Saturday, 11 June 2011

Relevancy of Hostede cultural dimensions and Gray's accounting values

Due to globalisation, IFRS have been adopted widely. However, under some circumstance, the convergence of IFRS has not been successful. Some major factors such as development factors and cultural factors have strong impacts on a country’s accounting principles and practices; and they contribute to.....Therefore, this report will examine the IFRS convergence and the impacts of development factors and cultural characteristics, particularly Hofstede and Gray’s models. To do this analysis, we have conducted a financial analysis about three different companies which are Tesco (UK), Metro (Germany), and Seven&i Holdings (Japan) in order to test the relevancy of both models. The opacity index has also been used to test the relevancy of these models.
During this analysis, we have found that IFRS has been fully adopted in the United Kingdom, partly in Germany, and has not been fairly accepted in Japan. This has led to some limitation to compare the three companies’ annual reports. Due to these hindrances, there is a sign of existence of hosted and Gray’s model in this modern world.
 Furthermore, a few major forces, for examples International Accounting Standards (IAS) at national levels, and International Accounting Standards Board (IASB) at international levels have harmonised countries’ accounting principles and practices.
United State has strongly involved in this harmonization as they engage lobbying against the IFRS convergence. This has made it difficult to the IFRS convergence, thus both Hofstede and Gray’s models become more important in 2011.

This report is prepared to test the relevance of Hostede and Gray’s models by digging through several steps. First of all, comparing different development factors of United Kingdom, Germany, and Japan are analysed. This will involve the examination of current factors and opacity index. Then, cultural characteristics and accounting values will be taken into consideration as well as an analysis of financial statements of Tesco (UK), Metro Group (Germany), and Seven&i Holdings (Japan); following by the confirmation of Hostede and Gray’s models and recommendations.

2.1.1 Development factors
United Kingdom, Germany, and Japan’s accounting principles and practices have been influenced by some major development factors such as legal systems, source of finance, and taxations, political and economic ties, etc. In United Kingdom, capital market mainly provides funding for business, and main form of organisations are limited liability companies. The UK’s accounting is an independent regulation, used to provide information for efficient functioning of the capital market. The principle-based approach is taken place within the system rather than rules-based approach. For Germany, tax law, EU directives, and globalization have strong impacts on German financial reporting. In Japan, bank credit and cross-corporate ownership are the main sources of finance and corporate earnings are the main source of funding for business. Conglomerates (known as Keiretsu) control over the economy and government regulate stock exchanges   

2.1.2 Current information
Furthermore, in April 2010, the Iceland volcano cloud has slightly impacted on United Kingdom’s economy in airline industry, export and import sectors for a while. The Germany’s economy is influenced by an allegation of soccer match-fixing, and senior politicians are allegedly affirmed that they are being paid by large companies. This has led to lower tax revenues and higher state spending. Japanese earthquake has a major impact on the country’s economy activities. Many large firms (i.e. Honda, Toyota, and Nissan) have suspended their total production and issues of power shortages are being significant due to the shutdown of reactors.

2.1.3 Opacity index
Opacity index is determined by conducting surveys from chief financial officers, equity analysts, bankers, and accounting consultants in different countries around the world. To estimate it, the analysis based on corruption, legal system, economic policy, accounting and reporting standards, and the regulatory regime have been conducted[3]. As UK, Germany, and Japan have O-factors scores of 18, 17, and 25, this leads to the following consequences for Tesco (UK), Metro (Germany), and Aeon (Japan):
Firstly, it could cause foreign direct investment decreasing, thus slower GDP growth. Secondly, companies (i.e. Aeon) are likely limited to access capital which is related to bank loans, and deposits. In addition, Aeon is operating in a less liquid, and efficient financial market, thus income would be reduced

2.2  Perspectives of Hofstede and Gray’s models
2.2.1 Culture Characteristics 
Culture is a complex thing which inspires knowledge, art, morals, custom, heroes, rituals, laws, religions, taboos and any other capabilities and habits acquired by members of society. It has different characteristics in different countries. This is one of the reasons that encourage Hostede to analyse and create five dimensions of national cultures such as power distance, uncertainty avoidance, masculinity, individualism, and long-term orientation[5]. However, Hostede’s model have strengths and weaknesses
Using these dimensions, we may identify the way of how cross-cultural people behave and habitats. In United Kingdom, respects are showed between employees and managers, and people are taught to be independent and willing to take risks. People from Germany do not have strong distance between poverty and wealthy. Somehow they focus on individual achievement, and have ambitions of going beyond the nation. In contrast, Japanese society has a strict social structure where there is strong distance between managers and staff, men and women. People tend to follow societal structures and code of conducts.

2.2.2 Accounting Values
More than Hostede (1980) did, Gray (1988) developed his theories through the general experience of international accounting regimes. This is a result of the creation of the four accounting values including professionalism (versus statutory control), uniformity (versus flexibility), conservatism (versus optimism), and secrecy (versus transparency)[7]. These accounting values have strong influence on accounting practices, thus it can be used to explain the difference of accounting systems worldwide. However, debates for its usefulness are still going concerned.
United Kingdom is a professionalism, flexibility, transparency, and optimistic country where there are private-self regulations, transparent fair and true view concepts. Accounting practices are flexible and accounting measurements are approached by optimistic views. As Germany is individualism country where people tend to care about themselves and their own families, it has affects to Germany’s accounting professions and work ethics. In contrast, Japanese people prefer to live in a restricted culture and legal systems.

