Essay: Legal And Cultural Influences On Accounting Systems In USA And Germany.

Legal Systems Adopted Worldwide

The accounting systems have usually understood by people as the functions included financial numbers and their standards. Whereas in real terms the legal framework, cultural, politics and other factors of a country affect that country’s accounting system (Lenard, 2017). The legal systems are not universal in nature and different systems have been following by the different countries. For example, France and Germany are following the civil law system in their country whereas US followed the common law systems from years (justice.gov, n.d.). These legal systems differs the accounting principles from country to country. The cultural aspects is also a major factor that influence the management of accounting system. The social, cultural, and other factors affecting the accounting systems of a country could understood through Hofstede’s cultural dimensions and Sydney Grey’s accounting values (Edeigba, et al., 2020). In this essay, the Hofstede-Grey model shall be analysed to determine the accounting systems in USA and Germany. The essay shall also include the cultural and legal impact of accounting in the USA and Germany.

A legal system of a country is different from other countries due the influence of their religious and cultural factors. There are so many legal systems adopted worldwide. The five most commonly adopted legal systems are: common law, civil law, religious law, customary law, and hybrid adopted legal system (Heidhues & Patel, 2019).

The countries like UK and US had adopted the common law legal system. The rules and regulations made under legal scenario has an influence from the previous judgements and legal proceedings. They rely on the case-to-case judgements and reality aspects of a count. Statutory and legislation based legal system that apply the acts on the case scenarios through interpreting the updated legislation and statutes on the case. Civil law legal system has adopted by the countries like Germany, France, Brazil,and some countries in South America.

Religious legal systems, religious and traditional believes outlines the legal codes to apply in a country (Tanaka, 2014). Legal religious systems include Canon, related to the Raman and Catholic religion, Islamic and Talmudic, related to Jewish religion laws. In some countries like India, different religious laws had introduced as per the religions followed in it. These are the laws that differ from the different community. Customary laws are decided by the community itself and unique in nature in different societies. The community decides the application of rules and apply it on a particular case. There are so many countries that follow both, common law and civil law legal systems or merge different legal system together depending on the case scenarios referred as hybrid legal systems. For example, Nepal is following Hindu legal concepts with common law. India follows common laws with different religious in the country (Troilo, et al., 2019). As, our objective is to compare the accounting system of Germany and United States most of the part in USA is following common law as their legal system and Germany is following civil law legal system. Legal system of a country plays an important role on accounting framework. It regulates the financial accounting standards and its application in the country (justice.gov, n.d.).

The Comparison of Common Law and Civil Law Legal Systems

Secondly, all the legal systems discussed above evolved and apply the system according to their country’s societal and cultural status. The society and cultural dimensions plays an important role to frame these legal systems, needed to evaluate from Hofstede’s theory, and has to apply accounting principles of Grey (Troilo, et al 2019).

Hofstede cultural dimensions had evolved in 1960s and 70s through surveying the cultural dimensions of the 50 countries. This survey had given mainly the four dimensions to evaluate the different social and cultural characteristics: power distance, individualism, masculinity, and uncertainty avoidance. The individualism is a theory that includes the members of the society and give the preference to their individual choices. Whereas the power distance is totally opposite to this theory. This theory states that the society follows a hierarchy of power and the higher power distance took the decisions and lower power distance people shall follow that decision. The masculinity theory talks about masculine and feminine concepts and its achievement by the societal perspective. Masculine includes the competition and material prizes whereas, feminine reflects and work-life balance. (Khlif, 2016)

Sydney Grey has extended these cultural dimensions to evaluate the accounting principles in 1988. He determine the social factors that influence the accounting with the help of Hofstede dimensions. Grey’s hypothesis to the Hofstede theory of cultural dimension evolved the accounting values: professionalism v. statutory control, infirmity v. flexibility, conservatism v. optimism, and secrecy v transparency. These accounting values had brought from the results of the cultural dimension of societal factors of Hofstede theories (Vasile, 2016).

