CHAPTER 2 ENRIRONMENTAL INFLUENCE ON ACCOUNTING DEVELOPMENT

1 2.1 Introduction

In international accounting research, environmental influence is the key to understanding one country’s accounting system. "To a large extent, accounting is a product of its environment. That is, it is shaped by, reflects, and reinforces particular characteristics unique to its national environment" (Radebaugh and Gray 1997). From the late 1960s, researchers in international accounting have tried to categorize countries according to a series of criteria, which have been developed on a deductive or conductive basis. These criteria tried to explain the reasons for accounting differences between countries; they aimed to describe and compare different systems with each other in an efficient way. There are several advantages to categorize and analyze the differences among countries: First, it promotes improved understanding of the complex realities of accounting practices, as well as the factors that shape a country’s accounting regulations; Second, it provides useful information for solving some of the important accounting problems that exist in the world. For example, it can help policymakers assess the prospects and problems of international harmonization; Third, it can assist in the training of accountants and auditors who operate internationally; And finally, it can enable a developing country to better understand the available and appropriate types of financial reporting by seeing other countries’ use of particular systems. By looking at other countries in its group it is possible to predict the problems that it is about to face, and the solutions that might work. When classifying international accounting systems, two main forms have been employed: one is the deductive approach, in which the approaches to accounting development are identified. By linking these to economic or business factors, the influential environmental factors are recognized. The examples of this approach include the works done by Mueller (1967), Choi and Mueller (1984), and Nobes (1985); Another form is the inductive approach, which identifies individual accounting practices, by analyzing the practices to identify accounting patterns. An example can be found with Nair and Grand (1980), who carried out a statistical analysis of international accounting practices using the Price Waterhouse surveys of 1973 and 1975. No matter what methods are employed in international accounting classification, they are all closely related with the environmental factors, especially for the first one. Therefore the analysis on environmental influential factors is not only the key to understanding one countries’ accounting system, but more importantly it is the basis to classify the accounting and reporting system in international accounting context so as to further predict the likelihood of changes, and their impact. International accounting classification research is still at an early stage. Concerning environmental factors in international accounting, there seems to be a consensus, on the whole, about which factors are involved in shaping financial report. But there are still some different understandings of which is the dominant environmental factor that shapes one country’s accounting development and to what extent each factor affects its accounting development. Some literature has already included China into their contents, but concerning China’s accounting environment and its accounting development, there still exists divergent points of view. This may form an obstacle for outsiders to understand China’s accounting system, as well as for the policy makers of China’s accounting standards to decide which kind of system would be most appropriate for China’s own circumstances. This chapter will review the literature concerning environmental influential factors on accounting development in an international accounting context from English literature. Based on the review, analysis and evaluation will be made for each environmental influential factor. Then, it will review and evaluate the literature concerning the influential factors on China’s accounting development both from English and Chinese literature. The key influential factors on China’s accounting development will be recognized from the review. Finally, by linking with the factors evaluated above, further hypothesis will be proposed.

2 2.2 Literature Review on Environmental Influencing Factors in International Accounting Context

In international accounting, researchers have made a lot of effort to analyze and categorize the reasons for accounting differences between countries. A large list of possible causes can be found in the writings of previous researchers, including Muller (1967), American Accounting Association (1977), Nobes (1981), Arpen and Radebaugh (1981), Belkaoui (1985), Harrison and McKinnon (1986), Gray (1988), Radebaugh and Gray (1993), Lawrence (1996), and Walton (1998). Factors, that might be relevant as the causes of international differences include politics, economics, culture, and legal systems, as well as providers of finance, taxation, the profession, inflation, theory, and other factors such as language, history, geography, religion, and education. Accordingly, which factor forms one country’s accounting pattern depends on its own unique environment, and also forms different points of view in the sphere of learning. One point of view argues that economic factors are the strongest influential factors (e.g. Arpan, 1981). Of increasing interest to accounting researchers is the impact of culture on accounting (e.g. Gray, 1988; Radebaugh, 1993). “Culture is considered an essential element in the framework for understanding how social systems change”(Radebaugh, 1997). And Gray (1988) elaborated the link between culture and accounting value.

● Mueller’s classification and its development

Professor Mueller (1967) in his International Accounting conducted the pioneering work of classification in international accounting first. He proposed four comparative patterns of accounting development, which included: accounting within a macroeconomic framework, where business accounting interrelated closely with national economic policies; the microeconomic approach to accounting, where accounting is viewed as a branch of business economic policies; accounting as an independent discipline where accounting is viewed as a service function; and uniformed accounting, where accounting is viewed as an efficient means of administration and control. Mueller considered this range of four as “sufficient to embrace accounting as it is presently known and practiced in various parts of the globe”. He also suggested that the fifth pattern, the comprehensive mathematical approach to accounting, would be separated in the future. He recognized that accounting evolution and direction of accounting development are determined by “various individual social, economic, and legal influences”. “Thus different environments have produced different results in accounting structures. In addition to environmental relationships, the development process itself has caused outcome variations”. Mueller’s classification is based on the differences of the importance of economic, governmental and business factors. Yet he failed to explain the methods employed to obtain the groupings. Mueller’s four patterns were later employed to conceptualize international accounting developmental patterns among Western nations with market-oriented economic systems by Chio and Mueller (1984). They summarized these four approaches, or patterns, of accounting development as follows: 1. The macroeconomic pattern. Serving for national economic policies, accounting is obviously intervened by the government. Many newer accounting concerns, such as accounting for corporate social responsibilities, and reporting and auditing the ‘social conscience’ of a firm, along with accounting for human resources, appear to fit the macroeconomic pattern of accounting development. Sweden could be an example; 2. The microeconomic approach. Market-oriented economies form the basis of this approach and the tradition of western economic thought is overwhelmingly a tradition of microeconomic thought. Being a tool for microeconomics, accounting serves businesses and business enterprises. An accounting measurement system based on replacement cost is said to be most suitable for microeconomic concepts. And the Netherlands is the most comprehensive example of the microeconomic pattern of accounting development; 3. Independent discipline. Accounting, as an independent discipline does not need any conceptual support from a discipline like economics, because accounting mainly serves businesses, and it has to meet the conditions of practical business usefulness, thus it can construct itself a meaningful framework derived essentially from the business process it serves. The United States and the United Kingdom are taken as comprehensive example countries in which accounting has been developed as an independent discipline; 4. Uniform accounting. Being described as more scientific, simple, and convenient for administration, accounting presents itself as a tool for economic management and business control by government. Three practical approaches, business approach, economic approach, and technical approach, are distinguished to the uniform accounting development pattern. The United States’ governmental regulations and the Swedish ‘M-Chart’ are taken as the example of business approach, which takes full account of the business characteristics and business environment under which the data are collected, processed, and communicated; Nazi Germany between 1939 to 1945 is the example of economic approach, which links accounting to public policy. National economic policy is considered uppermost, while technical accounting is considered secondarily; France is said to be the example of technical approach, which by theoretical analysis, uniformity scheme is derived by academics. Choi and Muelller (1984) deduced that international accounting concepts, like the other social sciences, are premised on or derived from environmental analysis. They asserted, “Accounting innovation and development are triggered by non-accounting factors”. They concluded with a list of environmental factors that they believe to have direct effect upon accounting development, which include: 1. Legal system; 2. Political system; 3. Nature of business ownership; 4. Differences in size and complexity of business firms; 5. Social climate; 6. Level of sophistication of business; 7. Degree of legislative business inference; 8. Presence of specific accounting legislation; 9. Speed of business innovations; 10. Stage of economic development; 11. Growth pattern of an economy; 12. Status of professional education and organization. Though detailed, this kind of illustration seems vague for grasping an outline of environmental factors, as some of the factors overlap according to domain. By analyzing the factors mentioned above, the author conceives that factor 3, 4, 6, 9,10,11 can be taken into the domain of economic factor; factor 1 and 7 belong to legal factor; factor 5, social climate, attributes to the dimension of culture, thus five aspects of factors, legal, political, economic, cultural and professional factors, can be recognized from Choi and Mueller’s work. Choi and Mueller did not give much more attention to the interrelationship of cultural and economic ‘values’, even though they suggested it would be a significant breakthrough in the dimension of accounting research, if international accounting researchers could incorporate cultural analysis in their studies. Nobes (1984) extended Mueller’s analysis and based his classification on an evolutionary approach. He adapted some of Mueller’s useful terminology and proposed a hypothesis in which microeconomic and macroeconomic systems were distinguished. Under the micro-based classification, he made a distinction between business economics and business practice orientations. Under the macro-uniform based classification, he made distinction between a government/tax/legal orientation and a government/economics orientation. Nine factors were identified for differentiating accounting systems, which included: 1. Type of users of the listed companies’ published accounts; 2. Degree to which law or standards prescribe in detail and exclude judgment; 3. Importance of tax rules in measurement; 4. Conservatism/prudence; 5. Strictness of application of historic cost; 6. Susceptibility of replacement for cost adjustments in main of supplementary accounts; 7. Consolidation practices; 8. Ability to be generous with provisions (as opposed to reserves) and to smooth Income; 9. Uniformity between companies in application of rules. Furthermore he tested this classification system by means of a judgmental analysis of measurement and valuation, reporting practices in fourteen developed countries. The result provided strong support for the classification of countries as either micro-based or macro-based. Broad support for the hierarchical classification developed by Nobes later was provided by Doupnik and Salter’s (1993) empirical research, in which the macro/micro classification for fifty countries, communist as well as capitalist, was clearly supported by both measurement and disclosure practices. Nobes’ classification mentioned above was confined to the western developed world and the financial reporting practices of their public companies. The reporting practices were those concerned with measurement and valuation. This may not be enough to cover the entire aspect of one country’s accounting development and make a multiple evaluation not only for developed countries, but also for developing countries. Referring to the causes of international differences, Nobes identified 8 factors as the influential factors to a country’s accounting development, including: (1) Legal system; (2) Providers of finance; (3) Taxation; (4) The profession; (5) Inflation; (6) Theory; (7) Culture and; (8) Accidents Again these factors could be further categorized into economic (provider of finance, inflation), legal (taxation), profession (theory), culture and accidents. Nobes had noticed the cultural relevance with accounting, but he conceived “the major direct cause of the financial reporting differences is a two-way split of countries into: (1) Those with important equity markets and many outside shareholders and; (2) Those with a credit-based financial system and with relatively unimportant outside shareholders. The equity/outsider system leads to a separation between tax and accounting rules, and to large auditing professions”(Nobes, 1998).