2.3       Limitations for comparing the performance of TESCO(UK), METRO(GERMANY), and SEVEN&I HOLDING(JAPAN)
Tesco (UK) and Metro Group (Germany) have prepared the financial statements in accordance with the International Accounting Standards (IFRS). In contrast, Seven&i Holdings (Japan) are still preparing the financial statements using Japanese accounting principles generally accepted (GAAP). In addition, there are some other barriers that have impeded the comparison of the three financial reporting practices such as currency, audits differences, timeliness, goodwill, and disclosure differences[8]. As moving into second step of financial statement analysis, another hindrance has come into light, that is the current ratio may not be used to compare the performance between Tesco (UK), and Metro (Germany). This is because the “asset held for sale” line item is classified as current liability in Metro, whereas non-current liability in Tesco[9]. In the prospective analysis, it is given that Tesco has prospectively approached substantial returns; however there is no sign of independent supported evidence. Additionally, Seven&i Holdings has expected an increase in revenue, but the operating income are decreasing due to applying new accounting standards[10].
However, these hindrances can be overcome by using coping mechanism. That is using currency translators to convert all the currency to a common one, undertaking the three companies visitations, asking for second auditor for opinion, and so on[11].
As all the necessary analysis have been taken, it is found that Hofstede and Gray’s models still have strong influence on worldwide accounting principle and practices. These models also play a key part in gathering an accurate FSA as they can tell how problems are incurred, some solutions can be carried out.

2.4       Evaluation and Recommendation
Tesco (UK) and Metro Group (Germany) fully disclose their information in a concept of true and fair view presentation, Seven&i Holdings however have limited disclosure. This is because Tesco and Metro Group’s financial statements are prepared in accordance with IFRS, but Seven&i Holdings’ are not. These firms are using different accounting standards and principles as they are impacted by development factors (i.e. legal systems, source of financing, tax system), cultural factors defined by Hofstede and Gray. Japan still keeps their existing GAAP, Germany partially adopt IFRS, and UK fully adopts IFRS; these substantial variations have supported the Hostede and Gray’s model in term of its relevancy in 2011.
To understand and to be more reliable in the market place, the following recommendations should be suggested to Mr. Peter Hines (CEO of DPT Holdings Ltd):
·         As Tesco (UK), and Metro (Germany) are more transparent in the disclosures than Japan, it is recommended that UK and Germany are better places to invest.
·         Japan has very high opacity index, this could indicate that there is hidden risks behind company’s “actual” performance; thus we should implement all the necessary analysis before investing in Seven&i Holdings.
·         Development should find the ways to solve all the barriers cause by the different development factors, cultural factors.
International Accounting Standards (IAS) and International Accounting Standards Board (IASB) are major forces that drive the movement towards international harmonisation at both a national and international level. Moreover, U.S governments and Swiss companies have been lobbying against the IFRS[12].


Hostede and Gray’s models have been tested by analysing financial statements between three different countries including Tesco, Metro, and Seven&i Holdings from different countries around the world. Somehow, it seemed to be obsolete; however, as the result of the analysis, these models become even more important. It is also expected to be more significant factors if the political lobbying is still in place.

APPENDIX 1: Development factors of United Kingdom, Germany, and Japan

Section A: Development factors

Development Factors
United Kingdom
-   The capital market provides the main source of funding for companies

-   The limited liability company is the main form of business organization.

-   UK’s accounting purpose: providing information for the efficient functioning of the capital market.

-   Accounting in the U.K. grew as an independent discipline, responding to business needs.

-   The first professional accounting body in modern times was established in the U.K. in 1853

-   There are six professional bodies in UK, coordinated by the Consultative Committee of Accountancy Bodies (CCAB).

-   The U.K. accounting profession has favoured a principles-based approach rather than a rules-based approach to standard setting.         
-  Tax law has a strong influence on accounting and financial reporting

-  This is because when corporate income taxation was introduced in Germany in 1874, the requirement for annual accounting had already been codified in the Commercial Code in 1862. It was convenient to link corporate income taxation to existing financial statements. 

-  There are two main external factors that have influenced financial reporting in Germany in recent years. They are, EU Directives and the forces of globalization. The 1985 Accounting Act implemented the Fourth, Seventh, and Eighth Directives and transformed them into German Commercial Law.

-  The EU’s decision to adopt IFRS from January 1 2005, was in recognition of the global trends in financial reporting. Even before the EU’s decision, large German companies like Daimler-Chrysler that had their shares listed on foreign stock exchanges were already using internally acceptable accounting standards.  
- The economy is dominated by a few conglomerates known as Keiretsu.

- The main sources of finance for business are bank credit and cross-corporate ownership, rather than outside equity finance.

- Corporate earnings are regarded as the source of funds that can be distributed (but only distributed to shareholders, after payments to banks and government who are the priority under the Japanese legal system), and not as a measure of corporate performance.

- Stock exchanges in Japan are government regulated rather than self-regulated.  The stock exchange law is administered by the Ministry of Finance.


Section B: Current information of United Kingdom, Germany, and Japan

B1. United Kingdom

Iceland volcano cloud: the economic impact Tuesday, 20 April 2010
The cloud of volcanic ash drifting across Europe is continuing to make much of the continent a no-fly zone this week. International trade relies more heavily on road, rail and sea freight than it does on air freight. For example, just 1% of the UK's trade, by volume, is carried by air but the disruption has caused real problems for those trading perishable goods, including food and flowers, which depend on air freight. Food exports from Africa and the Caribbean are among those hit, with reports of Kenyan farmers being forced to dump stocks of fresh food and flowers destined for European consumers. According to a report in Kenya's Daily Nation newspaper, the Kenyan economy is losing $3.8m a day as a result of flight cancellations to Europe. That scale of losses is expected to be repeated in agriculture-based economies across Africa and South America. Supermarkets' supplies of some fresh produce could soon be affected, though no problems have yet been reported by UK retailers. Meanwhile, carmaker Nissan has also announced a one-day suspension of production of three of its models in Japan because it has been unable to import parts from the Irish Republic. It is still unclear how long that disruption will last, but the longer flights are grounded, the greater the impact will be on businesses and the wider economy. Businesses are also expected to lose money through cancelled meetings, stranded staff, and delays to air mail. Productivity in the UK is expected to suffer due to workers being unable to return to work, according to the Centre for Economic and Business Research (CEBR). Meanwhile, major courier companies FedEx, DHL and TNT have reported delays and disruption to their services.

