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33: I
PERIODICAL
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The
International
Journal of
Accounting
EDI
Belverd E. Needles, Jr.
DePaul Vnivvrsitv
EDITOR
Andrew D. Bailey, Jr.
University of Illinois at
I'rhana-Champaiiin
Special Issue
International Accounting Research
1965-1996
Indexes and Annotated Bibliography
of the International Journal
of Accounting
Published by
Greenwich. Connecticut London. Ensland
CO-EDITORS
Arthur R. Wyatt
University of Illinois at
Urhana-Champai^n
Yukio Fujita
Aichi-Gakuin University, Tokyo
Volume 33 • Number 1 • 1998
Center for International Education and Research in Accounting,
University of Illinois at Urbana-Champaign
Name of publ.cation: THE INTERNATIONAL JOURNAL OF ACCOUNTING (ISSN:0020-7063)
Issue: Volume 33/Number 1/1998
Frequency: Published Quarterly
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Copyright: © Board of Trustees of the University of Illinois,
IVIAR 5 1998
UNIVERSITY OF ILLINOIS
URBANA-CHAMPAIGN
The
International
Journal of
Accounting
Special Issue
International Accounting Research
1965-1996
Indexes and Annotated Bibliography
of the International Journal
of Accounting
GUEST EDITOR
Belverd E. Needles, Jr.
DePaul University
EDITOR
Andrew D. Bailey, Jr.
University of Illinois at
Urbana-Champaign
CO-EDITORS
Arthur R. Wyatt
University of Illinois at
Urbana-Champaign
Yukio Fujita
Aichi-Gakuin University, Tokyo
Volume 33 • Number 1 • 1998
Greenwich, Connecticut
London, England
Center for International Education and Research in Accounting,
University of Illinois at Urbana-Champaign
Andrew D. Bailey, Jr.
University of Illinois. U rhana-Champaign
CO-EDITORS
Arthur R. Wyatt. University of Illinois, U rhana-Champaign
Yukio Fujita. Aichi Gakuin University. Tokyo
BOOK REVIEW EDITOR
Belverd E. Needles. Jr.. DePaul University
EDITORIAL POLICY BOARD
Hans Havermann. KPMG Deutsche Treiihand-Gesellschaft. Diisseldoif
H. Peter Holzer, Wirtschaftsuniversitdt. Vienna
Toshio lino, Surugadai University. Japan
Yu Xu-Ying. Xiamem University. People's Republic of China
Stephen A. Zeff. Rice University
EDITORIAL REVIEW BOARD
Dhia D. AlHashim. California State University. Northridge
A. Bose, Haldia Petrochemicals Limited
Giles Chevalier, Samson Belair/Deloitte & Touche, Montreal
Nairn Dahmash, University of Jordan
Tom Evans, University of Central Florida
Shawki Farag, The American University, Cairo
James B. Ghartey, Jr., Controller and Accountant-General's Department, Ghana
Sergio de ludiicibus, Universidade de Sao Paulo
Robert J. Kirsch. Southern Connecticut State University'
Chris Lefebvre, Katholieke Universiteit Leuven, Belgium
Joelle Le Vourc'h, Ecole Superieure de Commerce de Paris
Gary Meek, Oklahoma State University
Gordian A. Ndubizu. Drexel University
Prawit Ninsuvannakul, Chulalongkorn University, Thailand
Babatunde Ogundele. University of Ilorin, Nigeria
Soong Park. The Economics Institute, Colorado
Lee Radebaugh, Brigham Young University
Hanns-Martin Schoenfeld, University of Illinois, U rhana-Champaign
James Schweikart, University of Richmond
Daniel T. Simon. University of Notre Dame
M.A. van Hoepen. Erasmus University, The Netherlands
R.S. Olusegun Wallace, Middlesex University Business School, London
THE INTERNATIONAL
JOURNAL OF ACCOUNTING
VOLUME 33 NUMBER 1 1998
Special Issue
International Accounting Research from 1965 to 1996:
Indexes and Annotated Bibliography of The International
Journal of Accounting
GUEST EDITOR
Belverd E. Needles, Jr.
DePaul University
Dedication: To Vernon K. Zimmerman
PREFACE
Belverd E. Needles, Jr 1
INDEXES
Index 1 : Articles by Country/Region & Methodology
Comprehensive 3
Index 2: Articles by Subject
Comprehensive 19
Index 3: Articles by Country/Region & Methodology
European Region 23
Index 4: Articles by Subject
European Region 29
index 5: Articles by Country/Region & Methodology
Asian/Pacific Region 31
Index 6: Articles by Subject
Asian/Pacific Region 37
Index 7: Aricles by Country/Region & Methodology
Developing Countries 39
Index 8: Articles by Subject
Developing Countries 45
Annotated Bibliography 47
The International
Journal of
Accounting
Preface
The purpose of this compendium of indexes and annotated bibliography for the full his-
tory of the International Journal of Accounting (formerly The International Journal of
Accounting, Education, cmd Research) is to provide a resource for scholars in this field of
research. Having been published for thirty-two years, the International Journal of
Accounting has the longest continuous history of published research in international
accounting. Although other journals have more recently covered this field, the Interna-
tional Journal of Accounting in its early years was the only outlet for such research in the
United States. V.K. Zimmerman described the mission of the journal in his "Note from the
Editor" in the first issue (Vol. 1, No. 1, Fall 1965), as being "To explore and identify the
international dimension of accounting as it exists today." Following this philosophy dur-
ing this entire period until his death in November 1996, Zimmerman's editorship reflects
the full range of developments and changes in international accounting research.
The annotated bibliography contains entries for all the articles published in the Interna-
tional Journal of Accounting and related monographs through the end of 1996 (Volume
32). In total, 768 articles have been published in this journal and related monographs,
including 263 devoted to the European region, 183 to the Asian Pacific region and 126 to
countries classified by the World Bank (1990) as economically developing. In the early
years of the journal, one of the two issues per year were devoted to the proceedings of the
Seminar in International Accounting conducted annually at the University of Illinois at
Urbana-Champaign. More recently, the proceedings of the seminar have been published
as separate monographs. Since the research represented in these proceedings represents, in
effect, an extension of the journal, the articles in these monographs are covered by this
study. The separately published monographs included in this bibliography are:
The Multinational Corporation: Accounting and Social Implications, 1977.
The Impact of Inflation on Accounting: A Global View, 1979
Managerial Accounting: An Analysis of Current International Applications, 1984
The Recent Accounting and Economic Developments in the Middle East, 1985
The Recent Accounting and Economic Developments in Western Europe, 1985
The Recent Accounting and Economic Developments in the Far East, 1988
Comparative International Accounting Educational Standards, 1990
Ethical Considerations in Contemporary International Accounting Practice. 1992
Changing International Financial Markets and Impact on Accounting, 1992
Direct all correspondence to: Belverd E. Needles, Jr., School of Accountancy, DePaul University, 1 East Jack-
son Blvd. Chicago, IL 60604. U.S.A. (Tel: 312-362-5 130; Fax: 3 12-362-6208; E-Mail:
bneedles@condor.depaul.edu).
The International Journal of Accounting, Vol. 32, No. 4, pp. 1-2 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1997 University of Illinois
2 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
• The New Europe: Recent Political and Economic Implications for Accountants and
Accounting, 1994
Volumes 1-23 consisting of two issues each were published by the Center for Interna-
tional Accounting Education and Research in Accounting at the University of Illinois at
Urbana-Champaign. Volumes 24-30 consisting of four issues per year were published by
the Springer- Verlag. Volume 3 1 and 32 also consisting of four issues per year were pub-
lished by the current publisher JAI Press, Inc.
Each sequentially numbered entry in the annotated bibliography, presented alphabeti-
cally by author, contains the full name of the author(s), title of the article, affiliation of the
author(s), research methodology, subject of the research, country(ies) or region, and a
short description of the research. Criteria for making these designations are set forth in the
article "International Accounting Research: An Analysis of Thirty-Two Years from the
International Journal of Accounting," by Belverd E. Needles, Jr. in Volume 32, Number 2
of the International Journal of Accounting.
Indexes of the entries in the bibliography are provided for easy reference. In addition to
an overall index for all entries, indexes are also provided for the European region, Asian/
Pacific region, and developing countries. In each of these areas, an index is provided by
subject and by country or region and methodology.
Many thanks to my graduate assistants at DePaul University — Michael Whalen, Marty
Frierson, and Haoying Ewing — for their assistance with this project. Working with them
has been a pleasure.
I wish to acknowledge the encouragement and support my work throughout my career
from Professor Zimmerman. This project of almost ten years was inspired by his leader-
ship in the field of international accounting and could not have been completed without
his support. Further, I wish to thank Dr. Andrew Bailey for his willingness to see it
through to fruition.
Belverd E. Needles, Jr.
The International
Journal of
Accounting
INDEX 1: ARTICLES BY COUNTRY/REGION &
METHODOLOGY— COMPREHENSIVE
Africa
Deductive Descriptive: 94, 229. 264, 289, 314, 372
Empirical Descriptive: 70, 196, 751
Theoretical: 191
Arab Countries
Deductive Descriptive: 177, 178,654
Empirical Descriptive: 179, 312
Theoretical: 27, 617
Argentina
Deductive Descriptive: 122, 314
ASEAN Countries
Deductive Descriptive: 151
Asia
Deductive Descriptive: 229, 289, 433
Empirical Descriptive: 196, 751
Australia
Capital Markets: 309
Deductive Descriptive: 14, 56, 88. 89, 148, 288. 289, 314, 392,
414, 423, 430, 448, 584, 628, 723
Empirical Descriptive: 20, 46, 58, 131, 221, 294, 338, 422, 485, 621.
671,694
The International Journal of Accounting, Vol. 33, No. 1, pp. 3-17 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1997 University of Illinois
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1 , 1 998
Empirical Statistical: 435
Historical: 571. 724
Modeling: 207
Theoretical: 13. 90. 91. 103. 191, 702
Austria
Theoretical: 376
Bangladesh
Deductive Descriptive: 266. 726
Empirical Statistical: 19. 333
Theoretical: 585
Barbados
Deductive Descriptive: 130
Belgium
Deductive Descriptive: 31. 424. 425. 432. 469
Empirical Statistical: 30, 366. 547, 548, 613
Historical: 78
Botswana
Deductive Descriptive: 460
Brazil
Deductive Descriptive: 28. 122, 242, 314, 475, 494, 566, 723
Empirical Descriptive: 194
Theoretical: 193,201.634
Brunei
Deductive Descriptive: 173, 533
Canada
Deductive Descriptive: 14. 56. 87. 88, 89. 148, 245, 277, 314,
3 16. 33 1 , 342. 392. 414. 428, 430. 437, 448, 538. 590. 628. 683. 723
Empirical Descriptive: 20, 42. 46, 131, 146, 183, 196, 221,
250, 378, 454, 485, 610, 645, 751
Empirical Statistical:41 .43.435.507,593
Index 1
Historical: 506, 724
Modeling: 197, 207
Theoretical: 27, 90, 91, 103, 1 19, 491, 562, 696, 702, 756
Central & South America
Deductive Descriptive: 288, 289, 572. 602, 619
Empirical Descriptive: 196, 298, 508, 751
Theoretical: 191,209,346
Chile
Deductive Descriptive: 314
Modeling: 391
China
Capital Markets: 754
Deductive Descriptive: 51, 109, 143, 159, 224, 227, 282, 289,
342, 343, 372, 416, 426, 453, 663, 755
Historical: 83, 384, 434
Theoretical:410, 634, 691
Colombia
Deductive Descriptive: 557
Modeling: 391
Cook Islands
Deductive Descriptive: 735
Cyprus
Empirical Descriptive: 70
Czech Republic
Deductive Descriptive: 369
Denmark
Deductive Descriptive: 468
6 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1 , 1 998
Empirical Descriptive: 70
Historical: 724
Developed Countries
Deductive Descriptive: 339
Theoretical:27, 226, 516
Developing Countries
Deductive Descriptive: 34, 50, 229, 300. 356, 375. 475, 522, 339, 697
Empirical Descriptive: 692
Theoretical: 38, 200. 210, 226, 231, 235, 340, 487, 516, 639, 642, 680
Capital Markets: 208
East Germany
Deductive Descriptive: 82, 284. 467
Eastern Block Countries
Deductive Descriptive: 284, 398, 61 1, 646
Egypt
Deductive Descriptive: 29, 30, 31, 35, 107, 180, 229, 292, 296, 483
Empirical Descriptive: 1 1, 70
Empirical Statistical: 30
Theoretical: 620
Ethiopia
Deductive Descriptive: 375
Europe
Deductive Descriptive: 76, 120, 137, 281, 284. 289. 316, 377. 468,
486. 505. 530, 608, 700
Empirical Descriptive: 48, 79, 176, 196, 508, 570, 707. 731, 751
Empirical Statistical: 33
Modeling: 554
Theoretical: 1 17, 152, 376, 443, 452, 524
European Community
Capital Market: 291
Deductive Descriptive: 288, 326, 424, 469, 478, 565. 590. 597.
601,604,646,698,715
Index 1
Empirical Descriptive: 70, 72, 155, 156, 254, 298, 710
Empirical Statistical: 262, 366, 576
Historical: 603
Theoretical: 27, 191, 234, 560, 706
Far East
Empirical Descriptive: 196
Fiji
Deductive Descriptive: 735
Finland
Capital Markets: 535
Deductive Descriptive: 354
France
Deductive Descriptive: 28, 31, 100, 148, 288, 437, 468, 470,
498, 523, 537, 566, 680, 683, 699
Empirical Descriptive: 68, 31 1, 485, 519
Empirical Statistical: 30, 613, 212
Theoretical: 1 14, 1 16, 346, 376, 560, 701
Germany
Deductive Descriptive: 28, 31, 32, 148, 204, 288, 302, 314, 352,
353, 357, 401, 444, 445, 447, 451, 468, 523, 529, 530, 537, 566,
630, 632, 678, 680, 699
Empirical Descriptive: 68, 485, 519, 709
Empirical Statistical: 212, 262, 613
Theoretical: 8, 27, 91, 1 14, 1 19, 187, 234, 376, 387, 395, 446, 452, 560
Ghana
Deductive Descriptive: 263
Historical: 482
Global
Capital Markets: 69, 41 1, 649
Deductive Descriptive: 23, 24, 96, 1 33, 233, 236, 337, 474, 5 1 2, 52 1 , 650
Empirical Descriptive: 167, 239, 317, 337, 386, 450, 465, 692
Empirical Statistical: 4, 80, 192, 195, 258, 412, 495, 725
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33. No. 1 , 1 998
Historical: 747
Theoretical: 301. 560
Greece
Deductive Descriptive: 171.468
Historical: 172
Guatemala
Deductive Descriptive: 16
Holland
Deductive Descriptive: 247, 566
Historical: 163
Hong Kong
Capital Markets: 132
Deductive Descriptive: 688
Empirical Descriptive: 294. 419. 518
Empirical Statistical: 135. 360. 449. 471. 528. 661. 689. 703
Theoretical: 134
Historical: 724
Hungary
Deductive Descriptive: 369
India
Deductive Descriptive: 97. 359. 628, 667
Empirical Descriptive: 513. 666
Empirical Statistical: 662. 665
Historical: 724
Indonesia
Deductive Descriptive: 108. 173. 247. 533
Empirical Descriptive: 518
Empirical Statistical: 693
Theoretical: 684
index 1
Inflationary Countries
Empirical Statistical: 765
Theoretical: 272
Iran
Deductive Descriptive: 248
Empirical Descriptive: 249
Iraq
Deductive Descriptive: 292
Empirical Descriptive: 1 1
Empirical Statistical: 30
Ireland
Deductive Descriptive: 468
Islamic Countries
Deductive Descriptive: 5
Israel
Italy
Japan
Capital Markets: 476
Deductive Descriptive: 122, 223, 268. 431. 458
Empirical Descriptive: 62, 65, 70
Empirical Statistical: 63, 477
Deductive Descriptive: 468, 523. 604
Empirical Descriptive: 298. 762
Empirical Statistical: 613
Historical: 269
Theoretical: 286. 620
Capital Markets: 185. 406. 476. 615
Deductive Descriptive: 247. 256. 289. 344. 348. 409. 420. 473,
509. 536, 673. 676, 686, 695, 699
Empirical Descriptive: 46, 52, 68, 220, 518. 534, 626, 635
Empirical Statistical: 169. 212. 222. 457. 477. 693. 708. 757. 758
10 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
Historical: 675
Modeling: 554
Theoretical: 91, 145, 154, 286, 383, 543
Jordan
Empirical Descriptive: 9, 1 1
Theoretical: 178
Kenya
Empirical Descriptive: 70
Kiribati
Deductive Descriptive: 735
Korea
Capital Markets: 390
Deductive Descriptive: 150, 421, 488, 748
Empirical Statistical: 551. 552
Theoretical: 322
Historical: 724
Kuwait
Deductive Descriptive: 237, 438. 567. 648. 654. 655
Empirical Descriptive: 11,312
Latin America
Deductive Descriptive: 92
Libya
Deductive Descriptive: 55, 237
Empirical Descriptive: 1 1
Luxembourg
Deductive Descriptive: 468
Malaysia
Capital Markets: 335
Deductive Descriptive: 173,533
Empirical Descriptive: 295, 518
Empirical Statistical: 661
Index 1 11
Malta
Deductive Descriptive: 252
Mexico
Deductive Descriptive: 251, 314, 744
Empirical Statistical: 157, 745
Historical: 493
Theoretical: 235, 286
Middle East
Deductive Descriptive: 34. 289, 292
Empirical Descriptive: 70, 196, 751
Theoretical: 191,617
Nauru
Deductive Descriptive: 735
Netherlands
Capital Markets: 476
Deductive Descriptive: 77, 288. 314, 353. 468, 523, 537, 566,
636,680,718
Empirical Descriptive: 68, 519
Empirical Statistical: 347, 477, 613, 693
Theoretical: 27, 103, 560, 711, 712
New Zealand
Deductive Descriptive: 288, 314, 392, 414, 423, 459, 584, 683. 717. 728
Empirical Descriptive: 20, 53, 131, 138, 189, 250, 270, 466. 492.
553. 568, 733
Empirical Statistical: 455, 605
Historical: 124,724
Theoretical: 90, 91, 110, 191, 559, 569, 588, 727
Nigeria
Deductive Descriptive: 355, 542, 544, 550. 677
Empirical Descriptive: 70
Nine
Deductive Descriptive: 735
12 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1 , 1 998
No specific country
Deductive Descriptive: 21, 101, 115, 124, 125, 126, 175, 202,
203, 216, 228, 232, 261, 267, 273, 278, 285, 315, 367, 382,
462, 464, 472, 539, 612, 625, 633, 637, 641, 643, 647, 664,
670. 716, 719, 738, 746. 760, 766
Empirical Descriptive: 181,217, 246. 306. 308, 682, 730, 732,
741,752
Empirical Statistical: 293, 481, 586
Historical: 128, 255
Modeling: 98, 99, 105, 659
Theoretical: 26, 59, 60, 61, 73, 74, 75, 93, 1 12, 140, 142, 147,
153, 161, 162, 182, 184,211,213,214,218,230,238,253,
259, 260, 265. 276. 280. 299, 320, 321, 332, 358, 371. 388,
399, 400, 402, 404, 427, 441, 442, 500, 502, 510, 522, 556,
564, 575, 607, 598, 629, 638, 656, 668, 669, 674, 681, 685,
690, 713. 720. 729. 739. 743, 750, 761
North America
Theoretical: 191
Norway
Deductive Descriptive: 596
Oceania
Empirical Descriptive: 751
Pakistan
Deductive Descriptive: 296, 628
Empirical Descriptive: 578
Panama
Deductive Descriptive: 158
Empirical Descriptive: 599
Peru
Theoretical: 579. 714
Philippines
Capital Markets: 476
Deductive Descriptive: 173, 533, 628
Index 1 13
Empirical Descriptive: 5 1 8
Empirical Statistical: 10. 477
Poland
Deductive Descriptive: 31. 82. 84. 188. 279. 361. 362. 363.
369. 467
Empirical Statistical: 30
Theoretical: 364
Rumania
Deductive Descriptive: 467
Saudi Arabia
Capital Markets: 6, 7
Deductive Descriptive: 3. 237. 296. 438. 483. 499. 652. 764
Empirical Descriptive: 11, 70, 206
Modeling: 207
Singapore
Deductive Descriptive: 173. 247. 480, 533
Empirical Descriptive: 521. 709
Empirical Statistical: 44. 661
Slovalc Federal Republic
Deductive Descriptive: 369
Socialist Countries
Deductive Descriptive: 82
Solomon Islands
Deductive Descriptive: 307, 735
South Africa
Deductive Descriptive: 288, 314, 448. 566, 628
Empirical Descriptive: 70, 131, 645
Empirical Statistical: 660
South America
Deductive Descriptive: 288, 289, 572, 602, 619
Empirical Descriptive: 196. 298. 508, 751
14 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1 , 1 998
Theoretical: 191,209.346
South Korea
Deductive Descriptive: 144
Empirical Descriptive: 518
Soviet Union
Deductive Descriptive: 82, 160. 214. 275. 281. 288, 289. 342.
372, 4 1 8, 438, 467, 6 1 1 , 646, 748
Empirical Descriptive: 622
Empirical Statistical: 30
Historical: 54. 583
Theoretical: 274. 341.408
Spain
Deductive Descriptive: 598
Empirical Descriptive: 81. 373
Historical: 603
Sudan
Deductive Descriptive: 237
Sweden
Deductive Descriptive: 148. 353. 370, 523
Empirical Descriptive: 37. 68. 519. 546
Theoretical: 38.91
Switzerland
Deductive Descriptive: 28, 76. 407. 767. 768
Empirical Descriptive: 519
Modeling: 391
Theoretical: 91. 376,573
Syria
Deductive Descriptive: 1. 2
Taiwan
Deductive Descriptive: 143, 283
Empirical Descriptive: 518
Empirical Statistical: 327, 365. 380
Historical: 139
Index 1 15
Thailand
Tonga
Deductive Descriptive: 25, 173, 329, 379, 532, 533, 627
Empirical Descriptive: 518
Theoretical: 763
Deductive Descriptive: 735
Tunisia
Deductive Descriptive: 329
Theoretical: 525
Turkey
Deductive Descriptive: 120, 541
Tuvalu
Deductive Descriptive: 735
United Arab Emirates
Deductive Descriptive: 237
Empirical Descriptive: 70
United Kingdom
Capital Markets: 309, 476, 615
Deductive Descriptive: 14, 28, 31, 36, 56, 88, 89, 106. 129, 148.
168, 205, 245, 247. 252, 277, 288, 310. 314. 323, 326, 331. 339.
355, 392, 414, 423, 430, 448, 459, 469, 470. 523, 537, 538, 561,
566, 577, 590, 596, 628, 678, 680, 699, 723, 740
Empirical Descriptive: 20. 46, 49, 68. 81, 138. 176, 196. 220, 221.
241, 244, 250, 290, 311, 312, 454, 485, 519, 553, 558, 614, 621, 645,
653,671,672
Empirical Statistical: 30. 33. 43. 63, 212, 222, 243, 328, 351. 455,
477,511,593,693
Historical: 136, 506, 571. 724
Modeling: 391
Theoretical: 12, 13, 22, 27, 90, 91, 103, 1 10, 1 19, 164, 186, 345,
346, 385, 417, 440, 452, 559, 560, 562, 569, 585, 588, 620, 691,
696,702.721
16 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1 , 1 998
United Nations
Capital Markets: 515
Deductive Descriptive: 61 1
Historical: 18.257
Theoretical: 410
United States
Capital Markets: 7, 297, 309, 476, 478, 614, 623, 657
Deductive Descriptive: 14, 16, 28, 31, 36, 39, 56, 57, 67, 76,
77, 87, 88, 89, 106, 107, 120, 122, 123, 148, 150, 160, 165,
168, 174, 190, 204, 205, 223, 240, 245, 247, 272, 277, 281,
288, 289, 292, 303, 304, 305, 310, 313, 316, 331, 342, 350,
353, 354, 355, 372, 377, 389, 392, 396, 397, 405, 407, 409,
413, 414, 420, 429, 430, 431, 437, 438, 448, 459, 460, 469,
473, 483, 484, 486, 494, 496, 503, 526, 531, 537, 538, 540,
555, 557, 565, 566, 577, 581, 590, 591, 596, 600, 601, 606,
624, 628, 631, 646, 673, 678, 683, 687, 695, 699. 715. 718,
722, 723, 734, 736, 737, 744, 748, 753, 755, 759
Empirical Descriptive: 17, 20, 37, 40, 42, 46, 48, 49, 52, 58,
65,68,70,71,79, 111, 118, 131, 138, 150, 155, 166, 175,
196, 199, 219, 220, 221, 250, 298, 312, 317, 324, 325, 334,
337, 373, 374, 419, 454, 461, 485, 492, 497, 507, 545, 553,
558, 589, 592, 599, 610, 615, 621, 626. 635, 645, 651, 653,
671, 672, 709, 731, 733, 750, 751
Empirical Statistical: 10, 30, 33, 43, 44, 47, 63, 95, 102, 121,
141, 149, 157, 198, 212, 222, 318, 319, 327, 347, 351, 380, 381,
393, 394, 415, 455, 457, 477, 487, 504, 507, 511, 514, 551, 552,
593, 613, 644, 662, 665, 693, 708, 745, 758, 765
Historical: 66. 83, 136. 506, 571, 574
Modeling: 197, 207, 336, 391, 554, 742
Theoretical: 12, 13, 15,22,27,45,64,90,91, 104, 110, 113, 114.
1 16, 1 19, 134, 145, 154, 164, 170, 186. 187, 193, 225, 234, 273,
286, 287, 301, 322, 330, 341, 345, 346, 368, 376, 403, 436, 439,
440, 443, 452. 456, 463, 479, 491, 501, 527, 559, 560, 562, 563,
573, 580, 582, 585, 587, 588, 594, 595, 609, 634, 658, 679, 696,
702,721,756
Uruguay
Deductive Descriptive: 127
Modeling: 391
Vanautu
Deductive Descriptive: 735
Index 1 17
Venezuela
Deductive Descriptive: 600
West Germany
Deductive Descriptive: 470, 531, 687
Empirical Descriptive: 46, 220, 311
Empirical Statistical: 10, 222, 511, 693
Western Samoa
Deductive Descriptive: 735
Yugoslavia
Deductive Descriptive: 467, 704, 705
Zambia
Empirical Descriptive: 70
Zimbabwe
Capital Markets: 549
Empirical Descriptive: 70
The International
Journal of
Accounting
INDEX 2: ARTICLES BY SUBJECT— COMPREHENSIVE
accounting education
3, 11,25,39,64,93. 100, 108, 113, 118, 130, 159, 165, 166, 171, 181,
217, 247, 250, 263, 266, 310, 371, 372, 405, 425, 428, 458, 459, 460,
463, 480, 488, 489, 492, 524, 527, 532, 540, 541. 550, 555. 556, 599.
618, 619, 621, 631, 641, 642, 651, 654, 667, 696, 738, 743, 747, 750, 763
accounting history
54,59.66.78,83,98, 104, 112, 128, 163, 172,211,257,332,440,571,
574, 583, 603. 744
accounting theory
14, 15. 24, 26, 51, 60. 75, 88, 89, 90, 99, 1 14, 122, 129, 131. 133, 142,
147, 149, 153, 162, 182, 184, 187, 216, 219, 235, 238, 240, 255, 259,
271, 273, 275, 285, 299, 306, 321, 323, 349, 376, 377, 382, 399, 400,
401, 402, 403, 404, 406, 437, 441, 442, 452. 481. 484, 501, 510. 559.
561, 562, 563, 568, 569, 575, 587, 593, 594. 607, 612, 633, 636, 664,
669, 671, 674, 682, 685, 701, 71 1, 712, 713, 716, 720, 722, 729, 736, 760, 761
auditing
10, 37, 62, 70, 81, 150, 157, 175, 179, 204. 225. 243, 282, 294, 295,
322, 324, 325, 327, 363, 416, 419, 429. 473, 495, 518, 521, 523, 528,
529, 544, 545, 551, 564, 591, 595, 648, 660, 661, 662, 686, 703, 724, 726, 758
economics and development
2, 5, 7, 16, 21, 34, 45, 48, 94, 106, 1 16, 138, 141, 144, 152, 178, 185,
191, 201, 202, 203, 208, 209, 210, 215, 224, 231, 237, 264, 278, 284,
291, 300, 313, 329, 335, 339, 351, 355, 356, 368, 393, 398, 409. 427,
433, 436, 468. 471. 475, 482, 490, 516, 525, 535, 539, 547. 549. 567.
The International Journal of Accounting, Vol. 33, No. 1, pp. 19-21 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1997 University of Illinois
20 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
577, 578. 615. 617. 620, 627. 639. 640. 646. 655. 656. 657. 658. 663,
672, 673. 677. 678. 690, 691, 699, 704, 719. 735. 746. 748. 754
financial accounting and reporting
4, 8, 9, 13. 17, 18, 19, 20, 22, 23, 27, 28, 30, 32, 40, 43, 44. 47. 48, 50,
55, 56, 58, 68, 69. 71. 72, 73, 74, 79, 80. 82. 85, 87. 91, 92, 101, 102,
103, 105, 107, 111, 117, 120, 121, 127, 132, 137, 143, 146, 148, 151,
154, 155, 160, 164, 169, 170, 173, 176, 177, 186, 192, 194, 196, 197,
198, 199. 205, 206, 212, 221, 227, 229, 232, 239, 241. 242, 244. 245.
246, 248, 249, 251, 252, 253, 254, 256. 258, 262. 268. 270, 272. 279.
283, 286, 290, 293, 297, 298, 301, 302, 303, 304. 309, 311.312. 314.
315, 316, 326, 330, 337, 340, 341. 342. 343. 345. 346. 347. 348, 353.
354, 360, 361, 362, 364, 366, 367, 370. 378. 379. 383, 390, 392, 397,
410, 41 1, 414, 421, 422, 423, 424, 426, 430, 431, 445, 446, 448. 449,
450. 451. 454. 456. 462, 465, 467. 470. 469, 474. 476, 477, 478, 479,
486. 487. 488. 493. 498. 499. 503. 505. 507, 508. 511, 512, 513, 514,
515, 519, 520, 531, 536, 537, 542, 543. 546, 552, 557, 565, 566, 568,
576, 579, 582, 585. 586, 589, 592. 596. 598. 601. 602. 604, 605. 608.
611, 613, 614, 623. 624, 625, 629. 634. 643. 644. 645. 659. 665. 666.
670. 676. 679. 680. 681. 683. 687. 689. 692. 693. 694. 695. 698. 702.
705. 706. 709, 710, 715. 718. 725. 734. 741. 742. 745. 752. 753. 757. 765
governmental
67, 124. 161. 180. 193, 418, 558. 570
information systems
156, 189, 276, 387, 408, 526, 626, 638. 737
managerial accounting
12,46,52,53,61,84,95, 109. 110. 115, 123. 190.207,216,222,230,
234, 261, 265, 287, 308, 320, 328, 333, 334, 336, 350, 373, 394, 395,
396, 412, 417, 420, 455, 466, 491, 496, 497, 505, 517, 534, 538, 554,
580. 588, 600, 622, 628, 630, 638. 647, 649, 668, 697. 708. 723. 727. 755. 756
miscellaneous
31. 96. 135, 145, 174. 188. 214, 369, 386, 391, 430, 432, 457,
584, 730. 764. 766. 767
professional development
33, 41, 97. 125. 134, 136. 139, 183, 226, 236, 277. 280, 288, 289, 318,
319, 338, 352, 359, 365, 374, 381, 384, 415, 444, 453, 461, 464, 483.
500, 522, 533, 609, 635. 650, 675. 688, 700. 717. 728. 768
Index 2 21
public accounting
6, 35, 36, 42, 57, 63, 65, 76, 77, 126, 158, 220, 223, 233, 281, 292,
317, 331, 375, 388, 407, 443, 447, 502, 506, 509, 530, 553, 572, 597,
610, 632, 652, 653, 707, 731, 751, 762
social effects of accounting
29, 86, 140, 167, 195, 218, 228, 260, 267, 269, 344, 357, 358, 380,
438, 439, 560, 581, 606, 616, 684, 714, 721, 733, 740
taxation
1, 38, 1 19, 168, 200, 296, 305, 413, 494, 740
The International
Journal of
Accounting
INDEX 3: ARTICLES BY COUNTRY/REGION &
METHODOLOGY— EUROPEAN REGION
Europe (in general)
Deductive Descriptive: 76, 120, 137, 281, 284, 289, 316, 377,
468, 486, 505. 530, 608. 700
Empirical Descriptive: 48. 79, 176, 196, 508, 570, 707, 731, 751
Empirical Statistical: 33
Modeling: 554
Theoretical: 1 17, 152, 376, 443, 452, 524
Austria
Theoretical: 376
Belgium
Deductive Descriptive: 31, 424, 425, 432, 469
Empirical Statistical: 30, 366, 547, 548, 613
Historical: 78
Czech Republic
Deductive Descriptive: 369
Denmark
Deductive Descriptive: 468
Empirical Descriptive: 70
Historical: 724
East Germany
Deductive Descriptive: 82, 284, 467
The International Journal of Accounting, Vol. 33, No. 1, pp. 23-27 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1997 University of Illinois
24 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1. 1998
Eastern Block Countries
Deductive Descriptive: 284, 398, 61 1. 646
European Economic Community
Capital Markets: 291
Deductive Descriptive: 288, 326, 424, 469, 478, 565,
590. 597, 601, 604, 646, 698, 715
Empirical Descriptive: 70. 72. 155. 156. 254. 298. 710
Empirical Statistical: 262. 366. 576
Theoretical: 27. 191, 234. 560. 706
Finland
Capital Markets: 535
Deductive Descriptive: 354
France
Deductive Descriptive: 28. 31. 100. 148. 288. 437. 468,
470, 498, 523, 537, 566, 680, 683, 699
Empirical Descriptive: 68, 31 1. 485, 519
Empirical Statistical: 30, 212. 613
Theoretical: 1 14. 116. 346. 376. 560. 701
Germany/ West Germany
Deductive Descriptive: 28, 31, 32, 148, 204, 288, 302,
314, 352, 353, 357, 401. 444, 445. 447. 451, 468. 523,
529, 530. 531, 537, 566. 630. 632. 678. 680. 687. 699
Empirical Descriptive: 46, 68, 220, 31 1, 485, 519, 709
Empirical Statistical: 10, 212, 222, 262, 511, 613, 693
Theoretical: 8, 27, 91, 1 14, 1 19, 187, 234, 376, 387, 395, 446, 452, 560
Greece
Deductive Descriptive: 171,468
Historical: 172
Holland
Deductive Descriptive: 247. 566
Historical: 163
Index 3 25
Hungary
Deductive Descriptive: 369
Ireland
Deductive Descriptive: 468
Italy
Deductive Descriptive: 468, 523, 604
Empirical Descriptive: 298. 762
Empirical Statistical: 613
Historical: 269
Theoretical: 286, 620
Luxembourg
Deductive Descriptive: 468
Malta
Deductive Descriptive: 468
Netherlands
Capital Markets: 476
Deductive Descriptive: 77, 288, 314, 353. 468, 523, 537, 566, 636, 680, 718
Empirical Descriptive: 68, 519
Empirical Statistical: 347. 477, 613. 693
Theoretical: 27, 103, 560, 711, 712
Norway
Deductive Descriptive: 596
Poland
Deductive Descriptive: 31, 82, 84, 188, 279, 361, 362, 363, 369, 467
Empirical Statistical: 30
Theoretical: 364
Rumania
Deductive Descriptive: 467
26 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
Slovak Federal Republic
Deductive Descriptive: 369
Soviet Union
Deductive Descriptive: 82, 160, 214, 275, 281, 288, 289,
342, 372, 418, 438, 467, 611, 646, 748
Empirical Descriptive: 622
Empirical Statistical: 30
Historical: 54, 583
Theoretical: 275, 341,408
Spain
Deductive Descriptive: 598
Empirical Descriptive: 81, 373
Historical: 603
Sweden
Deductive Descriptive: 148, 353, 370, 523
Empirical Descriptive: 37, 68, 519, 546
Theoretical: 38,91
Switzerland
Deductive Descriptive: 28, 76, 407, 767, 768
Empirical Descriptive: 519
Modeling: 391
Theoretical: 91, 376, 573
United Kingdom
Capital Markets: 310, 476, 615
Deductive Descriptive: 14, 28, 31, 36, 56, 88, 89, 106, 129,
148, 168, 205, 245, 247, 252, 277, 288, 310, 314, 323, 326,
331, 339, 355, 392, 414, 423, 430, 448, 459, 469, 470, 523,
537, 538, 561. 566, 577, 590, 596, 628, 678, 680, 699, 723, 740
Empirical Descriptive: 20, 46, 49, 68, 81, 138, 176, 196, 220,
221, 241, 244, 250, 290, 311, 312, 454, 485, 519, 553, 558,
614,621,645,653,671,672
Empirical Statistical: 30, 33, 43, 63, 212, 222, 243, 328, 351,
455,477.511,593,693
Historical: 136,506,571,724
Modeling: 391
Index 3 27
Theoretical: 12, 13, 22, 27, 90, 91, 103, 1 10, 1 19, 164, 186,
345, 346, 385, 417, 440, 452, 559, 560, 562, 569, 585, 588,
620,691,696,702,721
Yugoslavia
Deductive Descriptive: 467, 704, 705
The International
Journal of
Accounting
INDEX 4: ARTICLES BY SUBJECT— EUROPEAN REGION
accounting education
100, 171, 247, 250, 310, 372, 425, 459, 524, 621, 696
accounting history
54,78, 163, 172,440,571,603
accounting theory
14, 88, 89, 90, 1 14, 129, 187, 275, 323, 376, 377, 385,
401, 437, 452, 557, 561, 562, 569, 583, 593, 636, 671, 701,
711,712
auditing
10, 37, 70, 81, 204, 243, 363, 523, 529
economics and development
49, 106, 116, 138, 152, 191,284,291,339,351,355,398.
468, 535, 548, 575, 615, 620, 646, 672, 678, 691, 699, 704, 748
financial accounting and reporting
8, 13, 20, 22, 27, 28, 30, 32, 43, 48, 56, 68, 79, 82, 91, 103,
117, 120, 137, 148, 155, 160, 164, 176, 186, 196,205,212,
221, 241, 244, 245, 252, 254, 262, 279, 286, 290, 298, 302,
309, 311, 312, 314, 316, 326, 341, 342, 345, 346, 347, 353,
354, 361, 364, 366, 370, 376, 392, 403, 414, 423, 424, 430,
445, 446, 448, 451, 454, 467, 470, 469. 476, 477, 478, 485,
486, 498, 505, 508, 51 1, 519, 531, 537, 546, 565, 566, 573,
576, 585, 596, 598, 601, 604, 608, 611, 613, 614, 645, 680,
683, 687, 693, 698, 702, 705, 706, 709. 715. 718
The International Journal of Accounting, Vol. 33, No. 1, pp. 29-30 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1997 University of Illinois
30 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
governmental
418,558.570.590
information systems
156,387.408
managerial accounting
12, 46, 84, 1 10, 123, 222, 234, 328, 373, 395, 417, 455,
538, 554, 622, 628, 630, 723
miscellaneous
31, 188. 214, 369, 391, 430, 432, 767
professional development
33, 136. 277, 288, 289, 352, 444, 700, 768
public accounting
36, 63, 76, 77, 220, 281, 331, 407, 443, 447, 506, 530, 553,
597, 632, 653, 707, 731, 751, 762
social effects of accounting
269,357,438,560,721
taxation
38. 119. 168,740
The International
Journal of
Accounting
INDEX 5: ARTICLES BY COUNTRY/REGION &
METHODOLOGY— ASIAN/PACIFIC REGION
Asia (in general)
Deductive Descriptive: 229, 289, 433
Empirical Descriptive: 196, 284
ASEAN Countries
Deductive Descriptive: 151
Australia
Capital Markets: 309
Deductive Descriptive: 14, 56, 88, 89, 148, 288, 289, 314,
392, 414, 423, 430, 448, 584, 628, 723
Empirical Descriptive: 20, 46, 58, 131, 221, 294, 338, 422, 485,
621,671,694
Empirical Statistical: 435
Historical: 571,724
Modeling: 207
Theoretical: 13, 90, 91, 103, 191, 702
Bangladesh
Deductive Descriptive: 266, 726
Empirical Statistical: 19, 333
Theoretical: 585
Brunei
Deductive Descriptive: 173, 533
The International Journal of Accounting, VoL 33, No. 1, pp. 31-35 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1997 University of Illinois
32 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
China
Capital Markets: 754
Deductive Descriptive: 51, 109. 143. 159, 224, 227, 282, 289,
342, 343, 372, 416, 426, 453, 663, 755
Historical: 83, 384, 434
Theoretical:410. 634. 691
Cook Islands
Deductive Descriptive: 735
Far East
Empirical Descriptive: 196
Fiji
Descriptive Descriptive: 735
Hong Kong
Capital Markets: 132
Deductive Descriptive: 688
Empirical Descriptive: 294, 419, 518
Empirical Statistical: 135, 360, 449, 471, 528, 661, 689, 703
Theoretical: 134
Historical: 724
India
Deductive Descriptive: 97, 359, 628, 667
Empirical Descriptive: 513, 666
Empirical Statistical: 662, 665
Historical: 724
Indonesia
Japan
Deductive Descriptive: 108, 173, 247, 533
Empirical Descriptive: 518
Empirical Statistical: 693
Theoretical: 684
Capital Markets: 185, 406, 476, 615
Index 5 33
Deductive Descriptive: 247, 256, 289, 344, 348, 409, 420, 473,
509, 536, 673, 676, 686, 695, 699
Empirical Descriptive: 46, 52, 68, 220, 518, 534, 626, 635
Empirical Statistical: 169, 212, 222, 457, 477, 693, 708, 757, 758
Historical: 675
Modeling: 554
Theoretical: 91, 145, 154, 286, 383, 543
Kiribati
Deductive Descriptive: 735
Korea
Capital Markets: 390
Deductive Descriptive: 150, 421, 488, 748
Empirical Statistical: 551, 552
Theoretical: 322
Historical: 724
Malaysia
Capital Markets: 335
Deductive Descriptive: 173,533
Empirical Descriptive: 295, 518
Empirical Statistical: 661
Nauru
Deductive Descriptive: 735
New Zealand
Deductive Descriptive: 288, 314, 392, 414, 423, 459, 584, 683,
717,728
Empirical Descriptive: 20, 53, 131, 138, 189, 250, 270, 466, 492, 553,
568, 733
Empirical Statistical: 455, 605
Historical: 123,724
Theoretical: 74, 75, 90, 157, 452, 463, 479, 583
Niue
Deductive Descriptive: 735
34 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
Oceania
Empirical Descriptive: 751
Pakistan
Deductive Descriptive: 296. 628
Empirical Descriptive: 578
Philippines
Capital Markets: 476
Deductive Descriptive: 173, 533, 628
Empirical Descriptive: 518
Empirical Statistical: 10, 477
Singapore
Deductive Descriptive: 173, 247, 480, 533
Empirical Descriptive: 521, 709
Empirical Statistical: 44, 661
Historical: 724
Solomon Islands
Deductive Descriptive: 307, 735
South Korea
Deductive Descriptive: 144
Empirical Descriptive: 518
Taiwan
Deductive Descriptive: 143, 283
Empirical Descriptive: 518
Empirical Statistical: 327, 365, 380
Historical: 139
Thailand
Deductive Descriptive: 25, 173, 329, 379, 532, 533, 627
Empirical Descriptive: 518
Theoretical: 763
Index 5 35
Tonga
Deductive Descriptive: 735
Tuvalu
Deductive Descriptive: 735
Vanautu
Deductive Descriptive: 735
Western Samoa
Deductive Descriptive: 735
The International
Journal of
Accounting
INDEX 6: ARTICLES BY
SUBJECT— ASIAN/PACIFIC REGION
accounting education
25, 108, 159, 247, 250, 266, 372, 459, 488, 492, 532, 621, 667, 763
accounting history
83,571
accounting theory
14,51,88,89,90, 131, 149,406,559,568,569,671
auditing
10, 150, 282, 294, 295, 322, 327, 416, 419, 435, 473, 518,
528, 551, 661, 662, 686, 703, 726, 758
economics and development
138, 144, 185, 191, 224, 329, 335, 409, 433, 471, 578, 615,
627, 663, 673, 691, 699, 735, 748, 754
financial accounting and reporting
13, 19, 20, 44, 56, 58, 68, 91, 103, 132, 143, 148, 151, 154,
169, 173, 196, 221, 227, 229, 256, 270, 283, 286, 309, 314,
342, 343, 348, 360, 379, 383, 390, 392, 410, 414, 421, 422,
423, 426, 449, 476, 477, 485, 513, 536, 543, 552, 585, 605,
634, 665, 666, 676, 683. 689, 693, 694, 695, 702, 708, 757
The International Journal of Accounting, Vol. 33, No. 1, pp. 37-38 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1997 University of Illinois
38 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
information systems
189, 626
managerial accounting
46, 52, 53, 109, 1 10, 207, 222, 333, 420, 455, 466. 534,
554. 588, 628. 708. 723. 727. 755
miscellaneous
135, 145,430,457.584
professional development
97, 134. 139, 288. 289. 307. 338, 359, 365. 384. 453. 533. 635.
675.688.717.728
public accounting
220.509.553.751
social effects of accounting
86. 344. 380. 684. 733
taxation
296
The International
Journal of
Accounting
INDEX 7: ARTICLES BY COUNTRY/REGION &
METHODOLOGY— DEVELOPING COUNTRIES
Argentina
Deductive Descriptive: 122,314
Bangladesh
Deductive Descriptive: 266, 726
Empirical Statistical: 333, 19
Theoretical: 585
Barbados
Deductive Descriptive: 130
Botswana
Deductive Descriptive: 460
Chile
Deductive Descriptive: 314
Modeling: 391
China
Capital Markets: 754
Deductive Descriptive: 51, 109, 143, 159, 224, 227, 282, 289,
342, 343, 372, 416, 426, 453, 563, 755
Historical: 83, 384, 434
Theoretical:410. 634, 691
The International Journal of Accounting, Vol. 33, No. 1, pp. 39-43 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1997 University of Illinois
40 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
Colombia
Deductive Descriptive: 557
Modeling: 391
Cyprus
Empirical Descriptive: 70
Egypt
Deductive Descriptive: 29, 30, 31, 35, 107, 180, 229, 292, 296, 483
Empirical Descriptive: 1 1, 70
Empirical Statistical: 30
Theoretical: 620
Ethiopia
Deductive Descriptive: 375
Fiji
Deductive Descriptive: 735
Ghana
Deductive Descriptive: 263
Historical: 482
Guatemala
Deductive Descriptive: 16
Kenya
Empirical Descriptive: 70
Korea
Capital Markets: 390
Deductive Descriptive: 150, 421, 488, 748
Empirical Statistical: 551, 552
Theoretical: 322
Historical: 724
Index 7 41
Malaysia
Capital Markets: 335
Deductive Descriptive: 173.533
Empirical Descriptive: 295. 518
Empirical Statistical: 661
Mexico
Deductive Descriptive: 251, 314, 744
Empirical Statistical: 158. 745
Theoretical: 235, 743
Historical: 493
Nigeria
Deductive Descriptive: 355. 542. 544, 550. 677
Empirical Descriptive: 70
Pakistan
Deductive Descriptive: 297, 628
Empirical Descriptive: 578
Panama
Deductive Descriptive: 158
Empirical Descriptive: 599
Philippines
Deductive Descriptive: 173. 533, 628
Empirical Descriptive: 518
Empirical Statistical: 10, 477
Capital Markets: 476
Poland
Deductive Descriptive: 31, 82, 84, 188, 279, 361, 362, 363, 369, 467
Empirical Statistical: 30
Theoretical: 364
Solomon Islands
Deductive Descriptive: 308, 735
42 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
Sudan
Deductive Descriptive: 237
Thailand
Deductive Descriptive: 25. 173. 329, 379. 532, 533, 627
Empirical Descriptive: 518
Theoretical: 763
Tonga
Deductive Descriptive: 735
Tunisia
Deductive Descriptive: 329
Theoretical: 525
Turkey
Deductive Descriptive: 120,541
Uruguay
Deductive Descriptive: 127
ModeUng: 391
Venezuela
Deductive Descriptive: 600
Western Samoa
Deductive Descriptive: 735
Yugoslavia
Deductive Descriptive: 467, 704, 705
Zambia
Empirical Descriptive: 70
Zimbabwe
Capital Markets: 549
Empirical Descriptive: 70
Index 7 43
General: developing & emerging countries
Capital Markets: 640
Deductive Descriptive: 34, 50, 229, 300. 339, 356. 375. 475,
522. 646
Empirical Descriptive: 692
Theoretical: 38, 200. 210. 226. 231. 235. 340, 487, 620. 639. 642
The International
Journal of
Accounting
INDEX 8: ARTICLES BY
SUBJECT— DEVELOPING COUNTRIES
accounting education
1 1, 25, 130, 159, 263, 266, 372, 458, 460, 480, 488, 532, 541,
599, 642, 763
accounting history
83, 744
accounting theory
51, 122,235
auditing
10, 70, 157, 282, 295, 363, 416, 521, 544, 661, 726
economics and development
16, 34, 94, 106, 144, 201, 210, 224, 231, 237, 300, 329, 335,
339, 355, 356, 368, 482, 490, 525, 549, 578, 620, 627, 639,
640,663,691,704,735,754
flnancial accounting and reporting
9, 19, 30, 50, 82, 107, 120, 127, 143, 227, 229, 248, 249, 251,
279, 286, 314, 342, 343, 361, 362, 364, 379, 390, 397, 410,
421, 426, 467, 476, 477, 493, 552, 585, 634, 692, 705, 745
government
157
The International Journal of Accounting, Vol. 33, No. 1, pp. 45-46 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1997 University of Illinois
46 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
managerial accounting
84. 109,600,628,755
miscellaneous
31, 188,369,391
professional development
216, 289, 308, 384, 453, 483, 522, 533
public accounting
35.158,292.375
social effects of accounting
29
taxation
38, 200, 296
The international
Journal of
Accounting
ANNOTATED BIBLIOGRAPHY
Abdeen, Adnan M., Syria (University of Petroleum and Minerals, Saudi Arabia).
The Impact of Accounting Practices on Tax Revenue in Syria [taxation]. The
Inteniational Journal of Accounting. 1984 Sep; 20(1): 121-139.
Methodology: deductive descriptive.
Discussion of the relationship of accounting and the tax system in Syria. Finds
that the accounting function can help to improve the tax system.
Abdeen, Adnan M., Syria (University of Petroleum and Minerals, Saudi Arabia).
The Role of Accounting in Project Evaluation and Control: The Syrian Experi-
ence [economics and development]. The International Journal of Accounting.
1980 Mar; 15(2): 143-158.
Methodology: deductive descriptive.
Description of the organizational structure and methodology used by the Syri-
ans for capital projects and economic development.
Abdeen, Adnan M.; Yavas, Ugur, Saudi Arabia (California State University at Los
Angeles/ZUniversity of Petroleum and Minerals, Saudi Arabia). Current Status
of Accounting Education in Saudi Arabia [accounting education]. The Interna-
tional Journal of Accounting. 1985 Mar; 20(2): 155-173.
Methodology: deductive descriptive.
Description of the Saudi Arabian system for accounting education. Describes
the deficiencies and provides recommendations for the system's improvement.
Abdel-Magid, Moustafa P.; Cheung, Joseph K., global (Simon Eraser University,
Canada/ZSimon Eraser University, Canada). Ratio Scales, Eoreign Exchange
Rates, and the Problem of Eoreign Currency Translation: An Analytical-Empir-
ical Perspective [financial accounting and reporting]. The International Journal
of Accounting. 1986 Sep; 22(1): 33-49.
Methodology: empirical statistical.
Study of fourteen foreign subsidiaries regarding the effects of different types of
translation methods. Einds that the least squares method minimized the estima-
tion error.
Abdel-Magid, Moustafa E., Islamic countries (Simon Eraser University, Canada).
The Theory of Islamic Banking: Accounting Implications [economics and
development]. The International Journal of Accounting. 1981 Sep; 17(1): 79-
102.
Methodology: deductive descriptive.
Discussion of the religious, social, and political factors affecting Islamic bank-
ing. Includes an overview of Islamic banking theory and related accounting
concerns.
The International Journal of Accounting, Vol. 33, No. 1, pp. 47-178 ISSN: 0020-7063.
All rights of reproduction in any form re.served. Copyright © 1997 University of Illinois
48 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
6. Abdelsalam, Mahmoud; Satin, Diane. Saudi Arabia (King Saud University, Saudi
Arabia/ZUniversity of California, Berkeley). The Effect of Published Corporate
Financial Reports on Stock Trading Volume in Thin Markets: A Study of Saudi
Arabia [social effects]. 77?^ International Journal of Accounting. 1991; 26(4):
302-313.
Methodology: capital markets.
Examination of relationship between corporate financial reports and stock trad-
ing volume in Saudi Arabia. Gives four reasons of insignificant effect of
financial reports on share trading volume.
7. Abdelsalam, Mahmoud; Satin. Diane. Saudi Arabia/United States (King Saudi Uni-
versity, Saudi Arabia/ZUniversity of California at Berkeley). The Impact of
Published Annual Financial Reports on Share Prices in Saudi Arabia [econom-
ics and development]. The International Journal of Accounting. 1988 Mar;
23(2): 113-124.
Methodology: capital markets.
Study of the Saudi Arabian stock market's reaction to published
announcements.
8. Abel, Rein. Germany (University of Pennsylvania). The Impact of Environment on
Accounting Practices: Germany in the Thirties [financial accounting and report-
ing]. The International Journal of Accounting. 1971 Sep; 7(1): 29^7.
Methodology: theoretical.
Study of the importance of environmental factors in establishing the character-
istics of accounting practices that are prevalent in any country. Contends that
these factors must be considered when striving for international uniformity.
9. Abu-Nassar, Mohammad; Rutherford, Brian A., Developing countries/Jordan (Uni-
versity of Jordan/ZUniversity of Kent, Canterbury, UK). Preparers' Attitudes to
Financial Reporting in Less Developed Countries with Moderately Sophisti-
cated Capital Markets: The Case of Jordan [financial accounting & reporting].
The International Journal of Accounting. 1995; 30(2): 129-138.
Methodology: empirical descriptive.
Comparative study of financial statement preparers in Jordan with previous
studies involving preparers in other developing countries.
10. Agacer, Gilda M.; Doupnik. Timothy S., United StatesZthe PhilippinesZWest Ger-
many (Mississippi State UniversityZZUniversity of South Carolina). Perceptions
of Auditor Independence: A Cross-cultural Study [auditing]. The International
Journal of Accounting. 1991; 26(3): 220-237.
Methodology: empirical statistical.
Examination to determine if client size, management advisory services, past
due fees, and spouse employment at same audit firm play roles in weakening
auditing independence.
11. Agami. Abdel; Alkafaji, Yass A., Egypt/Jordan/Saudi Arabia/Libya/IraqZKuwait
(Old Dominion UniversityZZNorthem Illinois University). Accounting Educa-
tion in Selected Middle Eastern Countries [accounting education]. The
International Journal of Accounting. 1987 Sep; 23(1): 145-169.
Methodology: empirical descriptive.
Bibliography 49
Description of the social, political, and professional influences on accounting
education in the Middle East.
12. Agrawal, Surendra P., United States/United Kingdom (Memphis State University).
Current Cost Accounting in the United Kingdom and the United States: A Com-
parative Analysis [managerial accounting]. 77?^ International Journal of
Accounting. 1983 Mar; 18(2): 95-108.
Methodology: theoretical.
Comparison of the current cost accounting methods used in the U.S. and the
U.K.
13. Agrawal. Surendra P.; Hallbauer, Rosalie C, United States/United Kingdom/Aus-
tralia (Wright State University/ZFlorida International University). Advantages
of Replacement Cost Accounting: A Critical Evaluation [financial accounting
and reporting]. The International Journal of Accounting. 1978 Mar; 13(2): 1-
14.
Methodology: theoretical.
Presentation of many examples of simulated situations where replacement cost
accounting could be used. Criticizes the benefits of such treatment and calls for
alteration.
14. Agrawal, Surendra P.; Jensen, Paul H.; Meador, Anna Lee; Sellers, Keith, United
States/United Kingdom/Canada/Australia (Memphis State University/ZUniver-
sity of Central Arkansas/ZMarshall University/ZUniversity of Arkansas). An
International Comparison of Conceptual Frameworks of Accounting [account-
ing theory]. The International Journal of Accounting. 1989; 24(3): 237-249.
Methodology: deductive descriptive.
Discussion of the international and domestic developments of accounting the-
ory in the U.S., the U.K., Canada, and Australia.
15. Agrawal, Surendra P.; Rosenzweig, Kenneth, United States (Memphis State Uni-
versity/ZUniversity of Dayton). Some Simpler Methods of Accounting for the
Effects of Changing Prices [accounting theory]. The International Journal of
Accounting. 1983 Sep; 19(1): 157-171.
Methodology: theoretical.
Presentation and analysis of three accounting methods — the Price Waterhouse,
Grady, and Agrawal methods — for changing prices.
16. Aguirre, Alejandro; Hagigi, Moshe, Guatemala/United States (Megasistemas Inter-
nacional, S. A./Francisco Marroquin University, Guatemala/ZBoston
University). Accounting, Economic, and Environmental Determinants of
Financial Reporting Practices in Guatemala [economics and development]. The
International Journal of Accounting. 1987 Mar; 22(2): 169-191.
Methodology: deductive descriptive.
Description of the economic, environmental, and legal factors affecting
accounting practice in Guatemala.
17. Ahadiat, Nasrollah, United States (California State Polytechnic University,
Pomona). Some Thoughts on the Development of Geographic Segment Report-
ing in the United States [financial accounting & reporting]. The International
Journal of Accounting. 1995:30(2): 139-148.
50 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1 , 1 998
Methodology: empirical descriptive.
Presentation of research evidence supporting the need to revise the Financial
Accounting Standards Board (FASB) standards regarding geographic reporting
standards.
18. Ahadiat, Nasrollah; Stewart, Barbara R., United Nations (Towson State University/
/Towson State University). International Geographic Segment Reporting Stan-
dards: A Case for the Harmonization of Accounting and Reporting Practices
[financial accounting & reporting]. The International Journal of Accounting.
1992; 27(1): 45-56.
Methodology: historical.
This article gives a historical overview of the development of financial state-
ment reporting by several organizations, including the United Nations and
European Economic Community, as well as other geographic segment
organizations.
19. Ahmed. Kamran; Nicholls, Des, Bangladesh (University of Wellington, New
Zealand/ZAustralian National University, Canberra). The Impact on Non-Finan-
cial Company Characteristics on Mandatory Disclosure Compliance in
Developing Countries: The Case of Bangladesh [financial accounting & report-
ing]. The International Journal of Accounting. 1994; 29(1): 62-11 .
Methodology: empirical statistical.
Study involving nonfinancial companies in Bangladesh which evaluates statu-
tory disclosure compliance of information in the corporate annual reports and
disclosure compliance based upon selected company characteristics. Statistical
findings show that large audit firms and subsidiaries of multinational compa-
nies have a positive influence on the level of disclosure compliance.
20. Ahmed, Sadrudin A.; Zeghal, Daniel, Canada/United States/United Kingdom/Aus-
tralia/New Zealand (University of Ottawa/ZUniversity of Ottawa). Industry
Segment Identification and Social Responsibility Information Disclosure in
Selected Canadian Companies [financial accounting and reporting]. The Inter-
national Journal of Accounting. 1987 Mar; 22(2): 153-168.
Methodology: empirical descriptive.
Study of different industries in Canada, finds that industries typically disclose
similar information.
21. Aitken, Hugh T., none (Exports Credit Insurance Corporation). Accounting Related
to Exports Credits Insurance and Finance [economics and development]. The
International Journal of Accounting. 1969 Sep; 5(1): 71-78.
Methodology: deductive descriptive.
Review of the current condition of credit in the international market, the risks
involved, and solutions to problems surrounding the topic.
22. Aitken, Michael J., United Kingdom/United States (University of New South
Wales, Australia). A General Theory of Financial Reporting: Is It Possible?
[financial accounting and reporting]. The International Journal of Accounting.
1990; 25(4): 221-233.
Methodology: theoretical.
Bibliography 51
Analysis of accounting theory. Author contends that a general theory may be
developed; however, it is not possible to develop a theory that takes into
account all possible needs.
23. Aitken, Michael J.; Islam, M. A., global (University of New South Wales, Austra-
lia//University of New South Wales, Australia). Dispelling Arguments Against
International Accounting Standards [financial accounting and reporting]. The
International Journal of Accounting. 1984 Mar; 19(2): 35-46.
Methodology: deductive descriptive.
Presentation of arguments, pro and con, regarding international accounting
standards.
24. Aitken, Michael J.; Wise, Trevor D., global (University of New South Wales, Aus-
tralia//La Trobe University, Australia). The Real Objective of the International
Accounting Standards Committee [accounting theory]. The International Jour-
nal of Accounting. 1984 Sep; 20(1): 171-177.
Methodology: deductive descriptive.
Discussion of the effectiveness of the lASC's standards. Contends that because
of the accountant-dominated standard-setting process, the lASC has been inef-
fective to date.
25. Akathaporn, Parporn; Novin, Adel M.; Abdolmohammadi, Mohammad J., Thai-
land (Western Washington University, Bellingham, Washington//Kent State
University, Kent, Ohio//Bentley College, Waltham, Massachusetts ). Account-
ing Education and Practice in Thailand: Perceived Problems and Effectiveness
of Enhancement Strategies [accounting education]. The International Journal
of Accounting. 1993; 28(3): 259-272.
Methodology: deductive descriptive .
Evaluation of problems in Thailand's accounting profession and accounting
education program, based on a survey of 285 Thai accounting educators and
professionals. The results of this study revealed numerous deficiencies.
26. Al Hashim, Dhia D., none (Florida International University). Accounting Control
Through Purposive Uniformity: An International Perspective [accounting the-
ory]. The International Journal of Accounting. 1973 Mar; 8(2): 21-32.
Methodology: theoretical.
Study of purposive uniformity — a system of accounting control in which the
inteipretation of economic events, the prescription of accounting methods, and
development of reports are responsive to definite user needs.
27. Al Hashim, Dhia D., European Economic Community/Arab Countries/United
States/United Kingdom/Netherlands/Germany/Canada/Developed Countries
(California State University at Northridge). Accounting Framework for the
Gulf Cooperation Council [financial accounting and reporting]. The Recent
Accounting and Economic Developments in the Middle East. Champaign, IL:
Center for International Education and Research in Accounting; 1985 May:
1-12.
Methodology: theoretical.
Presentation of an accounting framework for the Gulf Cooperation Council
members. Framework addresses the goals of countries in the Middle East.
52 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1 , 1 998
28. AI Hashim. Dhia D., Brazil/France/Germany/Switzerland/United StatesAJnited
Kingdom (California State University at Northridge). Regulation of Financial
Accounting: An International Perspective [financial accounting and reporting].
The International Journal of Accounting. 1980 Sep; 16(1): 47-62.
Methodology: deductive descriptive.
Discussion of the relationship between the status of a country's accounting pro-
fession and the regulating body. Concludes that generally, the lower the status
of the profession, the more likely the governmental body will be governmental
or legislative.
29. Al Hashim, Dhia D., Egypt (California State University at Northridge). Social
Accounting in Egypt [social effects of accounting]. The International Journal
of Accounting. 1977 Mar; 12(2): 127-141.
Methodology: deductive descriptive.
Discussion of the controlled accounting system in Egypt. Concludes that the
current system in Egypt does not properly evaluate management's use of
resources.
30. Alnajjar, Fouad K., Soviet Union/United KingdomAJnited States/France/Belgium/
Poland/Egypt/Iraq (Wayne State University). Standardization in Accounting
Practices: A Comparative International Study [financial accounting and report-
ing]. The International Journal of Accounting. 1986 Mar; 21(2): 161-176.
Methodology: empirical statistical.
Study of accounting standard development. Finds that accounting standards
have generally been falling under legislative regulation through time.
31. Alnajjar. Fouad K.; Buttross, Thomas E., Belguim/France/Germany/United King-
dom/Russia/Poland/Egypt (Wayne State University, Detroit, Michigan/ZDetroit
Mercy University, Michigan). The Development and Acceptance of Interna-
tional Accounting Standards: The Evolution of lASC after Two Decades
[miscellaneous]. The New Europe: Recent Political and Economic Implications
for Accountants and Accounting. Champaign, IL: Center for International Edu-
cation and Research in Accounting; 1994: 21 1-232.
Methodology: deductive descriptive.
Examination of factors which lead to different national accounting systems and
introduction of a model for implementing harmonized international accounting
standards.
32. Alnajjar, Fouad K.; Volz, William H., Germany (Wayne State University, Detroit,
Michigan/ AVayne State University, Detroit, Michigan). The Status of Account-
ing and its Environment in West Germany: An Overview [financial accounting
& reporting]. The International Journal of Accounting. 1991; 26(2): 104-1 17.
Methodology: deductive descriptive.
Discusses environmental impact, particularly tax and corporation laws, on West
German accounting with its distinct feature of uniformity and compliance to
regulations.
33. Alnajjar, Fouad K.; Prodhan, Bimal K., United Kingdom/United States/Europe
(Wayne State University/ZUniversity of Strathclyde, Scotland). Accounting
Bibliography 53
Research 1976 to 1985: A Transatlantic Perspective [professional develop-
ment]. The International Journal of Accounting. 1987 Sep: 23(1): 167-188.
MethodologN : empirical statistical.
Study of \arious accounting journals regarding research methodology. Finds
growth de\eloping toward empirical and institutional influences.
34. Al-Saffar. Hadi R.. Middle East/de\ eloping countries (Organization of Petroleum
Exporting Countries,). The Role of Accounting Information in National Devel-
opment Planning in the Middle East [economics and development]. The Recent
Accounting and Economic Developments in the Middle East. Champaign. IL:
Center for International Education and Research in Accounting: 1985 May:
25-32.
Methodology: deductive descripti\e.
Presentation and discussion of national-investment-price planning and control
in the Middle East.
35. Amber. Matwalli B.. Eg\pt (Cairo University. Egypt). Impact of Public Ownership
on the U.A.R. Accounting Profession [public accounting]. The International
Journal of Accounting. 1969 Mar: 4(2): 49-61.
Methodology: deductive descripti\e.
Discussion of the changes in the economic system of Eg>pt that have resulted in
basic changes in the accounting profession, particularly after July 1961.
36. Ameiss. Albert P.. United States/United Kingdom (University of Missouri at St.
Louis). Can British E.xperience in Profit Forecasting Assist U.S. Firms Inter-
ested in Establishing Such Financial Disclosure? [public accounting]. The
International Journal of Accounting. 1977 Sep: 13(1): 77-91.
Methodolog} : deductive descripti\e.
Comparison of the requirements of the Security and Exchange Commission and
the U.K. for financial forecasting. Holds that if such disclosures could be prop-
erly implemented the a\erage in\estor w ould benefit.
37. Ameiss. Albert P.. Sweden/United States (University of Missouri at St. Louis).
Could Swedish Auditing Procedures Result in Greater Corporate Control for
U.S. Stockholders'? [auditing]. The International Journal of Accounting. 1970
Mar: 5(2): 103-116.
Methodology: empirical descriptixe.
Proposal of solutions to U.S. reporting problems through application of S\\ ed-
ish auditing procedures.
38. Ameiss. Albert P.. de\eloping countries/Sweden (University of Missouri at St.
Louis). Developing Nations and Tax-Ordained .Accounting Principles — The
Swedish Model [taxation]. The Intenuitional Journal of Accounting. 1971 Mar;
6(2): 89-102.
Methodolog\ : theoretical.
Study of how accounting can become an integral part of the central planning
process in newly emerging nations, as it has been in Sweden. Also explores
how such planning can defeat the purposes of sound principles of accounting,
even though national objectives may be accomplished.
54 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
39. Ameiss, Albert P., United States (University of Missouri at St. Louis). International
Accounting at the Senior Student Level [accounting education]. The Interna-
tional Journal of Accounting. 1974 Sep; 10(1): 107-121.
Methodology: deductive descriptive.
Account of experiences at the University of Missouri at St. Louis in introducing
and reviewing an undergraduate-level course in international accounting .
Includes a course syllabus and shows U.S. pronouncements relating to the
weekly subject matter.
40. Ameiss, Albert P., United States (University of Missouri at St. Louis). Two
Decades of Change in Foreign Subsidiary Accounting and United States Con-
solidation Practices [financial accounting and reporting]. The International
Journal of Accounting. 1972 Mar; 7(2): 1-22.
Methodology: empirical descriptive.
Review of 20 years of change, using the results of surveys about the consolida-
tion of foreign subsidiary accounting operations from 1950 to 1970.
41. Amemic. Joel H.; Aranya, Nissim; Kanungo. Rabindra, Canada (University of Tor-
onto//Tel Aviv University/ZMcGill University, Canada). Professional and Work
Values of Accountants: A Cross-Cultural Study [professional development].
The International Journal of Accounting. 1983 Mar; 18(2): 177-192.
Methodology: empirical statistical.
Survey of Canadian accountants with French and Anglo backgrounds regarding
their work ethics and acceptance of professional standards.
42. Amemic, Joel H.; Aranya, Nissim, Canada/United States (University of Toronto//
Tel Aviv University). Public Accountants' Independence: Some Evidence in a
Canadian Context [public accounting]. The International Journal of Account-
ing. 1981 Mar; 16(2): 11-33.
Methodology: empirical descriptive.
Sur\'ey of Canadian chartered accountants regarding independence. Concludes
that practitioner's independence depends on level in the organization and size
of the organization — the higher the level in the organization and the larger the
size, the more independent he or she will be.
43. Amemic, Joel H.; Galvin, B. J. B.. United States/Canada/United Kingdom (Univer-
sity of Toronto//University of Toronto). Implementing the New Foreign
Currency Rules in Canada and the United States: A Challenge to Professional
Judgment [financial accounting and reporting]. The International Journal of
Accounting. 1984 Mar; 19(2): 165-180.
Methodology: empirical statisdcal.
Analysis of the translation methods used. Results indicate disagreement
between auditors and management regarding which translation methodology is
appropriate.
44. Andrew. Brian; Austin, Lloyd; Chew, Andrew. Singapore/United States (The Uni-
versity of Western Sydney, AustraliaZ/Auckland University, New Zealand//The
University of Technology, Australia). A Study of the Relationship Between
Three Business Flows: Some Evidence From Singapore [financial accoundng
Bibliography 55
and reporting]. The International Journal of Accounting. 1988 Mar; 23(2):
57-70.
Methodology: empirical statistical.
Study of companies in Singapore regarding their working capital from opera-
tions, and cash flows from operations. Examines the usefulness of this
information and the links this information may have to solvency.
45. Andrews, Wesley T.; Smith, Charles H., United States (Arizona State University//
University of Illinois at Urbana-Champaign). A Role for Financial Accounting
in National Economic Planning in the United States [economics and develop-
ment]. 7/?e /nfcrnar/ona/Joi/rna/ <7/Accc»to?rmg. 1976 Sep; 12(1): 133-145.
Methodology: theoretical.
A study of the basic objectives of a bill introduced in the U.S. Senate by sena-
tors Hubert Humphrey and Jacob Javits outlining the potential role of financial
accounting such as in a planning system.
46. Anyane-Ntow, Kwabena, Japan/United States/Canada/West Germany/Australia/
United Kingdom (North Carolina Central University). Just-In-Time Manufac-
turing Systems and Inventory Reported in Financial Statements: A
Cross-National Comparison of Manufacturing Firms [managerial accounting].
The International Journal of Accounting. 1991; 26(4): 277-285.
Methodology: empirical descriptive.
Comparison of inventory levels and profitability between Japanese firms and
those in other industrial countries, indicating long period of implementation of
JIT systems and lower profitability accompanied. Suggests that all costs be con-
sidered in adoption of JIT.
47. Arbel, Avner; Jaggi, Bikki L., United States (State University of New York at
Binghamton/ZState University of New York at Binghamton). Impact of
Replacement Cost Disclosures on Investors' Decisions in the United States
[financial accounting and reporting]. The International Journal of Accounting.
1978 Sep; 14(1): 71-82.
Methodology: empirical statistical.
Study using statistical testing to determine investor reaction to the disclosure of
replacement costs. Suggests that first disclosures do not affect investors, per-
haps due to lack of investor understanding.
48. Arnold, Jerry; Holder, William W.; Mann, M. Herschel, United States/Europe
(University of Southern CalifomiaZ/University of Southern Califomia//Texas
Tech University). International Reporting Aspects of Segment Disclosure
[financial accounting and reporting]. The International Journal of Accounting.
1980 Sep; 16(1): 125-135.
Methodology: empirical descriptive.
Study of the 10-U reports of 200 companies. Finds that many companies lacked
disclosure of their foreign activities and concludes that there is a need for disag-
gregated disclosure, which FASB 14 may not be able to achieve.
49. Arnold, John; Moizer, Peter; Noreen, Eric, United States/United Kingdom (Univer-
sity of Manchester, England//University of Manchester, EnglandZ/University of
Washington). Investment Appraisal Methods of Financial Analysts: A Compar-
56 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
ative Study of U.S. and U.K. Practices [economics and development]. The
IntemationalJoumal of Accounting. 1984 Mar; 19(2): 1-18.
Methodology: empirical descriptive.
Survey of financial analysis methodology in the U.S. and U.K. Finds numerous
differences between the two countries.
50. Baccouche, Mustapha, developing countries (University of Illinois at
Urbana-Champaign). The Need for International Accountancy [financial
accounting and reporting]. The International Journal of Accounting. 1969 Sep;
5(1): 97-99.
Methodology: deductive descriptive.
Study of the accounting needs of developing countries. Finds that the fulfill-
ment of these needs must come from the government of each country.
51. Bai, Zhao Lu, China (People's University of China). Accounting in the People's
Republic of China — Contemporary Situations and Issues [accounting theory].
Recent Accounting and Economic Developments in the Far East. Champaign,
IL: Center for International Education and Research in Accounting; 1988 May:
27-50.
Methodology: deductive descriptive.
Brief history of the accounting profession in China and a description of current
bookkeeping, managerial accounting, and auditing theories.
52. Bailes, Jack C; Assada, Takayuki, JapanAJnited States (Oregon State University//
Tsukuba University, Tokyo, Japan). Empirical Differences Between Japanese
and American Budget and Performance Evaluation Systems [managerial
accounting]. The International Journal of Accounting. 1991; 26(2): 131-142.
Methodology: empirical descriptive.
Survey of 256 Japanese and 80 American manufacturing companies budget and
performance evaluations. Finds more participation by division managers,
higher ranking of ROI and more emphasis on short-term performance evalua-
tions in U.S. companies than in Japanese companies.
53. Bailes, Jack C; McNally, Graeme M., New Zealand (Oregon State University//
University of Canterbury, New Zealand). Cost and Management Accounting
Practices in New Zealand [managerial accounting]. The International Journal
of Accounting. 1984 Mar; 19(2): 59-71.
Methodology: empirical descriptive.
Survey of 62% of New Zealand firms regarding their managerial accounting
practices. Indicates that their practices are similar to those followed by firms in
the U.S.
54. Bailey, Derek T., Soviet Union (University of Birmingham, England). Accounting
in Russia: The European Connection [accounting history]. The International
Journal of Accounting. 1982 Sep; 18(1): 1-36.
Methodology: historical.
Historical discussion of accounting in Russia.
55. Bait-El-Mal, Mohamed M.; Smith, Charles H.; Taylor, Martin E., Libya (Univer-
sity of LibyaZ/Arizona State University//University of Maryland). The
Bibliography 57
Development of Accounting in Libya [financial accounting and reporting]. The
International Journal of Accounting. 1973 Mar; 8(2): 83-101.
Methodology: deductive descriptive.
Description of the development of accounting in the Libyan Arab Republic.
56. Bakal, Robin J.; Lemon, W. Morley, Australia/CanadaAJnited Kingdom/United
States (University of Illinois at Urbana-Champaign/ZMcMaster University,
Canada). Current Value Accounting: One Standard or Many? [financial
accounting and reporting]. The Impact of Inflation on Accounting: A Global
View. Champaign, IL: Center for International Education and Research in
Accounting; 1979 May: 241-259.
Methodology: deductive descriptive.
Discussion of the International Auditing Standards Commitee approach to
inflation accounting. Concludes that, in the short run, standards for inflation
accounting are not feasible.
57. Baker, C. Richard, United States (Columbia University). The Structural Response
of the Large CPA Firm to Its Environment [public accounting]. The Interna-
tional Journal of Accounting. 1977 Mar; 12(2): 69-80.
Methodology: deductive descriptive.
Discussion of the methodology used by large CPA firms for coping with chang-
ing legislation, technology, and client demands.
58. Baker, H. Kent; Chenhall, Robert H.; Haslem, John A.; Juchau, Roger H., United
States/Australia (The American University/ZMacquarie University, Australia//
University of Maryland//Nepean College of Advanced Education, Australia).
Disclosure of Material Information: A Cross-National Comparison [financial
accounting and reporting]. The International Journal of Accounting. 1977 Sep;
13(1): 1-18.
Methodology: empirical descriptive.
Survey comparing U.S. and Australian investor needs. Concludes that the level
of disclosure is inadequate for these needs.
59. Baladouni, Vahe, none (University of New Orleans). The Study of Accounting His-
tory [accounting history]. The International Journal of Accounting. 1977 Mar;
12(2): 53-67.
Methodology: theoretical.
Presentation of cultural, social, and technological frameworks necessary for the
study of accounting history.
60. Balke, Thomas E.; Sorenson, James E., none (University of Nebraska//University
of Denver). Reliability and Validity of Accounting Data [accounting theory].
The International Journal of Accounting. 1975 Mar; 10(2): 37-46.
Methodology: theoretical.
Study that applies a conceptualization of validity and reliability from the behav-
ioral sciences to accounting.
61 . Bardsley, R. Geoffrey, none (Xerox Corporation). Managing International Financial
Transactions [managerial accounting]. The International Journal of Accounting.
1972 Sep; 8(1): 67-76.
58 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
Methodology: theoretical.
Study of policies for the financial functions which might be used in a multinational
corporation. Develops methods and procedures for the implementation of these
policies.
62. Barlev, Benzion, Israel (University of Rochester/Jerusalem School of Business
Administration, Hebrew University). The Independent Auditor's Report: Study
of a Change [auditing]. The International Journal of Accounting. 1976 Mar;
11(2): 73-90.
Methodology: empirical descriptive.
Study of Israel's decision to substitute the American version of the audit report
for the British tradition and issues that were considered in making this change.
Uses findings obtained from an empirical investigation which centered on a
group of accountants who were active in the professional committees of the
ICPAI and who participated in the 1970 resolution.
63. Barlev, Benzion. Israel/United States/United Kingdom (Jerusalem School of Busi-
ness Administration, Hebrew University). The Initial Selection of Independent
Public Accountants: An Empirical Investigation [public accounting]. The Inter-
national Journal of Accounting. 1977 Mar; 12(2): 37-51.
Methodology: empirical statistical.
Study of the selection process methodology to choose an independent public
accountant. Addresses such factors as firm size, type of service, personality
traits, and personal ties are addressed in the study.
64. Barlev, Benzion; Friedman, Abraham, United States (The Hebrew University,
Jerusalem//The Hebrew University, Jerusalem). Experience Requirements and
the Education of Certified Public Accountants [accounting education]. The
International Journal of Accounting. 1982 Mar; 17(2): 75-88.
Methodology: theoretical.
Discussion of the theoretical and educational aspects of the experience require-
ments to become a CPA.
65. Bamiv, Ran; Elitzur, Ramy, Israel/United States (Ben Gurion University of the
Negev, Israel/ZUniversity of Toronto). Attitudes of CPAs in Israel Towards
GAAP for Closely Held Corporations and Small Business [public accounting].
The International Journal of Accounting. 1989; 24(4): 343-364.
Methodology: empirical descriptive.
Survey of the attitudes toward GAAP held by 200 CPAs in Israel. Finds that
Israeli CPAs generally disagree with GAAP.
66. Barr, Andrew, United States (University of Illinois at Urbana-Champaign).
Accounting Yesterday, Today, and Tomorrow [accounting history]. The Inter-
national Journal of Accounting. 1972 Sep; 8(1): 1-15.
Methodology: historical.
Study of events of the last fifty years as a basis for predicting future develop-
ments in accounting.
67. Barr. Andrew. United States (Securities and Exchange Commission). The Influence
of Government Agencies on Accounting Principles with Particular Reference to
Bibliography 59
the Securities and Exchange Commission [governmental]. The International
Journal of Accounting. 1965 Sep; 1(1): 15-33.
Methodology: deductive descriptive.
Study of positive and negative views of government influence on establishing
uniformity in accounting practices.
68. Barrett, M. Edgar, United States/United Kingdom/Japan/Sweden/Netherlands/Ger-
many/France (Southern Methodist University). The Extent of Disclosure in
Annual Reports of Large Companies in Seven Countries [financial accounting
and reporting]. The International Journal of Accounting. 1977 Mar; 12(2):
1-25.
Methodology: empirical descriptive.
Study of the extent of financial disclosure in the annual reports of major, pub-
licly-held foreign corporations with that found in major, publicly-held U.S.
firms. Presents a detailed analysis of the extent of annual report disclosure of
both domestic and foreign firms as compared to segment reporting and capital
expenditure, current and planned.
69. Bavishi, Vinod B., Global (Center for International Financial Analysis and
Research). International Accounting Differences and the Globalization of Capi-
tal Markets: Issues and Answers [financial accounting & reporting]. Changing
International Financial Markets and Their Impact on Accounting: Center for
International Education and Research in Accounting. Champaign, IL: Center
for International Education and Research in Accounting, Department of
Accountancy; 1992: 1-16.
Methodology: capital markets.
Study examining major accounting distinctions between various industrialized
nations and comparing these distinctions to GAAP principles, as well as provid-
ing suggestions toward harmonizing such differences.
70. Bavishi, Vinod B., United Arab Emirates/Egypt/Cyprus/Zambia/Israel/United
States/European Economic Community/Africa/Middle East/South Africa/Zim-
babwe/Nigeria/Kenya/Saudi Arabia (University of Connecticut). Who Audits
the World? International Accounting Firms' Operations in Developing Coun-
tries: The Case of Africa/Middle East [auditing]. The Recent Accounting and
Economic Developments in the Middle East. Champaign, IL: Center for Inter-
national Education and Research in Accounting; 1985 May: 183-195.
Methodology: empirical descriptive.
Study of international auditing firms regarding their structure, and market. Lists
findings by firms.
71. Bavishi, Vinod B.; Wyman, Harold E., United States (University of Connecticut//
University of Connecticut). Foreign Operations Disclosures by U. S.-Based
Multinational Corporations: Are They Adequate? [financial accounting and
reporting]. The International Journal of Accounting. 1980 Sep; 16(1): 153-168.
Methodology: empirical descriptive.
Study of the inadequacies of current disclosure. Suggests that improvements be
made, by grouping the countries according to level of development and political
risk. Suggests a 5 percent cutoff instead of 10 percent.
60 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
72. Baydoun, Nabil, France, European Economic Community (City Polytechnic of
Hong Kong and University of Otago, New Zealand). The French Approach to
Financial Accounting and Reporting [financial accounting and reporting]. The
International Journal of Accounting. 1995; 30(3): 222-244.
Methodology: empirical descriptive.
Examination of the cultural and environmental effects influencing France's
financial accounting and reporting process.
73. Beaver, William H., none (Stanford University). Accounting for Inflation in an
Efficient Market [financial accounting and reporting]. The Impact of Inflation
on Accounting: A Global View. Champaign, IL: Center for International Edu-
cation and Research in Accounting; 1979 May: 21-42.
Methodology: theoretical.
Comparison of different methods of accounting for price-level changes.
74. Beazley, Jr Garnett F., none (University of South Carolina). An International Impli-
cation for Accounting [financial accounting and reporting]. The International
Journal of Accounting. 1968 Mar; 3(2): 1-10.
Methodology: theoretical.
Discussion of the need for research efforts to focus primarily upon the
cross-cultural aspects of the work of accountants in different environments.
75. Bedford, Norton M., none (University of Illinois at Urbana-Champaign). The Inter-
national How of Accounting Thought [accounting theory]. The International
Journal of Accounting. 1966 Mar; 1(2): 1-7.
Methodology: theoretical.
Study of the processes used in the transmission of basic accounting knowledge
and new accounting developments in one part of the world to other parts.
76. Bedford, Norton M.; Gautier, Jacques P., Europe/Switzerland/United States (Uni-
versity of Illinois at Urbana-Champaign/ZUniversity of Geneva). An
International Analytical Comparison of the Structure and Content of Annual
Reports in the European Economic Community, Switzerland, and the United
States [public accounting]. The International Journal of Accounting. 1974 Mar;
9(2): 1-44.
Methodology: deductive descriptive.
Discussion of the differing information provided by contemporary annual
reports in the U.S., the European Economic Community, and Switzerland.
Describes the differences in the accounting thought, principles, and procedures
underlying rational report preparation as they existed in 1973.
77. Beekhuizen, Theo; Frishkoff. Paul. Netherlands/United States (European Institute
of Business Administration (INSEAD). France/ZUniversity of Oregon). A Com-
parison of the New Dutch Accounting Act with Generally Accepted American
Accounting Principles [public accounting]. The International Journal of
Accounting. 1975 Mar; 10(2): 13-22.
Methodology: deductive descriptive.
Comparison of the accounting principles in the Netherlands with those of the
U.S. Concludes that the Netherlands is a commercial center with sophisticated
financial practices and the home of several world giant corporations and Dutch
accounting principles have been codified.
Bibliography 61
78. Beghin, Paul; Lefebvre, Chris J. L., Belgium (Administrative en Economische
Hogeschool, Belgium/ZKatholieke Universitiet Leuven, Belgium). The Impact
of Fiscal Law on Prescribed Accounting Standards in Belgium [accounting his-
tory]. The Recent Accounting and Economic Developments in Western Europe.
Champaign, IL: Center for International Education and Research in Account-
ing; 1985 May: 143-159.
Methodology: historical.
Historical recount of influences on the Belgian accounting practice.
79. Belkaoui, Ahmed; Kahl, Alfred; Peyrard, Josette, United States/Europe (University
of Ottawa/ZUniversity of Ottawa/ZUniversity of Paris). Information Needs of
Financial Analysts: An International Comparison [financial accounting and
reporting]. The International Journal of Accounting. 1977 Sep; 13(1): 19-27.
Methodology: empirical descriptive.
Survey of the needs of European and North American investors. Finds that
North Americans agree on what information is valuable, but that American and
European investors differ greatly.
80. Belkaoui, Ahmed; Maksy, Mostafa. global (University of Illinois at Chicago//Uni-
versity of Illinois at Chicago). Welfare of the Common Man and Accounting
Disclosure Adequacy: An Empirical Investigation [financial accounting and
reporting]. The International Journal of Accounting. 1985 Mar; 20(2): 81-94.
Methodology: empirical statistical.
Study of 124 countries to determine whether economic factors and social fac-
tors have an effect on welfare and accounting principles. Finds that economic
factors have an effect on the welfare of the common man, but that no link exists
between welfare and accounting principles.
81. Benau, Maria Antonia Garcia; Humphrey, Christopher; Moizer, Peter; Turley, Stu-
art, Spain/United Kingdom (Universidad de Valencia, Spain/ZUniversity of
Leeds, United Kingdom/ZUniversity of Leeds, United Kingdom/ZUniversity of
Manchester, United Kingdom). Auditing Expectations and Performance in
Spain and Britain: A Comparative Analysis [auditing]. The International Jour-
nal of Accounting. 1993; 28(4): 281-307.
Methodology: empirical descriptive.
Comparison and differentiation of the audit expectations and perceptions in
Spain and Britain. This article calls for more indepth analysis on the basis of
audit expectations, as well as more emphasis on fulfilling audit expectations.
82. Berry, Maureen H., Socialist CountriesZSoviet UnionZEast GermanyZPoland (Uni-
versity of Illinois at Urbana-Champaign). The Accounting Function in Socialist
Economies [financial accounting and reporting]. The International Journal of
Accounting. 1982 Sep; 18(1): 185-198.
Methodology: deductive descriptive.
Discussion of the function, status, and economics of accounting in the Socialist
countries.
83. Beny, Maureen H., ChinaAJnited States (University of Illinois at Urbana-Cham-
paign). The Cultural Development of Accounting in the People's Republic of
China [accounting history]. Recent Accounting and Economic Developments in
62 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1 . 1 998
the Far East. Champaign. IL: Center for International Education and Research
in Accounting; 1988 May: 1-25.
Methodology: historical.
Study of the relationship between the changes in Chinese society and changes
in Chinese accounting. Considers the effect of social, political, and economic
pressures on the current accounting function.
84. Berry. Maureen H.: Jaruga. Alicja A.. Poland (University of Illinois at
Urbana-Champaign/ZUniversity of Lodz. Poland). Industrial Accounting in
Poland's Reorganized Economy [managerial accounting]. The International
Journal of Accounting. 1985 Mar: 20(2): 45-63.
Methodology: deductive descriptive.
Description of the 1980 reorganization of the accounting function in Poland.
85. Blake. John: Salas. Oriol Amat: Clarke. Julia. Spain (University of Central Lan-
cashire. UK//Universitat Pompeu Fabra. Balmes. Barcelona, Spain/ZUniversity
of Central Lanashire). Management's Response to Finance Lease Capitalization
in Spain [financial accounting and reporting]. The International Journal of
Accounting. 1995: 30(4): 331-342.
Methodology: empirical descriptive.
Analysis of survey results involving a questionnaire survey of Spanish manag-
ers regarding accounting for leases by lessees.
86. Blattner, Ken, Japan (St. Cloud State University). Cultural Intluences on the Japa-
nese Accounting System [social effects]. Changing International Financial
Markets and Their Impact on Accounting. Champaign, IL: Center for Interna-
tional Education and Research in Accounting, Department of Accountancy;
1992: 139-146.
Methodology: deductive descriptive.
Study of internal cultural influences upon Japan's accounting system.
87. Bloom. Robert. United States/Canada (Concordia University. Canada). American
and Canadian Accounting Standard Setting: A Comparative Analysis [financial
accounting and reporting]. TJie International Journal of Accounting. 1984 Mar;
19(2): 47-57.
Methodology: deductive descriptive.
Comparison of the standard-setting bodies in Canada and the U.S. Concludes
that its national culture requires Canada to implement its own standards apart
from the FASB.
88. Bloom. Robert: Debessay. Araya. United States/Australia/Canada/United Kingdom
(John Carroll University/ZUniversity of Delaware). An Appraisal of the Con-
ceptual Issues on Backlog Depreciation and a Comparative Analysis of
International Accounting Practices [accounting theor}]. The International Jour-
nal of Accounting. 1985 Sep: 21(1): 107-121.
Methodology: deductive descripti\e.
Comparison of the accounting practice for backlog depreciation. Contends that
the determination of the availability of funds for replacement purposes should
be a financing problem.
89. Bloom, Robert; Debessay, Araya, United States/United Kingdom/Canada/Australia
(John Carroll University/ZUniversity of Delaware). A Comparative Analysis of
Bibliography 63
Recent Pronouncements on Accounting for Changing Prices [accounting the-
ory]. The International Journal of Accounting. 1985 Mar; 20(2): 1 19-138.
Methodology: deductive descriptive.
Discussion and analysis of the accounting methods used to account for
price-level changes in the U.S., the United Kingdom, Canada, and Australia.
90. Bloom, Robert; Debessay, Araya, United States/United Kingdom/Canada/New
Zealand/Australia (John Carroll University/ZUniversity of Delaware). The Con-
troversial Development of the Deprival Issue Value Concept [accounting
theory]. The International Journal of Accounting. 1986 Sep; 22(1): 159-174.
Methodology: theoretical.
Presentation of the deprival valuation method for current cost accounting.
91. Bloom, Robert; Naciri, M. A., United States/Canada/United Kingdom/Germany/
Australia/New Zealand/Sweden/Japan/Switzerland (John Carroll University//
University of Quebec of Montreal, Canada). Accounting Standard Setting and
Culture: A Comparative Analysis of the United States, Canada, England, West
Germany, Australia, New Zealand, Sweden, Japan, and Switzerland [financial
accounting and reporting]. The International Journal of Accounting. 1989;
24(1): 70-97.
Methodology: theoretical.
Comparison of the accounting standard setting functions of the U.S.. Canada,
the United Kingdom, Germany, Australia, New Zealand, Sweden, Japan, and
Switzerland.
92. Boatler, Robert W., Latin America (Texas Christian University. Forth Worth,
Texas). When Inflation is Not High Enough: Disappearance of Real Assets
Under FAS 52 [financial accounting & reporting]. The International Journal of
Accounting. 1992; 27(3): 262-266.
Methodology: deductive descriptive.
Discussion of distortive accounting reporting of foreign assets belonging to
American companies when such reporting is done in accordance with FAS 52.
93. Bomeli, Edwin C, none (Bowling Green State University). Curricular Recognition
of International Accounting — An Appraisal [accounting education]. The Inter-
national Journal of Accounting. 1969 Sep; 5(1): 85-96.
Methodology: theoretical.
Exploration of the growing recognition of international accounting problems in
accounting courses. Also considers less obvious manifestations of curricula rec-
ognition of international accounting.
94. Bond, Richard R., Africa (Illinois State University). Emerging Nations and Emerg-
ing Institutions [economics and development]. The International Journal of
Accounting. 1970 Sep; 6(1): 83-90.
Methodology: deductive descriptive.
Examination of the struggling nations of Africa. Proposes solutions to problems
in the educational institutions of these countries.
95. Borkowski, Susan C, United States (Lasalle University, Philadelphia, Pennsylva-
nia). International Versus Domestic Managerial Performance Evakiation: Some
64 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1 , 1 998
Evidence [managerial accounting]. The International Journal of Accounting.
1993; 28(2): 129-139.
Methodology: empirical statistical.
Study of managerial performance evaluation of domestic and international
managers.
96. Borkowski, Susan C, Global (Lasalle University, Philadelphia, Pennsylvania). An
Analysis (Meta- and Otherwise) of Multinational Transfer Pricing Research
[miscellaneous]. The International Journal of Accounting, 1996; 31(1): 39-53.
Methodology: Deductive descriptive.
A description of current transfer pricing practice, methodology used to identify
and analyze the transfer pricing studies, and review and meta-analyses of those
studies.
97. Bose, A., India (lEL Limited/Institute of Cost and Works Accountants, India). The
Indian Accountancy Profession: Its Origins and Current Status [professional
development]. Recent Accounting and Economic Developments in the Far East.
Champaign. IL: Center for International Education and Research in Account-
ing; 1988 May: 149-162.
Methodology: deductive descriptive.
Discussion of historical and current implications on the accounting profession
in India. Maintains that the profession is moving forward, but needs coopera-
tion from the country's unions.
98. Boussard, Daniel, none (University of Paris). Accounting as an Artifact: A Method-
ological Design on Dimensions of Accounting [accounting history]. The
International Journal of Accounting. 1981 Mar; 16(2): 125-147.
Methodology: modeling.
Study of a model of accounting development using social political and opera-
tional aspects. Concludes that accounting is a "social code" and application of
true/false descriptions will adversely affect the development of accounting.
99. Boussard, Daniel, none (University of Paris). Application of GST to the Financial
Accounting Model [accounting theory]. The International Journal of Account-
ing. 1978 Sep; 14(1): 17-37.
Methodology: modeling.
Study using the systems approach to develop a model of the accounting system.
Also discusses the implications of such a model to accounting education.
100. Boussard, Daniel; Burlaud, Alain; Malo, Jean-Louis, France (University of Paris/
Ecole Superieure de Commerce de Paris/ZUniversity of Paris/Ecole Superieure
de Commerce de Paris/ZUniversity of Poitiers). The Education of Professional
Accountants in France [accounting education]. Comparative International
Accounting Educational Standards. Champaign, IL: Center for International
Education and Research in Accounting; 1990 Apr: 193-211.
Methodology: deductive descriptive.
Discussion of the environmental, historical, and institutional effects on the
French system.
101. Bowles, C. C, none (Dow Chemical Company). International Accounting — A
Challenge for Ingenuity [financial accounting and reporting]. The International
Journal of Accounting. 1968 Sep; 4(1): 83-98.
Bibliography 65
Methodology: deductive descriptive.
Discussion by the comptroller of the Dow Chemical Company European Divi-
sion regarding the company's operations in Europe, providing examples and
their resolutions.
102. Brankovic, Marlene; Madura, Jeff, United States (MIG Companies/ZFlorida Atlan-
tic University). Effect of FASB Statement No. 52 on Profitability Ratios
[financial accounting and reporting]. The International Journal of Accounting.
1990; 25(1): 19-28.
Methodology: empirical statistical.
Study of 30 multinational firms regarding the effects of FASB Statement No.
52. Finds that FASB No. 52 has increased the volatility of net income and low-
ered the volatility with regards to equity.
103. Brennan, W. John, United Kingdom/Australia/Canada/Netherlands (University of
Saskatchewan, Canada). The Impact of the Inflation Accounting Debate on
Accounting Standard-Setting Bodies [financial accounting and reporting]. The
Impact of Inflation on Accounting: A Global View. Champaign. IL: Center for
International Education and Research in Accounting; 1979 May: 205-223.
Methodology: theoretical.
Discussion of the standard-setting bodies of various countries. Calls for the
independence of international standard-setting bodies.
104. Brewer, Carl, United States (Sam Houston State University). Accounting and His-
tory [accounting history]. The International Journal of Accounting. 1988 Mar;
23(2): 47-59.
Methodology: theoretical.
Presentation of support for the use of accounting as a historical function.
105. Bricker, Robert; Grant, Julia; Woodlock, Peter, none (Case Western Reserve Uni-
versity, Cleveland, Ohio//Case Western Reserve University, Cleveland, Ohio//
Case Western Reserve University, Cleveland. Ohio). Harmonization and Inter-
national Transfers of Accounting Related Information: A Laboratory Market
Investigation [financial accounting & reporting]. The International Journal of
Accounting. 1992; 27(4): 365-376.
Methodology: empirical statistical.
Study which presents a model to explore ways to harmonize the financial
reporting on the transfer of international, intra-market. intra-industry
information.
106. Briston, Richard J., United States/United Kingdom (University of Strathclyde,
Scodand). The Evolution of Accounting in Developing Countries [economics
and development]. The International Journal of Accounting. 1978 Sep; 14(1):
105-120.
Methodology: deductive descriptive.
Discussion of the development of national accounting systems. Concludes that
the accounting system should be developed for a nation's needs, but that most
of the development in this area has been towards international practice.
107. Briston, Richard J.; El-Ashker, Ahmed A., Egypt/United States (University of Hull/
/Paisley College of Technology). The Egyptian Accounting System: A Case
66 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33. No. 1, 1998
Study in Western Influence [financial accounting and reporting]. The Intenia-
tionalJoumal of Accounting. 1984 Mar; 19(2): 129-155.
Methodology: deductive descriptive.
Discussion of the factors affecting the development of the accounting system in
Egypt.
108. Briston, Richard J.: Liang, Foo See: Yunus. Hadori. Indonesia (University of Hull//
Nanyang Techological Institute. Singapore/ZGadjah Mada University, Indone-
sia). Accounting Education and Work Force Requirements in Indonesia
[accounting education]. Comparative International Accounting Educational
Standards. Champaign, IL: Center for International Education and Research in
Accounting: 1990 Apr: 147-173.
Methodology: deductive descriptive.
Discussion of the Indonesian system and the effects of duelism with the Dutch
system. Concludes that the formation of the coordinating committee may pro-
vide for the needs of the Indonesian system.
109. Bromwich, Michael; Wang, Guoqi, China (London School of Economics & Politi-
cal Science. United Kingdom//The People's University of China. PRC).
Management Accounting in China: A Current Evaluation [managerial account-
ing]. The International Journal of Accounting. 1991 ; 26( 1 ): 5 1-66.
Methodology: deductive descriptive.
Discusses introduction of western managerial accounting in China and the
development of Chinese version of managerial accounting.
110. Brooks. LeRoy; Buckmaster. Dale. United States/New Zealand/United Kingdom
(University of South Carolina//University of Delaware). On Monetary' Working
Capital Maintenance: Theory and Implementation [managerial accounting].
The International Journal of Accounting. 1987 Mar; 22(2): 103-1 14.
Methodology: theoretical.
Presentation of a methodology for capital maintenance. Provides a model for
the effects of price change on monetary working capital.
111. Brown. Betty. United States (University of Louisville). The Relationship between
Firm Attributes and Early Adoption of the Foreign Currency Translation Stan-
dard. SFAS No. 52: An Empirical Investigation [financial accounting and
reporting]. The International Journal of Accounting. 1985 Sep; 21(1): 1-19.
Methodology: empirical descriptive.
Survey of Fortune 500 companies regarding their adoption of SFAS No. 52.
Finds that adoption of SFAS No. 52 increased reported profits and financial
leverage factors.
1 12. Brown, Clifford D., none (State University of New York at Brockport). The Emer-
gence of Income Reporting [accounting history]. The International Journal of
Accounting. 1975 Mar; 10(2): 85-107.
Methodology: theoretical.
Study of the emergence of the use of income data by management.
113. Brummet, R. Lee, United States (University of North Carolina). Internationalism
and the Future of Accounting Education [accounting education]. The Interna-
tional Journal of Accounting. 1975 Sep; 11(1): 161-165.
Bibliography 67
Methodology: theoretical.
Discussion of the effects of multinational corporation on accounting education.
114. Buckmaster, Dale, United States/Germany/France (University of Delaware). Infla-
tion Gains and Losses from Holding Monetary Assets and Liabilities 1918 to
1936: A Study of the Development of Accounting Thought in the United States
[accounting theory]. The International Journal of Accounting. 1982 Mar; 17(2):
1-22.
Methodology: theoretical.
Discussion of the various theoretical and social factors influencing inflation
accounting.
1 15. Burke, Walter L., none (University of South Wales, Kensington, Australia). Capital
Expenditure Analysis [managerial accounting]. The International Journal of
Accounting. 1974 Mar; 9(2): 143-154.
Methodology: deductive descriptive.
Discussion of the expenditure appraisal method of payback, accounting rate of
return, discounted cash flow, sensitivity analysis, and probabilistic models.
116. Burlaud, Alain; Dahan, Lionel, United States/France (Ecole Superieure de Com-
merce de Paris/University of Paris//Ecole Superieure de Commerce de Paris).
Global Productivity Surplus Accounts [economics and development]. The
International Journal of Accounting. 1985 Sep; 21(1): 159-172.
Methodology: theoretical.
Presentation of the surplus account method. Provides a description of the meth-
odology and the difficulties of application.
117. Burnett, R. Andrew, Europe (Price Waterhouse & Company). The Harmonization
of Accounting Principles in the Member Countries of the European Economic
Community [financial accounting and reporting]. The International Journal of
Accounting. 1975 Sep; 11(1): 23-37.
Methodology: theoretical.
Study of the reasons why efforts toward harmonization are more evident at the
legislative level, than at the level of national professional institutes. Discusses
the actions of national governments and law-making bodies in the development
and promulgation of policies.
118. Bums, Jane O., United States (Indiana University). A Study of International
Accounting Education in the United States [accounting education]. The Inter-
national Journal of Accounting. 1979 Sep; 15(1): 135-145.
Methodology: empirical descriptive.
Survey of international accounting programs at 151 schools. Indicates that only
3 1 .6 percent of responding schools have an international accounting course and
concludes that much improvement is needed in this area.
119. Burns, Jane O.; Ross, Ronald S., United Kingdom/Germany/United States/Canada
(Indiana University/ZIndiana University). Establishing International Transfer
Pricing Standards for Tax Audits of Multinational Enterprises [taxation]. The
International Journal of Accounting. 1981 Sep; 17(1): 161-179.
68 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1 , 1 998
Methodology: theoretical.
Discussion of various methods of, and influences on. transfer pricing. Con-
cludes that the arm's length method is the most commonly used, even though it
is difficult to define. Calls for bilateral treaties to resolve this problem.
120. Bursal, Nasuhi I., Turkey/United States/Europe (Ohio State University). The
Accounting Environment and Some Recent Developments in Turkey [financial
accounting and reporting]. The International Journal of Accounting. 1984 Mar;
19(2): 93-127.
Methodology: deductive descriptive.
Discussion of recent developments affecting the accounting profession in Tur-
key. Concludes that the changes in the legal structure and the economy have
affected accounting practice significantly.
121. Callaghan, Joseph H.; Bazaz, Mohammad Sadegh, United States (Oakland Univer-
sity, Rochester, Michigan/ZOakland University, Rochester. Michigan).
Comprehensive Measurement of Foreign Income: The Case of SFAS No. 52
[financial accounting & reporting]. The International Journal of Accounting.
1992; 27(1): 80-87.
Methodology: empirical statistical.
Study to determine whether direct equity adjustments (EA's) of foreign subsid-
iaries of multi-national corporations be considered as income, allowing
investors to use a comprehensive income to measure multinational
corporations.
122. Callen, Jeffrey L.; Livnat, Joshua, United States/Israel/Brazil/ Argentina (Hebrew
University, Israel/University of Toronto/ A^anderbi It University/Hebrew Uni-
versity, Israel). Is Historical Cost Accounting Possible during Hyperinflation?
[accounting theory]. The International Journal of Accounting. 1984 Mar; 19(2):
73-81.
Methodology: deductive descriptive.
Examination of the various effects of inflation accounting on the historical cost
model. Concludes that the historical cost model is still appropriate.
123. Camfferman, Kees, The Netherlands (Vrije Universiteit, Amsterdam, The Nether-
lands). Schmidt, Limperg and Dissemination of Current Cost Accounting in the
Netherlands [managerial accounting]. The International Journal of Accounting.
1994; 29(3): 251-264.
Methodology: historical.
Historical perspective of the prevalance of Theodore Limperg' s theories of cost
accounting over those of Fritz Schmidt.
124. Campfield, William L., none (Office of Policy and Special Studies. U.S. General
Accounting Office). Selected International Trends in Financial Planning and
Control in the Public Sector [governmental]. The International Journal of
Accounting. 1969 Sep; 5(1): 123-151.
Methodology: deductive descriptive.
Presentation of the attempts by selected governments to make significant
improvements in their financial management practices.
Bibliography 69
125. Canning, Robert J., none (General Electric Company). Selection, Training and
Placement of Overseas Accounting Personnel [professional development]. The
International Journal of Accounting. 1968 Sep; 4(1): 41-50.
Methodology: deductive descriptive.
Presentation of the topics of selection, training, and placement of overseas
accounting personnel. Covers the importance of these subjects in international
business.
126. Carey, John L., none (American Institute of Certified Public Accountants). How
Can Barriers against International Accounting Practice Be Eliminated? [public
accounting]. The International Journal of Accounting. 1970 Sep; 6(1): 53-58.
Methodology: deductive descriptive.
Proposal that large international accounting firms maintain offices in develop-
ing countries in order to industrialize these countries and promote the growth of
international accounting.
127. Carmony, Larry, Uruguay (Terra Corporation). Accounting in the Context of Its
Environment: The Uruguayan Case [financial accounting and reporting]. The
International Journal of Accounting. 1987 Mar; 22(2): 41-56.
Methodology: deductive descriptive.
Description of the accounting system in Uruguay. Describes internal and exter-
nal conflicts in the development of the Uruguayan system.
128. Carrington, Athol S., none (University of New South Wales, Australia). Account-
ing Standards and the Profession— Seven Ages of Development [accounting
history]. The Multinational Corporation: Accounting and Social Implications.
Champaign, IL: Center for International Education and Research in Account-
ing; 1977 Jan: 41-46.
Methodology: historical.
Discussion of the seven ages of accounting.
129. Castle, Eric F., United Kingdom/United States (City of London Polytechnic). The
Problems of Consolidation of Accounts of a Multinational Enterprise: Shell
Group of Companies — Shell Transport and Trading Company, Limited, U.K.
[accounting theory]. The International Journal of Accounting. 1980 Sep; 16(1):
209-219.
Methodology: deductive descriptive.
Description of the consolidation of the Shell group companies. Concludes that
international standards create greater differences in reporting now than they did
previously.
130. Chaderton. Robertine, Barbados (University of the West Indies). The Education of
Professional Accountants in the Barbados [accounting education]. Comparative
International Accounting Educational Standards. Champaign. IL: Center for
International Education and Research in Accounting; 1990 Apr: 237-243.
Methodology: deductive descriptive.
Historical and institutional view of the accounting system in Barbados. Lists
many reports calling for changes in the system, but concludes that the imple-
mentation of these reports will not be forthcoming.
131. Chambers, R. J., United States/ Australia/Canada/New Zealand/South Africa (Uni-
versity of Sydney, Australia). The Functional Utility of Resale Price
70 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33. No. 1 , 1 998
Accounting [accounting theon]. Tlie Intenxational Journal of Accounting. 1985
Sep: 21(1): 53-70.
Methodology: empirical descriptive.
Suney of accountants and u•^e^^ of financial statement^ regarding tiie presenta-
tion and valuation procedures of the assets presented.
132. Chan. Anthon> Moung Yin: Chan. Pik Yu: Chan. Wai Lin: Leung. Man "ling:
Won. Xga ^'ue. Hong Kong (Cit> Polytechnic of Hong Kong). Segmental
Reporting and Risk Reduction: The Hong Kong E.xperience [financial account-
ing & reporting]. The Internationa] Journal of Accounting. 1993; 28(3):
Methodology: capital markets.
Assessment of segmental financial reponing of companies listed on the Hong
Kong Stock Exchange in regards to investors" benefits and risk expectations.
Statistical analysis pro\ es that -egmental reponing doe^ not reduce ri^k to Hong
Kong investors.
133. Chan. Anthony Moung-Yin. Global (The Chine>e Uni\ervit_\ of Hong Kong). The
Pattern of the Theoretical Basis of I.\S: .Accounting Theor\ Models at the Inter-
national Level [accounting theor}]. The Initrnauonal Journal of Accounting.
1986 Sep: 22(1): 101-11".
Methodolog} : deductive descnptixe.
Discussion of the development of the I.ASC and the committee's impact on
international standards.
134. Chan. Anthonx Moung-'^'in. Hong Kong/L'nited States (Chinese l"ni\ersity oi
Hong Kong). The Speculative .Accounting System in Hong Kong: Understand-
ing Hong Kong"s Accounting Reality [professional development]. Recent
Accounting and Economic Developments in the Far East. Champaign. IL: Cen-
ter for International Education and Research in .Accounting: 1988 May:
197-218.
Methodology: theoretical.
.Analysis and comparison of Hong Kong's current accounting practice with U.S.
accountmg practices. Contends that Hong Kong's speculative nature will be the
determining force in its future G.AAP.
135. Chan. .Anthonv Moung-Yin. Hong Kong (The Cit\ University of Hong Kong). Pos-
sible Factors of the .Accuracy of Prospectus Earnings Forecast in Hong Kong
[Misecllaneous]. The International Journal of Accounting. 1996; 31(3):
381-398.
Methodology: Empirical statistical.
An analysis of prospectus earnings forecasts iPEFi in assessing the quality of
initial public offerings candidates. It indicates that prospectus earnings fore-
casts accuracy in the Hong Kong context tends to increase if the past profit
variability is lower, the change in economic conditions is smaller, and the com-
pany's listing is more recent.
136. Chandler. Roy A.. United States/United Kingdom (University of Wales. Cardiff.
United Kinadom). The International Harmonization of .Accounting: In Search
Bibliography 71
of Influence [professional development]. The International Journal of Account-
ing. 1992; 27(3): 222-233.
Methodology: historical.
Description of the progression toward international harmonization and the
influences of organizations outside the accounting profession that have made an
impact on international harmonization of accounting.
137. Chang, Lucia S.; Most, Kenneth S., Europe (Florida International University//Flor-
ida International University). International Accounting Standards: The Case of
European Oil Companies [financial accounting and reporting]. The Interna-
tional Journal of Accounting. 1976 Sep; 12(1): 27-43.
Methodology: deductive descriptive.
Study of differences in accounting policies and practices followed by compa-
nies in the same industry in different European countries.
138. Chang, Lucia S.; Most, Kenneth S., United States/United Kingdom/New Zealand
(Florida International UniversityZ/Florida International University). An Interna-
tional Comparison of Investor Uses of Financial Statements [economics and
development]. The International Journal of Accounting. 1981 Sep; 17(1):
43-60.
Methodology: empirical descriptive.
Survey of investors in the U.S., United Kingdom, and New Zealand which con-
cludes that investors do use the financial statements for investment purposes.
139. Chang, Young H., Taiwan (North Dakota State University, Fargo). Taiwan's
Accounting Profession: A Response to National Economic Growth [profes-
sional development]. The International Journal of Accounting. 1992; 27(1):
57-68.
Methodology: historical.
Study providing a fundamental description of the accounting profession in Tai-
wan as well as comparisons of Taiwan's and United States' growth in the
accounting field.
140. Chastain, Clark E., none (University of Michigan at Flint). Accounting and Society:
A Behavioral View [social effects of accounting]. The International Journal of
Accounting. 1973 Mar; 8(2): 1-20.
Methodology: theoretical.
Examination of the interdependent behavioral relationship between society and
accounting.
141. Chen, Kung H.; Balke. Thomas E.. United States (University of Nebrasbi/ZUniver-
sity of Nebraska). Scale of Operation, Industry, and Financial Ratios
[economics and development]. The International Journal of Accounting. 1979
Mar; 14(2): 17-28.
Methodology: empirical statistical.
Statistical survey of six industries from 1969-73 using data from compustat.
Seven ratios were analyzed according to the size and industry. Findings show
that industry has an effect on capital turnover, inventory turnover, receivable
turnover, short term liquidity, and cash position. The findings in relation to size
indicate that only capital turnover is affected.
72 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
142. Chen. Kung H.; Summers, Edward L., none (University of Nebraska/ZUniversity of
Texas at Austin). Should Accounting Data Be Single- Valued Measurements?
[accounting theory]. The International Journal of Accounting. 1977 Mar; 12(2):
109-125.
Methodology: theoretical.
Study criticizing current accounting practices in single-valued measurements.
Argues that more useful information would be available if the single-value
methodology were changed to include multiple values.
143. Cheng, Philip C, China/Taiwan (Northern Illinois University). Accounting in
Nationalist China [financial accounting and reporting]. The International Jour-
nal of Accounting. 1971 Mar; 6(2): 75-88.
Methodology: deductive descriptive.
Study of the modem accounting profession in Nationalist China which attempts
to further the goal of better communications among nations.
144. Cheng, Philip C; Jain, Tribhowan N., South Korea (Northern Illinois University//
University of Florida). Economic Perspective and Accounting Practices in
South Korea [economics and development]. The International Journal of
Accounting. 1973 Mar; 8(2): 123-139.
Methodology: deductive descriptive.
Discussion of the economic activity in South Korea with emphasis on all
aspects of accounting.
145. Chesebrough, Harry E., United States/Japan (industrial consultant). American
Management Expertise: Exportable? [miscellaneous]. The International Jour-
nal of Accounting. 1975 Sep; 11(1): 145-159.
Methodology: theoretical.
Personal account of some of the conditions encountered by business people in
their contacts with the Japanese.
146. Chesley, G. R.; Scheiner, J. H.. Canada/United States (Dalhousie University, Can-
ada//The University of Tennessee). The Statement of Changes in Financial
Position: An Empirical Investigation of Canadian and U. S. Users in Nonpublic
Companies [financial accounting and reporting]. The International Journal of
Accounting. 1982 Mar; 17(2): 49-58.
Methodology: empirical descriptive.
Survey of the usefulness of the current "statement of changes." Concludes that
this statement requires improvement.
147. Chetkovich, Michael N., none (Deloitte & Touche). An Appeal for Unity in Estab-
lishing Financial Accounting Standards [accounting theory]. The International
Journal of Accounting. 1972 Sep; 8(1): 99-107.
Methodology: theoretical.
Discussion urging common international objectives and standards of
accounting.
148. Chetkovich, Michael N., Austraha/France/Germany/Canada/United Kingdom/
United States/Sweden (University of California at Berkeley). The International
Federation of Accountants: Its Organization and Goals [financial accounting
Bibliography 73
and reporting]. 77?^ International Journal of Accounting. 1979 Sep; 15(1):
13-20.
Methodology: deductive descriptive.
Discussion of the events and proceedings that led to the formation of the Inter-
national Federation of Accountants. Maintains that financial difficulties and
difficulties with authority slow the growth of international accounting stan-
dards, but concludes that because of leadership and commitment the
International Federation of Accountants will advance accounting at the interna-
tional level.
149. Cheung, Joseph K.; Li, Mandy; Wu, Anne, United States/Taiwan (George Mason
University/ZUniversity of Maryland/ZNational Chengchi University, Taiwan). A
Comparative Analysis of US and Taiwanese Finns' Decisions to Issue Earnings
Forecasts [accounting theory]. The International Journal of Accounting. 1991;
26(4): 264-276.
Methodology: empirical statistical.
Analysis of validity of U.S. positive accounting theories to the Taiwanese man-
agement earnings forecasts. Concludes that institutional backgrounds are
important to the application of such theories.
150. Cho, Ik Soon; Park, Soong Hyun, Korea/United States (Korea University/ZRutgers
University-The State University of New Jersey at Newark). The Korean Profes-
sion: Its Role in the Economic Development of Korea [auditing]. Recent
Accounting and Economic Developments in the Far East. Champaign, IL: Cen-
ter for International Education and Research in Accounting; 1988 May: 97-1 13.
Methodology: deductive descriptive.
Discussion of the history of the accounting function in Korea listing social and
economic pressures that may have an effect on the independence of the Korean
auditor.
151. Choi, Frederick D. S., ASEAN countries (University of Hawaii at Manoa). ASEAN
Federation of Accountants: A New International Accounting Force [financial
accounting and reporting]. The International Journal of Accounting. 1979 Sep;
15(1): 53-75.
Methodology: deductive descriptive.
Discussion of the many professional and enviromental factors that led to the
formation of the ASEAN Federation of Accountants. Concludes that the AFA is
necessary to provide leadership and international representation to the ASEAN
countries.
152. Choi, Frederick D. S., Europe (University of Hawaii at Honolulu). Financial Dis-
closure in Relation to the European Capital Market [economics and
development]. The International Journal of Accounting. 1973 Sep; 9(1): 53-66.
Methodology: theoretical.
Study of the relationship between financial disclosure and capital markets.
153. Choi, Frederick D. S., none (University of Hawaii at Honolulu). Price-Level
Adjustments and Foreign Currency Translation: Are They Compatible?
[accounting theory]. The International Journal of Accounting. 1975 Sep; 11(1):
121-143.
74 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1 , 1 998
Methodolog)': theoretical.
Discussion of the restate-translate versus translate-restate controversy with
arguments supporting each model. Draws on recent recommendations of the
AICPA's Accounting Objectives Stud> Group, discussing the controversy from
the perspective of a normative decision-framework.
154. Choi. Frederick D. S.. Japan/United States (Uni\ersit\ of Hawaii at Honolulu]. Pri-
mar) -Secondar\ Reporting: A Cross-Cultural Analysis [financial accounting
and reporting]. The International Journal of Accounting. 1980 Sep: 16(1):
83-104.
Methodology: theoretical.
Study of the conversion of the financial reports of a Japanese company to U.S.
standards. Finds that this conversion led to a misleading financial representa-
tion and calls for additional disclosure to enable users to identify social
environmental concerns.
155. Choi. Frederick D. S.: Bavishi. \'inod B.. United States/European Economic Com-
munit\' (New York Uni\ersit\//L'ni\ersit> of Connecticut). Financial
Accounting Standards: A Multinational Synthesis and Policy Framework
[financial accounting and reporting]. The International Journal of Accounting.
1982 Sep: 18(1): 159-183.
Methodology: empirical descriptive.
Survey of 1.000 international firms (with consolidated income greater than 520
million) as to their adoption of international standards. Finds that these firms
are slow in their adoption of international standards, a problem requiring the
lASC to take a firmer leadership role.
156. Choi. Frederick D. S.; Foote. Paul Sheldon. European Economic Community (New
York University//New York University). Western European Accounting Data
Bases for Managers, Investors, and Researchers: An Analytical Survey [infor-
mation systems]. The Recent Accounting and Economic Developments in
Western Europe. Champaign. IL: Center for International Education and
Research in Accounting: 1985 May: 121-128.
Methodology: empirical descriptive.
Survey of the European databases available to users.
157. Chow. Chee W.: Wong-Boren. Adrian. .Me.xico/L'nited States (San Diego State
University//San Diego State University). Audit Firm Size and Audit Quality:
Some Evidence from Mexico [auditing]. The International Journal of Account-
ing. 1986 Mar; 21(2): 1-25.
Methodology: empirical statistical.
Study recording firm size and audit quality in Mexico. Finds that audit quality
increases as a firm gets larger.
158. Chu. Jose Manuel, Panama (Factores Integrados, S.A., Panama/Universidad Santa
Maria La Antigua). Accounting Principles and Practices in Panama [public
accounting]. The International Journal of Accounting. 1973 Sep: 9(1): -14-52.
Methodology: deductive descriptive.
General overview of the accounting principles and practices in Panama.
Bibliography 75
159. Chu, Kuo-Chang, China (National Taiwan University). Accountancy Education in
the Republic of China [accounting education]. The International Journal of
Accounting. 1969 Mar; 4(2): 75-91.
Methodology: deductive descriptive.
Study of the objectives of educational institutions that provides statistical data
to show the present conditions of these institutes and that evaluates the present
accountancy education system and suggests ways to remedy the defects.
160. Chumachenko, Nikolai G.; Bedford Norton M.. Soviet Union/United States (Kiev
Institute of National Economy, Soviet Union/AJniversity of Illinois at
Urbana-Champaign). Some Distinctive Aspects of Accounting in the USSR
[financial accounting and reporting]. The International Journal of Accounting.
1968 Sep; 4(1): 29-40.
Methodology: deductive descriptive.
Comparative study of accounting in the Soviet Union and the U.S. offering sug-
gestions for the further development of accounting principles and techniques.
161. Churchill, A. A., none (International Bank for Reconstruction and Development).
The Balanced Budget in Highway Finance: A Dangerous Concept [governmen-
tal]. The International Journal of Accounting. 1968 Sep; 4(1): 101-110.
Methodology: theoretical.
Examination of the economics of road pricing. Holds that the orthodoxy of the
balanced budget can lead to serious distortions in the allocation of resources.
162. Clapp, Charles L., none (Deloitte & Touche). National Variations in Accounting
Principles and Practices [accounting theory]. The International Journal of
Accounting. 1967 Sep; 3(1): 29-42.
Methodology: theoretical.
Study of the variations in national accounting principles and practices to dis-
cover what they indicate about the orientations and purposes of a given country.
163. Clarke, F. L.; Dean, G. W., Holland (the Netherlands)/Germany (The University of
Newcastle, Australia//The University of Sydney, Australia). The Views of
Limperg and Schmidt: Discovering Patterns and Identifying Differences from
Chaotic Literature [accounting history]. The International Journal of Account-
ing. 1992; 27(4): 287-309.
Methodology: historical.
Comparative study of the literary contributions of Europeans Theodore Limp-
erg and Fritz Schmidt to replacement price theory.
164. Clarke, Frank; Craig, Russell; Amernic, Joel H., United Kingdom/United States
(University of Newcastle, Australia/ZUniversity of Newcastle, Australia//Uni-
versity of Toronto). Misplaced Trust in Reliance on Published Accounting Data
for Wage Negotiation: An International Perspective [financial accounting and
reporting]. The International Journal of Accounting. 1990; 25(3): 184-201.
Methodology: theoretical.
Study of the use of published accounting information in labor negotiations.
Contends that "monetary equivalent" information should be used rather than
traditional published data.
76 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
165. Clay, Alvin A.. United States (Villanova University). Undergraduate International
Accounting Education [accounting education]. The International Journal of
Accounting. 1975 Sep; 11(1): 187-192.
Methodology: deductive descriptive.
Explanation of the approach used by Villanova University.
166. Cohen, Jeffrey R.; Pant, Laurie W.; Sharp, David J., United States (Boston College/
/Suffolk University, Boston, Massachusetts//Boston College). An Empirical
Investigation of Attitudinal Factors Affecting Educational Course Coverage of
International Topics [accounting education]. The International Journal of
Accounting. 1991; 26(4): 286-301.
Methodology: empirical descriptive.
Survey of identification of beliefs affecting inclusion of international account-
ing issues in undergraduate accounting curriculum. Finds that favorable
attitudes toward internationalization are significantly correlated with course
coverage.
167. Cohen, Jeffrey R.; Pant, Laurie W.; Sharp, David J., United States (Boston College/
/Suffolk University, Boston, Massachusetts//Boston College). A Methodologi-
cal Methodology on Cross-cultural Accounting Ethics Research [social effects
of accounting]. The International Journal of Accounting, 1996; 31(1): 55-66.
Methodology: empirical descriptive.
A report of an empirical test of the usefulness of Hofstede's five dimensions of
culture to predict cross-cultural differences in ethical sensitivity. Demonstrates
that these measures of culture can be used to develop directional hypothesis
concerning cross-cultural differences in ethical perceptions.
168. Comiskey, Eugene E.; Groves, Roger E. V., United KingdomAJnited States (Geor-
gia Institute of Technology//The University of Wales Institute of Science and
Technology). United Kingdom Developments in Interperiod Tax Allocation
[taxation]. The International Journal of Accounting. 1981 Mar; 16(2): 1-9.
Methodology: deductive descriptive.
Comparison of the tax deferral practices of the U.S. to those of the U.K.
169. Cooke, T. E., Japan (University of Exeter, England). An Assessment of Voluntary
Disclosure in Annual Reports of Japanese Corporations [financial accounting &
reporting]. The International Journal of Accounting. 1991; 26(3): 174-189.
Methodology: empirical statistical.
Discussion regarding voluntary disclosure of Japanese annual reports and the
influences in which a company's size, stock market listing, and industry have
on such disclosure.
170. Copeland, Ronald M.; Ingram, Robert W., United States (University of South Caro-
lina//University of South Carolina). An Evaluation of Accounting Alternatives
for Foreign Currency Transactions [financial accounting and reporting]. The
International Journal of Accounting. 1978 Mar; 13(2): 15-26.
Methodology: theoretical.
Presentation of the theoretical and empirical evidence in argument against
SEAS 8. Suggests that deferral of interim foreign exchange gains and losses is a
better alternative.
Bibliography 77
171. Costouros, George J., Greece (San Jose State University). Accounting Education
and Practice in Greece [accounting education]. The International Journal of
Accounting. 1975 Sep; 11(1): 95-106.
Methodology: deductive descriptive.
Survey of the contributions made by accounting education in Greece to the pro-
fessional development of accounting and the socio-economic needs in both the
private and public sectors.
172. Costouros, George J., Greece (California State University at San Jose). Develop-
ment of Banking and Related Bookkeeping Techniques in Ancient Greece
(400-300 B.C.) [accounting history]. The International Journal of Accounting.
1973 Mar; 8(2): 75-81.
Methodology: historical.
Brief review of the developments in banking and bookkeeping in Greece
(400-300 B.C.).
173. Craig, Russell J.; Diga, Joselito G., Brunei/Indonesia/Malaysia/Philippines/Sin-
gapore/Thailand (The Australian National University). Financial Reporting
Regulation in ASEAN: Features and Prospects [financial accounting and
reporting]. The International Journal of Accounting, 1996; 31(2): 239-259.
Methodology: deductive descriptive
An analysis of similarities and differences in the financial reporting regulation
practices of the six countries comprising the Association of South East Asian
Nations (ASEAN). Similarities are observed in the objectives of financial
reporting regulations and in the participation of the private sector in accounting
standards setting and enforcement. Differences are discerned in each country's
companies law requirements, securities market regulations, accounting stan-
dards-setting procedures and accounting standards content.
174. Cravens, Karen S.; Shearon, Jr. Winston T., United States (The University of Tulsa/
/Texas A&M University). An Outcome-Based Assessment of International
Transfer Pricing Policy [miscellaneous]. The International Journal of Account-
ing, 1996; 31(4): 419-443.
Methodology: deductive descriptive.
An analysis of the consequences of international transfer pricing for multina-
tional entities in the US. It indicates that fimis employ international transfer
pricing to meet a variety of objectives, and the dollar value of international
transfers and the foreign sales percentage are both significant explanatory vari-
ables for the financial outcomes of these objectives.
175. Cummings, Joseph P., none (KPMG Peat Marwick). The International Accounting
Standards Committee [auditing]. The International Journal of Accounting.
1975 Sep; 11(1): 31-37.
Methodology: deductive descriptive.
Study of progress made by the lASC since 1973. Concludes that the lASC is
willing to meet problems which go to the root of most published accounts, and
that, due to its success in issuing strong standards, its future seems bright.
176. da Costa, Richard C; Bourgeois, Jacques C; Lawson, William M., United States/
United Kingdom/Europe (Carleton University, Canada//Carleton University,
Canada/ZCarleton University, Canada). A Classification of International Finan-
78 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
cial Accounting Practices [financial accounting and reporting]. The
International Joiinuil of Accounting. 1978 Mar; 13(2): 73-85.
Methodology: empirical descriptive.
Survey of the U.S., U.K., and European accounting models. Concludes that the
U.K.'s model served as the basis for the other two.
1 77. Dahmash, Nairn. Arab Countries (University of Jordan). External Financial Report-
ing in the Arab Countries and Its Role in the Investment Decision-Making
Process [financial accounting & reporting]. Changing International Financial
Markets and Their Impact on Accounting. Champaign. IL: Center for Interna-
tional Education and Research in Accounting, Department of Accountancy;
1992: 155-174.
Methodology: deductive descriptive.
Evaluation of relationships between financial reporting and financial markets in
the Arab Countries and various economic consequences of these relationships.
178. Dahmash, Naim H., Jordan (University of Jordan). Accounting Aspects of Eco-
nomic Development Planning in Jordan [economics and development]. The
Multinational Corporation: Accounting and Social Implications. Champaign,
IL: Center for International Education and Research in Accounting; 1977 Jan:
139-149.
Methodology: theoretical.
Brief description of accounting history in Jordan. Proposes an economic model
for economic growth.
179. Dahmash, Naim H., Arab Countries (University of Jordan). Public Auditing Devel-
opments in the Arab States: A Comparative Study [auditing]. TJie International
Journal of Accounting. 1982 Sep; 18(1): 89-114.
Methodology: empirical descriptive.
Survey of the various auditing and reporting practices in the Arab states. Con-
cludes that the Arab states should place more emphasis on operational auditing
as a source of economic planning information.
180. Dahmash, Naim H.; Zimmerman, V. K., Egypt/ Arab Countries (University of Jor-
dan//University of Illinois at Urbana-Champaign). A Unified Governmental
Accounting System for the Arab Countries [governmental]. The Recent
Accounting and Economic Developments in the Middle East. Champaign, IL:
Center for International Education and Research in Accounting; 1985 May;
101-125.
Methodology: deductive descriptive.
Discussion of the governmental accounting systems in the Arab countries as
proposed by the Arab Organization of Administrative Sciences in 1980.
181. Dascher, Paul E.; Smith, Charles H.; Strawser, Robert H., none (Drexel University/
/Arizona State UniversityZ/Texas A & M University). Accounting Curriculum
Implications of the Multinational Corporation [accounting education]. The
International Journal of Accounting. 1973 Sep; 9(1): 81-97.
Methodology: empirical descriptive.
Study of the influence of the multinational corporation on future accounting
curriculum.
Bibliography 79
182. Dau, Khalifa, none (University of Garyounis, Libya). A Probabilistic Income
Determination Theory [accounting theory]. 77?^ International Journal of
Accounting. 1978 Sep; 14(1): 39-56.
Methodology: theoretical.
Presentation of a statistical model to report a probability distribution of net
income using generally accepted accounting principles. Concludes that such a
model will enhance the usability of financial statements.
183. Davidson, Ronald A.: Chrisman, Heidi Hadlich, Canada (Simon Fraser University,
Bumaby, British Columbia/ZHautes Etudes Commercials, Montreal, Quebec).
International Comparison of International Standards: The Case of Uncertainty
Expressions [professional development]. The International Journal of Account-
ing. 1993; 28(1): 1-16.
Methodology: empirical descriptive.
Comparative study examining differences in the translation of uncertainty
expressions in international accounting standards in English and French-Cana-
dian versions.
184. Daynes, A.; Aiken, M., none (Victoria University of Wellington, New Zealand//La
Trobe University, Australia). A. C. Littleton's Very Long-Term Perspective of
Public Accounting Practice: Historical, International and Ethical Foundations
[accounting theory]. The International Journal of Accounting. 1990; 25(1):
1-18.
Methodology: theoretical.
Presentation of Littleton's framework in the long term sense. Presents the his-
torical, philosophical, and social contexts.
185. Deakin, Edward B.; Norwood, Gyles R.; Smith, Charles H., Japan (University of
Texas at Austin/ZCoopers & Lybrand// Arizona State University). The Effect of
Published Earnings Information on Tokyo Stock Exchange Trading [economics
and development]. The International Journal of Accounting. 1974 Sep; 10(1):
123-136.
Methodology: capital markets.
Study of the relationship between earnings announcements and vol-
ume-and-price activity of stocks on the Tokyo Stock Exchange using tests for
determining the correlation between the release of earnings information and
activity in a company's stock. These tests were first applied to activity on the
New York Stock Exchange. Concludes that the activity in a company's stock
arises from the effect of earnings announcements on investor expectations and
trading.
186. Demirag, Istemi S., United States/United Kingdom (University of Sheffield, Great
Britain). A Review of the Objectives of Foreign Currency Translation [financial
accounting and reporting]. The International Journal of Accounting. 1987 Mar;
22(2): 69-86.
Methodology: theoretical.
Study of the current factors regarding currency translation. Holds that transla-
tion methods will not provide useful information until current value methods
are adopted.
80 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
187. Dheeriya, Prakash L., United States/Germany (North Texas State University). A
Case for Special Drawing Rights as a Unit of Account [accounting theory]. The
International Journal of Accounting. 1985 Sep; 21(1): 71-87.
Methodology: theoretical.
Presentation of the use of special drawing rights as a unit of account when for-
eign currencies are involved.
188. Dixon, Rob; Jaruga, A., Poland (University of Durham, England/ZUniversity of
Lodz, Poland). The Changing Face of Accountancy in Poland [miscellaneous].
The New Europe: Recent Political and Economic Implications for Accountants
and Accounting. Champaign, IL: Center for International Education and
Research in Accounting; 1994: 233-252.
Methodology: deductive descriptive.
Presentation of present-day accounting in Poland and those influences which
impact the Polish accounting system's reformation process.
189. Donaldson, Bronwyn; Lai, Mohan, New Zealand (KPMG Peat MarwickZ/Univer-
sity of Otago, New Zealand). Existence of and Needs for Informal Accounting
Information Systems: A Case Study of New Zealand Companies [information
systems]. The International Journal of Accounting. 1988 Mar; 23(2): 85-93.
Methodology: empirical descriptive.
Study of informal accounting information systems in New Zealand. Finds that
such systems exist in an unstructured form and contribute to the formal system.
190. Donaldson, Howard M.; Pai, Amar K., United States (International Group of the
Burroughs Corporation/ZIntemational Group of the Burroughs Corporation/
Oakland University). Management and Performance Evaluation: An Interna-
tional Perspective [managerial accounting]. Managerial Accounting: An
Analysis of Current International Application. Champaign, IL: Center for Inter-
national Education and Research in Accounting; 1984 Jan: 1-21.
Methodology: deductive descriptive.
Discussion of the current and potential uses of the computer in management and
performance evaluation. Concludes that such a system must be objective, pro-
vide timely accountability, facilitate communication and be cost effective.
191. Doost, Roger K., Africa/Australia/New Zealand/European Economic Community/
North America/Middle East/Central & South America (Clemson University).
Alternative Techniques to Measure the Well-Being of a Region [economics and
development]. The International Journal of Accounting. 1985 Mar; 20(2):
95-101.
Methodology: theoretical.
Discussion of the limitations of per capita GNP. Presents some alternatives to
per capita GNP.
192. Doupnik, Timothy S., global (University of South Carolina). Evidence of Interna-
tional Harmonization of Financial Reporting [financial accounting and
reporting]. The International Journal of Accounting. 1987 Sep; 23(1): 47-67.
Methodology: empirical statistical.
Study of the financial reporting used in practices of several different countries.
Substantial differences still exist.
Bibliography 81
193. Doupnik, Timothy S., Brazil/United States (University of Illinois at Urbana-Cham-
paign). Indexation: Brazil's Response to Inflation [governmental]. The
International Journal of Accounting. 1982 Sep; 18(1): 199-220.
Methodology: theoretical.
Discussion of the history of inflation accounting in Brazil. Calls for an investi-
gation regarding the cost of implementing the U.S. system in Brazil.
194. Doupnik, Timothy S.; Martins, Eliseu; Barbieri, Geraldo, Brazil (University of
South Carolina/ZUniversidade de Sao Paulo/ZUniversity of South Carolina).
Innovations in Brazilian Inflation Accounting [financial accounting & report-
ing]. The InternationalJournal of Accounting. 1995; 30(4): 302-317.
Methodology: empirical descriptive.
Introduction and discussion of innovations of monetary corrections in inflation
accounting in Brazil.
195. Doupnik, Timothy S.; Salter, Stephen B., Global (University of South Carolina//
Texas A&M University). External Environment, Culture, and Accounting Prac-
tice: A Preliminary Test of A General Model of International Accounting
Development [social effects]. The International Journal of Accounting. 1995;
30(3): 189-207.
Methodology: empirical statistical.
Statistical examination of the relationship between countries' external environ-
mental factors and their accounting practices.
196. Doupnik, Timothy S.; Rolfe, Robert J., Europe/Asia/Africa/Far East/Middle East/
United States/United Kingdom/Canada/Central & South America (University
of South Carolina/ZUniversity of South Carolina). Geographic Area Disclosures
and the Assessment of Foreign Investment Risk for Disclosure in Accounting
Statement Methodologies [financial accounting and reporting]. The Interna-
tional Journal of Accounting. 1990; 25(4): 252-267.
Methodology: empirical descriptive.
Study of 520 CFAs regarding direct foreign investment risk. Shows that divid-
ing a hemisphere into two components affects risk assessment.
197. Drury, D. H., Canada/United States (McGill University, Canada). Earnings Per
Share: A Canada-United States Comparison [financial accounting and report-
ing]. The International Journal of Accounting. 1977 Sep; 13(1): 29-51.
Methodology: modeling.
Presentation of a model to detennine the difference between earnings per share
in Canada and the U.S. Concludes that the Canadian model generally reflects a
lower earnings per share.
198. Duangploy, Orapin, United States (University of Wisconsin at Oshkosh). The Sen-
sitivity of Earnings Per Share to Different Foreign Currency Translation
Methods [financial accounting and reporting]. The International Journal of
Accounting. 1979 Mar; 14(2): 121-134.
Methodology: empirical statistical.
Study using a computer model to measure the effects of different translation
methods. States that during periods of little economic change all translation
methods provide the same results and concludes that the temporal method pro-
vides the best results.
82 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
199. Duangploy, Orapin; Zieha, Eugene L.; Gray, Dahli, United States (University of
Houston/ZUniversity of Maryland/University of Missouri at Columbia/ZUniver-
sity of Notre Damej. SFAS No. 52 and the Statement of Changes in Financial
Position: A Survey and Proposal for Change [financial accounting and report-
ing]. The International Journal of Accounting. 1987 Mar; 22(2): 25-40.
Methodology: empirical descriptive.
Survey of the usefulness of the statement of changes in financial position, pre-
senting a model statement of cash flows, which is compared to that of the
FASB.
200. Due. John F.. Third World Countries/Developing Countries (University of Califor-
nia at Berkeley). The Institutional Environment and the Tax Structure in
Developing Economies [taxation]. The International Journal of Accounting.
1968 Sep; 4(1): 17-28.
Methodology: theoretical.
Discussion of four requirements for developing countries striving for a higher
rate of growth including increased savings, foreign exchange, entrepreneurship,
and infrastructure. Stresses the importance of government and taxation.
201. Duerr. Edwin C; Duerr, Mitsuko S., Brazil (San Francisco State College/ZDaniel,
Mann, Johnson and Mendenhall). Financing in Northeast Brazil: Problems and
Opportunities in a Developing Area [economics and development]. The Inter-
national Journal of Accounting. 1968 Mar; 3(2): 105-116.
Methodology: theoretical.
Examination of the particular problems of financing a new company in North-
east Brazil, centering on what happens when local sources provide all of the
funds.
202. Dufey, Gunter. none (University of Michigan). The Outlook for the International
Monetary System and Implications for Subsidiary Valuation [economics and
development]. The International Journal of Accounting. 1970 Sep; 6(1): 25-33.
Methodology: deductive descriptive.
Outline of the current status of the international monetary system.
203. Dufey, Gunter, none (University of Michigan). Recent Developments in Interna-
tional Money and Capital Markets [economics and development]. The
International Journal of Accounting. 1972 Mar; 7(2): 77-90.
Methodology: deductive descriptive.
Report on the sources of international funds and the mechanisms used in con-
verting these funds into profitable real capital.
204. Dykxhoorn, Hans J.; Sinning, Kathleen E.. United States/Germany (Western Mich-
igan University /AVestem Michigan University). The Independence Issue
Concerning German Auditors: A Synthesis [auditing]. The International Jour-
nal of Accounting. 1981 Mar; 16(2): 163-181.
Methodology: deductive descriptive.
Discussion of the independence of the German auditor comparing the current
situation in the U.S. and Germany. Concludes that the German profession will
have to change both its requirements and public perceptions regarding auditors
independence.
Bibliography 83
205. Edwards, James Don; Barrack, John B., United Kingdom/United States (University
of Georgia/ZUniversity of Kentucky). Objectives of Financial Statements and
Inflation Accounting: A Comparison of Recent British and American Proposals
[financial accounting and reporting]. The International Journal of Accounting.
1976 Mar; 11(2): 11-32.
Methodology: deductive descriptive.
Study comparing the recommendations of the Sandilands Committee with those
of the Trueblood Study Group, which concludes that the Trueblood Report con-
tains broad guidelines on what financial statements should seek to report and
the Sandilands Report, guidance designed to alleviate accounting for effects of
inflation.
206. Eikharouf, Farouk Wasef, Saudi Arabia (Arab National Bank in Saudi Arabia).
Generally Accepted Accounting Principles in Saudi Arabia [financial account-
ing and reporting]. The Recent Accounting and Economic Developments in the
Middle East. Champaign, IL: Center for International Education and Research
in Accounting; 1985 May: 127-149.
Methodology: empirical descriptive.
Survey to determine the level of development and usefulness of Saudi Arabian
GAAP. Indicates that Saudi Arabian GAAP are not meeting users' needs and
must be better organized.
207. Elam, Rick; Henaidy, Hamid, United States/Australia/Canada/Saudi Arabia (Uni-
versity of Missouri at Columbia/ZKing Abdulaziz University, Saudi Arabia).
Transfer Pricing for the Multinational Corporation [managerial accounting].
The International Journal of Accounting. 1981 Mar; 16(2): 49-65.
Methodology: modeling.
Presentation of a mathematical model to analyze resource allocation and trans-
fer prices together rather than separately.
208. Eikharouf, Farouk Wasef, Third World (Arab Bank. Ltd.). The Impact of Unified
Risk Assets Ratios on International Banks and Accounting Standards [econom-
ics & development]. Changing International Financial Markets and Their
Impact on Accounting. Champaign, IL: Center for International Education and
Research in Accounting, Department of Accountancy; 1992: 175-194.
Methodology: capital markets.
Examination of the impacts of proposed unified risk ratios and banks' manage-
ment decisions and on the harmonization of accounting.
209. Elliott, Edward L., Central & South America (University of Illinois at
Urbana-Champaign). Accounting and Economic Development in Latin Amer-
ica [economics and development]. The International Journal of Accounting.
1972 Sep; 8(1): 89-97.
Methodology: theoretical.
Explanation of the role of the accountant in the economic development of Latin
America.
210. Elliott, Edward L., developing countries/third world countries (University of Illi-
nois at Urbana-Champaign). The Managerial Role of Governmental
84 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
Accounting in Economic Development [economics and development]. The
International Journal of Accounting. 1968 Sep; 4(1): 129-136.
Methodology: theoretical.
Report on government participation in economic growth which calls for the
adoption of techniques designed to obtain efficient use of available resources.
Contends that accounting offers one of the best means to attain the efficient
allocation of resources and the coordination and control of governmental
actions.
211. Elvik. Kenneth, none (Iowa State University). Acquisition Cost Versus Revalua-
tion: A Historical Perspective [accounting history]. The International Journal
of Accounting. 1974 Mar; 9(2): 155-167.
Methodology: theoretical.
Study of the conventional model for long-lived asset accounting, which is based
on acquisition cost.
212. Emenyonu, Emmanuel N.; Gray, Sidney J., France/Germany/JapanAJnited Kin-
dom/United States (Sacred Heart University, the University of Warwick).
International Accounting Harmonization and the Major Developed Stock Mar-
ket Countries: An Empirical Study [financial accounting and reporting]. The
International Journal of Accounting, 1996; 31(3): 269-279.
Methodology: empirical statistical
An assessment of the extent to which the accounting measurement and associ-
ated disclosure practices of large listed companies have become more
harmonized internationally. Shows that while progress has been made in some
respects, international accounting harmonization has remained an elusive goal.
213. Enthoven, Adolf J. H., none (University of Illinois at Urbana-Champaign). The
Unity of Accountancy in an International Context [accounting theory]. The
International Journal of Accounting. 1973 Sep; 9(1 ): 113-133.
Methodology: deductive descriptive.
Discussion of the areas of unification, and standardization in international
accounting. Emphasizes the need for cohesion between the branches of accoun-
tancy and the disciplines of accounting and economics.
214. Enthoven, Adolf J. H., Russia (University of Texas, Dallas). Joint Venture
Accounting in the Former Soviet Union (USSR) [miscellaneous]. The New
Europe: Recent Political and Economic Implications for Accountants and
Accounting. Champaign, IL: Center for International Education and Research
in Accounting; 1994: 193-210.
Methodology: deductive descriptive.
Analysis of the accounting aspects of joint ventures in the former USSR.
215. Enthoven, Adolph J. H., none (University of Illinois at Urbana-Champaign).
Accounting and Development Programming [economics and development].
The International Journal of Accounting. 1967 Sep; 3(1): 107-120.
Methodology: theoretical.
Study of interdependency of accounting and development programming. Con-
cludes that accounting may assist economic progress in developing countries.
Bibliography 85
216. Enthoven, Adolph J. H., none (University of Texas at Dallas). International Man-
agement Accounting: Its Scope and Standards [managerial accounting]. The
International Journal of Accounting. 1982 Mar; 17(2): 59-74.
Methodology: deductive descriptive.
Discussion of international managerial accounting which concludes that, in
order to develop, this area needs support from various professional organiza-
tions worldwide.
217. Estes, Ralph, none (Wichita State University). The Profession's Changing Hori-
zons: A Survey of Practitioners on the Present and Future Importance of
Selected Knowledge and Skills [accounting education]. The International Jour-
nal of Accounting. 1979 Mar; 14(2): 47-70.
Methodology: empirical descriptive.
Discussion of a survey which asked both entry and senior level accountants to
rank aspects of accounting education programs in the order of importance.
Finds that communication, both written and verbal, is regarded as important.
218. Evans, Bergen, none (Northwestern University). On Authority [social effects of
accounting]. The International Journal of Accounting. 1970 Sep; 6(1): 1-14.
Methodology: theoretical.
Discussion of the various philosophies underlying human societies.
219. Evans, Thomas G.; Folks, Jr William R., United States (University of South Caro-
lina//University of South Carolina). SEAS No. 8: Conforming, Coping,
Complaining, and Correcting! [accounting theory]. The International Journal
of Accounting. 1979 Sep; 15(1): 33-43.
Methodology: empirical descriptive.
Survey of multinational corporations as to the effect SEAS no. 8 has had on
them. Concludes that the FASB methodology toward SEAS is correct and
argues that SEAS no. 8 must be changed.
220. Evans, Thomas G.; Taylor, Martin E., United States/United Kingdom/JapanAVest
Germany (University of South Carolina). 'Bottom Line Compliance" with the
lASC: A Comparative Analysis [public accounting]. The International Journal
of Accounting. 1982 Sep; 18(1): 115-128.
Methodology: empirical descriptive.
Study of five countries regarding their adoption of promulgated international
standards. Finds that few international standards have been adopted.
221. Falk, Haim, Canada/United Kingdom/United States/Australia (McGill University,
Canada). Current Value Accounting Preferences: The Case for Canada [finan-
cial accounting and reporting]. The International Journal of Accounting. 1979
Mar; 14(2): 29-46.
Methodology: empirical descriptive.
Survey of financial analysts, bankers, and chartered accountants regarding the
methodolgy used for current value accounting. Finds that the needs are deter-
mined by the investment decision.
222. Falk, Haim; Errunza, Vihang R., United StatesAVest Germany/United Kingdom/
Japan (McGill University, Canada/ZMcGill University, Canada). Risk and Prof-
itability Differences Between National and Multinational Firms [managerial
accounting]. The Multinational Corporation: Accounting and Social Implica-
86 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1 , 1 998
tions. Champaign, IL: Center for International Education and Research in
Accounting: 1977 Jan: 63-91.
Methodology: empirical statistical.
Study of the ways in which multinational corporations differ in their profitabil-
ity performance from similar domestic corporations.
223. Falk, Haim: Frumer, Samuel; Heintz, James A., Israel/United States (Indiana Uni-
versity/ZIndiana University/ZIndiana University). Accounting for Stock
Reacquisitions: Israel and the United States Compared [public accounting]. The
International Journal of Accounting. 1974 Mar: 9(2): 1 11-123.
Methodology: deductive descriptive.
Examination of the accounting treatment of stock transactions by corporations
in the U.S. and Israel. Suggests that each of the legal and accounting require-
ments can contribute to improving the traditional means of accounting for
corporation stock acquisitions.
224. Fang, Zhilong: Tang, Yunwei, China (Shanghai University of Finance & Econom-
ics//Shanghai University of Finance & Economics). Recent Accounting
Developments in China: An Increasing Internationalization [economics &
development]. The International Journal of Accounting. 1991; 26(2): 85-103.
Methodology: deductive descriptive.
Discusses ideological evolution of Chinese accounting practices research and
education and the socio-economic impact on them.
225. Fantl, Irving L., United States (Baruch College, City University of New York).
Control and the Internal Audit in the Multinational Firm [auditing]. The Inter-
national Journal of Accounting. 1975 Sep; 11(1): 57-65.
Methodology: theoretical.
Study of some aspects of the accounting and control problems faced by multi-
national firms. Emphasizes barriers in communication among nations and
differences in attitudes towards business goals.
226. Farag, Shawki M.. Developed Countries/Developing Countries (The American
University, Egypt). Accounting in the 1990s: An International Perspective [pro-
fessional development]. The International Journal of Accounting. 1991; 26(4):
243-251.
Methodology: theoretical.
Comparison of responses of accounting the profession to economic conditions
and changes. Urges adjustment of accounting practices to meet the needs of
decision making.
227. Farag, Shawki M., China (The American University, Egypt). Accounting Develop-
ments in the People's Republic of China: A Commentary [financial accounting
and reporting]. The International Journal of Accounting. 1988 Mar; 23(2):
145-149.
Methodology: deductive descriptive.
Description of developments in China affecting the accounting profession.
228. Farag, Shawki M., none (Cairo University, Egypt). Littleton's Views on Social
Accounting— An Elaboration [social effects of accounting]. The International
Journal of Accounting. 1967 Mar; 2(2): 123-132.
Bibliography 87
Methodology: deductive descriptive.
Study elaborating on A. C. Littleton's views on social accounting.
229. Farag, Shawki M., developing countries/Asia/Africa/Egypt (The American Univer-
sity, Egypt). Management and Development: The Case of Performance
Evaluation [financial accounting and reporting]. The Recent Accounting and
Economic Developments in the Middle East. Champaign. IL: Center for Inter-
national Education and Research in Accounting; 1985 May: 13-23.
Methodology: deductive descriptive.
Study of the effects that changing prices have on the growth of developing
countries. Discusses management's responsibilities for such changes and calls
for further research.
230. Farag, Shawki M., none (World Bank). The Problem of Performance Evaluation in
International Accounting [managerial accounting]. The International Journal of
Accounting. 1974 Sep: 10(1): 45-53.
Methodology: theoretical.
Discussion of capital performance evaluation as the extension of the accounting
function to record and report intercountry operations. Identifies this as a key
problem in developing countries which need to expand their level of investment
and the inflow of foreign capital, and concludes that it makes multinational per-
formance evaluation a much-needed accounting function.
231. Farag, Shawki M., third world countries/developing countries (Cairo University,
Egypt). Project vs. General Development Financing: A Comment [economics
and development]. The International Journal of Accounting. 1968 Sep; 4(1):
115-120.
Methodology: theoretical.
Critique of favored project financing in developing countries, which offers a
proposal for general development financing.
232. Farag, Shawki M., none (Cairo University, Egypt). The Valuation of National Cap-
ital and the Development of Accounting Theory [financial accounting and
reporting]. The International Journal of Accounting. 1969 Sep; 5(1): 153-169.
Methodology: deductive descriptive.
Examination of the concept of national capital, its uses, and some of the prob-
lems associated with its valuation. Advocates greater accounting research in
capital to cover the macroaggregates because these aggregates are the summa-
tion of the microvariables.
233. Fechner, Harry H. E.; Kilgore, Alan, Global (University of Western Sydney,
Nepean, Australia/AJniversity of Western Sydney). The Influence of Cultural
Factors on Accounting Practice [public accounting]. The International Journal
of Accounting. 1994; 29(3): 265-277.
Methodology: deductive descriptive.
Examination of various external influences, especially culture, on accounting
practice.
234. Fekrat, M. Ali, United States/Germany/European Economic Community (George-
town University). Accounting for Forward Exchange Contracts [managerial
accounting]. The International Journal of Accounting. 1984 Mar; 19(2): 83-92.
88 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1 , 1 998
Methodology: theoretical.
Critical examination of the present methodology for forward exchange con-
tracts. Concludes that the methodology is inconsistent with GAAP.
235. Fekrat, M. Ali. Mexico/developing countries (Georgetown University). Accounting
Non-Response to the International Debt Crisis: A Positive Theory Perspective
[accounting theory]. The International Journal of Accounting. 1989; 24(2):
131-141.
Methodology: theoretical.
Presentation of the accounting profession's reaction to the less developed coun-
tries debt crisis.
236. Fekrat, M. Ali, Global (Georgetown University). Globalization of Financial Mar-
kets and Financial Reporting Standards [professional development]. Changing
International Financial Markets and Their Impact on Accounting. Champaign.
IL: Center for International Education and Research in Accounting, Department
of Accountancy; 1992: 195-211.
Methodology: deductive descriptive.
Study to determine w hich trends in the development of current accounting stan-
dards have strengthened and weakened international accounting harmonization.
237. Fekrat, M. Ali. Kuwait/Saudi Arabia/Libya/United Arab Emirates/Sudan (George-
town University). Islamic Banking: Concepts, Practices, and Implications for
Accounting: The Case of Kuwait [economics and development]. The Recent
Accounting and Economic Developments in the Middle East. Champaign, IL:
Center for International Education and Research in Accounting; 1985 May:
177-182.
Methodology: deductive descriptive.
Discussion of the social and economic issues affecting the development of the
Islamic banking system.
238. Fekrat, M. Ali. none (Georgetown University). Multinational Accounting: A Tech-
nical Methodology [accounting theory]. The International Journal of
Accounting. 1979 Sep; 15(1): 95-103.
Methodology: theoretical.
Analysis of the conventional temporal method concludes that this method pro-
duces inaccurate results and holds that an economic method that measures
purchasing power would be more effective.
239. Fekrat. M. Ali; Inclan. Carla; Petroni. David, Global (Georgetown Universiy and
National Semiconductor). Corporate Environmental Disclosure: Competitive
Disclosure Hypothesis Using 1991 Annual Report Data [Financial Accounting
and Reporting]. The International Journal of Accounting, 1996; 31(2):
175-195.
Methodology: Empirical descriptive.
Studies of the scope and accuracy of environmental disclosures made in corpo-
rate annual reports. Examination of the scope of environmental disclosures for
168 companies in six industries and 18 countries found that there are significant
variations in environmental disclosures and hence no support for the voluntary
disclosure hypothesis, and no apparent association between disclosure and
environmental performance.
Bibliography 89
240. Felt, Howard M.. United States (Temple University). The Effort and Authority of
the AICPA in the Development of 'Generally- Accepted Accounting Principles'
[accounting theory]. The International Journal of Accounting. 1968 Mar; 3(2);
11-27.
Methodology: deductive descriptive.
Study of the need for clarification of the principles which underlie accounting
statements. Concludes that this effort will continue to be a primary responsibil-
ity of the AICPA.
241. Ferris, Kenneth R.; Hayes, David C, United Kingdom (Northwestern University//
University of British Columbia). Some Evidence on the Determinants of Profit
Forecast Accuracy in the United Kingdom [financial accounting and reporting].
The International Journal of Accounting. 1977 Mar; 12(2): 27-36.
Methodology: empirical descriptive.
Study of some of the determinants of profit forecast accuracy, as seen in profit
forecasts in prospectuses from firms listed on the following exchanges: Lon-
don, Belfast, Irish, Scottish, Northern, and Midlands and Western.
242. Fieldcamp, Dale, Brazil (Caterpillar Tractor Company). International Accounting
in an Inflationary Economy [financial accounting and reporting]. The Interna-
tional Journal of Accounting. 1968 Sep; 4(1): 155-164.
Methodology: deductive descriptive.
Study of aspects of international accounting related to an inflationary economy
and to a fluctuating foreign exchange rate.
243. Firth, Michael, United Kingdom (Victoria University of Wellington, New
Zealand). A Cross-Sectional Analysis of Qualified Audit Reports [auditing].
The International Journal of Accounting. 1980 Mar; 15(2): 47-59.
Methodology: empirical statistical.
Statistical study to determine if the characteristics were different in firms
receiving uncertainty qualifications or procedural qualifications in the United
Kingdom. Shows that these reports are not conelated to auditing firm, industry.
or company size.
244. Firth, Michael, United Kingdom (Victoria University of Wellington, New
Zealand). A Study of the Consensus of the Perceived Importance of Disclosure
of Individual Items in Corporate Annual Reports [financial accounting and
reporting]. The International Journal of Accounting. 1978 Sep; 14(1): 57-70.
Methodology: empirical descriptive.
Results of a survey that asked users, auditors, and accountants about the impor-
tance of financial disclosure. Finds that auditors and users place a higher level
of importance on disclosure than do the internal sources of such disclosure.
245. Fitzgerald, Richard D., United States/United Kingdom/Canada (Price Waterhouse
& Company). International Harmonization of Accounting and Reporting
[financial accounting and reporting]. The International Journal of Accounting.
1981 Sep; 17(1): 21-32.
Methodology: deductive descriptive.
Discussion of factors affecting agreement on standards among the international
organizations. Contends that politics may hamper international standard-setting
90 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
and calls for cooperation among the different organizations following the lead
of recent cooperation among the U.S., Canada, and the U.K.
246. Folks, Jr William R.; Evans, Thomas G.; Jilling, Michael, none (College of Busi-
ness Administration, Columbia/ZUniversity of South Carolina/ZUniversity of
South Carolina at Spartanburg). Foreign Exchange Risk Management at Ameri-
can Multinationals: Social Responsibility or Earnings Protection? [financial
accounting and reporting]. The Multinational Corporation: Accounting and
Social Implications. Champaign, IL: Center for International Education and
Research in Accounting; 1977 Jan: 47-61.
Methodology: empirical descriptive.
Survey of multinational firms with regard to their foreign exchange risk man-
agement policies.
247. Foo, See Liang, Indonesia/Singapore/United Kingdom/Japan/Holland/United
States (Nanyang Technological Institute, Singapore). Accounting Educational
Systems in Southeast Asia: The Indonesian and Singaporean Experiences
[accounting education]. The International Journal of Accounting. 1988 Mar;
23(2): 125-136.
Methodology: deductive descriptive.
Discussion and comparison of the historical, political, social, and economic
influences on accounting education in Indonesia and Singapore.
248. Foroughi, Tahirih Khodadoust, Iran (University of Nevada at Reno). Accounting in
Developing Countries Before and After Social Crisis: The Case of Iran [finan-
cial accounting and reporting]. The International Journal of Accounting. 1981
Sep; 17(1): 181-223.
Methodology: deductive descriptive.
Comparison of a study of the Iranian accounting system before the 1978-79 rev-
olution with a study of developing countries conducted by the American
Association of Accountants. Concludes that accounting education must
undergo further development in these countries.
249. Foroughi, Tahirih Khodadoust, Iran (University of Tehran, Iran). Potentials of
Inflation Accounting in Iran [financial accounting and reporting]. The Impact
of Inflation on Accounting: A Global View. Champaign, IL: Center for Interna-
tional Education and Research in Accounting; 1979 May: 55-86.
Methodology: empirical descriptive.
Survey of Iranian accountants about their attitudes and practices toward infla-
tion accounting.
250. Foroughi, Tahirih Khodadoust; Reed, Barbara, United States/Canada/United King-
dom/New Zealand (American Graduate School of International Management//
American Graduate School of International Management). A Survey of the
Present and Desirable International Accounting Topics in Accounting Educa-
tion [accounting education]. The International Journal of Accounting. 1987
Sep; 23(1): 70-82.
Methodology: empirical descriptive.
Survey of the differences among educators and executives regarding interna-
tional accounting topics.
Bibliography 91
251. Foyo, Diego; Cunningham, Gary M.. Mexico (Valores Industriales, S.A. and Sub-
sidiaries/Instituto Technologico de Monterrey/A^irginia Polytechnic Institute
and State University). Accounting for Inflation in Mexico: A Major Firm's
Approach [financial accounting and reporting]. The Impact of Inflation on
Accounting: A Global View. Champaign. IL: Center for International Educa-
tion and Research in Accounting; 1979 May: 103-148.
Methodology: deductive descriptive.
Discussion of the accounting policies of the Mexican company VISA.
252. Francalanza. Charles A.. Malta/United Kingdom (University of Malta). Setting
Accounting Standards for Malta [financial accounting and reporting]. The
International Journal of Accounting. 1988 Mar; 23(2): 163-178.
Methodology: deductive descriptive.
Discussion of the regulatory, social, and environmental factors that have helped
develop the accounting system in Malta.
253. Fredrikson. E. Bruce, none (Syracuse University). The Valuation of Noncurrent
Foreign Currency Monetary Claims [financial accounting and reporting]. The
International Journal of Accounting. 1973 Sep; 9(1): 149-158.
Methodology: theoretical.
Presentation of arguments for the \ aluation of noncurrent foreign currency
receivables and payables.
254. Freedman. Martin; Stagliano. A. J.. European Economic Community (School of
Management, Binghamton, New York//St. Joseph University, Philadelphia.
Pennsylvania). European Unification. Accounting Harmonization, and Social
Disclosures [financial accounting & reporting]. The International Journal of
Accounting. 1992; 27(2): 112-122.
Methodology: empirical descriptive.
Comparison of the information provided in annual reports in selected firms in
European Community countries, with emphasis on seeking inconsistencies on
social disclosures made in the European Community.
255. Frishkoff. Paul, none (University of Oregon). Capitalism and the Development of
Bookkeeping: A Reconsideration [accounting theory]. The International Jour-
nal of Accounting. 1970 Mar; 5(2): 29-37.
Methodology: historical.
Analysis of the causes of the adoption of bookkeeping during the late part of the
middle ages.
256. Fujita, Yukio, Japan (University of Illinois at Urbana-Champaign). The Evolution
of Financial Reporting in Japan [financial accounting and reporting]. The Inter-
national Journal of Accounting. 1966 Sep; 2(1 ): 49-75.
Methodology: deductive descriptive.
Discussion of the evolution of financial reporting in Japan with special refer-
ence to the related legal background.
257. Fujita. Yukio. United Nations (Waseda University and Earlham College). Recent
Activities of the United Nations Toward International Harmonization in
Accounting and Reporting [accounting history]. Changing International Finan-
cial Markets and Their Impact on Accounting. Champaign. IL: Center for
92 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1. 1998
International Education and Research in Accounting. Department of Accoun-
tancy: 1992:93-104.
Methodology: historical.
Historical perspective regarding the United Nations' efforts toward promoting
harmonization in international accounting and reporting.
258. Gamble, George O.: Hsu. Kathy: Jackson. Cynthia; Tollerson. Cynthia D.. Global
(University of Houston). Environmental Disclosure in Annual Reports: An
International Perspective [Financial Accounting and Reporting]. The Interna-
tional Journal of Accounting, 1996: 31(3):293-331.
Methodology: Empirical statistical.
An investigation of the annual report disclosures of environmental information
for 276 companies representing 9 industries and 27 countries for the years 1989
through 1991.
259. Gambling, Trevor E.. none (University of Birmingham, England). Toward a Gen-
eral Theory of Accounting [accounting theory]. The International Journal of
Accounting. 1971 Sep: 7(1): 1-13.
Methodology: theoretical.
Development of a distinct system of non-transferable cultural wealth to help
explain the difficulties of cross-cultural income comparison.
260. Gandhi. Natwar M.. none (University of Pittsburgh/Program Analysis Division,
U.S. General Accounting Office). The Emergence of the Postindustrial Society
and the Future of the Accounting Function [social effects of accounting]. The
International Joun^al of Accounting. 1976 Mar; 11(2): 33-49.
Methodology: theoretical.
Study of the effects of monetary' unidimensional expression on accounting in a
post-industrial society. Also discusses the significance of accounting to the
societal process of adaptation.
261. Garda, J. A., none (Overseas Division. International Harvester & Company). The
Measurement of Financial Data in Evaluating Overseas Managerial Efficiency
[managerial accounting]. The International Journal of Accounting. 1976 Sep;
12(1): 13-17.
Methodology: deductive descriptive.
Discussion of changes in the way the International Harvester views overseas
results. Shows that the company will continue to look at foreign currency
results and. excluding exchange effect, measure the key quantitative goals in
the performance of foreign managers.
262. Gebhardt. Guenther. Germany/European Economic Community (Institut fur
Untemehmungsfuhrung and Untemehmensforschung of the Ruhr-Uni\ersitat,
Germany). The Usefulness of Different Accounting Disclosure Regulations: A
German Experience [financial accounting and reporting]. The International
Journal of Accounting. 1983 Mar: 18(2): 109-131.
Methodology: empirical statistical.
Survey of German firms indicating that current disclosure is useful in determin-
ing failure.
Bibliography 93
263. Ghartey. Ato, Ghana (University of Ghana at Legon). A New Perspective for
Accountancy Education in Ghana [accounting education]. The International
Journal of Accounting. 1978 Sep; 14(1): 121-132.
Methodology: deductive descriptive.
Study of the current method of educating accountants in Ghana. Concludes that
the current methods are inadequate and calls for reforms.
264. Ghartey, J. B., Africa (Suffolk University). Accountability, the Threshold of Politi-
cal Instability, Underdevelopment, and Misery: The Case of Africa [economics
and development]. The International Journal of Accounting. 1985 Sep; 21(1):
143-158.
Methodology: deductive descriptive.
Discussion of the instability on the African continent, which holds that accoun-
tants could add to the future stability of the region.
265. Ghosh, Dipankar; Grain, Terry L., none (University of Oklahoma, Norman//Uni-
versity of Oklahoma, Norman). A Transfer Pricing Decision Model of
Multinationals [managerial accounting]. The International Journal of Account-
ing. 1993:28(2): 170-181.
Methodology: theoretical.
Introduction of a decision model to calculate the total profit function of a multi-
national company.
266. Ghosh, Santi Narayan, Bangladesh (University of Dhaka, Bangladesh). A Compar-
ative International Study of the Education of Professional Accountants: A Case
Study of Bangladesh [accounting education]. Comparative International
Accounting Educational Standards. Champaign, IL: Center for International
Education and Research in Accounting; 1990 Apr: 97-108.
Methodology: deductive descriptive.
Discussion of the accounting educational system of Bangledesh. Gives an insti-
tutional view of the current system.
267. Gilling, D. M., none (University of New Castle, Australia). Accounting and Social
Change [social effects of accounting]. The International Journal of Accounting.
1976 Mar; 11(2): 59-71.
Methodology: deductive descriptive.
Discussion of the factors that facilitate accounting change. Concludes that
because accounting is a product of its environment, technology and society will
continue to change accounting.
268. Givoly, Dan; Lakonishok, Josef, Israel (Tel Aviv University/Carnegie Mellon Uni-
versity//Tel Aviv University/University of North Carolina). Accounting for
Construction Companies. Inflation, and Market Efficiency: Analysis of an
Israeli Case [financial accounting and reporting]. The International Journal of
Accounting. 1982 Mar; 17(2): 121-149.
Methodology: deductive descriptive.
Discussion of practices affecting construction accounting in Israel.
269. Glautier, M. W. E., Italy (University of Sheffield). Roman Accounting: The Influ-
ence of Socioeconomic Factors on the Development of Accounting Concepts
94 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
[social effects of accounting]. The International Journal of Accounting . 1973
Mar: 8(2): 59-74.
Methodology: historical.
Study of several approaches to the development of accounting in Roman times.
270. Gniewosz. A., New Zealand (Churchlands College of Advanced Education, Austra-
lia). The Equity Method of Accounting for Investments in Common Stock: The
New Zealand Experience [financial accounting and reporting]. The Interna-
tionalJounial of Accounting. 1980 Mar: 15(2): 115-128.
Methodology: empirical descriptive.
Study of the equity method used in New Zealand based on a survey of forty-one
corporations. Indicates that this method is not always followed properly, but
that those discrepancies occur infrequently when fully consolidated companies
are carried by the equity method.
27 1 . Goldschmidt, Yaaqov, Inflationary Countries (Tel Aviv University, Israel). Interna-
tional Accounting Standard 29: Formulation and Clarification on Income
Measurement in Hyperinflationary Economies [accounting theory]. The Inter-
national Journal of Accounting. 1992:27(2): 137-150.
Methodology: theoretical.
Formulation and analysis of a model for income measurement in accordance
with International Accounting Standard 29, with special attention given to
interest expenses.
272. Golub, Steven J., United States (Deloitte & Touche). A Global Perspective to
Financial Reporting [financial accounting and reporting]. The International
Journal of Accounting. 1982 Sep: 18(1): 37-44.
Methodology: deductive descriptive.
Discussion of the various issues affecting international accounting. Concludes
that protecting investors should be the primary concern and that the develop-
ment of international standards, providing market access and adequate
regulation, is the methodology most likely to achieve this protection.
273. Gonedes, Nicholas J., none (University of Texas at Austin). Perception Estimation
and Verifiability [accounting theory]. The International Journal of Accounting.
1969 Mar; 4(2): 63-73.
Methodology: deductive descriptive.
Study of verifiability and two methods of measuring it.
274. Gorelik, George, Soviet Union/United States (University of British Columbia).
Enterprise Profit and Profitability Measurements: Soviet-American Conver-
gence [managerial accounting]. The International Journal of Accounting. 1971
Mar; 6(2): 1-14.
Methodology: theoretical.
Study of similarities between ROI measures used in the two countries. Applies
this use of similar information needs by top management to overall measures of
performance of decentralized organizational subunits.
275. Gorelik, George, Soviet Union (University of British Columbia). Methodologies on
the Development and Problems of Soviet Uniform Accounting [accounting the-
ory]. The International Journal of Accounting. 1973 Sep; 9(1): 135-148.
Bibliography 95
Methodology: deductive descriptive.
Study of the historical development of Soviet uniform accounting which con-
siders some of the major problems currently faced by Soviet accounting.
276. Gorelik. George, none (University of British Columbia). On the Nature of Informa-
tion [information systems]. The International Journal of Accounting. 1975 Mar:
10(2): 109-125.
Methodology: theoretical.
Study of the nature of information in the context of systems that concludes that
information appears as a composite in complex relationships, which are essen-
tial to purposive systemic adaptations.
277. Gorelik. George, United States/Canada/United Kingdom (University of British
Columbia. Vancouver. Canada). The Setting of Accounting Standards: Canada.
the United Kingdom, and the United States [professional development]. The
International Journal of Accounting. 1994; 29(2): 95-122.
Methodology: deductive descriptive.
Comparative study questioning the viability of Canada's Accounting Standards
Committee, the United States" Financial Accounting Standards Board, and the
United Kingdom's Accounting Standards Commitee.
278. Gorski. Janusz, none (University of Lodz, Poland). The Council for Mutual Eco-
nomic Assistance (CMEA): Its Role in the Economic Integration of Socialist
Countries [economics and development]. The International Journal of Account-
ing. 1974 Sep; 10(1): 19-32.
Methodology: deductive descriptive.
Discussion of the CMEA's program to improve the national economics of
socialist countries, as well as the industrial and technological base.
279. Gorski. Janusz, Poland (University of Lodz. Poland/Ministry of Science, Higher
Education and Technology in Poland). Theoretical and Practical Problems of
Accounting for Changing Prices in Poland-Part I [financial accounting and
reporting]. The Impact of Inflation on Accounting: A Global View. Champaign,
IL: Center for International Education and Research in Accounting; 1979 May:
87-92.
Methodology: deductive descriptive.
Discussion of the history and effects of inflation accounting on the Polish
economy.
280. Grady. Paul, none (Price Waterhouse & Company). Professionalism in Accounting
[professional development]. The International Journal of Accounting. 1967
Sep; 3(1): 87-99.
Methodology: theoretical.
Discussion of the key elements in the advancement of accounting
professionalism.
28 1 . Graebner, Norman A., United States/Soviet Union/Europe (University of Virginia).
Whither Containment? [public accounting]. The International Journal of
Accounting. 1969 Sep; 5(1): 17-33.
Methodology: deductive descriptive.
96 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
Discussion of the role of containment in bringing the full power of the United
States to bear on world politics. Considers how that power could best be used to
serve the needs of a divided humanity.
282. Graham. Lynford E.. China (Rutgers University). Setting a Research Agenda for
Auditing Issues in the People's Republic of China [Auditing]. The International
Journal of Accounting, 1996; 3 1(1): 19-37.
Methodology: Deductive descriptive.
A discussion of a number of potentially meaningful auditing research issues
that arise from the dramatic changes currently taking place in China, identifying
organizational, technical practice and economic issues that impact the practice
of accounting and auditing.
283. Graham, Roger C; Wang, Chi-Hsin Coco, Taiwan (Oregon State University//Ore-
gon State University). Taiwan and the International Accounting Standards: A
Comparison [financial accounting & reporting]. The International Journal of
Accounting. 1995; 30(2): 149-167.
Methodology: deductive descriptive.
Comparative analysis of Taiwanese financial accounting standards with Inter-
national Accounting Standards (IAS).
284. Graves, O. Finley; Berry, Maureen H., East Germany/Europe/Eastem Bloc Coun-
tries (University of Mississippi/AJniversity of Illinois at Urbana-Champaign).
Accounting's Role in Successful Economic Development: Some Normative
Evidence from the German Democratic Republic [economics and develop-
ment]. The International Journal of Accounting. 1989; 24(3): 189-220.
Methodology: deductive descriptive.
Description of the development of the East German accounting system and its
role in the economic growth.
285. Gray, Dahli, none (University of Notre Dame). SEAS No. 52: Progress or Problem?
[accounting theory]. The International Journal of Accounting. 1984 Sep; 20(1):
109-119.
Methodology: deductive descriptive.
Discussion of the effects of SEAS No. 52, emphasizing its role in increasing the
diversity of financial reports.
286. Gray, H. Peter; Miranti, Paul J., United States/Italy/Japan/Mexico (Rensselaer
Polytechnic Institute//Rutgers-The State University of New Jersey at Brun-
swick). International Einancial Statement Translation: The Problem of Real and
Monetary Disturbances [financial accounting and reporting]. The International
Journal of Accounting. 1988 Mar; 23(2): 19-31.
Methodology: theoretical.
Presentation of a translation methodology contending that historical rates
should be used for translations involving differences in international inflation
rates and current rates should be used when terms of trade are altered.
287. Gray, Jack; Morris, Deigan, United States (University of Minnesota//The European
Institute of Business Administration). Comprehensive Controls for Multina-
tional Corporations [managerial accounting]. Managerial Accounting: An
Bibliography 97
Analysis of Current International Application. Champaign, IL: Center for Inter-
national Education and Research in Accounting; 1984 Jan: 107-123.
Methodology: theoretical.
Presentation of six elements of a planning and control system, as well as a
framework for the communication of the system to managers around the world.
288. Gray, S. J., Central & South America/France/Germany/Netherlands/United King-
dom/European Economic Community/United States/Australia/New Zealand/
South Africa/Soviet Union (University of Glasgow, United Kingdom). Interna-
tional Accounting: A Review of Academic Research in the United Kingdom
[professional development]. The International Journal of Accounting. 1983
Sep; 19(1): 15-42.
Methodology: deductive descriptive.
Discussion of the past and current research in international accounting carried
out in the U.K. Concludes that the majority of the research has been
comparative.
289. Gray, S. J., United States/Europe/Middle East/Africa/Soviet Union/China/Japan/
Asia/Australia/Central & South America (University of Glasgow, United King-
dom). International Accounting Research: The Global Challenge [professional
development]. The International Journal of Accounting. 1989; 24(4): 291-307.
Methodology: deductive descriptive.
Discussion of the role that international accounting has on accounting research.
290. Gray, S. J., United Kingdom (University of Lancaster, England). Statistical Infor-
mation and Extensions in European Financial Disclosure [financial accounting
and reporting]. The International Journal of Accounting. 1978 Mar; 13(2):
27-40.
Methodology: empirical descriptive.
Survey of the comparative disclosure of European countries. Concludes that the
European disclosure lacks statistical information.
291. Gray, Sidney J.; Meek, Gary K.; Roberts, Clare B., European Community (Univer-
sity of Warwick, England/ZOklahoma State University, Stillwater, Oklahoma//
University of Glasgow, Scotland). Financial Deregulation, Stock Exchange
Listing Choice, and the Development of a European Capital Market [economics
& development]. The New Europe: Recent Political and Economic Implications
for Accountants and Accounting. Champaign, IL: Center for International Edu-
cation and Research in Accounting; 1994: 171-192.
Methodology: capital markets.
A study of the trends of European Community companies of their listing behav-
ior in various stock markets and the reasons for such preference.
292. Gress, Edward J., Egypt/Iraq/Middle East/United States (Canisius College). Public
Accounting in Selected Middle East Countries: A Historical Perspective [public
accounting]. The Recent Accounting and Economic Developments in the Mid-
dle East. Champaign, IL: Center for International Education and Research in
Accounting; 1985 May: 167-175.
Methodology: deductive descriptive.
98 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
Discussion of the development of the public accounting profession in the Mid-
dle East. Places emphasis on the role of the Middle East Society of Associated
Accountants.
293. Grove, Hugh D.; Bazley, John D., Unknown (University of Denver, Colorado//Uni-
versity of Denver, Colorado). Disclosure Strategies for Harmonization of
International Accounting Standards [financial accounting & reporting]. The
International Journal of Accountin}^. 1993; 28(2): 116-128.
Methodology: modeling.
Introduction to different strategies in reducing the number of international
accounting alternatives in order to achieve harmonization.
294. Gul, Ferdinand A.; Tsui, Judy, Hong Kong/Australia (The Chinese University of
Hong Kong//City Polytechnic of Hong Kong). A Comparative Study of Audi-
tors' Attitudes to Uncertainty Qualifications: An Empirical Test of the Strong
Versus Weak Uncertainty Avoidance Hypothesis [auditing]. The International
Journal of Accounting. 1993; 28(4): 356-364.
Methodology: empirical descriptive.
Empirical study examining the influences of uncertainty avoidance and cultural
dimensions on Hong Kong and Australian auditors' perception of the "subject
to" audit qualification.
295. Gul, Ferdinand A.; Yap, Teoh Hai, Malaysia (University of Wollongong, Australia/
/University of Wollongong, Australia). The Effects of Combined Audit and
Management Services on Public Perception of Auditor Independence in Devel-
oping Countries: The Malaysian Case [auditing]. The International Journal of
Accounting. 1984 Sep; 20(1): 95-107.
Methodology: empirical descriptive.
Survey of financial statement users in Malaysia to determine their perception of
the auditor's independence.
296. Hagigi, Moshe; Hubbard, Howard H., Saudi Arabia/Egypt/Pakistan (Boston Uni-
versity//Fluor Corporation). Forging National Accounting Practices: The Saudi
Arabian Experience in Taxation [taxation]. The International Journal of
Accounting. 1988 Mar; 23(2): 151-162.
Methodology: deductive descriptive.
Discussion of the Saudi Arabian tax accounting system which compares this
system with those used in other Middle Eastern countries.
297. Hagigi, Moshe; McAuliffe, Terry Lynn, United States (Boston University//Rice
University). Stock Price Reaction to 'Off-Balance-Sheet' Information: The
Case of International Finance Subsidiaries [financial accounting and reporting].
The International Journal (f Accounting. 1989; 24(1): 21-28.
Methodology: capital markets.
Study of "off balance sheet" activities of forty-six international finance compa-
nies. Finds that significant market reactions did not occur immediately.
298. Hagigi, Moshe; Sponza, Andrea, Italy/United States/European Economic Commu-
nity/Central & South America (Boston University//Boston University visiting
from University of Venice). Financial Statements Ananlysis of Italian Compa-
nies: Accounting Practices, Environmental Factors, and International Corporate
Bibliography 99
Performance Comparisons [financial accounting and reporting]. The Interna-
tionalJournol of Accounting. 1990; 25(4): 234-251.
Methodology: empirical descriptive.
Study of the financial statements of thirty-four Italian companies. Discusses the
factors affecting Italian accounting practices and the effect they had on the
financial ratios.
299. Hakansson, Nils H., none (Yale University). Normative Accounting Theory and the
Theory of Decision [accounting theory]. The International Journal of Account-
ing. 1969 Mar; 4(2): 33-47.
Methodology: theoretical.
Discussion of an approach to the construction of normative accounting theory
with respect to both methodology and substance.
300. Hall, L. LeVan, developing countries (Communities Economic Development Fund,
Canada). The Multinational Corporation: Its Impact on Developing Countries
[economics and development]. The Multinational Corporation: Accounting and
Social Implications. Champaign. IL: Center for International Education and
Research in Accounting; 1977 Jan: 93-106.
Methodology: deductive descriptive.
Explanation of the effects of the multinational corporation on developing coun-
tries. Calls for controls to protect these countries.
301. Hall, Thomas W.; Snavely, H. Jim. United States/global (University of Texas at
Arlington/ZUniversity of Texas at Arlington). Translated Financial Statements
Can Be Meaningful [financial accounting and reporting]. The International
Journal of Accounting. 1984 Sep; 20(1): 153-170.
Methodology: theoretical.
Presentation of a method of translation, as compared with methods now used.
302. Haller, Axel. Germany (University of Augsburg. Germany). The Relationship of
Financial and Tax Accounting in Germany: A Major Reason for Accounting
Disharmony [financial accounting & reporting]. The International Journal of
Accounting. 1992; 27(4): 310-323.
Methodology: deductive descriptive.
Detailed study of the influence and relationship of tax accounting on financial
accounting in Germany and other countries in the European Economic
Community.
303. Hamer. John G.; Kistler. Linda H.. United States (University of Lowell/ZUniversity
of Lowell). The Statement of Cash Flow— An Analysis of Translation and
Remeasurement Techniques for Foreign Subsidiaries [financial accounting and
reporting]. The International Journal of Accounting. 1990; 25( 1 ): 29-41.
Methodology: deductive descriptive.
Discussion of the translation and remeasurement methods necessary when the
statement of cash flows is prepared for foreign tlrms.
304. Hamer, John G.; Kistler. Linda H.. United States (University of Lowell/ZUniversity
of Lowell). The Impact of Foreign Currency Translations on the New FASB
Statement of Cash Flows [financial accounting and reporting]. The Interna-
tional Journal of Accounting. 1987 Sep; 23(1): 129-144.
Methodology: deductive descriptive.
100 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
Discussion and presentation of the statement of cash flows.
305. Hammer. Richard. United States (Price Waterhouse & Company). Financial Plan-
ning to Avoid Tax Problems [taxation]. The International Journal of
Accounting. 1972 Mar; 7(2): 23-34.