● AAA’s report

The American Accounting Association (1977) employed ‘morphological structuring’ methods to convey the range of factors considered by that committee and the structure postulated. Even though the AAA Committee’s report had not spawned any follow-up because of its diverse logic and report methods, its attempt “to outline a methodology for the comparative study of accounting systems in an international context” (Chio and Mueller, 1984:39) had some reference value to researchers. In the report eight critical parameters were recognized as characterizing elements to classify accounting practices. These parameters included: P1: Political System; P2: Economic System; P3: Stage of Economic Development; P4: Objectives of Financial Reporting; P5: Source of, or Authority for, Accounting Standards; P6: Education, Training & Licensing; P7: Enforcement of Ethics & Standards; P8: Client. These eight parameters could be grouped even further: economic system, stage of economic development, objectives of financial reporting and client could be grouped into the users of the financial report; source of, or authority for, accounting standards and enforcement of ethics & standards are both related with legal systems. So these eight parameters could be summarized into five, including political, economic, legal, and professional and the user of financial report parameters. The report did not give any attention to the culture factor. It was Hofstede who identified cultural values in his cross-cultural research and structured dimensions of culture.

● Hofstede’s culture model and his following

Hofstede (1980) conducted one of the most extensive cross-culture surveys aimed at detecting the structural elements of culture and particularly those that most strongly affected known behavior in the work situations of organizations and institutions. He developed a model of culture as the collective programming of the mind that distinguishes the members of one human group from another. And he distinguished four levels at which culture manifests itself: "The levels of symbols, heroes, rituals, and values". He conceived "accounting is a field in which the technical imperatives are weak; historically based conventions are more important to it than laws of nature", and "accounting systems to vary along national cultural lines"(1987:2). He defined and scored the following four basic dimensions of culture (1984): “Individualism versus collectivism. Individualism stands for a preference for a loose knit social framework in society wherein individuals are supposed to take care of themselves and their immediate families only. Its opposite, collectivism, stands for the preference for a tightly knitted social framework in which individuals expect their relatives, clan, or other in-group to look after them in exchange for unquestioning loyalty. The fundamental issue addressed by this dimension is the degree of interdependence a society maintains among individuals. Large versus small power distance. Power distance is the extent to which the members of a society accept that power in institutions and organizations is distributed unequally. This affects the behavior of the less powerful as well as the more powerful members of society. People in Large Power Distance societies accept a hierarchical order in which everybody has a place that needs no further justification. People in Small Power Distance societies strive for power equalization and demand justification for power inequalities. The fundamental issue addressed by this dimension is how a society handles inequalities among people when they occur. This has obvious consequences for the way people build their institutions and organizations. Strong versus weak uncertainty avoidance. Uncertainty Avoidance is the degree to which the members of a society feel uncomfortable with uncertainty and ambiguity. This feeling leads them to beliefs promising certainty and maintaining institutions protecting conformity. Strong Uncertainty Avoidance societies maintain rigid codes of belief and behavior and are intolerant of deviant persons and ideas. Weak Uncertainty Avoidance Societies maintain a more relaxed atmosphere in which practice counts more than principles and deviance is more easily tolerated. The fundamental issue addressed by this dimension is how a society reacts to the fact that time runs only one way and that the future is unknown, and whether it tries to control the future or just lets it happen. Like Power Distance, Uncertainty Avoidance has consequences for the way people build their institutions and organizations. Masculinity versus femininity. Masculinity stands for the preference in society for achievement, heroism, assertiveness, and material success. Its opposite, Femininity, stands for the preference for relationships, modesty, caring for the weak, and the quality of life. The fundamental issue addressed by this dimension is the way in which a society allocates social roles to the sexes”. Later in 1991, Hofstede (1991) identifies the fifth dimension: Short-term versus long-term orientation (Confucian Dynamism). The short-term orientation emphasizes respect for tradition; respect for social and status obligations regardless of cost; social pressure to “keep up with the Joneses”, even if it means overspending; small savings levels and so little money for investment; a concern to get quick results; a concern for appearances; and a concern for truth rather than virtue. The long-term orientation, on the other hand, emphasizes the adaptation of traditions to meet modern needs; a respect for social and status obligations within limits; a thrifty and sparing approach to resources; large savings levels and so funds available for investment; perseverance toward achieving gradual results; a willingness to subordinate personal interests to achieve purpose; and a concern for a virtuous approach to life. Hofstede’s value dimensions later were applied into various aspects of accounting studies. Harrison and McKinnon (1986) proposed a methodological framework incorporating culture for analyzing changes in corporate financial reporting regulation at the nation-specific level. They considered culture as an essential element in the framework for understanding how social systems change due to ”culture influences: (1) the norms and values of such systems; and (2) the behavior of groups in their interaction within and across systems” (Radebaugh and Gray, 1997: 73) Gray (1988) linked Hofstede’s culture value to accounting value later in 1998. He was the pioneer who brought together constructs from culture and accounting, and related them in a meaningful way. He proposed quite specified hypotheses of the form of these relationships. He linked Hofstede’s dimensions of cultural value to accounting sub-cultural values and proposed the identification of four accounting values, derived from a review of accounting literature and practice. His claim of a cultural influence on accounting rested on the framework he proposed, which can be shown in figure 2-1:

1 Figure 2-1: Culture, societal values and the accounting subculture

[pic] (Source: S.J. Gray, “Towards a Theory of Cultural Influence on the Development of Accounting Systems Internationally,” Abacus, March 1988,P7.)

Gray expected that culture, or societal values, at national level permeated through organizational and occupational subcultures as well, though with varying degrees of integration. “Accounting systems and practices can influence and reinforce societal values” (Radebaugh and Gray, 1997:59). Later Gray developed his model into international accounting context. Figure 2-2 shows the process of accounting change. He identified a number of important international pressures affecting accounting change, “including a growing international economic/political interdependence, new trends in FDI, changes in multinational corporate strategy, the impact of new technology, the rapid growth of international financial markets, the expansion in business services and the activities of international regulatory organizations” (Radebaugh and Gray, 1997:63). Having related social values to international accounting values, Gray linked accounting values to specific accounting system characteristics and proposed four hypotheses on the relationship between identified cultural characteristics and the development of accounting systems. Gray’s accounting values and hypotheses can be described as follows (Radebaugh and Gray, 1997:76 and Chanchani: 1999):

2 Figure 2-2: Changes and Development of Accounting Values and Systems Internationally

[pic] (Source: S.J. Gray, “international Accounting Research: The Global Challenge,” International Journal of Accounting 23, No.4, winter 1989, P. 294)

1. Professionalism versus statutory control. This value reflects a preference for the exercise of individual professional judgment and the maintenance of professional self-regulation as opposed to compliance with prescriptive legal requirements and statutory control. Gray summarized his perception of the link between professionalism and Hofstede’s dimensions of culture and formulated the hypothesis: The higher a country ranks in terms of Individualism and the lower it ranks in terms of Uncertainty Avoidance and Power Distance, the more likely it is to rank highly in terms of Professionalism. 2. Uniformity versus flexibility. This value reflects a preference for the enforcement of uniform accounting practices between companies, and for the consistent use of such practices over time, as opposed to flexibility in accordance with the perceived circumstances of individual companies. Gray articulated the relationship of Uniformity with Hofstede’s cultural dimension of Uncertainty Avoidance, Power Distance and Individualism as: The higher a country ranks in terms of Uncertainty Avoidance and Power Distance and the lower it ranks in terms of Individualism then the more likely it is to rank highly in terms of Uniformity. 3. Conservatism versus optimism. This value reflects a preference for a cautious approach to measurement that enables one to cope with the uncertainty of future events, as opposed to a more optimistic, risk-taking approach. Gray linked Conservatism with Hofstede’s dimensions of Uncertainty Avoidance, Masculinity, and proposed the hypothesis: the higher a country ranks in terms of Uncertainty Avoidance and the lower it ranks in terms of Individualism and Masculinity, the more likely it is to rank highly in terms of Conservatism. 4. Secrecy versus transparency. This value reflects a preference of confidentiality and the disclosure of information about the business only to those who are most closely involved with its management and financing, as opposed to a more transparent, open, and publicly accountable approach. Linking with Hofstede’s dimensions of Uncertainty Avoidance, Power Distance and Masculinity, Gray proposed: “The higher a country ranks in terms of Uncertainty Avoidance and Power distance and the lower it ranks in terms of Individualism and Masculinity then the more likely it is to rank highly in terms of Secrecy”. Gray’s framework led to an increase in studies relating culture and accounting in later studies, and also another increase in studies applying Hofstede’s value dimensions to various aspects of accounting. Some literature developed and critically evaluated the Hofstede-Gray framework on a theoretical basis, such as Perera (1989, cited in Shalin, 1999),and Perera and Matthews (1990, cited in Shalin, 1999), who built on Gray’s theory to propose a number of hypotheses relating societal values to accounting sub-cultural values. Perera suggested that a combination of accounting sub-cultural dimensions have considerable influence on accounting practices, and he further suggested that social values are affected by a broad set of environmental factors including economic variables, and analyzed the Anglo-American and Continental European systems of accounting. Extending his discussion to developing countries, he suggested that transferring accounting skills from Anglo-American countries to developing countries is unlikely to be appropriate, as these countries typically have inadequate professional subcultures to develop suitable standard accounting skills[1]; others such as Baydoun and Willett (1995, cited in Shalin, 1999), and Willett et al. (1997, cited in Shalin, 1999), critically evaluated Gray’s theory and suggested that although Gray’s dimensions may possibly help us understand how social factors affect the technology of accounting, certain pure technical aspects of accounting, which are also pertinent to the question of cultural relevance, should also be considered more formally. Some studies attempted to apply Hofstede’s theory and his proposed dimensions of culture to aspects of accounting, mainly two aspects. One side employed Hofstede’s dimensions in the context of studying management control systems within firms. Another side applied the Hofstede-Gray framework to a particular country or a set of countries to test the validity of the underlying theory. One example is Gehrardy (1990), who attempted to test the Hofstede-Gray framework by applying it to accounting systems found in West Germany. He found that Gray’s theory was unable to explain the relationship between accounting and cultural value dimensions in an entirely satisfactory manner[2]. Eddie (1991), who looked for association between societal values and accounting sub-culture values by studying thirteen countries of the Asia Pacific region found support for Gray’s theory, confirming all the predicted signs of association between societal and accounting values; Chow et al (1995), who applied Hofstede-Gray model to the case of China, and suggested that given the current state of the accounting profession, and the accounting measurement and disclosure in China, the development of the accounting system will be constrained by the influence of China’s culture and its sub-culture; Salter and Niswander (1995), who tested the Hofstede-Gray framework based upon data from countries drawn from Gray (1998), and concluded that Gray’s model is the best when explaining actual financial reporting practices and is relatively weak in explaining extant professional and regulatory structures from a cultural base[3]. Radebaugh and Gray (1997:48) stressed the importance of environmental analysis and cultural relativism to explain and understand differences in the ways businesses operate in different countries, and accounting resembles international business. They presented a model of the environmental influences, which included: 1. The nature of enterprise ownership; 2. The business activities of the enterprise; 3. Sources of finance and the stage of development of capital markets; 4. The nature of taxation system; 5. The state of accounting education and research; 6. The nature of the political system; 7. The social climate; 8. The stage of economic growth and development; 9. The rate of inflation; 10. The nature of the legal system; 11. The nature of accounting regulation; 12.The culture and the international factors. These twelve factors can be further categorized: factor 1, 2, 3, 8 and 9 can be seen as a part of economic factors; factor 4, 10 and 11 belong to legal factors; and factors 7 and 12 can be grouped under sphere of culture, however international factors can be conceived as a single factor. Thus six factors can be recognized, including economic, political, legal, culture, professional and international factors. Radebaugh and Gray (1997:49) conceived that “The influence of these factors is dynamic and will vary both between and within countries over time. Moreover, an evolutionary process of some complexity appears to be at work that is reflected in a growing number of international and regional influences”. They elaborated upon the cultural influence on accounting according to Gray’s model (shown in figure2.1), and conceived it was possible to identify key accounting values derived from societal cultural influences: professionalism, uniformity, conservatism, and secrecy. They also asserted that by linking accounting values and accounting systems, an international classification of accounting systems could be made. There were also other researchers who conceived culture as a dominant factor in one country’s accounting development: Lawrence (1996:5) proposed that a national accounting framework is shaped by the combination of cultural, political, legal and economic factors. Different combinations of factors would also lead to different national financial reporting environments. He explained, “Culture is taken to mean ‘the whole set of social norms and responses that condition a population's behavior,” and stressed it was “culture that makes one social environment different from another, and one could therefore consider that culture is the dominant influential factor and that the other influences are part of it”. Hofstede’s and Gray’s classification of cultural value and accounting value later was commented by Nobes (1998:17) as to be “particularly useful for examining such issues as international differences in the behavior of auditors. However, for financial reporting, the measures of cultural attributes seem vague and indirect, compared to the measurement of certain elements of the external environment of accounting, such as legal systems or equity markets”.