B2. Germany

The German Problem With Corruption
 Großansicht des Bildes mit der Bildunterschrift: The Parliament dome is transparent, but that's about itA widening match-fixing scandal and revelation of politicians' corporate salaries have sullied Germany's once clean image. Experts say the country has been slow to tackle corruption and are calling for tougher laws. There was a time when Germany was known as a country stubbornly resistant to corruption, where even the mere whiff of scandal or sleaze would spell the end of a public or political career. Bildunterschrift: Großansicht des Bildes mit der Bildunterschrift:  German referee Robert Hoyzer at the center of a match-fixing scandalNot anymore. In recent months, the country has been rocked by allegations of soccer match-fixing and revelations of high-ranking politicians making money on the side by being on the payrolls of large companies. The events have further tainted Germany's once squeaky-clean reputation, which was already dealt a blow in 1999 when a financing scandal involving the conservative Christian Democratic Party came to light. Now, experts say that Germany's problem with corruption may be worse than previously thought. "The perception that Germany has no corruption problem has absolutely nothing to do with reality, but rather with the fact that a maximum of five percent of all corruption cases come to light," said Uwe Dolata, press spokesman for the trade union representing Germany's criminal police (BDK). The Berlin-based arm of Transparency International, a corruption watchdog, defines corruption as "the misuse of public or private economic power for private use." According to economists, corruption in Germany results in lower tax revenues and higher state spending, amounting to losses of some €200 billion ($259 billion) yearly.

B3. Japan

'Considerable' economic impact from Japan quake Mar 13, 2011
Japan's government expects the economic impact of Friday's huge 8.9-magnitude quake and the devastating tsunami that followed to be "considerable". Chief cabinet secretary Yukio Edano says the government will hold a meeting to assess economic damage from the disaster which laid waste to parts of the north-eastern coast and triggered a nuclear emergency. "The quake is expected to have considerable impact on a wide range of our country's economic activities," he said. Analysts say it will take weeks to get a firm idea of the extent of the damage inflicted on the nation and its economy, as the destruction wrought by the biggest quake on record to strike Japan continues to emerge. The government says at least 1,000 people are believed to have lost their lives, but the police chief in badly-hit Miyagi Prefecture says the death toll there alone is certain to exceed 10,000. The quake and tsunami have damaged or closed down key ports. Some airports shut in the immediate aftermath have since reopened, but transport infrastructure has been crippled along parts of the north-east. Many top Japanese firms say they are suspending operations. Automakers Toyota, Nissan and Honda have announced the total suspension of production in Japan until at least Monday. Sony has also shut plants. Mitsubishi says it will halt production at all three of its domestic plants on Monday and Tuesday. Suzuki motors also says it will suspend all domestic plant operations on Monday. The immediate prospects for Japan's atomic power industry are a key concern following a radioactive leak and an explosion at the ageing Fukushima No. 1 atomic plant located 250 kilometres north-east of Tokyo. Japan's nuclear industry provides around a third of the nation's power needs, and the shutdown of reactors may lead to a shortfall in electricity supply that will make power outages necessary, the government has warned. The east of the country is likely to face substantial power shortages due to Friday's massive quake, economy, trade and industry minister Banri Kaieda says.
In total, 11 of Japan's roughly 50 nuclear reactors shut down following the earthquake, an action taken automatically because they were located in affected areas.
The Bank of Japan (BoJ) says it will do its "utmost" to provide market liquidity and ensure the stability of financial markets. The BoJ has also announced that the two-day policy board meeting previously scheduled for Monday and Tuesday will now be cut short and conclude on Monday, seen as a sign it may quickly implement extraordinary measures.


A.     What is opacity index and how is it calculated?

PricewaterhouseCoopers' Opacity Index report -- developed from surveys of chief financial officers, equity analysts, bankers, and the firm's consultants in each country -- presents an estimate of the adverse effects of opacity on the cost and availability of capital.
The report offers a composite opacity-factor (O-Factor) ranking for each country based on the lack of transparency in five areas that affect capital markets: corruption, legal system, government macroeconomic and fiscal policy, accounting standards and practice, and regulatory regime. The O-Factor is based on a scale of zero to 150, with the lower numbers indicating a greater degree of transparency.
According to the report, factors that contribute to a country's opacity include: corruption in government bureaucracy that allows bribery or favouritism; unclear, conflicting, or incomplete laws governing contracts or property rights; economic policies -- fiscal, monetary, and tax related--that are vague or change unpredictably; weak, inconsistent, or unenforced accounting standards; and unclear, inconsistent, or irregularly applied business regulations. The report considers the impact of opacity from two perspectives: as a form of hidden tax and as a risk premium when countries borrow through sovereign bond issuances in international or domestic capital markets. The countries included in the index were chosen to be representative geographically and also to provide measurements for a sample of countries taken from the World Bank's economic tier -- upper income, upper middle income, lower middle income, and lower income.