Methodology: deductive descriptive.
Discussion of (1) organizational methods needed to operate abroad, (2) tax-sav-
ing opportunities available to corporation taxpayers through the WHTC and
possessions corporation provisions, (3) tax problems arising from Section 502
of the Internal Revenue Code, and (4) U.S. foreign tax credit rules.
306. Hanna, John R., none (McMaster University, Canada). An Application and Evalua-
tion of Selected Alternative Accounting Income Models [accounting theory].
The International Journal of Accounting. 1972 Sep; 8(1): 135-167.
Methodology: empirical descriptive.
Application of selected models to determine financial position and income.
307. Hardman, D. J., Solomon Islands (The New South Wales Institute of Technology,
Australia). Accounting Development in the Solomon Islands [professional
development]. The International Journal of Accounting. 1984 Sep; 20(1):
141-152.
Methodology: deductive descriptive.
Discussion of the development of the accounting profession in the Solomon
Islands. Holds that modernizing and building a more indigenous accounting
profession is necessary for the economic development of the Solomon Islands.
308. Hartmann, Bemhard. none (Technical University of Berlin). The Effect of EDP
Systems on the Internal Organization of the Firm [managerial accounting]. The
International Journal of Accounting. 1966 Mar; 1(2): 101-117.
Methodology: empirical descriptive.
Discussion of the changes in the traditional organizational structure of the firm
caused by EDP Systems.
309. Hartnett, Neil A., Australia/United Kingdom/United States (University of Newcas-
tle, New South Wales. Australia). Corporate Financial Forecast Accuracy: An
Australian Study [financial accounting & reporting]. r/ie International Journal
of Accounting. 1993; 28(3): 248-258.
Methodology: capital markets.
Study of corporate financial forecast accuracy behavior as denoted in revenue
forecasts presented in prospectus and related published data of companies listed
on the Australian Stock Exchange, with particular emphasis on revenue and net
operating profit.
310. Hassan, Naim A., United Kingdom/United States (University of Birmingham,
England). Accounting Education and Training in the United Kingdom: The
Search for a New Strategy [accounting education]. Comparative International
Accounting Educational Standards. Champaign, IL: Center for International
Education and Research in Accounting; 1990 Apr: 109-131.
Methodology: deductive descriptive.
Discussion of current practices in accounting education in the U.K. Compares
the U.S.' programs with those used in the U.K. and calls for more research
funding.
Bibliography 101
311. Hassan, Nairn A., United Kingdom/West Germany/France (University of Birming-
ham, England). Different Business Accounting Policies as a Function of
Macroaccounting Influences: A Comparative Study in Selected European
Countries [financial accounting and reporting]. The Recent Accounting and
Economic Developments in Western Europe. Champaign, IL: Center for Inter-
national Education and Research in Accounting; 1985 May: 59-90.
Methodology: empirical descriptive.
Study of the macroaccounting models used in several European countries.
312. Hassan, Naim A., United Kingdom/United States/Arab Countries/Kuwait (Univer-
sity of Birmingham, England). International Accounting Standards: Desirable
as a Short-term Solution in the Case of the Arab Gulf States? [financial
accounting and reporting]. The Recent Accounting and Economic Develop-
ments in the Middle East. Champaign, IL: Center for International Education
and Research in Accounting; 1985 May: 69-100.
Methodology: empirical descriptive.
Survey of the annual reports of Arab Gulf States corporations, which reveals
that the reports are the primary source of information of users in that area.
313. Hausman, Donald I., United States (Deloitte & Touche). The Foreign Direct Invest-
ment Program [economics and development]. The International Journal of
Accounting. 1968 Sep; 4(1): 67-80.
Methodology: deductive descriptive.
A study of the Foreign Direct Investment Program, which emphasizes its limi-
tations for overseas business activities.
314. Hauworth, II William P., Argentina/Brazil/Mexico/Chile/United Kingdom/South
Africa/Australia/Canada/Germany/Netherlands/New Zealand (Arthur Andersen
& Company). A Comparison of Various International Proposals on Inflation
Accounting: A Practitioner's View [financial accounting and reporting]. The
International Journal of Accounting. 1980 Sep; 16(1): 63-82.
Methodology: deductive descriptive.
Study of the methodology used by each company for inflation accounting. Con-
tends that most countries have just started to account for inflation and that a
general lack of understanding exists as to the usefulness of this information.
Concludes that in time inflation accounting will become more important to
financial statement users.
315. Hauworth, II William P., none (Arthur Andersen & Company). Problems in the
Development of Worldwide Accounting Standards [financial accounting and
reporting]. The International Journal of Accounting. 1973 Sep; 9(1): 23-34.
Methodology: deductive descriptive.
Outline of several problems which impede the development of worldwide
accounting standards.
316. Hayes, Donald J., Canada/United States/Europe (Arthur Young & Company). The
International Accounting Standards Committee— Recent Developments and
Current Problems [financial accounting and reporting]. The International Jour-
nal of Accounting. 1980 Sep; 16(1): 1-10.
Methodology: deductive descriptive.
102 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
Discussion of three problems facing the lASC: the lack of recognition, identifi-
cation of objectives, and intervention by international bodies. Holds that the
lASC is addressing these problems, but that it will need continued professional
support.
317. Heaston. Patrick H., United States/global (Drake University). Qualification
Requirements for Public Accounting in Selected Foreign Countries: A Compar-
ison with the United States [public accounting]. The International Journal of
Accounting. 1984 Sep; 20(1): 71-94.
Methodology: empirical descriptive.
Comparison by country of the professional requirements necessary to become a
professional public accountant.
318. Heck, Jean Louis; Jensen, Robert E.; Cooley, Philip L., United States (Villanova
University/ZTrinity University/ZTrinity University). An Analysis of Contribu-
tors to Accounting Journals. Part II: The Individual Academic Accounting
Journals [professional development]. The International Journal of Accounting.
1991; 26(1): 1-17.
Methodology: empirical statistical.
Disaggregated analysis of contributors to 24 accounting journals. Finds that top
contributors tend to spread their works among various journals.
319. Heck, Jean Louis: Jensen, Robert E.; Cooley Philip L., United States (Villanova
University/ZTrinity University/ZTrinity University). An Analysis of Contribu-
tors to Accounting Journals. Part I: The Aggregate Performances [professional
development]. The International Journal of Accounting. 1990; 25(3): 202-217.
Methodology: empirical statistical.
Study of twenty-four international accounting journals through 1988. Finds an
increase in co-authorship and number of articles written.
320. Heinen, Edmund, none (University of Munich). Goals in Managerial Economics
[managerial accounting]. The International Journal of Accounting. 1976 Mar;
11(2): 1-10.
Methodology: theoretical.
Presentation of the control and economic benefit to be obtained through use of
management by objectives.
321. Heinen, Edmund, none (University of Munich). Supplemented Multi-Purpose
Accounting [accounting theory]. The International Journal of Accounting. 1978
Sep; 14(1): 1-15.
Methodology: theoretical.
Presentations of the different methods of multipurpose accounting which holds
that the multi-purpose accounting theory should be regarded not only as an
accounting theory, but also as an internal communication theory.
322. Heintz, James A.; Han, Jin-Soo, Korea/United States (Indiana University//Dongguk
University, Korea). A Study of Audit Judgments of Korean CPAs [auditing].
The International Journal of Accounting. 1985 Sep; 21(1): 21-37.
Methodology: theoretical.
Comparison of internal control judgements with those observed in earlier
research, which finds that present judgments are consistent with ones studied
previously.
Bibliography 103
323. Hendriksen, Eldon S., United Kingdom (Washington State University). Disclo-
sures— Insights Into Requirements in the United Kingdom [accounting theory].
The International Journal of Accounting. 1969 Mar; 4(2): 21-32.
Methodology: deductive descriptive.
Review of the 1967 Companies Act in Great Britain and its relevance to current
proposals and discussions in the U.S.
324. Hermanson, Dana, United States (Kennesaw State College, Marietta, Georgia).
Multinational External Audit Planning [auditing]. The International Journal of
Accounting. 1993; 28(3): 206-214.
Methodology: empirical descriptive.
Examination of how multinational companies are audited by Big Six compa-
nies. Emphasis is given to numerous risk factors involving multinational audit
planning.
325. Hermanson, Heather M.; Hermanson, Dana R.; Carcello, Joseph V., United States
(Kennesaw State University/University of Tennessee). An Analysis of Multina-
tional "Audit Failures" [auditing]. The International Journal of Accounting,
1996; 31(3): 281-291.
Methodology: Empirical descriptive.
An examination of the public clients of the Big Eight (Six) that declared bank-
ruptcy from 1/1/88 through 12/31/92 and that had in excess of $40 million of
revenue. Indicates that multinational factors are not associated with a large
number of audit failures during the sample period.
326. Higson, Andrew; Blake, John, United Kingdom/European Community (Loughbor-
ough University Business School, Leicestershire, United KingdomZ/University
of Central Lanashire, Preston, United Kingdom). The True and Fair View Con-
cept-A Formula for International Disharmony: Some Empirical Evidence
[financial accounting & reporting]. The International Journal of Accounting.
1993; 28(2): 104-115.
Methodology: deductive descriptive.
Study of the increasing importance of the "true and fair view" concept in inter-
national accounting.
327. Ho, Joanna L.; Chang, Chengyee Janie, Taiwan/United States (University of Cali-
fornia, Irvine//University of California, Irvine). Does National Culture or
Professional Knowledge Affect Auditors' Probabilistic Conjunction Judg-
ments? A Study of the United States Versus Taiwan [auditing]. The
International Journal of Accounting. 1994; 29(3): 189-205.
Methodology: empirical statistical.
Comparative study of the influence of culture and job experience on the diag-
nostic probability judgments of Taiwanese and American auditors.
328. Ho, Simon S. M., United Kingdom (The Chinese University of Hong Kong). The
Impact of Using Risk Analysis in Capital Budgeting on Earnings Performance:
The UK Experience [managerial accounting]. The International Journal of
Accounting. 1992; 27(1): 1-14.
Methodology: empirical statistical.
Examination of the effectiveness of probabilistic risk analysis in improving a
firm's 9apital budgeting program over simple risk adjustment analysis.
104 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
329. Holzer, H. Peter; Tremblay, Doria. Thailand/Tunisia (University of Illinois at
Urbana-Champaign/ZLaval University in Quebec. Canada). Accounting and
Economic Development: The Cases of Thailand and Tunisia [economics and
development]. The International Journal of Accounting. 1973 Sep; 9(1): 67-80.
Methodology: deductive descriptive.
Outline of the needs for accounting in a developing country. Provides an analy-
sis of the status of accounting in Thailand and Tunisia illustrates the extent to
which the needs of accounting are being met in specific developing nations.
330. Hooper. Paul; Liao. Li-Min, United States (University of Delaware/ZContel Service
Corporation). Foreign Currency Accounting: A Review and Critique of Major
Empirical Studies [financial accounting and reporting]. The International Jour-
nal of Accounting. 1990; 25(2): 113-12^6.
Methodology: theoretical.
Presentation of the xarious research methodologies and factors affecting foreign
currency accounting.
331. Hooper. Paul; Page, John; Smith, Karen. United States/United Kingdom/Canada
(University of Delaware/ZTulane Uni\ ersity/ZPrice Waterhouse & Company).
Accountants" Legal Liability: An International Comparison [public account-
ing]. The International Journal of Accounting. 1985 Mar; 20(2): 65-80.
Methodology: deductive descriptive.
Comparison of the accountants" legal liability in the U.S., the U.K., and
Canada.
332. Hopwood. Anthony G.: Johnson. H. Thomas, none (London School of Economics
and Political Science/ZPacific Lutheran University). Accounting History's
Claim to Legitimacy [accounting history]. The International Journal of
Accounting. 1986 Mar; 21(2): 37-46.
Methodology: theoretical.
Presentation of Roger Cister's arguments regarding the legitimacy of account-
ing histor\'.
333. Hoque. Zahirul. Bangladesh (Victoria University of Wellington, Wellington, New
Zealand). Budgetary Control Systems in Public Sector Enterprises in a Devel-
oping Country: Some Evidence from Bangladesh [managerial accounting]. The
International Journal of Accounting. 1995; 30(4): 344-355.
Methodology: empirical statistical.
Study to determine how managers perceive and utilize organizational tools such
as budgeting systems in the jute mills of Bangladesh.
334. Hoshower, I^on B.; Mandel, Linda Ann, United States (Pennsylvania State Uni-
versity/ZComell University). Transfer Pricing Policies of Diversified U.
S. -Based Multinationals [managerial accounting]. The International Journal of
Accounting. 1986 Sep; 22(1); 51-59.
Methodology: empirical descriptive.
Surxey of U.S. -based multinational corporations regarding their transfer pricing
policies. Finds that policies are decentralized.
335. Hossain, Mahmud; Tan, Lin Mei; Adams. Mike, Malaysia (Massey University,
Palmerston North. New Zealand/ZMassey University, Palmerston North, New
Zealand/ZMassey University, Palmerston North, New Zealand). Voluntar>' Dis-
Bibliography 105
closure in an Emerging Capital Market: Some Empirical Evidence from
Companies Listed on the Kuala Lumpur Stock Exchange [economics & devel-
opment]. The International Journal of Accounting. 1994; 29(4): 334-351.
Methodology: capital markets.
Examination of characteristics which influence the level of voluntary disclosure
in annual reports of companies listed on the Kuala Lumpur Stock Exchange.
336. Hosseini, Ahmad; Aggarwal, Raj, United States (University of Detroit/ZUniversity
of Toledo). Evaluating Foreign Affiliates: The Impact of Alternative Foreign
Currency Translation Methods [managerial accounting]. The International
Journal of Accounting. 1983 Sep; 19(1): 65-87.
Methodology: modeling.
Study of ROI as to its level of distortion using different translation methods.
Contends that ROI was sensitive not only to the translation method used, but
also to structure, dividend policy, and exchange rate fluctuations.
337. Hosseini, Ahmad; Rezaee, Zabihollah, United States/global (University of Detroit//
University of Detroit). Impact of SEAS No. 52 on Performance Measures of
Multinationals [financial accounting and reporting]. The International Journal
of Accounting. 1990; 25(1): 43-52.
Methodology: empirical descriptive.
Survey of 109 multinational companies regarding the effects of SEAS No. 52.
338. Houghton, Keith A.; Bell, Richard, Australia (Western Australian Institute of Tech-
nology/ZUniversity of Melbourne, Australia). Evaluations of Accounting and
Finance Journals: The Australian View [professional development]. The Inter-
national Journal of Accounting. 1984 Sep; 20(1): 179-187.
Methodology: empirical descriptive.
Survey of Australian educators regarding the quality of a number of accounting
journals. Finds that factors such as "reading frequency," "content familarity,"
and whether or not the journal had published the respondents' work affected the
evaluation.
339. Hove, Mfandaidza R., developing countries/Developed Countries/United Kingdom
(University of Zimbabwe). Accounting Practices in Developing Countries:
Colonialism's Legacy of Inappropriate Technologies [economics and develop-
ment]. The International Journal of Accounting. 1986 Sep; 22(1): 81-99.
Methodology: deductive descriptive.
Discussion of the influences that investing countries have had on the less devel-
oped countries.
340. Hove, Mfandaidza R., developing countries (University of Zimbabwe). The Inap-
propriateness of International Accounting Standards in Less Developed
Countries: The Case of International Accounting Standard Number 24 —
Related Party Disclosures — Concerning Transfer Prices [financial accounting
and reporting]. The International Journal of Accounting. 1989; 24(2): 165-179.
Methodology: theoretical.
Discussion of the transfer pricing methodology and disclosure used by transna-
tional corporations in less developed countries.
341. Hoyt, Ronald E., United States/Soviet Union (University of Arkansas). Profit Mea-
surement in East- West Trade and Industrial Cooperation: Concepts, Criteria,
106 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1 , 1 998
and Special Problems [financial accounting and reporting]. The International
Journal of Accounting. 1978 Mar; 13(2): 119-144.
Methodology: theoretical.
Presentation of the different models and practices involved in East- West trade.
States that generally accepted accounting principles do not present these trans-
lations properly and concludes that a change is needed.
342. Hoyt, Ronald E.; Maples, Lawrence D., Soviet Union/China/United States/Canada
(University of Laval, Canada/ZUniversity of Louisville). Accounting for Joint
Ventures with the Soviet Bloc and China [financial accounting and reporting].
The InternationalJournai of Accounting. 1980 Sep; 16(1): 105-124.
Methodology: deductive descriptive.
Discussion of the consolidation practices necessary when a firm is involved in a
joint venture with an Eastern bloc country. Concludes with a discussion of the
implications of U.S. tax laws on East-West trade.
343. Hsu, Tsun Tsien, China (Wuhan University, The People's Republic of China).
Recent Business and Accounting Developments in China [financial accounting
and reporting]. The International Journal of Accounting. 1981 Sep; 17(1):
157-160.
Methodology: deductive descriptive.
Discussion of the various factors necessary for the modernization of China.
344. Hudack, Lawrence R.: Orsini, Larry L., Japan (St. Bonaventure University, New
York//St. Bonaventure University, New York). A Methodology of Caution to
Users of Japanese Financial Reports: A Demonstration of an Enlarged Exo-
genist Approach [social effects]. The International Journal of Accounting.
1992:27(1): 15-26.
Methodology: deductive descriptive.
Examination of how the socio-economic environment undermines the funda-
mental objectives of Japanese financial reporting.
345. Hunziker, A. E., United States/United Kingdom (Caterpillar Tractor Company).
Commentary to Discussion on International Accounting Challenges [financial
accounting and reporting]. The International Journal of Accounting. 1968 Sep;
4(1): 99-100.
Methodology: theoretical.
Comparison between the foreign growth of Caterpillar and of Dow Chemical
Company.
346. Hussein, Mohamed Elmutassim, United States/Central & South America/France/
United Kingdom (University of Connecticut). Translation Problems of Interna-
tional Accounting Standards [financial accounting and reporting]. The
International Journal of Accounting. 1981 Sep; 17(1): 147-155.
Methodology: theoretical.
Discussion of the language translation methods used by the International
Accounting Standards Committee.
347. Hussein, Mohamed Elmutassim, United States/Netherlands (University of Con-
necticut). A Comparative Study of Cultural Influences on Financial Reporting
Bibliography 107
in the U.S. and the Netherlands [financial accounting and reporting]. The Inter-
national Journal of Accounting, 1996; 31(1): 95-120.
Methodology: empirical statistical.
An argument that financial reporting and its regulation have multiple purposes
reflecting each country's social, cultural, and political environment. Presents a
comparison of financial reporting in US and Netherlands within their respective
cultures.
348. lino, Toshio, Japan (Hitotsubashi University, Japan). Accounting Principles and
Contemporary Legal Action in Japan [financial accounting and reporting]. The
International Journal of Accounting. 1967 Mar; 2(2): 65-87.
Methodology: deductive descriptive.
Discussion of the philosophy of the accounting provisions of the Japanese
Commercial Code applicable to stock corporations and of the regulation for
corporate balance sheets and income statements of Japan.
349. Ijiri, Yuji, Global (Carnegie Mellon University). Global Financial Reporting Using
a Composite Currency: An Aggregation Theory Perspective [accounting the-
ory]. The International Journal of Accounting. 1995; 30(2): 95-106.
Methodology: modeling.
Introduction to a model for determining composite currency for multinational
corporation with semi-permanent foreign investments.
350. Ings, William C, United States (Arthur Young & Company). The Function of the
Managerial Accountant in Planning and Control [managerial accounting]. Man-
agerial Accounting: An Analysis of Current International Application.
Champaign, IL: Center for International Education and Research in Account-
ing; 1984 Jan: 125-137.
Methodology: deductive descriptive.
Discussion of the accountant's role in planning and control.
35 1 . Ivancevich, Daniel Michael. United Kingdom/United States (University of Nevada,
Las Vegas). Acquisitions and Goodwill: The United Kingdom and the United
States [economics & development]. The International Journal of Accounting.
1993:28(2): 156-169.
Methodology: empirical statistical.
Empirical study seeking to find evidence of differences in recording purchased
goodwill in companies taken over by American and British firms.
352. Jacob, Hans-Joachim, Germany (BDO Germany). Ethical Concerns and Regula-
tions of the German Certified Public Accountant (Wirtschaftsprufer)
[professional development]. Ethical Considerations in Contemporary Interna-
tional Accounting Practice. Champaign, IL: Center for International Education
and Research in Accounting, Department of Accountancy; 1992: 19-30.
Methodology: deductive descriptive.
Descriptive summary of the regulations and the consequential ethical issues
involving the German certified public accountant.
353. Jacobi, Michael H., Netherlands/Germany/Sweden/United States (a Swiss multina-
tional chemical company). The Unit of Account in Consolidated Financial
108 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1 , 1 998
Statements of Multinational Enterprises [financial accounting and reporting].
The InternationalJownal of Accounting. 1980 Mar; 15(2): 17-34.
Methodology: deductive descriptive.
Presentation of the use of special drawing rights as a uniform method of restat-
ing foreign denominated financial statements. Concludes that because people
lack an understanding of special drawing rights, this method will provide state-
ments that are at first hard to understand.
354. Jagerhom. Reginald. Finland/United States (Swedish Graduate School of Econom-
ics and Business Administration of Helsinki). Some Aspects of Finnish
Financial Reporting Practices [financial accounting and reporting]. The Inter-
national Journal of Accounting. 1970 Sep: 6( 1 ): 15-23.
Methodology: deductive descriptive.
General comparison of the annual reporting of Finnish firms and U.S. firms,
accompanied by a discussion of legislative reform.
355. Jagetia. Lai C: Nwadike, Evaristus C.. Nigeria/United States/United Kingdom
(Cleveland State University/Zassociated with the Nigerian government).
Accounting Systems in Developing Nations: The Nigerian Experience [eco-
nomics and development]. The International Journal of Accounting. 1983 Mar;
18(2): 69-81.
Methodology: deductive descriptive.
Discussion of the considerations involved in developing an accounting system
for developing countries. Concludes that accounting systems should be devel-
oped on a subjective basis.
356. Jaggi. Bikki L., Developing Countries (State University of New York at Bingham-
ton). Accounting Studies of Developing Countries: An Assessment [economics
and development]. The International Journal of Accounting. 1973 Sep; 9(1):
159-170.
Methodology: deductive descriptive.
Assessment of the progress of international accounting. Examines the potential
for further research in this field.
357. Jaggi, Bikki L.. Germany (State University of New York at Binghamton). An Anal-
ysis of Corporate Social Reporting in Germany [social effects of accounting].
The International Journal of Accounting. 1980 Mar; 15(2): 35-45.
Methodology: deductive descriptive.
Discussion of social reporting in Germany. Concludes that German firms have
made progress in social accounting and that other countries could follow their
example.
358. Jaggi, Bikki L., none (State University of New York at Binghamton). The Impact of
the Cultural Environment on Financial Disclosures [social effects of account-
ing]. The International Journal of Accounting. 1975 Mar; 10(2): 75-84.
Methodology: theoretical.
Study of the impact of the cultural environment and individual value orienta-
tions on information disclosures. Offers a hypothesis as to the reliabilit\ of
financial disclosures.
Bibliography 109
359. Jaggi, Bikki L., India (State University of New York at Binghamton). A Review of
the Accounting Profession in India [professional development]. The Interna-
tional Journal of Accounting. 1970 Sep; 6(1): 35-51.
Methodology: deductive descriptive.
A brief historical perspective, followed by a discussion of some issues faced by
the accounting profession in India and of the present status of the profession.
360. Jaggi, Bikki; Zhao, Ronald, Hong Kong (Rutgers University/City University of
Hong Kong). Environmental Perfomance and Reporting Perceptions of Manag-
ers and Accounting Professionals in Hong Kong [financial accounting and
reporting]. The International Journal of Accounting, 1996; 31(3): 333-346.
Methodology: Empirical statistical.
An evaluation of Hong Kong managers' perceptions of envirionmental disclo-
sures by their firms. It examines professional accountants' perceptions of
environmental disclosures and finds that there was a gap between perceived
importance of environmental performance and actual environmetnal
disclosures.
361. Jaruga, Alicja A., Poland (University of Lodz, Poland). Problems of Uniform
Accounting Principles in Poland [financial accounting and reporting]. The
International Journal of Accounting. 1972 Sep; 8(1): 25-41.
Methodology: deductive descriptive.
Analysis of current uniform accounting principles, with emphasis placed on
existing problems and emerging needs.
362. Jaruga, Alicja A., Poland (University of Lodz, Poland). Recent Developments in
Polish Accounting: An International Transaction Emphasis [financial account-
ing and reporting]. The International Journal of Accounting. 1974 Sep; 10(1):
1-18.
Methodology: deductive descriptive.
Study of problems associated with the increase in Poland's foreign trade, result-
ing from the development of the Polish economy and accounting system.
363. Jaruga, Alicja A., Poland (University of Lodz, Poland). Recent Developments of
the Auditing Profession in Poland [auditing]. The International Journal of
Accounting. 1976 Sep; 12(1): 101-109.
Methodology: deductive descriptive.
Analysis of the development of the auditing profession in Poland and the role
the PAA has played in this general development.
364. Jaruga, Alicja A., Poland (University of Lodz, Poland). Theoretical and Practical
Problems of Accounting for Changing Prices in Poland-Part II [financial
accounting and reporting]. The Impact of Inflation on Accounting: A Global
View. Champaign, IL: Center for International Education and Research in
Accounting; 1979 May: 93-102.
Methodology: theoretical.
Theoretical description of the accounting practices in Socialist Poland.
365. Jeffrey, Cynthia; Weatherholt, Nancy; Lo, Steven. Taiwan (Iowa State University/
The University of Missouri-Kansas City/Grant Thornton, LLP). Ethical Devel-
opment, Professional Committement and Rule Observance Attitudes: A Study
110 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
of Auditors in Taiwan [professional development]. The International Journal of
Accounting, 1996; 31(3): 365-379.
Methodology: Empirical statistical.
An examination of ethical reasoning and professional commitment in Taiwan
by focusing on the relation between professional commitment, ethical develop-
ment of accountants, and accountants' attitudes towards following rules.
366. Jegers, Marc; Buijink, Willem, European Economic Community/Belgium (Univer-
sity of Antwerp, Belgium/ZUniversity of Limburg, the Netherlands). The
Reliability of Financial Accounting Data Bases: Some Belgian Evidence [finan-
cial accounting and reporting]. The International Journal of Accounting. 1987
Sep; 23(1): 1-21.
Methodology: empirical statistical.
Study of the reliability of the financial statements of Belgian firms available on
data base. Finds numerous discrepencies among these statements.
367. Jensen, Daniel L., none (Purdue University). Professional Responses to Reporting
the Impact of Inflation: A Discussion-Part I [financial accounting and report-
ing]. The Impact of Inflation on Accounting: A Global View. Champaign, IL:
Center for International Education and Research in Accounting; 1979 May:
179-182.
Methodology: deductive descriptive.
Discussion of the issues raised by Alain M. Oberrotman in his paper.
368. Jensen, Daniel L., United States (Purdue University). The Role of Interest in
Revolving Capital Plans for Cooperative Enterprise [economics and develop-
ment]. The International Journal of Accounting. 1974 Mar; 9(2): 105-109.
Methodology: theoretical.
Discussion of the role of interest in revolving capital plans, which argues that
the failure to pay interest may lead to instability in the cooperative organization
and aggravate capital accumulation problems. Recommends that interest be
imputed to member-capital accounts by credit based on contributed capital and
offsetting charges based on patronage.
369. Jermakowicz, Eva; Rinke, Dolores F., Hungary/Poland/Czech Republic/Slovak
Federal Republic (University of Southern Indiana/ZPurdue University-Calu-
met). A Comparative Analysis of New Accounting Standards in Hungary,
Poland, and the Czech and Slovak Federal Republics with International
Accounting Standards and the European Community Directives [miscella-
neous]. The New Europe: Recent Political and Economic Implications for
Accountants and Accounting. Champaign, IL: Center for International Educa-
tion and Research in Accounting; 1994: 253-274.
Methodology: deductive descriptive.
Descriptive review of new accounting regulations enacted in various former
Soviet bloc countries and an examination of these regulations to determine the
degree of harmony with the standards of lASC and the European Community.
370. Johansson, Sven-Erik, Sweden (Stockholm School of Economics). An Appraisal of
the Swedish System of Investment Reserves [financial accounting and report-
ing]. The International Journal of Accounting. 1965 Sep; 1(1): 85-92.
Bibliography 111
Methodology: deductive descriptive.
Brief description of the basic structure and function of the Swedish system of
investment reserves and a tentative evaluation of the current system.
371. Johnson, Eldon L., none (University of Illinois at Urbana-Champaign). Interna-
tional University Reponsibilities [accounting education]. The International
Journal of Accounting. 1968 Sep; 4(1): 121-128.
Methodology: theoretical.
Discussion of the inadequacies in international policy education at the univer-
sity level.
372. Johnson, Eldon L., United States/Soviet Union/China/Africa (University of Illinois
at Urbana-Champaign). Universities and Our Other Citizenship [accounting
education]. The Recent Accounting and Economic Developments in Western
Europe. Champaign, IL: Center for International Education and Research in
Accounting; 1985 May: 115-120.
Methodology: deductive descriptive.
Discussion of the role of the university on the international level.
373. Johnson, Gene H.; Byington, J. Ralph, United States/Spain (Louisiana Tech Uni-
versity, Ruston, Louisiana/ZLouisiana Tech University, Ruston, Louisiana).
Accounting Competence, Machiavellianism, and Budget-Related Behavior: A
Comparative Study of U.S. and Spanish Managers [managerial accounting].
The International Journal of Accounting. 1993; 28(4): 335-346.
Methodology: empirical descriptive.
Comparative study to determine how American and Spanish managers differ in
budget-related attitudes and behavior.
374. Johnson, Van E.; Khurana, Inder, United States (Northern Illinois University//Uni-
versity of Missouri-Columbia). Voluntary Disclosures and the SEC: Rule 144a
Private Debt Placements [professional development]. The International Journal
of Accounting. 1994; 29(2): 136-145.
Methodology: empirical descriptive.
Study providing preliminary evidence on the extent of voluntary disclosures
based upon Securities and Exchange Commission's Rule 144a.
375. Jones, Gardner M.; Kinfu, Johannes, Ethiopia/developing countries (Michigan
State University/ZHaile Selassie I University, Ethiopia). The Birth of an
Accounting Profession: The Ethiopian Experience [public accounting]. 77/^'
International Journal of Accounting. 1971 Sep; 7(1): 89-98.
Methodology: deductive descriptive.
Presentation of the historical circumstances leading in the development of
accounting in Ethiopia. Emphasizes the changes that are needed in institutions,
laws, and customs so as to create a full-fledged accounting profession in that
country.
376. Kafer, Karl, Europe/United States/Germany/Austria/France/Switzerland (Univer-
sity of Zurich). European National Uniform Charts of Accounts [accounting
theory]. The International Journal of Accounting. 1965 Sep; 1(1): 67-83.
Methodology: theoretical.
Brief history of the national charts of accounts, accompanied by a discussion of
the pros and cons of such a system and the design of a uniform chart.
112 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
377. Kafer, Karl: Zimmerman. V. K., United States/Europe (University of Zurich//Uni-
versity of Illinois at Urbana-Champaign). Methodologies on the Evolution of
the Statement of Sources and Applications of Funds [accounting theory]. The
International Journal of Accounting. 1967 Mar: 2(2): 89-121.
Methodology: deductive descriptive.
Application of A. C. Littleton's theories to the history of the modern funds
statements from its approximate origin in 1900 to the present.
378. Kantor, Jeffrey; Grosh, Michael, Canada (University of Windsor/ZMassey Univer-
sity. New Zealand). Deferred Income Tax Accounting: Opinions of Canadian
Accountants [financial accounting and reporting]. The International Journal of
Accounting. 1987 Sep; 23(1): 83-93.
Methodology: empirical descriptive.
Survey of Canadian chartered accountants regarding deferred income tax
accounting.
379. Kaocharem, Sukri. Thailand (Securities Exchange of Thailand (SET)). The Devel-
opment of the Securities Exchange in Thailand [financial accounting and
reporting]. The International Journal of Accounting. 1976 Sep; 12(1): 19-26.
Methodology: deductive descriptive.
Summary of the development of the securities exchange in Thailand which con-
tends that Thailand's goal is to force the growth of a capital market.
380. Karnes, Allan; Sterner, Julie; Welker, Robert; Wu, Frederick, Taiwan/United States
(Southern Illinois University/ZSouthem Illinois University/ZSouthem Illinois
UniversityZZSouthem Illinois University). A Bicultural Study of Independent
Auditors" Perceptions of Unethical Business Practices [social effects of
accounting]. The International Journal of Accounting. 1989; 24(1): 29-41.
Methodology: empirical statistical.
Study comparing the social, cultural, and ethical concerns of public accountants
in the U.S. and Taiwan.
381. Karnes. Allen: Sterner, Julie. United States (Southern Illinois University-Carbon-
daleZZSouthem Illinois University-Carbondale). An Empirical Investigation of
Morality Judgments by CPAs and Non-CPAs: Implications for Peer Reviews
[professional development]. Ethical Considerations in Contemporary Interna-
tional Accounting Practice. Champaign, IL: Center for International Education
and Research in Accounting, Department of Accountancy; 1992: 31-48.
Methodology: empirical statistical.
Comparative examination of a hypothetical self-monitored review program as
opposed to the current peer review system in place.
382. Katano, Ichiro, none (Hitotsubashi University, Japan). Structure of Accounting for
Changing Money Values [accounting theor>']. The International Journal of
Accounting. 1967 Mar; 2(2); 21-36.
Methodology: deductive descriptive.
Study of the structure of accounting for changing money value.
383. Katsuyama, Susumu, Japan (Nihon University, Japan). Recent Problems of the
Financial Accounting System in Japan [financial accounting and reporting].
The International Journal of Accounting. 1976 Sep; 12(1): 121-131.
Bibliography 113
Methodology: theoretical.
Discussion of the problems of financial accounting systems in Japan, with spe-
cial reference to international accounting.
384. Kazenski, Paul M.; Wong, Elaine Yin Ling, People's Republic of China (Univer-
sity of Hawaii at Manoa/ZUniversity of Hawaii at Manoa). Unifying Accounting
in the People's Republic of China [professional development]. The Interna-
tional Journal of Accounting. 1994; 29(4): 352-363.
Methodology: historical.
Study of the underlying reasons for the recent improvements with the account-
ing system in the People's Republic of China.
385. Keasey, Kevin; McGuiness, Paul, United Kingdom (University of Leeds, United
Kingdom/ZChinese University of Hong Kong). An Examination of the Accu-
racy and Bias Prospectus Earnings Forecasts: UK Evidence [accounting
theory]. The International Journal of Accounting. 1991; 26(4): 252-263.
Methodology: theoretical.
Examination of accuracy and bias of prospectus earnings forecasts (PEFs).
Reveals that PEP is a conservative but more accurate estimation of future earn-
ings while positively related to the time horizon of forecasts.
386. Kenny, Sara York; Larson, Robert K., Global (University of Utah, Salt Lake City//
Pennsylvania State University at Harrisburg). The Development of Interna-
tional Accounting Standards: An Analysis of Constituent Participation in
Standard-Setting [miscellaneous]. The International Journal of Accounting.
1995; 30(4): 211.
Methodology: empirical descriptive.
Analysis determining the major organizational participants in the standard-set-
ting process of the International Accounting Standards Committee (lASC).
387. Kern, Werner, Germany (University of Cologne). The Accounting Concept in Ger-
man Labor-Oriented Business Management [information systems]. The
International Journal of Accounting. 1975 Mar; 10(2): 23-35.
Methodology: theoretical.
Discussion of the "labor-oriented business management" proposal, originating
in the Institute for Economic and Social Sciences of the German Federation of
Trade Unions, to create a more informative accounting system. Shows that this
concept is intended to be a counterpart to traditional business management.
388. Keyserlingk, Alexander N., none (International Finance Corporation). International
Public Accounting: An Underdeveloped Profession [public accounting]. The
International Journal of Accounting. 1975 Sep; 11(1): 15-22.
Methodology: theoretical.
Study of why auditing and accounting professions have failed to expand world-
wide. Also discusses the expansion abroad of large audit firms in response to
the growth of international audit firms.
389. Keyserlingk, Alexander N.; Tetley, John C. N., United States (International
Finance CorporationZ/International Finance Corporation). Management Con-
trols of Investments in an International Development Bank [managerial
accounting]. Managerial Accounting: An Analysis of Current International
114 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
Application. Champaign, IL: Center for International Education and Research
in Accounting; 1984 Jan: 23-39.
Methodology: deductive descriptive.
Discussion of the management control system of the International Finance Cor-
poration (IFC). Describes the relationships of IPC with the World Bank and the
control system for investments before and after approval.
390. Kim, Jeong-Bon; Krinsky, Itzhak; Lee, Jason, Korea (Concordia University, Mont-
real, Quebec/ZMacMaster University, Hamilton, Ontario/ZMacMaster
University, Hamilton, Ontario). The Valuation of Initial Public Offerings and
Accounting Disclosures in Prospectuses: New Evidence from Korea [financial
accounting & reporting]. The International Journal of Accounting. 1994; 29(1):
46-61.
Methodology: capital markets.
Study involving the correlation between the valuation of initial public offerings
(IPOs) in Korea and the different motives having an impact of such valuations.
391. Kim, Seung H.; Kuzdrall, Paul J., United States/United Kingdom/Switzerland/
Chile/Colombia/Uruguay (Saint Louis University/ZUniversity of Akron). The
Simulation of Financial Strategy under Fluctuating Exchange Rates Conditions
[miscellaneous]. The International Journal of Accounting. 1977 Mar; 12(2):
93-107.
Methodology: modeling.
Discussion of the simulation models for accounting for exchange rate changes.
Presents models both for developed countries and for less developed countries.
392. Kirsch, Robert J.; Becker-Dermer, Dawn, United States/Canada/United Kingdom/
Australia/New Zealand (Southern Connecticut State UniversityZ/Ludlow Com-
posites Corporation, Fremont, Ohio). Proposed Revisions of International
Accounting Standard No. 21 and their Implications for Translation Accounting
in Selected English-Speaking Countries [financial accounting & reporting]. The
International Journal of Accounting. 1995; 30(1): 1 - 24.
Methodology: deductive descriptive.
Presentation of proposed revisions to reduce the alternatives allowed in report-
ing foreign exchange rates translations in an effort toward accounting
harmonization.
393. Kirsh, Robert J.; Evans, Thomas G., United States (Southern Connecticut State
University/ZUniversity of Central Florida). The Implementation of SEAS 52:
Did the Functional Currency Approach Prevail? [economics & development].
The International Journal of Accounting. 1994; 29(1): 20-33.
Methodology: empirical statistical.
Examination of the foreign environmental influence on the currency determina-
tion process as presented in SFAS 52. Results of this analysis do not support
U.S. dollar approach to currency translation.
394. Kirsh, Robert J.; Johnson, Wayne, United States (Bowling Green State University//
Bowling Green State University). The Impact of Fluctuating Exchange Rates
on US Multinational Corporate Budgeting for, and Performance Evaluation of.
Bibliography 115
Foreign Subsidiaries [managerial accounting]. The International Journal of
Accounting. 1991; 26(3): 149-173.
Methodology: empirical statistical.
Evaluation of methods used to implement foreign exchange rates in preparing
operating budgets of foreign subsidiaries of US based multinational
corporations.
395. Koch, Helmut, Germany (Westfalische Wilhelms Universitat, Germany). The Con-
cept of Synchronized Profit and Loss Accounting in Response to Continuous
Increases or Decreases in Prices [managerial accounting]. The International
Journal of Accounting. 1986 Mar; 21(2): 133-144.
Methodology: theoretical.
Discussion of profit and loss accounting during changes in prices. Presents a
model for "synchronized profit and loss accounting.."
396. Kohler, Eric L., United States (accounting consultant). Methodologies on Activity
Accounting [managerial accounting]. The International Journal of Accounting.
1967 Mar; 2(2): 59-64.
Methodology: deductive descriptive.
Outline of the principle features of activity accounting.
397. Kohler, Eric L., United States (accounting consultant). On Developing Interna-
tional Accounting Meanings [financial accounting and reporting]. The
International Journal of Accounting. 1965 Sep; 1(1): 35-40.
Methodology: deductive descriptive.
Discussion of the simplification and overuse of terms in the accounting profes-
sion and the difficulties with defining and translating such terms.
398. Kortan, Jerzy, Eastern bloc countries (Institute for Organization and Management/
University of Lodz, Poland). International Economic Organizations and Joint
Enterprises in Socialist Countries — Principles of Operation and Management
[economics and development]. The International Journal of Accounting. 1976
Sep; 12(1): 147-165.
Methodology: deductive descriptive.
Discussion of the roles and benefits of cooperative organizations such as joint
international organizations, joint international economic organizations, and
joint enterprises.
399. Kosiol, Erich E., none (Free University of Berlin). Accounting Models as Bases of
Managerial Decisions [accounting theory]. The International Journal of
Accounting. 1969 Sep; 5(1): 47-59.
Methodology: theoretical.
Study of the need for cooperation between theory and practice in order to
jointly construct accounting models for use in practical applications.
400. Kosiol, Erich E., none (Free University of Berlin). An Axiomatic Approach to the
Pagatoric Theory of Financial Income Determination [accounting theory]. The
International Journal of Accounting. 1970 Mar; 5(2): 1-28.
Methodology: theoretical.
Outline of the pagatoric theory of income determination, which describes all
entries, transactions, items, and statements of the financial bookkeeping system
116 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
in terms of payments by reducing the amounts to various types of receipts and
disbursements.
401. Kosiol, Erich E., Germany (Free University of Berlin). Price Changes, Money
Value, and Profit Distribution Within the Framework of Financial Accounting
[accounting theory]. The International Journal of Accounting. 1966 Sep; 2(1):
1-24.
Methodology: deductive descriptive.
Discussion of the German concepts of income determination which originated
as a result of the inflationary pressures on accounting after World War I.
402. Kosiol, Erich E., none (Free University of Berlin). A Proposal for a General Con-
cept of Cost [accounting theory]. The International Journal of Accounting.
1967 Sep; 3(1): 1-19.
Methodology: theoretical.
Study of the value of using a general cost concept in the development of a pre-
cise theoretical foundation of the cost accounting field.
403. Krasensky, Hans, United States (Hochschule fur Welthandel, Austria). The Con-
cept of a Business Asset [accounting theory]. The International Journal of
Accounting. 1967 Mar; 2(2): 47-58.
Methodology: theoretical.
Study of the difficulty of determining whether or not a good belongs to the
assets of a firm. Discusses the circumstances in which a general economic good
becomes an accountable business asset.
404. Krieg, Emile, none (Ingenieur E.C.P.). New Landmarks for Accountancy [account-
ing theory]. The International Journal of Accounting. 1969 Mar; 4(2): 93-1 13.
Methodology: theoretical.
Proposal for the abandonment of conventional double-entry principles of objec-
tive historical costs and the adoption of a new type of double-entry principles.
405. Kubin, Konrad W., United States (Virginia Polytechnic Institute and State Univer-
sity). The Changing Nature of International Accounting Courses [accounting
education]. The International Journal of Accounting. 1973 Sep; 9(1): 99-1 11.
Methodology: deductive descriptive.
Discussion of the changing nature of international accounting courses. Provides
some thoughts and encouragement to colleagues who contemplate establishing,
or participating in, an international accounting course.
406. Kubota, Keiichi, Japan (Musaski University, Japan). Information Content of
Accounting Numbers: Evidence on Tokyo Stock Exchange Firms [accounting
theory]. The International Journal of Accounting. 1980 Mar; 15(2): 61-76.
Methodology: capital markets.
Study of the correlation between the accounting disclosure of Japanese firms
with the return of the firms' securities. Does not pinpoint a specific part of the
information as a cause.
407. Kullberg. Duane R., United States/Switzerland (Arthur Andersen & Company).
Management of a Multinational Public Accounting Firm [public accounting].
The International Journal of Accounting. 1981 Sep; 17(1): 1-5.
Methodology: deductive descriptive.
Bibliography 117
Description of the managerial structure and internal environment of Arthur
Anderson & Company.
408. Kupzhasar, Naribaev, Soviet Union (Alma-Ata Institute of National Economy,
USSR). Computer Applications in Soviet Accounting [information systems].
The International Journal of Accounting. 1974 Sep; 10(1): 33-43.
Methodology: theoretical.
Study of the use of computers in accounting in the Soviet Union and how com-
puter use has influenced organizational and educational processes.
409. Kurisaka. Yoshiro, Japan/United States (International Affairs of the Keizai Koho
Center in Japan). Lessons and Opportunities in International Communication
[economics and development]. Recent Accounting and Economic Develop-
ments in the Far East. Champaign, IL: Center for International Education and
Research in Accounting; 1988 May: 229-234.
Methodology: deductive descriptive.
Discussion of the trade relationship between the U.S. and Japan finding that
Japan's markets are far more open than many U.S. markets. Calls for less com-
petition and greater friendship between the two countries.
410. Kwang, Ching-Wen, China/United Nations (California State College at Hayward).
The Economic Accounting System of State Enterprises in Mainland China
[financial accounting and reporting]. The International Journal of Accounting.
1966 Mar; 1(2): 61-99.
Methodology: theoretical.
Study of the concept of "economic accounting" as it is used in mainland China
and the implementation of the economic accounting system in various Chinese
state enterprises.
411. Lainez, Jose A.; Callao, Susana; Jarne, Jose I., Global (University of Zaragoza).
International Hannonization of Reporting Required by Stock Markets [financial
accounting and reporting]. The International Journal of Accounting, 1996;
31(4): 405-418.
Methodology: capital market
An evaluation of the degree of reporting required on the part of the different
stock markets from those companies which wish to be quoted on them, testing
whether the degrees of requirements are homogeneous at an international level.
412. Lai, Mohan; Dunk, Alan S., Smith, Gregory D.. Global (Massey University/The
University of Western Sydney/KPMG Peat Marwick). The Propensity of Man-
agers to Create Budgetary Slack: A Cross-National Re-Examination using
Random Sampling [managerial accounting]. The International Journal of
Accounting, 1996; 31(4): 483-496.
Methodology: empirical statistical
An examination of how managers' propensity to create budgetary slack is influ-
enced by the importance of meeting the budget, the degree of participation
allowed, the level of technology employed and the ability of superiors to detect
slack.
413. Lassila, Dennis R.; Smith, L. Murphy, United States (Texas A & M University//
Texas A & M University). An Analysis of Alternative Tax Treatments of the
118 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33. No. 1, 1998
Net Income of Controlled Foreign Subsidiaries of US Multinational Corpora-
tions [taxation]. The International Journal of Accounting. 1991; 26(1): 27-50.
Methodology: deductive descriptive.
Analysis of U.S. tax burden on net income of U.S. corporations' foreign subsid-
iaries under current law and three proposals to change the law. Concludes that
the low flat rate alternative is both simple and comparable to the current one.
414. Laswad, Fawzi; Mak, Y. T., New Zealand/ Australia/United States/Canada/United
Kingdom (Victoria University of Wellington. New Zealand/A^ictoria Univer-
sity of Wellington, New Zealand). An International Comparison of Uncertainty
Expressions in Accounting Standards [financial accounting & reporting]. The
International Journal of Accounting. 1994:29(1): 1-19.
Methodology: deductive descriptive.
Discussion of uncertainty expressions used in various accounting situations and
the consistency of their use across different countries.
415. Latanich, Gary A.; Kaminarides, John. United States (Arkansas State University//
Arkansas State University). Performance of Accountants in International Busi-
ness [professional development]. The International Journal of Accounting.
1984 Mar; 19(2): 157-164.
Methodology: empirical statistical.
Discussion of a survey that found a lack of productivity among accountants at
the international level.
416. Lau, Amy Hing-Ling; Yang, Ji-Liang, China (Oklahoma State University //Shang-
hai Academy of Social Sciences, People's Republic of China). Auditing in
China: Historical Perspective and Current Developments [auditing]. The Inter-
national Journal of Accounting. 1990; 25(1): 53-62.
Methodology: deductive descriptive.
Discussion of the historical, governmental, social, and economic influences on
the auditing profession in China.
417. Lawson, G. H., United Kingdom (University of Manchester, England). The Mea-
surement of Corporate Profitability on a Cash-Flow Basis [managerial
accounting]. The International Journal of Accounting. 1980 Sep; 16(1): 11-46.
Methodology: theoretical.
Study of the negative effects that current methods of interest and taxation have
on corporations in the U.K. and, by implication, all other democratic countries.
Concludes that if current trends continue, lending institutions will assume con-
trol of the corporations in the U.K.
418. Lebow. Marc I.: Tondkar, Rasoul H., Soviet Union (Virginia Union University//
Virginia Commonwealth University). Accounting in the Soviet Union [govern-
mental]. The InternationalJoumal of Accounting. 1986 Sep; 22(1): 61-79.
Methodology: deductive descriptive.
Discussion of the historical, social, and economic influences on the Soviet
Union's accounting system.
419. Lee, Dominica S., Hong Kong/United States (Chinese University of Hong Kong,
Shatin. Hong Kong). Further Evidence on Auditor Concentration: The Case of a
Bibliography 119
Growing Market [auditing]. The International Journal of Accounting. 1994;
29(3): 234-250.
Methodology: empirical descriptive.
Comparative study of auditor concentration in Hong Kong and the United
States and some of the underlying reasons.
420. Lee, John Y.; Monden, Yasuhiro, United States/Japan (Pace University/University
of Tsukuba, Japan). An International Comparison of Manufacturing-Friendly
Cost Management Systems [managerial accounting]. The International Journal
of Accounting, 1996; 31(2): 197-212.
Methodology: deductive descriptive
An international comparison of cost management systems which have claimed
as manufacturing-friendly in US and Japan, specifically between activity-based
costing and target costing and kaizen costing regarding their relative merits in
strategic cost management and operational improvement and control.
421. Lee, Samuel S. O., Korea (Korean Industrial Bank). Some Accounting and Philo-
sophical Aspects of the Third Korean Property Revaluation Law [financial
accounting and reporting]. The International Journal of Accounting. 1968 Mar;
3(2): 117-123.
Methodology: deductive descriptive.
Study of the Korean Property Revaluation Law of 1965, suggesting areas for
improvement.
422. Leech, Stewart A.; Pratt, Denis J.; Magill, W. G. W., Australia (University of Tas-
mania/ZUniversity of Tasmania/ZUniversity of Tasmania). Asset Revaluations
and Inflation in Australia, 1950 to 1975: An Industry Study [financial account-
ing and reporting]. The International Journal of Accounting. 1982 Mar; 17(2):
23-34.
Methodology: empirical descriptive.
Study of fourteen industries in Australia regarding asset revaluation. Finds that
six of the industries had a tendency to revalue based on increases of the compa-
nies' outputs.
423. Leech, Stewart A.; Pratt, Denis J., United Kingdom/New Zealand/Australia (Uni-
versity of Tasmania/ZUniversity of Tasmania). Current Cost Accounting in
Australia, New Zealand, and the United Kingdom: A Comparative Study
[financial accounting and reporting]. The International Journal of Accounting.
1978 Mar; 13(2): 105-118.
Methodology: deductive descriptive.
Comparison of the current cost accounting methods in the United Kingdom.
New Zealand, and Australia. Concludes that these countries will gradually
move to current cost accounting as the basis for financial reporting.
424. Lefebvre, Chris J. L., Belgium/European Economic Community (Katholieke Uni-
versitiet Leuven, Belgium). Development of Belgian Accounting Standards
Within the European Economic Community Framework [financial accounting
and reporting]. The International Journal of Accounting. 1981 Sep; 17(1):
103-132.
Methodology: deductive descriptive.
120 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
Overview of the impact that the European Economic Community has had on
Belgian accounting.
425. Lefebvre, Chris J. L., Belgium (Katholieke Universitiet Leuven, Belgium). The
Impact of Accounting Education on Accounting Research and Practice in Bel-
gium [accounting education]. Comparative International Accounting
Educational Standards. Champaign, IL: Center for International Education and
Research in Accounting; 1990 Apr: 71-95.
Methodology: deductive descriptive.
Synopsis of the historical and social effects on accounting research in Belgium.
Concludes that accounting research is not highly regarded in Belgium, thus
making accounting education more practical than theoretical.
426. Lefebvre, Chris J. L.; Lin, Liang-qi, China (Katholieke Universitiet Leuven, Bel-
giumy/Katholieke Universitiet Leuven, Belgium). Internationalization of
Financial Accounting Standards in the Peoples' Republic of China [financial
accounting and reporting]. The International Journal of Accounting. 1990;
25(3): 170-183.
Methodology: deductive descriptive.
Analysis of the regulations, capital structure, financial reporting, and methodol-
ogies responsible for the current accounting practices in China. Contends that
Chinese financial statements may be translated accurately.
427. LeMelle, Wilbert J., none (International Division for the Middle East and African
Overseas Development program of the Ford Foundation). The Imperative of an
Economic Development Program [economics and development]. The Interna-
tional Journal of Accounting. 1967 Sep; 3(1): 101-106.
Methodology: theoretical.
Study of two aspects of development programming, the organizational require-
ment for effective program administration and project construction and
implementation.
428. Lemon, W. Morley, Canada (University of Waterloo. Canada). Current Interna-
tional Accounting Education Standards-Canada [accounting education].
Comparative International Accounting Educational Standards. Champaign, IL:
Center for International Education and Research in Accounting; 1990 Apr:
133-145.
Methodology: deductive descriptive.
Outline of the professional and educational requirements of the major account-
ing bodies in Canada (CICA, SMAC, and CGAAC). Describes the accounting
program of the Waterloo University.
429. Leonard, Thomas B., United States (Price Waterhouse & Company). The Auditor's
Review of Management Reports and Records [auditing]. Managerial Account-
ing: An Analysis of Current International Application. Champaign, IL: Center
for International Education and Research in Accounting; 1984 Jan: 83-91.
Methodology: deductive descriptive.
Discussion of the use of management reports by auditors, emphasizing the
effect that management information systems have had on reporting and
reliability.
Bibliography 121
430. Leung, Victor K. L., United StatesAJnited Kingdom/Canada/Australia (The Chi-
nese University of Hong Kong). An Institutional Analysis of Authorship in the
International Journal of Accounting Education and Research [miscellaneous].
The InternationalJournal of Accounting. 1988 Mar; 23(2): 179-187.
Methodology: deductive descriptive.
Discussion and analysis of the countries and affiliations of the contributors of
articles published in the International Journal of Accounting.
431. Lev, Baruch, Israel/United States (Tel Aviv University). The Formulation of
Accounting Standards and Rules: A Comparison of Efforts in Israel and the
United States [financial accounting and reporting]. The International Journal of
Accounting. 1976 Mar; 11(2): 121-131.
Methodology: deductive descriptive.
Comparison of the development of accounting standards and rules in Israel and
the U.S. Provides some general observations on the problem of accounting prin-
ciples formulation.
432. Lin, Liangqi; Lefebvre, Chris, Belgium (Catholic University, Leuven/ZCatholic
University, Leuven). Defining a Subsidiary: A Comparison of IAS 27, EC Sev-
enth Directive, and the Belgian Royal Decree on Consolidation
[miscellaneous]. The New Europe: Recent Political and Economic Implications
for Accountants and Accounting. Champaign, IL: Center for International Edu-
cation and Research in Accounting; 1994: 1-16.
Methodology: deductive descriptive.
Comparative discussion of the IAS No. 27, EC Seventh Directive, and the Bel-
gian Royal Decree on Consolidation in terms of European accounting harmony.
433. Lin, Liang-Qi; Lefebvre, Chris; Kantor. Jeffrey, Asian Pacific (Katholieke Univer-
siteit Leuven, Belgium/ZKatholieke Universiteit Leuven, Belgium/ZKatholieke
Universiteit Leuven, Belgium/AVindsor University, Canada). Economic Deter-
minants of International Transfer Pricing and the Related Accounting Issues,
with Particular Reference to Asian Pacific Countries [economics and develop-
ment]. The International Journal of Accounting. 1993; 28(1): 49-70.
Methodology: deductive descriptive.
Study of international transfer pricing in various Asian Pacific countries.
434. Lin, Zhijun; Deng, Shengliang, China (University of Lethbridge, Alberta, Canada//
University of Saskatchewan, Saskatoon, Canada). Educating Accounting in
China: Current Experiences and Future Prospects [accounting education]. The
Inte motioned Journal of Accounting. 1992; 27(2): 164-177.
Methodology: historical.
A historical overview of accounting in China and an outlook on the reform of
Chinese accounting education.
435. Lindsay, Daryl, Australia/Canada (University of Saskatchewan, Saskatoon. Can-
ada). Auditor-Client Conflict Resolution: An Investigation of the Perceptions of
the Financial Community in Australia and Canada [auditing]. The International
Journal of Accounting. 1992; 27(4): 342-364.
Methodology: empirical statistical.
122 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1 , 1 998
Examination of Canadian and Australian auditors' ability to maintain objectiv-
ity during significant conflicts over accounting issues by investigating various
environmental factors.
436. Linowes, David F., United States (Laventhol, Krekstein. Horwath & Horwath).
Commentary on the Foreign Direct Investment Program [economics and devel-
opment]. The International Journal of Accounting. 1968 Sep; 4(1): 81-82.
Methodology: theoretical.
A brief commentary on the Foreign Direct Investment Program.
437. Linowes, David F., Canada/United States/France (University of Illinois at
Urbana-Champaign). The Implications of Transborder Data-Flow Development
for the Accounting Profession [accounting theory]. The International Journal
of Accounting. 1981 Sep; 17(1): 33-41.
Methodology: deductive descriptive.
Description of the technological innovations currently involved in international
telecommunications. Also discusses various regulations placed in the flow of
this information.
438. Linowes, David F., Saudi Arabia/Kuwait/Soviet Union/United States (University
of Illinois at Urbana-Champaign). International Business and Morality [social
effects of accounting]. The Multinational Corporation: Accounting and Social
Implications. Champaign, IL: Center for International Education and Research
in Accounting; 1977 Jan: 151-158.
Methodology: deductive descriptive.
Description of several different countries' approaches to ethics.
439. Linowes, David F., United States (Laventhol, Krekstein, Horwath & Horwath).
Strategies for the Survival of Our Democratic Institutions [social effects of
accounting]. The International Journal of Accounting. 1973 Sep; 9(1): 1-12.
Methodology: theoretical.
Critique of the inefficiencies of government and social institutions. Recom-
mends a socioeconomic accounting and management approach to the problem.
440. Lister, Roger J., United States/United Kingdom (University of Liverpool,
England). Accounting as History [accounting history]. The International Jour-
nal of Accounting. 1983 Mar; 18(2): 49-68.
Methodology: theoretical.
Study that concludes that accounting history should be viewed as a series of dis-
connected episodes rather than as a thoughtful development.
441. Littleton. A. C, none (University of Illinois at Urbana-Champaign). The Continu-
ing Importance of Basic Concepts [accounting theory]. The International
Journal of Accounting. 1965 Sep; 1(1): 55-65.
Methodology: theoretical.
Study that rejects the deductive approach in accounting research in favor of the
inductive approach.
442. Littleton, A. C, none (University of Illinois at Urbana-Champaign). The Signifi-
cance of Interrelated Concepts in Accounting [accounting theory]. The
International Journal of Accounting. 1966 Sep; 2(1): 25-34.
Methodology: theoretical.
Bibliography 123
Discussion of the interrelationships among accounting concepts used in enter-
prise accounting.
443. Lubbert, Jens, United States/Europe (University of Hamburg). National Account-
ing— Its Scope and Purpose [public accounting]. The International Journal of
Accounting. 1966 Mar; 1(2): 43-59.
Methodology: theoretical.
Brief survey of the history and purposes of national accounting and of basic
accounting problems that are dealt with in research.
444. Luck, Wolfgang, Germany (Phillips-Universitat Marburg, Germany). The Educa-
tion of Professional Accountants in West Germany: A Comparative
International Study [professional development]. Comparative International
Accounting Educational Standards. Champaign, IL: Center for International
Education and Research in Accounting; 1990 Apr: 41-60.
Methodology: deductive descriptive.
Discussion of the development of professional accounting education in West
Germany, giving both a historical and institutional overview. Concludes that
the system will move toward international accounting education concerns.
445. Luck, Wolfgang, Germany (Technical University of Berlin). The Impact of Interna-
tional Standards and Other Developments on the German Accounting
Profession [financial accounting and reporting]. The International Journal of
Accounting. 1982 Sep; 18(1): 45-56.
Methodology: deductive descriptive.
Discussion of the international and domestic influences on the German account-
ing profession. Concludes that these influences will affect the German
profession more in the future than they have in the past.
446. Luck, Wolfgang, Germany (Phillips-Universitat Marburg, Gemiany). Problems of
International Corporate Consolidations: A German View [financial accounting
and reporting]. The Multinational Corporation: Accounting and Social Implica-
tions. Champaign, IL: Center for International Education and Research in
Accounting; 1977 Jan: 159-181.
Methodology: theoretical.
Discussion of the German accounting practices for consolidating the multina-
tional enterprise. Also includes a desscription of the translation methods used.
447. Luck, Wolfgang, Germany (director of special education for public accounting
firms in Germany). Recent Changes in the German Professional Certified Pub-
lic Accountant (Wirtschaftsprufer) Examination [public accounting]. The
International Journal of Accounting. 1977 Sep; 13(1): 131-140.
Methodology: deductive descriptive.
Discussion of the current requirements to become a CPA in Germany, including
historical backgrounds.
448. Luther, Robert, Australia/United States/South Africa/Canada/United Kindom (Uni-
versity of Exeter). The Development of Accounting Regulation in the
Extractive Industries: An International Review [financial accounting and
reporting]. The International Journal of Accounting, 1996; 31(1): 67-93.
Methodology: deductive descriptive
124 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
A review of the development of accounting regulations and practices in the
extractive industries in five countries. Exposes possible explanations for the
lack of conformity and dearth of extractive industry accounting regulation.
449. Lynn, Murray; McGuiness, Paul, Hong Kong (Chinese University of Hong Kong//
Chinese University of Hong Kong). The Incidence. Nature, and Impact of
Extraordinary Items on Earnings: An Exploratory Study for Hong Kong [finan-
cial accounting & reporting]. The International Journal of Accounting. 1995;
30(1): 62-82.
Methodology: empirical statistical.
Examination of reported extraordinary items by Hong Kong companies over a
five-year period.
450. MacArthur, John B.. Global (Uiversity of North Florida). An Investigation into the
Influence of Cultural Factors in the International Lobbying of the International
Accounting Standards Committee: the Case of E32, Comparability of Financial
Statements [financial accounting and reporting]. The International Journal of
Accounting, 1996; 31(2): 213-237.
Methodology: empirical descriptive
An investigation of the influence of cultural factors on the corporate comment
letters sent on the International Accounting Standard Committee's E32, Com-
parability of Financial Statements, to test Gray's hypothesized linkages
between accounting values and the cultural values identifed by Hofstede.
451. Macharzina, Klaus R., Germany (Hohenheim University, Germany). The Impact of
Inflation on German Accounting: Theoretical Background and Professional
Issues [financial accounting and reporting]. The Impact of Inflation on
Accounting: A Global View. Champaign, IL: Center for International Educa-
tion and Research in Accounting; 1979 May: 225-240.
Methodology: deductive descriptive.
Discussion of the German approach to inflation accounting, compared with
approaches followed in other European countries.
452. Macharzina, Klaus R.; Coenenberg, Adolf G., Germany/Europe/United Kingdom/
United States (University of Hohenheim at Stuttgart. Germany//University of
Augsburg, Federal Republic of Germany). Current-Cost or Current Purchas-
ing-Power Accounting? An Internationally Based Assessment of FASB
Statement No. 33 on Financial Reporting and Changing Prices [accounting the-
ory]. The International Journal of Accounting. 1981 Mar; 16(2): 149-162.
Methodology: theoretical.
Comparison of the German model for inflation accounting with those of the
U.S. and U.K. Concludes that information regarding price-level change is not
necessary to users.
453. Macve, Richard; Liu, Zhi Yu, China (North Dakota State University//North Dakota
State University). A Proposal to Form a Unified Chinese Public Accountancy
Profession: An Academic Perspective [professional development]. The Interna-
tional Journal of Accounting. 1995; 30(1): 48-61.
Methodology: deductive descriptive.
Bibliography 125
Proposals to regulate Chinese public accounting and auditing professions as
well as the necessity to create a formal Certified Public Accountant designation
as a professional qualification.
454. Maingot, Michael, United Kingdom/Canada/United States (University of Ottawa).
Published Interim Reports in the United Kingdom [financial accounting and
reporting]. The International Journal of Accounting. 1983 Mar; 18(2): 133-149.
Methodology: empirical descriptive.
Survey of firms in the U.K. regarding financial disclosure. Finds that firms in
the U.K. should disclose on an interim basis.
455. Mak. Y. T., New Zealand/United States/United Kingdom (Victoria University of
Wellington. New Zealand). The Determinants of Accuracy of Management
Earnings Forecasts: A New Zealand Study [managerial accounting]. The Inter-
national Journal of Accounting. 1989; 24(3): 267-280.
Methodology: empirical statistical.
Analysis of the accuracy of earnings forecasts, through a comparison of com-
pany, industry segment, and economic conditions.
456. Maldonado, Rita M., United States (New York University). Recording and Classi-
fying Transactions in the Balance of Payments [financial accounting and
reporting]. The International Journal of Accounting. 1979 Sep; 15(1): 105-133.
Methodology: theoretical.
Discussion of the balance of payments method of accounting for foreign
exchange. Concludes that because of the complexity of the collection of data, a
balancing entry is required to offset errors.
457. Mande, Vivek, Japan/United States (University of Nebraska). A Comparison of US
and Japanese Analysts' Forecasts of Earnings and Sales [miscellaneous]. The
International Journal of Accounting, 1996; 31(2): 143-160.
Methodology: empirical statistical
An examination of whether there are significant differences in the forecast
accuracy of US and Japanese analysts in sales and earnings. Explains the source
of Japanese analysts' forecast superiority in sales.
458. Markell, William, Israel (University of Delaware). Accounting Education— Its
Importance in Developing Countries: Israel — A Case Study [accounting educa-
tion]. The International Journal of Accounting. 1968 Mar; 3(2): 125-33.
Methodology: deductive descriptive.
Case study of accounting education in Israel used to emphasize the importance
of accounting to the economic health and growth of developing nations, the
need for trained personnel in accounting, and the importance of managing such
development in businesses.
459. Markell, William, New Zealand/United States/United Kingdom (University of Del-
aware). A Comparison of Preparation for the Accounting Profession among
New Zealand, the United Kingdom, and the United States [accounting educa-
tion]. TVit' //!fernc/r/o7j^//yo/<rn<://o/'Acrr;M/7rmg. 1980 Mar; 15(2): 101-114.
Methodology: deductive descriptive.
Comparison of the accounting education systems in New Zealand, the U.K..
and the U.S. Concludes that all are similar with a few exceptions. The trend in
the U.S. is toward a five-year program. Programs in the United Kingdom are
126 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
moving towards a longer educational period and a better balance between the-
ory and practice. In New Zealand the need is for a professional examination
prior to public practice.
460. Markell, William, Botswana/United States (University of Delaware). Development
of Accounting Education and the Accounting Profession in Third World Coun-
tries: Botswana [accounting education]. The International Journal of
Accounting. 1985 Sep; 21(1): 99-105.
Methodology: deductive descriptive.
Description of the accounting profession in Botswana, centering on the
accounting program at the University of Botswana.
461. Martens, Stanley C; McEnroe, John E., United States (DePaul University, Chi-
cago, Illinois). Accounting Standard Setting in the United States: Are Public
Accountants Serving on FASB Influenced by their Former Firms? [professional
development]. The IntemationalJournal of Accounting. 1993:28(2): 147-155.
Methodology: empirical descriptive.
Study to determine the independence (or influence) of public accountants serv-
ing on the Financial Accounting Standards Board (FASB) from their former
employers.
462. Mauritz. E. Waldo, none (International Finance Corporation). Observations on
Accounting in International Finance [financial accounting and reporting]. The
International Journal of Accounting. 1969 Sep; 5(1): 61-69.
Methodology: deductive descriptive.
Review of the developments in international accounting. Contends that
accounting has failed to communicate compatible information from one country
to another.
463. Mautz, R. K., United States (University of Illinois at Urbana-Champaign). The
Direction of Accounting Education [accounting education]. The International
Journal of Accounting. 1967 Mar; 2(2): 37-46.
Methodology: theoretical.
Review of the changes in accounting education, projecting developments which
appear unavoidable if present tendencies continue. Suggests the steps accoun-
tancy must take in order to meet current needs and to prepare for the future.
464. Mautz, Robert K., Unknown (University of Illinois). Ethics — A Philosophical
Analysis [professional development]. Ethical Considerations in Contemporary
International Accounting Practice. Champaign, IL: Center for International
Education and Research in Accounting, Department of Accountancy; 1992:
1-10.
Methodology: deductive descriptive.
A philosophical summary of the term ethics, its underlying principles, and eth-
ics in regard to its application to public accounting.
465. McEnroe, John E., Global (DePaul University). An Examination of Attitudes
Involving Cash Flow Accounting: Implications for the Content of Cash Flow
Statements [financial accounting and reporting]. The International Journal of
Accounting. 1996; 31(2): 161-174.
Methodology: empirical descriptive.
Bibliography 127
A survey of the attitudes of several segments of the financial community
towards additional cash flow disclosures as well as their perceptions regarding
certain professed attributes of Cash Flow Accounting.
466. McCall, Owen S.; Popoff, Boris, New Zealand (Deloitte & Touche/AJniversity of
Otago, New Zealand). The Income and Rate of Return of Fanning Enterprises:
A New Zealand Case Study [managerial accounting]. The International Journal
of Accounting. 1987 Sep; 23(1): 105-127.
Methodology: empirical descriptive.
Case study of the accounting implications on a sheep farm in New Zealand.
467. McClure, Malcolm M., Soviet Union/Poland/Rumania/East GermanyA^ugoslavia
(Illinois State University). An Overview of Rumanian Accounting [financial
accounting and reporting]. The International Journal of Accounting. 1983 Sep;
19(1): 131-156.
Methodology: deductive descriptive.
Discussion of the structure and theory of Rumanian accounting. Provides a
background of methods and statement requirements.
468. McComb, Desmond, Europe/Germany/Ireland/Netherlands/France/Greece/Bel-
gium/Lux emburg/Italy/Denmark/ United Kingdom (University of
Southampton, England). Harmonization of European Coiporate Financial
Reporting [economics and development]. The Recent Accounting and Eco-
nomic Developments in Western Europe. Champaign, IL: Center for
International Education and Research in Accounting; 1985 May: 31-58.
Methodology: deductive descriptive.
Description of the effects of the seventh and eighth directives on the European
Economic Community.
469. McComb, Desmond, United States/European Economic Community (University of
Southampton, England). International Accounting Standards and the EEC Har-
monization Program: A Conflict of Disparate Objectives [financial accounting
and reporting]. The International Journal of Accounting. 1982 Mar; 17(2):
35-48.
Methodology: deductive descriptive.
Discussion of the development of international accounting standards. Discusses
the main topics which have had an influence on these standards.
470. McComb, Desmond, United Kingdom/FranceAVest Germany (University of
Southampton, England). The International Harmonization of Accounting: A
Cultural Dimension [financial accounting and reporting]. The International
Journal of Accounting. 1979 Mar; 14(2): 1-16.
Methodology: deductive descriptive.
Discussion of the many influences on the development of international account-
ing standards. Contends that an understanding of those influences is necessary
to achieve better international standards.
471. McGuinness, Paul, Hong Kong (Chinese University of Hong Kong). The Financial
Characteristics of Hong Kong Tender Offer Targets [economics & develop-
ment]. The International Journal of Accounting. 1993; 28(3): 215-231.
Methodology: empirical statistical.
128 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1 , 1 998
Investigation of financial attributes of companies which are most susceptible to
coqjorate takeovers in Hong Kong. Statistical analysis on data taken revealed
that target firms had higher profit growth levels and liquidity while having
lower gearing levels.
472. McKeown. James, none (University of Illinois at Urbana-Champaign). Professional
Responses to Reporting the Impact of Inflation: A Discussion-Part II [financial
accounting and reporting]. The Impact of Inflation on Accounting: A Global
View. Champaign. IL: Center for International Education and Research in
Accounting; 1979 May: 183-188.
Methodology: deductive descriptive.
Discussion of issues raised by Felix Pomeranz.
473. McKinnon, Jill. Japan/United States (Macquarie University, Australia). Cultural
Constraints on Audit Independence in Japan [auditing]. The International Jour-
nal of Accounting. 1984 Sep; 20(1): 17-43.
Methodology: deductive descriptive.
Discussion of the social and legal factors affecting independence in Japan.
474. McKinnon. S. M.; Janell, Paul, global (Northeastern University/ZNortheastem Uni-
versity). The International Accounting Standards Committee: A Performance
Evaluation [financial accounting and reporting]. The International Journal of
Accounting. 1984 Mar; 19(2); 19-34.
Methodology; deductive descriptive.
Critique of the role of the lASC in implementing international standards. Con-
tends that shortcomings of the lASC are due to internal constraints within
individual countries which will be lifted as companies look for international
financing.
475. McMahon, Terrence J.. Brazil/Developing Countries (United States Agency for
International Development Mission. Brazil). Brazil: A Maturing Capital Market
Seeks Accelerated Improvements in Accountancy [economics and develop-
ment]. The International Journal of Accounting. 1972 Sep; 8(1): ll-Sl.
Methodology: deductive descriptive.
Review of how the demand for the FUMCAP program evolved, with sugges-
tions as to how this program can accomplish its purpose.
476. Meek, Gar}. United States/Japan/Netherlands/Philippines/United Kingdom/Israel
(Oklahoma State University). Interim Earnings Announcements in the United
States by Non-U. S. Multinational Corporations-Responses by the U.S. Securi-
ties Market [financial accounting and reporting]. The International Journal of
Accounting. 1985 Mar; 20(2): 1-18.
Methodology: capital markets.
Study of the effects of financial announcements made abroad and of the foreign
stock markets in which a company's securities are traded. Finds that these
announcements do affect stock prices abroad, however not equally, from one
country to another.
477. Meek. Gary, United States/IsraeL/Japan/Netherlands/Philippines/United Kingdom
(Oklahoma State University). The Multiple Earnings Announcements of
Non-U. S. Multinational Enterprises — Implications of Observed Patterns [finan-
Bibliography 129
cial accounting and reporting]. The International Journal of Accounting. 1983
Sep; 19(1): 115-130.
Methodology: empirical statistical.
Study of non U.S. multinational companies regarding their reporting practices.
Concludes that a great many reporting deficiencies exist world wide.
478. Meek, Gary; Gray, Sidney J., United States/EEC (Oklahoma State University//Uni-
versity of Glasgow). The Impact of Stock Market and Corporate Globalization
on Disclosure Trends in International Financial Reporting [financial accounting
& reporting]. Changing International Financial Markets and Their Impact on
Accounting. Champaign, IL: Center for International Education and Research
in Accounting, Department of Accountancy; 1992: 43-66.
Methodology: capital markets.
Analysis of the effects of global stock market transactions have on the financial
reporting process of multinational corporations (MNCs).
479. Mehta, Dileep R.; Thapa, Samanta, United States (Georgia State University/ AVest-
ern Kentucky University). FAS-52, Functional Currency, and the
Non-Comparability of Financial Reports [financial accounting & reporting].
The International Journal of Accounting. 1991; 26(2): 71-84.
Methodology: theoretical.
Examines the notion of functional currency and its potential of non-comparabil-
ity of financial reports by presenting empirical evidence of some MNCs. Five
recommendations to enhance comparability.
480. Meng, Tan Teck; Hoong, Pang Yang; Liang, Foo See, Singapore (Nanyang Techni-
cal University, Singapore/ZNanyang Technical University, Singapore/ZNanyang
Technical University, Singapore). Accounting Education and Practice: The Sin-
gapore Experience [accounting education]. The International Journal of
Accounting. 1994; 29(2): 161-183.
Methodology: deductive descriptive.
Study of the demand and responsiveness of accounting education in Singapore
and the relationship between accounting and Singapore's business and indus-
trial base.
481. Mensah, Yaw M.; Biagioni, Louis F., none (Indiana University/Indiana Univer-
sity). The Predictive Ability of Financial Ratios Using Alternative Translation
Methods for Foreign-Currency Financial Statements: A Simulation Study
[accounting theory]. The International Journal of Accounting. 1980 Sep; 16(1):
221-245.
Methodology: empirical statistical.
Study of a model to determine the predictability of financial ratios using differ-
ent translation methods. Indicates that none of the translation methods was
more predictable than the others.
482. Mensah-Mireku, Yaw, Ghana (University of Illinois at Urbana-Champaign).
Accounting Aspects of Economic Development in Ghana [economics and
development]. The Multinational Corporation: Accounting and Social Implica-
tions. Champaign, IL: Center for International Education and Research in
Accounting; 1977 Jan: 127-138.
Methodology: historical.
130 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1 , 1 998
Historical description of accounting and economics in Ghana, concluding with
a description of future requirements for economic development.
483. Merei. Issam J., Saudi Arabia/Egypt/United States (Arab Society of Certified
Accountants). Design and Application of Professional Standards in a Develop-
ing Country: The Case in Saudi Arabia [professional development]. The Recent
Accounting and Economic Developments in the Middle East. Champaign, IL:
Center for International Education and Research in Accounting; 1985 May:
43-68.
Methodology: deductive descriptive.
Discussion of the current and possible trends in the development of professional
standards in Saudi Arabia.
484. Messier, Jr William F., United States (University of Florida). SEAS No. 8: Some
Implications for MNCs [accounting theory]. The International Journal of
Accounting. 1979 Mar; 14(2): 101-119.
Methodology: deductive descriptive.
Discussion of past accounting practices, giving reasons for the adoption of
SEAS no. 8 and considering the potential impact of this ruling.
485. Mette, Jr William R., Erance/Germany/United StatesAJnited Kingdom/Canada/
Australia (Alexander Grant Tansley Witt). A Discussion of Current Interna-
tional Accounting and Reporting Problems [financial accounting and
reporting]. The Multinational Corporation: Accounting and Social Implications.
Champaign, IL: Center for International Education and Research in Account-
ing; 1977 Jan: 183-212.
Methodology: empirical descriptive.
Survey of the differences in accounting and reporting standards of France, Ger-
many, U.S., United Kingdom, Canada, and Australia.
486. Mielke, David E.: Giacomino, Don E., United States/Europe (Marquette Univer-
sity//Marquette University). Cash-Flow Reporting: A Step Toward
International Harmonization [financial accounting and reporting]. The Intema-
tionalJoumal of Accounting. 1987 Mar; 22(2): 143-152.
Methodology: deductive descriptive.
Review of the international standards affecting cash-flow accounting. Contends
that the international standard-setting bodies should promulgate uniform
standards.
487. Millar, James A.; Nunthirapakom, Ted, United States/Canada (University of
Arkansas/ZNational Institute of Development Administration, Bank of Thai-
land). A Comparison of Earnings Per Share Reporting for United States and
Canadian Companies [financial accounting & reporting]. The International
Journal of Accounting. 1992; Vo. 27(1): 38-44.
Methodology: empirical statistical.
Statistical analysis to validate differences in earnings per share (EPS) reporting
between United States and Canadian companies. Results of such analysis could
not validate the hypothesis.
488. Min, H. K.; Song, Ja; Kim, J. S., Korea (University of Wisconsin, Whitewater//
Yonsei University, Seoul, KoreaZ/Yonsei University, Seoul, Korea). Account-
ing Education in Korea: Current Trends and the Challenge for the Future
Bibliography 131
[accounting education]. The International Journal of Accounting. 1993; 28(1):
78-87.
Methodology: deductive descriptive.
Study of accounting education in Korea. Topics include accounting origins,
educational models and curricula, and recent important trends.
489. Mintz, Steven M., United States (California State University at Hayward). Interna-
tionalization of the Accounting Curriculum [accounting education]. The
International Journal of Accounting. 1980 Sep; 16(1): 137-151.
Methodology: empirical descriptive.
Survey of the international members of the AAA and schools with an interna-
tional curriculum, indicating a trend toward more of an international
curriculum.
490. Mirghani, Mohamed A., developing countries (Miami University, Ohio). A Frame-
work for a Linkage between Microaccounting and Macroaccounting for
Purposes of Development Planning in Developing Countries [economics and
development]. The International Journal of Accounting. 1982 Sep; 18(1):
57-68.
Methodology: theoretical.
Presentation of a framework for connecting micro and macro accounting, and
the use of this framework for development purposes. Concludes that developing
countries must adopt strategic plans for accounting development.
491. Moller, George, United States/Canada (international consultant). The Multinational
Executive: Patroit or Traitor [managerial accounting]. The International Jour-
nal of Accounting. 1972 Mar; 7(2): 69-75.
Methodology: theoretical.
Presentation of a mock trial which examines the legal problems faced by top
management of multinational enterprises.
492. Moores, Ken; MacGregor, Alan C, New Zealand/United States (Bond University,
Queensland, Australia/ZUniversity of Otago, Dunedin, New Zealand). Account-
ing Education in New Zealand [accounting education]. The International
Journal of Accounting. 1992; 27(1): 69-79.
Methodology: empirical descriptive.
Analysis of the progression of accounting education in New Zealand and its
interrelationship with that country's socioeconomic history and future.
493. Mora, Jr Ricardo, Mexico (Firm Despacho Freyssinier Morin, S.C., Mexico). The
Accounting Profession in Mexico— And Why [financial accounting and report-
ing]. The International Journal of Accounting. 1972 Sep; 8(1): 17-24.
Methodology: historical.
Review of the history of the accounting profession in Mexico, with a discussion
of current practices.
494. Morgan, Robert A., United States/Brazil (Caterpillar Tractor Company). The Mul-
tinational Enterprise and Its Accounting Needs [taxation]. The International
Journal of Accounting. 1967 Sep; 3(1): 21-28.
Methodology: deductive descriptive.
132 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
Study of the problems that arise in accounting needs for multinational enter-
prises. Discusses solutions that have been used, and problems that remain
unresolved.
495. Morse. Dale, Global (University of Oregon, Eugene, Oregon). Explaining the Inter-
national Supply of Auditors [auditing]. The International Journal of
Accounting. 1993; 28(4): 347-355.
Methodology: empirical statistical.
Study involving 62 different countries to compare the proportion of auditors to
each country's population. Results show that countries with an established
financial sector and former British colonies tend to have a larger number of
auditors.
496. Morsicato, Helen G.; Diamond, Michael A., United States (University of Oregon//
California State University at Los Angeles). An Approach to 'Environmentaliz-
ing' Multinational Enterprise Performance Evaluation Systems [managerial
accounting]. The International Journal of Accounting. 1980 Sep; 16(1):
247-266.
Methodology: deductive descriptive.
Discussion of the use of environmental considerations in the evaluation of mul-
tinational enterprise performance. Centers on the Farmer-Friedman Model for
incorporating environmental issues in the evaluation system.
497. Morsicato, Helen G.; Radebaugh, Lee H., United States (University of Oregon//
Pennsylvania State University). International Performance Evaluation of Multi-
national Enterprise Operations [managerial accounting]. The International
Journal of Accounting. 1979 Sep; 15(1): 77-94.
Methodology: empirical descriptive.
Study of the currency used by multinational corporations for internal reporting.
Concludes that local currency should be used in measuring performance.
498. Most, Kenneth S., France (Texas A & M University). The French Accounting
Experiment [financial accounting and reporting]. The International Journal of
Accounting. 1971 Sep; 7(1): 15-27.
Methodology: deductive descriptive.
Application of an accounting model of a French firm to a wide range of com-
mercial and industrial activities so that elegant variations and unnecessary
proliferations could be eliminated.
499. Moustafa, Mohamed Eid, Saudi Arabia (California State University at Long
Beach). Framework for the Role of Accounting in the Economic Development
in Saudi Arabia [financial accounting and reporting]. The Recent Accounting
and Economic Developments in the Middle East. Champaign, IL: Center for
International Education and Research in Accounting; 1985 May: 197-211.
Methodology: deductive descriptive.
Discussion of the economic, social, and regulatory effects of the Saudi Arabian
accounting profession.
500. Mueller. Gerhard G., none (University of Washington). Academic Research in
International Accounting [professional development]. The International Jour-
nal of Accounting. 1970 Sep; 6(1): 67-81.
Methodology: theoretical.
Bibliography 133
Proposal of topics suitable for theoretical inquiry. Defines applied and theoreti-
cal research in accounting, as correlated with the international dimensions of
the discipline.
501. Mueller, Gerhard G., United States (University of Washington). Accounting Princi-
ples Generally Accepted in the United States Versus Those Generally Accepted
Elsewhere [accounting theory]. The International Journal of Accounting. 1968
Mar; 3(2): 91-103.
Methodology: theoretical.
Empirical evaluation of the complexities of accounting principles followed in
several countries.
502. Mueller, Gerhard G., none (University of Washington). An International View of
Accounting and Disclosure [public accounting]. 77?^ International Journal of
Accounting. 1972 Sep; 8(1): 117-134.
Methodology: theoretical.
Discussion of an international trend toward increased financial disclosure that
has developed since the mid-1960s. Holds that disclosure improvements offer
more hope for financial reporting than accounting development during the
1970s.
503. Mueller, Gerhard G., United States (University of Washington). St. Louis to
Munich: The Odyssey of the International Congresses of Accountants [financial
accounting and reporting]. The International Journal of Accounting. 1979 Sep;
15(1): 1-12.
Methodology: deductive descriptive.
History of the International Congress of Accountants listing the major topics of
each congress. Concludes that the congress has been instrumental in bringing
together international accounting principles and methods of disclosure.
504. Mugan, Can Simga, United States (Bilkent University, Ankara, Turkey). Exploring
the Effect of Non-Financial Indicators on Returrn on Investment in Multina-
tional Companies [managerial accounting]. The International Journal of
Accounting. 1992; 27(2): 123-136.
Methodology: empirical statistical.
Introduction and explanation of a performance evaluation model for analyzing
correlation of investment (ROI) and nonfinancial indicators of performance on
multinational companies in the United States and abroad.
505. MuUer, Welf, Europe (Klynveld Main Goerdeler/Johann- Wolfgang-Goethe
Univesitat, Germany). Eighth Council Directive on the Approval of Persons
Responsible for Statutory Audits of Accounting Documents [financial account-
ing and reporting]. The Recent Accounting and Economic Developments in
Western Europe. Champaign, IL: Center for International Education and
Research in Accounting; 1985 May: 15-30.
Methodology: deductive descriptive.
Discussion of the effects that the eighth directive will have on the European
Economic Community and international auditing.
506. Murphy, George J., Canada/United States/United Kingdom (University of
Saskatchewan, Canada). Financial Statement Disclosure and Corporate Law:
134 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1 , 1 998
The Canadian Experience [public accounting]. The International Journal of
Accounting. 1980 Mar; 15(2): 87-99.
Methodology: historical.
History of financial statement disclosure in Canada starting in 1 877 comparing
the forces currently affecting disclosure in the U.K.. U.S., and Canada. Con-
cludes that the Canadian situation is different than that in the U.K. and the U.S.
because the Canadian Institute's recommendations have been passed as
legislation.
507. Murphy, George J.; Fizzell, M. R.; Lindsay, W. D., Canada/United States (Univer-
sity of Saskatchewan, Canada/AJniversity of Saskatchewan, Canada//
University of Saskatchewan, Canada). Revaluation of Assets in Canada,
1920-36 [financial accounting and reporting]. The International Journal of
Accounting. 1988 Mar; 23(2): 33-45.
Methodology: empirical statistical.
Study of Canadian corporations regarding their revaluation of assets from 1920
to 1936. Finds that these revaluations were infrequent and were not undertaken
to increase earnings or equity.
508. Nair, R. D.; Frank, Werner G., United States/Europe/Central & South America
(University of Wisconsin at Madison//University of Wisconsin at Madison).
The Harmonization of International Accounting Standards, 1973-1979 [finan-
cial accounting and reporting]. The International Journal of Accounting. 1981
Sep; 17(1): 61-77.
Methodology: empirical descriptive.
Survey of the international accounting practices used by 37 countries. Con-
cludes that since the inception of the international accounting standards
commission a growing acceptance of international standards has occurred.
509. Nakajima, Seigo, Japan (International Christian University, Japan). Economic
Growth and Corporate Financial Reporting in Japan [public accounting]. The
International Journal of Accounting. 1973 Sep; 9(1): 35-41.
Methodology: deductive descriptive.
Discussion of the development of accounting in Japan, corporate financial
reporting in Japan, and of the economic growth in Japan during the sixties.
510. Nakano, Isao, none (Kobe University, Japan). On Monetary-Sacrifice-Based
Depreciation [accounting theory]. The International Journal of Accounting.
1978 Mar; 13(2): 41-55.
Methodology: theoretical.
Presentation of a model for monetary-sacrifice-based depreciation. Presents
arguments that this method is technically and theoretically more valid, and gen-
erally more useful, than current depreciation techniques.
511. Nance, Jon R.; Roemmich, Roger A., United States/West Germany/United King-
dom (University of Nebraska/ZUniversity of Georgia). Financial Statement
Impact of Foreign Currency Translation Alternatives [financial accounting and
reporting]. The International Journal of Accounting. 1983 Sep; 19(1): 89-113.
Methodology: empirical statistical.
Study of different translation methods as to their effect on the financial
statements.
Bibliography 135
512. Nance, Jon R.; Roemmich, Roger A., global (University of Nebraska/ZUniversity of
Georgia). Foreign Currency Translation: An Evaluation [financial accounting
and reporting]. The International Journal of Accounting. 1983 Mar; 18(2);
29-48.
Methodology: deductive descriptive.
Evaluation of different currency translation methodologies.
513. Narayanaswamy, R., India (Indian Institute of Management, Bangalore, India).
Accounting for Leases in India: Some Evidence of Economic Impact [financial
accounting & reporting]. The International Journal of Accounting. 1992; 27(3):
255-261.
Methodology: empirical descriptive.
Investigation of lease accounting in India, with emphasis given to off-balance
sheet financing and capitalization.
514. Nbudzu, Gordian A.; Tsetsekos, George P.. United States (Drexel University,
Philadephia, Pennsylvania/ZDrexel University, Philadephia, Pennsylvania).
Functional Currency Smoothing and Managerial Incentives: An Empirical Test
[financial accounting & reporting]. The International Journal of Accounting.
1992: 27(1): 27-37.
Methodology: empirical statistical.
Examination of income smoothing methods that do not require disclosure, with
particular emphasis on SFAS No. 52, which allows foreign currency adjustment
to be included in earnings.
515. Ndubizu, Gordian A., United Nations (Drexel University, Philadelphia, Pennsylva-
nia). Accounting Disclosure Methods and Economic Development: A Criterion
for Globalizing Capital Markets [financial accounting & reporting]. The Inter-
national Journal of Accounting. 1992; 27(2): 151-163.
Methodology: capital markets.
Study determining the relationship between capital markets and accounting dis-
closure methods and their influences on economic development.
516. Ndubizu, Gordian A., developed countries/third world countries (North Texas State
University). Accounting Standards and Economic Development: The Third
World in Perspective [economics and development] . The International Journal
of Accounting. 1984 Mar; 19(2): 181-196.
Methodology: theoretical.
Examination of the effect that accounting standards have on economic develop-
ment. Concludes that the current situation adversely affects the third world
countries.
517. Ndubizu, Gordian A., United States (Drexel University). Management Preferences
for Foreign Currency Standards: An Empirical Analysis [managerial account-
ing]. The International Journal of Accounting. 1987 Mar; 22(2): 115-130.
Methodology: empirical descriptive.
Study of financial controllers and managers of muUinational corporations
regarding their early adoption of SFAS No. 52. Determined that the stan-
dard-setting process was political and that early adoption depended on
favorable effects on earnings.
136 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
518. Needles, Jr Belverd E., Hong Kong/Indonesia/Japan/Malaysia/Philippines/Sin-
gapore/South Korea/Taiwan/Thailand (DePaul University). Auditing Standards
in the Far East: An Overview [auditing]. Recent Accounting and Economic
Developments in the Far East. Champaign, IL: Center for International Educa-
tion and Research in Accounting; 1988 May: 65-95.
Methodology: empirical descriptive.
Study of the various standards and qualifications necessary to be an auditor in
the Far East. Survey questions included issues affecting the auditor, indepen-
dence, attestation, and reports.
519. Needles, Jr Belverd E.; Powers, Marian; Revsine, Lawrence, France/Germany/the
Netherlands/Sweden/Switzerland/United Kingdom (DePaul University//Uni-
versity of Illinois at Chicago/ZNorthwestem University). Financial Disclosures
and Institutional Characteristics: Pension Reporting Differences Across Six
Countries [financial accounting & reporting]. The International Journal of
Accounting. 1991; 26(3): 190-205.
Methodology: empirical descriptive.
Analysis of pension and retirement benefits reporting and disclosure practices
of six European countries.
520. Needles, Jr Belverd E., none (University of Illinois at Urbana-Champaign). Imple-
menting a Framework for the International Transfer of Accounting Technology
[financial accounting and reporting]. The International Journal of Accounting.
1976 Sep; 12(1): 45-62.
Methodology: theoretical.
Proposal for a conceptual framework by which a country may formulate a strat-
egy for the international transfer of accounting technology as a part of its
overall economic plan. A three-phase plan is described for the implementation
of this framework.
521. Needles, Jr Belverd E., global (DePaul University). International Auditing
Research: Current Assessment and Future Direction [auditing]. The Interna-
tional Journal of Accounting. 1989:24(1): 1-20.
Methodology: deductive descriptive.
Discussion of the need for international auditing research. Reviews publications
from 1978-1987, discovering that few articles were written then, making sug-
gestions for improvement.
522. Needles, Jr Belverd E., Developing Countries (DePaul University). A Profile,
Annotated Bibliography, and Index of Accounting Research on Developing
Countries: 1965-1990 [professional development]. The International Journal of
Accounting. 1995; 30(2): 107-128.
Methodology: deductive descriptive.
Bibliographical compilation involving international accounting research arti-
cles concerning developing countries from 1965 to 1990.
523. Needles, Jr Belverd E., The Netherlands/United Kingdom/ Italy/France/Germany/
Sweden (DePaul University, Chicago, Illinois). The Regulation of Auditing
Standards: An Assessment of Six European Countries [auditing]. The New
Europe: Recent Political and Economic Implications for Accountants and
Bibliography 137
Accounting. Champaign, IL: Center for International Education and Research
in Accounting; 1994: 61-96.
Methodology: deductive descriptive.
Identification of the similarities and differences in auditing procedures and
standards in six European countries.
524. Needles, Jr Belverd E., Europe (DePaul University). Standards for International
Accounting Education: A Consideration of the Issues [accounting education].
Comparative International Accounting Educational Standards. Champaign, IL:
Center for International Education and Research in Accounting; 1990 Apr:
1-29.
Methodology: theoretical.
Discussion of the international standards necessary for the education of quali-
fied accountants. Provides a methodology for the analysis and implementation
of such standards.
525. Nehrt, Lee C, Tunisia (Indiana University). Evaluating the Political Climate for
Private Investment with Special Application to Tunisia [economics and devel-
opment]. The International Journal of Accounting. 1969 Sep; 5(1): 109-122.
Methodology: theoretical.
Study of the terms "investment climate" and "political climate." Evaluates the
political climate for private investment and the general applicability of this
model.
526. Neuhauser, Lenz. United States (KPMG Peat Marwick). Analyzing Management
Information Systems of Multinational Companies: An External Auditor's
Viewpoint [information systems]. Managerial Accounting: An Analysis of Cur-
rent International Application. Champaign. IL: Center for International
Education and Research in Accounting; 1984 Jan: 41-51.
Methodology: deductive descriptive.
Discussion of the role of management information systems in international
accounting. Suggests that certain elements regarding currency translation, infla-
tion, intercompany pricing, performance criteria, and risk analysis be
incorporated in these systems.
527. Neumann. Frederick L., United States (University of Illinois at Urbana-Cham-
paign). Career Education in Accounting in the United States: A Current
Appraisal [accounting education]. The International Journal of Accounting.
1974 Mar; 9(2): 169-179.
Methodology: theoretical.
Discussion of the trend in accounting toward post-secondary schools, arguing
against this trend.
528. Ng. Patrick P. H.; Fung, S. M.; Tai, Benjamin Y. K.. Hong Kong (City Polytechnic
of Hong Kong//City Polytechnic of Hong Kong//City Polytechnic of Hong
Kong). Auditing Firm Reputation and the Underpricing of Initial Public Offer-
ings in Hong Kong: 1989-1991 [auditing]. The International Journal of
Accounting. 1994; 29(3): 220-233.
Methodology: empirical statistical.
138 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
Presentation of the results of empirical tests to determine the relationship
between auditing firm reputation and the underpricing of initial public offerings
in Hong Kong.
529. Niehus. Rudolph J., Germany (Deloitte & Touche). Generally Accepted Auditing
Principles in Germany [auditing]. The International Journal of Accounting.
1969 Mar; 4(2): 113-124.
Methodology: deductive descriptive.
Review of the importance and significance of newly adopted auditing rules in
Germany.
530. Niehus. Rudolph J., Germany/Europe (Deloitte & Touche). Harmonized European
Economic Community Accounting— A German View of the Draft Directive for
Uniform Accounting Rules [public accounting]. The International Journal of
Accounting. 1972 Mar; 7(2): 91-125.
Methodology: deductive descriptive.
Summary of the features of the European Economic Community valuation
requirements. Explains the German perspective on the format of financial state-
ments, disclosures, and reporting rules.
531. Niehus, Rudolph J., West Germany/United States (Dr. WoUert-Dr. Elmendorff
K.G., Germany). Stock Corporation Law Reform in Germany and the Public
Accountant [financial accounting and reporting]. The International Journal of
Accounting. 1966 Mar; 1(2): 25-41.
Methodology: deductive descriptive.
Summary and explanation of the changes in the Stock Corporation Law of 1965
in West Germany.
532. Ninsuvannakul, Pianchai. Thailand (University of Illinois at Urbana-Champaign).
Education for Accountancy in Thailand [accounting education]. The Interna-
tional Journal of Accounting. 1966 Sep; 2(1): 77-1 1 1.
Methodology: deductive descriptive.
Study of education for accountancy in Thailand which evaluates professional
activities pertaining to the training of competent accountants.
533. Ninsuvannakul. Prawit. Indonesia/Malaysia/Philippines/Singapore/Thailand/Bru-
nei (Chulalongkom University, Thailand/Ministry of Science and Technology,
Thailand). The Development of the Accounting Profession of the ASEAN
Countries: Past, Present, and Future [professional development]. Recent
Accounting and Economic Developments in the Far East. Champaign, IL: Cen-
ter for International Education and Research in Accounting; 1988 May:
115-148.
Methodology: deductive descriptive.
Study of the history and characteristics of the accounting profession in the
ASEAN countries. Concludes that accountants in the ASEAN countries should
be more active and up to date with the accounting environment.
534. Nishimura, Akira. Japan (Kyushu University, Fukuoka, Japan). Transplanting Japa-
nese Management Accounting and Cultural Relevance [managerial
accounting]. The International Journal of Accounting. 1995; 30(4): 318-330.
Methodology: empirical descriptive.
Bibliography 139
Study of the transfer of Japanese management accounting and cultural tech-
niques to countries abroad.
535. Niskanen, Jyrki; Kinnunen, Juha; Kasanen, Eero, Finland (Helsinki School of Eco-
nomics. Finland/ZHelsinki School of Economics, Finland/ZHelsinki School of
Economics, Finland). The Association of Stock Returns with International
Accounting Standards Earnings: Evidence from the Finnish Capital Market
[economics & development]. The Intemational Journal of Accounting. 1994;
29(4): 283-296.
Methodology: capital markets.
Comparative study of the incremental market information of earnings figures
based on Finnish accounting rules and those based on IAS' rules.
536. Nissan, Samir; Otaka, Reijun; Kamata, Nobo, Japan (California State University,
Chico/ZNanzan University, Nagoya, Japan/ZNanzan University, Nagoya, Japan).
Cash Reporting in Japan [financial accounting & reporting]. 77?^ International
Journal of Accounting. 1995; 30(2): 168-180.
Methodology: deductive descriptive.
Presentation of the format used for the Japanese fund (cash) flow statement and
its restatement in accordance with American generally accepted accounting
principles.
537. Nobes, C. W., United States/United Kingdom/France/Germany/Netherlands (Uni-
versity of Exeter, England). Harmonization of Accounting within the European
Communities: The Fourth Directive on Company Law [financial accounting
and reporting]. The International Journal of Accounting. 1980 Mar; 15(2):
1-16.
Methodology: deductive descriptive.
Discussion of accounting differences in the European Economic Community.
Concludes that the Fourth directive should help to alleviate legal and presenta-
tion differences, but that differences in methods of inflation accounting may
hinder the directive.
538. Oberrotman, Alain M., United StatesAJnited Kingdom/Canada (Deloitte & Tou-
che). Financial Information for Internal Decision Making Under Inflation
[managerial accounting]. The Impact of Inflation on Accounting: A Global
View. Champaign, IL: Center for Intemational Education and Research in
Accounting; 1979 May: 163-178.
Methodology: deductive descriptive.
Description of the policies and strategies used by business administrators in
decision making during periods of inflation.
539. Obersteiner. Erich, none (Bucknell University). The Management of Liquid Fund
Flows Across National Boundaries [economics and development]. The Interna-
tional Journal of Accounting. 1976 Mar; 1 1(2): 91-101.
Methodology: deductive descriptive.
Discussion of the problems of international fund flows within the constraints of
a multinational firm.
540. O'Connor, Walter F., United States (Fordham University). Accounting Education
Worldwide from the Perspective of Accounting Practice [accounting educa-
tion]. Comparative International Accounting Educational Standards.
140 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1 , 1 998
Champaign, IL: Center for International Education and Research in Account-
ing; 1990 Apr: 61-70.
Methodology: deductive descriptive.
Discussion of the effect of current developments on accounting education.
541. Ogan, Pekin, Turkey (Indiana University). Turkish Accountancy: An Assessment
of Its Effectiveness and Recommendations for Improvement [accounting edu-
cation]. The International Journal of Accounting. 1978 Sep; 14(1): 133-154.
Methodology: deductive descriptive.
Study that finds the accounting profession in Turkey to be inadequate, unregu-
lated, and poorly regarded. Suggests solving these problems through legislation
and the development of a professional organization of accountants.
542. Ogundele. Babatunde. Nigeria (University of Illinois at Urbana-Champaign). The
Accounting Profession in Nigeria: An International Perspective [financial
accounting and reporting]. The International Journal of Accounting. 1969 Sep;
5(1): 101-106.
Methodology: deductive descriptive.
Review of the accounting profession in Nigeria.
543. Ohno, Kimiyoshi; Ichikawa, Hideo; Kodama. Atsuyoshi. Japan (Oita University,
Japan// Aichi-Gakuin University, Japan// Aichi University of Education, Japan).
Recent Changes in Accounting Standards in Japan [financial accounting and
reporting]. The International Journal of Accounting. 1975 Sep; 11(1): 107-120.
Methodology: theoretical.
Discussion of the problems brought on by the amendment of BAP"s. Covers the
background of the reconciliation between the BAP's and the commercial code
and changes in the accounting method for allowances, and in the form of finan-
cial statements.
544. Okike. Elewechi N. M., Nigeria (University of Exeter, United Kingdom). Curious
Auditing Regulations in Nigeria: A Case Study of Cultural/Political Influences
of Auditing Practice [auditing]. The International Journal of Accounting. 1994;
29(1): 78-91.
Methodology: deductive descriptive.
Study of Nigeria's auditing profession and the various influences effecting it.
Factors discussed include the political, cultural, and institutional influences.
545. Okopny. Robert D.; Strawser, Robert H., United States (Eastern Michigan Univer-
sity//Texas A & M University). International Internal Audit Planning
[auditing]. The International Journal of Accounting. 1989; 24(4): 308-319.
Methodology: empirical descriptive.
Study of four factors that affect the planning decisions of international internal
auditors: scope, external environment, communication, and working and social
environments.
546. Olbert, Lars, Sweden (University of Lund, Sweden). Stock Valuation Methods of
Financial Analysts in a Thin Stock Market in Sweden, with Comparisons to the
United Kingdom and the United States [financial accounting & reporting]. The
International Journal of Accounting. 1994; 29(2): 123-135.
Methodology: empirical descriptive.
Bibliography 141
A study which is an appUcation of previous research of U.S. and British finan-
cial analysts' methods of security valuation to Sweden's stock market. Results
indicate that Swedish analysts do not use technical analysis (past price history)
as frequently as American and British analysts.
547. Ooghe, Hubert; Joos, Peter; De Bourdeaudhuij, Carl, Belguim (University of
Ghent, Belguim/ZStanford University/ZUniversity of Ghent, Belguim). Financial
Distress Models in Belguim: The Results of a Decade of Empirical Research
[economics & development]. The International Journal of Accounting. 1995;
30(3): 245-274.
Methodology: empirical statistical.
Presentation of a ten-year study of financial accounting distress models used in
analyzing Belgian companies.
548. Ooghe, Hubert; Verbaere, Eric, Belgium (State University of Ghent, Belgium//
State University of Ghent, Belgium). Predicting Business Failure on the Basis
of Accounting Data: The Belgian Experience [economics and development].
The International Journal of Accounting. 1985 Mar; 20(2): 19-44.
Methodology: empirical statistical.
Study of the predictive value of financial information to determine bankruptcy
in Belgium.
549. Oppong, Andrews, Zimbabwe (Dalhousie University, Halifax, Nova Scotia).
Price-Earnings Approach and Emerging Capital Market: The Case of Zimba-
bwe [economics & development]. The International Journal of Accounting.
1993; 28(1): 71-77.
Methodology: capital markets.
Analysis of price-earnings accounting in the Zimbabwe Stock Exchange.
Results presented in this article emphasize the need for further research in
emerging capital markets in developing countries.
550. Osiegbu, Patrick I., Nigeria (University of Port Harcourt, Nigeria). The State of
Accounting Education in Nigeria [accounting education]. The International
Journal of Accounting. 1987 Mar; 22(2): 57-68.
Methodology: deductive descriptive.
Description of the history, educational requirements, and the professional
requirements affecting the Nigerian accounting profession.
551. Park, Soong Hyun, Korea/United States (National University of Singapore. Sin-
gapore). Competition, Independence and Audit Quality: The Korean
Experience [auditing]. The International Journal of Accounting. 1990; 25(2):
71-86.
Methodology: empirical statistical.
Study of the audit opinions of Korean firms during a six-year period, regarding
the effects of competition on such opinions. Discusses the implications for the
international community as well.
552. Park, Soong Hyun, Korea/United States (Rutgers University-The State University
of New Jersey at Newark). The Use of Foreign Financial Statements for Risk
Analysis: An Empirical Test (Korea) [financial accounting and reporting]. The
International Journal of Accounting. 1984 Sep; 20(1): 1-15.
Methodology: empirical statistical.
142 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No, 1, 1998
Study of the difference between the information contained in U.S. and in
Korean financial statements.
553. Parker, L. D., United States/United Kingdom/New Zealand (Monash University,
Australia). Corporate Annual Reports: A Failure to Communicate [public
accounting]. The International Journal of Accounting. 1981 Mar; 16(2): 35-48.
Methodology: empirical descriptive.
Study of the level of disclosure in corporate reporting. Finds that reports are too
complex for the average investor and concludes that the profession must
address the situation.
554. Pasewark, William R.; Heagy, Cynthia D.; Godfrey, James T., United States/Japan/
Europe (University of Georgia/ZUniversity of Georgia/ZGeorge Mason Univer-
sity). Impact of Socially Motivated Quality Cost Control Policies on Cost
Behavior [managerial accounting]. The International Journal of Accounting.
1988 Mar; 23(2): 71-83.
Methodology: modeling.
Presentation of a model for quality cost measurement. Discusses the social fac-
tors and possible constraints to implementing such a model.
555. Pavlock, Ernest J., United States (Deloitte & Touche). Training Accountants for the
Future [accounting education]. The International Journal of Accounting. 1977
Sep; 13(1): 141-158.
Methodology: deductive descriptive.
List of the current educational and continuing education requirements of the
profession. Concludes that future accountants must be ready to cope with
change.
556. Peche, Tadeusz, none (Central School of Planning and Statistics, Poland). Instruc-
tional Problems in the Modernization of Accounting Theory [accounting
education]. The International Journal of Accounting. 1978 Mar; 13(2): 87-104.
Methodology: theoretical.
Presentation of the financial accounting theory using the matrix approach.
557. Pena, Pablo A., Colombia/United States (University of Bogota). Special Report: A
Comparison of the Accounting Profession of Colombia and the United States
[financial accounting and reporting]. The International Journal of Accounting.
1976 Mar; 11(2): 143-177.
Methodology: deductive descriptive.
Study of Columbian accounting developments after 1956, including a review of
the country's historical, geographical, and governmental facts.
558. Pendlebury, Maurice; Jones, Rowan, United States/United Kingdom (University of
Wales Institute of Science and Technology/ZUniversity of Birmingham,
England). Municipal Disclosure in England: Another Market for Excuses?
[governmental]. The International Journal of Accounting. 1983 Mar; 18(2):
83-93.
Methodology: empirical descriptive.
Survey of municipalities disclosure in the U.K. Holds that this disclosure is
controlled by special interest groups.
559. Pendrill, David, New Zealand/United Kingdom/United States (University College,
Cardiff). Contrasting Income Treatment of Monetary Items in Recent Account-
Bibliography 143
ing Standards in New Zealand, the United Kingdom, and the United States
[accounting theory]. The International Journal of Accounting. 1985 Mar; 20(2):
139-154.
Methodology: theoretical.
Study of the effects of price-level accounting on financial statements in New
Zealand, the U.K., and the U.S.
560. Perera, M. H. B., United States/European Economic Community/Germany/France/
United Kingdom/Netherlands/global (Massey University, New Zealand).
Towards a Framework to Analyze the Impact of Culture on Accounting [social
effects of accounting]. The International Journal of Accounting. 1989; 24(1):
42-56.
Methodology: theoretical.
Discussion of the effect that culture has on accounting and international
standards.
561. Piper, Andrew G., United Kingdom (University of Birmingham, England).
Accounting for Overseas Currencies [accounting theory]. The International
Journal of Accounting. 1976 Sep; 12(1): 63-90.
Methodology: deductive descriptive.
Discussion of accounting for overseas currency translations, using examples
from the published accounts of companies with registered offices in the U.K. .
562. Piper, Andrew G., United Kingdom/United States/Canada (University of Birming-
ham, England). A Methodology on Translation for Interim Accounts
[accounting theory]. The International Journal of Accounting. 1979 Sep; 15(1):
45-52.
Methodology: theoretical.
Study of the Unilever Corporation's practice of disclosure for changing cur-
rency rates, citing this as a model for disclosing exchange rates.
563. Polimeni, Ralph S., United States (Hofstra University). Accounting for Forward
Exchange Contracts [accounting theory]. The International Journal of Account-
ing. 1977 Sep; 13(1): 159-168.
Methodology: theoretical.
Presentation of techniques for dealing with currency futures.
564. Pomeranz, Felix, none (Coopers & Lybrand). International Auditing Standards
[auditing]. The International Journal of Accounting. 1975 Sep; 11(1): 1-13.
Methodology: theoretical.
Perspective on recent developments in international auditing. Discusses audit
procedures relating to inventory, accounts receivable, and reporting standards.
Uses case study drawn from Coopers & Lybrand" s experience in developing an
international practice. .
565. Pomeranz, Felix, United States/European Economic Community (Coopers &
Lybrand). Prospects for International Accounting and Auditing Standards —
The Transnationals in Governmental Regulations [financial accounting and
reporting]. The International Journal of Accounting. 1981 Sep; 17(1): 7-19.
Methodology: deductive descriptive.
144 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol, 33, No. 1 , 1 998
Discussion of three organizations having an effect on the development of inter-
national standards: the Organization for Economic Cooperation and
Development, the European Economic Community, and the United Nations.
566. Pomeranz, Felix, United States/United Kingdom/South Africa/France/Brazil/Ger-
many/Holland/Netherlands (Coopers & Lybrand). Reporting the Effects of
Inflation: An Accountant's View [financial accounting and reporting]. The
Impact of Inflation on Accounting: A Global View. Champaign, IL: Center for
International Education and Research in Accounting; 1979 May: 149-161.
Methodology: deductive descriptive.
Description of the practices and options available to the accountant when
reporting for inflation. Gives a description of foreign practices in this area.
567. Pomeranz, Felix; Haqiqi, Abdul Wassay, Kuwait (Coopers & Lybrand/ZMutual
Life of America). The Collapse of the Souk al-Manakh: A Chronicle [econom-
ics and development]. The Recent Accounting and Economic Developments in
the Middle East. Champaign, IL: Center for International Education and
Research in Accounting; 1985 May: 151-166.
Methodology: deductive descriptive.
Discussion of the social and governmental consequences of the failure of the
stock exchange in Kuwait.
568. Popoff, Boris, New Zealand (University of Otago, New Zealand). The Price Level
Adjustment and Accounting Realism: A Case Study of a New Zealand Com-
pany [accounting theory]. The International Journal of Accounting. 1971 Mar;
6(2): 15-35.
Methodology: empirical descriptive.
Study of price-level adjustment as against more traditional accounting methods
based on unadjusted historic cost. Contends that the price-level adjustment may
produce misleading results on the operating statement, and that some problems
in the production of reliable company reports do not arise from changing prices.
569. Popoff, Boris, New Zealand/United Kingdom (University of Otago, New Zealand).
Some Conceptualizing on the True and Fair View [accounting theory]. The
International Journal of Accounting. 1983 Sep; 19(1): 43-54.
Methodology: theoretical.
Theoretical discussion of the concept of a true and fair view, as it pertains to
financial accounting. Discusses problems and advantages of the concept.
570. Porcano, Thomas M., Europe (Miami University, Ohio). The Perceived Efficacy of
Government Incentives: A Comparative Study of Seven European Community
Countries [governmental]. The International Journal of Accounting. 1986 Sep;
22(1): 135-157.
Methodology: empirical descriptive.
Survey of large corporations in Europe as to the effects of government sup-
ply-side manipulation.
571 . Pound, G. D.; Pollard, B. M., United States/United Kingdom/ Australia (University
of New England, Australia/ZUniversity of New England, Australia). Accounting
Theory and History — Lessons to be Learned [accounting history]. The Interna-
tional Journal of Accounting. 1981 Mar; 16(2): 99-123.
Methodology: historical.
Bibliography 145
Historical account of the development of accounting standards and theory in the
U.S., U.K., and Australia. Concludes that the theoretical approach to standard
setting has been proven by history.
572. Powelson, John P., Central & South America (University of Colorado). National
Income Estimates in Latin America [public accounting]. The International
Journal of Accounting. 1967 Sep; 3(1): 55-65.
Methodology: deductive descriptive.
Review of the systems of national accounts in Latin America, highlighting
progress and problems in these systems.
573. Pratt, Jamie; Behr, Giorgio, Switzerland/United States (University of Washington//
international consultant). Environmental Factors, Translation Costs, and Exter-
nal Reporting: A Cross-National Comparison [financial accounting and
reporting]. The International Journal of Accounting. 1987 Mar; 22(2): 1-24.
Methodology: theoretical.
Comparison of the market factors in Switzerland and the U.S. that drive
standard-setting.
574. Previts, Gary John, United States (Case Western Reserve University). A Centennial
Sketch of Accountancy Education in the United States [accounting history].
Comparative International Accounting Educational Standards. Champaign, IL:
Center for International Education and Research in Accounting; 1990 Apr:
31-40.
Methodology: historical.
Description of the history of accounting in the United States. Concludes that
more attention must be paid to culture in the U.S. educational system.
575. Previts, Gary John, none (University of Alabama). On the Subject of Methodology
and Models for International Accountancy [accounting theory]. The Interna-
tional Journal of Accounting. 1975 Mar; 10(2): 1-12.
Methodology: theoretical.
Study of a methodology for reviewing and synthesizing global accounting
developments, considering the international relationships which have arisen
during the 20th century. Emphasizes developments in American accountancy
during this era.
576. Purcell, Thomas J. Ill; Scott, James P., European Economic Community (Creighton
University//Creighton University). An Analysis of the Feasibility of Harmoniz-
ing Financial Reporting Practices Between Member Countries of the EEC and
the OECD [financial accounting and reporting]. The International Journal of
Accounting. 1986 Mar; 21(2): 109-131.
Methodology: empirical statistical.
Study that groups the OECD and EEC countries by accounting and disclosure
practices.
577. Queenan, John W., United States/United Kingdom (Deloitte & Touche). Chal-
lenges in International Auditing [economics and development]. The
International Journal of Accounting. 1965 Sep; 1(1): 43-51.
Methodology: deductive descriptive.
Explanation of the problems facing U.S. and British auditors practicing in a for-
eign country.
146 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
578. Qureshi. Mahmood A., Pakistan (DePauI University). Private Enterprise Account-
ing and Economic Development in Paki.stan [economics and development]. The
International Journal of Accounting. 1974 Mar; 9(2): 125-141.
Methodology: empirical descriptive.
wStudy of the potential of private enterpri.se accounting as a tool in the develop-
ment of an emerging economy such as Pakistan. Discusses capital formation,
foreign investment, and management capability.
579. Radebaugh, Lee H., Peru (Pennsylvania State University). Environmental Factors
Influencing the Development of Accounting Objectives, Standards, and Prac-
tices in Peru [financial accounting and reporting]. The International Journal of
Accounting. 1975 Sep; 11(1): 39-56.
Methodology: theoretical.
Discussion of the major environmental factors that influence the development
of accounting objectives, standards, and practices. Cites current developments
in Peru as an example.
580. Radebaugh, Lee H., United States (Brigham Young University). The Impact of a
Strengthening Dollar, Weak World Economy, and New Accounting Standard
on Performance Evaluation of Foreign Operations [managerial accounting].
Managerial Accounting: An Analysis of Current International Application.
Champaign, IL: Center for International Education and Research in Account-
ing; 1984 Jan: 53-70.
Methodology: theoretical.
Discussion of the effects that exchange rates, economic growth, strength of the
dollar, and FASB 52 have had on the earnings of foreign operations.
581. Radebaugh, Lee H., United States (Pennsylvania State University). International
Corporate Bribery: A New Dimension In Accounting [social effects of account-
ing]. The Multinational Corporation: Accounting and Social Implications.
Champaign, IL: Center for International Education and Research in Account-
ing; 1977 Jan: 21-39.
Methodology: deductive descriptive.
Study of the causes for bribery, explaining the role of government in regards to
it.
582. Radebaugh, Lee H., United States (Pennsylvania State University). The Interna-
tional Dimension of the Financial Accounting Standards Board: Translation and
Disclosure of Foreign Operations [financial accounting and reporting]. The
International Journal of Accounting. 1974 Sep; 10(1): 55-70.
Methodology: theoretical.
Discussion of the translation of foreign currency into parent currency for con-
solidation with domestic operations, and on the disclosure of translation-related
information.
583. Radebaugh, Lee H.; Krylova, Tatiana B.; Rahman, Zubaidur, Russia (Brigham
Young University/ZMoscow State University/ZState University of New
York-Plattsburgh). The Evolution of Accounting in the Former Soviet Union:
Historical Perspectives and Global Influences [accounting history]. The New
Europe: Recent Political and Economic Implications for Accountants and
Bibliography 147
Accounting. Champaign, IL: Center for International Education and Research
in Accounting; 1994: 131-148.
Methodology: historical.
Historical overview of the evolution of the accounting system of Russia, from
the reign of Tsar Peter the Great to the present.
584. Rahman, A. R.; Perera, M. H. B.; Tower, G. D., Australia/New Zealand (Massey
University, Palmerston North, New Zealand/ZMurdoch University, Perth, Aus-
tralia). Accounting Harmonization Between Australia and New Zealand:
Towards a Regulatory Union [miscellaneous]. The International Journal of
Accounting. 1994; 29(4): 316-333.
Methodology: deductive descriptive.
Discussion of the degree of accounting harmonization in New Zealand and
Australia and ways to further hamionize both countries' accounting systems.
585. Rahman, M. Zubaidur, United Kingdom/BangladeshAJnited States (State Univer-
sity of New York at Plattsburgh). The Local Value Added Statement: A
Reporting Requirement for Multinationals in Developing Host Countries
[financial accounting and reporting]. The International Journal of Accounting.
1990; 25(2): 87-98.
Methodology: theoretical.
Study of the uses and benefits of the local value added statement.
586. Rappaccioli, Donna; Schiff, Allen, Unknown (Fordham University, New York,
New York//Fordham University, New York, New York). An Enhancement to
IAS 8: "Unusual and Prior Period Items and Changes in Accounting Policies"
[financial accounting & reporting]. The International Journal of Accounting.
1993; 28(1): 40-48.
Methodology: empirical statistical.
Examination of the deficiencies regarding the presentation of gain and loss in
the income statement in accordance with International Accounting Standards
(IAS) 8 and 14. This study recommends a modification of IAS 8 to include a
materiality threshold to improve the quality of income statements issued by
members of the lASC.
587. Ray, Manash R.; Gupta, Parveen P., United States (Lehigh University, Bethlehem,
Pennsylvania/ZLehigh University, Bethlehem, Pennsylvania). International
Accounting Practices and Transaction Cost Theory: An Extended Framework
[accounting theory]. The International Journal of Accounting. 1993; 28(3):
187-205.
Methodology: theoretical.
Study of transaction cost theory involving the measurement and analysis of the
degrees of specificity and compliance of some 30 countries. Cultural variables
and possible areas of future research are discussed.
588. Raymond, Robert H.; Iqbal, M. Zafar; Schafer, Eldon L., United States/United
Kingdom/New Zealand (University of Nebraska/ZCalifomia Polytechnic State
University/ZPacific Lutheran University). The Gearing (Leverage) Adjustment:
A Historical and Comparative Analysis [managerial accounting]. The Interna-
tional Journal of Accounting. 1982 Sep; 18(1): 139-157.
Methodology: theoretical.
148 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No, 1, 1998
Study of the arguments for and against the use of a gearing leverage adjustment
in financial reporting.
589. Razasee, Zabihollah; Lee, John T., United States (Middle Tennessee State Univer-
sity//Middle Tennessee State University). Market Value Accounting Standards
in the United States and Their Significance for the Global Banking Industry
[financial accounting & reporting]. The International Journal of Accounting.
1995; 30(3): 208-221.
Methodology: empirical descriptive.
Discussion of the necessity to move toward market value accounting from his-
torical cost accounting in order to provide relevant and reliable financial
reporting by banking institutions.
590. Rege, Udayan P.; Brennan, W. John; Silvester, W. Harold, United Kingdom/Euro-
pean Economic CommunityAJnited States/Canada (University of
Saskatchewan/AJniversity of Saskatchewan/ZUniversity of Saskatchewan). Cur-
rent Regulatory Practices, Corporate Financial Forecasting, and Takeover Bids
[governmental]. The International Journal of Accounting. 1983 Mar; 18(2):
171-175.
Methodology: deductive descriptive.
Discussion of the current regulations regarding takeover bids in the U.K., U.S.,
European Economic Community, and Canada.
591. Reinstein, Alan; Spalding, Albert D., United States (Wayne State University,
Detroit, Michigan/AVayne State University, Detroit, Michigan). Accounting
and Auditing Implications of Complying with the United States' Foreign Cor-
rupt Practices Act Amendments of 1988 [auditing]. The International Journal
of Accounting. 1991; 26(1): 18-26.
Methodology: deductive descriptive.
Comparison of 1977 and 1988 Foreign Corrupt Practices Act. The 1988 amend-
ments give U.S. corporations both an opportunity to engage in foreign
commerce and a challenge to develop internal policies.
592. Rezaee, Zabihollah, United States (Middle Tennessee State University). The
Impact of New Accounting Rules on the Consolidation of Financial Statements
of Multinational Companies [financial accounting & reporting]. The Interna-
tional Journal of Accounting. 1991; 26(3): 206-219.
Methodology: empirical descriptive.
Evaluation of the influence SEAS No. 94 has had on the consolidated financial
statements reported by multinational companies.
593. Riahi-Belkaoui, Ahmed; Picur, Ronald D., Canada/United States/Great Britain
(University of Illinois at Chicago/ZUniversity of Illinois at Chicago). Cultural
Determinism and the Perception of Accounting Concepts [accounting theory].
The International Journal of Accounting. 1991; 26(2): 118-130.
Methodology: empirical statistical.
By using multidimensional scaling techniques, demonstrates that different cul-
tural groups have different interpretations of accounting concepts and will have
communication problems.
594. Riahi-Belkaoui, Ahmed, United States (University of Illinois at Chicago, Illinois).
The Information Content of Value Added, Earnings, and Cash Flow: US Evi-
Bibliography 149
dence [accounting theory]. The International Journal of Accounting. 1993;
28(2): 140-146.
Methodology: theoretical.
Examination of earnings, cash flows, and value added as related to adequate
disclosures in American corporate reports.
595. Richards, William R., United States (Coopers & Lybrand). Auditing U.S. Compa-
nies With Operations Abroad [auditing]. The International Journal of
Accounting. 1976 Sep; 12(1): 1-11.
Methodology: theoretical.
Study of the effect of the establishment of operating subsidiaries abroad by U.S.
corporations on the auditing of large multinational companies based in the U.S.
Holds that the responsibilities of the auditors of U.S. multinational corporations
have been poorly defined.
596. Riise, Ame, Norway/United States/United Kingdom (The Norwegian School of
Economics and Business Administration). Norwegian Standards for Annual
Reporting Requirements and Chart of Accounts [financial accounting and
reporting]. The International Journal of Accounting. 1982 Mar; 17(2): 103-120.
Methodology: deductive descriptive.
Discussion of the political, social, and international factors influencing the Nor-
wegian accounting system.
597. Rinke, Dolores, European Community (Purdue University, Calumet, Indiana).
Comparative Analysis of the Credentialing Processes of Professional Public
Accountants in the European Community [public accounting]. The New
Europe: Recent Political and Economic Implications for Accountants and
Accounting. Champaign, IL: Center for International Education and Research
in Accounting; 1994: 97-130.
Methodology: deductive descriptive.
Comparative examination of the requisite credentials for public accountants in
the European Community.
598. Rivera, Juan M., Spain (University of Notre Dame). The Accounting Profession in
Spain: Apartheid or Isolationism on the European Continent [financial account-
ing and reporting]. The Recent Accounting and Economic Developments in
Western Europe. Champaign, IL: Center for International Education and
Research in Accounting; 1985 May: 129-142.
Methodology: deductive descriptive.
Discussion of the history and economic environment responsible for current
accounting practices in Spain.
599. Rivera, Juan M., Panama/United States (University of Notre Dame). The Account-
ing Profession and Accounting Education in Panama: A Survey [accounting
education]. Comparative International Accounting Educational Standards.
Champaign, IL: Center for International Education and Research in Account-
ing; 1990 Apr: 175-192.
Methodology: empirical descriptive.
Study of current needs in the Panamanian accounting educational system. Also
discusses the effect the U.S. system has had on Panama.
150 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
600. Rivera, Juan M., United StatesA^enezuela (California State University at
Northridge). The Financial Function of a U.S. Multinational Company
Abroad— A Venezuelan Experience [managerial accounting]. The International
Journal of Accounting. 1982 Sep; 18(1): 129-138.
Methodology: deductive descriptive.
Discussion of the factors affecting a U.S. firm with affiliates in Venezuela or
abroad.
601. Rivera, Juan M., United States/European Economic Community (University of
Notre Dame). The Internationalization of Accounting Standards: Past Problems
and Current Prospects [financial accounting and reporting]. The International
Journal of Accounting. 1989; 24(4): 320-341
Methodology: deductive descriptive.
Discussion of the factors that have undermined the acceptance of international
accounting standards. Calls for recognition of individual needs rather than the
needs of a few large countries.
602. Rivera, Juan M., Central & South America (Instituta Technologico y de Estudios
Superiores de Monterey). Latin American Accounting— A General Perspective
[financial accounting and reporting]. The International Journal of Accounting.
1969 Sep; 5(1): 107-108.
Methodology: deductive descriptive.
Study of the major problems in accounting in Latin America.
603. Rivera, Juan M.; Salva, Antonio Socias, Spain/European Union (University of
Notre Dame, Indiana/ZUniversitate de les Illes Balears, Spain). The Recent Eco-
nomic Developments in Spain and the Implementation of EU Directives on
Accounting [accounting history]. The New Europe: Recent Political and Eco-
nomic Implications for Accountants and Accounting. Champaign, IL: Center
for International Education and Research in Accounting; 1994: 149-170.
Methodology: historical.
Overview of the development of the accounting in Spain and its consequential
implementation of accounting-related directives of the European Union.
604. Rivola-Clay, Anna Maria; Doupnik. Timothy S., Italy/European Economic Com-
munity (University of South Carolina/ZUniversity of South Carolina). The
Progress of Italian Accounting: Allegro Ma Nontroppo [financial accounting
and reporting]. The International Journal of Accounting. 1987 Mar; 22(2):
87-102.
Methodology: deductive descriptive.
Discussion of the social, environmental, and legal influences on the Italian
accounting system.
605. Robb, A. J., New Zealand (University of Canterbury. New Zealand). Interim
Reports and Their Qualitative Evaluation [financial accounting and reporting].
The International Journal of Accounting. 1980 Mar; 15(2): 77-86.
Methodology: empirical statistical.
Study of the interim reports of forty New Zealand companies. Indicates a wide
variety of reporting levels, with the highest levels taken by the industrial and
service related firms.
Bibliography 151
606. Rohleder, Robert P., United States (Deloitte & Touche, Chicago). Ethics, the Prac-
tice of International Accounting and Auditing, and New Influences in the
Marketplace [social effects]. Ethical Considerations in Contemporary Interna-
tional Accounting Practice. Champaign, IL: Center for International Education
and Research in Accounting, Department of Accountancy; 1992: 11-18.
Methodology: deductive descriptive.
Article addressing societal issues involving the practice of ethics in the public
accounting profession.
607. Rosenfield, Paul, none (American Institute of Certified Public Accountants).
Accounting for Foreign Branches and Subsidiaries [accounting theory]. The
International Journal of Accounting. 1972 Mar; 7(2): 35-44.
Methodology: theoretical.
Discussion of the conceptual issues common to both the translation and the
restatement of foreign balances for general price-level changes.
608. Rueschhoff, Norlin G., Europe (University of Notre Dame). European Accounting
and Auditing Standards: A Comparative Study with International Standards and
Guidelines [financial accounting and reporting]. The Recent Accounting and
Economic Developments in Western Europe. Champaign, IL: Center for Inter-
national Education and Research in Accounting; 1985 May: 91-1 14.
Methodology: deductive descriptive.
Discussion of the major European standard-setting bodies and their effects on
accounting principles, disclosures, auditing practices, ethics, and education.
609. Rueschhoff, Norlin G., United States (University of Notre Dame). International
Accounting and Auditing in the U.S. CPA Examination, 1917-86 [professional
development]. The International Journal of Accounting. 1986 Sep; 22(1):
25-31.
Methodology: theoretical.
Study of the U.S. uniform CPA exam calling for greater emphasis on interna-
tional issues.
610. Rueschhoff, Norlin G., CanadaAJnited States (University of Notre Dame). U.S.
Dollar Based Financial Reporting of Canadian Multinational Corporations
[public accounting]. The International Journal of Accounting. 1973 Mar; 8(2):
103-109.
Methodology: empirical descriptive.
Review of the factors causing the Canadian Multinational Corporation to use
the U.S. dollar as a basis for financial reporting.
611. Ruffing, Lorraine, United Nations/Eastern Europe/former USSR (United Nations
Intergovernmental Working Group of Experts on International Standards of
Accounting and Reporting). United Nations Activities in International
Accounting in Eastern Europe and the USSR [financial accounting & report-
ing]. The New Europe: Recent Political and Economic Implications for
Accountants and Accounting. Champaign, IL: Center for International Educa-
tion and Research in Accounting; 1994: 43-60.
Methodology: deductive descriptive.
1 52 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1 , 1 998
Study of work the United Nations has accomplished in Eastern Europe and the
former USSR to bring those countries' accounting systems in harmony with
those of the West.
612. Ruggles. Richard: Ruggles, Nancy, none (Yale University //International Associa-
tion for Research on Income and Wealth). The Evolution and Present State of
National Economic Accounting [accounting theory]. The International Journal
of Accounting. 1968 Sep; 4(1): 1-16.
Methodology: deductive descriptive.
Study of national economic accounting systems, focusing on the extent to
which these systems meet current and anticipated needs for economic
information.
613. Rushinek. Avi: Rushinek. Sara F., Belgium/France/Germany/Italy/Netherlands/
United States (University of Miami//University of Miami). Additional Fund
Allocation Constraints for Common Stock Investments: An Empirical Analysis
of Regional Portfolios in the Common Market and the United States [financial
accounting and reporting]. The International Journal of Accounting. 1986 Mar;
21(2): 69-89.
Methodology: empirical statistical.
Study of inter country redundancy regarding portfolio management.
614. Rushinek. Avi; Rushinek. Sara F., United States/United Kingdom (University of
Miami/ZUniversity of Miami). Multinational Transfer-Pricing Factors: Tax,
Custom Duties. Antitrust/Dumping Legislation. Inflation. Interest, Competi-
tion. Profit/Dividend, and Financial Reporting [financial accounting and
reporting]. The International Journal of Accounting. 1988 Mar; 23(2): 95-1 1 1.
Methodology: empirical descriptive.
Study of multinational corporations regarding factors that influence their trans-
fer-pricing policies.
615. Ruth, John J., United States. Japan, Great Britain (Goldberg Securities, Inc.).
Recent Changes in International Financial Markets [economics & develop-
ment]. Changing International Financial Markets and Their Impact on
Accounting. Champaign. IL: Center for International Education and Research
in Accounting. Department of Accountancy; 1992: 17-30.
Methodology: capital markets.
Discussion of the changes in international capital markets and various proposals
to aid in the area of financial disclosure and reporting.
616. Sabri, Nidal R.; Jabr, M. Hisham, Middle East (Birzeit University. PalesUne//
An-najah University, Palestine). Business and Accounting Ethics in Islam: The-
ory and Practice [social effects]. Ethical Considerations in Contemporary
International Accounting Practice. Champaign, IL: Center for International
Education and Research in Accounting. Department of Accountancy; 1992:
49-64.
Methodology: deductive descriptive.
Analysis of the relationship between business accounting ethics and Islamic
codes of conduct and legislation.
617. Sabri, Nidal R.; Jabr, M. Hisham. Middle East/ Arab Countries (Birzeit University//
Birzeit University). Accounting Information Systems for Banks Without Inter-
Bibliography 153
est (Islamic Banks) [economics and development]. The Recent Accounting and
Economic Developments in the Middle East. Champaign, IL: Center for Inter-
national Education and Research in Accounting; 1985 May: 233-242.
Methodology: theoretical.
Presentation of a framework for Islamic banks, discussing the social and legis-
lative factors that would influence such a system.
618. Said, Kamal E.; Funk, lerry A., none (University of Houston//San Jacinto College).
Planning and Control in Accounting Education: A Model for Subsystem Con-
trols in a Free Market Environment [accounting education]. The International
Journal of Accounting. 1976 Mar; 11(2): 103-119.
Methodology: theoretical.
Presentation of a model to regulate accounting education at the undergraduate
and graduate levels. Regards education as a subsystem that needs restructuring
so as to include controls for regulation. Gives several recommendations.
619. Salas, Cesar A.. Central & South America (Arthur Andersen & Company).
Accounting Education and Practice in Spanish Latin America [accounting edu-
cation]. The International Journal of Accounting. 1967 Sep; 3(1): 67-85.
Methodology: deductive descriptive.
Study that relates problems in accounting education to issues about the practice
of accounting in Latin American countries.
620. Samuels, J. M.; Oliga J. C. Developing Countries/Egypt/Italy/United Kingdom
(University of Birmingham, England/ZUniversity of Birmingham. England).
Accounting Standards in Developing Countries [economics and development].
The International Journal of Accounting. 1982 Sep; 18(1): 69-88.
Methodology: theoretical.
Discussion of the view that uniform standards are always feasible and good.
Argues that decisions must be made from one country to another.
621. Sands, John Stephens; Pragasam, John, Australia/United States/United Kingdom
(Griffith University, Brisbane, Queensland, Australia/ZUniversity of Southern
Queensland, Toowoomba, Queenland, Australia). Students" Perceptions of the
Usefulness of International Accounting course Contents: An Australian Study
[accounting education]. The International Journal of Accounting. 1993; 28(4):
325-334.
Methodology: empirical descriptive.
Examination of the results of a survey given to Australian students who had just
completed a course in international accounting to determine the usefulness of
each topic taught via ranking.
622. Satubaldin, Sagandyk, Soviet Union (Alma-Ata Institute of National Economy.
USSR). Methods of Analyzing Profits of Industrial Enterprises in the USSR
[managerial accounting]. The International Journal of Accounting. 1976 Sep;
12(1): 91-99.
Methodology: empirical descriptive.
Discussion of the Soviet use of profit analysis to determine the extent of plan
fulfillment, as well as the causes of non-fulfillment.
623. Saudagaran, Shahrokh M., United States (Santa Clara University). The SEC's
Response to the Internationalization of Securities Markets [financial accounting
154 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
& reporting]. Changing International Financial Markets and Their Impact on
Accounting. Champaign. IL: Center for International Education and Research
in Accounting. Department of Accountancy; 1992: 125-138.
Methodology: capital markets.
Historical analysis of whether the Securities and Exchange Commission (SEC)
has responded to pressure to ease its disclosure requirements to allow foreign
securities to be accessible to American securities exchanges.
624. Savoie, Leonard M.. United States (Clark Equipment Company). Financial and
Accounting Aspects in International Business [financial accounting and report-
ing]. The InternationalJournal of Accounting. 1973 Sep; 9(1): 13-22.
Methodology: deductive descriptive.
Case study of Clark Equipment Company's overseas investment.
625. Savoie, Leonard M.. none (American Institute of Certified Public Accountants).
International Dimensions of Accounting [financial accounting and reporting].
The International Journal of Accounting. 1969 Sep; 5(1): 79-84.
Methodology: deductive descriptive.
Study of progress in measuring the international dimensions of accounting
which explores ways to achieve greater cooperation and understanding among
accountants in all nations.
626. Scarbrough, Paul; McGee, Robert; Sakurai. Michiharu, United States/Japan (Bent-
ley College, Waltham. Massachusetts/ZSeton Hall University, New York//
Senshu University, Tokyo, Japan). Accounting for Software Costs in the United
States and Japan: Lessons from Differing Standards and Practices [information
systems]. The International Journal of Accounting. 1993; 28(4): 308-324.
Methodology: empirical descriptive.
Study of how different theoretical accounting models of a new software con-
structive process effect the accounting standards of both the United States and
Japan. This article differentiates between the cost accounting emphasis of Japan
and the financial accounting emphasis of the United States.
627. Schaller, Howard G., Thailand (Indiana University). Thailand: NIDA — An Experi-
ment in Management in the Public and Private Sectors [economics and
development]. The International Journal of Accounting. 1968 Sep; 4(1):
137-140.
Methodology: deductive descriptive.
Review of the current state of the National Institute for Development Adminis-
tration (NIDA) in Thailand.
628. Schiff, J. B., Canada/United Kingdom/United States/Australia/India/Pakistan/Phil-
ippines/South Africa (Fairleigh Dickinson University). Management
Accounting Practices Statement Promulgation: An International Perspective
[managerial accounting]. The International Journal of Accounting. 1986 Sep;
22(1): 119-133.
Methodology: deductive descriptive.
Discussion of the various professional organizations influencing the promulga-
tion of international management accounting standards.
629. Schoenfeld. Hanns-Martin, none (University of Illinois at Urbana-Champaign).
Comments on 'International Accounting in an Inflationary Economy' [financial
Bibliography 155
accounting and reporting]. The International Journal of Accounting. 1968 Sep;
4(1): 165-168.
Methodology: theoretical.
Remarks concerning the development of adequate accounting procedures for
enterprises operating in countries with an inflationary record.
630. Schoenfeld, Hanns-Martin, Germany (University of Illinois at Urbana-Cham-
paign). Development and Present State of Cost Theory in Germany [managerial
accounting]. The International Journal of Accounting. 1972 Sep; 8(1): 43-65.
Methodology: deductive descriptive.
Analysis of the development of cost theory in Germany.
631. Schoenfeld, Hanns-Martin, United States (University of Illinois at Urbana-Cham-
paign). International Influences on the Contemporary Accounting Curriculum:
International Accounting Instruction at the University of Illinois at
Urbana-Champaign [accounting education]. The International Journal of
Accounting. 1974 Sep; 10(1): 71-85.
Methodology: deductive descriptive.
Discussion of the need for a specialized course in international accounting.
632. Schoenfeld, Hanns-Martin, Germany (University of Illinois at Urbana-Cham-
paign). New German Regulations for the Publication of Financial Statements
[public accounting]. The International Journal of Accounting. 1970 Mar; 5(2):
69-88.
Methodology: deductive descriptive.
Summary of both the background and purposes of the Publicity Law in
Germany.
633. Schweikart, James A., none (University of Richmond). Attitude Measurement and
Instrumentation in International Accounting Research [accounting theory]. The
International Journal of Accounting. 1987 Mar; 22(2): 131-141.
Methodology: deductive descriptive.
Discussion of the use of surveys in international accounting research. Presents
different survey instruments and discusses their implementation.
634. Schweikart, James A., United States/Brazil/China (Temple University). Contin-
gency Theory as a Framework for Research in International Accounting
[financial accounting and reporting]. The International Journal of Accounting.
1985 Sep; 21(1): 89-98.
Methodology: theoretical.
Presentation of the contingency theory as a methodology for international
accounting research.
635. Schweikart, James A.; O'Connor, Walter F., United States/Japan (University of
Richmond/ZFordham University). Attitude Measurement in International
Accounting Research: A Test of Thurstone and Likert Scaling Validity [profes-
sional development]. The International Journal of Accounting. 1989; 24(2):
103-130.
Methodology: empirical descriptive.
Study of different research techniques to analyze attitudes toward international
accounting.
156 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
636. Scott, George M.. Netherlands (University of Pennsylvania). A Business Econom-
ics Foundation for Accounting: The Dutch Experience [accounting theory]. The
International Journal of Accounting. 1970 Mar; 5(2): 117-131.
Methodology: deductive descriptive.
Presentation of the business economics approach to accounting as used by
Dutch accountants.
637. Scott, George M., none (University of Texas at Austin). Financial Control in Multi-
national Enterprises — The New Challenge to Accountants [managerial
accounting]. The International Journal of Accounting. 1972 Mar; 7(2): 55-68.
Methodology: deductive descriptive.
Study with two major objectives: ( 1 ) to show that multinational enterprises con-
stitute a different economic phenomenon than had previously existed (2) to
inform accountants about the probable impact of multinational enterprises on
management, management information systems, financial accounts, and the
education of accountants.
638. Scott, George M., none (University of Texas at Austin). Information Systems and
Coordination in Multinational Enterprises [information systems]. The Interna-
tional Journal of Accounting. 1974 Sep; 10(1): 87-105.
Methodology: theoretical.
Explanation of the concept of coordination in management describing the coor-
dinative form of management. Presents recent developments in information
systems, arguing that computer technology will greatly facilitate coordination
management.
639. Scott, George M.. third world countries/developing countries (University of Penn-
sylvania). Private Enterprise Accounting in Developing Nations [economics
and development]. The International Journal of Accounting. 1968 Sep; 4(1):
51-65.
Methodology: theoretical.
Examination of several aspects of private enterprise accounting in three
advanced nations that proposes how this form of accounting could be applied in
"developing" nations.
640. Sedaghat, Ali M.; Sagafi-Nejad, Tagi; Wright. George. Developing Countries
(Loyola College, Baltimore, Maryland/ZLoyola College, Baltimore, Maryland//
Loyola College, Baltimore, Maryland). Economic Development and Securities
Markets in Developing Countries: Implications for International Accounting
[economics & development]. The International Journal of Accounting. 1994;
29(4): 297-315.
Methodology: capital markets.
Investigation of variables to develop a model to associate economic develop-
ment as measured by gross domestic product and securities markets.
641. Seidler. Lee J., none (New York University). Nationalism and the International
Transfer of Accounting Skills [accounting education]. The International Jour-
nal of Accounting. 1969 Sep; 5(1): 35-45.
Methodology: deductive descriptive.
Discussion of the interference nationalistic activities in the transfer of account-
ing skills between countries.
Bibliography 157
642. Seidler, Lee J., developing countries/third world countries (New York University).
Teaching Business Administration Overseas: The Case for the Ugly American
[accounting education]. The International Journal of Accounting. 1968 Sep;
4(1): 145-154.
Methodology: theoretical.
Study of the reasons for the success of business schools organized around
American models in developing countries in spite of the failure of these schools
to "adapt" to local ways.
643. Sempier, Robert N., none (International Federation of Accountants). The Interna-
tional Federation of Accountants: Operating Procedures and Current Progress
[financial accounting and reporting]. The International Journal of Accounting.
1979 Sep; 15(1): 21-31.
Methodology: deductive descriptive.
Description of three basic objectives of the International Federation of Accoun-
tants: to develop international concerns, to develop regional organizations, and
to arrange international congresses.
644. Senteney, David L.; Bazaz, Mohammad S., United States (Eastern Michigan Uni-
versity, Ypsilanti, Michigan/ZOakland University, Rochester, Michigan). The
Impact of SFAS 14 Geographic Segment Disclosures on the Information Con-
tent of US-Based MNEs' Earnings Releases [financial accounting & reporting].
The International Journal of Accounting. 1992; 27(3): 267-279.
Methodology: empirical statistical.
Comparative statistical examination of unexpected earnings and unexpected
security price revisions released simultaneously with US-based multinational
enterprises' annual earnings releases before and after the implementation of
SFAS 14.
645. Shalchi, Hossein; Zimmerman, V. K., United States/United Kingdom/Canada/
South Africa (University of Illinois at Urbana-Champaign/ZUniversity of Illi-
nois at Urbana-Champaign). Appendix: Index of Price-Level and Inflation
Accounting, 1972-76 [financial accounting and reporting]. The Impact of Infla-
tion on Accounting: A Global View. Champaign, IL: Center for International
Education and Research in Accounting; 1979 May: 262-300.
Methodology: empirical descriptive.
Study of price-level and inflation related articles categorized by topic and
frequency.
646. Shama, Avraham; McMahan, Christopher G., Soviet Union/European Economic
Community/Eastern bloc countries/United States (University of New Mexico//
University of New Mexico). Perestroika and Soviet Accounting: From a
Planned to a Market Economy [economics and development]. The International
Journal of Accounting. 1990; 25(3): 155-169.
Methodology: deductive descriptive.
Discussion of the effect that reforms in the Soviet Union will have on its
accounting system. Discusses the conceptual framework and history of the
present system.
158 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
647. Shapiro. Alan C. none (University of Southern California). Evaluation and Control
of Foreign Operations [managerial accounting]. The International Journal of
Accounting. 1978 Sep; 14(1): 83-104.
Methodology: deductive descriptive.
Discussion of the evaluation and translation methods that affect the control of
the multinational corporation. Author concludes that the multinational corpora-
tion should be treated as a social institution.
648. Sharkas, Wajdy, Kuwait (Kuwait University). The Effectiveness of the Supreme
Audit Bureau in Kuwait in Monitoring Public Expenditures: An Evaluation
[auditing]. The International Journal of Accounting. 1985 Sep; 21(1): 123-141.
Methodology: deductive descriptive.
Description of the economic, political, and regulatory effects on auditing in
Kuwait.
649. Sharp, David J., Global (Boston College). Global Foreign Exchange Markets:
Implications for Management Accounting [managerial accounting]. Changing
International Financial Markets and Their Impact on Accounting. Champaign,
IL: Center for International Education and Research in Accounting, Department
of Accountancy; 1992: 107-124.
Methodology: capital markets.
Analysis of the implications of global currency markets' efficiency and volatil-
ity for managerial accounting.
650. Sharp, Robert F., global (Ohio University). The Use of Computer Simulation in
International Accounting Research [professional development]. The Interna-
tional Journal of Accounting. 1989; 24(1): 57-69.
Methodology: deductive descriptive.
Discussion of computer simulation as a research tool. Past examples are given
and author makes suggestions for future research implications.
651. Shields, Janice Christine, United States (Pennsylvania State University). Foreign
Language and Accounting Expertise: A Marketable Combination [accounting
education]. The International Journal of Accounting. 1981 Sep; 17(1): 133-146.
Methodology: empirical descriptive.
Sur\'ey of various multinational companies and accounting firms as to the mar-
ketability of foreign languages, which encourages multilingualism.
652. Shinawi, Ahmed Abdul Kadir; Crum, William F., Saudi Arabia (Ministry of Com-
merce and Industry of the Government of Saudia Arabia///University of
Southern California). The Emergence of Professional Public Accounting in
Saudi Arabia [public accounting]. The International Journal of Accounting.
1971 Mar; 6(2): 103-110.
Methodology: deductive descriptive.
Overview of the development of public accounting in Saudi Arabia.
653. Shoenthal, Edward, United States/United Kingdom (Brooklyn College). Differ-
ences in the Characteristics of Certified Public Accountants and Chartered
Accountants: An Obstacle to Harmonization [public accounting]. The Interna-
tional Journal of Accounting. 1987 Sep; 23(1): 95-103.
Methodology: empirical descriptive.
Bibliography 159
Comparison of CPA's in the U.S. with CA's in the U.K.. which finds that CA's
are more likely to be male, older than CPA's, and more highly trained and edu-
cated prior to licensing. Discusses the effect of these differences on efforts
toward harmonization.
654. Shuaib, Shuaib A., Kuwait/ Arab Countries (Kuwait University). Accounting Edu-
cation in the Middle East: The Case of Kuwait [accounting education]. The
Recent Accounting and Economic Developments in the Middle East. Cham-
paign, IL: Center for International Education and Research in Accounting; 1985
May: 213-232.
Methodology: deductive descriptive.
Discussion of the development of accounting education in Kuwait.
655. Shuaib, Shuaib A., Kuwait (University of Kuwait). Accounting Information and the
Development Planning Process in Kuwait [economics and development]. The
InternationalJournal of Accounting. 1980 Mar; 15(2): 129-141.
Methodology: deductive descriptive.
Description of the use of the accounting system in Kuwait as a source of infor-
mation and as a tool for economic development. Urges the development of a
professional body to analyze, define, assess information needs, and develop
uniform standards in the system.
656. Shute, John, none (Agency for the International Development, Washington, D.C.).
Comments on Dr. Churchill's Paper on Highway Finance [economics and
development]. The International Journal of Accounting. 1968 Sep; 4(1):
111-114.
Methodology: theoretical.
Commentary on A. A. Churchill's crutuque of the balanced budget in highway
finance.
657. Sigel, Phillip; Theerathom, Pochara; Alcerreca-Joaquin, Carlos, United States
(University of Houston-Downtown, Texas/ZMemphis State University, Mem-
phis, Tennessee/ZUniversity of Houston-Downtown/Instituto Technologio
Autonono de Mexico, Mexico City, Mexico). The Determinants of Systematic
Risk in Multinational Corporations After SPAS 52 [economics & develop-
ment]. International Journal of Accounting. 1992; 27(4): 324-341.
Methodology: capital markets.
Study to identify various sources of risk for subsidiaries of multinational corpo-
rations in order to better evaluate the performance of multinational
corporations. This research was done in light of the issuance of SFAS 52.
658. Simon, Abraham J., United States (Queens College, City University of New York).
An Economic and Macroaccounting Framework for Household Nonmarket
Production and Its Uses: The Output Side [economics and development]. The
International Journal of Accounting. 1977 Mar; 12(2): 143-168.
Methodology: theoretical.
Presentation of a framework to account for nonmarket production output.
659. Simon, Abraham J., none (Queens College, City University of New York). A Mac-
roaccounting Framework for the Value-Added and Saving Side of Household
160 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
Nonmarket Production [financial accounting and reporting]. The International
Journal of Accounting. 1977 Sep; 13(1): 93-129.
Methodology: modeling.
Presentation of a model of the accounting methodology for the value-added per-
spective and nonmarket production. Focuses on the input side.
660. Simon. Daniel T.. South Africa (University of Notre Dame). The Market for Audit
Services in South Africa [auditing]. The International Journal of Accounting.
1995; 30(4): 356-365.
Methodology: empirical statistical.
Study to determine similarities between South African audit services/practices
and those of the United States, United Kingdom, and Australia.
661. Simon, Daniel T.; Teo, Susan; Trompeter. Gregory, Hong Kong/Malaysia/Sin-
gapore (University of Notre Dame, Indiana/ZNanyang Technological
University, SingaporeZ/Boston College, Massachusetts). A Comparative Study
of the Market for Audit Services in Hong Kong, Malaysia, and Singapore
[auditing]. The International Journal of Accounting. 1992; 27(3): 234-240.
Methodology: empirical statistical.
Study of similarities and differences between the audit services offered in Hong
Kong. Malaysia, and Singapore.
662. Simon, Daniel T.; Ramanan, Ramachandran; Dugar, Amitabh, United States/India
(Northwestern University/ZUniversity of North Carolina/ZNorthwestem Univer-
sity). The Market for Audit Services in India: An Empirical Examination
[auditing]. The International Journal of Accounting. 1986 Mar; 21(2): 27-35.
Methodology: empirical statistical.
Study of auditing in India. Finds that auditor type, client size, audit risk, and
complexity affect the audit fees in such engagements.
663. Simyar, Farhad, China (Concordia University, Canada). Joint Ventures in the Peo-
ple's Republic of China [economics and development]. Recent Accounting and
Economic Developments in the Far East. Champaign, IL: Center for Interna-
tional Education and Research in Accounting; 1988 May: 169-195.
Methodology: deductive descriptive.
Discussion of the historical, economic, and social background of the environ-
ment surrounding enterprise in China. Suggests that foreign businesses obtain a
basic understanding of these factors before implementing international
endeavors.
664. Sinason, David H., none (University of North Florida). Executory Contracts in
Agency Theory [accounting theory]. The International Journal of Accounting.
1988 Mar; 23(2): 137-143.
Methodology: deductive descriptive.
Discussion of the nature and function of the executory contract. Concludes that
the information contained in such contracts should be disclosed to outside
principles.
665. Singh, D. R.; Ahuja, Jag Mohan, India/United States (Punjab Agricultural Univer-
sity, India/ZIndian Bank). Corporate Social Reporting in India [financial
Bibliography 161
accounting and reporting]. The International Journal of Accounting. 1983 Mar;
18(2): 151-169.
Methodology: empirical statistical.
Survey of firms in India regarding their level of social disclosure. Finds that
companies do not adequately disclose their social activities.
666. Singhvi, Surendra S., India (Miami University, Ohio). Characteristics and Implica-
tions of Inadequate Disclosure: A Case Study of India [financial accounting and
reporting]. The International Journal of Accounting. 1968 Mar; 3(2): 29-43.
Methodology: empirical descriptive.
Study of some of the characteristics of corporations associated with the quality
of disclosure in annual reports.
667. Sishtla, Vijaya Saradhi. India (Pennsylvania State University). Economic Change
under Five- Year Plans and Accounting Education in India [accounting educa-
tion]. Comparative International Accounting Educational Standards.
Champaign, IL: Center for International Education and Research in Account-
ing; 1990 Apr: 213-236.
Methodology: deductive descriptive.
Discussion of the educational and professional requirements of the Indian
accounting system. Contends that changes to date with the system have been
disorganized and that restructuring is needed.
668. Skinner, R. C, none (University of Otago. New Zealand). Accounting Information
for Decision-Making [managerial accounting]. The International Journal of
Accounting. 1971 Sep: 7(1): 65-78.
Methodology: theoretical.
Study emphasizing unification in decision-making.
669. Skinner. R. C. none (Monash University. Australia). Combining LIFO and FIFO
[accounting theory]. The International Journal of Accounting. 1975 Mar; 10(2):
127-133.
Methodology: theoretical.
Study of a method of stores issue pricing and stock valuation used by some
companies in England, which combines the best features of LIFO and FIFO.
670. Skinner. R. C, none (Monash University. Australia). Cost Allocation in Manage-
ment and Financial Accounting [financial accounting and reporting]. The
International Journal of Accounting. 1986 Mar; 21(2): 91-107.
Methodology: deductive descriptive.
Description of cost allocation for financial accounting. Holds that cost alloca-
tion is appropriate and should be considered.
671. Skinner. R. C. Australia/United Kingdom/United States (Monash University. Aus-
tralia). The Role of Conservatism in Determining the Accounting Lives of
Fixed Assets [accounting theory]. The International Journal of Accounting.
1988 Mar; 23(2): 1-18.
Methodology: empirical descriptive.
Survey of the role of conservatism in both fixed asset life determination and
valuation.
672. Skomp, Stephen E.; Ward. C. W. R.. United Kingdom/United States (Louisiana
Tech University/ZUniversity of Lancaster, England). The Capital Structure Poli-
162 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
cies of U.K. Companies: A Comparative Study [economics and development].
The International Journal of Accounting. 1983 Sep; 19(1): 55-64.
Methodology: empirical descriptive.
Survey and comparison of British companies regarding their capital structure
policies. Finds that managers in the U.K. tend to focus on the balance sheet.
673. Skully, Michael T., Japan/United States (University of New South Wales, Austra-
lia). Japanese Corporate Structure: Some Factors in Its Development
[economics and development]. The International Journal of Accounting. 1981
Mar; 16(2): 67-98.
Methodology: deductive descriptive.
Discussion of the historical, social, and economic reasons for the growth of Jap-
anese firms. Concludes that the Japanese firms have developed primarily
because of the Japanese banking structure, but that the role of the Japanese
banks will diminish in the future.
674. Smith, Charles H., none (University of Texas at Austin). The Modem Systems
Approach, General System Theory, and Accounting Theory Development in
the Age of Synthesis [accounting theory]. The International Journal of
Accounting. 1971 Mar; 6(2): 59-73.
Methodology: theoretical.
Investigation of whether or not the systems approach and general system theory
can contribute to the development of accounting theory.
675. Someya, Kyojiro, Japan (Waseda University, Tokyo, Japan). Accounting Standard
Selection and its Socio-economic Consequences [professional development].
International Journal of Accounting. 1993; 28(2): 93-103.
Methodology: historical.
Analysis of three events in 1990 in which legal alternative reporting techniques
by Japanese companies allowed those companies to evade ethical and credible
standards of accounting.
676. Someya, Kyojiro, Japan (Waseda University, Japan). The Slip Accounting System:
Traditional Bookkeeping Procedures in Japan [financial accounting and report-
ing]. The International Journal of Accounting. 1971 Sep; 7(1): 99-1 14.
Methodology: deductive descriptive.
Presentation of the advantages and disadvantages of methods employing slips
to record transactions.
677. Soyode, Afolabi, Nigeria (University of Ibadan, Nigeria). Indigenizing the Multina-
tional Corporation in Nigeria: Accounting and Social Effects [economics and
development]. The Muldnational Corporation: Accounting and Social Implica-
tions. Champaign, IL: Center for International Education and Research in
Accounting; 1977 Jan: 107-126.
Methodology: deductive descriptive.
Explanation of the requirements necessary for the growth of the Nigerian
economy.
678. Spagnola, Bob; Brannon, Roger, United StatesAJnited Kingdom/Germany (Colo-
rado State University/ZUniversity of Minnesota-Duluth). International Joint
Ventures: A Perspective on Organization and Accounting Implications of Glo-
Bibliography 163
bal Partnering for U.S. Multinationals [economics & development].
International Journal of Accounting. 1994; 29(1): 34-45.
Methodology: deductive descriptive.
Examination of the organizational fundamentals of international joint ventures
(IJVs) and various accounting issues related to them.
679. Sprouse, Robert T., United States (Financial Accounting Standards Board). Infla-
tion: Symptom or Disease? [financial accounting and reporting]. The Impact of
Inflation on Accounting: A Global View. Champaign. IL: Center for Interna-
tional Education and Research in Accounting; 1979 May: 1-19.
Methodology: theoretical.
Discussion of the effect of inflation on financial statement presentation and the
unit of measurement. Discusses the capital maintenance concept and its rele-
vance to investors.
680. Standish, Peter E. M., United Kingdom/France/Germany/Netherlands (London
Graduate School of Business Studies). Accounting Responses to Inflation in the
European Economic Community [financial accounting and reporting]. The
International Joitmal of Accounting. 1975 Sep; 11(1): 167-186.
Methodology: deductive descriptive.
Discussion of the responses within the European Economic Community (ECC)
to inflation from the standpoint of statutory disclosure requirements, particular
professional bodies, and particular companies.
681. Standish, Peter E. M., none (London Graduate School of Business Studies). Inter-
national Accounting Practice and the Reporting of Price-Level Changes
[financial accounting and reporting]. The Multinational Corporation: Account-
ing and Social Implications. Champaign, IL: Center for International Education
and Research in Accounting; 1977 Jan: 213-234.
Methodology: theoretical.
Description of theories of price-level translation and accounting for inflation.
682. Stanley, Marjorie T.; Block, Stanley B., none (Texas Christian University/ZTexas
Christian University). Accounting and Economic Aspects of SEAS No. 8
[accounting theory]. The International Journal of Accounting. 1979 Mar; 14(2):
135-155.
Methodology: empirical descriptive.
Survey supporting modification of SEAS no. 8 because of increased volatility
of earnings and the requirement that investors be better informed when dealing
with a multinational firm.
683. Stolowy, Herve; Walser-Prochazka, Sylvie, United States/Canada/New Zealand/
France (Ecole Superieure de Commerce de Paris, Erance/ZEmst & Young,
Paris, France). The American Influence in Accounting: Myth or Realty? The
Statement of Cash Flows Example [financial accounting & reporting]. The
International Journal of Accounting. 1992; 27(3): 185-221.
Methodology: deductive descriptive.
Results of a comparative survey to determine the extent of American and Cana-
dian influence on more recent models of statement of cash flows.
684. Sudarwan, M.; Fogarty, Timothy J., Indonesia (Jakarta, Indonesia/Case Western
Reserve University). Culture and Accounting in Indonesia: An Empirical
164 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
Examination [social effects of accounting]. The International Journal of
Accounting, 1996: 31(No.4): 463-481.
Methodology: theoretical
An examination of the relationships among the cultural characteristics of Indo-
nesian society, reporting practices of Indonesian firms, and accounting
standards released by the Association of Indonesian Accounts. It is argued that
an empirical relation exists between the change in cultural values and the
change in accounting values as captured by Gray's four dimensions (profes-
sionalism, conservatism, secrecy, and uniformity).
685. Summers, Edward L.; Deskins, James Wesley, none (University of Texas at Austin/
/University of Illinois at Urbana-Champaign). A Classification Schema of
Methods for Reporting Effects of Resource Price Changes (with Technical
Appendix) [accounting theory]. The International Journal of Accounting. 1970
Sep: 6(1): 101-120.
Methodology: theoretical.
Taxonomy of the responses to the problem of financial reporting in the presence
of resource price changes.
686. Suzuki, Norihiko, Japan (University of Illinois at Urbana-Champaign). The Japa-
nese Auditing System: Its Problems and Prospects [auditing]. Managerial
Accounting: An Analysis of Current International Application. Champaign, IL:
Center for International Education and Research in Accounting; 1984 Jan:
93-106.
Methodology: deductive descriptive.
Discussion of the development of the auditing system in Japan and of the
effects of legal, international, and social influences.
687. Swoboda, Peter, United States/West Germany (University of Frankfurt). Compari-
son of Consolidated Financial Statements in the United States and West
Germany [financial accounting and reporting]. The International Journal of
Accounting. 1966 Mar; 1(2): 9-24.
Methodology: deductive descriptive.
Comparison of consolidation practices in West Germany and (a) principles of
accounting generally accepted in the U.S. and (b) SEC requirements.
688. Tai, Benjamin Y. K., Hong Kong (California State University at Fresno). The
Accounting Profession in Hong Kong: Problems and Challenges [professional
development]. Recent Accounting and Economic Developments in the Far East.
Champaign, IL: Center for International Education and Research in Account-
ing; 1988 May: 219-228.
Methodology: deductive descriptive.
Discussion of the history and requirements in the accounting profession in
Hong Kong. Concludes that current conditions are inadequate for future profes-
sional growth and calls for a plan to accommodate this professional growth.
689. Tai, Benjamin Y. K.; Au-Yeung, Pak-Kuen; Kwok, Maurice C. M.; Lau, Lawrence
W. C, Hong Kong (California State University at Fresno//Chinese University
of Hong Kong//Hagemeyer-Morison Ltd, Hong Kong//Television Broadcasts
Limited, Hong Kong). Non-Compliance with Disclosure Requirements in
Financial Statements: The Case of Hong Kong Companies [financial account-
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ing and reporting]. The International Journal of Accounting. 1990; 25(2):
99-112.
Methodology: empirical statistical.
Study of seventy-six firms in Hong Kong regarding their compliance with dis-
closure requirements. Finds a 22% non-compliance rate overall. Analyzes the
relationship of business size, sector, and auditor with non-compliance.
690. Talaga, James A.; Ndubizu, Gordian A., none (West Chester University/ZDrexel
University). Accounting and Economic Development: Relationships among the
Paradigms [economics and development]. The International Journal of
Accounting. 1986 Mar; 21(2): 55-68.
Methodology: theoretical.
Discussion of the role accounting plays in economic development.
691. Tang, Qingliang, United Kingdom/China (University of New England, Armidale,
NSW, Australia). Economic Consequences of the International Harmonization
of Accounting Standards: Theory and its Chinese Application [economics &
development]. International Journal of Accounting. 1994; 29(2): 146-160.
Methodology: theoretical.
Proposal of a theoretical model used to evaluate foreign users of financial state-
ments as well as local users to determine the degree of harmonization of
accounting standards on local affected groups and implementation of this model
to explain pertinent accounting standards in Chinese joint ventures.
692. Taylor, Martin E.; Evans, Thomas G.; Joy, Arthur C, global/developing countries
(University of South Carolina/ZBowling Green State University/ZUniversity of
South Carolina). The Impact of lASC Accounting Standards on Comparability
and Consistency of International Accounting Reporting Practices [financial
accounting and reporting]. The International Journal of Accounting. 1986 Sep;
22(1): 1-9.
Methodology: empirical descriptive.
Survey of two big eight accounting firms regarding the comparability and con-
sistency of present international reporting practices. Finds that the IS AC has
been successful in improving such reports.
693. Teamey, Michael G.; Baridwan, Zaki, United States/United Kingdom/Japan/Neth-
erlandsAVest Germany/Indonesia (University of Kentucky/ZGadjah Mada
University, Indonesia). The Effects of Translation Accounting Requirements
and Exchange Rates on Foreign Operations' Financial Performance — The Case
of Indonesia [financial accounting and reporting]. The International Journal of
Accounting. 1989; 24(3): 251-265.
Methodology: empirical statistical.
Study of seventeen companies operating in Indonesia. Finds that U.S. compa-
nies showed higher performance after, rather than before, the translation of the
financial statements.
694. Teoh, Hai Yap; Er, Meng, Australia (University of Wollongong. Australia/ZUniver-
sity of Wollongong, Australia). Impact of Floating Exchange Rates on
Company Risk Management Practices and Reported Income: The Australian
166 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
Experience [financial accounting and reporting]. The International Journal of
Accounting. 1989; 24(3): 221-236.
Methodology: empirical descriptive.
Survey of 480 Australian companies involved in international trade. Finds that
Australian currency fluctuations have increased the exposure to exchange rate
risk.
695. Teruya, Yukio, Japan/United States (Okinawa University, Japan). The Accounting
Disclosure System in Japan [financial accounting and reporting]. Recent
Accounting and Economic Developments in the Far East. Champaign, IL: Cen-
ter for International Education and Research in Accounting; 1988 May:
163-167.
Methodology: deductive descriptive.
Discussion of the development and regulation of the current accounting disclo-
sure system in Japan. Discusses the current structure of the system and
problems existing in it today.
696. Thomas, R. Douglas, United States/Canada/United Kingdom (Canadian Institute of
Chartered Accountants). The Accountants International Study Group — The
First Three Years [accounting education]. The International Journal of
Accounting. 1970 Sep; 6(1): 59-65.
Methodology: theoretical.
Critique of the work of the Accountants International Study Group.
697. Thorelli, Hans B., developing countries (Indiana University). Management Audit
and Social Indicators: The MNC through the Glasses of the LDC [managerial
accounting]. The Multinational Corporation: Accounting and Social Implica-
tions. Champaign, IL: Center for International Education and Research in
Accounting; 1977 Jan: 1-19.
Methodology: deductive descriptive.
Explanation of the need for management audits at the local level of the less
developed countries.
698. Tondkar, Rasoul H.; Adhikari, Ajay; Coffman, Edward N., European Economic
Community (Virginia Commonwealth University/ZGrand Valley State Univer-
sity/A^irginia Commonwealth University). An Analysis of the Impact of
Selected EEC Directives on Harmonizing Listing and Filing Requirements of
EEC Stock Exchanges [financial accounting and reporting]. The International
Journal of Accounting. 1990; 25(2): 127-143.
Methodology: deductive descriptive.
Discussion of the effects that the admission, listing, and interim reporting direc-
tives have had on four European Economic Communities' stock exchanges.
Analyzes the listing and filing requirements for the international, Amsterdam,
Frankfurt, and Paris exchanges are analyzed and concludes that the directives
have prompted harmonization.
699. Tondkar, Rasoul H.; Adhikari, Ajay; Coffman, Edward N., United States/Japan/
United Kingdom/Germany/France (Virginia Commonwealth University/A^ir-
ginia Commonwealth University/ZVirginia Commonwealth University). The
Internationalization of Equity Markets: Motivations for Foreign Corporate List-
ing and Filing and Listing Requirements of Five Major Stock Exchanges
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[economics and development]. The International Journal of Accounting. 1989;
24(2): 143-163.
Methodology: deductive descriptive.
Discussion of listing and filing characteristics in the international markets.
700. Treffers, Henk C, Europe (Union Europeene des Experts Comptables,
Economiques et Financiers). The Changing Nature of the European Accounting
Profession [professional development]. The International Journal of Account-
ing. 1967 Sep; 3(1): 43-54.
Methodology: deductive descriptive.
Discussion of the problems facing the European accounting profession. .
701. Tritschler, Charles A., France (Purdue University). A Sociological Perspective on
Accounting Innovation [accounting theory]. The International Journal of
Accounting. 1970 Mar; 5(2): 39-67.
Methodology: theoretical.
Study of social variables within the context of accounting innovation. Uses
these social variables to explain mixed patterns in the adoption of adjusted
statements and their ultimate rejection in France.
702. Trotman, Ken T., Australia/Canada/United States/United Kingdom (The University
of New South Wales, Australia). An Evaluation of Accounting for Construction
Contracts: An International Comparison [financial accounting and reporting].
The International Journal of Accounting. 1982 Mar; 17(2): 151-166.
Methodology: theoretical.
Presentation of the methodology used to account for construction projects. Con-
cludes that current standards do not properly address the issue and that future
standards should consider existing conditions.
703. Tsui, Judy S.L., Hong Kong (City University of Hong Kong). Auditors' Ethical
Reasoning: Some Audit Conflict and Cross Cultural Evidence [auditing]. The
International Journal of Accounting, 1996; 31(1): 121-133.
Methodology: empirical statistical
An examination of the relationship between different levels of ethical reasoning
and ethical behavior of Hong Kong Auditors in an audit conflict situation. Tests
the hypothesis that ethical reasoning scores for Hong Kong auditors will be
lower than US auditors on the basis of Hofestede's theory of cultural
differences.
704. Turk, Ivan, Yugoslavia (University of Ljubljana, Yugoslavia). Analysis of Effi-
ciency by Means of Interrelated Indicators: A Yugoslav Approach [economics
and development]. The International Journal of Accounting. 1982 Mar; 17(2):
89-102.
Methodology: deductive descriptive.
Discussion of the Yugoslavian method of efficiency analysis using indicators.
705. Turk, Ivan, Yugoslavia (Ljubljana University, Yugoslavia). Recent Professional
Statements of Accounting Principles and Ethics in Yugoslavia [financial
accounting and reporting]. The International Journal of Accounting. 1976 Sep;
12(1): 111-120.
Methodology: deductive descriptive.
1 68 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1 , 1 998
Discussion of the socioeconomic, regulatory, and theoretical effects of the
accounting system in Yugoslavia.
706. Turley. W. S., European Economic Community (University of Manchester,
England). International Harmonization of Accounting: The Contribution of the
EEC Fourth Directive on Company Law [financial accounting and reporting].
The International Journal of Accounting. 1983 Mar; 18(2): 13-27.
Methodology: theoretical.
Study that attributes differences in accounting practice to theoretical differ-
ences. Concludes that international standard-setting is far more complex than
originally thought.
707. Tyra, Anita I., Europe (Bellevue Community College). Financial Disclosure Pat-
terns in Four European Countries [public accounting]. The International
Journal of Accounting. 1970 Mar; 5(2): 89-101.
Methodology: empirical descriptive.
Synopsis of a study on financial disclosure in annual reports published in West
Germany. France, the Netherlands, and the U.K.
708. Ueno, Susumu; Wu, Frederick H., United States/Japan (Kanazawa College of Eco-
nomics. Toyama-City. Japan/ZSouthem Illinois University at Carbondale,
Illinois). The Comparative Influence of Culture on Budget Control Practices in
the United States and Japan [managerial accounting]. International Journal of
Accounting. 1993:28(1): 17-39.
Methodology: empirical statistical.
Study to determine degree of impact of national culture on budget control prac-
tices in the United States and Japan.
709. Vaidya, Surekha; Poitras. Geoffrey: Talib. Ameen. Singapore/United States/Ger-
many (National University of Singapore/ZSimon University, Bumab), BC,
Canada/ZNational University of Singapore). International Accounting Implica-
tions of Bond-cum- Warrant Issues [financial accounting & reporting]. The
International Journal of Accounting. 1995: 30( 1 ): 25-36.
Methodology: empirical descriptive.
Determination of how differences in accounting and policies for warrant bond
issues effect subsequent reporting and disclosure of such information.
710. Van Offeren. Dick: Bavishi. Vinod B.. European Community (University of
Amsterdam, The NetherlandsZZCenter of International Financial Analysis &
Research, Inc.). Financial Reporting Practices of Leading European Companies
[financial accounting & reporting]. The New Europe: Recent Political and Eco-
nomic Implications for Accountants and Accounting. Champaign, IL: Center
for International Education and Research in Accounting; 1994: 29-42.
Methodology: empirical descriptive.
Study to identify annual reports which pro\ ide useful information to interna-
tional readers.
711. van Seventer. A.. Netherlands (San Jose State University). The Continuity Postu-
late in the Dutch Theory of Business Income [accounting theory]. The
International Journal of Accounting. 1969 Mar; 4(2): 1-19.
Methodology: theoretical.
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Study of the continuity postulate offered by the Amsterdam school as a new
approach to the problems of income accounting.
712. van Seventer, A., Netherlands (San Jose State University). Replacement Value
Theory in Modem Dutch Accounting [accounting theory]. The International
Journal of Accounting. 1975 Sep; 11(1): 67-94.
Methodology: theoretical.
Discussion of a few fundamental principles of the replacement value theory.
713. van Seventer, A., none (San Jose State University). An Unsettled Problem in the
Theory of Replacing Durable Assets: The Wemelsfelder — Traas Controversy
[accounting theory]. The International Journal of Accounting. 1914 Mar; 9(2):
45-81.
Methodology: theoretical.
Discussion of the problem of replacing durable assets without giving attention
to the literature of economics and finance.
714. Vandendries, Rene, Peru (University of Illinois at Urbana-Champaign). Social
Accounting and Its Applications in Peru [social effects of accounting]. The
International Journal of Accounting. 1970 Sep; 6(1): 91-99.
Methodology: theoretical.
Study of the interrelationships among variables of macroaccounts, essential for
the analysis of the economic development of Peru.
715. Vangermeersch, Richard, European Economic Community/United States (Univer-
sity of Rhode Island). The Route of the Seventh Directive of the EEC on
Consolidated Accounts — Slow, Steady, Studied, and Successful [financial
accounting and reporting]. The International Journal of Accounting. 1985 Mar;
20(2): 103-118.
Methodology: deductive descriptive.
Discussion of the development and implications of the European Economic
Community's seventh directive.
716. Vatter, William J., none (University of California at Berkeley). Progress in the Pur-
suit of Principles [accounting theory]. The International Journal of Accounting.
1969 Sep; 5(1): 1-15.
Methodology: deductive descriptive.
Critique of developments in accounting principles which have not achieved the
anticipated goals.
717. Velayutham, Sivakumar; Perera, Hector, New Zealand (Massey University, New
Zealand). Recent Development in the Accounting Profession in New Zealand:
A Case of Deprofessionalization? [professional development]. The Interna-
tional Journal of Accounting, 1996; 31(4): 445-462.
Methodology: deductive descriptive
A description of recent developments in the accounting profession in New
Zealand and analysis of the direction of these changes. Evidence is provided to
argue that the recent changes in the accounting profession in New Zealand sug-
gest a trend towards deprofessionalization.
718. Vergoosen, Ruud G. A., The Netherlands/ZUnited States (Vrije Universiteit,
Amsterdam, The Netherlands). The Classification of Leases by Leassees in the
170 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
United States and the Netherlands: A Comparative Study [financial accounting
& reporting]. The International Journal of Accounting. 1992; 27(3): 241-254.
Methodology: deductive descriptive.
Comparative study between Dutch and American lease classification systems
and SFAC No. 2.
719. Vickrey, Don W., none (Arizona State University West, Phoenix). An Internation-
ally Relevant, Alternative Price-Oriented Concept of Market Efficiency
[economics & development]. The International Journal of Accounting. 1994;
29(3): 206-219.
Methodology: deductive descriptive.
Introduction and application of an alternative price-oriented concept of market
information efficiency.
720. Vickrey, Don W., none (University of Arizona). Two Views of Current-Exit Val-
ues: Addition and Additivity [accounting theory]. The International Journal of
Accounting. 1976 Mar; 11(2): 51-57.
Methodology: theoretical.
Discussion of how current-exit values can be added in a manner consistent with
measurement theory. Contends that a current-exit- value accounting system can
be developed around the concepts of realizable market value of an asset set and
discharge value of a liability set.
721. Violet, William J., United States/United Kingdom (Moorhead State University).
The Development of International Accounting Standards: An Anthropological
Perspective [social effects of accounting]. The International Journal of
Accounting. 1983 Mar; 18(2): 1-12.
Methodology: theoretical.
Social analysis of the development of international accounting standards.
722. Violet, William J., United States (Moorhead State University). A Philosophical
Perspective on the Development of International Accounting Standards
[accounting theory]. The International Journal of Accounting. 1983 Sep; 19(1):
1-13.
Methodology: deductive descriptive.
Discussion of the pragmatic formulation of accounting principles in a society.
Calls for the development of a postulate based framework for international
principles.
723. Vobroucek, C. A., United Kingdom/United States/Canada/Brazil/Australia (Cater-
pillar Tractor Company). Reshaping Corporate Information Flows Using
Cost-Effective Financial Systems [managerial accounting]. Managerial
Accounting: An Analysis of Current International Application. Champaign, IL:
Center for International Education and Research in Accounting; 1984 Jan:
71-81.
Methodology: deductive descriptive.
Discussion of the transformation of the accounting system at Caterpillar Tractor
into one that is standardized and centrally controlled.
724. Walker, Kenton B.; Johnson, Eric N., Australia/United Kindom/New Zealand/Den-
mark/Korea/ Canada/Singapore/India/Hong Kong (University of Wyoming/
University of Toledo). A Review of Synthesis of Research on Supplier Concen-
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tration. Quality and Fee Structure in non-U. S. Markets for Auditor Services
[auditing]. The International Journal of Accounting, 1996; 31(No.l): 1-18.
Methodology: Historical.
A review of research on audit market concentration, auditor quality and the
determinants of audit fees in countries outside of the U.S. Identifies some struc-
tural differences in audit markets between studies that are traceable to
divergence in economic, cutural nd social norms across developed and develop-
ing countries.
725. Wang, Zhemin, Global (North Dakota State University). An Empirical Assessment
of lASC's Proposed Goodwill Amortization Requirement [financial accounting
& reporting]. The International Journal of Accounting. 1995; 30(1): 37-47.
Methodology: empirical statistical.
Analysis of the implications involving lASC's proposal to amortize goodwill
over a five-year period.
726. Waresul Karim, A.K.M.; Moizer, Peter. Bangladesh (University of Leeds). Deter-
minants of Audit Fees in Bangladesh [auditing]. The International Journal of
Accounting, 1996; 31(4): 497-509.
Methodology: auditing.
A description of the nature of audit services market in Bangladesh and analysis
of the determinants of audit fees of both financial and non-financial companies
in Bangladesh. It shows that the size of the auditee has the greatest influence on
audit fees and that auditees which employed at least one qualified acountant had
higher audit fees.
727. Wasley, Robert S., New Zealand (University of Colorado at Boulder). The Role of
Management Accounting in New Zealand Business [managerial accounting].
The International Journal of Accounting. 1975 Mar; 10(2): 57-74.
Methodology: theoretical.
Discussion of four basic elements of management accounting: organizational
structure, a chart of accounts, a cost accounting and budgeting system, and fre-
quent comparison of the budget to actual performance.
728. Wasley, Robert S., New Zealand (University of Colorado). The Status of Accoun-
tancy and of Accounting Practices in New Zealand [professional development].
The International Journal of Accounting . 1968 Mar; 3(2): 67-89.
Methodology: deductive descriptive.
Study of the status of accountancy and of accounting practices in New Zealand
as they relate to the economic and social environment of the country and the
existing philosophy of management.
729. Weber, Charles, none (University of Illinois at Urbana-Champaign). Income Deter-
mination Theory: Some Mathematical and Graphical Approaches [accounting
theory]. The International Journal of Accounting. 1966 Sep; 2(1): 35-47.
Methodology: theoretical.
Proposal of steps to integrate probability theory into the framework of account-
ing thought. Emphasizes the determination of subjective income along
Bayesian lines and the establishment of a clear distinction between subjective
and realizable income.
172 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
730. Weber, John A., none (University of Notre Dame). Keeping Current on New
Developments in Accounting [miscellaneous]. The International Journal of
Accounting. 1971 Sep; 7(1): 115-123.
Methodology: empirical descriptive.
Study of recent developments in journal systems of related disciplines, which
suggests that the average lag within the accounting journal system will increase
in the future unless acceptance rates are reduced. Concedes, however, that the
current accounting journal systems are more efficient than those in the past.
731. Weinstein, Arnold K.; Corsini. Louis; Pawliczek, Ronald, United States/Europe
(Boston College/ZBoston CoUege/ZBoston College). The Big Eight in Europe
[public accounting]. The International Journal of Accounting. 1978 Mar; 13(2):
57-71.
Methodology: empirical descriptive.
Survey of the big eight firms regarding their organizational structures in the
U.S. and Europe. Presents different models of organizational structure among
the big eight and concludes that big eight firms must be more responsive to
local needs, yet retain enough control to ensure proper international reporting.
732. Weirich, Thomas R.; Clarence G. Avery; Anderson, Henry R., none (Northern Illi-
nois University/ZNorthem Illinois University/ZNorthem Illinois University).
International Accounting: Varying Definitions [financial accounting and report-
ing]. The International Journal of Accounting. 1971 Sep; 7(1): 79-87.
Methodology: empirical descriptive.
Study with three main purposes: (1) to report research on some of the major
concepts of the term "international accounting," (2) to survey periodicals on
this topic to determine if the authors have explicitly defined "international
accounting," if not, to arrive deductively of a definition from the periodicals,
and (3) based on an analysis of these articles to draw a conclusion as to the
meaning of "international accounting."
733. Welton, Ralph E.; Davis, James R., United States/New Zealand (Clemson Univer-
sity/ZClemson University). Accounting Implications of the Perception of
Professional Ethics: A Comparative Analysis of American and New Zealand
Students [social effects of accounting]. The International Journal of Account-
ing. 1990; 25(4): 268-283.
Methodology: empirical descriptive.
Study of U.S. and New Zealand college students that shows a maturation pro-
cess regarding ethics that occurs during the college years.