● Economic determinant

Arpen and Radebaugh (1985:13) employed Farmer and Richman’s (1966) environmental characteristics conceptual framework, in which environmental characteristics were organized into four major groups: educational, socio-cultural, legal and political and economic, to explain the environmental influences on accounting. They examined, in great detail, how some of the environmental characteristics of a country affect the way of its accounting development, and concluded that economic characteristics were the most influential factors. Because “economic development affects many socio-cultural attitudes and brings about changes in legal, political, and educational objectives and sophistication, each of which in turn can affect accounting practices” (1985:23). Additionally, they proposed that when analyzing a country’s accounting system, there is a need to consider all the environmental factors. Haller and Walton (1998:3) conducted a ‘contingent’ model of accounting evolution to describe accounting development. They attributed accounting development to economic events or circumstances from the point of view of the evolution of the ensemble accounting rules in a country. They conceived, being an artificial device, that accounting is constructed by society and is also subject to legislation, as well as unwritten rules developed through usage. This legislation is often triggered by some economic event of circumstance. The introduction of limited liability is an example to support this judgment. And they concluded that “as a model for the evolution of accounting in any one country a situation where there is an equilibrium state which lasts potentially for years, which is disturbed either by some change in the economic environment or by some unusual event” (Walton, 1998:4).

● Linguistic approach

Belkaoui (1985) presented the most important determinants of national differences in international accounting and by presenting an international accounting contingency framework to explain these differences. He considered that the determinants and main elements of the framework include “Cultural relativism, linguistic relativism, political and civil relativism, economic and demographic relativism, and legal and tax relativism”. Cultural Relativism “refers to the need to judge any behavior in terms of its own cultural contract, and not from another cultural context. Applied to accounting, cultural relativism rests on the fundamental assumption that accounting concepts in any given country are as unique as any other cultural traits. Thus the study of cultural issues, cross-cultural research, and their impact on accounting research is fundamental to an understanding of the determinants of national differences in international accounting” (Belkaoui, 1985:29). Linguistic-relativism refers to language as a mediator and shaper of the environment. Applied to accounting, this would imply that “accounting language may predispose ’user’ to a given method of perception and behavior. Furthermore, the affiliation of users with different professional organizations or communities with their distinct interaction networks may create different accounting language repertories” (Belkaoui, 1985:41). Being called the language of business, accounting has (1) ‘meaningful’ units of words, such as numerals and words, and debits and credits, as the only symbols respectively accepted and unique to the accounting discipline; (2) the grammatical rules, for example, the general set of procedures used for the creation of all financial data for the business. Belkaoui argued, “accounting is language and, according to the Sapir-Whorf hypothesis, its lexical characteristics and grammatical rules will affect the linguistic and non-linguistic behavior of users” (Belkaoui, 1978:41). He introduced four propositions derived from the linguistic-relativism paradigm to conceptually integrate research findings on the impact of accounting information on the user’s behavior. The propositions include: 1. The user that makes certain lexical distinctions in accounting are enabled to talk and/or solve problems that cannot be solved by users that do not； 2. The user that makes certain lexical distinctions in accounting are enabled to perform (non-linguistic) tasks more rapidly or more completely than those users that do not； 3. The user that possesses the accounting (grammatical) rules are predisposed to different managerial styles or emphasis than those that do not； 4. The accounting techniques may tend to facilitate or tender more difficult various (non-linguistic) managerial behaviors on the part of users. Using a “socio-linguistic thesis”, Belkaoui (1980) empirically showed that various affiliations in accounting created different linguistic repertories or codes for intra/inter-group communications: “Political and Civil Relativism refers to the need to judge any behavior in terms of its own political and civil context and not from any other context. Applied to accounting, political and civil relativism rests on the foundational assumption that accounting concepts in any given country rest on the political and civil context of that country” (Belkaoui, 1985:42). The political freedom of a country is conceived to be important to the development of accounting in general and reporting and disclosure in particular, as when people cannot choose the members of a government or influence government policies, they are less likely to be able to create an accounting profession based on the principle of full and fair disclosure. The relationship between accounting freedom to report or to disclose and political freedom is negative. “Economic and Demographic Relativism refers to the need to judge any behavior in terms of its own economic and demographic context. Applied to accounting, economic and demographic relativism rests on the fundamental assumption that accounting concepts in any given country rest on the economic and demographic context of that country” (Belkaoui, 1985:44). Belkaoui made several deductions that “the economic environment is important to the development of accounting in general and reporting and disclosure in particular.” “The higher the level and growth of income, the higher the political and economic freedom and the better the adequacy of reporting and disclosure.” ”The higher the level of government expenditures, the higher the level of disclosure.” “The higher the level of exports and imports, the higher the need for better reporting and disclosure.” “The larger the population, the higher the number of people to be interested in the accounting profession, and the greater the need for a well-developed accounting profession and the need for full and fair disclosure” (Belkaoui, 1985:46,47). “Legal and Tax Relativism refers to the need to judge any behavior in terms of its own legal and tax context. Applied to accounting, legal and tax relativism rests on the fundamental assumption that accounting concepts in any given country rest on the legal and tax context of that country” (Belkaoui, 1985:48). Different countries have different legal systems, such as civil law and the common law, and this may determine whether or not there will be different accounting systems. As a matter of fact, some countries rely completely on the legalistic approach, thus accounting has effectively become a process of compliance with the laws of the country. Also, different countries have different national tax systems, which define most directly and most frequently the conduct of business and hence the practice of accounting. Belkaoui’s classification later was argued for the relevance of the linguistic with accounting by Nobes. Except for the deductive method mentioned above, some researchers also used the inductive approach to classify international accounting. For example, Da Costa, Bougeois and Lawson’s (1978) empirical classification by using Price Waterhouse Survey data; Frank’s (1979) analysis, and Nair and Frank’s (1980) grouping. For the latter it seems a little irrelevant with the author’s aim, so it will not be discussed further. The literature review shows that the international accounting classification is still in its early stage, even studies look at systematic differences, there is still an issue in terms of the influence of individual thinkers on accounting in particular jurisdictions, and there are also different points of view for the influential factors’ effect on accounting development. In addition, as environment is always on a state of flux, a dominant factor at one time may change into a weak one to a country’s accounting development with the change of the country’s circumstance. Therefore the classification of international accounting may also be in a state of flux. For example, the adopting the IAS of EU listing company by 2005, may result in some changes of national accounting regulation within EU members, and may also cause some changes on international accounting classification. In fact, with social and economic development, the environmental influential factors, which may play the leading role on accounting at one time, may also change with the evolution of the society. Besides, there is still a need to consider all the environmental factors when analyzing a country’s accounting. In this thesis the author means not to make more comments on the classifications of international accounting, but to find the dominant influential factors on national accounting development. By far factors recognized as the important environmental factors by the researchers can be summarized as following, shown in table 2-1. It is generally accepted in international accounting research that accounting objectives, standards, policies, and techniques reflect the particular environment of the standards-setting body. The section below will examine how some of the environmental characteristics of a country affect the way of a country’s accounting development and its practice.

1 Table 2-1: Summarized environmental influence factors

|Factors |Politica|Legal |Economic |Culture |Education |Profession |International |Others |
|Authors |l | | | | | | | |
|Choi and|Politica|Legal |Nature of busi- |Social |Status of |Status of | | |
|Mueller |l system|system; |ness ownership; |climate |profe- |professional| | |
| | |Degree |Different size and | |ssional |organization| | |
| | |of |Complexity of | |education | | | |
| | |legislativ|business firms; | | | | | |
| | |e business|Level of sophisti- | | | | | |
| | |inference;|cation of busi- | | | | | |
| | |Presence |ness; Speed of | | | | | |
| | |Of |business innova- | | | | | |
| | |specific |tions; Stage of | | | | | |
| | |accounting|economic deve- | | | | | |
| | |legislatio|lopment; Growth | | | | | |
| | |n |pattern of an | | | | | |
| | | |economy. | | | | | |
|Nobes | |Legal |Providers of |Culture | |The | |Accid- |
| | |system; |finance; Inflation;| | |profession; | |ents |
| | |Taxation | | | |Theory. | | |
|AAA’s |Politica|Source of,|Economic system; | |Education,|Licensing | | |
| |l system|or auth- |Stage of economic | |training | | | |
|Factors |Politica|Legal |Economic |Culture |Education |Profession |International |Others |
|Authors |l | | | | | | | |
|report | |ority for,|development; | | | | | |
| | |accounting|Objectives of | | | | | |
| | |standards;|financial | | | | | |
| | |Enforce- |reporting; Client | | | | | |
| | |ment of | | | | | | |
| | |Ethics & | | | | | | |
| | |Standards | | | | | | |
|Rade-gau|The |The nature|The nature of |The |The state |The state of|International | |
|gh and |nature |of |enterprise |social |of |accounting |factors | |
|Gray |of |taxation |owner-ship; the |climate;|accounting|research; | | |
| |politica|system; |business activities|The |education | | | |
| |l system|The nature|of the enterprise; |Culture | | | | |
| | |of legal |Source of finance |factors | | | | |
| | |system; |and the stage of | | | | | |
| | |The nature|development of | | | | | |
| | |of |capital market; The| | | | | |
| | |accounting|stage of eco-nomic | | | | | |
| | |regulation|growth and | | | | | |
| | | |development; The | | | | | |
| | | |rate of inflation | | | | | |
|Belkaoui|Politica|Legal and |Economic and |Culture | | | | |
| |l and |tax |demographic |relati- | | | | |
| |civil |relativism|relativism |vism; | | | | |
| |relati-v| | |linguis-| | | | |
| |ism | | |tic | | | | |
| | | | |rela- | | | | |
| | | | |tivism | | | | |
|Gray | |Legal |Corporate |Societal|Education |Professional|Economic/ |Reli- |
| | |system |ownership; Capital |values | |associations|Political |gional; |
| | | |markets; Economic; | | | |inter- |Geogra-p|
| | | |Trade; Investment. | | | |dependence; |hic; |
| | | | | | | |Foreign direct |Demo-gra|
| | | | | | | |investment; |phic; |
| | | | | | | |Multinational |Histori-|
| | | | | | | |corporate Stra-|cal; |
| | | | | | | |tegy; Interna- |Techno-l|
| | | | | | | |tional |ogical; |
| | | | | | | |financial |Urbanis-|
| | | | | | | |markets; |ation; |
| | | | | | | |inter-national |Con-ques|
| | | | | | | |regulatory |t. |
| | | | | | | |organization; |Genetic/|
| | | | | | | |business and |hygienic|
| | | | | | | |finance | |
| | | | | | | |services. | |