B.     Opacity Index score of United Kingdom, Germany, and Japan

2009 opacity score (O-factor)
2008 Opacity score (O-factor)
2009 country rank
2007-2008 country rank
United Kingdom
10 (↓)
9 (-)
18 (↓)
Table 1: Opacity Index for United Kingdom, Germany, and Japan
Note: C = Corruption; L = Legal System; E = Economic policy; A = Accounting and reporting standards; R = the Regulatory regime.

C.      Consequences for Tesco (UK), Metro (Germany), Aeon (Japan)

Higher costs associated with high levels of opacity function as a drag on the economies of the countries that score poorly on the Index. Slower GDP growth is correlated with higher opacity levels, as are other factors, including a reduced ability to attract foreign direct investment (FDI).
High opacity decreases the ability of entrepreneurs, institution to access capital, since access to capital is critical for entrepreneurship to operate, a changes in policies to improve opacity result in higher level of entrepreneurship.
Furthermore, it also highly associated with banked deposit, which is a different source of funding for entrepreneurs.
High Opacity also negatively affects the trading of equity market; the result could be wider bid-offer spread and therefore less liquid and less efficient financial market. Also, it can mask underlying fundamentals of investment, which cause investment in an opaque country less attractive.

Opacity Index impacts on Income
Income To test these relationships, we looked for consistent differences between the average Opacity Index and individual scores among the four World Bank income groups. (See “Average Scores by World Bank Income Group,” p. 42.) We found that, as income decreases, opacity increases for each factor except accounting. The accounting exception is probably when the countries studied are broken down into the four World Bank income groups, group opacity for each component increases as group income decreases. The sole exception is accounting, because most lower-income countries adopt international accounting standards, possibly to counter high opacity in other components.
·         Opacity is not only a deterrent to economic development; it also decreases the ability of entrepreneurs to access capital
·         Opacity also increases the ranges of possible projected cash flows from risky projects, resulting in lower expected present values. This decreasing of expected discounted returns may ultimately result in the rejection of some projects that have strong potential but appear, because of opaque conditions, to be poor investments.
·         Opacity can affect economic development indirectly by deterring foreign direct investment. Since FDI is an amalgamation of stable investment funds, advanced technology, efficient managerial skills and easier access to the world market, it has a positive impact on economic growth and development
Opacity also has a negative and significant impact on FDI as a percentage of GDP.
(See “Opacity Vs. Foreign Direct Investment.”) In the majority of cases, most foreign direct investments go to countries with relatively transparent financial and economic systems. In the case of China, which has high levels of opacity and high levels of economic development, the simple lure of China’s “bigness” has tended to make it the recipient of greater levels of FDI than would otherwise be warranted
Power Distance Index (PDI): that is the extent to which the less powerful members of organizations and institutions (like the family) accept and expect that power is distributed unequally. This represents inequality (more versus less), but defined from below, not from above. It suggests that a society's level of inequality is endorsed by the followers as much as by the leaders. Power and inequality, of course, are extremely fundamental facts of any society and anybody with some international experience will be aware that 'all societies are unequal, but some are more unequal than others.
Individualism (IDV) on the one side versus its opposite, collectivism, that is the degree to which individuals are inter-grated into groups. On the individualist side we find societies in which the ties between individuals are loose: everyone is expected to look after him/herself and his/her immediate family. On the collectivist side, we find societies in which people from birth onwards are integrated into strong, cohesive in-groups, often extended families (with uncles, aunts and grandparents) which continue protecting them in exchange for unquestioning loyalty. The word 'collectivism' in this sense has no political meaning: it refers to the group, not to the state. Again, the issue addressed by this dimension is an extremely fundamental one, regarding all societies in the world.
Masculinity (MAS) versus its opposite, femininity refers to the distribution of roles between the genders which is another fundamental issue for any society to which a range of solutions are found. The IBM studies revealed that (a) women's values differ less among societies than men's values; (b) men's values from one country to another contain a dimension from very assertive and competitive and maximally different from women's values on the one side, to modest and caring and similar to women's values on the other. The assertive pole has been called 'masculine' and the modest, caring pole 'feminine'. The women in feminine countries have the same modest, caring values as the men; in the masculine countries they are somewhat assertive and competitive, but not as much as the men, so that these countries show a gap between men's values and women's values.
Uncertainty Avoidance Index (UAI) deals with a society's tolerance for uncertainty and ambiguity; it ultimately refers to man's search for Truth. It indicates to what extent a culture programs its members to feel either uncomfortable or comfortable in unstructured situations. Unstructured situations are novel, unknown, surprising, and different from usual. Uncertainty avoiding cultures try to minimize the possibility of such situations by strict laws and rules, safety and security measures, and on the philosophical and religious level by a belief in absolute Truth; 'there can only be one Truth and we have it'. People in uncertainty avoiding countries are also more emotional, and motivated by inner nervous energy. The opposite type, uncertainty accepting cultures, are more tolerant of opinions different from what they are used to; they try to have as few rules as possible, and on the philosophical and religious level they are relativist and allow many currents to flow side by side. People within these cultures are more phlegmatic and contemplative, and not expected by their environment to express emotions.

Long-Term Orientation (LTO) versus short-term orientation: this fifth dimension was found in a study among students in 23 countries around the world, using a questionnaire designed by Chinese scholars It can be said to deal with Virtue regardless of Truth. Values associated with Long Term Orientation are thrift and perseverance; values associated with Short Term Orientation are respect for tradition, fulfilling social obligations, and protecting one's 'face'. Both the positively and the negatively rated values of this dimension are found in the teachings of Confucius, the most influential Chinese philosopher who lived around 500 B.C.; however, the dimension also applies to countries without a Confucian heritage.