734. Westaway, James G., United States (Barber-Ellis Group). Inflation Accounting:
What Would We Do without It? [financial accounting and reporting]. The
Impact of Inflation on Accounting: A Global View. Champaign, IL: Center for
International Education and Research in Accounting; 1979 May: 43-54.
Methodology: deductive descriptive.
Description of the use of replacement cost accounting by the Barber-Ellis
Group.
735. White, Mick; Hopkins, Roger; Juchau, Roger H.. Cook IslandsZFijiZKiribatiZNauruZ
NiueZSolomon IslandsZTongaZTuvaluZVanautuZWestern Samoa (University of
the South PacificZZUniversity of SingaporeZZUniversity of Canterbury, New
Bibliography 173
Zealand). Tertiary Education Strategies for Accounting in Developing Societ-
ies— The Southwest Pacific as a Case Study [economics and development]. The
International Journal of Accounting. 1986 Mar; 21(2): 145-160.
Methodology: deductive descriptive.
Discussion of the factors that affect the accounting profession in the southwest
Pacific.
736. Wilkinson, Theodore L., United States (Price Waterhouse & Company). United
States Accounting as Viewed by Accountants of Other Countries [accounting
theory]. The International Journal of Accounting. 1965 Sep; 1(1): 3-14.
Methodology: deductive descriptive.
Narration of the inconsistencies and problems plaguing current (1965) account-
ing practices, both domestic and international.
737. Will, Hartmut J., United States (University of British Columbia). Computerized
Accounting: International Issues [information systems]. The International
Journal of Accounting. 1980 Sep; 16(1): 169-203.
Methodology: deductive descriptive.
Discussion of the role of accounting in management information systems. Calls
for the standardization of professional principles and of the management infor-
mation systems.
738. Williams, Thomas H.; Griffin, Charles H., none (University of Texas at Austin//
University of Texas at Austin). MAS and the Expanded Meaning of Accounting
Education [accounting education]. The International Journal of Accounting.
1973 Mar; 8(2): 33-43.
Methodology: deductive descriptive.
Study of the evolution of the management advisory function, accounting prac-
tice, and the question of appropriate education.
739. Willingham, John J.; Sorenson, James E., none (University of Texas at Arlington//
University of Denver). The Behavior Science Milieu of Accounting [social
effects of accounting]. 77?^^ International Journal of Accounting. 1971 Sep;
7(1): 49-63.
Methodology: theoretical.
Study of the scientific content of accounting placing special emphasis on the
behavioral dimension.
740. Winjum, James O., United Kingdom (University of Michigan). Income Tax
Administration in Great Britain [taxation]. The International Journal of
Accounting. 1972 Sep; 8( 1): 109-116.
Methodology: deductive descriptive.
Discussion of the general administration of income taxes in Great Britain,
emphasizing the roles played by local tax inspectors and independent chartered
accountants in the assessment of income taxes.
741. Woelfel, Charles J., none (Southern Illinois University). Understanding the Multi-
nationals [financial accounting and reporting]. The International Journal of
Accounting. 1976 Mar; 11(2): 133-142.
Methodology: empirical descriptive.
Discussion of the role and operations of multinationals in modem society.
Defines multinational corporations and discusses technological, economic, and
174 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 1, 1998
political factors contributing to the development of a domestic company's for-
eign operations. Forms conclusions based on evidence drawn from discussions
and correspondence with executives in major multinational corporations and
members of academia.
742. Wolk. Harry I.; Heaston. Patrick H.. United States (Drake University. Des Moines,
Iowa//Drake University, Des Moines, Iowa). Toward the harmonization of
Accounting Standards: An Analytical Framework [financial accounting &
reporting]. The International Journal of Accounting. 1992; 27(2): 95-1 1 1 .
Methodology: modeling.
Presentation of an analytical framework for examining accounting event cate-
gories (called uniformity analysis) frequently used in globalized business
operations in an attempt to increase harmonization.
743. Wolk, Harry I.; Briggs, Roger W., none (Drake University/ZDrake University).
Accounting Research, Professors, and Practitioners: A Perspective [accounting
education]. The International Journal of Accounting. 1975 Mar; 10(2): 47-56.
Methodology: theoretical.
Presentation of a sample framework for analyzing accounting research, placed
within the context of current criticisms made by directors of accounting educa-
tion. Suggests how to strengthen accounting research, the perceived neglect of
which has been responsible, in part, for the eroding relationship between pro-
fessors and practitioners.
744. Wong-Boren, Adrian. Mexico/United States (San Diego State University). Impor-
tant Events in the Development of the Accounting Profession in Mexico
[accounting history]. The International Journal of Accounting. 1987 Sep; 23(1):
23-46.
Methodology: deductive descriptive.
Historical survey of the accounting profession in Mexico.
745. Wong-Boren, Adrian; Bamett, Andrew H., Mexico/United States (San Diego State
University//San Diego State University). Mexican Market Efficiency: A Study
of the Information Content of Accounting Numbers [financial accounting and
reporting]. The International Journal of Accounting. 1984 Sep; 20(1): 45-70.
Methodology: empirical statistical.
Study of the Mexican stock exchange to determine the value of the financial
statement information, which finds that this information did help investment
decisions.
746. Wonnacott, Ronald, none (University of Western Ontario). U.S. Investment and the
Recipient Country [economics and development]. The International Journal of
Accounting. 1972 Mar; 7(2): 45-54.
Methodology: deductive descriptive.
Discussion of U.S. investment practices and the reasons why they raise prob-
lems for Europeans and Canadians.
747. Woodruff, William, Global (University of Florida). The Accumulation and Trans-
fer of Capital: A Global View [accounting history]. Changing International
Financial Markets and Their Impact on Accounting. Champaign, IL: Center for
Bibliography 175
International Education and Research in Accounting, Department of Accoun-
tancy: 1992: 147-154.
Methodology: historical.
Examination of the evolution of global capitalization and various issues regard-
ing capital accumulation and transfer.
748. Woodruff, William, United States/Korea/Soviet Union (University of Florida).
World Power and the United States: The Shifting Realities [economics and
development]. The Impact of Inflation on Accounting: A Global View. Cham-
paign, IL: Center for International Education and Research in Accounting; 1979
May: 189-203.
Methodology: deductive descriptive.
Discussion of the reasons for the inability of the U.S. to provide economic lead-
ership to the Western world.
749. Wright, P. K., none (University of Adelaide in South Australia). The Valuation of
Tax-Depreciable Assets [taxation]. The International Journal of Accounting.
1973 Mar; 8(2): 45-57.
Methodology: theoretical.
Modification of the theory of asset valuation, as it applies to the problem of val-
uing tax-depreciable assets.
750. Wright, William, United States (Stanford University). An Empirical Study of the
Professional Socialization of Accounting Students [accounting education]. The
International Journal of Accounting. 1977 Sep; 13(1): 53-76.
Methodology: empirical descriptive.
Survey of entry-level auditors, which revealed a desire for less tedious and
mundane responsibilities. Author concludes that public firms could lower
employee turnovers and audit cost by implementing such desires.
751. Wu, Frederick H.; Hackett, Donald W., United States/Europe/Central & South
America/Canada/Africa/Asia/Oceania/Middle East (Wichita State University//
Wichita State University). The Internationalization of U.S. Public Accounting
Firms: An Empirical Study [public accounting]. The International Journal of
Accounting. 1977 Mar; 12(2): 81-91.
Methodology: empirical descriptive.
Study of U.S. CPA firms regarding their expansion outside the U.S. Finds that
client requirements and the desire to serve clients moving abroad were the main
factors influencing the expansion.
752. Wu, Frederick H.; Sharp, Douglas, none (Wichita State University//Wichita State
University). An Empirical Study of Transfer Pricing Practice [financial
accounting and reporting]. The International Journal of Accounting. 1979 Mar;
14(2): 71-99.
Methodology: empirical descriptive.
Study of the prominence of transfer pricing theory, which traces its influence to
market prices and social factors.
753. Wyatt, Arthur R., United States (Arthur Andersen & Co.). Accounting Standards:
National or International? [financial accounting & reporting]. Changing Inter-
national Financial Markets and Their Impact on Accounting. Champaign, IL:
176 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No, 1, 1998
Center for International Education and Research in Accounting, Department of
Accountancy; 1992: 31-42.
Methodology: deductive descriptive.
This article addresses the need for the promulgation of international accounting
standards in light of the globalization of the business sector.
754. Xu-Ying, Yu, China (Xiamen University, People's Republic of China). The Fund
Market in China: Its Formation, Development, and Impact on Accounting [eco-
nomics & development]. Changing International Financial Markets and Their
Impact on Accounting. Champaign, IL: Center for International Education and
Research in Accounting. Department of Accountancy; 1992: 67-92.
Methodology: capital markets.
Examination of the growth of the commodity market in China and its effects on
China's accounting system. A hypothetical model is introduced and its impact
upon various areas of accounting is analyzed.
755. Xu-ying, Yu, China/United States (Xiamen University, People's Republic of
China). The General Character of Chinese and U.S. Management Accounting
and an Analysis of the New Chinese Management Accounting Style [manage-
rial accounting]. Recent Accounting and Economic Developments in the Far
East. Champaign, IL: Center for International Education and Research in
Accounting; 1988 May: 51-64.
Methodology: deductive descriptive.
Discussion of the developments which have led to the current managerial
accounting practices in China and the U.S. Includes as overview of current Chi-
nese managerial accounting theory.
756. Yagil, Joseph; Amoako-Adu, Ben; Kantor, Jeffrey, Canada/United States (Haifa
University/ZUniversity of New Brunswick/ZUniversity of Windsor). Capital
Cost Allowance (Depreciation) and Capital Budgeting in Canada [managerial
accounting]. The International Journal of Accounting. 1986 Mar; 21(2): 47-54.
Methodology: theoretical.
Discussion of the effects that disposition value will have on capital budgeting in
Canada.
757. Yamaji, Hidetoshi, Japan (Kobe University, Japan). Collective Bargaining and
Accounting Disclosure: An Inquiry into the Changes in Accounting Policy
[financial accounting and reporting]. 77?^' International Journal of Accounting.
1986 Sep; 22(1): 11-23.
Methodology: empirical statistical.
Study of Japanese firms regarding the effect that collective bargaining has on
the manipulation of accounting information. Finds that Japanese management is
inclined to manipulate the accounting information in order to reduce a firm's
labor costs.
758. Yamamura, Jeanne H.; Frakes, Albert H.; Sanders, Debra L.; Ahn. Sung K., Japan/
United States (University of NevadAVashington State University). The Interna-
tional Journal of Accounting. 1996; 31(3): 347-363.
Methodology: auditing.
An empirical comparison of Japanese and US auditor decision making in areas
expected to be affected by cultural differences. Results proved national differ-
Bibliography 177
ences, however, due to environmental factors rather than the theorized effect of
cultural differences.
759. Yu, S. C, United States (University of Florida). Is the New U.S. Budget More a
Understandable Document? [governmental]. The International Journal of
Accounting. 1968 Mar; 3(2): 45-66.
Methodology: deductive descriptive.
Examination of the new budget in an effort to determine whether or not it is eas-
ier to understand and more useful than the old budget.
760. Yu, S. C, none (University of Florida). A Reexamination of the Going Concern
Postulate [accounting theory]. The International Journal of Accounting. 1971
Mar; 6(2): 37-58.
Methodology: deductive descriptive.
Reexamination of the going concern concept, by identifying its constitutive and
operational meanings and by explaining its implications.
761. Yu, S. C, none (University of Florida). The Several Modes of Normative Account-
ing Thought: A Critical Examination [accounting theory]. The International
Journal of Accounting. 1974 Mar; 9(2): 83-104.
Methodology: theoretical.
Examination of several modes of accounting thought, with reference to episte-
mological foundations and empirical validity. Discusses assertions in
theorization, especially emphasizing truth values, the positive and normative
phases of accounting operation.
762. Zappala, Frederick J., Italy (Boston College). The Current State of the Accounting
Profession in Italy [public accounting]. The International Journal of Account-
ing. 1973 Mar; 8(2): 111-121.
Methodology: empirical descriptive.
Survey of professional accountants, university professors, and students to
obtain a consensus of opinion on existing conditions of public accounting in
Italy.
763. Zeff, Stephen A., Thailand (Tulane University). Comments on the NIDA Program
[accounting education]. The International Journal of Accounting. 1968 Sep;
4(1): 141-143.
Methodology: theoretical.
Brief commentary on the NIDA Program.
764. Zick, John W., Saudi Arabia (Price Waterhouse & Company). International Trade:
Opportunities in the Arabian Gulf [miscellaneous]. The Recent Accounting and
Economic Developments in the Middle East. Champaign, IL: Center for Inter-
national Education and Research in Accounting; 1985 May: 33-41.
Methodology: deductive descriptive.
Discussion of the opportunities and requirements for establishing enterprise in
the Middle East.
765. Ziebart, David A., United States/inflationary countries (University of Illinois at
Urbana-Champaign). Exchange Rates and Purchasing Power Parity: Evidence
Regarding the Failure of SFAS No. 52 to Consider Exchange Risk in
178 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol 33, No. 1, 1998
Hyper-Inflationary Countries [financial accounting and reporting]. The Interna-
tional Journal of Accounting. 1985 Sep; 21(1): 39-51.
Methodology: empirical statistical.
Empirical study of SFAS No. 52 regarding exchange risk exposure in
hyper-inflationary countries. Concludes that SFAS No. 52 fails to address this
risk.
766. Zimmerman, V. K., none (University of Illinois at Urbana-Champaign). The Long
Shadow of a Scholar [miscellaneous]. The International Journal of Accounting.
1967 Mar; 2(2): 1-20.
Methodology: deductive descriptive.
Appreciation of A. C. Littleton's lifelong devotion to accounting.
767. Zund, Andre, Switzerland (University of St. Gallen, Switzerland). Accounting and
Auditing in Switzerland [miscellaneous]. The New Europe: Recent Political
and Economic Implications for Accountants and Accounting. Champaign, IL:
Center for International Education and Research in Accounting; 1994: 17-28.
Methodology: deductive descriptive.
Overview of the accounting environment in Switzerland and its evolution
toward European harmonization.
768. Zund, Andre, Switzerland (Saint Gall Graduate School, Switzerland). Swiss
Accounting and Auditing in an International Context [professional develop-
ment]. The Recent Accounting and Economic Developments in Western
Europe. Champaign, IL: Center for International Education and Research in
Accounting; 1985 May: 1-13.
Methodology: deductive descriptive.
Discussion of how the Swiss accounting profession will be affected by confor-
mity to the practices of other countries.
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id SCOPE. The aims of The International Journal of Accounting are to advance the aca-
\6. professional understanding of accounting theory and practice from the international per-
jand viewpoint. The Journal recognizes that international accounting is influenced by a
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[he origins and development of accounting with an emphasis on its functions in an increas-
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\national Journal of Accounting, University of Illinois, 320 Commerce West, 1206 S. Sixth
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Reflect National Character?" Journal of International Business Studies. (Fourth
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CONTENTS: The Association between Audit Reports and Bankruptcies: Fur-
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Retention of Women in Public Accounting: Directions for Future Research, |
Karen L. Hooks, Paula B. Thomas, and William D. Stout. Effects of Engage-
ment-Wide Inherent Risk Factors on Auditor's Evaluations of Multiple Explana- '
tions from Client and Audit Team Sources, Susan Ayers and Steven Kaplan. An i
Investigation of the Relevance of Disclosure of Asset Composition in Assessing
Distress Risk of Savings Institutions, SaeedJ. Roohani and Zabihollah Rezace. I
Evidence of the Relations between Firm Characteristics and Reserve Revisions i
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Kwon. Accounting Accruals and the Incremental Content of Earnings and Cash 1
Flows from Operations, C.S. Agness Cheng, Chao-Shin Liu, and Thomas
Schaefer. An Investigation of the Impact of Market Discipline on Individuals'
Price Revisions, Charles E. Davis, Elizabeth B. Davis, and Daniel P. Murphy.
The Impact of Earnings Management on Bank Risk Premia, Thomas G. Robin-
son and Julia Grant The Comparison of Dysfunctional Behaviors by Tax Ac-
countants and Auditors Under Time Budget Pressures, Tom Dalton and Tim |
Kelley. A Comparison of AHP and ANOVA Decision Modeling Techniques in In-
ternal Control Procedures Evaluations, Sally A. Webber and John Hassell. A I
Longitudinal Analysis of Environmental Disclosure Practices, Sarah D. Stan- i
wick and Richard Tabor. A Bayesian Analysis of Cost- Effectiveness of Auditing
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Participative Budgeting Under Uncertainty: Multi-Period Experimental Evi-
dence, Larissa Kyj and Penelope Sue Greenberg.
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INSTRUCTIONS FOR AUTHORS
AIMS and SCOPE. The aims of The International Journal of Accounting are to advance the aca-
demic and professional understanding of accounting theory and practice from the international per-
spective and viewpoint. The Journal recognizes that international accounting is influenced by a
variety of forces, e.g., governmental, political and economic.
The Journal attempts to assist in the understanding of the present and potential ability of account-
ing to aid in the recording and interpretation of international economic transactions. These transac-
tions may be within a profit or nonprofit environment. The Journal deliberately encourages a broad
view of the origins and development of accounting with an emphasis on its functions in an increas-
ingly interdependent global economy, and welcomes manuscripts that help explain current interna-
tional accounting practices, with related theoretical justifications, and identify criticisms of current
practice. Other than occasional commissioned papers or special issues, all the manuscripts published
in the Journal are selected by the editors after the normal refereeing process.
1 . Manuscripts should be submitted in triplicate to the Editor, Professor Andrew D. Bailey, Jr., The
International Journal of Accounting, University of Illinois. 320 Commerce West, 1206 S. Sixth
Street, Champaign, IL 61820, U.S.A.
2. All manuscripts must be typewritten or word processed, double spaced on one side only and
numbered consecutively, including an abstract of approximately 100 words, and 6 key words for
indexing. Papers must either be neither previously published nor submitted elsewhere simulta-
neously. Authors are responsible for obtaining permission from the copyright owner (usually the
publisher) to use any quotations, illustrations, or tables from another source.
3. The author's full name, affiliation, and when applicable, e-mail address should appear on the
title page.
4. All tables, figures and illustrations should accompany the manuscript on separate sheets. Captions
should clearly identify all separate matter, and all figures must be submitted in camera ready copy,
or electronic program specifies files, such as EPS or Post Script. All should be called out in text
and indication given as to location. For example,
TABLE 1 ABOUT HERE.
5. Footnotes should be numbered consecutively throughout the manuscript with superscript Arabic
numerals. They should be collected in a separate file at the end of the text.
6. References should be cited in the text as follows:
Schweikart and O'Conner (1989) agree with this method. Other studies have found simi-
lar results (Schweikart and O'Conner, 1989; Smith, 1991).
On a separate Reference page(s), each citing should appear, double-spaced, in alphabetical order as
follows:
Journal Articles
Langlois, Catherine C. and Bodo B. Schlegelmilch. 1990. "Do Corporate Codes of Conduct
Reflect National Character?" Journal of International Business Studies, (Fourth
Quarter): 519-539
Books
Hampden-Turner Charles and Alfons Trompenaars. 1993. The Seven Cultures of Capital-
ism. New York: Doubleday.
7. Upon acceptance the author is to submit one copy of the approved manuscript on a spellchecked
IBM compatible, program specific disk to the editor. The accuracy of the disk and proofs is the
responsibility of the author. Macintosh submissions are limited to high density disks.
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PERIODICAL
Ihe
International
Journal of
Accounting
Andrew I). Bailey, Jn
University of Illinois at
Urhana-C hampaifin
CO-EDITORS
Arthur R. Wyatt
University oj Illinois at
VrbanU'Champai^n
Yukio Fujita
Aichi-daknin University, Tokyo
R.S. Olusegun Wallace
Kinfi l-ahd University, Saudi Arabia
Volume 33 • Number 2 • 1998
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The
International
Journal of
Accounting
APR 2 2 1998
UNIVERSITY OF ILLINOIS
URBANA-CHAMPAIGN
EDITOR
Andrew D. Bailey, Jr.
University of Illinois at
Urbana-Champaign
CO-EDITORS
Arthur R. Wyatt
University of Illinois at
Urbana-Champaign
Yukio Fujita
Aichi-Gakuin University, Tokyo
R.S. Olusegun Wallace
King Fahd University, Saudi Arabia
Volume 33 • Number 2 • 1998
Published by
^JAI Press Inc.
Greenwich, Connecticut London, England
Center for International Education and Research in Accounting,
University of Illinois at Urbana-Champaign
EDITOR
Andrew D. Bailey, Jr.
University of Illinois, Urbana-Champaign
CO-EDITORS
Arthur R. Wyatt, University of Illinois, Urbana-Champaign
Yukio Fujita, Aichi Gakuin University, Tokyo
R. S. Olusegun Wallace, King Fahd University, Saudi Arabia
BOOK REVIEW EDITORS
Axel Haller, Universitat Augsburg, Augsburg
Stephen A. Zeff, Rice University, Houston
EDITORIAL POLICY BOARD
Hans Havermann, KPMG Deutsche Treuhand-Gesellschaft, Diisseldorf
H. Peter Holzer, Wirtschaftsuniversitdt, Vienna
Toshio lino, Surugadai University, Japan
Yu Xu-Ying, Xiamen University, People's Republic of China
Stephen A. Zeff, Rice University, Houston
EDITORIAL REVIEW BOARD
Dhia AlHashim, California State University, Northridge
Bhabatosh Banerjee, lAAER, India
Barbro Back, Turun Kauppakorkeakoulu, Finland
Pierre Bescos, ESCP, France
A. Bose, India
C. S. Agnes Cheng, University of Houston, Houston
Joseph Cheung, Polytechnic University, Hong Kong
Gilles Chevalier, Samson Belair/Deloitte-Touche, Quebec
Ling-Tai Lyunete Chou, National Chengchi University, Taiwan
David Cooper, University^ of Alberta, Canada
Sejila Dizdarevic, Tucson, Arizona, U.S.A.
Timothy S. Doupnik, University of South Carolina
Peter Easton, Ohio State University^ Columbus
John W. Eichenseher, University of Wisconsin-Madison
Kenneth Euske, Navel Postgraduate School, Monterey
Shawki Farag, The American University, Cairo
Ehsan H. Feroz, University of Minnesota, Duluth
Cathy Finger, University of Illinois, Urbana-Champaign
Carol Frost, Dartmouth College, Hanover
Yukio Fujita, Aichi Gakuin University, Japan
Sidney Gray, University of New South Wales, Australia
Trevor Harris, Columbia University, New York
Sergio de ludicibus, Universidade De Sao Paulo
Chen-en Ko, National Taiwan University, Taiwan
Chris Lefebvre, Kotholieke Universiteit Leuven, Belgium
Joelle Le Vourc'h, ESCP, Paris
Mei-Hwa Lin, National Chengchi University
Thomas Linsmeier, University of Illinois, Urbana-Champaign
Andrew Lymer, The University of Birmingham, UK
M. R. Mathews, Massey University, New Zealand
Gary Meek, Oklahoma State University, Stillwater
Karen MoUoy, University of Illinois, Urbana-Champaign
Ken Moores, Bond University, Australia
Belverd Needles, DePaul University, Chicago
Masayuki Nakagawa, Universiade De Sao Paulo
Prawit Ninsuvannakul, Thailand
B.O. Ogundele, University ofllorin, Nigeria
Soong Park, Presbyterian Church (USA)
Enrique Bonson Ponte, University ofHuelva
Grace Pownall, Emory University, Atlanta
Reiner Quick, Universitat GH Essen, Essen
Lee Radebaugh, Brigham Young University, Provo
Sridhar Ramamoorti, University of Illinois, Urbana-Champaign
Robert S. Roussey, University of Southern California, Los Angeles
T. Flemming Ruud, University of St. Gallen, Switzerland
Stephen B. Salter, University of Cincinnati
Alan Sangster, Queen 's School of Management, Northern Ireland
Shigeto Sasaki, Senshu University, Japan
Michael Schadewald, University of Wisconsin-Milwaukee
Hanns-Martin Schoenfeld, University of Illinois, Urbana-Champaign
Daniel T. Simon, University of Notre Dame
Herve Stolowy, HEC Group School ofMgt., France
Gary L. Sundem, University of Washington, Seattle
Jimmy Y. T. Tsay, National Taiwan University
Judy S L Tsui, City University of Hong Kong
M.A. van Hoepen, Erasmus University Rotterdam, Netherlands
R. S. Olusegun Wallace, King Fahd University, Saudi Arabia
Stephen Z. Zeff, Rice University, Houston
David A. Ziebart, University of Illinois, Urbana-Champaign
1997 Ad Hoc Reviewers
Matt Anderson, Michigan State University, East Lansing
Barbro Back, Turun Kauppakorkeakoulu, Finland
Maureen Berry, University- of Illinois, Urbana-Champaign
Pierre Bescos, ESCP, France
A. Bose, India
Robert Bricker, Case Western Reserve University, Cleveland
Dennis Chambers, University of Illinois, Urbana-Champaign
John Chandler, University of Illinois, Urbana-Champaign
Gilles ChevaHer, Samson Belair/Deloitte & Toiiche, Quebec
Frederick D. S. Choi, New York University, New York
Eugene E. Comiskey, Georgia Institute Tech, Atlanta
Daniel Collins, University of Iowa, Iowa City
Jeremy Cripps, Heidelberg College, Tiffin
Naim Dahmash, University of Jordan, Amman
Bala Dharan, Rice University, Houston
Jon Davis, University of Illinois, Urbana-Champaign
Richard J. Dietrich, University of Illinois, Urbana-Champaign
Timothy S. Doupnik, University of South Carolina, Columbia
Leslie Eldenburg, University of Arizona, Tucson
Howard Engle, Arthur & Anderson, Chicago
Merle Erickson, University of Chicago, Chicago
Thomas G. Evans, University of Central Florida, Orlando
Michael Favere, National Institute of Development Administration, Thailand
Joseph Fisher, Indiana University, Bloomington
Cheryl Fulkerson, University of Texas at San Antonio
James Ato B. Garthey, Controller and Accountant, Republic of Ghana
Julia Grant, Case Western Reserx'e University, Cleveland
Audrey Gramling, University of Illinois, Urbana-Champaign
Mohamed Hussein, University of Connecticut, Storrs
Frederick Jacobs, University of Minnesota, Minneapolis
Sanjay Kallapur, University of Arizona, Tucson
Robert Kirsch, Southern Connecticut State University, New Haven
John Kramer, University of Florida. Gainesville
Chris Lefebvre, Katholieke Universiteit Leuven. Belgium
Marian Lower, Security Control & Audit, United Kingdom
Silvia Madeo, University of Missouri - St. Louis
Kenneth Merchant, University of Southern California, Los Angeles
B. O. Ogundele, University ofllorin, Nigeria
Soong Park, Economics Institute, Boulder
Kathy Petroni, Michigan State University, East Lansing
Judy Raybum, University of Minnesota, Minneapolis
Hanno Roberts. Norwegian School of Management. Norway
Robert Roussey, University of Southern California, Los Angeles
Marjorie Shelley, University of Illinois, Urbana-Champaign
Claude Simon, ESCP, France
Daniel Smith, University of Georgia, Athens
Theodore Sougiannis, University of Illinois, Urbana-Champaign
Thomas Stemburg, University of Illinois, Urbana-Champaign
Mark Tombley, University of Arizona, Tucson
Shiing-Wu Wang, University of Southern California, Los Angeles
Arnold Wright, Boston College, Chestnut
THE INTERNATIONAL
JOURNAL OF ACCOUNTING
VOLUME 33 NUMBER 2 1998
Editorial Comment
ANDREW D. BAILEY, Jr vii
ARTICLES
The Quest for International Accounting Harmonization: A Review of
the Standard Setting Agendas of the lASC, US, UK, Canada, and
Australia, 1973-1997
DONNA L STREET AND KIMBERLEY A. SHAUGHNESSY 179
Corporate Financial Disclosure in Emerging Markets: Does
Economic Development Matter?
STEPHEN B. SALTER 211
Ownership Effects on Audit-Detected Error Characteristics: An
Empirical Study in an Emerging Economy
K. HUNG CHAN AND PHYLLIS L L. MO 235
Differential Reporting in Singapore and Australia: A Small Business
Managers' Perspective
S. MITCHELL WILLIAMS AND GREG TOWER 263
Colonialism and Accounting Education in Developing Countries:
The Experiences of Singapore and Sri Lanka
HEMA WIJEWARDENA AND SENARATH YAPA 269
BOOK REVIEW
Japanese Accounting — A Historical Approach by Kyojiro Someya
Reviewed by MOSHE HAGIGI 283
Accounting Research in Lund, edited by Kristina Artsberg,
Anne Loft and Stefan Yard
Reviewed by JOHN FLOWER 285
EDITORIAL COMMENT
As the editor of The International Journal of Accounting I have the opportunity to write the
occasional editorial. I plan to use this opportunity sparingly. In my first editorial I placed
my faith in the international research community to identify outstanding research topics
and methods for the future. I believe that the research faculty should drive the academic
research endeavor. I will try to remain open to researcher innovation and direction.
My role as editor effectively began in January 1997. 1 am writing this editorial after one
year of editing experience with The IntemationalJournal of Accounting. I want to give you
some idea about the rewards that come with the editorship of the Journal. However, I also
want to discuss some of the problems my review board and I encounter in reviewing papers
submitted for publication.
The rewards associated with the Journal editorship are immense. I am becoming much
more attuned to the importance of international issues, the richness of the work and the
unique difficulties associated with doing quality work in this arena. My regard for those
who have chosen to make this their career commitment was always high, but rises daily.
As a result of my Journal editorship I have attended a number of interesting meetings, met
and spoken with many academic researchers committed to advancing international
accounting research and international educational cooperation. The conversations have
contributed to my education and understanding of international research issues.
I firmly believe that the economic globalization of business and accounting and the ris-
ing power of technology to knit our capital, labor, and production markets into a single
market, means that international accounting research, broadly defined, will become a
major factor in accounting research before the end of the next decade. The good news is
that more academics will be interested in international research topics. The bad news is that
the competition is going to be fierce. I think we will all benefit by this process.
All told, this last year as editor of The International Journal of Accounting has been one
of the most rewarding of my academic career. I appreciate the support freely offered by
many reviewers and authors and look forward to the coming year.
However, all is not well for some authors who wish to publish their international
accounting research. In my last editorial I indicated that I relied on the authors to be inno-
vative in identifying topics and applying sound methodologies. Further, I indicated that the
reviewers and I would maintain an open mind with respect to innovation. Nevertheless, the
Journal receives many manuscripts each year that cannot be accepted for publication.
What is it that makes a manuscript acceptable for publication?
First and foremost is motivation. Authors who spend the time to motivate the interna-
tional significance of their work early in their paper substantially improve their chances of
a positive review. The editor and reviewers do not consider the fact that a paper was not
written in the U.S., the editorial and publishing home of the Journal, as prima facie evi-
dence that the paper qualifies as significant international accounting research. Author must
take the time and make the effort to link their work to a significant international accounting
problem and the relevant published literature. This is valuable to the author as it enhances
the chance of acceptance or invitation to revision. It is important to the Journal reader
because it contributes to their understanding.
VIII
Second, authors should develop or refer to a conceptual framework within which they
expect interesting differences or interpretations within or between countries or jurisdic-
tions due to the accounting issues addressed in the research. The authors who demonstrate
that their work fits within the conceptual framework provide a reference point for the inter-
pretation of their research results. Linkage to other countries or jurisdictions may be done
by reference to other extant works or by actually applying the author's own method across
national or other jurisdictional boundaries.
Some papers may be intrinsically interesting even though they address only a single
country or jurisdiction. This may occur when a country makes changes in its accountancy
standards or practices and a pre-post analysis becomes possible. Other possibilities do exist
and many of them appear in the past issues of the Journal. So, we do publish papers
restricted to a single country if there is an intrinsic international interest of some kind. Nev-
ertheless, the author who makes the connections to the international accounting literature
explicit improves the quality of the paper and its chance to influence future accounting
developments.
Authors cannot rely on editors, reviewers and ultimately readers to make the necessary
connections. We try to give advise on this matter when we can, however, if the author does
not make the connection, it is asking a lot to obtain direction from the editor and/or review-
ers. The author is the expert with respect to the research under consideration.
Third, the selection and application of appropriate research methods is important. I will
not spend much time on the obvious fact that authors who apply the appropriate methods
rigorously will likely receive encouragement if the paper is well motivated. The selection
and careful application of any chosen research methodology is crucial to success. A well-
motivated paper where the research is not competently implemented should not be pub-
lished. Because of the obvious nature of this point and because there is an extensive
research literature on the matter of individual methods, I will not address these matters fur-
ther in this editorial.
Instead, I will comment on a few other matters of an editorial nature that can contribute
significantly to the success of an otherwise well-motivated and implemented project. The
structure of a paper and the proper use of English both contribute to the likely acceptance
of a paper.
First, a well-constructed paper that uses the English language properly substantially
improves its success potential. It does this because structure substantially improves the
communications potential of the paper and its ability to communicate a coherent story. In
fact, authors might find it useful to think about the construction of their paper as a process
of telling a story about their research. The story should be told so that an intelligent person,
not particularly knowledgeable about the author's work, can understand the basic points of
the paper. One of the advantages of presenting papers at seminars and workshops prior to
submission is to develop the story nature of the paper. The difficulty in properly structuring
papers does not seem to be related to whether the author's first language is English.
Second, the proper use of the English language is important. Successful authors often
take the time to obtain professional editing support prior to submission. I use editorial sup-
port on my own papers and often recommend that an author use an expert English language
editor before resubmitting a paper. The reviewers and I recognize our responsibility to
encourage those for whom English is a second or third language to write for our Journal
audience. We are particularly prepared to work with authors who provide well-motivated
and structured papers, but have some difficulty with EngUsh usage. Nevertheless, we are
an English language journal and our reviewers are not likely to speak the first language of
the author even if the reviewer's first language is not English.
We want to help authors because it is in our interest to do so. We want the best research
possible published in The International Journal of Accounting. We will do our best
because it is a shame when a perfectly good piece of work is rejected because the reviewers
and editors could not decipher the research meaning of the paper due to any of the above
problems.
The competition for outstanding international accounting research is growing. There are
more accounting journals willing to publish quality international research today than ever
before and the number is growing. We at The International Journal of Accounting are
pleased by this recognition of the importance of international accounting research issues.
We seek to be your journal of first choice when submitting papers. We will work with you
to bring your research to a publishable level. Give us the opportunity to consider your next
international accounting research effort.
Andrew D. Bailey, Jr.
Editor, TIJA
The International
Journal of
Accounting
The Quest for International Accounting Harmonization:
A Review of the Standard Setting Agendas of the lASC,
US, UK, Canada, and Australia, 1973-1997
Donna L. Street and Kimberley A. Shaughnessy
James Madison University
Key Words: Harmonization; Accounting Standard Setting Process; Anglo-American Accounting
Model; G4+1; lASC; International Accounting Standards
Abstract: For 1973 through 1997, the research examines the evolution of accounting standards to
ascertain the extent of similarities and differences in financial reporting practices among the lASC
and national standard setters in the US, UK, Canada, and Australia. Collective and individual
efforts aimed at minimizing differences to achieve harmonization/compatibility are discussed. The
impact of the lASC's modified philosophy for the 1990s, specifically its cooperative endeavors
with the G4 standard setters on agenda coordination and hannonization/compatibility of account-
ing standards, is also investigated.
During the 1970s and 1980s, the lASC, US, UK, Canada, and Australia achieved accounting
standard compatibility in very few areas. Successes included the funds flow statement and leases.
This failure to make significant progress toward hannonization/compatibility can be linked to lim-
ited agenda coordination and cooperation between the lASC and national standard setters. The
research also reveals that significant periods of time, of as much as two decades or more, passed
before the lASC and Anglo-American standard setters attained some form of consensus on agenda
items initiated during the lASC's first nvo decades.
The lASC and Anglo-American standard setters entered the 1990s better equipped than in prior
decades to engage in cooperative endeavors. By focusing on common themes in their conceptual
frameworks and adopting a philosophy of harmonization via cooperation, the lASC and G4 have
made considerable progress. Areas where the five standard setters have achieved consensus, or
are close to achieving concurrence, include several projects initiated during the 1970s and 1980s.
These projects include investments in associates, interim reporting, business combinations, joint
ventures, deferred taxes, and pensions. In addition, projects launched by the G4 + 1 members dur-
ing the 1990s have often produced compatible standards (or proposals) on a relatively timely
basis. Examples include financial instruments, EPS, segment reporting, and comprehensive
income. The research also reveals a few areas where consensus has not been achieved, such as
accounting for the correction of errors. R&D. and interest capitalization.
Direct all correspondence to: Donna L. Street, School of Accounting, James Madison University, Harrisonburg,
WA 22807, U.S.A.; E-mail: streetdl@jmu.edu.
The International Journal of Accounting, Vol. 33, No. 2, pp. 179-209 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1998 University of Illinois
180 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1998
Several objectives underlying the goal of accounting standard harmonization have been
achieved in the 24 years since the International Accounting Standards Committee (lASC)
was founded. Yet, true harmonization has been hindered by many factors. Accounting sys-
tems are developed and fostered within a nation's unique environment, which includes dif-
ferent socioeconomic factors, educational and legal systems and cultural mores. Plus,
accounting systems do not evolve uniformly or simultaneously (Radebaugh & Gray,
1997). Accordingly, significant differences exist between International Accounting Stan-
dards (lASs) and the national standards of the lASC membership.
Researchers often refer to the Anglo-American accounting model that is practiced in the
United Kingdom (UK), United States (US), and other countries where the UK has had a
major colonial influence. The impact of the Anglo-American model on the lASC's work is
evident. As reflected in the conceptual frameworks of the lASC, the US, UK, Canada and
Australia, these standard setters share "the objective of providing quality financial stan-
dards for the primary purpose of providing information useful to capital market
participants" (Paul, 1997, p. III). However, despite a common conceptual goal, notable
contrasts exist between lASs and the standards of those countries using the Anglo-Ameri-
can model.
Initially the lASC worked independently of national standard setters. However, in 1990
the lASC elected to work towards greater compatibility between national accounting
requirements and the removal of differences between national requirements and lASs. A
1980 lASC resolution, which provided the basis for participation with groups of national
standard setters, was reaffirmed in 1993. The resolution stated:
Because members have agreed that lASC is the appropriate forum for the development
and publication of international accounting standards, . . . lASC requests member bod-
ies to use their best endeavors to ensure that the lASC board is kept fully informed of
all initiatives within their country towards the development of accounting standards and
that, when any discussions on accounting standards are proposed between two or more
countries ... lASC is invited to participate ... (lASC, 1993, p. 1)
Based on the lASC's revised philosophy for the 1990s, a cooperative effort of the lASC
and those organized national standard setters whose standards were universally recognized
was initiated to facilitate harmonization (Carsberg, 1996). Among the most likely candi-
dates to work with the lASC were standard setters from the US, UK, Australia, and Can-
ada, especially in view of each entity's commitment towards harmonizing standards and
their strikingly similar conceptual frameworks.
The current research examines the evolution of accounting standards, since the forma-
tion of the lASC in 1973, to ascertain the extent of similarities and differences in
financial reporting practices among the lASC and standard setters in the US, UK, Can-
ada, and Australia. Efforts to minimize differences to achieve harmonization are
discussed. The impact of the lASC's modified philosophy for the 1990s, specifically
with respect to cooperative endeavors with the Anglo-American standard setters on
agenda coordination and harmonization/compatibility of accounting standards, are also
investigated.^
In 1993, the Australian Accounting Standards Board (AASB), Canadian Accounting
Standards Board (AcSB), Financial Accounting Standards Board (FASB), and UK
International Accounting Harmonization 181
Accounting Standards Board (ASB) began work on a project with the lASC. Together, this
Group of 4+1 (G4+1) produced Future Events: A Conceptual Study of Their Significance
for Recognition and Measurement (Johnson, 1994). As a result of this successful endeavor,
the lASC desired to continue to coordinate agendas with the 04 (Carsberg, 1996). Initially,
the G4+1 focussed on agreeing to broad principles. By formulating a consensus view, the
G4+1 arrives at a basis upon which each standard setter can write its own individual stan-
dard. Working together on common problems assists the G4+1 in achieving its goal of
harmonizing the members' individual standards. Recently, the G4+1 members committed
to jointly develop the group's first accounting standard (Cairns, 1997a). The current
research ascertains the success of the G4+1 in improving compatibility of national
accounting standards and lASs.
METHODOLOGY
For 1973-1997, the lASC and Anglo-American agendas are reviewed to ascertain the suc-
cess these standard setters have made toward achieving harmonization. Data were col-
lected for projects in progress in 1973 and those beginning in or after 1973. In 1973, the
lASC and FASB were formed, and the current standard- setting bodies in Australia, Can-
ada, and the UK were formed post- 1973. Therefore, the data include all major projects
addressed by the G4+1 members plus some addressed by predecessor bodies."
For each project, data were collected regarding the year each standard setter placed the
item on its agenda and issued relevant documents such as discussion papers (DPs), expo-
sure drafts (EDs) and final standards. All projects examined are the subject of an IAS, or
on the lASC's agenda, and have also been considered by a majority of the Anglo-Ameri-
cans, including conceptual framework projects. Industry standards and standards dealing
exclusively with disclosures are excluded.
Data sources include: International Accounting Standards 1997 {Table on History of
lASs and EDs},-^ lASC Insight {the lASC newsletter}, lASC annual reports, the lASC
World Wide Web Home Page; Financial Accounting Series Status Report {the FASB
newsletter}, Financial Accounting Standards (FASs) {Background Information Appendix
for each standard}, FASB's (1997a) World Wide Web Home Page; Ernst & Young's UK
GAAP (Davies et al., 1994),"^ ASB press releases. Inside Track {the ASB newsletter} ;Am5-
tralian Accounting Handbook {project chronology preceding each standard}; and a list of
Canadian EDs with publication dates {provided by Canadian Institute of Chartered
Accountants (CICA)}, the 1996 Canadian Accounting Handbook, and the CICA World
Wide Web Home Page, for the lASC, US, UK, Australia, and Canada respectively.
Analysis
Table 1 summarizes the standard setters' agendas and indicates the time required to
achieve consensus for each financial reporting topic. Highlighting is used to indicate the
release of a standard that adopted the majority view. For on-going projects, release of an
ED reflecting the consensus view is indicated by black print on white. To identify the phi-
losophy endorsed by each standard setter, the relevant literature was reviewed. Table 1
182
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
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190 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1998
indicates where the standard setters: 1) achieved compatibility (in order of consensus), 2)
are working towards compatibility pending completion of current agenda items (beginning
when the first standard addressing the current philosophy was issued), and 3) have not
achieved consensus.
RESULTS AND INTERPRETATION
Based on Table 1, the chronology of standard- setting activity for each project is reviewed,
and the current status of compatibility/harmonization is discussed. Discussion follows the
order of Table 1 with one exception; given the overlapping nature of the topics, funds flows
and cash flow statements are combined.
Harmonization/Compatibility Achieved
Funds Statement (Panel A) /Cash Flow Statement (Panel 0)
Prior to adopting a cash flow statement, the Anglo-Americans experimented with a funds
flow statement. The US Accounting Principles Board (APB) addressed the funds statement
in 1963. Canadian R#l 1, SSAP 10, IAS 7, and AAS 12 were issued in 1974, 1975, 1977,
and 1983 respectively, and each required a funds statement.
The focus changed in 1987 when FAS 95 initiated a worldwide trend by requiring a cash
flow statement (see O'Bryan, 1989). The UK (FRS 1} and Australia {AASB 1026/ AAS
28} followed the US model in 1991. And, the revised IAS 7 { 1992} is virtually identical to
FAS 95. Moving more in line with IAS 7R, Australia issued ED 77. Canada plans to adopt
IAS 7R with only minor changes (CICA, 1997b). Completion of the Australian and Cana-
dian projects should yield compatibility among the G4+1.
Leases (Panel B)
Today, the G4+1 members have similar leasing standards. In 1976, the US's FAS 13 first
adopted a substance-over- form approach for leases. Similar standards followed with Can-
ada's 1978 R#28, 1984's SSAP 21, and 1984's AAS 17 (Skinner, 1987; Davies, et al.,
1994; Godfrey & Warren, 1995). While conceptually similar to the US rules, the guidance
in 1982's IAS 17 is broader and application often requires judgmental determinations
(FASB, 1996). To address concerns expressed by the International Organization of Securi-
ties Commissions (IOSCO), the lASC (1997a) is reviewing IAS 17. A 1997 ED focuses on
enhanced disclosure requirements and the elimination of the free choice of methods for les-
sors to recognize finance lease income. The modifications will bring IAS 17 more in line
with SFAS 13. Australia's 1997 ED 82 proposes revisions consistent with lASC ED 56.
In 1996, the G5+rs (with New Zealand) Accounting for Leases, A New Approach
(McGregor, 1996) proposed that all non-cancelable leases should be capitalized. Australia
and the UK plan to jointly revise their standards based on the G5-I-1 DP, and the lASC also
plans to eventually adopt this approach.
International Accounting Harmonization 191
Provisions and Contingencies (Panel C)
The G4+1 members have similar rules for provisions and contingencies. FAS 5 { 1975}
addresses disclosure and recognition of contingent liabilities/assets. In 1978, the lASC and
Canada issued similar standards, and SSAP 18 followed in 1980. Minor disclosure differ-
ences exist, and the US has the most extensive requirements (Skinner 1987; Davies, et al.,
1994; CICA, 1997a). Australia's guidelines are also similar to FAS 5 and are addressed in
the Appendix to SAC 4 { 1992, paras. 18-19} (Ryan & Heazlewood, 1997).
Currently, the G4+1 are reconsidering provisions. The G4+1 DP Provisions: Their Rec-
ognition, Measurement, and Disclosure, in Financial Statements was aimed at developing
a common conceptual understanding to enhance the prospect of harmonization (Lennard &
Thompson, 1995). Such an understanding was vital in that the lASC, Canada, the UK, and
the US were considering related issues.
Building on the G4+1 DP, the lASC and UK undertook a joint project that led to 1997's
lASC ED 59 and FRED 14. These EDs argue that provisions are liabilities and should be
recognized only if there is a present obligation to transfer economic benefits as a result of
past events. In addition, provisions should be recognized at the best estimate of the amount
required to settle the obligation that existed at the balance sheet date (lASC, 1997b; ASB,
1997a). Completion of the lASC/UK project may lead to similar guidelines for all G4+1
members, thereby enhancing comparability and minimizing abuses in areas such as
accounting for future operating losses and restructuring costs.
Extraordinary Items (Panel D)
The G4+1 members have similar guidelines for reporting extraordinary items. In 1969,
Canada's s3480 {replaced by R#64 in 1989} required that extraordinary items be reported
as a separate component of income. In 1996, si 520 {R#87} noted that the income state-
ment should clearly distinguish income before discontinued operations and extraordinary
items. The US's 1973 APB 30 defines extraordinary items and also requires they be dis-
closed as a separate component of income.
SSAP 6 { 1974, revised in 1986} distinguished between ordinary and extraordinary items
of profit and loss (P&L). Under SSAP 6, extraordinary items were more prevalent in the
UK than in the US. FRS 3 {1992} now defines extraordinary items in a manner that is
broadly similar to the US; however, the new UK standard has effectively outlawed extraor-
dinary items.
IAS 8 {1978} addressed reporting unusual items. IAS 8 was revised in 1993 via the
Comparability Project (CP). Under the revised standard, P&L is split between ordinary
operating activities and extraordinary items.
AASB 1018 was approved in 1989. Modifications to AASB 1018R in 1992 were under-
taken to achieve greater consistency between Australia and definitions in the UK, US, and
Canada and to achieve a reduction of alternative treatments for similar items (Ryan & Hea-
zlewood, 1997).
All G4+1 members require separate disclosure of extraordinary items. While all mem-
bers define extraordinary items in a consistent manner (AASB, 1994), only the Canadian
definition specifies that classification of extraordinary items does not depend on manage-
rial or owner's decisions.
192 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
Compatibility Pending Completion of Current Agenda Items
Investments in Associates (Panel E)
Most G4+1 members" standards endorse the equity method of accounting for invest-
ments in associates. The US"s APB 18 and the UK's SSAP 1, both issued in 1971, require
the equity method. In the US, the equity method is used when an investor is able to exercise
significant influence (a 20% or more voting interest) over an associate. Under Canadian
s3050 {1973, revised in 1978}, the equity method is also employed when an investor is
able to exercise significant influence. Holding at least a 20% voting interest is a necessary,
but not sufficient criterion, for significant interest (see CICA, et al., 1994 for US compari-
son). While IAS 28 (superseded IAS 3 in 1989} prescribes the equity method, the
disclosure requirements for investments in associates fall short of US requirements.
In contrast to the UK, US, Canada, and lASC, equity data in Australia appear only in
footnotes or as a third column adjacent to consolidated accounts. AAS 14 { 1983} was pre-
ceded by three EDs (Gordon & Morris, 1996) proposing equity accounting. However, a
legal impediment obstructed the issuance of a standard. ED 71 { 1995} proposes that equity
accounting be applied in consolidated accounts. A standard is expected in 1997, dependent
upon proposed legislation (Ryan & Heazlewood, 1997). Assuming passage of the Austra-
lian proposal, G4+1 standards regarding investments in associates will be compatible in
that all will permit the use of the equity method. Harmonization may be further facilitated
by a G4+1 project led by Canada and the UK addressing equity accounting and joint
ventures.
Interim Reporting (Panel F)
Soon all G4+1 members will provide guidelines regarding the preparation of interim
reports. Quarterly interim reports are currently prepared in Canada and the US. In 1971,
Canada's si 750 {R#6} required presentation of interim data and noted that such reports are
normally prepared quarterly. In the US, guidance for preparing interim reports, which are
required by the SEC, is presented in 1973's APB 28. While the Canadian (discrete method)
and US (integral method) standards differ conceptually, neither rigorously adheres to a sin-
gle concept; therefore, the standards are not seriously at odds (Skinner, 1987).
Quarterly reporting is not as widely practiced outside of North America. For example,
Australia's AASB 1029 { 1994} requires half-year accounts (Ryan & Heazlewood, 1997).
In the UK, the normal frequency of reporting is also biannually (Davies, et al. 1994). An
ASB "best practice" standard {1997} provides guidance on the preparation of interim
reports and states a preference for the discrete method. The lASC's 1997 ED 57 presents
guidelines similar to the UK recommendations. ED 57 notes that national regulators should
decide whether interim reports are required, and, if so, the frequency of publication. Thus,
all members of the G4+1 will soon provide guidance on the preparation of interim reports.
Joint Ventures (Panel G)
Currently, the G4+1 members disagree regarding joint ventures. While the US's 1971
APB 18 generally requires that the equity method be used for joint ventures, proportional
International Accounting Harmonization 193
consolidation is more popular outside the US. A 1994 revision of s3055 (added in 1977
and first revised in 1991 } eliminated the choice of equity method and required proportional
consolidation for joint ventures in Canada (see CICA, et al., 1994 for a US and Canada
comparison). And, under 1990's IAS 31, proportional consolidation is the benchmark with
equity method serving as the alternative. Australia's AASB 1006 { 1986, AAS 19R} is con-
sistent with the lASC benchmark. ED 79 { 1 997 } proposes to bring Australia even more in
line with IAS 31. In the UK, SSAP 1, as amended in 1983, indicates that proportional con-
solidation or the equity method may be used for joint ventures. A recent UK ED reaffirms
support for proportional consolidation. Yet, most responses to 1996' s FRED 1 1 preferred
equity accounting (ASB, 1997b).
Despite current differences, a G4+1 project led by Canada and the UK should lead to
harmonization. At a 1997 meeting, the G4+1 representatives unanimously endorsed the
equity method for joint ventures (Cairns, 1997b) suggesting that the members may modify
their standards to achieve compatibility.
Discontinued Operations (Panel H)
The G4+1 are working toward developing similar disclosure guidelines for discontinued
operations. The US (APE 30, 1973} and Canada {s3475, R#64, 1989 and si 520, R#87,
1996} have adopted similar definitions and both require separate disclosure of discontin-
ued operations in income. In the UK, 1992's FRS 3 modified the requirements of SSAP 6,
thereby moving the UK more in line with North American requirements. FRS 3 requires
that P&L be split between continuing operations and discontinued operations.
IAS 8 {revised in 1993} provides a loose definition of discontinued operations.
Although the US influence is evident, the accounting requirements are less rigorous. How-
ever, proposals set forth in 1997's ED 58 will bring the lASC more in line with the US,
UK, and Canada. In Australia, the AASB (1994) currently plans to review performance
measurement, including discontinued operations. Completion of the lASC and Australian
projects should yield similar requirements for all G4-I-1 members.
Business Combinations (Panel I)
G4+1 business combination standards differ depending upon when, or if, pooling
accounting may be used. In the US, APB 16 { 1970}, allows both purchase and pooling
accounting, although not as alternatives for the same transaction. Although only about 10
percent of US business combinations qualify as poolings (Radebaugh & Gray, 1997), the
US rules are less strict than those of the lASC and other G4 members.
In 1974, Canadian si 580 {R#10} required that the purchase method be used unless an
acquirer could not be identified, an event which would necessitate poohng. Hiller and
Smith (1996) argue that accounting for business combinations represents a significant dif-
ference between Canadian and US GAAP.
Accounting under the UK's SSAP 23 { 1985} depended heavily on the form of the trans-
action. In 1994, FRS 6 adopted the principle of control used by Canada and the lASC
(Tweedie, 1996). While FRS 6 brought the UK more in line with the US, like IAS 22, the
UK standard is more stringent (ASB, 1994).
194 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
IAS 22 was issued in 1983 and revised in 1993 as part of the CP. IAS 22R more clearly
defines which combinations are deemed purchases and which must be reported as a pool-
ing (Epstein & Mirza, 1997). The lASC's pooling criteria are simpler yet much more
restrictive than in the US. Australia's AAS 21 { 1985} requires the purchase method for
all combinations.
As an outlier, the FASB (1997a) is reconsidering business combinations to achieve
greater global comparability. Faced with opposition to Canada's "strict" rules on pooling,
a CICA Task Force will carry out a project in step with the FASB and will provide input to
the US. Completion of the FASB project may result in more compatibility among the G4+1
members. Yet, recent events indicate FASB (1997b) may retract its threat to limit poolings.
Consolidated Statements (Panel J)
Like business combinations, the US rules for consolidated statements differ from those
of other G4+1 members. In fact, consolidation accounting represents a major area of diver-
gence between the US and Canada (CICA, et al., 1994). The US's 1959 ARB 51 and 1987
FAS 94 prescribe that control through direct or indirect ownership of a majority voting
interest is the usual condition for consolidation. Under Canada's sl600 (revised in 1975,
R#14}, control is the principle criterion for consolidation.
IAS 27 { 1989} superseded IAS 3 ( 1976}, and in 1995, the standard was revised. Like
Canada's sl600, IAS 27 focuses on an assessment of control as opposed to the US's focus
on an ownership criterion (FASB, 1996). SSAP 14 { 1978} followed IAS 3 (ASB, 1992).
Changes in company law prompted the issuance of FRS 2 in 1992. The UK's consolidation
procedures are similar to IAS 27's (Davies et al., 1994). Australia's AASB 1024 (AAS
24}, as revised in 1992, also requires a parent to consolidate all entities under its control.
An Australian ED is expected during 1997 to achieve compliance with lASs.
The entities included in consolidated statements may be different under US GAAP than
under Canadian, UK, Australian, or lASC GAAP. Yet, a 1995 FASB ED's definition of
control, requirement to include controlled entities in consolidated statements, and descrip-
tion of the purpose of consolidated statements are all consistent with other Anglo-
American standards. Adoption of the proposal should improve compatibility among the
G4+1 with control being the determining factor regarding when to consolidate.
Foreign Currency (Panel K)
The initial attempts to address foreign currency translation proved frustrating and led to
one of the first cooperative endeavors between the lASC and the Anglo-Americans. In the
US, FAS 1 { 1973} was superseded as early as 1975 by FAS 8. The US again decided to
reconsider foreign currency translation in 1979. Meanwhile in the UK, EDs issued in 1975
and 1977 permitted use of either the closing rate or temporal method for currency transla-
tion. The temporal method was considered in the UK only because it was the sole method
allowed in the US (Davies et al., 1994). In Canada, the CICA also adopted the temporal
method in 1978 {R#26} but suspended the standard in 1979.
Aiming for harmonization, the FASB, UK ASC, CICA, and lASC next elected to work
together and develop similar proposals (see FASB, 1981, para. 76). In the US, FAS 52 fol-
lowed in 1981; however, the UK's SSAP 20 was delayed until 1983 due to conflicts with
International Accounting Harmonization 1 95
the 1981 Companies Act. Although SSAP 20 and FAS 52 are similar in that each require
the closing rate/net investment method when the functional currency is different from that
of the holding company, other differences exist. IAS 21, also issued in 1983, allowed sev-
eral choices. IAS 21R, as revised by the CP in 1993, yielded only modest changes (Epstein
& Mirza, 1997). IAS 21R is similar to FAS 52 and SSAP 20; yet, again, discrepancies
exist.
Canada issued a standard in 1983. Despite cooperation with the US, UK, and lASC, for-
eign currency translation represents an area of considerable diversity between Canadian
and US and international standards (Hillier & Smith, 1996; CICA et, al, 1994; CICA,
1997a; and AASB, 1994). Fortunately, a 1996 ED proposed eliminating differences with
lASs. But, the AcSB has deferred work on this project and will consider these issues as part
of its project on recognition and measurement of financial instruments.
Australia's AASB 1012 {1987 and revised in 1988, AAS 20R} is similar to the above
standards but discrepancies exist (AASB, 1994). A forthcoming ED will ensure compli-
ance with IAS 21.
The G4-I-1 members each prescribe that the statements of self-sustaining operations be
translated using the current rate method, and statements of integrated operations be trans-
lated using the temporal method. Yet, procedural differences abound. Although the G4-I-1
standards will continue to be based on the same theory, application differences may con-
tinue after completion of the Canadian and Australian projects.
Conceptual Framework (L)
All members of the G4+1 have developed, or are in the process of developing, concep-
tual frameworks. In the US, FASB completed work on its framework in 1985. Similar
frameworks followed for the lASC {1989}, AcSB {1989 and 1991}, and AASB {1992}.
Currently, the UK is working on a Statement of Principles (Tweedie, 1996). Analyses of
the G4-I-1 frameworks reveal that each standard setter benefited from its predecessors'
work. For example, the lASC drew on FASB's endeavors and benefited from parallel work
in Australia and Canada (Cairns, 1995). The objectives and qualitative characteristics in
the other frameworks are similar to SFACs 1 and 2 (ASB 1991 ; Johnson, 1994; McGregor,
1996).
Building on FASB's pioneering work, the UK has further advanced the concept of com-
prehensive income (lASC, 1996), and the UK's Statement of Principles contains
groundbreaking work on measurement. The ASB (1995a) takes a prescriptive approach
proposing that measurement decisions should be based on the value to the business rule
(Tweedie, 1996). During 1997, the US also issued a proposed SFAC that addresses mea-
surement issues related to discounting. In its DPs, the G4+1 often acknowledges the
importance that common conceptual frameworks play in facilitating the working group's
joint endeavors.
Pensions and Other Post Employment Benefits (OPEBs) (Panel M)
Historically, pension accounting standards provided for flexibility in the choice of actu-
arial methods and assumptions (Skinner, 1987). However, in 1985, the FASB introduced
an approach that has since been adopted by other G4-I-1 members. US standards on pension
196 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
disclosures and related topics were issued in 1980 and 1983. In 1985, FAS 87 endorsed a
balance sheet focus for pensions and required the accrued benefit valuation method. A
1997 ED proposes significant modification of pension disclosure requirements.
Canadian s3460 {1968, modified in 1973} endorsed several methods for calculating
pension expense and required minimal disclosures. Then, in 1986. s3460 {R#50}, like FAS
86, required an accrued benefit valuation method (Santora, 1986). Again, major disclo-
sures were not mandatory. Several differences existed between s3460 and FAS 87
(Skinner. 1987). The Canadians chose a discount rate based on the long-run average rate of
return on fund investments, while FAS 87 required the obligation be revalued based on a
rate reflecting current conditions. Canadian s4100 { 1990} continues to require use of an
accrued benefit valuation method. Disclosure requirements remain less stringent than for
the US and lASC. A 1997 ED proposes the elimination of US/Canadian discrepancies.
The 1983 version of IAS 19 required that either an accrued or a projected benefit valua-
tion method be used consistently (CA Magazine, 1983). IAS 19R (revised in 1993 via the
CP} adopts an accrued benefit valuation method as the benchmark, but permits a projected
benefit valuation method as an alternative.
SSAP 24 { 1988} also follows the same broad approach as FAS 87, but the US standard
is more tightly defined. The major difference is the US specification of the accrued benefit
valuation method (Davies, et al. 1994).
Currently, the lASC and UK are reconsidering pensions. Like FAS 87, the lASC's 1996
ED 54 proposes a single actuarial method. Two options are presented in a 1995 UK DP
(ASB 1995b). The main differences between the ASB's preferred approach and the lASC
ED are that the lASC proposes the use of: (1) market values (ASB, actuarial methods) to
measure pension assets; (2) a high quality fixed interest bond rate (ASB. the rate of return
on a pension fund's assets); and (3) a "corridor" to reduce volatility (ASB, gradual recog-
nition) (ASB, 1997b). Some G4+1 members (Micallef et al.. 1997) challenge the UK
position on discount rates and argue that to improve financial reporting and harmonization
the lASC should retain the specific rate approach. The ASB is following lASC develop-
ments, and a FRED is due out in 1997.
Traditionally, minimal accounting guidance existed for OPEBs. With the exception of
the US, the G4+1 members have only recently began to seriously consider accounting for
OBEPs. In the spirit of FAS 87, 1990's FAS 106 required that a liability be recorded for
OPEBs.
Other G4+1 members are moving toward the FAS 106 approach. While SSAP 24 states
its principles may be applicable to OPEBs, ASC Technical Release 756 stated it was not
necessary to apply SSAP 24 to such benefits. In 1992. the Urgent Issues Task Force (UITF)
ruled that OPEBs are liabilities and should be recognized following the principles of SSAP
24. UITF Abstract 6 refers to FAS 106 for guidance on measurement bases. IAS 19 sug-
gests it may be appropriate to account for and disclose OPEB costs in a similar manner if
the substance is the same as that of retirement benefit plans. In Canada, various methods of
accounting for OPEBs are practiced; however, a 1997 ED aims to eliminate US/Canada
differences. In Australia, OBEPs are covered by 1994's AASB 1028. which addresses all
employee entitlements and requires that employee entitlements for periods over 12 months
be measured using present values (Ryan & Heazlewood, 1997). An ED is expected in 1997
to achieve compliance with the proposed IAS.
International Accounting Harmonization 197
Pension standards issued during the 1960s allowed much flexibility. In 1985, the US
adopted a limited liability approach requiring use of an accrued benefit valuation method.
Canada eventually adopted a similar approach, and the lASC and Australia will likely soon
follow the same route. The UK is considering an alternative that although similar to inter-
national standards would differ significantly in key areas.
The US also assumed the lead in adopting accrual accounting for OBEPs and was
quickly followed by the UK. A 1997 ED suggests Canada will also adopt this approach.
The lASC's planned revision of IAS 19 is to deal with "all forms of post-employment ben-
efits" (lASC, 1997c). A similar Australian standard should follow issuance of the proposed
IAS, thereby yielding compatibility among the G4-I-1.
Deferred Taxes (Panel N)
In recent decades, debates on deferred tax allocation have focused on the merits of the
deferred versus the liability method and comprehensive versus partial allocation. In 1967,
the US { APB 11} and Canada { AARC Bulletin 26} adopted the deferred method of com-
prehensive tax allocation (Skinner, 1987). Canada's 1973 s3470 adopted partial allocation
for tax loss carry-forwards.
The Australian view has changed several times, with 1970's D4 supporting matching
(Leppinus, 1977); 1976's DS4 reasserting the "realization concept"; and AAS 3 noting that
matching was preferable to the cash flow alternative (Chew Ng, 1984). Currently, AAS 3,
as reissued in 1989, requires the liability method with comprehensive allocation (Davies,
et al. 1994).
Though most UK companies used the liability method, 1973's ED 11 endorsed the
deferred method (Davies, et al., 1994). Hope and Briggs (1982) argue the move was in the
interest of harmonization. However, SSAP 1 1 { 1975 } allowed for the deferred or liability
method. In 1978, inflation prompted the issuance of SSAP 15. As amended SSAP 15
allows for partial allocation (with disclosure of the comprehensive provision) computed
under the liability method.
Inflation also produced increasing deferred tax balances in the US. In line with AAS 3
and SSAP 15, 1987's FAS 96 adopted the liability method. Unlike SSAP 15, FAS 96
retained comprehensive allocation (recognition of deferred assets was restricted). In 1992,
FAS 109 superseded FAS 96. Similar to 96 in most other areas, FAS 109 adopted partial
allocation for deferred tax assets.
IAS 12 { 1979} allowed use of the deferred or liability method and permitted comprehen-
sive or partial allocation. In 1996, IAS 12 was revised along the lines of FAS 109. While
the lASC was reconsidering deferred taxes, the UK, Canada, and Australia embarked on
similar projects (lASC, 1995). In 1997, Canadian s3465 was approved, which is consistent
with IAS 12R and FAS 109 (CICA, 1997b). An Australian ED, based on IAS 12R, is
expected in 1997. Thus, with the exception of the UK, the 04+ 1 have adopted similar posi-
tions on deferred taxes.
A 1995 UK DP advocated comprehensive allocation, noting it is more consistent with
international practice ( ASB, 1995c). The proposal was similar to the lASC and FASB posi-
tion, except the ASB advocated discounting. When the DP met resistance, the ASB
postponed action. Such opposition is interesting in that a review by the accounting bodies
identified SSAP 15 as one of the two SSAPs most in need of early attention (ASB,
198 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1998
1995b). ^° Though the UK voted against the proposed IAS (Accountancy, 1996a), the ASB
(1997c) now argues that full provisioning is the only internationally accepted method. A
forthcoming DP should suggest whether the G4+1 will soon be in harmony regarding the
issue or if the UK will be an outlier.
Impairment (Panel P)
During the 1980s and 90s each G4+1 member addressed impairment. In 1990, Canada's
s3060 {R#67} was revised to require that when the carrying value of a capital asset
exceeds the recoverable amount the excess must be charged to income. In the US, 1995's
FAS 121 requires that long-lived assets and certain intangibles be reviewed for impair-
ment when events or circumstances indicate the carrying value may not be recoverable. If
value in use (not discounted) is less than the carrying amount, the asset is written down to
fair value and a loss is recognized. An impairment loss cannot be reversed. In Australia,
amendments to AASB 1010 {1991} mandate that non-current assets are written down to
recoverable amount if that amount is higher than carrying amount. Impairments may be
taken through any revaluation reserve and only the excess is charged to P&L. In the spirit
of FAS 121, lASC (1997d) ED55 and the UK's FRED 15 (ASB, 1997a) were issued dur-
ing 1997. Unlike FAS 121, the lASC and UK propose that 'value in use' be calculated by
discounting future cash flows. And, both proposals allow for the restoration of past
impairment losses based on a change in economic conditions. While the G4+1 will likely
soon have similar standards, important differences continue. Fortunately, the G4+1 DP
International Review of Accounting Standards Specifying a Recoverable Amount Test for
Long-Lived Assets (Paul, 1997) provides a basis on which further harmonization can be
pursued.
Financial Instruments (Panel Q)
Having achieved similar standards, or proposals, regarding financial instrument disclo-
sures, the G4+ 1 are now focusing on recognition and measurement. Each member is
building on the G4+1 consensus view that derivative financial instruments should be rec-
ognized and measured at fair value (Adams & Montesi, 1995). A 1997 FASB ED adopts
this approach and proposes that changes in fair value be reported in net income or compre-
hensive income. However, US Congressional intervention may delay a FAS. The FASB
(1997a) has closely followed a similar lASC/Canada project and provided consultation and
comment about FASB's project. Based on its work with Canada, the lASC (1997e) issued
a DP proposing that all financial assets/liabilities be measured at fair value with all changes
in value charged to income/expense. In response to the lASC DP, the Australian Society of
CPAs (ASCPA, 1997a) requested that the lASC proposal be issued as an Australian DP. A
1996 UK DP also recommends that financial instruments be measured at current values
(ASB, 1996a and 1997d and e). In late 1997, the G4+1 agreed to work together to complete
the members' individual standards (Cairns, 1997a). The G4+rs first standard should result
in all five bodies requiring that derivatives and other financial instruments be recognized at
fair value.
International Accounting Harmonization 1 99
Comprehensive Income (Panel R)
Recently, each G4+1 member has moved toward endorsing comprehensive (all-inclu-
sive) income. Borrowing from FASB's conceptual framework, the UK's FRS 3 (1992)
requires that comprehensive income be reported via the statement of total recognized
gains/losses (Tweedie, 1996). Similarly, Australia's 1018 (AAS 1}, as revised in 1992,
requires that all items of income/expense be included in income except for the effects of
certain changes in accounting policies (AASB, 1994). IAS 8R { 1993} also requires that all
items of income/expense be included in income unless an IAS requires or permits
otherwise.
Moving in line with the UK's FRS 3, 1997' s FAS 130 and IAS IR estabUsh a new pri-
mary financial statement showing those gains and losses not currently presented in the
income statement (Double Entries, 1997b). An Australian ED, expected in 1998, should be
consistent with IAS IR. And, Canada has noted that a new performance measurement
statement designed to bring together all changes in equity other than owner transactions
may hold promise (CICA, 1997b).
While the G4-I-1 members are committed to disclosure of comprehensive income, debate
continues concerning where certain items should appear and whether items which initially
by-pass income should later be recycled through the income statement (Cairns, 1997b).
The North Americans (FAS 130} prefer recycling while the UK {FRS 3} insists items
should be recognized only once. A forthcoming G4+1 DP will likely provide insight
regarding further harmonization efforts.
Eamings Per Share (EPS) (Panel S)
The 04+ 1 are moving toward consensus regarding the calculation of EPS. The US, Can-
ada, and UK initially issued EPS guidelines in 1969 (APB 15}, 1970 {s3500, R#4}, and
1972 {SSAP 3}, respectively. Each required calculation of primary /basic and fully diluted
EPS, but the calculations varied (see CICA, et al., 1994). Concurrent projects by the lASC
and US have led to minimizing these differences.
IAS 33 and FAS 128 (1997} (see FASB, 1997c) require the calculation of basic and
diluted EPS. AASB 1027 { 1992}, which applies only to listed companies, was based on
the then proposed IAS. To further enhance harmonization, Australia plans to issue an ED
based on IAS 33.
A 1996 UK DP requested feedback on lASC ED 52. The ASB (1997f) argues that certain
changes made when the ED was translated into an IAS reflect the views of UK respon-
dents. In 1997, FRED 16 was issued; the ED generally follows the text of IAS 33. Thus,
the lASC, Australia, UK, and US will soon have similar EPS standards. Modifications con-
sistent with Canada's commitment to achieving harmonization with lASC and US
standards would yield harmony among the G4+1.
Marketable Securities (Panel T)
Currently, the G4+1 members concur that marketable securities should not be carried in
excess of their recoverable amount. Canada's 1972 R#8 re- worded s3010 stating tempo-
rary investments in marketable securities should be carried at lower of cost or market
200 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
(LCM). Section 3050 {R#8} requires that long-term investments be written down when
there has been a loss in value. Like Canada, in 1975 the US adopted LCM for marketable
equity securities. Under 1986's IAS 25, current investments may be carried at market or
LCM. Long-term investments may be carried at cost or revalued amounts, or for market-
able equity securities, at LCM. According to Australia's 1988 Accounting Guidance
Releases (AGR) 9 and 10, non-current marketable securities should not be carried in excess
of recoverable amount.
Reflecting a trend toward carrying financial instruments at fair value, 1993's FAS 115
requires that trading securities be carried at market with gains/losses flowing through
income and available for sale securities be carried at market with holding gains/losses by-
passing income. However, held to maturity debt securities are reported at amortized cost.
Based on The Role of Valuation in Financial Reporting, the UK ASB also favors marking
quoted securities to market (Davies, et al., 1994). While variability currently exists among
the G4+1 guidelines, the decision to jointly work on a standard indicates that all members
will soon require that marketable securities be carried at fair value (Cairns, 1997a; Adams
& Montesi, 1995; also see Financial Instruments, Panel Q).
Segment Reporting (Panel U)
AH G4+1 members currently require the disclosure of segment information. FAS 14
{1976} contained the first segment reporting guidelines issued by an Anglo-American
standard setter. Similar, though less extensive, requirements followed for Canada {sl700,
1979, revised in 1993}, the lASC {IAS 14, 1981}, Australia {AAS 16, 1984; revised fol-
lowing 1986's AASB 1005},'" and the UK {SSAP 25, 1990}. All of these standards
require disclosure of segment revenues, earnings and assets (AASB, 1994).
Following ajoint US/Canada project and a simultaneous lASC project, 1 997' s FAS 131,
Canada si 701 {R#93}, and IAS 14R contained new segment reporting guidelines.
Although differences remain (lASC, 1997f), the standards basically require that operating
segments be determined based on management structure. With the IAS, companies will
most often report two bases, with extensive disclosures required for the primary base and
limited disclosures for a secondary base. Normally, the bases will be industry and geo-
graphic. Australia is developing an ED based on IAS 14R.
A 1996 ASB DP requested feedback on the FASB and lASC EDs {Accountancy, 1996b).
Respondents indicated SSAP 25 is satisfactory, overwhelmingly rejected the managerial
response, and argued the lASC disclosures are excessive (ASB, 1996b). The ASB has
made no move to modify its current guidelines. Thus, while all G4+1 members require
some form of segment reporting, the UK may choose not to endorse the new approach
developed concurrently by the US, Canada, and lASC.
Accounting Changes (V)
Today, each G4+1 member endorses one of two treatments for reporting changes in
accounting method. As of 1969, Canadian s3600 stated that retroactive treatment may be
appropriate. Via I980's R#34, sl506 {modified in 1996, R#87} requires that most changes
in principle be applied retroactively. Similar to Canada, 1974's SSAP 6 requires retroactive
treatment; however, 1992's FRS 3 requires that all prior-period adjustments be reported in
International Accounting Harmonization 201
the Statement of Total Recognized Gains and Losses. Under the IAS 8R { 1993} bench-
mark, changes in method are also reported as retroactive adjustments. The allowed
alternative is inclusion of the effect in income. IAS 1, as revised in 1997, requires that the
cumulative effect of changes in method dealt with under the IAS 8 benchmark be reported
in a statement of changes in equity.
Consistent with the lASC alternative, the US's 1971 APB 20 requires that the effect of
most changes in method be reported as a separate category of income. FAS 130 { 1997},
reaffirms this treatment. In Australia, AASB 1018 { 1989}, also requires that most changes
in method be reported in income.
With the exception of Canada, all G4+1 members require that changes in accounting
method be reported in either net income or a statement of "other changes in equity." Adop-
tion of a "statement of other changes in equity" by Canada (see Comprehensive Income,
Panel R) would yield compatibility.
Goodwill (GW) (Panel W)
The US {APB 17, 1970}, Canada {s 1580, 1973}, Australia {AAS 18, 1984/AASB 1013,
1988} and lASC {IAS 22R, 1993} all currently follow a "capitalize and amortize" philos-
ophy for GW (see Carnegie & Gibson, 1991). GW is written off to income if an annual
review indicates impairment (see FASB, 1996). Required amortization periods vary as fol-
lows: US and Canada 40 years or less; the lASC 5 years or less (unless a longer period, not
to exceed 20 years, is justified); and Australia 20 years or less. Unlike the US and lASC,
Canada and Australia {AASB 1013 as revised in 1996} require straight-line amortization
(Ryan & Heazlewood, 1997; Grant, 1996).
In the UK, SSAP 24 { 1984} also allows for the amortization of GW; however, immedi-
ate write-off to equity is the preferred method. While the 1983 version of IAS 22, allowed
for immediate write-off, IAS 22R, as revised in 1993 by the CP, prohibits this treatment
(Epstein & Mirza. 1997). Thus, the UK is out of line with international practice. In addi-
tion, as early as 1990, the ASC's ED 47, proposed a ban on reserve accounting and argued
the resulting assets should be depreciated (Rhodes, 1990).
Currently, the lASC and UK are reconsidering GW. Although 1997's ED 60 reasserts
support for the capitalization and amortization of GW (lASC, 1997c), the lASC is request-
ing feedback regarding whether GW should always be amortized. Australia plans to issue
an ED, which will be compatible with the forthcoming IAS.
The UK's FRED 12 { 1996} states that GW need not be amortized if its value is signifi-
cant, is expected to be maintained indefinitely, can be reliably measured in the future, and
an impairment review indicates no diminution in value. If the life is expected to be limited,
GW should be amortized over a period of 20 years or less. FRED 15 (ASB, 1997a) con-
firms this position.
For most of the G4-I-1, current practice involves the capitalization and amortization of
GW. However, the UK, and, to some extent, the lASC, are considering whether GW may
be viewed as a permanent asset that is regularly reviewed for impairment. Australia will
likely follow the approach adopted by the lASC (Grant, 1996). While the US initially
expressed skepticism regarding the UK proposal, that position is now being reconsidered
(FASB, 1997b). If the lASC and FASB were to consider GW as a permanent asset, Canada
and Australia would likely endorse the same view. However, whether the FASB could
202 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
attain SEC approval of such an approach is questionable. Thus, the G4+1 may soon agree
that GW should be capitalized, but may continue to differ regarding whether it must be
amortized.
No Significant Progress Toward Compatibility
Error Correction (Panel X)
Currently, each G4+1 member endorses one of two treatments for correcting errors. As
of 1971, Canada's s3600 noted errors should be corrected by prior-period adjustments.
This policy was restated in 1980's si 506 {R#34; modified in 1996 by R#87}. Similar
requirements followed in the US {FAS 16. 1977} and UK (SSAP 6, 1974}. In the US, FAS
130, notes that the retroactive adjustment should not be reported in comprehensive income.
Alternatively, the UK's FRS 3 {1992} notes that prior-period adjustments should be rec-
ognized in the Statement of Total Recognized Gains and Losses. Consistent with the US
and UK, under the IAS 8R { 1993} benchmark, errors are corrected via prior-period adjust-
ments. However, an allowed alternative states the correction may be included in income.
Revisions to IAS 1 { 1997} require that the correction of errors dealt with under the IAS 8
benchmark must also be reported in a statement of total changes in equity.
Consistent with the lASC allowed alternative, Australia's AASB 1018 {AASIR;
approved in 1989 and revised in 1992} requires the inclusion of all revenues/expenses in
P&L including adjustments relating to prior years (Ryan & Heazlewood, 1997). As long as
the lASC allows for this alternative treatment, Australia will likely continue to be out of
line with other members of the G4.
Interest Capitalization/Borrowing Costs (Panel Y)
The G4+1 members disagree regarding the appropriate treatment of borrowing cost.
While the US {FAS 34, 1979} mandates capitalization for interest costs associated with the
acquisition of qualifying non-current assets, Canadian s3850 {R#54, 1987} only requires
disclosure of the amount of any capitalized interest. The original version of IAS 23 { 1984}
permitted capitalization or expensing of borrowing costs. However, IAS 23R {revised in
1993 via CP} now requires expensing as the benchmark, with capitalization serving as an
allowed alternative. Australia's 1997 ED 75 is based on IAS 23, but, because the AASB
tends not to allow choices, the proposal endorses only the lASC allowed alternative
(ASCPA, 1997b). Adoption of the Australian proposal would yield compatibility with
lASC and US GAAP. While there is no UK standard. Company Law allows interest to be
included in the production cost of an asset. Despite the disparity among the G4+1, no har-
monization plans have been announced.
Research and Development (R&D) (Panel Z)
The G4+1 members are also at odds regarding R&D. FAS 2 { 1974} requires the expens-
ing of R&D.' ^ Prompted by FAS 2 (Nobes, 1991), a 1975 UK ED recommended that most
R&D be expensed. However, following criticism, the proposal was modified. SSAP 13
International Accounting Harmonization 203
{ 1977) requires research be expensed and allows, but does not require, the capitalization
of certain developmental costs.
Canadian s3450 {R#25} and IAS 9 were issued in 1978/^ Originally, IAS 9 required the
expensing of research cost but allowed capitalization or expensing of development costs.
IAS 9R (revised in 1993 via CP} is similar to s3450 and SSAP 13, which both allow cap-
italization of certain developmental costs. The lASC mandates that development cost be
recognized as an asset when certain criteria are satisfied.
In Australia, AAS 13 { 1983} permits R&D to be recognized as an asset and amortized
(AASB, 1994). The AASB acknowledges AAS 13 must be reconsidered in the interest of
harmonization.
Currently, the G4+1 disagree regarding R&D. However, in 1997, the AcSB announced
it would address Canadian/US differences. And, although change is unlikely, in ED 61, the
lASC is re-examining R&D. Thus, the opportunity exists for minimizing, but not eliminat-
ing, differences. In late 1997, the UK ASB stated that a new R&D standard is not a priority.
SUMMARY AND CONCLUSIONS
Globalization of business and capital markets has resulted in an ever-increasing demand
for harmonization of accounting standards. Yet, the current research reveals that entering
the 1990s, numerous differences existed between lASs and the accounting standards of the
major Anglo-American countries. Few examples of compatibility were identified. While
the lASC and Anglo-American's achieved consensus during the early 1980s regarding the
funds flow statement, this achievement was short-lived as the US initiated a move toward
the cash flow statement in 1987. A decade later consensus is contingent on issuance of a
Canadian standard based on the lASC and US standards. The standard is expected during
late 1997.
In the 1980s, compatibility was also achieved in accounting for leases. And, a current
project will bring the lASC even more in line with the Anglo-Americans. Yet, the status
quo may be disrupted in that a G4+1 publication calls for capitalization of all non-cancel-
able leases. Australia, the UK and lASC are further developing the proposal and are
committed to adopting the new approach. At a 1997 G4-I-1 meeting, the US reaction to the
"New Approach" was more positive than at past meetings (Cairns, 1997b) suggesting the
North Americans may also reconsider accounting for leases.
Failure to achieve significant gains toward harmonization in the 1970s and 1980s can be
linked to the manner in which the lASC and Anglo-American standard setters operated.
The lASC, whose membership consists of national professional accountancy bodies,
worked primarily in isolation of national standard-setters. With few exceptions, national
standard setters also worked independently of each other.
Prior to the 1990s, agenda coordination was limited, with the exception of a cooperative
effort on foreign cunency translation in the early 1980s. Unfortunately, this endeavor was
a limited success as the resulting Canadian standard contrasts significantly from other
international standards. Yet, this discrepancy may be resolved, as Canada has announced
plans to move more in line with the US rules. And, Davies, et al. (1994) suggests that UK
guidelines should be amended to achieve greater comparability internationally.
204 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1998
Lack of agenda coordination and cooperation between the lASC and Anglo-Americans
resulted in significant time lags before consensus was achieved on agenda items initiated
during the lASC's first two decades. For example, it took more than 20 years to achieve
similar guidelines on the funds statement and extraordinary items. And, it took more than
a decade to arrive at compatible rules for provisions.
As the 21st century approaches, harmonization has become an even more desirable goal.
Yet, no nation has a set of accounting rules which have such clear merits that they deserve
adoption by the world (Carsberg. 1996). The US has the longest standard setting history
and the largest standard setting body that is characterized by high standards of profession-
alism. Even the US rules, however, exhibit compromises between different interests of a
kind that could reasonably have been decided differently. No nation has an unquestionable
right, on the basis of existing achievement, to be regarded as predominant in accounting.
Presently, lASs also fail to provide the solution. lASs are considered too broad as they
were designed to meet the needs of many countries with different economic, legal, and reg-
ulatory frameworks. Carsberg (1996) argues that much work is needed before a well-
founded basis for uniformity can be reached, and this work can take place, effectively, only
at the international level. In 1993, the lASC reaffirmed a 1980 resolution whereby member
countries are encouraged to invite the lASC to participate in discussions between two or
more countries dealing with accounting standards. This act set the stage for the lASC to
participate with groups like the G4.
The lASC and Anglo-Americans entered the 1990s better equipped than in prior decades
to engage in cooperative endeavors. By focusing on common themes in their conceptual
frameworks and adopting a philosophy of harmonization via cooperation, the G4+1 has
contributed significantly to the development of accounting thought and regulation and has
cut the time required to develop a standard. During the 1990s, the G4+1 has made substan-
tial progress toward harmonization. Successes include topics initially addressed in the
1970s or 1980s. Pending removal of a legal impediment in Australia, all five will endorse
the equity method of accounting for investments in associates. Over two decades have
passed since the US and UK first endorsed the equity method. Also, after more than two
decades, the G4+1 will likely soon attain consensus regarding: interim reporting; separate
disclosure of discontinued operations in income; limited use of pooling of interest; and
consolidation of accounts based on control. In 1997, the G4+1 voted unanimously in favor
of using the equity method for joint ventures.
The G4+1 are also moving toward compatibility on two of the most pressing problems
of the 1980s. The lASC, US, Australian, and Canadian deferred tax standards are based on
an approach first adopted in 1987's FAS 97. With the ASB acknowledging that compre-
hensive allocation has become the only internationally accepted method and the UK's
commitment to harmonization, an effort to harmonize with the lASC is likely.
Current lASC and Australian projects on pensions will likely yield standards similar to
those adopted by the US in 1985 and soon thereafter in Canada. Yet, the UK ASB's pre-
ferred approach differs somewhat from the lASC proposal. Compromise by the UK is
questionable, in that the US standard was to represent only "'an evolutionary change"
(FASB, 1985, para. 107). Conclusion of the current pension projects will likely be fol-
lowed by consensus regarding OPEBs. The G4+1 members' OPEB standards should be
similar to the approach adopted by the US in 1990.
International Accounting Harmonization 205
G4+1 projects initiated in the 1990s have often produced compatible standards, or pro-
posals, on a relatively timely basis. Agenda coordination and cooperation have resulted in
the G4+1 achieving consensus on several topics in less than one decade, as opposed to the
larger lags characteristic of the 1970s and 1980s. Upon completion of lASC and UK
projects, all the G4+1 will have impairment standards based on a philosophy similar to that
adopted by Canada in 1990. In addition, the G4+rs comprehensive income project
appears to be leading to adoption of an all-inclusive income statement by all members
within only a few years of the UK establishing international precedent in 1992.
While cooperative efforts of the 1990s yielded similar disclosure guidelines, or propos-
als, for financial instruments, measurement has proven more challenging. Yet, the G4+1
members have worked on individual standards that reflect the group's consensus view that
derivatives should be recognized and carried at fair value (Adams & Montesi, 1995). In
late 1997, the lASC Board voted against a staff recommendation that the lASC adopt all
US standards on financial instruments (Double Entries, 1997c and d). Alternatively, the
Board decided that the lASC should join with national standard setters, including the G4
members, to develop a harmonized IAS. Prior to the Board meeting, the G4+1 members
had agreed to work collectively to complete national and international standards requiring
the use of fair values for all financial instruments (Cairns, 1997a). The outcome of the
project will be the G4+rs first standard.
The G4+1 may soon have similar EPS standards. Projects that ran concurrently resulted
in timely adoption of similar lASC and US standards. Australia's guidelines are based on
the (then proposed) IAS. And. the UK has issued a FRED based on the IAS. According to
the ASB, minimal changes to UK requirements are necessary since the ASB was able to
feed the views of the UK community into the debate leading to the IAS. These views were
based on responses to an UK DP that requested comments regarding the lASC/US propos-
als. This DP reflects the ASB's desire to ensure UK views are reflected in all
harmonization efforts. Given Canada's commitment to harmonize with lASC and US
rules, the AcSB can be excepted to issue a standard that, like FRED 16, reflects only minor
modifications to the IAS.
Also representative of unprecedented cooperation is a US/Canada joint project on seg-
ment reporting that ran concurrently with an lASC project. During 1997, the US, Canada,
and lASC issued similar standards. Again, an UK DP encouraged constituent feedback and
the responses were introduced into the lASC deliberations. Hence, the UK may again draft
a FRED based on the new IAS. And, Australia's harmonization strategy commits the
AASB to develop a standard compatible with IAS 14R.
GW has been debated for decades with limited success, but this may change. The UK has
introduced an alternative to the "capitalize and amortize" approach, and an lASC ED
requests feedback regarding whether GW should always be amortized. In a surprising
move, the FASB announced it might make purchase accounting less onerous by eliminat-
ing GW amortization. Given Australia and Canada's lASC harmonization strategies,
compatibility among the G4-I-1 on GW is possible.
Diversity among the G4-t-l identified by the research includes: accounting for changes in
accounting method, R&D, and interest capitalization. Given the successes of the G4-I-1 and
each member's commitment to harmonization, achieving compatibility in these areas
appears feasible. In fact, Canada is currently addressing Canada/US differences regarding
R&D.
206 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
Only a few years ago harmonization of accounting standards was viewed by most as an
admirable but unattainable goal. However, this research indicates significant gains have
been achieved through the lASCs cooperative efforts with the G4. The G4+rs successes
can be tied to agenda coordination and cooperation. By agreeing to broad principles prior
to the drafting of individual standards, the G4+1 set the stage for the development of sim-
ilar standards. Harmonization is further enhanced by activities such as the lASC/Canada
financial instruments, US/Canada and lASC segment reporting, US/IASC EPS, and lASC/
UK provisions projects.
lASs must not be viewed as an Anglo-American product if these standards are to be
accepted worldwide. While continuing to work with the 04, the lASC must also further
develop its working relationships with other groups of national standard setters. Such
endeavors will prove more challenging. While the conceptual frameworks of the lASC and
Anglo-Americans are highly similar, the objectives of other national standard setters often
conflict with those of the lASC. Nevertheless, the lASC must view its early successes with
the G4 as only an initial step and continue the difficult task of working with other standard
setters to achieve international accounting harmonization.
NOTES
1. The G4+1 members have formally committed to work toward the harmonization of accounting
standards. See FASB's (1997a) Strategic Plan for International Activities; CICA (1997a)
Handbook sl501; Australia's 1996 Harmonization Policy (Ryan & Heazlewood, 1997; Davies,
etal.. 1994; Cairns, 1995).
2. In 1966. the Australian Accounting Research Foundation (AARF) was formed to provide a
research base for the profession. In 1984, the Accounting Standards Review Board (ASRB)
was formed with legislative power to approve standards. The AARF and ASRB merged in
1981, and in 1991, the AASB replaced the ASRB. Australian Accounting Standards (AAS) are
developed by the AARF and considered by numerous formal bodies (Whittred & Zimmer,
1992). After exposure drafts are issued for comment, a standard is issued and forwarded to the
AASB for approval. Currently, Australia is considering replacing the AASB with a new stan-
dard setting body {Double Entries, 1997a).
The AcSB of the Canadian Institute of Chartered Accountants (CICA) issues Releases (Rs)
which add, replace, and/or modify Sections (s) of the Canadian Accounting Handbook. In
1997, the CICA Task Force on Standard Setting recommended Canada's continued contribu-
tions to the global accounting standard setting objectives.
In the UK, the Accounting Standards Committee (ASC) issued Statements of Standard
Accounting Practice (SSAPs) between 1970 and 1990. The ASC was replaced in 1990 with the
ASB that issues Financial Reporting Standards (FRSs).
3. Braces are utilized to indicate the date a standard, ED, or other document was issued or to pro-
vide additional information about a document or data source. References are not provided for
these documents.
4. Limited agenda information is provided in early versions of lASC Insight and its predecessor,
[ASC News.
5. Informed parties, including a representative of the Institute of Chartered Accountants in
England and Wales (ICAEW) and a former ASC member, indicated no one source provides all
the necessary data for the UK.
6. Most of FRED Us proposed changes to SSAP 1 pertain to joint ventures, not investments in
associates.
International Accounting Harmonization 207
7. lASC ED 61 was issued in 1997. Yet, the Board does not intend to revise IAS 22 in areas that
are not linked to the projects on provisions and contingencies, intangible assets, and impair-
ment of assets.
8. The value to the business rule compares net realizable value and value in use to determine the
recoverable amount that is then compared to replacement cost to determine the value to the
business.
9. Initially SSAP 15, did not mandate the liability method which was proposed in ED 19. If fact
the standard did not mention either the liability method or the deferred method.
10. SSAP 24, Accounting for Pensions, was the second standard noted by the accounting bodies.
11. FAS 115 (Panel T) represents an accelerated portion of the US's recognition phase. Similar
projects include: FAS 's 110 {1992}, 114 {1993}, 118 {1994}, and 125 {1996}.
12. For a comparison of Australian, US, UK, Canadian, and lASC rules see Ryan and Heazlewood
(1997).
13. FAS 68 {1982} specifies how an enterprise is to account for its obligation under an arrange-
ment for the funding of its R&D by others and does not affect FAS 2.
14. Paragraphs 16-18 of DIO {issued in 1972 and reissued as AAS 9 in 1979} addressed develop-
ment costs. Paragraphs 16-18, dealing with R&D, were deleted in 1983 due to issuance of
AAS 13.
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The International
Journal of
Accounting
Corporate Financial Disclosure in Emerging Markets:
Does Economic Development Matter?
Stephen B. Salter
University of Cincinnati
Key Words: Emerging markets. Disclosure, Foreign investment
Abstract: This paper breaks with previous research by concentrating on emerging market econo-
mies rather than developing countries. It tests the relationship between corporate financial
disclosure and the sophistication of economies and capital markets within the context of the extant
Cooke and Wallace (1990) model. It finds that, as posited in the model, firms in developed market
economies have a significantly higher mean level of effective disclosure than those in emerging
market economies. These differing levels of disclosure are modified by the importance of capital
markets and a relatively low level of the uncertainty avoidance culture variable. The study also
finds that the level of corporate disclosure is positively related to prior levels of corporate finan-
cial disclosure regulation and is directly related to the ability to draw future foreign portfolio
investment.
This paper breaks from previous research! by concentrating on emerging market economies
rather than developing countries. Emerging market countries are those countries in which
capital markets have developed to the point of contributing to the national financial pool
and are usually able to receive some external portfolio investment. This suggests that at
some point such markets will fully emerge to become "developed" markets. Excluded are
those countries that have not yet developed to the point of being viable areas for portfolio
investments from the global investment community.
In the early 1990s emerging markets seemed to be the answer to investors' prayers. In
the period from its inception in 1988 to April 1997, the International Financial Corpora-
tion's (IPC) index of investable emerging markets rose by a mean compound rate of 16
percent per annum. This return was larger than either the developed markets as a whole,
or the S&P 500 {The Economist, 1997). Despite the very significant return and continuing
robust performance of the economies of the major countries that constitute the IPC index.
Direct all correspondence to: Stephen B. Salter, Assistant Professor, Department of Accounting and Information
Systems, University of Cincinnati, OH 45221-021 1, USA; E-Mail: saltersb@email.uc.edu.
The International Journal of Accounting, Vol. 33, No. 2, pp. 21 1-234 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1998 University of Illinois
212 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1998
emerging market stocks appear to be of relatively little interest to US and other institu-
tional investors (The Economist, 1997). Why has this happened and does it relate to
accounting?
In a recent overview The Economist (1997:80) suggests that "The well known risks in
emerging economies include patchy information about companies, ropey accounting prac-
tices and lax regulation" are largely to blame. In a more formal academic setting Alford et
al. (1993) model a lack of good disclosure (asymmetric information) as quotas limiting the
quantity of an asset in an investors portfolio. This in turn supports earlier work by Adler
and Dumas (1975) who point to asymmetric information as the second reason why global
markets may be segmented, and Errunza and Losq (1985) who demonstrate that emerging
markets are segmented from US markets and that such markets command a super risk pre-
mium, i.e., shares listed solely in emerging markets command higher risk premiums than
similar securities listed in a non-segmented market. Thus, while emerging markets con-
tinue to perform well they seem to suffer directly or indirectly from information problems
which can be related to poor disclosure.
This paper examines four major questions:
1 . Do systematic gaps in disclosure levels exist between emerging and developed mar-
kets?
2. Do these gaps continue to be important after controlling for global factors which
have been found to affect disclosure levels?
3. Is Corporate Financial Disclosure (CFD) associated with Corporate Financial Dis-
closure Regulation (CFDR)?
4. Can disclosure be described as an effective signaling technique to attract inward
investment in a global market?
The study draws on the theoretical work of Cooke and Wallace (1990), which develops
an environmental model to explain differences in nominal Corporate Financial Disclosure
Regulation (CFDR), and actual Corporate Financial Disclosure (CFD) between emerging
and developed markets. The study uses data from the Center for International Financial
Analysis and Research (CIFAR, 1991, 1993, 1995) disclosure indices for industrial firms
in 14 emerging market countries and 19 developed countries at three points in time. The
study fmds that the mean level of CFD for companies in developed markets is statistically
significantly greater than those in emerging market economies. Further this relationship
continues even after controlling for global factors known from prior research to affect lev-
els of corporate disclosure (see for example, Salter & Niswander, 1995; Adhikari &
Tondkar, 1992). CFDR is found to be significantly associated with CFD. Finally, some
limited evidence is found among emerging markets that increased disclosure can be
regarded as an effective tool in signaling that foreign portfolio and direct investment are
welcome.
The remainder of the paper starts with a brief review of the literature. This is followed
by a description of the proposed models for determining patterns of actual corporate finan-
cial disclosure (CFD) and corporate financial disclosure regulation (CFDR). Then the
hypotheses, methodology, sample and results are presented. The paper concludes with a
brief summary and proposals for future research.
Corporate Financial Disclosure 213
LITERATURE REVIEW
Starting with Ball and Brown (1968), much of the US and non-US domestic accounting lit-
erature in English has concentrated on the usefulness of accounting information. A large
part of this literature is dedicated to understanding the relationship between accounting dis-
closure and stock markets (see for example Atiase, 1988, 1994). At the same time, the lit-
erature in the international finance area has concentrated on documenting and explaining
the lack of integration among global capital markets. The global finance research has come
to an initial conclusion similar to that of the domestic accounting literature that levels of
financial reporting may affect the direction and force of stock market performance and
indirectly, stock market integration (see Alford, 1993; Alford & Folks, 1996). Information
asymmetry and global market segmentation thus appear to be linked. A logical follow-up
question is, does actual corporate financial disclosure (CFD) differ between countries, and
why?
Evidence of inter-country disclosure difference has a fairly long but limited history (see
Appendix 1 for a tabular summary of significant International Accounting literature on dis-
closure). Tyra (1970) established that financial disclosure patterns differed among a
sample of European companies grouped by country. More recently, Needles et al ( 1 99 1 ),
examining pension reporting, find differences between six European countries. Frank
(1979), Nair and Frank (1981), Belkaoui (1983), and Belkaoui and Maksy (1985) establish
that differences may exist among countries. Most recently, Alford et al. (1993), using a
capital markets based methodology for each of 16 developed economies, conclude that
accounting numbers contain information content across a wide variety of markets. How-
ever Alford et al. (1993) add a significant finding. They find that the relative information
content of accounting disclosure varies from country to country. The US, Australia, France
and the UK are found to have accounting data with relatively high information content, and
that of Denmark, Germany, Italy and Sweden being less value relevant. Regrettably Alford
et al. (1993) limit their work to developed markets.
Explanations of cross-national differences in financial reporting practices have concen-
trated on so-called environmental models primarily using cultural and other systemic
variables at a global level. Much of the early theoretical literature suggests that financial
reporting practices as a whole, and CFD as a subset of financial reporting, should be
affected by and may be explained by a number of environmental factors including a coun-
try's particular colonial history or stage of development (Mueller, 1967; American
Accounting Association, 1977). Later (Nobes, 1983; Gray, 1988; Riahi-Belkaoui, 1995;
Salter & Niswander, 1995) add cultural and market dimensions to the earlier studies and do
some empirical testing. Alford et al. (1993) identification of groups of countries with good
and poor information content ties closely with the models of Nobes (1983), Gray (1988),
Salter and Niswander (1995), and Doupnik and Salter (1993). All of these models place
countries in similar groups to Alford et al. (1993), citing socio-cultural reasons for disclo-
sure levels. Despite the considerable work done, the environmental models and testing is
incomplete, as Gemon and Wallace (1995: 86) note, "there is a need to factor dimensions
other than culture such as industrialization and level of economic development, within a
polycentric approach so as to recognize many of the factors in the accounting ecology of
each country under consideration."
214 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1998
Surprisingly, given the wealth of theoretical work on the connection between levels of
development and CFD, there is very little empirical evidence that links level of develop-
ment and CFD and none that look explicitly at disclosure in emerging markets. Some early
studies (Frank. 1979: Nair & Frank, 1981) do provide results which suggest that financial
disclosure can be linked to economic systems and level of development among many other
variables. Other more recent studies (Belkaoui, 1983; Belkaoui & Maksy, 1985) find no
relationship between economic welfare and financial reporting. What appears to be an
open question is whether differences in disclosure continue to exist between developed
market countries and that subset of developing countries identified as emerging market
economies. Further, little testing has been done to explain the modifying effect of the
proven global control variables such as culture and stock market activities as they apply in
emerging and developed market economies.
A MODEL OF CFDR: COOKE AND WALLACE (1990) AND BEYOND
The difficulty of obtaining reliable company or national level information on CFD for
emerging market countries led in the late 1980s and early 1990s to examining CFDR rather
than actual CFD. The seminal work in this area, Cooke and Wallace (1990), tests an envi-
ronmental model of global differences in CFDR, with emphasis on the difference between
developed and developing countries. This model (Figure 1) posits that effective regulation
will be the outcome of an interaction between nominal accounting regulation and the will-
ingness of companies to follow guidelines and enforcement mechanisms. Both nominal
accounting regulation (those regulations that have been published) and the relative
enforceability of such regulation are in turn directly affected by the internal and external
environment. The final result of the regulation process, "effective accounting regulation",
is analogous to CFD. Since the available data at that time did not provide a basis for the
measurement of CFD in a reliable manner, Cooke and Wallace (1990) present CFDR as a
testable precursor to the final level of CFD. Cooke and Wallace (1990) then test the prop-
osition that level of CFDR is related to level of development.
The results from Cooke and Wallace (1980) can, at best, be described as mixed. Their
initial non-parametric tests of differences in sample medians led to the view that "it was not
possible to conclude that the developed countries differed significantly from the develop-
ing countries in the intensity of their CFDR" (Cooke & Wallace 1990:97). While Cooke
and Wallace (1990, page 98, Table 4) subsequently link GNP per capita and level of
CFDR, the result is statistically significant in only one of the four regression tests in which
it appears. This would appear to be less than compelling evidence that CFDR and eco-
nomic development are linked. As Cooke and Wallace (1990) conclude, this lack of result
may well be linked to the importation by emerging market countries of CFDR found in
developed countries, particularly those with a colonial or economic dominance link. This
being the case there would be no guarantee, since there is no underlying social or economic
commitment to such imported standards, that CFD would mirror CFDR in these countries.
One of the more interesting results that reported by Cooke and Wallace (1990) is that for
developing market countries, CFDR is positively and significantly related to indices which
measure the quality of the climate for inward foreign investment. This raises the interesting
point that CFDR may be envisaged as a mechanism for signaling that the country is open
Corporate Financial Disclosure
215
Internal
Environment
Nominal
Accounting
Regulation
Effective
Accounting
Regulation
= Disclosure
External
Environment
Enforcement
Mechanism
Figure 1 . Cooke and Wallace (1990) Abbreviated Model
for business. It is perhaps not unreasonable to extend this resuU to the idea that effective
regulation (CFDR) should precede higher levels of foreign investment in the years that
follow.
Adhikari and Tondkar (1992) also test the relationship between CFDR and the environ-
ment. Adhikari and Tondkar' s (1992) major contribution is in the use of an index of
disclosure based on their examination of actual stock market listing and filing disclosure
regulation for the world's 35 largest markets. As part of their model, Adhikari and Tondkar
(1992) test the relationship between CFDR and development as measured by GNP per cap-
ita, along with stock market and other economic variables. No significant relationship
between CFDR and level of development was found. The only significant relationship
found was between CFDR and stock market capitalization for the two previous years.
216 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1998
Riahi-Belkaoui (1995) re-tests this relationship using the Adhikari and Tondkar (1992)
index and interestingly does find a positive relationship with yet another measure of devel-
opment, the United Nations Development Program's (UNDP) 1990 Human Development
Index (HDD (United National Development Program, 1990).
All of these results seem to indicate that the relationship between level of emergence
from social/economic poverty and level of disclosure regulation is, at best, unclear. Further
the CFDR literature provides only theoretical links between actual CFD, CFDR. and level
of development. If the objective of CFDR is disclosure and CFDR does not lead to disclo-
sure, it may be viewed as ineffective. This in turn, may lead to questioning the continuation
of the regulatory process in its current form."
Thus, despite the significant theoretical advances of the Cooke and Wallace (1990),
Adhikari and Tondkar (1992), and Riahi-Belkaoui (1995) papers, the following interesting
questions still remain unanswered:
1 . Do companies in emerging market economies have different levels of disclosure
from those in developed markets?
2. Is there a relationship between CFD and CFDR?
3. Is there a relationship between CFD and emergence from social/economic poverty?
4. Do certain measurements of social/economic emergence do a better job of explain-
ing the relationship between CFD and social/economic emergence? and,
5. Building on the secondary findings of Cooke and Wallace (1990), is CFD and/or
CFDR a form of effective signaling/inducement to foreign investors?
HYPOTHESES
The hypotheses that flow from the research questions in the immediately proceeding sec-
tion are as follows:
Hal: There is a lower national average level of corporate financial disclosure
(CFD) for companies in emerging markets than for companies in developed
markets.
Ha2: There is a positive relationship between levels of corporate financial disclo-
sure (CFD) and corporate financial disclosure regulation (CFDR).
Ha3: There is a positive relationship between levels of corporate financial disclo-
sure (CFD) and the base classification of a country's stock market as
emerging or developed.
Ha4: There is a positive relationship between levels of corporate financial disclo-
sure (CFD)and the levels of national economic income as measured by gross
national product per capita (GNPpc).
Ha5: There is a positive relationship between levels of corporate financial disclo-
sure (CFD) and the levels of socio-economic emergence as measured by the
United Nations Development Programs (UNDP) Human Development Index
(HDD (UNDP, 1988-1995).
Corporate Financial Disclosure 217
Finally, extending Cooke and Wallace's (1990:89) hypothesis that "countries with a favor-
able environment (high evindex scores) are more likely to have more items under CFDR
than those with low evindex scores," it is posited that one of the roles of effective CFDR is
higher CFD and that the role of such CFD is to encourage future investment. The Cooke
and Wallace (1990) finding that evindex is positively related to a country's CFDR is re-
interpreted as a signaling hypothesis as follows:
Ha6: The level of corporate financial disclosure is positively related to the future
level of foreign investment.
METHODOLOGY
Dependent Variables
The initial dependent variable in this study is CFD as measured by the mean volume of
disclosure provided by firms in each country. (Table 1 contains a short description of each
dependent and independent variable.) For the purposes of this study "The International
Financial Reporting Index (IFRI) for Industrial Companies" from International Account-
ing and Auditing Trends for 1991,1993, and 1995 is utilized (CIFAR, 1991, 1993, 1995).
The IFRI is based on the mean disclosure scores of a sample of the largest industrial com-
panies in a country. Each company's scores are extracted from an examination of its annual
reports 1989, 1991, and 1993 respectively. In each case, the annual reports in the Center for
International Financial Analysis and Research library were examined for the inclusion or
omission of 85 items. Each one of the 85 items was either present or absent in the partic-
ular annual report. The data were then divided into seven broad categories: general
information, income statement, balance sheet, funds flow statement, accounting policies,
stockholders' information and supplementary information. Within each category the per-
centage of all available disclosed information items to all information items expected to be
disclosed was calculated. The average of the seven categories was then calculated to pro-
vide the company IFRI, which in turn was averaged for a national IFRI. IFRI is, therefore,
the mean index of national disclosure and has a theoretical range of zero to 100, with 100
indicating complete disclosure of all possible items. Appendix 2 provides a list of the items
used by CIFAR in determining the IFRI scores.
The strengths of the CIFAR data are as follows:
1. It is based on actual annual reports rather than regulation or perception. For each
annual report the analysts based in one of CIFAR' s two centers for research identi-
fied the presence or absence of an item on the list of disclosures. Given that a 1/0
(present/absent) classification is used, there is very little scope for the data collector
to interpret or impose his or her view of accounting in the country that is analyzed.
2. The data were audited by external sources (Cooke & Wallace, 1989). Cooke and
Wallace's (1989: 48) summary evaluation was that "the compilers of the data
reported in the two volumes have taken great care to prevent many of the inadequa-
cies and pitfalls which feature in the previous data bases (Nobes, 1981), and a care-
ful audit of the contents of this book did not reveal any significant biases and errors."
Subsequent editions also completed a peer review process prior to publication.
218
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
Table 1 . Definition of Variables
Variable Name
Description
Dependent Variables
IFRI 89
IFRI 91
IFRI 93
Control Variables
UNCERT
MARKET
Independent Variables
ADTON
EM
GCS
GNPC
HDI 86-88
HDI 88-90
HDI 90-92
DIRG91
DIRG 92
DIRG 93
PIG 92
PIG 93
Country averages of disclosure based on average disclosure across seven categories of
the companies surveyed in a country. Items surveyed and data sources are described in
Appendix 2. 89, 91, 93 indicate the year of the annual reports surveyed.
Uncertainty Avoidance is the degree to which the members of a society feel uncomfort-
able with uncertainty and ambiguity. It is measured on a scale from 0 to 100 (with one
exception, Portugal). Salter and Niswander (1995) find significant relationship
between this variable and all of Gray's (1988) accounting values.
Mean Market Capitalization in USS divided by Gross Domestic Product in US$, for
each of three periods immediately preceding the relevant IFRI index (1986-88,1986-90
and 1990-92).
An unadjusted measure of corporate financial disclosure regulation used in Adhikari
and Tondkar (1992)
Whether market is classified as emerging or developed by the Emerging Stock Markets
Factbook (International Financial Corporation, 1992, 1996) in the relevant year.
An measure of corporate financial disclosure regulation used in Cooke and Wallace
(1990) based on the work of Gray, Campbell and Shaw (1984)
Mean Gross National Product per capita in USS for each of three periods immediately
preceding the relevant IFRI index (1986-88, 1986-90 and 1990-92 as reported in the
World Development Report (World Bank, 1988-1995).
Human Development Index for the relevant year as reported by the United Nations
Development Program Human Development Report. Year represents actual year of
data rather than date of the report.
Foreign Direct Investment/Gross Domestic Product as reported in the World Develop-
ment Report. Year represents actual year of data rather than date of the report.
Portfolio Investment/Gross Domestic Product as reported in the World Development
Report. Year represents actual year of data rather than date of the report.
3. It clearly provides information on the number and nature of companies in each coun-
try (see Table 1).
4. The International Financial Reporting Index (IFRI) for Industrial Companies Index
is available at three different points in time (International Accounting and Auditing
Trends 1991,1993,1995. See CIFAR, 1991, 1993, 1995). This permits the testing of
the results of the model for inter-temporal stability by repeating the analysis at three
points in time.
Independent Variables
Economic emergence/development is a multi-faceted concept. Enthoven (writing in
Nobes & Parker, 1991: 255) describes the process of social/economic emergence thus:
Corporate Financial Disclosure 219
... economic development can be considered to be 1. a country's ability to increase its
per capita income or production — i.e., a transitional process between economic stagna-
tion and economic progress; and 2. the ability to execute a series of structural, social
and economic changes and improvements — a transformation process, e.g., more equi-
table income distribution, improved medical services and housing, enhanced education
and training, and greater employment.
Based on this statement it appears that emergence may be measured on three dimensions:
(1) economic wealth; (2) socio-economic progress; and (3) a composite indicator of both.
In the literature on CFDR each of these has been utilized. The indicator variable used in
Cooke and Wallace (1990) is the World Bank's classification of markets as developing or
developed. In this study, for the purposes of testing Hypothesis 1, whether a difference
exists between emerging and developed market CFD, this study uses a slightly different
classification, i.e., the International Financial Corporations classification of a market econ-
omy as emerging or developed in the Emerging Stock Markets Factbook (International
Financial Corporation, 1992, 1996). This variable (EM) is used as the classificatory vari-
able in the test of difference of means (r-test) for CFD between samples of emerging and
developed market economies. It is also used as an independent variable in the OLS Regres-
sion used to test Hypothesis 3.
In testing Hypothesis 2, a test of the relationship between CFDR and CFD, two measures
of CFDR are used: GCS and ADTON. The first measure, GCS, uses data from Cooke and
Wallace (1990, page 96, Table 3) which, in turn, was extracted from Gray Campbell and
Shaw (1984). The second measures, ADTON, uses Adhikari and Tondkar's (1992) index
of disclosure.
Hypotheses 3 through 5 test the efficacy of various measures of economic development
in explaining disclosure levels. The construct of economic wealth, which is utilized in two
of the recent studies (Cooke & Wallace, 1990; Adhikari & Tondkar, 1992) is operational-
ized as gross national product per capita (GNP). As there is likely to be some lag between
a country's changing economic fortunes and resultant accounting change, mean GNP for
the three years preceding any disclosure measurement is used with a one year lag to the date
of the data. This lag is not out of line with the time taken to revise standards in many coun-
tries. Thus, the IFRI index data for 1991 (based primarily on 1989 annual reports) are related
to the GNP per capita from 1 986 through 1 988 to test Hypothesis 4. Similar procedures were
used for tests using the 1993 and 1995 IFRI indices. All data for GNP were extracted from
the relevant World Development Report for ihQ^tdod 1988-1995 (World Bank, 1988-1995)
As pointed out above by Enthoven (in Nobes & Parker, 1991) and echoed by Cooke and
Wallace (1990), social/economic emergence is also a process of social as well as economic
change and may not be measured simply by economic wealth. A country may be appar-
ently wealthy but not yet considered to have emerged as a market or economy, e.g., the
high income, oil producing countries in the late 1970s. In order to deal with this problem,
the test of Hypothesis 5 uses a second metric measure of overall emergence, the Human
Development Index (HDI) (United Nations Development Program, 1988-1995). This
index was previously found to be related to the Adhikari and Tondkar (1992) index by
Riahi-Belkaoui (1995). The HDI is:
... an alternative measure of economic and social progress, because gross national
product (GNP) is a poor measure of relative living standards. The index is a cocktail of
220 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
life expectancy, adult literacy, average years of schooling and GDP per head (measured
at purchasing-power parity). The UNDP now calculates the index for 173 countries.
(The Economist, 1994: 110)
The Economist (1994: 1 10) goes on to point out:
For some countries the gap (between GDP and the HDI) is wide. For example, China
ranks only 143rd in terms of its GNP per head, but is in 94th position in terms of the
index. By contrast, Gabon's ranking in the UNDP's index (114th) is miles below its
42nd position on GNP. South Africa, Saudi Arabia and the United Arab Emirates also
rank much lower on the index. For rich countries the difference in ranking tends to be
smaller. In 1994 Canada was top of the league (it ranks only 11th on GNP per head) fol-
lowed by Switzerland (which ranks first on GNP). Japan, which topped the index in
1993, fell back to third place.
As with GNP, a one year lag and three year averaging procedure is used based on the year
the data were collected by the United Nations Development Program (UNDP).
Hypothesis 6 (the signaling effect of CFD) proposes that if high levels of CFD does
indeed indicate openness to foreign investment, actual levels of foreign investment after
some period should indicate the success of the CFDR or CFD. This proposition is tested by
correlating foreign direct and foreign portfolio investment as a percentage of GDP for the
years after 1990 to IFRI for each of the years 1989, 1991, and 1993. In the case of portfolio
investment these statistics are not available before 1992 and the analysis is limited to the
period 1992-1993. Both foreign direct and foreign portfolio investment as a percentage of
GDP are extracted from the World Development Report (World Bank, 1993-1995).
Control Variables
The regression contains two control variables. The first is uncertainty avoidance
(UNCERT): "the degree to which the members of a society feel uncomfortable with uncer-
tainty and ambiguity" (Hofstede, 1984: 84) and how they deal with it. The second is a
measure of stock market capitalization (MARKET) in US$ as a percentage of gross domes-
tic product for the relevant year. Gray's (1988) model and Salter and Niswander (1995)
find that both variables have strong global explanatory power for national levels of disclo-
sure. The latter has also been found by Adhikari and Tondkar (1992) to be related to CFDR
at a global level. Taking these articles together it can be argued that if the impact of market
emergence on CFD is to be tested, then the impact of universal dimensions that have been
shown to impact disclosure levels, must be controlled for.
UNCERT is measured as the values reported in Hofstede (1991: 1 13)^ on a scale from
approximately 100 (extreme fear of uncertainty) to zero (having no fear of uncertainty).
Actual minimum and maximum scores are 8 and 1 12.
MARKET is measured as the ratio of stock market capitalization to gross national prod-
uct using the mean ratio for each of the three year periods immediately preceding the year
for which the IFRI were calculated, 1986 to 1988, 1988 to 1990, and 1990 to 1992 respec-
tively. The data source was the Emerging Stock Markets Eactbook (International Financial
Corporation 1992, 1996) and the World Development Report (World Bank, 1988-1995).
Corporate Financial Disclosure
221
Table 2. Details by Country of the Sample
Number of
Number of
Number of
Firms in
Firms in
Firms in
/War/cef
Sample
Sample
Sample
Capitalization
GDP
Countries
1989
1991
1993
1993
1993
Emerging Markets
Brazil
15
14
25
99,430
444,205
Chile
6
4
7
44,622
43,681
Colombia
6
6
6
9,237
54,076
Greece
4
4
5
12,319
63,240
India
12
29
9
97,976
225,431
Korea S.
5
7
8
139,420
330,831
Malaysia
8
18
15
220,328
64,450
Mexico
4
7
7
200,671
343,472
Nigeria
7
10
10
1,029
31,344
Philippines
6
8
10
40,327
54,068
Portugal
8
5
10
12,417
85,665
South Africa
12
21
20
171,942
105,636
Thailand
7
7
5
130,510
124,862
Turkey
5
5
5
21,605
156,413
Developed Markets
Austria
15
9
14
28,437
182,067
Australia
23
25
27
203,694
289,390
Belgium
7
9
9
78,067
210,576
Canada
22
40
40
326,524
477,468
Denmark
6
14
15
41,785
117,587
Finland
7
16
15
23,562
74,124
France
65
64
49
456,111
1,251,689
Germany
38
52
56
463,476
1.910,760
Italy
9
13
17
136,153
991,386
Israel
5
6
5
50,773
69,739
Japan
74
96
101
2,999,756
4,214,204
Netherlands
22
22
20
181,876
309,227
Norway
5
12
15
27,380
103,419
Spain
10
15
15
119,264
478,582
Switzerland
7
14
15
271,713
232,161
Sweden
7
13
25
107,376
166,745
United Kingdom
44
83
81
1,151,646
819,038
New Zealand
6
5
10
25,297
43,699
U.S.A.
200
276
248
5,136,199
6,256,899
TOTAL
677
929
919
13.030,922
20.326.134
Sample
The initial sample consisted of all countries for whom data were reported in Edition 2 of
International Accounting and Auditing Trends (CIFAR,1991) provided that the countries
were also represented in subsequent editions. Deletions were made for Hong Kong and
Singapore which were upgraded during the period from emerging to developed markets.
Taiwan, which is considered part of China by the UNDP and World Bank, was also
excluded because no comparable GDP and HDI statistics could be found. The result was a
net sample of 33 countries including all but two of those used in Cooke and Wallace (1990)
222 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
and 28 of the 35 countries included in Adhikari and Tondkar (1992). This sample covers in
excess of 90 percent of total global stock market capitalization in US dollars for 1993 and
approximately 86 percent of global GDP for the same year. (See Table 2 for details on the
number of companies and the value of the stock markets and GDP of the countries.)
Analysis of the Data
To test Hypothesis 1, the data were analyzed using a parametric r-test with the a 1/0
variable as a classification tool and IFRI for each of the years 1989,1991 and 1993 as the
dependent variable. Hypotheses 2 was tested using Spearman non-parametric correlations.
Hypotheses 3 though 5 were tested for each of the IFRI data years (1989, 1991, 1993)
using an OLS Regression in the following form:
IFRIt = a + piEMERGENCEp +P2UNCERT + P3MARKETP + e.
IFRIj represented the mean national disclosure scores for industrial companies for the years
1989,1991 and 1993. EMERGENCEp is first represented by EM (a 1/0 variable based on
IFC classification as a developed or emerging market) and subsequently by gross national
product per capita (GNPC) or the Human Development Index (HDI) for the three year
period ending in the year prior to t. MARKET and UNCERT are as defined previously.
RESULTS
Table 3 shows initial ?-tests for differences in each of the years' mean disclosure levels
(IFRI) between developed and emerging market blocks are statistically significant. The
mean CFD for companies in developed markets is higher than for those in emerging mar-
kets for each of the three years. Throughout the period the mean disclosure level for emerg-
ing market economies rises (on a scale of 1 to 100) from 60.5 to 66.42, and that of
developed market economies from 69.05 to 74.16. While CFD in emerging markets has
Table 3. f-test for Equality of Means on Disclosure for Industrial Firms
Number of Two Tail
Countries Mean t Value Significance
1989 Industrial Index
Emerging Markets 14 60.5000 -2.699 .011
Developed Markets
1991 Industrial Index
Emerging Markets 14 63.5000 -2.581 0.015
Developed Markets
1993 Industrial Index
Emerging Markets 14 66.4286 -2.976 .006
Developed Markets
Notes: In all years, Levine's Test for equality of variance cannot be rejected. Therefore, /-tests assume equal variance
14
60.5000
19
69.0526
14
63.5000
19
69.5623
14
66.4286
19
74.1579
Corporate Financial Disclosure 223
Table 4. Correlation between CFD and CFDR Spearman Correlation Coefficients
Subsamples
A. Adhikari and Tondkar (1992)
IFR189 .5518
Sig. .002
IFRI91
.5742
Sig. .001
.9158
Sig. .000
IFRI93
.5281
.8899
.9226
Sig. .004
Sig. .000
Sig. .000
ADTON 92
IFRI 89
IFRI 91
B. Cooke and Wallace (1990)
GCS
.5452
Sig. .016
IFRI89
.6267
Sig. .004
.2601
Sig. .282
IFRI91
.6230
.1928
.9293
Sig. .004
Sig. .429
Sig. .000
IFRI 93
.5948
.2207
.8453
.9225
Sig. .007
Sig. .364
Sig. .000
Sig. .000
ADTON
GCS
IFRI 89
IFRI 91
Notes: 1 . Variables are defined in Table 1 .
2. Samples reflect numbers available in Adhikari and Tondkar (1992) and Cooke and Wallace (1990): N = 2& and
A' = 1 9. respectively.
3. Table 3 should be read as coefficient/2-tailed significance.
risen slightly faster than in developed markets over the period 1989-1993, it is insufficient
to close the gap and a statistically significant difference remained as of the end of 1993.
Table 4 displays the relationship between CFD and CFDR. The Adhikari and Tondkar
(1992) measure of CFDR, ADTON,^ is positively and significantly related to CFD at the a
< .05 level. GCS, the Cooke and Wallace (1990) measure of CFDR is positively but not
significantly related to CFD. The correlations also indicate that GCS and ADTON are
related. It appears that CFD and CFDR are related. However, over a period of time [the
Cooke & Wallace (1990) measure precedes IFRI by seven years] this relationship decays.
Hypotheses 3 through 5 test whether CFD is related to various measures of social/eco-
nomic emergence even after controlling for the global influences of culture and markets. In
all years and for all combinations of variables the regression equations are significant at a
< .05. In addition, despite using a somewhat different sample from Salter and Niswander
(1995) and Adhikari and Tondkar (1992), all of the tests of hypotheses find the control
variables to be significant and in the direction predicted by these studies, providing contin-
ued support for the global importance of culture and markets to the determination of
disclosure at a global level.
In Hypothesis 3 the relationship between disclosure and market status was tested. As can
be seen from Table 5 (Panel A) the EM variable (classification as a developed [1] or
emerging market [0]) is significant at a < .05 for 1989,1991 and 1993.
224
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1998
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Corporate Financial Disclosure 225
Table 6. Spearman Correlation between CFD, CFDR and Investment
Spearman Correlation Coefficients
DIR91
.4248
Sig. .065
DIR92
.3296
Sig. .125
.9295
Sig. .000
DIR93
.1969
Sig. .250
.8150
Sig. .000
.9295
Sig.
PIG 92
.0156
-.3359
-.2581
-.0079
Sig. .479
Sig. .120
Sig. .187
Sig. .344
PIG 93
.1497
-.2470
-.0267
.1402
.7753
Sig. .305
Sig. .197
Sig. .464
Sig. .316
Sig. .001
IFRI89
.1776
.0773
.0729
.1834
.4263
.3996
Sig. .272
Sig. .396
Sig. .402
Sig. .265
Sig. .064
Sig. .078
IFRI91
.1048
.1287
.1021
.1598
.4731
.2444
Sig. .361
Sig. .330
Sig. .364
Sig. .293
Sig. .044
Sig. 200
IFRI 93
.2320
.0044
-.0133
.1282
.3583
.2913
Sig. .212
Sig..49 4
Sig. .482
Sig. .331
Sig. .104
Sig. 156
ADTON 92
DIR91
DIR92
DIR 93
PIG 92
PIG 93
Note: 1 . All vanables are defined in Table 1 .
2. DIR and PIG indicate direct and portfolio investment as a percent of GDP for the relevant year.
3. N = 14 for all correlations. A' is limited to emerging market countries for which data are available.
Hypotheses 4 posits a relationship between gross national product per capita and level of
disclosure. As Cooke and Wallace (1990) note for CFDR, wealthier countries can afford
the infrastructure and effort of higher disclosure, less wealthy countries cannot. This direc-
tion is true for CFD in all of the time periods of this study. In Table 5 (Panel B) it can be
observed that IFRI for 1989 and 1993 has a positive and significant relationship with gross
national product per capita (GNPC) at a < .05. For 1991 the relationship is positive but sig-
nificant only at a < .0665.
Hypothesis 5 tests the relationship between CFD and the Human Development Index
(HDI). Should this hypothesis be supported it would argue that disclosure relates not only
to affordability but also priorities as countries ration available wealth. In fact, as Table 5
(Panel C) illustrates, this relationship was only found to be significant and positive for
1993 at a < .05. In 1991 the relationship is positive but only significant at a < .09 and
although positive, it is not significant at all for 1989. It is interesting to note that social
wealth becomes increasingly important in the later years of the time period, implying that
countries whose disclosure indices are improving are those that are moving upwards in the
social development index (HDI).
Finally, Hypothesis 6 tested the relationship between CFD as a form of signaling and
actual foreign direct investment and foreign portfolio investment. This test is conducted as
Cooke and Wallace (1990) suggest solely for emerging economies. The results (Table 6)
indicate that while CFDR, measured using the Adhikari and Tondkar (1992) index, is pos-
itively related to direct and portfolio investment as a percentage of GDP, the relationship is
not significant at a < .05.
226 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
There is however a significant relationship between CFD, as measured by IFRI 1991,
and the 1992 portfolio investment at the a < .05 level. Similarly, IFRI for 1989 has rela-
tively weak relations, a < .10 for portfolio investment in 1992 and 1993. The research
indicates no relationship between CFDR and foreign direct investment.
Discussion of Results
The initial (^test) results indicate that average level of CFD in emerging markets contin-
ues to be significantly lower than those in developed markets. This does not preclude
exceptions to this result. Chile, for example, has higher disclosure than some developed
markets such as Austria. It does however provide evidence of an ongoing problem. The
findings are a vindication of Cooke and Wallace's (1990) hypothesis that development
impacts on disclosure regulation, and when conjoined with the effectiveness of such regu-
lation, to actual CFD. Given evidence in the extant financial literature (Alford, 1993) that
information asymmetry and global market integration are inversely related, the persistent
levels of difference found in this study between mean disclosure levels in emerging and
developed market economies indicates that emerging market economies may be in need of
assistance with the regulatory and enforcement process for financial reporting, if the global
capital market is to be integrated. This would seem to argue strongly for the lASC to work
on establishing a common disclosure GAAP rather than its current program in which
efforts have been concentrated on measurement rather than disclosure. One brief rider to
this is the need to make sure that rules are actually enforced as simple importation of rules
may not be enough (see Donleavy, 1993, for some evidence on this). Findings on the rela-
tionship of CFDR and CFD offers hope in this area.
In examining how such a strong CFD might develop, the results of the OLS regressions
provide some insight. Initially, these indicate that levels of national income (GNPC) may
impact on the ability of a country to afford the creation and enforcement of extensive dis-
closure regulations. Richer countries tend not only to have more extensive regulation, but
also to enforce those regulations that exist.
Perhaps more interesting is that (as shown in Table 5 Panel C) CFD in 1993 was also a
product of social allocation as indicated by the positive relationship of IFRI and HDI. Even
though some countries may not be as wealthy as others, the relative importance placed on
social development can influence the level of disclosure. Thus, the will to disclose may
grow out of improved social conditions, however with only one year's results this conclu-
sion should be taken with some caution.
Finally, in the OLS results it is interesting to note that the measures of social/ economic
emergence are important even after controlling for the global factors of culture and mar-
kets. As countries grow richer they disclose more. It is found that at a global level, a
country's cultural predilections may hold back its progress towards full disclosure. A
strong need for non-debt investor capital can, however, move even a relatively low disclo-
sure, highly uncertainty avoidant country towards greater disclosure. The beta coefficients
(which are not disclosed here for space reasons) show that a one percent increase in wealth
or market capitalization has roughly equivalent positive impacts on disclosure patterns,
while a one percent increase in uncertainty avoidance can lead to CFD being approxi-
mately half a point lower. This would mean countries with a high uncertainty avoidant
Corporate Financial Disclosure 227
cultural disposition will have to work harder at increasing disclosure than those with a less
resistant cultural disposition.
The results of these disclosure studies are limited in value if we cannot formally make
the link to investment. Portfolio investment in 1992 is linked to CFD for 1989 and 1991,
indicating that prior CFD is related to levels of portfolio investment. Portfolio investment
in 1993 is significantly related only to CFD in 1989. In either case, it appears that for
emerging markets CFD precedes investment with a clear lag. Not surprisingly, foreign
direct investment does not exhibit a similar link. Investors who make portfolio investments
depend on public financial reporting data. Foreign direct investment is more likely to be
green field (i.e., new physical facilities) and hence little concerned with historical account-
ing information. Even acquisitions are unlikely to be as dependent on public data as
managers often seek to fulfill strategic rather than portfolio needs.
In conclusion, though not as strongly as one would like, there appears to be a causal link
between CFDR, CFD and investment. CFDR can enhance CFD, and CFD in turn appears
to be linked to portfolio investment. Those who desire to develop the investment potential
of emerging markets first need to improve levels of effective CFDR and the resultant cor-
porate financial disclosure.
CONCLUSION AND LIMITATIONS
This paper tested the relationship between national levels of disclosure and social/eco-
nomic emergence of nations within the context of the Cooke and Wallace (1990) model. It
finds that, as posited in the model, firms in developed market countries have a significantly
higher mean level of effective disclosure than those in emerging market economies. This
lack of disclosure is modified by the importance of markets and a relatively low level of the
uncertainty avoidance culture variable and is directly related to the ability to draw foreign
portfolio investment. While not tested, this may be extrapolated to imply that those coun-
tries that see rapid growth in their stock markets are likely to see the greatest growth in dis-
closure over time. This growth may be modified in high uncertainty avoidant countries by
a national reticence about disclosure.
This study is limited by the sample used. The IFRI data are limited by the number of
available annual reports in the CIFAR database. The basic CIFAR database represents the
world's 1000 largest companies and is likely to provide information on those companies
available for investment to the institutional community. The sub-sample used in this study
takes particular care to ensure that disclosure practices are representative by selecting (with
one exception) only those countries where at least five companies are used to distill the
country averages.
The study can be improved if a larger number of firms can be studied in the emerging
market countries or the relationship between disclosure and investment confirmed over a
longer period of time. However, these data are simply not available at this time.
The IFRI disclosure index is calculated based on the presence or absence of certain dis-
closure items. Because measures of the depth and breadth of disclosure on each item were
not available the data are less than perfect. Future studies may wish to use more detailed
breakdowns when they become available, to fomi a company by country disclosure matrix.
The literature review that preceded this study did not reveal any literature that effectively
228 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33. No. 2, 1 998
utilized depth and breadth items to determine disclosure effectiveness or its statistical rela-
tion to market reaction. The existence of such literature would be a pre-condition to any
study attempting to use depth of disclosure as a dependent variable.
This study provides evidence that levels of CFD in emerging market economies appear
to suffer from a structural deficit, i.e., even though there is growth in the level of disclosure
from year to year, there still remains a significant difference in the level of CFD between
emerging and developed market economies. It further posits that change is likely to be
most difficult in countries where there is a culture of avoiding uncertainty and where the
stock market is weak. Given that culture is relatively slow to change, the strongest influ-
ence for increases in CFD will be the demand for information that would arise from a
growing stock market.
Finally the study finds that regulation alone is not enough. Evidence is presented that the
Cooke and Wallace (1990) model of CFDR and CFD is correct and that for regulation to
work there must be a strong desire and capacity for enforcing CFDR. In the absence of this,
the CFDR of countries will draw ever closer together while their CFD will continue to
move far apart.
Acknowledgments: The author would like to acknowledge the assistance of Professors Clare Rob-
erts, David Sharp, and R.S.O. Wallace, and the anonymous reviewers, all of whose comments added
greatly to the development of this manuscript.
Corporate Financial Disclosure
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Corporate Financial Disclosure
231
Appendix 2. List of CIFAR Variables by Group (2nd edition)
Group A
General Business Information
1. Address/Telephone/Fax/Telex (at least one is
given)
2. Product Segment
3. Geographic Segment
4. Management Information
5. subsidiaries Information
6. Future Plans/Chairman or CEO's Statement (at
least exists)
7. Breakdown of employees
8. Fiscal Year- End
Group B
Income Statement
9. Consolidated Income Statement
10. Cost of Goods Sold Clearly Segregated
11. Complete Income Statement
12. Sales Reported
13. Sales, general and Administrative Expenses
Reported
14. Operating Income Reported
15. Foreign Exchange Gains/Losses Reported
16. Extraordinary Gains/Losses Reported
17. Income Tax expense reported
18. Minority Interest Reported
19. Net Income Reported
Group C
Balance Sheet
20. Balance Sheet Fully Disclosed
2 1 . Current Assets Separated from Fixed Assets
22. Current Liability Separated from Fixed Assets
22. Current Liability Separated from Long-Term Lia-
bility
23. Owners' Equity Separated from Liability
24. Separated of Non-Equity Reserves and retained
earnings
25. Cash and Equivalents Reported
26. Accounts Receivable Reported
27. Inventories Reported
28. Current Assets Reported
29. Fixed Assets on Asset Side
30. Goodwill and Other Intangibles
31 . Total Assets Can Be Derived
32. Shareholders' Equity Changes
33. Appropriation of Retained Earnings
Group D
Funds Flow Statement
34. Funds Flow Statement Disclosed
35. Extensive Funds flow Statement
36. Funds from Operations Separated
37. Funds Definition Exists
38. Cash Flow Statement
Group E
Accounting Policies
39. Accounting Standard
40. Financial Statements Cost Basis
41. 50% Long-Term Investment
42. Starting Point for Funds Statement
43. R&D Costs
44. Pension Costs
45. Reasons for Extraordinary Items
46. Inventory Costing Method
47. 20% Long-Term Investment
48. 21-50% Long-Term Investment
49. Acquisition Method
50. Accounting for Goodwill
5 1 . Deferred Taxes
52. Outside Manager of Pension Funds
53. Long-Term Financial Leases
54. Foreign curtency Method
55. Foreign Currency Translation Gain/Losses
56. Discretionary Reserves
57. Minority Interest Effect Separated
58. Contingent Liabilities
Group F
Stockholders' Information
59. Disclosure of Dividends Per Share
60. Disclosure of Earnings Per Share
6 1 . Number of Shares Outstanding
62. Information if Multiple Share exist
63. Par Value
64. Total Dividends
65. Stock Split/Dividend/Rights (if applicable)
66. Stock Price
67. Stock Exchange Listing
68. Volume Traded
X69. Basic Shareholding data
70. Diluted Earnings Per share
71. Quarterly/Interim Dividends Reported
X72. Common share Outstanding Disclosed
73. Changes in Capital
74. Different Dividends for Multiple Classes of Share
75. Earnings Per Share for Multiple Classes of Share
X76. Majority Shareholders Disclosed
77. Significant Shareholders
78. Composition of Shareholdings
Group G
Special Items
79. Earnings Per Share Numerator
80. Earnings Per Share Denominator
232 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1998
81 . Notes to Accounts In 4th Edition but
82. Disclosure of Subsequent Events Not Found in 2nd Edition
83. Remuneration of Directors and Officers
84. R&D Costs Group G
85. Capital Expenditures SUPPLEMENTARY INFORMATION
86. Financial Ratios Computed 85. Financial Summary
87. List of Board Members and their Affiliations
88. Exports Reported ^°'^- ** "X" Denotes Not Found in 4th Ed.
X89. Graphs/Charts/Diagrams
X90. Factory /Staff/Product Photographs
NOTES
1 . Cooke and Wallace (1990) test two models using two regression methods, ordinary least squares
and modified generalized least squares. GNP is significant in one of the MGLS forms.
2. Emenyonu and Gray (1992) discuss this issue relative to harmonization in the European Com-
munity.
3. Evindex is an overall indication of the profit opportunity in a country, based on its political envi-
ronment, probability of being able to remit dividends and return capital to the foreign investor,
and the extent to which nationals are given preference over foreign companies. Further details
are contained in Cooke and Wallace (1990), page 89.
4. The 1991 version uses 90 questions.
5. Hofstede (1991) contains data from 53 countries and regions. It includes data from Hofstede's
(1980) original study of 39 countries and subsequent data collected between 1980 and 1990.
6. As the sample was relatively small, non-parametric tests were also carried out. The results using
a Wilcoxon Rank Sum Test were identical to those of the parametric /-tests.
7. Throughout this paper, the expressions "significant" or "significantly" indicate differences sig-
nificant at a < .05 unless otherwise indicated .
8. The samples used to test these relationships reflect the countries available in Cooke and Wallace
(1990) and Adhikari and Tondkar (1992).
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The International
Journal of
Accounting
Ownership Effects on Audit-Detected Error
Characteristics: An Empirical Study
in an Emerging Economy
K. Hung Chan and Phyllis L. L. Mo
The University of California-Riverside, The Chinese University of Hong Kong
and The Hong Kong Polytechnic University
Key Words: Audit planning; emerging economy; error characteristics; ownership effects.
Abstract: The presence of foreign subsidiaries and local companies, each playing a significant
role in the local economy is a typical phenomenon in the business environment of emerging econ-
omies. The objective of this study is to extend the research concerning the relationship between
environmental factors and error occurrence by examining the impact of organizational ownership
(foreign subsidiaries in Hong Kong vs. local Chinese companies) on error characteristics. The
second objective of this study is to examine the empirical characteristics of errors in an emerging
economy. Hong Kong, with references to relevant U.S. studies. Hong Kong is part of the Chinese
Economic Area, a Big Emerging Market identified by the U.S. Department of Commerce. In the
past two decades, while there have been numerous empirical studies on error characteristics for
U.S. audit data, there is a scarcity of such studies using non-U. S. data. Due to differences in orga-
nizational culture, nature of business transactions as well as accounting practices, the error
characteristics detected in audit populations in emerging economies may be significantly different
from those discovered in the U.S. Results of this study should facilitate audit efficiency and effec-
tiveness through improved audit risk assessment for each ownership type company and should
also alert management of multinational corporations to incorporate the potential differences in
error patterns in designing and implementing effective accounting controls for companies outside
the U.S.
The Usefulness of Empirical Evidence on Error Characteristics
Recent studies have suggested that knowledge of financial statement errors is an impor-
tant component of audit expertise (Kinney, 1975; Libby, 1985; Libby & Frederick, 1990).
For example, auditors are shown to rely on their knowledge of population error frequency
Direct all correspondence to: Professor Phyllis L. L. Mo, Department of Accountancy, The Hong Kong Polytech-
nic University. Hung Hom, Kowloon, Hong Kong, P.R.C.; Tel: (852) 2766-7034; Fax: (852) 2330-9845; E-Mail:
acphmo@polyu.edu. hk.
The International Journal of Accounting, Vol. 33, No. 2, pp. 235-261 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1998 University of Illinois
236 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33. No. 2. 1 998
in analytical review (Tuttle, 1996). With the knowledge of error characteristics, auditors
would have more accurate anticipation of errors. As a result, the efficiency and effective-
ness of audit would be enhanced by placing greater focus on areas that are most likely to
have errors (Bedard & Biggs, 1991). However, individual auditors in general experience
relatively few audits, about 10 to 15 per year (Abdolmohammadi, 1987) and detected
errors in financial statements are rare events (Wright & Ashton, 1989). Even the most
experienced auditors have limited direct experience with financial statement errors (Ash-
ton, 1991). Therefore, empirical evidence provided by aggregating and examining the data
in audit workpapers helps overcome auditors' limited knowledge of errors through direct
experience.
In the past two decades, numerous empirical studies have focused on the nature and fre-
quency of errors detected in U.S. audit populations (e.g., Ramage et al., 1979; Johnson et
al., 1981; Hylas & Ashton, 1982; Ham et al., 1985; Kreutzfeldt & Wallace, 1986; Bell &
Knechel, 1994). With the increase in the availability of empirical evidence on error char-
acteristics, auditors have been able to develop appropriate audit methodologies, sampling
plans and associated estimators to infer total population errors (Neter & Loebbecke, 1975;
Dworin & Grimlund, 1984; Chan, 1996). Information on the relative frequency of errors
and the distribution of these errors are also useful for auditors to assess audit risk and to
quantify prior judgments on the size of error in substantive testing (Steele, 1992, p. 102).
Environmental Factors Affecting Error Characteristics
More recent research has attempted to examine the relationship between error character-
istics and environmental factors like internal control and audit firm type (Kreutzfeldt &
Wallace, 1990; Icerman & Hillison, 1990, 1991; Wright & Wright, 1996; Petroni & Beas-
ley, 1996). Information concerning the impact of internal control on error occurrence can
enhance audit planning in different control strength settings. Our study examines the
impact of different types of ownership on error characteristics. This information should be
useful for auditors in audit planning for clients of different ownership and for corporate
management in designing effective accounting controls.
Lack of Non-U. S. Studies on Error Characteristics
Although previous research in the U.S. has accumulated an extensive knowledge base of
financial statement errors, little empirical evidence exists about the characteristics of errors
detected in accounting populations outside the U.S. In particular, there is a scarcity of such
studies in emerging economies. Johnson (1987) investigated the relationship between cli-
ent characteristics and error type and size using U.K. data. Entwistle and Lindsay (1994)
examined the existence, cause and discovery of income-affecting errors based on Canadian
data. However, in these studies, no effort was made to compare the results with data from
other countries. Houghton and Fogarty (1991) analyzed audit adjustments from U.S., U.K.
and South African audit engagements to determine the environmental characteristics and
conditions associated with the occurrence of errors. Their study focused primarily on the
inherent risk characteristics of errors and had devoted little attention to investigating coun-
try differences.
Ownership Effects on Audit-Detected Error 237
The Growth of Emerging Economies and the Global Audit Market
Two megatrends in the decade ahead are the globalization of business and the growth of
the emerging markets (Naisbitt & Aburdene, 1990). The Big Emerging Markets (BEMs) in
Asia, which include the Chinese Economic Area (China, Hong Kong and Taiwan), attract
enormous foreign direct investments from the world's most competitive multinational cor-
porations (U.S. Department of Commerce, 1995). Of the world's ten largest recipients of
foreign direct investment in the period from 1988 to 1992, seven were from the BEMs. Dur-
ing the period 1989 to 1993, U.S. direct investment in the BEMs increased by 125 percent
as compared to the 23 percent increase for the G-7 countries (Garten, 1996). This rapid
growth of multinational business activities has also accelerated the development of the glo-
bal audit market. In order to serve these multinational clients, large international accounting
firms, in particular the U.S. -based Big Six have increased their operations in these emerging
markets directly or through affiliates. The effects of globalization on audit business are
many. For example, differences may exist cross-culturally on the notions of what constitute
appropriate internal controls and reliability of accounting data. Also, differences in the
assessment of risk level and materiality may create barriers for implementing unifomi audit
approaches for international accounting firms. The current concern regarding the issues on
audit risk, materiality and audit strategies is also reflected by the very high ranking of
importance among auditing topics by accounting academicians (Bryan & Smith, 1997).
The presence of foreign subsidiaries and local companies, each playing a significant role
in the local economy, is one of the common characteristics of business environment in
emerging economies. Given the potential differences in organizational culture between
foreign subsidiaries and local companies (Chow & Hwang, 1995), the error characteristics
may be different for different ownership companies. The objective of this study is to exam-
ine the impact of different types of ownership (foreign subsidiaries vs. local companies) on
audit-detected error characteristics. This information should be useful for auditors in for-
mulating audit strategies for clients of different ownership. With the globalization of
business, information about the differences in error attributes should also be useful for
management of multinational corporations to design and implement effective administra-
tive and accounting controls for subsidiaries outside the U.S.
Due to differences in business practices, nature of business transactions and accounting
practices, the error characteristics detected in accounting populations in emerging econo-
mies may also be significantly different from those discovered in the U.S. Thus, the second
objective of this study is to add to the profession's knowledge by providing empirical evi-
dence on error characteristics in an emerging economy — Hong Kong. References will be
made to the comparable results of relevant U.S. studies. Knowledge of error characteristics
in different environments has the potential to enhance audit effectiveness and efficiency
through improved audit risk assessments and the design of appropriate audit procedures
tailored for the audit environment.
The remainder of this paper is organized as follows. Background literature and research
hypothesis are discussed in the next section. Common error characteristics in the U.S. are
then reviewed, followed by a description of the research method. The paper proceeds to
analyze the empirical characteristics of errors detected in Hong Kong and compare them
with relevant U.S. studies. Finally, the paper concludes with a summary of results and
discussions.
238 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33. No. 2, 1 998
BACKGROUND LITERATURE AND RESEARCH HYPOTHESIS
The Study of Error Characteristics in Hong Kong
Hong Kong was chosen for this study because of its unique characteristics as an emerg-
ing economy with a rapid growing audit market for international accounting firms (Lee,
1994), and because of its long tradition as a meeting point between East and West. Hong
Kong has emerged as an international finance and trade center over the past several
decades and is part of a Big Emerging Market identified by the U.S. Department of Com-
merce (1995). It is ranked the world's 8th largest trading entity in terms of total trade
values in 1995 (Economic Information and Agency, 1996). The number of companies
listed in the Hong Kong Stock Exchange has grown by over 60% in the past decade (The
Stock Exchange of Hong Kong, 1986, 1996). Total market capitalization has increased
more than tenfold from US$35,769 million to US$445,636 million during the same period.
Furthermore, since the adoption of open door policy by the People's Republic of China
(P.R.C.) in 1978, many multinational companies have established subsidiary companies in
Hong Kong as a stepping stone for entering the China market. Among the Big Emerging
Markets, the Chinese Economic Area (China, Hong Kong and Taiwan) represents by far
the largest and one of the most important emerging markets both now and in the foresee-
able future. According to a 1993 World Bank estimate, the combined gross domestic
product of this area in the year 2002 will total approximately US$10 trillion. This figure
would represent the largest single regional proportion, surpassing the U.S.' projected GDP
of US$9.7 trillion (Garten, 1996). In view of these significant developments. Big Six have
rapidly expanded their operations in both Hong Kong and China to meet the surged
demand. Five of the Big Six have more than 1,000 professional staff members in Hong
Kong with the smallest one having about 700 (SCMP, 1997).
Impact of Ownership Structure on Error Characteristics
Accounting and management control systems are seen to be manifestations of culture
and reflect basic cultural assumptions (Hofstede, 1991, p. 155). People of different national
cultures have different preferences for, and reactions to, management practices. Accord-
ingly, management philosophy, organizational culture and internal control systems are
different for different cultural companies (Bimberg & Snodgrass, 1988). Chinese organi-
zations are characterised by direct supervision and emphasize co-ordination through direct
personal intervention of the owner and his/her relatives (Hofstede. 1991, p. 153). The con-
trol environment and internal control system of Chinese companies are different from that
of more formalized U.S. companies.
Hong Kong has the unique characteristics of having a mixture of Western and Chinese
business cultures. The types of companies present in Hong Kong include subsidiaries of
multinational companies and local Chinese companies. To facilitate better co-ordination,
comparability and control, multinational corporations tend to develop and maintain home-
country organizational cultures in overseas operations. This kind of coercive institutional
isomorphism as suggested by DiMaggio and Powell (1983) results in the phenomenon that
subsidiary companies often adopt parent company accounting practices, internal control
Ownership Effects on Audit-Detected Error 239
system, performance and evaluation policies. Prior studies provide evidence that foreign
subsidiaries often transplant home-country organizational cultures that differ from those of
the local populace (Soeters & Schreuder, 1988; Chow & Hwang, 1995; Firth, 1996).
Hence, the organizational culture of foreign subsidiaries in Hong Kong are likely to be dif-
ferent from those of local Chinese companies.
Since the strength of internal controls and management philosophy correlate signifi-
cantly with the likelihood and nature of financial statement errors (e.g., Icerman &
Hillison, 1990; Wallace & Kreutzfeldt, 1995; Wright & Wright, 1996). it is expected that
the nature and frequency of errors detected would be different for different ownership com-
panies. For example, with more formalized internal control systems, foreign subsidiaries in
Hong Kong are expected to have less mechanical errors and lower error rates than local
Chinese companies. To test the difference in error characteristics between different owner-
ship structure, the following general hypothesis (in null form) is generated:
Ownership Effect
Hq: There are no significant differences in the direction, magnitude, variability,
types, frequency and tainting distribution of errors detected between foreign
subsidiaries and local Chinese companies in Hong Kong.
Comparison with U.S. Studies
Chinese society is characterised by having large power distance, strong uncertainty
avoidance, less masculinity, long-term and collectivism orientated (Chow et al., 1995). The
societal values of strong avoidance and large power distance prescribe that people would
tend to adhere to rules and regulations. In an organizational context, staff would follow the
prescribed operational procedures as closely as possible. According to Gray (1988),
accounting values most relevant to the enforcement of accounting systems are profession-
alism and uniformity. Hong Kong is classified as having lower professionalism and greater
preference for uniformity than Anglo-American countries. These differences in societal
and accounting values in Hong Kong may affect the occurrence of financial statement
errors. For example, given the fact that foreign subsidiaries often adopt parent company
accounting practices, internal control system and transplant home-country organizational
culture as discussed above, the stricter compliance with rules and regulations by the Chi-
nese accounting personnel in foreign subsidiaries in Hong Kong may lead to less routine
errors compared to companies operating in Anglo-American countries.
Results of the Hong Kong sample, particularly foreign subsidiaries are analyzed with
reference to Ham et al. (1985) and other U.S. studies to examine the country differences
and to determine the universality of some error characteristics found in prior literature.
Results in Ham et al. ( 1985) were chosen as the main reference for U.S. studies because of
the similarities of the data sets. The nature of the companies selected in this study resem-
bles closely that of Ham et al. (1985) in terms of firm size, as well as to the fact that both
samples consist of private companies. However, because of the difference in time periods
of the samples studied (Hong Kong: 1990-1992. Ham et al.: five annual audits prior to
1985) and other extraneous factors, no formal hypothesis is set to test the level of signifi-
240 THE INTERNATIONAL JOURNAL OF ACCOUNTING VoL 33, No. 2, 1 998
cance of the difference in the error characteristics between foreign subsidiaries in Hong
Kong and Ham et al. (1985). It should be mentioned that as prior error studies at different
time periods (1975-1996) show consistency in major error characteristics, including error
directions, error magnitude and frequency (see next section), the different time periods of
the samples studied may not be a hindrance for general comparison.
ERROR CHARACTERISTICS IN PRIOR STUDIES
Previous research on error characteristics includes empirical studies on different attributes
of error detected, such as the causes, frequency and distribution of errors, and the environ-
mental effects on error characteristics. The great majority of prior studies provide evidence
on error characteristics of U.S. accounting populations (e.g., Ramage et al., 1979; Johnson
et al., 1981; Hylas & Ashton, 1982; Kreutzfeldt & Wallace, 1986; Icerman & Hilhson,
1990, 1991) with a few exceptions for Canada, U.K. and South Africa (e.g., Johnson, 1987;
Entwistle & Lindsay, 1994; Houghton & Fogarty, 1991). Results of these studies suggest
that accounting populations do possess a number of common characteristics. Some of the
more salient features for auditing are as follows:
1. Populations may have overstatement errors only, understatement errors only, or
both. Most errors in accounts receivable audit are overstatements, while in inventory
audits, errors tend to be more evenly distributed between overstatements and under-
statements (Johnson et al., 1981; Ham et al., 1985; Willingham &. Wright, 1985).
Detected accounts payable and purchase errors tend to be understatements while
sales errors tend to be overstatements (Ham et al., 1985; Kreutzfeldt & Wallace,
1986). With the exception of inventory, the results confirm the common assumption
made by auditors that assets and revenue errors are likely to be overstatements while
liabilities and expense errors are likely to be understatements.
2. Cutoff and mechanical errors represent the most likely source of material financial
statement error for inventory, accounts receivable and accounts payable (Hylas &
Ashton, 1982; Ham et al., 1985; Bell & Knechel, 1994; Entwistle & Lindsay, 1994).
3. The error incidence (the proportion of accounts that are in error) varies significantly
among accounting populations and the error rates in inventory audits tend to be sub-
stantially higher than those for accounts receivable (Johnson et al., 1981; Ramage et
al., 1979).
4. The distributions of taintings (the proportion of a dollar unit that is in error) are non-
normal and characterised by pronounced discontinuities at +100%, particularly so
for accounts receivable for which 100% overstatement errors are frequently present
(Johnson et al., 1981; Neter & Loebbecke, 1975). One of the explanations suggested
for this phenomenon is that a 100% overstatement tainting may reflect a single trans-
action, while smaller taintings may reflect accounts with numerous transactions. An
entire account receivable may not be confirmed due to dispute over one invoice or a
confirmation cut-off problem.
Despite the above common features, certain inconsistencies were found among prior
studies. For example, a number of studies found that errors in accounts receivable favour
Ownership Effects on Audit-Detected Error 241
overstatements (Ramage et al., 1979; Johnson et al., 1981; Kreutzfeldt & Wallace, 1986;
Icerman & Hillison, 1990, 1991), but Johnson (1987) found only a slight bias toward
overstatements.
In addition, the occurrence of errors in financial statements is found to be affected by a
number of environmental factors like inherent and internal control risks. For example,
Kreutzfeldt and Wallace (1986), Wright and Wright (1996) found that as assessed internal
control weakens, the frequency of errors increases and the adjustments are more likely to
have an effect on income. Icerman and Hillison (1990) also provided evidence that the
strength of internal control correlates negatively with error rates.
In summary, previous research has accumulated an extensive knowledge base of finan-
cial statement errors predominantly from North American data. However, there are very
limited findings regarding the nature, frequency and distribution of errors across different
cultural settings. In particular, there has been no studies on error characteristics in the Chi-
nese business culture.
RESEARCH METHODOLOGY
Data Collection
Data in this study were obtained from an international accounting firm in Hong Kong.
All major prior empirical studies on error characteristics adopt this single-firm approach of
data collection (Ramage et al., 1979; Ham et al.. 1985; Kreutzfeldt & Wallace. 1986, 1990;
Wright & Ashton, 1989; Wallace & Kreutzfeldt, 1995; Wright & Wright. 1996, 1997).
Testing the differences in error characteristics detected for samples from the same account-
ing firm is a rather conservative approach as the error differences may be understated due
to the clientele effect. It is possible that companies choosing the same accounting firm may
tend to have similar error characteristics. Though this single-firm approach may have lim-
ited the examination of the differences in the effects of ownership that would have been
possible had the audit files been selected from more than one international accounting firm,
this is a good procedure to facilitate the comparability of data and to control for the con-
founding effects of the differences in the audit client portfolios and audit procedures across
different accounting firms.
One of the distinguishing features of this study is the control over the data collection pro-
cess yielding more reliable results. As the data were extracted directly by the researchers
from the audit working papers, this data collection procedure helps reduce the potential
variation in the definition of errors among auditors. For example, one auditor may consider
additional provision for bad debts as an error whereas another may not. Since this study
focused on balances before any adjustments for such provisions, it consistently excluded
all these "errors" from the data analysis and eliminated this potential source of variation.
More important is that this direct assessment of data allowed the researchers to identify the
causes of the errors and also to understand how auditors dispose the errors found. Without
detailed review of the working papers, it is hard to identify the unreconciled differences of
customer accounts not investigated by auditors due to their perceived immateriality, as will
be explained later. Most of the previous studies collected data by sending questionnaires to
accounting firms (e.g., Johnson et al., 1981; Kreutzfeldt & Wallace, 1986, 1990; Entwistle
242 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1998
Table 1 . Number of Audits Used in This Study Categorized by Ownership Type and Firm Size
Average Net Sales (Million U.S. Dollars)
Small
Medium
% Distribution by
Ownership Type
(<$10)
(>$10)
Total
Ownership Type
Foreign subsidiaries
62
37
99
61%
Local Chinese companies
38
24
62
39%
Total
100
61
161
100%
% distribution by size
62%
38%
100%
(Net Sales)
% distribution by ownership type
for each size
(Foreign Subsidiaries v.
62% \
61% V.
Local Chinese Firms)
38%
39%
& Lindsay, 1994). Only Ham et al. (1985) had more control over the data collection as they
were physically present to supervise and answer the questions of the audit staff who col-
lected the data for them.
Our data include audit files of three annual audits (1990-1992) for 60 companies. The
sample reflects a wide range of firms in terms of size and industry. Using average net sales
over the three years (1990-1992), company size ranges from US$1.2 million to US$450
million. All companies in the sample are in non-regulated industries which include a cross-
section of manufacturing and service-oriented firms. Regarding the ownership. 37 compa-
nies are foreign subsidiaries (of which 29 are subsidiaries of U.S. companies) and the other
23 are local Chinese companies. The foreign subsidiaries are similar to the local Chinese
companies in terms of size (net sales), and both include a cross-section of service and man-
ufacturing firms. Some of the companies had less than three years' audit files available for
the authors' examination because of a change in auditors. Therefore, the number of annual
audit files used in this study fell from 180 to 161. The data of Ham et al. (1985) were from
the audit files of five annual audits for each of 20 companies selected by Price Waterhouse
(Table 1).
Observations were collected from three accounting categories, namely, accounts receiv-
able, accounts payable and inventory. The balances of these three ledger accounts usually
have a significant impact on the financial statement and are more vulnerable to have errors
(Hylas & Ashton, 1982; Wright & Ashton, 1989; Entwistle & Lindsay, 1994). Like the
study by Ham et al. (1985), all tests reported in these audits had been performed on samples
selected on a judgmental basis. This is consistent with a recent survey on Hong Kong CPA
firms which revealed that judgmental sampling was predominantly used by practitioners
(Ng & Ho, 1993), and that most of the companies in Hong Kong are small to medium-sized
(Sit & Wong. 1989, p.27).
Definition of Errors
An error is defined as a non-zero difference between the book and the audit values for an
item. The book value is the amount recorded by the client before audit and the audit value
Ownership Effects on Audit-Detected Error 243
is the amount deemed by the auditor to be the correct value for that item. No differentiation
was made between adjusting and non-adjusting errors as excluding the latter would distort
the underlying error patterns.
In this study, classification errors refer to the situation where the items tested have been
posted to a wrong accounting category. An example of misclassification would be fixed
asset being included as inventory. These errors involve balance-sheet types of accounts and
would not have significant effect on net income. This definition of classification errors is
similar to that defined by Ham et al. (1985, p.391).
EMPIRICAL CHARACTERISTICS OF ERRORS IN HONG KONG
Direction of Errors
The directions of errors detected in accounts receivable, accounts payable, and inventory
are summarised in Table 2. According to the above definition for classification errors,
occurrence of this type of error would also have the effect of overstating or understating the
accounts balance. However, they are classified as a separate category for the discussion of
directions of errors due to their special nature.
Ownership Effect
Chi-square tests were performed to test the difference in the distributions of the direction
of errors between foreign subsidiaries and local Chinese companies. When classification
errors were excluded, results for foreign subsidiaries in Hong Kong were significantly dif-
ferent from local Chinese companies for accounts payable only. When classification errors
were included in the Chi-square tests, significant differences were found for accounts pay-
able and inventory. The significant difference in inventory between foreign subsidiaries
and local Chinese companies is due to the large number of classification errors found in
foreign subsidiaries. Reasons for this finding are explored in the types of errors section to
be discussed later.
Accounts payable errors found in local Chinese companies tend to be overstatement
errors while the errors found in foreign subsidiaries tend to be understatement errors. Most
of the overstatement errors found in local Chinese companies were mainly mechanical mis-
takes which were related to the purchases of raw materials from suppliers in the People's
Republic of China (P.R.C.). The companies were required to make prepayments to those
suppliers before goods were received. When vendors' invoices were received, the account-
ing staff of the companies recorded the acquisitions in accounts payable without netting off
from prepayments. Although foreign subsidiaries may make similar errors when dealing
with P.R.C. suppliers, in general, they have relatively fewer transactions with these suppli-
ers. This finding reflects the importance of auditors' understanding about the culture and
practices of clients' business environment in detecting errors. This also has the implication
for management to design and implement effective controls to prevent duplicate payment
to suppliers.
244 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
Table 2. Direction of Errors
Foreign Subsidiaries
Local Chinese Firms
Hong Kong Total
Number of
# %
# %
(a) Accounts Receivable
Overstatement Errors
71
57
24
58
95
57
Understatement Errors
36
29
8
20
44
27
Classification Errors
18
14
9
22
27
16
Total Number of Errors
125
100
41
100
166
100
Notes: Chi-square test for the difference in the direction of errors between foreign subsidiaries and local Chinese firms:
X" (including classification errors) (d.f =2) = 3.440;
X' (excluding classification errors) (d.f =1) = 1.947.
(b) Accounts Payable
Overstatement Errors
51
41
61
49
112
45
Understatement Errors
67
53
39
32
106
42
Classification Errors
8
6
24
19
32
13
Total Number of Errors
126
100
124
100
250
100
Notes: Chi-square test for the difference in the direction of errors between foreign subsidiaries and local Chinese firms:
X' (including classification errors) (d.f =2) = 12.659*;
X^ (excluding classification errors) (d.f =1 ) = 6.49*.
* Reject the null hypothesis that the proportions are the same at the 0.05 level.
(c) Inventory
Overstatement Errors
139
31
114
57
253
39
Understatement Errors
125
28
83
42
208
32
Classification Errors
185
41
3
1
188
29
Total Number of Errors
449
100
200
100
649
100
Notes: Chi-square test for the difference in the direction of errors between foreign subsidiaries and local Chinese firms:
X" (including classification errors) (d.f =2) = 48.577*;
X~ (excluding classification errors) (d.f.= l) = 0.731.
* Reject the null hypothesis that the proportions are the same at the 0.05 level.
Comparison with U.S. Studies
Except for accounts payable, results of the Hong Kong sample are consistent with prior
studies. Accounts receivable errors tenti to be overstatement errors while inventory errors
are fairly balanced between overstatements and understatements. Detected accounts pay-
able errors in this study are quite evenly spread between overstatements and
understatements and this is different from the results of U.S. studies for which accounts
payable tends to be understated (Johnson et al., 1981; Ham et al., 1985; Kreutzfeldt & Wal-
lace, 1986; Icerman & Hillison, 1990). This phenomenon is a net result of the ownership
effect on accounts payable as the understatement errors found in foreign subsidiaries were
balanced by the overstatement errors found in local Chinese companies.
Focusing on foreign subsidiaries, directions of errors found are consistent with Ham et
al. (1985) and other prior studies for all three accounting categories when classification
errors were excluded from the comparison. However, when classification errors were
included, significant differences were found for accounts receivable and inventory. Thus,
classification errors represent the major cause for the differences between foreign subsid-
iaries in Hong Kong and Ham et al. (1985).
Ownership Effects on Audit-Detected Error 245
In summary, these results indicate that the direction of errors of foreign subsidiaries dif-
fers more from local companies than from U.S. companies. This result confirms our earlier
expectation of cultural influence.
Magnitude of Errors
To test whether there is any significant difference in error magnitude among accounting
categories, absolute values of the mean net errors of each accounting category were ranked
from the largest (Rank 1) to the smallest (Rank 3) for each company.
Ownership Effect
Table 3 shows that the mean ranks among the three accounting categories are more dis-
persed in local Chinese companies than in foreign subsidiaries. Results of the Chi-square
tests show that the distributions of the relative magnitude of mean errors for foreign sub-
sidiaries differ significantly from those of local Chinese companies for accounts receivable
and inventory. Compared to foreign subsidiaries, local Chinese companies had smaller
mean errors for accounts receivable and inventory. To better understand whether these dif-
ferences in error magnitudes are due to the differences in the relative significance of
accounts receivable to overall sales or of inventory to overall purchases, t-tests were con-
ducted to test the differences in the mean ratios of accounts receivable to sales and of
inventory to purchases between foreign subsidiaries and local Chinese companies respec-
tively. Results of the tests indicate that the mean ratio of accounts receivable to sales for
foreign subsidiaries (0.25) is significantly greater than that of local Chinese companies
(0.1 1) (/? < 0.0001), whereas there is no significant difference in the mean ratio of inven-
tory to purchases (0.12 v. 0.15, p = 0.1536) between foreign subsidiaries and local Chinese
companies. Hence, plausible explanation for the smaller mean errors for accounts receiv-
able found in local Chinese companies may be due to lower accounts receivable balance as
a percentage of total sales because Chinese companies tend to have more cash sales.
Comparison witfi U.S. Studies
As shown in Table 3, accounts payable errors in the Hong Kong sample are on average
the largest of the three accounting categories and accounts receivable errors have the small-
est mean ranking. Foreign subsidiaries in Hong Kong had larger inventory errors but
smaller accounts receivable errors. These results differ clearly from the U.S. studies
(Johnson et al., 1981; Ham et al., 1985) where accounts receivable errors are the largest and
inventory errors are the smallest.
Variability of Errors
Similar to the magnitude of errors, the variability of errors as measured by the coeffi-
cients of variation among the three accounting categories were ranked from the largest
(Rank 1) to the smallest (Rank 3) for each company. The objective of this ranking is to
determine whether the errors of any one accounting category are more highly variable than
246 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
Table 3. Relative Magnitude of Mean Errors in Absolute Dollars
Foreign Subsidiaries
# %
Local Chinese Firms
Hong Kong Total
Rank
# %
# %
(a) Accounts Receivable
4
20
0
50
6
30
13
6
17
27
14
40
60
15
43
8
40
8
53
16
46
7
35
5
33
12
34
5
25
2
14
7
20
(1) (greatest)
(2)
(3) (smallest)
Mean Rank 2.1 2.5 2.3
Chi-square test for the difference in distributions of relative magnitude of mean errors between foreign subsidiaries and local Chi-
nese firms: x" (d.f.=2) = 18.36*.
*Reject the null hypothesis thai the distribution of relative magnitude of mean errors are the same at the 0.05 level.
(b) Accounts Payable
(1) (greatest)
(2)
(3) (smallest)
Mean Rank 1.9 1.6 1.7
Chi-square test for the difference in distributions of relative magnitude of mean errors between foreign subsidiaries and local Chi-
nese firms: x" (d.f.=2) = 4.98.
(c) Inventory
(1) (greatest)
(2)
(3) (smallest)
Mean Rank 1.8 1.9 1.9
Chi-square test for the difference in distributions of relative magnitude of mean errors between foreign subsidiaries and local Chi-
nese firms: x" (d.f.=2) = 8.78*
*Reject the null hypothesis that the distribution of relative magnitude of mean errors are the same at the 0.05 level.
Note J: To illustrate the ranking process, the mean errors in absolute dollars and their ranks for Company # 4 are shown as
below:
9
47
5
33
14
41
4
21
6
40
10
29
6
32
4
27
10
30
Accounts receivable
Accounts pavable
Inventory
Mean error
154,874.64
2,700.00
79,704.09
Rank
1
3
->
For example, results in Table 3(a) can be interpreted as follows. There were four foreign subsidiaries in Hong Kong
whose mean errors in accounts receivable are greater than their mean errors in accounts payable and inventory. There
were six foreign subsidiaries in Hong Kong whose mean error in accounts receivable are smaller than their mean errors
in accounts payable and inventory.
Note 2: Companies having errors in one accounting category only were excluded from the analysis.
the errors of other accounting categories. Table 4 shows the results of the distributions of
the relative degree of variability for the Hong Kong sample.
Ownership Effect
The underlying distributions of the degree of variability differ significantly between for-
eign subsidiaries and local Chinese companies for accounts payable according to our Chi-
square tests at a = 0.05. Accounts payable errors in foreign subsidiaries vary more than that
in local Chinese companies. This may be explained by the difference in the distributions of
the types of errors found (see Table 5. Part b). For foreign subsidiaries, there were a signif-
Ownership Effects on Audit-Detected Error 247
Table 4. Relative Degree of Variability
Foreign Subsidiaries
# %
Local Chinese Firms
Hong Kong Total
Rank
# %
# %
(a) Accounts Receivable
0
53
6
40
16
47
5
26
6
40
11
32
4
21
3
20
7
21
(1) (greatest) 4 20 4 27 8 23
(2) 6 30 5 33 11 31
(3) (smallest) 10 50 6 40 16 46
Mean Rank 2.3 2.1 2.2
Chi-square test for the difference in the distributions of relative degree of variability between foreign subsidiaries and local Chi-
nese firms: x" (d.f.=2) = 2.30.
(b) Accounts Payable
(1) (greatest) 7 35 5 36 12 35
(2) 10 50 4 28 14 41
(3) (smallest) 3 15 5 36 8 24
Mean Rank 1.8 2.0 1.9
Chi-square test for the difference in the distributions of relative degree of variability between foreign subsidiaries and local Chi-
nese firms: x^ (d.f.=2) = 14.87*
* Reject the null hypothesis that the distributions of relative degree of variability are the same at the 0.05 level.
(c) Inventory
(1) (greatest)
(2)
(3) (smallest)
Mean Rank 1.7 1.8 1.7
Chi-square test for the difference in the distributions of relative degree of variability between foreign subsidiaries and local Chi-
nese firms: x" (d.f.=2) = 4.81
Note: Companies having errors in one accounting category only were excluded from the analysis.
icant number of large cutoff errors and immaterial "not identified" errors. Therefore, the
overall error magnitude vary greatly.
Comparison with U.S. Studies
The overall findings of the present study as shown in Table 4 indicate that accounts
receivable errors in the Hong Kong sample have the smallest variability whereas inventory
has the largest. The high variability of inventory errors may be due to the difference in error
magnitude found between testing individual inventory items and year-end cutoff problems.
For instance, average pricing error of individual inventory items for one of the manufactur-
ing companies in the sample was around US$100, but the cutoff error was more than
US$40,000, and the resulting coefficient of variation was about 24.
Ham et al. (1985) found no difference in the variability of errors among accounting cat-
egories based on the standard deviations of the enor distributions (Ham et al.. 1985. Table
4, p. 392). However, relative measure of the dispersion is a more appropriate index to use
to compare variability. To facilitate comparison, the ranking of Ham et al.'s results was
reconstructed using the coefficient of variation of the errors. Results of the revised ranking
suggest that inventory errors are more highly variable than the errors of the other account-
ing categories, consistent with the Hong Kong results.
248 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No, 2, 1 998
Types of Errors
The new methodology of direct assessment of data in audit working papers allows us to
have a more in-depth examination of different types of errors in this study. The types of
errors were classified in more details than the Ham et al.'s study by including errors due to
discrepancies "not identified". This type of error has not been investigated in prior studies.
These errors occur mainly when the book value of an item audited does not agree with the
value confirmed by customer or supplier. During substantive testing, auditors would rec-
oncile the material difference but very often no further investigation would be done if the
unreconciled difference is perceived to be immaterial. However, the concept of materiality
should not be used at this stage as small difference may be due to netting off of large over-
statement and understatement of balances in the customer account.
Table 5 shows that 37% and 24% of errors found in accounts receivable and accounts
payable respectively of the Hong Kong (total) sample, fall into the "Not identified" type.
For foreign subsidiaries, these percentages are 38% and 32% respectively for accounts
receivable and accounts payable. The significant number of unreconciled account balances
found should alert management and auditors to the possible existence of fraud. Control
procedures should be strengthened in these areas to prevent and detect any fraudulent
transactions.
Ownership Effect
Results in Table 5 show that the hypothesis can be rejected for all three accounting cat-
egories at 5% significance level, indicating a significant difference between local Chinese
companies and foreign subsidiaries on the types of errors found. Cutoff errors for accounts
payable in local Chinese companies occurred less frequently and represented insignificant
dollar amount. The unique business practices of P.R.C. suppliers requiring prepayments
and issuance of letters of credit for purchases explain this phenomenon. It is because com-
panies would be more alert to the timing of transactions and less unrecorded liability would
be resulted if purchases made near year end were not recorded in the proper period. More
and larger mechanical errors as well as inventory pricing and valuation errors were found
in local Chinese companies than in foreign subsidiaries. These differences may be attrib-
uted to weaker internal control systems established in local Chinese companies.
Comparison witti U.S. Studies
In addition to the difference in "Not identified" errors discussed above, classification
errors represent another major cause of difference between the Hong Kong sample and
Ham et al. (1985). In particular, classification errors in Hong Kong represented 13% to
29% of the total number of errors found in the three accounting categories. Classification
errors in accounts receivable include misclassifying promotional charges claimable from
customers, claims settlement receivable etc. as accounts receivable. For accounts payable,
classification errors normally arise when sales discounts payable to customers are included
in accounts payable. Whereas for inventory, classification errors mainly result from the
inclusion of fixed assets in inventory. This type of error was minimal in Ham et al.'s (1985)
investigation.
Ownership Effects on Audit-Detected Error 249
Table 5. Types of Errors
(a) Accounts Receivable
Number of
Foreign Subsidiaries
Local Chinese Firms
Hong Kong Total
(frequency)
#
%
#
%
#
%
Cutoff
28
22
4
10
32
19
Pricing & Valuation
12
10
10
24
22
13
Mechanical
6
5
2
5
8
5
Classification
18
14
9
22
27
16
Not identified
47
38
14
34
61
37
Others
14
11
2
5
16
10
Total
125
100
41
100
166
100
Chi-square test for the difference
in the distributions of types of
errors (frequency)
between foreig
n subsidiaries and local Chinese
firms: x-(d.f.=5)= 14.515*.
Absolute Error Amount
Foreign Subsidiaries
Local Chinese Firms
Hong Kong
Total
($000)
US$
%
US$
%
US$
%
Cutoff
3908
68
134
21
4042
63
Pricing & Valuation
73
1
30
4
103
2
Mechanical
548
10
81
12
629
10
Classification
415
7
266
41
681
11
Not identified
458
8
135
21
593
9
Others
335
6
8
1
343
5
Total
5737
100
654
100
6391
100
Chi-square test for the difference in the distributions of types of errors (absolute amount) between foreign subsidiaries and local
Chinese firms: y} (d.f.=2) = 46.746*.
* Reject the null hypothesis that the distributions of types of errors are the same at the 0.05 level.
Note: Cells with expected value less than 5% were grouped with the next cells for Chi-square test.
(b) Accounts Payable
Number of
Foreign Subsidiaries
Local Chinese Firms
Hong Kong Total
(frequency)
#
# %
# %
Cutoff
24 19
10 8
34 14
Pricing & Valuation
17 13
11 9
28 11
Mechanical
22 18
47 38
69 28
Classification
8 6
24 19
32 13
Not identified
40 32
22 18
62 24
Others
15 12
10 8
25 10
Total
126 100
124 100
250 100
Chi-square test for the difference in the distributions of types of errors (frequency) between foreign subsidiaries and local Chinese
firms: x* (d.f.=4) = 13.147*
Absolute Error Amount
ruiciyn ou
u^iuictiieii
i-uuai ^niin
:;:>t; riiini>
nuny r\ui
ly 1 uicti
($000)
US$
%
US$
%
US$
%
Cutoff
1738
44
80
2
1818
21
Pricing & Valuation
467
12
25
0
492
6
Mechanical
458
12
1603
34
2061
24
Classification
629
16
2908
61
3537
40
Not identified
99
2
107
2
206
2
Others
569
14
36
1
605
7
Total
3960
100
4759
100
8719
100
Chi-square test for the difference in the distributions of types of errors (absolute amount) between foreign subsidiiuies and local
Chinese firms: x" (d.f.=2) = 50.739*
* Reject the null hypothesis that the distributions of types of errors are the same at the 0.05 level.
Note: Cells with expected value less than 5% were grouped \\ ith the next cells for Chi-square test.
(continued)
250 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1998
Table 5. Continued
(c) Inventory
Number of
Foreign Subsidiaries
Local Chinese Firms
Hong Kong
Total
(frequency)
#
%
#
%
#
%
Cutoff
190
43
54
27
244
38
Pricing & Valuation
55
12
116
58
171
26
Mechanical
13
3
14
7
27
4
Classification
185
41
3
T
188
29
Not identified
6
1
13
6
19
3
Total
449
100
200
100
649
100
Chi-square test for the difference
in the distributions
of types of errors ( frequency ) bet'
ween foreign
subsidiaries and local Chinese
firms: x" (d.f =3) = 58.606*
Absolute Error Amount
Foreign Subsidiaries
Local Chinese Firms
Hong Kong
Total
($000)
US$
%
US$
%
US$
%
Cutoff
1983
13
3144
44
5127
22
Pricing & Valuation
1565
10
3102
43
4667
20
Mechanical
216
1
350
5
566
3
Classification
12038
75
555
8
12593
54
Not identified
222
1
5
0
227
1
Total
16024
100
7156
100
23180
100
Chi-square test for the difference in the distributions of types of errors (absolute amount) between foreign subsidiaries and local
Chinese firms: X" (d.f.=2) = 82.819*
* Reject the null hypothesis that the distributions of types of errors are the same at the 0.05 level.
Noie: Cells with expected value less than 5% were grouped with the next cells for Chi-square test.
Plausible explanations for the significant number of classification errors found in Hong
Kong may include lower professionalism of accounting personnel and differences in
business culture (Gray. 1988; Hofstede, 1991; Chow & Hwang. 1994). Proper classifica-
tion of assets and liabilities should be facilitated if there is a comprehensive chart of
accounts, and/or the accounting personnel who can exercise their professional accounting
knowledge to classify the transactions by their nature. In addition, as the classification
errors do not have an effect on income. Hong Kong companies tend to pay less attention
to these errors. Subsidiaries of multinational companies are usually organized as profit
centers to their respective parents, and the perfonnance of these profit centers are nor-
mally evaluated on the basis of their income statements (Warren et al., 1996, p. 902). The
subsidiaries are hence more concerned about errors affecting the profit. Finally, an addi-
tional finding that most of the classification errors were recurring further supports the
above explanation and suggests that Hong Kong companies rely on auditors to make the
adjustments.
Error Rates
Two error rates, the rate of error incidence and tainting, were examined in this study.
These two rates are important to auditors in assessing the likelihood of errors and making
inference to populations errors (Ham et al.. 1985). For instance, rate of error incidence is
useful to auditors for estimating the probability of occurrence of error in an account.
Ownership Effects on Audit-Detected Error 251
Whereas the commonly used estimators like modified moment bounds developed by
Dworin and Grimlund (1984) and the simulation ratio estimators developed by Chan
(1988, 1996) are based on the knowledge of tainting distributions.
Rate of Error Incidence (R^)
The definition of rate of error incidence (R^) is as follows:
/?, = k/n, (1)
where k = the number of errors found in an audit; n = the number of items tested in an audit.
Table 6 summarises the rate of error incidence for the three accounting categories.
Ownership Effect
To test the ownership effect on error incidence. Chi-square tests for the distributions of
error rates between foreign subsidiaries and local Chinese companies show significant
difference at 5% level for all accounting categories. A one-way ANOVA was also per-
formed to test if there is significant difference in mean rate of error incidence between
foreign subsidiaries and local companies. The results show marginal significance at 10%
level for accounts receivable and accounts payable. Foreign subsidiaries have higher
error incidence rate for accounts receivable but lower error incidence rate for accounts
payable.
Comparison witti U.S. Studies
The findings show that for the Hong Kong data, accounts payable has the highest error
incidence rate (26%). Inventory has a higher error rate than accounts receivable (18% v.
14%), which is consistent with U.S. empirical studies (e.g., Neter & Loebbecke, 1975;
Ramage et al., 1979; Johnson et al., 1981). Overall, the mean error rates of the Hong Kong
sample are lower than Ham et al. for accounts receivable and payable. In particular, a large
number of Hong Kong companies had zero error incidence for accounts receivable (60%),
accounts payable (45%) and inventory (41%), whereas for Ham et al., zero incidence rate
only accounts for 7% to 14% of the distributions. This may be one of the reasons for Hong
Kong auditors to use non-statistical sampling as previous research on statistical sampling
has shown that when the rate of error incidence is low, most statistical estimators become
unreliable (Frost & Tamura, 1982, p.l03; Neter & Loebbecke, 1975, Ch. 4).
Consistent with our expectation, foreign subsidiaries have lower error incidence rates for
accounts receivable and payable than Ham et al. (1985). This may be due to the stricter
compliance with rules and regulations by the Chinese accounting personnel in foreign sub-
sidiaries in Hong Kong.
Tainting (Proportion of Eacti Dollar Unit in Error, R2)
As described in Ham et al.'s study. 'A tainting is defined as the error amount of a line
item in error divided by the book value of the line item" (Ham et al.l985, p. 398). Because
252
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
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Ownership Effects on Audit-Detected Error 253
dollar-unit sampling was not used in the samples (as in Ham et al.). for comparative pur-
poses. Ham et al.'s formula was adopted by weighting each tainting by the associated book
value as follows:
k
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avj = audit \alue of the /th item in an audit.
In order to avoid having undefined tainting, obsen ations which had zero book values were
ignored.
Ownership Effect
The Chi-square tests for distributions of taintings between foreign subsidiaries and
local Chinese companies indicate significant differences for accounts payable and inven-
tory taintings. The impact of ownership type on mean tainting was further examined by
using one-way ANOVA. In order to prevent the netting off of positive and negative taint-
ings which will lead to understating the true mean error rate, absolute taintings were
computed. Consistent with the Chi-square tests, significant differences in absolute mean
tainting of inventor) (at 1<5^ level) were found. Higher absolute mean inventor}' tainting
found in foreign subsidiaries is mainly due to more cutoff and classification errors
detected.
Comparison witli U.S. Studies
The distributions presented in Table 7 show that the mean taintings of accounts receiv-
able and accounts pa) able are lower, whereas mean tainting of inventor)- is higher for the
Hong Kong sample as a whole and also for foreign subsidiaries compared with that of Ham
et al. (1985). Consistent with the findings in the direction of errors that more overstatement
errors were found in accounts payable, the mean tainting of accounts payable is positive.
Similarto the prior U.S. studies (Johnson et al.. 1981; Neter& Loebbecke. 1975). the over-
all distributions of taintings are non-normal per the Kolmogorov-Smimov Goodness-of-Fit
tests ip < 0.01) for all three accounting categories. The distributions are also characterized
by pronounced discontinuities at 1009^ taintings due to classification and cutoff errors
found, particularly so for accounts payable and inventory. The mean inventory tainting of
foreign subsidiaries is significantly higher than that of Ham et al. (40% v. 4%) because
more 100% taintinas were found in foreign subsidiaries in Hong Kong.
254
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1998
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Ownership Effects on Audit-Detected Error
255
Table 8 Summary of Ownership Effects on Error Characteristics: Results of Test of Hypothesis
Chl-square tests for the differences in distributions of error attributes
between foreign subsidianes and local Chinese companies
(Hypotheses were rejected at 5°o level of significance)
Accounts Receivable Accounts Payable Inventory
Error Characteristics
Direction of Errors
— including classificaiion error
— excluding classification error
Magnitude of Errors
— distributions of the relative significant
magnitude of mean errors
Variability' of Errors
— distributions of the relative degree
of variability
T\ pes of Errors
— distribution of frequency significant
— distribution of absolute amount significant
Error Rates
— distribution of rate of error significant
incidence
— mean rate of error incidence significant*
— distribution of taintings
— mean absolute tainiins
significant
significant
significant
significant
significant
significant
significant*
significant
sienitlcant*
significant
significant
significant
significant
significant
sisnificant
Sole: Ownership effect HypotheN;^
Hq: There are no significant differences between foreign subsidiaries and local Chinese companies in Hong Kong.