3 2.3 Evaluations on the Environmental Influencing Factors

The influence of environmental factors on accounting found, mainly, in the literature can be summarized as follows:

1 2.3.1 Political Factors

Certain political factors can influence accounting systems and practices. Gastil (1978) defined political rights as the right to play a part in determining the laws and the government of a community. And he developed seven levels of political rights index: Level 1 states that almost everybody has both rights and opportunities to participate in the political process, to compete for political office, and to join freely formed political parties; Level 2 states that the effectiveness of the open electoral processes is reduced by factors such as extreme poverty, a feudal social structure, violence, or agreements to limit opposition; Level 3 states that the effectiveness of the open electoral processes is reduced by non-democratic procedures, such as coups; Level 4 states that there is either a constitutional block to the full democratic significance of election or the power distribution is not affected by the elections; Level 5 states that either elections are closely controlled or limited or the results have very little significance; Level 6 states that either there is no operational electoral system, or opposition candidates are not allowed to compete; Level 7 states that some factors may be characterized as tyrannies with little legitimacy either in a national tradition or a modern ideology. The political-structure index suggested by Gastil ranks countries into five types: (1) multiple-party systems, (2) dominant-party systems, (3) one-party systems, (4) military dictatorships, and (5) traditional monarchies. The higher the level of political freedom, the lower the rank of a country. Another useful and sophisticated classification of political systems is provided by Edward Shils (1966). He presented five different types of political systems: political democracy, tutelary democracy, modernizing oligarchy, totalitarian oligarchy, and traditional oligarchy. The characteristics of these different types of political systems can be summarized in table 2-2.

1 Table 2-2: A Classification of political systems

|Systems |Political |Tutelary |Modernizing |Totalitarian |Traditional |
|Properties |Democracy |Democracy |Oligarchy |Oligarchy |Oligarchy |
|Legislature |Representative, |“Rubber-stamp” |Is advisory or |Acclamatory & |Not needed, |
| |elected. |parliament or |serves in |ceremonial |function |
| |”Parliament” is |none at all. But |ratification |functions. |performed as |
| |centre of partisan |there is the |mode. | |needed by |
| |decision-making. |appearance of | | |executive |
| | |representation. | | |(“monarch”). |
|Systems |Political |Tutelary |Modernizing |Totalitarian |Traditional |
|Properties |Democracy |Democracy |Oligarchy |Oligarchy |Oligarchy |
|Executive |Shares power with |Personality-oriente|Centralized |Strong, Limited |Supreme power, |
| |the legislature. |d. Greater |powers, strong |sharing of power |divine right to |
| |Actions are |preponderance of |control by |and autocratic. |rule. |
| |modified by party |the executive. |power elite. | | |
| |ideology, | | | | |
| |opposition & | | | | |
| |electorate. | | | | |
|Judiciary |Constitutional and |Constitutional & |Controlled by |No independent |No independent |
| |independent. |generally |the executive. |Judiciary. |judiciary, |
| | |independent but | |Supports & enforces|in-stead there is|
| | |subject to | |executive |usually a |
| | |corruption by the | |decrees |handpicked |
| | |executive. | | |retinue of |
| | | | | |advisers. |
|Power Elite |Exist in diverse |Coalesced, stable, |Well-organized,|Party-oriented. |Dynastic, |
| |fields, e.g, |competent & |cohesive, |Stringent Restri- |coherent, |
| |industrial, |politically |closed |ctions on member- |extremely |
| |political, |active. |military-civili|ship. Loyalty, |conservative, |
| |professional are | |an clique. |coherence and |fraternal, lineal|
| |not coalesced. | | |discipline. |& reactionary. |
|Opposition |Multi-partied |Being, but |Suppressed in |Suppressed in all |Opposition is not|
| |structure. Coherent|“visible” |Political form.|phases of society. |tolerated. Moral |
| |articulate & |opposition. |Contrary views |“States of crisis” |as well as legal |
| |responsible. |Restrictions on |may surface in |are used to induce |pressures are |
| | |press. |press, but they|cooperation & |used to secure |
| | | |are censored. |stifle |cooperation & |
| | | | |opposition. |stifle |
| | | | | |opposition. |
|Mechanism of|Politically-detache|Competent and |Bureaucratic |Party supervision |Lineal relation- |
|Authority |d civil service, |detached civil |entrenched |over member, |ships, fraternal,|
| |independent |service. Police/ |civil service. |non-members, & |rudimentary and |
| |judiciary, |military are used |Police/military|government |incapable of |
| |police, secret |to discourage |are used to |leader & |dealing with |
| |service & |dissatisfaction. |discourage |bureaucracy. |social change. |
| |military. | |dissatisfaction| | |
| | | |. | | |
|Public |Self-confident and |Feeble public |Feeble, |Loyal |Absent. Confined |
|Opinion |self-sustaining |institutions press,|suppressed |intelligentsia |to advisory |
| |public |universities and |interest |substitutes for |function of the |
| |institutions: |special interest |groups, or used|civic & special |monarchal |
| |press, universi- |groups. A |to support |interest groups. |retinue. |
| |ties, special |Politi-cal or |government. |Extensive | |
| |interest groups. |compliant. | |propaganda. | |
|Civil Order |Homeostasis. |National rather |Strong |Unity behind party.|Maintained by |
| |Self-disciplining. |than political |dependence on |Party policies are |encouraging |
| |Common belief in |loyalties, supine &|police & |enforced. |ignorance, |
| |political order. |antitumultous. |military. |Prospect of party |illiteracy, |
| | | |Absence of |membership provides|and poverty. |
| | | |civility & |incentive to social|None or poor |
| | | |public opinion |order as does the |education for the|
| | | |forums. |possibility of |masses. Rural |
| | | | |non-membership. |subsistence. |

(Source:” Report of the Committee on International Accounting Operations and Education, 1975-1976,” The Accounting Review, Supplement to Vol.52, 1977, P.94.)

Political factor exerts influence on accounting most probably via its system and the level of freedom. Political systems can determine one country’s economic system and hence determine its accounting patterns: It seems almost self-evident that an accounting system that is useful to a centrally controlled economy must be different from an accounting system that is optimal for a market-oriented economy. In the former, the state owns all fixed assets and land; there is very little or no private ownership of business equities; “outside” auditors are simply government employees from another government agency; and the concept of periodic profit determination makes no sense. Political systems also export and import accounting standards and practices. For instance, British accounting, as it existed at the turn of the twentieth century, was exported in large measure to other Commonwealth countries. Dutch did the same with the Philippines and the French with their possessions in Africa and Asia. The Germans used political sympathy to influence accounting in Japan and Sweden, among others. Modern-day political systems have even larger impacts upon accounting (Choi and Muller, 1984, 1978). The political freedom of a country is important to the development of accounting, reporting, and particularly disclosure. When people cannot choose the members of a government or influence government policies they are less likely to create an accounting profession based on the principle of full and fair disclosure. The degree of political freedom in a given country is generally assumed to depend on the degree of political rights, civil liberties, and the type of political system. The higher the political rights and civil liberties, the more freedom and flexibility the accounting profession will have, and accounting disclosure will be more honest and balanced: In socialist countries it is often politically expedient and desirable to require certain information from companies about their social impact. For similar reasons, developing countries may require reports from companies on the balance of payments impact of their planned operations as a precondition to approving the investment (Arpen and Radebaugh, 1985:19). Gastil (1978) defined civil rights as the right of the individual against the state and the rights to freedom of expression and a fair trial. Seven levels of civil-liberties index was developed by Gastil, which include: 1. The rule of the law is not mistaken and which include various news media and possible and evident freedom of expression; 2. Civil liberties are less effective than it is in those states ranked in level 1, because of violence and ignorance or lack of sufficient or free media of expression, created either by special laws that restrain rights or authoritarian civil tradition or by the influence of religion; 3. Civil liberties exist but are hampered by serious imperfections such as repeated reliance on martial law, jailing for sedition, or suppression of publications; 4. There are broad areas of freedom and free publication along with broad areas of repression; 5. Civil liberties are often denied and complaints of violation are ignored because of weak government-controlled or frequently censored media; 6. The rights of the states and the government are given legal priority over the rights of groups and individuals, although a few individuals are allowed considerable freedom; 7. Citizens have no rights vis-à-vis the state and where internal criticism is only known to the outside world because of the government’s condemnation of it.

2 2.3.2 Legal Factors

Legal factors are concerned with one country’s legal system, taxation, and/or accounting legislation. These factors may affect one’s country’s Source of or Authority for Accounting Standards, accounting function, accounting pattern, as well as the details of accounting regulation.

Legal system

Different countries have different national legal systems. It was suggested that many countries in the world can be put into one of two categories with respect to their main legal system: common law and Roman (or civil) law. Civil law is a legislative system in which company law or commercial codes need to establish rules in detail for accounting and financial reporting. For example, in Germany, company accounting is to a large extent a branch of company law. Accounting becomes effectively a process of compliance with the laws of the country. Similarly, official audits is performed by statutory auditors in order to certify that financial statements have been prepared in accordance with the law. Common law is basically non-legislative law whose rules seek to provide an answer to a specific case rather than to formulate a general rule for the future. This naturally influences company law, which traditionally does not prescribe a large number of detailed, all embracing rules to cover the behaviors of companies and how they should publish their financial statements. To a large extent, accounting within such a context is not dependent upon law. Other general differences include the size and sophistication of government and the proliferation of regulatory agencies and commissions. All these legal differences imply different accounting practices internationally since accounting may be used to implement some of these laws.