Section A: United Kingdom

Figure 3: United Kingdom's five cultural dimensions

Power Distance: The UK's score in this dimension is 35. This indicates that rank, status and inequalities between people are reasonably low. On a macro level this manifests in a number of ways, such as legislation protecting ethnic minorities. On a micro level this is witnessed in the office where the relationship between superiors and subordinates is relatively casual and incorporates little ceremony.
Individualism: The UK scores 89 for Individualism. This is high and therefore points to that fact that British culture values and promotes individuality. On a macro level we see that the nuclear family is the more predominant form of basic social structure. On a micro level, in the business environment the individual may be more concerned with themselves rather than the team.
Uncertainty Avoidance: For this dimension the UK scores 35 which is quite low. This means British culture is relatively open to taking risks and dealing with change. On a macro level this can be seen in the constant revision of laws and government structures. On a micro level, conflict or disagreement in the workplace, even with superiors, is considered healthy.
Masculinity: The UK scores 66 which indicates that it is somewhere in the middle. This may reflect the fact that British society and culture aims for equality between the sexes, yet a certain amount of gender bias still exists underneath the surface.

Section B: Germany

Figure 4: Germany's five cultural dimensions

Power Distance 35: Germany has a 35 on the cultural scale of Hofstede’s analysis. Compared to Arab countries where the power distance is very high (80) and Austria where it very low (11), Germany is somewhat in the middle. Germany does not have a large gap between the wealthy and the poor, but have a strong belief in equality for each citizen. Germans have the opportunity to rise in society.
Individualism (67): Germany can be considered as individualistic with a relatively high score (67) on the scale of Hofstede compared to a country like Guatemala where they have strong collectivism (6 on the scale).
In Germany people stress on personal achievements and individual rights. Germans expect from each other to fulfill their own needs. Group work is important, but everybody has the right of his own opinion and is expected to reflect those. In an individual country like Germany people tend to have more loose relationships than countries where there is collectivism where people have large extended families
Uncertainty Avoidance Strong :(65):      The structured system used was more preferable for German people before the Second World War. However, it had been changed after merging of East and West Germany.
In German, the political style and culture had been influenced by USA because of the frontline status in the Cold war. For at least two generation, German people had been absorbed the USA life style. These make their culture structure to have less regulation control (Tomalin, 2003). Furthermore, the movement of European Union impacts the German culture. For example, German regulators implemented the EU Directive to German law system. This has created the flexibility to German culture because some of these laws were adopted from UK and USA regulations that provide more freedom (the_German_Federal_Foreign_Office, 2009).    
Masculinity :(66):  In Germany, Role between genders is not different. Also, German people emphasize the visible achievement as equal to caring for the environment and personal relationships.  
In Germany, as in other modern societies, there has been tremendous progress with regard to the equal rights for women stipulated in the Basic Law. As such, with regard to education girls have not only drawn level with, but have indeed now overtaken boys (the_German_Federal_Foreign_Office, 2009). Furthermore, the rights of woman workers are protected by legislations. For example, workers who become pregnant will be treated fairly (Tomalin, 2003).   

Section C: Japan

Power Distance :(52): The Japanese culture is generally well-known for its hierarchical nature, and resembles what is expected by academics among Asian cultures, particularly in relation to power distance (Yamamura et al., 2003). Society’s inclination toward Hierarchical structure is best demonstrated through professional ranks, grade in school, or age (Hagen & Choe, 1998, p. 591). With regards to the workplace, Yamamura (et al.) characterizes power distance in Japanese organizations as follows:

“In the work place, high power distance reveals itself in the form of centralized decision structures and [a] concentration of authority. The ideal boss is a well-meaning autocrat or paternalistic leader”(Yamamura et al., 2003, p. 5)
 The origins of this attitude towards management have been established over many years, and known as Oyabun-Kohai. This system separates employees as senior (Oyabun), who is responsible for and provides advice to employees under his charge; and Junior (Kohai) or general employees. This system results in the creation of relationships where new workers will rely on the senior or supervisors to instruct and evaluate their performance (Alston & Takei, 2005).          
Individualism :(46): Japanese society has strong traditional belief in religions which are Shinto and Buddhism (85% of population) (Choi & Meek, 2008; O'Regan, 2003).  Even though the Religion does not have much impact on the daily life, Japanese people favor religious rituals at ceremonies involving births, weddings and funerals; and may visit a shrine or temple on New Year and participates at local festivals (, 2009;, 2009). Close relationships between individuals are forged and maintained during these festivities.
Japanese people are likely to rely on group’s opinion rather than to use individual mentality (Intelligence_Bridges, n.d.). For example, when shopping, the opinion of friends and colleagues will significantly influence their purchasing decisions. In a situation where a decision on travel is being made, they are likely to choose the travel packages offered by travel agencies rather than making individual decision (Intelligence_Bridges, n.d.). The strength and coverage of their language is high, with Japanese being the language spoken by all members of society, and only a few who can speak a secondary language (Lycos_Inc, 2009; O'Regan, 2003). The influence of opinion of the group in the decision process, and the uniqueness of their language saturation amongst society, results in the strengthening of interrelationships with each other. 
Attendance by students to senior high school is not compulsory, yet is recorded at over 90% in Japan (Japan_Guide, 2001). Japanese children today attend schools that are very much similar to those schools of the Western countries. However, traditional interrelationships are maintained in Japanese schools during group activities.  During the summer vacation, high school students will join major class trips (Shugaku-ryoko), and stay in a Japanese-style Inn.  Girls are accommodated in one room and the boys in another.  The time spent together in shared accommodation builds societal interrelationships.  Further relating to education, there is a great expectation in Japan that parents will provide daily assistance with homework compared to the United States (White, 1987).  The education system is a prevailing method used by most societies to teach young people traditional national values, a technique that has a demonstrated use in Japan.
Additionally, without similar debate system in Western countries, school culture from primary school to undergraduate university emphasizes teachers to provide lecture from a platform and students taking notes. Students are evaluated solely by exam results, which test memorization of the lecture materials (Intelligence_Bridges, n.d.). This system will not encourage Japanese students to be creative and free on their opinion.
Uncertainty Avoidance (92): According to Hofstede cited in Yeh (1988, p. 153), the reason for high Uncertainty Avoidance  in Japan is that “ ancestor worship in Japan can be seen as a form of religious coping with uncertainty”. These actions are deemed to represent the Japanese people preferring strong uncertainty avoidance; exhibiting a high tolerance on strict regulations and controls, and preferring to follow the societal structures and code of conduct (Vitell, Nwachukwu, & Barnes, 1993). Furthermore, many regulations later had become the customs and code of conduct and the penalties for breach of these customs could become severe in Japan because these customs are centered on ostracism (Hagen & Choe, 1998, P. 591).
Masculinity :(95): A standout aspect of high power distance in Japanese culture is the right between women and men (Japan_Institute_of_Workers'_Evolution, 2007). Most of men would reject any woman who used vocabulary of power to give males orders (Alston & Takei, 2005, p. 24) This is also related to the Japanese hierarchical nature. In additional aspect of the Masculinity society characteristics in Japan is that there are high levels of competitiveness for material successes or business achievement rather than environment conservation (Vitell et al., 1993; Yeh, 1988). This is because once the country has been grown, it will require more resources to maintain the economy progress (Auty, 2001). Thus, Japanese government and corporation both require the successes of the economy instead of remedy to recover environment resources that have been used up.