* Hypothesis was rejected at ]0'^ level of significance.
SUMMARY OF RESULTS AND DISCUSSIONS
This studs provides some exploratory evidence on the impacts of ownership structure on
audit-detected error characteristics. Results of test of hypothesis as summarised in Table 8
indicate that the error characteristics of Hong Kong's foreign subsidiaries, differ signifi-
cantly from local Chinese companies. Differences in internal control system, nature of
transactions and organizational culture lead to great variations in the error characteristics
of foreign subsidiaries from those of local Chinese companies. The implication of these
results is that when stud\ ing error patterns tor other emerging economies, these ownership
effects should be carefully considered.
Table 9 provides a summarN of significant differences in the directions, types, frequency
and tainting distributions of errors among foreign subsidiaries, local Chinese companies.
Ham et al. and other U.S. studies. Some of the important findings are:
1. The direction of errors in accounts payable differs significant!) between different
ownership type of companies (foreign subsidiaries vs. local Chinese companies).
Accounts payable in local Chinese companies tends to be overstated, while results in
foreign subsidiaries are consistent with the U.S. studies and are mosth understate-
ment errors. Most of the overstatement errors in local Chinese companies are due to
lack of adequate internal control system to take into account the unique business
practice of Chinese (P.R.C.) companies which require prepaNinents for purchases.
256
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
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Ownership Effects on Audit-Detected Error
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258 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
2. More and larger mechanical errors as well as inventory pricing and valuation errors
are found in local Chinese companies because of the differences in the form of rela-
tionship with suppliers and weaker internal control system. On the whole, more cut-
off errors are found for foreign subsidiaries due to more extensive involvement in
international trade.
3. Foreign subsidiaries tend to have higher mean rate of error incidence for accounts
receivable and higher mean absolute tainting for inventory. However, the mean rates
of error incidence and mean absolute tainting for accounts payable tend to be lower
than local Chinese companies.
4. A large number of "Not identified" type of errors found in the Hong Kong sample is
mainly attributable to the perceived immateriality of the unreconciled differences
between book values and the confirmed balances from customers. This indicates that
differences in the perception of the accounting concept of materiality may affect the
errors detected by auditors. No prior studies on this type of errors is available for
comparison and further research on this area is warranted. Also, classification errors
in the Hong Kong sample are significantly larger and more frequent than that in the
U.S. studies and this type of error is recurring. Though this type of error does not
affect the income statement, it would affect the "true and fair view" of the balance
sheet.
Knowledge of specific error characteristics in different audit environments should help
auditors and researchers modify relevant audit procedures or techniques by taking into
account the differences identified, so as to increase the effectiveness and efficiency of local
audits. For example, auditors should pay special attentions to detect overstatements in
accounts payable for transactions with Chinese (P.R.C.) suppliers instead of focusing on
detecting unrecorded liabilities. Hong Kong auditors should put more emphasis on detect-
ing cutoff and classification errors in addition to testing pricing and mechanical errors of
transactions and account balances. The differences in the error characteristics found in
Hong Kong and their underlying reasons should have implications for auditors in design-
ing audit sampling plans and choosing appropriate error estimators for non-U. S.
accounting populations. As the performance of certain error estimators is affected by the
error distribution of the accounting population, those estimators developed based on U.S.
data may be unreliable for estimating errors in accounting populations in non-U. S. jurisdic-
tions. Finally, information about the likely causes and location of errors in non-U. S.
accounting populations should also alert management of multinational corporations to
incorporate the potential differences in error patterns in designing and implementing effec-
tive accounting controls for subsidiaries outside the U.S. For instance, our data reveal that
management of corporations should devote more efforts on providing specific guidelines
such as an adequate chart of accounts to ensure proper classification of transactions and
balances. Effective information system will help management make better decisions.
Generalization of the above results may be limited to the extent that data were based on
the clients of a single international accounting firm. This approach may have understated
the differences in the effects of ownership that would have been possible had the audit files
been selected from more than one accounting firm in Hong Kong. However, in order to
control for the likely confounding effect of the differences in the audit client portfolios of
different accounting firms and the differences in audit procedures, it is better to use audit
Ownership Effects on Audit-Detected Error 259
data from a single accounting firm. More importantly, the mixture of foreign subsidiaries
and local firms in Hong Kong, each playing a significant role in the local economy, is typ-
ical of the business environment in emerging economies. Thus, the focus of this study is to
compare the differences in enor patterns between different ownership companies (local
Chinese companies vs. foreign subsidiaries) in Hong Kong. Separating the firms in Hong
Kong into local Chinese companies and foreign subsidiaries should not necessarily lead to
a cross country comparison since foreign firms often have organizational cultures that are
different from those in their home countries as soon as they transplant into host countries
(Chow & Hwang, 1995).
The new approach of data collection by direct assessment of audit working papers allows
us to evaluate the underlying reasons for the causes of different errors and provide more
reliable results. Therefore, the empirical results provided in this study should help enhance
our understanding of the impact of organizational culture and business practices on error
characteristics in other emerging economies. Further research should be devoted to devel-
oping an empirical error characteristics database for accounting populations in other
emerging economies such as the P.R.C. because of the increasing economic importance in
world trade and its unique business culture. The findings of such studies should have impli-
cations for the development of the global audit market. Audit technologies which are
effective in one national setting can be ineffective or even dysfunctional in another (Chow
& Hwang, 1994). It is important to understand the error patterns of different ownership
firms as well as the differences between the U.S. and non-U. S. audit populations so as to
provide guidance to auditors as to when and how audit technologies can be effectively
transferred to non-U. S. jurisdictions.
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The International
Journal of
Accounting
Differential Reporting in Singapore and Australia:
A Small Business Managers' Perspective
S. Mitchell Williams and Greg Tower
Key Words: International accounting. Culture. Differential reporting, Financial accounting
Abstract: This study examines societal values on two key issues of differential reporting, the pre-
ferred level of disclosure and perceived balance of costs relative to benefits of compliance. A
theoretical framework developed by Gray (1988) is utilised, linking Hofstede's (1980) societal
values to issues in differential reporting and the accounting subcultural value of secrecy.
Interactive multiple regression analysis is used to ascertain the effect of power distance, uncer-
tainty avoidance and individualism on the perceptions of the sun'ey groups towards issues of
differential reporting. Findings from this study indicated that the perceptions of small business
managers in Singapore and Australia were consistent with prior literature. Uncertainty avoidance
and to some extent power distance were found to have a significant effect on small business man-
agers perceptions. This study indicates that the current association between societal values,
accounting subcultural dimensions and accounting practice as depicted by Gray (1988) may have
to be rearranged.
This paper reports the results of empirical tests that assess the significance of cultural influ-
ence on small business managers attitudes toward accounting disclosure requirements in an
international context. Prior research suggests that cultural differences may help to explain
international differences in accounting systems and patterns of international accounting
development (Perera. 1989; Belkaoui & Picur, 1991). Specifically, the paper examines the
cultural impact on small business manager perceptions about two key issues in differential
reporting.
1. the perceived level of cost and benefits associated with small business financial
statements accounting disclosures; and
2. the degree of support for differential accounting disclosure requirements.
Direct all correspondence to: Associate Professor Greg Tower, School of Business, Murdoch University, South
Street, Perth Australia, 6150; Email : tower@commerce.murdoch.edu.au
The International Journal of Accounting, Vol. 33, No. 2, pp. 263-268 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1998 University of Illinois
264 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No, 2, 1 998
Section two reviews the links between culture and accounting disclosure leading to the
development of the hypotheses. In section three the research methodology is then explained.
Results of the tests are described and their significance discussed in sections four and five.
CULTURE AND ACCOUNTING VALUES
The notion of differential reporting suggests that certain reporting entities may be
exempted from the application of specific accounting standards because of their size, legal
structure, ownership and/or the presence of a dependent user (Nair & Rittenberg, 1983;
McCahey & Ramsay, 1989). International studies have generally concluded that small
business managers perceive the costs of complying with accounting standards to be greater
than the benefits. This is due to their perception that there are a limited number of users
requiring such data and that compliance with accounting standards may disclose strategic
information to competitors (Nair & Rittenberg, 1983; Carsberg, Page, Sindall & Waring,
1985). FASB (1983) and others have concluded there is a need to exempt small business
entities from full compliance with promulgated accounting standards. The research to date,
has been limited primarily to Anglo-American nations and has therefore ignored cultural
influences relevant to disclosure perceptions.
Culture is operationalised in this study in line with Hofstede (1980, p. 26) who defined
this concept as "the collective programming of the mind which distinguishes the members
of one human group from another". Gray (1988) argued that the seminal work of Hofstede
(1980) provided insights about the evolution of accounting systems. As noted by Perera
and Mathews' (1990, p. 230) "the extent of disclosure in financial reports would seem to
differ between countries in line with differences in the value orientations of the preparers
of these reports." Gray (1988) linked Hofstede's (1980) four societal value dimensions
(uncertainty avoidance, power distance, individualism and masculinity) to four accounting
value dimensions (professionalism versus statutory control; uniformity versus flexibility;
conservatism versus optimism; and secrecy versus transparency).
The accounting sub-cultural value of greatest importance to this study is the secrecy/
transparency dimension. Gray (1988, p. 8) indicates that this dimension is a "preference for
confidentiality and the restriction of disclosure of information about the business only to
those who are closely involved with its management and financing as opposed to a more
transparent, open and publicly accountable approach." Secrecy, Gray (1988) argued, can
be most closely linked with the uncertainty avoidance, power distance and individualism
dimensions. A preference for secrecy was thought to be consistent with a high level of
uncertainty avoidance following from a need to restrict information disclosure so as to
avoid possible conflicts, limit the uncertainties of competition and preserve security.
Power distance is another potentially influential value as it deals with the restriction of
information to preserve power inequalities. A preference for collectivism rather than indi-
vidualism is also likely to be consistent with secrecy as it reflects more concern for the
interests of the group most closely and directly involved with the management and financ-
ing of the firm than with a wide range of external parties including potential investors and
the public at large. Another dimension, long versus short term orientation, is added to this
analysis (Hofstede & Bond, 1988). In line with the work of Eddie (1996). it is suggested
that the value of long term orientation is associated with secrecy because of a tendency to
preserve relationships, thrift and long range goals.
Differential Reporting in Singapore and Australia 265
It is felt that the degree of secrecy will tend to vary across countries with resulting differ-
ences in the amount of information disclosed. Based on the above, the following null
hypotheses are formed in regard to culture and respondent's view of differential reporting.
Two respondent perception variables are considered: Preferred level of Disclosure (PLD);
and Perceived Extent of Costs Versus Benefits (PECVB) related to disclosure.
HI: Singapore and Australian small business managers will not differ significantly
due to cultural values with respect to PLD.
H2: Singapore and Australian small business managers will not differ significantly
due to cultural values with respect to PECVB.
It is hypothesized that the higher a country ranks in terms of uncertainty avoidance, collec-
tivism feminity and power distance and long term orientation the more likely it is to be
highly ranked in terms of secrecy.
RESEARCH METHODOLOGY
Because corporate size is related to disclosure requirements, corporation size have been
used in prior research. Our interest in small business manager leads us to adopt following
entity's size criteria:
1. fixed production costs should not exceed $8 million;
2. employee numbers should be greater than 10 but less then 100; and
3. annual turnover should not exceed $15 million.
These criteria were applied based on the qualification requirements in Singapore and Aus-
tralia for membership as a small or medium sized business (Singapore Small and Medium
Sized Business Association, 1993; Australian Small Business Association, 1993).
The small business managers views were measured as to their perception of the Preferred
Level of Disclosure (PLD) and the Perceived Extent of Costs Versus Benefits (PECVB)
related to disclosure. The PLD is defined as the level of information a small business man-
ager believes should be disclosed in the company's reports. The PECVB is a measure of
the perceived costs and benefits to a small business manager upon expanded requirements
to disclose information. The measures for both PLD and PECVB are related to the subcul-
tural value of secrecy versus transparency. Secrecy can be interpreted to be similar to a low
PLD and high PECVD. Thus in a country where secrecy is preferred small business man-
agers will prefer a low level of disclosure. They will also perceive that the costs relative to
benefits are outweighted if additional disclosure is required.
The two dependent variables, PLD and PECVD, were measured using a range of item
statements drawn from prior differential reporting literature. A copy of the questionnaire
can be demanded from the author. All questions were scored on a seven point Likert scale.
All scores for the statements related to the respective dependent variable were then added
for each respondent and divided by the number of statements to arrive at a final mean score
for each dependent variable.
266 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
Table 1 . Small Business Managers Cultural Scores
Calculated Score for Small Hofstede's (1980) and
Cultural Dimension Business Managers Bond's (1988) Scores
Individualism
Singapore 20 8
.■\ustralia 57 51
Power Distance
Singapore 81 74
Australia 45 36
I'nrertainty Avoidance
Singapore 41 20
Australia 67 90
Masculinity
Singapore 55 48
Australia 63 61
Long-term Orientation
Singapore 38 47
Australia 26 3 1
RESULTS
An o\ erall useable response rate of 57.75^ was obtained from the four hundred question-
naire packages sent. Reliability of the instrument was measured across and within both
groups using the alpha coefficient. The alpha coefficient across all subjects was 0.8934
indicating that the treatment variables captured the desired construct independence. The
coefficient for Singapore and Australia approached the magnitude for the overall alpha.
Hence it is concluded that the research instrument was deemed to be reliable in both
nations. Using the same techniques as Hofstede (1980). cultural scores for each societal
dimension was recalculated using the data collected from this study. Table 1 illustrates that
these results are similar to Hofstede's original results and other related studies (for example
Harrison. 1993).
Interactive univariate linear regressions were undertaken between each societal variable
with respect to each nation (Table 2). From this table it can be seen that the signs of the
slope coefficients are as expected in all cases for both dependent variables. The PLD and
PECVD is positively correlated with individualism and masculinity and negatively corre-
lated with uncertainty avoidance, power distance and long-temi orientation. Further, the
statistics for uncertainty avoidance are significant at the \9c level, the 5^ level for power
distance and 10*^ level for indi\idualism. In the case of masculinity and long-term orien-
tation the statistics are not significant.
A further set of multiple linear regressions were undertaken using a stepwise procedure.
Findings from this procedure were consistent with the uni\ ariate lineai" regression analysis.
The models to explain the PLD and PECVB were found to be ones containing only uncer-
tainty avoidance and power distance. In both models, each independent variable was
significant at the 10^ level. The inclusion of indi\ idualism these models did not signifi-
cantly improve performance, while including mascuhnity and long-term orientation
resulting in deteriorations in performance.
Differential Reporting in Singapore and Australia
267
Table 2, Interactive Multiple Regression Analysis
Power
Uncertainty
Long-Term
Individualism
Distance
Avoidance
Masculinity
Orientation
PLD
Regression
-0.080156
-0.906456
1.075399
-0.216698
-0.1M319
Co-efficient
Value of f-statistic
-0.3666
-1.707
2.673
-0.837
-0.317
Probability
0.7146
0.0892**
0.0081*
0.4043
0.7516
PECVB
Regression
-0.202483
-0.257413
0.738674
-0.139753
-0.145871
Co-efficient
Value of f-statistic
-1.178
-1.121
2.37!
-0.282
-1.056
Probability
0.2402
0.2633
0.0198"
(J. "9
0.2978
Notes: * = Significant at the 95% significance level;
** = Significant at the 90% significance level.
DISCUSSION
The empirical results supports the rejection of both hypotheses. This supports the percep-
tion that culture is a significant factor influencing the PLD and PECVB of small business
managers in Singapore and Australia. However the proposed explanatory' models are only
partially supported. The societal values most significantly related to the two differential
reporting issues differential reporting are uncertainty avoidance and power distance.
This study suggests that the differences in disclosure preferences of small business enti-
ties are, in part, culturally based. Hence, there may be differential resistance by small
company managers to accept international standards requiring more disclosure require-
ments than existing domestic standards.
An interesting alternative explanation for the lack of support for the influence of individ-
ualism, masculinity and long-term orientation, arises from the work of Fechner and Kilgore
(1994). They felt that cultural factors are more likely to be moderating rather than an inter-
vening factors. Therefore the results of this study may not be registering the direct
influence of the respective societal values on perceptions related to differential reporting,
but rather their residual influence in moderating the relationship between secrecy and the
views of small business managers.
Further empirical research needs to be conducted, involving a larger number of countries
to examine the strength of the respective relationships. Additional studies incorporating the
perceptions of lenders, practitioners and large business managers could also provide valu-
able insights. Longitudinal research could be of benefit in examining the influence of such
factors as generational and cyclical effects.
Acknowledgments: The authors wish to acknowledge the constructive comments of Bob Arm-
strong. Mike Baziey. Ian Eddie. Cecil Pearson. Hector Perera. Malcolm Smith. Hume Winzar. an
anonymous reviewer and participants of research seminars at Murdoch University, the International
Accounting Group seminar (AAANZ) 1994, AAANZ Annual Conference 1995 and Eighth
Asia-Pacific Conference on International Accounting Issues 1996 in earlier drafts of this paper. The
authors wish to further express their gratitude to Coopers and Lybrand for their assistance in funding
of this project.
268 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1998
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International Journal of Accounting, Education and Research, 24(1), 42-56.
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The International
Journal of
Accounting
Colonialism and Accounting Education in Developing
Countries: The Experiences of Singapore and Sri Lanka
Hema Wijewardena and Senarath Yapa
University of Wollongong, Australia
Key Words: Accounting education and practice. Accounting profession. Professional accounting
bodies. Colonial system. Accounting in developing countries.
Abstract: This paper provides a comparative analysis of the nature of accounting education in
Singapore and Sri Lanka. Both these countries were British colonies for nearly one hundred and
fifty years and inherited their accounting education systems from the British. After fifty years of
independence, Sri Lanka is still following the colonial system to produce its accountants. Sin-
gapore, however, moved away from the colonial system within four years of independence. This
paper indicates that if a developing country continues to depend heavily on foreign education pro-
grams and accounting bodies to produce accountants locally, the consequences can be less than
desireable.
Almost all developing countries that were British colonies for a considerable length of time
inherited the British accounting education system (Briston, 1978; Hove, 1986). During the
early years of the colonial period, most of the sizable businesses in these countries were set
up by British investors. The managerial personnel, including accountants, for these enter-
prises were generally brought from the UK. At that time a person could obtain the status of
professional accountant only by admission to one of the British professional accounting
bodies. Only the small number of local people who could bear the cost of education and
training abroad proceeded to England to obtain professional qualifications. Some British
accounting bodies set up examination centers in a few major cities in developing countries
allowing local people to obtain British professional accounting qualifications while work-
ing in their own countries (Johnson & Caygill, 1971). A considerable number of local
accounting students fulfilled the examination and practical training requirements of these
professional bodies and became British qualified accountants. They occupied dominant
Direct all correspondence to: Hema Wijewardena, Department of Accounting and Finance, University of Wol-
longong, NSW 2500, Australia. E-mail: hema@uow.edu.au.
The International Journal of Accounting, Vol. 33, No. 2, pp. 269-281 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1998 University of Illinois
270 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
positions in the accounting profession in these countries, particulariy after gaining inde-
pendence. Some continue to act as consultants and advisers to their respective governments
on accounting related matters.
The experiences of many previously British colonies is that a small nucleus of British
qualified accountants created a monopolistic and elite professional body that is virtually a
carbon copy of the Institute of Chartered Accountants of England and Wales. These pro-
fessional bodies have similar examination and training structures and an identical emphasis
upon auditing as the British counterparts (Briston, 1978). Accordingly, despite the exist-
ence of a local professional accounting body and good quality universities and technical
colleges, many of these developing countries, even after gaining independence, continued
to follow the same colonial system to produce accountants (Perera, 1975; Ghartey, 1978;
Briston, 1978; Wallace, 1990). Moreover, in some countries the local professional body
appears to exert control over the supply of accountants by limiting the membership only to
those who complete its own examinations. These measures allow them to maintain the
"status" of their members. According to Briston (1978: 108), the group of British qualified
accountants who hold key positions in the local profession have a vested interest in perpet-
uating the accounting education system they followed, partly because of the high rewards
it provides and partly because they are not prepared to admit that the system may no longer
be relevant or adequate. However, several countries, previously under British rule, have
moved away from the colonial system of accounting education by making use of their uni-
versities and technical colleges to produce competent accountants in sufficient numbers for
their local organizations (Osieghu, 1987; Moores & MacGregor, 1992; Tan et al., 1994;
Linn, 1996).
Singapore and Sri Lanka were British colonies for nearly one hundred and fifty years.
Both these countries inherited their accounting education and practice almost entirely from
the British system. Consequently, at the initial stage of their development, the accounting
education systems of Singapore and Sri Lanka were very similar. The current state of
accounting education in these two countries is, however, significantly different. Compared
with Sri Lanka, Singapore appears to have made greater progress in the field of education
and training of accountants. Singapore within four years of attaining independence adopted
an effective system for producing its accountants locally (Fong & Foo, 1992; Wee, 1994;
Tan, et al., 1994). Sri Lanka, after fifty years of independence, is still following the old
colonial system to educate accountants. Singapore, economically inferior to Sri Lanka dur-
ing the early years of post-independence has achieved a remarkably higher economic
development in recent decades and has emerged as one of the newly industrialised coun-
tries (NIC). In 1995, Singapore recorded a per capita income of 22,500 US dollars, second
only to Japan in the entire Asian region, whereas per capita income was only 640 US dol-
lars in Sri Lanka (World Bank, 1996). It has been reported that Singapore's accounting
education and practices contributed significantly to its economic success (Foo, et al., 1993;
Tan, et al., 1994). Singapore and Sri Lanka are an interesting case study of the historical
development of accounting education and economic development in two countries. We
hope to gain insights into: (1) why one country is still following the old colonial system
while the other has shifted away from it; and, (2) how these events may have effected the
respective economies.
Colonialism and Accounting Education 271
ACCOUNTING EDUCATION IN SINGAPORE
Historically, except for the brief Japanese occupation in the 1940s, Singapore was a British
colony for nearly one and a half centuries gaining independence in 1959. Consequently, its
general education from primary to university level was inherited from the British education
system and accounting education was no exception. The British system of accounting edu-
cation was imposed on Singapore during the colonial period in a number of ways: (1) the
export of British accounting personnel to Singapore; (2) the export of British accounting
qualifications; (3) the establishment of British professional accounting bodies' examina-
tion centers in Singapore; (4) the involvement of British experts in the planning, directing,
organising, teaching and providing assistance in the development of academic institutions
in Singapore; and (5) the general British influence upon the business, education and admin-
istrative environments in the early days of Singapore (Foo, 1988).
Prior to 1956, Singapore did not have a program of studies leading to a local qualifica-
tion in accounting. A foreign professional accounting qualification was the only avenue
through which a person could expect an accounting job. particularly a job in the public sec-
tor. The only accounting qualifications available were obtained by examinations conducted
by overseas professional accounting bodies, such as the Association of Certified Corporate
Accountants of the United Kingdom ( ACCA), the Institute of Cost and Works Accountants
of the United Kingdom (ICWA), and the Australian Society of Accountants (ASA).
The first local accounting program leading to a Bachelor of Commerce with specialisa-
tion in accounting was launched by the Nanyang University in 1956. In the following year,
the Department of Commerce at the Singapore Polytechnic was established to offer, among
other courses, a full-time course leading to the College Diploma in Accounting (Fong &
Foo, 1992). In 1958, the Department of Commerce at the Singapore Polytechnic was
replaced by the Department of Accountancy with the objective of offering both full-time
and part-time courses leading to a Professional Diploma in Accounting (Tan et al., 1994).
Soon after gaining political independence, the authorities of Singapore realised the impor-
tance of producing accountants through their own higher educational institutions without
depending on foreign accounting bodies and what was perceived to be out-dated education
systems. Consequently, the professional accounting diploma awarded by the Singapore
Polytechnic was recognised in 1963 as an adequate qualification for admission to provi-
sional membership of the Singapore Society of Accountants (SSA). The SSA was the local
professional accounting body established by the government for the purpose of registering
professional accountants and regulating the practice of the profession of accountancy in
Singapore. During the 1965-66 academic year, the Department of Accountancy at the Sin-
gapore Polytechnic was renamed the School of Accountancy and the accountancy program
was upgraded from a diploma to a university degree signifying the transformation of the
polytechnic to a university college. As a result of negotiations between the college and the
University of Singapore, the latter agreed to award its accounting degree to students of the
Singapore Polytechnic. In 1969, the amalgamation of the School of Accountancy with the
Department of Business Administration of the University of Singapore represented another
milestone in the historical development of an independent accounting education system in
Singapore (Sunday Times, 1968). At the time of the merger, the School of Accountancy
was relocated to the University of Singapore campus. As a further development in 1971,
the Bachelor of Commerce (Accountancy) program offered by Nanyang University since
272 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
1956 also received its professional recognition, subject to practical training, from the Sin-
gapore Society of Accountants. In 1978, joint courses in accounting were introduced by the
Nanyang University and the University of Singapore. The two schools of accountancy
merged in 1980 to form the School of Accountancy at the National University of
Singapore.
After the reorganization of the Singaporean university system through the formation of
the National University of Singapore and the Nanyang Technological Institute, the coun-
try's accounting education system achieved its highest growth rate. The School of
Accountancy of the National University of Singapore was physically relocated at the Nan-
yang Technological Institute in 1987 and the School of Accountancy was renamed the
School of Accountancy and Business in 1990. In 1991, the Nanyang Technological Insti-
tute became a full-fledged university and is now named the Nanyang Technological
University (NTU). The School of Accountancy and Business of this university has gained
a reputation today as the leading centre for undergraduate and postgraduate accounting
education in Southeast Asia. The Bachelor of Accounting degree awarded by the Nanyang
Technological University is based on a 3-year full-time program of study. In addition to its
Bachelor of Accountancy degree program, it also offers a professional postgraduate pro-
gram leading to a Master of Business Administration in Accounting. Both these accounting
degrees are recognised by the Institute of Certified Public Accountants of Singapore
(ICPAS) for admission to its membership, subject to approved practical experience. The
Bachelor of Accountancy program of NTU, at its various stages of development, has pro-
duced nearly 10, 000 accounting graduates. By the end of 1992, 7442 of these graduates
had become professional accountants by obtaining the ICPAS membership. In addition to
the undergraduate degree, the School of Accountancy and Business at NTU also offers two
postgraduate research degrees leading to the Master of Accountancy (M.Acc) and the Doc-
tor of Philosophy (PhD) in Accounting (Wee, 1994).
Since its inception, the Singapore professional accounting body, [initially as the Sin-
gapore Society of Accountants (SSA) in 1963 and later as the Institute of Certified Public
Accountants of Singapore (ICPAS) in 1987], has maintained a close relationship with the
university's School of Accountancy. This liaison is evidenced by the fact that the Institute
was consulted at each stage of the transition of the School from the Singapore Polytechnic
to the present Nanyang Technological University. A representative of the School of
Accountancy and Business is appointed by the Minister of Finance as a statutory member
of the Council of the ICPAS. Through various committees, the School of Accountancy and
Business also maintains close rapport with the professional accounting body, business
community and other professional organizations to ensure the continuing relevance of its
degree programs (Tan, et al., 1994).
ACCOUNTING EDUCATION IN SRI LANKA
During the colonial period, business activity in Sri Lanka was directed toward the planta-
tion sector introduced to the economy by the British (Ramanathan, 1952). In order to facil-
itate the investment of British capital, plantation joint stock companies were introduced in
the middle of the nineteenth century. Initially, these companies were owned by British
investors and required management and accounting personnel came from the U.K. Even
Colonialism and Accounting Education 273
though these firms were actually located in Sri Lanka, they were managed as if they were
in Britain. No attempt was made to develop an accounting system suitable to local condi-
tions (Perera, 1975). Local people were trained by British accountants to the British system
and employed in operating the British firms. Until about 1925 there were no professionally
qualified accountants in the government service. An exception was the Government Rail-
way, where a few professionally qualified accountants were recruited from England,
apparently for the purpose of training accounting personnel for the Railway (Report of the
Special Committee Appointed to Investigate into the Structure of the Accounting Service,
1949).
Beginning around 1890 a few private educational institutions conducted classes in com-
mercial subjects, including accounting, mainly for students preparing for the British
external examinations held in Sri Lanka. The most popular of these were the examinations
leading to the London Chamber of Commerce certificates and the Cambridge certificates
with the first certificates dating back to 1891 (De Silva, 1969). However, no program of
study leading to a local qualification in accounting was conducted by any organization
until 1943. Even though the Ceylon Technical College at Maradana was set up by the
colonial government in 1893, accounting education was not given a place in its programs
for another fifty years. Only after 1942 did the Ceylon Technical College take steps to
organise and offer certificate and diploma courses in accounting. Accordingly, a commer-
cial certificate course for bookkeepers and a diploma course for prospective accountants
were launched by the Technical College in 1943 and 1946 respectively. These courses
were modelled on similar programs of studies offered in the U.K. Since the Diploma in
Accountancy was a four-year evening course offered at the professional level the admis-
sion to the course was restricted to those who were engaged in accounting related activities.
The curriculum of this course was quite similar to those of the leading professional
accounting bodies in the U.K.
During 1941-1959, the only authoritative body of accountancy existing in Sri Lanka was
the Accountancy Board established by the government to prescribe regulations and con-
duct examinations for selecting suitable candidates for the accountancy service (Report of
the Commission of Inquiry on Technical Education, 1963). Those who were selected by
the Accountancy Board through its examinations were called Ceylon Registered Accoun-
tants. The examinations conducted by this body were based on similar examinations of the
British professional accounting bodies. The Accountancy Board also organised classes for
prospective accountants in collaboration with a few private academies. A number of pri-
vate academies conducted classes for accounting students who independently prepared for
the external examinations of British professional accounting bodies, for the first time in
Colombo in 1920 (Johnson & Caygill, 1971). There was no local professional body of
accountants in Sri Lanka even by the late 1950s, thus, prospective accountants in Sri Lanka
depended on the professional bodies in the U.K. for their professional qualifications. The
most prominent of these professional bodies were the Institute of Chartered Accountants in
England and Wales, the Institute of Incorporated Accountants, the Association of Certified
Corporate Accountants, and the Institute of Cost and Works Accountants. Among them,
the first two required the candidates to be articled under practising accountants, whereas
the last two did not have such a requirement. All prospective chartered accountants were
required to go to the U.K. to be articled for five years, whereas it was possible for the Incor-
porated Accountants to be articled in Sri Lanka for four years and two months before going
274 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
to England to take their examinations. The membership of the other two professional bod-
ies was open to those engaged in accounting activities and it was obtainable locally by
completing the examinations and satisfying the conditions as to the candidate's experience
and character. Primarily based on the knowledge acquired through the Diploma in Accoun-
tancy course conducted at the Ceylon Technical College, a considerable number of
accounting students completed the examinations of the above professional bodies and
became British qualified professional accountants. Over the past three decades, in addition
to the accounting courses offered by the premier technical college at Maradana, similar
courses were conducted by most of the regional technical colleges.
The Institute of Chartered Accountants of Sri Lanka (ICASL) replaced the Accountancy
Board in December 1959 under the provisions of the Act of Parliament No. 23 of 1959.
Since that time it has functioned as the only local professional body of accountants in Sri
Lanka. From its inception, the ICASL was the main local center of accounting education
and training in the country. It provided the opportunity for prospective accountants to
become qualified as Chartered Accountants within the country. However, apart from the
fact that chartered accountants could be produced locally, the method of education and
training used for producing such accountants continued to be the same as that of the Insti-
tute of Chartered Accountants of England and Wales. Following the British model, the
ICASL also introduced its own examinations and only those who passed those examina-
tions and successfully completed a five-year period of practical training as articled clerks
under the supervision of chartered accountants (called principals) were admitted to the
membership of the Institute as 'Chartered Accountants'.
The ICASL has also been engaged in providing a study program to its registered students
for enabling them to prepare for the intermediate (Licentiate) and final (Professional)
examinations. Both formal education and on-the-job training adopted by the ICASL
stressed conformance with the requirements of the Companies Ordinance which was mod-
elled on the British Companies Act of 1929. Consequently, a heavy emphasis was placed
on the legal and auditing aspects of accounting with an emphasis on the technical or
mechanical aspects of accounting (Perera, 1975). Referring to the situation in Sri Lanka,
Perera commented that.
Practically trained accountants tend to eliminate from serious consideration all abstract
and abstruse concepts of accounting, possibly because such complexities are not well
received or understood by them. They are inclined to view accounting education with a
more narrow perspective, and those who are trained under them will have the same atti-
nide(1975:94).
Until recently, the system of 'articles' played a major role in the whole program of educa-
tion and training provided by the ICASL. Under the terms of this training scheme, the prin-
cipal was expected to allow study-time and provide on-the-job training for the trainee
called 'articled clerk'. Since this system was adopted from the U.K. it was generally
assumed that training under articles was adequate for local requirements, even without any
monitoring of the type of training received by an articled clerk. However, experience indi-
cated that articled clerks were often used for mechanical and routine work that could be
handled by bookkeepers or others of more limited capacity. They were seldom given chal-
lenging work or real responsibility (Perera, 1975). Furthermore, in 1973, the Report of the
Colonialism and Accounting Education 275
Committee on the Future Training of Accountants in Sri Lanka pointed out that the system
of accounting education and training based almost exactly upon that of the British char-
tered accountant was inadequate for the country's needs and proposed instead a much more
flexible and relevant system (Accountant, 1973; Manoharan, 1974). In response to the rec-
ommendations of this committee, the ICASL changed the name of its training scheme from
'articles' to 'practical training' and reduced the duration of training from 5 to 3 years for
university graduates and 4 years for non-graduates. It is interesting to note that this reduc-
tion in the duration of practical training was nothing more than directly following the same
change that had been introduced previously by the Institute of Chartered Accountants of
England and Wales (ICAEW, 1997). As a response to the comments made by the above
committee, the ICASL also introduced a new examination structure. However, according
to Briston (1978), the new structure was "a rehash of traditional accounting subjects rather
than a fundamental reassessment of the subjects in which a qualified accountant should be
skilled". Referring to these changes, Briston further noted that,
The disappointing remedy prescribed in Sri Lanka following such a foresighted analy-
sis of the disease is largely attributable to deep-seated British influence exercised
directly through underlying commercial attitudes and through the cadre of U.K. quali-
fied professional accountants in that country ( 1978: 115).
As such, the type of education and training received by prospective accountants in Sri
Lanka has remained practically the same from the inception of the ICASL. The total num-
ber of chartered accountants produced by the ICASL during the 36-year period from 1959
to 1995 amounted to only 1,680 (The Chartered Accountant, 1995). The examination fail-
ure rate is extremely high. Consequently, many school leavers have depended on foreign
professional bodies to acquire professional qualifications.
Although the Sri Lankan university system was established in 1942, it did not include
commerce as a separate discipline until the beginning of 1960. The Vidyodaya University
pioneered in this area by launching two bachelor's degree programs in Business Adminis-
tration and Public Administration at the general and honours levels. Both programs
included a considerable number of accounting subjects. The Bachelor of Arts (Economics)
program of this university also provided a specialisation in accountancy. In 1961, the Uni-
versity of Ceylon (Peradeniya) introduced a program of study leading to the Bachelor of
Commerce degree. This program included a number of accounting subjects. When the uni-
versities in Sri Lanka were reorganised in 1972, all the universities came under central
administration and consequently each university became a campus of the University of Sri
Lanka. One of the significant developments of this reorganization was the rapid expansion
of commerce education in the university system. For example, in addition to the Business
and Public Administration degree programs, a new Bachelor of Commerce degree program
with an emphasis on accounting subjects was introduced at the Vidyodaya Campus in
1973. Similar programs were started in other university campuses in Kelaniya, Colombo,
Ruhuna and Jaffna. These campuses were renamed as separate independent universities in
1977. Although the accounting subjects were offered as a major component of undergrad-
uate degree programs in commerce and management, a comprehensive accounting degree
program was not offered by any university in Sri Lanka until 1992.
276 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
A separate academic department for accounting was set up for the first time and a com-
prehensive bachelor's degree program in accounting was started at the University of Sri
Jayewardenepura in 1992. This four-year program of study is designed to cover the theo-
retical and practical aspects of accounting required for a high-quality academic and
professional degree in accounting. Another important feature of this program is its practi-
cal training scheme. Under this scheme, every undergraduate student is required to
complete a 60-week program of practical training in a selected organization. This is a com-
pulsory requirement satisfied in the third and fourth years of the student's program of
study. However, this accounting degree is still not recognised by the ICASL as a sufficient
qualification for meeting the examination requirement for its membership.
COMPARISON OF ACCOUNTING EDUCATION IN SINGAPORE AND SRI LANKA
Our discussion in the preceding two sections reveals that, despite the similar colonial influ-
ence on the two countries, there exist a number of differences between Singapore and Sri
Lanka in terms of their accounting education systems. The most obvious difference is that
while Singapore successfully moved away from the colonial system of producing accoun-
tants, Sri Lanka is still following the same old system. In Singapore, only the practical
training and the continuing professional development activities are handled by the profes-
sional accounting bodies. Professionals in many countries have concluded that the univer-
sity is the most appropriate institution to organize and offer comprehensive programs of
study that provide the foundations for competent accounting professionals. By adopting
this model, Singapore has been able to produce high-quality accountants locally in suffi-
cient numbers to support their expanding economy (Tan, et al., 1994). The three-year
Bachelor of Accounting degree awarded by the university is accepted by the professional
accounting body in Singapore as an adequate qualification for professional recognition
without further examination, subject only to the practical experience. As such, the univer-
sity accounting education has enabled the Singaporean professional accounting body
(ICAPS) to increase its membership from 344 in 1964 to 7,444 in 1992 and concentrate
more effectively on the professional development of accountants in the country (Tan, et al.,
1994).
In Sri Lanka, even the four-year accounting degree with 60-week practical experience is
not accepted by the ICASL as an adequate qualification for granting exemptions from its
professional examinations. As shown in Table 1, the rate of failure at these examinations is
enormously high. Several reasons seem to have contributed to the poor student pass results
on the ICASL examinations. A principal reason is the inadequate teaching time and cover-
age of subject matter devoted to each subject in the study programs. The professional
accounting body is not a full-time educational institution and does not have a full-time
teaching staff who can devote individual attention to the different student needs. The
amount of time devoted to lectures, tutorials and assignments and subject matter coverage
at a full-time university is much greater than those of a study program provided by the pro-
fessional body.
In 36 years, the ICASL has produced only 1,680 professional accountants with an annual
supply as low as 47. Since 617 of these accountants have left the country for employment
abroad, the actual number of locally qualified professional accountants working in Sri
Colonialism and Accounting Education 277
Table 1 . Results of Examinations Conducted by the Institute of Chartered Accountants of Sri Lanka-
1994
Number of
Number of
Percentage of
Percentage of
Title of Examination
Candidates
Passes
Passes
Failure
Licentiate Part 1
5,074
1,045
21
79
Licentiate Part II
2,008
749
37
63
Professional Part I
1,260
290
23
77
Professional Part II
498
111
22
78
Professional Part III
275
63
23
77
Professional Unit I
21
4
19
81
Professional Unit II
46
2
4
96
Source: Annual Report of ICASL 1 994.
Lanka was only 1,063 in 1995 (ICASL, 1995). Even when the accountants with British
qualifications are added to this figure, the total number of professionally qualified accoun-
tants working in Sri Lanka is only around 2,000. For a country with 17.9 million people,
this seems grossly inadequate to sustain economic development. By contrast, Singapore
with only 2.9 million people has over 8,000 professionally qualified accountants today.
The establishment of a local accounting body in Sri Lanka (ICASL) in 1959 was
undoubtedly a very important step toward the development of accounting education and
practice in the country. Unfortunately, the ICASL accounting curriculum is not designed to
suit the local needs, instead, it is a replica of the accounting curriculum of the Institute of
Chartered Accountants of England and Wales (ICAEW) as indicated in Table 2.
Another feature of the deep-rooted colonial influence on accounting education at the
professional level in Sri Lanka is the heavy emphasis placed on the legal and auditing
aspects of accounting with inadequate attention being devoted to managerial accounting.
As a result, accounting education in Sri Lanka concentrates on the technical or mechanical
aspects of accounting. In this regard, what Enthoven observed in most developing coun-
tries three decades ago is still applicable to Sri Lanka:
Unfortunately, in most developing economies accounting is still not viewed as a tool for
such management purposes as realistic comparison, evaluation, and decision making.
Its primary objective is still the accumulation of (historical) data for financial statement
and auditing purposes. Although this is a necessary and valuable function, it is not
wholly satisfactory for the essential "development programming" in these economies.
That the accounting requisites of a mature economy are different from those in a coun-
try at or near the "take off point should be stressed (Enthoven, 1967: 109).
The above situation is apparent in examining accounting education programs in Sri Lanka.
For example, cost and management accounting courses in the curriculum of the ICASL
account for only 10.5 per cent of the curriculum (Table 2). A large proportion of what
remains is devoted to the basic objectives and procedures of accounting and how to comply
with the technical requirements for corporate accountability, legal compliance and audit-
ing. All of these topics are agreed to be essential elements in accounting. However, they are
more of a preventive and detective character than directly supporting the development of
278
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1998
Table 2. Subjects for the Examinations of ICASL and ICAEW
Institute of Chartered Accountants
of England and Wales (ICAEW)
Institute of Chartered Accountants
of Sri Lanka (ICASL)
1959
1960
Intermediate:
Bookkeeping & Accounts (incl. Companies)
Bookkeeping & Accounts (incl. Partnerships)
Bookkeeping & Accounts (inch Executorship)
Auditing
General Commercial Knowledge
Taxation and Cost Accounting
Final:
Advanced Accounting — Part 1
Advanced Accounting — Part 2
Auditing (incl. Investigations)
Taxation
General Commercial Knowledge, Cost and
Management Accounting
English Law — Part 1
English Law — Part 2
Intermediate:
Bookkeeping & Accounts 1
Bookkeeping & Accounts 2
Auditing
General Commercial Knowledge
Final— Part 1:
Advanced Accountancy 1
Advanced Accountancy 2
Partnership and Company Law
Mercantile Law
Final — Part 2:
Management Accountancy
Auditing
Taxation
General Commercial Knowledge
1996
1996
Foundation Education:
Financial Accounting and Auditing
Business Law
Economics
Introduction to Financial Decisions
Company Law
Management and Marketing
Intermediate:
Auditing and Professional Issues
Financial Reporting
Taxation
Business Planning and Finance
Management Infonnation and Control
Final:
Advanced Auditing and Financial Reporting
Advanced Taxation
Advanced Business and Financial Management
Multidisciplinary Case Study
Licentiate I:
Financial Accounting
Business Math., Statistics & Data Processing
Business Communication (English ) Paper 1
Licentiate II:
Cost and Management Accounting
Auditing
Business Environment (Economics, Law, Taxation &
Management)
Professional I:
Accounting Theory
Auditing (Principles, Techniques & Procedures)
Economics, Finance and Commerce
Commercial and Industrial Law
Business Communication (English) — Paper 2
Professional II:
Advanced Financial Accounting
Taxation
Corporate Law
Information Technology
Professional III:
Management Accounting & Operations Research
Techniques
Financial Management
Auditing (Practice)
Management
Sources:
Artliur N. Long (I960), Training Accountant in Great Britain, The Accouniing Review. July, p.457-58: ICASL,
Annual Report 1994; ICAEW, Training to Become a Chartered Accountant. July 1996.
Colonialism and Accounting Education 279
entrepreneurial skills (Standish, 1983: 5). The development of entrepreneurial skills is
extremely important for the developing economy like Sri Lanka.
In Singapore, students who obtain high marks at the GCE advanced level examination
and aspire to pursue an accounting career can enter the accounting profession through a
university degree program. This opportunity to advance to professional status through for-
mal education enables the professional accounting body in Singapore to admit
academically superior and competent accountants to the profession in relatively large num-
bers. By contrast, Sri Lankan students who have not been able to obtain the high marks
required for admission to university degree programs are the ones who normally register
for examinations of the ICASL and British professional accounting bodies. Most of these
students depend on private tutoring to study and prepare for examinations of these profes-
sional bodies. Nevertheless, the rate of failure at these examinations is extremely high,
certainly due in part to the low academic level of students seeking the qualification. Stu-
dents who obtain the highest aggregate marks at the GCE Advanced Level examination
and are admitted to the accounting degree program at the University of Sri Jayewar-
denepura are not exempted from the examination requirement of the ICASL.
Consequently, we fear that some of them are diverted to non-accounting careers. It is a pity
that the apparently most qualified students are not encouraged to enter the accounting pro-
fession. The situation in Sri Lanka provides a classic example of a developing country
where the colonial influence on accounting education is so powerful that even the political
authorities do not dare to break it despite a clear need for more qualified accounting
professionals.
Sri Lankans in large numbers continue to depend on a number of British professional
accounting bodies to obtain professional qualifications. A considerable number of these
candidates have become fully qualified professional accountants, however, many others
complete only parts of the examinations. The British professional examinations are based
on the subject matter applicable to the British economy. This is appropriate for Britain.
However, the Sri Lankan economy is very different from the British in many ways, thus a
considerable amount of the subject matter covered in the above examinations is not rele-
vant for a Sri Lankan accountant. For example, subjects like British Taxation and British
Company Law are almost totally irrelevant in Sri Lanka. One should not assume that what
might be good accounting for a developed country will automatically be relevant and good
for an developing nation and its development process (Enthoven, 1973). For accounting to
be an effective contributor to a country's economic development, what prospective
accountants study must be relevant to the social, political, legal, and economic conditions
within which they operate (Briston, 1978; Hove, 1986). As such, the accountants produced
through studies and examinations based on a developed Western country are unlikely to
contribute effectively toward meeting the needs of the developing economy in Sri Lanka.
CONCLUSION
As mentioned previously, accounting education developed rapidly in Singapore mainly as
a result of its prompt recognition and encouragement by the professional accounting body.
Sri Lanka would have made a much greater progress by now, if the university authorities
had taken similar steps to establish accounting departments and accounting degree pro-
280 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
grams in their universities. The major reason for their reluctance to set up accounting
departments and degree programs is the non-acceptance of university accounting education
by the ICASL for professional recognition. In most developed and fast developing nations,
universities play the major role in producing accountants who can contribute effectively to
the nation's economic development. For example, Korea established its first university
department for accounting in 1978. By the end of 1989, it had established similar depart-
ments and accounting degree programs in 50 universities with a total enrolment of nearly
15,000 accounting students (Min, Song & Kim, 1993). Similarly, in China many universi-
ties have accounting departments offering accounting degree programs at both undergrad-
uate and postgraduate levels (Lin & Deng, 1992). In contrast, the Sri Lankan university
system still has only one accounting department with less than 400 students for the whole
country.
Sri Lankan political and educational leaders must pay a greater attention to accounting
education and take steps to make it relevant and appropriate to solving the problems of eco-
nomic development.
NOTES
1. The country was known as 'Ceylon' until the name was changed to 'Sri Lanka' in 1972.
2. In Singapore and Sri Lanka, students are admitted to universities on the basis of the results
obtained at the General Certificate of Education (Advanced Level) Examination.
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The International
Journal of
Accounting
Book Review
Japanese Accounting — A Historical Approach by Kyojiro Someya, Claredon Press,
Oxford, 1996, 241 pp, $70.
Many articles and books have been written on Japanese management practices, production
and inventory maintenance systems, and business culture. Little, however, has been written
on the distinct Japanese approach to accounting. The collection of Professor Someya' s
essays presented in this book reflects the evolution of Japanese accounting over the 50 year
period following the second World War. Tracing the author's footsteps through his various
research projects also exposes the reader to the different views of other prominent Japanese
researchers. Professor Someya, a former president of the Japanese Accounting Associa-
tion, is currently the Director of the Japan Tax Institute and the focus of his research
reflects the changes in the economic and business conditions in Japan.
The Japanese economy suffered a devastating blow during the second World War, fol-
lowed by a high level of economic growth. During this time, there were many challenging
economic developments. The Japanese accounting research, through its practical applica-
tions, has contributed significantly to revitalizing the Japanese economy. Some examples
include the development of a suitable financial reporting system assisted in controlling the
rampant post-war inflation, rationalizing Japanese business management, and establishing
and fostering the Japanese stock exchange.
The work described in this book spans three main areas of research. The first deals with
the history of Japanese accounting. The second focuses on financial accounting theory. The
third concentrates on cash flow accounting in the context of the difficulties related to the
high inflation in Japan in the immediate post-war period.
After a brief overview of his course of accounting research, Professor Someya describes
in the second chapter the accounting 'revolutions' in Japan. In particular, he details the
introduction of investor-oriented financial reporting and other factors that contributed to
the evolution of the Japanese accounting practices. Chapter 3 describes accounting and
financial reporting in Japan under the commercial code and the securities and exchange
law. It also discusses the Financial Accounting Standards for Business Enterprises
(FASBE), the international accounting standards, and the tax system. Chapter 4 deals with
Japanese accounting principles and the users of financial information. In particular, it high-
lights the impact of the changes in the social environment on the Japanese accounting
principles. Chapter 5 presents external views and their impact on major revisions to the
Japanese authoritative accounting literature. Chapters 6 through 8 describe traditional Jap-
anese bookkeeping procedures and contrast them to current Japanese and common
international procedures.
The International Journal of Accounting, Vol. 33, No. 2, pp. 283-291 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1998 University of Illinois
284 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
Chapter 9 describes the three domains of financial reporting: income measurement,
cash flow accounting, and balance sheet items. It describes the development of Japa-
nese financial accounting by detailing the distinction between accounting for capital
maintenance and accounting for decision making. Chapter 10 describes the author's pro-
posal for the incorporation of "cash-cost" classification to replace the "current-fixed"
classification of balance sheet items. This essay is consistent with the author's prior
writing, which advocated the inclusion of a fund statement among the other financial
statements. Chapter 1 1 details the distinction between cash flow versus flow of com-
modities (production, consumption, and distribution of social wealth). Professor
Someya contends that the objective of business accounting is to present both the cash
flow and flow of commodities. Hence, the author demonstrates the need for three finan-
cial reporting domains: accounting for income measurement (reflecting the flow of
commodities), cash flow accounting, and balance sheet presentation, to incorporate both
the cash flow and the flow of commodities and to account for the discrepancies
between the two statements.
Chapter 12 presents Professor Someya' s views about the role of accounting in industry
and society. By measuring, recording, and disseminating the economic activities of indi-
viduals and organizations, accounting contributes to the industrial development and to
society at large. Chapter 13 discusses the accounting unit of measure and the translation
of foreign currency transactions and financial statements of foreign subsidiaries. Between
1949 and 1971, the exchange rate between the Yen and the U.S. Dollar remained stable
as established by the IMF. Since August 1971, however, there have been wide fluctua-
tions in the exchange rates, which caused significant accounting problems. Professor
Someya argues that exchange rate fluctuations should not be considered as related to the
attributes being measured, but rather, to the accounting unit of measure. He advocates the
translation of financial statements of foreign subsidiaries into domestic currency by using
the "current" exchange rate prevailing on the balance sheet date. The second part of the
book ends with Chapters 14 and 15, dealing with accounting standard selection and its
socio-economic consequences. In this recent essay from 1993, Professor Someya con-
tends that "...in to-day's society we have reached a point where accounting standards
cannot be established without considering their social and economic conse-
quences."(page 147).
The third part of the book deals with "cash flow" accounting. This issue has received
special attention by the author because of periods of high inflation in the history of Japan,
for example, at the end of the Second World War. The accounting profession was chal-
lenged to avoid confusing higher nominal sales figures coupled with lower nominal costs
of sales against the economic reality of losing due to the erosion in the purchasing power
of the money. The income statements and balance sheets, which were based on the accrual
method did not reflect the real value and economic activity of the Japanese enterprises and
this called for the emergence of cash flow accounting. Accordingly, Chapters 16 through
20 describe the preparation and use of cash flow and fund accounting statements in Japan.
Finally, Chapter 21 describes how heads of accounting departments for major Japanese
companies view the statements of cash flow.
The writing and translation of Professor Someya are generally very clear, although occa-
sionally there are statements which seem to be distorted by the difficult task of translation.
For example, on page 2. the author very ably describes a misconception, prevalent during
Book Review 285
inflationary times, confusing "nominal" revenues and expenses with "real" revenues and
expenses. He states: "...to continue showing profits but still be plagued by a lack of cash
means that a company is in fact operating below cost." I believe that the author does not
mean that there is a "lack of cash" during inflationary times, but rather, that there is a lack
of purchasing power during inflationary times.
There is only one point in which I allow myself to have a different opinion than that of
the distinguished author. Professor Someya advocates the translation of financial state-
ments of foreign subsidiaries into domestic currency by using the "current" exchange rate
prevailing on the balance sheet date. In my opinion, the logic behind the "temporal"
method as required, sometimes, by FASB 52 is preferred. It is more consistent with the
accounting treatment of the other issues as it allows for historical exchange rates for items
when they were measured by the "historical" cost.
In conclusion, I believe that this collection of essays by Kyojiro Someya presents a sub-
stantial contribution to the field of accounting. The author has tried to address not only the
basic accounting developments in Japan, but also to trace the socio-economic background
and the reasons for these developments. Readers of Japanese financial statements, accoun-
tants, potential investors, and creditors will find this book concise, useful and very
readable.
Reviewed by Moshe Hagigi
Boston University
Boston, Massachusetts, USA
Accepted by Belverd E. Needles, Jr.
Accounting Research in Lund, edited by Kristina Artsberg, Anne Loft and Stefan Yard,
Lund University Press, Lund, 1993, 248 pp, ISBN 91-7966-242-0 (SEK 196) 248 pp.
The worst thing about this book is its title, which provokes the questions, "Where is
Lund?" and "What possible interest can there be in the accounting research there?" The
answer to the first question is easy: Lund is a small town in Southern Sweden, whose prin-
cipal claim to fame is that it is the site of that country's second oldest university. The
answer to the second question is more problematical, but I hope that, by the end of this
review, I will have persuaded at least some of my readers that at least part of the accounting
research carried out at Lund deserves their attention.
The book consists of thirteen separate papers. The editors claim in their introduction that
the papers have two common characteristics: they are all concerned in various ways with
the relationship between accounting and its social and organisational context, and that they
are all in some way "interdisciplinary." Thus the papers reflect a distinctively Swedish
approach to research which for the non-Swedish reader enhances their interest and origi-
nality. I consider this claim later in the review. At the outset I make the point that the papers
cover a very wide field, including standard-setting, company law, taxation, organisational
matters, budgeting and auditing. Apart from the fact that all the papers reflect the Swedish
approach to research, there is no common theme running through the book. Hence it is very
unlikely that anyone (apart from reviewers!) will read the book from cover to cover. Fur-
thermore the papers are of very mixed quality: some are excellent; two or three a frankly
286 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 2, 1 998
rather poor and which would be likely rejected by a re fereed journal. Faced with this diver-
sity, I feel that the most useful way to review this book is to give a short analysis and
evaluation of each paper, concentrating on those which I consider to be the more interest-
ing for the non-Swedish reader.
Determinants of Accounting Choices by the Auditing Profession: Kristina Artsberg
The first paper is concerned principally with standard-setting in Sweden, concentrating
on the standards set by the Swedish auditing profession, FAR. The research consists of an
analysis of the twenty standards issued by FAR up to 1989, backed up by interviews with
seven leading auditors. The main conclusions are that, over the period 1957-1989, there
was a change in valuation principles from prudence to matching, a change in recognition
criteria from form to substance and a change in legitimation from law to practice. The
paper is a shortened version of the author's doctoral thesis, which was published in Swed-
ish in 1992. In editing her thesis for this book, the author seems to have left out many
important points. The paper is disjointed and the basis for many of its conclusions is
unclear. A further weakness is that the paper is rather out of date; the reported research was
completed in 1990. Hence the recent reform of the Swedish standard-setting system, which
led to the setting up of the Accounting Council in 1989, is not mentioned. Regrettably the
first paper in the book is not one of the best, but readers should not be put off. Many of the
following papers are much better.
Accounting and Taxation: Kristina Artsberg & Christer Nilsson
This paper is excellent. It gives a very clear analysis of the role and influence of taxation
on financial reporting in Sweden, where the state claims to regulate financial reporting in
the public interest (largely, but not exclusively, for taxation purposes). Most of the leading
actors in the accounting field in Sweden consider that the connection between accounting
and taxation is desirable. This is in sharp contrast with the position in the Anglo-Saxon
countries, where the accounting profession considers that the influence of tax rules on
financial reporting is most harmful. The difference in assessment is attributed to the differ-
ent principal function of accounting: in the Anglo-Saxon countries, the informative
characteristics of accounting are stressed; in Sweden, the distributional and calculative
functions are more important. Clearly these different approaches create problems for inter-
national accounting harmonisation. One possible solution is to concentrate on disclosure
and not on valuation, that is Swedish companies should be allowed to retain their tax-
driven valuations on condition that they provide additional information. The great value of
this paper is that it challenges, in a very clear and well-argued way, the conventional wis-
dom of the Anglo-Saxons, that in financial reporting the interests of the shareholders
should have priority over those of the state. The paper should be compulsory reading for all
students in Anglo-Saxon countries who accept the dogma that the principal function of
financial reporting is to provide information for the capital market.
Book Review 287
Accounting Harmonization: Olaf Arwidi andJ[\e Development
of Budgetary Control in Sweden: Olaf Arwidi & Lars Samuelson
Olaf Arwidi contributes two papers. The first paper (on accounting harmonization) is
very difficuh to follow and in your reviewer's opinion is of very limited interest. The sec-
ond paper traces the changing role of budgeting in Sweden from the 1950s, when the
principal objective was cost control, through to the 1990's when budgeting serves a multi-
tude of purposes including facilitating the delegation of responsibility to decentralized
operations. The tasks and methods of budgeting have grown quantitatively, but this does
not mean that budgeting has become "better," simply that it has become more complex. An
important current trend is the greater use of non-financial measures, relating to such mat-
ters as quality and the environment. Specific reference is made to the T50 project of a
major multi-national which aims to reduce all activity times by 50%. The author concludes
that more research is needed on the effect of non-financial measures. Your reviewer agrees
completely: to concentrate on time to the exclusion of other factors would seem to be the
surest way of going bankrupt.
The Role of Administrative Arrangements in Coordinating Federative Structures:
Karin Jonnergard
This paper is on "federative organisations," specifically retail cooperative societies,
where the central organization is owned by the member cooperatives, in complete contrast
to the typical group of companies, where the central organization (the holding company)
owns the subsidiaries. Based on case studies of two "federative organisations" (in Sweden
and in Canada) undertaken in 1983-5, the author demonstrates very clearly how the success
of this organizational form depends on a value system that binds the members together,
backed up by matching administrative arrangements. The paper is well-researched and
well-written. For your reviewer, its great value is that it deals with a form of business orga-
nization that is fundamentally different from the limited company/corporation which
dominates the text-books, and thus it provides a useful stimulus to questioning conven-
tional wisdom. The paper's greatest weakness is that the research on which it is based is
over ten years old and is thus principally of historical interest.
From Gemeinschaft to Gesellschaft: Karin Jonnergard,
Per Arvidson & Jbrgen Carlsson
Karin Jonnergard is also the joint author of this beautifully written and well argued paper
which is based on the ideas of the little-known Swedish sociologist, J. Asplund. "Gemein-
schaft" refers to less formal family-like social organisms which are based on mutual trust
and solidarity. "Gesellschaft" refers organizations, such as commercial enterprises, which
are based on formal contractual relationships, often reflecting the economic interests of the
members. The authors hypothesise that, in recent years, there has been a shift from
Gemeinschaft to Gesellschaft in Swedish society. The authors present a detailed analysis
of two Swedish organizations: the retail cooperative movement (the subject of the previous
paper) and the police force. Accounting has been a major factor in this shift — as a facilitat-
288 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33. No. 2, 1 998
ing factor not as a causal factor — in that a Gesellschaft seeks to measure what a
Gemeinschaft considers to be either immeasurable or not worth measuring. An interesting
point is that the shift from Gemeinschaft to Gesellschaft can be interpreted as a bid by an
organization to achieve greater legitimacy in relation to the rest of society. Over the last
thirty years, the Swedish retail cooperative movement has lost not only market share but
also the respect of many Swedes, who regarded it as highly inefficient by comparison with
commercial firms. By adopting the characteristics of Gesellschaft, the retail corporative
movement is seeking to make itself more similar to those commercial companies which are
deemed to have greater social legitimacy. The paper is well written and illustrated with
appropriate examples from the two organizations studied. Its value to the non-Swedish
reader is that it gives an insight to the behaviour of organizations different from the text-
book profit-maximising firm.
Environment Accounting: the Swedish Case: Fredrik Ljungdahl
This paper presents the results of a survey of the environmental reporting practice of the
62 largest quoted companies on the Stockholm stock exchange. The annual reports were
examined to see if they contained the information recommended by the United Nations'
ISAR working group. In fact only slightly over half of the annual reports contained any
environmental information whatsoever and only 25 (40%) contained information recom-
mended by the UN. Each of the 25 reports contained on average only 2.5 of the 14 different
information elements recommended by the UN. No company reported on environmental
contingent liabilities; the author speculates that this is due to the great difficulty of valuing
this type of liability. The most commonly presented type of environmental information is
that related to the company's products — which is not even mentioned in the UN's report.
The paper is clearly written and provides both a useful (but in no way original) introduction
to the whole subject and an analysis of the position in Sweden. However it is based on
research undertaken in 1990/1, which presumably is now out of date.
Audit Concentration in Sweden and Denmark: Anne Loft & Agneta Sjofors
This paper analyses the increase in audit concentration in Sweden (between 1985 and
1990) and in Denmark (between 1988 and 1991 ). The dates chosen are before and after the
mergers that reduced the Big Eight to the Big Six. Not surprisingly the research reveals a
significant increase in concentration. The authors use sophisticated mathematical tech-
niques to prove what many observers would consider to be blindingly obvious; however it
is good to be rigorous. In Sweden in 1990, three audit firms were responsible for auditing
companies that represented 63% of the turnover of all quoted companies (in 1985 the same
market share was held by seven audit firms). In Denmark in 1991 the top two audit firms
audited 56% of quoted companies (by turnover). In both countries the Big Six became
increasingly dominant, as is illustrated by certain very significant name-changes. The larg-
est Danish audit firm changed its name from "C.Jespersen" to "KPMG C.Jespersen." In
Sweden the second largest firm changed its name from "Bohlins" to "KPMG Bohlins," and
the third largest from "Hagstrrm & Olsson" to "Ernst & Young." The authors ask some
interesting questions as to the consequences of the increasing dominance of the multina-
Book Review 289
tional audit firms: for example what will happen to the nationally defined notion of "good
auditing practice" which is embodied in the law of both Sweden and Denmark. The value
of this paper is that it makes available to the English-speaking reader research on audit con-
centration in Sweden. The Danish research is fully described in an article published in the
European Accounting Review in 1992.
Accounting for Goodwill: The Swedish Case: Sven-Arne Niisson
The subject of this paper is the controversy over the accounting treatment of goodwill
that arose in Sweden in the late 1980's. At this time a significant number of major Swedish
companies accounted for goodwill in ways that were apparently contrary to the law and the
standards set by the Swedish auditing profession. The law prescribed that goodwill should
be amortised over not more than ten years. However beginning in 1986 an increasing num-
ber of Swedish companies began to employ other methods, notably writing off directly to
reserves (used by 26 companies in 1989) and amortising over more than ten years (used by
20 companies in 1989). The impetus came from Swedish companies that were listed on for-
eign stock exchanges (notably New York and London) which preferred to follow the
foreign rules rather than the Swedish ones. Most Swedes were horrified by this flouting of
the law. The Swedish government reacted by setting up the official Accounting Council as
a standard setting body to supplement the auditing profession's private body, whose stan-
dards had been ignored by so many Swedish companies. The first standard issued by the
new body dealt with accounting for business combinations and adopted the lASC's
approach. However the paper, which was apparently written in 1992, does not enlighten us
as to whether the new body has succeeded in restoring order by successfully imposing its
standard on Swedish companies. The value of this paper to the non-Swedish reader is that
it demonstrates the difficulty that a small country may experience in attempting to maintain
its own local accounting standards in the face of the increasing globalization of the world
economy. Sweden is particularly vulnerable in that it has a remarkable number of multi-
national companies that are quoted on foreign stock exchanges and which tend to resist the
imposition of Swedish rules that conflict with American or British rules.
The Historical Development of Company Law in Sweden:
Sven-Arne Niisson & Martin Smiciklas
This short paper gives in four pages a very brief summary of Swedish company law up
to 1910.
Accounting Systems in Their Context: Gert Paulsson
This paper presents the results of a study of the accounting systems of a Swedish health
care district carried out by the author in 1990. The study focussed on changes in the organ-
isational structure of the district whereby departmental managers were given greater
responsibility for the buying and selling of health services. This change led to new
demands being placed on the accounting system, for example, for information that would
290 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol, 33, No. 2, 1 998
facilitate the pricing of the services that were bought and sold. The author considers that
this analysis is consistent with the "orthodox" approach in which the aim of accounting is
deemed to be the provision of information that helps to improve efficiency. However, there
is also evidence of what is termed the "institutional" approach — that accounting is used as
a means of enhancing the legitimacy of the manager and the organization. At the time of
the research, public health care organisations were widely criticised as being hopelessly
inefficient by comparison with private firms. The reform of the accounting system was a
way of deflecting this criticism. The principal value of this paper is that, through the case
study, it provides a valuable bridge between theory and practice. However, the paper is
rather brief. Serious students would be advised to consult the author's book on the study,
which is published (in English) by the Lund University Press.
Investment Evaluations in Swedish Companies: Stefan Yard
This paper reports on a 1986 study of the capital investment criteria used by Swedish
companies. There are two striking results: that the most widely used method was pay-back,
employed by 42% of responding companies; and that the pay-back method was preferred
by companies with relatively low and relatively high profitability. Companies in the mid-
dle (with average profitability) preferred methods that used discounting (NPV or IRR). The
author attributes this preference to the flexibility offered by the pay-back method, in that it
more easily allows the consideration of criteria other than cash flows. The second part of
the paper describes the very complicated mathematical technique used by a large unnamed
Swedish corporation in the 1980' s. This part is interesting, not so much for the details of
the technique, but for the author's assessment that, over time, the technique became so
complicated that the staff did not understand it and treated it as a "black-box." However,
the technique was only changed when the corporation merged with another firm that used
IRR, which evoked the author's dry comment "Corporation harmonization seems to be
considered to be a more important factor when choosing evaluation methods than theoret-
ical consistency or understandability by users."
Accounting and Visibility: Anne Loft
This paper examines the role of cost accounting as a means of increasing the power of
managers to control the operations within factories, particularly the activities of workers.
Reference is made to the work of the French thinker, Michel Foucault, particularly his
analysis of the rise of the factory as a "disciplinary institution." But all the examples in the
text are from Britain; the author, a part-time professor at Lund University, is of British ori-
gin. The cost accounting system and management control regime at the Soho works in
Birmingham are analysed in detail, as is the accounting system described in a British text-
book of 1932. The paper is well-written and provides a useful introduction to the subject of
alternative interpretations of the function of cost and management accounting of which
there is a growing literature. However it has nothing to do with Lund.
Finally I consider the editors' claim that the papers in the book are of particular interest
because they reflect a peculiarly Swedish approach to accounting research. In my opinion
this claim is rather exaggerated. In the case of only four papers (numbers 2,5,6 and 10) did
Book Review 291
I detect a specifically Swedish flavour in the research approach. They were also (perhaps
coincidently) the best and the most interesting from the viewpoint of the non-Swedish
reader. Most of the remaining papers are of interest in that they provide an insight into the
position in Sweden, but there was nothing unusual or exceptional in the research approach
or the research methods that they employed. The last paper is a straightforward piece of
Anglo-Saxon research. In my opinion the value of this book is that it makes available for
the English-speaking reader research that has previously been published only in Swedish.
Lund University is to be congratulated in taking this initiative to bring its accounting
research to a wider audience.
Reviewed by John Flower
Director, Centre for Research
in European Accounting
Brussels, Belgium
Accepted by Belverd E. Needles, Jr.
UCTIONS FOR AUTHORS
JCOPE. The aims of The International Journal of Accounting are to advance the academic and profes-
Titanding of accounting theory and practice from the international perspective and viewpoint. The Jour-
;s that international accounting is influenced by a variety of forces, e.g., governmental, political and
lal attempts to assist in the understanding of the present and potential ability of accounting to aid in
^ and interpretation of international economic transactions. These transactions may be within a profit
• environment. The Journal deliberately encourages a broad view of the origins and development of
Jvith an emphasis on its functions in an increasingly interdependent global economy, and welcomes
Ithat help explain current international accounting practices, with related theoretical justifications, and
jcisms of current practice. Other than occasional commissioned papers or special issues, all the manu-
fihed in the Journal are selected by the editors after the normal refereeing process.
|:ripts should be submitted in triplicate to the Editor, Professor Andrew D. Bailey, Jr.. The Interna-
\oumal of Accounting, University of Illinois, 320 Commerce West, 1206 S. Sixth Street, Champaign
\IQ, U.S.A. '
luscripts must be typewritten or word processed, double spaced on one side only and numbered con-
jly, including an abstract of approximately 100 words, and 6 key words for indexing. Papers must
Se neither previously published nor submitted elsewhere simultaneously. Authors are responsible for
'ig permission from the copyright owner (usually the publisher) to use any quotations, illustrations, or
|rom another source.
Lhor's full name, affiliation, and when applicable, e-mail address should appear on the title page,
lies, figures and illustrations should accompany the manuscript on separate sheets. Captions should
^identify all separate matter, and all figures must be submitted in camera ready copy, or electronic pro-
jecifies files, such as EPS or Post Script. All should be called out in text and indication given as to loca-
u example,
TABLE 1 ABOUT HERE.
Ices should be numbered consecutively throughout the manuscript with superscript Arabic numerals,
^ould be collected in a separate file at the end of the text,
lices should be cited in the text as follows:
Peikart and O'Conner (1989) agree with this method. Other studies have found similar results
Iveikart and O'Conner, 1989; Smith, 1991).
Iparate Reference page(s), each citing should appear, double-spaced, in alphabetical order as follows:
li Articles
^ois, Catherine C. and Bodo B. Schlegelmilch. 1990. "Do Corporate Codes of Conduct Reflect
National Character?" Journal of International Business Studies, (Fourth Quarter): 519-539
pden-Turner Charles and Alfons Trompenaars. 1993. The Seven Cultures of Capitalism. New
York: Doubleday.
Icceptance the author is to submit one copy of the approved manuscript on a spellchecked IBM compati-
fcgram specific disk to the editor. The accuracy of the disk and proofs is the responsibility of the author,
losh submissions are limited to high density disks.
'lEW SECTION. The book review section is interested in works published in any language, as long
Comparative or international in character. The author or publisher of such works should furnish either
editor with two (2) copies of the work, including information about its price and the address where
write for copies. Reviews will be assigned by the book review editors. No unsolicited reviews will be
liggestions of works that might be reviewed are welcomed.
Stephen A. Zeff Rice University - MS 531, P. O. Box 1892, Houston. TX 77251-1892; Tel: +1-713-
^ax: +1-713-285 5251; E-Mail: sa7eff@rice.edu; Dr. Dr. habil. Axel Haller, Universitat Augsburg,
^.r Wirtschaftsprufung, 86135 Augsburg, Germany; Tel: +49 821 5984127; Fax: +49 821 5984224; E-
iller@wiso.uni-augsburg.de.
INSTRUCTIONS FOR AUTHORS
AIMS and SCOPE. The aims of The International Journal of Accounting are to advance the academic and profes-
sional understanding of accounting theory and practice from the international perspective and viewpoint. The Jour-
nal recognizes that international accounting is influenced by a variety of forces, e.g., governmental, political and
economic.
The Journal attempts to assist in the understanding of the present and potential ability of accounting to aid in
the recording and interpretation of international economic transactions. These transactions may be within a profit
or nonprofit environment. The Journal deliberately encourages a broad view of the origins and development of
accounting with an emphasis on its functions in an increasingly interdependent global economy, and welcomes
manuscripts that help explain current international accounting practices, with related theoretical justifications, and
identify criticisms of current practice. Other than occasional commissioned papers or special issues, all the manu-
scripts published in the Journal are selected by the editors after the normal refereeing process.
1. Manuscripts should be submitted in triplicate to the Editor, Professor Andrew D. Bailey, Jr., The Interna-
tional Journal of Accounting, University of Illinois, 320 Commerce West, 1206 S. Sixth Street, Champaign,
IL 61820, U.S.A.
2. All manuscripts must be typewritten or word processed, double spaced on one side only and numbered con-
secutively, including an abstract of approximately 100 words, and 6 key words for indexing. Papers must
either be neither previously published nor submitted elsewhere simultaneously. Authors are responsible for
obtaining permission from the copyright owner (usually the publisher) to use any quotations, illustrations, or
tables from another source.
3. The author's full name, affiliation, and when applicable, e-mail address should appear on the title page.
4. All tables, figures and illustrations should accompany the manuscript on separate sheets. Captions should
clearly identify all separate matter, and all figures must be submitted in camera ready copy, or electronic pro-
gram specifies files, such as EPS or Post Script. All should be called out in text and indication given as to loca-
tion. For example,
TABLE 1 ABOUT HERE.
5. Footnotes should be numbered consecutively throughout the manuscript with superscript Arabic numerals.
They should be collected in a separate file at the end of the text.
6. References should be cited in the text as follows:
Schweikart and O'Conner (1989) agree with this method. Other studies have found similar results
(Schweikart and O'Conner, 1989; Smith, 1991).
On a separate Reference page(s), each citing should appear, double-spaced, in alphabetical order as follows:
Journal Articles
Langlois, Catherine C. and Bodo B. Schlegelmilch. 1990. "Do Corporate Codes of Conduct Reflect
National Character?" Journal of International Business Studies, (Fourth Quarter): 519-539
Books
Hampden-Turner Charles and Alfons Trompenaars. 1993. The Seven Cultures of Capitalism. New
York: Doubleday.
7. Upon acceptance the author is to submit one copy of the approved manuscript on a spellchecked IBM compati-
ble, program specific disk to the editor. The accuracy of the disk and proofs is the responsibility of the author.
Macintosh submissions are limited to high density disks.
BOOK REVIEW SECTION. The book review section is interested in works published in any language, as long
as they are comparative or international in character. The author or publisher of such works should furnish either
book review editor with two (2) copies of the work, including information about its price and the address where
readers may write for copies. Reviews will be assigned by the book review editors. No unsolicited reviews will be
accepted. Suggestions of works that might be reviewed are welcomed.
Professor Stephen A. Zeff Rice University - MS 531, P. O. Box 1892, Houston, TX 77251-1892; Tel: +1-713-
527 6066; Fax: +1-713-285 5251; E-Mail: sazeff@rice.edu; Dr. Dr. habil. Axel Haller, Universitat Augsburg,
Lehrstuhl fur Wirtschaftsprufung, 86135 Augsburg, Germany; Tel: +49 821 5984127; Fax: +49 821 5984224; E-
Mail: axel.haller@wiso.uni-augsburg.de.
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Accounting
Editor
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The
International
Journal of
Accounting
JUN 2 9 1998
. ,K„VFRRITY OF ILLlNOlc
^URBANA-CHAMPAIGN
EDITOR
Andrew D. Bailey, Jr.
University of Illinois at
Urbana-Champaign
CO-EDITORS
Arthur R. Wyatt
University of Illinois at
Urbana-Champaign
Yukio Fujita
Aichi-Gakuin University, Tokyo
R.S. Olusegun Wallace
King Fahd University, Saudi Arabia
Volume 33 • Number 3 • 1998
Stamford, Connecticut
London, England
Center for International Education and Research in Accounting,
Jniversity of Illinois at Urbana-Champaign
EDITOR
Andrew D. Bailey, Jr.
University of Illinois. Urbana-Champaign
CO-EDITORS
Arthur R. Wyatt. University of Illinois, Urbana-Champaign
Yukio Fujila, Aichi Gakiiin University, Tokyo
R. S. Olusegun Wallace, King Fahd University, Saudi Arabia
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Arnold Wright, Boston College, Chestnut
THE INTERNATIONAL
JOURNAL OF ACCOUNTING
VOLUME 33 NUMBER 3 1998
ARTICLES
National Culture and Subordinates' Upward Communication of
Private Information
CHEE W. CHOW, RICHARD NEN-CHEN HWANG,
WOODY LIAO AND ANNE WU 293
Earnings Management in Japanese Companies
MASAKO N. DARROUGH, HAMID POURJALALI AND
SHAHROKH SAUDAGARAN 313
Effect of the Inconsistency In Accounting Standards on the Choice
of Financial Instruments: The case of Debt Issued with Stock
Purchase Warrants and Convertible Debt by Japanese Companies
AKIHIRONOGUCHI 335
New Forms of Assurance Services for New Forms of Information:
The Global Challenge for Accounting Educators
GARY L HOLSTRUM AND JAMES E. HUNTON 347
Accounting Income, Income Components and Market-to-Book
Equity Ratios: Finnish Evidence
JUHA-PEKKA KALLUNKI, MINNA MARTIKAINEN AND
TEPPO MARTIKAINEN 359
Equity Returns: Local GAAP versus U.S. GAAP for Foreign Issuers
from Developing Countries
NORLIN G. RUESCHHOFF AND C. DAVID STRUPECK 377
BOOK REVIEWS
International Financial Reporting and Analysis: A Casebook by
Kenneth R. Ferris
Reviewed by MARK LANG 391
International Accounting and Finance Handbook by Frederick D.S.
Choi
Reviewed by ROLF RUNDFELT 392
Accounting: An International Perspective by Gerhard G. Mueller,
Helen Gernon and Gary K. Meek
Reviewed by THOMAS H. BEECHY 394
The Development of Accounting in an International Context:
A Festschrift in honour of R. H. Par/cer edited by T.E. Cooke and
C.W. Nobes
Reviewed by RICHARD IVIACVE 396
CAPSULE COMMENTARIES 401
The International
Journal of
Accounting
National Culture and Subordinates' Upward
Communication of Private Information
Chee W. Chow, Richard Nen-Chen Hwang, Woody Liao and Anne Wu
Key Words: National culture; Management controls; Subordinate communication truthfulness
Abstract: This study investigates the effects of national culture on the truthfulness with which sub-
ordinates communicate upwards under alternate pay schemes. U.S. nationals and Chinese nation-
als in Taiwan were used to represent members of fwo cultures that significantly diverge on three
cultural dimensions postulated to be relevant to this behavior: Confucian dynamism, individual-
ism/collectivism and a correlate of the latter: concern with "face. "
The results of an experiment were consistent with the prediction that in the absence of face-to-
face interactions with superiors, Chinese relative to U.S. nationals would make smaller misrepre-
sentations of their private information. Also consistent with prediction based on concern with
"face ", both national samples had lower levels of misrepresentations when there was face-to-face
interaction between superior and subordinate. However, contrary to prediction, U.S. nationals
reacted more to such interactions than did their Chinese counterparts. Taken as a whole, these
findings support the importance of national culture and attributes of the control setting on subor-
dinates' communication truthfulness. At the same time, they suggest that how these factors affect
employee behavior is more complex than hypothesized.
INTRODUCTION
Resource allocations in decentralized firms often rely on information supplied by subordi-
nate managers. If these managers are not properly motivated or controlled, then they may
misrepresent their private information to further their self interests at the firm's expense
(Dye, 1983; Penno, 1984; Radner, 1986). Analytical research has proposed pay schemes
for motivating truthful subordinate reporting, and three experimental accounting studies —
Waller and Bishop (1990), Chow et al. (1994a, 1995)— have tested the truth-inducing
properties of some of these schemes. In particular, all three studies have compared subor-
Direct all correspondence to: Chee W. Chow, Vem Odmark Professor of Accountancy, School of Accountancy,
San Diego State University, San Diego, CA 92182-8221, USA E-Mail: cchow@sciences.sdsu.edu.; Richard Nen-
Chen Hwang, Associate Professor of Accounting, California State University-San Marcos; Woody Liao, Profes-
sor of Accounting, University of California-Riverside; Anne Wu, Professor of Accounting, National Chengchi
University.
The International Journal of Accounting, Vol. 33, No. 3, pp. 293-31 1 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright (£) 1998 University of Illinois
294 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol, 33, No. 3, 1 998
dinates' communication truthfulness under the reportedly common hnear profit sharing
(LPS) scheme against one (Groves) that has received much attention in the analytical liter-
ature (Groves, 1973, 1976; Green and Laffont, 1977; Groves and Loeb, 1979; Jennergren,
1980). All found the Groves scheme to be more effective than the LPS scheme at sup-
pressing subordinates' misrepresentations of private information, though it did not elimi-
nate subordinate misrepresentations."
While these prior studies have advanced understanding of how incentive schemes affect
subordinates' communication truthfulness, their findings are limited by the narrow scope
of the experiment. In particular, all three studies have focused on the analytical properties
of the pay schemes tested, and suppressed personal interactions between superior and sub-
ordinate. Yet both the organizational communication and accounting literatures have long
identified face-to-face interactions between superiors and subordinates as an important
form of management control (Lewis, 1980; Bimberg and Snodgrass, 1988; Merchant,
1989). Thus, in his critique of accounting experimental studies on employment contracts.
Waller (1994) stressed the need to go beyond the analytical properties of such contracts to
systematically introduce "experimental treatments that represent behavioral as well as eco-
nomic conditions," because they may reveal "empirical patterns that supplement the
insights derivable from analytical methods" (p. 722). Along the same vein. Baker et al.
(1988) have suggested that economic models of incentive schemes may need to be
enriched by incorporating the insights of psychologists, behaviorists, human resource con-
sultants and personnel executives for compensation practices. The current study is, in part,
a response to these calls for change by introducing face-to-face interactions between supe-
riors and subordinates.
A related objective is to explore whether the effects of controls can be generalized across
national boundaries. There is accumulating evidence that people from different nations dif-
fer in their work-related values and how they react to management practices (Adler, 1996;
Bimberg and Snodgrass, 1988; Chow et al., 1996; Hofstede, 1980, 1991; Kreder and
Zeller, 1988; Vance et al., 1992; Vertinsky et al., 1990). For example. Chow et al. (1996)
have found that relative to their U.S. counterparts facing the same tightness of controls,
Japanese profit center managers were less inclined to engage in activities that were dys-
functional to the company (e.g., myopic actions and data manipulations). Cultural differ-
ences also have been suggested as potential explanatory factors for many U.S. companies'
failed attempts to adopt Japanese management practices (Fucini and Fucini, 1990; Naj,
1993; Young, 1992). Thus, there is reason to expect that both the mix of management prob-
lems (e.g., the extent to which subordinates will engage in misrepresentations), and the
most effective means of controlling them may differ cross-nationally. In the current study,
national culture is hypothesized to affect subordinates' communication truthfulness under
alternate performance-based pay schemes, and in the absence as opposed to the presence of
face-to-face interactions with superiors. Beyond advancing understanding of the determi-
nants of subordinate misrepresentations, the findings also can help the design of controls to
curtail their occurrence in different national settings.
National culture is tested in this study by comparing U.S. nationals and Chinese nation-
als in Taiwan. The former are broadly representative of the Anglo-American cultural clus-
ter (e.g., Australia, New Zealand, United Kingdom, United States), while the latter are part
of the Chinese-based cluster (e.g.. Mainland China, Taiwan, Singapore) (Hairison et al.,
1994; Hofstede, 1980, 1991; O'Connor, 1995). Aside from being divergent from U.S. cul-
National Culture and Private Information 295
ture — thus enabling a more powerful test of culture's effects — Chinese-based culture is
worthy of study because of the emergence of the People's Republic of China and the eco-
nomic power of the overseas Chinese (Barnathan et al., 1993; Drucker, 1994; Kraar, 1993;
Merchant et al., 1995).
The remainder of this paper is organized as follows. The next section provides a review
of the literature as the basis for developing two hypotheses. Then the research method and
findings are presented. The final section provides a summary and discussion.
LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT
National Culture and Subordinate Behavior
Many alternative ways to operationalize the national culture construct have been pro-
posed (Adler, 1996; Child, 1981; Hofstede, 1980, 1991; Schein, 1985; Schwartz, 1994;
Smith et al., 1996; Triandis, 1984). Synthesizing these varied approaches is beyond the
scope of this study, and we organize our discussion and analysis around Hofstede's (1980,
1991) taxonomy in part because it is well supported empirically (e.g., Bochner (1994), Chi-
nese Cultural Connection (1987), Hofstede and Bond (1984), Sondergaard (1994)), and in
part because it is arguably the most widely cited and applied in management and account-
ing research (e.g.. Chow et al., 1991, 1994b, 1996; Gudykunst and Ting-Toomey, 1988;
Harrison, 1992, 1993; Harrison et al., 1994; O'Connor, 1995; Merchant et al., 1995; Soet-
ers and Schreuder, 1988).
Hofstede's ( 1980, 1991 ) taxonomy identifies five major components of national culture:
individualism/collectivism, Confucian dynamism, masculinity/femininity, power distance,
and uncertainty avoidance.' Of these, individualism/collectivism, Confucian dynamism,
and a correlate of the former — concern for "face" — are especially relevant to the phenom-
enon of interest in this study.
Individualism/Collectivism
Individualism and its opposite, collectivism, relate to the relative emphasis that individ-
uals place on their self interests as opposed to those of the group (e.g., family, company).
Students of culture have often cited this attribute as being a fundamental, or core, value that
differs across nations, especially those from the East and West (Triandis, 1989; Lachman
et al., 1994). According to Hofstede (1980, p. 166), employees from collectivist cultures
tend to have an emotional dependence on, and a perceived moral involvement with, the
company, and practices and behaviors are premised on a sense of loyalty and duty binding
the individual to the organization, hi contrast, members of individualist cultures tend to be
emotionally independent from the company, their involvement with the latter tends to be
calculative, and work-related practices and behaviors tend to allow for individual initiative
and expression.
In the case of U.S. nationals and Chinese nationals in Taiwan, Hofstede ( 1 99 1 . p. 53) has
reported individualism scores of 91 and 17. respectively. Consistent with Hofstede's
numerical findings, students of Chinese-based culture have often cited collectivism as one
of its main characteristics, noting especially its emphasis on subjugating one's own inter-
296 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
ests to those of the collective (Bond et al., 1982; Bond and Hwang, 1986; Leung and Bond,
1984; Redding, 1980). In contrast, the self-interest motive is often identified as the comer-
stone of Anglo-American management theories and practices (Bellah et al., 1987; Earley,
1993; Harris and Moran, 1987; Triandis et al., 1988). To the extent that Chinese nationals
emphasize collective interests more so than U.S. nationals, they are less likely to seek per-
sonal gain (such as through misrepresenting their private information) at the expense of the
firm when facing the same pay scheme as the latter.
Concern with "Face"
A correlate of individualism/collectivism is concern with "face." "Face" represents the
positive social value that a person claims for him/herself by the line that others assume he/
she has taken during a particular contact (Goffman, 1955), and would be lost if he/she fails
to meet essential requirements placed upon him/her by virtue of the social position that he/
she occupies. In the case of subordinates reporting their private information to superiors,
misrepresentations of such information would tend to reduce the effectiveness of resource
allocations. Since such dysfunctional acts may be detected (e.g., when outcomes are com-
pared to submitted projections), subordinates' concern for face in the social setting of an
employment relationship can be expected to reduce their misrepresentation tendencies.
Consistent with the view that interpersonal interactions can affect behavior, Young (1985),
Young and Lewis (1995) and Waller ( 1994) have suggested that social pressure to refrain
from opportunistic behavior can significantly affect managerial actions. However,
accounting studies to date on subordinates' communication of private information have not
directly examined this determinant of behavior.^
Redding and Wong (1986, p. 286) note that while concern with face is a human univer-
sal, for the Chinese the degree of concern is particularly high. The reason for this, as
explained by Ho (1976, p. 871), is that in the context of Chinese-based culture, "face is
always attached to status. ..At stake is nothing less than the effective maintenance of one's
standing in society." In contrast, Hofstede (1980) and Triandis (1989) observe that since
members of an individualist culture are supposed to look after themselves, an individual's
self respect can be preserved regardless of what other people think about him/her. Thus,
while maintaining the respect of peers still is important in an individualist culture, it is less
so than obtaining "inner-directed" satisfaction (Harrison, 1993).
Confucian Dynamism
According to Hofstede and Bond (1988), Chinese Cultural Connection (1987) and Hof-
stede (1991), this cultural dimension relates to the extent to which people emphasize long-
term over short-term goals and concerns. In the case of subordinates misrepresenting their
private information to superiors for short-term gain, detection of such misrepresentations
can damage their long-run standing and prospects. To the extent that member of a high
Confucian dynamism culture are more concerned with their actions' long term conse-
quences, they are more likely to refrain from such behavior.
Hofstede (1991, p. 166) reports that the Confucian dynamism scores of U.S. nationals
and Chinese nationals in Taiwan are 29 and 87, respectively. This directional difference
National Culture and Private Information 297
suggests that relative to their U.S. counterparts, Chinese nationals would be more con-
cerned with long-term than short-term gains.
HYPOTHESES
Based on the directional differences between Chinese and U.S. nationals on individualism/
collectivism, concern for "face," and Confucian dynamism, we predict that they would
react differently to the same pay scheme both in the presence and absence of face-to-face
interactions with superiors. In the case of face-to-face interactions being absent, we expect
misrepresentations of private information to be lower for Chinese relative to U.S. subordi-
nates. First, the Chinese nationals' higher collectivism should make them more reluctant to
seek private gain (via misrepresentations) at the expense of the organization. Second, since
misrepresentations may be detected with the passage of time. Chinese nationals' greater
concern for long-run consequences (via their higher Confucian dynamism) should further
dampen their misrepresentation tendency. Hence:
HI: In the absence of face-to-face interactions with superiors, Chinese nationals
would misrepresent their private information to a more limited extent than
would U.S. nationals working under the same pay schemes.
When face-to-face interactions with superiors are present, issues of "face" become more
salient. Since concern with "face" is universal, both Chinese and U.S. nationals are
expected to have lower misrepresentations in the presence of such interactions. However,
since Chinese relative to U.S. nationals have a greater concern for "face," the deterrent
effect on them should be stronger. Thus:
H2: Controlling for the type of pay scheme, face-to-face interactions with superiors
reduce misrepresentations by Chinese nationals more than they do for U.S.
nationals.
METHOD
Design
The experiment had six cells derived from three between-subjects factors. Each factor
had two levels. The first factor was national origin (U.S., Chinese). The second was pay
scheme. The LPS and Groves schemes were selected because both have been included in
all three related prior studies, such that their findings can potentially be related to the cur-
rent study for additional insights. Because of resource considerations, the third between-
subjects factor — presence vs. absence of face-to-face interactions between superior and
subordinate — was crossed with only the LPS scheme. This choice was based on prior
research having found the LPS scheme to induce high levels of subordinate misrepresenta-
tions. If the presence vs. absence of face-to-face interactions does affect subordinate mis-
representations, then this effect is more likely to be manifest under the LPS scheme.
298 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
Subjects
The sample consisted of 144 volunteer subjects, half each from Taiwan and the U.S.. All
were full time upper-division undergraduate business students at a major university in their
respective countries. During recruitment, subjects were told that they would earn cash
based on their performance in a management simulation, but neither the nature nor the
objective of the experiment was revealed to them. To increase homogeneity of cultural val-
ues within each national sample, all U.S. subjects were non-oriental while all Taiwanese
subjects were of Chinese ethnicity and spoke Chinese as their first language.
Task
Consistent with the focus on allocating limited resources among alternate uses, the task
involved pairs of division managers submitting competing project proposals to a central
manager. In both national settings, each treatment was randomly assigned 24 subjects, who
formed 12 pairs of division managers. The role of central manager for each pair was
assumed by a research assistant to maintain consistency across pairs and treatments. '
In each of 20 experimental periods, each division manager first privately observed the
expected ratio of output to input (the "/^ " ratio) for each of three projects. Then he/she sub-
mitted (either truthfully or otherwise) to the central manager a p-ratio for each project.
Each project required 100 units of resource and the central manager only had 300 units
available. Hence, only half (three out of six) of each period's proposed projects could be
selected. Similar to Waller and Bishop (1990) and Chow et al. (1994a, 1995), the central
manager allocated the firm's limited resources to maximize the total expected output, and
had to do so strictly based on the division managers' communicated /^-ratios for the period.
This approach was known to all participants. They also knew that the central manager had
no access to the true p-ratios before making the project funding decision, and that only the
funded projects' true /^-ratios would become known at the end of the period.
The use of 20 periods was aimed at overcoming the prior studies' potential lack of suffi-
cient trials for subjects to understand the experimental setting and to develop their commu-
nication strategies. The first 15 periods were designed for learning, and had their self-
contained set of /^-ratios. Periods 16-19 had their own set of /^-ratios for hypothesis testing.
Period 20 was dropped to control for end-period effects (e.g., a manager changing his/her
communication strategy in the last period to take advantage of his/her paired manager's
stable strategy).^
The subjects were paid cash based on their performance as computed under their
assigned pay schemes. The translation rates between measured performance and cash were
preset and known to each subject. These rates differed between the U.S. and Taiwanese
subjects to allow for differences in local pay scales. For the U.S., the expected cash pay
was $.75 per experimental period under truthful communications.
Procedure
Since running the experiment was highly labor intensive, only 4 or 6 subjects were
scheduled for each time slot. In both countries, all subjects randomly scheduled for a given
National Culture and Private Information 299
time slot were assigned to the same treatment. The experiment took about three hours and
contained the following three steps:
Step One
When the subjects arrived, they were randomly assigned to a division manager position
and directed to a room dedicated to that position. To limit the potential for tacit collusion
(e.g., subjects coordinating their communications to yield the highest combined pay for
each period, and splitting the total pay later), no subject was allowed to know who he/she
was paired with in the experiment.
Upon arrival at the assigned room, each subject was given a packet containing the task
instructions, a form that he/she could use to keep track of decisions and outcomes, and 20
sealed envelopes, one for each experimental period. Each envelope contained a communi-
cation form and the actual p-ratios for that period's three projects. The subjects were told
not to open any of the materials until instructed to do so.
Step Two
The subjects read through the experimental instructions. These provided detailed expla-
nations of the experimental task, the assigned pay scheme, and the order of events in each
period. Then the subjects completed a set of numerical exercises to test their understanding
of how alternate communication strategies may feed into the central manager's project
selection decisions, and in turn how such decisions would affect their measured perfor-
mance. Correct answers were provided at the end of each exercise.
Step Three
The subjects completed 20 experimental periods. Below, the procedure for the subjects
assigned to the LPS scheme without face-to-face interactions (LPS) will first be explained.
Then deviations for the subjects assigned to the Groves scheme and LPS with face-to-face
interactions (LPS-FF) will be noted.
1 . After privately observing his/her three actual /^-ratios, each division manager wrote
on his/her communication form for that period a p-ratio for each project to be
reported to the central manager.
2. The central manager collected both division managers' communication forms and
mechanistically selected the three projects (out of the combined six from both divi-
sion managers) with the highest communicated /^-ratios. (The subjects were aware
that ties would be broken by flipping a coin.) Then he/she marked on each division
manager's communication form the latter' s project(s) selected for funding, and
returned each form to the appropriate division manager.
Subjects assigned to the Groves scheme also received, at the end of each period, the com-
municated net output of their paired managers' funded project(s) for the period. This infor-
mation was needed by each manager under the Groves scheme to compute his/her
performance measure for the period.
300 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
For subjects assigned to LPS-FF, an additional event occurred at the beginning of each
period, starting with period 2. Prior to communicating that period's p-ratios to the central
manager, each division manager was separately visited by the latter. At this meeting, the
division manager had to reveal to the central manager the true p-ratios for those of his/her
projects that had been funded in the prior period (much like a comparison of actual vs. bud-
geted performance). Then the central manager made the following verbal statement. (The
phrase in parentheses was included only if there was a deviation between a subject's actual
and communicated /^-ratios.)
Last period, you had proposed three projects for funding from the company's limited
pool of funds. (Now. it appears that you had mis-communicated the /?-ratio(s) for the
following funded project(s )....) It is important to note that I had relied on your projec-
tions to select the projects for funding allocations so as to maximize the profit for the
company. It is your responsibility as well as mine to make sure that we achieve the com-
pany's financial goal. Now we are about to start the funding decisions for the next
period. Please prepare your funding proposals so I can again allocate the company's
limited funds between you and the other manager.
Then the central manager left each division manager to fill in his/her communication
form in private, and returned to collect it later.
At the end of the 20th period, the subjects completed a post-experiment questionnaire
which contained several manipulation check questions. They were paid later, after their
earnings had been verified.
RESULTS
Manipulation Checl(s
Responses to the exit questionnaire indicated that the subjects from both nations had
high levels of task involvement and had correctly understood the information asymme-
try between them and the central manager.^" To gain some assurance that the two
national samples did differ on individualism/collectivism and Confucian dynamism as
assumed, an additional questionnaire was administered to the LPS-FF subjects on these
cultural dimensions. Based on Hofstede's Scoring Guide (1982), the Chinese subjects'
individualism index was -7.25 vs. 46.42 for the U.S. subjects. This directional differ-
ence is consistent with assumption. For Confucian dynamism, we selected six items
from the Chinese Cultural Connection (1987) instrument which related to this cultural
dimension: harmony with others, non-competitiveness, close friendships, solidarity with
others, trustworthiness, and having a sense of shame (face saving). The 10-point
response scale was anchored by 1 = "of no importance" and 10 = "of supreme impor-
tance." The mean Chinese responses were higher for all six items, with four of these
differences being significant at /? = .05. Specifically related to concern with face sav-
ing, the mean U.S. response of 6.17 was statistically significantly lower than the Chi-
nese mean of 7.17.
National Culture and Private Information
301
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302 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1998
DESCRIPTIVE STATISTICS
The means (standard deviations) of the division managers' cash earnings were as follows
for the U.S. subjects: LPS: $13.20 ($4.22), LPS-FF: $13.84 ($1.96), and Groves: $14.39
($1.75). After adjusting for local pay scale differences, the corresponding numbers for the
Chinese subjects were: LPS: $14.11 ($2.57), LPS-FF: $14.50 ($2.25), and Groves: $14.55
($0.44). The mean pay for each treatment did not differ significantly between the two
national groups, and also appeared to be adequate (though not generous) for the length of
the experimental session.
To as.sess whether 15 periods was sufficient for subject learning, each subject was asked
to identify the period by which he/she had developed a consistent communication strategy.
These self-reported data (Table 1) show that all manager pairs had developed a communi-
cation strategy by period 16 — the start of our test periods. Table 1 also shows that while
quite a few subject pairs reported having developed a stable communication strategy early
in the experiment. 19 pairs did not attain this state until after period 10. While self-reported
data like these admittedly are subject to error, they still provide some assurance that
enough periods had been provided for subject learning. And although it was feasible to
use data from each pair's steady state periods for hypothesis testing (e.g., the data for peri-
ods 12-19 for a pair that had reached steady state in period 12), we elected to focus on peri-
ods 16-19 for two main reasons. One was that this conservative approach provides some
protection against subject error in judging when they had developed a consistent reporting
strategy. More important, since all subject pairs had faced, by design, the same four sets of
/?-ratio triads in periods 16-19 (cf fn. 9), their misrepresentations in these periods could be
directly compared. Below, all of the statistics and test results are based on periods 16-19.
Following the approach of Waller and Bishop (1990), we constructed two misrepresen-
tation measures for each communicated /?-ratio. Absolute misrepresentation (AM) was the
absolute value of the difference between the actual and communicated /^-ratios. Relative
misrepresentation (RM) measured the extent of misrepresentation out of the total amount
possible. For no misrepresentation, RM = 0; for an overstatement, RM = AM/(2.0 - actual
/7-ratio); and for an understatement, RM = AM/( actual /?-ratio - 1.0).
Table 2 presents selected distributional statistics for RM (Panel A) and AM (Panel B).
Two patterns can be noted. First, for both national samples, the mean values of both AM
Table 2. Distributional Statistics for P-Ratio Misrepresentations
U.S. Sample
Chinese Samph
3
LPS
Groves
LPS-FF
LPS
Groves
LPS-FF
Panel A: Relative
Misrepresentations (RM) for Periods 16-
19
Mean
.636
.226
.309
.487
.162
.270
Std. dev.
.358
.275
.379
.391
.267
.320
Minimum
0
0
0
0
0
0
Maximum
1
1
1
1
1
1
Panel B: Absolute M
isrepresentations (AM) for Periods 16
-19
Mean
.272
.075
.120
.169
.052
.086
Std. dev.
.224
.121
.184
.200
.082
.123
Minimum
0
0
0
0
0
0
Maximum
.89
.89
1
.92
.81
.74
National Culture and Private Information 303
and RM are higher under LPS than LPS-FF, with those under Groves being lowest. Sec-
ond, both mean RM and AM are lower for the Chinese sample than its U.S. counterpart
under each pay scheme. And as might be expected based on these patterns. RM and AM
are highly and positively correlated (Pearson r = .638, p<.000). Since the results were qual-
itatively identical between RM and AM, only those based on RM are reported below.
HYPOTHESES TESTS
Test of H1
HI stated the expectation that in the absence of face-to- face interactions with superiors,
subordinate misrepresentations would be smaller for Chinese relative to U.S. nationals.
This hypothesis was tested with an analysis of variance (ANOVA) using each national
sample's data for the LPS and Groves cells. The dependent variable was RM, averaged
over the three projects per period to yield four observations per manager.'"^ The indepen-
dent variables were national origin (Chinese, U.S.), pay scheme (LPS, Groves) and their
interaction. The overall model was highly significant (F = 53.14, p = .000), as were the
main effects due to nation and pay scheme (respectively, F= 12.53. 143.79; p = .000. .000).
The interaction between nation and pay scheme was only marginally significant {F - 3.10,
p = .079).
To further elucidate the nation main effect, t-tests for equality in means were conducted
between nations for the same pay scheme. Consistent with H 1 , under both LPS and Groves,
mean RM was significantly lower for the Chinese than for the U.S. sample (respectively,
r = 23.40, 10.41; /? = .000. .000).''^ Thus. HI was supported.
Test of H2
H2 stated the expectation that Chinese subordinates would respond more than their U.S.
counterparts to the presence of face-to-face interactions with superiors. The ANOVA to
test this hypothesis used each national sample's data for the LPS and LPS-FF cells. RM
was the dependent variable. The independent variables were national origin (Chinese,
U.S.), face-to-face interaction (present, absent) and their interaction term.'^
The overall model was highly significant {F = 29.30, /; = .000). The main effects due to
nation and face-to-face interaction were both highly significant (respectively, F = 9.53,
74.54; p - .000, .000). And in apparent conformity to expectation, the interaction term
between nation and face-to-face interaction also was statistically significant (F = 3.83,
p=.05).
Since H2 was predicated on concern with "face" having an impact on behavior, further
analysis of this effect was conducted using the Chinese and U.S. subjects in the LPS-FF
treatment. An ANOVA was performed using these subjects' RM as the dependent variable.
The independent variables were national origin (Chinese. U.S.). these subjects' responses
to the Chinese Cultural Connection ( 1987) item "having a sense of shame (face saving),"
and their interaction. The model as a whole was significant (F = 2.75. p = .044). Neither the
nation main effect nor its interaction with "face saving" was significant (respectively.
304 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
F = .008, .385; p = .93, .54), but the main effect due to "face saving" was significant
{F = 7.29, p = .008). Furthermore, the pattern of mean RMs was consistent with the
hypothesized effect of concern with face. Using the median observed value (6.0) to dichot-
omize each national sample into high vs. low concern for face, mean RM for the high-con-
cern U.S. subjects was 0.21 vs. 0.36 for those with low concern. For the Chinese sample,
mean RM for high-concern subjects was likewise lower than that for the low-concern sub-
jects (0.23 vs. 0.33).
The pattern of cell means for the interaction between nation and presence/absence of
face-to-face interaction was, however, opposite to that predicted. Whereas mean RM under
LPS (i.e., the absence of face-to-face interactions) was significantly higher for the U.S.
than for the Chinese sample (from HI: r = 23.40, p = .000), the two national samples' mean
RMs were not significantly different under LPS-FF, when such interactions were present {t
= 1.33, p<.lS5). In other words, rather than diverging further in the presence of face-to-
face interactions, the two national samples' misrepresentations became more equal. This
outcome was due to the U.S. subjects having a bigger reduction in mean RM between LPS
and LPS-FF (.636 vs. .309; / = 10.36, /7<.001) as compared to their Chinese counterparts
(.487 vs. .270, r = 7.28, /7<.001).
A possible explanation for the Chinese sample's smaller RM reduction is that it had a
lower starting point (when face-to-face interactions were absent), such that it did not have
as much misrepresentation to forego as its U.S. counterpart. To explore this possibility
with the available (between-subjects) data, we deleted all foursomes of manager pairs (one
pair from each of the four cells from crossing nation with LPS vs. LPS-FF) that had either
zero, or the same low mean RM. Then we reran the tests for H2 using this truncated sam-
ple, and obtained qualitatively equivalent results. As with the full sample, under LPS and
the absence of face-to-face interactions, mean RM was significantly higher for the U.S.
than for the Chinese nationals (.77 vs. .58; / = 4.33, p = .000). And under LPS-FF, mean
RM remained statistically insignificantly different between them (.40 vs. .34; t = 1.26,
p = .21). This similarity of results between the full and truncated samples fails to provide
support for the "floor effect" explanation.
SUMMARY AND DISCUSSION
Consistent with predictions based on individualism/collectivism and Confucian dyna-
mism, when face-to-face interactions with superiors were absent, Chinese subjects misrep-
resented their private information to a smaller extent than U.S. subjects under the same pay
scheme. Also consistent with concern for "face" affecting subordinate behavior, both U.S.
and Chinese nationals had significantly lower levels of misrepresentations when such
interactions were present. Within both national samples, the level of misrepresentation was
negatively related to the degree of concern for face.
The findings, however, were contrary to the expectation that Chinese nationals would
respond more to the presence of face-to-face interactions. The decrease in mean misrepre-
sentations between the absence vs. presence of face-to-face interactions was greater, rather
than smaller, for U.S. than for Chinese nationals, with the mean misrepresentation levels
being not significantly different between the two national samples when face-to-face inter-
actions were present. An exploratory test did not indicate that this result was due to the Chi-
National Culture and Private Intormation 305
nese nationals having started from a lower level of misrepresentations when face-to-face
interactions were absent.
Overall, these experimental findings are consistent with national culture having an
important effect on subordinates' communication truthfulness to superiors. They also
reveal that the way effects arise is more complex than had been assumed. Specifically, the
unexpected greater effect of face-to-face interactions on U.S. vs. Chinese nationals sug-
gests the need to further understand the nature of concern for "face", as well as how "face"-
related considerations arise in different national settings. More important, while this study
has extended experimental research to a richer environment by incorporating interpersonal
interactions and cross-cultural considerations, it still falls far short of capturing the com-
plex setting in which superiors and subordinates interact. Given the importance of informa-
tion sharing within organizations and the increasing globalization of economic activities,
further work to validate and extend this study is highly desirable. In particular, this study
has examined only two pay schemes and national cultures. And within each culture, the
subjects had come from only one institution. Expanding each of these dimensions can shed
light on the findings' robustness, as well as illuminate how components of each dimension
independently and interactively affect subordinate communication behavior. For example,
including students from other universities can help to assess whether the findings are insti-
tution-specific, while engaging managers from real world organizations can shed light on
the findings' generalizability to practice. Relating to individualism/collectivism and Con-
fucian dynamism, since they were hypothesized to affect behavior in the same direction, it
was not possible to differentiate between them or to assess the relative sizes of their
impacts. By designing settings that implicate these (and other) cultural dimensions in dif-
ferent directions, more insight can be obtained into how national culture affects people's
behavior in employment settings.
Beyond studying upward communications by subordinates, it is desirable to explore the
determinants and effects of horizontal and downward communications within organiza-
tions. Furthennore, organizations' concerns probably extend beyond communication truth-
fulness to include such factors as employee work effort, learning and improvement,
teamwork, risk taking, short vs. long term tradeoffs, satisfaction, and job stress. Thus, con-
current with enriching the context being studied, there is room for considering a fuller set
of factors in the objective function.
Finally, this study has used a laboratory experiment. While this approach has areas of
strength (e.g., control, internal validity, replicability), it also has weaknesses (e.g., potential
lack of external validity) (Bimberg et al., 1990). Given the importance of the issues being
considered here, expanding the scope of investigation to include multiple methods (e.g.,
surveys, field studies, archival analysis) would be very desirable.
Acknowledgments: The authors are indebted to the anonymous reviewer for many constructive sug-
gestions, and to the C. F. Koo Educational and Cultural Foundation for its tlnanciai support.
NOTES
Analytical research has suggested many truth-inducing pay schemes beyond that of Groves
(e.g.. Banker & Datar, 1992; Kanodia. 1993; Osband & Reichelstein. 1985). However, none of
these schemes has received nearly as much attention and empirical testing as the Groves
306 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1998
scheme. We limit our discussion to the latter because it has been tested by all three related prior
studies.
Under the Groves scheme, a manager's performance measure is a function of his/her actual out-
put and other managers" projected output for the levels of resources provided to them. Groves
and Loeb ( 1979) have analytically demonstrated that, in a one-period setting and without col-
lusion among risk-neutral subordinates, the dominant strategy for each subordinate under the
Groves scheme is to truthfully communicate his/her private information. In contrast. Waller
and Bishop ( 1990) and Chow et al. ( 1994a) have shown that the LPS scheme motivates manag-
ers to overstate their projects" expected profitability.
2. In addition. Waller and Bishop (1990) found that an extreme form of '"unit-profit-plus-penalty"
scheme — under which pay was reduced to zero for any deviation between actual performance
and budget — also reduced subordinate misrepresentations. Chow et al. ( 1995) found that com-
bining the LPS scheme with probabilistic audits was as effective as the Groves scheme at deter-
ring subordinate misrepresentations.
3. Since Hofstede's taxonomy has been so often used in accounting research, a detailed descrip-
tion of the five cultural dimensions is omitted. Interested readers can obtain such descriptions
from, for example, Haixison et al. ( 1994) and Merchant et al. (1995).
4. To the extent that our study focuses on superior-subordinate relationships, a case can be made
that the power distance cultural dimension also may be relevant. In an employment setting, this
cultural dimension relates to the degree to which subordinates are willing to accept an inequal-
ity of power between them and their superiors and to follow directives given to them by the lat-
ter, including truthful reporting of their private information (Merchant et al., 1995). According
to Hofstede ( 1980. 1991). Chinese nationals in Taiwan are higher in power distance than U.S.
nationals (58 vs. 40). This relative placement of the two cultures is consistent with other studies
of Chinese-based vs. Western cultures (e.g., Harrison, 1992, 1993: Harrison et al., 1994;
0"Connor, 1995). However, Hofstede (1980) also has cautioned that based on the observed dis-
tribution of the cultural dimensions across countries in his sample, only cross-national differ-
ences of 20 points or more should be considered significant. Based on his admonition, and the
fact that the superiors in our experiment had no direct authority over the subordinates beyond
selecting projects for funding, we consider the role of power distance to be minimal in our
study. We also omitted uncertainty avoidance and masculinity because our experimental task
and design did not include manipulations (e.g,, the extensiveness of standardized operating pro-
cedures and the degree of challenge in the performance standard) which implicated these cul-
tural dimensions.
5. The findings of Young's ( 1985) study did suggest that the subjects" misrepresentation behavior
(creation of budgetary slack) was affected by social concerns. However, it did not directly test
this effect as the nature of the superior-subordinate relationship was not varied across treatments.
6. Both the experimental materials and the conduct of the experiment in Taiwan were in Chinese.
The English materials were first translated into Chinese by one of the bilingual members of the
research team. Then it was independently evaluated by another bilingual team member for
adherence to the original. Only minor deviations had to be resolved through discussion.
7. Two research assistants were used in each national setting. All were male graduate students.
Each assistant was trained for up to two hours before assuming his role in the experiment.
8. Waller and Bishop (1990) used a total of 10 experimental periods, while Chow et al. (1994a,
1995) used nine periods. We used double the number of periods of Waller and Bishop because
of their observation that the number of periods in their experiment may have been insufficient
for subjects to fully understand the properties of their pay schemes for developing their com-
munication strategies, especially under the Groves scheme.
9. Separate sets of p-ratio triads were developed for periods 1-15 vs. 16-19 as follows. First, 60
p-ratios were randomly generated using a uniform distribution with a range of 1 .0 to 2.0. Incre-
National Culture and Private Information 307
merits of .01 were used. These /7-ratios were randomly grouped into 20 sets of three. Then, a
duplicate set of these 20 triads was created and randomly matched to the original set to yield 20
pairs of /7-ratio triads. These 20 pairs were divided into three subsets with 15, four, and one
member(s), respectively. The subset of 15 pairs was used in periods 1-15 in 12 random orders,
one per manager pair. (Each manager got one of the two /7-ratio triads in each set.) The subset
of four p-ratio triads was used in periods 16-19, and the final subset was used in period 20.
10. Under the LPS and LPS-FF treatments, the translation rate for the U.S. subjects was $1 in cash
for each 144 units of performance measure. The cash pay to the Chinese subjects was at 60 per-
cent of this level to adjust for differences between accounting graduates' beginning salaries in
the U.S. and Taiwan. Because of the way the performance measure is calculated under the
Groves scheme (see Waller & Bishop, 1990; Chow et al.. 1994a), its scale was double that of
the LPS scheme given the parameter values in our experiment. To preserve parity in expected
cash pay across treatments, the translation rate between performance units and cash for the
Groves subjects was 288 to $ 1 . We acknowledge that these different translation rates may bias
the results (against the Groves scheme in our case). However, the alternative of using the same
translation rate would create an opposite bias by making the cash gain per unit of misrepresen-
tation higher under Groves than the LPS scheme. While the preceding caveat has to be borne in
mind, note that despite the potential bias against the Groves scheme, misrepresentations still
were lower under it than under LPS.
1 1 . This added verbal exchange did not alter the arrangement that the central manager made each
period's project selections strictly based on the two division managers" communicated p-ratios
for the period.
12. The question on task involvement was "To what extent did you make your decisions as if you
were actually involved in a real business situation?" The information asymmetry question was
"How much did the central manager know about your actual p-ratios right after sending your
messages in each round?" The 10-point response scale for each question was anchored with 1
- "not at all" and 10 = "totally." The mean responses from both national samples were substan-
tially above and below the midpoint, respectively, for the two questions.
13. The data in Table 1 suggest that if we had followed the approach of Waller and Bishop (1990)
(which used all 10 periods' data) or Chow et al. (1994a, 1995) (which alternately allowed 3 or
5 learning periods), then over half of the communicated /^-ratios used in the statistical analyses
would not have reflected a steady state communication strategy.
14. We did not treat each reported p-ratio as an independent observation because the managers'
decisions regarding their numerical values are likely to be correlated. For example, if one
project has a very high true /7-ratio, a manager probably would not overstate a less profitable
project's /7-ratio to the extent of causing it to be funded over the former. We also performed the
same set of analyses by aggregating each manager's relative misrepresentations over all four
test periods to yield one observation per manager. The results were not qualitatively different.
15. For all reported t-test results, the results of non-parametric Mann Whitney U-tests were quali-
tatively identical.
16. Note that our test focused on the levels of misrepresentations under LPS and LPS-FF, rather
than the difference between them. This is because the face-to-face interaction treatment was
between, not within, subjects.
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The International
Journal of
Accounting
Earnings Management in Japanese Companies
Masako N. Darrough, Hamid Pourjalali and Shahrokh Saudagaran
University of California-Davis, University of Hawaii at IVIanoa and Santa Clara University
Key Words: Earnings management; Cross-cultural; Japanese accounting; International
accounting
Abstract: This study examines choices of accounting accruals using a large sample of Japanese
companies, which operate in an environment that is generally regarded as being rather different
from the United States. We find that debt-to-equity and asset hypotheses hold in the Japanese envi-
ronment only for the years after the market crash of 1 990. Prior to the crash, the number of
employees seems to capture the political (or economic) pressure. Similar to their U.S. counter-
parts, managers of Japanese companies chose income-increasing accounting accruals to increase
their bonus and increase the amount of outside funding. The ownership effect was also observed
on the choice of accounting accruals. Those companies that have higher degrees of ownerships by
trust companies and stock brokers have incentives to choose income-increasing accruals to pro-
vide a more positive picture of the firm. Since this incentive does not e.xistfor ownership by finan-
cial institutions, the opposite effect was obserx'ed. The effect of ownership by individual investors,
management, or corporations on the choice of income-increasing accruals was opposite to that
hypothesized in 1989. These opposite-to-expected effects were not present after the Japanese mar-
ket crash. The stock market crash of 1990 appears to have had a profound effect on the choices of
accounting accruals.
INTRODUCTION
This study addresses the question of which factors influence the accounting accruals
choices that firm managers make in Japan. Although Japan is the second largest economy
in the world and Japanese firms operate in a global market, the Japanese socio/economic
and institutional environments differ significantly in many aspects from those of the United
States. On an a priori basis, it is not clear how well the contracting theory holds for Japa-
nese firms. Various other forces might be at work to influence accounting accruals choices
for Japanese firms. Based on empirical analysis of data for a large sample of Japanese com-
Direct all correspondence to: Hamid Pourjalali, University of Hawaii at Manoa. Honolulu. HI 96822, E-Mail:
hamid@hawaii.edu; Masako N. Darrough, University of California-Davis, Davis, California 95616-8609, E-
Mail: mndarrough@ucdavis.edu; Shahrokh Saudagaran, Santa Clara University, Santa Clara, CA 95053, E-Mail:
ssaudagaran@mailer.scu.edu.
The International Journal of Accounting, Vol. 33, No. 3, pp. 313-334 ISSN: 0020-7063.
All rights of reproduction in any form re.served. Copyright © 1998 University of Illinois
314 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1998
panics, we provide evidence that some explanatory variables affect choices of accounting
accruals differently as compared to the findings from research on U.S. companies.
Our results indicate that on average, the debt hypothesis does not hold in the Japanese
environment. On the other hand, the political cost hypothesis holds when total assets or the
number of employees is used as the proxy for firm size. Similar to their U.S. counterparts,
managers of Japanese companies chose income-increasing accounting accruals to increase
their bonuses and to increase the amount of outside funding. Income-increasing choices
were positively associated with the ownership of individual investors and trust companies,
but negatively associated with the ownership by other corporations and financial institu-
tions. The Market crash of 1990, which resulted in changes in economic factors, had an
identifiable effect on the choices of accounting accruals.
The paper is organized as follows. The paper first provides a brief review of the eco-
nomic environment in Japan that pertains to the choice of accounting methods. This is fol-
lowed by a description of the variables and the empirical models that are used to test the
theory. Sample selection, data sources, and empirical results are presented in order and fol-
lowed by concluding remarks.
ECONOMIC ENVIRONMENT IN JAPAN
In this section, we discuss briefly two major aspects of the economic environment that are
unique to Japan and pertinent to our discussion: (1) the Japanese accounting framework
and (2) the institution of industrial groups (or keiretsii). Interestingly, both aspects work in
the same direction with respect to managerial incentives to increase reported earnings
either by increasing the cost of or by decreasing the benefit from income-increasing earn-
ings management. In particular, accounting requirements increase the cost of reporting a
higher income, whereas the practice of industrial groupings reduces the need for managers
to increase reported earnings. The close relationship between firms and banks allows man-
agers to take a long-term perspective without worrying about short-term corporate perfor-
mance. This situation does not imply, however, that Japanese managers have no incentive
or desire to look more profitable. Clearly, ceteris paribus, managers look more competent
with a higher reported income.
Japanese Accounting
Japanese accounting practices are influenced by two tracks. In the first track, all joint
stock corporations are subject to the accounting and financial reporting requirements of the
Japanese Commercial Code, which is based on the German code. The second track is cov-
ered by the Securities and Exchange Law, which is based on that of the United States.
While most accounting policies are similar, one important difference is the much larger
role played by the tax laws in Japan as compared to the U.S. (Choi and Hiramatsu, 1987).
Corporation Tax Law and its related regulations specify the methods to be used in
recording various expenses and allowances in order for them to be tax deductible. Given
that the marginal tax rate can exceed 50 percent for many large corporations, tax consider-
ations are likely to be important in accounting choice. For example, companies tend to fol-
low maximum depreciation schedules for both financial and tax purposes. In the U.S. on
Earnings Management 315
the other hand, temporary differences between the tax-related statements and other external
reports are permitted. In addition, there are also various requirements and allowances for
reserves in Japan. The financial reporting is not, however, exactly similar to tax reports.
While the allowances and reserves must be accounted for in the financial statements to be
allowed as tax deductions, there are a number of items that reflect permanent or temporary
differences between taxable and pretax income shown in the financial statements. For
example, entertainment expenses and the bonuses paid to directors, in most cases, are not
tax deductible in Japan (Price Waterhouse. 1993, p. 99).
In sum, although there might be incentives for Japanese managers to manipulate reported
earnings to appear more profitable, the cost of the manipulation is much higher for Japa-
nese managers due to a high level of conformity between financial reporting and tax report-
ing. To the extent that tax accounting and financial reporting have greater differences in the
U.S., managers are subject to smaller opportunity costs.
Industrial Groups
An important feature of the Japanese industrial structure is the existence of keiretsu
(industrial groups). It is estimated that as much as 25 percent of the Japanese GNP is pro-
duced by the firms that belong to the six largest keiretsu groups (Mitsui, Mitsubishi, Sum-
itomo, Fuji, Sanwa, and Dai-ichi Kangyo). These six, as well as other keiretsu groups, are
loosely connected through a main bank (or main banks) referred to as the main hank sys-
tem. Typically, large firms in each group own shares of other firms in the group. Cross-
share holding is in part an anti-takeover device, but also represents shares that are not
bought and sold for short-term capital gains, but rather for long-term business relationships
(Phan and Yoshikawa, 1996).
Close relationships among firms and banks within a keiretsu group result in better infor-
mation sharing within each group. For example, the bank's intimate involvement in the
strategic and financial planning activities of the firm confers a unique access to critical
information that other investors do not have (Sohn, 1994). In addition, information gather-
ing is also facilitated by such keiretsu-affiliated networks as interlocking directorates
(Gerlach, 1992) and regular meetings of presidents. In one study, almost 70 percent of the
'outside' directors of the 100 Japanese companies sampled were from other companies
within the keiretsu (McKinnon, 1984). These networks allow the bank, as a governance
institution, to screen and monitor management in the same way that credit-rating or secu-
rities analysis agencies do under the U.S. capital market system and to proactively respond
rather than react to managerial investment decisions. Kaplan and Minton (1994) found that
Japanese banks tend to send their directors to help companies with financial and earnings
problems.
The much more active role played by banks in the Japanese capital market, coupled with
the significant number of shares owned by cross-share holders, is expected to reduce the
need for disclosure of financial information to the equity market. For example, individual
investors hold 49 percent of total outstanding shares in the United States, but they hold
only 24 percent in Japan. Banks, other financial institutions, and non-financial firms hold
47 percent of total outstanding shares in Japan. Thus, roughly half of the outstanding shares
might be held by the so called stable shareholders.
316 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
Traditionally, Japanese firms relied heavily on debt rather than equity as the major
source of capital. The typical debt-ratio in Japanese firms has been in excess of 80 percent
(McKinnon, 1984). Coupled with the fact that a significant portion of shares are owned by
banks and other affiliate corporations, the resulting ownership structure is more concen-
trated than that in the U.S. and other equity-oriented countries. Thus, the financial account-
ing information is oriented toward the needs of other corporations, financial institutions,
and the government rather than the individual stockholder (Evans, Taylor and Holzmann,
1994; Mueller, Gernon and Meek, 1994).
Furthermore, since Japanese corporations obtain substantial funds from their main bank
and other affiliate banks, the level of competition for resources in the capital market is less
for large Japanese companies. In sum, the institution of industrial groups allows the man-
agement of member firms to take long-term perspectives (due to cross-share holding), pro-
vides opportunities for private information sharing with important financial investors
(banks and other coiporations), and reduces the need to disclose information to the inves-
tors that are more short-term oriented.
A discussion of two more features that are specific to Japan is in order: ( 1 ) corporate
governance practice and (2) the role of unions. Until the most recent revision of the Com-
mercial Code in 1993, Japanese boards rarely paid much attention to their fiduciary duties
simply because shareholders were not very active. Pre- 1993 board structures emphasized
stakeholder participation, which meant that boards with outsiders (excluding bank execu-
tives) were uncommon. With no competitive market for outside directors, board members
were usually selected from the ranks of employees. This virtual merging of management
and board also meant that boards were seldom independent entities and thus often served
at the behest of management." Due to the pattern of institutional cross equity holdings and
an insider board structure, the market for corporate control is undeveloped in Japan. Take-
overs (as a means of corporate control) are actively resisted because they are considered a
form of robbery in the Japanese culture. Stock price is rarely an efficient indicator of Jap-
anese corporate performance since the cross holding of equity is meant to stabilize trading
relationships and therefore a relatively low volume of stocks is actually traded. The unreli-
ability of stock prices as an information source reduces the ability of an acquirer to evaluate
potential targets (Phan and Yoshikawa, 1996). In terms of accounting method choice, this
factor is expected to put less pressure on managers to use income-increasing accruals.
Finally, we note that there might be a strong rationale for Japanese management to
appear less profitable when negotiating with labor unions. Typically, labor unions are orga-
nized within each company, with possible affiliation with national unions. Each enterprise
union negotiates with its employer. Both the management and the union are usually aware
of the fact they are in the same boat. However, labor negotiations can be quite antagonistic
and confrontational. In such situations, the management would find it easier to extract con-
cessions from unions if the company had lower reported earnings.
VARIABLES AND MODEL SPECIFICATION
Dependent Variable Specification: Measuring Discretionary Accruals
Most of the effort in testing earnings management behavior has focused on explaining
accounting choices by examining the relationship between an accounting choice variable
Earnings Management 317
and a number of explanatory variables. In defining the accounting choice variable, three
different approaches ha\e been most w idely used: ( I ) single procedure (e.g.. Hagerman
and Zmijewski. 1979). (2) sets of procedures (e.g.. Zmijewski and Hagerman. 1981: Press
and Weintrop. 1990. Inoue and Thomas. 1996). (3) and net accruals (e.g.. Healy. 1985;
DeAngelo. 1988). All three definitions of accounting choice ha\e been criticized as being
poorly specified, and consequently, they may ha\e contributed to the low power of the tests
(Watts and Zimmerman, 1990).
Jones ( 1 99 1 ) developed a model to capture the discretionary component of total accruals.
Jones defines the total accruals as "the change in noncash working capital before income
taxes payable less total depreciation expense" (page 207). To relax the assumption that the
changes in total accruals are due solely to changes in discretionary accruals, she uses an
expectation model for total accruals to control for changes in the economic circumstances
of each firm. This expectation model uses an estimation period for each firm that ranges
between 14 and 32 years. Dechow. Sloan, and Sweeney ( 1995) assess the relative perfor-
mance of fi\e alternati\e discretionan,' accrual models (Healy: DeAngelo: Jones: modified
Jones: and industry ) at detecting earnings management. They conclude, based on four sets
of power tests, that a modified \ersion of the Jones ( 1991 ) model pro\ ides the most pow-
erful tests of earnings management. Unfortunateh . the long historical data necessary to
establish the expectation model is not available in our data base and we could not use the
Jones model. Pourjalali and Hansen (1996) developed a model that measures the amount
of manipulation in the discretionary accruals. Because this model is not directly related to
a specific set of acceptable accounting methods and the expected values could be calcu-
lated using the items that are available in the NIKKEI data base, we used a modified ver-
sion of this model to measure the manipulated amount of accruals. The modified model and
its assumptions are discussed below .
The Discretionary Amount of Accrual Model
The accounting choice variable should measure the income effect of all discretionary
choices made by a manager for a gi\ en period. Let A, be the total income effect of the dis-
cretionarv choices for period t. Since discretionary choices can affect revenues, variable
expenses, and fixed expenses, A^ can be expressed as the sum of three discretionarv sub-
components:
where
Ai-f = the discretionary revenue effect
A^., = the discretionary variable accrual effect
Afj = the discretionary fixed accrual effect
Assessing each sub-component effect provides a measure for the total discretionary
effect. The following assumptions are needed to build the desired measurement
model:
31 8 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
1. Receivables Assumption. The ratio of true accounts receivables to true sales reve-
nues can be measured using the average of prior period balances for these accounts.
"True" is defined as the amount that would be reported without manipulation..
2. Cost Behavior Assumption. Cost behavior can be described as a linear function of
reported revenues. This function can be measured using the average of prior period
balances for costs (operating expenses) and sales revenues.
3. Fi.xed E.xpense Assumption. The only significant fixed expenses are depreciation and
amortization. Any changes in assessing these expenses and their effects on income
must be disclosed.
Following the first assumption, the true ratio for accounts receivables to revenue pro-
duces the expected amount of non-manipulated revenue for the period. The difference
between the expected and the reported amount of revenue is the discretionary revenue
effect (A,-, ) on reported income for period t. Details for this calculation are provided in
Appendix A. The second assumption and the expected amount of non-manipulated revenue
(see above) can be used to estimate expected variable accrued expenses. The difference
between the expected and the reported amounts of variable accrued expenses is the discre-
tionary variable expenses effect (Aj,,) on the reported income for period t. Details for this
calculation are also provided in Appendix A. Adding A,., , Aj., and Aa provides total income
effect of discretionary choices for period t (A,); this is the dependent variable used in this
study.
Specification of Explanatory Variables
A frequent problem with international accounting research is data availability and com-
parability. Although prior US-based research has identified a large set of variables that
influence accounting method choices, this study is limited to the variables whose disclo-
sure is required in Japan (e.g., total compensation data for directors are not required,
although total bonuses are) and available through the NIKKEI data base. An important set
of missing variables in this study is the one related to management compensation plans.
This limitation can reduce the power of the bonus hypothesis test. The explanatory vari-
ables considered in this study are categorized as follows:
1 . Debt Covenants
2. Political Cost/Public Exposure Variables
3. Bonus Variable
4. Internal/External Financing
5. Ownership
6. Effect of the 1990s Stock Market Crash
Debt Covenants
Most accounting-choice research has used the debt-to-equity ratio as a surrogate for a
firm's closeness to debt covenant violations and found that the higher the debt-to-equity
ratio, the more income-increasing accounting methods managers choose. Results of Duke
Earnings Management 319
and Hunt (1990) suggest that the debt-to-equity ratio is a good surrogate for the closeness
to or existence of debt covenant restrictions for over 60 percent of restrictions that relate to
retained earnings, working capital, and net tangible assets (p. 56). Thus, as the debt-to-
equity ratio increases, income-increasing activity is expected; that is, a positive association
is predicted.
Even though the debt ratio may be a good proxy for measuring closeness to debt cove-
nants, there is no compelling reason to believe that the closeness to debt covenants will
influence the managers in Japan to choose to increase accruals. As discussed earlier, one
difference between debt in the U.S. and in Japan is the source. Most large U.S. corporations
borrow through the issuance of long-term bonds, while most Japanese corporations borrow
money from banks. On average, Japanese companies have a higher debt-to-equity ratio
than the U.S. companies. This higher rate does not necessarily mean that the firm is close
to debt covenant violations. In Japan, the majority of debt and equity holders function as
the governance institution for client firms (Phan and Yoshikawa, 1996). In times of finan-
cial distress, Japanese banks and other members of keiretsu provide additional support or
send their directors to oversee operations instead of pushing the firms into bankruptcy
(Hoshi et al., 1991). The presence of a main bank within the keiretsu and stable sharehold-
ers are usually attributed as one of the important reasons why Japanese managers can
afford to take a long-term perspective without worrying about short-term corporate perfor-
mance. Given this situation, the debt covenant hypothesis may not hold the same explana-
tory power for Japanese companies' accounting choices. The following hypothesis is
suggested with the expectation that it might not hold for Japanese companies to the same
extent as for American companies:
HI: The larger the Japanese firm's debt/equity ratio, the more the manager is
expected to choose income-increasing accruals.
Political Cost/Public Exposure Variables
Past studies often used size (measured by total assets) as a proxy for political sensitivity.
We do not expect the same relation to hold in Japan. The Japanese economic climate is
friendlier to large businesses than that in the United States. The Japanese government has
not been as concerned with anti-trust regulation as has the United States. One possible rea-
son for this difference in attitudes is that the Japanese government focuses on the compet-
itiveness of Japanese companies in the global market, while U.S. authorities have largely
focused on the domestic market when measuring market dominance. Moreover, the size
variable may be a proxy for effects other than political sensitivity. For example, the oper-
ating characteristics of smaller firms may be significantly different from those of larger
firms (e.g., greater default risk). Thus, it seems possible that accounting accrual behavior
may differ based on the size of the firm because of factors other than political sensitivity.
In addition to size, therefore, a more direct measure of political sensitivity is needed. One
possible proxy for political sensitivity is the number of employees, since they are one of the
political groups for each company (i.e., the enteiprise union). Given the well-known Japa-
nese emphasis on collective and group achievement, one may suggest that employees do
not have the same incentives to impose political pressure on their companies as do employ-
ees of U.S. firms. Moreover, since the collective bargaining takes place at the enterprise
320 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
level and workers are typically paid a bonus based on the performance of the company, the
management of Japanese companies may have incentives to reduce reported income by
choosing income-decreasing accruals to weaken the bargaining position of their unions.
The following hypotheses are suggested here to capture the effect of size and number of
employees on the choice of accounting accruals. We do not expect that the size hypothesis
will be supported in Japan.
H2: The larger the Japanese company, the more likely managers are to choose
income-decreasing accruals.
H3: The more employees that a Japanese company has, the more managers are
expected to choose income-decreasing accruals.
Because conformity between financial reporting and tax reporting is required in the Jap-
anese environment, management may change accounting accruals to minimize the com-
pany's taxes. As mentioned previously, since the same depreciation methods are required
for tax and financial purposes, depreciation expense cannot be manipulated for tax pur-
poses only. The influence of tax on other choices of accounting accruals can be related to
the income tax rates. The higher the rate, the more beneficial income-decreasing deprecia-
tion methods would be. Since it is not possible to determine the "true" marginal tax rate
(i.e., the marginal tax rate without earnings management), we use an average effective tax
rate based on actual tax liability and income. To adjust for the benefit from depreciation
expenses, we calculated the effective tax rate as the ratio of "tax paid and accrued" to the
income before taxes and depreciation. The test of this argument about depreciation as well
as any other accruals is incoiporated in the following hypothesis:
H4: The higher the tax rates, the more Japanese managers are expected to choose
income-decreasing accruals.
Bonus Variable
To test the bonus hypothesis, most studies have used a zero-one bonus effect variable.
This simplistic approach ignores the details of bonus plans as well as the effect of total
compensation on accounting choice. Healy (1985), for example, has shown that the details
of bonus plans are significant. While the details of the compensation plans in Japan are not
readily available, current literature suggests that the bonuses are based on operating
income, ordinary income, or the differences between actual and budgeted items (Inoue
and Thomas, 1996). Since the budgeted items are not disclosed, we can only look at the
income variables. Thus, we expect to find a direct relationship between the management
bonus and choices of income-increasing accruals. Mangers would choose increase-
increasing accruals in an expectation of increasing their bonus. The following hypothesis
will be tested:
H5: The higher the amount of management bonus for the period, the more likely
Japanese management is to have chosen income-increasing accruals.
Earnings Management 321
Since the only information on the management bonus plans is the total amount of bonus
paid, this amount will be used to test this hypothesis.
Internal/External Financing
In addition to the high degree of reserves that Japanese corporations are legally required
to maintain, most companies are able to appropriate a considerable amount of their retained
earnings to reduce the earnings available for dividend payments, hence to generate internal
financing. This practice is easily implemented in the Japanese environment since compa-
nies are heavily owned by other corporations and financial institutions that are interested in
long-term rather than short-term returns. Although the debt covenant variable (debt-to-
equity ratio) captures the effect of the financial dependency on outside sources, this vari-
able ignores an internal source of financing: the appropriation of retained earnings. Once
appropriated, the retained earnings cannot be used for dividend payments. Similar to the
debt covenant hypothesis, managers of firnis that need external financing are more likely
to use discretionary accounting accruals to present a better picture of the firm. The follow-
ing hypothesis is tested:
H6: The more a Japanese firm needs external financing, the more managers are
expected to select income-increasing accruals.
The high degree of appropriations of earnings (as compared to total net assets) signals
that the firm has high internal financing or low external financing. Clearly, a negative rela-
tionship exists between the internal and external financing. Since data are available to cal-
culate internal financing (ratio of Appropriated Retained Earnings to Net Assets), we will
use this ratio to test the above hypothesis with an expectation that there will be a negative
relationship between internal financing and income-increasing choices of accounting
accruals (opposite to the hypothesized sign in the case of external financing).
Ownership
As previously mentioned, the ownership structure of Japanese companies is different
from that of their counterparts in the U.S. A larger portion of the equity of companies in
Japan is held by financial institutions, securities brokers, other corporations, and invest-
ment trusts. We develop four hypotheses to examine the effect on earnings management
from ownership by ( 1) individual investors, (2) the management, (3) securities brokers and
investment trusts, (4) other corporations, and (5) other financial institutions. Although all
these investors are "owners" of companies, the horizon over which these investors hold
their share ownership might vary significantly. In general, individual investors, securities
brokers, and investment trusts are expected to have a shorter horizon than management,
financial institutions, and corporate cross-share holders.
Ownership by Individual Investors
U.S. companies are expected to have strong incentives to provide a more positive picture
of the firm to their most important source of capital, individual investors; therefore they
322 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No, 3. 1 998
choose accruals to either smooth or increase income. Individual investors hold on average
49 percent of total outstanding shares in the United States, whereas they hold only 24 per-
cent in Japan. Since individual investors play a less significant role. Japanese companies,
on average, might not have the same incentive to paint a more positive picture of the com-
pany. Nevertheless, at the margin, as individual ownership increases, Japanese companies
are expected to try to provide a better picture. The following states this hypothesis.
H7: The higher the degree of individual investors in the ownership, the more Japa-
nese managers are expected to choose income-increasing accruals.
Ownership by the Management
Research has revealed that manager-controlled firms and owner-controlled firms have
different goals. One way these differences manifest themselves is through the choice of
accounting methods (e.g., Hunt, 1985 and Dhaliwal et al., 1982). Thus, we hypothesize that
the degree of managerial control affects accounting choices.
One possible measure of managerial control is the percentage ownership of shares by the
management. As ownership by management increases, managerial control increases. In the
U.S. environment, management has at least two incentives to choose income-increasing
accruals. First, income-increasing methods present a more favorable financial picture and
may help prevent a takeover. Managers' resistance to takeovers is explained by the fact that
they often lose their jobs or perquisites (Azariadis and Stiglitz. 1983). Second, accounting-
based bonus schemes are more likely to be found in manager-controlled firms. In the U.S.
environment, Pourjalali and Hansen (1996) provide evidence that as managerial control
increases (ownership by management decreases), income-increasing activities increase.
While Japanese managers are rarely worried about take-overs, their bonus is based on
only current income or some items derived using current income. Thus, we suggest that
while managers in Japan would choose income-increasing accounting accruals to increase
their bonuses, the choice is affected by their degree of ownership in the company. The
managers of Japanese firms that have a lower degree of ownership in their companies
might choose income-increasing accruals to increase their wealth through accounting num-
bers more than those managers who have a higher degree of ownership in their companies.
The following hypothesis tests this conjecture:
H8: The lower the degree of ownership by the management, the more the Japanese
managers are expected to choose income-increasing accruals.
Ownership by Securities Brokers and Investment Trusts
The final ownership hypothesis is related to the effect of the investment by securities
brokers and investment trusts. Both these groups have a short-term return perspective (ver-
sus investments by other corporations and financial institutions). As a result, we expect a
positive relationship between the choice of income-increasing accounting accruals and the
degree of ownership of these groups of investors. The following hypothesis is tested:
Earnings Management 323
H9: The higher the degree of ownership by securities brokers and investment
trusts, the more the Japanese managers are expected to choose income-increas-
ing accruals.
Ownership by Other Corporations and Financial Institutions
Relative to the U.S., the environment in Japan is characterized by very large banks that
provide a significant amount of the capital necessary for the coiporations. Moreover, many
firms are owned jointly and mutually by other firms and organized into keiretsu. Since
these organizations are more interested in long-term benefits from their investments, the
Japanese companies do not have strong incentives to increase their income by choosing
income-increasing accruals (Phan and Yoshikawa, 1996). On the contrary, they have
incentives to choose income-decreasing accruals in an attempt to provide long-term bene-
fits such as minimization of tax payments. The following hypothesis tests this theory:
HIO: The higher the degree of ownership by other corporations and financial institu-
tions, the more the Japanese managers are expected to choose income-decreas-
ing accruals.
The 1990 Stock Market Crash
After the Plaza Accord of 1985, the government of Japan let the value of the yen rise.
While this action resulted in a decrease in exports (and an increase in imports), it also
resulted in an increase in new investment and an increase in Japan's stock prices. The mar-
ket capitalization of stocks on the Tokyo Stock Exchange in 1990 was 4.5 times the value
in 1986. In 1989, the government, noticing stock price increases and problems in the
financial system, launched various new policy measures to rectify the situation. For exam-
ple, during the first week of 1990, the government increased interest rates. This action,
among other factors, triggered the market crash of 1990, which resulted in a 5 1 % reduction
in stock prices (Scott and Wellons, 1996). The government intervened by actions such as:
• Pouring pension funds cash into the market
• Creating a Securities and Exchange Surveillance Commission-SESC (1992)
• Creating a Cooperative Credit Purchasing Company (1992)
• Accepting interest lost as a deductible tax item
• Advising no rapid write-off for bad debt
• Not requiring companies to mark to market Fixed Assets, Investment in Stocks
(although the market values depreciated after the market crash).
Since the economic environment has undergone a major change, we must consider the
possibility that the managers of Japanese companies had different incentives for earnings
management in years prior to 1991 (before the stock market crash) from the incentives fol-
lowing 1990. For this reason, the test results are provided for both before and after the Jap-
anese market crash.
324 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
Table 1. Sample sizes used in the study
1989-1992
1989
1990
1991
1992
(Company-Year)
Sample size before deletion of
1440
1440
1440
1440
5760
tho.se with missing data
Companies with missing data
874
803
785
845
3307
Remaining companies
566
637
655
595
2453
SAMPLE AND DATA
The population includes 1440 companies for which data were available through the
NIKKEI Databank Bureau. The data we use are based on parent-only rather than on con-
solidated financial statements. More detailed data are available on a parent-only basis (e.g.,
the composition of ownership), and parent-only financial statements are traditionally con-
sidered the primary financial statements in Japan (Lowe 1990). In particular, tax liability is
calculated according to parent-only financial results. All firms for which we could get data
on the necessary variables for the years 1989, 1990, 1991, or 1992 were included in the
sample. Depending on the year , different numbers of companies were deleted because of
missing variables. Table 1 provides a summary of the sample of companies in each of the
four years.
RESULTS OF THE STUDY
Table 2 provides the descriptive statistics for all the variables included in the study. As this
table indicates, the mean for most of the variables did not substantially change during the
four-year period under study; however, it should be noted that the percentage of shares held
by securities brokers steadily decreased, while the percentage of shares held by individual
investors increased in 1991 and 1992. On average, companies continued to grow with their
average total assets increasing almost 18% during the four year period. The average tax
rate was the lowest in 1991, the year following the stock market crash, and internal financ-
ing (FIN) increased by almost 20% from 1989 to 1992.
Each hypothesis was tested in two different ways: by company-year (pooled) and by cal-
endar years. The ordinary least squares (OLS) analysis was used.
Company-Year Results
Table 3 reports the results for the company-year (the entire period) analysis. As this table
indicates, all of the significant variables, except the individual and corporate ownership
variables, had the signs suggested by the hypotheses. One of the interesting findings is that,
as expected, the debt-to-equity variable is not significant, although this variable has con-
stantly been used to explain income-increasing accounting accrual choices in the United
States. We used total assets and the number of employees as alternative measures of polit-
ical cost and found negative associations for both variables. The total assets variable is sig-
nificant despite the expectation that it would not be important in the Japanese environment.
Earnings Management
325
Table 2. Descriptive Statistics for Variables that were Included in the Model
Mean (Std Dev)
Variable
1989
1990
1991
1992
DTOE
2.711084
2.748266
2.767377
2.652559
(3.861)
(4.67)
(7.63)
(4.758)
ASSET
74672
82210
86708
88002
(112796)
(125808)
(132540)
(135003)
EMPLOY
1420.581
1472.349
1520.100
1548.240
(1970.87)
(2062.93)
(2172.67)
(2262.86)
TXRT
0.257029
0.234328
0.211928
0.231747
(0.369)
(0.125)
(0.352)
(0.268)
BONUS
43.10466
45.90403
46.64750
46.24334
(32.16)
(34.11)
(35.28)
(35.38)
FIN
0.136601
0.140102
0.150026
0.163227
(0.105)
(0.106)
(0.110)
(0.117)
IND-SHR**
0.254750
0.251532
0.255739
0.271542
(0.107)
(0.107)
(0.108)
(0.114)
FIN-SHR**
0.347522
0.345666
0.342452
0.335785
(0.148)
(0.145)
(0.145)
(0.144)
CORP-SHR**
0.297982
0.308533
0.310752
0.308005
(0.173)
(0.175)
(0.174)
(0.172)
dir-shr"
0.036970
0.034392
0.033865
0.032665
(0.055)
(0.052)
(0.052)
(0.049)
TRST-SHR**
0.040028
0.042344
0.040971
0.040859
(0.037)
(0.038)
(0.037)
(0.038)
BROK-SHR**
0.022747
0.017532
0.016220
0.011144
(0.023)
(0.021)
(0.021)
(0.012)
Notes: DTOE = Debt to Equity Ratio
ASSET = Total Assets
EMPLOY = Number of Employees
TXRT = Enteqjrise Tax Paid and AccruedACurrent income + Depreciation)
BONUS = Officers Bonus
FIN = Appropriated Retained Earnings/Total Assets
IND-SHR = Shares Held by Individuals
DIR-SHR = Shares Held by Directors
CORP-SHR = Shares Held by Other Corporations
RN-SHR = Shares Held by Financial Institutions
TRST-SHR = Shares Held by Investment Trusts
BROK-SHR = Shares Held by Securities Brokers
**Since the total number of shares was unavailable, these numbers were calculated by dividing the
number of shares for the mentioned variable by the total number of shares for all groups whose data
was available.
This suggests that even in Japan, the larger companies could be subject to more political
pressure than the smaller companies. The negative relationship lor the number of employ-
ees, however, might be due to firms' attempts to reduce wage bills (economic motivation
rather than political). A significant result for the effect of the corporate tax rate (TXRT)
was not found. ^ This might be due to the lack of data on the fixed accrual effect through
depreciation. The result for the individual ownership variable, which is much smaller in
Japan relative to the U.S., shows that the Japanese managers have opposite incentives to
their U.S. counterparts for choosing income-decreasing accounting accruals.
326
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol, 33, No. 3, 1 998
Table 3. Manipulation in Accounting Numbers for Years 1989-1992
Expected
Parameter
Standard
T for HO:
Variable
Sign
Estimate
Error
Pramater = 0
Prob> ITI
INTERCEPT
None
340.40
230.54
1.476
0.1399
DTOE
+
+50.58
39.410
1.283
0.1994
ASSET
-0.004*
0.0007
-5.979
0.0001
EMPLOY
-0.08*
0.0289
-2.975
0.0030
TXRT
-204.48
619.90
-0.330
0.7415
BONUS
+
+ 11.15*
2.2355
4.989
0.0001
FIN
-3914.11*
666.25
-5.875
0.0001
IND-SHR
+
-0.018*
0.0032
-5.670
0.0001
FIN-SHR
+0.093*
0.0186
4.999
0.0001
CORP-SHR
+0.005
0.0030
1.902
0.0573
DIR-SHR
+
-0.009*
0.0021
-4.321
0.0001
TRST-SHR
+
+0.106*
0.0132
8.052
0.0001
BROK-SHR
+
+0.173*
0.0257
6.748
0.0001
DUMMY
+
+343.14*
139.58
2.458
0.0140
Sores: DTOE = Debt to Equity Ratio
ASSET = Total Assets
EMPLOY = Number of Employees
TXRT = Enterprise Tax Paid and Accrued/( Current income + Depreciation)
BONUS = Officers Bonus
FIN = Appropriated Retained Earnings/Total Assets
IND-SHR = Shares Held by Individuals
DIR-SHR = Shares Held by Directors
CORP-SHR = Shares Held by Other Corporations
FIN-SHR = Shares Held by Financial Institutions
TRST-SHR = Shares Held by Investment Trusts
BROK-SHR = Shares Held by Securities Brokers
DUMMY = Dummy variable ( Dummy =1 for 1991 and 1992 otherwise zero)
*Significant at .05 level; Number of observations (company-year): 2454; F Value: 40.8 1 8, Prob>f :
0.0001 ; ^-square 0. 1 786, Adj /?-sq 0. 1 742.
Another noteworthy finding in Table 3 is that the dummy variable for the 1990 stock
market crash is significant. This variable takes a value of one for years 1991 and 1992 and
a value of zero for years of 1989 and 1990. Given the direction of the dummy variable, the
finding suggests that managers of Japanese companies chose income-increasing account-
ing accruals for years after the market-crash of 1990. The income-increasing-accruals may
have been chosen to provide a better picture of companies in the troubled economy of years
after 1990 or in an effort to keep companies' stock value high. Consequently, there is evi-
dence that the choices of accounting accruals were influenced by the market crash.
Calendar-Year Results
To see if managers reacted differently pre (1989 and 1990) and post (1991 and 1992)
stock market crash, we ran a regression analysis for each of the four years: 1989, 1990.
1991, and 1992. Table 4 compares the results among different years and those of pre- and
post-market crash. Results for these years are both similar and as strong as those in Table
3. The only significant variables that are contrary to our hypotheses are the ones mentioned
in Table 3 (individual and corporate ownership, and total assets). Interestingly, these
Earnings Management 327
Table 4. Comparative Results of Regression Analysis for Years 1989-1992
(only signs for significant vanables are included)
Market Crash"
1989-1992
Year"
1989
1990
1991
1992
pre
Post
Table (3)
Number of obsen ations
566
637
655
595
1203
1250
2453
(AdjR-)
(.21)
(33')
(.19)
(.32)
(.21)
(.24)
(.17)
DTOE
+
+
+
ASSET
+*
-
-
-
-
EMPLOY
-
-
-
TXRT
BONUS
+
+
+
+
+
+
FIN
-
-
-
-
-
-
IND-SHR
.*
_*
_*
FIN-SHR
-
-
-
-
-
-
CORP-SHR
+*
+*
+*
DIR-SHR
+*
+*
+*
TRST-SHR
+
+
+
+
+
+
BROK-SHR
+
+
+
+
+
+
+
Dummv Var
N/A
N/A
N/A
N/A
N/A
N/A
+
Notes: The \ ariable is significant with opposite to hypothesized sign.
TTie detailed analysis for each year is available upon request from the corresponding author.
N/A Not applicable. For definition of variables see Table 3 above.
All significant variables (but three in 1989). were in the same direction as predicted in this study's
hypotheses. These variables are: DTOE. .ASSET. Employ. BONUS. HN. RN-SHR. TRST-SHR, and
BROK-SHR. The direction of Dummy Variable suggest income-increasing behavior for years after
market crash of 1990.
results are present onh in 1989. the year before the stock market crash. We attribute this to
the bubble economy of the pre-stock market crash period.
Although the results show that the debt-to-equity variable for the entire four year period
was not significant (see Table 3 above), it was significant after the crash (1991 and 1992).
It appears that under a tighter market economic condition, the managers of Japanese com-
panies either encountered greater pressure from the debt-holders to provide a more positive
picture, or the> needed to pro\ ide a more positi\ e picture to obtain outside financing. The
increase in the amount of internal financing during the years after the crash supports the
second e.xplanation (see Table 2 above). The results for >ears 1989 and 1990 are in accord
with our expectation and this \ ariable does not significantly affect the amount of manipu-
lation in the accruals. These results ma\ also indicate that the debt and equit\ en\ ironment
in Japan is moving closer to that of the U.S.^
The second hypothesis addressed political cost and suggested that larger firms would
choose income-decreasing behavior. We expected that this hypothesis would not hold. As
Table 4 indicates, the ASSET variable is significant for years after the crash (1991 and
1992) in the direction suggested by the hypothesis. This variable is significant in 1989 with
an opposite sign to what was hypothesized. Again, these results could be related to market
pressure that resulted from the market crash. This result shown in Table 3 (income-decreas-
ing effect of size variable) is driven by the years 1991 and 1992. The effect of the number
of employees (as a measure of political costs) is significant and negative as hypothesized
onh in one \ ear (i.e.. 1989).
328 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
The coq)orate tax rates also did not significantly affect the choices in accounting accru-
als in any of the years under study. The management bonus continued to provide incentives
for the firms to choose income-increasing accruals in all years except for 1989. When this
variable was standardized by the total assets, however, the significant effect disappeared
completely. This suggests that managers of larger companies receive higher bonuses (as is
expected in any environment) and they do not use accounting accruals to increase the
amount of their bonuses. The results found for FIN strongly support hypothesis 6. The sig-
nificant negative coefficient suggests that firms requiring more external financing chose
more income-increasing accounting accruals. Even in 1992, this variable is significant at
.09 level and carries the expected sign.
The results indicate that the ownership variables are mostly consistent with the suggested
hypotheses w ith three exceptions. First, not every variable was consistently significant across
time. For example, the management ownership ( DIR-SHR) was significant for only one year,
1989. Second, three (out of six) ownership variables had opposite to predicted signs: indi-
vidual, management, and corporate ownership (IND-SHR, DIR-SHR, and CORP-SHR),
again in 1989. As argued earlier, these results could be related to the market crash of 1990.
SUMMARY AND CONCLUSION
This study addressed the question of how Japanese managers make decisions on accounting
choice. Using the data available for a large sample of Japanese companies, the study presented
evidence supporting most of the hypotheses as developed. Since the business and accounting
environment in Japan is different from that in the U.S.. it is quite likely that the incentives
to manipulate accounting numbers in Japan are different from those in the U.S . The dependent
variable in this study is a discretionary accrual variable. This amount is calculated using a
model that incorporates any changes in the discretionary accounting accruals without employ-
ing the accounting methods directly. We found that some explanatory variables affect choices
of accounting accruals differently in Japan as compared to prior tests for U.S. companies.
Our results indicate that, on average, the debt hypothesis does not hold in the Japanese
environment. Total assets and the number of employees appear to provide significant expla-
nation either as political pressure variables or as proxy of labor costs. Similar to their U.S.
counterparts, managers of Japanese companies choose income-increasing accounting accru-
als to increase the amount of outside funding. The ownership effect was also observed on
the choices of accounting accruals. Those companies having higher degrees of ownership
by trust companies chose income-increasing accruals to provide a more positive picture of
the firm. The opposite effect was observed for the ownership by financial institutions. Con-
trary to our expectations, three ownership variables (individual investors, managers, and
corporations) had wrong signs only in 1989. The stock market crash of 1990 had a definite
effect on earnings management behavior and seems to have signaled a major regime change.
Although this study has data limitations, the results contribute to the existing literature
regarding the choices of accounting accruals in other countries. For example, the model
used in this study can be easily applied in other countries. Furthermore, we have shown that
the traditional way of explaining accounting accrual choices in the U.S. may not be appro-
priate in other countries and additional (and in some cases, different) variables need to be
employed for explaining accounting accrual choices.
Earnings Management 329
This study can be extended to include additional detailed information for ownership
(such as foreign investors), and management bonus plans. Furthermore, future researchers
should consider the effect of the changing environment in Japan for the years after 1992.
For example, the Japanese government revised the Commercial Code in 1993. The revised
Code provides more incentives for Japanese corporate boards to pay closer attention to
their fiduciary duties because of the possibility of shareholder activism. Similarly, in 1997,
the Japanese government lifted the ban on holding companies (zaibatsus) that had been in
place since the end of the Second World War. In due course, this action could drastically
affect the Japanese business environment. Our results suggest that financial statement users
must consider financial statements from countries other than their own within the context
of the business and cultural environment of the country where they originate. Financial
statements from different countries cannot be treated as identical even though they may
ostensibly be prepared using identical accounting standards such as those of the Interna-
tional Accounting Standards Committee (lASC).
Acknowledgments: We wish to thank Jacob Thomas, Somnath Das. Russell Taussig and partici-
pants at the Oklahoma State University research colloquium and the 1997 Annual Meeting of the
American Accounting Association's International Accounting Section, and an anonymous reviewer
for the International Journal of Accounting for their helpful comments and suggestions.
APPENDIX A
Assessing the discretionary revenue effect
The receivables assumption suggests that a true ratio for accounts receivables to reve-
nues exists. Then this ratio can be found using the following:
K = A/?^,.„ to M ) / ^{t-n to M ) = ^^Tl / ^Tt '
where
K is the firm's normal (true) accounts receivable to revenues ratio (averaged
from n to t-1, where t is the year under study).
^{t-n to r-1 ) *^ ^^^ firm's total revenue from t-n to t-1, where t is the year under study.
^^{t-)not-\) is ^he firm's total accounts receivable from t-n to t-1, where t is the year
under study.
ARjj is the true accounts receivable in year t.
Rjj is the true total revenue in year t.
An important assumption we make about sales revenue manipulation is that managers
can only manipulate the amount of credit sales (not cash-sales) through accounts receiv-
ables. Assuming that management has manipulated the revenue in period t, the accounts
receivable (ARj) to sales revenues (/?,) ratio for t is not equal to K. Defining ARj, = /?j, to
be the manipulated amount, we have the following relation:
K = ARj/Rj, = (AR, - ARj,)/(R, - /?j,).
Substituting the equality ARj, = R^j, and solving for /?j,, we get
330
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
Rj, = (AR,-K*R,m-K).
Assessing the Variable Accrual Effect
By the Cost Behavior assumption, the average variable accrued cost ratio of periods (t-n
to /-I) can serve as the benchmark for assessing period r's discretionary changes in variable
accrued expenses. Essentially, the change in the average variable accrued expense ratio for
periods (t-n to r-1 ) to period / signals a discretionary change that belongs only to period /.
Thus, the income effect is simply the change in ratio multiplied by the true revenues of
period t. The total variable cost ratio is the difference between the total expenses and fixed
expenses (i.e.. the depreciation and amortization expenses), divided by reported revenues:
where
Ef is total reported operating expenses
F^ is Depreciation + Amortization (by the fixed expense assumption)
The income effect of manipulating variable accrued expenses is computed as follows:
^vt ~ '^(t-n '
)^Tt
b,R,
Even if management manipulates the amount of income for one period by adjusting
accounts receivables and revenues, the effect has to be reversed in the near future. Using
the average of six years (n - 7) should delete the manipulation effect for individual periods.
APPENDIX B
Dependent Variable Specification: Measuring Discretionary Accruals
ACCOUNTING NUMBERS WITHOUT MANIPULATION
"t-1"
T
"t+1"
Sales (.8 cash)
400
500
300
Cash exp (.5 sales)
(200)
(250)
(150)
200
250
150
Accrued expenses:
Dep. Ex.
50
50
50
Bad debt (.1 sales)
40
50
30
Other accruals(.2 sales)
80
100
60.
Total accruals
(170)
(200)
(140)
Net Income
30
50
10
Account Receivable(.2 sale)
80
100
60
Assume that the manager manipulates the amount of sales, bad debts expense, and the
depreciation expense for the period '7." The manager may decide to decrease or increase
the net income of the period, depending on the firm's contracting situation. Also, assume
Earnings Management 331
that the changes in the depreciation expense are disclosed in the financial statements as
"cumulative effect of the changes in accounting methods." As a result, it is not necessary
that the researcher calculate the effect of the depreciation manipulation on the period's net
income. The direction of the manipulation in net income can be predicted by the direction
of the "cumulative effect of the changes in accounting methods" (or by that of the effect of
the manipulation of the variable accrued expenses) on net income. The following situation
is a case of income-increasing behavior for period "r"
MANAGER CHOOSES TO INCREASE THE NET INCOME FOR "t:"
Assume that the result of the manipulation is as follows:
"t-1"
"t"
"t+1"
Sales (.8 cash)
350
550
300
Cash exp (.5 sales)
075)
(275)
(150)
175
275
150
Accrued expenses:
Dep. Ex.
50
30
70
Bad debt (.1 sales)
35
27.5
57.5
Other accruals(.2 sales)
70
110
60.
Total accruals
(155)
(167.5)
(187.5)
Net Income
.2 sale)
20
30
107.5
37.5
Account Recei\able(
100
60
The dependent variable for the test of theory consists of three components:
where
A,.f = the discretionary revenue effect
A^., = the discretionary variable accrual effect
Ajj = the discretionary fixed accrual effect
The following steps should be taken to calculate the dependent variable:
Step one: Calculate A^^ (assume R, and /?,^| are reported revenues for the two periods / and
t+l and AR stands for accounts receivable):
A,,,,, /R,,,=K,,,=K = 60/300 = . 2
Rj; = AR/K = 100/.2 = 500 = expected revenue for /.
A,.f =(Rf- Rj,)i 1 -/?), where h is the total variable cost ratio.
h = [(275/550) + ((27.5+1 10)/550)] = .75
A„ = {R, - Rjf)il-b) = (550 - 500}{l-J5) = 12.5
Step two: Calculate A,,,:
^vt ~ ^at ' ^ at
332 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
where:
E^j = total accrued expenses
F^i, = fixed accrued expenses
£",,, = variable accrued expenses
Vi_, = £,„.///?M = (d 55-50)7350) = .3
V, =£,//?, = ((167. 5-30)7550) = .25
DV =V,.i- V,= 3- .25 = +.05
A^., =DV* Rj, = .05 * 500 = 25
Step three: Find the disclosed amount oi Af,:
This amount should have been disclosed in the financial statement, and for this case, it is
assumed that the effect of change in the depreciation expense has been disclosed as $20.
Then, A^ is "+20."
Test of calculation
A, =A,, + A,, + Af,
Aj =12.5 + 25 + 20 = 57.5
Reported net income - True net income = Manipulated amount
107.5-50 = 57.5
As a consequence, given the assumptions constructed for the model, the model can capture
100% of the manipulation for period "/." If we had used DeAngelo's 1988 random walk
model instead, that would have resulted in $27.5 for the manipulation in the net income in
period /. As is shown, the model of this study outperforms the random walk model.
NOTES
1 . OECD. Financial Market Trend, 1 995
2. McKinnon (1984) showed that less than 9 percent of directors of Japanese firms were indepen-
dent in that they were from non-banking companies which did not belong to the keiretsu of the
firm whose board they were serving on.
3. Other studies (e.g., Shivakumar, 1996) have also tried to address the problems with currenUy
used models to estimate the manipulation in the accounting accmals. However, most of these
models require detailed data items.
4. According to U.S. Generally Accepted Accounting Principles, the current (or catch-up) approach
should be employed to account for changes in accounting principles. The cumulative effect of
the adjustment should be reported in the income statement between the captions "extraordinary
items" and "net income" (Accounting Changes, Opinions of the Accounting Principles Board
No. 20, New York: AICPA, 1971). This measure is not available for Japanese companies.
5. Since the effect of these changes was not available in the Japanese data base, this item is not
included in our calculation of the manipulation in the accounting accruals. Even for U.S. compa-
nies. Pourjalali and Hansen did not find many companies that chose to change from an accepted
accounting principles to another accepted accoundng principle in any given period.
6. From various issues of the Tokyo Stock Exchange Fact Book.
Earnings Management 333
7. Even for individual years, the tax-rate variable continued to be insignificant. Inoue and Thomas
(1996) found that this variable is significant for companies with year end during October 1990
and September 1991.
8. The increase in the percentage of the individual investors' ownership in Japanese firms may also
indicate a shift in the equity structure.
9. Our results of 1992 are consistent with those reported by Inoue and Thomas (1996) and Aono
and Eakin (1996).
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The International
Journal of
Accounting
Effect of the Inconsistency in Accounting Standards on
the Choice of Financial Instruments: The Case of Debt
Issued with Stock Purchase Warrants and Convertible
Debt by Japanese Companies
Aklhiro Noguchi
Nagoya University
Key Words: Convertible debt; Covered warrants; Debt issued with stock purchase warrants;
Japan; Substance over form
Abstract: Accounting treatment for debt issued with stock purchase warrants in Japan was
changed to record consideration for warrants and consideration for debt separately. As a result,
accounting for convertible debts and debt with warrants became inconsistent, and the choice of
financial instrument seems to be affected by that inconsistency. Some Japanese companies began
to use covered warrants in the Euro market to repackage their convertible debt into debt with war-
rants. This paper provides evidence which shows the necessity of consistent treatment for call
options in convertibles and warrants.
In 1994, the Japanese Institute of Certified Public Accountants (JICPA) issued a report
entitled "Accounting for debt issued with stock purchase warrants by the issuing compa-
nies," which changed the accounting treatment for debt issued with stock purchase war-
rants (WB) in Japan. Before that report, Japanese companies were not required to
distinguish between the consideration for debt and the consideration for warrants. As a
result, in the extreme case, some companies could even increase their net income directly
by issuing debt, because the consideration for warrants was greater than the total interest
expense over the term of that debt, and the premium was, in fact, treated as revenue or a
deduction of expense.
After the adoption of the new accounting treatment, there were two significant changes
in the behavior of Japanese companies. (1) The number of WBs by Japanese companies
dramatically decreased. (2) Japanese companies which issued the convertible debt (CB)
Direct all correspondence to: Akihiro Noguchi, School of Economics, Nagoya University, Furocho, Chikusa 464-
8601 Japan; E-Mail: dnogutiO@eds.ecip.nogaya-u.ac.jp
The International Journal of Accounting, Vol. 33, No. 3, pp. 335-345 ISSN: 0020-7063.
All rights of reproduction in any form re.served. Copyright © 1998 University of Illinois
336 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
began lo use covered warrants in the Euro market. This paper explains the cause of those
resuhs and seeks a solution to niake the accounting standards in Japan consistent.
The problem addressed in this paper is not unique to Japan. Although IAvS32 requires
split accounting for both convertible debt and debt issued with stock purchase warrants, the
accounting standards in the USA and in the UK do not permit separate recognition of the
conversion privilege. FRS4 does not permit split accounting for convertible debt because
of the complexity and subjectivity involved. APB 14 denies recognition of conversion priv-
ilege separately because of the inseparability, however, according to paragraph 18, when
the convertible debt is issued with a substantial premium, that part will be treated as paid
in capital. And actually, in the case of Adjustable Rate Convertible Notes, paragraph 18 has
been applied, and the conversion privilege has been recogni/ed separately (King and Orte-
gren, 1988). In the USA, inconsistencies in accounting treatment can be found, not only
between convertible debt and debt issued with stock purchase warrants, but also among
different forms of con\ertible debt.
If there is something different in legal form, but the same in substance, the same account-
ing treatment should be applied. If an accounting treatment is applied based on form
instead of substance, it will provide opportunity for earnings management or creative
accounting.
HOW THE REPORT CHANGED THE ACCOUNTING FOR WB
Before the JICPA report was issued, Japanese companies did not distinguish between the
consideration for warrants and the consideration for debt. As a result, some companies
could increase their net income by simply issuing debt. For example, one company issued
WB at (fp 101 .60 yen. The interest rate was only 0. 1 % per year. As that debt was a four year
bond, the total interest expense until maturity was only @0.40 yen, and the premium was
@1.60 yen which was treated as revenue. Thus, net income was increased by the net of
@ 1.20 yen.
This strange result was caused by mixing the interest expense and the consideration for
warrants. By distinguishing the consideration for warrants from the consideration for debt,
it became possible to present the interest expense fairly.
If a WB for ten billion yen were issued at par (consideration for debt equal to eight bil-
lion yen and consideration for warrants equal to two billion yen), before the change in
accounting treatment, the entry for that transaction would be as follows;
Dr. Cash 10,000,000,000
Cr. Debt issued with stock purchase warrants l(),0()(),()()().000
As the interest rate of WB is set lower than that of debt issued without stock purchase
warrants, the cost of debt will not be presented fairly.
The Report changed the accounting treatment to distinguish the consideration for war-
rants from the ccmsideration for debt. As a result, the above entry changed as follows;
Dr. Cash 2,000,00(),()0()
Cr. Stock purchase warrants outstanding 2,000,000,000
Dr. Cash 8,000,000,000
Debt discount 2,000,000,000
Cr. Debt 10,000,000,000
Effect of the Inconsistency in Accounting Standards
337
The stock purchase warrants outstanding account will appear in the current liability sec-
tion of the balance sheet. This is because paid in capital is defined as consideration for cap-
ital stock, and the consideration for stock purchase warrants cannot be said to be
consideration for capital stock before the warrants are exercised. When the warrants are
exercised the balance of that account will be transferred to the Capital reserve account. If
the warrants expire, the balance will be transferred to revenue.
The change in accounting for WB has the two following aspects;
1. It reduces net income.
The debt discount must be charged to expense immediately or deferred and amor-
tized until the maturity of the debt, which will reduce the net income.
2. It reduces corporation taxes.
The above mentioned charge for the debt discount is tax deductible, and therefore
will reduce the corporation tax.
CB by Japanese Companies
CM
CO
0> O)
in
en
<£>
at
WB by Japanese Companies
5000
O '- "^ r^ o ■^
'"CO "" Tt
C3> 0>
Figure 1. CB and WB by Japanese Companies.
in
(£3
338 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
Actually after the adoption of the new accounting treatment, the number of WB
decreased from one hundred eighty eight in fiscal year 1993 to thirty six in fiscal year 1994.
The amount decreased from two trillion one hundred eleven billion yen to two hundred
fifty billion yen. As for CB, the number increased from one hundred ninety three to one
hundred ninety four, and the amount from two trillion six hundred seven billion yen to two
trillion eight hundred ninety eight billion yen {Bond Review No. 464, The Bond Underwrit-
ers Association of Japan). These figures seem to show that there might be a change in
choice of financial instruments caused by the change in accounting treatment.
Figure 1 shows the financial activity by Japanese companies in CB and WB based on the
data from Bond Review (Nos. 440, 452, 464, 476). As for WB, a cliff can be seen between
March and April in 1994, when the accounting treatment was changed.
EFFECTS ON THE CHOICE OF CB AND WB
CB and WB are both debt issued with call options for the stock of the issuing company.
Therefore, they are alternatives for each other to some extent. However, if the conversion
privilege is exercised, debt will disappear, but if the warrant is exercised debt will remain
and at maturity, it has to be redeemed. The exercise of the conversion privilege will not
provide a cash inflow, but the exercise of the warrant will provide a cash inflow. So CB and
WB are not exactly the same but can be considered as alternatives to a certain extent.
As for accounting treatment, because the accounting for WB was changed, the account-
ing now for warrants and the conversion privilege are completely different. The conversion
privilege is not recognized separately, as the warrants were before the change in accounting
treatment. Now, the warrants are accounted for separately, but the conversion privilege is
not.
It can be assumed that companies with a larger net income may prefer WB because they
care more about reducing taxes, but companies with a smaller net income care more about
their net income than reducing taxes.
In order to test this hypothesis, companies that issued CB and/or WB between April 1992
and March 1996 were identified from Japan Company Handbook on Convertible Debt and
Debt Issued with Stock Purchase Warrants, Toyokeizai, May 1996 (in Japanese). The
results are shown in Table 1 .
Table 1 . Number of Japanese Companies Issued CB and/or WB from April 1 992 to March 1 996
AFTER NONE only CB only WB BOTH
BEFORE
NONE
only CB
only WB
BOTH
Noie: "BEFORE" means the period from April 1992 to March 1994. and "AFTER" means the period from April 1994
to March 1996. "NONE" means the companies which issued neither CB nor WB dunng that period, "only CB"
means the companies which issued CB but did not issue WB during that period, "only WB" means the compa-
nies which issued WB bud did not issue CB during that period, and "BOTH" means the companies which issued
both CB and WB during that period.
160
48
14
114
35
4
3
146
26
17
7
32
9
6
6
Effect of the Inconsistency in Accounting Standards
339
Comparison of EPS index
Comparison of N«t Income Index
BEFORE AFTER
Figure 2. Comparison of EPS and Net Income Indexes
Table 1 shows how the companies made their choice between CB and WB. before and
after the change in accounting treatment for WB.
Figure 2 shows the comparison of the difference in the average of the index of EPS and
the index of net income between the companies that issued CB and companies that issued
WB, before and after the change in the accounting treatment. The EPS and net income fig-
ures for each company were gathered from the data available in Nikkei Corporation Infor-
mation, Nihon Keizai Shinbun, (Summer 1996) and (Fall 1997) (in Japanese). Index of
EPS was calculated by dividing the EPS of the period in which the company issued CB or
WB by the EPS of the previous period, and the resulting number was then multiplied by
one hundred. The index of net income was calculated in the same manner. The companies
that reported a net loss during either of those periods were excluded because the figures
would be negative. The OTC companies which issued CB before January 1996 were
excluded because they were not allowed to issued WB, so they did not have a choice. The
companies that issued both CB and WB during the same period were excluded because
their preference were not clear. The companies that changed their accounting period were
also excluded.
The average of the increase in EPS of the companies that issued WB was larger than that
of the companies that issued CB, and the difference increased after the change in the
accounting treatment. However, the t values in both cases were small, and the difference
between the index of net income did not increase after the change in the accounting treat-
ment.
Convertible securities can be thought of as securities with non-detachable warrants
(Jensen and Meckling, 1976, 354, Finnerty, 1986, 82). However, when the warrants are
detachable, the tax effects, capital structure changes, and cash flows may differ (Phelps,
Moore, and Roenfeldt, 1990, 101). There are also differences in issuing costs (Long and
Sefcik, 1990, 34). So the differences in accounting treatment are not the only reason that
companies make this decision.
For example, there were one hundred and sixty companies which issued only CB after
the change, whose decision might be based on a nonaccounting factor. The same thing can
be said for forty eight companies which issued only WB after the change. Although, there
were one hundred and forty six companies which issued only WB before the change and
did not issued WB after the change, that does not necessarily mean that those companies
340 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
Table 2. Comparison of the Trends in Earnings
Number
of Data
EPS (Yen) Index of EPS
(Average) (Average)
Index of Net Income
(Average)
CB to WB
WB to CB
t value
4
25
32.4 127.9327
24.824 99.4723
0.5526 1.0005
127.9251
106.5967
0.7453
Table 3. Comparison
of the Trends in Expected Earnings and the Total Assets
Number
of Data
Index of Net Income Total Assets in Million
(Average) Yen (Average)
CB to WB
WBtoCB
! value
4
27
164.5982
105.1915
2.7176
52000
153666.7
2.3428
moved away from issuing WB. If there were no necessity for financing, those companies
would not issue WB regardless of the accounting treatment. The same thing can be said for
one hundred and fourteen companies which issued only CB. So it is necessary to focus on
that data whose preference for CB or WB is most likely to be affected by the change in
accounting treatment.
Table 2 shows the comparison of the EPS, trends in the EPS, and trends in the net income
of the companies that changed their choice of financial instruments absolutely. "CB to
WB" companies are defined as companies which issued CB but did not issue WB for two
years before the change in accounting treatment for WB, and issued WB but did not issue
CB for two years after the change. "WB to CB" companies are defined as companies which
issued WB but did not issue CB before the change in accounting treatment, and issued CB
but did not issued WB after the change. There were four "CB to WB" companies, and
twenty six "WB to CB" companies (see Table 1). Two "WB to CB" companies were
excluded from Table 2 because they suffered extraordinary losses caused by the earthquake
after issuing CB. One "WB to CB" company is included twice in that data because that
company issued CB in two different periods. Therefore the number of the data is not same
as the number of the companies shown in Table 1 .
Table 2 shows that the average EPS for "CB to WB" companies was larger than that of
"WB to CB" companies, as expected. The indexes are calculated by dividing data of the
current period by that of the previous period and multiplying by one hundred. "CB to WB"
companies increased their EPS and net income more than "WB to CB" companies. But the
number of data was small, and t values were too small even at the ten percent level.
The choice between CB and WB is made before the end of the accounting period. There-
fore, the management's decision must be made based on their forecast for earnings at that
time. Table 3 is prepared based on the expected earnings instead of the actual results.
Expected net income figures were gathered from Nikkei Corporation Information, Nihon
Keizai Shinbun, (Summer 1994 to Spring 1996). Although these figures might not be the
exact figures that the management had in mind, they are the best estimates available.
Two "WB to CB" companies that suffered extraordinary losses due to the earthquake are
included in Table 3, so the number of data is different from Table 2.
Effect of the Inconsistency in Accounting Standards 341
The difference between the average of the expected net income indexes was significant
at the five percent level. However, the size of the companies measured by total assets were
also different (significant at the five percent level), and the number of data was small as
stated before.
The change in accounting for WB made the accounting for CB and WB inconsistent. As
a result, the choice of the financial instruments to be used seems to have been affected by
that inconsistency.The next section presents a piece of evidence which proves this point.
THE USE OF COVERED WARRANTS BY JAPANESE COMPANIES IN THE EURO
MARKET
Covered warrants of Japanese companies issued by financial institutions are not new. The
covered warrant market began to emerge in the late 1980s, because there was a substantial
demand for Japanese warrants denominated in Swiss francs (Redmayne, 1995, 157-158).
However, the usage of covered wanants under the control of the company which issues CB
in new. According to Dictiomuy of New Economic Terms. Nihon Keizai Shinbun Inc.,
1995, (in Japanese), this new scheme can be summarized as follows.
A financial institution which is the lead underwriter for a company establishes a special
purpose company. That special purpose company will purchase all of the CB issued by a
company and repackage the securities into WB, and then sell this new package of securities
to investors. When the warrants are exercised concurrently by the investors, the special
purpose company will exercise the conversion privilege to receive the shares of the issuing
company. The cash paid in for the exercise of the warrants will be retained by the special
purpose company and used for the redemption of the debt. If the warrants are not exercised,
the special purpose company will simply receive cash from the redemption of the CB and
redeem the debt on its own.
This scheme has the effect of circumventing the new accounting treatment for WB. The
company issuing CB does not separate the consideration for conversion privilege from the
consideration for debt when they make an entry in their books. However the investor can
invest in the wanants of that company by investing in the covered warrants issued by the
special purpose company. The special purpose company is not a subsidiary of the issuing
company, for that special purpose company is established by the arrangement of the finan-
cial institution. So the consolidated financial statements cannot tell the full story.
According to Ariga (1995), it was better for the company to issue CB in the Euro market
than in the domestic market. The sudden decrease in the number of warrants issued by Jap-
anese companies made it advantageous to sell covered warrants in the Euro market. If that
is the main reason for the usage of the scheme, it must be more beneficial for the companies
to sell WB without using a special purpose company. It can be said that the inconsistency
in accounting treatment between CB and WB made companies use covered warrants in
Euro market.
One more problem exists here. The consolidated financial statements failed to reveal the
reality of the situation because the special purpose company used to repackage CB into
WB was not a subsidiary. The consolidation policy should be reconsidered to include con-
solidation of such kind of special purpose companies. Considering substance over fomi,
such special purpose companies should be treated as subsidiaries.
342 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
CONSISTENT ACCOUNTING FOR CB AND WB
If the accounting for CB was changed in Japan and the consideration for conversion
privilege were to be separately recognized from the consideration for debt, the inconsis-
tency will disappear for the accounting treatment when the debt is issued. However,
because of the unique feature of the Japanese Commercial Code, another problem might
arise.
According to the Japanese Commercial Code, articles 341-7 and 222-3. the amount of
the consideration for the stock issued by conversion is the amount of the consideration
received for the CB when it was issued (Nakamura. 1996. 193). As long as CB is issued at
par. there will be no problem in the application of this provision.
When CB are issued at a premium or a discount, there will be a problem. The existence
of a premium or discount makes the book value and the original value of the convertible
debt different. If the conversion privileges are exercised, the difference will be treated as a
lost or a gain on conversion (Nakamura, 1971, 24-25). Example 1 explains this point.
Example 1
CB of ten billion yen was issued at eight billion yen.
Dr. Cash 8.000,000.000
Debt discount 2,000,000,000
Cr. Convertible debt 10,000,000,000
The conversion privilege was exercised \\ hen the balance of the debt discount was one
billion yen.
Dr. Convertible debt 10,000,000,000
Cr. Capital stock 8,000.000,000
Gain on conversion 2,000,000,000
Dr. Interest Expense 1,000,000,000
Cr. Debt discount 1,000,000,000
Japanese companies rarely issue CB at a premium or discount. They simply issue at par
to avoid the above mentioned gain or loss on conversion. So without amending those arti-
cles of the Japanese Commercial Code, and assuming the current tendency to issue CB at
par continues, the situation in Example 2 will be brought about.
Example 2
CB of ten billion yen was issued at par (two billion yen for conversion privilege and
eight billion yen for debt).
Dr. Cash 2,000,000.000
Cr. Conversion privilege outstanding 2.000.000.000
Dr. Cash 8,000,000,000
Debt discount 2,000,000,000
Cr. Debt 10.000.000.000
The conversion privilege is exercised when the balance of the debt discount account was
one billion ven.
Effect of the Inconsistency in Accounting Standards 343
Dr. Debt 10,000,000,000
Cr. Capital stock 8,000,000,000
Gain from conversion 2,000,000,000
Dr. Interest Expense 1,000,000,000
Cr. Debt discount 1,000,000,000
Dr. Conversion privilege outstanding 2,000,000,000
Cr. Capital reserve 2,000,000,000
However, if the companies' attitude is to avoid gain or loss on conversion, they can do
so by issuing CB with a premium exactly equal to the value of conversion privilege. Exam-
ple 3 explains this point.
Example 3
CB of ten billion yen was issued at twelve billion yen (two billion yen for conversion
privilege and ten billion yen for debt).
Dr. Cash 2,000,000,000
Cr. Conversion privilege outstanding 2,000,000,000
Dr. Cash 10,000,000,000
Cr. Debt 10,000,000,000
Conversion privilege is exercised.
Dr. Debt 10,000,000,000
Cr. Capital stock 10,000,000,000
Dr. Conversion privilege outstanding 2,000,000,000
Cr. Capital reserve 2,000,000,000
In this case, no gain or loss on conversion will be reported. If the main reason for Japa-
nese companies issuing CB at par is to avoid a gain or loss on conversion, the term of the
CB will be like this.
However issuing debt with a high premium is not popular in Japan. It is hard to say for
certain that a situation like Example 3 would take place. Moreover, companies can report
a gain or loss on conversion if they issue CB at a premium or discount. So the articles in
the Japanese Commercial Code should be amended so that book value of the CB can be
transferred to the capital stock account.
SUMMARY
The change in accounting treatment for WB caused two effects. One is the sudden decrease
in number of WB issued, and the other is the use of covered warrants.
To some extent, CB can be a substitute for WB because they are both debt issued with
call options. However, besides the difference in the pattern of their cash flows, there is a
significant difference in the accounting treatment, which results in a difference in net
income and coiporation taxes. It can be assumed that companies with enough income will
care more about taxes and choose WB, and that companies with less income will care less
about taxes and choose CB. However, the results of the survey on this point were not clear.
More interesting was the use of covered wanants to repackage CB into WB in the Euro
market. By using this scheme, companies could circumvent the new accounting treatment.
344 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
This fact proves that the inconsistency in the accounting treatment for CB and WB affected
their choice of financial instruments.
In order to make the accounting standard neutral, the consideration for conversion priv-
ilege and the consideration for debt have to be accounted for separately. In addition, the
unique feature in Japanese Commercial Code which requires that the value of the stock
issued on conversion be equal to the original value of the convertible debt has to be
amended.
NOTE
1. It was reported by the Nikkei Newspaper on July 10, 1996 that the Ministry of Finance of the
Japanese Government would reconsider the accounting for convertible debt. In June 1997, Issues
Paper on Accounting Standard for Financial Instruments was issued from the advisory council to
the Ministry of Finance of Japan (Business Accounting Deliberation Council: BADC, 1997).
BADC plans to finalize the opinion on accounting for financial instruments in the summer of
1998.
Acknowledgments: Helpful comments were received from Vernon K. Zimmerman, Andrew D.