Legalistic approach

Arpan (1985:19) made a definition of legalistic approach as to the countries which laws determine accounting practices. In such countries, their governments play an active, even dominant role in the economic sector, and their accounting profession is often relatively weak. In most of these countries, there is no difference between tax accounting and financial accounting. And Arpan asserted, “the legalistic approach to accounting is found to some degree in all countries of the world, regardless of their stage of economic development of the level of their accounting profession’s development” (1985:19). He took the United States’ tax law and the regulations promulgated by the Securities and Exchange Commission (SEC) as an example to demonstrate the legalistic approach to accounting. He concluded: “The main distinctions among countries are the pervasiveness of the legal approach and whether other approaches are permitted”(Arpan, 1985:19). In fact, the legalistic approach to accounting is predominant in most countries, with some countries completely relying on it and others permitting other approaches.

Taxation

Concerning the relationship between tax and accounting, Seidler (1981) made this point: Worldwide tax collections constitute the greatest source of demand for accounting services. The tax on income, both on the individual and business enterprise level, is the largest source of revenue for governments of countries with literate populations. Clearly, the collection of tax revenues, the life-blood of government, outweighs the niceties of accounting theory. Income tax evasion is frequently grounded in distortions of records or in absence of records. Therefore, tax collecting governments initially become involved in the bookkeeping and accounting procedures followed by individuals and companies, to provide some assurance of collecting taxes (Seidler, 1981) Taxation may have a strong influence on one country’s accounting practice, especially for accounting measurements. Countries have different national tax systems which define most directly and most frequently the conduct of business and hence the practice of accounting. In many countries, law, and particularly tax law, is the only reason that accounting is done at all. In these countries accounting rules and practices are spelled out in laws, often called companies’ acts, which also contain the general laws for all business operations and activities. In most of these countries, there is no difference between tax accounting and financial accounting. Such as in Germany, the tax account should be the same as the commercial accounts before 1983. In addition, tax laws in virtually all countries specify accounting procedures to be used in the tax area. In other countries, such as United Kingdom, the United States and the Netherlands, published accounts are designed particularly as performance indicators for investment decisions, where commercial rules operate separately from tax rules in a number of accounting areas. In most cases, there is not the degree of separation between tax and financial reporting that is found in the United Kingdom in the shape of capital allowances. However, in all such countries the taxation authorities have to adjust the commercial accounts for their own purposes, after exerting only minor influence directly on them. Accounting legislation is strongly influenced by the legal system. In countries with legalistic approaches, laws set the details of accounting regulation. Accounting standards possess legal effects, and government mostly decided accounting functions and objectives.

3 2.3.3 Economic Factors

Economic environment is important to the development of accounting. The economic environment includes two macro and micro aspects. For the macro aspect, factors such as the type of economic system chosen, the level and growth rate of income, the extent of government intervention and expenditures, inflation, and the level of exports, etc. may imply a specific impact on accounting development, which needs to be investigated. For the micro aspect, factors, such as the source of funds, differences in size and complexity of business firms, level of sophistication of business management and the financial community etc. may also influence accounting’s development. Other factors such as ties to other countries, and degree of international activity may also exert influence on accounting development.

Types of economic systems

Gastil makes a distinction among the following four economic systems: capitalist, capitalist-statist, capitalist-socialist, and socialist. Capitalist states are those states that ‘”rely on the operation of the market and on private provision for individual welfare.” Capitalist-statist states are those states that have “very large government productive enterprises, either because of an elitist development philosophy of a major dependence on a key resource such as oil.” Capitalist-socialist states are those states that “provide social services on a large scale through government or other nonprofit institutions, with the result that private control over property is sacrificed to egalitarian purposes.” Finally, socialist states are those states that “strive programmatically to place an entire national economy under direct or indirect control” (Belkaoui, 1985:44). It was conceived that a capitalist system might be more favorable to accounting development than other economic systems may be: In a capitalist economic system the survival of private enterprises depends on not only the production of goods and services but adequate information to various interest groups from investors and creditors to the capital market in general (Belkaoui, 1985:46).

Basic economic orientation and degree of government involvement

The types of economic systems may decide one country’s basic orientation of the economic system and the degree of government involvement in the economic sector, and decide the objectives of accounting. In Communist countries, for example, the state owns all production facilities, makes most of the economic and business decisions, and controls virtually all operations through a central planning and control system. These countries have a highly standardized and uniform accounting system to facilitate the government’s planning and control function, and there are few users of accounting information other than the government. In market-capitalist economies, there is predominantly private ownership. With greater individual freedom in economic activity and decision-making, a correspondingly greater diversity in accounting practices is permitted and practice. There are also more users of accounting information— stockholders, auditors, suppliers, and creditors—in addition to the government (Arpen and Radebaugh, 1985:21). Concerning the relationship between government expenditures and accounting, Belkaoui (1985:67) declared that “the higher the level of government expenditures, the higher the level of government intervention and the better the adequacy of reporting and disclosure.” Because government is assumed to be accountable to the people, its intervention may be followed by an effort to report and disclose, and may be favorable to the development of an accounting program and a reporting and disclosure tradition. This is applicable to any economic system.

The stage of economic development

“Stages of economic development may decide the complexity of accounting practice and theory. The higher the level and growth of income, the higher the political and economic freedom and the better the adequacy of reporting and disclosure. This may apply to any economic system, since economic growth in some socialist countries was often followed by an effort to liberalize the regimes”(Belkaoui, 1985:47). “At extremely low levels of economic development, there is few economic activities and correspondingly little financial, tax, or managerial accounting. As the level of economic activity and size of companies increase, there is a corresponding increase in accounting activity. This continues through each successive stage of development, albeit with certain lags.” Although as Lowe (1967: 360) noted that “from a historical point of view, accounting development is an evolutionary process dependent upon and interwoven with economic development,” Elliot stressed the “social function of accounting, to measure and communicate economic data, can not be considered simply as the effect of economic development, but should be considered a valuable tool for promoting the development process.”(Elliot et al 1968: 764). The developing level of exports and imports may have a positive effect on the development of accounting. “The higher the develop level of exports and imports, the higher the need for better reporting and disclosure. Free-trade policies in general and export promotion in particular increase cooperation with other countries, the flows of human and physical capital and the need for comparable reporting and adequate disclosure” (Belkaoui 1985:47).

Inflation

Inflation is often associated with economic growth and is a major influence on accounting where hyperinflation is rife to the extent that alternative systems to the traditional historical cost approach are preferred. The cumulative effect of inflation over a number of years can render all accounting information meaningless unless it is appropriately adjusted. Therefore inflation affects accounting standards and practices. Thus countries with relatively low levels of inflation have been slower to develop inflation accounting rules than hyperinflationary countries such as Brazil or Argentina.

Source of funds and working capital

Source of funds and working capital may be decided by economic systems, and in return they may decide accounting objectives and postulation. Source of funds has two types of orientation: creditor and equity orientation. They may influence the degree of investor orientation versus creditor orientation of the accounting system. For the creditor orientated accounting system, the major source of funds is loans from banks, financial intermediaries, or even wealthy individuals, accounting standards, principles, and procedures will tend to be more conservative and reflective to creditor preferences and requirements. This creditor orientation remains predominant in the world, at least in terms of number of countries. On the other hand, for the equity orientated accounting system, the majority of funds is invested by investors, and the accounting system will include such important investor information as earnings per share and more extensive public disclosure. For instance “the huge public interest in corporate securities in the United States has produced many so-called “sunshine” accounting standards of wide open disclosure, whereas the virtual absence of public participation in corporate equities ownership in France has limited effective financial communications there largely to “insider” communication channels. Heavy bank ownership of corporate equities in West Germany still produces different accounting responses. In the United States, the American Institute of Certified Public Accountants (AICPA) made special recommendations for particular financial accounting standards and practices to be used by smaller, closely held enterprises” (Choi and Mueller, 1978).

Business innovations and Complexity of business

Business innovations may bring some new challenges in accounting. As the result, some new accounting policies and methods may improve. For example: Business combination became popular in Europe only a few years ago. Before that, European countries had little need for accounting standards and practices relating to mergers and acquisitions of going concerns. Very small stock distributions (so-called “stock dividends”) occurred most generally in the United States. Again, this is a business innovation that has directly affected U.S. accounting. Examples of this type abound. For instance, equipment leasing is not practiced at all in a number of countries, and consequently there is simply no need for lease accounting standards in those situations (Choi and Muller, 1984, 1978). Complexity of business may decide the complexity of accounting methods. Business firms of different size and complexity may have different needs for accounting: Self-insurance may be acceptable for a very large firm but not for a small firm. Similarly, a large firm mounting an extensive advertising campaign directed at a specific market or season may be justified in deferring part of the resultant expenditure, whereas smaller programs in smaller firms may need to be expensed directly. This dichotomy extends over the entire range of parent company-subsidiary company accounting and specific technical problems like research and development expenditures or restructuring of long-term debt. The complexity argument is equally applicable. Large conglomerate enterprises operating in significantly different lines of business need financial reporting techniques different from those for a small firm producing a single product. Similarly, multinational enterprises need accounting systems different from those for strictly domestic firm. Product testing (and accounting for it) is a different matter for a worldwide pharmaceutical firm than it is for a local firm producing only oil additives in a provincial capital in Mexico (Choi and Mueller, 1978).

Management level

Levels of sophistication of business management and the financial community may result in the different needs for accounting. The higher developing level of business management and the financial community, the higher the need for accounting. As “highly refined accounting standards and practices have no place in an environment where they are misunderstood and misused. A complex technical report on cost behavior variances is meaningless unless the reader understands cost accounting well. Statements of changes in financial position are useless unless they can be read competently. Capitalization of leases, consolidation of foreign subsidiaries, separate parent company financial statements, or financial forecasts are all counterproductive accounting techniques in the hands of the unsophisticated” (Choi and Mueller, 1978).

Degree of international business activity

Degrees of international business activity may affect both accounting principles and methods. “The greater the amount of a country’s international trade, the greater is its need for accounting practices concerning foreign exchange transactions and translations. Going a step further, the number and size of a country’s multinational firms is directly related to the development of accounting rules for consolidation of foreign source income (income earned outside the parent company’s country)” (Arpen and Radebaugh, 1985:22).

