Complexity and Dual Institutionality: The Case of IFRS Adoption in Russia

• DOI: http://doi.org/10.1111/j.1467-8683.2012.00927.x
• Author: Anna Alon
• Date: 01 January 2013
• Published date: 01 January 2013

Complexity and Dual Institutionality: The Case

of IFRS Adoption in Russia

Anna Alon*

ABSTRACT

Manuscript Type: Empirical

Research Questions/Issue: The widespread adoption of International Financial Reporting Standards (IFRS) by many

transition economies is expected to contribute to greater transparency in f‌inancial reporting. However, the business

environment in many of these countries is associated with institutional voids and ongoing economic and institutional

change. Organizations operating in this environment face considerable institutional complexity due to inf‌luences from

incongruent institutional logics of local and global institutions. This study investigates how organizations manage institu-

tional complexity created by the incompatible institutional logics which are linked to IFRS adoption.

Research Findings/Insights: In Russia, institutional change related to IFRS adoption was not revolutionary as IFRS did not

replace Russian Accounting Standards (RAS) but both standards coexist. Based on a sample of 1,236 f‌irms, organizational

identity and the discretion in standard implementation were identif‌ied as factors that play a role in how organizations

manage institutional complexity created by the coexistence of both standards.

Theoretical/Academic Implications: With organizations in transition economies increasingly managing global and local

pressures, this study highlights conditions under which practices rooted in conf‌licting institutional logics coexist and create

dual institutionality.Dual institutionality occurs when distinct but related practices that organizations are using have

legitimacy but are rooted in diverse institutional logics and coexist due to different levels of discretion associated with their

implementation. This concept is distinct from previously identif‌ied institutional duality, where competing institutional logics

of subsidiary and the host country inf‌luence how a particular practice is implemented by organizations.

Practitioner/Policy Implications: While adoption of IFRS is expected to contribute to greater f‌inancial transparency and

comparability, some countries choose to continue with the local standards while permitting or requiring IFRS. This type of

parallel adoption mayundermine the inf‌luence of IFRS. However, divergence between the logics and discretion in standard

implementation makes it possible for both practices to exist.

Keywords: Corporate Governance, International Financial Reporting Standards, Institutional Change,

Dual Institutionality, Russia

INTRODUCTION

As the institutional infrastructure of the transition

economies1continues to evolve, countries seek to

adopt corporate governance mechanisms that have global

legitimacy. International Financial Reporting Standards

(IFRS) represent one such mechanism. The widespread

adoption of IFRS by many transition economies is expected

to contribute to a number of benef‌its, including greater

f‌inancial transparency (Barth & Schipper, 2008; Brown,

2011; IASB, 2012; Jermakowicz & Gornik-Tomaszewski,

2005).

Judge, Li, and Pinsker (2010) found that nations adopt

IFRS as a response to coercive, normative, and mimetic pres-

sures. In the case of IFRS, nations have the pressure from

different sources to adopt global standards but, based on the

need for legitimacy, their response differs and some choose

to require the standards, permit,or not allow. IFRS is a set of

accounting standards established by the developed coun-

tries based on the Anglo-American reporting framework.

How IFRS is integrated by the transition economies is not

clear because they are typically less advanced in the area of

corporate governance and “their corporate sector character-

istics greatly differ fromthose in the industrial world” (Reaz

& Hossain, 2007:169).

The business environment in the transition economies is

associated with institutional voids and ongoing economic

*Address for correspondence: AnnaAlon, Rollins College, 1000 Holt Ave-2723, Winter

Park, FL, 32789-4499, FL, USA. E-mail: aalon@rollins.edu

42

Corporate Governance: An International Review, 2013, 21(1): 42–57

© 2012 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2012.00927.x

and institutional change (Meyer & Gelbuda, 2006; Svejnar,

2002). Managers frequently operate in unpredictable envi-

ronments as organizations not only initiate change but are

also inf‌luenced by changes at the national level (Meyer

& Gelbuda, 2006; Suhomlinova, 2006). Thus, organizations

operating in this environment faceconsiderable institutional

complexity as they “confront incompatible prescriptions

from multiple institutional logics” (Greenwood, Raynard,

Kodeih, Micelotta, & Lounsbury, 2011:317). This studyinves-

tigates how organizations manage institutional complexity

created by the incompatible institutional logics related to

IFRS adoption in transition economies.

In order to consider global, national, and organizational

dimensions, this study examines national-level institutional

change that shapes organizational reality and creates ten-

sions when global and nationalpractices are introduced. The

theoretical development is based on the synthesis of the

literatures on institutional change (Greenwood, Suddaby, &

Hinings, 2002), institutional complexity (review by Green-

wood et al., 2011), and institutional duality (Kostova & Roth,

2002). The institutional-change framework is applied to

examine the context and the stages of change. The institu-

tional complexity literature recognizes conf‌licting pressures

that organizations face given institutional dualityof conf‌lict-

ing institutional logics. Organizational identity and discre-

tion in implementation and adoption are factors that are

expected to impact how organizations internalize new prac-

tices and manage complexities created by the diverging

institutional logics.