Bailey, Jr., J. Richard Dietrich, Sridhar Ramamoorti, Hanns-Martin Schoenfeld, Theodore Sougian-
nis, Arthur Wyatt, during my stay from August 1996 to April 1997 as a visiting scholar at the Center
for International Education and Research in Accounting of the University of Illinois at Urbana-
Champaign, and from two anonymous reviewers. Financial support from the Shikishima Foundation
is gratefully acknowledged.
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Issued with Stock Purchase Warrants."
Accounting Standards Board. 1993. Financial Reporting Standard 4, "Capital Instruments," Central
Milton Keynes: ASB.
The Bond Underwriters Association of Japan. 1996. "Bond Review, No. 476." (May).
. 1995. "Bond Review, No. 464", (April).
. 1994. "Bond Review, No. 452", (April).
. 1993. "Bond Review. No. 440", (April).
Business Accounting Deliberation Council (BADC). 1997. "Issue Paper on Accounting-Standards
for Financial Instruments." Keieizaimu, (Jun. 23); 24-28 (in Japanese).
Finnerty, John D. 1986. "The Case for Issuing Synthetic Convertible Bonds." Midland Corporate
Finance Journal. (Fall): 73-82.
International Accounting Standards Committee. 1995. International Accounting Standards IAS 32,
"Financial Instruments: Disclosure and Presentation." London: lASC.
Japanese Institute of Certified Public Accountants. 1994. "Accounting for Debt Issued with Stock
Purchase Warrants by the Issuing Companies." Tokyo: JICPA (in Japanese).
Jensen, Michael C. and William H. Meckling. 1976. "Theory of the Firm: Managerial Behavior
Agency Costs and Ownership Structure." Journal of Financial Economics. (October): 305-
360.
Effect of the Inconsistency in Accounting Standards 345
King, Thomas E. and Alan K. Ortegren. 1988. "Accounting for Hybrid Securities: The Case of
Adjustable Rate Convertible Notes." The Accounting Review, (July): 522-535.
Long, Michael S. and Stephan E. Sefcik. 1990. "Participation Financing: A Comparison of the Char-
acteristics of Convertible Debt and Straight Bonds Issued in Conjunction with Warrants."
Financial Management, (Autumn): 23-34.
Nakamura, Tadashi. 1996. The Fundamentals of Corporation Accounting. Tokyo: Hakutoshobo (in
Japanese).
. 1971. "Accounting for Convertible Debt." Zeikeitsushin, (February): 23-29 (in Japanese).
Nihon Keizai Shinbun. Inc. 1997. Nikkei Corporation Information, (Fall), (in Japanese).
. 1996. Nikkei Corporation Information. (New Year, Spring and Summer), (in Japanese).
. 1996. "Accounting for Convertible Debt." Nikkei Newspaper (July 10). (in Japanese).
. 1995. Dictionary of New Economic Terms. Tokyo (in Japanese).
. 1995. Nikkei Corporation Information, (New Year, Spring, Summer, Fall), (in Japanese).
. 1994. Nikkei Corporation Information, (Summer and Fall), (in Japanese).
Phelps, Katherine L., William T. Moore and Rodney L. Roenfeldt. 1991. "Equity Valuation Effects
of Warrant-Debt Financing," The Journal of Financial Research, (Summer): 93-103.
Redmayne, Julian. 1995. Equity Warrants, London: Euromoney Books.
Toyokeizai, Inc. 1996. Japan Company Handbook on Convertible Debt and Debt Issued with Stock
Purchase Warrants, (May), (in Japanese)
The International
Journal of
Accounting
New Forms of Assurance Services for New Forms of
Information: Tlie Global Challenge for Accounting
Educators
Gary L. Holstrum and James E. Hunton
Key Words: Assurance services; Information technology; Virtual reality; Accounting education;
International; Global
Abstract: This paper explores recent initiatives to develop new assurance services that are being
demanded for new types of information in the marketplace and the resulting global challenge to
accounting educators. The paper develops a realistic scenario for new assurance services, identi-
fies critical business performance areas for which new assurance services are demanded, dis-
cusses the work of the AlCPA Special Committee on Assurance Services (Elliott Committee, 1994)
and related international groups, and makes recommendations for actions by accounting educa-
tors. These recommendations parallel and enhance those of the American Accounting Associa-
tion's Task Force on Future Audit, Attestation, and Assurance Services.
Philippe Mercier, a venture capitalist located in Paris just read a business plan submitted
by Sally Reid, who owns and operates an upscale, unique clothing store located in New
York City. Sally's store is called CADCAM Clothing, Inc., hereafter referred to as CCC,
and she deals exclusively with men's and women's business suits. Customers of CCC use
a sophisticated computer program to shop for business apparel.
Customers first walk through a scanning device that looks much like a metal detector
used in airports, and the computer records a host of physical attributes, such as height,
weight, and body measurements. From this scan, the computer digitally reproduces the
customers' human form. Next, customers use the computer to view business suits offered
through CCC's electronic catalog and pick one or more they like. The computer shows cus-
tomers how they would look in their chosen suits in full-size, three-dimensional, holo-
graphic images. Suits can be further adapted to the customers' personal tastes by viewing
a variety of cloth types, material patterns, and custom alterations. Once a customer decides
to purchase a suit, a CADCAM system, in conjunction with robotic cutting and sewing
Direct all correspondence to: Gary L. Holstrum, School of Accountancy, University of South Florida, 4202 E.
Fowler Ave., BSN 3403, Tampa, FL 33620-5500; Tel: 813-974-6507; Fax: 813-974-6528; E-Mail:
gholstru@bsn01 .bsn.usf.edu.
The International Journal of Accounting, Vol. 33, No. 3, pp. 347-358 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright ® 1998 University of Illinois
348 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
machines, creates the suit to exact specifications. The suit is completed and delivered in
about one-hour.
Sally's business plan proposes to expand this concept, on a franchise basis, throughout
the world. The advantages to franchisees are: (a) they join a network of franchisees where
the business suit lines of all participating clothing stores form a virtual showroom of suits
and (b) CCC will supply the software, hardware, equipment, and training to franchisees. As
a result, for example, a customer in Frankfurt may choose a suit offered by a store in Lon-
don. If the selected material is available in Frankfurt, the customer can walk out with the
suit in about an hour. However, if the material is not available in Frankfurt, the computer
will search the inventory of all franchisees, find the nearest location having the material,
produce the suit at that remote location, and ship the suit to the requesting store or directly
to the customer using priority mail. The business plan calls for an alliance with a Hong
Kong company to establish a purchasing program to conduct real-time searches of the glo-
bal marketplace for high quality fabrics at the most competitive prices and with the best
quality controls and the most reliable delivery times. The objective is to have any suit
delivered to any customer anywhere within three working days. Sally needs $30 million in
start-up capital, and Philippe is interested.
The first trip Philippe makes is to visit Sally's existing store. He meets with Sally and
her 25 workers, tours the physical plant, and performs an analysis of CCC s financial posi-
tion by querying CCC's financial database. Philippe next visits three clothing store chains,
which are very interested in purchasing franchises. The potential franchisees are located in
Madrid, Spain; Tokyo. Japan; and Sydney. Australia. At each location. Philippe visits with
owners and discusses their expectations, views the business suit lines, analyzes historical
financial statements, examines plans for the franchise, meets with local marketing analysts
to obtain an independent assessment of market potential, and tours production facilities of
local cloth suppliers. The next stop on Philippe's journey is the plant location for the devel-
opers of the C ADC AM system and related production equipment in the California's Sili-
con Valley. Philippe visits with owners and management, examines patents awarded to the
unique and novel CADCAM system, reviews past financial performance by querying their
financial database, observes production processes, inspects final products, and learns how
the CADCAM system works. Next Philippe meets w ith the management of the fabric-sup-
ply alliance firm in Hong Kong, performs a review of their fabric-procurement process
conducted jointly with CCC, and analyzes the controls that the vendors have in place to
provide reasonable assurance of complying with the quality control standards of ISO 9000.
Finally. Philippe travels to the office of a marketing analyst in Milan. Italy, who is a lead-
ing international expert in clothing and business suit lines. After reviewing Sally's business
plan, the marketing analyst determines that the assumptions and projections made in
CCC's business plan are reasonable.
Immediately after talking with the marketing analyst. Philippe takes off his virtual reality
headset, bodysuit, and gloves, stares out the window of his 40th story office in La Defense
looking in the distance at the Arc de Triomphe and Avenue des Champs-Elysees, and
reflects on his recent experiences.
The fictitious scenario just presented takes place in the not-too-distant future when a
large portion of worldwide business travel occurs in virtual reality. Philippe completed all
of his journeys in the comfort of his office. In just two working days, he has sufficient
information to make a $30 million investment decision. His costs for reviewing and ana-
Assurance Services: Global Challenge to Educators 349
lyzing all of the information that is relevant to the business plan are nominal, and they fall
into two general categories. First, there is an hourly rate charged by his virtual reality pro-
vider to fly around the virtual world created in cyberspace. Second, Philippe pays fees to a
variety of CPA fiims and other entities along the way who provide desired degrees of
assurance that the virtual world fairly represents its physical counteipart.
The broad array of information used in making business decisions has expanded rapidly
and extensively, creating a strong demand for new types of assurance services. Indeed,
Elliott (1994) argues that unless auditors dramatically refocus the scope of their assurance
services to address these new types of information, the very survival of the profession is at
risk. In this paper, we identify the vital role accounting educators will play in shaping
future assurance services, such as our virtual reality example. We explore the global chal-
lenge facing accounting educators as they struggle to develop relevant curricula, create
new technology-based methods of educational delivery, and design meaningful research
projects for such assurance services. But first, we explain the necessity to expand assurance
functions and describe current efforts by several groups to lead the profession in meeting
the demand for assurance services moving into the 21^* century.
CRITICAL PERFORMANCE AREAS AND THE NEED FOR FUTURE ASSURANCE
SERVICES
To evaluate the overall performance of a business entity, it is essential to evaluate not only
the items that are included in present financial statements prepared in accordance with gen-
erally accepted accounting principles, but rather all four of the critical performance areas
shown in Figure 1. In this figure, financial performance evaluation addresses items typi-
cally included in current-day financial statements. Process performance evaluation
addresses how the entity manages internal processes designed to produce its products or
Financial
Resources
-^$^-
Nonfmancial
Resources
Figure 1. Critical Entity Performance Area
350 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
services. Nonfinancial resource performance evaluation addresses how the entity manages
critical resources that are largely ignored by current-day financial statements, such as intel-
lectual capital, human resources, and information. Market performance evaluation
addresses the market for the entity's products or services and how the entity manages its
marketing efforts.
The current practice of financial accounting, business reporting, and auditing ignores
most of the critical information in all but the financial performance area. Yet, relevant mea-
sures of economic performance and value in today's global market are largely contained
within the other three areas — processes, markets, and nonfinancial resources. Indeed, much
of the growth in value in the economy is associated with up-start or relatively young entities
that capitalize on information technology, intellectual resources, and innovative processes
designed to meet specified marketplace demands efficiently and effectively. Some rela-
tively new companies (such as Netscape Communications Corporation and Amazon.com)
have modest financial statements relative to their market value, but they possess excellent
intellectual resources, efficient processes, and outstanding potential in exploding markets.
These entrepreneurial companies have been able to amass astounding amounts of capital
through initial public offerings of their stock or through venture capitalists.
The Wall Street Journal (May 16, 1996) described a relatively new company with a very
small amount of financial statement assets, Amazon.com, that was able to raise significant
venture capital because of its business plan to use its Internet web site to tap into a global
marketplace. Customers of Amazon.com can access a million-book database, view news-
group commentaries by authors and readers, and purchase any database book at a signifi-
cant discount and with quick delivery. The novel aspect of Amazon.com is that it has cre-
ated a virtual storefront on the Internet. With minimal physical assets and inventory,
Amazon.com has created significant value from intellectual capital and technological inno-
vation.
With Netscape, Amazon.com, and other highly valued entities with excellent growth
potential, neither the economic substance of the entity nor its economic performance is
adequately captured by current financial statements or auditing services. Such statements
and services are limited in that they focus on only financial performance measurements,
while ignoring performance indicators related to other equally critical success areas, i.e.,
processes, nonfinancial resources, and markets. The real assets of these entities are in the
intellectual capabilities of human resources, the efficient and effective business processes
centered around information technology, and the ability to gain a significant portion of
healthy, growing markets.
A strong and expanding demand exists for a comprehensive set of business performance
measurements and for professional services that will provide assurance regarding informa-
tion quality in all four critical performance areas. Investors, managers, customers, and
other users of business information are increasingly demanding high quality information
that is relevant, reliable, timely, and in an appropriate mode and format.
ASSURANCE SERVICE INITIATIVES
In the United States, four professional groups have recently addressed the issues related to
meeting this demand for assurance services. These groups include:
Assurance Services: Global Challenge to Educators 351
• The American Institute of Certified Public Accountants (AICPA) Special Committee
on Financial Reporting (Jenkins Committee. 1991-93),
• The Sante Fe Assurance Visioning Conference (1993),
• The AICPA Special Committee on Assurance Services (Elliott Committee, 1994-
97), and
• The American Accounting Association's Future Audit. Attest, and Assurance Ser-
vices Task Force ( 1994-97).
Much of the impetus for assurance services originated in the work of the AICPA Special
Committee on Financial Reporting, chaired by Ed Jenkins. The AICPA formed the Jenkins
Committee in 1991 to address concerns about the relevance and usefulness of business
reporting. Among its recommendations was a suggestion that auditors should play an
enhanced assurance role regarding the overall quality of business reporting (AICPA 1994).
As a follow-up to the Jenkins Committee recommendation and other demands for an
enhanced auditor role, a round-table "visioning" conference was held in Sante Fe, New
Mexico in 1993 with a goal of developing a vision of future assurance services. The com-
pleted "vision" from the Sante Fe Conference was presented to the AICPA Board of Direc-
tors, which generally embraced the vision and appointed the Special Committee on
Assurance Services, chaired by Robert Elliott (AICPA, 1994). The Auditing Section of the
AAA appointed the Future Audit, Attest, and Assurance Services Task Force in 1994 to
review the work and recommendations of the Elliott Committee and to focus on the educa-
tional, research, and professional implications of future assurance services.
Of the four U.S. professional groups, the Elliott Committee has had the most significant
impact on the nature of future assurance services to be offered by the accounting profes-
sion. The AICPA assurance services initiative, led by the Elliott Committee, is divided into
three phases. Phase I focused on research concerning user needs for information and assur-
ance on that information and is discussed in the Committee's brief interim report (AICPA
1995).
Phase II focused on the development of scenarios for ( 1 ) the future of current services,
(2) extensions of current lines, and (3) completely new lines of service. The scenarios for
future audits illustrate a dramatic shift from an old paradigm in which a set of yearly finan-
cial statements is accompanied by an annual audit report to a new paradigm in which a set
of real time financial and nonfinancial information is accompanied by continuous assur-
ance. The scenarios for extensions of current lines include assurance services related to
comprehensive risk assessments, databases, comprehensive business performance mea-
surements, Internet web sites, and ISO 9000 or ISO 14000 information. Scenarios for com-
pletely new lines include assurance services for electronic commerce, elder care, and
health care performance measurement. The AICPA Internet home page, www.aicpa.org,
contains information about the first two phases of the Elliott Committee work, completed
in early 1997 (AICPA, 1997).
Currently, Phase III of the AICPA assurance services initiative focuses on implementing
the services proposed by the Elliott Committee. Implementation efforts are directed at
overcoming barriers to change, improving attitudes and competencies of assurance provid-
ers, and changing certain ethical rules, such as tho.se concerning the definition of indepen-
dence for assurance service. The AICPA has established implementation committees for
each of the three proposed new assurance lines — electronic commerce, elder care, and
352 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
health care performance measurement — in addition to a senior-level Assurance Services
Committee to provide overall guidelines for new assurance services.
INTERNATIONAL INITIATIVES
Accounting groups in other parts of the world are also developing plans for expanding
assurance services to meet new information technology needs. For example, the Canadian
Institute of Chartered Accountants (CICA) has a project that addresses issues similar to
those addressed by the Elliott Committee, and the accounting profession in the United
Kingdom is developing an Audit Agenda that explores the extension of the audit function
into selected new assurance service areas.
IFAC's International Auditing Practices Committee (lAPC) has recently explored the
global extension of assurance services and has recently issued an exposure draft of a pro-
posed International Auditing Standard, Reporting on the Credihility of Information (1997).
This can be accessed through the IFAC Internet home page www.ifac.com.
WEBTRUSTSM— A NEW ASSURANCE SERVICE FOR INTERNET WEB SITES
An excellent example of a new assurance service with tremendous market potential is the
new WebTrust program that has recently been developed by the AICPA and the CICA.
This program allows U.S. Certified Public Accountants or Canadian Chartered Accoun-
tants, with specific training and licensing in web site security, to review client web site
security and issue assurance to electronic commerce customers regarding the security of
related web site transactions. The WebTrust program requires the practitioner to review
and test the client's electronic commerce systems and evaluate them with respect to criteria
concerning three broad categories: business practice disclosures, transaction integrity, and
information protection. The WebTrust seal was developed in conjunction with VeriSign, a
well-respected global provider of digital authentication services. Further information about
this program is available through the WebTrust button on the AICPA web home page,
www.aicpa.org.
THE CHALLENGE TO ACCOUNTING EDUCATION
The new assurance services present some significant challenges for accounting and audit-
ing education.
1. Accounting educators and their students must develop high levels of information-
technology competence or risk becoming functionally obsolete. The IFAC Educa-
tion Committee's International Education Cjuideline No. I 1, Information Technol-
ogy in the Accounting Curricuhim (1995), provides very helpful guidance for
meeting this aspect of the challenge.
2. The so-called "silo-effect" of functionally separated departments is perhaps more
firmly ingrained in academia than in contemporary businesses and must give way to
Assurance Services: Global Challenge to Educators 353
interdisciplinan. teams that focus on the goal of a ful]\ integrated, technologically
sophisticated, educational proce>s.
3. The discipline of auditing \\\U likel} he subsumed intn a broader, more technologi-
cally adaptable discipline of information assurance, with less emphasis on rules pro-
mulgated by a single authoritati\ e body and greater emphasis on adapting to broader
standards issued by an array of international groups o\ er a diverse range of informa-
tion domains.
4. As with auditing, the discipline of accounting will also likel> be >ub>umed into a
broader, more technological!) adaptable discipline of information for business deci-
sions, with emphasis on both internal and external decision-makers. As with audit-
ing, there will be much less emphasis on rules promulgated by a single authoritati\e
body and greater emphasis on adapting to broader standards issued by a wider array
of international groups o\ er a di\ erse range of information dorTiains.
The AAA Auditing Section Task Force on Future .Audit. .Aitcst. and .Assurance Services
has been reviewing the work of the Elliott Committee on an ongoing basis and is address-
ing the challenge to accounting educators h\ de\ eloping a set of responses in three areas.
The first response area addresses the impact that emerging assurance services will ha\e on
the accounting and auditing curriculum and educational deli\cr\ methods. These are dis-
cussed in a Task Force uorking paper h\ Holder and Pincus i 1997j.
The second response area addresses research issues and opportunities presented b> new
assurance services. In a Task Force working paper b\ Carcelli). .Messier, and Ricchiute
M997). significant research opportunities related to future assurance ser\ices ha\e been
identified in five related areas: markets, litigation, communication, independence, and
measurement.
The third response area addresses professional issues presented b\ the mo\e to pro\ ide
future assurance services. Although many of the proposed new assurance ser\ices tit
within the current audit/attest model, others ha\ e characteristics that are quite different and
that w ould therefore require major changes in accounting and auditing education. Some of
these unique characteristics ha\e been described in a Task Force \\orking paper by Jaen-
icke and Whittington (1997. p. 2) as follows:
1. The ser\ice ma_\ be purchased b) the users rather than the pro\iders of ihe informa-
tion.
2. Performance may require specialized knowledge that trai.litionall\ has not been part
of the training and education of the CPA.
3. Assurance may be pro\ided about the relevance of information in addition to its reli-
ability,
4. The service may involve maintaining controls or sensory monitors.
5. The output of the service ma\ include data analysis or interpretation, and
6. The assertion ma> he made b) the practitioner rather than the pro\ ider of the infor-
mation.
7. The Task Force is in the process of developing its report on the educational,
research, and practice implications of future assurance services and is scheduled to
complete its work by late 1997.
354 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
GLOBAL ISSUES FOR ASSURANCE SERVICES
Providing future assurance services in an increasingly global marketplace creates addi-
tional challenges for assurance providers and accounting educators. In the current account-
ing and financial reporting environment, significant differences between countries with
respect to generally accepted accounting principles create barriers to raising capital across
international boundaries. Arnold Schilder (1996, 102) provides a clear illustration of sub-
stantial differences between U.S. GAAP and GAAP in various countries in the European
Union as follows:
For example, in contrast to a reported profit of DM 615 million per German GAAP for
fiscal 1993, Daimler-Benz reported a 1993 loss of DM 1,819 million per U.S. GAAP.
On the other hand, the Swedish group Volvo reported a loss of SEK 3.466 million under
Swedish GAAP but a profit of SEK 1,938 under U.S. GAAP.
If these kinds of international differences exist with respect to current GAAP for financial
resources, what kinds of global differences might we expect to standards of measurement
for the vastly broader array of information to be covered by future assurance services? In
many respects, assurance service issues are more international and global than either
accounting or auditing issues. Unlike accounting and auditing standards that historically
have developed quite unique national characteristics, many assurance services, especially
those related to the Internet and information technology, appear to be quite global and inde-
pendent of national boundaries.
The global challenge for information providers, users, assurance providers, and educa-
tors is to curtail the tendency for each country or region to develop its own idiosyncratic
standards for each type of information and assurance service. Instead, all of these groups
should strive to replace such a potential patchwork mosaic of standards with an interna-
tional cooperative effort to develop preemptive global standards for information quality,
measurement, and assurance in areas that are crucial to world commerce. At a minimum,
accounting educators need to revise our curricula and educational delivery methods to
make students aware of existing international differences, of the need to reconcile these
differences, and of the importance of developing global standards for the broad array of
information and assurance services demanded by contemporary users.
THE NEXT LEVEL OF ASSURANCE SERVICES
The virtual reality example presented at the beginning of this article provides a futuristic
setting whereby we can begin to envision how future assurance services could be provided.
Philippe Mercier, the venture capitalist referred to previously, examined financial
resources, markets, processes, and non-financial resources surrounding CCC's business
plan without leaving his office. This scenario, while technically not feasible at present
time, may be the preferred mode of business travel in the future. In order for Philippe to
make an informed decision, he chose to investigate all four critical entity performance
areas presented earlier.
Figure 2 graphically depicts Philippe's cyberspace journey. Philippe queried CCC's
financial database, as well as the databases of potential franchisees and the CADCAM
Assurance Services: Global Challenge to Educators
355
Financial Resources
■
1 1 ,-t
Control Boundary
Markets
Processes
Non-FinanCiaFResources
Figure 2. User View of Sensing the Real World
developers, to evaluate prior financial performance. He visited local marketing analysts in
various worldwide locations and a leading expert in clothing and business suit lines to gain
an understanding of potential markets. Philippe examined the production processes of
CCC, potential franchisees, the Hong Kong fabric-procurement alliance, various fabric
suppliers, and the CADCAM developers to assess process quality. Finally, in order to eval-
uate non-financial resources, he met with Sally (the owner of CCC) and her employees.
356 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
owners of potential franchisees, and developers of the CADCAM equipment; additionally,
he toured plants and observed equipment. Philippe is contemplating a $30 million invest-
ment based on what he experienced in virtual reality, and he paid CPA firms and other enti-
ties to provide a level of assurance that what he experienced in his virtual-world fairly
represents the real-world.
Future auditors can become intricately involved in providing desired assurance services
by establishing and monitoring a boundary of controls between the virtual-world and real-
world (see Figure 2). The foundation for developing such a control boundary is already laid
in the COBIT (Control Objectives for Information and Related Technology) framework
(COBIT 1994). The COBIT framework is the result of an international collaborative effort
to establish global standards and objectives for enacting and monitoring control procedures
over infonnation and technology. COBIT was sponsored by the Information Systems
Audit and Control Foundation. COBIT defines control as "The policies, procedures, prac-
tices, and organisational structures, designed to provide reasonable assurance that business
objectives will be achieved and that undesired events will be prevented or detected and cor-
rected" (COBIT 1994, pg. 9). In our example, users who conduct business in virtual reality
want independent, reasonable assurance that the virtual-world is fairly representative of the
real world in all material respects.
COBIT delineates the following four domains: planning and organization, acquisition
and implementation, delivery and support, and monitoring. All four domains can include
and support the assurance services envisioned in the virtual reality scenario. For example,
future auditors can work with virtual reality providers to communicate the needs and con-
cerns of users and to assess possible risks (planning and organization). Future auditors
might provide delivery and support services to providers, such as ensuring systems secu-
rity, assisting and advising customers, defining service levels, and managing problems and
incidents. Within the acquisition and implementation domain, future auditors can help to
develop and maintain virtual reality procedures, install and accredit systems, and manage
system changes. Finally, future auditors can continuously monitor virtual reality control
processes and, periodically, perform substantive type testing to determine the extent to
which virtual images map to real objects.
Given the current state of information technology and extant business practices, the vir-
tual reality scenario described in this article may seem inconceivable to some accountants
and auditors. However, conducting commerce over the Internet and coping with related
control issues may have appeared just as implausible a mere 10 years ago. Future auditors,
as compared to their today's counterparts, will likely approach these forward-looking sce-
narios with more of an open mind, since future auditors will be in a better position to under-
stand the vast untapped potential of information technology. The COBIT framework,
coupled with the work of the AICPA Special Committee on Assurance Services, provides
a significant leap forward in guiding the accounting profession to the next level of assur-
ance services.
SUMMARY
The assurance service initiatives described in this paper are designed to guide the account-
ing profession into the next century. It seems clear that, in order to survive and prosper, the
Assurance Services: Global Challenge to Educators 357
profession must adapt to rapidly changing business conditions and competitive environ-
ments. Information technology is the enabling force behind such radical organizational and
market transformations. One important survival strategy is to expand our concept of finan-
cial accounting, business reporting, and assurance services beyond the traditional financial
arena, by including other critical entity performance areas, such as, markets, processes, and
nonfinancial resources.
In this article, we take a futuristic look at assurance services that auditors might provide
to users who conduct business in virtual reality. Upon close examination of the possible
risks involved in this setting, the fundamental issue is that of control over information and
related technology. Cyberspace users will want reasonable assurance that their virtual-
world fairly represents its real-world counterpart.
An analogy to piloting an airplane seems appropriate. When flying an airplane, it is pos-
sible to slow the aircraft to a minimal, critical airspeed where a stall becomes imminent. At
this point, a pilot attempts to increase airspeed by applying full power and lowering the
nose of the plane. However, under certain circumstances, particularly when there is insuf-
ficient remaining altitude, there is not enough power to pull the aiiplane out of the stall sit-
uation. As a result, the plane can catapult into the ground. This phenomenon is called
"getting behind the power curve."
At times, it seems as though accounting practitioners and educators often find them-
selves behind the power curve, particularly in the domain of information technology. That
is, a new technology, such as Internet commerce, blossoms into practice and then account-
ing professionals and educators begin worrying about how to apply appropriate controls in
this new environment. It would behoove educators to envision potential information tech-
nology applications and assurance services, such as virtual reality, before they are inte-
grated into business practice. This would provide a degree of lead-time during which
educators and accounting professionals can act proactively to assess potential risks and
design appropriate control procedures.
This is clearly a global challenge to accounting educators, as the influence of informa-
tion technology penetrates ever so deeply into international business practice. In this
regard, let us not find ourselves behind the information technology power curve, for the
very survival of accounting education and of the accounting profession may well rest on
the ability to envision the future and adapt to the demands of the global marketplace.
NOTE
Adapted from a paper presented at The Eighth World Congress of Accounting Educators
and the International Association of Accounting Educators and Researchers (lAAER),
Paris, France, October 23-25, 1997. Please do not quote without permission.
REFERENCES
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tomer Focus. New York: AICPA.
AICPA. 1995. Interim Report of the Special Committee on Assurance Services. New York: AICPA.
AICPA. 1997. Special Committee on Assurance Services. Web site: www.aicpa.org.
358 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
Carcello, J., W. Messier, and D. Ricchiute. 1997. Research Opportunities in Assurance Services.
Working paper prepared for the AAA Auditing Section Task Force on Future Audit, Attest,
and Assurance Services. (Available through the authors of this paper).
Elliott, R. 1994. Confronting the Future: Choices for the Attest Function. Accounting Horizons 8:3
(September) 106-124.
COB IT. 1996. Control Objectives for Information and Related Technology, COBIT Steering Com-
mittee, Information Systems and Control foundation Research Board and Information systems
Audit and Control Foundation Standards Board, Rolling Meadows, IL.
International Auditing Practices Committee (lAPC). 1997. Exposure draft of a proposed Interna-
tional Auditing Standard, Reporting on the Credibility of Information.
International Federation of Accountants (IFAC) Education Committee. 1995. International Educa-
tion Guideline No. 1 1 , Information Technology in the Accounting Curriculum.
Holder, W. and K. Pincus. 1997. The Impact of Future Assurance Services on Accounting and Audit-
ing Education. Working paper prepared for the AAA Auditing Section Task Force on Future
Audit, Attest, and Assurance Services. (Available through the authors of this paper).
Jaenicke, H. R., and R. Whittington. 1997. Expansion of Assurance Services — Implications for the
Profession. Working paper prepared for the AAA Auditing Section Task Force on Future
Audit, Attest, and Assurance Services. (Available through the authors of this paper).
Schilder, A. 1996. Research Opportunities in Auditing in the European Union. Accounting Horizons.
10(4) (December): 98-108.
Wall Street Journal. How Wall Street Whiz Found a Niche Selling Books on the Internet. (May
16.1996).
The International
Journal of
Accounting
Accounting Income, Income Components and
Market-to-Book Equity Ratios: Finnisli Evidence
Juha-Pekka Kallunki, Minna Martikainen and Teppo Martikainen
Key Words: Accounting income; Income components; Market-to-book equity ratios; Finland
Abstract: This study provides new evidence on the relationship between various income-to-hook
and market-to-hook equity ratios using Finnish data. Because of extremely wide earnings manage-
ment possibilities that are tractable from published financial statements, Finland provides a
unique environment to test the importance of income management in creating investors' cashflow
expectations. The findings suggest that income statement items other than "bottom-line " earnings
contain useful information when investors are creating cashflow expectations for Finnish firms.
This holds especially for income components that can be regarded permanent. It also appears that
the income management component of earnings has low value-relevance. This is the case also for
extraordinaiy income/expenses, which can be regarded as transitory by nature. The findings of the
study further suggest that in none of the various income levels investigated is negative accounting
income significantly positively related to the market-to-book equity ratios. If income is positive,
however, the positive relationship exists. These findings support the hypothesis that investors
regard accounting losses as temporary, not reflecting future cash flow expectations. In general,
the results of the study indicate that investors split accounting earnings into components and eval-
uate the value-relevancy of income statement items when creating cash flaw expectations for
firms.
ACCOUNTING INCOME, INCOME COMPONENTS AND MARKET-TO-BOOK EQUITY
RATIOS: FINNISH EVIDENCE
In recent years empirical studies relating stock prices and returns to accounting earnings
have increasingly suggested that accounting earnings should he split into components to
better understand how the stock market uses the information content in income statements
(see e.g., Lipe, 1986; Livnat & Zarowin, 1990; Ohlson & Penman. 1992: Ramakrishnan &
Thomas, 1995). Following these lines, this study aims to ascertain which income levels and
components are related to market-to-book equity (MTB) ratios. These relationships are of
importance from the accounting perspective, because the MTB ratio can theoretically be
Direct all correspondence to: Teppo Martikainen, University of Vaasa. PO Box 700, FIN-65101. Vaasa, Finland;
E-Mail: tlm@uwasa.fi; Fax: +358 6 3248 344.
The International Journal of Accounting, Vol. 33, No. 3, pp. 359-375 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1998 University of Illinois
360 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33. No. 3. 1 998
shown to measure investors" growth expectations and to be positively related to persistent
accounting earnings (see Fama & French. I'^Q.^). Therefore. b\ in\estigating the relation-
ship between the MTB ratio and accounting income and itv components, it is possible to
study how investors exploit accounting data \\ hen the\ are forming cash tlow expectations
for t~irms. Moreo\er. for instance. Fama and French ( 1992. 1993. 1996) suggest that the
MTB ratio capture^ much of the cross-section of a\erage stock returns. As a consequence,
the MTB ratio may be useful for creating profitable trading strategies in stock markets.
Therefore, the economic fundamentals of the MTB ratio ai"e obviously of great interest
among the investment community .
This stud\ addresses three closel> related research questions:
1 . Do income le\ els other than the "bottom-line" earmngs contain \ alue-rele\ ant infor-
mation in Finland '.^
2. When disaggregating net mcome into indixidual income statement items, which of
these items are most important and do these item^ contain incremental intormation
to each other ?
3. .Are accounting losses and profits \ alued differenth in the Fiinnsh stock market'.^
The current paper contributes to the existing literature in tl\e main respects. First. pre\i-
ous evidence regarding the relationships between the MTB ratios and accounting income
or its components is limited. Fama and French ( 1995) measure the relationship between
MTB and income-to-book 1 1TB ) equitx ratios b\ using a sample of fimis listed on the New
York Stock Exchange." The income le\el used to measure the 1TB ratios is primar\' annual
earnings before extraordmar\ items. Then" empirical anahsis stud_\ing the profitabilit\ of
six portfolios based on the MTB ratios indicates that high MTB stocks appear more profit-
able than low MTB stocks for four \ears before and at least fi\e >ears after ranking dates.
These results are recentl) confirmed b_\ Martikainen i 19'-)8ai in different size and financial
leverage portfolios. While Fama and French i 1905 i use onl_\ one income le\ el. i.e. primar\
annual earnings before extraordinaiA items, this paper calculates the ITB ratios b_\ usuig
six alternative income le\ els to determine the numerator of the ratio. The results suggest
that \ arious income le\ eU are important in generating in\estors" cash flow expectations in
Finland. Moreo\er. it appears that the different income le\"els ha\'e incremental informa-
tion content in combination with one another. The results are in accordance with earlier
studies investigating the relationship betw een stock returns and earnings in \ aiious mai'-
kets. suggesting that several income le\ els ma> be important to in\estors (see. for instance.
U.S. by Livnat & Zarowin. 1990: U.K. b\ .-\li ^: Pope. 1995: and Finland b\ Booth. Kal-
lunki & Martikainen. 1997).
Second, this study investigates the importance of different income statement items in
creating income levels and forming cash flow expectations for firms. The breakdow n of
accounting income into components indicates that various components of accounting
income are important in creating investors" cash flow expectations. This again suggests
that income statements contain several relevant figures to investors, rather than onh the
"bottom-line"" figure. The results also indicate that the income management component of
accounting earnings is not significanth reflected in the MTB ratio. This is in accordance
with the notion by Ramakrishnan and Thomas i lQ'-)5 i. among others, that the existence of
income management ma_\ lead to \alue-irrele\ant components of earnings. Moreo\er.
Market-to-Book Equity Ratios 361
extraordinan' income and expenses are not found to be related to the MTB ratios in Fin-
land, obviously because of their temporan, nature.
The third contribution of the cuirent paper is that it extends the ^tud\ b\ Fama and
French (1995). who do not pa\ attention to the phenomenon that negati\e earnings ma_\
be more temporary than positive earnings and consequently ha\e less effect on MTB
ratios. The current study delineates between profits and losses, because Ha\n ( 1995i and
Martikainen (1997) suggest that accounting losses, i.e. negative earnings, can be
regarded as transitor}^ by nature.' This is because shareholders have a liquidation iput)
option on the future cash flows of the firm. i.e. they ha\e the opportunitx to sell their
shares at a price equal to the net asset assets of the firm. We find no positive relationship
between the MTB and ITB ratios if earnings are negati\e. Therefore, the results support
the hypothesis that accounting losses are temporary and are not reflected in cash flow
expectations.
Fourth, the empirical results by Hayn (1995) and Martikainen (1997) give support to the
temporary nature of accounting losses, in the context of earnings response coefficients
(ERCs), when primary annual earnings before extraordinary items are used to measure
income. The current in\estigation contributes to their studies by adding fi\ e more income
levels to the analysis of the transitor\ nature of losses. It appears that, while losses are tem-
porary in all income levels, there are also significant differences across different income
levels in this respect. ob\iousl\' because the temporar\- nature of different income compo-
nents varies.
Fifth, while Fama and French ( 1995 ) and Martikainen ( 1997) use U.S. data in their anal-
ysis, this paper exploits Finnish data. This makes it possible to investigate whether the rela-
tionship between MTB and ITB ratios is an international phenomenon rather than
idiosyncratic to the U.S. Our findings suggest that even in Finland, where accounting rules
are very different from major countries and stock markets are relati\el_N unde\eloped.
investors exploit accounting data to fomi cash flow expectations for Finnish finns. More-
over, in this process. in\estors seem to split accounting earnings into components b\ taking
into account the \ alue-rele\ anc> of \ arious income statement items.
The remainder of this article is organized as follows. The next section pro\ides the the-
oretical background for the paper. The paper then proceeds by providing descriptions of
the Finnish accounting system and income components used in the study. The next section
of the paper describes the data. The fifth section offers the empirical results on \ arious
income levels and their components as determinants of the MTB ratios. Finally, conclu-
sions and implications of the paper are provided in Section VI.
HYPOTHESIS DEVELOPMENT
To explain the relationship between the MTB ratio, growth expectations and accounting
income, we apply the notations of Fama and French (1995). For the sake of simplicity, let
us assume an all equity-firm that finances its in\ estments soleh' with retained earnings. In
this case dividends for year r, Dj, are
D, = EI, + DP, - 1,.
362 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
where EIj equals equity income, depreciation is noted with DP,, and investment outlays
with /,. Let us further assume that at time t expected depreciation and investment for any
year t+i are proportional to expected future equity income, that is,
Ep,^, = E, [EI,^i + DP,^, - I,^i\ = E, EI,^i ( 1 + A- , -k.Y (2)
where k\ and A^ are the proportionality factors. If the discount rate, /% is constant, the mar-
ket value of equity for year t. ME,, equals
°° p pj
ME, = (l+A-i-A.)^ ' '\' . (3)
1 (/+'•)
Consequently, the MTB ratio, ME, I BE,, is
°° E.EL^/BE
MTB, = (l+Aj-A,) X — -'• (4)
" /= 1 (/+ '-)'
Equation 4 shows that the MTB ratio can be interpreted as a measure of the market's
expectations of growth opportunities. This is because the MTB ratio increases with the
expectations on equity income (see also Collins & Kothari, 1989).
To better understand the link between stock prices and accounting earnings, the recent
accounting literature splits earnings figures into various components. For instance,
Ramakrishnan and Thomas (1995) suggest that earnings consist of permanent, transitory
and price-irrelevant components. Permanent shocks are shocks that continue into the
future and, therefore, have a large price effect. Transitory (temporary) shocks do not persist
beyond this period, leading to a lower price reaction. The price-irrelevant components of
earnings are defined as the difference between the reported earnings and price-relevant
earnings. For price-irrelevant shocks no price reaction exists. Ramakrishnan and Thomas
(1995) note that these three types of shocks are unlikely to completely describe reported
earnings, but definitely help us to better describe the relationship between stock prices and
accounting earnings. Equations 3 and 4 suggest that the MTB ratio is positively related to
persistent accounting income, while temporarily high or low accounting income do not
have a significant effect on the MTB ratio. Therefore, we hypothesize that permanent
income components are significantly related to the MTB ratio, while the transitory and
price-irrelevant components are not.
As noted by Hayn (1995) and Martikainen (1997), among others, it can be further
hypothesized that accounting losses are temporary and, therefore, bear less weight than
accounting profits when investors are forming their cash flow expectations. This is because
the equity holders have a put option on the future cash flows of the firm. Consequently, the
investors have the opportunity to sell their shares at the price of the market value of the net
assets of the firm. Based on this put option, accounting losses cannot be expected to con-
tinue infinitely. The notion of the liquidation option adding to the firm value is also dis-
cussed, for instance, by Robichek and VanHome (1967). Myers and Majd (1990) and
Berger. Ofek and Swary (1996). Therefore, we also hypothesize that negative income lev-
Market-to-Book Equity Ratios 363
els are less persistent than the positive ones, and, therefore, have less effect on MTB ratios
than the latter.
MEASURING INCOME IN FINLAND
Finnish Income Statements
Next we turn to describing the Finnish accounting rules and income statements to discuss
what income components can be regarded as permanent, temporary or price- irrelevant in
Finland. For this purpose, it is necessary to first briefly describe Finnish accounting prac-
tices. A continental accounting framework based on a civil law tradition has been diffused
from Germany, via Sweden, to the other Nordic (Norway, Denmark, Finland, Iceland)
countries in varying degrees (see Monsen & Wallace, 1995). In particular, the government
has been a strong accounting regulator in Norway and Finland. This similarity aside, how-
ever, Finland deviates from the other Nordic countries by employing the expenditure-rev-
enue theory of accounting developed by Professor Martti Saario in the 1950s (see Saario,
1959). As noted by Lukka and Pihlanto (1994), this theory has maintained its position as
the foundation of accounting thinking in Finland, despite many pressures, such as the har-
monization development within the EU.
The expenditure-revenue theory underlying Finnish accounting rules takes an unconven-
tional approach to the going concern convention, and develops the accounting model start-
ing from the income concept rather than the internationally more common expansion from
the balance sheet concept (see Salmi, 1994). As a consequence, income statements play a
key role in the Finnish accounting system, while the balance sheets and other fund state-
ment summations merely act as "transfer accounts" from one year to the next. The
Accounting Act, the Business Tax Act and the Companies Act set the requirements for
income statements for corporations. In addition, listed firms have to follow the Securities
Market Act and the rules and regulations of the Helsinki Stock Exchange (HSE). Although
the legislation stipulates a fixed scheme for the reported income figures, accounting con-
ventions and principles significantly affect the income figures. Therefore, firms usually
follow the Business Tax Act, which is more restrictive, but still gives ample discretion to
determine annual taxable net income. As a result, Finnish financial reporting is often criti-
cized for providing "tax minimization" rather than "economic reality" statements (see e.g.,
Troberg, 1992).
Table 1 provides a stylized income statement for Finnish firms. One of the most signifi-
cant differences between the income statements prepared following the Finnish bookkeep-
ing legislation and the International Accounting Standards (IAS) recommendations
concerns depreciation.'' Although the Accounting Act neither regulates the amount of
annual depreciation, nor specifies any particular depreciation method, the Business Tax
Act contains detailed instructions on the maximum depreciation rates for machinery (30
percent) and buildings (5-20 percent, depending on the material used in the construction).
The companies listed on the HSE currently report two types of depreciation: depreciation
according to plan and "tax" depreciation. Depreciation according to plan is based on the
management's evaluation of the economic life of an asset, straight-line depreciation being
the most common approach. Regarding reported earnings, firms can in principle select any
364 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
depreciation level between zero and the maximum depreciation rate. The depreciation
method applied here is an accelerated depreciation method known as the declining balance
method of depreciation, by which the maximum percentages are applied against declining
book values.
In addition to depreciation. Finnish reserves are another major difference in the Finnish
accounting system from the international perspective. This is because Finnish firms are
allowed to create untaxed reserves for future expenditures and losses. Examples of these
are the inventory reserve, bad debt reserve, operational reserve, warranty reserve and
investment reserves. The maximum levels of reserves have changed over the years, but, for
instance, in 1989 the maximum acceptable reserve was 35 percent of inventories, valued at
variable cost. Forming an inventory reserve means that companies transfer, in addition to
the costs of goods sold, extra inventory expenses to the income statement.
As shown above, Finnish accounting earnings may be considered managed earnings to a
larger extent than in most other countries. Earnings management is common among Finn-
ish firms to save taxes and pay constant dividends required by large institutional owners
(see Kasanen, Kinnunen & Niskanen, 1997). Therefore, Finnish financial analysts aim to
adjust firms' reported earnings to better describe "economic reality." As an illustrative
example, the widely used databank by the Research Institute of the Finnish Economy
Table 1. Income Statement Based on Finnish Accounting Legislation
NET SALES
Costs and expenses
Materials and supplies
Wages and salaries
Personnel costs
Rents
Other costs and expenses
Production for own use
Change in inventories
OPERATING MARGIN
Depreciation according to plan
Buildings
Machinery and equipment
Intangible assets
OPERATING PROFIT
Financial income and expenses
Interest income
Other financial income
Interest expenses
Other financial expenses
PROFIT AFTER FINANCIAL INCOME AND EXPENSES
Other income and expenses
Other income
Other expenses
PRORT BEFORE APPROPRIATIONS AND TAXES
Depreciation in excess of plan
Change in reserves
Taxes
NET PROFIT
Market-to-Book Equity Ratios 365
Table 2. Adjusted Finnish Income Statement
NET SALES (SAL)
Materials and supplies
Wages and salaries
Personnel costs
Change in pension fund liabilities
Rents
Other costs and expenses
Production for own use
Change in inventories
OPERATING INCOME (OPE)
Financial expenses
Financial income
Taxes
Other expenses
Other income
INCOME AFTER FINANCIAL INCOME AND EXPENSES (FIN)
Depreciation according to plan
NET INCOME (NET)
Extraordinary expenses
Extraordinary income
ADJUSTED INCOME (ADJ)
Depreciation in excess of plan
Changes in reserves
Change in pension fund liabilities
NET PROFIT (REP)
(ETLA) is compiled in accordance with the recommendations of the Corporate Committee
for Financial Analysis (see Yritystutkimusneuvottelukunta, 1993). The income statements
of Finnish firms are adjusted as shown in Table 2. Net sales (SAL) is the same in ETLA
databank and in the income statement based on the Finnish bookkeeping legislation.
Because Finnish firms do not have to record their pension liabilities contributed to pension
foundations on accrual basis, these can affect reported earnings. Therefore, Operating
Income (OPE) is adjusted by taking into account the annual change in pension liabilities.
OPE is followed by Income After Financial Income And Expenses (FIN) in the adjusted
income statement. FIN measures how much income a firm has produced to cover new
investments, increase in working capital and distribution of profit. When calculating Net
Income (NET), depreciation according to plan is used in ETLA's databank. Adjusted
Income (ADJ) is then obtained by subtracting (adding) extraordinary expenses (income).
The difference between the net profit in the income statement based on Finnish accounting
legislation (REP) and ADJ is, therefore, the result of changes in pension liabilities, reserves
and depreciation, as shown in Table 2.
Estimating Permanent, Transitory and Price-Irrelevant Components
As noted earlier, Ramakrishnan and Thomas (1995) suggest that earnings consist of per-
manent, transitory and price-irrelevant components. To estimate these components from
Finnish financial statements, we split the six income levels in adjusted income statements
366 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
into five parts: INCl (SAL-OPE). INC2 (OPE-HN), INC3 (FIN-NET), INC4 (NET-ADJ)
and INC5 (ADJ-REP). and then investigate their ability to explain the variation in MTB
ratios by using the framework by Ramakrishnan and Thomas (1995).
The definition of permanent income component is that it continues into the future. Using
the above definitions, we assume that INCl. INC2 and INC3 are related to the firms' eco-
nomic process in the long run. and are likely to be significantly related to firms" cash flows
in the future. Therefore, we assume that these components are related to the MTB ratios,
i.e. investors use them when creating cash tlow expectations for Finnish firms.
As noted above, transitory (temporary) income does not persist beyond this period. In the
ETLA's classification, extraordinary expenses and income fit to this definition. Therefore,
INC4 can be regarded as transitory, and no significant relation between INC4 and the MTB
ratios is. therefore, expected.
In the Ramakrishnan and Thomas (1995) framework, price-irrelevant earnings compo-
nents are defined as the difference between reported and price-relevant earnings. One of
the most likely reasons for the existence of this component is income management. This is
because the managers have an opportunity to smooth reported income by selecting a price-
irrelevant accrual that is negatively related to the observed values of price-relevant shocks.
Alternatively, firms may manage accounting accruals to shift revenues and expenses
between adjacent periods. In ETLA's income statement the difference between reported
earnings (REP) and the earnings corrected for income management (ADJ). i.e. INC5. rep-
resents a major part of the income management possibilities. Therefore, we expect that
INC5 is not related to the MTB ratios.^
THE DATA
Sample Description
The sample includes 250 firm-year observations of data for all Finnish firms that were
listed during the 1987-1994 period on the HSE. Financial firms (banks and insurance com-
panies) are excluded because of their different accounting practices. Since all firms are not
listed continuously, the number of annual observations varies between 21 and 38. as shown
in Table 3. The financial statement data are obtained from the data base published by
ETLA. Six income levels, i.e. SAL. OPE. FIN. NET. ADJ and REP described in Table 2
are used in the analysis. Moreover, data on the book and market value of equity is gathered
to calculate the MTB ratios.
The HSE is a small market comprised of stocks that have smaller market value and less
trading than the stocks in major European markets. Despite its small size. HSE has
received a lot of attention by researchers in recent years. Kallunki et al. (1997) review
Finnish stock market research and point out that the behavior of the Finnish market is in
many respects similar to major markets. In accordance with the earlier U.S. findings by
Foster. Olsen and Shevlin (1984) and Bernard and Thomas (1990). among others, it
appears that the Finnish stock market may not behave efficiently, in tenns of not being able
to correctly interpret all accounting information. This is one factor that may weaken the
observed relationships between MTB and ITB ratios, and should be recognized when inter-
preting the results of the study.
Market-to-Book Equity Ratios 367
Table 3. Means of ITB Ratios and Frequency of Losses on Different Income Levels
Year
Income
Level
1987
1988
1989
1990
1991
1992
1993
1994
Number of
Observations
21
27
29
29
38
37
34
35
SAL
3.303
3.230
3.024
2.616
2.885
3.440
4.418
2.861
[0]
[0]
[0]
[0]
[0]
[0]
[0]
[0]
OPE
0.358
0.361
0.322
0.203
0.181
0.274
0.512
0.345
[0]
[0]
[0]
[1]
[31
[2]
[2]
[1]
FIN
0.259
0.297
0.256
0.119
0.047
0.091
0.265
0.244
[0]
[0]
[0]
[3]
[in
[7]
[3]
[1]
NET
0.131
0.164
0.126
-0.006
-0.105
-0.097
0.033
0.097
[0]
[1]
[1]
[12]
[24]
[20]
[7]
[4]
ADJ
0.162
0.305
0.126
0.021
-0.077
-0.108
0.009
0.058
[0]
[1]
[3]
[8]
[21]
[19]
[8]
[5]
REP
0.068
0.099
0.048
0.027
-0.045
-0.048
0.053
0.146
[0]
[1]
[6]
[8]
[15]
[16]
[6]
[7]
SAL = sales, OPE = operating income, FIN = income after financial income and expenses, NET = net
income, ADJ = adjusted income. REP = net profit. All income levels based on ETLA's data bank, see
Table 2. In brackets are the number of losses.
Various studies suggest that there exist significant problems when returns on short inter-
vals, such as days are used to analyze Finnish stock returns. This is obviously because of
thin trading in the HSE. To illustrate. Booth, Kallunki and IVIartikainen (1996) report that
one-third of the stocks were not traded during their earnings announcement day in the HSE
in 1989-1993. Since we use annual accounting income and market value data in this paper,
the problems of nonsynchronous trading are not assumed to be serious in the current
study. '^
Data Analysis
Table 3 provides the average ITB ratios for the six alternative income levels separately
for each year investigated. To calculate the ITB ratios, the six income levels are divided by
the beginning-of-the-year book value of equity. Therefore, the ITB ratios can be regarded
as accounting-based profitability measurements. The figures in Table 3 support the earlier
Finnish findings by Booth, Kallunki and Martikainen (1997) and Kasanen, Kinnunen and
Niskanen (1997) that the variability of reported earnings over time is lower than that of
adjusted earnings. While the range for the average REP is from -0.045 to 0. 145, the respec-
tive figure for ADJ is from -0. 108 to 0.304. This is in accordance with the assumption that
Finnish accountants intentionally smooth reported accounting income to soften the effect
of hard times upon income and, conversely, in order to diminish the extent to which good
times are contemporaneously reflected in reported earnings. This earnings management
behavior of Finnish firms is strengthened, because firms want to save taxes and pay con-
stant dividends to their shareholders.
Table 3 also reports the frequency of losses for different income levels. Of course, sales
are never negative, but losses appear in all other income levels. Losses take place seldom
368 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
Table 4. Pearson Correlation Coefficients Between Income Components Deflated
by The Beginning-of-the-year Book Value of Equity
INC1/
INC2/
INC3/
INC4/
INC5/
BOOK
BOOK
BOOK
BOOK
BOOK
INCl/
1 .000
0.688
0.812
-0.03 1
0.046
BOOK
(0.000)
(0.000)
(0.620)
(0.464)
INC2/
1.000
0.897
-0.011
-0.097
BOOK
(0.000)
(0.858)
(0.127)
1NC3/
1.000
-0.042
0.003
BOOK
(0.508)
(0.962)
INC4/
1.000
-0.745
BOOK
(0.000)
INC5/
1.000
BOOK
INCl = SAL-OPE: INC2 = OPE - FIN: INC3 = FIN-NET: INC4 = NET-ADJ: and INCi =
ADJ-REP, when SAL = sales, OPE = operating income. FIN = income after financial income
and expenses, NET = net income, ADJ = adjusted income. REP = net profit based on ETLA's
databank (see Table 2). BOOK is the book value of equity in the beginning of the year. Prob-
ability values are in parentheses. The number of observations is 250.
in the OPE level, but are already much common for FIN. which takes into account interests
and taxes. For NET, ADJ and REP losses appear in 69, 65 and 59 firm-years, i.e. in 23.6-
27.6 percent of the observations. This proportion is considerably higher than that reported
by Hayn (1995) for U.S. firms. The large nuinber of losses in Finnish data is largely due to
the severe economic recession in the beginning of the 1990s, which followed the collapse
of the Soviet Union, formerly the most important trading partner of Finland. To investigate
whether the results of this study are time-sensitive because of the extremely deep recession,
the regression models of the study were re-estimated using annual dummy variables for
years 1990-1992. The results that are obtainable from the authors upon request suggest that
the main conlusions of the study are not affected by this recession.
Table 4 provides the Pearson correlation matrix between income components deflated
by the beginning-of-the-year book value of equity. It appears that INCl, INC2 and
INC3 are all positively correlated with each other. This is consistent with our hypothesis
stated earlier that all these components are likely to be permanent and continue into the
future. The component of extraordinary income/expenses, i.e. INC4, is not related to
INCl, INC2 or INC3. This supports the hypothesis of the transitory nature of this com-
ponent.
The earnings management component, INC5, is not related to INCl, INC2 and INC3,
but has a highly significant negative correlation, i.e. -0.745, with INC4. This is apparently
because managers aim to manage reported earnings downwards in the case of large transi-
tory income and upwards in the case of large transitory expenses. These correlations sup-
port the notion by Ramakrishnan and Thomas (1995) that earnings management is not
related to permanent income and is not likely to cause a large price effect in the market. It
also highlights the notion by Dechow, Sloan and Sweeeney (1995) that taking into account
the possible extreme financial performance of firms is essential when studying earnings
management and its implications.
Market-to-Book Equity Ratios
369
EMPIRICAL RESULTS
Relationship between IVITB and ITB Ratios
To investigate the relationship between the MTB and ITB ratios, the following regres-
sion is estimated:
MTBi, = rtQ + «i DPi^ ITBjf + «2 DL,^ ITB,, + e,,.
(5)
where MTB^ is the market-to-book equity ratio for firm / in April of the year t+l and ITBj^
is the income-to-book equity ratio (accounting income for year t divided by the book value
of equity at the beginning of year t) of the same firm. Accounting income is calculated
either as SAL, OPE, FIN, NET, ADJ or REP as described in Table 2. The terms DP^, and
DLjf are dummy variables having a value of one in case firm i's earnings are positive and
negative, respectively, and zero otherwise. The terms a, and ej( are estimated regression
parameters. Restricted models (see e.g., Judge et al., 1988) are used to study whether the
parameter estimates are different for positive and negative accounting income. The null
hypothesis tested is that there is no difference in the estimates for a given income level. The
null hypothesis is rejected when the restriction parameter is significant.
Table 5. Relationship between MTB and ITB Ratios in Different Income Levels
Relationship
Relationship
F- value for
Income
Intercept
when ITB>0
when ITB<0
restriction
level
3o
3l
a2
a-, =32
F^
F
SAL
1.026
(0.000)
0.013
(0.325)
0.004
0.974
(0.325)
OPE
1.017
0.112
-1.200
9.279
0.038
4.831
(0.000)
(0.164)
(0.004)
(0.003)
(0.009)
FIN
0.959
0.431
-2.163
8.663
0.048
6.172
(0.000)
(0.003)
(0.032)
(0.004)
(0.002)
NET
0.943
1.265
-0.150
11.163
0.079
10.638
(0.000)
(0.579)
(0.001)
(0.000)
(0.000)
ADJ
0.946
0.911
-0.342
13.278
0.069
9.132
(0.000)
(0.000)
(0.139)
(0.000)
(0.000)
REP
0.982
0.950
-0.291
9.208
0.061
8.053
(0.000)
(0.000)
(0.341)
(0.003)
(0.000)
Notes: The following regression is estimated separately for each income level:
MTBi, = flo + "1 DPi, ITH„ + a, l)L„ ITB,, + e„,
where MTB|, is the market-to-book equity ratio for firm i in April of the year t+l and ITB j, is the income-to-book equity
ratio (accounting income for year t divided by the book value of equity at the beginning of year t) of the same firm.
Accounting income is calculated either as SAL, OPE, FIN, NET, ADJ or REP as described in Table 2. DP|, and DL,,
are dummy variables having a value of one in case firm i"s earnings are positive and negative, respectively, afl, a., b,
and Cj, are estimated regression parameters. Restricted models are used to study whether the parameter estimates are
different for positive and negative accounting income. The null hypothesis tested is that there is no difference in the
estimates for a given income level. The null hypothesis is rejected when the restriction parameter is significant. Chi-
square tests (see White, 1980) indicate no significant problems due to heteroskedasticity. Probability values are in
parentheses.
370 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
To estimate equation (5), income levels rather than their differences are employed. This
is done because of three main reasons. First, the theoretical analysis by Ramakrishnan and
Thomas (1995) supports the use of levels rather than differences to split income into com-
ponents when investigating their information content. Second, the recent evidence by Mar-
tikainen, Kallunki and Perttunen (1997) suggests that earnings levels are more informative
than differences in explaining Finnish stock returns. Third, this analysis makes our results
comparable to those of Fama and French (1995).
Table 5 presents the regression results for the six alternative income levels. For
profits, the positive relationship between the MTB and ITB ratios holds irrespective
of which income level is used in the analysis. The relationship is statistically signifi-
cant for four "bottom" income levels, i.e. FIN, NET, ADJ and REP. This suggests
that positive income levels are used by investors when they are creating cash flow
expectations for Finnish firms. It is also consistent with the earlier findings that
income levels other than "bottom-line" earnings are important for investors. For OPE
and SAL the observed relationship remains insignificant. This may be bacause these
income levels exclude, for instance, financial expenses that are important determi-
nants of cash flows.
For negative income levels, a statistically significant positive relationship between MTB
and ITB ratios exists in none of the five income levels for which losses take place. For OPE
and FIN, the relationship is significantly negative. One plausible explanation for this phe-
nomenon is that the firms that are reporting losses even before taking into account depre-
ciation and extraordinary items, are likely to improve their earnings considerably in the
future. This is because otherwise they would not be able to survive and owners would use
their put option on the net assets of the firm. This explanation is in line with some previous
U.S. studies that, in certain conditions, earnings behave as a mean-reverting process. In
particular, periods with extreme changes in earnings have been found to be followed by
periods of earnings changes in the opposite direction (see, for instance, Beaver, Lambert &
Morse, 1980; Freeman, Ohlson & Penman, 1982).
The restrictions confinn that the parameter estimates are different for positive and nega-
tive accounting income, irrespective of which income level is used in the analysis. There-
fore, the results support the assumption that negative accounting earnings decrease
earnings persistence and, consequently, affect investors' cash flow expectations differently
than positive earnings.
Incremental Importance of Income Statement Items
The theoretical analysis above suggests that accounting income is value-relevant if it is
permanent. Because accounting income is obtained by subtracting relevant costs and
expenses from sales, it interesting to empirically study which of the individual income
statement items are so permanent that they are important in generating market values of
shares. Rather than investigating the information content of the different income state-
ment items individually, we report the results for their incremental information content.
This is because, as noted by Dechow, Sloan and Sweeney (1995), it is necessary to take
into account the underlying financial performance when studying individual earnings
Market-to-Book Equity Ratios 371
components, such as earnings management. Therefore, the following regression is esti-
mated:
5
MTB^^= bQ + b^SAL./BOOK.^_^+ "£ gjilNCj-/ BOOK . ^ ^) + e.^, (6)
7=1
where MTBji is the market-to-book equity ratio for fimi i in April of the year r+1 and SALj,
is the net sales of the same firm in year t. In addition, the five accounting income compo-
nents as described in Table 2, INC1-INC5, are included as explanatory variables deflated
by the beginning-of-the-year book value of equity. The terms /jq, b |, g and e jf are esti-
mated regression parameters.
The estimation results for model (6) are provided in Table 6. The R" of the model is 9.0
percent, which is economically low, but in line with earlier U.S. studies using annual earn-
ings windows. The F-value of the regression is highly significant (p = 0.001), suggesting
that the accounting variables are significantly related to investors' growth expectations.
The three income components, INCl, INC2 and INC3 are negatively related to the MTB
ratio. It, therefore, appears that an increase in these costs leads to lower cash flow expecta-
tions. This is consistent with the assumption discussed above that these components can be
assumed to be permanent by nature.
The extraordinary income/expense component, INC4, is not significantly related to the
MTB ratio. This is in accordance with the a priori hypothesis that this component is
regarded as transitory by investors. Moreover, INC5 remains insignificant in the regres-
sion, supporting the assumption by Ramakrishnan and Thomas (1995) that earnings man-
agement is value-iiTelevant for investors.
CONCLUSIONS AND IMPLICATIONS
This study investigates which income levels and components are related to the market-to-
book equity ratios in Finland. The findings of the empirical analysis suggest that income
statement items other than "bottom-line" earnings contain useful information when inves-
Table 6. Incremental Importance of Income Components
SAU INC1/ INC2/ INC3/ INC4/ INC5/
Intercept BOOK BOOK BOOK BOOK BOOK BOOK Ff F
MTB 1 .046 0.718 -0.648 -0.998 -1.748 0.352 -0.045 0.090 3.984
1 .046
0.718
-0.648
-0.998
-1.748
0.352
-0.045
0.090
(0.000)
(0.000)
(0.001)
(0.026)
(0.026)
(0.458)
(0.890)
(O.OOl)
Notes: The following regression is estimated:
s
MTB,, = b^ + b^SAL„/BOOK,,_^+ Y. g^(INCj„/ BOOK ^ , ^) + c„,
i= 1
where MTB,, is the market-to-book equity ratio tor firm i in April of the year t+1 and SAL,, is the net of the same firm
in year t. In addition, the five accounting income components INCl - INC.5 are included as explanatory variables
deflated by the beginning-of-the-year book value of equity. b(). b|, g: and e,, are estimated regression parameters.
Probability values are in parentheses. The number of observations is 250. Chi-square tests (see White, 1980) do not
indicate any significant problems due to heteroskedasticity.
372 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
tors are creating cash flow expectations for Finnish firms. This holds especially for income
components that can be regarded permanent. Because of the wide earnings management
possibilities provided by the Finnish accounting rules, the Finnish data also provides an
opportunity to test the importance of income management in creating investors' cash flow
expectations. It appears that the income management component of earnings is value-irrel-
evant. This is the case also for extraordinary income/expenses, which can be regarded as
temporary by nature. The findings of the study further suggest that in none of the various
income levels investigated is negative accounting income significantly positively related to
the market-to-book equity ratios. If income is positive, however, the positive relationship
exists. These findings support the hypothesis that investors regard accounting losses as
temporary, not reflecting future cash flow expectations.
To sum up, the results of this study indicate that investors split accounting earnings into
components and evaluate the temporary nature of income statement items when creating
cash flow expectations for firms. Therefore, to better understand the relationships between
accounting variables and stock market data, it is useful to split accounting income into
components. All of our evidence suggests that the framework by Ramakrishnan and Tho-
mas ( 1995) of spliting earnings into permanent, transitory and price-irrelevant components
seems plausible and helps us to better understand how the stock market uses accounting
data.
NOTES
1. See also Rosenberg, Reid and Lanstain (1985), DeBondt and Thaler (1987), Chan, Hamao and
Lakonishok (1991), Lakonishok, Schleifer and Vishny (1994), Davis (1994), and Daniel and Tit-
man (1997), among others, for similar findings. See also Kothari, Shanken and Sloan (1995) for
a discussion of some potential reasons explaining the effect
2. As a matter of fact, Fama and French (1995) use the reciprocal of the MTB ratio, i.e. the book-
to-market equity (BTM) ratio in their analysis. Since the MTB ratio is positively related to
growth expectations, it is selected for this study. The conclusions of the study are, of course, not
affected because of this selection. While Fama and French ( 1995) call their profitability measure
an eamings-to-book (ETB) ratio, we refer it as the income-to-book (ITB) ratio because of the
various income levels used to measure this ratio in this study.
3. See also e.g., Beaver. Lambert and Morse (1980), Beaver. Lambert and Ryan (1987), Ohlson
( 1989), and Ohlson (1990) suggesting that accounting earnings include temporary components.
4. The definitions of the nature of income components vary in the literature. Price-irrelevant com-
ponents are often called garbling or measurement errors, representing the difference between
reported and economic earnings. Sometimes the terms price-irrelevant and transitory (tempo-
rary) are used interchangeably (see Ramakrishnan & Thomas, 1995, for discussion).
5. See Niskanen, Ka.sanen and Kinnunen ( 1994) for a more detailed comparison between Finnish
and IAS profits.
6. In practice, however, most of the difference may be attributed to different methods of deprecia-
tion (see Booth, Kallunki & Martikainen, 1997).
7. As noted by Ramakrishnan and Thomas (1995), another reason for the existence of price-irrele-
vant components may be that stock prices lead accounting earnings. This phenomenon exists
because accounting emphasizes historical costs and transaction-based accounting (see e.g., Col-
lins et al., 1994)
Market-to-Book Equity Ratios 373
8. Regarding ERCs, earlier evidence suggests that ERCs are positive and statistically significant in
Finland (see e.g. Martikainen, Yli-Olli & Gunasekaran, 1993; Niskanen, Kasanen & Kinnunen,
1994; Martikainen. Kallunki & Perttunen, 1997). Moreover, event studies suggest that stock
prices react to the release of accounting information (see e.g.. Booth, Kallunki & Martikainen,
1996, 1997; Kallunki, 1996; Martikainen, 1997c).
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The International
Journal of
Accounting
Equity Returns: Local GAAP versus U.S. GAAP for Foreign
Issuers from Developing Countries
Norlin G. Rueschhoff and C. David Strupeck
Key Words: Accounting and financial reporting standards: De\ eloping countries: GAAP recon-
ciliations: Equity returns
Abstract: Tlie number of foreign firms from developing countries with common stock listings on
the New York and American Stock exchanges has been rapidly increasing. This provides motiva-
tion to study the accounting issues faced by foreign issuers from developing countries. Among the
important reporting issues is the reconciliation between local GAAP and U.S. GAAP when foreign
issuers apply the comprehensive body of accounting principles available in their own developing
country for stockholder reporting in the United States. This study analyzes these reconciliation dif-
ferences with particular attention to their effect on net income, stockholders ' equity and equity
returns. The findings highlight the fact that differences in accounting principles cause extreme
variations in reported net income, stockholders ' equity and equity returns for some developing
country finns.
The number of foreign issuers registering for the first time with the United States Securities
and Exchange Commission (SEC) increased from 45 companies in 1990 to 109 in 1993.
The value of these newly registered securities increased from about S8 million in 1990 to
about $50 billion in 1993 (Mills. 1994). .A.s noted herein, the number of the foreign issuers
is still increasing and. most significant!}, more of the recent increases are attributable to
firms from developing countries.
Since many foreign firms use their national Generally Accepted Accounting Practices
(GAAP), their financial statements may result in net income and/or o\\ ners' equity differ-
ent from that which would be reported using U.S. GAAP. Because these differences can be
significant, the SEC has special regulations that address foreign issuers desiring to raise
equity capital by listing on the U.S. exchanges. These regulations require that foreign issu-
ers must either use U.S. G.A.AP or present reconciliations of net income and stockholders"
Direct all correspondence to: .Norlin G. Rueschhoff. Professor of .Accountancy. College of Business Administra-
tion. University of Notre Dame. Notre Dame. Indiana 46556: Tel: 219-631-6280: Fa.\: 219-631-5255: E-Mail:
Rueschhoff.l@nd.edu: C. David Strupeck, Associate Profes.sor of Accounting. Division of Business and Eco-
nomics. Indiana Uni\ersity Northwest. 3400 Broadway. Gar>. Indiana 46408: Tel: 219-980-7762: Fa.\: 219-980-
6916: E-Mail: dave@iunbusl.iun.indiana.edu.
The International Journal of Accounting. \ ol. 33. No. 3. pp. 377-389 LS.SN: 0020-7063.
.\\\ rights of reproduction in any form reserved. Copyright 1998 I niversity of Illinois
378 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1998
equity for the differences between U.S. and local GAAP in the financial statements avail-
able to U.S. investors. Opponents of these regulations argue that these regulations create a
barrier to U.S. exchanges due to the reconciliation costs borne by the foreign corporations.
If the number of reconciliations by foreign issuers could be reduced or eliminated, entry to
the U.S. exchanges by foreign corporations would be less costly. Proponents, on the other
hand, hold that U.S. investors trust in the SEC to protect them from accounting practices
that produce financial statements with results significantly different from U.S. practices.
This study investigates the number and effect of the accounting differences and their
impact on net income and stockholders" equity regarding issuers from developing coun-
tries in 1994. We analyze the differences due to accounting principles in an effort to
observe significant net income and stockholders' equity variations, and the resulting
effects on equity returns. If net income, stockholders' equity, and the corresponding return
on equity vary little between accounting practices in developing countries and the U.S.,
then the standards would appear to produce similar results and the reconciliations would
not be necessary.
After a review of the U.S. regulatory reporting issues and the relevant literature, we
present the growth of common stock offerings on the New York Stock Exchange (NYSE)
and the American Stock Exchange (AMEX) by foreign issuers from developing countries.
The third section presents the manner by which the firms from these countries comply with
SEC regulations, a necessary quality of financial statements for public offerings on the
exchanges; also presented in this section is an analysis of the reported GAAP reconcilia-
tions. The fourth section provides a further analysis of the differences in accounting prac-
tices, using return on equity as the measurement base. Finally, a summary of the findings
and conclusions complete the paper.
REPORTING ISSUES IN THE U.S. CAPITAL MARKET
Several reporting issues impact the U.S. stock listings by foreign issuers. These include
added reporting costs, non-accounting reasons for differences in financial results, and rec-
onciliation of local GAAP to U.S. GAAP.'
The SEC requires an initial filing (Forms F-1. F-2 and F-3) and annual reports on Form
20-F. These forms parallel filings required for domestic firms. Foreign firms are also
required to file semiannually (Form 6-K) while U.S. corporations are required to file quar-
terly reports (Form 10-Q.) It can be seen that, from a filing perspective, foreign firms face
the same or lesser barriers to issuing securities in the U.S. as U.S. entities. A major advan-
tage of U.S. firms over foreign firms does exist that supports the barrier debate: the differ-
ences in accounting standards between the U.S. and other countries. Since the SEC
requires a reconciliation with U.S. GAAP, foreign finns are forced to comply with both
U.S. GAAP and their home country standards if they choose to offer their securities on
U.S. exchanges. Several arguments against the SEC's position may be relevant to firms
from developing countries. Arguments are that U.S. exchanges become positioned as
regional rather than global marketplaces, that the U.S. capital market is no more efficient
due to U.S. GAAP and SEC regulatory disclosure requirements, and that the mechanical
reconciliation from local GAAP to U.S. GAAP may suggest a comparability that does not
exist, given the intercultural differences (Aftermann, 1995). On the SEC's side of the
Equity Returns 379
debate, protection of the U.S. investor is first and foremost. In addition, the SEC believes
that U.S. GAAP is the best system in the world and this quality should be maintained and
uncompromised. The SEC did relax the registration process in 1 994, intending to lower the
barriers, by reducing the number of GAAP reconciliations to two years, from three, for ini-
tial filers. In addition, cash flow statements prepared using International Accounting Stan-
dards (IAS) in lieu of U.S. GAAP are acceptable.
BACKGROUND STUDIES
The literature reveals numerable studies that address the issue of barriers to foreign firms'
listing their equity issues on U.S. markets. Frost and Lang (1996) report that the SEC's
financial reporting requirements may deter foreign companies from offering their securi-
ties on U.S. markets. Biddle and Saudagaran (1991) found that companies are more likely
to list on exchanges with fewer reporting requirements.
Several articles suggest that the U.S. investor need be aware of a variety of non-account-
ing issues in making informed investing decisions. Anderson (1993) points out that gov-
ernment social programs, tax laws, politics and cultural differences impact the reporting of
financial performance. As examples, she cites the Japanese' long-term patience for eco-
nomic growth, a bias for savings and less concern for cash liquidity (certainly different
from, if not opposite to, the U.S. investor).
Reconciliation to U.S. GAAP has received the greatest attention since it appears to be the
greatest barrier. The chairman of the NYSE has stated that ". . .reconciliation to U.S. GAAP
is a major impediment to foreign firms listing in the U.S." (Adler, 1995). Accepting recon-
ciliation as the barrier to entry, several studies have addressed this accounting reporting
issue. Alford, Jones, Leftwich, and Zmijewski (1993) conducted a study that compares and
contrasts the information content and timeliness of accounting earnings for several non-
U.S. countries. Of the seventeen countries studied, eight were inconclusive, four reported
in a more timely or more value relevant fashion, and five had accounting earnings prepared
in accordance with domestic GAAP that were "...less timely or less value relevant than
U.S. GAAP." Amir, Harris, and Venuti (1993) investigated whether reconciliations
increased the association between accounting measures and prices of stock. They con-
cluded that ". . .U.S. GAAP measures appear to be more value-relevant. . .and the aggregate
reconciliations of both shareholders' equity and earnings are value-relevant." Lovata and
Costigan (1996) analyzed firms from Canada in an effort to test whether the statement of
reconciliation required by the SEC is used by stock market participants. They concluded
that the market does appear to react to the information provided on the reconciliation.
Absent from the literature appears to be studies that focus on firms from developing
countries. This may be due to the fact that a sufficient number of firms from developing
countries have not traded on the NYSE or AMEX for empirical study. For example, an
early study (Evans and Taylor, 1982) indicated that the lASC has had very little impact on
the accounting practices of France, Japan, the United Kingdom, the United States, and
West Germany. Except for a few instances, selected firms from these five countries con-
tinue to follow the same practice before and after an International Accounting Standard is
issued. A recent study (Chan and Scow, 1996) indicated that earnings based on foreign
GAAP were more closely associated with contemporaneous stock returns than earnings
380 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
reconciled with U.S. GAAP for 45 firms from 13 countries. The study, however, included
only one firm each from Chile. Hong Kong, Mexico, and South Africa; the remaining were
firms from developed countries. Also, except for the one firm from Mexico, returns corre-
lations between U.S. and foreign stock indices for 1988-1992 were not in the high correla-
tion group. Another recent study (Frost & Kinney. 1996) found substantial variation in
earnings/stock returns and earnings change/stock returns among different domicile and dis-
closure groups. Of the 156 companies in that study, less than 20 were from developing
countries. Another study (Larson, 1993) pointed out that, though a causal relationship
between international standards adoption and earnings growth cannot be proven. IAS
adoption and earnings growth tended to coincide within 35 African countries. Of related
interest, of seventeen Chinese companies listed on the Hong Kong Stock Exchange in May
1995. nine used Hong Kong standards, five applied international accounting standards, and
three used combined Hong Kong/International Accounting Standards (Goligoski and Tay-
lor. 1995).
Further, accounting standards in developing countries are, of course, lesser developed
than those in developed countries. A 1993 United Nations forum to investigate the global
accounting standards issue (Journal of Accountancy. 1993) reported that 'in nearly half of
the nations of Africa... the (accounting) profession was reported to be virtually non-exis-
tent— with no certification process. . ."' Certainly then, our study may be seen as a contribu-
Table 1. Number of Firms from Developing Countries with Common Shares Offered on the
New York Stock Exchange and the American Stock Exchange at End of Each Year as of
December 31. 1994. Listed by Country
Country 1985' 1986 1987 1988 1989 1990 1991 1992 1993 1994 Total
Argentina
Bermuda
Brazil
British W. Indies
Cayman Islands
1
1
Chile
China
Colombia
Hong Kong
Indonesia
Israel
4
1
Korea
Liberia
Mexico
1
Neth. Antilles
I
Panama
Peru
Philippines
South Africa
4
2
Venezuela
Totals: # of Firms
13
1
1
Cumulative Totals:
# of Firms
13
14
15
# of Countries
6
6
6
18 22
3
5
8
1
4
1
6
1
1
1
1
3
1
1
4
1
1
1
10
■)
1
1
2
15
3
1
2
1
7
2
5
2
2
10
10
25
1
1
1
1
1
2
2
1
4
2
1
1
3
7
26
33
92
23
26
33
59
92
9
9
13
16
20
Noie: *Listed On Or Before December 31,1 985.
Equity Returns 381
tion to the literature regarding accounting standards, reconciliations and accounting
reporting for firms from developing countries.
GROWTH IN FOREIGN ISSUERS FROM DEVELOPING COUNTRIES: DATABASE AND
DESCRIPTIVE STATISTICS
The database for this study was derived from sources that contained information from
firms from developing countries that offered common shares on either the NYSE or the
AMEX during the period from 1985 through 1994. The firms were identified by using the
annual factbooks published by the respective stock exchanges (AMEX 1995, NYSE 1995).
In 1985, five years after the SEC's 20-F requirements became effective, there were thir-
teen firms from developing countries with common shares listed on the NYSE or AMEX.
By 1994, the number of listings for the firms from developing countries on either the
NYSE or the AMEX had grown to 92. This growth is reflected in Table 1 which reveals the
almost three-fold increase during the 1992 to 1994 period, from 33 firms to 92 firms.
The number of firms from developing countries with common share issues listed on the
major U.S. stock exchanges has not only increased in total, but the number of countries
from which the foreign issuers are based also increased during the ten year period. In 1985,
six developing countries were represented on the exchanges. In 1994, twenty developing
countries had firms offering their common stock on the exchanges. Firms from three coun-
tries, namely Mexico, Chile and Argentina, are mostly responsible for the growth in stock
offerings. In 1994 alone, twenty five of the thirty three firms newly listed on the exchanges
were from these three developing countries. It may be argued that the North American Free
Trade Agreement (NAFTA) is responsible for the listings from Mexico, but a different
cause must exist for the listings from Chile and Argentina. Is this trend towards increased
capital market internationalization due to the influence of changed standards of reporting
by the U.S. SEC? The answer may depend on the manner or extent of reconciliation of the
local GAAP with U.S. GAAP.
GAAP UTILIZATION: METHODOLOGY OF STUDY
Corporate annual reports and/or the annual Forms 20-F required by the SEC were studied
to observe the firms' manner of meeting the SEC's GAAP reconciliation requirements.
Specifically, the independent auditor's letter, the accounting policies summaries, the foot-
notes, and U.S. GAAP reconciliation schedules were reviewed in an effort to discern the
GAAP used in the financial statements. In the cases where local GAAP was used, footnotes
or supplementary schedules revealed the nature and magnitude of the reconciliation
between foreign GAAP and U.S. GAAP.
Of the ninety two firms listed on the exchanges in 1994, sixty firms applied local GAAP
in preparing their annual reports. A relatively large number of finns, twenty eight in total,
used U.S. GAAP in preparing their annual reports, thereby eliminating the need for a rec-
onciliation." Two firms used international standards and provided a reconciliation to U.S.
GAAP. One firm was delisted in 1995 due to insolvency and is excluded from this study.
Further, one Israeli firm used combined U.S. -Israel accounting standards. It is important to
note that the annual reports themselves do not always specifically state the GAAP being
382 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
Table 2. Major Categories Of Net Income Reconciliation: Local to U.S. GAAP
Categories Used Most Frequently:
Frequencies
Income Taxes
69
Compensation
58
Intangible As.sets
34
Effects of Changing Prices
26
Property, Plant and Equipment
21
Paid-in Capital and Minority Interest
21
Total of Adjustments
Categories With Greatest Positive Adjustments:
(in Thousands)
Income Taxes
$914,272
Plant, Property And Equipment
$898,055
Effects of Changing Prices
$309,603
Foreign Currency Translation
$269,081
Paid-in Capital and Minority Interest
$202,389
Total of Adjustments
Categories With Greatest Negative Adjustments:
(in Thousands)
Income Taxes
($522,210)
Compensation
($374,677)
Nonmonetary Transactions
($337,700)
Foreign Currency Translation
($262,016)
Property, Plant and Equipment
($153,100)
employed to prepare the financial statements. Of the sixty firms using local GAAP, three
did not provide the reconciliation in their annual reports and one did not quantify the dif-
ference.
The firms using local GAAP were required to file SEC Form 20-Fs, which reveal the
amounts and specific accounts that cause net income and stockholders' equity to be differ-
ent between local and U.S. GAAP. The data was analyzed using a model adapted from a
recent study jointly undertaken by the Canadian Institute of Chartered Accountants, Mex-
ican Institute of Public Accountants and the Financial Accounting Standards Board of the
United States (FASB, 1995).^ The accounts resulting in reconciliation items were summa-
rized into twenty three categories for net income reconciliations and twenty four categories
for stockholders' equity reconciliations.
ANALYSIS OF GAAP RECONCILIATIONS
Table 2 lists the top five categories (with one tie) having the highest number of reconcilia-
tion items and the greatest sums for positive and negative adjustments for net income by
categories. Of the twenty three used, the six categories shown as "Used Most Frequently"
in Table 2 explain 67% of the total adjustments needed to reconcile net income under local
GAAP to net income under U.S. GAAP. Adjustments for income taxes was the category
found to be used most frequently and caused the greatest positive adjustments and caused
the greatest negative adjustments. One sub-category of income taxes alone, deferred
income taxes, caused positive adjustments for 21 firms totaling $912 million and negative
adjustments for 30 firms totaling $494 million."^ Another category that draws attention is
Equity Returns 383
compensation. Thirty four of the fifty eight adjustments for net income reconciliation stem
from three compensation items: retirement scheme expenses, deferred profit sharing and
employee stock plans. These three items alone resulted in negative adjustments of $309
million of the $375 million.
In contrast to these results, a study conducted by the SEC (1993) showed income taxes
as third in order of reconciliation item frequency compared to first in this study. Also, in
the SEC study, compensation was ninth compared to second in this study. The most fre-
quent reconciling difference in the SEC study was depreciation which was not in our top
five most frequent list. To be pointed out is that the SEC study included all foreign firms
registered on the U.S. exchanges and only net income reconciliation differences.
In the stockholders' equity reconciliation as shown in Table 3, income taxes were again
the category used most frequently, 62, and with the greatest negative adjustments, $3,713
billion. Item analysis of this category revealed that deferred income tax adjustments of 12
firms totaled $737 million while negative adjustments by 39 firms totaled $3.46 billion.
This is not surprising given the changes in tax treatments recently promulgated by the
Financial Accounting Standards Board. The category with the greatest sum of positive
adjustments was paid-in capital/minority interest. This was the only reconciliation cate-
gory that had a greater impact than income taxes on the difference between local and U.S.
GAAP in the equity calculations. Further analysis of this category revealed that the major
reason causing this adjustment was inclusion of minority interest in stockholders' equity.
Comparing the categories from both tables 2 and 3 reveals some interesting points. In the
"Used most frequently" categories, only the effect of changing prices is not common to
both net income and equity reconciliations. It was expected that, due to the large number
Table 3. Major Categories Of Equity Reconciliation: Local to U.S. GAAP
Categories Used Most Frequently: Frequencies
Income Taxes 62
Paid-in Capital and Minority 35
Intangible Assets 35
Compensation 31
Plant, Property and Equipment 20
Total of Adjustments
Categories With Greatest Positive Adjustments: (in Thousands)
Paid-in Capital and Minority Interest $2,631,152
Effects of Changing Prices $ 1 ,737,558
Plant, Property and Equipment $1,525,950
Contingencies $824,158
Income Taxes $802,426
Capitalization of Interest $562,523
Total of Adjustments
Categories With Greatest Negative Adjustments: (in Thousands)
Income Taxes ($3,7 1 3,368)
Effects of Changing Prices ($ 1 ,625, 1 67)
Postemployment Benefits ($1,035,437)
Consolidation and Equity Accounting ($556,508)
Compensation ($457,704)
Plant, Property and Equipment ($373,844)
384
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
Table 4. Comparative Results: This Study versus the FASB Study
Average (Absolute)
Adjustments in Net Income
or Stockholders' Equity
(In Thousands Of U.S. $)
Area Of Difference
This Study
FASB Study
Significant Areas Of
Difference Reported
in the FASB Study
Business Combinations
SI, 138
56.896
Consolidation And Equity Accounting
S35,309
$5,236
Foreign Currency Translation
S33.I94
$6,475
Income Taxes
S20,819
$7,085
Pension Accounting
51,364
530,637
Investments
S2,605
$3,824
Research And Development
525,220
$3,676
Other Areas Of
Significant
Difference In
Accounting
Standards reported in
the FASB Study
Effects Of Changing Prices
513.790
Na
Effects Of Changing Prices
513.790
Na
Changes In Accounting Principles
536,590
5105,520
Discounting/Imputed Interest
Na
$831
Nonmonetary Transactions
$168,850
51,667
Prior Period Adjustments
Na
$5,856
Compensation
$7,565
$2,909
Discontinued Operations
$980
$480
Extraordinary Items
$6,000
Na
Capitalization Of Interest
$17,739
52,340
Contingencies
$22,382
$242,667
Debt
SI,332
$23,784
Deferred Or Capitalized Costs
$5,079
$353
Intangible Assets
$5,321
$15,867
Inventory
51,209
510,285
Property, Plant And Equipment
550,055
511,668
Receivables
51,729
5533
Paid-in Capital and Minority Interest
510,639
561
of firms in the study from high inflation economies, this category would cause significant
adjustments. What is interesting for this category is that, for equity reconciliation, effect of
changing prices was among the greatest positive adjustments and greatest negative adjust-
ments while for income reconciliation it appeared only among the greatest positive adjust-
ments. Income taxes were found to be used most frequently for both reconciliations.
The final analysis of the areas of difference between local and U.S. GAAP is the result
of comparing the average differences in the significant categories of accounting principles
with that of a comparative study of accounting variations from U.S. GAAP among firms in
Mexico and Canada (FASB, 1995). That FASB study analyzed the financial statements
from 176 Canadian and 6 Mexican companies. As mentioned earlier in this paper, the cat-
egories of accounting principles were based on the model developed for that study. Table
4 lists the average adjustments to net income or stockholders' equity, using absolute dol-
Equity Returns
385
Table 5. Net Income (in 000): Local GAAP versus U.S. GAAP (by country)
#of
Percent
Conservatism
firms
Country
Local
U.S.
Difference*
Index -%
6
Argentina
Ave.
$
245,038
$
254.983
3.90
96.10
Hi
$
538.000
$
527.000
Lo
S
20,530
$
16.935
14
Chile
Ave.
s
65,101
$
60.997
-6.73
106.73
Hi
$
377,634
S
341.024
Lo
s
6,030
$
6.656
1
China
s
176.005
$
191.886
8.28
91.72
1
Colombia
$
47,843
$
39.721
-20.45
120.45
1
Hong Kong
$1,115,200
$1,098,600
-1.51
101.5!
1
Indonesia
s
131,349
$
127.378
-3.12
103.12
4
Israel
Ave.
s
13.598
$
11,783
-15.40
115.40
Hi
s
11.061
$
10,347
Lo
$
1.892
$
1,471
2
Korea
Ave.
$
864.600
$1,526,050
43.34
56.66
Hi
$1,260,500
$2,638,800
Lo
$
468.700
$
413,300
23
Mexico
Ave.
$
50,055
$
31,487
-58.97
158.97
Hi
$1,999,863
$2
,112,122
Lo
($ 225,000)
($
255,000)
1
Peru
$
33.086
$33,461
1.12
98.88
2
Philippines
Ave.
$
105.024
$
121,260
13.39
86.61
Hi
$
208.696
$
234,508
Lo
$
1,352
$
8,012
1
South Africa
$
6.238
$
4.573
-36.40
136.40
1
Venezuela
1
566
s
566
0
100.00
58
All firms
Totals
$7,036,835
$7,945,998
-11.44
111.44
Ave.
$
137.000
$
121.325
Note: *Percent difference = (U.S. GAAP NI - U.S. GAAP NI)/ Local GAAP NI.
lars, for the categories for each of the areas of difference from both studies. As is apparent,
no pattern emerges. The averages for the North American study were vastly different from
the averages for this developing country study. This may be due to the fact that Canadian
GAAP is based on the British-American model emphasizing full disclosure for the use of
external decision makers while much of the GAAP used by the firms in this study is based
on the South American model showing the inflation impact. What is intriguing about the
FASB study is that magnitude of differences did not apparently determine significance.
The study stressed qualitative and subjective factors as determining whether or not an area
of difference was "significant."
One of the main motivations for this study was whether or not the SEC is too strict with
its regulation of foreign firm's admittance to the U.S. stock exchanges. One of the leading
yardsticks for investors' stock selections is return on equity (ROE). Return on equity is net
income divided by the total stockholders' equity. Both the net income and the stockhold-
ers' equity reconciliations are required by SEC reporting requirements. Many foreign issu-
ers provide these reconciliations in the annual report to shareholders.
Table 5 shows the net income variations between U.S. and local GAAP by country. The
greatest disparities occur for the Mexican firms, the two Korean firms, and the South Afri-
386
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
Table 6. Stockholders' Equity (in 000): Local GAAP versus U.S. GAAP (by country)
#oi
Percent'
Conservatism
firms
Country
Local
U.S.
Difference
Index
6
Argentina
Ave.
$ 2,005,496
S
2,019,840
.71
99.29
Hi
$ 5,086.000
$
5,156,000
Lo
$ 25,794
S
246,730
14
Chile
Ave.
$ 499.097
$
464,056
-7.55
107.55
Hi
$ 2,580,695
$
2,337,514
Lo
$ 74,727
S
75,109
1
China
$ 1,088,406
$
945,231
-15.15
115.55
1
Colombia
$ 352,568
$
287,533
-22.62
122.62
1
Hong Kong
$ 2,271,500
$
2,503,400
9.26
90.74
1
Indonesia
$ 672,825
$
634,834
-5.98
105.98
4
Israel
Ave.
$ 112,677
$
113,213
.47
99.53
Hi
$ 223,871
$
224,329
Lo
$ 23,994
$
24,121
2
Korea
Ave.
Hi
$10,434,450
$14,479,600
$11,712,850
$16,896,500
10.91
89.09
Lo
$ 6,389,300
$
6,529,200
23
Mexico
Ave.
$ 1,176,430
$
959,037
-22.67
122.67
Hi
$14,053,753
$11,772,420
Lo
{$ 37,396)
($
38,343)
1
Peru
$ 161,026
$
156,750
-2.73
102.73
■)
Philippines
Ave.
$ 832,440
S
827,900
-.55
100.55
Hi
$ 1,562,660
$
1.562,660
Lo
$ 102,220
$
93,140
1
South Africa
$ 68.583
$
86, 1 1 1
20.36
79.64
i
Venezuela
$ 223.557
^
202.748
-10.26
110.26
58
All firms
Totals
$73,901,167
$71,024,634
Ave.
$ 1,274,158
$
1,224,563
-4.05
104.05
Note: *Percent difference = ( U.S. GAAP SE - Local GAAP SE)/ U.S. GAAP SE.
can firm. Significant disparities occur also for the Colombian firm, the four Israeli firms,
and the two Philippines firms. Total adjustments, negative and positive, for net income
were in excess of $5.5 billion from 343 items. This is reflected in the average percent dif-
ference for all firms of -1 1.4%. Using the conservatism index, developed by Gray (1980),
the average index of conservatism for all firms is 1 1 1.4%. An index value of more than
100% means that, overall, the national GAAP are less conservative when measuring net
income than U.S. GAAP.
The reconciliations of stockholders' equity also provide significant differences. Table 6
shows the stockholders' equity reconciliation differences between U.S. and local GAAP by
country. Here the greatest percentage differences are negative for the Mexican firms and
the one Colombian firm. Other significant negative differences also exist for the Chinese
firm and the Chilean firms. The greatest positive difference is reported by the South Afri-
can firm. Total adjustments, negative and positive, for stockholders' equity were almost
$20 billion from 323 items. These are revealed in the average percent difference for all 58
firms of -4.05%. This results in an index of conservatism of 104.05% which means that
when measuring equity, the local GAAP are less conservative than U.S. GAAP.
Table 7 shows the return on equity by country using both local and U.S. GAAP. In 33 of
the 58 cases, ROE decreased after reconciling the financial statements prepared using local
Equity Returns 387
Table 7. Return on Equity: Local GAAP versus U.S. GAAP (by country)
# of firms
Country
Local
U.S.
Difference*
6
Argentina
Ave.
12.229^
12.62%
0.4 Ft
Hi
18.49%
16.82%
-1.677c
Lo
8.12%
6.86%
- 1 .26%
14
Chile
Ave.
13.04%
13.14%
0.10%
Hi
61.75%
53.65%
-8.10%
Lo
2.10%
2.30%
0.20%
1
China
16.17%
20.30%
4.13%
1
Colombia
13.57%
13.81%
0.24%
1
Hong Kong
49.10%
43.88%
-5.21%
1
Indonesia
19.52%
20.05%
0.54%
4
Israel
Ave.
12.07%
10.41%
-1.66%
Hi
17.60%
14.50%
-3.10%
Lo
4.00%
3.30%
-0.70%
2
Korea
Ave.
8.29%
13.03%
4.74%
Hi
8.71%
15.62%
6.91%
Lo
7.34%
6.33%
-1.01%
23
Mexico
Ave.
4.25%
3.28%
-.91%
Hi
121.40%
85.00%
36.40%
Lo
—
—
—
1
Peru
20.55%
21.35%
0.80%
2
Philippines
Ave.
12.62%
14.65%
2.03%
Hi
13.36%
15.01%
1.65%
Lo
1.32%
8.60%
7.29%
1
South Africa
9.10%
5.31%
-3.78%
1
Venezuela
0.25%
0.28%
0.03%
58
All firms
Totals
A\e.
1.03%
-2.73%
-3.76%
Note: *Percent difference = (U.S. GAAP ROE - Local GAAP ROE;
**The Low firm has negative equity.
GAAP to U.S. GAAP. In the data are some extreme outliers, ranging from a decrease in
ROE for a Mexican firm of 142% to an increase in ROE by another Mexican firm of 28%.
The average ROE, including the outhers. decreased by 3.76%. A difference of nearly 4%
on investment would probably be of significant concern to the average investor.
In reviewing the differences among countries as shown in Table 7, the South American
firms have the lowest average ROE differences between local GAAP and U.S. GAAP.
Except for Argentina firms to some extent, the greatest differences both in absolute percent-
age and differences in percentages are reported primarily by Mexican firms and one Phil-
ippine firm. This tends to confirm the concern of the standard-setting bodies of Canada.
Mexico, and the United States as set forth in the FASB study (FASB, 1995). This difference
would also seem to affirm the SEC position that U.S. investors need reconciled statements
in order to compare U.S. firms' stocks to those of firms from developing countries.
SUMMARY AND CONCLUSION
A number of studies of differences in accounting principles have centered on the account-
ing standards of developed countries. Recently, however, a number of firms from develop-
388 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
ing countries have entered the U.S. capital market by having their common shares listed on
the New York Stock Exchange and the American Stock Exchange. In fact, the number of
such firms increased four- fold from 1990 to 1994. By the end of 1994, ninety two firms
from twenty developing countries have common shares listed on the U.S. stock exchanges.
This provides motivation to concentrate on the accounting issues faced by firms from these
twenty countries in expanding their investment base into the U.S. capital market.
The GAAP reconciliations required by the SEC for reporting in the U.S. provides the
core of this study. The differences between foreign GAAP and U.S. GAAP are categorized
and analyzed for significance. The quantitative significance of the differences are analyzed
from both the net income perspective and the stockholders' equity perspective and further
using the ratio of the two, namely, the return on equity ratio. This serves to highlight the
differences in accounting principles that cause the most variation in financial reporting
across borders from developing nations into the United States. Certainly, these need atten-
tion by standard-setters across borders if a global capital market is to become more effi-
cient.
The inconsistent level of conservatism among the income and equity items, the differ-
ences in return on equity, and, generally, the large number and magnitude of individual rec-
onciliation items are important findings. These findings should be of significant concern
for investors. Thus, the SEC should continue its current level of financial reporting require-
ments for foreign issuers. This would be particularly applicable for foreign issuers from
developing countries.
NOTES
1. Local GAAP refers to the comprehensive body of accounting principles promulgated in the
home, or local country, and applied by the foreign issuers.
2. This included one Argentine firm, the six Bermuda firms, the Brazilian firm, the British West
Indies firm, the three Cayman Island firms, one Chilean firm, one Hong Kong firm, one Israeli
firm, the five Liberian firms, the two Netherlands Antilles firms, two Chinese firms, the two Pan-
ama firms, one from the Philippines, and one South African firm.
3. This study is herein referred to as the FASB study.
4. All currency amounts in this narrative are in U.S. dollars. Foreign currency amounts reported in
the financial statements were translated into U.S. dollars at the year-end rate.
5. The index of conservatism for this study was calculated as follows: 1 - [(U.S. GAAP Earnings -
National GAAP Eamings)/U.S. GAAP Earnings]
Acknowledgments: The authors extend their appreciation for the comments of Vernon Zimmerman
and to the participants at the American Academy of Accounting and Finance conference. Thanks also
to the Coopers and Lybrand Foundation and the Center for Research in Business at the University of
Notre Dame for financial support during the course of this research.
REFERENCES
Adler, L. 1995. "Wall Street Targets Foreign Companies for Growth." Renter European Business
Report (June 14).
Equity Returns 389
Aftermann, A. B. 1995. "Chapter 9: Foreign Issuers and International Offerings." in SEC Regulation
of Public Companies. Prentice-Hall, Englewood Cliffs, NJ: 118-131.
Alford, A., J. Jones, R. Leftwich, and M. Zmijewski, 1993. "The Relative Informativeness of
Accounting Disclosures in Different Countries." Journal of Accounting Research (Supple-
ment): 183-223.
American Stock Exchange, 1995. 1995 Fact Book, New York.
Amir, E., T. S. Harris, and E. K. Venuti, 1993. "A Comparison of the Value-Relevance of U. S. ver-
sus Non-U. S. GAAP Accounting Measures Using Form 20-F Reconciliations." Journal of
Accounting Research: (Vol. 31 Supplement): 230-264.
Anderson, N. 1993. "The Globalization GAAP." Management Accounting (August): 52-54.
Biddle, G. C. and S. Saudagaran, 1991. "Foreign Stock Listings: Benefits, Costs, and Accounting
Policy Dilemma." Accounting Horizons. (September): 69-90.
Chan, K. C. and G. S. Scow, 1996. "The Association between Stock Returns and Foreign GAAP
Earnings versus Earnings Adjusted to U. S. GAAP", Journal of Accounting and Economics:
139-158.
Evans, T. G. and M. E. Taylor, 1982. "'Bottom Line Compliance' with the lASC: A Comparative
Analysis," The International Journal of Accounting (Fall): 1 15-128.
Financial Accounting Standards Board, 1995. Einancial Reporting in North America: A Joint Study
Undertaken by Canadian Institute of Chartered Accountants, Instituto Mexicano de Contado-
res Publicos, Einancial Accounting Standards Board of the United States.
Frost, C. A. and W. R. Kinney, 1996. " Disclosure Choices of Foreign Registrants in the United
States," Journal of Accounting Research, (Spring): 67-85.
Frost, C. A. and M. H. Lang, 1996. "Foreign Companies and U. S. Securities Markets Financial
Reporting Policy Issues and Suggestions for Research." Accounting Horizons (March): 95-
109.
Goligoski, R. and S. Taylor, 1995. "The Impact of International Accounting Standards in the Peo-
ple's Republic of China," M5C/«A/g/z/, (December): 11-13.
S. J. Gray, 1980. "The Impact of International Accounting Differences from a Security-Analysis Per-
spective." Journal of Accounting Research (Spring): 64—76.
"Lagging State of Third-World Accounting Focus of U. N. Forum," 1993. Journal of Accountancy.
(June): 15.
Larson, R. K. 1993. "International Accounting Standards and Economic Growth: An Empirical
Investigation of their Relationship in Africa," Research in Third World Accounting: 27-43.
Lovata, L. and M. Costigan, 1996. "The Market Response to the Reconciliation of U. S. and Cana-
dian Accounting Disclosures." Working Paper.
Mills, S. L. "United States," 1994. International Einancial Law Review (Special Supplement: Octo-
ber): 75-82.
New York Stock Exchange, 1995. Eactbook 1994 Data, New York.
United States Securities and Exchange Commission: Division of Corporate Finance, 1993. Survey of
Einancial Statement Reconciliations by Eoreign Registrants, (May 1).
The International
Journal of
Accounting
Book Review
International Financial Reporting and Analysis: A Casebook, by Kenneth R. Ferris,
Irwin/McGraw-Hill, Burr Ridge, Illinois, 1998.
As the author notes in the introduction, "identification of good case materials is often dif-
ficult, particularly in the international arena." This book takes a significant step toward fill-
ing that void. It includes thirty-three financial reporting cases representing nineteen
countries and covering a broad array of material.
Several key features of the text are striking. First, it is more "global" than "international"
in the sense that the focus is not on non-U. S. reporting, but rather on taking a balanced view
of reporting worldwide. This is apparent in several ways. Most obviously, several of the
cases are based on U.S. reporting. For example, the E.I. DuPont de Nemours case considers
environmental liability accounting and disclosure and how it has evolved over time in a
primarily US context. More substantively, the cases cover standard topics but draw on a
wide range of countries. So, for example, the LIFO inventory case is based on BASF — the
analysis is fairly standard in terms of restating the LIFO balance sheet, income statement
and taxes to FIFO, but use of the German context provides helpful exposure to alternative
balance sheet and income statement formats and terminology. Similarly, the Baycorp
Holdings case requires preparation of pro forma statements and pricing of an equity issue
for a New Zealand company. As a consequence, the cases provide a unique opportunity to
present material covered in a standard analysis class while providing a much broader
perspective.
Second, the cases are interdisciplinary and open-ended. They provide a broad range of
background material to help students think beyond the accounting and reporting issues to
the more general analysis of strategy, operations and underlying economics. Further, the
questions generally include both standard quantitative analysis as well as open-ended dis-
cussion questions. For example, the Buenos Aires Embotelladora (BAESA) case is an
analysis of Pepsi's strategic investment in the Argentine bottler and of BAESA's subse-
quent surprise announcement of financial difficulties. It begins with a general discussion of
the worldwide soft drink industry and Pepsi's strategy in the market, particularly as it
related to Latin American strategy and BAESA. Then it carefully lays out the reasons it
appeared that BAESA was well situated to help Pepsi challenge Coke in the region. The
questions begin with fairly standard analyses of cash flows, comparisons with competitors,
and ratios. However, they quickly turn to an analysis of the weak points in the strategy, the
early warning signs, and the disadvantages BAESA faced relative to its competition. The
case closes with a discussion of future directions for BAESA and for Pepsi. One leaves the
The International Journal of Accounting, Vol. 33, No. 3, pp. 391-399 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1998 University of Illinois
392 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
case with an understanding not only of the numbers, but also of the underlying economic
and strategy issues.
Third, the author has managed to assemble an assortment of cases that cover a remark-
able range of countries and issues. Many international texts draw primarily from the more
developed economies; the cases here include companies from Argentina, Chile, India,
Vietnam, Hungary, the West Indian Islands, and an array of other countries. For example,
the Zoltek Companies case considers a proposed acquisition by a U.S. company of a Hun-
garian manufacturing company. The case analysis requires the students to begin with a pro
forma analysis of the combined companies and then focus on the foreign exchange expo-
sure for the U.S. company which would result from such an acquisition and the strategies
for dealing with the exposure. The case ends with a discussion of the factors that would be
considered in valuing such a business, exposing students to the unique issues encountered
with acquisitions in volatile economies.
Fourth, as the preceding discussion suggests, all of the cases are very current and timely.
As a consequence, I have no doubt that the book would be very popular with students, since
it addresses many topics they would have been exposed to in the press and in other courses.
My only concern is with how well the book would fit in the standard curriculum, given
the range of topics covered. It is designed mainly "for graduate management students with
prior work experience, for executives, and for advanced undergraduate students." Several
of the cases cover fairly basic concepts (e.g., accounting for liabilities, revenue recognition
criteria, and preparation of a statement of cash flows) which would fit nicely into, say, an
MBA introductory class. Others seem more appropriate for an upper level course after stu-
dents have taken courses in strategy and finance. Many focus on a restatement to U.S.
GAAP, which is probably most appropriate for an elective with an explicit international
focus. As a consequence, I could imagine wanting to pull a few cases from the book for a
variety of courses, but it is more difficult to envision using the book as a primary text for a
specific course.
Reviewed by Mark Lang
University of North Carolina
Chapel Hill, North Carolina, USA
International Accounting and Finance Handbook, by Frederick D.S. Choi, second edi-
tion, John Wiley & Sons, New York, J 997, approximately 1 100 pages + index.
International Accounting and Finance Handbook, edited by Fred Choi, a distinguished
professor of accounting at New York University, has now appeared in a second edition.
The coverage is basically the same as in the first edition, published in 1991, although there
are a number of new contributors. The main change is some rearrangement of material and
the addition of some chapters dealing with international finance. As a consequence of this
change, the words and Finance have been added to the title. My comments are limited to
the accounting section, reflecting my background as, among other things, a Board member
of the lASC. representing financial analysts.
Editing a book on international accounting is not an easy task, and especially not at this
time. We have never before witnessed so many accounting changes taking place in a rela-
Book Review 393
tively short period of time. What I am thinking of are the new standards issued by the
lASC. It now looics as if the lASC will meet the IOSCO requirements for a core set of stan-
dards in late 1998. If so, we can expect a large number of non-U. S. companies to adopt
these standards. I am sure that Fred Choi has given a lot of thought on how to deal with
what is going on in the lASC. In the end, he must have decided that the emphasis of the
Handbook should be on current accounting practices, not on what might happen in 1999
and afterwards, however interesting. There are also many references to various lASs,
including an entire chapter written by Art Wyatt, a former chairman of the lASC. Still, if I
were to have written this book, I would probably have spent more time explaining what is
going on in the lASC and how its work influences standard setting and financial reporting
in different countries. I suppose this is a reflection that lASs are much more important to
non-U. S. than U.S. companies.
The Handbook has a heavy U.S. bias. This can be seen, in particular, in the list of
authors. Of some fifty people who have contributed to the Handbook, only a handful live
outside the U.S. I think that the book could have benefited from authors having a different
geographical background. I was a bit surprised to see that the chapter on Harmonization
Efforts in the European Union had been written by Professor Gerhard Mueller. We all
know that Professor Mueller is a leading expert on international accounting. In the chapter,
he acknowledges the assistance made by Karel Van HuUe, who is responsible for account-
ing issues in the European Commission. Even though it might be interesting to see
European accounting problems being discussed by an American, I believe that the book
would have gained in credibility if the chapter had been written by someone such as Mr
Van HuUe. It certainly would have saved the chapter from statements like "Positive good-
will can either be amortized over a maximum period of five years according to the
provisions of the Fourth Directive or can be written off directly to owners' equity" (11:19),
"France operates under a regime of dirigisme which produced a rigid, uniform accounting
system" (11:24) and "Sweden translates some of its social welfare goals into accounting
rules" (1 1:25). As for goodwill, the correct statement is that it may be written off over any
period of time. As for France and Sweden, the group accounts of at least the larger listed
companies often comply with lASs. Even though the statement made by Professor Mueller
may be correct for individual accounts, those accounts are normally not of particular inter-
est to readers other than the tax authorities.
It is inevitable that, in a handbook of this size, there will be factual statements that aie
incomplete or possibly misleading. One general observation is that it is seldom clear from
the text whether it refers to individual accounts or group accounts. I assume that the authors
normally intend to refer to group accounts, since individual accounts are not published in
the U.S. In Europe, however, one needs to be more careful, as the individual accounts are
just as common and because the accounting principles used in the individual (i.e., parent
company) accounts often differ from those used in the group accounts. One example is in
the chapter on International Accounting Diversity written by Choi and Richard M. Levich.
In the chapter there is a reference to deferred tax accounting in different countries. The
authors state that "recognition of deferred taxes as a current expense item is permitted in
the United States and the United Kingdom, but disallowed in Germany. Switzerland, and
Sweden" (6:6). It is true that, in Swedish individual accounts, deferred tax accounting is
not allowed. However, there is a Swedish standard that prescribes comprehensive deferred
tax accounting for group accounts. It is my understanding, moreover, that the larger Ger-
394 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1998
man and Swiss companies also account for deferred taxes in their group accounts. In tiie
U.K., the partial method for deferred tax accounting is compulsory. Therefore, it is difficult
to find this particular comment made by the authors especially helpful. It is perhaps even
more surprising that this brief comment on deferred tax accounting is the authors' only ref-
erence to this extremely complicated area. I would have thought that deferred tax
accounting would be one of the first topics to be discussed in a text on international
accounting. It was included in the first edition but, for some reason, was taken out.
Another area where I was surprised not to find more guidance relates to merger account-
ing, or the application of the pooling of interests method. I was asked a few weeks ago
whether a planned merger could be accounted for by the pooling of interests method in the
U.K., in the Netherlands, or in Sweden. What the Handbook says is that the U.S., Japan,
the U.K., Germany and the Netherlands all permit the pooling of interests method but that
the conditions vary from country to country. Once again, such a statement is not very help-
ful, especially as the method certainly is not expressly disallowed in other countries, like
Sweden, for example. I think it would have been more informative to describe the rules for
the pooling of interests method in IAS 22 and in the 7th E.U. Directive and then explain
which countries normally apply these rules.
According to the preface, the Handbook is intended as a practical reference work for a
broad spectrum of professionals and educators "whose responsibilities encompass the
international dimensions of financial analysis, reporting, and control" (xvii). The preface
gives as examples comparisons of cross-national performance statistics by analysts and
communication between a North American financial executive and German investors or a
Vietnamese supplier. A reader may get the impression that the intention is to explain in
some detail the different accounting languages around the world to enable the analyst or
the financial executive to make cross-national comparisons. It is, however, obvious that
this has not been the objective. The Handbook is much more general and there is no sys-
tematic discussion of what distinguishes, for example, German from British accounting. I
am therefore skeptical that the Handbook meets its objective of being a practical reference
book. I would refer to it as a book of readings. As such, it is certainly worth consulting.
Reviewed by Rolf Rundfelt
University of Stockholm
Stockholm, Sweden
Accounting: An International Perspective by Gerhard G. Mueller, Helen Gernon and
Gary K. Meek, fourth edition, Richard D. Irwin, Chicago, 1997, 215 + xv pp.
Most books on international accounting are written for readers who already have a fairly
extensive knowledge of accounting, usually at least through the intermediate level. As a
result, the books tend to assume a level of technical accounting knowledge that puts them
out of reach of non-accountants, be they students or practicing managers. Most interna-
tional accounting books also are quite lengthy and are intended as stand-alone books in 3-
credit hour courses.
In contrast, this book conveys the diversity of international accounting standards and
practice to an audience that has little technical knowledge of accounting. The stated objec-
Book Review 395
tive of the authors is "to supplement existing introductory accounting textbooks in order to
add an international dimension for students taking introductory accounting" (Instructor's
Manual, p. vii). Therefore, the book stands by itself as an overview of international
accounting that is ( 1) non-technical; and (2) brief.
Why deal with international accounting in an introductory course when students are
struggling just to master basic accounting knowledge? The reason is that the vast majority
of introductory accounting students are not going to be accounting majors. If the interna-
tional aspects of accounting are not dealt with in the first course, most students will never
be exposed to them in any organized or rational way. That is not to say that the majority of
students will not be exposed to international accounting in the future. Indeed, with the rap-
idly increasing globalization of business and management, it will be impossible for
students to avoid international accounting issues in their future careers. International
accounting issues will be pervasive, whether in the capital markets or in divisional perfor-
mance evaluation, and it is important that students understand the nature of nation-specific
accounting standards and the underlying reasons that they exist.
Often, students tend to believe that what they learned first is also best. When they learn
their own country's accounting standards without also appreciating the underlying circum-
stances and forces that created those standards, they tend to think that everyone else's
standards are wrong, simply because they are not the same. An exposure to international
accounting, as presented by Mueller et al., actually should improve students' understand-
ing of the bases of their own accounting standards, as well as prepare them to understand
those of other countries when they encounter them in the future.
The authors accomplish their goal of conveying the international aspects of accounting
quite successfully. The book is well written and easy to read, and it accurately captures the
cultural, historical, economic, political and legal factors that shape a nation's accounting
standards. As well, it deals effectively with the problems inherent in working with different
countries' accounting standards in international business.
The book deals with both the financial and managerial accounting aspects of interna-
tional accounting. Since most schools teach introductory financial and managerial
accounting over at least two terms, its 160 pages of text (plus 47 pages of questions, cases,
and supplemental readings lists) do not place a substantial extra burden on students. There
are many useful excerpts from non-U. S. financial statements in the book, which are
intended not for extensive analysis but rather to illustrate how fundamental the differences
are between countries. Examples include firms from Mexico. Germany, Japan, Sweden,
Switzerland, France and the U.K.
The non-technical nature of the book extends to the end-of-chapter material. Each chap-
ter has a list of review questions and two or three short cases. The cases generally are non-
numeric and implicitly stress the underlying nature of nation-specific financial reporting.
The authors provide a short list of additional readings at the end of each chapter. These
lists provide a very useful device for extending the material in the text. The most obvious
use of the supplemental readings is simply to enable students to read more about topics that
interest them. Perhaps more importantly, however, the supplemental readings make it easy
for the book to be used beyond its basic purpose as a supplemental text for U.S. introduc-
tory courses.
By prescribing selected articles from the supplemental readings lists, instructors can
expand the book's depth of coverage to use it for stand-alone short courses on international
396 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
accounting that are suitable for managers and management students. As well, the supple-
mental readings extend the book's relevance to non-U. S. readers. Essentially, the book is
written to U.S. students. The authors are very careful to emphasize the underlying reasons
for having different GAAP in different countries, and continuously caution students not to
think that GAAP in their own country is the "right" or "best" GAAP. However, the refer-
ence point for comparisons of business practices, economic environment, and GAAP
differences is always the U.S. The use of a U.S. reference base tends to limit the suitability
of the book for English-language courses in other countries. However, the lists of supple-
mental readings make it easy for an instructor to overcome this handicap because the
instructor can select supplemental readings that use European or Asian bases of compari-
son to supplement the U.S. bases that are inherent in the text. Indeed, this reviewer intends
to use the text in short courses in several management schools in other countries over the
next couple of years.
The authors have made every effort to make the text easy to use for instructors. Even
instructors who have little or no prior knowledge of international accounting issues should
be able to use this book without difficulty. The authors supply an extensive Instructor's
Manual which explains quite clearly how to use the book as a supplement, with suggestions
about where in an introductory course to assign the various chapters. For each chapter, they
provide a list of key points, a chapter outline, overhead transparency masters, and a test
bank of multiple choice and true-false questions, as well as suggested solutions to the
review questions and cases.
In summary, this is a unique book that very effectively enables non-accountants to
understand the reasons for nation-specific GAAP, the problems that arise from accounting
differences, and approaches to dealing with those problems.
Reviewed by Thomas H. Beechy
York University
Toronto, Ontario, Canada
The Development of Accounting in an International Context: A Festschrift in honour
of R. H. Parker, edited hy T.E. Cooke and C.W. Notes, Routledge, London, 1997, 261 pp.
Bob Parker's two main areas of interest have been accounting history and international
accounting.
In this collection, Basil Yamey first documents the diversity of accounting in Western
Europe from 1300 to 1800, concluding that "in the absence of strong internal or external
pressures to induce uniformity, a sort of laissez-faire prevailed as regards the bookkeeping
and accounts of commercial firms" (p. 24). Unifomiity was the exception and Yamey iden-
tifies just three examples.
Tom Lee examines the 19th century development of the profession in Scotland, arguing
for greater recognition of the role of significant individuals, such as Richard Brown, secre-
tary and treasurer, and later president, of the Society of Accountants in Edinburgh, while
Dick Edwards, Garry Carnegie and Jules Cauberg conduct a prosopographical study of the
founders of the Incorporated Institute of Accountants, Victoria. They demonstrate that,
while the conventional view of the importance of middle-aged, white, male, Protestant,
Book Review 397
British immigrants in establishing Australian professional societies holds good, these men
were not new arrivals but firmly entrenched residents — "independent Australian Brit-
ons"— who had not arrived in Australia as accountants but had moved in the direction of
an accounting career in the years after they had settled.
Lee Parker looks at professional bodies' ethical pronouncements (such as the long-stand-
ing prohibition on advertising) and the tensions between their stated detachment from
business objectives, their necessary interaction with commercial pressures, and the ethical
values of business itself — hard work and the single-minded pursuit of profit — as exhibited
in business self-help manuals and other literature.
Richard Morris charts the influence of England on Australia in the development of one
type of corporate legal fonn — contrasting the British cost book mining company (with, in
principle, unlimited liability of its owners) with the "no-liability" mining company estab-
lished by statute in Victoria in 1871.
The remainder of the studies focus more on recent aspects of international accounting
theory, practice and regulation than on the historical dimension. Phil Bell and Ken Peasnell
argue that Baxter's "deprival value" approach to measuring asset values and depreciation
can be strengthened by utilizing the used-asset pricing methodology they develop for deal-
ing with a single replacement cycle, without the need for assumptions about all future
replacement conditions (although this result appears to depend on knowing what is the
optimum economic life of a new asset (pi 36), which generally must in turn depend on an
assessment of future conditions). The importance of seeing "deprival value" as a funda-
mental way of arriving at "historical cost" depreciation rules, and not simply as a method
of "current value" accounting, is emphasized by the way in which David Tweedie and
Geoff Whittington chart the reasons for the decline in the utilization of current cost
accounting around the world since the early 1980s.
Steve Zeff contributes a lively account of how successful economic consequences lob-
bying by U.S. corporations, reaching a new height in gaining support from the Senate,
forced the FASB to abandon its proposed standard on the treatment of stock option com-
pensation in the income statement, even though the Board remained convinced that this
was the proper accounting treatment and had the support, inter alia, of U.S. accounting
academics, institutional investors and financial commentators.
Sid Gray and Clare Roberts examine the reasons for the world-dominance of London's
stock exchange in attracting foreign-company listings, looking at the period from 1937 to
1994. They model the variables that might explain the country origins of the foreign list-
ings in 1992, finding GDP, market capitalization and domestic investment to be the most
significant. However, they propose that further research is needed to identify factors such
as the impact of differing trade links and differential accounting and disclosure regimes.
Comparative modeling across major stock markets is also needed.
Finally, Segun Wallace studies the development of accounting research in the U.K. and
exhorts accounting to return to "core" accounting issues, i.e., concern with the content
rather than the context of accounting.
How is one to evaluate such a book? Selecting individual articles for detailed comment
and criticism cannot do justice to Ihe festschrift editors' objectives in compiling a collec-
tion that reflects the interests of the scholar to whom it is dedicated. But merely observing
that the collection does, as a whole, provide a spectrum of interesting knowledge and ideas
is likely to engage only those (such as this reviewer) whose interests are largely overlap-
398 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
ping. I therefore propose to take up the challenge offered by the last paper — Wallace's call
for more "core accounting" research — and indicate how several of the papers in the collec-
tion both raise interesting and topical "accounting content" questions that merit further
research and investigation, and also show how questions of accounting content and context
are necessarily intertwined.
Yamey's comments on the lack of uniformity in early European accounting lead one to
consider the nature of the lASC's current program for "core" accounting standards. This is
largely driven by the prospect of securing the agreement of IOSCO members (including the
U.S. SEC) to accept accounts prepared under lASC standards for the purposes of cross-
border listings. Here, the Gray and Roberts analysis of the dominance of London's stock
exchange (whose rules include mutual recognition of all E.U. member countries' require-
ments and acceptance of internationally recognized standards such as lASs and U.S.
GAAP) in attracting foreign listings raises the issue of the relative bargaining positions of
the SEC and other countries in the determination of the content of the "core" standards. If
such core standards are agreed, the focus of most future "financial accounting content"
debate, as well as of political lobbying of the kind analyzed in Zeff s paper, will presum-
ably switch to the international forum.
The standard setting agenda, nationally and internationally, is currently dominated by
issues relating to financial instruments and derivatives. Here, there is a renewed interest in
current values. While Tweedie and Whittington identify a number of contextual factors
contributing to the decline of "current cost accounting," they give only subsidiary status to
"technical weaknesses in the CCA proposals of the early 1980s" (p. 174), i.e., the content
of the accounting numbers. Yet, a major weakness may have been that preparers were
uncomfortable with methodologies that translated "bottom line" historical cost earnings
numbers that they knew how to manage (e.g., for "signaling" the information they believed
their investors and other users should receive) into "bottom line" CCA earnings numbers
that no longer gave those signals, and which they could not manage directly. Correspond-
ingly, a major concern that appears to have undermined the recent lASC proposals on the
reporting of current values and related "comprehensive income" measures for financial
instruments is the lack of direct consideration of the appropriate performance measurement
concepts (in particular how to deal with volatility arising from changing interest rates).
Here, Bell and Peasnell's paper on measurement of depreciation provides a platform for
further consideration of "capital" and "income" distinctions across the range of financial
assets and liabilities as well (e.g., p. 143); and of the relationship between "deprival value"
of assets (and liabilities) and models (such as Ohlson's) of entity valuation and income —
the fundamentals of accounting content viewed from the context of security valuation in
capital markets.
International harmonization of accounting content will require the lASC to adopt a more
acceptable "due process" — which in turn will require understanding of the way profes-
sional accounting traditions and values have developed in different countries, as illustrated
in the papers by Lee, Edwards et al., Parker, and Morris in this collection. Perhaps the most
important country to understand is now the U.S., and here Zeff s analysis of the U.S. polit-
ical context of the proposals on accounting for stock options again brings out the need to
consider the accounting content of proposed standards. While it may be well argued that:
Book Review 399
"If options aren't a form of compensation, what are they? If compensation isn't an
expense, what is it? And. if expenses shouldn't go into the calculation of earnings,
where in the world should they go?" (p. 185)
The issue of when they should be charged against earnings remains unresolved. Here the
paradox is that the most valid motive for utilizing stock options to incentivize managers
(rather than, say, performance-based remuneration linked to accounting earnings) is that
the benefits of the kinds of decisions and efforts they are being encouraged to make will not
show up in accounting earnings until long after they have shown up in the price of the com-
pany's shares — for example where managers are developing the intangible factors, or
undertaking research and development, crucial to a company's long-term success. So,
while proper "matching" should not charge the expense until the benefits are reflected in
accounting earnings, conventional accounting fails most conspicuously through its inabil-
ity properly to "match" expense and revenues in relation to areas such as research and
development and other intangibles. The beneficial role of executive stock options (pro-
vided there is full disclosure) may be to overcome this deficiency of accounting's content
(hence their popularity in Silicon Valley) — and the political lobbying may ultimately have
some legitimate basis in disagreement over "proper" accounting.
In stimulating questions such as these about the interrelationships between the content
and the context of accounting, which will increasingly be resolved at international level,
this collection of papers provides a tribute to Bob Parker's own work, and to his skilled edi-
torship of Accounting and Business Research, which emphasizes that the value of research
lies as much in the question asked and prompted, as in the particular details of the informa-
tion and insights offered.
Reviewed by Richard Macve
London School of Economics
England
The International
Journal of
Accounting
Capsule Commentaries
This sub-section will include brief commentaries on selected works for which full-fledged
book reviews have not been solicited. Except where otherwise noted, the commentaries
were written by the book review editors.
Financial Reporting in North America, A Joint Study Undertaken hy: Canadian Institute
of Chartered Accountants, Instituto Mexicano de Contadores Publicos, A.C., and the
Financial Accounting Standards Board, 1995, 204 pp.
This study "represents a first step in spuning future cooperation for progress in interna-
tional harmonization among the three countries in the wake of the North American Free
Trade Agreement" (p. iii). The international firm of KPMG Peat Marwick LLP performed
extensive research and analysis for the project.
After treating the capital market structures and accounting standard-setting processes in
Canada, Mexico and the United States, the study compares the three countries' conceptual
frameworks and then their accounting standards.
Among the areas in which significant differences were found are: the effects of changing
prices, business combinations, consolidation and equity accounting, foreign currency
translations, income taxes, pension accounting, and research and development.
Informative appendices compare the conceptual frameworks and accounting standards in
some detail as well as pinpoint differences in the reconciliations to U.S. GAAP filed with
the SEC by Canadian and Mexican companies.
S.A.Z.
International Accounting Standards versus US-GAAP Reporting: Empirical Evi-
dence Based On Case Studies, hy Trevor S. Harris, South-Western, Cincinnati, 1995, 147
pp.
The purpose of this study was to determine the significance of differences between revised
lASC standards (extant in 1994) and U.S. GAAP. With the assistance of Coopers &
Lybrand L.L.P., the author restated the group accounts of a sample of eight companies in a
variety of industries: six Continental European companies and two companies based in
Australia and New Zealand. The companies" annual reports for 1992 or 1993, as supple-
mented by research conducted by the companies themselves, were used to construct recon-
ciliation tables between the revised lASC standards and U.S. GAAP.
The International Journal of Accounting, Vol. H, No. 3, pp. 401-402 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1998 University of Illinois
402 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 3, 1 998
Harris concludes: "The analysis demonstrates that companies that comply with the revised
IAS provide accounting measures that are essentially consistent with US-GAAP, and,
where they differ, it seems difficult to argue that use of IAS will compromise the relevance
of the data" (p. 2). Two key areas of difference were accounting for business combinations
and foreign currency translation.
S.A.Z.
International Accounting — Similarities & Differences — IAS, US GAAP and UK
GAAP, Price Waterhoiise, London, 1997, 44 pp.
This is a handy comparison of lASC standards, U.S. GAAP and U.K. GAAP as of Decem-
ber 1997, prepared by the U.K. firm of Price Waterhouse. A matrix analysis of similarities
and differences by topical area is supplemented by a concise discussion, again by topical
area, of the current standards and the recent exposure drafts issued by the lASC, the U.K.
Accounting Standards Board and the U.S. Financial Accounting Standards Board.
S.A.Z.
jCTIONS FOR AUTHORS
' )PE. The aims of The International Journal of Accounting are to advance the academic and profes-
iding of accounting theory and practice from the international perspective and viewpoint. The Jour-
fhat international accounting is influenced by a variety of forces, e.g., governmental, political and
I attempts to assist in the understanding of the present and potential ability of accounting to aid in
1 id interpretation of international economic transactions. These transactions may be within a profit
vironment. The Journal deliberately encourages a broad view of the origins and development of
1 an emphasis on its functions in an increasingly interdependent global economy, and welcomes
t help explain current international accounting practices, with related theoretical justifications, and
' ns of current practice. Other than occasional commissioned papers or special issues, all the manu-
d in the Journal are selected by the editors after the normal refereeing process.
ts should be submitted in triplicate to the Editor, Professor Andrew D. Bailey, Jr., The Interna-
\ rnal of Accounting, University of Illinois, 320 Commerce West, 1206 S. Sixth Street, Champaign,
U.S.A.
cripts must be typewritten or word processed, double spaced on one side only and numbered con-
, including an abstract of approximately 100 words, and 6 key words for indexing. Papers must
leither previously published nor submitted elsewhere simultaneously. Authors are responsible for
permission from the copyright owner (usually the publisher) to use any quotations, illustrations, or
1 another .source,
.'s full name, affiliation, and when applicable, e-mail address should appear on the title page.
figures and illustrations should accompany the manuscript on separate sheets. Captions should
ntify all separate matter, and all figures must be submitted in camera ready copy, or electronic pro-
ifies files, such as EPS or Post Script. All should be called out in text and indication given as to loca-
xample.
TABLE I ABOUT HERE.
should be numbered consecutively throughout the manuscript with superscript Arabic numerals.
Id be collected in a separate file at the end of the text,
s should be cited in the text as follows:
art and O'Conner (1989) agree with this method. Other studies have found similar results
kart and O' Conner. 1989; Smith. 1991).
ate Reference page(s), each citing should appear, double-spaced, in alphabetical order as follows:
.rticles
;, Catherine C. and Bodo B. Schlegelmilch. 1990. "Do Corporate Codes of Conduct Reflect
(ational Character?" Journal of International Business Studies, (Fourth Quarter): 519-539
n-Tumer Charles and Alfons Trompenaars. 1993. The Seven Cultures of Capitalism. New
'ork: Doubleday.
jptance the author is to submit one copy of the approved manuscript on a spellchecked IBM compati-
am specific disk to the editor. The accuracy of the disk and proofs is the responsibility of the author.
1 submissions are limited to high density disks.
2W SECTION. The book review .section is interested in works published in any language, as long
nparative or international in character. The author or publisher of such works should furnish either
litor with two (2) copies of the work, including information about its price and the address where
j rite for copies. Reviews will be assigned by the book review editors. No unsolicited reviews will be
estions of works that might be reviewed are welcomed.
ephen A. Zeff Rice University - MS 531, P. O. Box 1892. Houston. TX 77251-1892; Tel: +1-713-
;: +1-713-285 5251; E-Mail: sazeff@rice.edu; Dr. Dr. habil. Axel Haller. Universitat Augsburg,
Virtschaftsprufung. 86135 Augsburg. Germany; Tel: +49 821 5984127; Fax: +49 821 5984224; E-
ir@wiso.uni-augsburg.de.
402 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, N
Harris concludes: "The analysis demonstrates that companies that comply with the
IAS provide accounting measures that are essentially consistent with US-GA/
where they differ, it seems difficult to argue that use of IAS will compromise the rt
of the data" (p. 2). Two key areas of difference were accounting for business comb
and foreign currency translation.
International Accounting — Similarities & Differences — IAS, US GAAP a
GAAP, Price Waterhouse, London, 1997, 44 pp.
This is a handy comparison of lASC standards, U.S. GAAP and U.K. GAAP as of
ber 1997, prepared by the U.K. firm of Price Waterhouse. A matrix analysis of sin
and differences by topical area is supplemented by a concise discussion, again h-
area, of the current standards and the recent exposure drafts issued by the lASC, .
Accounting Standards Board and the U.S. Financial Accounting Standards Board.
INSTRUCTIONS FOR AUTHORS
AIMS and SCOPE. The aims of The International Journal of Accounting are to advance the academic and profes-
sional understanding of accounting theory and practice from the international perspective and viewpoint. The Jour-
nal recognizes that international accounting is influenced by a variety of forces, e.g., governmental, political and
economic.
The Journal attempts to assist in the understanding of the present and potential ability of accounting to aid in
the recording and interpretation of international economic transactions. These transactions may be within a profit
or nonprofit environment. The Journal deliberately encourages a broad view of the origins and development of
accounting with an emphasis on its functions in an increasingly interdependent global economy, and welcomes
manuscripts that help explain current international accounting practices, with related theoretical justifications, and
identify criticisms of current practice. Other than occasional commissioned papers or special issues, all the manu-
scripts published in the Journal are selected by the editors after the normal refereeing process.
1. Manuscripts should be submitted in triplicate to the Editor, Professor Andrew D. Bailey, Jr., The Interna-
tional Journal of Accounting. University of Illinois, 320 Commerce West, 1206 S. Sixth Street, Champaign,
IL 61820, U.S.A.
2. All manuscripts must be typewritten or word processed, double spaced on one side only and numbered con-
secutively, including an abstract of approximately 100 words, and 6 key words for indexing. Papers must
either be neither previously published nor submitted elsewhere simultaneously. Authors are responsible for
obtaining permission from the copyright owner (usually the publisher) to use any quotations, illustrations, or
tables from another .source.
3. The author's full name, affiliation, and when applicable, e-mail address should appear on the title page.
4. All tables, figures and illustrations should accompany the manuscript on separate sheets. Captions should
clearly identify all separate matter, and all figures must be submitted in camera ready copy, or electronic pro-
gram specifies files, such as EPS or Post Script. All should be called out in text and indication given as to loca-
tion. For example,
TABLE 1 ABOUT HERE.
5. Footnotes should be numbered consecutively throughout the manuscript with superscript Arabic numerals.
They should be collected in a separate file at the end of the text.
6. References should be cited in the text as follows:
Schweikart and O'Conner (1989) agree with this method. Other studies have found similar results
(Schweikart and O'Conner, 1989; Smith, 1991).
On a separate Reference page(s), each citing should appear, double-spaced, in alphabetical order as follows:
Journal Articles
Langlois. Catherine C. and Bodo B. Schlegelmilch. 1990. "Do Corporate Codes of Conduct Reflect
National Character?" Journal of International Business Studies. (Fourth Quarter): 5 19-539
Books
Hampden-Turner Charles and Alfons Trompenaars. 1993. The Seven Cultures of Capitalism. New
York: Doubleday.
7. Upon acceptance the author is to submit one copy of the approved manuscript on a spellchecked IBM compati-
ble, program specific disk to the editor. The accuracy of the disk and proofs is the responsibility of the author.
Macintosh submissions are limited to high density disks.
BOOK REVIEW SECTION. The book review section is interested in works published in any language, as long
as they are comparative or international in character. The author or publisher of such works should furnish either
book review editor with two (2) copies of the work, including information about its price and the address where
readers may write for copies. Reviews will be assigned by the book review editors. No unsolicited reviews will be
accepted. Suggestions of works that might be reviewed are welcomed.
Professor Stephen A. Zeff Rice University - MS 531, P. O. Box 1892, Houston, TX 77251-1892; Tel: +1-713-
527 6066; Fax: +1-713-285 5251; E-Mail: sazeff@rice.edu; Dr. Dr. habil. Axel Haller, Universitat Augsburg.
Lehrstuhl fur Wirtschaftsprufung. 86135 Augsburg, Germany; Tel: +49 821 5984127; Fax: +49 821 5984224; E-
Mail: axel.haller@wiso.uni-augsburg.de.
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PERIODICAL
The
International
Journal of
Accounting
EDITOR
indrew D. Bailey, Jr.
University of Illinois at
I 'rha na-( hampaign
CO-EDITORS
Arthur R. Wyatt
University of Illinois at
Urhana-Champaign
Yukio Fujita
Aichi-Gakuin University, Tokyo
R.S. Olusegun Wallace
King Fahd University, Saudi Arabia
Volume 33 • Number 4 • lOOX
Stamford, Connecticut
London, England
iter for International Education and Research in Accounting,
versity of Illinois at Urbana-Champaign
Name of publication: THE INTERNATIONAL JOURNAL OF ACCOUNTING (ISSN:0020-7063)
Issue: Volume 33/Number 4/1998
Frequency: Published Quarterly
Office of publication: 100 Prospect Street
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Copyright: © Board of Trustees of the University of Illinois.
SEP 2 8 1998
UNIVERSITY OF ILLIN0I9
URBANA-CHAMPAIGN
The
International
Journal of
Accounting
EDITOR
Andrew D. Bailey, Jr.
University of Illinois at
Urbana-Champaign
CO-EDITORS
Arthur R. Wyatt
University of Illinois at
Urbana-Champaign
Yukio Fujita
Aichi-Gakuin University, Tokyo
R.S. Olusegun Wallace
King Fahd University, Saudi Arabia
Volume 33 • Number 4 • 1998
Published by
^■""^ Slamroid. Connecticut London. England /
u)r:
Center for International Education and Research in Accounting,
Jniversity of Illinois at Urbana-Champaign
EDITOR
Andrew D. Bailey, Jr.
University of Illinois, Urbana-Champaign
CO-EDITORS
Arthur R. Wyatt, University of Illinois, Urbana-Champaign
Yukio Fujita, Aichi Gakiiin University, Tokyo
R. S. Olusegun Wallace, King Fahd University, Saudi Arabia
BOOK REVIEW EDITORS
Axel Haller, Universitat Augsburg, Augsburg
Stephen A. Zeff, Rice University, Houston
EDITORIAL POLICY BOARD
Hans Havermann, KPMG Deutsche Treuhand-Gesellschaft, Diisseldorf
H. Peter Holzer, Wirtschaftsuniversitdt, Vienna
Toshio lino, Surugadai University, Japan
Yu Xu-Ying, Xiamen University, People's Republic of China
Stephen A. Zeff, Rice University, Houston
EDITORIAL REVIEW BOARD
Dhia AlHashim, California State University, Northridge
Bhabatosh Banerjee, lAAER, India
Barbro Back, Turun Kauppakorkeakoulu, Finland
Pierre Bescos, ESCP, France
Enrique Ponte Bonson, University ofHuelva, Spain
A. Bose, Haidia Petrochemicals Limited India
C. S. Agnes Cheng, University of Houston, Houston
Joseph Cheung, Polytechnic University, Hong Kong
Gilles Chevalier, Samson Belair/Deloitte-Touche, Quebec
Ling-Tai Lyunete Chou, National Chengdu University, Taiwan
David Cooper, University of Alberta, Canada
Nairn Dahmash, University of Jordan, Jordan
Sejila Dizdarevic, Tucson, Arizona, U.S.A.
Timothy S. Doupnik, University of South Carolina
Peter Easton, Ohio State University, Columbus
John W. Eichenseher, University of Wisconsin-Madison
Kenneth Euske, Navel Postgraduate School, Monterey
Thomas Evans, University of Central Florida, Orlando
Shawki Farag, The American University, Cairo
Ehsan H. Feroz, University of Minnesota, Duluth
Cathy Finger, University of Illinois, Urbana- Champaign
Carol Frost, Dartmouth College, Hanover
Yukio Fujita, A/c/?/ Gakuin University, Japan
James Ato B. Ghartey, Office of Controller & Accountant, Ghana
Audrey A. Gramling, University of Illinois, Urbana-Champaign
Sidney Gray, University of New South Wales, Australia
Kousaku Hamada, Chiba University of Commerce, Japan
Trevor Harris, Columbia University, New York
Sergio de ludicibus, Universidade De Sao Paulo
Robert J. Kirsch, Southern Connecticut State University, New Haven
Chen-en Ko, National Taiwan University, Taiwan
Chris Lefebvre, Kotholieke Universiteit Leuven, Belgium
Joelle Le Vourc'h, ESCP, Paris
Mei-Hwa Lin, National Chengchi University
Thomas Linsmeier, University of Illinois, Urbana-Champaign
Andrew Lymer, The University of Binningham. UK
M. R. Mathews, Massey University, New Zealand
Gary Meek, Oklahoma State University, Stillwater
Karen Molloy, University of Illinois, Urbana-Champaign
Ken Moores, Bond University, Australia
Masayuki Nakagawa. Universiade De Sao Paulo
Gordian A. Ndubizu, Drexel University, Philadelphia
Belverd Needles, DePaul University, Chicago
Prawit Ninsuvannakul, Thailand
B.O. Ogundele, University ofllorin, Nigeria
Soong Park, Presbyterian Church (USA)
Grace Pownall, Emory University, Atlanta
Reiner Quick, Universitat GH Essen, Essen
Lee Radebaugh, Brigham Young University, Provo
Sridhar Ramamoorti, University of Illinois, Urbana-Champaign
Robert S. Roussey, University of Southern California, Los Angeles
T. Flemming Ruud, University of St. Gallen, Switzerland
Stephen B. Salter, University of Cincinnati
Alan Sangster, Queen 's School of Management, Northern Ireland
Shigeto Sasaki, Senshu University, Japan
Michael Schadewald, University of Wisconsin-Milwaukee
Hanns-Martin Schoenfeld, University of Illinois, Urbana-Champaign
Daniel T. Simon, University of Notre Dame
Herve Stolowy, HEC Group School ofMgt., France
Gary L. Sundem, University of Washington, Seattle
Jimmy Y. T. Tsay, National Taiwan University
Judy S L Tsui, City University of Hong Kong
M.A. van Hoepen, Erasmus University Rotterdam, Netherlands
R. S. Olusegun Wallace, King Fahd University, Saudi Arabia
David A. Ziebart, University of Illinois, Urbana-Champaign
THE INTERNATIONAL
JOURNAL OF ACCOUNTING
VOLUME 33 NUMBER 4 1998
ARTICLES
The Difficulty of Achieving Economic Reality Through Foreign
Currency Translation
DAVID A. ZIEBART AND JONG-HAG CHOI 403
Harmonization of Foreign Currency Translation Practices:
Canadian Treatment of Long Term Monetary Items
W. ROTENBERG 415
Relationship of Tax and Financial Accounting Rules in
Anglo-Saxon Countries
THOMAS M. PORCANO AND ALFRED V. IRAN 433
Managing discretionary accruals in response to reductions in
corporate tax rates in Canada, Malaysia and Singapore
RAAFAT R. ROUBI AND A. WILLIAM RICHARDSON 455
Profit Sharing and Corporate Performance: Some Evidence from
Bangladesh
DHIMAN CHOWDHURY AND ZAHIRUL HOQUE 469
Internationalizing Accounting Education Through an Integration
Approach: A Survey of U.S. Schools
RASOUL H. TONDKAR, MARY A. FLANIGAN,
AJAY ADHIKARI AND JUDITH A. HORA 483
CAPSULE COMMENTARIES 511
BOOK REVIEWS
The Nature and Determinants of Disclosure Adequacy: An
International Perspective, by Ahmed Riahi-Belkaoui
Reviewed by BIKKI JAGGI 515
Comparative Studies in Accounting Regulation in Europe, edited by
John Flower and Chris Lefebvre
Reviewed by HERVE STOLOWY 517
Tfie Regulation of Financial Reporting in the Nordic Countries by
John Flower
Reviewed by KRISHNA ARTSBERG 519
The lASC-U.S. Comparison Project: A Report on the Similarities
and Differences between lASC Standards and U.S. GAAP,
edited by Carrie Bloomer
Reviewed by ALLISTER WILSON 521
Accounting in Transition: The Implications of Political and
Economic Reform in Central Europe, edited by Neil Garrod and
Stuart McLeay
Reviewed by DAVID ALEXANDER 525
The International
Journal of
Accounting
The Difficulty of Actiieving Economic Reality Through
Foreign Currency Translation
David A. Zlebart and Jong-Hag Choi
University of Illinois at Urbana-Champaign
Key Words: Foreign Currency Translation; Purchasing Power Parity
Abstract: The Financial Accounting Standards Board attempted to alleviate the problems with the
reporting of foreign operations and foreign currency translation adjustments by issuing SFAS No.
52. This study examines the sign and magnitudes of the reporting errors that result under the best
translation approach — current cost translated at the current exchange rate. Accordingly, a bench-
mark is established regarding the "best" we will be able to accomplish when certain foreign cur-
rency market conditions exist. Unfortunately, the results demonstrate that a foreign currency
translation that is economically interpretable is not easily achieved. To achieve economic inter-
pretability, we suggest that supplemental information regarding current values, the timing of asset
acquisitions, historical exchange rates at the time of the acquisitions, and the current exchange
rates should be provided in financial statements or the accompanying footnotes.
"The values in the Ledger must be reckoned in one kind of money ducats, or lire, or Flo-
rence, or gold scudi. . . .you should always use the same kind of money. ..."
Frater Lucas de Burgo Sancti Sepulchri. ( 1494, p. 210):
translation by Geijsbeek (1914).
Foreign currency translation has been an issue in accounting since the days of Paccioli. In
the United States, the Financial Accounting Standards Board (FASB) has been involved in
developing accounting methods for U.S. multinational corporations to translate the results
of foreign operations and financial position for inclusion in their financial statements. As
the globalization of corporate activities as well as the volatility of foreign currency
exchange rates increase, the FASB continues to face difficulties in developing translation
methods that provide financial reporting information which is interpretable. Given the con-
tinued pressure for financial statements to portray economic reality, the current approach
to foreign currency translation will continue to be questioned.
Direct all correspondence to: David A. Ziebart, Department of Accountancy, University of Illinois at Urbana-
Champaign 215 Commerce West, 1206 S. Sixth Street. Champaign, IL 61820; E-Mail:ziebart@uiuc.edu.
The International Journal of Accounting, Vol. 33, No. 4, pp. 403-414 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1998 University of Illinois
404 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1 998
It is difficult to develop foreign currency translation (FCT) methods that achieve "eco-
nomic interpretability" by employing a translation method of just converting the amounts
of transactions and balances of accounts from one currency to another using an exchange
rate. As explained later, employing such a simple approach does not result in economic
interpretability.
Given the recent emphasis on valuation and economic interpretability of the statement of
financial position, foreign currency translation continues to be a concern. This concern is
exacerbated since the degree of internationalization of many firms continues to increase
and now includes hedging activities as well as transactions in derivative securities. Interna-
tionalization and the need for sound FCT methods are expected to increase as additional
foreign markets are opened to U.S. corporations as well as foreign corporations expanding
their presence into new markets.
Of the alternative foreign currency translation methods, the method that theoretically
best achieves economic interpretability is current cost valuation translated at the current
exchange rate (CCCE, hereafter) (Beaver & Wolfson, 1982; Ijiri, 1983). Unfortunately,
Click (1986) points out that this method, while theoretically superior to the alternatives, is
flawed when conditions of market neutrality are violated — and these violations occur
almost continuously. This problem may assist in explaining why recent evidence on the
valuation implications of FCT adjustments (Soo & Soo, 1994; Collins & Salatka, 1993;
Bartov & Bodnar, 1994), although generally supporting the theoretically expected effects,
is inconsistent.
Using actual foreign currency exchange rates, this study investigates the degree that
reported values of foreign subsidiary assets, translated using CCCE (current costs and cur-
rent exchange rates — the best method for achieving economic interpretability), are biased
relative to the economic value of the assets. This bias is due to the failure of exchange rate
neutrality or purchasing power parity, one of the conditions of market neutrality assumed
by Beaver and Wolfson (1982), to hold. Most economists take it for granted that purchas-
ing power parity does not hold for exchange rates in today's markets and its failure is
widely documented.
HISTORICAL BACKGROUND
The FASB's first attempt to regulate foreign currency translation methods for U.S. GAAP,
SFAS No. 8, was issued in 1975. SFAS No. 8 standardized the various translation practices
being used by multinational corporations into one general approach. SFAS No. 8 was met
with strong opposition by the financial community since it disparately treated long term
assets and increased the volatility of reported income. The FASB attempted to alleviate
these problems by issuing SFAS No. 52 in December 1981.
SFAS No. 52 provided two methods of foreign currency translation; the temporal
method when the functional currency is the U.S. dollar and the current method when the
functional currency is the local currency of the foreign subsidiary. The temporal method is,
in essence, the same as SFAS No. 8; all translation gains and losses are reflected in current
income and different exchange rates are used for different items. The current rate approach
does not require gains and losses from foreign currency translation to be reported as
income and all items are translated at the current exchange rate.
Foreign Currency Translation 405
SFAS No. 70, issued in 1982, added to and clarified SFAS No. 52 by requiring supple-
mental disclosure of the current market values of fixed assets and certain other foreign
operation items. In 1986, the FASB issued SFAS No. 89 to supersede SFAS No. 33 and the
related statement No. 70. Supplemental disclosure of current market values is no longer
required; it is only encouraged.
Although SFAS No. 52 may have alleviated the significant controversies of SFAS No.
8, it does not result in financial statements that are economically interpre table. Selling and
Sorter (1983) describe the effect of SFAS No. 52 on financial statement analysis as fol-
lows:
...the translation at current exchange rates of local currency-denominated historical
cost items may be considered to result in a figure that is neither a meaningful descrip-
tion of past cash flows nor a description of future flows. The Statement further con-
founds interpretation of the effects of translation by requiring that these meaningless
balances be consolidated with the parent company's accounts.
Wojciechowski (1982) describes the position of Du Pont regarding SFAS No. 52 by stating
that "the current rate method... gives off potential false and misleading signals."
IDENTIFICATION OF "BEST " REPORTING METHOD
To evaluate alternative translation methods, Beaver and Wolfson (1982) introduced the
concepts of economic interpretability and symmetry as desirable attributes of the financial
statements produced using alternative FCT methods. Given some fairly restrictive assump-
tions regarding the nature of financial markets, Beaver and Wolfson concluded that the cur-
rent cost and current exchange rate (CCCE) method results in financial statements that
possess the properties of economic interpretability and symmetry. They note that other
methods, such as historical cost translated at the historical exchange rate and historical cost
translated at the current exchange rate, are deficient in achieving these attributes. The styl-
ized economy used by Beaver and Wolfson assumed a nearly perfect market situation and
they implied that alternative FCT methods are even more deficient in less perfect market
situations.
The Beaver and Wolfson (1982) results require four conditions of market neutrality to
hold (Glick, 1986). First, exchange rate neutrality, commonly referred to as purchasing
power parity, prevails when the change in price of goods in the parent countr\' is equal to
the dollar-equivalent change in price of goods in the host country. Second, inflation neu-
trality exists when the input and output prices change at the same rate. Third, international
interest parity holds when the domestic interest rate is equivalent to the effective dollar cost
of borrowing in the foreign market. Fourth, domestic interest neutrality exists when the
market rate of interest is equal to the real interest rate plus the rate of inflation. When these
conditions are met. the CCCE provides an accurate assessment regarding the value of the
foreign operations (Glick. 1986. 247)). However, when the neutrality conditions are not
met, CCCE does not produce financial information that is readily interpretable.
From a practical point-of-view. the "best" FCT approach (using the criteria identified by
Beaver & Wolfson) combines SFAS No. 52 with supplemental information such as was
required by SFAS No. 70. Unfortunately, translating historical cost information falls fall
406 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
short of achieving economic interpretabihty because the assets are not reported at current
costs and the conditions of neutraHty are not met in the real world. When neutrality condi-
tions are not met. even translating current values at current exchange rates may not achieve
complete economic interpretabihty. With financial statement information prepared using a
historical cost basis, the failure to disclose current values results in financial statements
which are even less interpretable.
SCOPE OF ANALYSIS
This study determines the extent to which the failure of the exchange rate neutrality condi-
tion (purchasing power parity) biases reported assets even when the assets are measured
using current cost translated at the current exchange rate (CCCE). Evidence on the extent
to which the most theoretically correct method of FCT is biased due to the failure of pur-
chasing power parity is provided. In addition, the results of this study provide a benchmark
as to the "best" we can hope to achieve with FCT. Accordingly, the analysis is conducted
such that the computed bias is due solely to the violation of the exchange rate neutrality
condition.
For a sample of 59 countries, the long-run deviation of the actual exchange rate from the
theoretical purchasing power parity derived exchange rate is computed and the degree of
long term asset misstatement is assessed for hypothetical asset acquisitions made from
1960 through 1996 and reported at year-end 1996.
For actual multinational corporations, the degree of actual misstatement will be most
severe when foreign operations have a high ratio of fixed assets. Therefore, the degree
of misstatement in actual financial statements depends on (1) the extent to which the
purchasing power parity condition is violated; (2) the degree of investment in fixed
assets; (3) the years in which the assets were acquired: and (4) the rate of asset turn-
over.
The results of this study demonstrate that the reporting of assets using CCCE does not
achieve economic interpretabihty in most cases. Click (1986) suggests that more meaning-
ful financial statements can be produced by adjusting the reported current values for the
deviations of the actual exchange rates from the purchasing power parity exchange rates.
The adjustments needed to offset the exchange rate purchasing power parity deviations in
the reporting of assets are provided in this study.
If corporations were to provide supplemental information regarding acquisition dates
and current costs of assets and liabilities, and either parity deviations or the exchange rates
at the time of the acquisitions, financial statement users could adjust the historical cost
information to be economically interpretable. Alternatively, these adjustments could be
computed by the reporting entity and provided directly to the financial statement users in
the financial statements or the accompanying notes.
The next section illustrates the effects purchasing power parity deviations may have
on the economic interpretabihty of asset values measured using CCCE. The computed
percentage amounts of misstatement are then reported. The fourth section summarizes
the results and the implications of the findings to the accounting for foreign opera-
tions.
Foreign Currency Translation 407
EFFECTS OF PURCHASING POWER PARITY DEVIATIONS ON
REPORTED ASSET VALUES
The purchasing power parity theory, an integral assumption of Beaver and Wolfson (1982,
pg. 531), links the change in the foreign exchange rate between two countries to the
changes in the price levels of the two countries. A change in the equilibrium exchange rate
is assumed to be proportional to the change in the ratio of the foreign price level to the
domestic price level. Given the evidence by Frenkel (1981) and Branson (1983) (as well as
others) that the purchasing power parity theorem does not hold in either the short or the
medium term, this analysis focuses on the extent to which asset values translated using the
"best" method, CCCE, may be biased.
To illustrate the effect of purchasing power parity deviations on the economic interpret-
ability of reported asset values, let us assume the following. XYZ Corporation, a multina-
tional corporation based in the United States, purchases fixed assets (land) in three
countries during year t. At the time of the purchase the U.S. dollar value for each of the
investments is $100.00. The exchange rates for the three countries at the time of acquisition
are: Country A: 3.5 local currency units to $1.00; Country B: 20 local currency units to
$1.00; and Country C: 1 local currency unit to $1.00.
In local currency units, the cost of the asset purchases is 350.00 in Country A, 2000.00
in Country B, and 100.00 in Country C. For simplicity, assume that during period T the for-
eign inflation rate is 10% in each of the three countries and there is no inflation in the
United States. For simplicity, let us further assume that the current value of the assets in
each of the countries rises at the general rate of inflation in that country.
The current values of the assets at time t-i-T in the local currency units are: Country A:
385.00 (350.00 * (1.10)); Country B: 2200.00 (2000.00 * (1.10)); and Country C: 110.00
(100.00* (1.10)).
Assume that at time t+T the current exchange rates, foreign currency units to U.S. dol-
lars, are: Country A: 4.50 local currency units to $1.00; Country B: 21.00 local currency
units to $1.00; and Country C: 1.10 local currency units to $1.00. The foreign currency
translated current values reported in the corporation's financial statements will be: Country
A: $85.56 (385.00 / 4.50); Country B: $104.76 (2200.00 / 21.00); and Country C: $100.00
(1 10.00 / 1.10). Note that by construction of the example, the economic value of the asset
measured in U.S. dollars is $100.00!
The value reported in the financial statements of the asset in Country A using CCCE
translation understates the economic value of the asset by $14.44 (a positive parity error of
14.44%; (4.50 - 3.85) / 4.50) while the reported value of the asset in Country B overstates
the economic value by $4.76 (a parity deviation of - 4.76%).~ Only for Country C is the
reported value of the asset consistent with its economic value.
The failure of the reported asset values (using CCCE) to portray the economic value of
the assets is due to the purchasing power parity deviations for Country A and Country B.
The purchasing power parity exchange rates are 3.85 local currency units per $1.00 and
22.00 local currency units per $1 .00 for Country A and Country B, respectively. The actual
exchange rates are 4.50 local currency units per $1.00 for Country A and 21.00 local cur-
rency units per $1.00 for Country B.
The preceding simple example illustrates the difficulty of developing a foreign currency
translation method that achieves economic interpretability when the exchange rate neutral-
408
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1 998
Table 1. Mean, Standard Deviation, and Range of Reported Bias by Country
Standard
Country
Mean
Deviation
Minimum
Maximum
Australia
-.06
.13
-.36
+.15
Austria
-.50
.37
-1.13
+.04
Belgium
-.23
.26
-.71
+.22
Bolivia
-5.18
25.37
-151.87
+.27
Brazil
-7.08
10.71
-45.37
-.15
Canada
+.14
.07
+.01
+.24
Chile
-.11
.74
-2.49
+.65
Columbia
-.09
.33
-.84
+.30
Costa Rico
+.12
.38
-1.08
+.49
Cyprus
+.05
.17
-.36
+.30
Denmark
-.37
.35
-1.07
+.07
Ecuador
+.01
.43
-1.09
+.42
Egypt
-.01
.23
-.50
+.33
El Salvador
-.85
.32
-1.37
-.07
Finland
-.12
.19
-.40
+.23
France
-.20
.20
-.64
+.09
Germany
-.27
.27
-.69
+.15
Guatemala
+.08
.27
-.81
+.31
Haiti
-.25
.22
-.96
+.06
Honduras
+.34
.21
-.30
+.55
Iceland
-.19
.27
-1.19
+.16
India
+.39
.23
-.11
+.63
Iran
+.18
.42
-1.34
+.65
Ireland
-.23
.20
-.52
+.10
Israel
-.66
1.22
-5.52
+.18
Italy
-.18
.18
-.57
+.14
Jamaica
-.00
.39
-1.37
+.42
Japan
-.81
.80
-2.53
+.19
Kenya
+.03
.22
-.86
+.35
Luxembourg
-.18
.22
-.67
+.22
Malaysia
+.12
.14
-.17
+.31
Malta
+.17
.14
-.11
+.38
Mexico
-.11
.52
-1.87
+.37
Morocco
+.07
.20
-.44
+.39
Netherlands
-.29
.33
-.90
+.19
Netherlands Antilles
+.04
.05
-.07
+.12
New Zealand
-.31
.20
-.88
+.01
Nigeria
-1.16
1.22
-4.82
+.24
Norway
-.22
.28
-.76
+.11
Pakistan
+.36
.24
-.07
+.65
Panama
+.30
.14
+.02
+.46
Paraguay
-.01
.32
-.69
+.42
Peru
-7.81
19.74
-102.01
-.07
Philippines
-.22
.24
-.92
+.35
Portugal
-.57
.37
-1.32
+.01
Sierra Leone
-.02
.34
-1.69
+.30
Singapore
-.18
.12
-.43
+.08
South Africa
+.02
.18
-.70
+.22
Sri Lanka
+.26
.41
-.25
+.87
Sweden
-.12
.20
-.53
+.17
(continued)
Foreign Currency Translation 409
Table 1. (Continued)
Standard
Country
Mean
Deviation
Minimum
Maximum
Switzerland
-.59
.53
-\A1
+.09
Syria
-1.18
.55
-lAl
-.02
Thailand
.00
.09
-.17
+.14
Trinidad
-H.04
.11
-.13
+.34
Turkey
-.13
.50
-1.41
+.42
United Kingdom
-.14
.16
-.38
+ .17
Uruguay
-1.26
1.07
-4.37
+ .75
Venezuela
-H.17
.46
-1.04
+.62
Zambia
-.35
.79
-2.61
+.31
ity condition, assumed by Beaver and Wolfson (1982), is violated. Accordingly, this exam-
ple portrays the practical significance of the problem pointed out analytically by Click
(1986).
One might presume from the example that the ideal is to maintain the dollar value of the
asset over time. This would imply that the use of historical costs translated at the historical
exchange rate would be appropriate. Unfortunately, this results in well known problems
regarding the economic interpretability of historical cost data.
EMPIRICAL ANALYSIS
To determine the extent to which reported asset values may be misstated due to purchasing
power parity deviations when CCCE is employed, the percentage deviation from parity is
computed for a sample of 59 countries. This computation is based on a year-end 1996
reporting date and computes the percentage error that results if assets were acquired during
each of the years from 1961 to 1996 and reported in 1996 using CCCE. The translation
error and, accordingly the correction needed to reflect economic interpretability, is deter-
mined for each of the 36 years. Table 1 reports the average translation error, the standard
deviation of the error across time, as well as the minimum and maximum errors for the 59
countries in this analysis.
Note that a positive parity error results in an understatement of asset values since more
local currency units are required to purchase a U.S. dollar. Alternatively, when less (than
parity) local currency units are required to purchase a U.S. dollar, a negative parity error
occurs and the economic values of the assets are overstated in U.S. dollars.
For example, the percentage parity deviation for an asset acquired in 1961 and reported
using CCCE is -.17 for Australia. The reported asset value is overstated by about 17 per-
cent, an amount that is probably material and certainly inconsistent with the accounting
notion of conservatism. However, the reported value in 1996 for an asset purchased in
1973 is understated by about 1 1 percent. For the 36 years of potential asset acquisition, the
reported asset value is overstated 23 times and understated 12 times.
In addition to the sign of the average parity errors across countries, the magnitude of the
parity errors varies both across time and across countries. For instance, Australia has thir-
teen periods out of thirty-six in which the magnitude of the error is less than 10 percent.
410
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. A, 1 998
Aggregate
Vertical Axis is %: -1 .0= -100%
Figure 1. Average Aggregate Parity Error
0.3
0.2
0.1
0
-0.1
J'^'"*-^*
*
ji
^■•■4 ^^
' ^
,>A)
&
/
^y
M f1
^
y
Australia
f^
\
^ //
1
/*
-0.2
-0.3
-0.4
-0.5
-0.6
Sweden
• ^
.4
\ \u
\ ^
&„ ,j.
«..♦
(O CD
o
to
980
lO
00
o
o>
O)
Vertical Axis is % : .1=1 0%
Figure 2. Parity Errors for Australia and Sweden
However, Brazil has twenty-six periods in which the magnitude of the error is greater than
100 percent.
The magnitude of the error is rather small for many countries. In instances in which the
error is small, the current values of assets translated at current rates may be reasonably
interpretable. Examples of countries with minor, on average, deviations from the parity
exchange rate are Ecuador, Egypt, Jamaica, Kenya, Netherlands Antilles, Paraguay, Sierra
Leon, South Africa, Thailand, and Trinidad. On the other hand, a number of countries have
numerous years in which the magnitude of the error exceeds 100% — Bolivia, Nigeria,
Peru, Syria, and Uruguay.
The patterns of the computed parity deviations indicate that the magnitudes of the errors
as well as the signs of the errors are not consistent over time. If the errors are not system-
Foreign Currency Translation
411
Canada
Panama
Vertical Axis is %: .1 =10%
Figure 3. Parity Errors for Canada and Panama
Ei Salvador
Syria
Vertical Axis is %: -1 .0= -100%
Figure 4. Parity Errors for El Salvador and Syria
atic, one cannot easily adjust for tiie parity deviation without knowing tiie composition of
the assets and the periods of acquisition.
Figure 1 portrays the mean percentage errors for each of the 36 years in this analysis.
Generally speaking, these results suggest an overall negative error, which implies an over-
statement of the reported values. However, these overall mean negative errors are driven
by a few extreme negative outliers.
To illustrate the longitudinal patterns, the percentage parity errors are graphed for a few
example countries. Figure 2 shows the patterns of two countries, Sweden and Australia, in
which the pattern is mixed in sign over time. This indicates that one cannot readily know
whether the reported assets are overstated or understated without knowing the years in
which the particular assets were acquired. In essence, information regarding acquisition
dates is needed in order to make the information economically interpretable. The informa-
412 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1 998
tion user cannot know the direction or the magnitude of the bias unless the acquisition date
is known.
Figure 3 illustrates two countries, Panama and Canada, in which the parity deviation is
positive over all the years analyzed. In this case, the current values of assets translated at
current exchange rates are systematically understated. A financial statement user knows
the general direction of the error and only needs the specific acquisition information to
determine the magnitude.
Figure 4 depicts the patterns for El Salvador and Syria, two countries in which the devi-
ations are negative over all of the years in the analysis. For these two countries, the eco-
nomic values of the assets are overstated when the current values are translated at the
current rate of exchange. Again, the sign of the error is known but acquisition information
is required to determine the magnitude.
Table 2 classifies the 59 countries into the three types of patterns, positive deviations,
mixed sign deviations, and negative deviations. For countries with a systematic pattern, the
sign of the misstatement is known but the magnitude of misstatement is not known without
detailed analysis. For the 59 countries studied, only two countries display a systematic pos-
itive parity deviation (understatement of economic values) while another four countries
possess a systematic negative parity deviation (overstatement of economic values) when
CCCE is applied. Fifty-three of the countries have a mixed pattern with both positive and
negative parity errors. The financial statement user does not know either the sign of the
misstatement or the magnitude unless more detailed information is provided.
One might expect the greatest deviations from purchasing power parity occurred when
the Bretton Woods agreement was still intact; exchange rates were not allowed to float
until the Smithsonian Agreement of 1971. This would result in greater parity deviations for
the 1960"s with smaller deviations from the early 1970's onward. However, many coun-
tries continued to lock their currency onto the dollar and maintained a relatively fixed
exchange rate policy after the Smithsonian Agreement. The results in Figure 1 suggest that
the deviations immediately following the Smithsonian Agreement. 1972 through 1980,
were relatively small with larger deviations both in the earlier (pre- 1972) and later (post-
1980) periods.
Table 2. Countries Classified by Systematic Deviations (Errors)
Systematic Systematic
Positive Negative Mixed
Australia Austria Belgium Bolivia Chile
Colombia Cyprus Denmark Ecuador Egypt
Finland France Germany Guatemala Honduras
Syria Iceland India Iran Ireland Israel Italy Jamaica
Japan Kenya Luxembourg Malaysia Malta
Mexico Morocco Netherlands Netherland
Antilles New Zealand Nigeria Pakistan
Paraguay Philippines Portugal Sierra Leone
Singapore Sri Lanka Sweden Switzerland
Thailand Trinidad & Tobago Turkey
United Kingdom Uruguay Venezuela Zambia
Canada
Brazil
Panama
El Salvador
Peru
Foreign Currency Translation 41 3
SUMMARY AND CONCLUSIONS
This study demonstrates that the notion of economic interpretability is not achieved when
foreign subsidiary financial statements are translated using the current cost and current
exchange rate method advocated by Beaver and Wolfson (1982). As pointed out analyti-
cally by Click (1986), when there are significant deviations from the conditions of
exchange rate neutrality, the value of the foreign operations is misstated.
In addition, the results of this study indicate that the degree of misstatement is unique
both across time and across countries. For many countries (53 out of 59) the sign of the
misstatement varies across years and a financial statement user needs to know the date the
asset was acquired in order to correctly understand its value when it is translated from the
foreign currency to U.S. dollars.
From a policy point of view, these results imply that the Financial Accounting Standards
Board may not be able to achieve economic interpretability in foreign currency translation
when the conditions of market neutrality fail to exist. Purchasing power parity has not
existed in foreign exchange rates in the past and it will probably not exist in the future. In
fact, the magnitudes of the deviations have gotten even larger during the later 1980's and
early 1990' s.
The most promising foreign currency exchange rate method, CCCE (Beaver & Wolfson,
1982), fails when the exchange rates are not consistent with the underlying price level
changes. For the current cost data translated at the current exchange rate to be made more
meaningful, additional disclosures need to be provided regarding the historical exchange
rates in effect when assets were acquired and the current exchange rate at the date of the
financial statement. In addition, a schedule of when the assets of the entity were acquired
is necessary. This information, in combination with the current costs of the assets, may
allow the user to more accurately assess the results of operations and the financial position
regarding foreign operations.
Given the complexity and volume of information that would need to be provided, we
suggest two alternatives. One approach would be to provide the additional information
only when the magnitude of the misstatement is greater than some threshold amount or per-
centage. A second approach would be to only provide the supplemental information only
for periods in which a significant amount of assets was acquired.
NOTES
1 . It is assumed that general price level changes and specific price level changes are the same This
simplifying assumption is necessary in order to focus on the general effects that are introduced
when purchasing power parity fails to hold and allows this analysis to focus on the assumptions
made by Beaver and Wolfson ( 1982) and questioned by Click (1986). Failure of this assumption
to hold indicates that the reported asset values may be even less economically interpretable.
2. Percentage Parity Error = [(Actual Current Exchange Rate) - (Parity Current Exchange Rate)] /
(Actual Current Exchange Rate). Parity Current Exchange Rate = Original Exchange Rate at
Time of Acquisition * [( 1 + Foreign Inflation Rate) / ( 1 + Domestic Inflation Rate)].
3. Percentage Parity Error = [(Actual 1996 Exchange Rate) - (Parity 1996 Exchange Rate)] /
(Actual 1996 Exchange Rate) where Parity 1996 Exchange Rate = Original Exchange Rate * [(1
+ Foreign Inflation Rate) / (1 + Domestic Inflation Rate)]
414 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
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Exposure Effect." Journal of Finance, 49(5): 1755-185.
Beaver, W. and M. Wolfson. 1982. "Foreign Currency Translation and Changing Prices in Perfect
and Complete Markets," Journal of Accounting Research, (Autumn): 528-550.
Branson, W. 1983. "Macroeconomic Determinants of Real Exchange Risk." in Managing Foreign
Exchange Risk, (edited by R. Herring). Cambridge: Cambridge University Press, pp. 33-74.
Collins D. and W. Salatka. 1993. "Noisy Accounting Earnings Signals and Earnings Response Coef-
ficients: The Case of Foreign Currency Accounting," Contemporary Accounting Research,
10{\): 119-159.
Frenkel. J. 1981. "The Collapse of Purchasing Power Parities During the 1970's." European Eco-
nomic Review, (May): 145-165.
Geijsbeek, J. 1914. Ancient Double-Entry Bookkeeping, Denver Colorado: 57.
Click, R. 1986. "Market Neutrality Conditions and Valuation of a Foreign Affiliate." Journal of
Business, Finance, and Accounting, (Summer): 239-249.
Ijiri. Y. 1983. "Foreign Currency Accounting and Its Transition." in Managing Foreign Exchange
Risk, (edited by R. Herring). Cambridge: Cambridge University Press), pp. 181-212.
Selling, T. and G. Sorter. 1983. "FASB Statement No. 52 and Its Implications for Financial State-
ment Analysis," Financial Analysts Journal, (May-June): 64—69.
Soo B. and L. Soo. 1994. "Accounting for the Multinational Firm: Is the Translation Process Valued
by the Stock Market?" The Accounting Review, (October): 617-637.
Wojciechowski, S. 1982. "Du Pont Evaluates FAS 52." Management Accounting, (July): 31-35.
Ziebart, D. 1985. "Exchange Rates and Purchasing Power Parity: Evidence Regarding the Failure of
SFAS No. 52 to Consider Exchange Risk in Hyper-Inflationary Countries," The International
Journal of Accounting, 27(1). (Fall): 39-51.
The International
Journal of
Accounting
Harmonization of Foreign Currency Translation Practices:
Canadian Treatment of Long Term Monetary Items
W. Rotenberg
University of Toronto
Key Words: International Harmonization; Foreign Debt; Foreign Currency Translation; Canada
Abstract: The harmonization of accounting practices requires that local practices be restricted.
An example is the outstanding proposal to change the Canadian accounting treatment of foreign
debt. Proposed changes include elimination of the deferral and amortization of translation adjust-
ments; a uniquely Canadian accounting treatment that is now at odds with intenuitionally
accepted practices. The likely result will be greater recognition of translation adjustments in cur-
rent earnings. This study is the first to examine the impact of the proposed changes on the reported
leverage and profitability of Canadian companies. The impact is found to be significant.
The potential benefits of harmonized financial reporting practices are significant and com-
pelling. More comparable financial statements will facilitate inter country transactions and
investments and promote international capital market development. With such goals in
mind, the International Accounting Standards Committee (lASC) established its "compa-
rability project" in 1989, which involves the creation of more restrictive international
accounting standards. An accelerated standard setting program was established to create a
complete, comprehensive set of rules by 1999.
While the lASC has no mechanism to enforce international standards, the standards it
issues have gained wide acceptance, through negotiation and consultation. The movement
to adopt international standards is demand driven, as businesses rely increasingly on inter-
national capital markets for financing and as international trade and investment expand.
Also, in order to attract capital market business, many national security markets now
accept financial information that is compatible with international standards, rather than
requiring full restatement to local GAAP. Consequently, most multinational firms now
prepare financial reports consistent with international accounting standards.
International accounting standards are also useful as a focus for debate and as models for
national standard setting bodies. As international standards become more restrictive under
Direct all correspondence to: W. Rotenberg, J.L. Rotman School of Management. University of Toronto. 105 St.
George Street, Toronto, Ontario, M5S 3E6; Tel: (416) 978-2664; E-Mail: rotenber@fmgmt.mgmt.utoronto.ca
The International Journal of Accounting, Vol. 33, No. 4, pp. 415-431 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1998 University of Illinois
416 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
the comparability project, they are having an increasingly visible impact on the formation
of accounting policies around the world. In several instances, the new more restrictive
international standards have prompted national standard setters to reexamine national prac-
tices that are no longer compatible with international standards. It is through this reassess-
ment of incompatible practices that national standards are expected to adjust, creating more
comparable worldwide reporting practices.
A natural conflict exists between national standard setting and global standardization,
because harmonization cannot accommodate the needs of specific local circumstances.
Local accounting practices can be expected to persist, because while multinational firms
are highly visible, most business involves local firms in local markets. Local accounting
methods have adapted to local business environments, providing relevant information in
each context, so it is not clear that harmonized accounting methods would result in more
useful information. In addition, international standards may be less flexible and less adap-
tive to both changing and specialized circumstances. Finally, there are several issues
regarding how international standards should be developed, and whether one set of stan-
dards should apply universally to all firms, regardless of size, industry and ownership
arrangements (public vs. private).
The disadvantages of international harmonization include less flexibility and the use of
methods not necessarily well suited to local business environments. The potential costs of
increasing the comparability of accounting standards should be weighed against the bene-
fits of harmonization. A first step in assessing the impact of a new international standard
on local accounting must be the measurement of the impact of the new standard on reported
results for local enterprises.
One of the new more restrictive rules is IAS 21, "Accounting for the Effects of Changes
in Foreign Exchange Rates", which came into effect on January 1, 1995. It is a significant
international standard in the Canadian context, since it eliminates a well established,
uniquely Canadian accounting treatment for foreign debt. Because the deferral and amorti-
zation of foreign debt adjustments may be the accounting treatment best suited to the Cana-
dian economic environment and to Canadian business and financing practices, its
elimination provides an example of the impact of the new, more restrictive lASC approach
under the comparability project. This study is the first to estimate the impact of the pro-
posed change in accounting standards on the financial reports of Canadian firms.
The Canadian tradition has been to reduce the income statement impact of exchange rate
volatility, first by a voluntary preference for recording foreign debt at historic exchange
rates, and then by deferring and amortizing translation adjustments when current exchange
rate translation became mandatory. IAS 21 established as a benchmark treatment the rec-
ognition of exchange gains and losses on long-term monetary items in income of the cur-
rent period." The defer and amortize approach was eliminated.
The introduction of IAS 21 therefore poses a challenge for Canadian standard setters,
since the Canadian treatment of translation adjustments on foreign currency debt is no
longer an acceptable international practice. Canadian foreign currency translation guide-
lines are set out in CICA Handbook Section 1650. In order to conform with IAS 21 and to
address other issues relating to foreign currency translation, an exposure draft proposing
changes to Section 1650 was first issued in September 1993. It proposed to eliminate defer-
ral and amortization of foreign debt adjustments as the usual Canadian practice, for foreign
currency debt not identified as a natural hedge of foreign assets or revenues. This exposure
Foreign Currency Translation Practices
417
draft was withdrawn, due to respondent concerns. A re-exposure draft, issued in May 1996,
remains outstanding.
This paper begins with a review of the evolution of translation practices for foreign debt
in Canada (Section II). Section III includes a discussion of the economic effects of account-
ing choice, potential costs of imposing mandatory accounting standards generally, and spe-
cific evidence of corporate reactions to foreign currency accounting policies. In Section IV
we examine the foreign exchange environment in Canada and illustrate the treatment of
translation adjustments that would occur for a Canadian borrower of foreign debt under
both the immediate flow through and the defer and amortize approaches. Then in Section
V we assess the impact of proposed changes in Section 1650 on Canadian firms. We first
document the incidence and importance of foreign debt financing for Canadian firms and
then we estimate the effect of the proposed rule change on reported earnings and reported
equity. The final section contains a summary and concluding remarks (Section VI).
Panel A:
Time Line of Significant Events
SFAS8
SFAS 52
lASC
IAS 21
Issued
Issued
Comparability
in Effect
1975
1
1
1
1981
1
1
Project
1989
1
1995
1
1
1
1978
1
1979
1
1
1983
1
1993
1
1996
SI 650
SI 650
Revised
ED to Revise
Re-ED Issued
Issued
Suspended
SI 650
Issued
SI 650
for SI 650
Panel B : Treatment of Translation Adjustments on Foreign Currency Debt
Standard
SFAS 8
Treatment
Immediate flow through
S 1 650 Immediate flow through
SFAS 52 Immediate flow through
Revised S 1 650 Defer and Amortize if Debt not identified as a natural hedge
IAS 21 Immediate flow through if Debt not identified as a natural hedge and
Hedge accounting treatment for Debt identified as a natural hedge
S 1 650 ED Immediate flow through if Debt not identified as a natural hedge and
additional requirements for hedge identification and treatment of
Debt identified as a natural hedge
S 1 650 Re ED Reaffirmation of requirement of immediate flow through if Debt not
identified as a natural hedge and modified treatment of adjustments on
Debt identified as a natural hedge
Figure 1. Evolution of North American Foreign Currency Translation Standards
418 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
THE EVOLUTION OF TRANSLATION PRACTICES FOR FOREIGN DEBT IN CANADA
Canadian business enteq)rises make extensive use of foreign capital to satisfy their financ-
ing needs. This financing pattern has developed for a number of reasons. As a primary
resource producing nation with a significant manufacturing base, Canada is home to many
capital-intensive industries. Domestic capital markets have been unable to fully meet the
demand for investment funds, in part because Canadian government debt requirements
have tended to account for a significant portion of available capital. Also, while Canada
has historically had relatively illiquid capital markets, it is conveniently situated next to the
largest capital market in the world - the U.S. market. Borrowing U.S. funds has been
advantageous, as it has provided Canadian firms with a natural hedge of the foreign
exchange exposure that arises from exporting primarily to the U.S. market and/or at U.S.
dollar-based prices. Further, since many Canadian firms have U.S. subsidiaries that gener-
ate U.S. dollar revenues, the foreign revenue streams of Canadian multinationals are also
well matched with U.S. dollar financing. Canadian firms therefore rely heavily on foreign
financing, particularly U.S. dollar financing, and many have U.S. dollar revenues and
assets as well.
North American companies have traditionally translated foreign debt at historic (date of
issue) exchange rates. Almost half of the US firms examined by Dukes (1978) and the
majority of the Canadian firms in Booth and Rotenberg (1991) voluntarily selected the
Current-noncurrent method prior to the imposition of mandatory translation standards.
Noncurrent items like long term foreign debt are translated at historic exchange rates under
this translation method, so that the Canadian dollar book value of the debt is invariant to
exchange rate changes.
See Figure 1 for a brief summary of the evolution of North American foreign currency
translation standards, which are described in more detail below.
The initial North American foreign currency translation standards (SFAS 8 and the orig-
inal SI 650) required that all firms employ a uniform translation method, involving current
rate translation of foreign currency debt. These translation standards proved to be highly
controversial. The US FASB was bombarded with complaints that the standards introduced
unnecessary volatility into corporate income statements (see Dukes 1978 for a discussion).
As a result of such complaints, original SI 650 was suspended and never came into effect.
New translation guidelines were introduced (SFAS 52 in the US and revised SI 650 in Can-
ada), that took a situational approach, recognizing that exposure to exchange rate changes
depends upon the nature of the firms' foreign operations. Although these standards pro-
vided more flexibility, the most popular method of accounting for foreign operations prior
to the introduction of these standards, namely the Current-nonCurrent method, was not
among the accepted alternatives. This meant that all foreign currency debt, whether on the
books of the parent firm or its subsidiaries, now had to be translated at current, year end,
exchange rates.
In 1983, the first mandatory standard, revised S 1650, that came into effect in Canada was
a very significant change for most companies, as they were newly required to translate for-
eign debt at current exchange rates. This raised the issue of how to deal with resulting
translation adjustments. SFAS 52 provided for immediate flow through of translation
adjustments on unhedged foreign debt, versus the corresponding standard in Canada,
revised Section 1650, did not. Rather, a compromise approach to dealing with translation
Foreign Currency Translation Practices 419
adjusimenis \\a^ adopied in rcNi-ed Section 1650. and remain^ in etTeci. This is to defer
and amortize the translatinn adjuvtmenis over the remaining lite ot' the debt.
Under the defer and amortize approach, if exchange rate> tluctuaie. translation adjust-
ments have less of an effect on interim earnings reports and result in a less volatile, more
informative earnings stream. If rales continue to nnne m one direction, however, the result
is escalating charges to income, rather than the intended dampening effect. .-Mso. the later
in the life of the loan an e.xchange rate change occurs, the more impact it \\ ill have on
reported earnings.
Wliile Canadian accounting standards currentK require that translation adjustments on
foreign debt be deferred and amortized, if the debt is identified as a natural hedge of foreign
assets or revenues, adjustments are often simph deferred. Rotenberg ( 1989) finds that only
22 of 177 sampled public Canadian tlrms did elect hedge accounting treatment of transla-
tion adjustments on their foreign debt. Most tlrms were therefore follow ing the defer and
amortize approach when I.A.S 2 1 became effective. The outstanding CIC.A Handbook Sec-
tion 1650 exposure draft v\ould follow suit with IAS 21. requiring translation adjustments
on non-hedged debt to tlow immediately through income.
Quite apart from an> international harmonization pressures, u iv possible that changes in
the Canadian economic en\ ironment or financial management practices justify the pro-
posed changes in accounting treatment for foreign debt. For example. Hunt i I'^Q?) suggests
that Canadian tlrms now recognize exchange exposure as a separate risk that can and
should be managed, so that immediate recognition of the outcome of an\ unhedged expo-
sures has become more appropriate for Canadian firms. Funher. the current hedge account-
ing provisions in Section 1^5ii irnoKe complete deferral o\ translation adjustments on
long term debt identified a^ a natural hedge of foreign assets or re\enues. This maN not
properh reflect the underh ing economics of the hedge relationships, since if a natural
hedge is m place, unexpected exchange rate movements have an equal and offsetting effect
on foreign assets/re\enues and on foreign liabilities. Hence panial flow through of the
translation adjustments on foreign debt should be allowed, for revenue hedges, as the rev-
enues materialize. This is the rationale behind the new hedge accounting provisions pro-
posed in the outstanding S 1 650 exposure draft. Finns must explicith designate the hedging
instrument and the hedged exposure at the inception ot hedge accounting. Then, as desig-
nated revenues materialize, adjustments on the corresponding portion of the foreign debt
are to be recognized in income.
To summarize, in its September l'^"')3 exposure dratt, the Canadian .Accounting Stan-
dards Board ( AcSB) proposed to eliminate the deferral and amoni/aiion of exchange gains
and losses on long-li\ed monetary asset and liabilities; and introduced re\ ised criterion for
hedge accounting.' The former in\ol\es the elimination of a uniqueK Canadian account-
ing treatment that is at odds with iniernatioiiall\ accepted practices. The latter relates to the
appropriate methods of applying hedge accounting provisions. In both cases, the result is
likeK to be greater recognition of translation adjustments in current reported earnings.
Man\ o\ the rcspiMideiiis lo the 1 '-''■'3 E.xposure Drafl commented on the proposed elimi-
nation o\ the deter and amonize approach, both favorabK and unfa\orabl\ . The .AcSB.
after carefulh considering the comments, reaffirmed its decision to hannonize Canadian
practices with Inicrnaiional standards and with standards in the U.S. Proposed changes to
Section 1650 were then re-exposed in Ma\ 1996. Comments ha\e been in\ited. but the
chanses remain to be finalized. One reason for the dela\ is a desire to achie\e consistent
420 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1 998
treatment of foreign exchange adjustments for foreign debt and for financial instruments
more generally. Hence the AcSB is awaiting the outcome of deliberations and correspon-
dence on another outstanding Exposure Draft, relating to Financial Instruments.
We next review how proposed changes in the Canadian treatment of translation adjust-
ments on foreign debt can be expected to impact reported results, and discuss why such
changes in reported results might be expected to have economic consequences for affected
firms.