4 2.3.4 International Factors

Economic ties to, and relationships with other countries may have influence on one country’s accounting system development. Pressures to change international accounting have become stronger and stronger. These international pressures come from growing international economic/political interdependence, new trends in FDI, changes in multinational corporate strategy, impact on new technology, rapid growth of international financial markets, expansion in business services, and the activities of international regulatory organizations: “Historically, the first of such arrangements was colonialism. The colonies adopted or were forced to adopt the accounting system of their colonial power, even though it may not have been particularly appropriate at the colony’s stage of development. Thus, the accounting systems in the British colonies were significantly influenced by British accounting, and the influence remains today, such as in the United States, Canada, Jamaica, and the Bahamas” (Arpen and Radebaugh, 1985:23). Secondly, the globalization and harmonization of markets have begun to affect accounting all over the world. Although several large multinational companies are based in comparatively small countries (e.g. the Netherlands and Sweden), international influences are likely to be particularly great. The harmonization of a regional economy calls for the harmonization of accounting also. Formal regional economic groups, such as the European Union (EU), the Andean Pact group, and the Central American Common Market (CACM), can significantly affect accounting development and practices, as harmonization requires countries to modify their historical ways of accounting. This may promote member countries to reconcile their accounting standards to the one accepted by the groups or by worldwide. For example, “the EU has embarked on a major program of harmonization, including measures to coordinate the company law, accounting, taxation, capital market, and monetary systems in the EU countries”. As the result, the “EU has emerged as a major economic and, to some extent, political force in recent years” (Radebaugh, 1997:60). These harmonizing objectives were mainly achieved through EU Directives. In June 2000, European Commission (EC) published a draft regulation, which proposed a compulsory use of IAS for the consolidated financial statements of European listed companies and would have to be effective as from 1 January 2005 onwards and would imply that 7000 European listed companies, including those listed at the Amsterdam stock exchange, should apply ISA for their financial reporting as for this date. “The EC also provides the member states with the possibility to compel or allow the application of IAS for the parent company financial statements and for the category non-listed companies” (Deloitte & Touche, 2002:7). The Netherlands is an example of fully supporting a worldwide harmonization of accounting standards. Dutch government has laid down a bill stating that companies must fully adopt IAS regulations and comply with the legally required ‘true and fair view’. This also means that non-listed companies in the Netherlands can change to IAS. Thirdly, international organizations, such as the United Nations (UN) and the Organization for Economic Co-operation and Development (OECD) have been deeply involved in the development of international business on a global scale: “The UN is responsible for the emergence of organizations such as the World Bank Group, the International Monetary Fund (IMF), the UN Conference on Trade and Development (UNCTAD), the Conference on the Law of Sea, the General Agreement on Tariffs and Trade (GATT), now the World Trade Organization (WTO), and the Economic and Social Council (ECOSOC). UNCTAD now includes the work of former Commission on Transnational Corporations, which was designed to promote an effective international framework for the operations of transnational Corporations and to monitor the nature and effects of activities. In particular, the UNCTAD and its Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) is involved, among other things, in initiatives to develop international standards of accounting and reporting and to promote accounting education in Russia and Africa” (Radebaugh, 1997:61). At the level of international financial markets, the OECD and especially the European Union have been influential in efforts to harmonize the minimum requirements for the admission of securities to listing and the content of prospectuses. In addition, the International Coordinating Committee of Financial Analysts Societies and the International Organization of Securities Commissions (IOSCO), both private organizations, are seeking to promote the internationalization and integration of securities markets on a global basis. On May17, 2000, the International Organization of Securities Commissions decided to endorse IAS. This endorsement implies that the IOSCO advised its members (the Securities Commissions) to accept 30 IASC, which has changed the name into IASB on 1 April 2001, standards as the reporting basis for companies that are listed at several (national) stock exchanges. In fact, the SEC’s decision whether or not to accept IAS unconditionally will be of crucial importance for the worldwide harmonization of accounting standards. Finally, MNEs may also exert a significant impact on the culture and social development of host countries. Employment and consumption patterns are often significantly influenced by MNEs.

5 2.3.5 Cultural Factors

Although no consensus exists in the definition of culture, Kroeber and Kluckhorn proposed the following definition after reviewing more than 150 year’s use of the concept: Culture consists of patterns, explicit and implicit, of and for behavior acquired and transmitted by symbols, constituting the distinctive achievements of human groups, including their embodiments in artifacts; the essential core of culture consists of traditional ideas and especially their attached values; cultural systems may on the one hand be considered as products of action, on the other as conditioning elements of further action (Kroeber and Kluckhorn, 1952). Hundreds of cultural factors influence accounting practice. Among the most important factors are society’s degree of conservatism, secrecy, distrust, and fatalism, coupled with the people’s attitudes toward business and the accounting profession itself. Cultural factors may influence accounting status in the society and the orientation of accounting standards.

Conservatism

Society’s degree of conservatism influences a number of accounting principles and practices, especially valuation and profit determination. For example, the use of the lower-of-cost-of market principles, and the allowance for bad debts both reflect a high level of conservatism, a desire to make a firm appear less profitable than it actually is.

Secrecy

Society’s degree of secrecy most directly affects the amount of disclosure, which an enterprise is willing to make in its external reporting. The higher the level of secrecy or distrust to the outsiders, the lower the level of disclosure would be. Internally, a high level of distrust makes it more difficult to implement a system of internal control and performance evaluation, because no one wants to have his or her activities scrutinized. Secrecy also affects the auditing function, making it more difficult to obtain necessary support information, verification, and corroboration of the accounting data supplied by the enterprise.

Attitude towards business

Societal attitudes toward business may range from distrust and antagonism to wholehearted support and trust. Distrust generates demands for more information and closer scrutiny of business operations, perhaps even regulation of nationalization. The information requested is likely to encompass far more than mere financial data and to include the enterprise’s treatment of employees, societal and political activities and contributions, environmental impacts, and so on. However, whether or not firms actually make such disclosure depends largely on their need for public-source funds and their relationship with the government. Government support of society’s wishes can lead to establishing and regulating accounting procedures and practices. This appears to be the situation in countries such as Sweden and France, where social accounting is becoming the order of the day. At the other extreme, society and government may make few if any disclosure demands on enterprises. In this situation, accounting is likely to be more flexible and much more at the discretion of firms, resulting in considerably less pressure for disclosure. This was the case in the United States before the Great Depression and remains largely the case in Switzerland today (Arpen and Radebaugh, 1985:18).

Attitude toward accounting

The attitude toward the accounting profession affects the status of the profession, the type of person who enters it, its credibility, and the work that accountants perform. In many countries, accounting is still regarded as a low-status occupation filled with thieves and people fit for no meaningful job. In other countries, accountants occupy a highly respected place in society, and accounting attracts high-caliber individuals as a result. Accountants in these countries tend to lead the world in the development of accounting theory, procedures, and practices. Germany, The Netherlands, the United Kingdom, and the United States are representative examples (Arpen and Radebaugh, 1985:18).

6 2.3.6 Educational Factors

The educational characteristics of a country have a significant effect on accounting practices. These educational characteristics encompass the degree of literacy, including the ability to use simple mathematics; the percentage of people who have received formal schooling at various levels (elementary school, high school, college); the basic orientation of the educational system (religion, vocational, liberal arts, scientific, professional) and the educational match---the appropriateness of educational system’s output for the country’s economic and societal needs (Arpen and Radebaugh, 1985:15).

Literacy

The more the educational level of a population improves, the less accounting problems may happen, and the more extensive and sophisticated accounting systems and reports become feasible. Because accounting takes a written and numerical form, it has relatively little use or significance in a society that is predominantly illiterate. Meticulous preparation and widespread circulation of corporate financial reports in such a society obviously would not be a judicious use of corporate time, money, and effort. Internally, the accounting planning and control system would be more difficult to be used effectively because of the limited ability of employees to prepare and understand budgets and reports. At the same time, the need for budgeting and control tends to greater in developing countries that have the highest level of illiteracy. Hence, the accountant can face many problems in designing an accounting system for either external or internal use.

Orientation

The orientation of the educational system also plays a part in determining accounting practices. Perhaps the most obvious relationship is whether mathematics is taught sufficiently to permit compilation and analysis of numerical data. Furthermore, the extent to which accounting itself is taught in the education system will influence the number of people who have some training in, and understanding of, bookkeeping, budgeting, financial analysis, and auditing. And more specifically related to accounting, does an accounting curriculum exist, and if so, what does it entail? Is there a degree in accounting, and for what type of work does the degree qualify someone? More subtly, the teaching and acceptance of the scientific method (the basic law of causality) influences people’s acceptance of, and adherence to, the process of planning, budgeting, and control.

Educational match

Finally, the educational match influences accounting system development to the extent that accountants and information users grow in number and sophistication as the economic and social systems need greater and more complex accounting information and procedures. In other words, as the country industrialized, there are more and bigger firms, more complex business arrangements (credit, leases, poolings, mergers), and usually an increasing need for outside capital. Each requires more complex accounting procedures and more people who can use and understand them. The issue is whether the educational system is producing enough of these people at each stage of development (Arpen and Radebaugh, 1985:16).

7 2.3.7 Professional Factors

The strength, size and competence of the accountancy profession in a country may follow to a large extent the various factors outlined above, and the type of financial reporting they have helped to produce. However, the nature of the profession also feeds back into the type of accounting that is practiced and could be practiced. Where there is a more developed accounting profession there is likely to be more developed, judgmentally based public accounting systems rather than more centralized and uniform systems. Furthermore, the development of professional accounting will depend on the existence of a sound infrastructure of accounting education and research, which is often lacking in, for example, developing countries (Radebaugh, 1997:48). There are also other factors that may have some influence on accounting development, which may be insignificant compared to the other factors discussed. Of all the environmental influencing factors, each factor may have a different influence on the different aspects of accounting. For the political factor, political systems may decide one country’s economic system and hence decide its accounting patterns, and political freedom, which may affect the development of accounting in general and reporting as well as disclosure in particular. The legal system may determine the mode of one country’s accounting legislation and influence its accounting practice, and economic factors most probably have an effect on the technical development of accounting and its objectives. The higher the level of one country’s economic development, the more the need for accounting, and the more complex the accounting techniques will be. The cultural factor may affect the accounting policy towards outsiders as well as its accounting practices, and may decide the status of the accounting profession in a particular country while educational factors may have a strong influence both in accounting practice and accounting theory. Finally international factors have an effect on a country’s accounting development especially where developing nations are concerned, as there are increasingly stronger tendencies towards globalization and harmonization, in the international accounting context. Referring to one country’s accounting development, the compelling force may mainly come from the effect of one of those factors mentioned above, or co-effect of several of those factors, or even the synthesis effect of all the environmental factors, depending upon the countries. Concerning China’s accounting development, there are also different points of view of what are the dominant factors in China’s accounting development. The section below will review the literature, both in English and in Chinese, concerning influential factors on China’s accounting development.

