2.4 Means of regulation
We 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).