ECONOMIC EFFECTS OF ACCOUNTING CHOICE
A well established theory of voluntary accounting choice draws on the notion that a firm is
a nexus of contracts between parties possessing conflicting objectives. This "'costly con-
tracting" approach has successfully explained many aspects of organizational behavior,
including accounting policy choice. In fact, in their review of the contributions attributable
to this "positive theory of accounting". Watts and Zimmerman (1990) note that this litera-
ture has uncovered relations between firms' accounting choices and other firm variables
for which there remain no 'systematic alternative sets of explanations' (pi 32).
In his discussion of International accounting harmonization, Ball (1995) explains that
accounting rules "are an integral part of how corporations transact. Change the accounting
rules and you change how corporations behave" (p 19). This occurs because transactions
require agreement on various financial measures. The link between accounting choices and
contracting is then forged by the monitoring and enforcement process, which relies on
accounting measures of such firm characteristics as earnings and leverage. For example,
slack in compliance with lending agreements is valuable, serving as a reserve against unan-
ticipated contingencies. Firms therefore have incentives to report high and stable earnings,
and low and stable financial leverage. One element of the set of accounting choices is the
selection of translation policy, which has a direct impact on the stability and growth of
earnings, the degree of leverage, and the volatility introduced into financial statements.
Empirical evidence regarding translation accounting choices is uniformly consistent
with there being a relationship between such choices and how they impact on reported
results. Also, evidence of changes in behavior, that is changes in financial hedging, are
apparent when firms are required to change the method of accounting for translation
adjustments. For example, Evans, Folks and Jillings (1978) show that under SFAS 8 firms
were hedging translation exposure to mitigate the increased volatility in corporate earn-
ings.
Correspondingly, once SFAS 52 was introduced and translation adjustments had less of
an effect on reported earnings, less financial hedging was conducted (Houston and Muel-
ler, 1988). Such behavior imposes real costs. Financial hedges create cash flow effects,
and firms hedging their translation adjustments or book exposure with financial hedges do
so at a cost. Further, evidence indicates that even in the SFAS 52, SI 650 era, companies
continue to hedge translation exposure using overt financial strategies and instruments, as
reported in Houston (1990), Belk and Glaum (1990), and Schooley and White (1995). Sim-
ilarly, activities may be structured to qualify for hedge accounting, and thereby to avoid
taking translation adjustments directly to income (see Beier and Herz. 1994, for a discus-
sion).
Foreign Currency Translation Practices 421
The evidence therefore points strongly to corporations acting to reduce the impact of
translation adjustments on reported earnings. Canadian evidence is consistent with this
finding. Canadian companies, particularly those with high leverage and low reported earn-
ings, that might be more sensitive to contractual constraints, have a demonstrated prefer-
ence for foreign debt treatment that avoids the recognition of translation adjustments in
current income. This is accomplished by translating foreign currency debt at the historic
exchange rate (ie pre SI 650), as shown in Booth and Rotenberg (1991). Another way to
avoid taking current translation adjustments on long term debt to income is to elect to use
the current hedge accounting procedures, identifying the foreign currency denominated
debt as a natural hedge of foreign assets or revenues, and deferring translation adjustments
on the debt. Rotenberg (1989) provides evidence that hedge identification is indeed related
to firm characteristics. She reports a correspondence between hedge identification and
whether the firm had high leverage or low reported income. Hence hedge identification
appeared to be used by firms vulnerable to violating their contractual relations with lenders
and other providers of financing.
This study estimates the impact on reported results of eliminating the defer and amortize
treatment of translation adjustments on foreign debt. It will also investigate the extent to
which Canadian companies are now using the hedge accounting treatment of foreign debt
and whether this accounting treatment is related to firm characteristics.
ILLUSTRATION AND EXCHANGE RATE ENVIRONMENT
The current S 1650 requires that long term debt be translated at the rate in effect on the bal-
ance sheet date with any exchange gains or losses being deferred and amortized on a sys-
tematic and rational basis over the remaining life of the debt. The outstanding exposure
draft proposes immediate recognition of exchange gains or losses on translation of long-
term debt, unless the debt meets the criteria for hedge accounting. The impact of the pro-
posed change on reported results depends on the behavior of exchange rates over the life of
the debt, on the use of foreign debt financing, and on whether firms identify their debt as a
natural hedge.
Table 1 . Canada-US Exchange Rates over 1 982 to 1 992 Period
Change from
Cumulative Change
Year
Opening Rate
Closing Rate
prior year
from year-end 1982
1982
n/a
.8138
-
-
1983
.8138
.8036
-1.3%
-1.3%
1984
.8036
.7566
-5.8%
-7.0%
1985
.7566
.7152
-5.5%
-12.1%
1986
.7152
.7244
+ 1.3%
-11.0%
1987
.7244
.7696
+6.2%
-5.4%
1988
.7696
.8386
+9.0%
+3.0%
1989
.8386
.8632
+2.9%
+6.1%
1990
.8632
.8621
-.1%
+5.9%
1991
.8621
.8654
+.4%
+6.3%
1992
.8654
.7868
-9.1%
-3.3%
Notes: Expressed as US dollar per Canadian dollar.
Source: Bank of Canada Review, various issues.
422
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
Table 1 illustrates the translation adjustments on a US$1 m loan, for a Canadian bor-
rower, over 1982 to 1992. It is appropriate to focus on the US$/Canadian$ exchange rate
because the vast majority of foreign Canadian corporate debt is denominated in US dollars.
This is a natural tendency, given the high proportion of Canadian trade that is conducted
with the U.S. and/or is trade in international conmiodities that are priced in U.S. dollars.^
Canadian foreign direct investment is also concentrated in the United States. Hence, most
Canadian firms experience exchange related gains on foreign assets and revenues, and
losses on foreign monetary obligations if the Canadian dollar depreciates relative to the
U.S. dollar. This was the case during our sample period (1982 to 1992).
Table 2. Income Impact of Translation Adjustments on a US$ 1 million
Debt for a Canadian Firm over 1 982 to 1 992
Panel A: Annual and Cumulative Translation Adjustments
Year
Cdn$ Value of
US$1 million
Change in Cdn$ Value
of US$1 million from
prior year
Cumulative Change in
Cdn$ Value of US$1
million from year-end 1982
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1,228,803
1,244.400
1,321,702
1,398,210
1,380,453
1,299,376
1.192.464
1,158,480
1,159,958
1.155.535
1,270,971
+ 15,597
+77,302*
+76,508
-17,758
-81,077
-106,913
-33,983
+ 1,478
-4.423
+ 115.436
+ 15,597
+92,899**
+ 169,407
+ 151.650
+70,573
-36,340
-70,323
-68,845
-73.268
+42,168
Notes: *the exchange rate change
**the exchange rate change
adjustment of S92.899.
in 1984 results in a current year translation adjustment of S77.302.
from year end 1982 to year end 1984 results in a cumulative translation
Panel B: Income Impact of the Defer and Amortize Approach
Current year Amortization Annual Amortized Total Amortization
Year Adjustment' Period (in years) Amount for the year
1982
-
-
1983
+ 15,597
10
1984
+ 77.302
9
1985
+ 76,508
8
1986
- 17,758
7
1987
-81,077
6
1988
- 106,913
5
1989
- 33,983
4
1990
+ 1,478
3
1991
- 4,423
2
1992
+ 115,436
1
1,560
1,560
8,589
10,149^
9,564
19,713
-2,537
17,176
13,513
3,663
21,383
-17,720
-8,496
-26,216
493
-25,723
2,212
-23,511
15,436
91,925
Notes: *the current year adjustment is the total impact on the Canadian dollar value of the US dollar denom-
inated SI million debt as calculated in Panel A above.
* total amortization for the year is the sum of annual amortizations from prior years, so that in 1985 the
total amortization is SI 9,7 13, which is the sum of 31,560 arising from 1983. plus S8. 589 arising from
the exchange rate change in 1984 and $9,564 arising from 1985.
Foreign Currency Translation Practices 423
The 1992 fiscal year was selected for study as it is the year immediately preceeding the
SI 650 exposure draft first suggesting the elimination of the deferral and amortization
approach. Table 1 tracks exchange rates over 1982 to 1992 and shows that the Canadian to
U.S. dollar exchange rate is quite volatile. Annual changes average approximately 4 per-
cent per year (in absolute terms). The cumulative changes are considerably smaller, with
only a 3.3% cumulative change over the entire 10 year period. While the Canadian dollar
devaluation of 9.1% in 1992 is roughly double the annual average change, there are several
other years in the 1982 to 1992 period where the exchange rate changes were large. In
1988, for example, there was a 9% appreciation of the Canadian dollar.
To illustrate the effect on the Canadian dollar value of US dollar liabilities. Table 2 Panel
A displays the year to year and cumulative effect on a $1 million US loan for a Canadian
borrower over the same 10 year period. The Canadian dollar value of the loan increases and
decreases over the period, with a cumulative adjustment of $42,168 (a loss to the Canadian
borrower who has to repay in US dollars). In some years the adjustments are very large. For
example, in 1992 there was a loss of $1 15,436 Canadian on the outstanding liability. These
are the effects on reported earnings, under the immediate flow through approach.
The right hand column of Table 2 Panel B shows charges to income under the defer and
amortize approach for the same $ IM US, 10 year loan. In any particular year, the total
amortization is the cumulative sum of annual amortization amounts for the current and
prior years. For example, in 1985, $19,713 is taken to income. Of this amount, $1560 is the
annual amortization of the 1983 translation adjustment, $8589 is the annual amortization
of the 1984 translation adjustment, and $9564 is the annual amortization of the 1985 trans-
lation adjustment. Note also that each year, amortization of the current years' adjustment is
spread over a shorter time period, so it has a bigger impact. For example, the $15,597
adjustment in 1983 is spread over a 10 year amortization period, while the $1 15,597 adjust-
ment in 1992 is taken to income all in one year. Also, note that the direction of the charge
to income can be inconsistent with economic events of the time period, as happens in our
example for the first time in 1986. In 1986 the current year adjustment is a gain of $17,758
while a loss of $17,176 is charged to income. Finally, note that the average income impact
is less when the defer and amortize approach is used, because of exchange rate reversals.
In absolute value terms, the average annual charge is $53,048 for immediate flow through
(this is the average of the current year adjustments from the left hand column of the table)
and only $23,736 for deferal and amortization (this is the average of the total amortization
amounts for the year, from the right hand column of the table).
This illustration demonstrates how exchange rate behavior affects the reported value of
a hypothetical $1 million US dollar long term debt obligation, under both the immediate
flow through and the defer and amortize approaches. We next estimate the impact of the
proposed immediate flow through of exchange adjustments for a sample of Canadian bor-
rowers, based on their actual financing practices.
DATA DESCRIPTION AND ASSESSMENT OF IMPACT
Observed financing behavior reveals that Canadian firms are obtaining significant foreign
debt financing. Rotenberg (1989) documents that in a 1984 sample of 177 firms, on aver-
age, 34.4% of the corporate debt was foreign currency denominated. Similarly, the 1993
424 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
annual CICA survey of financial reporting practices of 300 large Canadian companies (in
1992) identifies 1 18 of the firms as reporting debt payable in foreign currency.
To identify companies affected by the proposed changes in accounting standards for for-
eign currency debt, we began with the Micromedia Cancorp database. It includes over
8500 Canadian companies (public, private and crown corporations). The database includes
the full text of annual reports and full text searches can be performed using key words or
phrases. Various search terms were applied and the resulting company fields identified
were noted. The company lists were compared in an attempt to determine which search
term or phrase would best identify those firms with foreign debt financing. For example,
the phrase "Foreign Debt" resulted in a list of only 5 companies. The phrase "Exchange
Gain or Loss" resulted in a list of 60 companies. The phrase "Foreign Currency Transla-
tion" resulted in a list of 214 firms, etc. Using the 1992 annual reports, the search term
"translation" was used and provided an initial list of 367 companies. Examination of the
full text of the annual reports for these firms resulted in the identification of 144 firms with
foreign currency debt, for which complete data was available. Of these 144 firms, 22 iden-
tified their foreign debt as a natural hedge of foreign assets or revenues.
Disclosures on the Magnitude and Treatment of Translation Adjustments
Regarding disclosures about translation adjustments, the 1993 CICA survey indicates
that just 32 companies disclosed the amount of exchange gains/losses included in reported
income (including the current amortization of adjustments for long term monetary items as
well as translation adjustments arising from foreign subsidiary financial statements). Spe-
cific disclosures about the deferral of exchange gains and losses on long term monetary
items were provided for 86 companies in the CICA survey, but they were incomplete. Fifty
firms made reference to this item without describing the amounts involved, 29 disclosed
deferred charges or credits, and 7 disclosed only that some amount had been included with
long term debt. An examination of footnote disclosures in our sample reveals a similar lack
of detail. The appendix contains excerpts from the annual reports of two sample firms, one
which identifies some of its long term debt as a natural hedge (Abitibi-Price) and one
which does not (Canadian Pacific). These examples illustrate that without detailed disclo-
sures, it is not possible to precisely measure the expected impact of a change in translation
adjustment treatment. Instead, estimates must be made.
Hedge Identification Disclosures
In their footnote disclosures, 22 of the 144 sample firms identified their foreign currency
debt as natural hedges of their foreign assets and/or revenue streams. Table 3 provides how
the firms described their "hedge" identification policies in their footnote disclosures. Fully
half of the hedge identifiers recognize the foreign debt on subsidiaries books as natural
hedges of the subsidiary assets or revenues. Eight specified that it is foreign debt on the
parent firms' books that is serving to hedge parent firm foreign currency denominated
assets or revenues. Rather than flowing through annual adjustments, the proposed hedge
accounting provisions will require these firms to defer and recognize the adjustments along
with the other side of the hedge, as it materializes. Firms that self select hedge identifica-
Foreign Currency Translation Practices
425
Table 3. Hedge Accounting Identification and Footnote Disclosures
Frequency
Description
1 1 Foreign debt on books of subsidiary to hedge
subsidiaries' assets or revenues
7 Foreign debt on booics of parent to hedge parent
revenues or assets
1 Foreign debt on boolvs of parent to hedge
subsidiaries' operation
1 Revenues designated as a hedge against
repayment of foreing currency denominated
long term debt
1 Liability hedged by net investment
1 Use balance sheet assets denominated in foreign
currency to hedge foreign currency
denominated liabilities
22
Table 4. Descriptive Statistics for 1 992
Full sample
Hedgers*
Other
t-statistic*^
Variable
n= 144
n = 22
n= 122
(2 tail p)
Market Value
Mean
1340
846
1429
1.28
of Equity
(Std Dev)
(3953)
(1019)
(4272)
(.20)
(Smillions)
Total Assets
Mean
2112
2237
2089
-.21
(Smillions)
(Std Dev)
(4780)
(2412)
(5098)
(.83)
Proportion of
Mean
36.6
40.9
35.7
-.79
Foreign Assets
(Std Dev)
(27.7)
(25.0)
(28.2)
(.43)
(percent)
Proportion of
Mean
38.9
40.4
38.5
-.25
Foreign Sales
(Std Dev)
(30.1)
(22.4)
(31.5)
(.80)
(percent)
Proportion of
Mean
8.8
9.3
8.8
-.12
Export Sales
(Std Dev)
(19.7)
(19.7)
(19.8)
(.91)
(percent)
Proportion of
Mean
42.7
27.2
45.6
.43
Foreign Debt
(Std Dev)
(185.5)
(20.8)
(202.0)
(.67)
(percent)
Notes: *Hedgers are those firms that identified their foreign debt as a natural hedge of foreign revenues or assets for
accounting purposes, allowing them to defer realization of translation adjustments in income until the hedge
unwinds or becomes ineffective.
**Difference of means t-tests are conducted to examine whether the hedge identifiers differ significantly from the
non hedge identifiers, for each variable described in the table.
tion may have different characteristics from those that do not, so they will be assessed sep-
arately throughout this study.
Descriptive Statistics
We next provide descriptive statistics for the sample firms, in Tables 4 and 5. Table 4
shows that the 144 firms are large, with an average market value of equity of $1.34 billion
426 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1 998
Table 5. Descriptive Statistics for 1992 Continued
Full sample
Hedgers'
Other
chi-square"
Variable
n= 144
n = 22
n= 122
(2 tail sig)
Cross-Listed
Frequency
39
6
33
.000
(percent)
(27.1)
(27.3)
(27.0)
(.983)
Derivatives
Frequency
68
13
55
1.47
Use
(percent)
(47.2)
(59.1)
(45.1)
(.226)
Foreign Subs
Frequency
124
22
102
4.19
(percent)
(86.1)
(100)
(83.6)
(.041)
Notes: *Hedgers are those firms that identified their foreign debt as a natural hedge of foreign revenues or assets for
accounting purposes, allowing them to defer realization of translation adjustments in income until the hedge
unwinds or becomes ineffective.
**chi-square tests are conducted to examine whether the hedge identifiers differ significantly from the non hedge
identifiers, for each variable described in the table.
Canadian dollars and an average book value of assets of $2.1 billion. The average propor-
tion of foreign to total assets, sales and debt are 36.6, 38.9 and 42.7 percent, respectively.
These firms clearly have significant foreign involvement. Export sales by the parent firm
accounted for an average of 8.8 percent of total sales, so the bulk of foreign currency sales
are being made by affiliates in foreign locations rather than as parent firm exports. Note
that hedge identifiers and non-hedge identifiers do not differ, statistically significantly, on
any of these dimensions.
Table 5 includes descriptive statistics on count variables. About one fourth of the sample
are cross-listed companies, for both hedge identifiers and non hedge identifiers. The next
variable, disclosed use of financial derivatives, is intended to indicate the complexity of
financial hedging arrangements. It is found to be more frequent for those firms identifying
foreign debt as a natural hedge, although this difference is not significant at conventional
levels. That is. 59.1 percent of hedge identifiers but only 45.1 percent of non hedge identi-
fiers disclose use of financial derivatives. Finally, fully 124 of the 144 firms have foreign
subsidiaries and all of the hedge identifiers have foreign subsidiaries.
As might be expected, the use of foreign debt financing is related to firm characteristics.
The proportion of foreign financing is positively correlated with the proportions of both
foreign revenues and assets. The correlation of the foreign debt to total liability ratio with
the proportions of foreign revenues and foreign assets is .16 and .89, respectively. Both are
significant at conventional levels (10% and 1%, respectively). Also, cross-listed firms and
firms with foreign subsidiaries tended to have higher proportions of foreign financing.
Cross listed firms have average foreign financing percentages of .47, compared with only
.32 for non cross listed firms. Similarly, firms with foreign subs have average foreign
financing percentage of .44, compared with only .34 for firms without foreign subs. Rank
tests show that these relationships are significant at the 4.59c and 10.7% levels, respec-
tively.
Firms employing foreign currency debt therefore tend to have higher degrees of foreign
involvement, as measured by their proportions of foreign revenues and assets, and the
existence of export sales. They also tend to be cross-listed, so that they have both domestic
and foreign shareholders.
Foreign Currency Translation Practices 427
Table 6. Foreign Currency Debt Issues Outstanding for Sample of
144 Canadian Firms as at Year End 1992
Panel A: Description of Debt by Currency
Foreign Currency
# Companies
% Companies
US($)
133
92.4
UK (Pound)
16
11. 1
Switzerland (Fr)
12
8.3
Australia (S)
7
4.9
Germany (DM)
7
4.9
New Zealand ($)
5
3.5
Italy (Lira)
5
3.5
Japan (Y)
4
2.8
France (Fr)
4
2.8
Netherlands (Guilder)
3
2.1
Malaysia (Ringgit)
1
.7
Spain (Pesata)
1
.7
Panel B: Companies with Multiple Currency Debt Issues Outstanding
Number of Currencies Used Number of Companies
i m
2 22
3 5
4 4
5 2
144
Impact of Proposed Immediate Flow Through Approach
We next estimate the effect of proposed changes to Section 1650 for nonhedged debt.
We do this by measuring the magnitude of an immediate flow-through adjustment, relative
to the market value of equity, and to reported earnings.
Table 6A shows that for the 144 sample firms, there was foreign debt outstanding in 12
different currencies at year end 1992. The use of US$ financing dominates, with 92.4% of
sample firms having US$ debt. Table 6B shows that 33 of the firms have multiple currency
debt issues outstanding, but most use just one or two currencies of debt denomination.
As explained above, we must estimate the translation adjustments of the firms, since
translation adjustments on long term debt are either not disclosed at all, or are combined
with other translation effects. To do this we obtained start and end of year exchange rates
in 1992 for all currencies of debt in the sample. The percentage exchange rate changes over
the year are shown in Table 7. Relative to every currency except the Italian Lira and the
Spanish Pesata, the Canadian dollar depreciated during 1992. Most sample companies
therefore experienced translation losses on their foreign debt obligations.
To calculate the translation gains/losses, footnote disclosures of foreign currency face
values of outstanding debt at year end were then multiplied by these exchange rate changes
to estimate translation gains/losses for the year in Canadian dollar terms. Table 8 shows
428
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1 998
Table 7. Exchange Rate Changes in 1992
US$per
Cdn$ per
US$ per
CdnS per
currency unit
currency unit
currency unit
currency unit
Change in
at year-end
at year-end
at year-end
at year-end
CdnS during
Currency
1991
1991
1992
1992
1992
US(S)
1.0000
.8654
1.0000
.7867
-9.1%
UK (Pound)
1.8707
1.6188
1.5120
1.1895
-26.5%
Switzerland (Fr)
1.3555
1.1730
1.4560
1.1455
- 2.4%
Australia (S)
.7598
.6575
.6886
.5417
-17.6%
Germany ( DM )
1.516
1.3119
1.614
1.2698
-3.2%
New Zealand (S)
.5411
.4682
.5143
.4046
-13.6%
Italy (Lira)
1151.1
996.11
1470.9
1157.19
+ 16.2%
Japan (Y)
125.2
108.34
124.75
98.14
- 9.4%
France (Fr)
5.18
4.4825
5.5065
4.3321
- 3.4%
Netherlands (Guilder)
1.7104
1.4801
1.8141
1.4272
- 3.6%
Malaysia (Ringgit)
2.724
2.3572
2.5945
2.0411
-UA%
Spain (Pesata)
96.69
83.67
1 14.62
90.17
+ 7.8%
Source: International Financial Statistics, International Moneiar> Fund, various issues.
Table 8. Estimated impact of Immediate Flow Through of Translation Adjustment on
Foreign Currency Debt for year end 1992
Full sample
Hedgers*
Other
t-statistic
Variable
n= 144
n = 22
n= 122
(2 tail p)
Translation
Mean
-28.93
-25.69
-29.52
.33
Adjustment
(Std Dev)
(68.71)
(44.68)
(72.33)
(.74)
(Smillions)
Adjustment to
Mean
-.60
-2.60
-.24
-2.81
Net Income
(Std Dev)
(3.72)
(8.62)
(1.60)
(.006)
Adjustment to
Mean
-.17
-.04
-.19
.93
Market Value
(Std Dev)
(.67)
(.05)
(.73)
(.36)
of Equity
*Hedgers are those firms that identified their foreign debt as a natural hedge of foreign revenues or assets for accounting
purposes, allowing them to defer realization of translation adjustments in income until the hedge unwinds or becomes
ineffective.
that the translation adjustments are significant, averaging $28.93 miUion. This is 60% of
reported earnings and 17% of the market value of equity for sample firms.
The magnitude of the immediate flow through adjustment for each firm depends on the
degree of foreign financing, the currencies of denomination, and the exchange rate changes
during the year under study. As noted earlier, the 9.1% devaluation of the Canadian dollar
against the US dollar in 1992 is roughly double the annual average for the preceeding 10
year period, but there are many years with sizeable exchange rate changes. The impact of
proposed changes to SI 650 would be material in most years, due to the high proportion of
foreign financing by Canadian firms.
Proposed immediate flow through of translation adjustments on foreign debt will there-
fore directly and materially affect reported earnings and leverage for Canadian companies.
Contractual arrangements may be affected, if they are monitored and enforced using
accounting measures. Another potential economic consequence of the proposed change is
that firms may respond by altering their foreign exchange risk management practices.
Foreign Currency Translation Practices 429
Also reported in Table 8 is the ratio of the estimated translation adjustment to both
income and the market value of equity, for firms that do and do not identify their foreign
debt as a natural hedge. Prior studies have found that firms electing hedge identification
tend to be closer to their ratio constraints, reporting low earnings and high financial lever-
age. Hedge identifiers might therefore be expected to be firms for which the immediate
flow through of translation adjustments would have a greater effect on reported earnings
and assets. In this sample, hedge identifiers do have a higher proportion of translation
adjustments to reported earnings. The impact on reported earnings is the main characteris-
tic of hedge identifiers, as the difference in the ratio of translation adjustments to market
value of equity is not significant.
CONCLUSION
Canadian firms are heavy borrowers of US funds and have traditionally not taken transla-
tion adjustments on their foreign debt to current income. The defer and amortize approach
that was adopted in 1983 is no longer internationally acceptable, under IAS 21, and is
under review. The results reported here show that the elimination of this uniquely Cana-
dian accounting method will have a significant effect on the reported earnings level, and its
volatility, for Canadian firms. As the evidence from Canada and elsewhere indicates con-
sistendy that management behavior is affected by how foreign currency translation adjust-
ments must be reported, a reduction in financial reporting flexibility can be expected to
impose costs on Canadian companies. Such local costs are presumably smaller than the
global benefits of creating more comparable financial reporting information.
Acknowledgments: Funding provided by the Canadian Academic Accounting Association and the
Canadian Institute of Chartered Accountants is gratefully acknowledged.
APPENDIX: EXAMPLES OF DISCLOSURES ON THE TRANSLATION OF FOREIGN
DEBT
Abitibi-Price (Hedge identifier)
On the December 31, 1992 Balance Sheet, an unrealized loss on translation of long -term
debt payable in U.S. funds is disclosed, in the amount of $6.9 million.
Significant Accounting Policies include the following description of the treatment of
translation adjustments on foreign debt: " Exchange gains or losses on translation are
included in earnings, with the exception of those which arise on the translation of long-
term debt payable in U.S. funds. Such gains or losses which relate to debt that hedges the
net investment in self-sustaining U.S. subsidiaries and joint ventures are included in share-
holders' equity, while the balance, if any. which relates to debt that is hedged by a future
income stream denominated in U.S. funds, is deferred and included in earnings in the same
years as the income stream".
Foreign currency denominated debt identified in a footnote include the following:
430 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No, 4, 1998
$74.6 million of 10.65% Sinking Fund Debentures, Series H, maturing 2000 (U.S. $58.7
million)
$190.6 million Floating Rate Term Loan. Maturing 1994 (U.S. $150 million)
$122.5 million Floating Rate Cumulative Term Loan, maturing 1993 (U.S. $96.4 mil-
lion)
Canadian Pacific Limited (Not a Hedge identifier)
On the December 31, 1992 Balance Sheet, foreign currency translation adjustments of
$219.4 milhon are disclosed, a portion of which may relate to long-term debt.
Significant Accounting Policies include the following description of the treatment of
translation adjustments on foreign debt: " With the exception of unrealized gains and losses
on long term monetary assets and liabilities, which are being amortized to income over the
remaining lives of the related items, foreign currency gains and losses are included in
income immediately".
There are no foreign currency denominated debt issues specifically identified in the foot-
note describing long term debt, although a Deutsche Mark bond issue had been outstanding
in the amount of $25 million as at year end 1 99 1 . Rather, a general statement is made about
currency denomination of outstanding debt, as follows: "At December 31, 1992, foreign
currency long term debt, denominated principally in United States dollars, amounted to
$4,509.6 million.'"
NOTES
1. The lASC issued E32 "Comparability of Financial Statements" on January 1. 1989.
2. Foreign debt identified as a natural hedge of foreign assets or revenues receives hedge account-
ing treatment. Immediate flow through of translation adjustments is the benchmark treatment for
foreign debt not designated as a natural hedge.
3. Three revised criteria for hedge accounting were introduced in the September 1993 Exposure
Draft. Firms are required to ( 1 ) explicitly designate the hedging instrument and the hedged expo-
sure at the inception of hedge accounting, to (2) claim a high degree of correlation between the
currencies if different currencies are used in the hedging instrument and in the hedged exposure,
and to (3) claim a high probability that a change in the reporting currency amount of the exposure
being hedged will counterbalance exchange adjustments on the hedging instrument.
4. Houston and Mueller (1988) report a 16 percent reduction in outright forward transactions
between US banks and nonfinancial customers during the SFAS 52 implementation period ( 1980
- 1983). despite a 44 percent increase in total foreign exchange trade by banks over the same
period. Their exploration of corporate hedging activities shows less overt financial hedging fol-
lowing the replacement of SFAS 8 with SFAS 52, and they offer survey results attributing the
reduction in hedging to the change in accounting standards.
5. The April/May edidon of the Bank of Canada review contains an annual analysis of Canada's
trade. Trade with the U.S. is typically 70 to 80% of the total and there is a heavy emphasis on
natural resource exports.
6. While Rotenberg (1989) also observed 22 hedge identifiers in a related but different sample of
Canadian firms, for an earlier time period, only 6 of the hedge identifiers are the same companies
in both samples.
Foreign Currency Translation Practices 431
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of Applied Corporate Finance, (Fall): 19-29
Beier, R.J. and R.H. Herz. 1994. "A User's Guide to Currency Hedging." Financial Executive. (July/
August): 31-34
Belk, P. A. and M. Glaum. 1990. "The Management of Foreign Exchange Risk in UK Multinationals:
An Empirical Investigation." Accounting and Business Research, 3-13.
Booth, L. and W. Rotenberg. 1991. "Evidence on Corporate Preferences for Foreign Currency
Accounting Standards." Journal of International Financial Management and Accounting.
(Summer): 133-159
CICA Handbook, Section 1650 and related Exposure Drafts. Foreign Currency Translation.
CICA, 1993, Financial Reporting in Canada: A Survey of Annual Reports of 300 Canadian Public
Companies for 1992, Toronto.
Dukes, R.E. 1978. .4/; Empirical Investigation of the Effects of SEAS 8 on Securit}' Return Behavior.
Financial Accounting Standards Board Research Report.
Evans, T.G., W.R. Folks and M. Jilling. 1978. The Impact of SFAS No. 8 on the Foreign Exchange
Risk Management Practices of American Multinationals: An Economic Impact Study. Finan-
cial Accounting Standards Board Research Report.
Houston, C. 1990. "Translation Exposure Hedging Post SFAS No. 52." Journal of International
Financial Management and Accounting, 145-170
Houston, CO. and G.G. Mueller. 1988. "Foreign Exchange Rate Hedging and SFAS no. 52-Rela-
tives or Strangers?" Accounting Horizons. (December): 50-57
Hunt. C. 1993. "Currency Conundrum." CA Magazine. (November): 49-52
Rotenberg, W. 1989. "Characteristics of Canadian Firms Identifying Accounting Hedges for Foreign
Debt." Canadian Journal of Administrative Sciences. (September): 24-30
Schooley, D.K. and H. White. 1995. "Strategies for Hedging Translation Exposure to Exchange Rate
Changes: Theory and Empirical Evidence." Journal of Multinational Financial Management.
(No 4): 57-72
Watts, R.L. and J.L. Zimmerman. 1990. "Positive Accounting Theory: A Ten Year Perspective." The
Accounting Review. (January): 131-156
The International
Journal of
Accounting
Relationship of Tax and Financial Accounting Rules in
Anglo-Saxon Countries
Thomas M. Porcano and Alfred V. Tran
Miami University and The Australian National University
Key Words: Alignment; Anglo-Saxon countries; Book-tax relationship; Financial accounting:
Income tax.
Abstract: In this paper, we examine the relationship of tax rules and financial accounting rules in
Anglo-Saxon countries. In particular, we review the historical developments of the book-tax rela-
tionship in three Anglo-Saxon countries: the United States, the United Kingdom, and Australia.
We identify the major sources of divergence between the two sets of rules in these countries, and
briefly discuss the implications of an alignment of tax with financial accounting rules.
To various degrees, income tax laws in different countries rely on financial accounting
principles and practice to determine the quantum of taxable income derived from a busi-
ness. In a study conducted by the Organization for Economic Co-operation and Develop-
ment (OECD) Working Group on Accounting Standards (1987, p. 9), three main types of
relationships between financial accounting rules and tax rules were identified in OECD
member countries. First, there were countries where accounting practices were dictated by
tax rules. An example quoted was Norway where book entries contrary to tax rules were
not permitted. The second type of relationship was that accounting rules and tax rules were
independent of each other. Countries adopting this approach included the USA, the UK,
and the Netherlands. Finally, in countries such as France, Germany, and Italy, financial
statements drawn up according to accounting rules were used to determine the basis of
income tax assessment.
Nobes and Parker (1995) identify factors such as legal systems, major providers of
finance to business enterprises, influence of taxation, and strength of accounting profession
as the main causes leading to international differences in financial accounting and report-
ing. These factors also explain the international differences in the relationship of tax and
financial accounting rules. In continental European countries, typically accounting princi-
ples are part of the codified commercial law. The major providers of finance are the State
Direct all correspondence to: Alfred Tran, Department of Commerce, The Australian National University, Can-
berra, ACT 0200, Australia; Tel: (612) 6249-51 18; Fax: (612) 6249-5005; E-maii: Alfred.Tran@anu.edu.au.
The International Journal of Accounting, Vol. 33, No. 4, pp. 433-454 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1998 University of Illinois
434 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
or banks who are the users of financial reports, so uniform financial statements are pro-
duced to serve the purposes of credit provision, taxation, and economic planning by the
State. In these countries, accounting profit and taxable income are used by a rather homo-
geneous group of users and the two numbers are expected to be more or less identical.
By contrast, Anglo-Saxon countries generally adopt a common law system. The major
providers of finance are the public who demand true and fair or fairly presented financial
statements based on generally accepted accounting principles (GAAP) to assess manage-
ment performance and make investment decisions. Corporate law in these countries typi-
cally only requires a provision of periodic financial reports to investors and other users,
leaving the detailed accounting rules to be prescribed by the accounting profession and cor-
porate regulators. On the other hand, tax law in these countries typically imposes tax on
income without defining precisely and exhaustively the meaning of the word. It is up to the
courts and the tax administrators to interpret the meaning of income for tax purposes. Thus,
accounting income and taxable income are two concepts developed by different authori-
ties, and used by heterogeneous groups of users serving different purposes.
Lamb et al. (1995) compared the influence of taxation on accounting in four countries to
determine whether there was a clear distinction between Anglo-Saxon countries and some
continental European countries. The countries studied were the UK. the USA, France and
Germany. They found some support for the claim that it is possible to distinguish Anglo-
Saxon countries from continental European countries according to the relative strength of
tax influence on accounting. However, they also found that France could be distinguished
from Germany using the same criteria, and the UK could be distinguished from the USA.
Thus, the dichotomy of Anglo-Saxon model and continental European model oversimpli-
fies the complex pattern of reciprocal influence observed between taxation and financial
reporting in the countries under study.
In recent years, due to globalization of capital markets, large corporations in continental
European countries which seek quotation of their shares on stock exchanges in New York
and London are required to produce financial reports in accordance with the accounting
rules of the USA and the UK. This development has helped to promote the acceptance of
international accounting standards which are based mainly on the GAAP of Anglo-Saxon
countries. There is a tendency for corporations in continental European countries to pro-
vide two sets of financial reports: financial reports for individual companies according to
domestic accounting rules (which have a close link to tax rules) for domestic users, and
consolidated financial reports based on international accounting rules for use by interna-
tional investors and regulatory agencies (Nobes & Parker, 1995; Whittington, 1995).
In an opposite direction, there have been calls for an alignment of accounting profit and
taxable income in Anglo-Saxon countries such as Australia, the UK, and the USA. It has
been argued that alignment of the two sets of rules could improve the perceived equity of
the tax system, reduce tax compliance costs, and enhance tax compliance levels. For exam-
ple, in the early 1980s a large number of US firms reported significant earnings in their
tmancial statements but paid very little in taxes; thus a book income adjustment of the
alternative minimum tax' was introduced to tax the difference. If the reported accounting
profit in a firms financial statements exceeded the minimum taxable income, then the firm
had to pay a tax on a portion of the excess.
In this article, we review the historical developments of the relationship of tax and finan-
cial accounting rules in three Anglo-Saxon countries, the USA, the UK, and Australia, and
Accounting Rules in Anglo-Saxon Countries 435
demonstrate that the book-tax relationship varies among Anglo-Saxon countries. We then
compare the objectives and the evaluation criteria of the tax and financial reporting sys-
tems and identify the main areas of divergence of the two sets of rules in these countries.
Although not specifically examined, similar divergence of tax and financial accounting
rules can also be found in Canada (see e.g., Denega, 1965; Royal Commission on Taxation,
1966) and New Zealand. We conclude with an analysis of the feasibility and desirability of
alignment.
The purpose of this article (and its contribution to the literature) is twofold. First, by ana-
lyzing previous literature, we present a systematic description of the book-tax relationship
in Anglo-Saxon countries, so as to enhance the understanding of this relationship and to
stimulate further discussion and research on this relationship. Second, at various times the
American, the British, and Australian governments have considered trying to achieve
greater alignment of tax and financial accounting rules. We provide a foundation to enable
policymakers in the countries where book- tax alignment is currently an issue (e.g., Austra-
lia) to evaluate the feasibility and desirability of such an alignment objective and to make
better informed policy decisions.
The remainder of the article is organized as follows. The historical developments of the
book-tax relationship in three Anglo-Saxon countries are reviewed country by country in
the following section. Next, we identify the sources of divergence of the two sets of rules
in these countries. In the final section, we summarize our findings from the literature
review and briefly discuss the feasibility and desirability of a book-tax alignment.
HISTORICAL DEVELOPMENTS IN THREE ANGLO-SAXON COUNTRIES
Although in the OECD study, GAAP and tax rules are considered to be two separate sets
of rules in Anglo-Saxon countries, a closer examination of the tax laws in these countries
reveals some degree of connection between the two. The three subsections below review
the historical developments of the book-tax relationship in the USA, the UK, and Australia.
The United States
In the USA, Federal income tax is based on the taxable income of an individual or of a
corporation. Under the US Internal Revenue Code of 1986, as amended (the Code), com-
putation of taxable income begins with gross income. For a corporation, taxable income
equals gross income minus allowable deductions. A corporation's gross income from busi-
ness is its net sales less cost of goods sold (i.e., gross profit), plus other investment income
earned (e.g., dividends and interest) and gains from the sale of non-inventory property
(capital gains). Gross income then is reduced by allowable ordinary and necessary
expenses to arrive at taxable income. For an individual, the difference between gross
income from all sources and allowable deductions is adjusted gross income, from which
standard or itemized deductions (e.g., medical expenses and charitable donations) and
allowances for personal and dependency exemptions are subtracted to arrive at taxable
income.
US tax law has long recognized the fundamental dependence of the concept of taxable
income on approved accounting practice. Under Section 446 of the 1986 Code, taxable
436 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
income is computed according to the accounting method regularly employed in the tax-
payer's books of account, provided that the method so used clearly reflects the taxpayers
income. Thus, superficially tax rules and accounting rules in the USA are inseparable,
because taxable income from business cannot be determined without referring to GAAP.
Similar provisions could be found some 80 years ago in Section 212(b) of the Revenue
Act of 1918 (May. 1949. p. xviii). It appears that the US Congress did not want to develop
tax accounting"^ methods. Instead, it assigned this responsibility to tax administrators the
Internal Revenue Service (IRS). The US Congress did not define what is a clear reflection
of income. It did state, however, that income measurement would be subject to any subse-
quent Treasury Regulations. Thus, financial accounting rules were adopted for tax pur-
poses subject to the regulation of the US Treasury.
Between 1920 and 1960. most court decisions supported tax and financial accounting
conformity. The US Supreme Court appeared to rely on GAAP when it adopted the real-
ization principle in Eisner w Macomber ( 1920) 252 US 189. In United States \\ Anderson
(1926) 229 US 422. the US Supreme Court suggested that the accrual method used for
financial accounting purposes was acceptable for tax purposes unless it did not clearly
reflect income. Treasury Regulations and Committee Reports issued during this time
period also suggested an accord between tax and financial accounting, with indications that
GAAP clearly reflected income for tax purposes (Seago & Horvitz, 1980).
The LIFO inventory situation in the USA provides a good example of how alignment
occurs. LIFO was first used for financial accounting purposes in 1936. Gertzman (1988)
provides an historical description of the LIFO inventory method. The petroleum industry
wanted to use the method for financial accounting purposes and in 1934 its representatives
approached the American Institute of Accountants (AIA). predecessor to the American
Institute of Certified Public Accountants. The AIA granted approval in 1936. Soon after
certain other industries were permitted to use it, but official AIA approval for all firms did
not occur until 1947. The Treasury (IRS) refused to accept the method, but Congress
changed the law and permitted LIFO use for tax and financial accounting purposes. In the
Revenue Act of 1939, Congress permitted all taxpayers to use LIFO and also added the con-
formity requirement. Taxpayers who use LIFO for tax purposes also must use it for reports
or statements to shareholders, partners, proprietors, beneficiaries, and creditors. The provi-
sion was amended slightly in 1942.
Unfortunately. Congress did not provide any rationale for its decision. All Congressional
documents at that time were silent as to why conformity was required. Many believe that
conformity was required to give legitimacy to LIFO as an inventory method. Revenue Rul-
ing 74-586. 1974-2 CB 156. indicates that the purpose of the conformity requirement was
to give assurance that the LIFO method clearly reflects income. In a 1979 Tax Court case,
the court indicated that the underlying intent behind the LIFO conformity requirement was
to ensure that the use of LIFO for tax purposes conformed as nearly as possible to the best
accounting practice in the trade or business in order to provide a clear reflection of income.
In a 1981 District Court case,^ the court reiterated the Tax Courts position and indicated
that the conformity requirement was designed to establish prima facie evidence that at the
time of election the taxpayer believes that LIFO provides a clear reflection of income.
Thus, the alignment imposed by Congress was designed to assure that the taxpayer used
an accounting method that clearly reflects income. The fact that it would be used for finan-
cial accounting purposes established the clear reflection of income and shows that in this
Accounting Rules in Anglo-Saxon Countries 437
instance Congress implicitly relied on financial accounting in deciding what was appropri-
ate for tax purposes.
In the late 1960s the Tax Court and Seventh Circuit Court of Appeals, in finding for the
taxpayer, indicated that GAAP did provide a clear reflection of income, clearer than the
method the IRS wanted to impose.^ In 1970, the Court of Claims also held that GAAP were
admissible evidence in determining whether income was clearly reflected. Seago and Hor-
vitz (1980, p. 7) further noted that the court suggested that the goal should be to reconcile
business and tax treatment of an item and not to drive them further apart.
However, on balance, the reliance on GAAP for tax purposes began to decrease in the
1960s. In 1961, the US Supreme Court clearly stated that a method based on GAAP did not
imply that for tax purposes income was clearly reflected and therefore binding on the gov-
ernment. In a similar case four years earlier the Supreme Court also disregarded the tax-
payers financial accounting method because it did not clearly reflect income.'^ The Court
also developed an all events test to determine if certain transactions clearly reflect income,
regardless of their financial accounting treatment.' ' In 1976, in Eastman Kodak Co. v. the
United States (1976) 534 F.2d 252, the Claims Court rejected the use of GAAP because
although the taxpayers method was in conformity with GAAP it violated the all events test
and as such did not clearly reflect income.
Recognizing the growing divergence of the two sets of rules in 1970, the US President's
Task Force on Business Taxation (1970) noted that the divergence had resulted in unnec-
essary complexity and controversy. It suggested that the objective of GAAP and tax
accounting was basically similar — the determination of net income of the business on an
annual basis. The Task Force, which included academicians, tax policy analysts and prac-
titioners, recommended that the US Treasury Department and Congress take steps to
reduce the differences between the two sets of rules. The Treasury Department appeared to
respond to this by adopting some type of conformity policy: the IRS announced that
changes in accounting methods would be approved only if the taxpayer was changing to a
method also used for financial accounting purposes (IRS, 1971). However, the American
Institute of Certified Public Accountants (AICPA) issued a policy statement in favor of
closer conformity between financial and tax accounting but opposed any mandatory finan-
cial statement eligibility test (The Tax Adviser, 1971). It was concerned that such a
requirement would negatively impact the formation of accounting principles. Accounting
principles might start to favor tax-saving methods.
The conformity program was short lived and apparently not very far-reaching. There was
no Congressional action on the issue and by 1981 the IRS appeared to be moving away
from conformity. The AICPA expressed a general presumption that conformity was desir-
able provided (a) it acknowledged the existence of factors which might overcome that pre-
sumption, and (b) it did not have a materially adverse effect on the improvement or
application of GAAP (Raby & Richter, 1975). Its position at that time was to favor confor-
mity of tax rules to financial accounting rules but generally to oppose conformity of finan-
cial accounting rules to tax rules (Weinman. 1981). Apparently the AICPA did not want
the government to determine GAAP.
The final and most complete rejection of GAAP and financial accounting for tax pur-
poses occurred in a 1979 US Supreme Court case. Thor Power Tool (]919) 439 US 522. In
this case the taxpayer followed GAAP completely in accounting for its inventory. The
Court agreed fully with the IRS in ruling that the method did not clearly reflect income;
438 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1 998
conforming to GAAP did not create a presumption in favor of the taxpayer. GAAP appear
to have had no relevance in determining a clear reflection of income for tax purposes. The
Court clearly stated the different objectives of financial accounting and tax accounting and
suggested that such differences precluded an accord between them. This decision, and spe-
cific articulation of the differences, is often cited and is far reaching in that it is applicable
to all methods of accounting, not just the inventory procedure in question.
- Initially financial accounting and tax accounting were in some accord. However, the reli-
ance on financial accounting has eroded over time. The unstated definition of clear reflec-
tion of income led the IRS and the courts to define the phrase based on tax policy objectives
and concepts. This produced a divergence because such objectives do not appear to be in
conformity with those of financial accounting. An additional concern of tax policymakers
was the potential negative effects of conformity on tax revenues and/or capital markets.
The potential negative effect of conformity on the tax policy objectives of the investment
tax credit (ITC) was cited in the 1970s. Here concern was expressed that financial account-
ing rules might impede the fiscal (tax) policy goals underlying the implementation of the
ITC (Arnold & Keller, 1980).
Concern over the negative effects of earnings management on tax revenues was noted by
the US Supreme Court in the Thor Power Tool case where it stated that if management's
elections among acceptable options were dispositive for tax purposes, then a firm could
decide unilaterally, within limits only dictated by accountants, the tax it wished to pay.
Additionally, numerous concerns have been expressed about earnings management as a
result of the US Tax Reform Act of 1986, especially the enactment of the alternative min-
imum tax book income adjustment. Evidence of earnings management has been found by
Boynton et al. (1992), Dhaliwal and Wang (1992), Gramlich (1991, 1992), Guenther
(1994), Guenther et al. (1996). Manzon (1992), Matsunaga et al. (1992), Maydew (1995),
Mills (1996), and Scholes et al. (1992).
The United Kingdom
The Income and Corporation Taxes Act (ICTA) 1988 in the UK charges tax according to
the sources from which income arises: land, business, employment, etc. For historical rea-
sons such as privacy protection (Ross & Burgess, 1991, p. 36), income is classified and
chargeable to tax under five Schedules (A, C, D, E and F) depending on its source. Busi-
ness profits are covered by Schedule D. Incomes under different Schedules are aggregated
into total income from which reliefs (e.g., medical insurance and personal reliefs) are
deducted to calculate taxable income. The taxable income of a company is computed in
much the same way as that of an individual.
According to Section 1 8( 1 ) of ICTA 1988, tax under Schedule D is charged on the annual
profits of a business. It is the profit or net income, rather than gross income as in the USA,
that is brought into the tax base. However, tax legislation in the UK does not prescribe the
rules to determine the annual profits for tax purposes. One reason why the British tax stat-
ute imposes tax on profits without referring to accounting principles or practice is that
when income tax was re-introduced in the UK in the early nineteenth century,'" there were
still no widely accepted accounting principles on which to rely. By contrast, when the USA
enacted its income tax legislation after the Sixteenth Amendment to the Constitution in
/
Accounting Rules in Anglo-Saxon Countries 439
1913,'^ commercial accounting was already well developed. According to May (1949, p.
xviii), when the Revenue Act of 1918 was drafted by the US Treasury, technical input had
been contributed by a triumvirate of a distinguished economist, an outstanding accountant
and a brilliant lawyer. Presumably, the role of the accountant in the triumvirate was to
operationalize the concept of income as it was applied to business by referring to account-
ing principles. Thus, Edwards (1976, p. 302) reckoned that if accounting procedures had
been well developed at the time income tax was introduced in Britain, accounting profit
would have been adopted by the early UK income tax legislation.
Nonetheless, it was decided in 1892 in Gresham Life Assurance Co., Ltd v. Styles 3 TC
185 that profits must be ascertained on ordinary principles of commercial trading. This
principle has been amplified in later cases. In Duple Motors Bodies Ltd v. Ostime (1961)
39 TC 537, Viscount Simonds said (at p. 566):
. . . two considerations must be borne in mind: first, . . . the ordinary principles of commer-
cial accounting must, as far as practicable, be observed, and, secondly.... the law relat-
ing to income tax must not be violated. . .that is to say, by one means or another the full
amount of profits or gains must be determined.
Thus, a presumption made in the British income tax law is that the taxpayer shall prepare
a profit and loss account for each accounting period in accordance with GAAP, and the
profit computed in this account will form the basis of the income tax assessment, subject to
any adjustments that may be required by the statute or by precedents established by the
courts.
Even though ordinary principles of commercial accounting must be considered in deter-
mining the amount of taxable profit, the UK courts have recognized the subjectivity of
accounting methods and have eschewed the accounting approach on many occasions (Hill,
1996). Freedman (1987, p. 70) noted that the court's original intention in referring to
accounting practice was to use this as a reflection of the ordinary, natural meaning of prof-
its, and not to incorporate accounting practice and all its developments into tax law. Thus,
in Heather v. P.E. Consultancy Group Ltd (1973) 1 All E.R. 8, Lord Denning said (at p.
13):
The courts have always been assisted greatly by the evidence of accountants. Their
practice should be given due weight; but the courts have never regarded themselves as
being bound by it. It would be wrong to do so.
Radcliffe (1993) observed that the UK courts exercised their discretion to override
GAAP in three circumstances. First, if a statutory provision required adjustment of
accounting profit, the provision would prevail over accounting treatment; e.g.. non-deduct-
ibility of entertainment expenses. Second, any accepted accounting method was subject to
review by the courts to determine if it was the correct principle of commercial accountancy
to be applied in the circumstances, especially when there existed more than one acceptable
method. Third, accounting principles must yield to certain underlying principles of tax law
established by judicial decisions. Examples of principles of tax law established by the
courts are (a) the distinction between capital and revenue expenditure; (b) the principle that
440 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1 998
neither profits nor losses may be anticipated, and (c) the principle that revenue expenditure
is deductible in the year in which it is incurred.
The degree to which UK courts were receptive to GAAP varied over time. Freedman
(1995. p. 435) noted that Minister of National Revenue v. Anaconda American Brass Ltd
(1956) AC 85 and Willingdale v. International Commercial Bank Ltd^^ (1978) 52 TC 242
marked the peaks of assertion of judicial supremacy over GAAP in determination of tax-
able profit. However, a few recent court decisions, notably Gallagher v. Jones^^ (1993)
STC 537 and Johnston v. Britannia Airways (1994) STC 763 showed the tendency of the
UK courts to accept Statements of Standard Accounting Practice (SSAPs) as the correct
principles of commercial accountancy to be applied to determine taxable profit in prefer-
ence to principles of tax law. Freedman (1995) suggested a few reasons for this trend:
increased professionalism, increased comprehensiveness of financial accounting and
reporting standards, and the legislative recognition conferred to these standards. Appar-
ently the changes in the accounting environment in the UK have assured the judges that
they can rely on accounting standards which have gone through the rigorous formulation
process of the standard-setter the Accounting Standards Board (ASB).
Broke (1995), Macdonald (1995), and White (1987) argued that the courts could con-
tinue to place reliance on accounting concepts and standards. Some politicians also
believed that there is a strong case for harmonization of accounting and tax treatment of
profits, because this would bring the UK into line with many other countries in the Euro-
pean Union, and would reduce compliance costs and opportunities for tax abuse. ^^
However, Whittington (1995, p. 452), who has served on the UK Accounting Standards
Board and on the Meade Committee (which reviewed the UK income tax and pubhshed a
report in 1978), strongly argued that the principles of taxation (e.g., equity, neutrality, and
administrative effectiveness) would not allow one to adopt accounting standards as a basis
for corporate tax because of the different objectives of the two systems. Administrative
effectiveness requires certainty of measurement, and low cost to the taxpayer and tax col-
lector. To that end, the tax system tends to be based on rules which are intended to be pre-
cise, and the measurement rules tend to be based on presently existing rights to receive, and
obligations to pay, as a result of transactions, rather than on the accruals basis which is
more subjective and contentious. Accounting standards, on the other hand, are primarily
concerned with reporting past financial performance, present position, and future prospects
of a business to external users. This involves trading off relevance against reliability. To
provide relevant information to users of financial reports, there has been a tendency to de-
emphasize the bottom line profit figure because a single number cannot meet the needs of
all users, and instead to provide information which involves a high level of estimation and
subjectivity, such as strategies and intentions of management. Thus, there is a need for the
two sets of rules to be separately developed. This is in line with international trends.
Freedman (1987, 1993, 1995) and Green (1995) also maintained that separation of two
sets of rules is desirable in furtherance of both equitable and rational taxation and good
practices in financial reporting. The fact that the legal status of accounting standards has
been enhanced does not mean that they are suitable for use as a basis for determining tax-
able income, because they are written for financial reporting purposes and not for tax pur-
poses.
Accounting Rules in Anglo-Saxon Countries 441
Australia
Income tax was first introduced in Australia when Tasmania imposed withholding tax on
dividends, annuities and rents in 1880. A general income tax was first levied by South Aus-
tralia in 1884. The Commonwealth of Australia introduced personal income tax in 1915
(Smith, 1993).
Section 17 of Income Tax Assessment Act 1936 (ITAA) levies income tax at the rates
declared by the Parliament on the taxable income derived by any person during a year. A
person can be an individual or a company. In calculating taxable income, the allowable
deductions incurred by a taxpayer are subtracted from the assessable income derived. The
assessable income of a taxpayer includes the gross income derived directly or indirectly
from all sources, but gross income is not defined in the Act. In the case of a business, gross
income refers to the proceeds from business operations. Expenditures, to the extent to
which they are incurred in producing the assessable income, or are necessarily incurred in
carrying on a business for the purpose of producing such income, are allowed as deduc-
tions, provided they are not of a capital or private nature.
As far as income from business is concerned, the taxing scheme in Australia is at odds
with the schemes in the other two Anglo-Saxon countries. First, the ITAA never refers to
the accounting methods adopted by the taxpayer as in the US Code. Second, the gross pro-
ceeds of a business directly enter into the tax base, rather than its profits as in the UK tax
legislation. As a result, UK judicial precedents which applied the correct principles of com-
mercial accountancy in the determination of taxable profit do not appear to have had any
significant application in Australia, despite the historical connection of the judicial systems
of the two countries. Thus, unlike the USA and the UK, there is a lack of a formal relation-
ship between tax and financial accounting in Australia. Nonetheless, Herring (1986) noted
that the ITAA has incorporated some accounting practices. For instance, trading stock is
taken into account under s.28 in determining taxable income, and depreciation deduction
for plant is allowed under s.54 of the ITAA.
In general, it is not the gain that is the direct subject of income tax. Rather, the flow of
gross business proceeds directly enters into the tax base, and is aggregated with the gross
income from other sources to form assessable income. Business expenses and losses then
are deducted therefrom in arriving at taxable income. The distinction of this flow concept
of income originated from trust law and the gain concept of income adopted in the com-
mercial world is well explained by Parsons (1986).
Generally speaking, accounting principles and practices play a limited evidentiary role
in the development of judicial precedents in Australia (Blaikie, 1981). There have been
cases where the judge looked to GAAP in reaching a decision, but the judge emphasized
that though accounting principles and practices might assist, the Court always had the final
say and was never bound by them. Herring (1986). however, observed that in recent years
the judiciary appears to be placing more weight on accounting evidence, probably because
business transactions have become more and more complex and accounting standards have
received legal backing.
Justice Hill (1996) provided a comprehensive review of the role of GAAP in Australian
tax cases. He observed that in the context of income tax, accounting principles were some-
times determinative, sometimes a guide, and sometimes rejected altogether. Accounting
evidence is relevant in determining whether an amount received is income derived, and the
442 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
timing of income derivation.^ For tax purposes, judicial precedents suggest that only busi-
ness income can be recognized on the earnings basis; other income is generally recognized
on the cash receipts basis. When the tax law comes to taxing business income, GAAP are
expected to play a role.~~ However, one difficulty for the court to rely on accounting evi-
dence is that expert accountants assisting the two opposing parties may differ in their views
as to what is the correct accounting treatment accorded to a particular situation.
The income capital distinction is a principle entrenched in tax law, but is no longer an
accounting principle. Accounting evidence has rarely been accepted by the courts as eluci-
dating the distinction between income and capital. In deciding whether an expenditure or
loss is an allowable deduction, the courts have taken a legal or jurisprudential analysis in
interpreting the word "incurred." Accounting evidence has little part to play in deciding the
time or incurrence."
The matching principle in financial accounting is not accepted for tax purposes. How-
ever, Hill (1996, p. 33) observed that the Australian courts did at times require that expen-
diture be referable to the year(s) of income." Thus, while no expenditure is deductible
unless it has been incurred, it does not mean that an expenditure always is deductible in the
year of incurrence. Deduction must be claimed in a later year if the expenditure is referable
to that year and not to the year in which it is incurred. This principle of referability appears
to be an incomplete application of the matching principle.
The lack of a formal relationship between accounting rules and tax rules in the Austra-
lian tax laws has prompted calls for the adoption of GAAP in determining taxable income
for various reasons. In 1950, in a joint representation to the Commonwealth Treasurer, the
Associated Chambers of Commerce of Australia, the Associated Chambers of Manufactur-
ers of Australia, and the Institute of Chartered Accountants in Australia submitted that the
adoption of accounting principles, especially the matching principle, for tax purposes
would assist commercial progress by encouraging the use of proper accounting practices
and by basing the tax upon the true income rather than an artificial or distorted income as
in the ITAA. The Commonwealth Treasurer referred the submissions to the Common-
wealth Committee on Taxation for examination and recommendations. The Committee
(1954) noted that matching costs and income created many difficulties in practice. After
examination, the Committee concluded that the tax act had been working satisfactorily for
both the tax collectors and the taxpayers, so it recommended no major change to ITAA.
In 1975, the (Asprey) Taxation Review Committee (1975, ch. 8) reported that submis-
sions had been received suggesting that net income for tax purposes should be determined
by GAAP, subject to certain specific provisions in the tax legislation. The Committee
rejected these proposals, because the law could not resign its function of determining the
basis of income tax in favor of the professional bodies and business organizations which
played a large part in formulating accounting principles. Also, in many areas, alternative
procedures were available in accounting standards and a set of principles generally
accepted by companies had yet to be developed. The Committee, however, conceded that
company income tax might become a simple tax if the company already calculated its
income on the same or very similar basis. Accordingly, the proper approach was to narrow
the differences between taxable income and accounting profit. To build in some flexibility,
the Committee felt it necessary for the Commissioner of Taxation to have statutory author-
ity to adopt accounting principles if he considered adoption would be reasonable in the cir-
Accounting Rules in Anglo-Saxon Countries 443
cumstances. However, since the publication of the Committees report, no action has been
taken by the Parliament to confer such authority on the Commissioner.
Westworth (1985) observed that accounting standards were a codification and standard-
ization of current practices rather than a logical extension of agreed principles. They were
developed by a process of consensus rather than logical reasoning and were subjective.
Accounting profit could not become the basis on which taxable income was calculated
because it lacked certainty, and because tax rules were used to provide incentives under
general economic policies.
On the other hand. Parsons (1986) pointed out that income tax is based on a concept of
income that was designed for a different purpose. The judicial concept of income as
entrenched by court decisions is based on the notion of "flow" originated from trust law,
rather than an ideal notion of "gain" used in economic analysis. As such, the income tax
system lacks coherence of principle and a claim to fairness. Accounting profit may be a
step closer to the notion of gain, but a complete adoption of that notion requires that the
realization principle be abandoned.
Cooper (1986) referred to literature in Australia, Canada, the UK, and the USA and found
that invariably commentators and law reform authorities saw the conformity of tax to financial
accounting as a major goal of tax reform. He examined the rules of tax accounting and con-
trasted them with those in financial accounting, and concluded that to narrow the discrepancy
between tax and financial accounting as suggested by the Asprey Committee, the legislature
or the judiciary must import into the tax system accounting principles which are not at present
consistent with tax law but which can be used more accurately to determine profit.
In addressing the simplification debate, Boucher (1991, p. 282), then Commissioner of
Taxation, suggested that one possible way to simplify the tax system was to improve
accounting standards to make them robust, clear and otherwise suitable for the determina-
tion of the tax base, then to adopt them to determine taxable income. Another possibility
was to treat a group of companies as a single tax entity so as to reduce complexity in areas
such as rollover and loss transfer provisions.
In a report on an inquiry into the Australian Taxation Office, the Joint Committee of
Public Accounts (1993, paragraph 5.30) of the Commonwealth Parliament recommended
a redraft of the ITAA and suggested that the possible alignment of the taxation law with
accounting standards and concepts would be a fundamental change to be considered.
Thus, the alignment option is likely to be on the agenda of the tax reform initiative of the
current federal government.
If one set of rules can serve two systems well, compliance with both tax law and corporate
law would be much easier for corporate taxpayers. However, alignment of tax rules with
accounting rules presupposes suitability of financial accounting rules to achieve the objec-
tives and criteria of the income tax system. Unfortunately this may not be the case. In the
next section, the major causes of divergence of the two sets of rules are examined. The diver-
gence is due mainly to the different objectives that the two sets of rules are intended to serve.
SOURCES OF DIVERGENCE OF TWO SETS OF RULES
Fayle (1990) noted that when a legally-oriented objective (such as restricting dividends to
be paid only out of profits of a company) is to be achieved in the accounting standard-set-
444 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
ting process, certainty of calculation is the main emphasis. When the objective is to provide
information to control the performance of a business and to judge past success and future
potential, judgment and guesses are important. As modem accounting rules are intended to
produce information of which the protection of capital against unwarranted dividend dis-
tributions is but one of the many objectives, accounting rules provide a too subjective mea-
surement of profit to meet the need of tax laws which demand a high level of precision.
Fayle (1990) identified three types of relationships between tax and financial accounting
rules. First, there are accounting standards which have some degree of symmetry with the
tax laws. Second, there are accounting standards which cause divergence between account-
ing profit and taxable income. Finally, there are those accounting standards which are not
relevant to tax. Some standards in the last category may, however, impound useful infor-
mation that may assist indirectly in the tax compliance process.
The divergence of the two sets of rules does not suggest anything wrong with either set
of rules. They differ because they are intended to achieve different objectives.
Different Objectives of the Two Systems
The objectives of each system appear to be very different. The tax system is part of the
overall wealth redistribution system." The primary objective of a tax system is to raise
revenue for government programs. Additionally, governments use the tax system to exert
control over the economy, to accomplish social objectives, and for political purposes. Bal-
ancing these objectives is a concern that the tax system meet certain criteria or standards.
A tax system should be equitable, efficient (neutral), continuous, certain, convenient, and
economical (see e.g., James & Nobes, 1978; Krever, 1987; Rosen, 1992; Smith. 1776;
Sommerfeld et al., 1992; Stiglitz. 1988). At times these objectives and criteria may be in
conflict during tax policy decision making, but presumably to some extent the government
is aware of such conflicts when it makes law.
The objective of general purpose financial reporting as set forth in the Australian State-
ment of Accounting Concepts SAC 2 is to provide information useful to users for making
and evaluating decisions about the allocation of scarce resources. General purpose finan-
cial reports (GPFR) are those intended to meet the common information needs of users
who are unable to command information tailored to their specific needs. GPFR disclose
information relevant to the assessment of performance, financial position, and financing
and investing, including information about compliance. According to the Australian State-
ment of Accounting Concepts SAC 3, the information in GPFR should possess such qual-
ities as relevance, reliability, materiality, timeliness, comparability, and understandability.
Similar financial reporting objectives and qualitative characteristics of information can be
found in the US Statements of Financial Accounting Concepts, and the UK Statements of
Principles. Within this context certain principles, assumptions and concepts apply, such as
accounting entity, accounting period, historical cost, realization, matching, going concern,
conservatism, and consistency. In recent years, there has been a tendency to shift the focus
of financial reporting from the profit and loss (or income) statement to the balance sheet,
and to de-emphasize the profit figure" which is relevant to assessment of tax.
In the Thor Power Tool case, the US Supreme Court articulated these differences, noting
that the primary goal of financial accounting is to provide useful information to manage-
Accounting Rules in Anglo-Saxon Countnes 445
ment, shareholders, creditors, and others interested parties, and that the major responsibil-
ity of the accountant and auditor is to protect these parties from being misled. In contrast,
the primary goal of the tax system is the equitable collection of revenue and the major
responsibility of the administrator is to protect the public fisc. The US Supreme Court went
on to state that given the diversity of objectives, any presumptive equivalence between tax
and financial accounting would be unacceptable. This also is true for the UK and Australia.
Tax rules differ from GAAP because law-makers and administrators adopt concepts and
principles which reflect the objectives and criteria of the tax system. We group these dif-
ferences into four broad categories: (a) differences in the timing of recognition of income
and expenditure; (b) differences arising from government policy decisions; (c) differences
in the way of determining the quantum of taxable capital gains and how they are included
in taxable income, and (d) differences due to the principle of substance over form or due to
anti-avoidance measures. These categories are not mutually exclusive and are by no means
exhaustive. They are briefly examined below.
Timing Differences
One reason why income has been selected as a tax base is that income is thought to be a
good measure of a person's capacity to pay tax. To ensure the taxpayer has the wherewithal
to pay tax, traditionally income is not considered to have been derived for tax purposes
until the cash is received, or the taxpayer has control over the funds. This wherewithal to
pay principle is explicitly recognized as a tax accounting principle in the USA, but is only
implicitly applied in the tax laws of the UK and Australia. An important influence of finan-
cial accounting on income tax law is that the earnings basis of accounting based on the real-
ization principle has been accepted as a proper basis to recognize business income for tax
purposes. Thus, only income from non-business sources (e.g., property and employment)
is recognized on a receipt basis; business income is derived when goods are delivered or
services are rendered. By the same token, an expenditure is considered to have been
incurred for tax purposes only when the taxpayer has paid for it, or has committed to a def-
inite liability to pay.
On the other hand, due to the variety and complexity of business activities, flexibility has
been built into financial accounting rules which allow management discretion to choose
among a number of approved accounting methods, especially in the areas of cost allocation
and asset valuation where the matching principle plays an important role and where subjec-
tive judgment is needed. Also, the traditional conservatism or prudence concept in finan-
cial accounting requires recognition of doubtful income items to be postponed, and
recognition of doubtful expenses or losses to be brought forward. Tax laws require cer-
tainty and precision, and allow little room for subjectivity in the applications of the match-
ing principle and the prudence concept. Thus, neither income (profit) nor expenditure
(loss) can be anticipated. Precautionary and contingency provisions charged against
income, such as general provisions for doubtful debts and warranties, are not allowed as
deductions for tax purposes until such time as the contingencies become crystallized.
Thus, due to the wherewithal to pay principle (and the consequential emphasis on cash
flows) and the desirable feature of certainty and precision, the timing of derivation of
income and incurrence of expenditure and losses in tax rules may be different from the tim-
446 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
ing of recognition of the same items for financial accounting purposes. These timing dif-
ferences cause some items of income and deduction to appear in tlnancial accounts for one
period, but to impact tax HabiHty of another period.
Non-Revenue Raising Functions of Income Tax
The income tax was originally introduced to raise revenue for the government. Since the
1930s, different governments have been using the tax system as a means to regulate eco-
nomic activities. Accelerated depreciation, for instance, is widely adopted in many coun-
tries to encourage investment in plant and machinery which is essential for economic
growth. Reliefs also have been granted to specific industries as a result of policy decisions
or political pressures. In Australia, for example, there have been support for the film indus-
try, preferential treatment of the gold-mining industry, and concessions given to primary
producers.
Each time income tax is used as a policy instrument to achieve economic, social, or polit-
ical objectives other than revenue raising, special treatment will be accorded to certain
types of income or expenditure, and taxable income will be driven further away from
accounting profit. Alignment of tax rules with GAAP means that the government would
have to use means other than the income tax system to achieve its policy objectives.
Treatment of Capital Gains and Losses
A profit and loss (or income) statement prepared in accordance with GAAP includes all
revenues, expenses, gains and losses arising in an accounting period, whether they are of a
capital or revenue nature. GAAP only require material items outside the ordinary activi-
ties of the business (extraordinary items) to be separately disclosed." The distinction
between capital and revenue items is, however, important in tax rules.
In the USA, following the decision in Eisner v. Macomber (1919) 252 US 189. reahzed
capital gains are regarded as part of taxable income, but special rates apply to long-term
capital gains for a variety of reasons, one being that such gains have been accumulated over
a number of years and it would be inequitable to tax them at the marginal rate of the tax-
payer in the year of realization under a progressive rate structure.
In the UK. due to the influence of the income concept in trust law, capital gains are not
considered to be income and were not subject to tax until 1965 when a capital gains tax was
introduced. The statutory provisions relating to the capital gains tax now can be found in
the Taxation of Chargeable Gains Act 1992. Similarly, in Australia, capital gains generally
were not included in taxable income until 1985. In these two countries, the dichotomy of
capital and income has resulted in some permanent differences between accounting profit
and taxable income, even since capital gains have been included in the tax base. In Austra-
lia, for instance, the capital gain realized on the disposal of an asset held for more than one
year is computed by deducting the indexed cost base from the disposal proceeds; i.e.,
only the real gain is included in taxable income. On the other hand, relief for capital expen-
ditures is not comprehensive. No deduction is allowed for amortization of purchased good-
will in Australia. A capital expenditure which does not result in creation of an asset, such
Accounting Rules in Anglo-Saxon Countries 447
as the cost of feasibility study of an abortive venture, does not attract any deduction what-
soever.
Substance over Form and Anti-Avoidance Measures
There is a tendency for financial accounting rules to recognize the importance of looking
through the legal form of transactions to their economic reality. However, the principle of
substance over form appears to be applied differently for financial accounting purposes and
for tax purposes.
To achieve the objective of financial reporting, transactions may need to be recharacter-
ized to reflect their economic substance for financial accounting purposes. Since tax is a
contribution enforced by law, naturally the legal form of a transaction is important in deter-
mining its impact on the tax liability of the transactors. Also, to achieve certainty the courts
in the UK and Australia tend to adopt a legalistic approach to interpret tax legislation.
Recharacterization of a transaction may have various unintended and unforeseen conse-
quences and may create uncertainty as to how the related parts of the tax law should apply.
Thus, an asset acquired by a lessee under a finance lease is required by GAAP to be capi-
talized and depreciated (emphasis on economic substance), but tax law in Australia
requires the lessee to deduct the rent or lease charges payable under the lease as revenue
expenditures (emphasis on legal form).
However, in particular instances where tax avoidance is apparent, tax laws in different
countries have adopted the approach of ignoring the form of transactions and regarding
only their substance and purpose to protect revenue, either through judicial interpretation
or through legislation of anti-avoidance provisions (Millett. 1988). There has been a long-
standing doctrine of substance over form adopted by the US Supreme Court to attack tax
avoidance. In the early 1980s, the House of Lords in the UK adopted a similar doctrine
by developing the principle of fiscal nullity in WT Ramsay Ltd v /^C (1981) 1 1 ATR 752,
and Fumiss v Dawson (1984) 1 All ER 530. In Australia, a general anti-avoidance measure
along similar lines (Part IV A of the ITAA) has been operating since 1981. In addition to
the general anti-avoidance measures, there are numerous specific provisions designed to
ensure administrative effectiveness, or to plug specific loopholes exploited by taxpayers to
avoid tax. For instance, entertainment expenses are generally not allowed as a deduction;
there also are restrictions on deductions of operating losses and bad debts incurred by a
company in Australia.
Thus, tax rules emphasize economic substance in areas quite different from financial
accounting rules. Also, there are numerous anti-avoidance measures in tax laws which
have the effect of deeming fictitious income to exist and real expenditure or loss to be noth-
ing. These differences are another source of divergence between taxable income and
accounting profit.
SUMMARY AND CONCLUSIONS
The different institutional arrangements in continental European countries and Anglo-
Saxon countries are summarized in Table 1.
448
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol, 33, No. 4, 1998
Table 1. Different Institutional Arrangements in Continental European and
Anglo-Saxon Countries
Continental European Countries
Anglo-Saxon Countries
Small capital markets: main
providers of finance are banks and
government
Codified law system: detailed
accounting rules are part of codified
commercial law; uniform financial
reports are prepared for:
• credit provision
• taxation
• economic planning
Homogeneous users
Taxation is an important
consideration in setting accounting
rules
Small accounting profession
Huge capital markets: main providers
of finance are the general public
Common law system:
• Corporations law requires
periodic financial reports without
setting financial accounting rules
• Tax law imposes tax on income
without precisely defining
income
Heterogeneous users
Financial reporting rules and tax
rules are developed separately
Strong accounting profession
involved in accounting rule-making
Table 2. Divergence of Tax and Financial Accounting Rules in
Anglo-Saxon Countries
Taxation
Financial Reporting
Objectives
Raise revenue Provide useful information for-
Manage the economy • making and
Achieve social and political goals • evaluating
economic decisions
Criteria for Evaluation
Equity
Neutrality or efficiency
Certainty
Continuity
Convenience
Economy or cost-effectiveness
Relevance
Reliability
Materiality
Timeliness
Comparability
Understandability
Basic Principles
Wherewithal to pay • Realization
• Receipt or control of funds • Matching
• Payment or definite liability • Conservatism
Neither profit nor loss can be • Substance over form
anticipated
Income capital distinction
Even though Anglo-Saxon countries share similar institutional arrangements, the rela-
tionships of tax and financial accounting rules in these countries vary. At the legislation
level, the relationship ranges from an explicit one (as in the USA), to an implicit one (as in
the UK), and a complete lack of relationship (as in Australia). In practice, in the USA and
the UK where a formal book-tax relationship exists, the judiciary and tax administrators do
Accounting Rules in Anglo-Saxon Countries 449
at times reject financial accounting rules because these rules do not clearly reflect income
for tax purposes, or are inconsistent with tax laws. On the other hand, in Australia where a
formal book-tax relationship is absent, the judiciary does on some occasions rely on
accounting principles if they are considered helpful in the determination of taxable income.
Due to the institutional arrangements in Anglo-Saxon countries, tax and financial
accounting rules have been developed by different authorities for different purposes. They
are designed to meet different criteria and are based on different principles to reflect their
objectives and required standards. Table 2 summarizes the differences of the two sets of
rules in Anglo-Saxon countries.
Given the institutional arrangements, a wholesale adoption of financial accounting rules
for tax purposes appears to be infeasible and undesirable. First, the alignment of tax with
financial accounting rules may or may not result in cost saving simplification of the income
tax system. Taxpayers, especially listed companies and their subsidiaries, would reduce
their compliance costs when the process of converting accounting profit to taxable income
by making complex adjustments is dispensed. However, only a small (albeit important)
group of taxpayers is required to prepare financial reports and income tax returns based on
two different sets of rules. Savings in compliance costs mainly apply to this group of tax-
payers. Adoption of accounting profit in tax assessment also may reduce the costs incurred
by tax administrators in verifying the information supplied in tax returns, because public
companies must have the fair presentation of their financial statements testified by audi-
tors. However, audit fees would likely increase because the liability exposure of auditors
would increase upon an alignment. Thus, administrative costs would only be reduced at the
expense of increase in audit costs of the taxpayer.
Second, the revenue collection of the government would be threatened. Taxpayers might
manipulate their reported profits to reduce tax liability (earnings management). If so, book-
tax alignment may end up with increased legislation and regulations, and hence increased
complexity in the tax system.
Third, although adoption of financial accounting rules for tax purposes can eliminate the
book-tax income gap, it is doubtful whether such an alignment really could improve the
perceived fairness of the tax system and enhance taxpayer compliance. Because different
taxpayers face different constraints on earnings management (e.g., due to existing debt
covenants), it is possible that a book-tax alignment would produce an unfair result.
Finally, the rule-making bodies of the tax and financial reporting regulatory systems are
independent and powerful. Book-tax alignment would reduce this independence and alter
the power structure. The government needs a powerful agency to protect the public fisc and
its tax policy interests. Thus, it is unlikely that the tax administrators would reduce their
control over the tax system and shift power to the corporate regulators and the accounting
profession. The government also needs a powerful agency to protect the integrity of the
financial reporting system, the capital markets, and the investors. Corporate regulators and
the accounting profession would not like to see the tax administrators involved in the
accounting standard-setting process, because the objectives and standards of the two sys-
tems are different.
Having argued that a complete book-tax alignment is infeasible and undesirable in
Anglo-Saxon countries, we do not mean that there is no scope for bringing the two sets of
rules closer to each other. Tax authorities (i.e.. the legislature, the judiciary, and tax admin-
istrators) can selectively adopt some of the accounting principles and standards to provide
450 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
a tax base which is clear and certain. For instance, the Australian courts have recently
shown their willingness to adopt, for instance, the matching principle to spread the dis-
count expense on bills of exchange over the life of the bills, and similar accruals basis is
likely to be adopted in the emerging regime of taxation of financial arrangements (Austra-
lian Taxation Office, 1993). The realization basis (which can be traced to the wherewithal
to pay principle) is likely to be abandoned in the new taxation regime for financial arrange-
ments because the timing of realization of a financial instrument can be easily manipulated.
Thus, it is not that financial accounting rules should not be adopted for taxation purposes;
it is only an indiscriminate adoption of all financial accounting rules for taxation purposes
that will serve neither the needs of a good tax system nor those of a good financial reporting
system.
Acknowledgments: The authors have benefited from the comments of the Editor, Andrew Bailey,
and two anonymous reviewers.
NOTES
1 . GAAP refers to the conventions, rules and procedures that define accepted accounting practices
at a particular time and provide a standard by which auditors form their professional opinions
about financial statments (Cooper & Ijiri, 1983)). That is, financial accounting rules. The term
GAAP was first used in the USA and has gradually been adopted by other Anglo Saxon coun-
tries.
2. Often this arises because of the tax incentives and accelerated write-offs offered in the tax leg-
islation.
3. US Internal Revenue Code 1986, Sections 55-59.
4. Tax accounting concerns the timing of income and deductions. Depending on the context, tax
accounting also may be used in a broader sense to refer to the rules and procedures used to
determine taxable income.
5. Insilco Corporation 73 TC 589.
6. William Powell Co., 542 F.Supp 84 1 .
7. Artnell Company (CA-7, 1968) 400 F.2d 981 .
8. Cincinnati, New Orleans & Texas Pacific Railroad (1970) 424 F.2d 536.
9. American Automobile Association (1961) 376 US 687.
10. Automobile Club of Michigan v. the United States (1957) 353 US 180.
1 1 . Under the all events test, a taxpayer is entitled to deduct an accrued expense when all of the
events that determine the liability have occurred and the amount of the liability can be deter-
mined with reasonable accuracy. Under this rule certain provisions (e.g. for bad debts and for
warranties) are not deductible.
12. Income tax was first introduced in the UK in 1799 for nearly two decades in order to finance
the Napoleonic Wars. It was re-introduced in 1842 and has since become a regular tax in the
UK (Sabine, 1966).
13. The adoption of Sixteenth Amendment to the US Constitution on 25 February 1913 made pos-
sible a tax on all income without apportionment among the States according to population.
14. In this case, despite expert witness giving evidence that the LIFO method was a generally
acceptable method of inventory valuation, the Privy Council decided that for tax purposes,
LIFO was not appropriate in the circumstances of the taxpayer.
15. In this case, a bank purchased at a discount bills of exchange which would mature in a number
of years. In its accounts for each year, the bank credited a fractional part of the profit which the
Accounting Rules in Anglo-Saxon Countries 451
bank expected to make assuming the bills were held to maturity, but returned the profit as
income for tax purposes only upon maturity of the bills. The Revenue contended that the
accounting treatment adopted by the bank also should be applied for tax purposes. The House
of Lords decided in favor of the bank on the principle of tax law that profits cannot be taxed
until it is realized, i.e., until the bills matured or sold before maturity.
16. In this case, the Inland Revenue adopted the accounting treatment in SSAP 21, the accounting
standard on leasing, which was accepted by the Court. Instead of being allowed deduction of
lease payments, the lessee was allowed deduction of the financing expense based on the total
lease payments and an accountant's estimation of depreciation. The decision was a departure
from the traditional transaction-based tax rules. See discussions in Freedman (1993) and Whit-
tington(1995).
17. In this case, the High Court decided that an airline company could deduct the anticipated cost
of major jet engine overhauls on an accruals basis over a period of three to four years before the
next overhaul. The court accepted that accounts prepared according to GAAP were adequate
for tax purposes. This decision is at odds with previous decisions that no expenditure and losses
may be anticipated for tax purposes.
18. See the speech of Andrew Smith M.P., Shadow Chief Secretary to the Treasury, quoted in
Freedman(1995, p. 444).
19. As the costs incurred to purchase trading stock are allowable deductions, if no adjustment for
the change in the levels of trading stock were required by s.28, taxpayers would be able to
reduce their taxable income simply by building up trading stock.
20. In general, expenditure and losses of a capital nature are not allowed for deduction from
income. Depreciation deductions are an exception to this general rule.
21. Examples are New Zealand Flax Investments v. FCT (1938) 61 CLR 179, Commissioner of
Taxes (SA) v. The Executor Trustee and Agency Co of South Australia Ltd ( 1938) 63 CLR 108
(the Cardens case), Henderson v. FCT (1910) 70 ATC 4016, and Arthur Murray (NSW) Pt}' Ltd
V. FCr( 1965) 114 CLR 3 14.
22. In trading stock cases such as FCT v. Sutton Motors (Chullora) Wholesale Pty Ltd (1984-85)
157 CLR 277 and Phillip Morris Ltd v. FCT (1979) 79 ATC 4352, accounting evidence has
been adduced and accepted.
23. For instance, in Citibank Ltd & Ors v. FCT ( 1 992) 92 ATC 4822, the Federal Court at first held
that finance leases were in reality a financing arrangement for acquisition of assets. Nothing in
the legislation rendered the accounting treatment prescribed in accounting standards inappro-
priate for tax purposes, so only the element determined on the actuarial method stated in
accounting standards was income of the lessor. The Full Federal Court (FCT v. Citibank Ltd &
Ors (1993) 93 ATC 4691), however, reversed this decision and held that as the ITAA required
the rental receipts to be treated as assessable income, there was no room for the accounting
treatment to be applicable. The accounting treatment was appropriate for financial reporting
purposes under corporate law, but not for determination of income for tax purposes.
24. See, for example. New Zealand Flax Investments v. FCT (1938)61 CLR 1 79 and FCT v. James
Flood Pty Ltd (1953) 88 CLR 492.
25. This happenedin New Zealand Flax Investments v. FCr(1938) 61 CLR 179, and more recently
in FCT V. Australian Guarantee Corp Ltd (1984) 84 ATC 4642, Coles Myer Finance Ltd v.
FCT (\993) 93 ATC 4214, and FCT v. Energy Resources of Australia Ltd (1996) 33 ATR 52.
26. After the inquiry, the Government started the Tax Law Improvement Project (TLIP) to rewrite
the tax act in plain English. The objectives are to reduce compliance costs and to improve com-
pliance. However, the project team would not look into any major change to tax policy (TLIP
1994).
27. The wealth redistribution system includes the tax system which transfers wealth from the pri-
vate sector to the public sector, and various government programs, such as social security, edu-
452 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1 998
cation and health, which transfer the wealth back to the private sector and result in a
redistribution.
28. This trend is evident by the definitions of accounting elements in the conceptual framework for
financial reporting developed in the three Anglo-Saxon countries. See, for example, Australian
Statement of Accounting Concepts SAC 4 - Definition and Recognition of the Elements of
Financial Statements. As a result of this shift in focus, the matching principle and the conserva-
tism principle also are de-emphasized.
29. In the USA, under the exception principle, GAAP can vary to accommodate industry practice.
Thus. GAAP and income tax treatments are not uniform across all industries. This accommo-
dation for industry differences should lead to greater divergence between tax and financial
accounting, but in some instances might lead to some convergence.
30. In Australia, the relevant accounting standards are AAS 1 - Profit and Loss or Other Operating
Statements, and AASB 1018 - Profit and Loss Accounts.
3 1 . The US GAAP also require capital gains and losses to be separately disclosed.
32. Indexed cost base is the cost of an asset adjusted for inflation using the quarterly Consumer
Price Index.
33. Cooper ( 1991 ) presents a detailed discussion of this "blackhole" in tax laws.
34. For example, Gregory v. Helvering {\9?,5) 293 US 465, and US v. Phellis ( 1921) 257 US 156.
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The International
Journal of
Accounting
Managing Discretionary Accruals in Response to
Reductions in Corporate Tax Rates in Canada, Malaysia
and Singapore
Raafat R. Roubl and A. William Richardson
Brock University
Key Words: Managing accruals; Tax rates: Canada; Malaysia; Singapore; Culture
Abstract: The accounting literature provides much evidence of incentives to manage earnings
(Healy 1985, Jones 1991, Moses 1987). Evidence on using discretionary current accruals as an
earnings management tool to benefit from income tcLX rate changes in the USA is given in Guenther
(1994). The present study provides empirical evidence on the management of discretionary cur-
rent accruals by nonmanufacturing corporations in Canada, Malaysia and Singapore in response
to changes in the statutory corporate income tax rates in these countries. It also tests competing
hypotheses relating to managing discretionary current accruals, specifically the incentives pro-
vided by the positive accounting variables of political costs and debt covenants as pro.xied by firm
size and firm leverage, respectively. Our analysis provides evidence on managing discretionary
current accruals by companies in Canada and Singapore similar to that found by Guenther (1994)
for the USA. The weaker Malaysian results can be attributed to cultural factors.
In the latter half of the 1980s, a number of countries modified their federal income tax leg-
islation to reduce the rate of income tax levied on corporate entities. Probably the most
widely known of these changes is the US Tax Reform Act of 1986. The objective of this
action by national governments was presumably to lower the tax burden on companies in
their countries and so provide an incentive for them to expand their activity. The reduction
in tax rates at a specific point in time not only resulted in lower income taxes payable on
an ongoing basis but also created a window of opportunity for corporations to reap a short
term benefit by managing revenues and expenses so as to defer the payment of income
taxes for one or more years. The latter benefit required a short term strategy where man-
agement took actions to defer revenues from a high tax rate year to a low tax rate year and
to accelerate expenses to a high tax rate year from a low tax rate year.
Direct all correspondence to: Raafat R. Roubi. Department of Accounting and Finance. Faculty of Business,
Brock University. 500 Glenridge Avenue, St. Catharines. Ontario. Canada L2S 3A1: Tel: (905) 688-5550 ext.
4186; Fax: (905) 688-9779 E-Mail: rroubi@spartan.ac.brocku.ca; A. William Richardson. Tel: (905) 688-5550
ext. 3544: E-mail: awrichar@spartan.ac.brocku.ca.
The International Journal of Accounting, Vol. 33, No. 4, pp. 455-467 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1998 University of Illinois
456 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol, 33, No. 4, 1998
In the US, the Tax Reform Act (TRA) of 1986 reduced the federal corporate income
tax rate (CITR) from 46% to 34% effective July 1, 1987. Guenther (1994) found empiri-
cal evidence that US companies managed current accruals (i.e. deferred revenues and
accelerated expenses in the year preceding the tax rate change) to increase tax savings.
In this paper, we extend upon Guenther' s work to see whether changes in CITRs in
Canada, Malaysia and Singapore resulted in similar behaviour by companies in these
countries.
SUMMARY OF TAX RATE CHANGES
As stated above, the US government approved legislation which resulted in a reduction of
the CITR from 46% to 34% effective July 1, 1987. In February 1986, the Canadian gov-
ernment announced a series of changes to the Income Tax Act to level the playing field
for Canadian companies as compared to US companies which are their most direct com-
petitors. The Canadian changes included, among other things, corporate tax rate reduc-
tions, reductions in capital cost allowance (CCA) deductions, and phasing out of most
investment tax credits. The manufacturers sales tax was also phased out a few years later
and replaced with the goods and services tax (GST). A further complication was the dif-
ference in effect for manufacturing and nonmanufacturing companies because of the
manufacturing and processing tax credit. For nonmanufacturing firms, the statutory Cana-
dian CITR was reduced from 36% to 35% as of July 1, 1987, then to 28% effective July
1, 1988. Canadian manufacturing companies experienced a less significant total CITR
reduction from 28% to 23% and this was phased in over a number of years. Specifically,
the tax rate for manufacturing companies was reduced from 28% to 26% effective July 1,
1988, 25% effective July 1, 1989, 24% effective July 1, 1990, and 23% effective July 1,
1991. Provincial corporate income tax rates did not change significantly during the study
period.
The Malaysian government reduced its CITR from 40% in 1987 to 35% for the years
1988-1991, and then to 34% for 1992, 32% for 1993 and 30% thereafter. The Singapore
government enacted an across the board reduction of its CITR from 40% to 33%, with the
new rate taking effect for the 1986 tax year.
Table 1 summarizes the CITRs in effect for the period 1985 through 1992 in the three
countries studied here as well as in the USA.
Table 1. Statutory Corporate Income Tax Rates
Year
85
86
87
88
89
90
91
92
Canada '-3
36
36
35
28
28
28
28
28
Malaysia^
40
40
40
35
35
35
35
34
Singapore^
40
33
33
33
33
33
33
33
U.S.A.'
46
46
34
34
34
34
34
34
Notes: 1. Changes at July 1
2. Changes at January 1
3. Canadian nonmanufacturing firms only
Managing Discretionary Accruals
457
Table 2. Sonne Features of the Tax Systems for Canada, Malaysia and Singapore
Item
Canada
Malaysia
Singapore
Taxable Income
Inventory Valuation
Intercorporate
Dividends
Capital Gains
Foreign Income
Depreciation and
Depletion
Depreciation
Recapture
Operating Loss
Auto Leases
Investment Tax
Incentives
Accrual Accounting
adjusted for permanent
and timing differences
Lower of Cost or market
(LIFO is not allowed)
Accrual Accounting
adjusted for permanent
and timing differences
Lower of Cost or net
realizable value (LIFO is
not allowed)
Tax exempt for recipient Tax exempt for recipient
Only 75% taxable
Taxable + credit towards
foreign paid taxes
Based on CCA rates
depending on the asset's
class
Taxable as Ordinary
Income
Carried 3 years back and
7 years forward
Restricted
Most are phased out.
Available for some R&D,
energy saving expenses,
and for newly
incorporated businesses
Not taxable (except for
land and buildings)
Taxable + credit towards
foreign paid taxes
Based on depreciation
rates depending on the
asset's class
Taxable as Ordinary
Income
Carried forward for
indefinite time
Restricted
Available for capital
expenditures, expansions,
venture capital,
operational headquarters,
unit trusts, R&D, training,
factor^' location,
purchases of components
from small companies,
employment equity, and
using Malaysian ships
Accrual Accounting
adjusted for permanent
and timing differences
No special rules as long as
basis is consistent from
year to year (LIFO is not
allowed)
Taxable for recipient
Not Taxable
Taxable + credit towards
foreign paid taxes
Based on depreciation
rates depending on the
asset's class
Taxable as Ordinary
Income
Carried forward for
indefinite time
Restricted
Available investments in
pioneer industries,
producdve equipment,
R&D, development
contributions and interest,
exports, capital
expenditures, expansions,
regional warehousing, and
in new technology and
venture capital
CORPORATE TAXES IN CANADA, MALAYSIA AND SINGAPORE
Table 2 provides a comparison of the significant tax provisions of corporate income taxes
in Canada, Malaysia and Singapore and shows that the major features of the three systems
are similar. (Source of Malaysia and Singapore information: Price Waterhouse, 1990a)
DEVELOPMENT OF FINANCIAL REPORTING STANDARDS
Canadian GAAP promulgated by the Canadian Institute of Chartered Accountants (CICA)
differ in some respects from International Accounting Standards (IAS) which are followed
reasonably closely in Malaysia and Singapore. While revenue and expense recognition
rules are generally similar, there are some differences in accounting for income taxes.
Canadian income tax accounting for timing differences uses the deferral method and com-
prehensive tax allocation. Malaysia and Singapore reporting requirements follow IAS No.
12 which allows use of either the deferral or liability method with partial tax allocation
458 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
which Umits the recognition of a tax UabiHty (asset) to timing differences expected to
reverse within a reasonable time (normally within 3-5 years).
While Canadian GAAP have been primarily influenced by U.S. GAAP for the last 30-40
years, Malaysian and Singaporian GAAP generally follow lASs which tend to provide
more options and flexibility since they represent a compromise between U.S. and British
GAAP. The Malaysian Association of Certified Public Accountants (MACPA) and the
Institute of Certified Public Accountants of Singapore (ICPAS) are responsible for devel-
oping GAAP in their respective jurisdictions. Since becoming members of the Interna-
tional Accounting Standards Committee (lASC) in the mid 1970s, both the MACPA and
ICPAS have adopted most lASs. Historically, most former colonies of Britain adopted the
British tax and accounting systems and Malaysia and Singapore were not exceptions.
Under the British system, accounting and tax rules were originally closely related. D.
Jensen and M. Crumley (1997) conclude that with the exception of depreciation expense,
the accounting in Australia, Hong Kong and Singapore emulate the tax code. This is also
true for Malaysia and Canada.
DEVELOPMENT OF HYPOTHESES
Approach to Income Management
In order to benefit from the deferral of income taxes in response to the reduction in
CITR. it is necessary for a company to take actions which affect its taxable income. Given
that we are unable to determine taxable income from the information in the company finan-
cial statements, we rely upon the fact that taxable income is related to accounting income
for the countries studied as follows:
Taxable Income = Accounting Income ± Permanent Differences ± Timing Differences
where accounting income is reported in the financial statements, and permanent and timing
differences result from specifications in the appropriate income tax legislation. This rela-
tionship shows that accruals affecting accounting income which are not adjusted for by
permanent or timing differences will flow through to affect taxable income. Thus the tim-
ing of recognition of some revenues and expenses provides a mechanism to affect the tim-
ing, and consequently the present value, of taxes payable.
Accounting Accruals
Total accounting accruals measure the difference between operating cash flows (operat-
ing income on a cash basis) and reported accounting income before extraordinary items,
i.e. they capture all noncash items excluding extraordinary gains and losses. The effects of
major noncurrent accounting accruals (primarily depreciation but also certain amortization
and depletion charges) are fixed by income tax legislation, i.e. they are typically replaced
by allowed deductions for tax purposes in going from accounting income to taxable
income. This is not true for most current accruals. Therefore, the accounting mechanism
Managing Discretionary Accruals 459
considered in this study for affecting the timing of income tax payments is not total
accounting accruals but only current accruals (CACC). The exclusion of noncurrent accru-
als, mainly depreciation charges, from consideration in this study should mitigate the effect
of using accounting information as a proxy for income tax return information and differ-
ences in deferred tax accounting in the three countries. The ability to adjust the timing of
recognizing certain revenues and expenses enables firms to manage their earnings subject
to maintaining an acceptable level of normal operations. Therefore, current accruals are
segregated into two components, nondiscretionary accruals, which are determined by the
level of normal operations, and discretionary accruals. Managing current accruals as
described above applies only to the discretionary current accruals (DCACC) since it results
from the accounting and/or economic choices that cause a change from the normal or
expected level which reflects normal variation of operating activities. Researchers (DeAn-
gelo 1986; Healy 1985; Jones 1991) have developed several models to separate nondiscre-
tionary from discretionary accruals.
The focus on DCACCs justifies the use of financial accounting income as a proxy for
taxable income since the tax laws in the three countries allow use of financial accounting
methods for inventory (with the exception of LIFO), receivables, current liabilities, and
contingent liabilities in income tax reporting as shown in Table 2. More specifically, the
tax systems in the three countries accept an allowance for expected losses on accounts
receivable and actual write offs are not a prerequisite to claiming such a tax deduction. In
addition, Canadian tax planning literature recommends the use of financial accounting
accruals to minimize the total tax bill (Price Waterhouse, 1997, pp. 32-44; 75-84). For
example, to reduce income taxes, a company should review its method of accounting
with regard to the timing of revenue recognition. The Canadian Federal Court of Appeal
held that a company has the right to change its revenue recognition method (i.e., switch
from billed to earned revenue method) for tax purposes. In the mid-1980s, two companies
which were the subjects of the Appeal's Court ruling switched their revenue recognition
methods to minimize the tax bill (Price Waterhouse, 1997, p. 33). In addition, corpora-
tions can defer taxes by claiming reserves to defer recognition of certain types of
unearned income for goods not delivered and services not rendered such as the case with
returnable containers. Corporations can charge favorable interest rates and transfer prices
among the affiliated group of companies. Consignment sales are used to defer revenue
recognition on sale of goods to related companies. Companies are advised to satisfy the
conditions on contingent liabilities so they become tax deductible expenses and to review
receivables to see if the company may claim a larger deduction for bad debts (Price
Waterhouse, 1997, pp. 34, 35, 39). Given that the tax laws in the three countries greatly
rely on financial reporting of current accruals, it is reasonable to assume there is no
incentive for companies to incur the extra costs of maintaining two sets of records for tax
and financial accounting. There may be some differences as indicated in Table 2. For
example, the exemption status of intercompany dividends in Canada and Malaysia will
result in permanent differences between taxable income and financial accounting income.
Tax credits affecting the taxable amounts of foreign income will also lead to permanent
differences. However, these would not affect the DCACCs upon which we are basing our
analysis.
460 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1 998
Basic Hypotheses
We assume that managers pursue a wealth maximization strategy. Therefore, we expect
the management of companies in Canada, Malaysia and Singapore to accelerate expenses
to be recognized in the fiscal year preceding the CITR reduction and deducted in the deter-
mination of taxable income in the year with a higher tax rate. Similarly, we expect manage-
ment to defer revenues to be recognized in the fiscal year following the CITR reduction and
included in the determination of taxable income in the year with a lower tax rate. This leads
to the expectation that firms will have negative DCACCs in the fiscal year preceding the
CITR reduction and positive DCACCs in the fiscal year following the tax rate reduction.
Thus, for Canadian firms, we expect negative DCACCs in 1987, and positive DCACCs in
1988. with this being most noticeable for Canadian nonmanufacturing firms because of the
larger change in CITR. We focus on the largest single drop in CITR for companies in
Malaysia, i.e. the tax rate decrease of 5% in 1988. Thus, for Malaysian firms, we expect
negative DCACCs in 1987 and positive DCACCs in 1988. For Singapore companies, we
expect negative DCACCs in 1985 and positive DCACCs in 1986. Accordingly, the follow-
ing two hypotheses are formalized:
Hj: Firms will report negative DCACCs in the fiscal year preceding the CITR
decrease; 1987 for Malaysia and Canada, 1985 for Singapore.
H2: Firms will report positive DCACCs in the fiscal year following the CITR
decrease; 1988 for Malaysia and Canada, 1986 for Singapore.
Competing Hypotheses
In a situation where there is a motivation to adjust accounting income to reduce the
present value of income taxes to be paid, the actual decision taken depends upon the trade-
off of tax savings on the one hand and non-tax costs on the other (Scholes, Wilson and
Wolfson 1992). The non-tax costs of managing accounting accruals can be addressed in the
positive accounting theory framework which identifies three general factors affecting firm
management's motivation to engage in such behaviour, namely, political costs, debt cove-
nants, and management bonus plans.
The general expectation is that the management of larger firms will be inclined to engage
in income decreasing strategies to reduce political costs, whereas the management of
smaller firms may be more interested in income increasing strategies (Watts and Zimmer-
man, 1978). As a result, a third hypothesis is formulated as follows:
H3: DCACCs are negatively associated with firm size.
Contracting theory suggests that the management of a highly levered firm (i.e., with a high
debt to equity ratio) is more likely to follow an income increasing strategy (Watts and Zim-
merman, 1986). Accordingly, the management of a highly levered firm will be more likely
to report a positive DCACC. Thus, a fourth hypothesis is formulated as follows:
H4: DCACCs are positively associated with firm leverage.
Managing Discretionary Accruals 461
Management compensation plans provide incentives to manipulate income (Healy, 1985).
However, because specific details of compensation plans are not generally available for
Canadian companies, it is not possible to incorporate this variable in our study (Magnan,
St. Onge and Thome, 1995).
Cultural Factors
It is reasonable to expect that cultural factors will impact the above economic-based
expectations. As pointed out by (Gray, 1988) and (Perera, 1989), accounting systems and
financial reporting in practice are influenced by cultural factors such as statutory control
vs. professionalism and uniformity vs. flexibility. Choi and Mueller (1992, p. 77) argue
that actual accounting practice may vary from official GAAP to differing degrees in differ-
ent countries because of cultural factors. Thus, our a priori expectations as outlined above
may be influenced by the degree of enforcement, professionalism, flexibility and unifor-
mity of the accounting practice in each jurisdiction. Unfortunately, we have no specific
firm-related measures to modify our basic hypotheses. Rather, we must use the work of
authors cited above to provide guidance. Relying on Gray's four-dimensional classifica-
tion of international accounting systems (1998), we expect our basic hypotheses to hold for
Canada which is classified among the "Anglo-Saxon" countries which are ranked highest
on professionalism and flexibility. On the other hand, it is less likely that actual accounting
practices in Malaysia will be used in managing earnings to benefit from CITR reductions
given that the country is classified among the "Less-developed Asian" countries with high
ranks on statutory controls and uniformity. In addition, the tax administration in Malaysia
is armed with a strong anti-avoidance provision which empowers the Director-General to
make adjustments to taxable income and assets' valuation whenever there are reasons to
believe that a business transaction has altered the incidence of tax (Price Waterhouse,
1990b, p. 1 16). The stronger anti-avoidance rule in Malaysia is an example of such a stat-
utory control. Singapore is classified among the "Former Asian-Colonial" countries which
are characterized by low statutory control and flexibility and so we would expect earnings
management to be between that for Canada and Malaysia.
MODELS, MEASURES, SAMPLES AND RESULTS
Models and Measures.
We calculate DCACC as the difference between end-of-year actual current accruals
(ACACC) and predicted discretionary accruals (PCACC) which estimate CACC reflecting
the normal operating level of a sample firm. We use a standard definition for ACACC
[Guenther 1994] and three models for estimating PCACC. For company / in year /, PCAC-
^avgit is estimated as the average of the ACACC of the preceding three years; PCACC;,,, is
estimated using a growth model based on the ACACC of the preceding three years; and
PCACC^,,, is estimated using a random walk model. The details of the estimation are as
follows:
462 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
ACACC,-, = [(A Current Assets,, - A Cash,,) - (A Current Liabilitiesjt -A Current
Maturities of Long term Debt,, - A Income Taxes Payablejt)] / Total
Assets,-,. 1
PCACC^^,^,, = (ACACC,,,, + ACACC„.2 + ACACC„.3)/3
PCACC^,-, = ACACC,,., * ( 1 + Average Growth Rate for ACACC„.4 to i-i)
PCACC„,„ = ACACC
DCACC^^.^,, = ACACC
DCACC^,, = ACACC
DCACC„,.„ = ACACC
-PCACC
t " rCACCp^.jt
For each country-year studied, the data was fit to three regression models to test the
hypotheses as follows:
DC ACC^,.^,-, =o + b^ SIZE,-, + b2 DE„ + .y„ ( 1 )
DCACC^,-, =a + b^ SIZE,, + /?. DE„ + .v„ (2)
DCACC„,.„ = a + /?! SIZE,, + /^^ DE„ + .v,-, (3)
The independent variables in these regressions are:
SIZE,, - a dummy variable which measures the size of firm / at the end of year r. SIZE
is coded 1 for the largest 10 per cent of firms and 0 otherwise, where firm size
is measured as the natural logarithm of net sales
DE„ - the ratio of the book value of long term debt to stockholders' equity for firm
/ at the end of year t. and
Xfi - an error term.
Sample
This study examines the management of current accruals by nonmanufacturing compa-
nies in Canada. Malaysia and Singapore in the years preceding and following a change in
the statutory CITRs. The sample of Canadian companies was taken from the Financial Post
database (FPDB). The sample of companies in Malaysia and Singapore was taken from the
Company Account database (CODE) of the School of Accountancy at Nanyang Techno-
logical University in Singapore.
To be included in the sample, a firm has to meet several screening criteria which are
designed to minimize measurement errors (Young 1996; Dechow. Sloan and Sweeney
1995). The first two criteria for selection are straightforward, i.e.. a firm must report pos-
itive operating cash flows and have a positive long term debt to equity ratio. To elimi-
nate firms that have no motivation for managing their DCACCs. we exclude firms that
report a net operating loss carn,'forward for tax purposes. We also exclude financially
distressed companies and companies with extreme DCACC values in the study period
(1986-1988 for Canada and Malaysia; 1984-1986 for Singapore). Finally, we selected
Managing Discretionary Accruals 463
only firms with a fiscal year-end between October and December 3 1 . This last criterion
is added to maintain a homogeneous sample, i.e., firms with approximately the same
effect of the CITR reduction, because the income tax rate change is effective July 1 each
year in Canada and is a weighted average for firms with a year end other than June 30.
We excluded Canadian manufacturing firms from this study for two reasons. First, the
much smaller magnitude of the tax rate changes in each year given the gradual phase in of
the income tax rate reduction for manufacturing companies suggests less motivation for
management of CACC. Second, the benefits of the tax rate reductions granted to the man-
ufacturing sector are less clear because of concurrent tax changes including: CCA deduc-
tions for machinery and equipment were drastically reduced; most investment tax credits
for machinery and equipment were phased out except for some qualified energy-saving
equipment given that a firm received specific government approval; and inventory write-
offs were no longer allowed under the new tax rules. Thus, it is not clear whether Canadian
manufacturers benefited significantly from CITR changes. We restricted the Malaysia and
Singapore samples to nonmanufacturing companies to provide a common basis for com-
parisons.
Based on the selection criteria, the number of companies in the sample totalled 102 for
Canada, 149 for Malaysia and 126 for Singapore over the three years studied. Table 3 pro-
vides information about the mean (median) accounting accruals for the three countries over
the study periods.
Table 3. Descriptive Statistics — Mean (Median) of Accruals
Year
Country
84
85
86
87
88
Canada
DCACCavgit
0.001
0.016
-0.013
(0.007)
(0.014)
(-0.011)
DCACCgjt
-0.007
-0.006
0.161
(0.004)
(-0.001)
(-0.003)
DCACCr^i,
-0.010
0.015
0.022
(-0.018)
(0.002)
(0.003)
Malaysia
DCACC,,g„
-0.125
-0.219
0.873
(-0.056)
(-0.092)
(0.183)
DCACCgi,
-6.973
-3.374
0.765
(-0.040)
(-0.459)
(0.178)
DCACC^it
-0.416
-0.642
0.661
(-0.002)
(-0.219)
(0.186)
Singapore
DCACCavgi,
0.112
-0.109
0.292
(0.096)
(-0.021)
(0.097)
DCACCgi,
0.036
-1.301
0.663
(0.027)
(-0.072)
(0.021)
DCACCrwit
0.018
-0.057
0.072
(0.032)
(-0.003)
(0.022)
464
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
Table 4. Regression Results: 3- Year Average Model (t-values in parentheses)
Model: DCACCavgit = a + b^ SIZE;, + bg DE|t + x,,
Country &
No. of
Year
cases
a
bi SIZEi,
b2DE,
Ff
Canada
86
40
-0.029 (-0.35)
0.045 ( 1.15)
0.018 ( 1.60)
10%
87
31
0.005 ( 0.24)
0.005 ( 0.12)
0.011(0.91)
3%
88
31
0.013(0.65)
0.041 ( 0.47)
-0.027 (-2.26)**
11%
Malaysia
86
56
-0.144 (-1.00)
0.128 ( 0.53)
-0.056 (-0.42)
1%
87
50
-0.144 (-1.00)
-0.480 ( 2.90)***
-0.131 ( 1.34)*
16%
88
43
0.455 ( 1.43)*
1 .036 ( 2.20)**
0.017(0.09)
11%
Singapore
84
58
0.133 ( 3.45)*"
-0.077 (-0.93)
-0.155 (-1.57)*
8%
85
41
-0.068 (-1.03)
-0.189 (-1.23)
-0.020 (-0.14)
5%
86
33
0.176( 2.95)**'
* -0.126 (-1.06)
-0.016 (-0.09)
4%
Notes: *, **, ***!
-value IS significant at the ICfr, 5%, 1% levels, respectively.
Table 5. Regression Results: 3- Year Growth Model (t-values in parentheses)
Model: DCACCgi, = a + bi SIZE|t + b2 DEj, + X|t
Country &
No. of
Year
cases
a
bi SIZE,,
b2DE„
r2
Canada
86
40
-0.016 (-0.33)
0.027 ( 0.30)
0.018 ( 0.16)
1%
87
31
-0.093 (-2.54)***
0.032 ( 0.36)
0.011 ( 3.58)***
31%
88
31
0.239 ( 1.96)**
-0.244 (-0.46)
-0.069 (-0.94)
3%
Malaysia
86
54
-7.443 (-1.47)*
0.894 ( 0.11)
0.529 ( 0.12)
1%
87
40
-4.096 (-1.67)*
1 .556 ( 0.44)
0.336 ( 0.11)
1%
88
41
0.256 ( 0.78)*
1.151 ( 2.20)**
0.066 ( 0.35)
13%
Singapore
84
58
0.063 ( 1.37)*
-0.058 (-0.59)
-0.033 (-0.06)
1%
85
41
-1.623 (-1.32)*
1.147 ( 0.40)
0.542 ( 0.22)
1%
86
33
0.812 ( 2.21)**
-0.762 (-1.04)
-0.765 (-0.73)
5%
Notes: *, **, ***l
[-value is signil
leant at the 10%, 5%. \% levels, respectively.
RESULTS
We fitted the (1) 3-year average; (2) 3-year growth; and (3) random walk models sepa-
rately for each country for each year of the study periods, which were 1986-1988 for Can-
ada and Malaysia, and 1984-1986 for Singapore. Table 4 presents the results for the 3-year
average prediction model. The a coefficients for Canada are not significant for any year;
the a coefficient for Malaysia is significant at the 10% level for 1988; and the a coefficient
for Singapore is significant at the 1% level in 1986 but has an unexpected positive sign.
The coefficient bj is not significant for Canada or Singapore in any year, and the values for
Malaysia are significant but inconsistent in sign. The results for the coefficient b2 are not
generally significant for any country or year. Overall, the results for the 3-year average pre-
diction model are not encouraging.
I
Managing Discretionary Accruals 465
Table 6. Regression Results: The Random Model (t-values in parentheses)
Model: DCACCgi, = a + bi SIZEj, + bg DE|, + X|,
Country &
No. of
Year
cases
a
bi SIZE;,
b2DE„
^
Canada
86
40
-0.030 (-1.28)
0.013 ( 0.56)
0.025 ( 1.03)
4%
87
31
-0.024 (-1.45)*
0.026 ( 0.65)
0.037 ( 3.40)***
29%
88
31
0.057 ( 1.38)*
-0.066 (-0.37)
-0.032 (-1.30)
6%
Malaysia
86
56
-0.778 (-1.81)**
1.025 ( 1.41)*
0.148(0.37)
4%
87
50
-0.251 (-1.02)
-0.875 (-2.31)**
-0.215 (-0.96)
11%
88
43
0.296 ( 1.08)
0.905 ( 2.23)**
0.015 ( 0.09)
11%
Singapore
84
58
0.030 ( 1.13)
-0.075 (-1.33)*
0.013(0.19)
3%
85
41
-0.072 (-2.16)**
0.065 ( 0.84)
0.011 (0.16)
2%
86
33
0.115(4.25)***
-0.111 (-2.06)**
-0.088 (-1.14)
16^f
Notes: *, **, ***t-value is significant at the lO'/r, 5%, 1% levels, respectively.
Table 5 presents the results for the 3-year growth model. The a coefficients for Canadian
and Singapore companies are significant and negative in the year preceding the CITR
change, and significant and positive in the year following the CITR change. These results
are consistent with both Hj and H2 and lead to the conclusion that the DCACCs have been
managed. Table 5 shows that for Malaysian companies the a coefficient is significant and
negative in 1987 but not significant, although positive, in 1988; these results are consistent
with Hj but not with H2. The coefficients bj and b2 are insignificant in the majority of
cases and so provide no support for hypotheses H3 or H4.
Table 6 presents the results for the random- walk model. The a coefficients for Canadian
and Singapore companies are again significant and negative in the year preceding the CITR
change, and significant and positive in the year following the CITR change while those for
Malaysian companies have the correct sign but are not significant. These results provide
support for hypotheses Hj and H2 as seen for the 3-year growth model. Again, the coeffi-
cients bj and b2 are insignificant in the majority of cases and so provide no clear-cut sup-
port for hypotheses H3 or H4.
CONCLUSIONS
The empirical results reported in this study support the primary hypotheses of earnings
management in response to changes of the CITR affecting nonmanufacturing companies in
Canada and Singapore and, to a lesser extent, companies in Malaysia. The results support
the prediction that management of companies in the sample accelerated expenses in the
year prior to the change in CITR and deferred revenues in the year after the change in CITR
to benefit from the CITR changes. These results are very similar to the empirical evidence
reported in a previous US study (Guenther 1994). There appears to be no significant and
consistent effect of size and leverage derived from the positive accounting arguments relat-
ing to political costs and debt covenants.
The comparatively stronger support of earnings management to take advantage of CITR
changes for North American countries (i.e., Canada and the US) may result from North
466 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33. No. 4, 1998
American accounting systems and practices being ranked among the highest on flexibihty
and professionalism (Radebaugh and Gray, 1993, p. 75), both of which are required to
manage earnings. The greater flexibility and higher degree of autonomy of North Ameri-
can accounting may allow more exercise of professional judgement to defend management
actions to take advantage of CITR changes. The similar but weaker Singapore results may
be explained by the fact that, while these accounting systems are ranked lower on flexibil-
ity, accounting in former colonial countries in Asia such as Hong Kong and Singapore
(Radebaugh and Gray, 1993, p. 75) may still have sufficient flexibility that management
actions in response to CITR changes are allowed.
The weaker results for the Malaysian companies may result from several factors. The
phase-in of changes to Malaysian CITR offers a company the opportunity to trade off
immediate and deferred action to benefit from the CITR changes which may lead to a lower
initial reaction. In addition, cultural factors may also contribute here to our empirical
observations. Although Malaysian accounting is based on the British model, it is ranked
relatively high on the authority and enforcement dimensions leading to more statutory con-
trol and uniformity in the reporting and disclosure of financial information (i.e.. a higher
degree of authority and enforcement is built into the accounting system) (Radebaugh and
Gray, 1993. p. 75). The stronger anti-avoidance rule is an example of such a higher degree
of authority and may partially explain the weak results for Malaysia. In such a situation,
there may be less opportunity to support choice of accruals to manage earnings so as to
benefit from CITR changes.
As usual in such studies, there are various limitations to the study presented here. The
sample size is smaller than one would prefer but is limited by the databases used for sample
selection. A larger sample might strengthen the evidence for the primary hypotheses of
earnings management. The lack of significance for the political cost hypothesis is probably
partly attributable to the small sample size also. The lack of significance for the debt cov-
enant hypothesis likely relates to the sample selection criteria, i.e. the desire to increase
sample homogeneity led to elimination of companies with loss carryforwards and finan-
cially distressed companies so that there may be a relatively small impact of leverage in the
sample. In addition, our results may be weakened by the fact that we relied on financial
accounting income and current accruals as proxies for the determination of income tax
effects. Finally, it is quite possible that the magnitude of adjustment from DCACCs is rel-
atively small and so is less accurately observed in small samples as used here.
Acknowledgments: The data for companies in Singapore and Malaysia was extracted from the
Company Account Data Base of the School of Accountancy and Business at Nanyang Technological
University in Singapore. The support provided to A. William Richardson while a Visiting Professor
at NTU is greatly appreciated.
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The International
Journal of
Accounting
Profit Sharing and Corporate Performance: Some
Evidence from Bangladesli
Dhiman Chowdhury and Zahirul Hoque
University ofDlial<a, Bangladesti and Griffith University, Australia
Key Words: Profit sharing; Corporate performance; Performance related pay;
Developing country; Bangladesh
Abstract: Despite the recent growth in profit sharing research in the Western World, little is
known about the way profit sharing schemes are used in developing countries. This paper docu-
ments the incidence of profit sharing in a wide variety of Bangladeshi firms. In addition, consider-
ation has been given whether Bangladeshi profit sharing schemes differ from those used in
developed countries. Data has been collected from published annual reports, on-site semi-struc-
tured interviews and inspection of archived .sources. Employee profit sharing is regulated by the
Bangladesh Companies Profit (Workers' Participation) Act 1968 under which only 5% of profit
before tax is reserved for the employees. This legislation is not particularly restrictive, however,
as it applies to only 6.2% of companies. Furthermore, incentive bonuses comprise only 4.5% of
total remuneration. Although a profit sharing scheme has been introduced in some puhliclx quoted
firms, it does not appear to ser\'e as a dominant mode of increasing employee motivation and pro-
moting commitment; it has been largely concerned with meeting the legal requirements of the gov-
ernment regulation. The use of profit sharing in privately owned (unlisted) firms is almost non-
existent. Quantitative analysis has revealed a positive association between pay and corporate
financial performance where return on equity or market return on shares explain less than 2% of
the variations in employee remuneration.
Considerable effort has gone into researching of profit sharing schemes used by employers
to secure employee involvement (e.g., Procter, McArdle, Hassard & Rowlinson, 1993;
Smith, 1993; Ogden, 1992; Kennedy, 1995; Marks, 1995; Wood, 1996; Poland, 1996; Tho-
mas, 1996). These studies suggest that profit sharing ensures high financial benefits for
high performance and establishes the workers' claim on 'residuals' thus, causing them to
be more involved with their business and more motivated to ensure its success (for a
review, see Ogden, 1995). In the UK, securing greater employee involvement has been the
major justification offered by employers introducing profit-sharing schemes. It is also the
Direct all correspondence to; Zahirul Hoque, School of Accounting and Finance, Griffith University, Gold Coast
Campus, PMB50. Gold Coast Mail Center, Queensland 9726, Australia.
The International Journal of Accounting, Vol. 33, No. 4, pp. 469-481 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1998 University of Illinois
470 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1 998
principal argument in the government's recent promotion of its profit-related pay scheme
(Ogden, 1992, 1995).
The above findings are both theoretical in nature and based on empirical evidence from
a wide variety of firms located in developed economies. Little evidence is available for
firms in developing countries. The present study attempts to redress this situation.
This paper reports the findings of an empirical study of profit sharing systems in Bang-
ladeshi enterprises. It provides additional material to enhance comparative analyses of
profit sharing schemes between developed and developing countries. The study has the fol-
lowing objectives in the Bangladeshi environment:
1 . To examine the incidence of profit sharing schemes;
2. To review and evaluate the existing government regulation on profit sharing
schemes;
3. To examine whether profit sharing scheme adoption is related to socio-economic
variables; and
4. To examine the relationships between profit sharing scheme adoption and corporate
performance.
The next section documents the findings of previous studies on profit sharing. Subse-
quent sections describe the study's research method, findings, limitations and conclusions.
PREVIOUS RESEARCH
Performance-related pay (PRP) schemes are of two types: (1) long-run PR? schemes; and
(2) short-run PRP schemes (Bell & Hanson, 1984). Under long-run PRP schemes, incen-
tive benefits depend upon the long-run performance of the firm, and under short-run PRP
schemes, the benefits depend upon the short-run performance of the firm. Profit sharing is
considered as a short-run PRP scheme. Profit sharing schemes are a means by which
employees receive a share of the profits of the company in which they work. The essence
of a profit sharing scheme is the creation of a distributable pool based on the profits of the
company.
Profit sharing schemes encompass a number of different computational formats with
entitlement and payment varying with the profit level at which payment is triggered
(Ogden, 1995). Commonly, 5-10% of the corporate profit before tax is set aside and man-
aged by a trust for the benefit of the employees. The amount is distributed according to
some agreed formula.
There are alternative methods for calculating the employees' share of profit. One alter-
native is to take a certain percentage of profit before tax after deducting a minimum return
necessary for the investment. The minimum return is called the cost of capital. This method
is consistent with the assumption that the incentive bonus is paid for performance beyond
normal performance. Another method sets aside a specified percentage of profit before tax
subject to a maximum limit. Under this method, there is an upper bound on the total
amount the employees can share. The objectives of the upper bound are: ( 1 ) retaining suf-
ficient fund for investment (ploughing back profit); and (2) discouraging manager income
manipulation behavior. Another alternative is to employ both a lower and upper bound.
Profit Sharing and Corporate Performance 471
The lower bound is the minimum amount of profit that must be earned before a bonus will
be paid, and the upper bound is the maximum limit to which employees share in profits.
The later model satisfies the objectives of the previous two models, i.e., providing for
employees' abnormal performance, maintaining sufficient fund for reinvestment, and mit-
igating income manipulation behavior. This model is not free from limitations. Referring
to this model, Healy (1985) showed that managers manipulate profit not only by increasing
the amount of reported profit but also by reducing it. He observed that managers use
income decreasing accounting accruals (big bath) instead of income increasing accruals
(smoothing) when earnings fall below the lower bound of a bonus scheme with a view to
maximizing their own future bonuses.
Profit sharing as a financial incentive (McGuire et al., 1962; Cosh, 1975; Jensen & Mur-
phy, 1990; Baiman, 1982) applied to all employees in a company has been found to be of
limited usefulness (see Ogden, 1992, 1993, 1995). Ogden ( 1995), in his study of profit shar-
ing and organizational change in the newly privatized water industry in England and Wales,
argued that profit sharing is principally valued not for any immediate discernible impact on
employee motivation, or as an incentive to efficient working, but rather as a rhetorical device
to reinforce and support the singular importance of profit as a measure of organizational per-
formance. From this perspective it is argued that profit sharing is more concerned with per-
suading employees of the legitimacy of contributing to company performance (Reed, 1989;
Fox, 1985) than as a direct employee incentive. Support for this view can be found in Smith
(1986), Baddon et al ( 1989), Bell and Hansen (1987), Dewe et al (1988) and Ogden (1995).
Reed (1989) viewed profit sharing is aimed at mobilizing employees consent to increased
company income performance. Smith ( 1986) has shown that employers typically referred
to profit sharing as an attempt to make employees feel more involved and interested in the
company; to increase employees' sense of commitment to the company; and to increase the
sense of co-operation between management and staffs (see also Ogden, 1995).
In the UK, the Government's introduction of tax incentives encouraged companies to
introduce profit sharing schemes (see Poole, 1988; SchuUer, 1989; Smith, 1986). Procter et
al (1993) suggest that profit sharing becomes a fundamental part of the process by which
management can exercise control over efforts and rewards and, ultimately, affects the prof-
itability of the organization. Thompson (1990) suggests that management cannot rely on
coercion as the sole means of control but must engage the cooperation and consent of
employees in order to be constantly able to recognize production. This is particularly true
in volatile economies like Bangladesh where workers and trade unions can render the for-
mal systems of accountability and control ineffective despite worthy intentions by manage-
ment (Hoque & Hopper, 1994, 1997).
The above suggests several rationales for the introduction of a profit sharing. First, an
organization's profit sharing scheme can change employee attitudes about co-operation
with management on issues such as work practices and productivity improvements, and
more generally their attitudes toward involvement with and commitment to the company
(Ogden, 1995). Second, a profit sharing scheme adoption can be viewed as the successful
result of collective bargaining between employees and the employer. Third, a profit sharing
scheme adoption may be a response to government regulation.
Profit sharing in Bangladesh is, in fact, regulated by the government through the Com-
panies Profits (Workers' Participation) Act, 1968. Under this legislation every industrial
enterprise of more than 100 employees or with a capital of more than US$0,125 million or
472 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4. 1998
with value of fixed assets (at cost) of more than $0.25m must create a fund called 'Work-
ers' Profit Participation Fund' with 2.5% of the firm's profit before tax. In 1989 the Act
was amended and profit participation was increased to 5% of profit before tax. This paper
considers whether Bangladeshi profit sharing schemes differ from those used in developed
countries as described in earlier research.
RESEARCH METHOD
The Sample
This is part of a larger study examining the link between performance related pay
schemes and corporate financial performance. Data were collected from published annual
reports, on site semi-structured interviews and inspection of archival sources. The research
was conducted in a sample of both publicly quoted and privately owned companies operat-
ing in Bangladesh.
A total of 55 industrial firms were studied from the population of Bangladeshi quoted
companies in 1993 Dhaka Stock Exchange (DSE) Register of Listed Companies. The Reg-
ister includes 1 42 companies quoted on the Dhaka Stock Exchange on 30 June, 1 993 . Finan-
cial reports and relevant data were not available for 87 companies. This resulted in a usable
sample of 55 companies (38.7% of the total number of industrial firms listed on the Dhaka
Stock Exchange). The sample firms' activities include engineering, manufacturing of food
and allied products, wearing apparel, pharmaceuticals and chemicals, and footwear. In addi-
tion, a set of privately owned (unlisted) companies that do not satisfy the government leg-
islated profit sharing conditions are also studied. Taking into consideration time and money
constraints, this selection was made by taking the first 50 manufacturing companies in the
1993 Dhaka Chamber of Commerce and Industry (DCCI) Directory. The DCCI Directory
population is of 5,000 business establishments. The selected firms represent only 1% of the
total population and do not constitute a random sampling. It must be recognized that our
results may thereby subject to a selection bias. The state of profit sharing in banks was also
studied using data from three nationalized commercial banks and two privately owned com-
mercial banks. The aim of this exercise was to determine whether or not the employers intro-
duced profit sharing schemes solely because of government regulation or did so voluntarily.
Twenty interviewees were selected from different hierarchical levels with each organi-
zation: members of the board of directors; general managers; accountants; and trade union
officials. The inters iew topics included: the organization structure; organization strategy;
managerial control; employee reward policy; performance measurement; financial report-
ing; and employee attitudes towards their organizational processes and work environment.
The interviews varied in length between 1 and 2 h and normally took place in their offices
in informal surroundings.
Statistical Design
The first stage analysis utilizes data from the published annual reports of the selected
companies. Descriptive statistics are used to examine the variety of profit sharing schemes
Profit Sharing and Corporate Performance 473
in practice. The second stage analysis uses regression techniques to examine the relation-
ship between profit sharing and corporate financial performance. The variables used in our
regression models are: (1) profit sharing; (2) company size; (3) return on equity (ROE);
and (4) market return on shares (MRS). These are defined as follows:
1 . Profit sharing, for purposes of this study, is the amount of corporate profit before tax
set aside and distributed to the employees of the selected companies.
2. Company size is proxied as the natural logarithm of the company's sales revenue.
3. Return on equity (ROE) is calculated by dividing net income after tax by sharehold-
ers' equity. Shareholders' equity includes ordinary share capital, reserves, and credit
balances of profit and loss account.
4. Market return on shares (MRS) is calculated as follows:
MRS = iP/Pf_^)-\
Where, P^ = price of shares in the current month, and
f ^ ,] = price of shares in the previous month.
RESULTS
Profit Sharing in Publicly Quoted Firms
As mentioned earlier, since 1968 profit sharing in industrial enterprises is regulated by
the government through the Companies Profits (Workers' Participation) Act, 1968. Inves-
tigations reveal that since the legislation provides for "just 5% of profit before tax," every
company in the sample reserves just 5% of profit before tax. Table 1 shows that in 74.5%
of sampled companies incentive payment is less than 5%. Only 4 companies out of 55 have
paid more than 10% of total pay as profit sharing benefit. Table 1 also demonstrates that
sampled companies pay an average of only 4.5% of total pay as incentive bonus.
All the interviewees expressed a high degree of dissatisfaction with the low rates for
profit sharing schemes. They believe that the low rate of profit sharing has little or no
impact on employee motivation. They also believe that the profit sharing scheme in their
organizations is governed largely by the legal requirements under the Companies Profit
(Workers' Participation) Act, 1968. Thus, the evidence suggests that firms introduce profit
Table 1. Bonus as a Percentage of Total Pay in
Publicly Quoted Industrial Firms During 1993
Number of firms
% of sample
Below 2.5%
21
38.2
2.5% to 4.99%
20
36.3
5% to 9.99%
10
18.2
1 0% and above
4
7.3
Total (N)
55
100.0%
Note: Mean: 4.5%; Median: 2.9%: Standard Deviation: 2.49c.
Source: Calculated by the authors from annual reports & accounts.
474 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
Table 2. Profit Sharing in Privately-Owned (Unlisted) Companies (A/ = 41 )
Number of companies
Less than 100 employees 41
Value of fixed assets of less than $.25m 34''
Capital of less than SO. 1 3m 26*'
Profit sharing schemes nil
Eid bonuses equal to one month's pay 13
Eid bonuses equal to two months' pay 7
Notes: "7 companies declined to supply the data;
15 companies declined to supply the data.
sharing to comply with legal requirements, not as a means to increase employee motivation
and commitment. This behavior is inconsistent with findings reported in the studies of
Smith ( 1 986), Baddon et al. ( 1 989), Bell and Hansen ( 1 987), Dewe et al. ( 1 988) and Ogden
(1995).
Profit Sharing in Privately Owned Companies
Inspection of archival records revealed that only 6.2% of industrial enterprises satisfied
the conditions of the Companies Profit (Workers' Participation) Act, 1968. The question
now arises as to whether profit sharing is practiced by choice (voluntarily) in the 93.8% of
the manufacturing companies outside the purview of the legislation. Table 2 presents the
profit sharing profile of companies not subject to the Act. As can be seen from the Table 2,
all the companies have less than 100 employees, 34 companies have fixed assets of less
than US$ 0.25 million, and 26 companies have capital of less than US$ 0. 125 million. The
Table further shows that not a single company has introduced a formal profit sharing
scheme. However, 13 companies have paid one festival (Eid) bonus equal to one month's
pay and 7 companies have paid two Eid bonuses equal to two months' pay.
Family-owned enterprises tend to recruit family members and relatives who are loyal to
the owner. An interviewee put it thus; "the owner is the sole authority to decide employees'
remuneration." Since there is huge unemployment in the country (18% to 37% of the labor
force are unemployed or under-employed, according to Rahman, 1994) there is little room
for wage bargaining. Furthermore, labor unions are absent or weak in the family-owned
firms. Seen in such context, profit sharing can be seen as a "distant" issue for the privately
owned firms. Books of accounts are reportedly considered secret. A trade union official
remarked: "...we (workers) do not have access to the company's books of accounts." Gov-
ernment officials (law enforcement agencies) also indicate that they have no access to
accounts in these firms. Most interviewees believe that the Registrar of Joint Stock Com-
panies (company watchdog) lacks sufficient manpower to verify the books of accounts
even given adequate access.
Profit Sharing in Banics
Since 1975 profit sharing schemes in the selected banks have been introduced using the
following sharing rates:
Profit Sharing and Corporate Performance 475
Table 3. Profit-Sharing (Incentive Bonus) in Banks (1986-1988) (Million $)
Profit
Banks
before tax
Bonus
Bonus/profit (%)
Sonali
$19.5
$3.50
17.95%
Janata
15.08
2.38
15.78
Agrani
14.75
2.20
14.92
Pubali
2.95
0.60
20.34
Source: Annual reports
1. If profit before tax (PBT) is < 1/3% of working fund (WF): no bonus.
2. If PBT > 1/3% of WF but PBT < 1%: 1 month's basic pay as bonus.
3. If PBT > 1 % but PBT < 1 .5% of WF: 1 .5 months' basic pay as bonus.
4. If PBT > 1.5% of WF: 2.5 months' basic pay as bonus.
Until 1988 employees in the selected banks received incentive bonuses ranging from
14.8% to 20.3% of profit. During this period bank profit was sufficient to cover 1/3% of
the working fund (see Table 3). Since 1989 bank profits (before tax) are much lower than
the minimum requirement (1/3% of working fund) and therefore bank employees receive
no profit-related incentive bonus. In this study working fund is the sum of total of (i) all
deposits (time and demand); (ii) all borrowings; and (iii) reserve fund.
Due to the decreasing profitability since 1989 all of the banks failed to qualify for profit
sharing. One of the main reasons for decreasing profitability was the increasing trend in
bad and doubtful debts. Since 1989 (as per instruction of the Bangladesh Bank circular no.
34, dated 16.1 1.89) no bank can report in a bank's profit and loss account interest accrued
but unrealized from the classified loans and advances. Classified loans are loans that are
overdue more than twelve (12) months.
". . .for limitation beyond its control the bank suffered substantial loss due to suspension
of interest on classified loans under the policy directives of the Government. The bank
will make substantial profit when these loans aie recovered." (Director's overview,
Annual Report. 1990)
It is believed that bank employees are demoralized due to the elimination in 1989 of
profit-related incentive bonuses. A bank employee remarked:
"True, employees have to be blamed for the bad credit management but this is not the
whole scenario. Bank management does not wholly control debt recovery. It is also
dependent on political situation of the country. Bank performance has been actually
increasing from the viewpoint of deposits and advances."
Discussions with some bank employees reveal that they are also demoralized, because
they believe that their workload has increased without commensurate rewards. A bank
employee remarked that even though bank's deposits and advances had increased, employ-
ment size did not increase in proportion. Most bank employees interviewed believe that
good credit management is essential in order to revive incentive bonus. According to them,
co-ordinated efforts in this respect by management, trade union, political parties, and the
476
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol 33, No. 4, 1998
government is an urgent need if an 'enabling' and 'motivating' environment is to return to
the banking industry. It is recognized in Bangladesh that bank loan defaults are a national
crisis. "This has caused the discontinuation of incentive bonus." commented the chief
executive of one nationalized commercial bank.
An International Comparison of Profit Sharing Schemes in Practice
It will be interesting to observe the dissimilarities between this study and the studies con-
ducted in other countries. In the USA and UK, although there is no government regulation
on employee profit sharing schemes, the schemes are well developed through the interplay
of market forces. In the USA, typically between 10% and 12% of a firm's net profit are
paid as bonuses {The Economist, 15 April, 1995, p. 75). In the UK, there is at least one
incentive scheme in all of the 500 largest companies (Chowdhury, 1993), whereas, in
Bangladesh, profit sharing is found in less than 1% of the industrial enterprises. In the UK,
usually 15% to 25% of employee earnings are incentive related, whereas, in Bangladesh,
in 74.5% of sample firms, incentive payment is less than 5% (Chowdhury, 1993). In India,
profit-sharing benefit ranges between 8.33% and 20% of salary or wages (Narain, 1983).
Available data on Malaysia, Philippine, and Singapore indicates that typically 10% of
profit before tax is reserved for employees (ILO, 1989).
Profit Sharing and Corporate Financial Performance
The literature suggests a close linkage between profit sharing and corporate financial
performance (Baiman. 1982; Smith, 1986; Thomas, 1996; Wright, 1986). A cross-sec-
tional regression model is used to assess the relation. Here, the null hypothesis (Hq) that
employee profit sharing and corporate financial performance are unrelated may be rejected
Table 4. Descriptive Statistics for the Variables
Variables
Mean
Median
S.D.
Skewness
Employee profit sharing
S0.006m
SO.OOSm
S0.004
2.6
Sales revenue
S5.35m
S1.57m
SI 2.96m
6.1
Net profit
S0.09m
S0.02m
S0.23m
7.4
Equity
SI. 04m
S0.51m
S2.94m
6.9
Return on equity (%)
8.90
7.20
2.40
1.5
Market return on shares {%)
12.7
12.3
13.1
1.4
Table 5. Correlation matrix for the variables
Variables
LnEPS
LnSales
ROE
MRS
LnEPS (Employee profit sharing)
LnSales (Sales revenues)
ROE (Return on equity)
MRS (Market return on shares)
1.0
.79**
.20**
.18'
1.0
0.02
0.02
1.0
0.43**
1.0
Notes:
Significant at p"=.01, two-tailed;
Significant at p~=.05, two-tailed.
Profit Sharing and Corporate Performance 477
at a significance level of 1%. Table 4 presents the descriptive statistics and Table 5 shows
the correlation matrix for the variables used in the analysis.
As can be seen in Table 4, employee profit sharing and sales revenues are highly skewed.
The data was therefore transformed using a logarithmic transformation. The return on
equity (ROE) and market return on shares (MRS) are slightly skewed. No transformation
was thought necessary and none was performed. The relationship between the measures of
performance and employee profit sharing are modelled as follows:
LnEPS, = ^0 + /7,LnSales, + /?2R0E, + J (1)
LnEPS, = ^0 + ^jLnSales, + ^3MRS,- + J (2)
Where,
LnEPS, = Logarithm of employee profit sharing,
LnSales, = Logarithm of sales revenues of /th firm,
ROE, = Return on equity of /th firm,
MRS, = Market return on shares of /th firm, and
gj = Error term of the model.
As ROE and MRS are highly correlated (Table 5) they are not put in the same equation.
Sales revenue is added to the models because it is expected that employee profit sharing
varies with firm size (sales revenue being a proxy for firm size).
The results presented in Table 6 indicate that employee profit sharing is positively asso-
ciated with sales revenue, the firm size proxy. Employee profit sharing is also positively
associated with ROE and MRS individually (p = 0.0492-0.0500). We reject the null
hypothesis that employee profit sharing and corporate financial performance are unrelated.
The independent variables together explain 50.77%-51.03% variations in employee profit
sharing. We also ran regression with Ln (Sales) as the single independent variable. While
not presented here, it is noted that Ln (Sales) alone accounts for 49.9% of the variations in
Table 6. Regression Analysis with Log of Employee Profit Siiaring as the
Dependent Variable and Return on Equity (ROE) and Market Return on Shares
(MRS) as Independent Variables
Regression 1 Regression 2
Z>o = Constant
?-vaiue (sig)
b^ = LnSales
r-value (sig)
bj = ROE
f-value (sig)
bj = MRS
?-value (sig)
Adjusted R~
f (sig)
N
6.41
6.74
5.92 (0.000)
5.96 (0.000)
.1721
.1601
2.65 (0.005)
2.46(0.010)
.0028
-
1.99(0.049)
-
-
.0021
-
1.97(0.050)
.5103
.5077
.5178
.5061
4.01 (0.051)
3.99 (0.022)
55
55
478 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4. 1998
employee profit sharing. Thus performance variables appear to account for only 51.03%-
49.99c or 1.13% of the variations in employee profit sharing. Overall, it can be concluded
that while employee profit sharing is positively associated with organizational perfor-
mance, the adoption of profit sharing accounts for only a minor amount of the observed
variation in performance.
DISCUSSION AND LIMITATIONS
Employee profit sharing in Bangladesh is regulated by a government legislation called
Companies Profit (Workers' participation) Act, 1968. Under this legislation, every manu-
facturing enterprise with more than 1 00 employees or a capital of more than US$ 0. 1 3 mil-
lion or with the fixed assets values of more than $0.26 million must reserve 5% of profit
before tax for distribution to its employees. This legislation is not particularly restrictive,
however, as it applies to only 6.2% of companies in Bangladesh. The remaining 93.8% of
the companies remains outside the purview of this legislation.
Our analysis indicates that profit sharing in publicly quoted firms is mainly in response
to the external legitimacy offered by the Workers' Participation Act. Such a behavior is
inconsistent with the suggestions made in the literature that an organization should intro-
duce a profit sharing scheme to motivate employees to improve organizational perfor-
mance (Ogden, 1992, 1995; Smith, 1986; Bougen, 1989; Bougen et al., 1988). The data
indicates that the average incentive bonus in Bangladesh was only 4.5% of total pay. The
quantitative analysis did reveal a small but a positive association between profit sharing
and corporate performance.
Profit sharing schemes in banks are a separately interesting phenomenon. Until 1988.
employees in commercial banks, private and public, received yearly profit-related bonus
ranging from 1 to 2.5 months' basic pay depending upon bank profitability. Beginning in
1989 employees failed to qualify for incentive bonus due to low bank profitability, mainly
for two reasons. First, the Bangladesh Bank (the central bank) policy no longer permitted
commercial banks to credit their profit and loss account with interest from classified loans.
Second, loan recovery rates decreased over the preceding years.
Limitations
Although the sample size is small the study has covered a wide range of firm character-
istics e.g. large, medium and small firms, listed companies and unUsted companies, com-
mercial firms and banks. Quantitative analysis of the data in this paper is subject to three
primary' limitations. First, each measure of performance used throughout the paper is an
imperfect proxy for performance. For example, the accounting based measures of perfor-
mance may have been subject to manipulation. In addition, the use of reported profits for
any particular year as the index of corporate achievement may conflict with long-run max-
imization strategies by management. Second, this paper includes banks with publicly
owned and privately owned firms when measuring corporate performance. As pointed out,
the basis of profit sharing is different between banks and industrial companies. Moreover,
one may argue that bank performance in a developing economy should take into account
social and economic development considerations that may not be true in case of publicly
Profit Sharing and Corporate Perfornnance 479
owned and privately owned companies. Consequently, further research is advisable before
firm conclusions are drawn with regard to the study's reported association between profit
sharing and corporate performance in the selected companies. Third, the study is con-
strained to the period of 1993-94.
RESEARCHER POLICY OBSERVATIONS
The following observations are somewhat beyond the realm of the research presented
above. However, the researchers have developed the following opinions based on their
broader understanding of the Bangladeshi environment.
The Bangladeshi Company's Profit (Workers' participation) Act, 1968 discussed earlier
needs to be amended. First, coverage of the regulation should be extended further so that
large number of business establishments can reap the benefit of profit sharing schemes.
Second, considering that in overseas countries profit-sharing percentage is more than 5%,
the "just 5% of profit before tax" provision of the Bangladeshi Act can be replaced by "at
least 5% of profit before tax." Like developed economies, the Bangladeshi government
should give lucrative tax facihties to those business establishments that have wider incen-
tive schemes.
It is recognized that in Bangladesh, bank loan recovery rates depend not only on bank
management's performance but also on the national political condition. That is to say, it is
recognized that political instability tends to reinforce a loan-default culture. We believe
that employees, trade unions, politicians, and the Bangladeshi government must work
together to revive bank profitability and incentive bonus.
As pointed out, profit sharing schemes used in the selected Bangladeshi companies were
mainly in response to government regulation. In Bangladesh, the industry sector is subject
to serious political crisis as its trade unions have pervasive political influence and they are
linked to the political parties (Hoque & Hopper. 1994). The interaction of these factors ren-
ders extant control systems ineffective in the eyes of management. It is argued that profit
sharing can change employee attitudes about co-operation with management on issues
such as stable work environment and productivity improvements. Profit sharing can
become a fundamental part of the process by which management can exert discipline over
its workforce and develop the harmonious employer-employee relationship that is a pre-
condition for increasing productivity of the company.
Acknowledgments: Thanks are due to Haim Falk, Trevor Hopper. Bob Scapens. Chris Guilding and
Mike Dempsey for their helpful comments and suggestions on an earlier draft of this paper. The use-
ful comments of two anonymous reviewers and the Editor are also gratefully acknowledged.
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The International
Journal of
Accounting
Internationalizing Accounting Education Through an
Integration Approach: A Survey of U.S. Schools
Rasoul H. Tondkar, Mary A. Flanlgan, Ajay Adhikari and Judith A. Hora
Virginia Commonwealtli University, Longwood College, The American University
and University of San Diego
Key Words: Integration of international accounting topics; Internationalization of accounting
curricula: Coverage of international accounting topics; Integration approach; Resource materials
in internationalizing accounting curricula; Incentives and challenges in internationalizing
accounting curricula.
Abstract: The integration of international accounting topics throughout the curriculum (integra-
tion approach) is often recommended as the most preferred/desired method of internationalizing
the accounting curriculum. This study presents the results of sur\'ey research on the extent of inte-
gration, use of instructional resources, and perceived incentives and obstacles to internationaliz-
ing accounting curricula through the integration approach in U.S. schools. Additionally, the
paper suggests methods and instructional resources that can be used to add an international
dimension into the accounting curriculum through an integration approach.
The findings reveal that the integration approach of internationalization is used more fre-
quently in undergraduate programs (61%) compared to graduate programs (52%). Financial
accounting is the most frequently integrated, and auditing and taxation are the least frequently
integrated areas for both undergraduate and graduate programs. The integrated lecture is the
most popular method of integrating international topics into accounting courses, although other
instructional resource materials such as foreign annual reports, assigned articles, and cases are
also used. The findings of this .study should benefit faculty currently involved in international
accounting education as well as those planning on internationalizing their program in the future.
Several reports (AAA, 1986; Perspectives..., 1989; AECC, 1990) have criticized the cur-
rent state of accounting education in the United States. Pointing to the failure of educators
to respond to the changing business environment, these reports have recommended signif-
icant changes in accounting education. "The need for changes has arisen because account-
ing programs have not kept pace with the dynamic, complex, expanding, and constantly
changing profession for which students are being educated" (AECC, 1990, p. 305).
Direct all correspondence to: Rasoul H. Tondkar, Professor of Accounting. Virginia Commonwealth University.
Richmond. VA 23284-4000; Tel: (804) 828-7156; E-mail: rtondkar@busnet.bus.vcu.edu.
The International Journal of Accounting, Vol. 33. No. 4, pp. 483-507 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1998 University of Illinois
484 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1 998
One recommendation common to all these reports has been the need to include an inter-
national emphasis in accounting education. The Accounting Education Change Commis-
sion (AECC) advocated the inclusion of both international business and accounting
courses in the accounting curriculum. This position was supported by the leadership of the
major public accounting firms: "The successful practitioner requires general knowledge
that covers a number of factors... (including) a sense of the breadth of ideas, issues, and
contrasting economic, political, and social forces in the world" (Perspectives..., p. 7).
Additionally, current standards of the American Assembly of Collegiate Schools of Busi-
ness (AACSB) require the inclusion of global issues in the curriculum (AACSB. 1993,
p.l8).l
From a practical perspective, U.S. accountants and auditors are often confronted with sit-
uations that require knowledge of the accounting principles of other countries (Tondkar et
al.. 1994). This is particularly true when a U.S. company (1) prepares statements for con-
solidation by a non-U. S. parent, (2) seeks to raise capital in foreign markets, and/or (3) has
non-U. S. investors for whom the company prepares financial statements in accordance
with the foreign generally accepted accounting principles (AICPA, SAS No. 51, par. 1-8).
Responding to these concerns, business schools have sought to internationalize their
accounting course offerings. The accounting curriculum can be internationalized by using
one of two approaches: offering a separate international accounting course or integrating
selected international accounting topics into existing accounting courses (integration
approach). While the two approaches can also be used in conjunction, it is generally agreed
that integration is the more desirable approach to internationalize the accounting curricu-
lum (AAA, 1973; Bums, 1979; Mintz, 1980; Stout et al., 1988). The integration approach
exposes all accounting students to the international dimension of accounting, not just those
students taking an elective course in international accounting. This is more in line with the
AACSB (1985) recommendation that "every student should be exposed to the international
dimension through one or more elements of the curriculum." Moreover, many domestic
accounting issues have international counterparts; thus, incorporating coverage of interna-
tional issues is a natural extension of domestic issues. Introducing international materials
in an accounting classroom not only exposes students to accounting practices in other
countries, but also enhances and reinforces their understanding of the accounting principles
under discussion. Additionally, offering a separate international accounting course is often
not practical due to the lack of resources or other restrictions (e.g.. the inability to add an
additional course to the curriculum).
The objective of this paper is to examine the extent of coverage and methods currently
employed in the U.S. to internationalize accounting curricula using the integration
approach. Specifically, this paper investigates (1) the extent of the integration approach
being utiUzed in internationalizing accounting curricula, (2) the courses and topics that are
being integrated, (3) the instructional materials and resources being employed to interna-
tionalize the accounting curriculum, and (4) the perceived incentives and obstacles to inter-
nationalizing accounting curricula. Additionally, the paper suggests methods and
instructional resources that can be used to add an international dimension into the account-
ing curriculum through an integration approach. The findings of this study should benefit
faculty currently involved in international accounting education as well as those planning
to internationalize their programs in the future.
Internationalizing Accounting Education 485
The paper is organized in the following manner. The next two sections discuss the rele-
vant literature and the data collection process. The analysis of data and the findings of the
study are then presented and discussed. In the following section, suggested methods of
internationalizing the accounting curriculum through an integration approach is discussed.
The final section contains the summary and conclusions of the paper.
SURVEY OF LITERATURE
In the last two decades, various studies dealing with international accounting education in
the U.S. have been published. The studies relevant for the present study can, however, be
classified into two broad categories. Studies in the first category investigate the approaches
utilized in the U.S. to internationalize accounting curricula (Bums, 1979; Mintz, 1980;
Sherman, 1987; Stout and Schweikart, 1989; Huang and Mintz, 1992). Studies in the sec-
ond category discuss various innovative approaches that can be used to integrate selected
international accounting topics into accounting courses (Meek, 1985; McClure, 1988;
Stout et al., 1988; Bloom and Collins, 1990; Bloom et al., 1992; Tondkar et al., 1994;
O'Connor et al., 1996). Although a number of studies have examined the strategy by U. S.
schools of offering a separate international accounting course as a way to internationalize
the accounting curriculum, only a few studies have examined, in any detail, the use of the
integration approach to internationalize the accounting curriculum. Since the objective of
this paper is to examine how U.S. schools are internationalizing their accounting curricu-
lum through the integration approach, both categories of international accounting educa-
tion studies are of direct interest to the current study and are discussed below.
In a seminal study. Bums (1979) surveyed U.S. schools conceming existing and antici-
pated intemational accounting course offerings. While the study did not specifically exam-
ine the integration approach, Bums (1979) identified several obstacles to implementing the
integration approach across the curriculum. The most important challenge identified was
the lack of resources in the form of faculty qualified to teach intemational aspects of
accounting and textbooks or supplementary materials to be used. Mintz (1980), replicating
Burns' (1979) study, reinforced the need for implementing the integration approach as an
ideal strategy to intemationalize accounting curricula. However, the study also noted the
practical constraints (i.e., lack of textbooks and qualified faculty) that needed to be over-
come to implement the integration approach. In addition, the study discussed the efforts of
organizations such as the International Accounting Section (IAS) of the American
Accounting Association and the AACSB to promote intemationalization of accounting
curricula through position papers, workshops, and the exchange of syllabi.
Sherman (1987) was the first to examine which of the two approaches (a separate inter-
national accounting course or integration) was being used by U.S. schools to international-
ize their accounting curriculum. He surveyed chairs of accounting programs at AACSB
accredited schools concerning intemational accounting education at their institutions and
how they were satisfying the "worldwide dimension" of then (1985-1986) AACSB
requirements. The results of the study indicated that most responding schools were follow-
ing the strategy of incorporating international topics into traditional accounting courses
(the integration approach) rather than requiring a separate intemational accounting course.
Contrary to AAA's (1978) recommended approach of intemational coverage in principles
486 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
of accounting classes, most responding schools chose to integrate international topics into
intermediate and advanced accounting classes. The study also reported the international
topics that are most likely to be covered in different accounting courses at both the under-
graduate and graduate levels.
Stout and Schweikart (1989) surveyed practitioners and academics on the importance of
international accounting to the undergraduate curriculum. In terms of effectiveness of cov-
ering international accounting in the undergraduate curriculum, the respondents rated the
separate course strategy as the most effective, followed by the strategies of integration
throughout the accounting curriculum, integration throughout the business curriculum, and
coverage in particular accounting courses. On the question of which method(s) schools
were actually using, the results were consistent with Sherman (1987). The separate course
strategy was being used least while the preferred options were to integrate international
topics either throughout the business or the accounting curriculum.
Huang and Mintz (1992) surveyed members of the IAS on the current state of interna-
tional accounting education in the U.S. and abroad. The respondents to the survey felt that
the "preferred" method of international accounting education was to offer a separate inter-
national accounting course at the graduate level followed by integration of certain courses.
The least supported option was to offer a separate international accounting course at the
undergraduate level.
From the limited studies that have been conducted in this area and discussed above, the
results indicate that the integration approach is increasingly used to internationalize
accounting curriculum at U.S. schools. However, the lack of faculty qualified to teach
international aspects of accounting and appropriate teaching materials is generally
regarded as a major obstacle to implementing the integration approach.
Responding to these concerns, a number of studies have been published that discuss and
share the experiences of different accounting faculty and schools in integrating an interna-
tional accounting dimension into undergraduate and graduate accounting courses (Meek,
1985; McClure, 1988: Stout et al., 1988; Bloom and Collins. 1990; Bloom et al., 1992;
Tondkar et al., 1994; O'Connor et al., 1996). These studies are very useful because they
discuss procedures and suggestions as well as source materials that can be used by account-
ing instructors in integrating an international dimension in different accounting classes.
Meek (1985) suggests that the international aspects of certain managerial accounting
topics such as planning and control, transfer pricing, and performance evaluation can be
utilized to internationalize the introductory managerial accounting course. McClure (1988)
discusses the process of integrating an international dimension into the introductory finan-
cial accounting course. Instructional resource materials and guidelines for their utilization
by accounting faculty who lack expertise in international accounting are also described.
Both of these articles offer suggestions for overcoming some of the previously mentioned
obstacles — lack of faculty expertise in international accounting and lack of supporting
instructional materials.
Stout et al. (1988) and Bloom et al. (1992) suggest methods to add international topics
to upper-level accounting courses. Stout et al. (1988) present a case study based on an
assumed set of transactions and events for companies located in Australia. Germany, the
U.K., and the U.S. Differences in accounting principles and disclosures among the coun-
tries are illustrated by using comparative income statements. Bloom et al. (1992) empha-
size the relation between accounting principles and cultural factors in analyzing the
Internationalizing Accounting Education 487
accounting treatment of topics such as inventory costing, depreciation methods, and
business combinations in France, Japan, Sweden, the U.K., and the U.S. As in previous
studies. Bloom et al. (1992) attempt to provide information not readily available in order
to enhance the international component in intermediate and advanced accounting
courses.
Bloom and Collins (1990) recommend the integration of core accounting courses rather
than developing a separate course and hiring new faculty. Their article suggests the use of
instructional resource materials such as historical accounting textbooks, published interna-
tional case studies, international accounting associations' materials, and lectures by inter-
national visitors.
Tondkar et al. (1994) describe two methods to add an international dimension to upper-
level financial courses by incorporating foreign annual reports. In the first method, the
international perspective is introduced into existing courses by presenting information
from foreign annual reports from selected countries to contrast the treatment of topics such
as accounting for goodwill, inventories, deferred taxes, etc. with the U.S. treatment. The
second method covers the international topics as a distinct component of an existing
course. Either of the two methods could be tailored to the expertise of the faculty member
and time constraints.
Stout and Schweikart (1989) indicate that if only one course were to be selected for
internationalization, that course would be the advanced accounting course. O'Connor et al.
(1996) suggest a procedure for integrating an international perspective into the advanced
accounting course with the use of foreign financial statements and required SEC filings by
firms from developed countries. They recommend first introducing, early in the course, the
primary factors that influence the development of accounting systems. As the advanced
accounting course progresses, and particular topics are discussed, the accounting treat-
ments of these topics from other countries are presented to illustrate the differences
between U.S. GAAP and non-U. S. GAAP and to emphasize how the environmental factors
influenced the development of accounting practices.
While the first category of studies discussed in the literature review focuses on investi-
gating the approaches utilized by U.S. schools in internationalizing accounting curricula
(separate international accounting course, integration approach, etc.), the second category
of studies recommend various methods that could be used to surmount some of the obsta-
cles inherent in implementing the integration approach. The present study complements
and extends the extant literature by examining both the extent of the use of the integration
approach in U.S. schools as well as the implementation issues surrounding the integration
approach in internationalizing the accounting curriculum. This study is more comprehen-
sive than earlier studies in terms of its coverage of the integration approach and in terms of
the comprehensiveness of the sample. The sample in the current study (570 schools) is
much larger than earlier studies and captures a stronger cross-section of schools with dif-
ferent demographics (e.g., undergraduate vs. graduate, accredited vs. non-accredited, etc.).
Additionally, given the significant changes in the 1990s, the establishment of the EU mar-
ket, the NAFTA treaty, the emergence of the Pacific Rim countries, and the explosion of
the international capital markets, it is a good time to reassess how U.S. accounting educa-
tion is responding to the globalization of business.
488 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
DATA COLLECTION
The data were gathered through a questionnaire sent to chairs/facuhy members of 570
accounting programs selected from the 1995 edition of the Hasselback Accounting Fac-
ulty Directory? The sample used for this study is one of the most comprehensive samples
dealing with the coverage of international accounting topics in the U.S. It represents
appro.ximately 72 percent of all U.S. accounting programs included in the 1995 edition of
the Hasselback Accounting Faculty Directory. The first part of the questionnaire
requested demographic information about the institution (e.g.. programs offered, accredi-
tation status, number of faculty/students). All respondents were instructed to complete this
section and return the questionnaire even if their institutions did not internationalize
accounting curricula.
The next section of the questionnaire requested information on the methods used to inter-
nationaUze the accounting curriculum (e.g.. separate course, integration approach, etc.).
The integration segment of this section was divided into five parts. The first four parts cov-
ered tmancial. cost/managerial, tax, and auditing courses. In each of these parts, a grid con-
taining international accounting topics that might be integrated in that particular area, was
presented. Respondents were asked to indicate which course(s). if any, included coverage
(integration) of the topics. The fifth part covered instructional resource materials used to
integrate topics, obstacles encountered, and incentives available in internationalizing
accounting curricula.
In sending the questionnaire, the following strategy was selected: ( 1 ) The questionnaire
was sent to a faculty member of an accounting program identified in the Hasselback
Accounting Faculty Directory as having research and/or teaching interests in international
accounting. For those accounting programs with no such identified faculty member, the
questionnaire was sent to the chair of the department, and they were requested to forward
the questionnaire to appropriate faculty for completion.
Of the total of 201 responses received, 194 were usable responses (a 34 percent response
rate). The profile of responding accounting programs appears in Table 1. Of the 194
responding programs, 188 offer undergraduate degrees: 152 offer graduate degrees; and
146 offer both undergraduate and graduate degrees. One hundred twenty-six (65^) of the
responding institutions have AACSB business school accreditation and 73 (38%) of the
accounting programs are AACSB accredited.
Table 1. Profile of Responding Institutions
Total Number
Number
of Respondents
Degrees Offered:
Undergraduate
188
194
Graduate
152
194
Undergraduate & Graduate
146
194
AACSB Business Accreditation
126
194
AACSB Accounting Accreditation
73
194
11.7%
16.5%
36.2%
59.2%
2.7%
30.3%
61.0%
52.0%.
31.4%
12.5%
188
152
Internationalizing Accounting Education 489
Table 2. Approaches to Accounting Curriculum Internationalization
Approaches to Internationalize Accounting Curricula Undergraduate* Graduate*
Offer Multidisciplinary International Business Course in which
Accounting Topics are Covered
Offer Separate International Accounting Course
Offer Separate International Tax Course
Integrate International Dimension Into Accounting Courses
No Specific Internationalization Approach
Total Respondents
Note: *The percentages are of those respondents who answered "yes." Since respondents could choose more than one
answer, the sum of all items in the columns do not necessarily equal one.
ANALYSIS OF RESULTS
Each responding institution was asked to indicate the approach (es) utilized to intemation-
ahze the accounting curriculum. Table 2 summarizes these responses, by undergraduate
and graduate programs. There appear to be significant differences between the preferred
approach(es) for undergraduate and graduate programs. Many more of the responding
graduate programs (59.2%) offer separate courses in international accounting than do the
undergraduate programs (36.2%). Only a small number of responding undergraduate pro-
grams (2.7%) offer a separate international tax accounting course, while 30.3% of the
responding graduate programs offer this course. A relatively small number (12.5%) of the
institutions with graduate programs have no specific approach to internationalizing the cur-
riculum, but almost one-third (31.4%) of the undergraduate programs have no specific
approach.
The responding institutions indicate a strong support for the integration approach to
internationalizing the accounting curriculum. Sixty-one percent (61%) of the responding
undergraduate programs, and 52% of the responding graduate programs indicated that they
used the integration approach. The remainder of this paper will address the integration
approach to internationalizing the accounting curriculum.
Coverage of International Accounting Topics Through Integration Approach
The extent of integration of international accounting topics into the curriculum by type
of program is presented in Table 3. Although earlier studies on internationalization of
accounting curricula have reported low levels of support for the integration approach
(Bums, 1979, p. 137; Mintz, 1980, p. 144), the findings of this study show strong support
for the use of the integration approach in international accounting education. It appears that
over one-half of the respondents, except for those from graduate non-accredited business
schools, utilize the integration approach. This finding is consistent with Gray and Roberts'
(1984) suggestion that "In the long term, it can be expected that there will be some greater
movement towards a more integrated approach whereby international aspects are incorpo-
rated into existing courses currently concerned with purely domestic issues" (p. 269). This
finding is also consistent with the findings of Cohen et al. (1991). In their survey study.
Cohen et al. found that respondents believed that more international accounting topics
490 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
Table 3. Percentage of Responding Institutions Integrating International
Accounting Topics Into Accounting Curricula by Type of Program
Type of Program
Undergraduate*
Graduate*
All Undergraduate Programs
61%
—
All Graduate Programs
—
52%
AACSB Accredited Business Schools
63%
55%
AACSB Accredited Accounting Programs
59%
55%
Non-Accredited Business Schools
57%
46%
Note: *The numbers in Table 3 are computed by dividing the number of responses for each item
(Type of Program using integration) by the total number of appropriate responses for that cate-
gory. For example, 61% for "All Undergraduate Programs" is calculated by dividing the 1 14
undergraduate programs indicating that they utilize an integration approach by 188, the total
number of undergraduate responding programs.
should be integrated into the accounting curriculum than what they believed was taking
place at the time of the survey (p. 299).
Also, it is noteworthy to mention that integration is more frequently used at the under-
graduate than the graduate level. The integration approach of internationalizing accounting
curricula is more preferred/desired (Bums, p. 137; Mintz, p. 144; Sherman, p. 274; Cohen et
al., p. 300), especially at the undergraduate level. Cohen et al. (1991) stated "The key to
introducing international issues within undergraduate business programs is to facilitate
their integration within functional courses. We cannot rely upon the stand-alone interna-
tional business or international accounting course as the only source of international cov-
erage" (p. 300). Many accounting problems/issues discussed at the undergraduate and
graduate levels are not country specific (e.g., goodwill accounting, asset valuation, transfer
pricing, etc.). Comparing and contrasting the accounting treatment of these topics in other
countries is a logical extension of course coverage. Past studies have shown that the inte-
gration approach was not extensively used due to lack of instructional resource materials
and familiarity of instructors with international accounting topics (Bums, p. 137; Mintz,
p. 144; Bloom and Collins, p. 3 10; Sherman, p. 274; Stout and Schweikart, p. 138; O'Connor
et al., p.316). In response to these concerns, an increasing number of textbooks are now
including excerpts on international aspects of different topics. The results of this study
imply that the trend in intemationalizing accounting curricula through the integration
approach is increasing. The integration of different international accounting topics in spe-
cific undergraduate and graduate courses is discussed in detail in later sections of this
paper.
Topics Covered by the Integration Approach
Compared to previous studies, this paper is unique in that it attempts to identify which
international accounting topics are integrated into accounting courses, what courses are
used to integrate intemational accounting topics, and the relative frequency of coverage of
such topics in specific courses. As discussed earlier, one section of the questionnaire dealt
with the integration of intemational accounting topics into accounting courses. This section
contained four grids, one for each of the following areas: financial, cost/managerial, tax,
and auditing. Each grid contained a list of topics that could be integrated into courses in
Internationalizing Accounting Education 491
Table 4. Integration of International Accounting Topics by Accounting Area and
Type of Program
Undergraduate Graduate
Accounting Area No. of Respondents' (%) No. of Respondents' (%)
Financial Accounting 104(91%) 60(76%)
Cost/Managerial Accounting 61 (54%) 53 (67%)
Tax Accounting 30 (26%) 39 (49%)
Auditing 41 (36%) 28 (35%)
Total number of respondents
indicating use of integration 114 79
Note: *The number of respondents for each accounting area (e.g.. financial, managerial, etc.) represents those
respondents indicating that they use an integration approach. However, some of these respondents did
not complete the grids dealing with integration of specific international topics in different accounting
areas. Thus, the number of respondents in each area shown in Table 4 do not correspond to the total
number of respondents completing grids for each specific area (Tables 5-8).
these areas. These topics and the courses in which the topics could be integrated were iden-
tified by reviewing previously published studies. Respondents were asked to indicate
which course(s), if any, included coverage (integration) of the topics. Table 4 provides an
overview of integration of international accounting topics by accounting area and type of
program (i.e., undergraduate and graduate). As reported in Table 4, financial accounting is
the most frequently integrated area for both undergraduate and graduate programs. This is
not surprising since more courses are offered in financial accounting than other areas. At
the graduate level, financial accounting is followed by cost/managerial, tax. and auditing,
respectively, for integration of international topics. However, for the undergraduate level,
financial accounting is followed by cost/managerial, auditing, and taxation, respectively.
Tables 5, 6, 7, and 8 reproduce these grids with the percentage of responses for each topic
and course. The following sections discuss the findings of the study with regard to the inte-
gration of international accounting into specific areas by courses.
Financial Accounting Courses
Table 5 presents information on the coverage of international accounting topics by the
integration approach in undergraduate financial accounting courses (introductory, interme-
diate, advanced accounting, and theory) and graduate theory course. In comparing the total
number of respondents indicating coverage of international accounting topics in financial
accounting courses, it appears that the most frequently internationalized financial account-
ing course is advanced accounting, followed by intermediate accounting, introductory
accounting, and graduate accounting theory. This finding was expected since many of the
topics covered in advanced and intermediate accounting courses lend themselves to inter-
nationalization. Accounting theory at the undergraduate level had the fewest number of
responses, largely reflecting that this course is offered only at few schools.
The five most frequently integrated topics in introductory financial accounting are: for-
eign currency transactions, analysis of foreign financial statements, international account-
ing standards, comparative standard setting processes, and social responsibility
492
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
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accounting. This finding is extremely interesting in that some respondents introduce com-
plex issues such as foreign currency transactions at the introductory level. A cursory exam-
ination of introductory accounting texts available to the authors revealed that some of these
books contained excerpts of certain international accounting topics. These excerpts allow
instructors to add an international dimension by integrating certain international aspects
into the topics being discussed.
The most frequently integrated topics in intermediate accounting are: inflation account-
ing, international accounting standards, segmental reporting, inventory costing, accounting
for revenue recognition, accounting for fixed assets and leases, and pension accounting.
Sherman (1987) found that undergraduate intermediate accounting courses would typically
supplement domestic inflation accounting with its international counterpart. Since most
intermediate accounting texts contain a chapter on inflation accounting, instructors cover-
ing this topic presumably discuss inflation accounting in other countries. It is also impor-
tant to note that most other areas of accounting topics covered in intermediate accounting
(e.g., intangibles, expense recognition, stockholders' equity, etc.) are frequently interna-
tionalized (see Table 5). One possible explanation for the coverage of comparative finan-
cial accounting practices (e.g., inventory costing, pension accounting, intangibles, etc.)
may be due to the inclusion of such topics in the more current editions of intermediate
texts. An examination of intermediate texts available to the authors shows some coverage
of international aspects of accounting topics. As discussed earher, this allows instructors
to easily internationalize accounting topics being discussed.
The four most frequently covered international accounting topics in advanced
accounting are: consolidation of foreign affiliates, foreign currency transactions, com-
parative consolidation practices, and the international accounting standards. This find-
ing is not surprising since three of the four items (consolidation of foreign affiliates,
foreign currency transactions, and comparative consolidation practices) are topics ordi-
narily covered in advanced accounting. Therefore, comparing and contrasting the treat-
ment of these issues in the U.S. with other countries is a natural extension of the topics
being discussed. Further, the three above items are also identified by O'Connor et al.
(1996) as being prime examples of international topics that can be most effectively inte-
grated in the advanced accounting course. Sherman (1987) also found that consolida-
tions and foreign currency translation were topics that would typically be
internationalized.
With the exception of international accounting standards, topical coverage in the
accounting theory course (graduate and undergraduate), for the most part, is evenly spread.
International accounting standards are covered most frequently in the graduate accounting
theory course but are among the least frequently covered topics in the undergraduate
accounting theory course. It is interesting to note that the comparative financial accounting
practices (e.g., accounting for deferred taxes, intangibles, fixed assets, investments,
expense recognition, inventories, etc.) are more often internationalized in graduate theory
than undergraduate theory courses. Integration of international topics is more prevalent in
"Other Financial Accounting" graduate courses than undergraduate courses. As noted
above, few programs offer additional financial courses at the undergraduate level. Thus,
this result is not unexpected.
494
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1 998
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Cost/Managerial Courses
Table 6 presents the results for the cost/managerial topic integration grid. The three most
frequently integrated courses are: managerial and cost accounting at the undergraduate
level, followed by managerial accounting at the graduate level. International transfer pric-
ing is the topic most often integrated at both the undergraduate and graduate levels in
almost all courses. This finding is consistent with Bums (1979), Mintz (1980), Stout and
Schweikart (1989), and Meek (1985) who suggested that transfer pricing is an international
topic that can be easily integrated in cost/managerial accounting courses. Sherman (1987)
found that transfer pricing is one of the most frequently integrated topics in advanced cost
accounting courses. Other topics with a high level of integration are: performance evalua-
tion of foreign operations, managerial accounting practices in different countries, legal and
ethical considerations, international cash and working capital management, foreign invest-
ment analysis, foreign exchange risk management, and accounting and information sys-
tems for multinational organizations. Sherman's (1987) study found similar results with
regard to performance evaluation of foreign operations, accounting and information sys-
tems for multinational organizations, and legal and ethical considerations.
As discussed earlier, many textbooks now contain excerpts of certain international
accounting topics. These excerpts allow instructors to easily integrate an international
dimension into their lectures.
Tax Courses
Table 7 presents the results of the tax integration grid. Most of the integration of interna-
tional tax topics occur in undergraduate and graduate corporate taxation courses. This
reflects the growing importance of international tax considerations for companies operat-
ing in today's global environment. However, two topics that are reported to be integrated
with some frequency in individual taxation at both undergraduate and graduate levels are
foreign tax credits and source of income and allocation of deductions. These two topics are
also among the most often integrated topics in corporate taxation courses, along with trans-
fer pricing rules, taxation of foreign corporations with U.S. source income, foreign cur-
rency transactions, and tax treaties.
Auditing Courses
Table 8 presents the results of the auditing integration grid. Based on the responses, most
of the integration of international topics occurs in undergraduate auditing and graduate
advanced auditing courses. International auditing standards, comparative auditor's report,
and auditing foreign subsidiaries, are consistently the most often integrated topics. Surpris-
ingly, based on the responses, there is minimal integration of international topics in the
basic graduate auditing course.
Instructional Resource Materials Used in Covering International Accounting Topics
Table 9 presents information on the instructional resource materials used to internation-
alize accounting curricula by the integration approach. The integrated lecture approach
Internationalizing Accounting Education
497
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498 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
Table 9. Instructional Resource Materials Used in Integration of International Topics*
Undergraduate
Graduate
No. of Respondents
No. of Respondents
Integrated Lecture
66
33
Foreign Annua! Reports
25
21
Assigned Articles
32
24
Videos
14
3
Cases
28
25
Projects
12
14
Others
4
2
Notes: * A review of the respondents' written comments revealed the following examples of instruc-
tional resources.
Cases:
1 . Harvard Business Review Cases
2. International Accounting: A Case Approach by J. A. Schweikart, S. J. Gray, and C. B.
Roberts (McGraw-Hill, 1995).
Assigned articles from:
1. Tlie Wall Street Journal 4. Fortune
2. Financial Times 5. Euromoney
3. Economist 6. Business World
Videos:
1. Irwin's Managerial/Cost Videos, Vol. VI, Segment 6, International Accounting.
2. PBS videos of Life & Business in Japan (American Game--Japanese Rules).
Other instructional resource materials:
1 . Other publications
a. AICPA's The Profession of Accounting in Foreign Countries series
b. Coopers & Ly brand' s International Accounting Summaries: A Guide for Interpreta-
tion and Comparison (John Wiley & Sons, 1993).
c. Price Waterhouse's Doing Business //(...series
d. lASC Insight. lASC Annual Review, OECD publications, EU publications.
2. Internet
a. European Union homepage.
b. SEC's homepage (for Form 20-F).
3. International databases
a. Compact Disclosure
b. Compustat
c. Lexis-Nexis
appears to be the most frequently used method to internationalize the curriculum at both
the graduate and undergraduate levels. Although respondents did not specify the instruc-
tional resource materials (titles of books, cases, articles, etc.) used in the integrated lecture
approach, it is presumed that instructors either utilize their prepared remarks on interna-
tional accounting topics or rely on excerpts on international accounting topics provided in
many textbooks and instructors' manuals. As discussed earlier, a cursory examination of
introductory, intermediate, and advanced accounting textbooks available to the authors
revealed that these texts generally contain some excerpts on international accounting topics
such as the International Accounting Standards Committee, the International Federation of
Accountants, the International Organization of Securities Commissions, accounting for
foreign currency transactions and translations, goodwill, leases, deferred taxes, invento-
ries, investments, consolidations, etc. These excerpts can be used to add an international
dimension to the accounting topics being di,scussed. The other instructional resource mate-
rials used are: assigned articles (newspaper and journal), cases, foreign annual reports,
projects, and videotapes. It appears that a combination of source materials is utilized to
Internationalizing Accounting Education 499
integrate international accounting topics into the accounting curriculum. The instructional
resource materials identified in the respondents' written comments are summarized in
Table 9.
Incentives and Obstacles to Internationalize the Accounting Curriculum
Internationalization of an accounting curriculum requires strong commitment and inter-
est on the part of both school administrators and faculty. Although much has been written
about the necessity and benefits of internationalization, there are also many barriers. In this
section, the incentives and obstacles to internationalization are examined.
Results on incentives and obstacles to internationalize the accounting curriculum are
presented in Table 10. Consistent with Gray and Roberts' (1984) and Sherman's (1987)
assertions, accreditation requirements are one of the leading motivating factors for interna-
tionalization of the accounting curriculum in the U.S. In this study, accreditation require-
ments were considered the most important incentive for internationalization (mean
score = 3.39). Respondents also considered pressure from administrators as an important
factor in internationalization of accounting curricula. From the above results, it appears
that formal pressures rather than theoretical considerations are driving the internationaliza-
tion of accounting education. Other important incentives to internationalize accounting
curricula are: funds for attending conferences, pressure from employers of graduates, pro-
motion and tenure considerations, and research funds.
Table 10 shows a strong consensus among respondents on the obstacles to international-
ization. Respondents rated overcrowded curricula and lack of faculty expertise in interna-
tional topics as the two highest perceived obstacles to internationalization. These results
are consistent with those found by AlNajjar and Gray's (1992) study of U.S. AACSB
Table 10. Incentives and Obstacles to Internationalize Accounting Curricula
Standard
Incentives* Mean Deviation
Accreditation Requirements
Pressure from Sctiool Administration
Funds for Attending Conferences
Pressure from Employers of Graduates
Promotions & Tenure Considerations
Research! Funds
Teaching Load Reduction
Financial Compensation
Obstacles**
Overcrowded Curriculum
Lack of Faculty Expertise
Insufficient Faculty Interest
Insufficient Funds
Insufficient Market Demand
Insufficient Student Interest
Notes: *Measured on a 5 point scale: 1 "Not Important", 5 "Very Important."
**Measured on a 5 point scale: 1 "Not an Obstacle", 5 "Major Obstacle.'
3.39
1.4
2.88
1.3
2.76
1.5
2.54
L4
2.44
1.4
2.19
1.4
1.86
1.3
1.69
1.1
3.84
1.2
3.23
1.3
3.08
1.3
2.82
1.4
2.69
1.2
2.57
1.2
500 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
accredited schools, and Herremans and Wright's (1992) sampling of Canadian schools.
Other obstacles to internationalizing accounting curricula, are the lack of faculty interest,
funds, market demand, and student interest.
The problems of an overcrowded curricula will continue as long as schools approach
accounting curricula revision from an incremental rather than from a zero-based approach
(Radebaugh 1992). With the pressures to prepare accounting students for professional
examinations (e.g., CPA examination) that typically have very little international account-
ing content, and the proliferation of domestic accounting standards, many accounting fac-
ulty feel that internationalization can only be achieved by sacrificing coverage of important
material presently being taught in the accounting curriculum. Advocates argue that inter-
nationalization can only be effectively implemented by a complete reorientation of
accounting curricula to include international education.
SUGGESTED METHODS TO INTEGRATE INTERNATIONAL ACCOUNTING TOPICS
INTO THE CURRICULUM
The international dimension of accounting topics can be integrated into the accounting cur-
riculum in several ways. This section discusses the possible methods that can be used in the
integration approach and suggests some instructional materials for utilizing each method.
Use of Foreign Annual Reports
The use of foreign annual reports to integrate an international accounting dimension into
the curriculum can be stimulating and exciting for students. Foreign annual reports provide
"real life" examples and offer students opportunities to compare and contrast U.S. account-
ing practices with those of other countries. Foreign annual reports are especially useful in
integrating an international dimension of accounting into financial accounting courses, in
particular, intermediate and advanced accounting (Appendix A provides a list of suggested
topics that can be internationalized in financial accounting courses). Foreign annual
reports, however, offer limited opportunities to integrate the international dimensions of
the auditing, tax, and managerial aspects of accounting.
Integration through the use of foreign annual reports can be accomplished by two strate-
gies. One strategy is to utilize the foreign annual reports throughout a given course (e.g.,
intermediate or advanced accounting). Under this strategy, copies of foreign annual reports
are distributed to students at the beginning of the school term. During the discussion of cer-
tain accounting topics (e.g., accounting for inventories, goodwill, deferred taxes, leases,
etc.), the instructor refers students to the specific section of the foreign annual report(s)
where the topic under discussion is presented. Comparing and contrasting the accounting
treatment of a specific topic in the U.S. with other countries not only exposes students to
accounting principles in other countries, but also reinforces the learning process of the
topic being discussed. (Appendix B presents a list of foreign annual reports that the authors
have found useful for integration purposes).
The second strategy in utilizing foreign annual reports is similar to the first strategy;
however, it entails an out of class project where students analyze and discuss the different
treatments of accounting principles in the U.S. and other countries. Under this strategy.
Internationalizing Accounting Education 501
early in the school term, the students are divided into groups of four to five students. Each
group is provided with a foreign annual report and asked to prepare a two-part written
project, due at the end of the term. In part one, the financial statements contained in the for-
eign annual reports are reconstructed in a format and terminology similar to financial state-
ments prepared in the U.S. In the second part, each group describes and discusses the
significant differences between U.S. GAAP and those applied in preparing the foreign
financial statements. These projects are graded and returned to students. Again, under this
approach the students are not only exposed to an international dimension of accounting but
also learn from each other during the group discussions and deliberations on the U.S.
GAAP and those applied in preparing the foreign financial statements. This strategy might
offer an advantage over the first strategy, in that it does not take classroom time, thus
avoiding one of the obstacles: overcrowded curriculum. The strategy selected to integrate
an international accounting dimension will depend on preference and other considerations
by the instructors.
Use of Case Studies
Case studies provide another means of integrating an international dimension of
accounting into the curriculum. As discussed earlier, the use of foreign annual reports are
very useful in integrating an international dimension of financial accounting topics but they
offer limited opportunities to integrate the international dimensions of auditing, tax, and
managerial aspects of accounting. The use of published case studies containing aspects of
international tax, auditing, managerial, standard-setting processes, as well as financial
accounting, offers a distinct advantage to instructors in other areas of accounting (e.g.. tax,
auditing, and managerial) in integrating an international dimension into the accounting cur-
riculum. One source that the authors have found particularly useful is a recently published,
international case study text (Schweikart, Roberts, and Gray, 1995 — see references for
complete citation). This text contains cases on international financial accounting and
reporting, international accounting and financial statement analysis, managerial account-
ing for global business operations, international auditing, and international taxation. Each
case contains several discussion points and questions. An approach that might be useful in
utilizing cases to integrate an international dimension of accounting into the curriculum,
would be similar to one discussed under the second strategy in using foreign annual
reports, that is, grouping students and asking each group to prepare a group project in
which the case is analyzed and the questions and discussion points raised in the case are
answered. The written assignments would be completed out of class and tumed-in for grad-
ing. Once again, this method does not take classroom time and exposes students to the
international dimension of accounting.
Use of Published Articles
Another means of integrating an international dimension of accounting topics into the
accounting curriculum, is the use of published articles that discuss various aspects of inter-
national accounting. The articles suggested here (see Appendix C). are broad in nature and
provide an overview of topics such as international organizations involved in harmonizing
502 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
accounting practices, tlie European Union, listing on foreign stock exchanges, and the
problems and challenges faced in international capital markets due to diversity in account-
ing practices around the world. These articles may be assigned for out of class readings and
may be discussed during the class. This method is more desirable in upper level classes
such as advanced accounting and accounting theory courses.
The selection of a specific method to integrate an international dimension of accounting
into the curriculum depends upon the instructor's preference, available time, the course
being taught, and other constraints. The authors have utilized all of the above methods in
the past and have received positive feedback from students.
SUMMARY AND CONCLUSIONS
This paper presents the results of a survey of 194 schools of business that offer undergrad-
uate and/or graduate programs in accounting. The purpose of the study is to determine the
extent of coverage of international accounting topics through the integration approach. The
paper also suggests methods and instructional resources that can be used to add an interna-
tional dimension into the accounting curriculum through an integration approach.
The findings reveal that the integration approach of internationalization is used more fre-
quently in undergraduate programs (61%) compared to graduate programs (52%). The less
frequent use of integration at the graduate level, might be explained by the fact that inter-
nationalization of the graduate accounting curriculum is more often accomplished through
a separate course offering. Offering a separate course at the graduate level allows for in-
depth analysis of selected topics for which students have acquired the basic academic prep-
aration in their undergraduate program.
Results of this study indicate that financial accounting is the most frequently integrated
area for both graduate and undergraduate programs. This finding was expected since more
courses are offered in financial accounting than other areas. However, tax and auditing
areas appear least integrated. This could be explained by the lack of resources and the
nature of topics being discussed in these areas, i.e., they do not lend themselves easily to
internationalization. The integrated lecture is the most popular method of integrating topics
into other courses, although other instructional resource materials such as foreign annual
reports, assigned articles, and cases are also used.
With increasing globalization, the pressure to internationalize accounting education will
continue to rise. The experience of schools that have already internationalized their
accounting curriculum through the integration approach provides a rich resource for
schools currently involved in international accounting education as well as those planning
on internationalizing their programs in the future.
APPENDIX A
Accounting Topics tliat can be Integrated into Financial Accounting Courses
1 . Required Financial Statements
2. Format of Financial Statements
Internationalizing Accounting Education
503
3. Application of Historical Cost in Preparation of Financial Statements
4. Accounting for Uncollectible Accounts
5. Reporting Contingent Losses
6. Accounting for Long-term Construction Contracts
7. Accounting for Inventories
8. Depreciation Accounting
9. Accounting for Research and Development Costs
10. Accounting for Goodwill and other Intangibles
11. Accounting for Long-term Debts and Amortization of Bond Discount and Premium
12. Accounting for Marketable Securities
13. Use of Equity Method for Investments of 20-50%
14. Accounting for Treasury Stock Transactions
15. Accounting for Deferred Taxes
16. Accounting for Leases
17. Accounting for Pensions
18. Segment Reporting
19. Consolidation of Both Domestic and Foreign Subsidiaries
20. Foreign Currency Translation
2 1 . Treatments of Translation Gains and Losses
22. Reporting Minority Interest on Consolidated Income and Owners' Equity
APPENDIX B
Annual Reports and Addresses Where the Reports can be Obtained
Country
Annual Report
Address Where Annual Reports
can be Obtained
Australia
Canada
Finland
France
Foster's Brewing
Group Limited
Canadian Pacific
Limited
Nokia
Renault
Foster's Brewing Group Limited
1 Garden Street, South Yarra
Victoria 3141
AUSTRALIA
Canadian Pacific Limited
P.O. 6042, Station A
Montreal Quebec
H3C 3E4
CANADA
Nokia Investor Relations
2300 Valley View Lane
Suite 100
Irving, TX 75062
Regie Nationale des Usines Renault
34 quai du Point du Jour
B.P. 103
92109 Boulongne-Biliancourt Cedex
FRANCE
{continued)
504
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
Appendix B. (Continued)
Country
Annual Report
Address Where Annual Reports
can be Obtained
Germany
Italy
Japan
Sweden
Switzerland
Daimler-Benz
Fiat
Toyota
Volvo
Nestle
The Netherlands Philips
United Kingdom Imperial Chemical
Daimler-Benz AG, BPA
Postfach 80 02 30
D-7000 Stuttgart 80
GERMANY
Fiat S.P.A.