4 2.4 Literature Review Concerning Environmental Influencing Factors on China's Accounting Development

So far, the literature introducing and explaining China’s accounting and accounting reform is abundant both in international and Chinese accounting literature. A number of publications can be found concerning China’s accounting environment and its development both in English and Chinese. But the literature, which systematically analyzes the environmental influencing factors on China’s accounting development, is quite sparse. Most literature is descriptive without any further analysis. Even for the publications that made some analysis on the environmental factors, they only analyze from one or two aspects of environmental influencing factors, such as Zhang (1992), van Hoepen (1995), without making any integrated analysis and weighed which is the dominant factor among all the environmental factors influencing China’s accounting development. A list of authors can be found in the literature, such as Cheng (1980), Lou (1987), Enthoven (1987), Lin and Deng (1992), Zhang and van Hoepen (1992), van Hoepen (1995) Blake (1995), Gao (1995), Nobes and Parker (1998), Andy (1999), Liu (2001), and Zhu (2001), etc. Literature review reveals that in the existing international accounting literature concerning China's accounting development, there are also diverse opinions of view of which factor driving China’s accounting development. While in Chinese literature concerning China’s accounting development, there seems consensus to the direction of Chinese accounting development. The main ideas about influential factors on China’s accounting development can be summarized below:

● Culture is the dominant factor

Influenced by the increasing interest in cultural influence on accounting in international accounting research, some researchers took China as a case and tried to systematically analyze how Chinese culture influences its accounting theory and practice. Researchers conceived culture as the dominant influencing factor on China's accounting development. Examples include Zhang (1992), van Hoepen (1995) and Berry (1998). Zhang (1992:2) cited Hofstede’s (1980) definition of culture and further broadly defined culture as “the accumulation of the spiritual wealth and the mental creation of the people of a country or a region over a long time. It includes languages, social habits, moral standards, ways of thinking, and value concepts in a group” (1992:3). He proposed that the relationship between accounting and culture could be reflected from the following points: accounting language originates from a social language; accounting reflects social customs; and accounting is institutionalized by a national culture. And he asserted, “Chinese accounting strongly depends upon its culture” (1992:2). Zhang made further analysis to support his argument. He broadly classified Chinese culture into two parts: The first part was that Chinese traditional culture was rooted in the Confucianism and Buddhist philosophies and handed down from generation to generation; the second part is the Chinese modern culture which was created in the light of the socialist structure where the relationship of production and economic basis have changed radically after the founding of the People’s Republic of China (PRC) in 1949. He generalized the major traditional culture elements affecting the Chinese accounting system, which included: (1) Theory of Opposing Yi (justices) and Li (profits)[4] ; (2) Opposition of Trusts and Contracts; (3) The Dogmatic Attitude; (4) The Conservative Thought; (5) Collectivism; (6) Religions. And the most predominant modern cultural influences on accounting are: (1) The state theory, which decides accounting objectives, accounting functions and accounting organizations; (2) The class theory, which lead accounting to political oriented and argument over accounting with class characteristics; (3) Marxism, which becomes the basic concept of accounting, the theoretical structure of accounting, and decides the development of accounting; (4) The Cultural Revolution, which strongly discriminated against accounting and accountants. As a result accounting education was cut arbitrarily and accounting departments were dismissed. Zhang concluded: “The Chinese accounting theory, accounting system and accounting institution, etc. have been built according to its traditional and modern cultural frames. Both the traditional cultural and the modern culture have impacts on Chinese accounting. However, today’s Chinese accounting depends not only on its own cultures, but also to some extent on culture exchange as well as on the western cultures” (1992:17). He presented the main associations between culture and accounting, which included the following: accounting language originates from a social language; accounting reflects social customs; and accounting is institutionalized by a national culture. He explained the reason why Chinese accounting has been more or less developed towards the western style is because "the Chinese culture has been merged with the western cultures and the Chinese economy has been linked with the western market economies to some extent." “The difference between China's accounting and western accounting is because of the tremendous differences of culture between the two (1992:21). Several arguments can be raised from Zhang’s statement. First, it was argued for the linguistic relevance with accounting, which Belkaoui proposed first, and later was suspected for its relevance with accounting by Nobes. Accounting language originates from a social language; it employs social language to explain its meaning. However accounting also has its own language within the accounting sphere, which is different from social language. This language is developed more and more universally without culture boundary. For example, more and more countries have accepted IAS, and China’s accounting standards, promulgated in 1992, and are also developed according to the IAS, despite no unanimous requirement in details. From this point of view, linguistic relevance with accounting is very weak. Secondly, it is argued how accounting is institutionalized by a national culture. Culture can influence the way thinking, behaving, and value concept in implicit ways, but for the accounting regulation, it needs to be explicitly expressed by law or by tradition, and it is also influenced by many other factors, such as the government support. In China’s case, for example, the establishment of the uniform accounting system in 1952, was due to the establishment of the new social political and economic system. The simplification of accounting methods in 1958 resulted from new political and economic policies, and the promulgating of Accounting Standards for Business Enterprises (ASBE) in 1992 came from responding to a newly established socialist market economy system. Culture’s influence on accounting in these important events can hardly be found. Third, it is argued “the difference between China’s accounting and western accounting is because of the tremendous differences of culture between the two”. According to this assertion, further deductions can be made that if Chinese culture was completely immersed in Western culture patterns, then Chinese accounting would be the same as the western accounting, no matter what political system, what level of economic development, and what legal system China is in. This result cannot be accepted. It is worth noting that most of literature that study culture’s effect on accounting are based on western countries with similar political systems and economic development. While applying these studies to China’s situation, the precondition should be considered first. Apart from the other factors, only the analysis of the culture’s effect on China’s accounting can lead to a unilateral conclusion. Besides Zhang, there are other researchers who also noticed the cultural influence on China’s accounting development. Van Hoepen (1995:349) supported Gao’s point of view. He thought that “cultural influences, as far as they are still of influence on modern Chinese accounting, stem from the influence of religion and traditional Chinese philosophies and a certain degree of conservatism related thereto”. But further by analyzing the relationship between Chinese culture and accounting since 1949, he developed his standpoint and proposed: "culture influences on accounting diminished in China in the three periods after 1949, while (quite different) economic influences gained importance". Berry (1988:25) emphasized that “Culture reasoning” has directed accounting developments in China and then concluded, ”The synergistic effect of pluralism in the PRC’s marketplace today could lead to more experimentation to develop the accounting function. However, the PRC will also be searching for ideological explanations for the changes now being introduced so that its view of scientific management will exist in its appropriate cultural framework”.

● Economic Determinants

Some researchers conceived that China’s accounting system, especially the promulgation of the ASBE in 1992, was influenced by the reform of China’s economic system. As the part of economic system reform, China’s accounting system was reformed in order to meet the demand of socialist market economy system. Liu and Eddie (1995:139) recognized forces affecting accounting reform were the confirmation of the object of Chinese economic reform, which was decided at the Fourteenth National Congress of the Chinese Communist Party held in 1992, to develop a socialist market economy, and Deng Xiaoping’s remarks, which established the new policy direction of carrying out deep economic reform of state enterprises, to expand the private market economy and to provide a ‘wider open-door’ for foreign investment in China. Zhang (1996) confirmed the important impact of economic factors on China’s accounting and declared, “The need for accounting reform has been influenced by many factors, including a more diversified and less rigid role of the Chinese government in macroeconomic management, the increasing complexity of business transactions such as leasing of machinery and equipment, real estate valuation, business mergers, equity and debt financing, and the expansion of the securities market”. He stressed that China’s accounting is influenced not only by the Chinese government but also by foreign organizations, as “the formulation of the uniform accounting system and regulations has been the domain of the Ministry of Finance, the industrial ministries and some provincial government agencies. Neither any special committee under the People's Congress, nor any professional organization has ever actively participated in the decision-making process. A major development was the research jointly conducted by the Ministry of Finance and representatives of one of the large international accounting firms, under the auspices of a World Bank project”. Davidson (1996) asserted that “the close ties between accounting and the socio-economic-political environment can be seen very clearly in the case of China” (1996). China's social-economic structure reform process transformed the economic structure from a centrally planned and controlled economy to a market-oriented economy with a socialist characteristic. As a result the basic function of accounting information shifted from implementing macroeconomic planning and safeguarding national assets to decision making by enterprise management and external markets. He recognized the following economic reforms had important impacts on China's accounting: the separation of ownership and management of enterprises; change in the banking system since 1978; and the open-door policy. Field and Pendrill (1998), hypothesized that the reason why China’s accounting system needs to be reformed is because of the reform of China's economic system, which had moved from a centrally planned economic system to socialist market economic system. They illustrated some examples of economic changes such as foreign investment and joint ventures, state enterprises being given autonomy in their operational and financing activities, the setting up of the company with share capital and so on. Such changes in the economy necessitated changes in the accounting system. Chan (1999), after briefly reviewing China’s accounting history, explicitly stated that “economic reform mandates changes and development in accounting rules, accounting practices, and accounting education”, “China’s accounting developments have already followed economic reform”. He illustrated that the re-prosper of China’s accounting profession, accounting professional organization, accounting education and so forth are all the result of response to the economic reforms. Nobes and Parker (2000:308) conceived that China’s accounting developments had been driven by dramatic economic reforms, which began in 1978 after the Cultural Revolution ended in 1976. Different from Eastern Europe, China’s accounting reforms had not been accompanied by major political reforms. China has moved from a planned socialist model to a socialist market economy, in order to meet the requirement of the new economic system, such as the separation of management of business enterprises from ownership, foreign investment, the reform of banking system, the development of securities markets etc., particularly in order to encourage foreign investors，China’s accounting has moved from the funds based accounting system to a more Western accounting model. Tang (2000) confirmed that the new 1993 financial reporting and accounting system was the result of a combination of foreign influences and domestic socio-economic reforms. The pre-reform state control and tax driven financial reporting system had been gradually transformed into a capital market oriented financial reporting system. And the driving forces underlying these changes are the economic reform of state-owned enterprises, the development of capital market and the increase in foreign direct investment. Carnegie (2000) saw that the issuing of China’s Accounting Standards for Business Enterprises was part of the reforms necessary to develop China’s socialist market economy. Yuan (2000) explained reasons of China’s accounting evolution are because of: (1) Change of public administration function, which the role of the Chinese authorities in economy has changed from the direct controller of economy to indirect actor; from the enterprise’s operator to one of the owners; and from the only user of accounting information to one of man; (2) Diversification of enterprise ownership forms and its operations, which include diversity ownership forms such as state-owned and collective enterprises, private enterprises, mixed-ownership enterprises and joint ventures; and diversity operations such as cross-sector and multinational groups, stock operation; (3) Economic opening to the outside, which resulted in China’s becoming the second destination of international investments after the United States, and ranking eleventh in import and export activities, and issuing stocks and bonds on the international market. From the literature concerning economic influential factors on accounting, it can be recognized that the influence of economic factors on accounting mainly concentrated on the contents of China’s accounting system and regulation. These works are descriptive statements based on the background of China’s recent economic reform since 1979 and accounting reform since 1992. From these statements we can recognize the economic factor’s influence on accounting matches with the international accounting context, which is analyzed above, such factors as the types of economic system, the stage of economic development, basic orientation and degree of government involvement, source of funds and working capital, degree of international business activity, business innovations and complexity of business, can be found in China’s contexts. Except economic factors, Zhang (1996) recognized the influences from the governmental and international forces. There is no integrated analysis encompassing the entire period of China’s accounting development and the other factors while analyzed in the literature. The suspect is arisen then for the validity of the conclusion while applying it to the whole period of China’s accounting development since 1949. Further analysis will be needed in order to summarize China’s accounting development process since 1949.