APPENDIX 3: Hofstede model’s strengths and weaknesses.

There are some strengths of this model. Hofstede’s framework is the most widely used national cultural framework in psychology, sociology, marketing and management. He created five dimensions, assigned indexes on each to all nations, and linked the dimensions with demographic, geographic, economic, and political aspects of a society, a feature that is unmatched by other frameworks. It is the most comprehensive and robust in terms of the number of national cultures samples. Moreover, the framework is useful in formulating hypotheses for comparative cross-cultural studies. Consequently, Hofstede’s operationalization of cultures (1984) is the norm used in international marketing studies.
On the other hand, it has some weaknesses as well. The averages of a country do not relate to the individuals of that country. One must be aware that not all individuals or even regions with subcultures fit into the mould. The data has been collected through questionnaires, which have their own limitations. And all the respondents had worked in the single company. Hence, the results of the data may not be accurate. The data has become old at the present and it is not up-to-date (1967-1973). The culture of a country can change over time, by internal or external influences.

APPENDIX 4: Gray’s accounting values
Professionalism versus statutory control
Gray (1988, p. 8) defined professionalism as a preference for the exercise of individual professional judgment and the maintenance of professional self-regulation, as opposed to compliance with prescriptive legal requirements and statutory control. As identified by Gray, professionalism may be identified at two levels: the level of the individual making professional judgments and the statutory level, possibly concerning self-governing, professional, regulatory institutions. Professionalism is considered a core dimension of accounting values because accountants are required to make professional judgments regarding valuation and various aspects of disclosure in financial information. Such judgments are made by accountants to a lesser or greater extent in different parts of the world, depending on various factors including legal and statutory requirements and prevalent professional practice (Belkaoui, 1990 and Belkaoui, 1995). At an organisational level, the development of accounting bodies in various parts of the world reflects differing degrees of self-regulation with professional bodies in the United States and United Kingdom possessing a larger degree of autonomy and self-regulation than those in continental Europe and developing countries. Writers such as Gray and Coenenberg (1984), Holzer (1984), Nobes and Parker (1995), and Taylor and Turley (1986) support the above arguments for professionalism, and there is little disagreement that this is a significant concept in accounting.
Uniformity versus flexibility
Gray (1988, p. 8) defined uniformity as a preference for the enforcement of similar accounting practices between companies and for the consistent use of such practices over time, as opposed to flexibility in accordance with the perceived circumstances of individual companies. This dimension thus consists of at least two components: intertemporal consistency in accounting practices and uniformity in the application of accounting policies and rules across companies. There has been a wide variation in the application of accounting principles across firms and between countries. In France, for instance, where, traditionally, there has been a concern with facilitating national planning, a uniform accounting plan has been followed. This is in contrast to practices in the United Kingdom and the United States, where there is a perceived need for flexibility in adopting and following accounting policies. Writers such as Arpan and Radebaugh (1985), Choi and Mueller (1984), Holzer (1984), and Nobes and Parker (1995) have provided arguments in support of treating uniformity as a central notion underlying accounting practice.
Conservatism versus optimism
Gray (1988, p. 8) defined conservatism as a preference for a cautious approach to measurement, to cope with the uncertainty of future events as opposed to a more optimistic, laissez-faire, risk-taking approach. Conservatism here fundamentally means prudence or the use of caution and implies that accountants who are conservative should anticipate losses but not gains. It is considered by many as one of the most fundamental accounting concepts, even being “the most ancient and probably the most pervasive principle in accounting valuation” (Sterling, 1967, p. 110). Conservatism is usually thought to contrast widely in different parts of the world, ranging from a strongly conservative approach in Continental Europe to much less conservative attitudes among accountants in the United Kingdom and the United States. Gray suggested that such differences are reinforced by the relative development of capital markets, the differing pressures of users' interests, and the influence of tax laws on accountants in the countries concerned. In addition to Arpan, J.S. and Radebaugh, L.H., 1985. International accounting and multinational enterprises. , Wiley, New York.Arpan and Radebaugh (1985), Beeny, 1975 and Beeny, 1976, Choi and Mueller (1984), Gray (1980), Nobes (1992), and Sterling (1967) have noted the importance of the concept of conservatism in the practice of accounting.
Secrecy versus transparency
Gray defined secrecy as a preference for a cautious approach to disclosure, considering it a fundamental accounting attribute that stems from the influence of management on the quantity of information disclosed to outsiders. Jaggi (1975) had also previously attributed this dimension to management because firms often disclose minimal information in financial statements. Some research has claimed that secrecy varies considerably among countries, especially between continental Europe and the United States (Arpan & Radebaugh, 1985; Barrett, 1976 and Choi & Mueller, 1984). These differences may also be reinforced by the differential development of capital markets and the nature of share ownership, which provide incentives for disclosure (Watts, 1977).
Gray (1988) was presented as being “the first step” towards a theory of cultural relevance, but with much empirical work to follow. It is appropriate to operationalize Gray's accounting values as empirical constructs if the usefulness of the hypotheses stated earlier are to be assessed objectively. To facilitate this objective, the following subsection reviews some research that has attempted to extend, apply, and critique the Hofstede–Gray framework that developed from Gray's thesis.