Corse Marconi 10
Turin
ITALY
Toyota Motor Corporation
I Toyota-cho, Toyota City
Aichi Perfecture 47 1
JAPAN
Volvo Investor Relations
535 Madison Avenue
New York, NY 10022
Nestle S.A.
Investor Relations
Avenue Nestle 55
CH-1800Vevey
SWITZERLAND
N.V. Philips' Gloeilampen-fabrieken
Building VH-1
Groenewoudseweg 1
5621 BA Eindhoven
THE NETHERLANDS
Imperial Chemical House
Milibank, London SWIP 3JF
UNITED KINGDOM
APPENDIX C
List of Articles in Integrating an International Dimension of Accounting
1. Beresford, D., 1990. "Intemationalizaltion of Accounting Standards," Accounting
Horizons, (March): 99-107.
2. Choi, F.D.S. and R.M. Levich, 1991. "Behavioral Effects of International Account-
ing Diversity ," Accounting Horizons, (June): 1-13.
3. Duffy, D., 1994. "The Wooing of American Investors," The Wall Street Journal,
(February 25): A- 14.
4. Hora, J. A., R. H. Tondkar, and A. Adhikari, 1997. "International Accounting Stan-
dards in Capital Markets," Journal of International Accounting Auditing & Taxa-
tion, 6(2): 171-190.
5. O'Malley, S.F., 1992. "Accounting Across Borders," Financial Executive, (March/
April): 28-31.
Internationalizing Accounting Education 505
6. Radebaugh, L.H., 1993. "Daimler-Benz: First German Company on NYSE,"
Accounting: A Newsletter for Educators, Vol. 3, No. 1, (Fall): 7-8 (John Wiley &
Sons).
7. Sutton, M.H., 1997. "Financial Reporting in U.S. Capital Markets: International
Dimension" Accounting Horizons, (June): 96-102.
NOTES
1. The 1985-86 AACSB Accreditation Standards required that a "worldwide dimension" be incor-
porated into undergraduate business and accounting curricula. In 1991 (revised in 1993) these
standards were modified to require that curricula include coverage of "global issues" ( p. 18).
2. The data for this paper is based on a comprehensive research study that was conducted to deter-
mine the status of international accounting education in the U.S. This paper addresses one aspect
of that research, the use of the integration method in internationalizing the accounting curriculum.
3. We examined four intermediate accounting texts that were available to us for the coverage of
international accounting topics. A list of the texts examined and the extent of their coverage of
international accounting topics are as follows:
(i) Intermediate Accounting, ninth edition, by Kieso, D.E. and J.J. Weygandt, (John Wiley &
Sons, Inc., 1998). This book contains 107 marginal notes (referred to as "International Insight")
on international accounting topics. This text also contains a two page synopsis on "Perspectives
on International Standard Setting," by Arthur R.Wyatt.
(ii) Intermediate Accounting, first edition, by Spiceland, J.D. and J.F. Sepe. (Irwin/McGraw-
Hill, 1998). This text contains over 30 blocked segments (referred to as "Global Perspective") of
about one-third of a page to one-half of a page on international accounting topics. This book also
contains over a dozen small international cases as homework assignments,
(iii) Intermediate Accounting, fourth edition, by Dyckman, T.R., R.F. Dukes, and C.J. Davis,
(Irwin/McGraw-Hill, 1998). This text contains about 16 blocked segments (referred to as "Glo-
bal View") of about one-third of a page to one-half of a page on international accounting topics
at the end of some chapters. It also contains some questions on the international accounting top-
ics as homework assignments.
(iv) Intermediate Accounting, second edition, Hartman, B.P., R.M. Harper, J. A. Knoblett, and
P.M. Reckers, (Southwestern Publishing, 1997). Of the 20 chapters in this text, 1 1 chapters have
blocked segments on international accounting topics (referred to as "In Practice — International")
of about one-fourth of a page to two and one-half pages long. This text also contains some home-
work assignments on the international accounting topics.
REFERENCES
Accounting Education Change Commission (AECC). 1990. "Objectives of Education for Accoun-
tants: Position Statement Number One." Issues in Accounting Education (Fall): 307-312.
AlNajjar, F. K., and S. J. Gray. 1992. "Internationalizing the Accounting Curriculum: A Survey of
U.S. Schools.^' Journal of International Accounting Auditing & Taxation, 1(2): 145-160.
American Accounting Association (AAA). 1978. A Recommendation by the Education Committee
of the International Accounting Section. The Internationalization of the Accounting Curricu-
lum.
. 1986. Committee on the Future Structure, Content, and Scope of Accounting Education
(The Bedford Committee), "Future Accounting Education: Preparing for the Expanding Pro-
fession." Issues in Accounting Education, (Spring): 168-195.
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1973. Report of the Committee on International Accounting. Accounting Review, (Supple-
ment): 121-167.
American Assembly of Collegiate Schools of Business (AACSB). 1985. Accreditation Council: Pol-
icies, Procedures, and Standards. St. Louis, MO.
. 1993. The AACSB Accreditation Project: Final Report, St. Louis, MO.
American Institute of Certified Public Accountants (AICPA). 1996. SAS No. 51, "Reporting on
Financial Statements Prepared for Use in Other Countries." AICPA Professional Standards
Vol. I , Chicago: Commerce Clearing House.
Bloom, R., J. Fuglister. and J. Kantor. 1992. "Toward Internationalization of Upper-Level Financial
Accounting Courses." Advances in International Accounting, 5: 239-253.
, and M. Collins. 1990. "Internationalizing Accounting Courses." Journal of Education for
Business, (April): 309-312.
Bums, J. O. 1979. "A Study of International Accounting Education in the United States." Interna-
tional Journal of Accounting, (Fall): 135-145.
Cohen, J. R.. L. W. Pant, and D. J. Sharp. 1991. "An Empirical Investigation of Attitudinal Factors
Affecting Educational Course Coverage of International Topics." International Journal of
Accounting, 26: 286-301.
Gray, S. J., and C. B. Roberts. 1984. "International Accounting Education: A Survey of University
Courses in the UK." Accounting and Business Research, (Summer): 267-269.
Hasselback, J. R. 1995. Accounting Faculty Directory. Englewood Cliffs: Prentice-Hall.
Herremans, I. M., and M. E. Wright. 1992. "International Accounting Education in the Year 2000:
Will the Supply Provided by Canadian Universities Meet the Demands of Canadian Interna-
tional FirmsT'' Journal of International Accounting Auditing & Taxation, 1(2): 121-144.
Huang. J. C, and S. M. Mintz. 1992. "International Accounting Education: A Global Perspective."
Accounting Educators' Journal, (Spring): 69-85.
McClure, M. M. 1988. "Internationalization of the Introductory Financial Accounting Course." Jour-
nal of Accounting Education, (Spring): 159-181.
Meek, G. K. 1985. "Adding an International Dimension to the Introductory Managerial Accounting
Course." Journal of Accounting Education, (Spring): 57-68.
Mintz, S. M. 1980. "Internationalization of the Accounting Curriculum." International Journal of
Accounting, (FaWy. 137-151.
O'Connor, W., D. Rapaccioli, and P. A. Williams. 1996. "Internationalizing the Advanced Account-
ing Course." Issues in Accounting Education, (Fall): 315-335.
Perspectives on Education: Capabilities for Success in the Accounting Profession. 1989. Arthur
Andersen & Co., Arthur Young, Coopers & Lybrand, Deloitte Haskins & Sells, Ernst & Whin-
ney, Peat Marwick Main & Co., Price Waterhouse, and Touche Ross.
Radebaugh, L. H. 1992. "Internationalization of the Accounting Curriculum." In M. Rugman and W.
J. Stanburg (Eds.), The Global Perspective: International Management Education. CIBER,
University of British Columbia.
Schweikart, J. A., S. J. Gray, and C. B. Roberts. 1995. International Accounting: A Case Approach.
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Stout, D. E., D. E. Wygal, and J. Volpi. 1988. "A Comparative Income Statement Approach to Inte-
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, and J. A. Schweikart. 1989. "The Relevance of International Accounting to the Accounting
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Internationalizing Accounting Education 507
Tondkar, R. H., A. Adhikari, and E. N. Coffman. 1994. "Adding an International Dimension to
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The International
Journal of
Accounting
Book Review Section
The book review section is interested in works published in any language, as long as they
are comparative or international in character. The author or publisher of such works should
furnish either book review editor with two (2) copies of the work, including information
about its price and the address where readers may write for copies. Review will be assigned
by the book review editors. No unsolicited reviews will be accepted. Suggestions of works
that might be reviewed are welcomed.
Professor Stephen A. Zeff
Rice University - ms 531
P.O.Box 1892
Houston, TX 77251-1892
Tel +1-713-527 6066
Fax:+1-713-285 5251
E-Mail: sazaff@rice.edu
Dr. Axel Haller
Universitat Augsburg
Lehrstuhl fiir Wirtschaftsprufung und
Controlling
86135 Augsburg, Germany
Tel: +49 821 5984127
Fax: +49 821 5984224
E-Mail: axel.haller@wiso.uni-augsburg.de
The International Journal of Accounting, Vol. 33, No. 4, pp. 509-509 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1998 University of Illinois
The International
Journal of
Accounting
Capsule Commentaries
During the last few years, the interest of the German accounting community in U.S.
accounting has increased tremendously, only in part due to the U.S. listings of German cor-
porations of which Daimler-Benz was the first in 1993. In February, the German Parlia-
ment passed a law allowing German listed companies to present their consolidated
financial statements according to "internationally accepted standards." Although not
explicitly mentioned in the law, those standards are regarded to be International Account-
ing Standards (IAS) and U.S. GAAP. This will give a new push to the internationalization
of German accounting and will boost the interest in books dealing with U.S. accounting
and IAS. The following commentaries will introduce five of the most current books on
U.S. accounting in Germany. They should give some impression of the vast academic and
practical interest in U.S. accounting at the moment in Germany.
In one of the next issues of the journal, some German books that cover IAS will be pre-
sented in this section.
The books can be classified into three different categories. The first three are published
doctoral theses, the fourth is a handbook for practitioners, and the last is a reader.
Grundlagen der US-amerikanischen Rechnungslegung, Henning Siebert (Koln: Verlag
Dr. Otto Schmidt 1996), 527pp.
This thesis (University of Bonn) deals primarily with the institutional framework of finan-
cial reporting in the U.S. It explains the private-sector standard-setting process and its rela-
tion to the U.S. legal system. It deals especially with the SEC rules and their relationship
to U.S. GAAP. In addition, the author devotes more than 200 pages to the treatment of
important accounting issues under U.S. GAAP. He concludes his thesis with some hypoth-
eses on how the approach embodied in U.S. accounting could influence German account-
ing. Quite a number of his hypotheses have become reality in the short time since his thesis
was completed.
Grundlagen einer Bilanzrechtstheorie in den USA, Andreas-Markus Kuhleuind
(Frankfurt a. M. etai: Peter Lang Verlag 1997), 298 pp.
In his thesis (University of Munich), A. Kuhlewind makes an attempt to explain the con-
ceptual background or theoretical approach of U.S. accounting and to compare it with its
The International Journal of Accounting, Vol. 33, No. 4, pp. 511-513 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1998 University of Illinois
512 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
German counterpart. He bases his analysis primarily on the FASBs Conceptual Frame-
work, with its qualitative characteristics and principles, and examines in detail the U.S.-
specific concept of income. This is a very German approach since the calculation of
income traditionally has been the primary objective of financial accounting in Germany. In
many examples, the author explains how U.S. accounting, which he perceives as being
partly deductive and partly inductive, balances the conflicting characteristics of relevance
and reliability.
Bilanzkulturssund Bilanzpolitik in den USA und in Deutschland, Sebastian Heintges,
2nd ed. (Stemfels: Verlag Wissenschaft & Praxis 1997), 336 pp.
S. Heintges has chosen in his thesis (University of Marburg) another perspective to explain
financial reporting in the U.S. He investigates the possibilities and instruments of U.S.
accounting policy, which means the deliberate influence on reported figures and informa-
tion in financial statements, and compares those to what is practiced in Germany. He
derives the main differences in accounting policy objectives and behavior from the differ-
ent country-specific cultures. He comes to the conclusion that accounting policy in the U.S.
is much more capital-market focused and more likely intended to increase income than in
Germany.
Konzernabschlussnach US-GAAP, Rudolph J. Niehus/ Alfred Thyll (Stuttgart: Schdjfer
Poeschel Verlag 1998), 449 pp.
This handbook for practitioners deals primarily with special accounting issues and, in con-
trast to the three theses, contains considerable discussion on the subject of consolidation.
For each issue it describes U.S. GAAP (including SEC norms) as well as the German rules.
Additionally, it gives many practical examples extracted from the AICPAs Accounting
Trends and Techniques of 1995 and 1996. The book is primarily descriptive and. in con-
trast to the others, less analytical. On the other hand, it is easy to read and helpful for
resolving practical problems, although it does not prevent someone who seeks a special
solution to a particular problem from looking it up in American GAAP Guides or Original
Pronouncements.
US-Amerikanisclie Rechnungslegung, edited by Wolfgang Ballwieser, 3rd edition (Stutt-
gart: Schdffer Poeschel Verlag 1998), 395 pp.
This book is a reader containing articles on different accounting topics written by various
authors, primarily German accounting academics. Among the topics covered are intangible
assets, long-term contracts, consolidation, segment reporting, cash flow statements, and
the reconciliation of German financial statements to U.S. GAAP. Apart from these more
technical areas, some articles are more general, e.g., explaining the general accounting
objectives and principles of U.S. accounting or considering how IAS and U.S. GAAP
Capsule Commentaries 513
could influence German accounting practice through the intemationaUzation process. This
book gives a good (but partial) analytical insight into different aspects of U.S. accounting.
Axel Haller
The International
Journal of
Accounting
Book Review
The Nature and Determinants of Disclosure Adequacy: An International Perspective,
by Ahmed Riahi-Belkaoui, Quorum Books, Westport, CT, USA, 1997, 227 pp.
The book examines the determinants of accounting disclosure adequacy in a global envi-
ronment. Academics, students, managers and practitioners interested in international
accounting will find the book interesting and useful. Accounting policy makers concerned
with harmonization of accounting standards across national boundaries may also find
information contained in some chapters to be useful.
The book is divided into seven chapters. Its first chapter, which is the longest, develops
a framework for discussing different determinants of accounting standards for the mea-
surement and disclosure of financial information by firms in different counties. By using
contingency approach to disclosure adequacy, the author identifies the following main
determinants of accounting disclosures: culture, linguistic, pohtical and civil factors, eco-
nomic and demographic environments, and legal and tax system. In addition to discussing
the nature of these determinants, the author also explains how these factors would influ-
ence the disclosure adequacy, which is defined in terms of "fairness" of disclosures.
The remaining six chapters are based on the findings of research studies conducted by
the author at different times. These findings, which have appeared earlier in various
accounting journals, are discussed and interpreted to support the contingency framework
presented in chapter 1. Two chapters (chapters 2 and 3) are devoted to the discussion of the
impact of economic environments on financial disclosures, and one chapter each discusses
the influence of political/civil factors (chapter 6) and cultural environment (chapter 7) on
these disclosures. The remaining two chapters (chapters 4 and 5) discuss the role of man-
agers, academics, professionals, and human development in determining the disclosure
adequacy. Determinants of linguistic and legal and tax systems have not received any
attention in the book beyond chapter 1 . Omission of their discussion is probably because
the author has not conducted any empirical study to examine their impact on disclosure
adequacy. Contents of chapters 2 through 7 are briefly discussed below to provide readers
with an overall view of empirical findings presented in the book.
Chapter 2 presents the results of an exploratory empirical study on the impact of macro-
economic factors on accounting disclosures, and it also shows how accounting disclosures
impact economic growth. The research findings suggest that economic growth is positively
associated with gross domestic investment as a percentage of GDP, terms of trade, and
information adequacy. It is negatively associated with the inflation rate and total expendi-
tures on health and education as a percentage of GDP. On the basis of these findings, the
author concludes that economic growth is positively influenced by disclosure adequacy, as
The International Journal of Accounting, Vol. 33, No. 4, pp. 515-527 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1998 University of Illinois
516 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
measured by the accounting disclosure requirements of stock exchange of countries
included in the study.
Discussion of the association between economic factors and financial disclosures in con-
tinued in Chapter 3. This chapter discusses the results of an empirical study which exam-
ines the association between disclosure adequacy and country risk and return for a sample
of firms from European countries. The study is conducted to test the hypothesis whether
voluntary accounting disclosures by European firms are aimed at controlling the conflict
arising out of favorable and unfavorable signals for investment in a particular country. The
results indicate that European firms adjust their strategies for disclosure of financial infor-
mation to return and risk signals in their respective countries. Firms in countries with low
return and high risk are found to be associated with expanded disclosures.
Chapter 4 discusses the research findings of a study conducted by the author on the asso-
ciation of disclosure adequacy with managerial, academic and professional influences.
Disclosure adequacy is measured by a disclosure index based on 107 items. The results
indicate that all three variables of managerial, academic and professional influences are
positively related to actual disclosure adequacy. On the basis of these findings, the author
concludes that the supportive role of academicians, managers and professional accountants
is crucial to improve the disclosure adequacy in a country. Reinforcement of institutions
and enactment of appropriate laws in developing countries is especially emphasized to
enable academicians, managers and professionals to play an active and constructive role in
accounting development.
The association between human development and disclosure adequacy is explained in
chapter 5. It has been argued that economic growth and human development in a country
create a favorable climate for accounting development. A greater demand for accounting
information by stock exchanges can be expected when there is higher economic growth
and human development in a country. These results are interpreted to suggest that harmo-
nization efforts for accounting standards and disclosures would be more successful in
countries that have a similar profile for economic growth and human development.
Chapter 6 discusses two empirical studies on the impact of economic, political and civil
indicators on disclosure adequacy. The first study examines the impact of the economic
and political environment on international differences in reporting and disclosure ade-
quacy. The results of this study are not significant. The second study examines the impact
of political, financial and economic risks on stock exchange disclosure requirements. The
results of this study suggest that the level of disclosure requirements is positively associ-
ated with the political and financial environments in a country.
The last chapter examines how cultural factors impact self-regulation by the profession
and also the disclosure requirements of stock exchanges. This examination is based on
Hofstede's four cultural factors: power distance, uncertainty avoidance, individualism and
masculinity. The results indicate that the association between power distance and self-reg-
ulation is not significant, but is significant between self-regulation and the remaining three
cultural factors. Uncertainty avoidance and individualism are negatively associated with
self-regulation and the masculinity factor is positively associated. The disclosure require-
ments of stock exchanges are found to be positively associated with power distance and
individualism but negatively associated with uncertainty avoidance. The association of the
masculinity factor with the disclosure requirements of stock exchanges is found to be insig-
nificant.
Book Reviews 517
The book concludes that the disclosure adequacy level is influenced by a country's eco-
nomic growth, risk and return, development of managerial, academic and professional per-
sonnel, political and civil indicators, and different cultural dimensions. The author's claim
that "The overall thesis of the book is confirmed" (p. xii) would have been justified if a
comprehensive study had been conducted to obtain empirical evidence on the contingency
framework presented in chapter 1 . In the absence of a systematic study of different deter-
minants in interaction with one another, the author's claim is not fully substantiated.
Despite the lack of evidence based on a comprehensive study, the book is a useful source
of information on research findings relating to different determinants of financial disclo-
sures in a global environment. In addition to providing valuable information to researchers
and students of international accounting, it provides information that policy makers may
also find useful for harmonization of international accounting standards. The book will
provide inspiration to international accounting researchers to conduct further research in
order to have a better understanding of the impact of different determinants on the devel-
opment of standards for the measurement and disclosure of financial information in a glo-
bal economy.
Reviewed by Bikki Jaggi
Rutgers University
New Brunswick, NJ USA
Comparative Studies in Accounting Regulation in Europe, edited by John Flower and
Chris Lefebvre, Acco, Leuven/Amersfoort, 1997, BEF 1,750 (postage included), 431 pages.
This book presents a portion of the research output of the European Universities Account-
ing Network, founded in 1993, and coordinated by the Centre for Research in European
Accounting (CREA), attached to the European Institute for Advanced Studies in Manage-
ment (EIASM), in Brussels. The network received financial support from the European
Union's Human Capital and Mobility Programme. Under the terms of its contract with the
European Commission, the network had two principal objectives: (1) to undertake research
on the national systems for regulating financial reporting in the countries represented in the
network, (2) to contribute to the training and career development of 16 young researchers
by offering them the opportunity to conduct research in a university in another Member
State.
What makes this book unique is that all of the research studies it contains deal with
aspects of the national systems for the regulation of financial reporting in various states of
the European Union. Of particular interest is that the studies focus on the system for setting
the rules rather than the content of the rules.
In the first chapter, John Flower (director of CREA) presents a general introduction to
the topic of the regulation of financial reporting. In the following eight chapters, the
authors deal with country comparisons. In chapter 2 Lieve Lin- Van Nuffel of Catholic Uni-
versity of Leuven, Flanders, and Laury Bollen, of University of Limburg. Maastricht, show
that the differences between the accounting systems of Belgium and the Netherlands are
very significant and that an appreciation of the causes of these differences (which are
deeply rooted in history and "culture") leads to a better understanding of the present system
in both countries. In chapter 3, Simon Quinn, of University College Cork, and Ole
518 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
Sorensen, of the Copenhagen Business School, present a comparative analysis of the sys-
tems in Denmark and Ireland, two countries which, in the authors' opinion, have a great
deal in common.
Chapters 4 and 5 each present the reflections of a researcher from the United Kingdom
on certain aspects of the country he visited. Michael Power, of the London School of Eco-
nomics, studied the role of academics in the accounting policy process in Germany and
compared it with that of England, while David Neal, of the University of Wales, Bangor,
was interested in "locating" accounting regulation in Greece, which means placing it in the
context both of Greek history and of academic theory.
Chapters 6-9 deal with various aspects of the France-Italy-Spain triangle: chapter 6 by
Evelyne Lande, of the Conservatoire National des Arts et Metiers, Paris, on France and
Spain; chapter 7 by Araceli Mora, of the University of Valencia, on Italy and Spain; chap-
ter 8 by Bernard Olivero, of the University of Nice, on Italy; and, finally, chapter 9 by Rob-
erto Di Pietra, of the University of Siena, on France-Italy-Spain.
The following three chapters appear to me as different from the previous ones, and per-
haps more interesting, because they cover all of the 1 1 EU countries represented in the net-
work. All three of the chapters were written by Gabi Ebbers, of the University of Wales,
Bangor, who investigated the rules relating to the three areas of reporting practice which all
the network members have researched: revaluation of assets (chapter 10), foreign currency
translation (chapter 1 1), and definition of subsidiary company in determining the scope of
consolidated accounts (chapter 12). These chapters are remarkable for their wide range
(covering 1 1 countries), their depth (based on the author's own work and in part on the
research reports of the young researchers in the network coupled with the insights provided
by experienced and respected academics from these countries), and their detail (obtained
from the published accounts of over 200 European multinational companies).
Finally, in chapter 13, John Flower presents a synthesis of the network's research. His
text is based on a general model of a national regulatory system which includes four ele-
ments: (a) the state which promulgates laws, decrees and judicial decisions, (b) standard-
setting bodies which pronounce standards, (c) other bodies which issue recommendations,
and (d) individuals which make interpretations. Then, for each of these elements, the
author gives detailed comparisons for the 1 1 countries. For instance, a table includes the
membership composition of the national standard-setting bodies according to areas repre-
sented: government, the audit profession, users, the stock exchange, preparers, and individ-
uals. The influence of the state and other interested parties on the rules for both individual
company accounts and consolidated accounts is also developed. All of the tables included
in this chapter are. in my opinion, very interesting, as they give the reader a deep under-
standing of the origins of the differences in accounting regulation in Europe.
The primary audience for the book is academic researchers, as it deals with important
issues in accounting regulation. It could also be used as a textbook for an international
accounting course, since most of the papers describe in a quite detailed way the accounting
regulation in the surveyed countries.
The major strength of the book arises from the fact that, as John Flower writes, "the
young academics were able to bring a fresh approach to their analysis, both because of their
youth and because they came from another country, already equipped with a good knowl-
edge of that country's system" (p. 43). However, the book does have a few limitations. As
with any collection of papers, some are stronger than others in their methodology and anal-
Book Reviews 519
ysis. First of all, one might ask about the choice of the countries in the numerous compar-
isons. If the relationship between Belgium and the Netherlands seems to be obvious,
namely because of the historical and cultural common origin of these countries, the link
between Ireland and Denmark is, despite the authors" effort, difficult to accept. Moreover,
in my opinion, some chapters are too descriptive (for instance, when they are devoted to
only one country) or include ideas that are repeated several times (in the four chapters deal-
ing with France, Italy and Spain). As is usually the case in comparative international
accounting, a comparison by topic (as in chapters 10-12) can be much more interesting
than a comparison by country.
Despite this concern, it is my opinion that this book is well-written and understandable,
with considerable use of graphs and tables.
Reviewed by Herve Stolowy
HEC School of Management
Jouy-en-Josas, France
The Regulation of Financial Reporting in the Nordic Countries by John Flower (edi-
tor), CEFritzesAB, Stockholm, 1994, 285 pp.. 780 SEK (approx. $100).
This book is the collaborative product of seven researchers under the auspices of the Centre
for Research in European Accounting (CREA), which was established in 1991. The major
aim of CREA, which is reflected in the book under review, is to promote collective work
by a team of researchers coming from several countries and thus to support the European
Union (formerly the Economic Community) with research findings to guide its policies.
There is broad agreement in Europe that in order to harmonize financial accounting among
countries it is necessary to gain a deep understanding of each country's accounting system,
i.e., the contextual framework in which it is embodied. This deeper cultural understanding
can best be provided by researchers who have been raised and educated in the country-spe-
cific environment. This precept underlies the work of CREA, and its first publication deals
with the Nordic countries.
The major reason why CREA chose the Nordic countries for its first project is that those
countries, apart from Denmark which had joined the EC in 1973, were undertaking the
major task of harmonizing with the EC as a result of their decision in 1992 to join the Euro-
pean Economic Area. To deal with the Nordic countries in a comparative research study
might be seen, at the first glance, as an easy task, due to their cultural closeness, but this
perception is deceptive. Actually, people in the Nordic countries are trained more to under-
stand larger countries, like, for example Germany, France, the U.K. and the U.S., than one
another. One also has to keep in mind that John Flower, the director of CREA, a Briton and
not a Scandinavian, was the head of the project and editor of the book.
The introductory chapter of the book has three sections. Section 1 describes the goals of
EC harmonization and the role played by accounting in this context. Section 2 presents a
model of the system for the regulation of financial reporting which is general enough to
work as a starting point for a comparative study. The final section provides some back-
ground statistical data about the Nordic countries, which is useful, particularly since it can
be assumed that, as small countries, they are not as well known by readers. Generally, the
introductory chapter is interesting and well written: however, it would have benefited from
520 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No, 4. 1 998
a deeper comparison of the thinking and demands of the EC with the accounting concepts
of the Nordic countries at that time. Additionally, it can be questioned why the author of
the first chapter chose examples of disclosure issues and not measurement issues to explain
that unfair competition in the area of accounting within the EC is caused by uninformative
(not comparable) accounts, especially since measurement issues have been the most diffi-
cult to harmonize between European countries (particularly those with a link to taxation).
(See. for example. Biener 1994).
The countn,^ chapters follow in alphabetical order, probably to escape the delicate matter
of which countr\' should come first. But this order can be questioned since the authors
make references to Sweden as influential in their own countries' accounting, for Sweden
has the longest tradition of both legislation and standard setting. \ et Sweden is presented
last! The different countr\' chapters follow a similar structure, with sections on back-
ground, histor) , rule-making bodies, analysis, and specific instances of rules. There are
some small differences, though. Generally, the differences are justified by the specifics
within the country, and this is fair enough; but sometimes there are differences that can be
explained only by lack of coordination in the creation of the book. One interesting differ-
ence is that there is no subsection title "the State" in the chapter for Denmark, as is in all of
the other countn.' chapters: besides, this concept has been interpreted as the "countr)"' by
the Icelandic author and as the "go\emment" b\ the writers of the other chapters. There is
little written about the political system in Denmark but much more in the other chapters.
My own reflection as a "Scandinavian"" (whatever that is) is that the role of the state is gen-
erally underestimated in Denmark and overestimated in Sweden and Finland, w hich is also
reflected in this book.
A striking characteristic of the Nordic countries and their accounting is the cooperation
and consensus-seeking between many different stakeholder groups, and betw een the public
and the private sectors. This complexity is fully dealt with in this book. Because account-
ing development is so complex there is room for retrospective interpretation discrepancies.
This becomes obvious in this book concerning the classification of the legal systems in dif-
ferent countries. The Danish writer interprets the Danish legal system as "framed in accor-
dance with the English legal tradition" (p 38), while the Swedes write "Accounting
regulation through laws is a continuation of a continental European tradition" (p 199).
Because of the comparative approach adopted b> the book this can give the reader the
wrong idea of great diversity between the Nordic countries. Actually, the legal systems in
the Nordic countries are close and would, according to the Danish writer Nielsen, best be
described as a subgroup of its own (within the Civil Law group) (Nielsen. 1995). Another
example of divergent interpretation (or authors" different "constructions of reality") can be
observed in the treatment of the institutions that have most influenced accounting develop-
ment in the different countries. More discussions between the authors in the process of
developing the research project might possibly have narrowed the interpretive gap.
In trying to analyze and compare the situation in the covered countries, the concluding
chapter has a ver>' honorable objective, but it falls victim to the danger of departing from
reality, because frequently the analyses venture into the realm of speculation. Often a
meaning is constructed where I can see none. This final chapter would have been much
more valuable with a more humble descriptive approach, since the chosen anal\tical
approach would hav e needed much more work to be accurate.
Book Reviews 521
In some respects it becomes ob\ious that the book was written during quite a short time
period, as suggested, among other things. b\' the considerable amount of spelhng mistakes
and references to tables and figures for which the reader searches in \ain.
The intended readership mentioned in the preface is the EU Commission in its work. but.
of course, many more would benefit from reading this book, such as those who are inter-
ested in international accounting and those w ho are interested in learning about accounting
in its context. The book is also particular!} inspirational for those who are looking for
research questions. For example, why do the Danes draw quite different conclusions about
EC harmonization concerning accounting and taxation than do the Finns or Swedes''!' How
can it be explained that I.ASC influence has occurred much later in Sweden than in Den-
mark? When it comes to other phenomena, such as social accounting and inflation account-
ing models, these were introduced simultaneously in the Scandina\'ian countries: is that
because they are global fashion moxements'^ .Another topic that needs more research is
how influential theon.' is on accounting practice. This book demonstrates that, in both Den-
mark and Finland, it has had a great influence. Another interesting question is: Who is actu-
ally leading accounting change?
Therefore, as a source and basis of future research the book is still of interest even though
it is already four years old. It conve>'s to the reader a deeper understanding of the way of
thinking in accounting matters and how this has influenced accounting solutions. Despite
the fact that rules ha\e alread\' changed since the research was done for this comparati\-e
project, the book is still \aluable because it deals not just with specifics (procedures) but
primarily with concepts, which ha\e not changed materialh' so far. As to the cooperative
project. I am not as enthusiastic. What we ha\'e learned so far in Europe is to let each one
talk on his or her own premises, the next step being that we learn also to listen to each other
more carefully.
REFERENCES
Biener. H. i 1994i. "'What is the Future of Mutual Recognition of Financial Statements and Is Com-
parabilit) Really N"ecessar\?" The European Accounting Revie\\. 3(2). 335—342.
Nielsen. R. ( 1995j. Retskildeme. Copenhagen: Juristog Okonomforbundets Forlag.
Re\iewed b\' Kristina .Artsberg
Lund Uni\ersit\
Lund. Sweden
The I.\SC-U.S. Comparison Project: A Report on the Similarities and Differences
between lASC Standards and U.S. GAAP, edited by Carrie Bloomer (based on a study
undertaken by the FASB staff). Financial Accounting Standards Board. Sonvalk. Connect-
icut. 1996. 426 pages.
International accounting harmonisation has been debated for decades: the only difference
is that it ma\- now become a realit\ . Not onl\ is there general agreement that the interna-
tional capital markets need comparabilit\ in international financial reporting for their effi-
cient operation, but also there is agreement about how this might be achie\ ed in the short-
522 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1 998
term. Perhaps more surprising, though, is that it is now also widely accepted that compara-
bility can be achieved outside a U.S. GAAP framework.
One of the most significant initiatives to be undertaken in the field of international
accounting for many years has been what is now known as the IOSCO Agreement. In 1995
the International Accounting Standards Committee (lASC) reached an agreement with the
International Organization of Securities Commissions (IOSCO) that, provided the lASC
could complete a core set of upgraded standards to IOSCO' s satisfaction by 1999, IOSCO
would endorse lASC standards with a view to having them accepted as a sufficient body of
accounting rules for multinational companies to use for the purposes of cross-border secu-
rities issues and listings. This already demanding timetable was subsequently accelerated,
so that the lASC's present target is to complete the revision of the core standards by
November 1998.
Although the final outcome of the Agreement cannot be predicted with certainty, it does
raise the stakes considerably for domestic standard setters. If an accepted international set
of standards does emerge it will inevitably put domestic standards under considerable
strain. This may be felt particularly keenly in the U.S., where foreign registrants are pres-
ently required to file accounts reconciled to U.S. GAAP. If this regime were relaxed so as
to allow lASC rules to be used instead, the FASB and the SEC might experience consider-
able pressure from U.S. domestic companies who might be understandably reluctant to
comply with U.S. standards that they perceive to be more demanding.
Such an attitude is likely to have been reinforced by this book that claims to have iden-
tified 255 differences between U.S. GAAP and lASC standards. This, in turn, has led many
observers to believe that the SEC is unlikely to allow IOSCO to endorse lASC standards
unconditionally unless they correspond closely to existing U.S. standards. However, the
obvious response to the FASB study is: how many of the differences actually matter, par-
ticularly given the fact that most of the progressive and innovative thinking in accounting
is coming from outside the U.S.?
In his Foreword to the book, the FASB's Director of Research and Technical Studies
states that the study "was undertaken in the spirit of harmonization and was guided by the
belief that an enhanced understanding of the differences between standards issued by the
International Accounting Standards Committee (lASC) and U.S. generally accepted
accounting principles (GAAP) is necessary to guide future efforts toward greater compara-
biUty of accounting standards and financial reporting worldwide". It is not clear where this
belief comes from, or who holds it apart from FASB themselves. However, as an instru-
ment for the promotion of harmonization and common understanding the book has fallen
well short of the mark.
To describe the book as pejorative would be an understatement. In general terms, the
book provides detailed coverage of what the authors perceive to be omissions/deficiencies
in IAS, whilst often being less critical of relatively less detailed or robust requirements in
U.S. GAAP. For example, the book states (on page 133) that "IAS 2 provides extensive
guidance on the nature of costs appropriately included in inventory. In the United States,
that type of guidance is usually found in cost accounting textbooks." So does this make
U.S. GAAP all right? If an IAS were to be as unspecified on a matter such as this, the book
would most likely have been critical of it. Given that companies have the free choice of
applying FIFO, LIFO or the weighted average cost assumptions to inventory, the idea that
companies will ever account for similar transactions in similar ways is pure illusion. The
I
Book Reviews 523
same applies to the depreciation of long-lived assets, where all that U.S. GAAP requires in
the selection of an amortization method is that the allocation should be "systematic and
rational". So here we have what are often the two most material items in the balance sheets
of companies (inventory and long-lived assets) being the subject of measurement rules
which allow a free choice of methods, each giving wildly differing results. However, the
question is: does it matter? Harmonization is not about uniformity: it is about consistent,
clear and transparent reporting within a generally accepted framework of rules that are rig-
orously applied, audited and regulated.
The book also glosses over those areas of GAAP where IAS is more advanced. In partic-
ular, I refer to the area of business combinations. The book states (on page 369) that "Con-
trol of a subsidiary is the basis for consolidated financial statements under both IAS 21 ...
and U.S. GAAP." This statement is simply not true - as later acknowledged - and reflects
a fundamental misunderstanding of the notion of control under IAS. The book footnotes
the fact that "The FASB is currently reconsidering the issue of consolidation policies and
procedures as part of its major agenda project on consolidations" - as if this somehow mit-
igates existing shortcomings. The book also, in my view, understates the effects on compa-
rability of the considerable latitude currently afforded under U.S. GAAP to companies
applying the pooling-of-interests method to business combinations.
Similarly, in the area of lease accounting, the book would have uninformed readers
believe that FASB Statement 1 3 is a rigorous standard which will give much more robust
results than is the case with IAS 17. Of course, anyone with practical experience with both
systems will know that in reality the reverse is probably true.
It therefore seems that in writing the book the authors have adopted the old adage which
is reputedly applied in the fur trade of "never mind the quality, feel the width". There are
no prizes for guessing that when it comes to detail and volume, U.S. GAAP is without
equal. However, it did not need the FASB study to prove this. More importantly, though,
the book seems to miss completely the point about comparability, harmonization and glo-
bal accounting standards.
In their recently published study on global investing, Morgan Stanley Dean Witter
posed the question "How close are IAS and U.S. GAAP?". Perhaps surprisingly to many
they gave the following answer: "The answer depends on what benchmark you use; spell-
ing out all the differences would require a textbook. FASB has identified 255 differences,
although many investors would find most of them meaningless. For reflecting economic
substance in most industries, IAS is easily of comparable quality to U.S. GAAP, if auditors
do their jobs. Yet as a rulebook, IAS is definitely less detailed than U.S. GAAP."
This answer highlights a fundamental philosophical difference in approach to accounting
harmonization between the U.S. and Europe and which seems to have been overlooked by
FASB in preparing this book. It seems clear that the present U.S. approach to accounting
harmonization indicates a desire for all companies participating in the same capital markets
to provide users with uniform information based on uniform rules.
Conversely, Europeans, for example, would argue that whilst there may be perceived
benefits of international standardization of accounting principles based on a system of uni-
form reporting, it also has its pitfalls. Essentially, these are that uniform financial reporting
may delude the unsophisticated into thinking that genuine harmonization has been
achieved, when in fact some differences may be healthy because they emphasize real
underlying commercial differences.
524 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1 998
This is because financial reporting is, to a large extent, a product of the environment in
which the reporting entity operates. For one thing, it is difficult to imagine uniformity in
financial reporting without uniformity in taxation systems, since taxation considerations
have considerable influence over management decisions. Similarly, political, cultural and
environmental considerations are all important components of the diversity of international
accounting. Any attempt to standardize international financial reporting on the basis of
some uniform system will result in an over-simplification of the complexities underlying
the financial statements concerned, and will create a false impression of harmonization. In
other words, if reporting entities are operating in completely different environments, and
are being managed, taxed and regulated on completely different bases, then the effect of
uniform reporting might mislead users by treating unlike items as if they were alike.
In contrast to the U.S. preference for uniform reporting, the European approach is based
on the notions of equivalence and mutual recognition. Equivalence means being of equal
value; that is, the co-existence of two systems of financial reporting which produce similar
but equally relevant and reliable information for use by the capital markets and other users.
Equivalence also requires a number of common ingredients. These include: transparency,
due process, quality standards and, above all, proper independent regulation of the capital
markets.
Moreover, equivalence demands from both sides a willingness to sacrifice and compro-
mise. This means that, in order to achieve the convergence of the U.S. and European sys-
tems of reporting under the lASC umbrella, Europe will have both to compromise on some
of its existing practices and embrace a common system of securities regulation. Similarly,
IOSCO will have to be persuaded that the accommodation of different, though equally
valid, reporting systems is appropriate. This means that IOSCO will have to weigh up the
need to embrace a system based on the principle of equivalence instead of uniformity
against the practical reality that absolute comparability in international reporting based on
a uniform system is not attainable in the foreseeable future.
Individual European countries have also demonstrated their willingness to compromise.
For example, in Germany legislation has been passed to the effect that "internationally
accepted accounting principles" may be used in the consolidated financial statements of
listed companies instead of the national law. France and Italy have passed similar legisla-
tion, and it is likely that other European countries will follow suit.
For Europe, these are revolutionary changes. More importantly, though, they demon-
strate not only Europe's willingness to compromise, but also how Europe as a whole has
become a much more active player in the harmonization debate. Prior to the IOSCO agree-
ment, there was always the danger that Europe's capital markets would fragment and
thereby drive individual countries and companies into ad hoc alliances with the U.S. and
other international capital markets. However, as the balance of power in the international
harmonization debate moves away from U.S. dominance based on uniformity towards the
European system of equivalence and mutual recognition this now seems much less likely
to happen.
Moreover, with European Monetary Union coming in less than a year, the capital mar-
kets in Europe will inevitably come much closer together and be able to provide a much
more meaningful counter-balance to the U.S. capital markets. One can then envisage the
world's very largest companies being able to have more of their capital needs satisfied in
Europe at the same cost of capital as the U.S.
Book Reviews 525
It seems that the FASB is working on an updated version of this book, and is even con-
sidering pubHshing it in loose-leaf form. My view is that their energies could better be
spent on other things.
NOTE
1. Morgan Stanley Dean Witter, Apples to Apples. Overcoming Accounting Differences: A Stock-
picker's Guide to the Numbers that Count, February 1998.
Reviewed by Allister Wilson
Ernst & Young
London, England
[Editors' note: Allister Wilson is a Partner and Director of International Accounting the
U.K. firm of Ernst & Young. He serves as technical advisor to the European Commission
in the field of Financial Information and Accounting Standards. In this capacity, he attends
all meetings of the lASC Board as an observer member.]
Accounting in Transition: The Implications of Political and Economic Reform in
Centra\ Europe, edited by Neil Garrod and Stuart McLeay, Routledge, London, 1996, 166
pp. £50.
Looking back over the last ten years, there is no doubt that the fall of communism and the
concomitant desire to Westernize (originally to make capitalistic) business, finance and
accounting systems caught most accounting researchers on the hop. With honorable excep-
tions, such as Derek Bailey and Maureen Berry in one direction, and Alicja Jaruga in the
other, there was an accounting iron curtain of disinterest and ignorance. The Nair and
Frank (1980) and Nobes (1983) classifications ignore the entire state planning syndrome.
The trials and tribulations of "westernizing" Central and Eastern European accounting
are part of an ongoing saga of the process of paradigm change which cries out for longitu-
dinal research attention, and is generally not receiving it. Meanwhile, Accounting in Tran-
sition generally seeks to tell Westerners what is going on in six "Central European"
countries, i.e., Lithuania, Poland, the Czech and Slovak Republics, Hungary and Slovenia.
When starting with a tabula rasa, almost anything is helpful, even purely descriptive
papers, although to describe something to an outsider requires a cross-cultural under-
standing not always present. There are no such problems here, as these papers are written
by experts in the field, with local and Western co-authorship. Nevertheless, the bulk of
the (rather slim) volume, the country chapters numbered 4 to 8, contains essentially
descriptive studies of developments and the state of play in the country concerned. These
are good of their type. All have a proper historical and institutional context, and the regu-
latory detail with its often idiosyncratic mixture of rapid advance and apparent incom-
pleteness is generally explained and rationalized. To give one example, the careful reader
would not be surprised by either of the following two sentences from the chapter on
Lithuania (p.51):
526 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998
"The Act on the Principles of Accounting 1992 (Article 13) provides that the public
availability of financial statements 'shall be established by the Government of the
Republic of Lithuania.' No action has been taken."
The first three chapters attempt a more general approach. Chapter 3 by Renata Soch-
acka (her name is misspelled on p. 28, the opening page of the chapter) and Jean-Louis
Male adopts a systems perspective to the change process. The first part of their paper
considers operating, information and decision sub-systems in the context of the objec-
tive of "accountability," concluding — not surprisingly — that the sub-systems are interre-
lated. This is then applied to the creation of the Polish Securities Commission (to
which Sochacka was seconded for several years). The conclusion is again unsurprising
(p. 38):
"The key lesson seems to be that simply to change accounting methods is not enough
when the basic objectives of the system are no longer relevant and must be altered."
However, the writing is informed and authoritative.
The second chapter is a reprint, not updated, of a previously published paper by Jaruga
(1990). This is a fascinating little piece of history, doubtless a shaft of light in its time, tell-
ing it like it was with a real sense of overview and understanding. The paper essentially
outlines the key features of accounting as it used to be in "Socialist countries" and summa-
rizes some "controversial issues" as of the late 1980s.
Chapter 1 is an introductory piece by the editors. They discuss a number of key issues,
making two essential points. These are, first, that local factors remain of paramount impor-
tance in the process of accounting change. For example, ministry of finance officials who
have been in absolute control for 40 years, when charged with devising and overseeing a
new system, are not likely to give away all control over the process. The second point
made, correctly, is that events in these countries will affect accounting development
throughout Europe, and indeed beyond.
A major problem in books like this one is that of timeliness. I write in the summer of
1998 about a collection of papers published in 1996. in which it is perfectly obvious that
nothing has been updated since 1994. This is a very fast-moving field. The European
Accounting Guide (Alexander and Archer, 1995. 1998), for example, shares some country
coverage (and some authors) with the text under review. The third 1998 edition has
involved major rewrites compared with the second 1995 version.
The perils are well shown in that even Western situations can change radically. We read
that (p. 4):
"...it should be recalled that financial depth in Germany has provided the kind of pro-
tection from externalities which is not now available in central Europe. For
instance,. ..large German companies have been able to sidestep the influence of interna-
tional capital markets...."
Tell that to Daimler-Benz and Deutsche Telekom.
The editors state in their preface that the book
Book Reviews 527
"should prove useful to all readers interested in international accounting who wish to
learn more about the nature of the changes which have occurred in central Europe and
the problems which have arisen."
This relatively modest claim is certainly justified. There is much of interest, though for
160 pages the book is expensive. But be quick. A study of history is important for investi-
gating processes of accounting change. But history this book already is.
REFERENCES
Alexander D. and S. Archer. 1995. 1998. European Accounting Guide. San Diego, CA: Harcourt
Brace (second and third editions).
Jaruga A. A. 1990. "Accounting Functions in Socialist Countries." British Accounting Review, 22
(March): 51-77.
Nair R. and W. Frank. 1980. "The Impact of Disclosure and Measurement Practices on International
Accounting Classifications." The Accounting Review, 55 (July): 426-450.
Nobes C. 1983. "A Judgemental International Classification of Financial Reporting Practices." Jour-
nal of Business Finance and Accounting, JO (Spring): 1-19.
Reviewed by David Alexander
University of Hull
Hull, England
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5:S
PERIODICAL
JAN 1 1 1999
The
International
Journal of
Accounting
ndrew D. Bailey, Jr.
University of Illinois at
Urhana- Champaign
CO-EDITORS
Arthur R. Wyatt
University oj Illinois at
Urhana-Champainn
Yukio Fujita
Aichi-Ciakuin University, Tokyo
R.S. Olusegun Wallace
King Fahd University, Saudi Arabia
Volume 33 • Number 5 • 1998
(Index Issue)
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iter for International Education and Research in Accounting,
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The
International
Journal of
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EDITOR
Andrew D. Bailey, Jr,
University of Illinois at
JJrhana - Champaign
CO-EDITORS
Arthur R. Wyatt
University of Illinois at
Urbana-Champaign
Yukio Fujita
Aichi-Gakitin University, Tokyo
R.S. Olusegun Wallace
King Fahd University,
Saudi Arabia
Volume 33 • Number 5 • 1998
Greenwich, Connecticut London, England
Center for International Education and Research in Accounting,
University of Illinois at Urbana-Champaign
EDITOR
Andrew D. Bailey, Jr.
University of Illinois, Urbana-Champaign
CO-EDITORS
Arthur R. Wyatt. University of Illinois, Urbana-Champaign
Yukio Fujita, Aichi Gakuin University, Tokyo
R. S. Olusegun Wallace, King Fahd University, Saudi Arabia
BOOK REVIEW EDITORS
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EDITORIAL POLICY BOARD
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EDITORIAL REVIEW BOARD
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Call for Papers
EMERGING ISSUES IN INTERNATIONAL ACCOUNTING
Jointly sponsored by the
CENTER FOR INTERNATIONAL ACCOUNTING EDUCATION AND RESEARCH
Nigara University
and the
CENTER FOR INTERNATIONAL EDUCATION AND RESEARCH IN ACCOUNTING (CIERA)
University of Illinois at Urbana-Champaign
Augusts-?, 1999
Nigara Falls, New York, USA
This conference, in the international setting of the world famous Nigara Falls on the border
of the U.S. and Canada, will provide an opportunity for teachers, researchers, and practitio-
ners interested in international accounting to exchange ideas, to network, and to discuss
emerging issues.
Papers and panel discussions on any area of international accounting are welcome. If the
author wishes, the submitted paper will be given fast-track consideration for publication in
The International Journal of Accounting, a publication of CIERA, or The Journal of Inter-
national Accounting, Auditing, and Taxation. For those electing fast-track review, please
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THE INTERNATIONAL
JOURNAL OF ACCOUNTING
VOLUME 33 NUMBERS 1998
ARTICLES
Accounting Diversity and Firm Valuation
RAYMOND D. KING AND JOHN CHRISTIAN LANGLI 529
Budgeting and Standard Costing Practices in \
New Zealand and the United Kingdom y
CHRIS GUILDING, DAWNE LAMMINMAKI AND /
COLIN DRURY 569
Relevance of U.S.-GAAP for Japanese Companies
JOSEPH H. GODWIN, STEPHEN R. GOLDBERG, AND
EDWARD B. DOUTHETT 589
The Impact of Corporate Attributes on the Extent of Mandatory
Disclosure and Reporting by Listed Companies in Zimbabwe
STEPHEN OWUSU-ANSAH 605
The State of Accounting in Armenia: A Case
ROBERT BLOOM, JAYNE FUGLISTER, AND MARK MYRING 633
BOOK REVIEWS
The French Plan Comptable: Explanation and Translation
by Peter Standish
Reviewed by BERNARD RAFFOURNIER 657
International Accounting Standards: Deutsche Fassung,
edited by the International Accounting Standards Committee
Rechnungslegung nach International Accounting Standards
by Jorg Baetge, Dietrich Dorner, Heinz Kleekamper and
Peter Wollmert
Reviewed by JOHN FLOWER 660
Management Accounting: European Perspectives
by AInoor Bhimani, (Ed.)
Reviewed by ROBIN COOPER 663
International Accounting
by Peter Walter, Axel Haller and Bernard Raffournier, (Eds.)
Reviewed by CAROL A. ADAMS 666
International Accounting: A Global Perspective
by M. Zafar Iqbal, Trini U. Melcher and Amin A. Elmallah
Reviewed by JILL McKINNON 669
Contemporary Accounting Issues in
China — An Analytical Approach
by Lin Kin Cheung and Zhang Wei Guo
Reviewed by AMY HING-LING LAU 671
Index 675
i
The International
Journal of
Accounting
Accounting Diversity and Firm Valuation
Raymond D. King and John Christian Langll
University of Oregon and Norwegian Sctiool of f^anagement
Key Words: Accounting diversity. Valuation, International, Clean surplus. Conservatism
Abstract: We examine accounting numbers and stock prices across three countries: Germany,
Norway, and the United Kingdom (UK). The accounting systems in the three countries differ in
faithfulness to clean surplus accounting and in conservatism. We address three questions. First,
are there systematic differences across countries in the value relevance of accounting? Second,
are there systematic differences in the incremental and relative value relevance of book values and
earnings per share (EPS) across the countries? Third, do future earnings realizations (proxies for
expected earnings) explain current stock prices? We find that accounting book value and EPS are
significantly related to current stock prices across all three countries. German accounting num-
bers have the lowest relation with stock prices (R = 40%) and UK accounting numbers the highest
(R ~ 70%), while Norwegian accounting numbers are in between (R = 60%). Second, the incre-
mental and relative explanatory power of book value and of EPS differs across time and across
countries. Book values explain more than earnings in Germany and Norway, but less in the UK.
Finally, future income realizations explain little about market prices not already explained by cur-
rent book value and EPS.
Diversity in international accounting practice is the subject of much attention. Such
diversity makes reading foreign financial statements more difficult and may affect
firms and capital markets. The International Accounting Standards Committee (lASC),
the International Organization of Securities Commissions, (IOSCO) as well as the
European Union have both devoted considerable effort to standardization or harmoniza-
tion of accounting practices across countries. There are many claims by investment
professionals that accounting differences may impede international capital flows (Choi
and Levich, 1991). The limited existing evidence is based primarily on opinion and on
attitude surveys. This study examines the relation between accounting numbers and
firm market values across three countries with very different accounting practices. The
analysis follows a model formally developed by Ohlson (1990, 1991. and 1995).
Direct all correspondence to; Raymond D. King, Lundquist College of Business, University of Oregon, Eugene,
Oregon 97403; E-Mail; rking@oregon.uoregon.edu.
The International Journal of Accounting, Vol. 33, No. 5, pp. 529-567 ISSN: 0()20-7063.
All rights of reproduction in any form reserved. Copyright © 1998 University of Illinois
530 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
This model was termed the Edwards-Bell-Ohlson Model (EBO) by Bernard (1994) and
has also been called the Residual Earnings Model (Frankel and Lee, 1996 and Lee, 1996).
The model expresses a concept dating back at least to Edwards and Bell (1961): firm value
is a function of firm book value and future earnings. A key aspect of the model is that its
valuation accuracy does not depend on a particular set of "good" accounting procedures. In
fact, the only requirement on accounting procedures is that of clean surplus accounting.
That is, book value of equity changes only with income or loss and net capital investments
and withdrawals (dividends) by owners.
Practical applications of the model require only four inputs: (1) the current book value of
the firm. (2) the expected future accounting income. (3) the expected net dividends, and (4)
the equity cost of capital. These factors can usually be estimated from available data.
Accounting records provide book values, many financial analysts forecast future earnings,
dividend pay-out policies are relatively stable, and the Capital Asset Pricing Model
(CAPM) can be used to estimate the cost of capital. Hence, the factors determining value
are more amenable to estimation than are the future dividend amounts required to estimate
value under traditional dividend discount models.
The model expresses firm value as a function of book value and expected future residual
earnings over an infinite horizon. Estimates based on shorter horizons have proved rela-
tively robust in estimating value (Bernard, 1995). Over an infinite horizon clean surplus
accounting provides a complete offset between current biases in earnings and book values
and the effect of these biases on future residual earnings. Over finite horizons, however, the
effect of accounting bias on future residual earnings becomes more complex. Feltham and
Ohlson (1995) and Lundholm ( 1995) explore the effects of bias in accounting on the EBO
model. In this study, we look across countries at the effects of bias (conservatism) and vio-
lations of clean surplus accounting.
Across countries accounting systems vary in their faithfulness to clean surplus account-
ing and in the extent to which they exhibit bias (conservatism). Hence, it is possible that
accounting values from some countries may provide better estimates of firm value than
accounting values from other countries. In this study we examine the accounting systems
in three European countries to assess whether they differ in their value relevance under the
Residual Earnings model. The countries selected. Germany, Norway, and the United King-
dom (UK), differ in the extent to which their accounting is conservative and in their adher-
ence to clean surplus accounting. Therefore, the usefulness of accounting for firm
valuation may differ across countries as well. Evidence concerning the value relevance of
accounting numbers from different accounting systems would be of value in the current
debate over international accounting standards and practices.
We find book value and earnings are positively and significantly related to current stock
prices across all three countries. The accounting numbers for German firms have the lowest
relation with stock prices (R" about 40%) compared to Norwegian and United Kingdom
firms. United Kingdom accounting numbers have the highest relation with stock prices (R
about 70%) with the explanatory power of Norwegian accounting numbers in between (R
about 60%). However, the incremental and relative explanatory power for book value and
for earnings differs across time and across the three countries. Book values explain more
than earnings in Germany and Norway, but less in the UK. Earnings have little incremental
information in Norway. Finally, income realizations for future years have little relation to
Accounting Diversity 531
current stock prices. The increment is so small that we conclude future earnings explain lit-
tle about market prices not already explained by current book value and income.
The next section of the paper provides an overview of the residual earnings
(Edwards-Bell-Ohlson) model. Section 3 discusses accounting differences in the three
countries examined. In Section 4 we describe the sample and develop the study design.
Section 5 presents the analysis of our data and reports the results of our tests. A final sec-
tion summarizes our findings.
RESIDUAL EARNINGS MODEL
Finance theory has long accepted the dividend discount model (DDM) as reflecting the
correct (normative) equity value of a firm (Brealey and Myers, 1995, pp. 59-62). Under the
DDM the value of the firm is the present value of the future dividend stream to equity hold-
ers.
V^= I (1 + r)- £,[./,,,] (1)
/= 1
where:
Vj = the equity value of the firm at time t
dj - dividend at time t (all capital flows to equity holders net of contributions)
r = cost of equity capital
E(.) = expectations operator
Substituting accounting variables into the DDM, Ohlson (1991) developed the following
expression relating firm value to accounting values:
V, = h^+ X ((l+r)~'£,[.v;^,]) (2)
/ = 1
The value of the firm (V,) at time t is the sum of net book value (/?,) plus the discounted
expected future abnormal earnings (x^ ). The equivalence of (1) and (2) requires only three
assumptions:
(1) clean surplus accounting: h, - h,_i + x, - d, (3)
(2) residual (abnormal) earnings, defined
as earnings exceeding the required
return on equity capital: .v^ = .v, - /"/?,_/ (4)
532 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
(3) convergence conditions such that
earnings and abnormal earnings are
autoregressive.
To estimate equation ( 1 ) requires an analyst to forecast the complete future stream of firm
net dividends. Rather than reflecting wealth creation, however, dividends reflect wealth
distributions (Penman, 1992). Further, the timing of dividends is largely discretionary with
growing firms often paying little or no dividends. Hence, estimation of equation (1)
requires estimation of a terminal value that may be a large portion of total estimated value.
In contrast, equation (2) relies on known book values and estimated future accounting earn-
ings. To the extent that estimating future earnings is easier than estimating future divi-
dends, the residual earnings model is an attractive practical alternative to the DDM.
Since both equations are defined over an infinite horizon, truncation to finite periods will
require estimates of terminal value. However, the future values in equation (2) are residual
or abnormal earnings. Normal earnings (earnings that return the equity cost of capital) do
not add to value and may be ignored. Hence, the portion of total value represented by the
terminal value is typically much smaller for equation (2) than for equation (1). This is due
to the inclusion in equation (2) of the book value, a measure of normal return on the firm's
resources. Only abnormal future returns create value incremental to book value. Rewriting
equation (2) where the estimation period ends at time T gives:
T
V, = ^+ X ((l+r)"'£,U;'^.])+(l/r)((l + r)"^£,[4^,]) (5)
/= 1
In this case abnormal earnings are assumed to be zero on any growth in book value beyond
period T, but abnormal earnings at period T are assumed to be a perpetuity. If abnormal
earnings at period T are small, the terminal value (the third term) is a small portion of the
value of the firm.
Related Research
Research concerned with the relation of accounting numbers and stock prices covers
decades. In this brief review we summarize recent research with study designs and research
methods similar to ours. We see two principle strains: first, research focused on explaining
stock prices with accounting book value and earnings; and second, research examining the
incremental explanatory power of book value and earnings in the presence of the other.
Stock Prices Explained by Book Value and Earnings-per-Share
Examining a large set of United States firms, Bernard (1993) found that book values
explain 55% of the cross-sectional variation in market prices. When the rank of current
return on equity (ROE) was added to the regression, these two accounting measures
explain about 64% of the variation in market prices. Bernard (1994) finds that ROE is
Accounting Diversity 533
mean reverting over time so that firms with the highest (lowest) current ROEs tend to have
lower (higher) ROEs in later years.
Joos and Lang (1994) relate book value and earnings to stock prices for France, Ger-
many, and the United Kingdom. Their sample covers 1982 to 1990, and they focus on the
effects of implementing the accounting related directives of the European Union. They find
the explanatory power of book value and earnings together ranges from 20% to 38% for
Germany, 48-78% for France, and 14-42% for the UK. They do not examine incremental
information content. Evidence on changes over time is ambiguous, probably because the
time periods for the sample are relatively short. In a more recent study Rees (1977), using
a model like that used in this study, finds that book value and earnings explains about 54
percent of the variation in firm value for a large sample of UK firms during the period
1987-1995."
Harris, Lang, and Moller (1994) examine the value relevance of accounting numbers for
German firms compared to that for a matched set of US firms for 1982-1991. They find lit-
tie difference in overall value relevance (/?") between German and US firms. However,
coefficients (multiples) on book value and on earnings for German firms are greater than
for matched US firms. Further, they find that consolidation increases the value relevance
of accounting numbers, and restatements of earnings to adjust for transitory elements in
German accounting also increases explanatory power.
Frankel and Lee (1996) look at the relation between accounting values, earnings fore-
casts and market prices across twenty countries (including Germany, Norway, and the UK)
for eight years, 1987-1994. Sample sizes for these country are relatively small for each year
(52-135 for Germany, 1-19 for Norway, and 303-449 for the UK). They find that estimates
of value based on the residual earnings model have incremental explanatory power beyond
book value and earnings in explaining market value in all countries. In addition, they find
evidence of superior returns to trading strategies based on an estimate of value from a
residual earnings model.
Incremental Explanatory Power of Book Value and Earnings-per-Share
Collins, Maydew, and Weiss (1997) examine the incremental explanatory power of book
value and earnings across a 41-year time period (1953-1993) for United States firms. They
find a decline in the ability of earnings to explain market prices over this period. But the
explanatory power of book values increase such that total explanatory power is actually
higher in more recent periods. Average adjusted R for a model regressing book value and
earnings per share on stock price for the first ten years (1953-1962) was 0.50 increasing to
0.69 for their most recent ten-year period (1984-1993). Collins et. al., investigate possible
reasons for these changes. They find the reduced explanatory power of earnings is
explained by an increase in the incidence of one-time items and reported losses as well as
a decrease in the size of firms in the sample.
Harris et. al. (1994) also examine the separate explanatory power of book value and of
earnings using simple regressions with only one variable. They do not report the test statis-
tics. However, they report (1) the explanatory power of eamings-per-share in Germany is
approximately equal to that in the US, but (2) the explanatory power of book value is much
lower for Germany. This contrasts sharply to our results for a longer time period. These
results are not tests of incremental explanatory power since the simple regressions use only
534 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
one variable. However, if the results of these simple regressions were reported, incremental
power could be computed as demonstrated by Collins et. al. (1997) and this paper.
This study extends the evidence summarized above. Our sample covers a longer and a
more recent time period (fifteen years versus eight to ten years) and contains many more
firms for each of the three countries than previous studies. We examine the value relevance
of accounting numbers across countries and focus on the incremental and relative explan-
atory power of book value and earnings. Accounting systems differ across the countries,
and this study examines whether those differences, particularly differences in conservatism
and violations of clean surplus accounting, are related to the valuation usefulness of
accounting measures. Finally, we use future realized earnings as measures of expected
earnings to address whether models using longer time horizons of expected earnings will
improve explanatory power.
ACCOUNTING DIVERSITY
The residual earnings model is affected by the particular rules of the accounting system in
two ways. First, the model assumes clean surplus accounting; changes in book value, other
than net capital investments, come through the income statement. Expected future viola-
tions of clean surplus accounting destroys the equivalence of the residual earnings model
with the DDM. Second, bias in the accounting system may bias estimates of the value of
future residual earnings. Accounting practice in many countries has a conservative bias,
and "conservatism" is sometimes cited as a positive attribute of an accounting system.
Under conservative accounting, changes in values are reflected in accounting numbers
slowly and often with bias. Value reductions are typically reflected more quickly than
value increases. In this section we evaluate the accounting practices of the countries in our
study on these two dimensions. Then we develop hypotheses on the effects of these differ-
ences on the value relevance of accounting numbers.
Anecdotal evidence suggests that the financial reporting (accounting) systems of differ-
ent countries may be evaluated in terms of quality from an investor's perspective (Choi and
Levich, 1991; Weetman and Gray, 1991; and Haller, 1992). Classification studies have
categorized accounting systems in different countries on criteria such as business environ-
ment (Mueller, 1968), measurement and disclosure practices (Nair and Frank, 1980) and
culture and social values (Hofstede, 1980; Gray, 1988; and Perera, 1989).
In Gray's (1988) classification study accounting practice in the UK is dominated hy pro-
fessionalism and allows more flexibility than the accounting system in Norway, while Ger-
man accounting puts more emphasis on uniformity and statutory control. Further, using the
dimensions optimism versus consen'atism and secrecy versus transparency. Gray rates
accounting practice in the UK as more optimistic and more transparent than accounting in
Norway. However accounting in both the UK and Norway is much more transparent and
much less conservative than German accounting .
Nobes (1994, p.61 ) highlights the following features of UK accounting: (1) the immedi-
ate write off of goodwill against reserves, (2) the common practice of capitalizing pur-
chased or created brand names, (3) the lack of depreciation of investment properties and of
many shops, hotels, etc.. (4) the uncontrolled revaluation of assets such as land and build-
ings, and (5) the partial allocation method of deferred taxes (only deferred taxes expected
Accounting Diversity 535
to be paid in the foreseeable future are accounted for). Items (1) and (4) are violations of
clean surplus accounting/
For Germany, Nobes (1994, p. 63) points to the following characteristics: (1) the very
strong link between tax and accounting rules (Massgeblichkeitsprinzip) that, according to
Haller (1992), stimulates a desire to create hidden reserves, (2) the downward bias in val-
uations; (3) unfunded pension liabilities and pension costs based on tax rules rather than
economic assumptions; (4) the use of historical exchange rates for fixed assets of foreign
subsidiaries; and (5) larger provisions (frequently not disclosed) than what would be con-
sidered necessary by US/UK accountants. The collective effect of these features is a very
conservative calculation of book value and distributable profit.
Compared to Germany and the UK, Norwegian GAAP has undergone rapid and substan-
tial change during the 1980s and 1990s. Up to 1976-77, financial statements were linked to
tax statements and based on tax rules. The new Company Act of 1976 and the Accounting
Act of 1977 introduced a tax link model. This model was an attempt to present financial
statements that satisfied the information needs of both investors and the tax authorities
(Kinserdal 1994). In practice, however, tax considerations continued to dominate the mea-
surement of profits, assets, and equity. For example, most large companies did not disclose
information about tax-induced reserves until 1984-85. Tax considerations continued to
play an important role in Norwegian accounting until 1992, when deferred taxes were
introduced.
These changes in accounting regulation have moved Norwegian accounting from a sys-
tem somewhat similar to that of Germany to one more like that of the UK. However, Nor-
wegian accounting is still quite different from that of the UK. For example, none of the
features highlighted by Nobes (1994) as important in UK accounting are found in Norway.
That is, in Norway (1) goodwill must be capitalized and amortized, (2) brand names may
not be capitalized unless purchased (however, some marketing costs may be capitalized),
(3) depreciation of property, plant, and buildings is mandatory, (4) revaluation of fixed
assets is allowed only under restrictive conditions, and (5) deferred taxes are calculated
using the liability method (as in the US). In summary, Norwegian accounting is less con-
servative than German accounting and has fewer violations of clean surplus than does UK
accounting.
Appendix A gives a summary of some of the accounting standards and rules for the three
countries. The table is based on a survey by Price Waterhouse (1995) with additional infor-
mation from Nobes (1994) and Schwencke and Alexander (1996). This summary allows
comparison of accounting practices across the three countries with a specific focus on
accounting practices that differ significantly in conservatism or in violations of the clean
surplus assumption. The summary does not include areas of accounting practice that are
similar across the three countries.
In summary, the three countries exhibit considerable diversity in accounting practice.
German accounting has long been considered conservative and focused more on tax
and lender concerns than on information for investors (Samuels et. al., 1995, Ch. 4).
Accounting in the United Kingdom is thought to be less conservative, focused prima-
rily on equity investors, and more concerned with reflecting market values (Samuels et.
al., 1995, Ch. 4). Norwegian accounting has changed rapidly in recent years from a
tax-based, relatively conservative "continental model" to one closer to the US/UK/
Dutch investor-oriented model (Johnsen, 1993 and Kinserdal, 1994). The three coun-
536
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
Table 1 . Summary of Accounting Differences
Clean Surplus Violation
Germany
Nonvay
United Kingdom
Goodwill written off against equity
Revaluation of assets
Prior period adjustment to equity
Effect of new accounting principles
some
no
yes
no
some
frequent
no
no
yes
no
some
yes
Conservatism
Inventory valuation
lowest
higher
higher
Interest capitalized
no
some
some
Research and development capitalized
no
some
some
Long-term contracts
completed contract
% completion
% completion
Provisions and reserves
largest
smaller
smaller
Table 2. Sample and Study Design
Sample Selection
Firm-years
Global Researcher 1987-1996 (1995 for Norway)
Datastream 1982-1986
Negative book value
Missing observations of price, book value, ROE, EPS, or
P/E
Top and bottom 1 % of ROE and P/E
Sample size
Germany
Norway
United Kingdom
Sample size
14,078
2,388
-857
-345
-621
14,643
2,716
922
11,005
14,643
tries differ in both their conservatism and the extent to which they adhere to clean sur-
plus. German accounting is most conservative and UK accounting least, while UK
accounting has greater violations of clean surplus accounting. Norwegian accounting is
thought to lie between these extremes (Table 1).
SAMPLE AND STUDY DESIGN
Our sample covers publicly traded firms in Germany, Norway and the United Kingdom
across the period 1982 through 1996. The stock prices and accounting data for this study
are from the Worldscope Global Researcher as well as data maintained by the Institute of
Business Economics at the Norwegian School of Management. The sample selection cri-
teria are:
1 . Accounting data is from consolidated financial statements.
2. Financial firms are excluded (insurance, banks, property companies, investment
companies, and other miscellaneous financial firms). Accounting practices for these
Accounting Diversity
537
Table 3. Descriptive Statistics on Variables for Three Countries
Std.
5th
95th
Variable
N
Mean
Dev.
Percentile
Median
Percentile
Panel A: Germany
Price per share
2,716
330.2
356.8
26.3
241.0
870.0
Book value of
2.716
136.2
116.0
11.7
116.8
327.8
equity per share
(BV)
Earnings per
2,716
8.8
52.3
-24.7
9.5
42.4
share (EPS)
Return on
2,716
6.0
23.1
-32.0
8.9
26.1
equity
(EPS/BV)
Panel B: Norway
Price per share
922
205.3
449.2
8.2
97.8
680.0
Book value of
922
118.5
245.0
5.9
59.9
358.1
equity per share
(BV)
Earnings per
922
15.1
45.7
-6.1
5.8
61.8
share (EPS)
Return on
922
9.6
19.3
-24.5
10.4
37.1
equity
(EPS/BV)
Panel C: United Kingdom
Price per share
11,005
2.07
6.92
0.20
1.27
5.36
Book value of
11,005
1.31
4.97
0.12
0.71
3.42
equity per share
(BV)
Earnings per
11,005
0.14
0.49
-0.07
O.IO
0.43
share (EPS)
Return on
11,005
12.95
22.54
-16.67
14.29
39.58
equity
(EPS/BV)
Nole: N = the number of firm-ye;irs, 1982-1996 for Germany and the United Kingdom and 1982-
Price, book value, and earnings per share amounts are in nominal local currency.
1995 for Norway.
firms are so distinct that their valuation parameters are likely to be substantially dif-
ferent from those for industrial firms.
3. Firms with negative book values are deleted. These firms are likely to be in finan-
cial distress and may be interesting in their own right. However, the focus of this
study is the cross-country differences in value relevance of accounting numbers
derived under different accounting practices. Hence, restricting our sample to firms
with positive book values will allow us to focus on firms where differences are
mostly likely to reflect accounting differences.
4. We also trim the sample of the most extreme values. We omit firm-years with the
largest and smallest 1% of observations ROE and P/E (Table 2).
538
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
Table 4. Correlation Statistics for Three Countries
PEARSON
PRICE BOOK
ROE
EPS EPS,,, EPS,, 2 EPS,, 3 EPS,, 4
Panel A: Germany
PRICE
BOOK
ROE
EPS
EPSt + 1
EPSt + 2
EPSt + 3
EPSt + 4
2.716
2.716
2,716
2.716
2.399
2.081
1.770
1.454
1 0.597*=^
0.733*** 1
0.182*** -0.030
0.645*
0.532*
0.425*
0.360*
0.331*
0.609**=*
0.475** H
0.374**=*
0.311**=*
0.267**=*
0.109***
0.022
1
0.679***
0.485***
0.401***
0.346***
0.326***
0.145
-0.114
0.463
1
0.727
0.579
0.496
0.449
0.115*** -0.010 -0.091*** -0.055**
-0.006 -0.046** -0.090*** -0.149***
0.158*** 0.056*** 0.130*** 0.056**
0.251*** 0.067*** 0.177*** -0.018
1 -0.019 0.049** 0.132***
0.732*** 1 0.549*** 0.080***
0.571*** 0.723*** 1 0.164*=*=*
0.501*** 0.563*** 0.709*** 1
Panel B: Norway
PRICE 922 1
BOOK 922 0.729
ROE 922 0.329
EPS 922 0.724
EPSt + 1 767 0.580
EPSt + 2 618 0.488
EPSt + 3 482 0.424
EPSt + 4 364 0.404=*
0.798**^
< 0.142**'
^ 0.636***
0.442***
0.211***
0.145***
0.127**
1
0.080**
0.713***
0.440***
0.272***
0.181***
0.140***
0.089**=
^ 1
0.372***
0.239***
0.118***
0.129***
0.032
0.668**^
< 0.698**'
^ 1
0.405***
0.251***
0.211***
0.091*
0.504**'
' 0.439**'
' 0.696***
I
0.324***
0.313***
0.180***
0.443 **>
< 0.269**'
< 0.501***
0.685***
1
0.430***
0.421***
0.384**'
< 0.182**'
< 0.395***
0.477***
0.666***
1
0.222***
0.345**'
< 0.141**'
. 0.330***
0.347***
0.468***
0.671***
1
Panel C: United Kingdom
S
PRICE
11,005
1 0.665***
0.047***
0.744***
0.051***
-0.241***
-0.173***
-0.796***
p
BOOK
11,005
0.708*** 1
-0.025***
0.515***
-0.269***
-0.348***
-0.558***
-0.451***
E
ROE
11,005
0.274*** -0.2 11***
1
0.234***
0.057***
0.025**
0.017
0.003
A
EPS
11,005
0.809*** 0.665***
0.477***
1
0.204***
-0.172***
-0.107***
-0.611***
R
EPSt + 1
9,608
0.601*** 0.463***
0.330***
0.694***
1
0.062***
0.269***
-0.074***
M
EPSt + 2
8,217
0.480*** 0.377***
0.218***
0.523***
0.784***
1
0.066***
0.266***
A
EPSt + 3
6,887
0.372*** 0.316***
0.117***
0.392***
0.605***
0.776***
1
0.062***
N
EPSt + 4
5,618
0.273*** 0.272***
0.058***
0.318***
0.469***
0.605***
0.776***
1
Notes: N = the number of firm-years. 1982-1996 for Germany and the United Kingdom and 1982-1995 for Norway.
PRICE = Stock price at the end of fiscal year /;
BOOK = Book value of shareholder' equity at the end of time /;
EPS = Earnings per share for period ending at time t;
ROE = EPS/Book;
EPS, ,j= Realized earnings per share T periods following time t.
*** Significantly different from zero at the 0.01 level (2-tailed).
** Significantly different from zero at the 0.05 level (2-tailed).
* Significantly different from zero at the 0.10 level (2-tailed).
These restrictions on the sample will have several effects. First, the model will appear to
"fit'" better than it would fit unrestricted data. That is, the explanatory power of book value
and of earnings information in the sample is likely to be greater than for an unrestricted
sample. Second, the samples across the three countries will be more homogeneous and the
effects of different business cycles in the three countries will be reduced. This should allow
a better focus on the effects of accounting differences.
Accounting Diversity 539
Table 3 provides descriptive statistics for the sample for all three countries for the fif-
teen-year time period. Amounts are nominal per share values in the currency of each coun-
try. We do not adjust amounts to a common currency. In cross-country analysis we use
dummy intercept and interaction terms to allow the coefficients for each country to be inde-
pendent. Finally, we do not adjust for changes in purchasing power, but we explore the sta-
bility of the relationships over time. The descriptive data reveal some positive skewness
(means are higher than medians) for values of price, book value, and earnings per share
(EPS). ROE measures are highest for the UK with mean (median) 13.0% (14.3%) and low-
est for Germany with mean (median) 6.0% (8.9%), while ROE for Norway has a mean
(median) of 9.6% (10.4%).
Table 4 reports pairwise correlation between stock price and accounting variables for all
three countries. The rank (Spearman) correlations are greater than the product-moment
(Pearson) correlations, sometimes substantially so. This probably indicates the presence of
outlier observations. The correlation between current earnings per share and future earn-
ings per share are relatively high but decline across lags of one to four years. Again, rank
correlations are far higher than product-moment correlations. For the United Kingdom
product-moment correlations between current and future earnings are significantly nega-
tive.
Hypotheses
The study addresses three questions. First, are there systematic differences across coun-
tries in the value relevance of accounting numbers? Second, are there systematic differ-
ences in the incremental and relative contribution of book values and earnings to value
relevance across the countries? Third, do future realizations of earnings (as proxies for
expected future earnings) have information content in explaining current stock prices? We
develop our hypotheses based on the differences in accounting practices across countries
as previously summarized.
Differences Across Countries Due to Accounting Bias (Conservatism)
Feltham and Ohlson (1995) show that bias in accounting procedures can result in abnor-
mal measured earnings in future years even if economic income is nonnal. Conservative
accounting can cause accounting book values to lag their market values, and future earn-
ings on these assets will appear abnormal. Therefore, the value relevance of biased book
value will be reduced. The effect of accounting bias on the value relevance of expected
earnings depends on the relation between the bias and operational performance, and across
firms this effect is expected to be near zero. As discussed above, Germany's accounting
practices are most conservative with respect to recognition of changes in net asset values.
Accounting practices in the UK are least conservative and those in Norway are between.
This leads to the following hypotheses (in alternate form):
HAl : Conservative German accounting practices will result in lower value relevance
(explanatory power) for book value and earnings together than in Norway and
the UK.
540 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No, 5, 1998
HA2: United Kingdom accounting, being the least conservative, will have more
value relevance (explanatory power) for book value and earnings together
than under German and Norwegian accounting.
Together these hypotheses imply that R^q (BV, EPS) < R^t^ (BV, EPS) < R^uj^ (BV, EPS).
Differences Across Countries Due to Clean Surplus Violations
The effect of violations of the clean surplus relation (CSR) on the value relevance of
book value depends on whether the violation causes book value to be closer to or further
from market values. Under the residual earnings model only abnonnal future earnings are
value relevant. If book value reflects completely the value of all net assets that provide
future earnings, expected abnormal earnings are zero. However, when CSR violations
cause net assets that affect future earnings to be removed from book value, the value rele-
vance of book value will be reduced. The effect of clean surplus violations on the value rel-
evance of expected earnings is ambiguous.
Two violations of clean surplus accounting discussed in section 3: (1) the revaluation of
assets to reserves permitted in the UK and (2) the direct write-off of goodwill to reserves
allowed in Germany and the UK. We expect these to have opposite effects on the value rel-
evance of accounting numbers. Asset revaluations are primarily of property, and property
revaluations tend to bring book value nearer to market value. The effect on earnings is
likely to be small. Revalued land is, of course, not depreciated. Revalued buildings are
often not depreciated in the UK under the justification that they are maintained to a high
standard (Samuels, et. al., 1994, Chapter 6). Hence, property revaluation is primarily a
"book value effect" until disposal. Book values subsequent to revaluation will more nearly
reflect market values of assets; therefore, these book values should explain more of the
variation in firm market values. That is, revaluations should lead to greater explanatory
power for book values. In contrast, goodwill write-offs cause book values to omit intangi-
bles having positive market value in the acquisition transaction. Hence, goodwill write-offs
will tend to decrease the relation between book value and market value. Surveys and anal-
ysis of accounting practice (Nobes, 1994; CIFAR, 1995; and FEE, 1991) indicate that most
UK firms revalue land and buildings. Goodwill is written off directly to reserves by many
UK firms, but some amortize goodwill.
These two CSR violations are expected to have opposite effects on the relative explana-
tory power of book value and earnings for stock prices. Assets can be revalued many times,
but goodwill can be written off only once. However, the effects of these CSR violations
will depend on their magnitude as well as their frequency. Hence, the effects of these CSR
violations on the relative explanatory power of earnings versus book value are unclear for
the UK.
German accounting principles allow direct goodwill write-offs, but the majority of the
companies surveyed by FEE amortize goodwill (FEE, 1991). Hence we expect little effect
from these apparently infrequent violation of CSR. Norway has few significant violations
of CSR. We explore the incremental and relative value relevance of book value and of
earnings for all three countries, but we do not have directional hypotheses.
Accounting Diversity 541
Differences Within Countries
As discussed above, accounting bias (conservatism) tends to reduce the information
content of both book value and earnings. And violations of the CSR may either
increase or decrease the information content of book value depending on whether the
violation moves book value toward or away from market values. Accounting in the UK
is relatively less conservative, and goodwill write-offs and asset revaluations have con-
flicting effects. Hence, we have no prediction on the relative information content of
book value and earnings in the UK. Germany has the greatest conservative bias in its
accounting and relatively few violations of CSR. Therefore, we expect the effects of
conservatism to dominate and the value relevance of both book value and earnings to
be reduced. We have no prediction on the relative information content of book value
and earnings in Germany. Conservatism in Norway is less important than in Germany
and there are few CSR violations. Again we have no predictions on the relative infor-
mation content of book value and earnings. In summary, the expected directions of dif-
ferences in the incremental and relative explanatory power of book value and earnings
are ambiguous. We explore these differences and provide descriptive evidence rather
than hypothesis tests.
We also investigate changes in the value relevance of accounting numbers over
time. For example, since Norwegian accounting has changed from primarily
tax-driven to more investor focused over the past decade, it seems likely that we
would observe value relevance similar to German accounting in early years and grow-
ing more similar to UK value relevance in later years. As a second example, German
implementation of the European Union's Fourth and Seventh Directives in the
Accounting Directives Law of 1985 might be expected to increase the value relevance
of German accounting.
Finally, we examine the value relevance of future earnings realizations for current
stock prices. This analysis tests the effect of truncating the time horizon in the residual
earnings model. If future earnings have incremental explanatory power for current
stock prices, then future earnings estimates are important for implementing the model.
On the other hand, if future earnings realizations add little, implementing the model
with only current book value and earnings may be a useful and parsimonious simplifica-
tion.
Our analysis is based on cross-sectional regressions of current stock prices (depen-
dent variable) on accounting book values and earnings. We analyze both the incremen-
tal and the relative explanatory power of book value and earnings using an approach
applied previously in accounting by Biddle, Seow and Siegel (1995) and Collins, May-
dew and Weiss (1997).
TESTS AND ANALYSIS
Empirical specification of equation (5) requires estimates of book value, expected abnor-
mal earnings, and the horizon for abnormal earnings. For abnormal earnings estimated to
terminate at time T, the model would be:
542 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
Price,j = ^0 ^ «iBook„ + 02^^/1 "•" ^3^^,^+! + ^4^^it+2 + • ■ • + ^Ar^E/r + ^it (6)
where:
Price,, = price per share of firm / at time /;
Book,-, = book value per share of firm / at the end of period t;
AE,-, = abnormal earnings per share of firm z for year t + k;
The coefficient a^ would have an expected value of 1.0 while the coefficients aj to a^
would have expected values of (1 + r)~'. Finally, the expected value of coefficient a^. would
be ( \/r)*{\ + r) . Abnormal earnings horizons will differ cross-sectionally; therefore, par-
simonious cross-sectional representations of (6) will have only a few terms. For example
Frankel and Lee (1996) use 7=2.
Our first tests are concerned with the incremental explanatory power of book value and
earnings. As in Collins et. al. (1997) we compare the results of three regression equations
to address the question of incremental explanatory power. Equation (7) below provides the
most parsimonious empirical specification of equation (5) (the horizon is only one period).
Reported earnings are used as the proxy for expected abnormal earnings. Reported earn-
ings are the sum of normal and abnormal earnings. To the extent that normal earnings are
low variance, reported earnings will be a good surrogate.
Price,, = bQ + Z^jBook,, -1- b2EPSjf + e^^ (7)
where:
Price,, = price per share of firm / at time t\
Book,, = book \ alue per share of firm / at the end of period t\
EPS,, = earnings per share of firm / for year t.
In the residual earnings model (equation 5) book value (/?,) and firm intrinsic value (V,)
are taken at time t while future abnormal earnings (.v^^ ■) are for periods after time t. In our
empirical analysis earnings (£,) are for the period ending at time t. Hence, as in Bernard
(1994) and Collins et. al. (1997), earnings are current rather than estimated future earnings.
Further, in our study stock prices, book values, and earnings are all as of time t. Book val-
ues and earnings would not. of course, be announced until some weeks later. This study
addresses association between accounting and market values rather than prediction of mar-
ket values. Collins et. al. (1997). examining associations between market and accounting
numbers for United States firms, take prices three months after the end of the fiscal period.
In cross-country studies, however, this is problematic since the time lag between fiscal year
ends and report dates can vary widely. In Germany, for example, lags of six months are
typical and lags of up to nine months are not unusual (Harris et. al., 1994).
Equation (7) expresses price as a function of book value and earnings. Examining the
incremental (and relative) explanatory power of book value and of earnings requires two
additional equations expressing price as a function of book value alone, equation (8), and
earnings alone, equation (9).^
Accounting Diversity
543
o
o
§: "^
§: "h:
^
ri —
— fN
ra —
OS o vD o^
OS rf t:)- r^
C: — "* ■*
SO ON '^ OS
fNj OS -rf oq
so rn -^ ^'
O r^ 00 t^
ri —
— 1^—00
— sD — t^
r- -:)• OS U-,
Tf r<-, (N —
— sC r<-, Tt
— OS — SO
— — (N r^i
— ^ O •*
t~~ fN so so
■il:
00
oo
— <o r)
ri U-l r<-.
so O 00 <^i
t-~- 00 so o^,
O ro SO
r<^ 00 -r)-
C
(3
sd
rj 00 sc
fN — ' o6 r«-!
odd
■B U
— . aj
>■ ^
a! < > i
z: '-5 o)
<" - -?;
— c —
u a;
J.!
o
o
o Q-
D.
II
II
c -^
CO
cQ u:
».
u ^
-c
w "a
5
— (^ ti.
03 u:
OJ o w
D. -= oil
-= c
_:: _ c
544 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol, 33, No. 5, 1 998
Price,, = C() + C| Book,-, + ^,-, (8)
Price,, = dQ + d^ EPS,, + eit (9)
Following Theil (1971) we define the incremental explanatory power of the book value
and earnings variables in terms of differences in the coefficient of determination (/? ).
These differences are sometimes called the semi-partial coefficient of determination
(Cohen and Cohen, 1975, 79-84). They are a measure of the incremental explanatory
power of one variable given the remaining independent variables
Define the R~ statistics from equations (7), (8), and (9) as a ^^, /?"^ and R^ respectively.
Then the incremental explanatory power is defined as:
9 9 9
^"ble - ^ b.e ~ ^~e ^^^ incremental explanatory power of book value is the
total explanatory power of book value and earnings less the
explanatory power of earnings alone.
^ 9 9
^"eib - ^~b.e ~ ^~b The incremental explanatory power of earnings is the total
explanatory power of book value and earnings less the
explanatory power of book value alone.
o o 0 "^
^^coin = ^^b.e " ^"b\e " ^"eib ^^^ explanatory power common to book value and eammgs
is the total explanatory power of book value and earnings
less the incremental explanatory power of book value and
the incremental explanatory power of earnings.
We can also assess the relative explanatory power of book value and earnings by com-
paring the conditional (incremental) power as shown above (Biddle et. al., 1995). That is,
we can also address the question of whether book value or earnings has greater explanatory
power for each country.
Explanatory Power of Book Value and Earnings Per Share Across Three Countries
Table 5 reports summaries of regressions (7), (8), and (9) as well as incremental R" for
all years together for all three countries. The yearly results are shown in Appendix B. First,
we focus on the coefficients and the significance of regressions (7), (8), and (9), and then
we analyze the incremental and relative information content. Because tests indicate the
presence of heteroscedasticity in the error terms. White's adjusted ^statistics are reported.
We also computed diagnostics for multicoUinearity in the independent variables. For
regressions over all years condition indexes were less than 3.0 for all variables, and in no
year did any condition index exceed 8.2. Hence, multicoUinearity is unlikely to affect the
coefficients.
For Germany regression (7) shows that book value is strongly significant for all
years together (r-statistic = 9.50) and for the average across the fifteen years
(r-statistic = 6.61). The coefficient on book value is 1.9 for regression (7) and 1.8 for
regression (8). On a year-by-year basis all the coefficients from regression (7) on book
value are positive and are significant at the 10 percent level (two-tail) in thirteen of fif-
Accounting Diversity
545
Germany
1986
1987 1988 1989
Years.
1992
1994
a GermanyCommon
QGefmany Book Inctemental
■ Germany Earnings Incremental
Norway
Q Norway Common
1987 1938 IE
Years
El Norway Book Incremental
1990 1991 1992 1993 1994 IS
I Norway Earnings increments
Figure 1. Incremental Explanatory Power of EPS and Book Values Over Time
teen years. In regression (8) the yearly coefficients on book value are all positive and
significant. The coefficients for EPS from both regression (7) and regression (9) are
positive and significant in twelve of fifteen years. EPS is significant for all years
together (r-statistic = 6.34) for regression (7) and for regression (9) (r-statistic = 4.39).
The coefficient on EPS is 1.47 for regression (7) and 0.99 for regression (9). Overall
R exceeds 40% both for all years together and the average for all years. '"
For Norway coefficients on book value are positive and significant for twelve of fourteen
years for regression (7) and for all years for regression (8). For all years together book
546
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
Incremental ExDianatorv Power of Book Value
0 5
s °'-
1 03|
•?
•= 0.2-
! ;v
j
1
V
/ \
\
)^
...^tx
>J
-■-. / ^
K.-i---^-
\ ■■i
N,
/
1 **
V
/■■A::^-^
k :
\
\
'-.
\
( j
\
/,'
^-^.—
\
1
n !
i-'-'i
I 1
», \
1>^~~.~~A'
1
19
82 1983 1984 1985 1986 1987 1988 1989 1990 19S1 1992 1993 1994 1995 1996
Years
I ^ ^ a L. t
„ ^,
tll/OL.1 (ll
1
1 '"^
m- vjtriMioTiy ouw
R MlUICfllC
mat
■■ NoTOjy
-» \JT\
DWH IIH,
CIKCIIUII
1
1
Incremental Explanatory Power of Earnings
1
1 1
.'
i_
• i
^
i
k
/
1
J 0 3
5 0.25
? 02
015 1
0 1
0 05 •
'i
k
/ .J
■-.
1
t
\ I--
1
1
■•• -^1
i
l_
/
\
-r- '
[ "' \ ^
''•.J*— ^
'■■'
:
i
/
^1
^ ^
S '^
tr • — •<
'"'
y
f-^
X
\
■■
,.^T-..-^...-i-'^---H
^ \
^ •
19
82
1983 1984 1985 19S6 1987 1988 1989 199C 1991 1992 1993 1994 1995
Years
1
.
^
-.IL^e-l «ll
I
m
^
..=, 1
Explanatory Power Common to Earnings and Book Value
07^
0 6 -
0.5 -
- 0.3,
^ 0.2
*■ oil
0
-0.119
-0.2
^-A i
^
^
i
r
1
S V
.-4
k
y\
V
/
\ " >^^
^-
' "^.,
r '
\ /
/
/\
V .
/
^
~^
k
r »-- 8—771
'• - - - ^
1 \
^^ 1 . .
1-'
.-* ■♦•'
1 g
^_— -—<
<---.
J
\/
• - ■<
»
•.
-^
^
1 • -|
k — ^ --J'-----*.-;^
a? 19
1«
<^
"•' 1
I
A
i
1 i
1
Years
^ ^ ^
_
1
w w^....w.rs
^
" w.. ^
I
Figure 2. Incremental Explanatory Power of EPS and Book Values for Three Countries
value is strongly significant (r-statistic = 4.99). Coefficients on book value are 1 .28 for
regression (7) and 1.46 for regression (8). EPS coefficients are positive in ten and signifi-
cant in six of fourteen years for regression (7). For regression (9) EPS coefficients are pos-
itive for all years and significant for twelve of fourteen years. EPS is significant for all
years together for regression (9) with a r-statistic of 3.99 but not significant for regression
(7) (/-statistic = 1.27). The yearly mean coefficients on EPS are significant for both equa-
tion 7 (/-statistic = 2.03) and equation 9 (/-statistic = 4.89). For all years together coeffi-
cient values for EPS are 1.34 for regression (7) and 6.26 for regression (9). This difference
Accounting Diversity 547
may indicate higher colhnearity between book value and EPS for Norway than for Ger-
many. Overall R" exceeds those for Germany. For all years R" is 65% and the yearly aver-
age is 59%.
For the UK coefficients on book value are positive for thirteen of fifteen years and sig-
nificant in nine of fifteen years for regression (7) and positive and significant for all years
for regression (8). The r-statistics on the book value coefficient are 4.07 and 3.80 for
regressions (7) and (8) respectively. Coefficients on book value are lower than for Ger-
many and Norway, 0.5 for regression (7) and 0.9 for regression (8). On the other hand,
coefficients on EPS are higher than for Germany and Norway, 7.7 for regression (7) and
10.4 for regression (8). Coefficients on EPS are positive for all years for both regressions
(7) and (9) and significant in fourteen and thirteen years respectively. For all years together
f-statistics on EPS are 2.49 and 3.46 for regressions (7) and (9), respectively. /?" for regres-
sion (7) is 66% for all years together and the yearly average is 72%. The explanatory power
of book value and accounting earnings for firm value (/?" from Table 5 and Appendix B)
differs significantly for each country pair. Accounting explains significantly more of firm
value in the UK than in either Germany (r-statistic = 6.4) or Norway (/-statistic = 2.1), and
accounting numbers in Norway explain significantly more of firm value than in Germany
(/-statistic = 2.7).
The following conclusions seem warranted. First, for all three countries we find that both
book value and current earnings are strongly and positively related to current market
prices. This is true overall and for most years. Second, over the entire period and for most
years German accounting numbers provides the least explanatory power while accounting
numbers for UK firms provides the most explanatory power with Norway between. This is
consistent with the alternative hypotheses HAl and HA2. It is also consistent with argu-
ments that conservative German accounting is less value relevant than the less conservative
accounting in Norway and the United Kingdom.
Coefficients on book value are between 1.0 and 2.0 for Germany and Norway, signifi-
cantly greater than the expected value of 1 .0. For the UK, on the other hand, the book value
coefficient is significantly less than 1 .0. Coefficients on earnings per share are between 1 .0
and 2.0 for Germany and much higher for Norway and the UK (greater than 6.0). This leads
to the question of incremental value relevance for book value and EPS.
Incremental Value Relevance of Book Value and Earnings Per Share
Next, we examine the incremental explanatory power of book value beyond that for EPS,
R ly\e, and the incremental explanatory power of EPS beyond that of book value, R%\fy Rel-
ative information content can be addressed by comparing a ^i^ and ^""^,1/, to each other
(Biddle et. al., 1995). Table 5 reports these results for all years together. Appendix B con-
tains the results for each year, and Figures 1 and 2 show the patterns across time.
For Germany the incremental information content of book value, R h\e> is relatively high
from 1987 to 1995 ranging from 20% to 48%. However, R^/^if, was very low from 1982 to
1986. In contrast, /?\|^ ranged from 19% to 40% prior to 1988 but was low thereafter.
Overall, /?^/,|f is 38% for all years together with a yearly average of 22%. The incremental
explanatory power of EPS beyond that of book value, R~g\i,, is only 5% for all years while
the yearly average is 13%. Overall, book value is more important than earnings in explain-
548 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33. No. 5, 1 998
Table 6. Regressions of Yearly R-Square Statistics on Time (coefficients and f-statistics)
Dependent Variable N Constant Time Adj. R^ F-stat
Panel A: Explanatory Power of Book Value and Earnings Over Time by Country
Germany
Total /?"'(book, eps)
Incremental R (book)
Incremental /?"(eps)
Incremental ^"(common)
Norway
Total /?^(book, eps)
Incremental /?~(book)
Incremental R~(eps)
Incremental /?~(common)
UK
Total /?'(book, eps)
Incremental /?"(book)
Incremental /?"(eps)
Incremental /?"(common)
Notes: R", = ^q + b/iime + e,
where;
R , = R~ for regression of total or incremental book value/EPS/common on current price for year t
time = index equals 1 in 1982. 2 in 1983... and 15 in 1996.
Time x Time x
Dependent Variable N Constant Dum_G Dum_K Time Dum_G Dum_UK Adj. R^ F-statistic
Panel B: Explanatory Power of Book Value and Earnings Over Time for All Countries
Total ^^(book, eps) 44 0.736 -0.296 0.082 -0.019 0.018
(9.86) (-2.86) (0.79) (-2.21) (1.51)
Incremental /?-(book) 44 0.375 -0.351 -0.405 -0.013 0.037
(4.61) (-3.11) (-3.59) (-1.37) (2.88)
Incremental /?-(eps) 44 0.039 0.248 0.139 0.002-0.022
(0.79) (3.62) (2.03) (0.40) (-2.83) (-0.673
Incremental /?^(common) 44 0.322 -0.193 0.348 -0.009 0.003 -0.022 0.401 6.77***
(3.07) (-1.32) (2.39) (-0.70) (0.18) (-1.32)
Notes: R , = bQ + bj dum_G + /^i dum_UK + /jjtime + /?4time x dum_G + /^.^time x dum_UK + e,
where:
/? , = R' for regression of total or incremental hook value/EPS/common on current price for year t;
dum_G = dummy variable for Germany;
dum_UK = dummy variable for United Kingdom;
time = index equals 1 in 1982, 2 in 1983. ..and 15 in 1996.
*** Significantly different from zero at the 0.01 level (2-tailed).
** Significantly different from zero at the 0.05 level (2-tailed).
* Sigmficantly different from zero at the 0.10 level (2-tailed).
15
0.440
(7.03)
-0.002
(-0.22)
-0.073
0.048
15
0.024
(0.37)
0.024
(3.38)
0.427
11.42***
15
0.287
(5.70)
-0.020
(-3.58)
0.458
12.83***
15
0.130
(2.19)
-0.006
(-0.88)
-0.017
0.77
14
0.736
(9.44)
-0.019
(-2.12)
-0.211
4.47*
14
0.375
(3.81)
-0.013
(-1.13)
0.021
1.28
14
0.039
(1.38)
0.002
(0.70)
-0.041
0.49
14
0.322
(2.97)
-0.009
(-0.68)
-0.043
0.46
15
0.819
(10.60)
-0.013
(-1.48)
0.078
2.19
15
-0.030
(-0.40)
0.021
(2.56)
0.284
6.56**
15
0.178
(3.05)
-0.003
(-0.46)
-0.060
0.209
15
0.671
(5.27)
-0.030
(-2.18)
0.210
4.73**
0.007
0.474
8.74***
(0.58)
0.034
0.298
4.49***
(2.63)
-0.005
0.313
4 9]***
Accounting Diversity 549
Table 7. The Explanatory Power of Future Realized Earnings for Current Stock Prices
Dependent Variables in Regression Equation (6')
Book Book
Book Book EPS-current EPS-current
Book EPS-current EPS-current t-h1.t + 2. t+1.t-h2.
Country EPS-current t -h 1 t-h1.t-h2 t -i- 3 t -h 3. t -h 4
Panel .\: .\djust R' for regressions relating book value, current EPS, and future EPS to current prices.
Each column represents a separate regression with dependent variables book value, current EPS and EPS
for T periods in the future.
Gemianv N= 1.454
Regression
Adj. R-
Adj. R-
Adi-R-
Adj. R-
Adj. R-
All years
.37
.39
.39
.39
.39
Yearly means
.40
.41
.44
.44
.43
Norway A' = 364
Regression
Adj. R-
Adj. R-
.Adj. R-
Adj. R-
Adj. R-
All years
.80
.80
.80
.80
.80
Yearly means
.59
.62
.64
.65
.66
United Kingdom A^= 5.618
Regression
Adj. ^-
Adj. R-
Adj. R~
Adj. R-
Adj. R-
All years
.78
.80
.80
.81
.90
Yearh means
.73
.74
.76
.77
.77
Panel B: Incremental adjust R' for regressions relating book value, current EPS, and future EPS to
current prices. Each column represents a separate regression with dependent variables book value,
current EPS and EPS for T periods in the future.
Incremental Explanatory Power of Future EPS in Regression (6')
Germaii\
A'= 1.454
Incremental /?"
All years
.02
f^ eps: 1 b.e.
.01
.epsl
^"eps.^ 1 b.e, eps 1 -2 ^"eps4 j b.e. eps 1 -3
.00 (.00)
Yearly means
.01
.03
(.00) (.00)
Norway
N = 364
Incremental R-
All years
^"epsl Ib.e
.00
/^'eps: 1 b.e,
.00
.epsl
^"eps.^ 1 b.e, eps 1 -2 ^\>ps4 | b.e, eps 1 -3
.00 .00
Yearly means
.03
.02
.01 (.02)
United Kingdom A'= 5.618
Incremental /?"
■•\il \ears
/?\-ps,|b.e
.02
'^"eps2lb.e,
.00
.epsl
'^'eps3 1 b.e. eps 1 -2 ^"'eps4 j b.e, eps 1 -3
.01 .10
YearK means
.01
.01
.01 .01
Notes: Price,, = ;i(, + a|Book„+ a2EPS„+ a3EPS„+/ + a4EPS„+2+ asEPS,',+_f + a^EPS,-,^.j+ e„ (6')
where:
Price,, = price per share of firm / at time t:
Book,, = book value per share of firm / at the end of period r.
EPS,, = earnings per sh;ire of firm / for year r.
EPS„+7- = realized earnings per share /"periods following time t.
ing stock prices in Germany while explanatory power common to book value and earnings
is relatively low.
For Norway the incremental explanatory power of book value. /?~/,|,.. tor all years
together is 24% and the yearly average is 28%. While there is significant fluctuation in
R h\e over time (1% to 57%), there appears to be a decline in recent years. Incremental
550 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
Table 8. Regressions of Stock Price on Book Value, Current Earnings and Future Earnings
(coefficients and White adjusted t-statistics)
All years N
Adj. (F^)
Constant
Book
EPS
EPS,,,
EPSt.2
Panel A: Germany
Coefficient 2.081
0.408
44.984
1.895***
1.723**
1.219**
0.036
T-statistic
(1.39)
(7.50)
(2.15)
(2.51)
(0.61)
Mean of Yearly Regression
Coefficient
0.445
66.628***
1.350***
2.403***
1.843
0.385
Time-series t-
(3.95)
(5.93)
(3.34)
(1.18)
(0.42)
stat
Panel B: Norway
Coefficient 618
0.782
-2.986
1.459***
3.724***
0.329
-0.529*
7-statistic
(-0.26)
(6.65)
(3.26)
(0.84)
(-1.86)
Mean of Yearly Regression
Coefficient
0.620
29.135**
1.153***
2.330**
0.041
-0.774
Time-series t-
(2.77)
(4.40)
(2.92)
(0.06)
(-0.84)
stat
Panel C: United Kingdom
Coefficient 8,217
0.756
0.013
0.286**
11.493**
-0.043
-0.196
7-statistic
(0.03)
(2.18)
(2.86)
(-0.13)
(-0.87)
Mean of Yearly Regression
Coefficient
0.756
0.380**
0.393***
5.866***
-0.133
-0.601
Time-series t-
(2.53)
(5.41)
(4.46)
(-0.23)
(0.14)
stat
Notes: (/-statistics) are adjusted for heteroscedasticity using White's adjustment.
The mean coefficient is the time-series average of yearly regression coefficients, and the (-statistic is the average
coefficient divided by its time-series standard error. The mean R" is the average of yearly /?".
Price,, = Qg + ajBook,, + 02EPS,, + ajEPS,,^/ + a4EPS„+2 + e,7 (6')
where:
Price,, = price per share of firm i at time /,•
Book,, = book value per share of firm / at the end of period /;
EPS,, = earnings per share of firm / for year t:
EPS„+7- = realized earnings per share 7 periods following time i.
*** Significantly different from zero at the 0.01 level (2-tailed).
** Significantly different from zero at the 0.05 level (2-taiied).
* Significantly different from zero at the 0.10 level (2-tailed).
explanatory power of earnings, R~(.\i,, is generally low in Norway ranging from 0% to 13%
across years. Over all years R''g[i, is only 1% with a 6% yearly average. In contrast to Ger-
many explanatory power common to book value and earnings is much higher, 40% for all
years with the yearly average 26%.
In the UK book value has moderate incremental information content. R~iy\e ranges from
0% to 44% across years with 11% for all years together and a 14% for yearly average.
There is some evidence of increases in the 1990s. The incremental information in earnings.
Accounting Diversity
551
Variable
Germany
Nonvav
United
Kingdom
Constant
56.88 ••
(2.21)
32.76 *
(1.80)
0.30
(0.83)
Book Value
1.91
(9.50)
•••
G>N ^.^
1.28
(4.99)
*•*
N>UK ^^
0.53
(4.07)
*••
■'s*^ ^^„**''''"^
"^ ^^
^^
0.63
(1.92)
*
0,75
(2.60)
**
G>UK
^
G«N ^^-^
1.38
(5.74)
»»•
N<UK ^.-^
EPS
1.47
(6.34)
♦**
1.34
(1.02)
-^
7.67
(2.49)
*•
"■"^-x^ _^,0»^''''^
"^^^-N*^ ^^--'''''^
^t^
0.13
(0.11)
6,33
(1.93)
•
^
^
G<UK
6.19
(2,01)
• *
Number of observations = 14,643
Adjusted R' = 0.652
f-stat = 4.537
Notes:
The table is constructed from the following regressions:
Price,-, = slq +a|DN„ +a2DU„ +a3Book„ +a4(Book„ x DN„) +a5(Book;, x DU„) +a6EPS„
+a7(EPS„ X DN„) +ag(EPS„ x DU„) + e„
Price,, = ao +aiDG„ +a2DU„ +a3Book„ +a4(Book„ x DG„) +a5(Book„ x DU„) +a6EPS„
+a7(EPS„ x DG„) +a8(EPS„ x DU„) + e„
Price,, = ao +aiDG„ +a2DN„ +a3Book„ +a4(Book„ x DG„) +a5(Book„ x DN„) +a5EPS„
+a7(EPS„ x DG„) +ag(EPS„ x DN„) + e„
where:
Price,, = price per share of firm / at time t
DG„ = 1 for firm / at time t if firm is from Germany, 0 otherwise
DN„ = 1 for firm i at time / if firm is from Norway, 0 otherwise
DU„ = 1 for firm i at time / if firm is from United Kingdom, 0 otherwise
Book,, = book value per share of firm / at the end of period t
EPS,-, = earnings per share of firm i for year t
***Coefficient is significantly different from zero at the 0.01 level (2-tailed)
♦♦Coefficient is significantly different from zero at the 0.05 level (2-tailed)
♦Coefficient is significantly different from zero at the 0.05 level (2-tailed)
Figure 3. Regressions Over All Countries with Dummy Variables and Interactions Terms coefficients
and (White's adjusted f-statistics)
R ^1^, is both higher and more stable ranging from 4% to 36% across years with all years
together at 22% and the yearly average of 16%. Assuming clean surplus violations are
reflected in these results, they are consistent with write-offs of goodwill to reserves domi-
nating asset revaluations in their effects on the value relevance of book value. Explanatory
power common to book value and earnings is high, 33% for all years with a yearly average
of 43%.
552 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
Across time in the UK book value has lower incremental explanatory power than earn-
ings overall, but for the early 1990s, book value dominates. For Germany, earnings have
greater explanatory power than book values for the period before 1987. However, for the
post 1987 period and overall, book value dominates. Finally, for Norway book value dom-
inates in most years primarily because earnings have little explanatory power at any time.
The following conclusions seem warranted. First, book value has modest incremental
explanatory power in the UK, but considerably more in Norway and Germany. Second,
EPS has little incremental explanatory power in Norway, but significant incremental
explanatory power in the Germany, and even more in the UK (twice the German levels).
Finally, over all periods, the explanatory power common to book value and EPS is high in
the UK and Norway but near zero in Germany.
Following Collins et. al. (1997) we examine changes in the explanatory' power across
time of book value and earnings. Table 6 reports these results. The regressions reported in
Table 6 regress R~ statistics on time. The dependent variable for Total are R~ statistics from
regression (7) (book value and earnings). The dependent variables for Incremental are the
incremental R~ statistics for book value, earnings per share and common explanatory
power from Appendix B. In Panel A of Table 6 we examine the three countries separately.
Regressions are based on only 15 (14 for Norway) observations. Still, results confirm the
visual patterns noted in Figures 1 and 2. For Germany the total explanatory power of book
value and EPS is not changing significantly over time. The incremental explanatory' power
of book value increases significantly while that for EPS decreases. There is no significant
change in their common information. For Norway the total explanatory power of book
value and EPS decrease somewhat over time. There is no significant change in the incre-
mental explanatory power of book value, EPS, or their common explanatory power over
the fourteen years. For the UK there is no change in the total explanatory power of book
value and EPS. The incremental explanatory power of book value increases and the com-
mon explanatory power decreases significantly over the time period. A decreases in the
incremental explanatory power of EPS over time is consistent with increased competition
in product markets. Under the residual earnings valuation model, future earnings add to
firm value only to the extent that they exceed normal or required returns. One explanation
for the observed decline in the explanatory power of EPS (significant for Germany, not sig-
nificant for Norway and the UK) is that increased global competition reduces expected
future excess earnings.
In Panel B of Table 6 we examine all countries together so that there are 44 observations
(three countries time fifteen years less 1996 for Norway) with intercept and slope dummy
variables for Germany and the UK. For explanatory power of book value and EPS. (the
first row) the results show significantly less power in Germany than in Norway (the inter-
cept dummy for Germany is significantly negative), but no significant difference between
Norway and the UK. However, total explanatory power is declining significantly in Nor-
way (the time coefficient is significantly negative) but not in Germany or the UK (the inter-
action slope coefficients are not significant). For the incremental explanatory power of
book value, both Germany and the UK have significantly lower explanatory power than
Norway (negative intercept dummies), but are increasing over time (positive slope coeffi-
cients). For the incremental explanatory power of EPS. both Germany and the UK have
significantly more explanatory power than does Norway, with Germany decreasing over
time. Explanatory power common to book value and earnings is significantly greater in the
I
Accounting Diversity 553
UK than in Norwa}' and German) w ith no significant changes over time for any of the
countries. These resuhs pro\ide statistical tests of the differences reported in Appendix B
and Figures 1 and 2. Note that these regressions test for monotonic time trends, but not for
more complex time patterns.
The time patterns revealed in these regressions and in Figures 1 and 2 show a significant
increase in the value relevance of book value and a significant decrease in the value rele-
vance of earnings in Germany after 1987. This may be related to German implementation
of the European Union's Fourth and Seventh Directives in the Accounting Directives Law
of 1985. This Law was effective Januar}' 1, 1986, but implementation of some provisions
(consolidations) were delayed to 1990 (Harris et. al., 1994). However, the changes in the
value relevance of earnings and book \alue are largely offsetting and total explanatory
power of accounting numbers in Germany remains low.
For Norway, there is some evidence of decreasing value relevance over the fourteen-year
period. Earnings are never very important and the incremental power of book values is
declining. However, even the reduced power is greater than for German accounting. Con-
trary to our speculation the patterns are not similar to Germany in early years and to the UK
in later years. For the UK book value becomes much more important after 1989. and there
may be some decline in total explanator}' power in the 1990s.
The Explanatory Power of Future Earnings Realizations for Current Prices
Under the residual earnings model (2). firm value is a function of book value and
expected future abnormal earnings. In order to assess the importance of future earnings to
current market values, we extend the time horizon to include future earnings. We use real-
ized future earnings as proxies for expected residual earnings. We compute incremental
explanatory power for future earnings realizations similarly to our computations of incre-
mental explanatory power in Table 5.
1 ") ~>
^^f\b.e - ^~b.e,f~ ^~b.e "^^^ incremental explanatory power of future eammgs per
share is the total explanatory power of book value,
earnings, and future earnings less the explanaton power
of book value and earnings alone.
Table 7 reports the results of regressing current book and earnings measures as well as
measures of future realized earnings on current stock prices as in equation (6).
Price,-, = flQ + « I Book,, + (^^EPS,, -i- rt3EPS„+ 1 + rt4EPS„^2 + '^^sEPS,y+h -i- a5EPS,Y+4 -i- Cj, (6")
We run this model for one, two, three, and four years of future realized earnings. Table 7,
Panel A reports adjusted R~ for regression (6") regressing book value, current EPS. and
EPS one to four years ahead on current stock price. Panel B reports the incremental explan-
atory power of future realized earnings one to four years ahead. We conclude that future
earnings three and four years ahead have little incremental explanatory power: however,
earnings one and two years ahead may have some slight explanatory power for stock
prices.
554 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
Table 8 reports the results of regression (6') including EPS one and two years ahead for
all years together and for yearly averages. Appendix C shows results of yearly regres-
sions. For Germany coefficients on EPS^^.! (EPS,^.2) are positive in ten (eight) of thirteen
years and significantly positive in seven (three). EPS,^.i is significant for all years together
but not for yearly averages. For Norway, EPS,+ i (EPS,^2) coefficients are positive in eight
(five) of twelve years but significantly positive in only one (two). Neither EPS,+ ] nor
EPS,+2 coefficients are significant over all years together or for yearly averages. For Nor-
way EPS,+ i and EPS,^.2 have little incremental explanatory power. Adding EPS,+ i and
EPS,+2 causes some changes to the coefficients for EPS, from those reported in Table 5.
The coefficient for EPS, increases, offset by negative coefficients on EPS,+2-
For the UK coefficients on EPSf+ j (EPS,+2) are positive in seven (six) of thirteen years
but significantly positive in only two (two). Neither coefficient is significant over all years
nor on average. Adding EPS,^i and EPS,^.2 to the regression has some effect on the coeffi-
cients for book value and EPS,. The coefficient on book value declines from 0.5 to 0.3
while the coefficient on EPS, increases from 7.7 to 1 1.5.
In summary, our results show that future earnings one and two years ahead have little
incremental explanatory power over current earnings and book values. Our results are con-
sistent with those of Bernard (1994) for United States firms where he found that future
ROE realizations were not strongly correlated with current stock prices.
Finally, we report in Figure 3 the results of estimating a regression on all countries
together. We regress current stock prices on book value and EPS with dummy and interac-
tion variables to allow different responses for each country. The coefficients discussed
below are the sums of the coefficients for the base case and the coefficient on the interac-
9 9
tion terms. The adjusted R for the regression is 65%. (This is simply the average of the /? s
for each country weighted by the sample size.) The significance levels reported in Figure 3
are for tests of whether the coefficients (or the differences in the coefficients between coun-
tries) equal zero.
For book value Germany has the largest coefficient (1.91), significantly larger than Nor-
way ( 1 .28) and nearly four times that in the UK ( 0.53) against the theoretical value of 1 .0.
All are significantly different from each other. The weight given to earnings per share is
greatest in the UK (coefficient of 7.67), significandy greater than in Germany (1.47) and
Norway (1.34) which are not significantly from each other.
SUMMARY AND CONCLUSIONS
In this study we examine the accounting systems in three European countries to assess
whether they differ in their value relevance under the residual earnings model. The coun-
tries selected, Germany, Norway, and the United Kingdom, differ in the conservatism of
their accounting practices as well as in their adherence to clean surplus accounting. The
study addresses three questions. First, are there systematic differences across countries in
the value relevance of accounting numbers? Second, are there systematic differences in the
incremental and relative contribution of book values and earnings to value across the coun-
tries? Third, do future realizations of earnings (as proxies for expected future earnings)
have information content in explaining current stock prices?
Accounting Diversity 555
Our results indicate first, that accounting book value and earnings are positively and sig-
nificantly related to current stock prices across all three countries consistent with Bernard's
(1994) results for US firms. German accounting numbers have the lowest correlation with
stock prices (R^ about 40%) compared to Norway and the United Kingdom. United King-
dom accounting numbers have the highest relation with stock prices (R~ about 70%) with
the explanatory power of Norwegian accounting numbers in between (R~ about 60%). Sec-
ond, the incremental and relative explanatory power of book value and of earnings differs
across time and across the three countries. Book values explain more than earnings in Ger-
many and Norway, but less in the UK. Earnings have little incremental information in Nor-
way. Explanatory power common to book value and earnings is high in the UK and
Norway and near zero in Germany. Finally, income realizations for future years have little
relation to current stock prices, that is, they explain little about market prices not already
explained by current book value and current earnings.
Our results show significant differences in the relation between accounting numbers and
stock prices across the three countries. Further, the differences are consistent with the
accounting differences across the three countries at the overall level. However, the differ-
ences in the relative and incremental information content of book value and eam-
ings-per-share, both within and across countries, do not conform to simple stories based on
conservatism and clean surplus violations.
Future research on the value relevance of accounting systems across countries can take
several directions. First, additional countries can be evaluated. Second, groupings of coun-
tries with particular similarities and differences may allow researchers to distinguish
among alternative explanations for observed differences. For example. US and UK
accounting is similar on many dimensions but differs on asset revaluation. A study exploit-
ing these facts might provide a better test of the effects of clean surplus violations.
Acknowledgments: We thank Andy Bailey, Neil Fargher, Roger Graham. Dag Michalsen. Dale
Morse, Gordon Richardson, Sam Tiras. and workshop participants at the Norwegian School of Man-
agement for helpful comments and Svein Morten Damm for data collected for his MSc thesis at the
Norwegian School of Management.
556
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
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562
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
Appendix C. Regressions of Stock Price on Book Value, Current Earnings and Future Earnings
coefficients and (White adjusted f-statistics)
Year
N
Adj. f^
Constant
Book
EPS
EPSf^i
EPS,,2
Panel A: German
y
All years
2081
0.408
44.984
1.895***
1.723**
1.219**
0.036
(1.39)
(7.50)
(2.15)
(2.51)
(0.61)
1982
47
0.473
95.033***
0.324*
3.742***
3.331**
-3.357***
(6.28)
(1.86)
(3.77)
(2.12)
(-3.04)
1983
50
0.423
104.263***
0.377*
8.505***
-8.526***
4.283***
(4.67)
(1.84)
(4.40)
(-2.95)
(2.68)
1984
51
0.327
88.411***
0.442
2.697**
-4.072*
5.149***
(3.18)
(1.45)
(1.99)
(-1.90)
(3.10)
1985
53
0.612
-4.665
j_22***
-1.662
8.903*
-0.120
((-0.12)
(2.87)
(-.57)
(1.77)
(-0.04)
1986
60
0.690
61.565*
0.376
5.294
14.842**
-7.534
(1.84)
(1.18)
(1.48)
(2.25)
(-1.58)
1987
189
0.331
37.658**
1.184***
2.805**
2.171**
1.577
(2.50)
(11.36)
(2.26)
(2.16)
(1.58
1988
243
0.461
85.612***
1.515***
-0.798
3.629**
-1.615
(3.25)
(6.53)
(-0.85)
(2.10)
(-0.99)
1989
262
0.573
-80.064
3.102***
2.639
1.034
1.964
(-0.60)
(3.10)
(1.19)
(1.61)
(1.29)
1990
267
0.356
127.657***
1.505***
2.686*
0.935
-0.191
(4.50)
(6.66)
(1.83)
(1.50)
(-1.53)
1991
276
0.387
84.222***
1.754***
0.915*
1 .034
0.533
(4.05)
(11.05)
(1.65)
(1.10)
(0.53)
1992
284
0.383
46.739*
1.831***
0.540
1.422**
0.063
(1.86)
(7.76)
(0.68)
(2.32)
(1.48)
1993
273
0.532
56.720**
1.998***
2.073**
0.503
1.302
(2.37)
(10.03)
(2.09)
(1.05)
(1.57)
1994
26
0.239
163.019*
1.914***
1.767
-1.248
2.949***
(1.95)
(4.01)
(1.23)
(-0.91)
(2.59)
Yearly mean
0.445
66.628***
1.350***
2.403***
1.843
0.385
Time-series /-stat
(3.95)
(5.93)
(3.34)
(1.18)
(0.42)
Panel B: Norway
All years
618
0.782
-2.986
1.459***
3.724***
0.329
-0.529*
(-0.26)
(6.65)
(3.26)
(0.84)
(-1.86)
1982
48
0.855
-58.503*
0.674***
6.054**
2.369**
-0.263
(-1.95)
(2.60)
(2.42)
(2.44)
(-0.65)
1983
56
0.855
70.780**
1.374***
4.373
0.006
-0.364
(2.08)
(3.06)
(1.53)
(0.01)
(-0.49)
1984
49
0.838
28.786
2.078***
3.307
0.049
-0.439
(0.92)
(3.35)
(0.71)
(0.08)
(-0.22)
1985
37
0.753
80.616*
3.258***
-1.706*
3.620
-9.727
(1.73)
(4.66)
(-1.95)
(1.29)
(-1.16)
1986
28
0.758
62.514*
2.247***
8.158***
-6.247*
-3.522***
(1.72)
(3.85)
(3.71)
(-1.82)
(-5.74)
1987
44
0.540
12.685***
0.629***
1.194
-0.994*
0.425
(2.79)
(7.51)
(1.41)
(-1.83)
(1.28)
1988
49
0.556
24.533***
0.508***
0.164
0.378
0.815**
(2.92)
(2.93)
(0.38)
(1.21)
(2.20)
1989
54
0.205
55.068***
0.303
0.854***
0.846
-0.133
(3.66)
(1.18)
(2.71)
( 1 .30)
(-0.26)
(continued)
Accounting Diversity
563
Appendix C. (Continued)
1990
65
0.523
17.723***
0.843***
1.744***
-0.683
0.733
(2.95)
(8.14)
3.82)
(-0.97)
(1.14)
1991
62
0.471
19.290***
0.730***
0.337
1.160
0.589
(2.69)
(5.59)
(0.36)
(1.50)
(0.67)
1992
63
0.358
17.796***
0.545***
0.856
0.754
-0.549
(3.69)
(3.12)
(1.33)
(0.36)
(-0.45)
1993
63
0.723
18.336***
0.648***
2.627*
-0.769
3.152***
(2.67)
(3.68)
(1.72)
(-0.85)
(6.10)
Yearly mean
0.620
29.135
1.53
2.330
0.041
-0.774
Time-series r-stat
(2.77)**
(4.40)***
(2.92)**
(0.06)
(-0.84)
Panel C: United Kingdom
All years
8217
0.756
0.013
0.286**
11.493***
-0.043
-0.196
(0.03)
(2.18)
(2.86)
(-0.13)
(-0.87)
1982
213
0.640
0.046
0.236***
5.543***
0.275
-0.065
(0.69)
(3.31)
(5.38)
(0.70)
(-0.19)
1983
242
0.555
0.323***
0.145
4.247***
-0.296
0.384
(3.82)
(1.29)
(4.06)
(-0.35)
(0.48)
1984
256
0.665
0.109
0.376*
2.792*
-1.646**
3.138*
(0.67)
(1.85)
(1.69)
(-2.03)
(1.91)
1985
261
0.625
0.265***
0.149
6.887***
0.524
-0.594
(2.74)
(0.98)
(8.16)
(1.16)
(-1.19)
1986
284
0.862
0.264***
0.180*
6.929***
0.017
0.146
(3.54)
(1.82)
(7.93)
(0.03)
(0.26)
1987
692
0.740
0.780***
1.032***
5.827**
0.878
-3.746**
(4.07)
(4.06)
(2.37)
(0.42)
(-1.96)
1988
950
0.905
0.234*
0.458*
3.688**
4.452***
-0.988
(1.66)
(1.90)
(2.02)
(4.03)
(-1.83)
1989
1020
0.910
-1.063***
0.047
21.044***
-5.476***
0.524
(-2.96)
(0.20)
(6.90)
(-4.52)
(0.52)
1990
1007
0.898
0.565***
0.461***
3.910***
-0.416**
-0.314**
(5.20)
(12.79)
(3.77)
(-2.27)
(-2.17)
1991
989
0.971
0.601***
0.665***
4.308***
-0.533*
-0.324*
(4.34)
(7.49)
(3.70)
(-1.82)
(-1.89)
1992
950
0.720
0.823***
0.470***
3.238***
0.388**
-0.118
(7.56)
(4.39)
(4.47)
(2.42)
(-0.70)
1993
926
0.549
1.080***
0.381**
4.393***
-0.313
1.138
(6.33)
(2.00)
(4.71)
(-0.65)
(1.18)
1994
427
0.664
0.912***
0.507***
3.721***
0.414
1.616**
(13.07)
(2.89)
(2.66)
(0.46)
(2.23)
Yearly mean
0.746
0.380
0.393
5.866
-0.133
0.061
Time-series t-stat
(2.53)**
(5.41)***
(4.46)***
(-0.23)
(0.14)
(^-statistics) are adjusted for heteroscedasticity using White's adjustment.
The mean coefficient is the time-series average of yearly regression coefficients, and the /-statistic is the average
coefficient divided by its time-series standard error. The mean R' is the average of yearly R~.
Price,-, = flQ + a I Book,, + otEPS,, + ajEPS,,^/ + fl4EPS„+2+ ^ii
where:
Price,, = price per share of firm / at time t:
Book,., = book value per share of firm / at the end of period t;
EPS,-, = earnings per share of firm / for year t:
EPS,,^. 7"= realized earnings per share /"periods following time t.
(6')
Significantly different from zero at the 0.01 level (2-tailed).
Significantly different from zero at the 0.03 level (2-tailed).
Significantly different from zero at the 0. 10 level (2-tailed).
564 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
NOTES
1 . In a study of the effects of Spanish accounting reform, Giner and Rees ( 1 997) find that a model
relating firm value to book value and earnings explains about 59 percent of variation in firm
value during the period 1986-1995. Further, the coeffients on book value and earnings are simi-
lar to those found by Rees (1997) for UK firms.
2. Choi and Levich (1991 p. 7-16) quote the following remark by an investment manager: "Com-
parisons are more feasible for a US company, a UK company or an Australian. Scandinavia is
improving. The Japanese companies are a nightmare. In Europe, even within countries, there
may be significant differences in reporting. As a general rule, in Europe, the closer you get to
Switzerland, the worse the financial reporting becomes." After discussing the consequences of
the link between tax accounting and financial accounting in Germany, Haller (1992 p. 322) con-
cludes, "German commercial financial statements can hardly be correctly interpreted, even by a
person with a sound and comprehensive knowledge of German tax law."
3. Using models other than the residual earnings framework, researchers have examined whether
different accounting practices lead to a different relation between earnings and stock returns. For
example. Pope and Rees (1994) find systematic differences between UK and US firms in the
earnings-returns relation that they attribute to accounting differences.
4. "The undervaluation of assets for tax reasons tends to lead to a more pessimistic presentation of
the financial position and economic situation of a company than the very strong principle of pru-
dence already does." Haller (1992 p. 320).
5. Data for years 1982-1986 are from a data set collected by Svein Morten Damm for his Masters
thesis at the Norwegian School of Management (1996). Data for the years 1987-1996 are
extracted from the Worldscope database. The January 1997 Worldscope database used for this
study has incomplete data for 1996, there are few observations for Germany, none for Norway,
and about half of the total for the UK. We repeated the analysis in this study excluding the 1996
observations and found no qualitative differences.
6. Firms with negative earnings are also omitted for the period 1982-1986. Our primary database
{1997 Worldscope Global Researcher) includes data back to 1987. We extend our sample period
four additional years by using data from Data Stream from Damm (1996). Firms with negative
earnings were omitted in his study.
7. As noted by Lundholm (1995) Feltham and Ohlson's measure of conservatism does not allow for
asymmetry in accounting measurement. Accounting practices in Germany and most other coun-
tries are asymmetric in the sense that declines in asset values tend to be reflected more quickly
that increases. This bias could reduce the empirical prediction power of the model.
8. Easton et. al. (1993) show asset revaluations have information content for firm values for Aus-
tralian companies.
9. The coefficients i>2 and d^ in equations (7) and (9) are not equal to the aj coefficient in equation
(6). The earnings proxy used in equations (7) and (9) is reported earnings rather than expected
abnormal earnings. Abnormal earnings are defined in equation (4) as the difference between
expected earnings and the required return. The exact relationship in the coefficients in equations
(7) and (9) relative to that in equation (6) is difficult to specify. However, it is easy to show that
b2 and di must be smaller than oj.
10. All of the analyses in this paper were repeated with return on equity (ROE) replacing EPS. ROE
has slightly lower explanatory power than does EPS, but the time trends and the differences
across countries are similar.
1 1. Theil (1971. pp. 167-171) shows that where the independent variables are not orthogonal, the
sign of the difference between total R- (R-b.e) and the sum of the incremental R~s {R~e\b +
R~b\e) is not determined. That is. R-com may be either positive or negative.
Accounting Diversity 565
12. There is potential cross-sectional correlation in the residuals in the pooled (all years) regres-
sion. This could cause OLS estimates of standard errors of coefficients to be biased. Hence, we
compute average yearly coefficients, significance levels, and R~. For Germany, there are some
differences between the pooled regressions and the yearly averages. For Norway and the UK,
however, total and incremental explanatory power are quite similar between the two estimates.
13. We thank Dale Morse for suggesting this interpretation.
14. The results reported in Table 5 are for regressions for the subset of firms with observations for
all four periods of future realized earnings. We repeated the analysis for the complete sets of
firms with future earnings one, two, and three years ahead. The results are unchanged.
15. We computed diagnostics for multicollinearity in the independent variables for the regressions.
There is indication of mild collinearity between current EPS, and future earnings per share,
EPS,+ ] andEPS,+2 '" Germany. The condition indexes were greater than 15.0 in four of thirteen
years. Over all years, however, the condition index is less than 4.0 for Germany as well as for
the other countries. Therefore, multicollinearity in the earnings variables cannot explain the
consistent lack of explanatory power of future earnings for current stock prices.
16. Harris et. al. (1994) find that both earnings and book value multiples are higher for Germany
than US multiples.
17. The table is based on Financial Reporting — An International Survey (Price Waterhouse, May
1995), Christopher Nobes, International Guide to Interpreting Company Accounts — overcom-
ing disparities in national accounting procedures (Financial Times Management Reports, FT
Business Enterprise Ltd, 1994).
18. In Germany, it is not necessary to set up accruals for pension obligations arising prior to 1987
or for non-binding commitments based on practice. As a consequence, there may exist large
pension liabilities that do not show up on the balance sheet (the amounts should be disclosed in
notes). Usual practice for accrued pension is to cover the liabilities by internal provisions, and
not by transfers to separate plans or insurance companies. Thus, pension moneys may provide
a substantial financing of a company. Restrictions in the tax rules do also imply that pension lia-
bilities may be understated.
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1
The International
Journal of
Accounting
Budgeting and Standard Costing Practices
in New Zealand and tlie United Kingdom
Chris Guilding*, Dawne Lamminmaki* and Colin Drury^
Griffith University and ^ Huddersfield University Business Sctiool
Key Words: Budgeting, Standard-costing, Management accounting practice
Abstract: The findings of a sun'ey of budgeting and standard costing practices in New Zealand
(NZ) and United Kingdom (UK) manufacturers are reported. The results suggest that some com-
mentators ' predictions of a demise in standard costing and variance analysis are overstated. It has
been found that standard costing systems continue to be popular and that the majority of accoun-
tants surveyed do not envisage abandonment of standard costing and variance analysis in
advanced manufacturing technology environments. Comparisons between budgeting and standard
costing practices used in NZ and the UK reveal a high degree of consistency. In the case of the few
differences that have been obsen'ed, it appears that there is a greater lag behind prescribed prac-
tice amongst NZ manufacturers. The main differences noted are: a greater proportion of perfor-
mance reports used in NZ budget centers fail to distinguish betw'een controllable and non-
controllable costs; NZ manufacturers are more reliant on historic data when setting standard
costs; when distinguishing between variable and fixed costs, there is a greater tendency in NZ to
simply treat direct costs as variable and overhead costs as fixed.
Many recent management accounting commentaries are suggestive of a profession under
siege (Kaplan 1988, 1990; Johnson & Kaplan 1987; Cooper, 1990). Johnson and Kaplan
(1987) have coined the damning indictment "lost relevance," epitomising a widely-held
perception that management accounting has failed to evolve in a manner compatible with
a changed technological and competitive environment. This failure signifies that internal
accounting information might be frequently inaccurate and misleading. Debate over the
extent to which management accounting might suffer from diminished relevance appears
to have triggered a burgeoning interest in surveys of management accounting practice, e.g..
Bright et al. (1992) and Drury and Tayles (1994) in the United Kingdom; Emore and Ness
(1991), Green and Amenkhienan (1992) in the United States; Joye and Blayney (1990) in
Australia; Yoshikawa et al. (1989) in Japan.
Direct all correspondence to: Chris Guilding, School of Accounting & Finance, Griffith University, Gold Coast
Campus, PMB 50 Gold Coast Mail Centre, Queensland 42 17, Australia: E-Mail: C.Guiiding@bhm.gu.edu.au.
The International Journal of Accounting, Vol. 33, No. 5, pp. 569-588 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright (<^) 1998 University of Illinois
570 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
The primary orientation in this stream of research can be characterized by a concern with
co.sting practices and, most notably, overhead cost allocation practices. Given the consid-
erable attention commanded by the potential of "activity-based costing" in the new manu-
facturing age (Cooper and Kaplan, 1988; 1992), this predisposition in empirical studies of
practice is understandable. Costing techniques are not the only management accounting
practices that might be affected by a changed manufacturing environment, however. Sev-
eral commentators have predicted a reduced role for standard costing and variance analysis
(e.g., Kirwan, 1986; McCosh, 1986; Neuman and Jaouen. 1986; Sakurai, 1989). It is
claimed that the growing significance of fixed costs and the introduction of advanced man-
ufacturing technologies will render variance analysis an increasingly inappropriate mode
of control. Management control innovations such as target costing (Hiromoto, 1988; Kato,
1993) may also, in some companies, result in a changed approach to budget and standard-
setting. Such significant changes underway in the management accounting environment
highlight the importance of monitoring developments in budgeting and standard costing
practice. This view is reinforced when we consider earlier empirical research highlighting
extensive use of budgeting and standard costing systems (Puxty and Lyall, 1989; Comick
etal., 1988; Cress and Pettijohn, 1985; Scarborough etal., 1991; Schwarzbach, 1985). Rec-
ognition of the significant roles that budgeting and standard costing have played in organ-
isational control as well as the potential implications that a changing context may carry for
these management accounting practices provided impetus for the study of standard costing
and budgeting reported herein.
A further motivation for the work derives from the paucity of prior research directed
explicitly towards benchmarking management accounting practices employed in one coun-
try with those applied in another. Using a single survey instrument as the basis of data col-
lection, this paper presents the results of a comparison of New Zealand (NZ) and United
Kingdom (UK) budgeting and standard costing practices. Benchmarking the accounting
practices of these two countries would appear to be appropriate given their historically
strong political, cultural and trading links.
A study concerned with NZ budgeting and standard costing practices appears to be par-
ticularly timely. Over the last 15 years there has been considerable change in the NZ com-
mercial and economic environment. Since 1984 the government has freed prices, wages
and interest rates, floated the exchange rate, progressively removed tariffs and subsidies,
deregulated the financial system, reduced income tax rates, and encouraged overseas
investment in NZ. Spicer et al ( 1991) sees these NZ developments as more radical than in
any other industrialized country. There is a widely-held view that these changes have
engendered a more competitive commercial environment in NZ. One might expect this
development to be manifested by significant deployment of advanced manufacturing tech-
nologies as well as management systems appropriate to the changed manufacturing con-
text.
Given the broadly similar professional and academic accounting training in NZ and the
UK, any identification of differences between the two countries might stimulate further
inquiry into what contingency factors lie behind these differences as well as commentary
concerned with the relative sophistication of accounting practices employed in the two
countries. The specific research aims are twofold:
Budgeting and Standard Costing Practices 571
1 . to update our understanding of the extent to which budgeting and standard costing
practices are employed by UK and NZ manufacturers;
2. to compare budgeting and standard costing practices across the two countries using
a more rigorous research design than that employed in prior work offering cross-
country comparative comment.
The remainder of the paper is organized as follows. The next section describes the
research design. This is followed by a review of the survey's findings which are considered
in the context of prior theoretical and empirical work. The concluding section provides an
overview of the study's most significant contributions.
SURVEY DESIGN AND SAMPLE
A review of the literature reveals a paucity of research directed explicitly towards provid-
ing cross-country comparison of management accounting practices. What little has been
achieved in this area has tended to involve synthesizing the results of prior survey research.
This approach is evident in Drury and Tayles' (1995) commentary which draws on survey
findings in the UK (Innes and Mitchell, 1991; Bright et al., 1992; Drury et al., 1993), USA
(Emore and Ness, 1991; Cohen and Paquette, 1991; Green and Amekhienan, 1992), Bel-
gium (Kerremans et al., 1991), Sweden (Ask and Ax, 1992), Japan (Yoshikawa et al.,
1989) and Australia (Joye and Blayney, 1990). Cross-country comparisons of management
accounting practice can also be found in widely-used textbooks. For example Homgren et
al (1994, p. 232) report the level of standard costing applied in five countries by drawing on
the findings of Cornick et al. in the United States (1988), Clarke (1992) in Ireland, Drury
et al. (1993) in the United Kingdom, Ask and Ax (1992) in Sweden, and Scarborough et al.
(1991) in Japan. A significant shortcoming of these comparisons becomes apparent, how-
ever, when it is recognized that they are no more than a collation of independently con-
ducted surveys. The potential for significant differences in methodology across surveys is
considerable and the actual survey methodology used carries major implications for
reported findings. Cross-study differences on factors such as sampling procedures, size of
company surveyed, title and relative seniority of respondents, phraseology of questioning,
types of measures (e.g., Likert scales vs. categorical measures) etc., represent a significant
threat to the validity of collating the results of independently conducted surveys. No
attempt to investigate and control for such survey differences has been found in these syn-
theses of prior survey findings.
A research design that attempts to circumvent these shortcomings has been employed in
this study:
1. the same survey instrument, covering letter and survey administration procedures
have been used,
2. in the analysis of results, a comparison has been made of NZ and UK companies
matched by size.
For the UK, the initial sampling frame comprised all companies identified in a CD-ROM
database as having substantial manufacturing, producing or processing activities and also
572 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
Table 1. SummatY of Survey Reply Pattern
Questionnaires
mailed
Responses
Unadjusted
responserate
New Zealand
United Kingdom
268
1269
85
303
32%
24%
Table 2. Industry Classification of All Respondents
NZ% UK%
Chemicals & Plastics 21 26
Engineering/Industrial 20 27
Textiles 18 4
Food 13 9
Building 12 6
Paper & Packaging 10 5
Electrical 3 15
Motor Vehicles 3 6
Tobacco 0 1
Oil & Gas 0 1
100 100
n 61 303
a five-year average sales turnover exceeding 10 million pounds. This sampling frame was
then refined to include operating divisions and plants with distinct activities and where the
divisional accountant was a qualified member of one of the main accounting bodies. This
refined sampling process resulted in the identification of 1,269 accountants, of whom 303
responded to questionnaires mailed (an unadjusted response rate of 24%). The 303 respon-
dents represent 260 separate companies, i.e., 35% of sampled companies. Following Arm-
strong and Overton (1977), in order to test for non-response bias, a comparison of the data
provided by early and late respondents in both countries has been conducted for the vari-
ables referred to in Tables 3-14 below. At the five percent level of confidence, no statisti-
cally significant differences between the early and late respondents are evident." The
potential for a non-response bias in the UK data has also been investigated by comparing
the sales turnover and industrial classification of the responding organizations with those
of the sample population. The Kolmogorov-Smimov test was used. There was no evidence
of any response bias with respect to size or industry (p < .05).
Considerable care has been taken to apply, as far as possible, the same survey adminis-
tration procedures in NZ. Changes made to the questionnaire used in NZ were limited to
those necessitated by regional factors (e.g., UK pounds translated to NZ dollars). The ini-
tial sample frame for the NZ sample comprises the top 500 manufacturing companies iden-
tified by the New Zealand Manufacturer's Association. Consistent with the UK procedure,
the criterion that all respondents hold a professional accounting designation was applied.
Budgeting and Standard Costing Practices 573
268 qualified accountants holding a senior position at the divisional or plant level were
identified. Of this sample, 85 responded to one of the two questionnaire mailings con-
ducted, an unadjusted response rate of 32%. The 85 respondents represent 81 separate
companies, i.e., 42% of the 195 New Zealand manufacturing companies sampled.
Table 1 provides a summary of the number of questionnaires mailed and response rates
for the two countries. In addition to the respondents referred to in Table 1, nine further
members of the NZ sample responded indicating that they were unwilling to participate in
the study. None of the quoted reasons for non-participation give rise to a concern for non-
response bias. 37 of the NZ non-respondents were contacted by phone in order to deter-
mine their reason for non-participation. Again, none of the reasons cited suggest a system-
atic difference between respondents and non-respondents. The most widely cited reasons
were "too busy" (24 cases), "questionnaire too long" (5 cases), and "contravenes company
policy" (4 cases). The potential for a non-response bias in the NZ data has also been inves-
tigated by comparing the sales turnover and industrial classification of the responding
organizations with those of the sample population. At the five percent level of confidence,
no statistically significant differences have been observed. As an indication of the genuine
manner with which respondents treated the survey, 43% of the UK respondents and 35%
of the NZ respondents indicated a willingness to meet and discuss issues raised in the ques-
tionnaire.
Table 2 summarizes the industrial groups represented by the two samples. The decision
was taken not to attempt to achieve matched representations of the industrial groupings for
the two countries, as this would detract from our objective of gaining an appreciation of the
budgeting and standard costing practices in the manufacturing sector of each economy.
Subsequent data analysis has failed to reveal any systematic relationship between industry
and budgeting and standard costing practices.
As noted above, a comparison of data collected in the two countries has been made at
two levels. The first level is based on the entire data set, and the second is limited to com-
panies of a similar size. Previous work (e.g., Drury and Tayles, 1994), provides a strong
suggestion that company size is positively related to management accounting sophistica-
tion. As the bulk of the UK firms are larger than NZ firms, one would anticipate that a raw
cross-country comparison that fails to take into account company size differences would
result in a potentially misleading observation suggestive of greater budgeting and standard
costing sophistication in the UK.
Size has been measured in terms of annual sales. As the majority (85%) of the NZ sample
comprise companies or business units with an annual sales turnover less than $75 million,
this level of sales, which approximated 30 million pounds at the time of the study, has been
used as the qualifying upper threshold for inclusion in the matched sub-samples. In addi-
tion, a minimum annual sales criterion has been employed. Four of the companies/business
units sampled from NZ manufacturers had annual sales levels below the smallest sales
level of companies/business units sampled in the UK. These four companies/business units
have not been included in the matched sub-samples. In summary, therefore, the cross-
country comparison of budgeting and standard costing practices has been conducted at two
levels:
1. The entire data set, i.e., the 85 NZ accountants and the 303 UK accountants who
completed and returned the questionnaire.
574 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
Table 3. Techniques Used to Forecast Budgeted Sales Levels
Full sample Matched sample
NZ mean UK mean NZ mean UK mean
Subjective estimates based on experience of staff 4.30 4.24 4.31 4.53
Market research 2.85 3.13 2.84 2.58
Statistical forecasting 2.64 2.93 2.59 2.79
Notes: No statistically significant cross-countrj differences noted in Table 3.
On a scale ranging from "1" (never) to "5" (always), respondents indicated the extent to which each technique referred
to in Table 3 is used by their company when forecasting budgeted sales revenue.
2. The sub-sample of NZ and UK respondents who represent companies with an annual
sales turnover that falls within the range of 25-75 million dollars (48 NZ accountants
and 47 UK accountants).
SURVEY RESULTS
At the outset of this section concerned with the study's findings, it is salient to highlight the
extent to which budgets are used in practice. In their study of 453 UK companies, Puxty
and Lyall (1989) found that 94% of their sample used budgetary control systems. While no
question explicitly designed to determine the extent of budget use was included in this
study's survey instrument, over 95% of UK respondents and more than 98% of NZ respon-
dents completed that part of the questionnaire concerned with budgetary practices. From
this we conclude that budgetary control systems continue to be employed in virtually all
large NZ and UK manufacturing companies. The findings in the remainder of this section
are organized under the following headings: "Technical aspects of budget-setting," "Bud-
get participation," "Use of the budget in performance measurement," "Standard costing
and variance analysis."
Technical Aspects of Budget-Setting
Fundamental to budget setting is the sales mix and volume forecast. Commentators high-
lighting the importance of the forecasting role of the budget include Samuelson (1986),
Imhoff ( 1 986) and Lyne ( 1 988). Imhoff found that companies often take up to four months
to complete the forecasting process and that sales forecasts are revised an average of five
times. Lyne (1988), in connection with his empirical study that provided support for the
view that forecasting is the most important role of the budget, notes that little has been writ-
ten on the budget's forecasting and planning roles. He suggests that this may be because
they are of such fundamental importance.
Table 3 presents findings concerned with techniques used in sales forecasting. On a five-
point categorical scale ranging from "1" (never) to "5" (always), respondents were asked
to indicate the extent to which they used each of the three techniques referred to in the table
when forecasting sales revenue. Regardless of whether the comparison is conducted at the
full or matched sub-sample level, the approach to sales estimation is similar in both coun-
tries. "Subjective estimates based on experience of staff ranks as the most popular tech-
Budgeting and Standard Costing Practices 575
Table 4. Techniques Used to Classify Fixed and Variable Cos
Full Sample Matched Sample
NZ% UK% NZ% UK°.
Statistical regression techniques 0 2 0 2
Classification on a subjective basis based on 40* 58 33** 51
managerial experience
All overheads are classified as fixed costs and 44* 28 50** 33
direct costs are classified as variable costs
Fixed and variable costs are not separated 16 10 17 14
Other 0 2 0 0
Notes: * Statistically significant cross country difference (Chi-square; p < 0.01 )
** Statistically significant cross country difference (Chi-square: p <0A0)
Respondents indicated which of the techniques referred to in Table 4 best describes the approach their company
uses for separating fixed and variable costs.
nique with "Market research" and "Statistical forecasting" ranking second and third
respectively.
A second factor pertinent to budget setting is the need to segregate fixed and variable
costs. Karmarkar et al. (1989) conducted a survey in the U.S. and found that 77% of man-
ufacturing sites classify costs into fixed and variable components. Broadly similar to this
finding, in this study it has been found that 84% of the NZ sample and 90% of the UK sam-
ple segregate fixed from variable costs. While "classification on a subjective basis based on
managerial experience" and "treating all overheads as fixed and all direct costs as variable"
are the two most popular approaches, a statistically significant difference in the extent to
which they are employed across the two countries has been found. In the UK the former is
more popular, while the latter is more popular in NZ.
A further noteworthy result reported in Table 4 is the minimal extent to which statistical
analyses are used in the fixed/variable cost classification exercise. None of the NZ compa-
nies surveyed employed statistical regression techniques and only 2% of UK firms used the
technique. It appears that the relative usage of these techniques has not grown since Kar-
markar et al's study conducted in 1989 reported a 5% adoption rate amongst US manufac-
turers. In light of the growth of management education as well as computing power
available to companies, it is perplexing to observe that there has been minimal develop-
ment in the area of statistical approaches to cost classification. This concern with low com-
puter application is also apparent from the low ranking attached to statistical forecasting in
budgeted sales estimation (see Table 3).
Budget Participation
Budget participation has received considerable attention from behavioural accounting
researchers. Early studies provided conflicting findings on the significance of budgetary
participation. Stedry (1960) and Cherrington and Cherrington (1973) reported a negative
relationship between budget participation and performance while Merchant (1981) and
Brownell (1982) found a positive relationship. Following the introduction of mediating
variables and the contingency research paradigm, Bimberg and Sadhu (1986) cite evidence
576
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
Table 5. Areas of Influence Determining Authorized Expenditures for Budget Centres
Full sample
Matched sample
NZ mean
UK mean
NZ mean
UK mean
Senior Management
4.67
4.58
4.65
4.67
Budget Holders
3.64
3.89
3.63
3.68
Departmental Managers
3.52
3.57
3.54
3.40
Accounts/Budget Staff
3.29
3.30
3.29
3.38
Supervisors
2.33
2.09
2.30**
1.87
Notes: ** Statistically significant cross-country difference (Mann Whitney U; p <0.\0)
On a five point scale labeled "I" (not important), "2" (below average importance), "3" (average importance) "4"
(above average importance) and "5" (vitally important), respondents indicated the level of influence experienced by
each of the groups referred to in Table 5 when determining budget centres' authorized expenditure levels.
suggesting that budget participation is beneficial where budgetees beheve they can influ-
ence outcomes (Brownell, 1982), are willing to take the opportunity that participation
affords (Swieringa and Moncur, 1975) and are not too risk averse (Young, 1985).
Cress and Pettijohn (1985) surveyed 219 publicly traded US companies and found that
in 79% of the companies surveyed, lower-level managers have a significant role in both the
initial and revision stages of budget preparation. Shields and Young (1993) found that par-
ticipative budgeting is used more frequently when lower-level managers have more knowl-
edge than central management and also when part of the manager's remuneration package
is linked to budget performance.
Tables 5 and 6 report findings relating to two different dimensions of budgetary partici-
pation examined in this study. Table 5 is concerned with the degree of influence carried by
five different organizational positions in the budget setting exercise. Respondents to the
survey indicated the relative importance of each area on a five point scale labelled: "1" (not
important), "2" (below average importance), "3" (average importance), "4" (above average
importance) and "5" (vitally important). In both countries, "Senior management" achieved
the highest rating with a mean score approaching the maximum of the scale. This might
suggest that a "top-down" philosophy tends to predominate. This view should be qualified,
however, as individuals with other organizational titles appear to also exert influence in
budget-setting. "Budget holders" rank second with a mean score in the high "3's," (ie.,
approaching "above average importance"), and, in addition, four of the five organizational
areas examined have mean scores above the mid-point of the range (ie., above "average
importance"). This suggests that while the final ratification of the budget comes from
senior management, several other parties play influential roles in the budget-setting pro-
cess. The only suggestion of a cross-country difference arises with respect to supervisory
influence. While achieving the lowest ranking in both countries, the mean score recorded
for the NZ matched sub-sample is significantly greater than that for the UK matched sub-
sample. If there is a systematic difference between the two countries with respect to this
aspect of budget-setting, we would expect to see the same result appearing when the two
countries' full samples are considered. As this is not the case, and no strong rationale has
been developed to explain this result, we believe the observation should be viewed as a sta-
tistical artefact of the data collected.
This view of the budget setting exercise as a reconciliation of several influences, or a
negotiation process is further reinforced by the findings reported in Table 6. This table pre-
Budgeting and Standard Costing Practices
577
Table 6.
Approach to Managing Excessive Budgeted Cost Estimates
Full sample
Matched sample
NZ% UK%
NZ% UK%
Automatic decrease by a fixed %
Reduction by amounts that upper
management deem appropriate
Reduction through negotiation
between manager and superior
0%
38%
62%
3%
40%
57%
0%
37%
63%
0%
45%
55%
Notes: No statistically significant cross-country differences noted in Table 6.
Respondents indicated which of the three approaches referred to in Table 6 best describes their company's most frequent
action when cost estimates submitted by managers are perceived by superiors to be excessive.
Table 7. Perceived Propensity to Create Budgetary Slack
Strongly Strongly
agree Disagree Uncertain Agree agree
Budget holders should NZ full sample
not have too much UK full sample
influence in determining NZ matched sample
their own budgets UK matched sample
because there is a danger
that they will seek to
obtain easy budgets.
19%
45%
9%
27%
0%
21%
48%
7%
22%
1%
21%
36%
11%
32%
0%
28%
33%
10%
29%
0%
Notes: No statistically significant cross-country differences noted in Table 7.
Respondents indicated how much they thought their company's budgetary control philosophy agrees with the statement
presented in Table 7 by highlighting one of the five possible responses appearing as column headings in the Table.
sents the results of asking respondents to identify which of three possible responses best
describes their company's most frequent action when cost estimates submitted by manag-
ers are perceived by their superiors to be excessive. In both countries "reduction through
negotiation between manager and superior" is the most popular organizational response to
this situation. The autocratic response of an "automatic decrease by a fixed percentage"
appears to be little-used in either country, however it should be noted that approximately
40% of respondents see "reduction by amounts that upper management deem appropriate"
as the main organizational response. Considered holistically. Tables 5 and 6 provide little
suggestion of any systematic differences in budgetary participation between the two coun-
tries.
A shortcoming of increased budget participation arises due to the opportunity provided
for the budgetee to create budgetary slack (Merchant, 1985). In light of the relatively high
budget participation levels revealed by the study, it is pertinent to examine the extent to
which budgetary slack is perceived to be a problem. This issue has been addressed by ask-
ing respondents to indicate the extent to which their company's budgetary control philoso-
phy agrees with the view that "Budget holders should not have too much influence in
determining their own budgets because there is a danger that they will seek to obtain easy
budgets." Respondents indicated their answer on the following five point scale: "1"
(strongly disagree), "2" (disagree), "3" (uncertain), "4" (agree), "5" (strongly agree). No
578 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
Table 8. Degree of Emphasis Placed on the Budget in Managerial Performance Appraisal
Below Above
Not
average Average average Vital
important
importance importance importance importance
Importance of \ ariances NZ full sample
from budgetystandard in y^ full sample
managerial performance ^^ matched sample
^PP""^'^^'- UK matched sample
Top management should NZ full sample
judge a manager-s y^ full sample
performance mainly on ^^ matched sample
his/her ability to attain y^ matched sample
the budget.
O^f
7^f
22^f
45 '^f
26%
1%
4%
14%
39%
28%
0%
8%
16%
41%
35%
2%
26%
26%
41%
31%
Strongly
Strongly
agree
Disagree
Uncertain
Agree
agree
5%
39%
14%
37%
5%
3%
37%
14%
40%
6%
4%
26%
13%
53%
4%
0%
41%
10%
39%
10%
No statistically significant cross-country differences noted in Table 8.
Respondents answered the question: "How important do you think % ariances from budger/standard are in judging man-
agerial performance?" using the 5 point scale appearing as column headings in the upper panel of in Table 8.
Views towards the statement presented in Table 8"s lower panel were recorded by selecting one of the five responses pre-
sented as column headings in the lower panel..
significant differences have been observed across the two countries; the NZ sample
recorded a mean of "2.45" and the UK sample a mean of "2.33." The distribution of
responses to this question are presented in Table 7. The majority of respondents do not per-
ceive propensity to create slack as a significant problem. However, it should be noted that
approximately a quarter of respondents in both countries see the propensity to create slack
as a danger in the presence of budget holder budget participation.
Use of the Budget in Performance Measurement
Dating back to the seminal works of Hofstede (1968) and Hopwood (1972), there has
been a significant stream of research concerned with the implications and antecedents of
the degree of emphasis attached to the budget in performance measurement. The extent of
interest commanded by this research endeavour is such to warrant Brownell and Dunk
describing it as: "....the only organized critical mass of empirical work in management
accounting at present" (1991; 703). For an extensive critical review of the achievements of
this literature, see Briers and Hirst (1990).
The survey questionnaire included a question designed to appraise the importance of
budgets in performance measurement and also a question focusing on attitudes towards the
use of the budget in this manner. The first question asked "How important do you think
variances from budget/standard are in judging managerial performance?." Responses were
recorded on a scale ranging from "1" (not important) to "5" (vitally important). The second
question asked respondents to indicate on a scale ranging from "1" (strongly disagree) to
"5" (strongly agree), the extent to which their budgetary control philosophy adheres to the
view that "Top management should judge a manager's performance mainly on his/her abil-
Budgeting and Standard Costing Practices 579
ity to attain the budget." The distribution of responses relating to these two questions are
presented in Table 8.
The response pattern for these two questions is similar for the NZ and UK samples, with
no observed statistically significant differences in the mean scores for the two countries.
Accountants in both countries tend to see variances from budget as being important. Sev-
enty-one percent of the NZ sample and 67% of the UK sample see the variances as being
of either "above average importance" or "vitally important" to performance appraisal. A
second observation common to both countries is the wide dispersion of views with respect
to whether performance should be based mainly on budget achievement. While 42% of the
NZ sample and 46% of the UK sample agreed with the view that top management should
judge performance mainly on ability to attain the budget, 44% of the NZ sample and 40%
of the UK sample disagreed with these views. The significant recent attention commanded
by the "Balanced Scorecard" philosophy (Kaplan and Norton, 1992), may account for
some of those opposed to the use of the budget as the main basis for performance measure-
ment.
A further factor appraised by the survey questionnaire and relating to performance
appraisal is the design of budget holders' performance reports. The normative literature
outlines a rationale defending the inclusion of allocated costs, even though the departmen-
tal manager may exercise minimal control over these costs (see Demski, 1976). It is held
that this practice draws the departmental manager's attention to those costs and that he/she
may be able to influence some actions designed to reduce such costs. The normative liter-
ature also strongly recommends, however, that a clear distinction be made between con-
trollable and non-controllable costs (Drury, 1992; Horngren et al., 1994).
Respondents to the survey were asked to indicate which of four statements best charac-
terizes the content of performance reports received by budget holders in their company.
These four statements, together with the response distribution are presented in Table 9. The
single most popular approach for the NZ manufacturers is a report that records both con-
trollable and non-controllable costs but fails to distinguish between the two. For both the
full and the matched sub-samples it appears this approach is used more amongst NZ man-
ufacturers. The most widely used approach in the UK, however, (and used statistically sig-
nificantly more than in NZ) involves reporting both controllable and non-controllable costs
but distinguishing between the two categories in the performance report. These findings
suggest a greater propensity in NZ to employ theoretically deficient performance report
designs. This observation will be commented upon further in the concluding section.
A final aspect of budgetary performance measurement appraised in the survey concerns
the incidence of flexible budgeting. In an earlier UK study, Puxty and Lyall (1989) report
a flexible budget usage rate of 20%. Cress and Pettijohn's (1985) US study found that 48%
of companies use flexible budgets for manufacturing costs but only 27% use flexible bud-
gets for distribution, marketing, R&D, or general and administrative expenses. In our sur-
vey, no analysis by function was made, respondents were simply asked to indicate whether
their company uses flexible budgets when comparing actual with budgeted costs. From the
results reported in Table 10, it can be seen that, relative to NZ, a statistically significantly
greater proportion of UK manufacturers employ flexible budgeting. This difference
appears to be driven more by a "company size effect" rather than a "country effect," as no
statistically significant difference is noted when the matched samples are compared. The
finding that 42% of UK manufacturers use flexible budgeting resembles more the finding
580 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
Table 9.
Style of Performance Reports Received by Budget Holders
Full sample
Matched sample
NZ% UK%
NZ% UK%
Only costs controllable by the 26 23 21 19
particular manager are presented.
Both controllable and non-controllable 31* 52 33** 53
(e.g. Allocated) costs are presented,
but they are distinguished.
Both controllable and non-controllable 40* 23 42** 23
costs are presented but they are not distinguished.
Budget holders do not receive performance reports. 3 2 4 5
Notes: * Statistically significant cross-country difference (chi-squarep < 0.01)
** Statistically significant cross-country difference (chi-squarep < 0. 1)
Respondents were asked to indicate which of the four statements listed in Table 9 best characterises the content of
performance reports received by budget holders/departmental managers.
Table 10. Flexible Budget Usage
Full sample
Matched sample
NZ% UK%
NZ% UK%
Flexible budgets used 27* 42
Flexible budgets not used 73* 58
25 30
75 70
Notes: * Statistically significant cross-country difference (chi-squarep < 0.05)
The data reported in Table 1 0 were collected by asking respondents whether their company uses flexible budgets when
comparing actual with budgeted costs.
reported by Cress and Pettijohn in the US rather than the percentage found in Puxty and
Lyall's earlier UK study. This cumulative evidence suggests that since Puxty and Lyall's
1989 survey, there has been an uptake of flexible budgeting in the UK.
Standard Costing and Variance Analysis
Several studies in different countries have assessed standard costing adoption rates.
While a degree of cross-country variation is in evidence, one finding common to these stud-
ies is the fact that the majority of large companies employ standard costing systems. Three
independently conducted surveys of US practice provide highly consistent findings. Cress
and Pettijohn (1985) and Schwarzbach (1985) report an 85% adoption rate, while Comick
et al. (1988), found that 86% of firms surveyed use standard cost systems. In their Japanese
survey, Scarborough et al. (1991) found a 65% adoption rate of standard costing systems.
In the survey questionnaire used in this study, respondents were simply asked whether
their company operates a standard cost system. The findings reveal no statistically signifi-
cant difference across the two countries, with 73% of the NZ and 76% of the UK respon-
dents indicating standard costing system usage. The extent of the continuing popularity of
standard costing lies in stark contrast to the earlier noted claims that standard costing will
become increasingly inappropriate in the modem manufacturing environment.
Budgeting and Standard Costing Practices 581
Table 11. IVIethods Used to Set Labour and Material Standards
Full
sample
Matched
sample
NZ mean
UK mean
NZ mean
UK mean
Standards based on design/engineering studies
Observations based on trial runs
Worit study techniques
Average of historic usage
3.16
3.29
2.67*
3.63*
3.46
3.06
3.18
3.17
3.11
3.30
2.53*
3.74*
3.08
3.26
3.60
3.08
Notes: ** Statistically significant cross-country difference (Mann Whitney U: p < 0.05);
Respondents were asked to indicate on a scale ranging from "1" (never) to "5" (always) the extent to which their
company uses each of the methods referred to in Table 1 1 when setting labour and material standards.
With respect to standard setting techniques, prior empirical research suggests wide apph-
cation of a variety of approaches. In their 1983 survey of large US companies, Lauderman
and Schaeberle (1983) found that "historic usage" ranked behind "engineering studies" as
the most widely-used standard setting approach. 79% of respondents in Cress and Petti-
john's (1985) study report that three or more of the following functional areas participated
in standard setting: accounting, human resources, industrial engineering, purchasing, top
management and line managers with cost responsibility. In this study, no functional inves-
tigation has been made, however four techniques to setting labor and material standards
have been appraised: "standards based on design/engineering studies," "observations
based on trial runs," "work study techniques," and "average of historic usage." Respon-
dents indicated the extent of their company's usage of each method on a scale ranging from
"1" (never) to "5" (always). The mean scores relating to these four questions are presented
in Table 1 1 .
This table reveals some statistically significant cross-country differences in the approach
taken to standard setting. In NZ "average of historic cost" (which is used more by the NZ
sample than by the UK sample) achieves the highest ranking, however in the UK, "stan-
dards based on design/engineering studies" appears as the most popular. A further differ-
ence relates to "work study techniques" which experience statistically significantly more
use in the UK than in NZ. Despite these differences, a mean above the mid-point of the
range has been scored for all approaches appraised, suggesting that corporate use of a
breadth of approaches is a feature common to standard setting in both countries.
In addition to standard setting approaches, the issue of achievability of standards set has
also been investigated. It appears to be generally accepted in textbooks and articles on bud-
geting and standard setting that targets set at "achievable but difficult to attain" levels are
consistent with inducing maximum motivation (Drury, 1992; Hopwood, 1974; Otley,
1987). Experimental research has also shown that challenging targets result in higher per-
formance (Rockness, 1977; Chow, 1983). Cress and Pettijohn's 1985 survey of US firms
found that 50% of the US firms surveyed set standards at expected, but difficult to attain
levels, 42% set standards based on average past performance; and 8% set standards at the
maximum theoretical efficiency level.
Similar to the approach taken by Cress and Pettijohn, in this study respondents were
asked which of three approaches best describes the type of standards employed by their
company's standard costing system. The three approaches and the response distribution are
presented in Table 12. No statistically significant cross-country differences have been
582 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
Table 1 2. Difficulty of Standards Set
Full sample
Matched sample
NZ% UK%
NZ% UK%
4 5
45 44
51 46
0 5
3 8
43 42
54 50
0 0
Maximum efficiency standards
Achie\ able but difficult to attain
Average past performance standards
Other
Notes: No statistically significant cross-countr\' differences noted in Table 12.
Respondents were asked to indicate which of the approaches referred to in Table 12 best describes the type of standards
employed by their company's standard costing system.
noted. The majority of respondents are approximately evenly split between "achievable but
difficult to attain" and "past performance standards" and a minority (4% for NZ and 5% for
the UK) set very challenging standards at the level of "maximum efficiency." The first two
approaches referred to in Table 12 represent, to varying degrees, difficult to attain stan-
dards. If we aggregate the percentages relating to these two approaches, it appears that
approximately half of the sample surveyed pursue a standard-setting approach that is con-
sistent with prescribed practice, although it is questionable whether "maximum efficiency
standards" lie beyond what normative commentators see as practically achievable.
The final perspective in the empirical investigation focuses directly on the implications
of modem manufacturing techniques, e.g., advanced manufacturing technology (AMT)
and just in time (JIT) management. Sakurai (1989) documents the case of a Japanese auto-
mobile parts supplier that abandoned their standard costing and variance analysis system in
the mid- 1 980' s. Several factors may have accounted for this change. Firstly, AMT signi-
fies a reduction in labor costs and also a change in the remaining labor costs from being
variable to fixed. These developments suggest analysis of labor variances will be of dimin-
ishing managerial significance. A second factor reducing the value of variance analysis is
the fact that most overhead costs in an AMT environment are not related to short term
changes in production volume. Thirdly, the flexibility achieved in AMT environments sig-
nifies that there can be frequent changes made to products and processes. Increasing fre-
quency of change results in an increasing cost of maintaining a standard costing system.
Despite these comments, it should be noted that a 1991 survey of Japanese companies
found that most Japanese firms are maintaining their standard costing system (Scarborough
et. al.. 1991), and that there was a division in managerial attitudes towards whether greater
AMT signifies an increased or decreased need for standard costing and variance analysis.
Table 13 presents the distribution of answers provided by the NZ and UK accountants to
the question "To what extent has the implementation of JIT and/or AMT affected the
importance of variance analysis as an aid to controlling manufacturing activities and
costs?." The six closed-ended responses provided for this question are reproduced as the
six data columns in the table. The results of this analysis reveal little suggestion of JIT or
AMT precipitating a move away from variance analysis; in fact, conversely, they tend to
point in the opposite direction. The majority of respondents cite "no change" and more
respondents see variance analysis as being more rather than less important in a JIT/ AMT
production environment. The validity of this observation is strengthened when we recog-
Budgeting and Standard Costing Practices
583
Table 13. Impact of JIT/AMT on the Importance of Variance Analysis
Variance
Significant
Slight
Slight
Significant
analysis no
reduction in
reduction in
No
increase in
increase in
longer used
importance
importance
change
importance
importance
NZ full sample
0%
0%
11%
53%
7%
29%
UK full sample
1%
7%
8%
66%
11%
7%
NZ matched sample
0%
0%
21%
50%
7%
22%
UK matched sample
0%
13%
0%
73%
7%
7%
Notes: No statistically significant cross-country differences noted in Table 13.
Respondents were asked "To what extent lias the implementation of JIT and/or AMT's affected the importance of vari-
ance analysis as an aid to controlling manufacturing activities and costs?" and responded by selecting one of the six
closed answers appearing as column headings in Table 13.
Table 14. Impact that JIT/AMT Will have on Management Accounting Systems
Strongly
disagree
Disagree Uncertain Agree
Strongly
agree
Much greater emphasis will be
placed on using non-financial measures.
There will be a shift from standard
costing to actual costing.
Management accounting will
decline in importance.
NZ
0%
7%
19%
62%
12%
UK
3%
11%
21%
47%
18%
NZ
6%
19%
31%
44%
0%
UK
4%
29%
29%
33%
4%
NZ
12%
56%
20%
12%
0%
UK
18%
60%
11%
8%
2%
No statistically significant cross-country differences noted in Table 14.
Respondents indicated their views on how JIT/AMT adoption might affect the three aspects of management accounting
systems referred to in Table 14 by selecting one of the five closed responses appearing as the Table's column headings.
The number of respondents completing these three questions was not sufficient to permit a meaningful analysis at the
matched sample level.
nize that it has been found in both countries examined; Mann Whitney analysis has
revealed no statistically significant differences between the NZ and UK samples.
The survey questionnaire also asked whether JIT/AMT implementation will result in any
of the following:
• "A shift from standard costing to actual costing"
• "Much greater emphasis placed on using non-financial measures"
• "Management accounting will decline in importance"
The distribution of responses to these questions are presented as Table 14. No statistically
significant differences are in evidence across the two countries.
Table 14 provides some, albeit qualified, support for the view that standard costing
might suffer diminished relevance in the advanced manufacturing environment. 44% of the
NZ sample and 33% of the UK sample believe that the implementation of JIT/AMT will
result in a shift from standard costing to actual costing. This observation should be placed
in the context of the views of the remainder of the sample, however, as more than half of
the respondents are either uncertain or disagree with this view. A disparity of views is also
apparent with respect to the potential of using non-financial measures and the relative
584 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
importance of management accounting. The majority of respondents see greater emphasis
attached to non-fmancial measures in the modern manufacturing environment (74% in NZ;
65% in the UK). This finding may relate to the earlier reference to the recent attention com-
manded by Kaplan and Norton's "Balanced Scorecard" philosophy (1992). These views do
not seem to point to a diminished importance for management accounting, however, as
only 12% of NZ respondents and 10% of UK respondents believe that the modem manu-
facturing environment signifies a decline in the importance of management accounting.
CONCLUSION
The findings of this survey of NZ and UK manufacturers indicate that budgets and standard
costing systems continue to be widely-applied. Of the 321 NZ and UK manufacturing com-
panies represented in the sample, approximately 75% use standard costing systems and the
vast majority employ budgetary control systems. The relative importance of budgeting and
standard costing is also underlined by the finding that responding accountants tended to see
variances from budget/standard as of "above average importance" in judging managerial
performance.
The continuing popularity of standard costing is noteworthy as it lies in stark contrast to
several predictions of a marginalized role for the practice (Kirwan, 1986; McCosh, 1986;
Neuman & Jaouen, 1986; Sakurai, 1989). These predictions also receive little support from
the review made of accountants* perceptions of the role to be played by standard costing
and variance analysis in AMT environments. Largely consistent with earlier findings made
in Japan (Scarborough et. al., 1991), a division has been found in the views of both the NZ
and UK accountants on this matter. Most respondents see modem manufacturing technol-
ogies carrying no implications for the importance of variance analysis, and more respon-
dents see an increased rather than a decreased role for variance analysis. Respondents were
similarly split with respect to whether moves towards JIT/AMT production environments
would result in the replacement of standard costing by actual costing.
We are left to conclude that the predicted demise of standard costing has been either
overstated or is still to be realized. It could be that such predictions are overly-simplified
and fail to recognize the rich context of management accounting practice and the continu-
ing role standard costing might play in AMT environments. A future valuable research
endeavour might involve attempting to determine what factors lie behind some businesses
seeing no change and some seeing a reduced role for standard costing and variance analysis
in the modem manufacturing environment. A further issue worthy of study is the question
of whether conventional importance attached to variance analysis of labor and materials is
giving way to significance attached to variance analysis of overheads. In addition, we
know little of attitudes held by budgetees towards the use of variance analysis in AMT
environments. It might well be that a significant confounding factor in the relationship
between AMT adoption and accounting system design relates to the culture of the account-
ing department, i.e., the degree of resistance accountants feel towards modifying estab-
lished accounting practices.
When comparing the budgeting and standard costing systems of NZ and UK manufac-
turers, one is stmck more by degrees of convergence rather than divergence. This view
becomes particularly apparent when we recognize the breadth of budgeting and standard
Budgeting and Standard Costing Practices 585
costing system factors that have been appraised in the study. Notwithstanding this view,
there are some cross-country differences worthy of further comment. A theme common to
the differences noted suggests that the widely-commented upon lag between management
accounting theory and practice (see Choudhury, 1986; Edwards and Emmanuel, 1990;
Scapens, 1985) tends to be greater in NZ than in the UK. The following differences have
been observed:
• Budget holders' performance reports in 40% of New Zealand manufacturers fail to
distinguish between controllable and non-controllable costs. From a choice of four
reporting approaches referred to in the survey instrument, this was the single most
popular for the NZ sample and statistically significantly more popular than for the
UK sample. It was noted earlier that this approach is held by the normative literature
to be theoretically-deficient and can lead to dysfunctionalism. Merchant (1989; 5)
sees managers as assuming risk when held accountable for factors they cannot con-
trol. He argues that frustration, lower motivation and management turnover can
result if managers are not compensated for this risk. While this problem of an inap-
propriate reporting style appears to be more prevalent in NZ, it should nevertheless
also be noted that approximately a third of UK manufacturers surveyed are also cul-
pable in this regard.
• Relative to UK manufacturers, NZ manufacturers are more reliant on historic data
when setting standard costs. The significance of this observation is underlined when
it is also recognised that, of the four approaches investigated, historic usage ranks as
the most popular basis for setting standard costs in NZ (while ranking third in the
UK). Basing standard cost setting on historic usage rates is generally criticised in the
normative literature and is inconsistent with the currently widely-espoused "bench-
marking to best practice" philosophy (Walleck et al., 1991).
• Relative to the UK sample, there is a greater tendency in the NZ sample to simply
treat overheads as fixed and direct costs as variable. This somewhat simplistic
approach to cost classification appears to be less sophisticated than basing the exer-
cise on managerial experience which is used statistically significantly more in the
UK.
It was noted earlier that NZ represents a particularly interesting research site because of
the profound nature of its recent economic changes. The above summary of differences
appears to signify that these changes have not resulted in the use of budgeting and standard
costing practices that could be described as "leading edge." While we can do little more
than speculate, we believe that the last decade has seen NZ's management accounting prac-
tices catching up with those used in large industrialized economies such as the UK.
NOTES
1 . See Bromwich and Bhimani (1989) for a contrary view.
2. The Mann Whitney U statistic was calculated for variables with ordinal measures (i.e., variables
referred to in Tables 3, 5, 7, 8, II, 13, and 14) and chi-sqiiore tests were conducted for categori-
cal variables (i.e., variables referred to in Tables 4, 6. 9. 10, and 12).
586 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33. No. 5. 1 998
3. A copy of the questionnaire is available from any of the three authors. Data v\ ere collected in late
1995 and e;irly 1996.
4. This analysis was performed by conducting chi-square tests for categorical \anables (i.e.. vari-
ables referred to in Tables 4. 6. 9. 10. and 12) and calculating the Kxuskal Wallis H statistic for
variables measured on an ordinal scale (.i.e.. variables referred to in Tables 3, 5, 7. 8. 11. 13. and
14). At the 5% confidence limit, no statistically significant cross-industr. differences have been
observed.
5. One further finding (not reported in the bod> of the paper) pro\ ides additional suppon to this
view. Respondents were asked to indicate which of 13 variances are computed b> their com-
pany's standard costing system. The items included w idely referred to variances (e.g.. material
price, material usage, labor rate and efficiency) as well as less widely-referred to variances (e.g..
fixed overhead volume, volume efficiency and volume capacity). It is particularh striking that
based on the matched samples, none of the 13 variances are used statistically significantly more
in one countrv compared to the other.
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The International
Journal of
Accounting
Relevance of U.S.-GAAP for Japanese Companies
Joseph H. Godwin, Stephen R. Goldberg, and Edward B. Douthett
Grand Valley State University and Texas Christian University
Key Words: Book value equity. Earnings, Foreign registrants. Japanese-GAAP. U.S.-GAAP,
Value-relevance.
Abstract: We use dijferences in U.S.-GAAP and Japanese-GAAP accounting measures to evaluate
the value-relevance of U.S.-GAAP reports. We show data provided in U.S.-GAAP financial state-
ments of Japanese firms is value-relevant beyond that contained in domestic-GAAP statements.
Our results complement extant research and support the proposition that U.S. reporting methods
provide value-relevant data. Understanding the value-relevance of data from Japanese firms is
important in its own right because of the major role these firms play in international markets. We
also provide evidence on significant transnational firms that voluntarily provide U.S.-GAAP state-
ments.
This paper reports on an analysis of the value-relevance of Japanese firms' financial state-
ments that are prepared with U.S. generally accepted accounting principles (GAAP). Value
relevance is defined as a significant association between earnings or stockholders' equity
and security returns. Our findings suggest that U.S.-GAAP financial statements provide
value-relevant data beyond Japanese-GAAP statements. These findings, therefore, support
the reporting requirements imposed on transnational firms by the U.S. Securities and
Exchange Commission (SEC).
Non-U. S. companies listed on a primary U.S. exchange may choose to either provide
their U.S. shareholders with financial statements prepared according to their domestic
(non-U. S.) GAAP or provide them with U.S.-GAAP statements. The SEC requires
non-U. S. firms that elect to provide domestic-GAAP financial statements to also provide a
reconciliation of domestic earnings and shareholders' equity to their U.S.-GAAP counter-
parts. Both reporting alternatives imply a testable SEC hypothesis that U.S.-GAAP mea-
sures provide value-relevant data beyond domestic-GAAP measures.
Amir, Harris, and Venuti (1993) [henceforth AHV] provide evidence that reconciliations
of domestic earnings and shareholders' equity to U.S.-GAAP are associated with price
Direct all correspondence to: Edward B. Douthett, Department of Accounting, M.J. Neeley School of Business,
Texas Christian University, Fort Worth, TX 76129; 817-257-7921; Fax: 817-257-7227; E.Douthett@TCU.edu.
The International Journal of Accounting, Vol. 33, No. 5, pp. 589-604 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1998 University of Illinois
590 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
(returns) which they interpret as an indication of value-relevance. Their result holds for
both aggregate reconciliations and for some specific reconciliation components. This evi-
dence is important to the continuing policy debate over the SEC requirement that foreign
companies provide either reconciliations or U.S.-GAAP statements with Form 20-F in
order to be listed on a U.S. securities exchange. AHV assert it would be difficult to argue
for the requirement if it could not be shown that the reconciliation data were value-rele-
vant.
Since foreign companies can also meet SEC requirements by providing U.S.-GAAP
financial statements and are thus not considered by AHV, the question arises whether such
U.S.-GAAP data have value-relevance beyond data contained in firms' domestic-GAAP
financial statements. While specific differences in GAAP are not highlighted as they are
when reconciliations are provided, aggregate differences can be determined by an exami-
nation of both U.S. and domestic-GAAP earnings and shareholders' equity line items.
Thus, U.S. and non-U.S.-GAAP measures can be used in statistical tests to evaluate the
value-relevance of U.S.-GAAP financial statement data.
The purpose of this paper, therefore, is to examine the value-relevance of U.S.-GAAP
earnings and shareholders' equity data of non-U. S. companies (Japanese firms, in particu-
lar) that prepare U.S.-GAAP financial statements. This paper is of interest for several rea-
sons. First, we suggest, in the spirit of AHV, that it would be difficult to argue for
requirements to provide costly data in the form of either reconciliations or complete
U.S.-GAAP statements if it could not be shown that the data were value-relevant. Second,
the SEC allows non-U.S. firms to choose from two alternative reporting protocols which
could have value-relevance implications. If one protocol has differential advantages, firms
should consider those advantages. Thus, comparing our results with AHV could give addi-
tional insight into reconciling domestic-GAAP to U.S.-GAAP earnings and stockholders'
equity numbers as compared to preparing statements in U.S.-GAAP. Third, evidence of
value relevance could provide an explanation of why some firms prepare U.S.-GAAP
financial statements even when they are not required to do so by listing or registration
requirements. Fourth, AHV examine only firms that provide domestic statements along
with reconciliations and thereby omit significant transnational firms from a country with a
different industrial structure and different methods of preparing financial statements.
Thus, our results should be viewed in conjunction with AHV's results to draw conclusions
about SEC reporting requirements." Fifth, as Zmijewski (1993) points out, research on
cross-country comparisons of the role of earnings and other information is important
because we can provide information to regulators and investors grappling with the issues
related to globalization of the world's capital markets.
The next section provides additional details and describes some institutional back-
ground. We then describe sample selection and research design in the sections 3 and 4.
Results are presented in section 5 and concluding remarks are in section 6.
INSTITUTIONAL BACKGROUND
There has been a recent surge in the number of transnational firms that are SEC registrants
and trade in U.S. markets. Between October 1989 and May 1993, 208 registrants from for-
eign countries entered the U.S. market for the first time and approximately $80 billion of
U.S. -GAAP and Japanese Companies 591
Table 1. Sampling Scheme to Determine Japanese Firms That Prepare U.S. GAAP Statements
Firm Name 12g3-2(b) exempf? U.S. GAAP per JCH^ Observations used = 253
NYSE Firms:
Hitachi, Ltd. No Yes 9
Honda Motor Co., Ltd No Yes 7
Kubota Corporation No Yes 9
Kyocera Corporation No Yes 9
Matsushita Electric Ind. No Yes 9
Mitsubishi Bank, Ltd. No No^ 0^
Pioneer Corporation No Yes 8
Sony Corporation No Yes 7
TDK Corporation No Yes 7
Nippon Telegraph & Tele- No No 0
phone
NASDAQ Firms:
CSK Corporation Yes Yes 10
Canon. Inc. No Yes 9
2
Dai'ie, Inc. Yes No 0
Fuji Photo Film Co. Yes Yes 10
Ito-Yokado Co. No Yes 10
2
Japan Airlines Co. Yes No 0
Kirin Brewery Yes No 0
Makita Corporation No Yes 7
Mitsui & Co. Ltd. No Yes 9
NEC Corporation No Yes 9
Nissan Motor Co., Ltd. Yes No 0
Sanyo Electric Co., Ltd. Yes Yes 9
13
Tokio Marine & Fire Ins. No No 0
2
Toyota Motor Corp. Yes No 0
Wacoal Corp. No Yes 7
OTC Firms:
Ricoh No Yes 9
Komatsu No Yes 9
Marubeni Yes Yes 9
Mitsubishi Yes Yes 9
Mitsubishi Elect. Ind. No Yes 9
Dai Nippon Printing No Yes 7
Omron Yes Yes 9
Not in ADR Universe:
Asahi Optical No Yes 9
Itochu No Yes 9
Murata No Yes 7
Nippon Meat Packers No Yes 7
Orix Corp. No Yes 6
Toshiba No Yes 9
Notes: Firm prepares U.S. GAAP statement.s but Japanese GAAP used in Japan Company Handbook (JCH).
" Exempt from registration provisions under Rule i2g3-2(b) and does not provide U.S. GAAP statements.
Excluded from sample because firm is financial institution.
Excluded because Japanese Government has significant ownership.
the securities were registered for sale in the U.S. (USSEC, 1993a). The number of transna-
tional SEC registrants reporting U.S. -GAAP data increased from 528 to 625 between May
1993 and June 1994 (USSEC, 1994a).
592 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
Shares of foreign firms usually trade in the U.S. through American Depository Receipts
(ADRs). ADRs are negotiable receipts issued by a depository (normally a bank or trust
company) in the U.S. to represent ownership of the underlying shares of a foreign firm. A
custodian bank in the firm's home country typically holds the underlying shares in trust.
ADRs are sold, registered, and transferred in the U.S. in the same manner as any share of
stock. Each ADR represents some multiple of shares of the underlying stock such that the
trading price of each ADR is in a generally accepted range of $10 to $30.
An ADR facility can be created with or without a company's sponsorship. If the facility
is created without sponsorship, trading occurs over-the-counter (OTC) and the ADR (or
firm) is not subject to SEC reporting requirements. Sponsorship of an ADR facility occurs
at one of three levels that are unofficially coined as sponsored level-I, II, or III.
Sponsored level-1 ADRs trade in the OTC "pink-sheet" market and can neither be listed
nor make a public offering in the U.S. The sponsoring company often obtains a 12g3-2(b)
exemption from 1934 Exchange Act reporting requirements. This ADR level is often used
by foreign firms to test their reception in U.S. markets.
Sponsored level-II ADRs trade on NASDAQ or an exchange but are not associated with
a public offering. Level-Ill classification is associated with listing and a public offering.