● Ideology and politics are the dominant influencing factors on Chinese accounting development

Some researchers theorized that ideology plays a leading role in the process of China’s accounting development. Representatives include Lou (1987), Lin and Deng (1992) and, Blake (1995). Lou (1987), from an institutional point of view, explained that the existence of the Department of Administration of Accounting Affairs within the Ministry of Finance, which is quite different from West, is because of “the outcome of the school of thought that finance of state enterprises in a socialist country is one aspect of public finance, and that accounting is a means to facilitate efficient functioning of business finance in a narrow sense and thus to contribute to sound public finance in a broader sense”. The influence of this notion, which has prevailed in the PRC for more than thirty years, can be traced in accounting practices, especially in uniform accounting systems”(1987:3). And “Uniform accounting systems are enforced as a result of centralized control exercised over accounting affairs nationwide with the purpose of gathering consistent, comparable, and uniformly measured accounting data, which is closely coordinated with planning, financial, and statistical measurements” (1987:5). He highlighted “Both accounting and auditing theories are deeply rooted in the ideological foundation of Marxism-Leninism. Marxist-Leninist political economics have far-reaching effects on the formation and development of accounting and auditing theory. Definitions of some basic accounting terms are directly linked to the notions elaborated in Marxist-Leninist political economics. It is explicitly recognized that Marxism-Leninism is the guiding philosophy which should be employed to judge whether a particular theory is acceptable in accounting” (1987:4). From Lou’s description, strong governmental and political influences on China’s accounting can be clearly recognized. Lin and Deng (1992) remarked: "The nature of accounting is defined as something that is intrinsically ideological"(cited in Blake, 1995). Blake (1995:6,7), in his article, “A Chinese Perspective on International Variations in Accounting”, draws a list of international variations in accounting, which include: 1. Source of finance; 2. Economic environment; 3. Economic consequences; 4. Nationalism; 5. Other countries influences; 6. Tax accounting link; 7. Different user groups; 8. Legal context; 9. Language; 10. Influence of theorists and professional bodies; 11. History. He then applied all these factors to China’s accounting context; moreover he identified a new factor as ideology, which is particularly suited in China’s case. And further evidence is given that the importance of ideology is emphasized in university accounting education and admission to the accounting profession. Political theory, which is actually a political indoctrination, is taught in the university. The faculty is usually comprised of those who are assigned to do political work, and consists largely of learning about recent politics and documents approved by the Chinese Communist Party. The candidate sitting for the qualification examination, administered by a national body approved by the Ministry of Finance, must be a Chinese citizen who loves the People’s Republic of China and support the socialist system (1995:17). He concluded: “the adoption of Western accounting methods responds to a development in Chinese political theory and takes place within the context of socialist principles”(1995:18). And he declared, “the Chinese experience offers a range of insights into Western perceptions of the international environment and, in explicit recognition of the role of ideology in the development of accounting practice, adds a dimension to that perception” (1995:18). From these arguments political philosophy’s influence on accounting can be clearly recognized. Cheng (1980), Gao (1995), Ren (1995) and Andy (1999) explicitly stated China’s accounting is strongly influenced by China’s politics. Cheng (1980: 76) employed the topic of ''political accounting” in China and concluded: "The People's Republic of China employs accounting to achieve national economic and political goals". Gao (1995: 311) demonstrated the political influence on China’s accounting education and accounting research to support Cheng’s “political accounting” in China. From the aspect of accounting education, Gao stated: Political influence is evident throughout China’s accounting education, from the university system as a whole to the accounting degree program, from degree regulations to accounting research. China’s university is politically influenced and serves ideological as well as social purpose, which is realized by the Communist Party of China (CPA) structure at the university, which operates parallel to the administrative structure. The CPA branch serves as a vehicle for educating academics in Party beliefs, as a source of internal control to ensure that decisions at all levels within the university are consistent with the goals of the state and the Party, and as a ‘union safeguard’, helping to protect the rights of teachers and students by providing an appeal mechanism in and dispute with parties (Gao, 1995:311). From the aspect of accounting research, Gao illustrated that highly regarded ‘pure’ academic journal in China, Accounting Research, the official journal of the Chinese Accounting Association, published many politically oriented papers as well as speeches by Communist and government officers, which were usually considered to provide the theoretical background to accounting research in China. He asserted: Accounting research in China has rarely embraced scientific methods and is largely based on government policy and simple-minded descriptions of 'what is' and 'what to do'". Many published articles in both academic journals and professional magazines are no more than political propaganda”(Gao, 1995:311). Ren (1995) asserted that the enormous changes in China’s economic environment could not happen without political change, especially in China where political control is extremely powerful. It is true that Chinese policy makers are still conservative about political reform, but there have been some changes regarded as essential for the implementation of economic reform (1995:249). He thought accounting reform was the natural reaction to a changing socio-economic and political environment. And “the balance between China’s socialist ideology and its capital economic structure will depend on economic reform which, in turn, depends on political reform” (1995:259). Andy Ng (1999) conceived that China’s accounting standards were incompatible with international standards, and the reasons for this incompatibility lie in the political, economic, social and cultural systems of the PRC. He affirmed: "the political system is the most significant underlying factor affecting the pace of development of accounting standards in the PRC"(1999:32). Under the PRC’s socialist accounting system, which was consistent with the Marxist view that private ownership, ideally, should not exist, the primary goal of accounting used to be budgetary control of appropriated resources, rather than the measurement of an enterprises’ operating performance and reporting of corporate financial condition, the balance sheet emphasizes the allocation of state resources to the entity rather than the reporting of the financial position of the entity. From much of the CCP’s history, the economy has been planned from the center; accounting rules were used more as a means of implementing the state’s economic policy and maintaining administrative control over production. Graham (1997) asserted, from 1949 to the 1980s, “economic and political events had a dramatic influence on accounting practice, especially in the 1960s and 1970s” (1997:249). He illustrated some evidence to support this point of view, such as “the dominance of state-owned enterprises in the economy, as well as the political movement of the Great Leap Forward of the late 1950s and the Cultural Revolution of the mid-1960s targeted accounting for radical simplification and rejected any remaining existing theory of that time as taught in the universities”(1997:249). The literature concerning the influence of ideological and political factors on China’s accounting reveals that ideology and politics could affect not only China’s accounting standards and accounting practices, but also accounting theory, accounting research and accounting education. This effect has permeated in every aspect of China’s accounting development. China’s case may add a new dimension in international accounting context. The above research conclusions are based on the examples from one aspect or one period, without integrate the entire period and every aspects of China’s accounting development, so there still need a systemic and entire illustration and analysis to conclude the political influence on China’s accounting development.

● Some Chinese points of view

In Chinese literature there are also some articles discussing China's accounting environment and China's accounting characters. The hottest topic in China’s accounting research is the issue of the Chinese accounting theory and practice with distinctive Chinese characteristics. In December 2000 the Accounting Society of China conducted a seminar, whose topic was accounting theory and method systems with distinctive Chinese characteristics. In the seminar, the Vice Head of the Department of Administration of Accounting within the Ministry of Finance, and also the secretary-general of Accounting Society of China, Liu Yuting concluded, "the environmental influencing factors on characteristics of China's accounting are political and economic environment, legal and institution environment, education developing level and culture environment" (ASC, 2001:52). And Zhu (2001:23) considered that "Under the multiple influence of China's political, economic, legal and cultural environment, the characteristics of Chinese accounting, or the feature of the model of socialist market economy should primarily demonstrate these aspects, that is its theoretical basis is the theory of Deng Xiaoping's, its political direction is the socialism, its accounting system must be centralized, its accounting work must be continuously controlled by the Ministry department of State Council, and its unity of state accounting will be realized by constrain of law and regulation as well as ethic system and norm of socialist ideology". Zhu's argument has got consensus in the special seminar. This seminar set the basic tone of China’s accounting development both from the Chinese government and Chinese Accounting Research Society. It implies that China’s accounting is still under the tight control of the CCP and Chinese government. Political ideology is an ever going highlight during China’s accounting development. The literature both in international and in Chinese reviews reveal that environmental factors such as culture, economic, ideology and politics are highlighted as the influential factors on China’s accounting development. While legal, educational and professional factors are not recognized as the dominant factors within the Chinese context. Culture’s influence on China’s accounting is conceived to include China’s accounting theory, accounting system and accounting institution. But this conclusion is based on both Chinese traditional culture and modern culture, two aspects without considering the other factors. Moreover Zhang (1992) referred to the state theory, the class theory, Marxism, and the Cultural Revolution as modern culture. This classification is quite susceptible; it would be more suitable to classify these factors into political philosophy. Besides, traditional Chinese culture may play a very important part in shaping Chinese accounting methods, but for modern Chinese accounting there is no evidence to show culture’s important role. Thus it is unilateral to arbitrarily conclude that culture plays an important part in determining the accounting system. While quite obviously, various economic factors’ influence on accounting can be found in Chinese context, the evidence comes mostly from contemporary China’s economic reform. Economic factors determine the contents of China’s accounting system. It is worth note that political philosophy and Chinese politics’ influence on China’s accounting have permeated into every aspect of China’s accounting development since 1949, and much evidence can be found in literature. Based upon the literature review on influential factors on China’s accounting development, it can be concluded that there are still some strong links between politics and accounting in China. As Hilmy concluded, “there is a close link between political philosophy and its impact on economic goals, structure and growth. Accounting provides the indices and parameters to appraise such a relationship” (Hilmy, 1999:505). As to what extent and to what strength each factor’s influence has on China’s accounting at different periods, and whether there are other factors that have not been recognized, still need further exploration. In order to have an insight on China’s accounting development, it is important to have a good understanding on China’s political and economic structure first. Just as Enthoven (1987:209) states: "It is hard to comprehend Chinese accounting without a clear understanding of both its historical and recent (since 1949 and 1979) eco-political developments. These historical trends are extremely significant in trying to grasp the current Chinese accounting system, while Chinese accounting has its own characteristics resulting from these developments. The concept of social consciousness is a line that runs through Chinese accounting". The next chapter will give an introduction of background of China’s accounting development.

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[1] Cited from Shalin,1999:11
[2] Cited from Shalin,1999:19
[3] Cited from Shalin, 1999:19 [4] The culture of opposition between Yi and Li resulted accordingly in discrimination against merchants in Chinese history. As a result, the recognition of and emphasis on the importance of profits in accounting world would be criticized publicly.
According to Chinese philosophy, a good understanding and relationship based on mutual trust does not require legal provisions in order to stipulate the responsibilities and obligations.