constantly changing professional rules issued by ‘expert’ committees of auditors, preparers and users of financial statements. The detailed rules can be changed relatively easily and quickly and practitioners are used to having to maintain a significant level of updating of their professional knowledge base.In contrast, the Roman law model of continental Europe has rules emanating from (a) a commercial code, and (b) tax statutes and jurisprudence. The statutes change infrequently and any professional guidance is non-mandatory and not extensive. Changes in the law are typically drafted by civil servants, albeit in consultation with those with an interest in accounting.Many authors have written about the influence of cultural variables on accounting regulation and attempts have been made to model it. The seminal work here is that of Gray (1988), which takes a cultural analysis done by a Dutch sociologist, Hofstede, and applies it to accounting regulation. Although Hofstede's research has since been criticised, Gray's extension of it into accounting regulation offers some interesting insights. A more recent approach has been to consider the extent to which compliance with regulations is affected by culture (e.g. Aisbitt, 2004).2.5 ‘Events, dear boy, events’A further influence on accounting is, to borrow Macmillan, events. (Macmillan was the Prime Minister of the UK (1957–1963) who famously observed that the greatest obstacle to political achievement was ‘Events, dear boy, events’.)Countries' systems are overtaken by events of one kind or another that bring accounting consequences. Not least of these is war. Napoleon's desire to conquer Europe had the side effect of exporting his Roman law paradigm and the commercial code within it, to half of Europe. A cornerstone of European accounting was, in effect, a military decision. It can be demonstrated that the First World War provided the motivation for the development of cost accounting. The 1870 Franco-Prussian war and, later, restitution, brought the GmbH into French law. The empire-building enthusiasms of the nineteenth-century Europeans also led to the spread of different European accounting models all over the world.We do not need to go too far along this track, other than to note that such events can have far-reaching (and wholly unintended) accounting consequences, as also can political decisions to do things like becoming a member of the European Union.Activity 2Imagine that the people of Italy have decided (in a referendum) to leave the European Union and become one of the United States of America. Identify the changes that this would bring to the system of accounting regulations and discuss how easy (or difficult) these changes would be to implement.This is a rather extreme (not to mention unlikely!) example to illustrate some important points. Italy would probably be required to adopt the same system of accounting regulation as exists in the US. While experience of using IFRS in Italy would be helpful in understanding the US system, there would still be many differences. The underlying legal systems in the two countries are different – the US has a common law system, while Italy (in common with most continental European countries) has a Roman (code) law system. This would require a major change in attitudes to regulations and how they are formulated and enforced. There could also be some cultural issues in persuading the people of Italy of the need for change, which could be affected by the circumstances leading to the referendum and the level of support for the decision.2.6 ConclusionThis section has considered the reasons for different systems of accounting regulation in more detail. A number of factors external to accounting (e.g. the legal system and so-called ‘accidents of history’) have been important in shaping accounting regulations differently from one jurisdiction to another. The contingent model of accounting change provides an explanation of how accounting regulation continues to evolve and how dealing with one issue can have unintended consequences, leading to a new cycle of development.ConclusionThis free course provided an introduction to studying Business & Management. It took you through a series of exercises designed to develop your approach to study and learning at a distance and helped to improve your confidence as an independent learner.Keep on learning Study another free courseThere are more than 800 courses on OpenLearn for you to choose from on a range of subjects. Find out more about all our free courses. Take your studies furtherFind out more about studying with The Open University by visiting our online prospectus.If you are new to university study, you may be interested in our Access Courses or Certificates. What’s new from OpenLearn?Sign up to our newsletter or view a sample. For reference, full URLs to pages listed above:OpenLearn – www.open.edu/openlearn/free-coursesVisiting our online prospectus – www.open.ac.uk/coursesAccess Courses – www.open.ac.uk/courses/do-it/accessCertificates – www.open.ac.uk/courses/certificates-heNewsletter – www.open.edu/openlearn/about-openlearn/subscribe-the-openlearn-newsletterAisbitt, S. (2004) ‘Why did(n't) the accountant cross the road?’ OUBS working paper, 04/04.Bromwich, M. (1992) Financial Reporting, Information and Capital Markets, (in particular Chapter Two ‘The market provision of accounting information’) London, Pitman Publishing.Burchell, S., Clubb, C. and Hopwood, A. (1985) ‘Accounting in its social context: towards a history of value added in the UK’, Accounting, Organizations and Society, vol. 10, pp. 381–413.Forrester, D. (1996) ‘European Congresses of Accounting’, European Accounting Review, vol. 5, no. 1, pp. 93–101.Gray, S. (1988) ‘Towards a theory of cultural influence on the development of accounting systems internationally’ Abacus, vol. 24, no. 1, pp. 1–15.Hines, R. (1988) ‘Financial accounting: in communicating reality, we construct reality’ Accounting, Organizations and Society, vol. 13, pp. 251–62.Hoarau, C. (1995) ‘International accounting harmonization: American hegemony or mutual recognition with benchmarks?’, European Accounting Review, vol. 4, no. 2, pp. 217–33.IASB (2003) ‘International Accounting Standards Board issues wide-ranging improvements to standards’, Press release, 18 December.IASC (1989) Framework for the Preparation and Presentation of Financial Statements, London, International Accounting Standards Committee.Walton, P. (1986) ‘The export of legislation to Commonwealth countries’, Accounting and Business Research, Autumn, pp. 353–7.Walton, P. (ed) (1995) European Financial Reporting – A History, London, Academic Press.Except for third party materials and otherwise stated (see terms and conditions), this content is made available under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 LicenceCourse image: Ken Teegardin in Flickr made available under Creative Commons Attribution-ShareAlike 2.0 Licence.All other materials included in this course are derived from content originated at the Open University.Don't miss out:If reading this text has inspired you to learn more, you may be interested in joining the millions of people who discover our free learning resources and qualifications by visiting The Open University - www.open.edu/openlearn/free-coursesThis free course is adapted from a former Open University course B853 Issues in international financial reporting. B853 has been replaced in the business syllabus by B859 Financial strategy.
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