Both level-lI and III ADR sponsorship involve meeting SEC reporting requirements to
either provide domestic-GAAP statements with reconciliations or provide U.S. -GAAP
financial statements. The question we address is whether earnings and shareholders'
equity reported on a foreign firm's U.S. -GAAP financial statements have value-relevance
after controUing for earnings and equity determined with non-U. S. -GAAP.
SAMPLE SELECTION
Japanese firms make up the fourth largest group of foreign SEC registrants subject to
reporting provisions of the Securities Exchange Act of 1934. They are the largest group,
however, that unanimously provides U.S. -GAAP financial statements rather than reconcil-
iations to U.S. -GAAP (SEC, 1993a). Since 100% of Japanese SEC registrants and several
other Japanese firms prepare US. -GAAP statements, we are afforded a useable sample of
commonly domiciled firms which reduces concern that returns-earnings coefficients might
not be constant across countries. Thus, Japanese firms provide a unique opportunity to
examine the value- relevance of one SEC reporting option.
We examine a pooled cross-section of Japanese firms that prepare U.S. -GAAP financial
statements either because they wish to list or issue securities or because they deem it oth-
erwise advantageous. A search of the Japan Company Handbook (Toyo Keizai, 1993)
[hereafter JCH] identified thirty firms that report U.S. -GAAP data. We also identified two
additional Japanese firms listed on the New York Stock Exchange (NYSE) and six addi-
tional firms listed on NASDAQ since these firms are most likely to provide U.S. -GAAP
Q
financial data. These sources yield the 38 firms listed in Table 1.
JCH reports only Japanese-GAAP data for firms that employ both U.S. and Japa-
nese-GAAP to prepare consolidated statements. We obtained U.S. -GAAP annual reports
for the three NYSE and NASDAQ firms listed in Table 1 for which JCH did not report U.S.
data. Subsequently, we dropped these three firms from the analysis because they were
financial institutions or, in Nippon Telegraph & Telephone's case, significantly owned by
U.S. -GAAP and Japanese Companies 593
the Japanese Government. We dropped these firms because of difficuUy collecting consis-
tent U.S. -GAAP data and uncertainty over effects of their regulatory environment.
Five other NASDAQ firms were dropped because they do not provide U.S. -GAAP state-
ments. Non-U. S. firms traded in the U.S. do not necessarily meet SEC registration and
reporting requirements. Thirty-two Japanese firms are exempt from registration require-
ments under Rule 12g3-2(b) (SEC, 1994b).^ Eight of the exempt firms are NASDAQ
traded.'^ Three NASDAQ firms and three OTC firms prepare U.S. -GAAP financial state-
ments despite the exemption. Six sample firms do not trade in the U.S.
The last column of Table 1 shows the number of firm-year observations each firm con-
tributes to the final sample. We collected sample-firm data for the period 1983 to 1992. We
excluded one or two observations for seven firms that reported partial-year data when they
changed to March 3 1 fiscal year ends in the late-eighties to coincide with the government's
fiscal year-end (Toya Keizai, Inc, 1993). Additional firm-years were lost because of miss-
ing data in the Global Vantage data base (Compustat-PC, Plus, 1993). We have a maxi-
mum of 253 observations representing thirty firms for which we have domestic stock price
(returns) data and both Japanese-GAAP and U.S. -GAAP financial data.
We collected annual returns and U.S. -GAAP financial data from Global Vantage and
from JCH. Global Vantage reports U.S. -GAAP consolidated data for those firms that pro-
vide U.S. -GAAP data and Japanese-GAAP consolidated data for those firms that do not
provide U.S.-GAAP data.
We collected Japanese-GAAP financial data from JCH which reports both parent com-
pany data and consolidated data. The parent company data is prepared via Japanese-GAAP
and the consolidated data is prepared with either U.S. or Japanese-GAAP. AHV point out
that "most Japanese companies listed on a U.S. exchange use U.S.-GAAP because at the
time they originally listed in the United States, Japan did not require consolidated financial
statements. Since the companies had no domestic equivalent, they chose U.S.-GAAP and
were allowed to retain this for Japanese reporting purposes once Japan adopted full consol-
idation" (p. 233).
One limitation of allowing Japanese firms to use U.S.-GAAP data for domestic purposes
is that we are constrained to compare U.S. consolidated data to Japanese unconsolidated
data. Thus, we perform a joint test that consists of the value-relevance of U.S.-GAAP over
Japanese-GAAP and the value-relevance of U.S. consolidated over Japanese unconsoli-
dated data. Our approach seems reasonable for several reasons. First, Japanese financial
reporting has traditionally emphasized unconsolidated financial statements. For example,
the Commercial Code (Shoho) of Japan does not require consolidated statements (Ren-
ketsu Zaimushohyo) and the Japan Securities and Exchange Law (Shokentorihikiho)
requires consolidation only as supplemental information (Campbell, 1991; Coopers &
Lybrand, 1991). Second, Darrough and Harris (1989) provides evidence that unexpected
unconsolidated earnings of Japanese firms are more closely associated with returns than
unexpected consolidated earnings. Third, U.S.-GAAP consolidated data displays high cor-
relation (.70) with Japanese-GAAP unconsolidated data which is similar to the correlation
between consolidated and unconsolidated data (.86) of an industry-matched sample of
firms that do not prepare U.S. consolidated data. We provide additional specification
checks on this issue through other comparisons of sample firms with match firms. Never-
theless, Japanese-GAAP unconsolidated and U.S.-GAAP statements are the available
594 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
inputs to decision models and the value-relevance of the U.S. -GAAP data is an important
issue for the reasons enumerated previously.
Another potential limitation is there could be something economically different about
firms that choose to prepare U.S. -GAAP which could preclude generalization of results.
We do not address motivations of sample firms for preparing U.S. -GAAP. We do, how-
ever, attempt to measure differences by comparing our sample with a matched sample of
firms that do not prepare U.S.-GAAP. This comparison provides some evidence that sam-
ple firms behave similarly to other firms.
RESEARCH DESIGN
Following AHV, we use two approaches to evaluate the value-relevance of
U.S.-GAAP disclosures by Japanese firms. The first approach considers the association
between stock market returns and accounting earnings determined under two different
accounting practices. The second approach considers whether differences between Japa-
nese and U.S.-GAAP measures explain the market (P) to book-value of shareholders'
equity (BV) ratio. AHV assert that most earnings announcements contain domes-
tic-GAAP income only, show that most firms do not file annual reports at the same
time as Form 20-F, discuss other challenges of isolating the news and date of informa-
tion releases to the market (p. 237) and find no significant association between
short-window market returns and U.S.-GAAP disclosures. Therefore, because of the dif-
ficulties of identifying the timing of information releases in two or more markets, we
do not use an event-study methodology to evaluate the value-relevance of U.S.-GAAP
disclosures by Japanese firms.
Return-Earnings Association
Securities of most firms in this study trade in at least two countries (Japan and the U.S.)
and currencies (yen and dollars) and this fact raises the issue of where to measure returns.
We follow AHV and run all tests using domestic market prices to calculate returns. One
advantage of this approach is that we can admit six firms to the sample that do not trade in
the U.S. and thus do not have U.S. prices (returns). AHV find the correlation between U.S.
and non-U. S. returns is in excess of .99 and point out that arbitrage conditions suggest
equal domestic and U.S. prices unless thin trading in one market or the other creates a
transaction cost barrier.
We examine the association between returns and earnings over a twelve-month window
corresponding with the firm's fiscal year. The earnings variables follow from the rela-
tionship:
EARNjj^„_^, = EARNjus.¥.r + DEARNj^^j (1)
where EARN is reported earnings per share (excluding extraordinary items) for firm j, the
subscripts Jpn and US show which country's GAAP is employed, the subscript ¥ shows the
currency, and t shows the year. We drop the subscript ¥ since we use reported Yen mea-
sures for both U.S.-GAAP and domestic-GAAP data in this study. DEARN shows the dif-
U.S. -GAAP and Japanese Companies 595
ference between earnings reported under U.S. and Japanese-GAAP that balances the
equation. A review of annual reports indicates that major differences exist between U.S.
and Japanese accounting for deferred taxes, currency translation, accrual of expenses, post
employment benefits, leases, and stock purchase warrants.
We continue with the model:
Rj, ^ao + aj EARNjjj,„/Pjj_i + a2 AEARNjjp,JPjj_i + a^ Vj, + ej, (2)
where Rj j is (Py, - P: f_ j+ dividends jf}/Pjj_j\ AEARNjjp,^j is the earnings change under
Japanese- GAAP from period /-/ to t; P denotes share price at the subscripted time; Vy, rep-
resents nonrandom additional information that explains returns for firm 7 at time t; and ejj
is an i.i.d. random error term.
If U.S. -GAAP earnings reflect the additional information associated with returns, then
equation (2) can be rewritten as:
Rj, = ao + a, EARNjjpJPjf_j + a2 AEARNjjp„/Pj,_j +
a3, DEARNjJPjj_j + a32 ADEARNj/Fjj.j + ejj (3)
where DEARN: j is as defined in equation (1), and AD EARN jj is the change in the differ-
ence in earnings from the prior period (i.e., DEARN j- DEARN j_j).
Our general hypothesis, implied by SEC reporting requirements, is that accounting mea-
sures prepared under U.S. -GAAP are value-relevant after controlling for accounting mea-
sures prepared under Japanese-GAAP. Evidence supporting this hypothesis suggests that
SEC disclosure requirements provide benefits, net of costs, to transnational firms and
investors. We provide evidence to support the SEC hypothesis if we are able to reject
either the statement a3i or a32 = zero or the joint null hypothesis that a3j = a32 = zero .
Price-to-Book Analysis
Our second approach to evaluate the value-relevance of U.S. -GAAP disclosures consid-
ers whether they help explain the price-to-book-value ratio. Goodwill is the difference
between the market and book-value of an asset and is related to market perceptions of
expected earnings. AHV points out that P and BV may also differ because of accounting
differences, suggesting a higher ratio when firms use conservative practices. We examine
whether or not aggregate differences between Japanese and U.S. -GAAP measures help
explain the P to BV ratio when BV is measured in Japanese-GAAP (See AHV, Bernard,
Merton, and Palepu [1992]; Easton, Eddey, and Harris [1993]; Feltham and Ohlson [1993];
Ou and Penman [1992]). We continue with the model:
Pj/BVjjpnj = Po + P/ EARNjjp„/BVjjp,,, -h p, VV^y,,,,, + ej, (4)
where BVjjp,jj is the book-value per share determined via Japanese-GAAP for firm / at
time r, and y^jjput is nonrandom additional information explaining the price-to-book ratio
of firm j at time t. Assuming the difference between U.S. -GAAP and Japanese-GAAP
596 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
earnings and equity is the additional information contained in W: jp^ f , equation (4) can be
rewritten as:
PjJBVjjp,,, = Po + p, EARNjjpJBVjjp,,, + (3., DBVjJBVjj^,, +
^22DEARNj/BVjjp,_,+ejj (5)
where DB V is U.S. minus Japanese-GAAP measures of book- value for firmj at time / and
other variables are as defined.
Pi reflects the association between Japanese-GAAP return on equity (ROE) and the P to
BV ratio. The variable DBVjjp„/BVjjp„j, equals iiBVjus/BVj^jpnj) - !)• If the
U.S. -GAAP measure of BV is more closely aligned with price than the Japanese-GAAP
measure, then P2; will be positive. The coefficient P22 reveals how incorporating
U.S. -GAAP practices in earnings incrementally explains the P/BV ratio based on Japa-
nese-GAAP. If the U.S.-GAAP measure of earnings reflects a measurement of ROE closer
to that used by the market, then P22 will be positive.
AHV assert the price-to-book model in (5) is a function of practices implicit in domestic
GAAP. The right-hand-side variables in (5) reflect both future profitability and adjustment
of measurement differences implicit in Japanese measures of shareholders' equity and
earnings. We also define the price-to-book ratio in terms of U.S.-GAAP to distinguish the
two effects. Rewriting equation (5) as:
Pj,/BVjUS, = Go + e, EARNjjpJBVj^jj_s..t + hi DBVjJBVj_y_s.j +
822 DEARNjJBVjys.j + ^j.t (6)
where BV: ^^ j can be rewritten as BVjjp^j + ^BVjj. This measure alters the P/BV
ratio in equation (5) to account for differences between U.S. and Japanese-GAAP mea-
surement practices. If these differences are value-relevant, then the P/BV ratio based on
U.S.-GAAP measures should be closer to one and have a lower variance than Japanese
14
measures.
AHV provide arguments (p. 243) that we can expect 61 to be positive if Japa-
nese-GAAP earnings reflect firms' profitability. If U.S.-GAAP shareholders' equity
reduces the measurement error component, however, 0; should be smaller than the coef-
ficient P; in (5).
A nonzero coefficient P22 could result from differences between Japanese and U.S.
protocols to determine earnings or from the measurement error inherent in Japa-
nese-GAAP shareholders' equity. If U.S.-GAAP reduces the measurement error, then
the value-relevance of a difference in earnings can still be evaluated. A nonzero coef-
ficient, 622, will indicate that earnings determined under U.S.-GAAP provides
value-relevant information beyond that contained in differences between shareholders'
equity.
Finally, if the additional information contained in U.S.-GAAP BV is value-relevant
while Japanese-GAAP BV provides no incremental information, then DBVj/BV; y^ j
should not help explain the price-to-book ratio based on U.S.-GAAP. In this case, 621 is
expected to be zero.
U.S. -GAAP and Japanese Companies
597
Table 2. Summary Statistics for Japanese Firms Preparing U.S. GAAP A/= 245^
Median
Mean
Std. Dev.
Quartile 1
Quartile 3
^,
0.0035
0.0754
0.3335
-0.1701
0.3052
EARN^j^JP^,_j
0.0247
0.0280
0.0148
0.0186
0.0340
^EARNjJpJPj,_l
0.0007
0.0011
0.0010
0.0004
0.0014
DEARNj^/Pj,_,
0.0061
0.0079
0.0182
0.0000
0.0139
ADEARNj /Pj ,_,
0.0005
-0.0001
0.0158
-0.0037
0.0053
EARNj^usJPj.t-1
0.0338
0.0361
0.0251
0.0221
0.0468
AEARNj,us./Pj.,-i
0.0014
-0.0002
0.0192
-0.0053
0.0078
EARNjjp„/BVjjp„,
0.0658
0.0675
0.0297
0.0467
0.0848
DBVj/BV^jpn.,
0.1216
0.2023
0.3004
0.0184
0.3035
DEARNj/BVjjp,,,^
0.0139
0.0232
0.0424
0.0000
0.0394
EARNjjp„yBVj^u.s..r
0.0546
0.0599
0.0553
0.0397
0.0725
DBVj/BVj,js,,
0.1084
0.1281
0.1930
0.0181
0.2328
DEARNj/BYjas..,
0.0134
0.0145
0.0371
0.0000
0.0310
Pjpn/BVjpn,
2.3769
2.6251
1.1361
1.8353
3.2136
Pjpn/BV,s,
1.9894
2.4058
2.6733
1.598
2.8794
^EARNjysj
42.04
66.22
68.39
20.48
88.4
'EARNjjp,,,
37.7
54.01
51.97
15.8
64.9
'BV,,,
574
841
738
359
1030
'BVjpn
517
759
645
312
940
EARN,
Notes: Rj, is the annual return of firmy for the period ending at fiscal year-end;
is the domestic price per share of firm 7 at fiscal year end;
is fiscal year earnings per share of firm 7 reported in the subscripted GAAP;
is the change in subscripted GAAP fiscal year earnings;
is U.S. GAAP earnings - Japanese GAAP earnings per share for firm 7;
is the change in DEARN from time /-/ to 1 for firm 7.
BVj J is the book value per share of shareholders' equity of firm 7 at time / reported in the subscripted GAAP.
Sample excludes observations where /?-student values > 131 in regressions.
Statistics for these items are for full sample of 253 firms.
J-'
AEARNj,
DEARNj,
ADEARNj,
RESULTS
Table 2 contains descriptive statistics for the primary variables used in our analysis and for
the earnings and book-value numbers used to calculate those variables. The median (mean)
annual stock return is .35 (7.54)%. The high variance of returns reflects the roller-coaster
ride taken by Japan's stock market during the period. Average return on Japanese-GAAP
equity is 6.75%. Mean U.S. -GAAP (Japanese-GAAP) earnings are 3.6 (2.8)% of price.
The difference between earnings is 1.45 (2.32)% of U.S. -GAAP (Japanese-GAAP)
book-value. Both U.S. -GAAP consolidated earnings and book-value are greater and have
more variability than Japanese unconsolidated figures. The P/BV ratio based on
U.S. -GAAP measures is closer to one than P/BV based on Japanese measures, providing
some evidence that U.S. -GAAP measures are more closely aligned with price.
Return-Earnings Analysis
The results for the returns model in equation (3) are reported in Table 3. We estimate the
model for the full sample (1983- 1992), for the years 1983 through 1987, for the years 1988
15
through 1992, and for each year in the sample period. We delete from regressions any
598
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
Table 3. Regression Results for Annual Returns-Earnings Associations for
U.S. and Japanese GAAP Differences for Experimental Sample:^ 1983-1992
Rj, = ao + aiEARNjjpn/Pjj_i + a2^EARN|Jp„yP|^_1 + 0.3^ DEARNj/Pj,_i + 0.32
ADEARNj/Pj,_i + G jt
"0
a,
"2
(^31
0-32
Adj. R^
N
hf
1983-92
-0.131***
4.061***
76.465***
1.530
1.730
0.121
253
248
-2.960
3.119
3.157
1.104
1.237
1983-87
0.033
1.854
4.866
1.765
-0.472
-0.001
121
118
0.605
1.384
0.570
1.323
-0.461
1988-92
-0.436***
11.469***
253.790***
-1.497
13.142***
0.466
132
130
-6.218
4.602
6.057
-0.886
3.698
1983-84
0.082
0.914
-8.407
9.493***
X.Ald
0.017
34
34
0.536
0.241
-1.672
3.068
0.544
1985
-0.201**
4.003***
23.470
2.101
-0.082
0.176
30
29
-2.418
2.802
1.455
0.850
-0.026
1986
-0.276***
7.284*
120.750***
-3.128
2.371
0.320
29
28
-3.147
2.024
3.993
-1.645
1.344
1987
-0.102
7.262*
102.160**
6.135**
0.837
0.248
28
28
-0.968
1.925
2.378
2.432
0.459
1988
0.086
4.458
98.685
8.982
3.819
0.072
24
24
0.438
0.671
1.538
1.449
0.578
1989
-0.603***
15.379***
362.750***
1.730
19.977**
0.509
24
23
-3.746
2.891
4.439
0.239
2.497
1990
-0.240**
12.803**
-137.990
-1.399
16.416***
0.342
26
25
-2.585
2.479
-1.419
-0.331
3.936
1991
-0.360***
5.755***
135.460***
1.863
4.008
0.205
29
28
-6.810
3.918
4.099
1.349
0.622
1992
-0.472***
9.268***
71.679
-0.017
1.866
0.387
29
29
-7.840
3.854
1.389
-0.011
0.870
Notes:
Sample firms are Japanese firms that prepare U.S. GAAP financial statements.
A' is the number of observ ations a\ ailable for each regression.
hf is the number of observations that enter each regression after removing those with R-student scores>l3l.
/-statistics are italicised.
Significant at < .01 level. ' Significant at < .05 level. Significant at <.10 level.
EARN.
'J.Jpn.l
is the annual return of firm 7 for the period ending at fiscal year-end;
is the domestic price of firm j at fiscal year end;
is fiscal year earnings per share of firmy reported in Japanese GAAP;
AEARNjjp„, is the change in Japanese GAAP fiscal year earnings;
DEARNj,
ADEARNj,
is U.S. GAAP earnings - Japanese GAAP earnings per share for firm 7;
is the change in DEARN from time t-1 to t for firm 7.
16
observation that yields an /^-student ratio with an absolute value greater than three. The
second to last column in Table 3 indicates the number of available observations for each
sample period and the last column reports the number of observations entering the regres-
sion after excluding those with large /?-student ratios. We use White's (1980) covari-
ance-matrix estimator in all regressions to adjust for heteroscedasticity.
Coefficients on earnings levels (aj) and change in earnings (a2) determined with Japa-
nese- GAAP are positive and significant for the full sample, for the last five years of the
sample, and for most of the individual-year sub-samples. Coefficients on differences
between U.S. -GAAP and Japanese-GAAP earnings (a3|) or change in difference in earn-
ings (OC32) are significant at the .01 level for the second five year sub-sample and for a few
U.S.-GAAP and Japanese Companies
599
Table 4. Results for Price-to-Book Regressions for Aggregate Differences between
U.S. and Japanese GAAP Measures for Experiemental Sample:^ 1983-1992
f3o
Pr
^21
P22
Adj. F^
N
hf
Panel A:
Japanese GAAP Measure of Book Value:
1983-92
1.677***
12.580***
-0.240
7.160***
0.188
253
251
12.862
5.508
-0.931
3.081
1983-87
1.594***
11.577***
0.013
5.083**
0.164
121
120
9.017
4.149
0.042
2.140
1988-92
1.496***
17.607***
-0.900**
14.487***
0.279
132
131
7.575
5.356
-2.339
3.382
1983-84
1.278***
12.194***
0.275
9.353
0.221
34
33
3.946
3.012
0.i6i
1.417
1985
1.497***
5.959
0.182
6.510**
0.251
30
29
4.811
1.466
0.298
2.509
1986
1.122***
21.275***
-0.997
0.587
0.212
29
28
4.025
3.992
-7.650
0.195
1987
1.446***
23.714**
-1.073**
14.601*
0.351
28
28
3.035
2.144
-2.138
1.930
1988
2.593***
7.081
-0.019
15.057
0.075
24
24
4.437
0.735
-aoi6
1.633
1989
2.544***
4.375
-0.537
26.571***
0.350
24
23
9.684
1.013
-0.924
5.510
1990
1.227***
19.815***
-1.173
21.480***
0.534
26
25
4.774
3.392
-1.580
3.362
1991
1.344***
15.154**
-0.236
4.700
0.213
29
29
3.265
2.281
-0.4i0
0.730
1992
0.830***
19.325***
-0.170
0.032
0.641
29
28
9.389
9.000
-0.657
0.018
Qo
e.
^21
Q22
Adj. P^
N
N#
Pi./BVi^u.sj = ^0 + ^iEARN,jp,yBV,u.s
,j + Q2lDBVj
/BV,u.s.,t +
^22 DEARNj
./BVj.u.s.,
t + e jt
Panel B:
U.S. GAAP Measure of Book Value:
1983-92
1.682***
11.574***
-1.102***
4.200*
0.884
253
251
4.494
5.424
-5.207
1.753
1983-87
1.595***
11.577***
0.013
5.826**
0.164
121
120
9.022
4.149
0.041
2.453
1988-92
1.550***
16.842***
-2.858***
17.524***
0.388
132
129
9.882
5.540
-8.211
4.843
1983-84
1.244***
11.622***
-1.220***
14.114**
0. 1 30
34
33
4.394
i.i4S
-3.024
2.288
1985
1.353***
7.439**
-0.819
5.273***
0.190
30
29
5.298
2.220
-1.624
2.749
1986
0.895***
26.430***
-1.932*
1.344
0.336
29
29
2.948
4.025
-1.909
0.371
1987
1.289***
26.715**
-2.196***
12.531*
0.419
28
28
2.881
2.417
-4.845
1.942
1988
2.156***
8.721
-2.150**
25.505***
0.345
24
23
3.825
0.8S,*?
-2.iSS
4.123
1989
l.lQi"*
2.125
-2.717***
22.071***
0.572
24
23
10.953
0.401
-4.038
4.966
1990
1.262***
21.142***
-3.206***
22.766***
0.531
26
25
5.057
3.711
-4.6.^6
J. 742
(continued)
600 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No, 5, 1 998
Table 4. (Continued)
1991 1.665**' 9.959** -1.119*** -0.262 0.995 29 29
6.111 2.247 -8.819 -0.041
1992 0.840*** 18.416*** -0.818** -0.715 0.649 29 28
10.167 8.390 -2.305 -0.332
Notes: 'Sample firms are Japanese firms that prepare U.S. GAAP financial statements.
N is the number of observations available for each regression.
A'* is the number of observ ations that enter each regression after removing those with /f-studenl scores>l3l.
/-statistics are italicised.
Significant at < .01 level. Significant at < .05 level. Significant at <.I0 level.
Pj, is the domestic price of firm 7 at fiscal year end;
BVjjp„, is book value per share of shareholders' equity of firm j at time t in Japanese GAAP.
BVj (y 5 , is book value per share of shareholders' equity of firmy at time t in U.S. GAAP.
EARNjjp,,, is fiscal year earnings per share of firmy reported in Japanese GAAP;
EARNj u^, is U.S. GAAP earnings per share for firm 7;
DEARNj, = EARNji^s.t - E'^^^pp,,.,-
DBVj, =BVjc:s,,'-BVj.Jp,u.
of the individual years. For the full sample, however, coefficients on the differences are not
significant.
Price-to-book Analysis
We report results for the regression analysis using aggregate differences between U.S.
and Japanese measures in Table 4. Panel A reports results with the price-to-book ratio mea-
sured in Japanese-GAAP. The adjusted /?" is . 1 88 for the full sample and coefficients on
both ROE (Pi) and difference in earnings (P22) measures are positive and significant at the
.01 level. These results generally hold for many of the sub-samples, including 1983-1987.
Thus, it appears that incorporating U.S. -GAAP practices in earnings reflects a measure-
ment of ROE closer to that used by the market.
The coefficient P21 is not positive for any sample period and is significant and negative
for the 1988-1992 and the 1987 sub-samples. These results taken alone, provide mixed
support for U.S. -GAAP measures of BV being more closely aligned with price than Japa-
nese-GAAP measures.
We also define the price-to-book ratio in terms of U.S. -GAAP to distinguish the effects
of future profitability and implicit measurement differences of Japanese-GAAP. Results
for regressions using U.S.-GAAP shareholders' equity to determine price-to-book ratios
are reported in panel B of Table 4. The adjusted R~ is .884 for the full sample and all coef-
ficients on earnings and book-value measures are significantly different from zero.
The coefficient Q\ is smaller than Pi (reported in Panel A) for the full sample, the 1988-
1992 sub-sample, and for four of nine annual subsamples. This is consistent with
U.S.-GAAP shareholders' equity reducing the measurement error component in Japa-
nese-GAAP book-value.
Significant negative coefficients for the difference in BV variable (621) suggest that Jap-
I 8
anese-GAAP measures of book value are value-relevant beyond U.S.-GAAP measures.
The nonzero coefficient, 622, for the full sample and for most sub-samples, suggests earn-
ings determined under U.S.-GAAP provides value-relevant information beyond that con-
U.S. -GAAP and Japanese Companies 601
tained in differences between shareholders' equity. Overall, these results suggest that
adjusting book-value to comply with U.S. -GAAP captures value-relevant information
beyond that contained in Japanese-GAAP. The stronger results for the price-to-book tests
than for the returns analysis could be due to a small impact of accounting differences on
earnings compared with their impact on book- value in which differences accumulate over
time. It is also possible that measurement differences are value-relevant regarding price
levels that have less effect on price changes.
Additional Analysis
We compare AHV's results for a sample that is mostly European with our results on Jap-
anese companies. AHV find mixed support for the value-relevance of earnings reconcilia-
tions. We also find mixed support (Table 3) for U.S. -GAAP earnings providing incremental
value-relevant data. AHV's results provide support for the value-relevance of differences
in book value of stockholders' equity. Our results also support an hypothesis that
U.S. -GAAP book-value measures provide value-relevant data (Table 4, Panels A, and B).
AHV find no support for the hypothesis that earnings differences explain the
price-to-book ratio. Our results, however, support the hypothesis that earnings differences
explain the price-to-book ratio. U.S. -GAAP earnings in our sample are higher than Japa-
nese-GAAP earnings. The reverse is true in AHV's sample. The standard deviation of
earnings differences is smaller in our sample (.018) than in AHV's sample (.12). An inter-
pretation of these contrasting results is that the differences between Japanese-GAAP earn-
ings and U.S. -GAAP earnings provide more precise value-relevant disclosures for
explaining the price to book ratio than the differences between a cross-section of various
domestic-GAAPs and U.S. -GAAP. The AHV sample consists of firms from 20 countries.
Value relevance is likely to differ by country. Treating sample companies as if earnings
result from the same protocol is likely to result in greater measurement error.
It is possible that firms that choose to list their shares in the U.S. or otherwise choose to
report U.S.-GAAP data may be substantially different than other Japanese companies. We
examine a separate sample of 244 observations from twenty-nine Japanese firms matched
to our sample on SIC code to shed some light on whether firms in our sample are represen-
tative of other Japanese companies.
Experimental firms are significantly larger than firms in the control sample. For the
experimental (control) sample, mean unconsolidated sales is ¥3.45 trillion (¥1.13 trillion)
and mean unconsolidated total assets is ¥1.97 trillion (¥1.10 trillion). ^^ The correlation of
consolidated with unconsolidated sales for both groups is greater than .989. The correlation
of consolidated with unconsolidated income is also high for both groups, .70 for the exper-
imental group and .86 for the control group. These high correlation coefficients support, to
an extent, our joint test for differences across GAAPs and entities. Experimental and con-
trol firms also have similar international sales characteristics. A comparison of mean
export ratios of the experimental (33%) and control (29%) samples yields an insignificant
r-test /?- value of .49.
We estimate models relating price (returns) to earnings for both groups. A comparison of
coefficients (not reported) provides some evidence that the two groups behavior is similar
for the period 1988-1992 but dissimilar for the 1983-1987 period.
602 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33. No. 5, 1998
CONCLUDING COMMENTS
We use aggregate differences in U.S.-GAAP and Japanese-GAAP accounting measures to
evaluate the value-relevance of U.S.-GAAP reports. Our results are of interest for several
reasons. We show data provided in U.S.-GAAP financial statements of Japanese firms is
value-relevant beyond that contained in domestic-GAAP statements. Our results comple-
ment AHV and support the proposition that both SEC reporting methods (reconciliations
or full U.S.-GAAP reports) provide value-relevant data such that a firm's choice might be
predicated on local custom or other factors. We also provide evidence on a significant por-
tion of transnational firms that elect to provide U.S.-GAAP statements rather than recon-
ciliations. Moreover, understanding the value-relevance of data from Japanese firms is
important in its own right because of the major role these firms play in international mar-
kets.
The stronger results for book- value measures raise the possibility that value-relevance
studies that rely on earnings measures only may reach different conclusions. In summary,
our findings provide additional evidence to support the implied SEC hypothesis that
U.S.-GAAP data has value-relevance beyond domestic-GAAP data. It is possible, how-
ever, that similar value-relevant data could be reconstructed from other data available in a
firm's home country.
Acknowledgments: We thank participants at the congress of The European Accounting Association
and the annual meeting of the American Accounting Association for their helpful comments.
NOTES
1 . Five of the worlds ten largest public companies are Japanese. Two of these provide U.S.-GAAP
statements (WSJ, 1994). In addition, eighty-four of the 528 SEC registrants provided
U.S.-GAAP statements in 1993 (SEC, 1993a).
2. Neither AHV's nor our methodology precludes the possibility that U.S.-GAAP earnings and
equity are redundant to other information available in the market.
3. This arrangement between domesdc and U.S. banks and trust companies is commonly termed an
ADR facility.
4. As of August 1994, 996 firms hold the I2g3-2(b) exemption (SEC. 1994b).
5. As of July 1994, 625 foreign firms are subject to SEC registration and reporting requirements
(SEC. 1994a).
6. The five countries with the most SEC reporting registrants (U.S.-GAAP statement preparers)
are: Canada, 291 (22); United Kingdom. 53 (2); Israel, 36 (3); Japan, 19 (19); and Australia, 19
(1) (SEC, 1993a). Because Canadian and U.S. practices are similar, we would expect the
value-relevance of the differences between the two countries to be minimal.
7. AHV examine 467 observations representing 101 firms in 20 countries.
8. The ADR Universe (Bankers Trust. 1 993) lists 1 55 ADRs for Japanese firms traded in U.S. mar-
kets. Ten ADRs trade on the NYSE, fifteen trade on NASDAQ, and the remainder trade OTC or
in the "pink sheets."
9. The exemption from registration is provided a foreign issuer that submits information about
which investors ought to be informed and which the issuer makes public in its country of domi-
cile, files with stock exchanges, or distributes to shareholders.
U.S. -GAAP and Japanese Companies 603
10. On October 6, 1983, the SEC revised Rule 12g3-2(b) by terminating availability of the exemp-
tion rule for certain foreign issuers with securities traded on an automated inter-dealer quotation
system (which includes NASDAQ). Securities of non-Canadian issuers then in compliance
were grandfathered indefinitely.
1 1. AHV base their approach on Easton and Harris (1991), Ohlson (1989), and Ball and Brown
(1968).
12. We estimate returns-earnings associations for 12-month windows ending from one to six
months after the fiscal year-end for the sub-sample of firms that are SEC registrants. The results
(not reported) are qualitatively equivalent to those reported.
13. This could also explain why some firms provide U.S. -GAAP data without being required by the
SEC to do so.
14. See Bernard, Merton, and Palepu (1992) and Easton, Eddey, and Harris (1993) for a discussion
of this argument.
15. We combined the five observations from 1983 with twenty-nine 1984 observations.
16. See Belsley, Kuh, and Welsch (1980) for a discussion about measurement and investigation of
influential observations.
17. We also estimate a model (not reported) which includes both Japanese and U.S. earnings levels
and changes to consider relative versus incremental value-relevance of the two measures. For
the full sample, neither Japanese nor U.S. levels are significant. Earnings changes are signifi-
cant for both GAAPs. The results are otherwise similar to Table 3 for subperiods.
1 8. The variable DBV/BV^s equals 1 -{BVjp^BVus, )
19. Unconsolidated data are the only common items available for firms in both groups.
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Accounting Research (Spring): 19-36.
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WTiiie. H. 1980. "A Heteroscedasticity-Consistent Covariance Matrix Estimator and a Direct Test for
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The International
Journal of
Accounting
The Impact of Corporate Attributes on
the Extent of Mandatory Disclosure and
Reporting by Listed Companies in Zimbabwe
Stephen Owusu-Ansah
King Fahd University of Petroleum & Minerals
Key \\rjrds: Zimbabwe, MandatcHy disclosuie, Financial lepoilii^ Amual lepnt, Corpoate
atmbmes. Disclosure index
Abstract: This article reports the results of an atqfirical aivestigaiior --- - -- -— - — - ^-
eight corporate attributes on the extent cf mandatory disclosure and - -
nies in Zimbabwe. Using a disclosure index vihich consisted of 214 '
the extent cf mandatory disclosure by each sample company was q.
other data spec^ to each sample company to test the relational hypotheses. Although several
alternative specifications of rradmaiiate regression models Mere develop^ and .-",-,--( g^.
the results of a robust regression analysis which indicated that company size, ov. rure,
cemtpany age, multiiuuioTud corporation affiliation, and -
positive effect on mandatory disclosure and reporting r
reported The quality of external audit, industry-type and iiquuiity were s:^:
This article reports the results of an empirical investigation of the impact of some corpo-
raie-sp)ecific attributes on the extent of mandaton disclosure and reporting by Zimbabwe
Stock Exchange (ZSE) listed companies.^ The corporate attributes whose effects on man-
daton disclosure were in\ estigated are company size, quality of external audiL ownership
structure of issued equit>' shares. t)pe of industn.". company age. multinational corporation
(MXC) affiliation, profitability, and liquidit>. The importance of theorizing and testing
empirically for the effects of these corporate attributes on mandators disclosure practices
of the listed companies in Zimbabw e is to suggest areas where efforts to improve the dis-
closure regulators regime in that countn. should be concentrated. Tlie results of a robust
regression analysis suggest that compan> size, ownership structure, company age. MNC
Direct ail correspor.cence to: Stephen Ow-iisu-.\iisah. E>epartmeni of .\ccou::r"r -V V!r: l"'^ S'.Trer^.?. C"">;e
of Industrial ManagemenL King Fabd Universit> of Petroleum <£ Minerals. F . ;l
-\rabia; Tel: + 966 (>3 1 S60-4:S5 5:0S; Fax: + 966 0(3 'S6(V>i-S9: E-Mail: -, _
The Internationa] Journal of Accounting. Vol. 33. No. 5. pp. 605-631 ISSN: Ixl2l^-"|K^3.
.\1I rights of reproduction in any form reserved. CopjTight I 1998 Lruversitj of Illinob
606 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
affiliation, and profitability have positive statistically significant influence on the extent of
mandatory disclosure and reporting by the sample companies.
Cerf ( 1961 ) pioneered the study of the corporate-specific attributes which determines the
extent of disclosure. Measuring disclosure by an index of 31 information items considered
to be important or desirable by financial analysts in their investment decision making. Cerf
(1961) concluded that financial reporting practices of many US companies need improve-
ment. Cerf (1961) also observed that significant differences in disclosure appeared to be a
function of a variety of corporate-specific attributes including asset size, number of share-
holders, and profitability. Following Cerf s (1961) path-paving study, several researchers
have replicated his methodology with or without modification (e.g., Singhvi & Desai,
1971:Buzby, 1974; Firth. 1979; Wallace, 1988; Cooke. 1989a; Tai et al., 1990; Wallace et
al., 1994; Patton & Zelenka. 1997). The present study extends this field of study to compa-
nies listed on the ZSE.
The remainder of the article is structured in the following manner. The first section
examines the statutory and the institutional factors affecting financial accounting and
reporting of the private sector companies in Zimbabwe. It also describes some characteris-
tics and the role of the institutions involved in the regulatory process. The second describes
how the extent of disclosure in annual report of each sample company was captured. The
third section develops the relational hypotheses tested in this study. The fourth section is a
description of the sampling method and the statistical tests employed on the data. This sec-
tion also describes how the corporate attributes were operationally defined and measured.
The fifth section reports and discusses the results of the statistical analyses undertaken.
This section also evaluates the regression estimation procedures employed in this study.
The final section presents the conclusions, possible policy implications of the results, lim-
itations of the research design, and suggestions for future research.
REGULATION OF FINANCIAL ACCOUNTING AND REPORTING IN ZIMBABWE
Corporate financial accounting and reporting by public companies in Zimbabwe is influ-
enced by the Companies Act, 1952 (Chapter 190), and the pronouncement of the profes-
sional accountancy body which are, essentially. International Accounting Standards (lASs)
that are adopted by the Institute of Chartered Accountants of Zimbabwe (ICAZ). Public
listed companies are also required by the ZSE to comply with its listing rules on financial
disclosure and reporting. Generally, the financial accounting and reporting requirements of
these regulatory sources are similar to those in the UK. The similarity with the UK as
explained below, arises from the close historical and economic links between the two coun-
tries, the close cultural links of the accounting profession in Zimbabwe to the profession in
the UK, and the similarities between UK financial accounting standards and the lASs
adopted by the ICAZ.
The Legal Framework
Like many Commonwealth countries, Zimbabwe modelled its companies law on that of
the UK's 1948 Companies Act. The Zimbabwean Companies Act, primarily concerned
with the protection of existing and potential investors and creditors of companies with lim-
Impact of Corporate Attributes 607
ited liability status, sets out the general framework for financial accounting and reporting
by those companies. The Act. however, stipulates only the basic minimum requirements of
financial accounting and reporting. Since these financial accounting and reporting rules are
limited both in coverage and in detail, they are supplemented by the prouncencements of
the ICAZ, many of which are wholesale adoptions of lASs. The Act requires companies
registered under it to keep accounting records which sufficiently and accurately explain
their financial position and performance. Specifically, every company is required to keep
proper books of accounts regarding its assets and habilities. sales and purchases, all sums
received and expended and the matters in respect of which the receipts and expenditures
took place. The financial statements which must be prepared on regular basis in accordance
with the disclosure requirements prescribed in the Se\enth Schedule to the Act must also
give a true and fair view of the operations and the state of affairs of the reporting company.
Every company registered in Zimbabwe is legally required to appoint an independent
external auditor. The auditor is required to make a report to members of a company on the
accounts examined. The auditor's report should be attached to a company's accounts
signed by, at least, two directors and sent to all persons entitled to attend a company's
AGM 14 days before the date of such meeting. The Act obliges directors of every company
registered in Zimbabwe to publish audited annual accounts within 6 months (i.e., 24
weeks) following its financial year-end. Private companies, under certain conditions are.
however, exempted from the requirement to have their accounts audited.
The Accountancy Profession in Zimbabwe
The accountancy profession in Zimbabwe is regulated by the Accountants Act (Chap-
ter 215) through the ICAZ. Under the Act. the ICAZ is a statutory body run by a Coun-
cil of 15 members, two of whom are appointed by the Minister of Justice. Legal and
Parliamentary Affairs. Members of the Council are elected on the basis of geographical
representation. The Council is primarily responsible for the establishment, adoption and
publication of financial accounting standards, and the supervision of their application
throughout the country. As of March 1995. the ICAZ has 1.300 members and 500 stu-
dents. About half of the members are resident outside Zimbabwe, and about one-third
of those resident in Zimbabwe are working in public practice. There are several other
accountants in the country who have qualified with some of the UK's professional
accountancy bodies. However, only members of the ICAZ may legally describe them-
selves as public accountants or auditors in Zimbabwe. Legislation is currently under-
way to recognize other accounting professional qualifications for audit purposes in the
country'. The work of public accounting firms in Zimbabwe consists primarily of audit-
ing, accounting, tax. and management advisory services. All the international Big Five
audit firms are represented in the countr>'. The ICAZ is a member of some interna-
tional accounting bodies including the International Federation of Accountants and the
International Accounting Standards Committee (lASC). It also has representation on
several other local bodies including the Consultative Committee of Accountancy and
Secretarial Bodies of Zimbabwe. Public Accountants and Auditors Board of Zimbabwe,
and the Securities and Exchange Consultative Committee.
608 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
The Zimbabwe Stock Exchange
The ZSE was first established in Bulawayo in 1896, but ceased operations in 1924 due
to a slowdown in the country's mining industry on which the stock market was so heavily
dependent. A second stock exchange was established in Salisbury (now Harare) in 1951,
though dealings in securities started five years earlier. The present stock exchange was
established by the Rhodesia Stock Exchange Act (No. 27) of 1973. The stock exchange
places a continuing periodic reporting obligation on public companies listed on the
Exchange. Listed companies are obliged to report any relevant, material information nec-
essary to enable present and potential investors to appraise their financial position and per-
formance. The listing rules of the ZSE require that annual published accounts disclose
certain information in addition to those required by the Companies Act and the pronounce-
ments of the ICAZ. The stock exchange also has a general requirement of timely reporting.
Listed companies are required to send to their shareholders audited accounts at least 21
days before their AGM (i.e., within 21 weeks after financial year-end). In addition, three
copies of the said accounts should be submitted to the stock exchange 22 days before the
AGM.
The ICAZ monitors corporate financial accounting and reporting compliance in Zimba-
bwe. Like the US Securities and Exchange Commission (SEC), the ICAZ employs a
review method in monitoring and enforcing compliance with statutory and regulatory dis-
closure requirements. However, while the US SEC uses a more rigid, prosecution-oriented
approach to enforcement of disclosure regulations, the ICAZ uses a more flexible and
co-operative approach (see Owusu- Ansah [ 1 998] for the literature on regulatory enforce-
ment models). The primary purposes of ICAZ's monitoring of corporate annual reports
include: (1) to ascertain the extent to which they comply with Zimbabwe's financial
accounting standards; and (2) to encourage compliance with those standards as far as prac-
ticable. Unlike the UK's Financial Reporting Review Panel, the ICAZ does not compel
instant corrective action such as the publication of a revised set of accounts. It must be
pointed out, however, that the primary concern of the ICAZ is to ensure compliance with
Zimbabwe financial accounting standards. Nevertheless, it has a secondary obligation to
see to full compliance with all relevant disclosure provisions of the Companies Act, and the
disclosure requirements of the ZSE.
MANDATORY DISCLOSURE AND ITS MEASUREMENT
Disclosure is the communication of economic information, whether financial or non-finan-
cial, quantitative or otherwise concerning a company's financial position and performance.
It is described as mandatory' if companies are obliged under a disclosure regulatory regime
to disclose insofar as they are applicable to them.
Disclosure implies the presentation of a minimum amount of information in corporate
reports, sufficient to permit a reasonable evaluation of the relative merits and risks of listed
securities (Griffin & Williams, 1960; Belkaoui, 1985). In this study, the disclosure of
applicable mandated information items is the minimum standard of disclosure that regula-
tory bodies in Zimbabwe expect of the sample companies. Conceptually, disclosure of
information in corporate financial reports is considered "adequate" if it is relevant to the
Impact of Corporate Attributes 609
needs of users, capable of fulfilling those needs, and timely released (Buzby, 1974; Wal-
lace, 1987). In other words, adequate disclosure in a corporate financial report is a function
of the quantity and quality of information disclosed therein, the form in which they are pre-
sented, and how frequent and timely they are publicly reported. This study, however,
focuses only on an aspect of adequate disclosure — the extent to which mandated applicable
information items is presented in annual reports of the sampled companies. Adequate dis-
closure is, thus, operationalised as the number of mandated applicable information items
that a listed company discloses, and the degree of intensity by which it discloses those
items in its annual report.
To facilitate the quantification of the adequacy of mandatory disclosure practices of the
sample companies, a disclosure measuring instrument (index) was developed and used.
The measuring instrument consists of 32 disclosure items from the three regulatory sources
in Zimbabwe (i.e., the adopted lASs, the Companies Act, and the listing rules of the ZSE).
However, to capture the intensity of the disclosure of these items, they were disaggregated
into 214 sub-items. Content validity of the instrument was tested with the help of two
senior partners of two Big Five international audit firms operating in Zimbabwe. The vali-
dated instrument was applied to the annual report of each sample company, and the appli-
cable mandated items disclosed therein numerically scored on a dichotomous basis. That
is, a mandated item is scored one, if disclosed, or zero if not disclosed. These scores were
then aggregated to constitute the actual mandatory disclosure score for each sample com-
pany. To ensure rehability of the scoring instrument, a UK certified accountant was asked
to score 1 2 of the sample companies (representing about 25 per cent of the total sample
size). The results from the independent scores were compared with my own scores. The
results suggest that I was in substantial agreement with the independent scorer; indicating
minimal subjectivity in scoring the mandatory disclosures in the annual reports of the sam-
ple companies (Pearson product-moment correlation coefficient = 0.728, /;-value = 0.004).
To avoid a situation where a sample company will be penalized for non-disclosure of
certain mandated items in the index which, in fact, are inapplicable to it, a relative index
was used (Babbie, 1994, p. 172). The relative index is the ratio of what the reporting com-
pany actually disclose to what the company is expected to disclose under a regulatory
regime. The relative index approach has been used in prior studies (e.g., Wallace, 1988;
Cooke, 1989a, Wallace et al., 1994; Inchausti, 1997).
The information items in the index were not weighted (i.e., equal weighting system was
used) for two reasons. First, unweighted index obviates the necessity of making judge-
ments as to the relative importance of each information item. Research shows that individ-
uals (even experts) have poor insight into their own judgement process (see, e.g. Slovic,
1969; Ashton, 1974). Finally, it permits an independent analysis devoid of the perceptions
of a particular annual report user group. This study does not focus on the interest of any
particular annual report user group. In addition to the above reasons, the differential
weighting system is beset by several problems which are well documented in the literature
(see, e.g., Firer & Meth, 1986; Dhaliwal, 1980; Owusu-Ansah, 1998). Quite apart from
that, in one earlier study it was demonstrated that the equal weighting system is superior to
the differential weighting system (Einhom & Hogarth, 1975).
To determine whether or not the absence of a mandated information item from an annual
report is a case of non-disclosure, I took several measures to minimize the subjectivity
problem involved. First, because public companies are required by law to disclose compar-
610 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
ative figures for each information item, current figures of each item were compared with
that of the previous year. For instance, a dash in front of an item under the column showing
current year's figures (i.e., 1994 in this study) suggests inapplicability of that item to a
sample company in that reporting period. As in Buzby ( 1974), an item applicable to a spe-
cific sample company is defined as whether or not the item is disclosed in the annual
reports of that company. Second, following a suggestion by Cooke (1989a), I read the
entire annual report of each sample company twice. The first reading was just before each
sampled annual report was scored to familiarize me with the circumstances of each com-
pany and to enable me to form opinion as to whether an undisclosed item was, in fact, inap-
plicable to that company. The second reading which was after an annual report has been
scored ensured that the scoring has been consistent and any mistake rectified before the
scores were totalled.
CORPORATE AHRIBUTES AFFECTING MANDATORY DISCLOSURE PRACTICES
The corporate financial reporting literature suggests that several corporate attributes influ-
ence the extent to which listed companies comply with mandatory disclosure requirements
of the stock exchange on which they are listed (see, e.g., Ahmed and Nichols, 1994; Wal-
lace & Naser, 1995). However, attributes are selected for study if they meet all of the fol-
lowing five conditions. First, the attribute should be likely to associate with mandatory
disclosure either on a priori assumption or on theoretical consideration. Second, it should
be easily measured for the purpose of statistical analysis. Third, the attribute should be able
to facilitate the classification of the sample companies into sub-samples without ambiguity,
if it is categorical in nature. Fourth, data should be available on that corporate attribute.
Finally, the attribute should be relevant to the socio-economic environment of Zimbabwe.
The selected corporate attributes are: company size, quality of external audit, ownership
structure of issued equity shares, type of industry, company age, MNC affiliation, profit-
ability, and liquidity. The expected partial effect of each of the eight corporate attributes on
mandatory disclosure is theorized below.
Company Size
Economic theory, intuition and empirical evidence suggest that size of a company is
likely to positively influence its mandatory disclosure practices. Due to possible economies
of scale in the production and storage of information, large companies tend to allocate rel-
atively greater amount of resources to the production of information (Stigler, 1961;
Alchian, 1969). Generally, large companies tend to be multi-product business entities;
operating over wider geographical areas with several divisional units. Consequently, cen-
tral managements of such companies will require internal information system which will
enable them to make operational and strategic decisions concerning the divisions, and to
ensure that the divisions are performing adequately in pursuit of overall corporate objec-
tives. Since there is an information system already existing for mass production and circu-
lation of data for internal purposes in large companies, the incremental cost of supplying
non-proprietary data to the public is likely to be minimal (Dye, 1985, 1986, 1990). The
general expectation that the costs of production tend to decrease as company size increases
Impact of Corporate Attributes 61 1
underlie much consideration regarding the extent to which small companies are expected
to comply with disclosure rules.
Second, as Buzby (1975) argues disclosure in great detail puts small companies in com-
petitive disadvantage with their large counterparts in the industry." This suggests that the
opportunity cost of mandatory disclosure may be higher for small companies than for large
companies. They may, therefore, disclose less information than large companies.
The third factor which relates to the above is the direct cost of complying with disclosure
requirements. Since gathering, generating, and disseminating of data are costly activities,
small companies may not be able to afford such costs from their resource base. Salamon &
Dhaliwal (1980) present evidence suggesting that the direct cost of complying with the US
SEC's 10-K filing requirements is relatively higher for small companies than for large
companies. Hence, smaller companies may disclose less than their larger counterparts.
Fourth, it has been established that increased disclosure by a company reduces its cost of
capital (Choi, 1973; Elliott & Jacobson, 1994), and since large companies rely more
heavily on the securities market for external financing of their operations than smaller
companies (Shapiro & Wolf, 1972; cited in Salamon & Dhaliwal, 1980, p. 559), it follows
that large companies are more likely to have extensive disclosure than small companies.
Indeed, using experience survey and focused interview approaches, Gibbins et al. (1990)
found that the frequency with which companies issue securities influences their disclosure
policies. Finally, empirical evidence confirms the hypothesized positive relationship
between company size and disclosure (Cerf, 1961; Singhvi & Desai, 1971; Firth, 1979;
Wallace, 1988; Cooke, 1989a, 1989b; Wallace et al., 1994; Inchausti, 1997).
Company size is measured by both total assets and market values of equity shares of
sample company. The two size variables were logarithmically (base 10) transformed as
their distributions were positively skewed.
Quality of External Audit
It is suggested that external auditors play a major role in the disclosure policies and prac-
tices of their clients. Specifically, the analyses by Benston (1980) and DeAngelo (1981a)
indicate that audit quality is influenced by the size of the external auditing firm. DeAngelo
(1981a), for instance, argues that the value of an external audit depends on how users per-
ceive auditors' report in corporate annual report. The perception is formed on the basis of
users' understanding of both the auditor's ability to discover a material error (auditors'
technical capabilities), and the auditor's willingness to properly report the error (auditors'
independence). She contends further that holding technical capabilities for all independent
audit firms constant, large independent audit firms are more likely to lose when not report-
ing a mis-statement or an error. DeAngelo (1981b) and Fama & Jensen (1983b) suggest
two reasons why large independent audit firms have a competitive advantage over small
independent audit firms in reporting mis-statement and non-compliance with mandatory
reporting rules. First, since large independent audit firms have many clients, their eco-
nomic dependency on a particular client is minimal. Thus, large independent audit firms
have greater incentives to maintain independence from their clients. Hence, they are more
likely to report any mis-statement and errors, and to ensure compliance by their clients with
statutory and regulatory reporting rules than small independent audit firms. The results of
612 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
the statistical tests of a recent study by Raghunathan et al. (1994) confirm this hypothesized
relationship.
In addition, large independent audit firms have more to lose than small audit firms in
terms of damages to their reputation. Consider the following example: if an independent
auditor succumbs to the pressures of a particular client and it is discovered later, the value
of that auditor's services to other existing clients would be reduced. This may lead to
demands by the existing (and prospective) clients for lower fees or change of auditors. This
is because users of corporate annual reports would heavily discount annual reports certified
by that auditor to reflect the reduced value of its services. It follows that the more clients
an auditor has, the greater the losses from damages to its reputation. Consequently, large
independent audit firms have greater incentives to resist client pressures for lax application
of auditing and accounting standards. Another plausible factor may be that large audit
firms have greater potential exposure to legal liability. This is because external auditors are
liable for losses arising out of fraudulent or misleading certified annual reports. In addition,
large audit firms tend to have more collective wealth among their partners. Since investors
are more likely to rely on annual reports certified by large audit firms, and to sue for neg-
ligence or misconduct on the part of the audit firm, large audit firms have greater incentives
to conduct their audit with due diligence.
Furthermore, the findings from Wright's (1983) study also corroborate this hypothesis.
Wright presents evidence on auditors' differential preference to disclosure. He studied the
disclosure attitudes of various-sized independent audit firms and found significant differ-
ences in preferences. While large independent audit firms favor adjustment, small firms
favor footnote disclosure. This implies that large audit firms are more inclined to adhere to
statutory and regulatory rules than small audit firms as an adjustment is more likely to
affect prior, current or the next financial year's transaction, while footnote disclosure
affects only the current year. Finally, positive relationship between disclosure and the qual-
ity of external audit has been reported by several studies (Cerf, 1961; Singhvi & Desai,
1971; Patton & Zelenka, 1997).
Because audit quality is not directly observable and difficult to measure empirically, like
several other researchers, I used size of audit firm as a proxy (Cerf, 1961; Singhvi, 1968;
Singhvi & Desai, 1971; Tai et al., 1990; Wallace et al., 1994; Patton & Zelovka, 1997).
However, I derived a Big Two (large) and non-Big Two (small) audit firm classification
using concentration ratios derived from the market for audit services in Zimbabwe as the
original derivation of Big Six audit firms in the UK and the US is not relevant in the case
of Zimbabwe. A concentration ratio is defined as the extent to which a market is dominated
by a few large suppliers. Although the dichotomization of audit firms used in this study dif-
fers from the prevailing practice in the literature, it is not without precedent. Singhvi (1968)
and Lee (1994) derived and used concentration ratios arising from a study of the audit ser-
vices market in India and Hong Kong respectively. A sample company audited by a Big
Two audit firm is represented by a dummy of one and zero if otherwise.
Ownership Structure
It is assumed that a wider dispersion of share ownership of a company is associated with
it's compliance with mandatory disclosure rules. This proposition is explained in terms of
Impact of Corporate Attributes 61 3
positive (agency) theory of accounting because modem companies are characterized by a
separation of ownership and control. This arrangement for corporate control generates
agency costs resulting from conflicting interests between management and owners and
across classes of owners (Jensen & Meckling, 1976; Fama & Jensen, 1983a). Agency costs
tend to be higher for companies with a widespread public ownership of securities, there-
fore, shareholders of such companies press for more adequate information for monitoring
purposes (Watts, 1977).
The complementary view asserts that professional managers of such companies have
greater incentives to engage in bonding activities to reassure shareholders that they will be
acting in their (shareholders') interest. The provision of adequate information to sharehold-
ers through the annual report is one element of bonding activities (Jensen & Meckling,
1976; Watts, 1977). Since management probably already produces much of the desired
information for internal decision making purposes, the marginal cost of making this infor-
mation available to outside users is likely to be lower than for other alternatives. Hence, the
tendency for a company with greater number of public individuals on its share register
(high agency costs) to adequately disclose information in its annual report is likely to be
high.
In contrast, however, in countries where the state (e.g., China), banks (e.g., Germany and
Japan) or certain families (e.g.. Hong Kong) have substantial equity holdings or where
equity ownership is highly concentrated, there is generally little or no physical separation
between those who own, and those who manage the capital (Wallace, 1987, 1993; Wallace
& Nasar, 1995; Cooke, 1992, 1993; Kaplan, 1990). In such cases, capital owners have
greater access to internal information of the company, and may not have to rely, to a greater
extent, on public disclosure to monitor their investments. Thus, demand for adequate dis-
closure and reporting is generally low in such situations.
There does exist, however, a contrary view to the explanations offered by agency theo-
rists outlined above. Zeckhauser & Pound (1990) argue that dispersed individual share-
holders are not a formidable influence on corporate outcomes including disclosure policies
and practices, even if the net benefits are great enough to provide significant incentives to
become informed. Their argument implies that where share ownership is more widely-dis-
persed, individual public shareholders do not have the same bargaining power vis-a-vis the
company to access internal information of the company. It follows that the claim and the
presumed empirical observation that companies with dispersed ownership have superior
disclosure is suspect.
The share ownership structure is defined as the proportion of the voting shares of a sam-
ple company owned directly and/or indirectly by corporate insiders. Proportion of out-
standing equity share capital held by relatives of management and/or board members is
described by the Zimbabwean Companies Act as indirectly (non-beneficial) held by them,
and is required to be disclosed in the audit annual report of the company concerned.
Industry-type
Following Sprouse's (1967) suggestion that accounting policies and techniques may
vary by industry, I speculate that mandatory disclosure practices of companies are not
likely to be the same across different industries. There are several reasons for this specula-
61 4 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
tion. First, certain industries are highly regulated due to their overall contribution toward a
country's export earnings or national income. They may, therefore, be subject to more rig-
orous controls. It is possible that the regulation may affect the disclosure and reporting
practices of the companies in this industry. Second, companies in certain industries may
have difficulties in reporting adequately due to the nature of work involved. For instance,
companies in the oil industry are known to have serious problems in accounting for and
reporting depreciation, depletion and exploration of oil wells. Finally, disclosure differen-
tial may also be associated with the type of product line or the diversity of products of the
companies in an economy. These specific industrial characteristics (or patterns) may man-
ifest themselves in different ways. A consumer-product company may be particularly con-
cerned with its public image and, as such, may tend to comply with all mandatory rules.
Similarly, a company that deals in multi-products may have more information to share than
one with a small line of products.
The association between industry-type and mandatory disclosure is partially supported
by empirical evidence. Stanga (1976) and Fekrat et al. (1996) found industry-type to be a
significant factor accounting for the differences in the disclosure levels of the companies in
their sample.
A sample company's industry is defined as the main economic activity in which it
derives its revenue. The annual reports of the sampled companies were examined for
the detailed information about their principal economic activities. Four broad indus-
tries were identified, namely, conglomerate, mining, manufacturing and others. The
"others" category consists of companies engaged in agricultural, transport, communica-
tion, retailing and hoteling businesses. A sample company, for instance, is classified
as conglomerate if it derives its revenue from more than one economic activity irre-
spective of the proportional contribution of one principal economic activity to its
annual total revenue. The industry variable is coded as follows: Indus 1 = one for "oth-
ers" and zero otherwise; Indus2 = one for mining and zero otherwise; lndus3 = one
for manufacturing and zero otherwise; and Indus4 = one for conglomerates and zero
otherwise.
Company Age
The extent of a company's mandatory disclosure may be influenced by its age (stage
of development and growth). Older, well-established companies are likely to disclose
much more information in their annual reports than younger companies. There are
three factors that may contribute to this phenomenon. First, younger companies may
suffer competitive disadvantage if they disclose certain items such as information on
research expenditure, capital expenditure, and product development. The competitive
disadvantage would arise when the information disclosed by the newly-established com-
panies are used to their detriment by the other competitors. On the other hand, older
companies may naturally be motivated to disclose such information as their presenta-
tion may not hurt their competitive position. Second, the cost and the ease of gathering,
processing, and disseminating the required information may be a contributory factor.
These costs are likely to be more onerous for younger companies than for their older
counterparts. Finally, younger companies may lack a "track record" to rely on for pub-
Impact of Corporate Attributes 615
lie disclosure. This is explained by the fact that some companies are formed through
acquisition or merger of existing companies, while others are formed from scratch.
Companies formed from scratch would not have any past operating histories of their
own. Such new companies may have less incentive to disclose more information. The
company age variable is measured on six monthly basis since flotation date to the finan-
cial year ending in 1994.
MNC Affiliation
It is assumed that the extent of a company's mandatory disclosure is influenced by its
affiliation with a recognized MNC. First, because of MNCs' direct financial investment in
their affiliates (subsidiaries and associates) in emerging economies, the former tend to
demand a greater amount of information than is required by local regulations from the lat-
ter to evaluate their performance, and prospects.
Second, the political costs of affiliates of MNCs are relatively high. The perfor-
mance, behavior, and consequences of the operations of MNCs and their local affiliates
are frequently monitored, evaluated, and analyzed by international governmental agen-
cies such as the United Nations and host governments to serve as a basis for policy for-
mulation. This is partly explained by the important economic role MNCs play in the
development of their host countries and in the world trade. The relatively high level of
local economic activities under the control of foreign MNCs has led to political pres-
sure for the social control of these entities, and their local affiliates in emerging econo-
mies. In fact, some regard MNCs as sources of exploitation and agents of western
imperialism (Kobrin, 1978, p. 240). The control of the local activities of these MNCs is
partly also due to the alleged frequent abuse of corporate power by a few MNCs. Sev-
eral MNCs have been accused, by their host countries, of tax avoidance (through trans-
fer pricing), tax evasion, circumventing exchange controls, and discriminatory
practices. To improve their bargaining powers with their host countries, MNCs tend to
require detailed information on the operations of their affiliates. Also, because of high
political costs, MNCs are more likely to insist on full compliance with all statutory and
regulatory requirements of the host countries by their affiliates.
Finally, foreign direct investments by MNCs are often accompanied by technology
transfer, including the accounting and disclosure practices at home, to their affiliates in
emerging economies. This transplantation of foreign technology has enabled local affili-
ates to adopt more advanced systems relative to other local companies that are not so
affiliated. As a consequence, these affiliates are likely to have more sophisticated finan-
cial reporting systems that facilitate greater disclosure in their annual reports than other
local non-affiliated companies.
A sample company is considered to be affiliated to a recognized MNC if one of the
following criteria is satisfied: (1) more than 50 per cent of its outstanding equity shares
is owned by a recognized MNC, or (2) a MNC has a significant influence on its finan-
cial and operating policies (see lASC [1995] for several ways by which significance
influence is exercised). A sample company is assigned a numeric value of one if any of
the above criteria applies and zero if otherwise.
616 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
Profitability
Profitability has been identified, in prior studies, as capable of influencing the extent to
which companies disclose mandatory information items in their annual reports (Cerf, 1961;
Singhvi, 1968; Singhvi & Desai, 1971; Wallace & Naser, 1995; Inchausti, 1997). Several
arguments have been advanced to support this proposition. For example, Cerf (1961) sug-
gested that profitability is a measure of management performance, and as such the manage-
ment of a profitable company is likely more to disclose information to support the
continuance of their positions and the performance-related compensatory schemes that
may be due to them. Inchausti (1997), employing signalling theory, states that management
when in possession of "good news" due to better performance are more likely to disclose
more detailed information to the stock market than that provided by "bad news" companies
to avoid undervaluation of their shares. It can also be argued that unprofitable companies
will also be inclined to release more information in defence of poor performance. Indeed,
Lang & Lundholm (1993, p. 250) note that the influence of a company's profitability level
on disclosure can be positive, neutral or negative depending on its performance.
Profitability is measured in two ways to capture different dimensions of profitabil-
ity— operational efficiency (by return on turnover) and overall performance (by return
on capital employed) of the reporting company.
Liquidity
It is hypothesized that a company's liquidity level impacts on its mandatory disclosure
practices. According to Wallace & Naser (1995), regulatory bodies as well as investors and
lenders are particularly concerned with the going-concern status of companies. In view of
this, companies that are able to meet their short-term financial obligations without a
recourse to the liquidation of their assets-in-place may desire to make this known through
disclosure in their annual reports (Belkaoui & Kahl, 1978).
A sample company's liquidity position is measured by quick (acid test) ratio as it is a
more stringent measure of corporate liquidity. It is defined as the ratio of current assets less
stock to current liabilities. Using the conventional benchmark for acid-test ratio of one,
companies in the sample whose computed acid-test ratio is at least one are assigned a
numeric value of one and zero if otherwise.
METHODOLOGY AND RESEARCH DESIGN
Sampling Method
Due to the relatively small number of companies on the Official List of the ZSE, I con-
tacted the entire population by post for a copy of their audited annual reports for the finan-
cial year ending in 1994. The request for the 1994 corporate annual reports was influenced
by two factors. First, they were the most recent data available on the listed companies at the
start of the study. Second, 1994 was more stable than the previous two years. Zimbabwe
experienced a severe drought in 1992 which adversely affected its entire micro- and
macro-economic structures. The Zimbabwe economy showed signs of recovery during the
Impact of Corporate Attributes 617
Table 1. Summary of Sample Selection Criteria
No. of Percentage of
Description listed companies tlie total population
Companies with equity shares on Official List
of the market as at 3 1 December 1 994 Mi) 100.00
Companies on the Official List that responded to my
request for their 1 994 annual reports 56.0 87.50
Deduct:
Companies that listed in the last quarter of 1994 2.0 3.10
Companies in the banking, insurance, and other
financial services industry 53. 7.81
Companies with usable data (that is, the sample size) 49.0 76.56
latter half of 1993. Since compliance with legal and regulatory requirements entails costs,
it was assumed that the listed companies may adopt selective disclosure strategy during
1992 and 1993. The use of a selective disclosure strategy would arise when compliance
with reporting requirements will expose corporate reporters to adverse consequences. In
such a situation, any attempt to capture disclosure adequacy in corporate annual reports
will not be representative of the normal practice.
After a follow-up letter, 56 of the 64 listed companies responded to the request for their
annual reports. Some of the responding 56 companies were de-selected on the following
basis. First, companies which were listed on the ZSE less than a year were eliminated. This
was based on an assumption that the full impact of the disclosure requirements of the stock
exchange on the financial reporting practices of listed companies can only be assessed real-
istically if they had been listed on the market for more than a year. On the basis of this
assumption, two companies which listed on the ZSE in 1994 were eliminated. The second
criterion was the elimination of companies registered under the Banking Act (Chapter 188)
because such companies are exempt from complying with certain accounting requirements
of Part I of the Companies Act. Hence, to ensure uniformity in financial reporting, five of
these companies were de-selected. The resulting final sample consists of 49 companies, 43
(86 percent) of which are from the industrial sector of the ZSE, while the remaining six (14
percent) are from the mining sector. Although the sample is drawn entirely from ZSE listed
companies, it is a true representation of the population of non-financial companies in Zim-
babwe. Table 1 reports the sample design.
Model Development
A linear regression model which is assumed to hold for each sample company is speci-
fied below:
MDSj = a+ (3,5/-;^.+ P2/Im(///^.+ ^^Holcl-+ ^^Indus-
+ P^Agfy -I- ^f^Multi- + ^-jProfitj + ^^Liquid- + U-
See Table 2 for summary definition of variables.
61!
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
Table 2. Summary Statistics of Variables, Proxies and Notations in the Regression Model
Variable
Proxy of
Notation in
Standard
investigated
variable
model
Mean
deviation
Mandatory disclosure Relative disclosure score
MDS,
74.43
4.96
Company size
Log of capitalised equity values
Size,i
5.463
0.466
Log of total assets
Size^-2
5.419
0.443
Audit quality
Concentration ratio
Audity
0.531
0.504
Ownership structure
Proportion of outstanding equity
shares held by corporate insiders
Holdy
6.699
15.388
Industry type
Principal economic activity(ies)
Indus,
1.918
1.038
Company age
Half-yearly since flotation date
to December 1 994
Age^
51.143
28.827
MNC affiliation
Either ownership of more than
half of the share capital or the
presence of significant influence
Multiy
0.306
0.466
Profitability
Returns on turnover
Profityi
16.584
9.336
Return on capital employed
Profity2
9.380
7.401
Liquidity
Acid-test ratio
Liquid^
0.388
0.492
EMPIRICAL RESULTS AND DISCUSSION
Table 3 summarizes the cross-sectional regression parameters of the four alternative spec-
ifications of equation ( 1 ) referred to hereafter as Models A, B, C, and D.
Since this study is concerned with the partial effect of each of the corporate attributes on
the extent of mandatory disclosure and reporting, I tested for the presence and the nature of
collinearity. if any, before any formal estimation of equation (1) was done by computing
pair-wise correlation, tolerances (Panel B of Table 4) and variance (Panel C of Table 4) infla-
tion factors (VIFs) for each corporate attribute. The pair- wise correlations are reported in
Panel A of Table 4. Only the correlation coefficient of the two empirical indicants of com-
pany size (i.e., log market values of equity and log total assets) is greater than the threshold
level of 0.80. Consequently, these indicants were not simultaneously included in any of the
models. Though the sign of the coefficient and the associated observed significant level of
the company size variable were the same, no matter which empirical indicant was used, it
was measured by log total assets in all the regression models in Table 3.
Only one of the empirical indicants of the profitability variable (i.e., return on capital
employed) was also included in the models reported in Table 3 for three reasons. First, the
correlation coefficient of the two measures of profitability was significant, though it was
below the threshold level of 0.80. Second, the inclusion of the two measures in any model
renders the sign of the coefficient of the profitability variable negative, but not when
included individually. Finally, the profitability variable becomes a significant predictor of
mandatory disclosure whenever it is measured by return on capital employed.
Model A
Model A is a simple ordinary least squares (OLS) regression equation run with all
the corporate attributes included. As was also indicated by the results of a univariate
Impact of Corporate Attributes
619
Table 3.
The Partial Effects of Corporate Attributes on Mandatory Disclosure (f values in parentheses)
Variable investigated
Expected effect
Model
on mandatory
disclosure
A
B
C
D
?
60.755***
4.672
55.130***
54.227***
(6.205)
(1.236)
(6.784)
(5.296)
+
1 .340
0.040
3.404**
3.059*
(0.792)
(0.875)
(2.298)
(1.720)
+
-0.119
0.163
0.331
0.096
(-0.082)
(0.128)
(0.287)
(0.063)
-
0.073
0.081
0.082**
0.093*
(1.484)
(1.546)
(2.143)
(1.814)
?
-0.567
-0.472
-1.416**
-1.039
(-0.787)
(-0.760)
(-2.352)
(-1.371)
+
0.056**
0.133**
0.061**
0.057**
(2.281)
(2.361)
(3.016)
(2.235)
+
2.452
2.870**
3.569*
3.424**
(1.541)
(1.983)
(2.767)
(2.047)
7
0.843
0.009
0.067
0.259**
(0.825)
(0.196)
(0.625)
(2.412)
+
1.311
1.250
0.447
0.633
(0.875)
(0.970)
(0.362)
(0.402)
0.052
0.045
0.345
n/r
1.326
1.284
3.830***
2.420**
933.77
681.32
482.00
n/r
49.00
49.00
44.00
49.00
48.00
48.00
43.00
n/r
Intercept
Company size
Audit quality
Ownership structure
Industry-type'
Company age
MNC affiliation
Profitability
Liquidity
Adjusted /^-squared
F statistic
Sum squares of error
Number of observations
Degrees of freedom
Notes: * Significant at the 0.1 level.
** Significant at the 0.05 level.
*** Significant at the 0.01 level.
? indicates that the nature of the effect of the corporate attribute on the extent of mandatory disclosure, as far as
Zimbabwe is concerned, is not known.
n/r indicates that the statistic is not reported by the estimation procedure.
^Using the "others'" industry category (Indus! ) as a reference, in all the models, a hypothesis that the industry
dummies are jointly zero was rejected by a Wald test. However, there appears to be is no evidence that mandatory
disclosure is industry-related. Also, except for between the coefficients for Indus3 (manufacturing) and Indus4
(conglomerate) which was significant (f-statistic = 5.42, p-value = 0.0253); the differences between the
coefficients for the rest of the industry-type dummies were not significant.
analysis not reported here, mandatory disclosure is an increasing function of only one
corporate attribute, company age. Although the impact of company age on mandatory
disclosure measured by its regression coefficient is not strong, it is significant at the
0.05 level. The /-statistics of the remaining corporate attributes are insignificant, indicat-
ing that they have negligible effect on mandatory disclosure practices of the sample
companies.
I subject Model A to several diagnostic tests. A hypothesis that the model has no omitted
variables was rejected by a Ramsey RESET test (F = 0.68, /7-value = 0.572). Also, a
Cook-Weisberg test for heteroscedasticity rejected a hypothesis that the regression residu-
als have constant variance {X = 1.61, /7-value = 0.205). Further, a Cook's distance test
revealed that five companies (observations) in the sample exert disproportionate influence
on the model's coefficients.
620
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
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Impact of Corporate Attributes 621
Two ways have been suggested in the econometrics hterature (see, e.g., Bollen & Jack-
man, 1990; Kassab, 1990) to mitigate the effects of influential observations on regression
statistics. The first is to estimate a rank regression which assigns "equal weight to all
points" in a data set whether it is influential or not (Iman & Conover, 1979, p. 502). The
second is to remove the influential observations from the data set. To address the problem
of outliers, the next two models were estimated based on the above suggested procedures.
Model B
Model B is a rank (OLS) regression which treats all observations equally in the data set
whether it is influential or not. Rank regression has been estimated in several prior studies
(see, e.g., Lang & Lundholm, 1993; Wallace et al., 1994; Wallace & Naser, 1995). Model
B was estimated with rank transformation of the MDSs of the sample companies and four
corporate attributes measured on continuous scale (i.e., company size, ownership structure,
company age, and profitability). The raw (untransformed) data on the empirical indicants
of these corporate attributes and the MDSs were assigned ranks; ordered from smallest to
largest. The regression was run with these ranks plus those corporate attributes measured
on interval scale (i.e., external audit quality, industry-type, MNC affiliation and liquidity).
While the F statistic of Model B which tests the hypothesis that none of the corporate
attributes helps to explain the variation in mandatory disclosure indexes is not significant
at the conventional levels (p- value = 0.279), an examination of the regression statistics for
the individual corporate attributes suggests otherwise. For instance, company age emerges
again as the most significant predictor of the extent of mandatory disclosure at the 0.05
level. The MNC affiliation variable, for the first, also became significant at the 0.10 level.
The consequence of the variable, MNC affiliation, becoming a significant predictor of
mandatory disclosure is the intercept losing its significance. The intercept also experienced
a drastic change in the numerical value of its coefficient (now having only a moderate
effect), though, it is still positive. While rank regression is considered "robust" in mitigat-
ing many of the methodological problems associated with skewed distribution and nega-
tive values (Kane & Meade, 1997), Wallace et al. (1994) noted, however, that rank
transformation compromises the significance of the resulting model. Indeed, this is evident
in Table 3. The explanatory power of Model B is relatively weaker than those of Models A
andC.
Model C
As noted earlier, another means of overcoming the effect of influential observations is to
remove those observations from the data set. Model C which is also an OLS was estimated
after those influential observations have been removed from the data set. The results of this
model suggest that five of the corporate attributes have statistically significant effect on
mandatory disclosure. While company age and MNC affiliation have a positive significant
effect on mandatory disclosure at the 0.01 level, company size and ownership structure of
issued equity shares have a positive significant effect at the 0.05 level. Also, the indus-
try-type variable, for the first time, became significant at 0.05 level but still have a negative
622 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
effect on mandatory disclosure. Further, like the other models the intercept of Model C is
also positively significant at the 0.01 level.
In spite of the relatively good performance of Model C, the data-removal procedure has
been criticized in the econometrics literature (see Dietz et al., 1987; Bollen & Jackman,
1990; Kassab, 1990). For instance, Bollen & Jackman (1990) argued that the data-removal
procedure is misleading and a severe remedy because an observation that is an outlier in
one setting may not be an outlier in another. Kassab (1990) also added that deleting outliers
identified by univariate diagnostic tests such as stem-and-leaf plot is not effective as they
do not detect multivariate outliers (i.e., those observations appearing as oudiers when two
or more variables are viewed in combination).
Another problem of the data-removal procedure is that it reduces sample size which may
not be advisable if the sample size is small, as in this study. Quite apart from these, identi-
fying the outliers is not enough. The presence of outliers in a distribution merely suggests
that the sample is not from a normal distribution; it does not tell whether the distribution is
skewed or long-tailed symmetric. In view of this problem and the fact that theoretical
advantages of OLS estimates can not be claimed for the estimates of Models A, B and C as
my data is outlier-prone, I employed an estimator which is more "robust" than the OLS to
departures from normality. This estimation procedure is now discussed.
Model D
Model D is a robust regression. Estimates of robust regression are substantially better
than those of OLS in non-ideal (e.g., if residuals are not normally distributed) situations
(Kassab, 1990). Several robust estimators have been suggested in the econometrics litera-
ture including least absolute deviations, bounded influence estimator, least median of
squares, biweight least squares (BLS) and Huber estimator (the procedures are described in
Dietz et al., 1991, pp. 464-466 and 474). Both the Huber and the BLS robust estimators
were employed in analyzing the data of this study. The rationale is that the Huber estimator
improves the behavior of the BLS estimates (Stata Corporation, 1997). Huber estimator is
limited in dealing with effects of severe outliers which BLS is able to resist fairly, but
sometimes fail to converge to zero or have multiple solutions (Li, 1985; Dietz et al., 1987;
Dietz et al., 1991; Stata Corporation, 1997).
The Huber and the BLS estimators are iterative techniques which assign weights to
observations. The weights are based on absolute residuals associated with each observation
on a previous iteration (Stata Corporation, 1997). The Huber estimator assigns observa-
tions with small residuals with weights of one, and those with larger residuals receive
smaller weights. In the case of BLS, however, observations with non-zero residuals are
down-weighted, but those with larger residuals are assigned zero weights and thus effec-
tively dropped. The regression is run iteratively until the maximum changes in weights
converge to zero (Li, 1985). The results of this estimation procedure (Model D), also
reported in Table 3, suggest that company size, ownership structure, company age, MNC
affiliation, profitability, and the intercept have statistically significant effect on the extent
of mandatory disclosure, but at different levels. However, while the intercept is very sig-
nificant at the 0.01 level, company age, MNC affiliation and profitability are significant at
the 0.05; and company size and ownership structure are significant at 0.10 level.
Impact of Corporate Attributes
623
Because sampling properties of robust estimators are not known in small samples (Dietz
et al, 1987; Dietz et al., 1991 ; Stata Corporation, 1997), and the sample size of this study is
small I employed a non-parametric bootstrap procedure, as suggested in the econometric
literature, to assess the sampling variability of robust estimators of Model D (i.e., to re-esti-
mate the standard errors of the coefficients of Model D). Bootstrapping provides a means
of estimating standard errors and obtaining confidence intervals for true parameter values
when distributional assumptions of the population are untenable. Mechanically, the boot-
strap procedure works as follows: For a sample ofn size, a bootstrap sample of /: size is ran-
domly drawn from the original sample with replacement. The regression coefficients are
estimated using this bootstrap sample. A second bootstrap sample of k size is then drawn
from the original sample, and the process is repeated (called a replication) until enough
bootstrap samples have been drawn to provide estimates of the standard error of the param-
eters of interest. Some observations may not be selected at all in the process, while others
may appear more than once (Efron, 1982; Rasmussen, 1987).
Complementing the robust regression with the bootstrap procedure provides efficient
and unbiased parameter estimates and unbiased estimates of standard errors (Dietz et al.,
1987). Thus, robust and bootstrap estimation procedures, when used together, resolve the
problem of non-normal residuals. The regression estimates of Model D reported in Table 5
are based on 100 bootstrap replications. The bias in sample estimates of the regression
coefficients because of the outliers are also reported in Table 5. Efron (1982, p. 8) suggests
that the estimated bias should not be of concern if it is less than 25 per cent of the associated
standard error. He suggests further that the bias-corrected confidence interval should be
reported instead, if the estimated bias is more the 25 per cent threshold. All the estimated
bias shown in Table 5 except those for MNC affiliation and profitability are below 25 per
cent of the associated standard errors. Hence, the reported confidence intervals for these
two corporate attributes are bias-corrected. The confidence intervals for the other six cor-
porate attributes are based on the assumption of approximate normality of the sampling
(and hence bootstrap) distribution.
The assumption of normal distribution of regression residuals makes it possible to eval-
uate the statistical significance of the effect of each of the corporate attributes on the extent
of mandatory disclosure as reflected by Model D. Consequently, a normality test was done
Table 5. Bootstrapped estimates of Model D
Corporate
Observed
Percentage
Confidence
attribute
BLS
Standard
bias of
interval
investigated
coefficient
error
Bias
standard error
(5 percent
level)
Company Size
3.059
3.206
-0.337
10.51
-3.303
-9.421
Audit quality
0.096
2.017
0.067
3.32
-3.907
-4.098
Ownership structure
0.093
0.061
-0.002
3.28
-0.028
-0.214
Industry-type
-1.039
1.325
0.003
0.23
-3.670
-1.591
Company age
0.057
0.034
-0.005
14.71
-0.009
-0.124
MNC affiliation
3.424
2.662
-0.716
26.90
-2.617
-8.603'^
Profitabilty
0.259
0.255
-0.146
57.25
-0.282
-0.492^^
Liquidity
0.633
2.257
0.133
5.89
-3.846
-5.112
Note:
Suggests a bias-corrected confidence interval, as the estimated bias is more than 25 percent of the standard error (Efron.
1982).
624
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
1.00
0.75 -
E
3
^ 0.50
0.25 -
0.00 -[
0.00 0.25 0.50 0.75
Empirical P[i] = i/(N+1)
Figure 1. Normal probability plot of regression studentised residuals of IVIodel D
1.00
on the studentized residuals of Model D. A visual inspection of the normal probability plot
of studentized residuals of Model D in Figure 1 suggests that its error term is fairly nor-
mally distributed as the data points cluster around the straight line.
The result of the positive effect of company size on mandatory disclosure, though signif-
icant at the 0.10 level, suggests that large companies are better in disclosing mandated
information as their competitive advantage will not be weakened by such disclosure as it
might be for small companies. In addition, large Zimbabwean companies that are affiliated
with MNCs tend to have access to modem technology and are more capable of producing
information that are less costly than non-MNC affiliated Zimbabwean companies. Hence,
the tendency for such companies to disclose more information in their annual reports is
more likely in Zimbabwe. The positive relationship between company size and mandatory
disclosure is consistent with the results of similar studies conducted on some emerging
economies such as in Hong Kong (Wallace & Naser, 1995); and in Bangladesh (Ahmed &
Nicholls, 1994).
The positive effect of MNC affiliation on mandatory disclosure can be attributed to the
insistence of head offices of MNCs for high quality information from their local affiliates
in Zimbabwe. Apart from the use of this information for internal purposes, the headquar-
ters of MNCs use such information to strengthen their bargaining power in negotiations
with trade unions and host governments. Of particular relevance here is the fact that the
President of the Republic of Zimbabwe is well noted for his position on the ill-effects of
imperialism and activities of MNCs on developing countries' economies and other issues
in international politics. In view of this, MNCs with affiliates in Zimbabwe insist on full
Impact of Corporate Attributes 625
compliance with that country's statutory and regulatory requirements as a means of avoid-
ing or reducing political costs.
The finding that ownership structure is positively related to mandatory disclosure is
inconsistent with agency theory. In the context of disclosure studies, this theory suggests
that companies whose equity shares are predominately held by insiders tend to disclose less
information in their annual reports. The positive relationship between ownership structure
and mandatory disclosure, reported in this study, questions the general assumption that in
countries where either the state (e.g., China), banks (e.g., Germany and Japan) or certain
families (e.g.. Hong Kong) hold greater proportion of corporate voting shares, there is a
tendency for companies to disclose less information in their annual reports and accounts
(Wallace, 1987, 1993; Wallace & Naser, 1995; Cooke, 1992, 1993; Kaplan, 1997). Per-
haps, the implications of the agency theory for disclosure relate more to voluntary disclo-
sure than to mandatory disclosure.
Although the impact of company age on mandatory disclosure is not strong, it is signifi-
cant at the 0.05 level. The positive impact of company age on mandatory disclosure can be
explained in terms of the principles of learning curve. It takes newly-listed companies
longer time to become used to the demands of being public companies including their
external financial accounting and reporting responsibilities. In other words, a company's
disclosure score increases over time as it becomes used to being a public listed company.
The superiority of the older listed companies on the ZSE in disclosure practices can also be
attributed to their long association with corporate managers of some UK companies.
Indeed, most of these older companies in Zimbabwe were once managed by UK expatriates
in that country before the country's independence in 1980. In spite of the above reasons,
the hypothesised relationship was, however, not supported in Henderson (1969).
Similarly, the positive effect of profitability on mandatory disclosure is consistent with
signalling theory which, when applied in the present context, suggests that managers of
profitable companies are more likely to disclose more information in their annual reports
to justify their salaries (Singhvi & Desai, 1971), and to signal their superior performance
to the market (Wallace et al., 1994). The significant positive relationship between profit-
ability and mandatory disclosure is consistent with the results reported in Wallace et al.
(1994).
The finding that audit quality is not a significant predictor of the extent of mandatory dis-
closure in Zimbabwe agrees with those of Singhvi (1968) for India; Tai et al. (1990) for
Hong Kong; Cooke (1992) for Japan; and Wallace et al. (1994) for Spain. Similarly, the
finding that industry-type is not a significant discriminator agrees with those of Patton &
Zelenka (1997) in the Czech Republic. Finally, the irrelevance of liquidity as an explana-
tory variable in Zimbabwe agrees with the finding of Wallace & Naser' s (1995) in Hong
Kong.
CONCLUSIONS, LIMITATIONS AND SUGGESTIONS FOR FUTURE RESEARCH
This article reports the results of an empirical study in which the impact of eight corpo-
rate attributes on mandatory disclosure was investigated by employing alternative speci-
fications of a multiple linear regression. The results of the robust regression analysis
indicate that each corporate attribute has a differing impact on mandatory disclosure.
626 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
While company age, profitability, and MNC affiliation were positively significant at
the 0.05 level, company size and ownership structure were also positively significant at
the level of 0.10. On the extreme, whereas the intercept is significant at 0.01 level,
audit quality, industry-type and liquidity were not significant at any of the three crite-
rion levels. In sum, company age, MNC affiliation, company size, MNC affiliation,
profitability, company size, and ownership structure have significant positive impact on
mandatory disclosure practices of the sampled ZSE listed companies. The results sug-
gest that the regulators of financial accounting and reporting in Zimbabwe should focus
more on newly-listed, small, loss-making, non-affiliated and closely-held companies in
their effort to ensure adequate supply of mandated information in corporate annual
reports in Zimbabwe.
There are several limitations of this study. First, the subjectivity problem inherent in
scoring the annual reports of the sample companies may not be completely eradicated.
There are unavoidable subjectivity in the scoring process. Second, each disclosure item
was assumed to have the same information content. Thus, a disclosed mandated infor-
mation item was awarded one mark and zero for a non-disclosure. In the real life, some
information items may have higher value to users of corporate annual reports than oth-
ers, and as such the items should have been weighted to reflect their relative impor-
tance. Third, regression analysis does not resolve issues of causality. Consequently, the
coefficients of the significant corporate attributes in the Model D should not be taken
as elasticities that predict how much mandatory disclosure will change following a
change in any of those attributes. The estimated coefficients of these attributes and
their associated t statistics rather evaluate the strengths of their partial effects on manda-
tory disclosure. Finally, while statistical analysis helps to determine the nature and the
magnitude of the impact of the significant corporate attributes on mandatory disclosure,
it tells nothing of the reason for such relationship.
Notwithstanding the above limitations, the results are sufficiently interesting to war-
rant an extension to a larger sample size, and of course, to other emerging economies.
Another approach that could be adopted in any future research is to model the relation-
ships between corporate attributes and mandatory disclosure as non-linear. The relation-
ship between specific corporate attributes and mandatory disclosure may not always be
linear as generally assumed in the literature. Ramanathan (1995, p. 253) has stated that
the linear relationship usually assumed to subsist between dependent and independent
variables in regression models is "a severe and often unrealistic constraint on a model."
Finally, a number of potential independent variables were not considered in this study.
A potentially important variable that could possibly be included in the model is the eth-
nicity of corporate managers of the sampled companies. This is because Zimbabwe con-
sists of three main ethnic groups — the native blacks, the immigrant Europeans and
Asians. The support for investigating the effect of ethnicity of corporate managers on
mandatory disclosure is provided by Singhvi (1968) and Wallace & Naser (1995). For
instance, Wallace & Naser (1995) found significant differences in disclosure compre-
hensiveness between Chinese and non-Chinese managed companies in Hong Kong.
Future research studies may also investigate the effects of, say, the establishment (or
otherwise) of corporate audit committees and gearing on mandatory disclosure.
Impact of Corporate Attributes 627
NOTES
1. The literature is comprehensively reviewed elsewhere (see Owusu-Ansah, 1998).
2. Stevenson (1980, pp. 9-11) provides categories and examples of information, which if dis-
closed, might create competitive disadvantages. They include information about technological
and managerial innovation (for example, production processes, quality-improvement tech-
niques); strategies (planned product development); and about operations (for example, segment
sales and production cost figures).
3. Priebjvirant (1991) presents a contrary evidence in Thailand. His findings do not support the
hypothesized relationship between levels of disclosure and costs of capital as measured by both
beta and total risk.
4. Unlike the US, the UK and several other countries, data on companies listed on the ZSE includ-
ing their annual reports are not available in magnetic format and databases. Therefore, request-
ing copies of annual reports from the ZSE listed companies was the best and the quickest means
of accessing these important data.
5. A cut-off period of six months, commencing from the month in which the initial request was
made, was imposed after which it was considered that a listed company was not interested in
providing its annual report.
6. Although the correlation procedure is commonly used in empirical studies, it is incapable of
detecting linear relationships among more than two variables. Because of this problem, I also
computed tolerances and variance inflation factors for each of the corporate attributes. The
results (reported in Panels B and C of Table 4) suggest no evidence of serious coUinearity.
7. As suggested by Gujarati ( 1995, p. 335), coUinearity becomes a serious problem if its coeffi-
cient is greater than 0.80. In addition, the correlation between the two indicants of company size
is also significant at the 0.05 level.
8. Unlike Lang & Lundholm (1993) and Wallace & Naser (1995), the ranks in this study were not
converted to percentiles. Because a regression run by the present investigator with ranks and
another with ranks converted to percentiles (not reported here) yielded similar results.
9. The bootstrap procedure offers two advantages over parametric technique in estimating regres-
sion coefficients. First, it does not depend on the distributional assumptions required by para-
metric tests. Second, the bootstrap procedure retains distributional information about the
original sample (Rasmussen, 1987). Unlike other non-parametric techniques which convert raw
data to ranks (see Conover & Inian, 1 98 1 ), the bootstrap procedure does not throw away the dis-
tributional information about the original sample from which the bootstrap sample was drawn.
In spite of these advantages, the bootstrap procedure has several limitations. First, its assump-
tion that "the empirically generated sampling distribution of the bootstrap provides an accurate
estimate of the sampling distribution of the statistic" has not been made clear by its advocates
(Rasmussen, 1987, p. 137). Second, it yields excessively liberal Type I error rates and exces-
sively restricted confidence intervals. Rasmussen (1987) compared the bootstrap and paramet-
ric approaches to estimating confidence intervals and Type I error rates of correlation
coefficients of several samples ranging from 5 to 60. He found that the bootstrap procedure
results in overly liberal Type I error rates and overly confidence intervals than the parametric
technique. Rasmussen (1987) observed further that the bootstrap procedure performs poorly on
both normally-and non normally-distributed data. Third, it is nK)re appropriate for large sample
size due to its asymptotic attribute (see Bickel & Freedman, 1981 for further discussion).
Finally, it requires a highly powered computer to carry out the large number of compulation
involved.
10. The choice of the 100 bootstrap replications was influenced by the suggestion of Mooney and
Duval (1993, p. 1 1) that 50 to 200 replicafions are generally adequate for estimates of standard
628 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
error and thus adequate for normal approximation confidence interval, which are based on the
standard error estimates.
Acknowledgments: This article draws on the analyses in the doctoral thesis I submitted to Middle-
sex University. England. I acknowledge the continual support and suggestions of my thesis adviser,
Professor R. S. Olusegun Wallace. I also appreciate the helpful comments of Professor Donal McK-
illop and Mr. Peter Oyelere on the earlier drafts of the thesis. I am also grateful to Dr. Titus Oshag-
bemi for helpful comments on an earlier draft of this article. I acknowledge the travel grant awarded
by the Wincott Foundation, England for data collection in Harare, Zimbabwe and the logistic support
provided by King Fahd University of Petroleum and Minerals. Dhahron, Saudi Arabia.
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The International
Journal of
Accounting
The State of Accounting in Armenia: A Case
Robert Bloom, Jayne Fuglister, and Mark Myring
John Carroll University, Cleveland State University, and Kent State University
Key Words: Armenia, Chart of accounts. Commonwealth of Independent States, Culture, Eco-
nomic restructuring. Government. International accounting standards. Privatization.
Abstract: Armenia is a third-world country with a marginal economy and no capital markets to
speak of. The government is bureaucratic. Corruption is widespread and secrecy has long been a
tradition in business. Accounting is cash-based and oriented to the stewardship needs of the gov-
ernment. There is no tradition of accounting for management decision making, much less account-
ing for external, non-government users. Education for accounting has essentially been in technical
bookkeeping. Armenia has been attempting to privatize its economy but in order to do so it needs
to restructure its accounting system.
The focus of this case is the accounting system currently prevaihng in Armenia and
reforms necessary to enhance its usefulness for decision making to investors and credi-
tors. Specifically, the purpose of the case is to provide advice on reforming accounting in
Armenia, so enterprises can prepare useful financial reports. Once that task is accom-
plished, Armenian enterprises could attempt to raise funds from external private sources.
With a view towards that end, Armenians need considerable assistance to achieve an
understanding of other accounting systems — their rationale and how to apply them. Semi-
nars by experts from other countries are desirable to teach Armenians private enterprise
accounting.
This case has considerable potential for use in international accounting and accounting
policy courses at both the undergraduate and graduate levels. We assume that students ana-
lyzing this case will have had some exposure to basic concepts of international accounting,
including the Anglo-Saxon, Continental, and Mixed Economy frameworks and perhaps
also to the cultural aspects of accounting systems. If they do not, then the students can read
the articles included in the references in the process of preparing this case. The case can be
used in covering new developments in accounting standard setting in either one or two
class sessions. If two sessions are allocated for the case, then the first session could deal
Direct all correspondence to: Professor Robert Bloom, John Carroll University, University Heights, Cle\eland,
OH. 441 18. E-mail: rbloom@jcu.edu.
The International Journal of Accounting, Vol. 33, No. 5, pp. 633-654 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1998 University of Illinois
634 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
with the various international accounting frameworks and Hofstede's and Gray's cultural
values applied to accounting. The second session could be used for coverage of the case
itself.
The process of reforming accounting is the main issue addressed within this case. The
politics of setting standards is also a principal concern. Students might engage in role-play-
ing in analyzing this case in class — one student could be the Minister of Finance, a second
a consultant from a large accounting firm, a third a representative of the World Bank, a
fourth a representative of the U.S. Agency for International Development, and perhaps a
fifth a potential private investor from abroad.
CASE
The early 1990s was a time of historic change in the former Soviet Union and the Republic
of Armenia. The Communist party was overthrown in 1991, marking the end of the 74 year
old Union of Soviet Socialist Republics and the fall of the Iron Curtain. In 1991, 99 percent
of voters in Armenia participated in a referendum to decide if the former Soviet republic
was to become an independent democratic state. The measure passed overwhelmingly.
Also in 1991, the Supreme Soviet declared Armenia an independent state. The euphoria
surrounding Armenia's independence waned upon realization that transformation to a
democratic republic and economic privatization would be an arduous process.
The smallest of the former Soviet republics, Armenia is a mountainous country built on
volcanic lava. This earthquake-prone republic borders on Georgia to its north; Azerbaijan
east; Iran south; and Turkey west. While Armenia has no direct access to international
waterways, Turkey and Iran do have such access.
Since 1983, Armenia has been engulfed in a dispute with Azerbaijan over land within the
latter country, populated mainly by Armenian Christians who seek to take over the dis-
puted territory. Armenia is also preoccupied with reconstruction of buildings destroyed in
a 1988 earthquake. The earthquake killed an estimated 25,000 people (The Europa World
Year Book 1995, p. 397).
Economic conditions in Armenia have deteriorated significantly in recent years. Gross
domestic product (GDP) has declined substantially, inflation rates have soared, and food
and energy shortages have become widespread. In 1992, Armenia's GDP declined by 52
percent; consumer prices increased by 100 percent in 1991, and 973 percent in 1993 (The
Europa World Year Book 1995, p. 400).
The deterioration of the Armenian economy stems from factors both inside and outside
the republic's borders. Armenia produces less than 1 percent of its energy requirements,
relying on imports from Russia and other republics to supplement its production (The
Europa World Year Book 1995, p. 400). Armenia's single nuclear power plant was closed
in 1988 because of damage sustained in the earthquake. The year 1993 marked the third
consecutive winter that Armenian citizens had been forced to endure cold temperatures,
without heat and light for extended periods of time (The Europa World Year Book 1995, p.
399). In 1989, Azerbaijan imposed an economic blockade on Armenia, curtailing the
source of 90 percent of Armenia's imports from other republics (The Europa World Year
Book 1995, p. 400). A conflict in Georgia has also impeded the import of much needed sup-
plies and fuels. Compounding the deterioration of the economy has been an increase in
Accounting in Armenia 635
immigration. There is considerable inability to adjust in the former Soviet republics, and
Armenia is no exception. In a totalitarian society, people are accustomed to being told what
to do, and have no experience in making decisions and taking responsibility for such deci-
sions. Seven years after the collapse of the Iron Curtain, chaos and poverty prevail in
Armenia even though most of the farmland has been given to the people and industrial
privatization is actively pursued.
Major Models in Financial Reporting
There are three major models of financial reporting world-wide, with considerable vari-
ation among countries in which the models are used: (1) Anglo Saxon; (2) Continental; and
(3) Former Soviet Union and Eastern European.
The Anglo-Saxon model emphasizes investors and creditors in that order as the principal
users of financial reports. This model has been adopted in English-speaking countries.
Fairly sophisticated investors and creditors are the principal users of financial reports.
Emphasis is placed on the application of those reports in the financial decision-making pro-
cess. Significant disclosures are generally furnished in those reports. Additionally,
accounting standards and income tax regulations differ from each other in those countries.
Though common in Europe, the Continental model is not confined to European coun-
tries. Japanese and Brazilian systems, among others, also reflect this model. The main
users of financial reports are bankers, governments, and in some South American countries
wealthy landowners. Emphasis is placed on conveying stewardship information for credit
purposes and for adherence to national economic policies. Accounting standards in the
Continental model have a legalistic bent. The government is usually the principal, if not the
sole, standard setter. Accounting standards and tax regulations are similar or identical.
With the occurrence of hyperinflation, inflation accounting is mandatory in several South
American countries.
Accounting systems in the former republics of the Soviet Union, including Armenia and
other former Warsaw Pact countries in Eastern Europe, reflect a third accounting model.
Today these countries have mixed economies, a combination of socialism and capitalism
in varying degrees. With economies in transition, such countries have accounting frame-
works reflecting the Russian (1966-1991) — emphasizing budgets, fund accounting, and
stewardship with the government as the user — along with the post 1991 Russian — reaching
out to foreign investment and privatization, encouraging the profit motive in business
enterprises. In the Russian (post 1991) [Enthoven, (1992); Enthoven and Sokolov, (1993)]
accounting framework, investors and creditors are the fundamental users of financial
reports.
The Problem in Brief
Based on tradition, Armenia is fixated on a chart of accounts it has used since 1966 from
its Russian (1966-1991) accounting system. The chart of accounts provides for about 1000
different account titles. Fixation pertains to the "form" of accounts, regardless of their
underlying substance. Government bureaucrats, in particular, cannot understand how a
636 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
new accounting system conceivably could operate in their country. Basically, the current
Armenian accounting system possesses the following attributes:
1. Their internal accounting system is oriented toward custodial stewardship rather
than efficiency.
2. Their accounting deals exclusively with historical costs.
3. A system of fund accounting is used.
4. A modified cash basis is used. Revenue is recorded on a cash basis while expenses
are accrued, producing a conservative mismatch in the income statement. Neverthe-
less, it appears that Armenia is attempting to move to an accrual basis.
5. Many transactions involve barter, and are recorded as such (e.g., gold watches for
trade credits in another country). Foreign transactions are denominated in dollars or
handled through barter.
6. The balance sheet is cluttered with accounts from the chart of accounts.
7. The income statement is all too brief.
8. The lower of cost or market is not applied to inventories.
9. Income is most likely overstated from application of FIFO to inventories in a period
of inflation, which has recently been 5 percent a month or 60 percent a year.
10. There is no required accounting or disclosure for hyperinflation.
11. Bad debts are not accounted for.
12. It is not clear how depreciation is measured.
13. There does not appear to be a logical allocation of costs, including factory overhead.
While the need for a major restructuring of the accounting system currently in place in
Armenia is evident to outsiders and a necessary condition to enhance Armenia's ability to
attract foreign investment, the leaders focus on trivial problems. The Ministry of Finance
and the Central Bank appear to be feuding over the chart of accounts — in particular which
accounts to use for which purposes.
So accustomed are Armenians to preparing accounting reports for a totalitarian govern-
ment that they will need considerable persuasion to change their accounting mindset as
well as guidance towards that end. The accounting "profession," to the extent one exists in
Armenia, has had a low status. Traditionally accountants have been viewed as bookkeep-
ers, not decision makers. The functions of accountants have been limited to planning and
taxation by the government. Accounting judgment was not involved or practiced. Account-
ing information has not been used by investors or creditors.
Currently, Armenians are responsible for their own country's economic development,
which virtually mandates foreign investment. If such investment is to occur, a suitable pri-
vate enterprise accounting system with an independent audit has to be set in place.
Privatization is far from reality in Armenia. At this juncture, privatization is more a wish
than a reality. Most transactions still involve the government. Privatization requires
restructuring of the accounting system for the enterprises as well as adoption of Interna-
tional Accounting Standards, other countries' standards, or their own standards. Such
options could be consistent with the use of the chart of accounts. However, Armenians lack
the mindset to envision this. They would be unable to make a proper mapping from the
chart of accounts to the accounting elements. For a new system to be successful, Arme-
nians will have to reform their management accounting to prepare reliable reports for
Accounting in Armenia 637
themselves and external users. The external users have to be clearly defined; for example,
the World Bank (from which they wish to borrow funds), the government, and the overseas
investor.
There have been numerous attempts to aid Armenia in its goal to privatize. Some of the
large grant projects for the Commonwealth of Independent States (CIS) of the former
Soviet Union funded by the Agency for International Development (AID) have been
unsuccessful because they have been premature. However, some of the smaller projects
appear to be more manageable and successful. All too many consultants from abroad have
been traveling to CIS without any significant knowledge of the culture and problems of a
particular country to "advise" the people living there on how to manage their business
enterprises — to the utter disappointment of their hosts. Because consultants from abroad
represent different groups, sometimes the advice they provide is conflicting.
Before presenting the case questions, an important point should be emphasized: Arme-
nia must develop an accounting system to prepare useful financial reports to reflect the
operating performance and financial position of the enterprise. Without such a system,
adoption of International Accounting Standards, its own generally accepted accounting
principles (GAAP), or any other GAAP would be of no value. On the other hand, no mat-
ter how good the accounting system and how generally accepted the accounting princi-
ples, they alone cannot guarantee economic growth. Armenia needs entrepreneurship and
profitable industry.
CASE QUESTIONS
The following questions can be assigned for students to prepare prior to or after coverage
of this case in class. Before responding to most of the questions, students will have to read
outside source material. The references that follow the case questions are suggested read-
ings for the students. Furthermore, students are well advised to use the Internet to obtain
up-to-date information about Armenia.
With respect to question 6 below, we selected France and Germany along with the U.S.
and IAS accounting standards as a likely set of foreign standards from which Armenia may
wish to borrow in formulating its own standards. As a separate handout for the students
besides the case itself, we have provided a comparative analysis of GAAP in the U.S.,
France, Germany, IAS, and Armenia (Russia, 1966-1991) as well as post 1991 Russia.
1. What, specifically, do you think Armenia should do to restructure its accounting sys-
tem? Develop concrete proposals. [See articles by Enthoven (1992), Enthoven,
Sokolovano, & Petrachkov (1992), and Enthoven and Sokolov (1993), in particular.]
2. How can Armenia be described in terms of the culture model set forth by Hofstede
(1980) and the accounting framework developed by Gray (1988)? [See article by
Gray in particular.]
3. To what extent does Armenia's current accounting system reflect its culture? In
your judgement is the influence of the culture appropriate? [See article by Gray in
particular.]
4. Develop a suitable conceptual framework for financial reporting in Armenia. [See
FASB Statements of Financial Accounting Concepts No. 1 and 2 (1978, 1980).]
638 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
5. Compare Armenia's Generally Accepted Accounting Principles from 1966-1991
with Russia's post 1991 Generally Accepted Accounting Principles.
6. Compare Russia's post 1991 Generally Accepted Accounting Principles with its
counterparts in:
a. the U.S.
b. France
c. Germany
d. International Accounting Standards [See the Handout.]
7. Explain what you perceive to be the pros and cons of Armenia adopting IAS, U.K.,
or U.S. standards. [See Schneidman(1997) and Radebaugh and Gray (1997).]
8. Explain what you perceive to be the pros and cons of Armenia adopting accounting
standards from other countries on a selective basis. [See Schneidman (1997) and
Radebaugh and Gray (1997).]
Acknowledgments: We appreciate the comments made by an anonymous reviewer on earlier drafts
of this paper and the encouragement of the editor in revising the draft. Additionally, we are grateful
to Armen Jugurian for his comments on the teaching notes.
APPENDIX: TEACHING NOTES
Question #1
What, specifically, do you think Armenia should do to restructure its accounting system ?
Develop concrete proposals.
We suggest the following course of action. Look to other developing countries for their
experiences in much the same situation and to observe how they coped with similar cir-
cumstances (e.g., Poland, Vietnam). Consult with representatives from developed coun-
tries (e.g., U.S., U.K., for their expertise).
Armenia ought to sponsor seminars for the "accountants'" they currently employ, focus-
ing on the importance of private enterprise accounting and professionalism. How business
accounting can serve Armenia in improving the management of the enterprise and in priva-
tizing the economy ought to be stressed in these seminars, which should be conducted by a
coordinated group of professional and academic accountants from abroad who are familiar
with the culture of the countr>' and its current needs. Before Armenia can adopt interna-
tional accounting standards or standards from other countries, accountants and governmen-
tal officials need to understand the role of such standards in business decision making.
Investors and creditors from other countries will not finance Armenian enterprises unless
they expect to receive relevant and reliable financial statements pertaining to the perfor-
mance of those enterprises.
Once Armenians have achieved an understanding of the role of accounting standards in
business, they can then turn their attention to formulating a conceptual framework and
deciding upon the standards to adopt for their country — either international accounting
Accounting in Armenia 639
standards, standards of another country such as the U.K., selected standards from several
different countries, or their own, tailor-made standards.
After Armenia has selected their preferred accounting standards, additional seminars
will be necessary to teach accountants how to apply those standards. Again, accountants
from other countries, if coordinated, can assist in this endeavor.
Additionally, Armenian accountants have to understand the importance of independent
auditing and ethics in financial reporting and to concentrate on facilitating development of
their own auditing profession. For financial reports to be reliable for investors and credi-
tors, they must be independently audited. Seminars on internal and external auditing and
how to develop an auditing profession are also necessary.
International accounting firms have been establishing offices in various CIS. Such firms
can provide sorely needed accounting, consulting, and auditing services to CIS govern-
ments and enterprises, assist in the implementation of new accounting standards, and help
in privatization of the economy.
We would expect Fulbright scholars from the U.S. to teach at CIS universities, particu-
larly in Armenia. By the same token, university students from Armenia should have greater
opportunities to study abroad, e.g., at American universities, and to return to their own
countries with a better understanding of business enterprises and their accounting.
Given the tradition of CIS, the accounting profession will not develop in those countries
on its own over night. A more likely scenario would be for the governments to encourage
the profession to grow through uniform education, testing, and licensing of professional
accountants. Governments can also sponsor continuing education programs for profes-
sional accountants.
Question #2
How can Armenia he described in terms of the culture model set forth by Hofstede (1980)
and the accounting framework developed by Gray (1988)7
Hofstede asserts five cultural values derived from a survey of employee attitudes from
50 countries:
1 . Individualism — a preference for individual responsibility with emphasis on the indi-
vidual, as opposed to collectivism within a tightly knit social network. In Armenia,
a developing country, collectivism still prevails over individualism to a significant
extent (Jugurian, 1997). Especially in times of crisis — persecution and war, the
Armenians work together very well (Lang, 1978, p. 291). They are patriotic, heroic,
and loyal to their country (Atamian, 1955, p. 264). Given a tradition of social inter-
dependence, the group receives higher priority than the individual in this country.
2. Power distance — the extent to which people in a society accept unequal distribution
of power, i.e., hierarchies in institutions and organizations. A large power distance
is a traditionally accepted way of life in Armenia. After all, Armenia has long been
a communist country. People are used to being told what to do and when to do it.
However, unlike other communist countries, "for Armenians, self-initiative is more
typical than group feeling" (Jugurian, 1997).
640 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
3. Uncertainty avoidance — the extent to which people feel uncomfortable about uncer-
tainty, risk, and ambiguity. Armenians are highly risk averse, displaying a low
threshold for ambiguity and frustration. With a history of persecution and war,
Armenia still faces an uncertain future in view of conflicts with neighbors, not to
mention criminal elements within the country — organized corruption and drug traf-
fic (Curtis, 1995, pp. 77-78). There is a lack of effective law and order in the coun-
try. Uncertainty avoidance is one reason that Armenians are so attached to their chart
of accounts, which stems from traditional communistic centralized planning sys-
tems.
4. Masculinity and femininity — masculinity reflects an emphasis on self-assertiveness,
achievement, and heroism, whereas femininity reflects a concern for quality of life,
caring relationships, and sympathy for the unfortunate. Armenians show masculinity
in defending themselves in wars with their neighbors and coping with natural disas-
ters. They also show concern for the welfare of their own people.
5. Short-term versus long-term orientation — the Armenian people are short-term, not
long-term oriented. They focus on the "here-and-now" rather than the future. Arme-
nia has few natural resources, which have been drained by one war or tragedy after
another. Lacking the resources to save for tomorrow, Armenians live on a
day-to-day basis. Yet they are a hard-working, inventive, and resourceful people
(Lang, 1978, p. 291). They are survivors. As Boyajian observes (1972, pp. 306-
307):
"The Armenian people, in freedom or in subjugation, during the course of their history
have created and developed a rich culture — a language and alphabet of their own and a
literature which has inspired many generations by its grandeur. They have demon-
strated great skill, ingenuity and originality in architecture, music, miniature painting,
sculpture, and other forms of the arts and sciences...."
Gray sets forth the following framework of accounting characteristics of a country:
1 . Professionalism — a preference for the exercise of individual professional judgment
and professional self-regulation in contrast to adherence to legal requirements and
statutes. Armenians have a low sense of professionalism, and favor a high degree of
statutory and government control over their lives. In general, Armenia is less lawful
than other nations in the region (Jugurian, 1997). The accounting profession in
Armenia is virtually non-existent. Bookkeepers work for the government, which has
been responsible for formulating all accounting regulations.
2. Uniformity — a preference for standardized accounting practices among organiza-
tions and companies as opposed to individual flexibility based on different account-
ing circumstances. Armenians display a high degree of uniformity rather than
flexibility. They do not trust their fellow countrymen. Moreover, they cling tena-
ciously to traditions, e.g. to their chart of accounts, established by Russia.
3. Conservatism — a tendency in accounting when alternatives exist to reflect the least
favorable impact on net income and stockholders' equity as soon as possible. Con-
servatism represents a pessimistic, yet prudent approach to accounting measure-
ment. In view of their risk-aversion, Armenians appear to favor conservatism.
Accounting in Armenia 641
4. Secrecy — a desire for confidentiality in financial reporting, to avoid divulging infor-
mation to the public. By nature, Armenians are not "open" people. They would favor
secrecy over full disclosure in financial reporting. However, in order to privatize,
reporting to external users is necessary. That is a dilemma the Armenians face.
Question #3
To what extent does Armenia \s current accounting system reflect its culture ? Should that
be the case in your judgment? Explain.
Armenia's accounting system reflects its culture. An accounting system should "fit" the
country in question, or else its utility can be called into question. Different countries have
different accounting systems based on different economies, politics, and social customs.
No accounting system can be judged superior to any other without considering how the
system serves society in a specific country.
Given the totalitarian history of Armenia and its linkage to the former Soviet Union, it is
not surprising that Armenia clings to a Soviet chart of accounts. The government has long
dominated and controlled the Armenian economy, and thus has been the "user" of account-
ing information. Financial statements have been prepared for the stewardship of the gov-
ernment in making product and service allocations and distribution decisions nationwide.
There have been no outside, private investors and creditors to speak of before the Iron Cur-
tain collapsed seven years ago.
Private enterprise standards are needed to move privatization forward. Without such
standards, relevant and reliable financial statements geared to investors and creditors can-
not be prepared for business firms. Various professional and academic accountants from
developed countries are needed to provide guidance on how to adopt and implement such
accounting standards.
Accounting in Armenia, along with the other CIS, can be viewed as a dual system to
accommodate both government-owned and new private enterprises. In order to attract for-
eign investment, Armenia and the other CIS must use generally accepted business account-
ing standards.
Question #4
Develop a suitable conceptual framework for financial reporting in Armenia.
Borrowing from the American conceptual framework, the fundamental objective of its
counterpart for Armenia should be to furnish relevant and reliable information in the finan-
cial reports to help the government, investors, and creditors to make sound financial deci-
sions about the enterprise. The government continues to play a major role in Armenia's
business community, and this role is not expected to diminish significantly in the future
despite progress toward privatization.
Again, borrowing from the American framework, the central objectives of the Armenian
conceptual framework should be: (1) to help users make future cash flow forecasts to the
enterprise and to themselves, and (2) to provide information to help users evaluate the
642 THE NTHVIATIOIIAL JOURNAL OF ACCOUNTme Vd. 33. No. 5. 1998
stewardship of managemeat in conducting the operations of the enterprise. Information
about past current and expected events should he gi\ en in financial reports, helping users
make long-run cash flow forecasts to the enterprise. These forecasts can be used as a basis
f(x investiiig and lendiiig decisions. Conveying a vast array of material fmancial informa-
tioD in the financial reports should offer a foundation to the users of financial reports for
preparadMi of dieir o\i«iti assessment of the overall managorial stewardship of the enterprise
in terms of operating and financing activities. Such an assessment in turn, should be useful
in making long-nm cash flow forecasts.
Thus, the fwegoing objectives are interlinked. Achie\ ing the stewardship objective is
necessar> to attain die Icmg-nm cash fwecasting objective, and achie\ ing the forecasting
objective is necessary to fulfill the fundamental objective of conveying infmmation to
assist users in making decisions about tdie enteiiHise.
Beades the objectives, a ccMiceptual finamewoik: for financial reptwrting in .Armenia
should require accounting imder inflationaiy conditicHis and should emphasize relevance,
reliability^ conservatisnt and consistency.
Question #5
Conqjare Armenia's Generally Accepted Accounting Principles from 196&-1991 with
Russia's post 1991 Generally Accepted Accounting Principles.
Tfaoe are numerous differences and similarities A~ e -^^ Ge-erj: r A::rr:ec
Accounting Principles from 1966-1991 and Russia s pi^: l^v"! Ce: e: . A^.ep.ec
Accounting Principles. In addition, the jwesence of fi^e trade has p: c .e^ accounting
standards addressing previously unimpcxtant issues.
The two sets of Russian GAAP (ie. 1966-1991 and post 1991 T h ^c^. li^yZ):
Enthoven, Sokolov, and P^lradikov (1992); Enfhoven and Sokolo\ 1 ^^' are similar
with respect to iev»iueiecognitioitd^Heciati(xi,pensi<Hisaiid lor; ::: . :: : - Reve-
nue recogniti<Mi imd^* flie 1966-1991 Soviet system was cash or .i^^r__-ra^ = ^. Re\ enue
lecogniticm in the Russian post 1991 GA_\P remains on a cash or accrual basis. EJeprecia-
tion in the fonsex Soviet Union and A :: . ^ ^ had heen strain-line only v. h : :e - - e '-"-■
the state. Depreciation in Russia sti_ ::__ s tax-based rules that genera..; :eq-::r re
straight-line method. EHsclosure of pensions has been required in the Soviet Union and
Ann^iia. Disclosure of pensioos is also lequiied in Russia. Long-terrr - .^ re
accounted for in die new Russian GAAP using a method similar to complete c- . : r. ::.;. .
Thoe are noany areas in which accounting standards have changed since the liberation of
Armenia. Two key examples are the jxesence of income smoodiing devices and the treat-
ment of invoibMies. There had been income-smoothing devices in the fanner Soviet UnicMi
and Armaiia, the goal of which was to stabilize costs for plaiming. Income smoothing
devices undo' post 1991 Russian accounting standards are limited to loss {Hovisions.
Invoitories in the fonner Soviet Union and Armenia have been accounted fcM" at standard
costs with wholesale prices set by plaimers. InventOTy is accounted for using the lower of
cost or madtet and LIFO is allowed.
FinaUy, a number of issues have only beccnne inqprntant in the presence of free trade.
These include investments in associated companies and leases. In Russia, investments in
Accounting in Anmenia 643
associated companies have been recorded at actual costs. Leases are capitalized onh if
ownership is transferred in Russia currently. Moreover, periodic revaluations are allowed.
Neither of these where relevant issues in the USSR.
Question #6
Compare Russia's post 1991 Generally Accepted Accounting Principles with its coun-
terparts in: {a) The U.S.; (b) France; (c) Germany; id) International Accounting Stan-
dards.
There are numerous differences and similarities among the accounting standards in the
U.S., France. Germany. Russia (post 1991), and IAS. See the handout. [(Enthoven (1992);
Enthoven. Sokolov. and Petrachkov (1992): Enthoven and Sokolov (1993)]
Revenue recognition in the Russia (post 1991) GAAP is still on a cash or perhaps on an
accrual basis. As previously stated (in response to Question #5). in the U.S.. France, and
Germany revenue recognition occurs when it is earned, estimable, and probable. The
accrual-based LAS standards recognize revenue when it is earned, and collection is estima-
ble and probable.
Long-term contracts are accounted for in Russia's (post 1991) GAAP [Enthoven (1992):
and Enthoven and Sokolov (1993)] using a method similar to completed-contract. As pre-
viously stated, the U.S., France, and Germany permit either the completed-contract or per-
centage-of-completion methods. IAS requires the use of percentage-completion or
recoverability, and does not allow the completed-contract method.
Reserves are permitted for unforeseen losses in Russia. In France, an obligatory legal
reserve of 10 percent stockholders* capital exists. Germany requires provisions for all lia-
bilities and losses arising during the year.
Inventory in Russia is accounted for using the lower of cost or market, and LIFO is
allowed. This conforms with the French. Germany. U.S.. and IAS standards in general.
In Russia, investments in associated companies are recorded at actual costs. In France.
the U.S., and the IAS, the equity method is used if the investor has significant influence
over the investee. Germany requires the use of the equity method if the investor controls 20
percent of the voting rights of the investee.
Russia allows periodic revaluation of assets, but only w hen declared by the Ministry of
Finance. France allows periodic revaluation of long-term assets: Germany does not. The
U.S. essentially uses historical cost, but most marketable securities are reflected at fair
market value; long-lived assets are revalued downward if there is a permanent impairment
in their value. IAS recommends disclosure of revaluations.
Depreciation in Russia follows tax-based rules that generally require the straight-line
method. In France and Germany, depreciation is also tax-based, and accelerated deprecia-
tion is common; straight-line is. however, allowed. IAS requires disclosure of the method
used and consistency required.
Leases are capitalized only if ownership is transferred in Russia currently. In France,
leases are generally not capitalized. In Germany leases are only capitalized if several crite-
ria are met. For the U.S. and IAS. leases that are in substance installment purchases of
property are capitalized as an asset and liability.
644 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
Disclosure of pensions is required in Russia. In France, pension costs represent a tax
deduction, which are often expensed on a pay-as-you-go basis. In Germany, pension
expenses are accrued. In the U.S., a periodic pension expense based on the projected ben-
efit obligation (PBO) is accrued. IAS requires the use of a periodic expense based on accu-
mulated benefits obligation or PBO.
Question #7
Explain the pros and cons of Armenia adopting IAS, U.K., or U.S. standards.
These standards have already been formulated, and are well-recognized internationally.
So Armenia would not have to "reinvent the wheel" in adopting these standards. This coun-
try could avoid the cost of developing its own standards. Furthermore, Armenia could har-
monize its accounting with the other countries using IAS, U.K., or U.S. standards. Those
standards could be used in the preparation of certified financial reports with the aim of
attracting and retaining foreign investment and loan funds. That these standards are so
widely accepted is a factor promoting foreign transactions.
According to Schneidman (1997, pp. 60-61), Russia is gradually moving towards adop-
tion of IAS standards with a view to the following aims:
"...[I]t will facilitate Russian access to international capital markets...
...[I]t will ensure the fairness and meaningfulness of information prepared by Rus-
sian companies for international investors...
...[T]he introduction of IASs...will save time and effort that might otherwise have
been spent developing the national accounting standards from scratch.
...[I]t will boost the importance of accounting as a profession, since the switch to
lASs will require the introduction of the professional code and objectives.
...[I]t will segregate financial accounting from tax accounting...."
The key drawback to adoption of those standards is whether they would be compatible
with Armenian culture. Accounting systems have to fit the country's way of life.
Question #8
Explain the pros and cons of Armenia adopting accounting standards from other coun-
tries on a selective basis.
Eclectic standard setting is a process whereby standard setters choose existing individual
standards from other countries that they believe are most appropriate for their own country.
If such a system were implemented, Armenia and perhaps other CIS as well could select
among alternative accounting standards for a wide array of topics and issues. A form of
eclecticism in standard setting would be adopting the majority of one set of standards (IAS,
for example) while borrowing the remaining standards from other countries.
Eclectic standard setting can be beneficial to the participating country. Rather than
adopting a single set of standards (IAS, for example), eclectic standard setting allows
Accounting in Armenia 645
the participating country to choose its own mix of accounting standards. Such a mix of
standards would most accurately reflect the country's economic, political, and social
environment, and, therefore, should be more widely accepted. In Armenia, eclectic stan-
dard setting could be used in conjunction with the chart of accounts, easing the anxiety
caused by transition to the new accounting system. This process of standard setting
also can save time and resources. Although the economic, political, and social aspects
of the country still must be thoroughly understood, standards already exist, and do not
have to be created from scratch.
Additionally, because standards are adopted from outside sources, the lack of trust
of fellow citizens in formulating new standards would be reduced. Finally, the greater
degree that a CIS accounting system is based on widely understood and commonly
encountered accounting standards, the greater the acceptance of the standards is likely
to be. If the standards, and therefore the accounting system, are understood and famil-
iar, they should be attractive to foreign investment, which is desperately needed in
Armenia and other CIS. Such investment should stimulate the economy, facilitating
reconstruction of earthquake-damaged buildings and reducing the 70 percent unem-
ployment rate. Clearly the citizens would be the principal beneficiaries of such invest-
ment.
Though this standard setting process has definite advantages, there are serious flaws
inherent in the process. To be accepted, accounting standards must fit the social, eco-
nomic, and political climate of the countries. Would standard setters hastily select stan-
dards without giving them sufficient consideration and appropriate examination?
Would they take the time to study and understand the specific circumstances in which
the standard was developed and determine that the standard suits the environment in
the country being considered? What would happen if an acceptable accounting standard
does not exist? Would a standard be chosen that does not truly reflect the underlying
circumstances? If these issues are not prudently addressed, acceptance of the system
could be undermined. Another problem exists when selected accounting standards are
based on diverse conceptual frameworks.
Selective adoption of accounting standards could produce a set of accounting stan-
dards with conflicting conceptual frameworks. Such a system might lead to inconsistent
reporting of similar transactions, thereby compromising the viability and acceptance of
the system. Additionally, the continuous process of standard setting would be signifi-
cantly complicated. The conceptual framework on which new standards should be
based would be unclear to both standard setters and users. Setting standards inconsis-
tent with users' expectations could undermine the viability of this new system.
NOTE
1. Companies in Armenia will have to develop a management accounting framework to measure
their performance. To attract investors and creditors, firms have to be productive and efficient,
or show promise towards that end. Under a totalitarian regime, there was not much concern about
efficiency. That is not the case, however, with privatizing enterprises seeking to raise funds from
external sources.
646
THE INTERNATIONAL JOURNAL OF ACCOUNTING VoL 33, No. 5, 1 998
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648
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
Historical cost revalue.
With full di.sclosure.
(Framework).
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probable and estimable
(IAS 10).
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are permitted to be
capitalized and amortized
over useful life if five
criteria are satisfied
(IAS 9).
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Conservative. Historical
cost (write downs only)
Certain securities at
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(SFAS 115).
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is a funcfion of the law
of the state of
incorporation.
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downs only) (Coopers
07, 09).
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shareholder status
improving.
Capitalized and
amortized over
five years.
Accruals
understated - poor
actuary laws
(Coopers 01 8).
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subsequent to audit
report are corrected in
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changes arising from
reclassification of items
necessary to ensure
consistency qualify for
retrospective adjustment
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used to smooth income:
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(Coopers 014).
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discretionary revalue
since 1984.
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shareholder status
improving.
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life (AICPA 38).
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expensed when paid,
future costs may be
recognized (AICPA 40).
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non-recurring
income or expense
in year discovered
(Coopers F44)
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criteria are met
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land is reported at zero.
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conservative system.
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organizations in industry.
Gosbank and Srtoibank.
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Accounting in Armenia
649
Accrual based. Recorded
when earned, and
Collection estimable and
probable (IAS 18).
Required to disclose in
notes net sales by industry
and geographical market
if dissimilar and sales,
net assets, employment
or income of segment is
greater than 10%
(IAS 14).
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Gains or losses to income
statement or equity
depending on type
(IAS 21).
When earned,
estimable and probable
(SFAC 6)
Firms financial reports
are required to
reflect one basis of
segmentation
-e.g. products,
.services geography
pr customers. Segment
must have sales, net
assets or income
of segment is
larger than 10%
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method generally,
but temporal if U.S.
currency is functional
currency (SFAS 52).
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Required to disclose
in notes net sales by
industry and
geographical
market (Coopers 08)
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usually gains and loss
to capital accounts or
income statement;
consistent treatment
required (Coopers G6).
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Required to disclose
in notes net sales by
industry and
geographical
market if dissimilar
and sales, net assets or
income of segment is
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losses to income
statement. Current
rate method, generally
(AICPA 42-43).
Cash or accrual.
Changes are noted.
Investments are
re-valued at year end.
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650
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
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Accounting in Armenia
651
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THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
U c
fS c
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probable and estimable
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are permitted to be
capitalized and amortized
over useful life if five
criteria are satisfied
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understated - poor
actuary laws
(Coopers G 18).
Errors discovered
subsequent to audit
report are corrected in
following year. Only
changes arising from
reclassification of items
necessary to ensure
consistency qualify for
retrospective adjustment
(Coopers G7).
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654 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
REFERENCES
Atamian, S. 1955. The Armenian Community. New York: Philosophical Library.
Boyajian, D. H. 1992. Armenia: The Case for a Forgotten Genocide. Westwood, N.J.:Educational
Book Crafters.
Curtis, G. E., ed. 1995. Armenia, Azerbaijan, and Georgia: Country Studies. Washington, D.C.:
Library of Congress.
Enthoven, A. J. H. 1992. "Accounting in Russia: From Perestroika to Profits." Management Account-
ing.
Enthoven, A. J. H. and J. V. Sokolov. 1993. "Accountancy and Its Development in the Soviet
Union." Research in Third World Accounting, Vol. 2.
Enthoven, A. J. H., J. V. Sokolov, and A. Petrachkov. 1992. Financial and Management Accounting
in the USSR. Richardson, TX: Center for International Accounting Development.
The Europa World Year Book 1995. London: Europa Publications Limited.
Financial Accounting Standards Board. 1978. Statement of Financial Accounting Concepts No. 1.
"Objectives of Financial Reporting by Business Enterprises." Stamford, CT.
Financial Accounting Standards Board. 1980. Statement of Financial Accounting Concepts No. 2.
"Qualitative Characteristics of Accounting Information." Stamford, CT.
Gray, S. 1988. "Towards a Theory of Cultural Influence on the Development of Accounting Systems
Internationally." Abacus, (March).
Hofstede, G. 1980. Culture's Consequences. Beverly Hills, CA: Sage Publications.
Jugurian, A. 1997. Correspondence with the authors (September 1 1).
Lang, D. M. 1978. Armenia: Cradle of Civilization, second ed. London: George Allen & Unwin.
Radebaugh, L. H. and S. J. Gray. 1997. International Accounting and Multinational Enterprises,
fourth ed. New York: Wiley.
Schneidman, L. 1997 "RAR [Russian Accounting Regulations] and IAS: Will the Twain Meet?"
Accountancy, (January).
The International
Journal of
Accounting
Book Review Section
The book review section is interested in works published in any language, as long as they
are comparative or international in character. The author or publisher of such works should
furnish either book review editor with two (2) copies of the work, including information
about its price and the address where readers may write for copies. Reviews will be
assigned by the book review editors. No unsolicited reviews will be accepted. Suggestions
of works that might be reviewed are welcomed.
Professor Stephen A. Zeff
Rice University - MS 531
P.O.Box 1892
Houston, TX 77251-1892
Tel +1-713-527 6066
Fax:+1-713-285 5251
E-Mail: sazeff@rice.edu
Dr. Axel Haller
Universitat Augsburg
Lehrstuhl fiir Wirtschaftspriifung und
Controlling
86135 Augsburg, Germany
Tel: +49 821 5984127
Fax: +49 821 5984224
E-Mail: axel.haller@wiso.uni-augsburg.de
The International
Journal of
Accounting
Book Review
The French Plan Comptable: Explanation and Translation, by Peter Standish, Expert
Comptable Media Publisher, Paris, France, 1997, 563 p., FF 700 (approx. U.S.$130).
In essence, the French accounting system differs from its counterparts in the
English-speaking world mainly by the role that the state plays in accounting regulation.
Although representatives of the private sector, and particularly accounting professionals,
are closely associated with the creation of rules, accounting regulation is in fact the prerog-
ative of the public authorities. Most of accounting rules are included in the Plan Comptable
General (PCG), which forms the basis of the French accounting system. The objective of
Standish' s book is to make English-speaking readers more familiar with this system by
providing a comprehensive analysis and interpretation of this national accounting code.
In fact, the title of the book is at one and the same time too modest and misleading. The
book is not restricted to the Plan Comptable. It embraces all aspects of the French account-
ing system, covering issues such as company law, taxation, and the accounting profession.
It is organized in two parts. The first is devoted to a detailed analysis of the Plan and related
topics, while the second part is a translation into English of the Plan and of relevant sec-
tions of French commercial and company law. At the end of the book, the reader will also
find a glossary of technical terms found in the Plan or in other regulations covered within it.
Chapter 1 provides an overview of the PCG, explaining its objectives and structure. It
examines and explains the design of the PCG's chart of accounts and its basic (explicit as
well as implicit) accounting objectives and principles. A distinction is made between
requirements applicable to individual enterprises and to consolidated financial statements.
The chapter summarizes and comments on detailed rules and guidelines for the mainte-
nance of accounts, accounting within specified operating contexts or for particular transac-
tions, and presentation of financial statements. Throughout this chapter, the author
highlights differences with the approach to accounting in use in English-speaking coun-
tries. He notes in particular that, contrary to the U.S. view, the utility of accounting infor-
mation is not addressed in terms of user needs, but rather in technical terms, as if promoters
of the Plan had preferred to avoid venturing into the arena of contested theories regarding
the utility of information and the relative priorities of different users. Similarly, he points
out that, by contrast to the view that the primary objective of financial accounting is the
matching of components of income and expenses by financial years, the PCG emphasizes
the proper recognition of financial items and the determination of their values for inclusion
in the balance sheet. The author also insists on the importance of prudence, which, in
France as in other countries of continental Europe, is the most influential factor in the mea-
surement of assets and liabilities.
The International Journal of Accounting, Vol. 33, No. 5, pp. 657-673 ISSN: 0020-7063.
All rights of reproduction in any form reserved. Copyright © 1998 University of Illinois
658 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
Chapter 2 is devoted to an historical analysis of the development of the Plan Compt-
able. The first national accounting code was promulgated in 1942, based on the model
already in use in Germany. It was modified several times in subsequent years, more
precisely in 1947. 1957 and 1982. The last revision was motivated by the need for har-
monization with the Fourth and Seventh EC Directives. Throughout this period, the
author notes a great continuity in terms of maintenance of central objectives for the
code and institutional arrangements for its development and application. He also notes
that the existence of the PCG now seems relatively uncontroversial, as if all economic
interests had finally accommodated themselves to it or learned to use it to their advan-
tage. Although ver>' valuable for people interested in accounting history, this part of
the book will be less useful for most readers.
Chapter 3 addresses the position of the Plan Comptable in French law. It deals with
the relationship between the PCG. taxation and company law. The legal framework for
the preparation and presentation of financial statements is constituted on the one hand
by the Commercial Code, and on the other hand by the PCG. The former provides
basic general principles, the latter more detailed and technical rules. The author rightly
emphasizes the fact that the PCG is not expressed as a set of regulations, each of them
dealing with a specific issue, but rather as an accounting manual. As he notes, that
makes it difficult to distinguish between elements that must be considered as prescrip-
tive rules and those that have only the status of recommendations or illustrative exam-
ples. The chapter then deals with the relationship between the PCG and tax law. After
he has pointed out that accounting law is applicable for tax purposes, except in specific
instances of contran, requirements in the tax law, the author provides a detailed review
of the adjustments to be made to accounting profit or loss in arriving at taxable
income. Although unusual in an Anglo-American context, such an extensive descrip-
tion of fiscal rules is necessary in as much as most accounting decisions of French
firms are at least partially driven by fiscal considerations.
Chapter 4 deals with the authority and mission of the Conseil National de la Compt-
abilite (CNC), the consultative government agency responsible for the development
and maintenance of the PCG. Its membership structure is analyzed in terms of the cate-
gories of members and interest groups represented, from 1947 to 1996. The author
notes that a distinctive aspect of the CNC structure, compared with standard setting
bodies in the English-speaking world, is its representation of a range of public sector
agencies. Although the proportion of public sector membership has declined continu-
ously since 1947. he argues that there is still in France a wide consensus on the legiti-
macy of the state as the determinant and arbiter of accounting standards. The
accounting profession has no direct control over accounting standards: it exercises its
influence through CNC membership. In the author's opinion, the CNC presents a struc-
ture in which the interest that members of the profession may have in accounting doc-
trine is matched against the interests of the state. Because of its publication date, the
book could only make passing reference to the Comite de la Reglementation Compt-
able CCRC) whose creation in April 1998 was the final step of the reform of the stan-
dard-setting process undertaken in 1996. This new body, which is composed of civil
servants and CNC members, has the power to formulate accounting rules in the light
of recommendations or opinions from the CNC. The future will tell us whether the
Book Reviews 659
CRC will veto some CNC decisions or simply act as a faithful endorser of this institu-
tion.
Chapter 5 examines ways in w hich the Plan Comptahle has been applied in the per-
formance of certain specified roles of pubUc oversight of financial activity and report-
ing. The author highlights the influence of the National Institute of Statistics (INSEE)
in the development of the PCG. noting that the prospect of developing a national
accounting code to support development of national economic statistics was one of the
earliest aims of the PCG. This issue could have been more extensively addressed,
given the clear relationship that exists between some elements of the PCG (production,
value-added, etc.) and the corresponding concepts of national accounting. There is then
an examination of the role that the National Securities Commission (COB) and the
accounting profession play in monitoring compliance with the requirements of the PCG
and company law. The chapter ends with an over\ iew of adaptations of the PCG to spe-
cific enterprises or acti\ities. A list of these adaptations is pro\ ided. with their main
characteristics.
Chapter 6 provides an o\erall interpretation and assessment of the Plan Comptahle
in relation to its context. The PCG is viewed as a national accounting language which
contributes to increasing the effecti\'eness of communication between interested par-
ties, but which at the same time is a source of rigidity. Finalh . the author addresses
the issue of the system's capacity to adapt to changing circumstances, in the light of
the 1996 reform which has substantialh modified the CNC structure and created the
CRC.
With this book. Peter Standish proves he is certainly one of the best English-speak-
ing specialists in French accounting. Explaining the Plan Comptahle to people not
familiar with the French accounting tradition and the economic and political characteris-
tics of France is not an easy task. The author has fulfilled his aim probably beyond his
expectations. Readers should nevertheless be aware that this book relates much more to
individual (parent-only) accounts than to consolidated financial statements. Rules appli-
cable to group accounts allow considerable flexibility which enables French firms to
comply w ith practically any set of standards they want. More than 20 percent of listed
companies already prepare their consolidated statements in conformity with the Interna-
tional Accounting Standards (lASs). and several large firms apply U.S. GAAP. This
evolution was recently recognized with the adoption of a new law that allows listed
companies to use lASs in place of the PCG for the preparation of their consolidated
financial statements. By focusing on rules applicable to individual accounts, the book
probably overestimates the distinctive features of the French accounting system. Apart
from this limitation, Standish" s book will be of high value for people confronted with
the financial statements of French firms and for students taking advanced courses in
international accounting. Although this book is not primarily directed at them, French
readers will probably enjoy this description of their own accounting system from an
Anglo-Saxon point of view .
Reviewed by Bernard Raffoumier
Universite de Geneve
Geneva, Switzerland
660 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
International Accounting Standards 1997: Deutsche Fassung, edited by the Interna-
tional Accounting Standards Committee, Schdjfer Poeschel Verlag, Stuttgart, 101 pages,
DM 98 (approx. U.S.$55).
Rechnungslegung nach International Accounting Standards, by Jorg Baetge,
Dietrich Dorner, Heinz Kleekdmper and Peter WoUmert, Schdjfer-Poeschel Verlag,
Stuttgart, 1623 + xxiv pages, DM 348 (approx. U.S. $195).
The background to both these books is the extraordinary revolution in financial reporting
that has occurred in Germany in recent years. It started in 1993 with the listing on the New
York Stock Exchange of the shares of Daimler Benz AG, and recently, in April 1998, it
reached a crescendo with the enactment of two new laws. The "Kapitalaufnahmeerleichter-
ungsgesetz" (Law to Ease the Raising of Capital) permits listed companies to draw up their
consolidated accounts in conformity with "internationally recognized accounting princi-
ples." The "Gesetz zur Kontrolle und Transparenz im Untemehmensbereich" (Control and
Transparency Law) authorizes the Ministry of Justice to recognize a private body that is to
be given the task of developing recommendations on principles for consolidated financial
statements. The intention is that the private body's recommendations as to "internationally
recognized accounting principles" will be officially endorsed by the Ministry of Justice, so
as to remove any legal uncertainty as to the identity of the principles referred to in the first
law.
The International Accounting Standards Committee is not mentioned anywhere in the
new laws, but it is generally accepted in Germany that the new committee will recommend
the adoption of the lASC's standards. The only possible competitor is U.S. GAAP, and it
would seem that the German government much prefers the lASC's standards to U.S.
GAAP for the very same reason that the European Union in 1995 decided to support the
lASC: it is possible for Germany, through its participation in the workings of the lASC to
influence the content of that body's standards, whereas U.S. GAAP is determined by bod-
ies (the Securities and Exchange Commission and the Financial Accounting Standards
Board) over which it has no influence.
Hence, German accountants and auditors have suddenly become very interested in the
lASC's standards, and the two books reviewed here are likely to find a ready market in
Germany. However the great majority of the readers of The International Journal of
Accounting are not located in Germany, and, moreover, most of them do not read German.
What interest can these books have for them? This is the question that this reviewer seeks
to answer.
The first book. International Accounting Standards 1997: Deutsche Fassung, is simply
a translation into German of the LASC's 1997 bound volume of standards. It includes, in
addition to the text of the standards issued up to December 31, 1997, the lASC's Frame-
work, the Preface, and the sections in the bound volume on the lASC's constitution and
history. It is an official translation authorized by the lASC; in fact, it is the very first such
official translation. However, it is clearly stated that, in the event of a conflict between the
German translation and the English version, the English original prevails. This is a clear
indication of the privileged position accorded to the English language in the workings of
the lASC, which in many ways is regrettable, as it places non-English speakers at a consid-
erable disadvantage, both in the negotiations leading to the issue of an International
Book Reviews 661
Accounting Standard (IAS) and in understanding an IAS once it has been issued. The Euro-
pean Union has a quite different rule: all the different language versions of its directives
have equal validity. This clearly is more democratic and places no one at a disadvantage.
However, the lASC's practice is more realistic and leads to greater legal certainty, which
is probably more important than seeking to place everyone on an equal footing.
The principal interest in this book to the non-German is simply that it exists. Its publica-
tion demonstrates a commendable willingness on the part of the lASC to make its standards
more accessible to the non-English speakers who make up over 90 percent of the world's
population.
The second book is a commentary in German on the lASs. Its authors are a professor of
accounting at the University of Munster and three members of the German accounting firm
of Schitag-Deutsche Allgemeine Treuhand AG, which is associated with Ernst & Young.
It is a massive work of 1,623 large-format pages. For comparison, David Caims's Guide to
Applying International Accounting Standards, with only 909 far smaller pages, has less
than half the number of words. A better comparison is with Ernst & Young's UK GAAP,
which is very much the same size as the German book.
The book is divided into three unequal parts: A, B and C, as follows.
Part A: Basics (109 pages)
This part takes up less than one-tenth of the book, but nevertheless it is over 100 pages
long, which enables the authors to deal with a number of general topics in a commendably
rigorous fashion. Chapter I on the history and structure of the lASC contains nothing new
for the non-German reader. However, the next two chapters (II and III), which deal with the
basic principles behind the lASs, do bring out certain important differences between Ger-
many and the lASC in the approach to financial reporting. The authors note that two impor-
tant accounting principles that are laid down in the German Commercial Code and in the
EU's Fourth Directive are virtually ignored by the lASC: "Bilanzidentitat" (balance sheet
continuity — that the opening balance sheet should be identical with the closing balance
sheet of the previous year — article 31.1.f of the Fourth Directive) and "Einzelbewertung"
(individual valuation of assets and liabilities — article Bl.l.e of the Fourth Directive). The
first principle is clearly breached in the provision of IAS 8 that changes in the values of
assets and liabilities arising from fundamental errors and changes in accounting policy that
relate to prior periods should be effected by adjusting the opening balance of retained earn-
ings. In fact, it is doubtful whether the Anglo-Americans acknowledge the existence of a
principle of balance sheet continuity; this is regrettable, as this principle imposes a disci-
pline on preparers which makes the manipulation of reported earnings much more difficult.
With respect to individual valuation, the lASC follows no consistent line; sometimes it
respects the principle, as in IAS 1 1 which requires that the profit on construction contracts
be calculated on a contract-by-contract basis; sometimes the principle is breached, as in
IAS 25 which permits the valuation of securities on a portfolio basis. These comments are
most revealing to the non-German reader: the lASC's disregard of these basic principles,
which are central to German and EU law, results in its standards being inconsistent and
opening the door to income manipulation.
662 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
The following chapter (IV) deals with a matter of great practical and topical interest: the
rules to be followed by a company that seeks to apply lASs for the first time. The lASC has
completely ignored this subject. The authors are forced to discover these rules through a
painstaking examination of extant lASs, which reveals that different principles apply for
different lASs. Thus, IAS 21 (foreign currency translation) states that, on the first occasion
that an enterprise applies the standard, it should disclose the cumulative balance of deferred
exchange differences relating to previous years only if the amount is reasonably determin-
able. However, IAS 9 (research and development costs) states that the standard applies to
all financial statements covering periods beginning on or after January 1, 1995. The stan-
dard was issued in 1993, and no doubt the lASC considered that it was being helpful to
companies in not requiring retrospective application. However, it completely overlooked
the problems of enterprises that apply the standard for the first time after 1995. Hence, a
company that seeks in 1998 for the first time to draw up its accounts using lASs is required
to examine its accounts for all years since 1 995 to discover development expenditure that
should have been capitalized under IAS 9 to ensure that the intangible asset "development
cost" is correctly reported in its 1998 balance sheet. This is a costly and laborious operation
which yields little in the way of useful information. If the lASC does not want enterprises
to undertake this task, it should inform them by issuing a standard, or perhaps an interpre-
tation, on the subject of an enterprise's first IAS balance sheet.
The next chapter (V) is on the two German laws mentioned at the start of this review. It
is based on the draft law and, since certain modifications were included in the laws as
enacted, the chapter cannot be relied upon to give the correct position. The final chapter
(VI) in Part A is on the audit of a set of accounts based on the lASs, which is another inter-
esting and topical subject neglected by the lASC.
Part B Commentary (1,285 pages)
This part comprises the bulk of the work. It consists of 32 chapters, one chapter for each of
the 31 lASs extant at December 31, 1996 (up to and including IAS 33), plus a chapter on
E50 (the exposure draft on intangible assets). The average length of each chapter is 40
(large-format) pages, which allows a very detailed and rigorous analysis of each IAS. The
chapter on IAS 1 1 (construction contracts) may be taken as a good example of the authors'
approach. They explain that the basic issue addressed by IAS 1 1 is the allocation of the
profit on long-term contracts to accounting periods, and they set forth the lASC's justifica-
tion of the percentage-of-completion method, with reference to the recognidon criteria of
future economic benefit and reliable measurement that are contained in the lASC's Frame-
work. They contrast the lASC's method with the completed-contract method prescribed by
German accounting principles and conclude that, only in quite exceptional cases, are the
two compatible. They discuss how to measure the percentage of completion, distinguishing
between input-oriented and output-oriented methods. Finally, they point out that, whereas
IAS 1 1 is clear that the profit on a long-term contract should be allocated to accounting
periods on the basis of percentage of completion, it does not specify how revenues and
costs should be allocated, particularly when the percentage of completion is not measured
on the basis of cost, which means that alternative measurements of revenue and costs are
permitted. Many of the above points are included in the English-language commentaries.
Book Reviews 663
but not all. In reading this chapter, the non-German reader gains new insights into the
meaning of many aspects of IAS 1 1 , particularly in relation to its ambiguities and short-
comings.
Part C: Appendices (140 pages)
This part comprises four appendices:
(a) A checklist of information required under the lASs;
(b) A comparison of the lASs with the German Commercial Code;
(c) A glossary (only from English to German); and
(d) Four pronouncements issued by the German audit profession.
In conclusion, what is the value of this book to the non-German reader? It is appropriate to
distinguish two types of reader:
(a) The non-German who is a specialist in German accounting. This reader will find
much of the general material in Parts A and C most useful and may turn to the indi-
vidual chapters in Part B for an insight into the German approach to specific
accounting problems. Certainly, this book should be included among his/her stan-
dard works of reference.
(b) The non-German who has no particular interest in German accounting but has a gen-
eral interest in the International Accounting Standards. In fact, this reader will find
much of interest in the chapters on the individual standards, since they present an
analysis of these standards from a different and often novel viewpoint. However, it
is regrettable that the lack of an adequate knowledge of German will limit the acces-
sibility of this excellent book.
Reviewed by John Flower
Director, Centre for Research in European Accounting
Brussels, Belgium
Management Accounting: European Perspectives, edited by Alnoor Bhimani, Oxford
University Press, Oxford, 1996, 250 pp.
This important book sheds light on the range of management accounting practices in Euro-
pean countries. It fills an important gap in the literature by bringing together in one easily
accessible location descriptions of the management accounting practices in 11 countries. I
learned a lot from reading this book and recommend it for both academics and practitioners
who want to understand the differing practices in European countries.
My only major criticism of the book is that it made me work too hard as I read it, trying
to understand the factors that caused practices in the various countries to evolve in different
ways. The very nature of the book forces the reader to wonder about the evolutionary process
that led to such different national solutions. In my opinion, the book needs an initial sum-
664 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
marizing chapter that identifies these factors and explains the general role they played in
shaping practice in each country. Had such a chapter been written and then used to discipline
the final drafts of the other chapters, a stronger book would have emerged. The failure to
discipline the authors in this way makes it difficult for readers to develop their own model
of the evolutionary process. For example, some of the authors identified the academy as play-
ing a critical role in the development of management accounting practices in their country.
However, others do not mention the role of the academy. Unfortunately, by not ensuring
that each author explicitly specified whether or not the academy or, for that matter, any other
potential factor played a role, it is impossible to begin to build a definitive evolutionary
model, because there is no guarantee that a factor that is not mentioned was not operative.
Furthermore, giving the authors a common template would have led to a more consistent
book. For example, the authors of the chapters on Belgium and the U.K. talk about strategic
investment decisions, but such decisions are not described in the chapters on other countries.
A Preliminary Evolutionary Model
As I read the book, I was able to identify seven factors that appeared to play an important
role in the evolution of management accounting practice. All of these factors were men-
tioned by multiple authors and are intuitively reasonable to include in a preliminary evolu-
tionary model. These seven factors are unlikely to be the only ones that played a role, but
they do help explain why different practices emerged.
The Academy
In certain countries the academy was identified as playing a crucial role in the development
of both theory and practice. The primary role in many countries was in choosing between
full and variable costing. Typically, where the academy played a definitive role, variable
costing emerged as the dominant approach. The other role that was identified for the acad-
emy was to disseminate best practices and new theories to practitioners. In particular, the
spread of activity-based cost management theory by academics was mentioned.
The Profession
In most of the 1 1 countries, there is no professional body of management accountants, and
therefore the profession apparently played only a small role in the evolution of theory or
practice. The major developers of practice in counties without a professional accounting
body appear to have been engineers. In countries where a well-established professional
body exists, such as the U.K., the profession plays a role similar to the academy in diffus-
ing innovation to practitioners and, more importantly, in creating a country- specific
approach to management accounting.
Book Reviews 665
Consultants
Several of the authors identified the role of consultants (especially the major accounting
firms) in spreading innovation. The consultants appeared to play a similar, albeit more
active, role in relation to the academy and the profession. The consultants were more active
because they not only advocated adoption of new theories but also actively marketed them.
Therefore, countries that have a history of relying upon consultants may be more likely to
adopt innovations early on in their development.
Legislated Financial Accounting
Financial accounting legislation that identified the way inventory was to be valued fre-
quently also determined the managerial approach to product costing. For example, if full
costing was required for financial reporting, then full costing was the dominant managerial
approach. In contrast, if the legislated approach was variable or direct costing, that became
the dominant managerial approach adopted in the country.
In countries where the legislated approach changed, managerial practice also appeared to
change. Thus, despite all of the theoretical discussion about which approach is superior,
managers appear to adopt a very simple heuristic: use the same approach for managerial as
for financial accounting. This observation does not mean that managers who use full cost-
ing do not adopt a contribution approach to decisions, but just that their starting point is
full, not variable, cost.
Legislated Managerial Accounting
In some countries managerial accounting is or was legislated. Such legislation was typi-
cally developed to help manage a centralized economy — particularly in the years between
the two world wars. These years were for many countries a period of scarcity, and the pur-
pose of the legislation was to control prices. The legislation typically took a full-cost per-
spective, as the aim was to develop prices that were essentially cost-plus, and including all
costs ensured that firms would be profitable. As the period of scarcity was replaced by the
modem period of abundance, most of the countries repealed the legislation, and manage-
ment accounting practice began to evolve independently.
The obvious exception is France, which still has highly detailed legislation covering how
firms should managerially account for their transactions. The French model appears to be
unique; no other country has developed such sophisticated legislation or kept it for so long
a period. The French legislation is sufficiently general that new techniques such as activ-
ity-based costing can be adopted, but there is some suggestion that the rate of innovation
has been slowed by the existence of the legislation.
Dominant Foreign Model
Several countries have developed distinct approaches to cost management that have influ-
enced the practice in the countries around them. Four dominant foreign models were iden-
666 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
tified: German, Swedish (or Scandinavian), British and American (sometimes combined as
Anglo-Saxon). Interestingly, where a dominant foreign model was identified as an impor-
tant factor in influencing practice, the dominant model often changed over time. For exam-
ple, the German model appeared to play an important role in many countries in the early
development of practice, but today it is the American model that appears to dominate.
There was a clear geographical influence in the choice of the dominant foreign model.
For example, Denmark and Finland were clearly influenced by the Swedish model in the
early years. Whereas Dutch practice was influenced heavily by German practice, Belgian
practice was in turn influenced by Dutch practice. Common or similar languages might
explain this proximity effect.
Nature of the Local Economy
The evolution of management accounting was highly dependent upon the underlying
nature of the countries' economy. In countries were firms were historically small or fam-
ily-owned, virtually no dominant model of management accounting emerged. As large
firms emerged or developed in these countries, management accounting was imported
from elsewhere. If the largest firms were foreign subsidiaries, then the parent's country of
origin typically determined the management accounting model adopted by the subsidiary.
If the subsidiaries were highly visible in the local economy, they tended to be the role
model that local companies followed as their need for sophisticated cost management
developed.
Summary
These seven factors apparently played critical roles in the evolution of management
accounting in the 1 1 countries. However, with the possible exception of the last factor, the
nature of the local economy, they do little to explain why practice evolved in different
ways in the various countries. To develop a model of the evolutionary process of manage-
ment accounting requires, at a minimum, revisiting each country's author(s) and getting
them to describe the evolution of their own country's practices in common terms. It is a
shame that this last step was not taken. However, despite this shortcoming. Management
Accounting is an important and valuable contribution to the literature.
Reviewed by Robin Cooper
Claremont Graduate University
Claremont, California, USA
International Accounting, edited by Peter Walton, Axel Haller and Bernard Rajfoumier,
International Thomson Business Press, London, 1998, 458 + xiv pp.
In the last three decades since Gerhard Mueller wrote the first international accounting text
(Mueller, 1967), there has been a huge growth in the number of books and journals cover-
ing international accounting topics (see Adams and Roberts, 1994). The scope, quality and
Book Reviews 667
style of these books varies considerably. The editors of this book identify, in their preface,
two approaches to the international accounting education literature at the current time: the
"issues" approach which is concerned with the accounting problems of multinational cor-
porations; and the "country" approach which focuses on the comparative development of
accounting and reporting practices. The editors emphasize the "country" approach, and
while both approaches should feature in the accounting curriculum in today's global busi-
ness environment, the country approach is the most appropriate for undergraduate students
whose prior financial accounting courses are very often taught solely in the context of their
own country. It allows students to better understand the political and contingent nature of
accounting and the influences on their own domestic practices, rather than viewing
accounting as a neutral tool. While the country approach dominates, the book attempts to
integrate chapters concerning both approaches.
Each chapter is written by one or more experts on that particular topic. Contributors
include senior academics from a number of different countries, journal editors, senior per-
sonnel with multinational corporations, practicing accountants (including a Price Water-
house partner), a technical adviser to the lASC Board, and a member of the lASC's
Standing Interpretations Committee. This variety and expertise of the contributors gives
this book a major advantage. It has depth which makes it interesting. It describes account-
ing in particular countries as experienced by nationals of those countries with international
experience and so, unlike many of the international accounting texts written by
Anglo-American authors, is free from possibly biased interpretation. This approach, as the
preface, I think, correctly argues, "permits the student to gain an understanding of the
country's accounting culture and its likely future evolution" (p. xi). The book is also very
readable and, despite contributions from as many as 18 different authors, I found it. pre-
sumably as a result of some careful editing, seamless. Rather like financial statements pre-
pared under the European Directives, each country chapter satisfies a minimum list of
issues to be included.
The first chapter of the book is concerned with "country differences and harmonization."
It summarizes the causes of diversity, the main ways in which practices differ, and briefly
discusses the main organizations encouraging the convergence or harmonization of
accounting and reporting practices. Most importantly, perhaps, for those new to research in
international accounting, it classifies and briefly summarizes the research to date. It does
not, however, cover the classification studies of accounting and reporting in any depth, and
one might at least expect this to be explained in a book where the "country" approach dom-
inates.
The second chapter is devoted entirely to the International Accounting Standards Com-
mittee, and covers its background, achievements, current issues, and a summary of each of
its standards. As a measure of the emphasis on the cultural environment in which account-
ing develops, this chapter acknowledges the Anglo-American influence on the lASC and
calls for a "re-balancing" if harmonization is to be achieved.
The next four chapters cover the major models of accounting, reporting, and its regula-
tion. These are France, Germany and the U.S. "with the UK added as having influenced the
US in the past and influencing the European Union in the present" (preface, p. xii). While
these would be more appropriately referred to as models of Western accounting, it is very
refreshing to see the importance, distinctiveness and relevance of French and German
668 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1998
accounting recognized, and on reading these chapters one finds that the "re-balancing"
required for harmonization to be achieved is clear.
Chapters 7 to 13 cover Japan, Switzerland, Italy, Belgium, the Netherlands, Spain and
Australia. Chapter 14 covers the Scandinavian group of countries and Chapter 15 the East-
em European countries. The study of Eastern European countries is so often glossed over
by international accounting texts and yet offers an important insight into the political
nature of accounting and the processes of accounting change. The most obvious omissions
to me from this "country" section are the lesser-developed countries, with their own dis-
tinctive issues, as well as China, with its long history of a very different form of accounting
and its current process of reform.
The final five chapters deal with issues relevant to multinational corporations. Specifi-
cally, they cover: a comparative analysis of major accounting issues; the listing of multina-
tional companies in international capital markets; foreign currency translation; segmental
reporting; the auditing of multinationals; and accounting differences in relation to financial
statement analysis. I concur with the significance of the topics covered here, and the only
other one I would have especially liked to see specifically covered is accounting for groups
and goodwill. Unfortunately, the reasons for the order in which these topics were taken up
was not clear, and they perhaps could have been better integrated. It is because of the
growth of international capital markets that harmonization has developed, and this link
would have been much more clearly seen in this chapter if the chapter on the listing of mul-
tinationals in major capital markets had been placed nearer the beginning of the book,
before harmonization. While the book specifically covers foreign currency translation and
segmental reporting, which are presumably considered to be the most important accounting
issues, the chapter entitled Comparative Analysis of Major Accounting Issues, containing
tables comparing the accounting treatment of a number of issues in the different countries
dealt with in the book, comes before them and does not include them. In addition, it would
perhaps have been appropriate to link these tables with the final chapter: Accounting Dif-
ferences and Financial Statement Analysis.
Overall, I judge this to be an excellent book for students who genuinely want to gain an
understanding of the different factors influencing accounting and the diversity of account-
ing around the world. The approach, particularly the involvement of international authors
with extensive and varied backgrounds, together with the effective writing style, make it a
very interesting read. It will stretch students and, by its lack of tables and bullet points, be
disliked by those who prefer to "learn" parrot-fashion.
REFERENCES
Adams, C. A. and C. B. Roberts 1994. 'international accounting education in the UK." Accounting
Education, 3: 167-181.
Mueller, G. G. 1967. International Accounting. London: Macmillan.
Reviewed by Carol A. Adams
University of Glasgow
Glasgow, Scotland
Book Reviews 669
International Accounting: A Global Perspective, by M. Zafar Iqbal, Trini U. Melcher
and Amin A. Elmallah, South-Western College Publishing, Cincinnati, 1997. 610 pp.
In the Preface (p. v), the authors state that "International Accounting: A Global Perspective
is a current and comprehensive text, suitable for an upper-division undergraduate course or
a graduate level course. With its global orientation, it is suitable for adoption worldwide."
The appropriateness of this claim will be returned to at the end of the review, after discuss-
ing the structure and content of the book.
The text is comprised of 14 chapters, and. while the chapters are not formally grouped in
any way, they seem to fall into a number of broad areas. The first four chapters essentially
introduce the subject matter of international accounting and highlight some of the impor-
tant issues. Chapters 1 and 2 outline the many facets of international accounting, guiding
the student through the factors, processes and institutions that have led to business and eco-
nomic activity "going international." The importance of people factors and cultural sensi-
tivity in dealing with accounting in a global environment is also stressed in these chapters.
Chapter 3 deals with financial reporting and disclosures. This is a useful chapter. It does
not simply focus on mandated disclosures, but also examines voluntary and non-fmancial
disclosures, including social and environmental impact disclosures. The chapter illustrates
clearly how the adoption of different measurement rules in different nations lead to differ-
ences in reported amounts in income statements and balance sheets. This is a hands-on
approach that uses simple examples (including journal entries) to illustrate these differ-
ences. Taking four accounting issues (inventory measurement, write-up of fixed asset val-
ues, interest capitalization for asset construction, and capitalization of research and
development costs) and presenting the requirements of 1 1 selected nations on these issues,
the chapter allows students to see the potential for different combinations of accounting
methods across nations and the resultant impact of these differences on the financial state-
ments. The same 1 1 nations are used throughout the book to illustrate similarities and dif-
ferences in accounting and reporting requirements and business environments. The nations
are Australia, Brazil. Canada. France. Germany. Japan. Mexico, Netherlands. Nigeria, the
U.K. and the U.S. Chapter 4 provides a brief overview of the accounting standard-setting
process and some of the major accounting rules in each of the 1 1 nations.
Chapters 5 through 7 focus on a number of important financial accounting issues in an
international context. These are Accounting for Changing Prices. Foreign Currency (trans-
actions and translation). Business Combinations and Consolidations. Intangible Assets,
Research and Development, Leases, and Pensions and Post-Retirement Benefits. In each
case the authors illustrate the main accounting methods and then provide a comparative
summary of the approaches used in the 1 1 nations. Sufficient detail is provided to allow the
student to appreciate the financial statement differences that result from the different
approaches. Good problems and case studies are provided at the end of the chapters. These
require the student to work with different accounting requirements and to think in terms of
the economic, social and political contexts of other nations.
Chapters 8, 9 and 10 focus on management accounting issues in an international context.
The issues covered are Strategic Planning and Control; Budgeting. Product Costing and
Foreign Exchange Risk Management; and Transfer Pricing and International Taxation.
The inclusion of management accounting topics in an international accounting text is not
common, and this is a strength of the current text. It allows students to appreciate that the
670 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
issues facing organizations operating in the global environment are not just ones of exter-
nal financial reporting and capital raising, but also include the day-to-day problem solving,
risk appraisal and people management issues that face management as it constantly posi-
tions and re-positions its organization in a competitive international environment.
Chapter 1 1 discusses international financial statement analysis. It explains the main
approaches to financial statement analysis, stressing that the general limitations of finan-
cial ratio analysis are intensified in the international context. The chapter includes four
concise case studies which highlight the magnitude of the differences that arise when the
financial statements of a number of the 1 1 nations are restated to accord with GAAP in the
U.S.. U.K., Germany, Spain and France. A positive feature is that restatements are not
shown for only U.S. GAAP. Another positive aspect of this chapter is that it stresses the
importance of understanding cultural, business and economic differences when analyzing
financial statements. An instructor could usefully supplement the chapter with business
and research papers that highlight some of these differences and show how they might
affect the interpretation of financial statements.
The last two chapters in the text are entitled Developing Countries: The Emerging World
Economic Order (Chapter 13) and Eastern European Countries (Chapter 14). These chap-
ters are very important in rounding out the global focus of the book. They are written with
a sensitivity to, and a close awareness of, the problems and challenges that face developing
and Eastern European countries, and they emphasize the important roles that management
and financial accountants can play in the emergence of relevant and useful accounting sys-
tems and regulatory frameworks in these countries. The authors have placed these chapters
at the end of the text, and, while this is probably quite a logical placement, instructors using
the text may be tempted to introduce them earlier in their course so that students are
exposed to the full extent of the problems, challenges and opportunities that comprise
accounting in a global environment and have time to carefully evaluate the issues as the
course progresses.
In general, the book is well- structured and clearly written. One suggestion that I would
offer for future editions is the inclusion of one or two paragraphs at the beginning of each
chapter which outline clearly the purpose and structure of each chapter. While some chap-
ters in the text do this, most do not.
I now return to the objective of the book which was quoted at the beginning of the
review. Does the text fulfill its stated objective? First, in terms of its audience, the answer
is yes. The book is well positioned for upper-division undergraduates and graduate-level
courses. It assumes a reasonable proficiency in accounting (which is appropriate at this
level), but the authors are careful to provide sufficient detail and examples of accounting
and reporting practices that may be new to students. Second, is the book suitable for world-
wide adoption? In general, I think the authors have done a good job of living up to this
claim. The 1 1 illustrative nations used throughout the book have been carefully chosen to
represent a wide range of accounting practices and reporting environments. There are some
regions that may feel left out, such as China, the Middle East and Southeast Asia; however,
some nations from these regions are given special attention in Chapters 13 and 14, and oth-
ers are mentioned (albeit briefly) at relevant points throughout the book.
There are a number of other features of the book that make it student- (and instruc-
tor-) friendly. First, there is a useful glossary at the end of the book. Second, there is
an extensive reference list at the end of each chapter. These and other references will
Book Reviews 671
allow instructors to supplement the text with additional readings. It will be important
for the authors to keep their reference lists up to date when they revise the book for
future editions. While there are some classic references on the list, some of the refer-
ences, especially those from business journals and magazines, can easily start to look
old and out of date.
Reviewed by Jill McKinnon
Macquarie University
Sydney, Australia
Contemporary Accounting Issues in China — An Analytical Approach, by Liu Kin
Cheung and Zhang Wei Guo, Prentice Hall, Simon & Schuster (Asia) Pte Ltd, Singapore,
1996, 186 pages + xii pp.
Since the Economic Reforms in the early 1980s, there have been significant changes in
managing the state-owned enterprises (SOEs). In addition, there has been an increase in
foreign investments and in the joint venture-type of operations. To meet the accounting
needs of these new enterprises, the public accounting profession, which went into extinc-
tion in the late 1950s, has been revived. The Chinese government has devoted considerable
effort to issuing new regulations on the accounting profession and on financial reporting.
Many new accounting issues have arisen in the past decades.
This book provides a comprehensive study of some of the financial reporting and mana-
gerial accounting issues. It is a very timely book, as many accounting scholars and practi-
tioners have shown extreme interest in these issues. The book is written specifically for
academic and professional readers outside of China. It can also be used as a supplementary
textbook for an international accounting course or a course on accounting in China.
The book is divided into two parts. The first part (five chapters) focuses on financial
reporting issues, and the second part (another five chapters) discusses managerial account-
ing issues. On the financial reporting issues, the book begins with a description of the his-
torical development of financial accounting standards in China, factors underlying their
development, and the organizations involved in the standard- setting process. Other than
identifying the features and weaknesses of the old Financial System (i.e., under the
state-planned economy). Chapter 2 discusses the 1992 Financial Standard for Business
Enterprises and its problems. The financial disclosure issues are the focus of Chapter 3
which discusses securities market development, the securities regulations, and the required
reports to be filed with the Securities Regulatory Commission. Furthermore, it identifies
the problems in the implementation of the disclosure requirements. The qualifications,
training and independence of CPAs are also discussed.
Chapter 4 presents empirical results from a mail questionnaire survey of 300 investors in
Shanghai on their understanding and uses of annual report. The accounting treatments and
revaluation procedures for major assets and liabilities items are covered in Chapter 5. This
asset revaluation issue is significant in China due to the corporatization of state-owned
enterprises (SOEs). The regulatory and organizational factors contributing to the impor-
tance of having assets revalued are also presented.
672 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
To understand China's current accounting standards and reporting requirements, one
needs to know the historical background, the organizations involved, and the issues
encountered in setting the accounting standards in the 1990s. Chapter 1 provides an excel-
lent review of these areas and serves as a foundation for the following chapters. In Chapter
2, the authors treat the Financial Standard for Business Enterprises as a standard or regula-
tion rather than as a conceptual framework. According to Xiang (1998, p. 113), the Stan-
dard(s) "essentially comprise a conceptual framework rather than operational standards,
thus they are expected to serve as a guide for formulating the detailed accounting stan-
dards." In fact, in 1993, a three-year project was launched to issue 30 detailed accounting
standards. Exposure drafts of these standards have been released for comment (Xiang,
1998, p. 113). One of the reasons for the delay in enacting these standards is due to the sub-
stantial differences between the detailed standards and the Financial Standard. The detailed
standards would remove governmental control and allow more flexibility in choosing
accounting policy and estimates. These detailed standards, if enacted, would move China's
accounting standards closer to the International Accounting Standards. Consequently,
without discussing or alerting readers to these proposed detailed accounting standards,
Chapter 2's discussion on China's financial reporting issues seems incomplete. And Chap-
ter 3 fails to compare the differences between the Securities Regulatory Commission with
that of the U.S. Securities and Exchange Commission (SEC) in their roles and power in set-
ting accounting standards.
Chapter 4 is a very weak chapter due to the significant limitations of the survey study.
Overall, Chapter 5 is the best-written chapter and is very informative. The chapter provides
information that is of great interest to Western readers.
For the managerial accounting issues. Chapter 6 begins with a discussion of performance
evaluation issues of SOEs' contract responsibility system (CRS). The problems with CRS
and the resulting dysfunctional short-term managerial behavior are presented in Chapters 7
and 8. Using a questionnaire survey. Chapter 7 summarizes the respondents' views on the
types of short-term dysfunctional management behavior under the CRS and the factors
causing the formation of these behaviors. Six short cases are presented in Chapter 8 to
illustrate the various types of financial performance measures used by these SOEs and their
problems. In describing the performance evaluation systems, limited discussion is pro-
vided of the weaknesses of the systems and the types of penalty usually levied. In addition,
no discussion is directed at the roles performed by the management accountants and audi-
tors.
Chapter 7 very thoroughly discusses the factors causing the short-term dysfunctional
behavior and enables one to gain a better understanding of the distinct features of SOEs. As
for Chapter 8, most of the issues discussed are of a management nature rather than of an
accounting significance. No discussion is provided on the management control systems
used by these SOEs. Finally, these three chapters discuss the management accounting
issues primarily applicable to SOEs under CRS in the 1980s. In the 1990s, the government
has reduced the use of CRS and encouraged the corporatization of SOEs. Consequently,
these three chapters may lose much of their significance in the near future.
Chapter 9 is a short and concise chapter on performance indicators for joint ventures
(JVs) based on a questionnaire survey result of 30 manufacturing JVs. This is a useful
chapter for those involved, or planning to be involved, in establishing a joint venture rela-
tionship with a Chinese SOE.
Book Reviews 673
The last chapter of the book reports a survey of accounting data manipulation conducted
in Hong Kong and China. By comparison with Hong Kong practices, China's accounting
practices look extremely good, with a very low level of accounting data manipulation in all
aspects investigated. This is due to the limited use of accounting information for decision
making and also to the fact that accounting disclosures are still in an early stage.
Overall, the weakness of this book is the lack of a framework within which to examine
the financial, managerial and auditing issues. Consequently, the issues under discussion
seem unrelated. Finally, the authors do not identify the areas requiring more research. As a
result, this book fails to motivate further research interest in China's accounting arena.
However, considering that this is the first book on accounting in China written in English
in the 1990s, the authors have done an outstanding job in providing an overview of the
accounting issues. In addition, the research findings presented via the field studies and
questionnaire surveys were very interesting and thought-provoking.
REFERENCE
Xiang, B. 1998. "Institutional factors influencing China's accounting reforms and standards."
Accounting Horizons, 12: 105-119.
Reviewed by Amy Hing-Ling Lau
Oklahoma State University
Stillwater, Oklahoma, USA
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EDITOR
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University of Illinois at
Urbana - Champaign
CO-EDITORS
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University of Illinois at
Urbana-Champaign
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Aichi'Gakuin University, Tokyo
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King Fahd University,
Saudi Arabia
Volume 33 • Number 5 • 1998
^li) JAI Press Inc.
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Center for International Education and Research in Accounting,
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opyright © JAI Press Inc. 1998 All rights of reproduction in any form reserved.
EDITOR
Andrew D. Bailey, Jr.
University of Illinois, Urbana-Champaign
CO-EDITORS
Arthur R. Wyatt, University of Illinois, Urbana-Champaign
Yukio Fujita. Aichi Gakuin University, Tokyo
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BOOK REVIEW EDITORS
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EDITORIAL POLICY BOARD
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H. Peter Holzer, Wirtschaftsuniversitdt, Vienna
Toshio lino, Surugadai University, Japan
Yu Xu-Ying, Xiamen University, People's Republic of China
Stephen A. Zeff, Rice University, Houston
EDITORL\L REVIEW BOARD
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A. Bose, Haidia Petrochemicals Limited, India
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Ling-Tai Lyunete Chou, National Chengchi University, Taiwan
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Research in Accounting Regulation
Edited by Gary John Previts, Department of
Accountancy, Case Western Reserve University
Volume 11, 1997, 262 pp.
ISBN 0-7623-0168-6
$78.50/£49.95
CONTENTS: MAIN PAPERS. Tax Policy Implications of Legislating Account-
ing Change: The Case of S & L Goodwill and Tax Nols, Anthony Catanach.
An Investigation of Auditor Resignations, Mark Defend. l\/licfiael Ettredge and
David B. Smitii. Regulating Research: Relevance vs. Elegance, Micliael l\Aa-
iier The Effect of SEC Enforcement on Auditor IPO Market Share, Keitfi A.
Moreland. The Effects of Financial Reporting Disputes with the SEC on the
Informativeness of Earnings, Obeua S. Persons. Comment Letters as Indica-
tors of Overall Corporate Manager Preferences: Employers' Accounting for
Pensions, Georgia Saemann. RESEARCH REPORTS. The SEC's Audit Re-
quirements for Companies Acquired and Equity Investees, Jerry Arnold and
William W. l-loider The Auditor Expectation and Performance Gaps: Views
from Auditors and Their Clients, Steven L. Harris and Dale E. IVIarxen. Post
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tion Ahead for Accounting Firms, Philip Little and Debra Burke. PERSPEC-
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through the Sec Maze, Barbara Clemenson. REVIEWS AND ESSAYS. RE-
VIEWS: The Accounting Profession Major Issues: Progress and Concerns by
the General Accounting Office, reviewed by E. James Burton. Performance
Results in Value Added Reporting by Ahmed Riahi-Belkaoui, reviewed by
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Author Index for Volume 33
The International
Journal of
Accounting
Adhikari, A.: See Tondkar, R., Flanigan, M.,
Adhikari, A., and Hora, J.
Alexander, D.: Accounting in Transition: The Impli-
cations of Political and Economic Reform in
Central Europe 525
Artsberg, K.: The Regulation of Financial Reporting
in the Nordic Countries 519
Beechy, Thomas: Accounting: An International Per-
spective by Gerhard G. Mueller, Helen Ger-
non and Gary Meek 394
Bloom, R., Fuglister, J., and Myring, M.: The State of
Accounting in Armenia: A Case 633
Chan K. H.: See Mo, P and Chan K. H.
Choi J.: See Ziebart D. and Choi J.
Chow, C, Hwang, R, Liao W, and Wu, A: National
Culture and Subordiantes' Upward Communi-
cation of Private Information 293
Chowdhury, D and Hoque, Z.: Profit Sharing and
Corporate Performance: Some Evidence from
Bangladesh 469
Darrough, M, Pourjalali H, and Saudagaran, S: Earn-
ings Management in Japanese Companies 313
Douthett, E.: See Godwin, J., Goldberg, S., and Dou-
thett, E.
Drury, C: See Guiiding, C, Lamminmaki. D. and
Drury, C.
Flanigan, M.: See Tondkar, R., Flanigan, M.,
Adhikari, A. and Hora, J.
Flower, J.: Accounting Research in Lund 285
Fuglister, J.: See Bloom, R., Fuglister, J., and Myring,
M.
Godwin, J., Goldberg, S., and Douthett, E.: Relevance
of U.S.-GAAP for Japanese Companies 589
Goldberg, S: See Godwin, J., Goldberg, S., and Dou-
thett, E.
Guiiding, C, Lamminmaki. D., and Drury. C: Bud-
geting and Standard Costing Practices in New
Zealand and the United Kingdom 569
Hagigi. M: Japanese Accounting — A Historical
Approach 283
Holstrum, G. and Hunton, J.: New Forms of Assur-
ance Services for New Forms of Information:
The Global Challenge for Accounting Educa-
tors 347
Hoque, Z: See Chowdhury. D. and Hoque. Z.
Hora. J.: See Tondkar, R., Flanigan, M., Adhikari, A.,
and Hora, J.
Hunton J.: See Holstrum, G. and Hunton, J.
Hwang, R: See Chow. C. Hwang. R. Liao W, and Wu,
A
Jaggi, B.: The Nature and Determinants of Disclosure
Adequacy: an International Perspective 515
Kallunki, J.. Martikainen. M. and Martikainen, T.:
Accounting Income, Income Components and
Market-to- Book Equity Ratios: Finnish Evi-
dence 359
King. R, and Langli, J. C: Accounting Diversity and
Firm Valuation 529
Lamminmaki, D.: See Guiiding. C. Lamminmaki. D.
and Drury. C.
Lang. M.: International Financial Reporitng and
Analysis: A Casebook by Kenneth R. Ferris
391
Langli, J. C: See King, R. and Langli, J. C.
Liao W: See Chow, C, Hwang, R, Liao W. and
Wu. A
Macve, R.: The Development of Accounting in an
International Context: A Festschirft in Honour
of R.H. Parker edited by T. E. Cooke and C.
W. Nobes 396
Martikainen, M.: See Kallunki, J., Martikainen, M.
and Martikainen. T.
680
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
Martikainen, T.: See Kallunki, J.,
Martikainen, M. and Martikainen, T
Mo, P and Chan K. H.: Ownership and Country
Effects on Error xx Characteristics: An
Empirical Study in an Emerging Economy
235
Myring, M.: See Bloom, R., Fuglister, J., and Myring,
M.
Needles, B: International Accounting Research from
1965 to 1996: Indexes and Annotated Bibliog-
raphy of the International Journal of Account-
ing 1
Noguchi, A: Effect of the Inconsistency in Account-
ing Standards on the Choice of Financial
Instruments: The case of Debt Issued with
Stock Purchase Warrants and Convertible
Debt by Japanese Companies 335
Owusu-Ansah, S.: The Impact of Corporate
Attributes on the Extent of Mandatory Disclo-
sure and Reporting by Listed Companies in
Zimbabwe 605
Porcano, T. and Tran, A: Relationship of Tax and
financial Acounting Rules in Anglo-Saxon-
Countries 433
Pourjalali, H: See Darrough, M, Pourjalali H, and
Saudagaran, S
Richardson, W: See Roubi, R. and Richardson. W.
Rotenberg W.: Harmonization of Foreign Currency
Translation Practices: Canadian Treatment of
Long Term Monetary Items 4 1 5
Roubi, R. and Richardson, W.: Managing Discretion-
ary Accruals in Response to Reductions in
corporate Tax Rates in Canada, Malaysia and
Singapore 455
Rueschhoff, N. and Strupeck, C: Equity Returns:
Local GAAP versus U.S. GAAP for Foreign
Issuers from Developing Countries 377
Rundfelt, R.: International Accounting and Finance
Handbook by Frederick D.S. Choi 392
Salter, S: Financial Disclosure in Emerging Markets:
A Re-Examination 211
Saudagaran S: See Darrough, M, Pourjalali H, and
Saudagaran, S
Shaughnessy, K: See Street, D. and Shaughnessy, K
Stolowy, H.: Comparative Studies in Accounting
Regulation in Europe 519
Street. D and Shaughnessy, K: The Quest for Interna-
tional Accounting Harmonization: A Review
of the Standard Setting Agendas of the lASC,
US, UK. Canada, and Australia. 1973-1997
179
Strupeck. C: See Rueschhoff. N. and Strupeck, C.
Tondkar, R., Flanigan. M.. Adhikari, A. and Hora,
J.: Internationalizing Accounting Education
Through and Integration Approach: A Sur-
vey of U.S. Schools 483
Tower, G: See Williams, S.M. and Tower, G
Tran, A.: See Porcano. T. and Tran A.
Wijewardena H. and Yapa S: Colonialism and
Accounting Education in Developing Coun-
tries: The Experiences of Singapore and Sri
Lanka 269
Wilson, A.: The lASC-U.S. Comparison Project: A
Report on the Similarities and the lASC-U.S.
GAAP Comparison Project: A Report on the
Similarities and Differences between lASC
Standards and U.S. GAAP 521
Williams. S. M. and Tower, G: Differential Reporting
in Singapore and Australia: A Small Business
Managers' Perspective 263
Wu. A: See Chow, C. Hwang, R, Liao W, and Wu. A
Yapa S: See Wijewardena H. and Yapa S.
Ziebart, D and Choi, J: The Difficulty of Achieving
Economic Reality Through Foreign Currency
Translation 403
Subject Index for Volume 33
The International
Journal of
Accounting
269
269
179
Accounting diversity 529
Accounting & financial reporting standards 379
Accounting education 347
Accounting education and practice
Accounting in developing countries
Accounting income 359
Accounting profession 269
Accounting standard setting process
Alignment 433
Anglo-American accounting model 1 79
Anglo-Saxon countries 433
Annual Report 605
Armenia 633
Assurance services 347
Audit planning 235
Bangladesh 469
Book-tax relationship 433
Book value equity 589
Budgeting 569
Canada 415,455
Chart of accounts 633
Clean surplus 529
Colonial system 269
Commonwealth of Independent States 633
Conservatism 529
Convertible debt 335
Corporate attributes 605
Corporate performance 469
Coverage of international accounting topics 483
Covered warrants 335
Cross-cultural 3 1 3
Culture 263,455, 633
Debt issued with sock purchase warrants
Developing countries 377, 469
Differential reporting 263
Disclosure 211
Disclosure index 605
Earnings 589
Earnings management 313
335
Economic restructuring 633
Emerging economy 235
Emerging markets 2 1 1
Error characteristics 235
Equity returns 379
Financial accounting 263, 433
Financial reporting 605
Finland 359
Foreign currency translation 403, 415
Foreign debt 415
Foreign investment 2 1 1
Foreign registrants 589
G4+1 179
GAAP reconciliations 379
Global 347
Government 633
Harmonization 179
lASC 179
Incentives and challenges in internationalizing account-
ing curricula 483
Income components 359
Income tax 433
Information technology 347
International 347, 529
International harmonization 4 1 5
International accounting 263,313
International accounting standards 179, 633
Internationalization of accounting curricula 483
Integration approach 483
Integration of international accounting topics 483
Japan 335
Japanese accounting 313
Japanese-GAAP 589
Malaysia 455
Management accounting practice 569
Management controls 293
Managing accruals 455
682
THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 5, 1 998
Mandatory disclosure 605
Market-to-book equity ratios 359
National culture 293
Ownership effects 235
Performance related pay 469
Privatization 633
Professional accounting bodies 269
Profit sharing 469
Purchasing Power Parity 403
Resource materials in internationalizing accounting
curricula 483
Singapore 455
Standard-costing 569
Subordinate communication Truthfulness 293
Substance over form 335
Tax rates 455
U.S.-GAAP 589
Value-relevance 589
Valuation 529
Virtual reality 347
Zimbabwe 605
107 10/99
NSTRUCTIONS FOR AUTHORS
\IMS and SCOPE. The aims of The International Journal of Accounting are to advance the academic and profes-
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Journal Articles
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