Section A: United Kingdom

Professionalism versus statutory control
·         With long accounting history, UK establishes private-self regulation and concept of true and fair view which requires professional judgment. UK’s accounting standards are set up by private-self regulation and UK emphasize the important of true and fair view concept.
·         UK’s culture values and promotes individuality indicating relatively high score in individualism. In addition, power distance and uncertainty avoidance are quite low which put UK in Professionalism’s accounting value
Uniformity versus flexibility
With the low power distance and low uncertain avoidance, it indicates the flexibility of accounting practice . This is because of few regulations. With few regulations and less restricted law, the business investors in UK are more flexible in making their business decision. Also it is found that UK have low power distance and uncertainty avoidance, which allow more risky transaction involve in capital market
Conservatism versus optimism
·         The factor which makes UK to have less conservative attitude is the legal system. Also, an emphasis on individual achievement is likely to foster a less conservative approach to accounting measurement.
·         Legal system has huge impact on UK being optimism. Thus high masculinity and low uncertainty avoidance keeps them away from being a conservative country.
Secrecy versus transparency
Transparent (High)
·         In weak uncertain avoidance society, the material information is likely to disclose more than strong uncertain avoidance society.  Also, in the countries with high individualism, the capital market play important role. Thus, voluntary disclosure will be performed to persuade investors.
·         The information and material related to financial statement are likely to be disclose more easier compare to other country that have low individualism, and high certainty avoidance. For UK, they has score relatively high individualism and low uncertainty avoidance, which lean them toward high transparency

Section B: Germany

Professionalism versus statutory control
·         In German culture, People have high individualism   which respects others on academic and professional titles, and a strong work ethic. Doing what need to be done in the right way is an important part of German psyche.
·         People tend to look after themselves and their family only which indicate a high individualism. Thus, Germany society is decentralized with relatively flatter organisation structures. They also have low uncertainty avoidance as they feel the needs for their security, rules and details code of conduct are essential.
·         Germans workers are known for being loyal to their companies and wish to comply with their legal duty to respect company confidentiality indicating a small power distance
Uniformity versus flexibility
Uniform/ Flexibility (low)
·         With high individualism, middle power distance and high uncertainty avoidance German accounting system is on Low level Uniform of Flexibility culture. They may require having certain regulations but it still requires accountants to use their professional judgment. 
·         Germany has a high individualism, medium power distance and relatively high uncertainty avoidance which would put Germany on medium-low level of uniform/flexibility culture.
Conservatism versus optimism
·         Although German has high individualism and low power distance, the uncertainty avoidant German culture, together tax regime drive individual companies and profession toward a conservative set of financial statements.
·         In Germany, it is required for all the business corporation to follow a standard set of rules to prepare their annual financial report, thus their accounting standard are based on Code law indicating high uncertainty avoidance which drive them toward conservatism even though they have high score on individualism and power distance

Secrecy versus transparency
Secrecy (Medium-Low)
·         The information discontinuity / low disclosure can occur with uncertainty avoidant culture in which it results in substantial fluctuations in risk premium
·         Germany has high individualism, power distance and masculinity. However high uncertainty avoidance can lead to limited information disclosure

Section C: Japan

Professionalism versus statutory control
Statutory control
·         Due to strong governmental interference, large distance of social hierarchy and strong culture ‘taboos’, it clearly predicts that Japanese culture is on statutory control.
·         As the business in Japan are controlled closely by government bodies, as well as other factors such as low individualism, high power distance and high uncertain avoidance clearly indicate that Japanese is more Statutory Control.
Uniformity versus flexibility
Uniform (strong)
·         Japanese people prefer clear culture and legal restrictions in order to illustrate their duty and social position. This results in less flexibility of accounting practice and strong written accounting rule.
·         Japanese prefer to follow rules and strict standard and less likely to take a lot of risk in doing their business. The culture of Japan is uniformed and oppose to flexibilities.
Conservatism versus optimism
·         Japan accounting value is highly affected by low individualism and high power distance. Therefore, Japanese accounting system is based on prudent and conservative concepts which requires in its accounting standards.
·         Low individualism and high power distance played a key role in Japanese’s culture which heavily affect the accounting system set of rules, considered being conservative.