The first accounting principle analyses whether the accounting standards set out through the individual professionalism or the legislation should take into account to frame the accounting principles. The second accounting value Grey established is uniformity v. flexibility that determines the need of a country to apply uniform principles to all companies or provide flexibility to apply the principles individually according to their individual scenarios. The third value asks about the approaches (cautious or risk taking) that a company shall prefer to adopt. Lastly, Grey talks about the disclosure accounting value that determines whether the company has to adopt secrecy or disclosure of an accounting report of the company (Edeigba, et al, 2020).

All the principles of Grey shall apply to a particular society after analysing and evaluating the Hofstede’s cultural dimensions and know all the aspects related to the culture of a country. Grey’s explanation of his accounting values helps to justifies the decision of a country to apply accounting principles and standards differs from other countries. For example, Germany has adopted the IFRS accounting standards whereas; USA adopted the GAAP principles to maintain their accounting standards (Palmer, et al, 2021).

The above theories and accounting values applying on the business enterprises and relate to the business. Business management and decisions has taken according the cultural and the societal influences of a country. Hence, the Hofstede’s cultural influences that affect the US atmost could understood by analysing the societal approach there. United States is a country where Hofstede’s 6-dimension theory has applied. The theory of individualism applied in America as it is low uncertainty avoidance (LUA) country. LUA concludes that America believes in taking risks hence, does not follow the structured, and uniform accounting standards. The individualism theory approached Grey’s professionalism principle as it involves the universal decision of American society. The professional accounting theory that applied in US, had mentioned in Accounting Historians Journal illustrated that people is having faith in professionalism over statutory control. American Institute of Certified Public Accountants (AICPA) developed the accounting profession in United States (Lenard, 2017).

Influence of Religious and Traditional Believes on Legal Systems

According to Grey’s model on Hofstede’s cultural dimensions evaluated that the country that relies on high uncertainty avoidance results in low disclosure of accounting reports and indicated secrecy. The high power distance following societies results to maintain the secrecy and caused negative influence on financial transparency. Grey believes that Hofstede theory helps to develop the accounting system of a country as it reflect the societal thoughts of a country. As US is following the theory of individualism that lead the accounting value of professionalism, it indicates that US is following the Grey model of accounting values.

Contradictory to the US accounting framework, Germany is an example that evidences the criticism of Grey’s model. The hypothesis model of Grey on Hofstede theories reflects a simple elaboration of theories. Hofstede theory’s limitations results the criticism on Grey’s model. The Hofstede’s theory ignored the factual concepts like legal, political, and economic factors of a country that affect the accounting structure and framework. Contradicting the accounting framework in US, Germany is following the two-dimensional Hofstede’s theory. It applied the uniformity and secrecy method. Germany is a country that applies the high uncertainty avoidance and form the accounting framework as per the power distance principle. Restrictions in disclosure of financial records to the closely related management are the key policy in Germany. The political hierarchy has followed by Germany that applied to accounting framework and constructs the theory of power distance (Heidhues and Patel, 2019).

The US Generally Accepted Accounting Principles (GAAP) reflects the transparent societal culture of America, whereas Germany is maintain its secrecy in its accounting framework through International Financial Reporting Standards (IFRS). Having separate accounting standards reflects that United States is famous to bring the innovative framework (Palmer, et al, 2021).

The above write up concluded that the factors like societal thoughts, legal systems, political aspects are the factors that influence the accounting frameworks of a country. Hofstede theories relate the accounting framework of a country to its societal thoughts and cultural dimensions. Grey expanded Hofstede’s theory and made the model that explains the accounting values applied to structure the accounting framework. Applying the Grey’s model US accounting structure is based on the professionalism principle and following low uncertainty avoidance (LUA) whereas, Germany contradicting the same is following the high uncertainty avoidance (HUA) principle for adapting the accounting standards. Due to this distinctive culture of both the countries, US is following GAAP as accounting standards and Germany is following IFRS as its financial standards.

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Heidhues, E. & Patel, C., 2019. A critique of Gray’s framework on accounting values using Germany as a case study. Critical Perspectives on Accounting, pp. 273-287. https://dx.doi.org/10.1016/j.cpa.2010.08.002

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Vasile, A. C., 2016. Hofstede’s cultural dimensions and management in corporations. Cross-Cultural Management Journal, 18(1), pp. 35-46.

Available at: https://econpapers.repec.org/RePEc:cmj:journl:y:2016:i:9:p:35-46