Prior studies have warned that institutional differences

make observations about corporate governance in one

economy unlikely to be applicable to a wide range of other

economies (e.g., Brown, 2011; Pope & McLeay,2011; Svejnar,

2002; Young, Peng, Ahlstrom, Bruton, & Jiang, 2008). Thus,

adoption of IFRS in the transition economies should be

examined in conjunction with the specif‌ic contextual factors.

The proposed theoretical lens is applied to investigateadop-

tion of IFRS in Russia. A unique dataset of responses from

1,236 f‌inancial professionals in Russia is analyzed to gain

insights into how organizations respond to conf‌licting pres-

sures of practices rooted in differing institutional logics.

This study makes several important contributions. A

number of scholars have highlighted the interdependency

between nationalinstitutions and f‌irm-level actors (Aguilera

& Jackson, 2003; Lubatkin, Lane, Collin, & Very, 2007).

Missing from the literature is a deep understanding of how

conf‌licting logics of national and global institutions contrib-

ute to greater institutional complexity and which factors

impact how organizationsmanage that environment (Green-

wood et al., 2011; Thornton, Jones, & Kury, 2005). The study

recognizes the multilevel nature of institutional change and

explores dual institutionality2which creates conditions under

which practices rooted in conf‌licting institutional logics

coexist. Specif‌ically, it is proposed that legitimacy of both

logics and discretion in practice implementation contribute

to the development of organizational identity and internal-

ization of distinct but related practices. The “examination of

identity in the processing of institutional pressures is still

nascent” (Greenwood et al., 2011:348), but is considered an

important element that impacts how institutional pressures

are processed.

Prior empirical studies of institutional complexity prima-

rily focused on U.S. settings. Transition economies in

general, and Russia in particular, are not suff‌iciently exam-

ined. Since the 1990s, transition economies of the Soviet Bloc

had to establish regulatory and market institutions to f‌ill the

institutional void created during the Soviet era. Because

transition economies differ on regulatory, normative, and

cultural dimensions, examining the specif‌ics of their institu-

tional environment is necessary. This extension is important

because it recognizes the unique nature of institutional

change in the environments of institutional void and how

organizations respond to such institutional complexity.

The results indicate that due to the specif‌ics of the Russian

environment, de-institutionalization of the Russian Account-

ing Standards (RAS) did not occur. Instead, IFRS was

adopted and used in parallel with the RAS. The differences

in institutional logics of the standards and the varying

degree of discretion in the implementation have contributed

to the development of organizational identity and dual insti-

tutionality of both standards. While these factors were asso-

ciated with the internalization of the practices and more

positive perceptions of IFRS transition, discretion in adop-

tion (voluntary vs mandatory) did not contribute to salient

differences in how IFRS was perceived.

BACKGROUND AND

THEORETICAL DEVELOPMENT

Corporate Governance in Transition

Transition economies have been undergoing numerous

political, economic, and social changes. The move to capital-

ism has drastically altered the role of the f‌irm and its focus

on stakeholders. Because governance processes were less

developed in the transition economies (Reaz & Hossain,

2007), corporate governance mechanisms representative of

business practices in the developed countries, such as IFRS,

were introduced. The benef‌its sought from IFRS adoption

include an increase in the reliability, transparency and

comparability of f‌inancial reports (Brown, 2011).

With the worldwide adoption of IFRS, a number of

authors have noted that the outcomes of IFRS implementa-

tion are context-specif‌ic rather than uniform (Brown, 2011;

Pope & McLeay, 2011; Sunder, 2011; Wysocki, 2011).

Whether the expected benef‌its are realized depends on a

number of factors, including the legal and regulatory

support and “the nature of the standards used before the

change to IFRS” (Brown, 2011:270). On the surface, formal

institutional ideals from the West were adopted by the tran-

sition economies but “social norms developed during social-

ism persisted underneath” (Meyer & Gelbuda, 2006:146).

Considering the unique aspects of the transition econo-

mies, an examination of corporate governance mechanisms

requires a theoretical lens that captures the contextual com-

plexities and recognizes the changes occurring across differ-

ent levels (e.g., Filatotchev & Boyd, 2009; Knapp, Dalziel, &

Lewis, 2011; Lubatkin et al., 2007). A number of studies

suggest an institutional embeddedness perspective that

stresses the importance of the interdependencies between

national institutions and f‌irm-level actors (Aguilera &

Jackson, 2003; Lubatkin et al., 2007). These authors argue

COMPLEXITY & DUAL INSTITUTIONALITY: IFRS IN RUSSIA 43

Volume 21 Number 1 January 2013© 2012 Blackwell Publishing Ltd