Secrecy versus transparency
·         With high collectivism and power distance, people tend to preserve material information to their groups. With high uncertain avoidance, Japanese people only disclose required information
·         Businesses in Japan are not open in disclosing their financial information, only required information is disclosed. Thus, people tend to keep the material information to themselves and not sharing it with others.

APPENDIX 5: Gray’s accounting values’ strengths and weaknesses.

There are some strengths of this model. Drawing upon Hofstede's (1980) framework, Gray incorporated accounting to it by depicting how accounting practices might influence and reinforce societal values. Gray's theory presents societal values at the level of the accounting subculture. Cultural or societal values at the national level permeate through to occupational subcultures, including the accounting profession, with varying degrees of integration. The value systems of accountants are derived from societal values, with specific reference to work-related values. Accounting values, in turn, influence accounting practices, including the reporting and disclosure of information. Thus, depending on the varying degrees of external and ecological forces shaping societal values, different accounting systems develop, reflect, and reinforce these values. Gray proposed that this framework might be used to explain international differences in accounting practices. Gray also suggests that there should be a close match between cultural areas and patterns of accounting systems. Hence, each culture should develop its own accounting systems to serve its own distinct requirements and is the basis upon which Gray rests his theory of cultural relevance to accounting.
But this model also has some limitations. The questionnaire items were developed based on theoretical, rather than the empirical, considerations. There was the difficulty of clearly identifying the constructs of interest with particular questionnaire item statements. It is assumed that the questionnaire responses were truthful and meaningful, and that reported attitudes, perceptions, beliefs, and values have significance for the respondents in terms of social action. The reliability of the responses can be gauged some extent from the consistency of the responses to particular questionnaire items

APPENDIX 8: Prospective Analysis

Tesco (UK)
An improving global economy and recent investments in acquisitions and new selling space making a greater contribution going forward, returns will improve significantly – starting this year. However, there are no independent evidences that have supported this prospect.
MetroGroup (Germany)
MetroGroup has come up with the following prospects:
·         The Eastern European cash & carry segment is expected to continue to grow in the next two years, but at starkly varying speeds
·         They expect the strong growth trend of the cash & carry segment in Asia to continue unchanged for the next two years.
·         The growth dynamic in the cash & carry segment will remain higher than in the modern food retail business
KPMG has confirmed that the Group management report is consistent with the consolidated financial statements and as a whole provides a suitable view of the Group’s position and suitably presents the opportunity and risks of future development.

Seven&i Holdings (Japan)
In the fiscal year ending February 28, 2011, they are forecasting revenues from operations of ¥5,200.0 billion, up 1.7%; operating income of ¥240.0 billion, an increase of 5.9%; and net income of ¥100.0 billion, up 122.8%.
However, from the current fiscal year, the Company has applied the “Accounting Standard for Measurement of Inventories” (ASBJ Statement No. 9, on July 5, 2006), and inventories are now stated mainly at cost determined by the retail method with book value written down to the net realizable value. Due to this change, valuation loss on beginning inventories included in other expenses was ¥1,323 million. As a result of this change, the impact of operating income decreased by ¥320 million, income before income taxes and minority interests for the period decreased by ¥1,644 million.

APPENDIX 09: Harmonisation and political lobbying

 International Level
When the AISG was expanded to the formulation of international accounting standards and gained the assurance of world wide acceptance of the standards, this was the starting point for the International Accounting Standards Committee (IASC), at a meeting in London in June 1973. The IASC was characterized as a “major step towards the harmonization of international accounting practice”. It is responsible for issuing standards, known as International Financial Reporting Standards (IFRS).
National level
In 2000, the IASC modified its constitution and constituted the International Accounting Standards Board (IASB), which had assumed the responsibility for setting standards. Many countries without domestic standards have adopted the International Accounting Standards (IAS).  In addition, many countries allow the use of IAS in cross-border filing of financial information with stock exchange listing and regulatory boards. 
Harmonisation of accounting standard could prove dangerous to the companies, as the standards could cut profits and inject volatility into the balance sheets of the companies. Therefore the companies must educate their investors about the effects of harmonization, on their reported profits and liabilities. Also, the harmonization of accounting standards would change the complexion and quality of financial information in unpredictable ways. Therefore, it is vital that the companies understand the extent of the impact and ensure that the stakeholders also understand it.
Political lobbying:
Concert campaigns of action against a proposal, where the lobbyists make overt or convert threats to seek intervention to overturn a proposed standard or to compromise the standard-setter’s reputation, independence, powers or even its existence.
The "political" pressures may emerge in very different degrees and strength of feeling across the eight countries whose standard setters are to act in liaison with the IASB. Such pressures could impede the effort to achieve convergence at a high level of quality
A major Swiss company, later revealed to be Novartis, had written to Sir David Tweedie, chairman of the IASB, that it will consider switching from IFRSs to U.S. GAAP if the IASB does not change its standard that requires the amortization of goodwill over 20 years.
One researcher has found that the chief financial officers (CFOs) of a number of major Swiss companies are attracted to U.S. GAAP because preparers in the U.S. are well organized and constitute a powerful lobby-a source of comfort to CFOs[13]
Beginning in the late 1930s, the SEC looked to the public accounting profession and, since 1973, to the independent FASB as the authoritative source of most of what constitutes U.S. GAAP. Once the FASB issues a Standard, except in rare instances when the SEC regards the Standard as an unacceptable norm, the SEC requires all publicly traded companies to adopt it forthwith. If such companies fail to do so, or if they implement the Standard in a way that is unacceptable to the SEC's accounting staff, then the SEC requires them to revise and reissue their defective financial statements. Otherwise, these companies are rebuked by the SEC, which would immediately issue an order to stop the trading of their securities in the U.S. securities market[14]


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