The effect of culture on accounting conservatism during adoption of IFRS in the EU

• Pages: 311-330
• DOI: https://doi.org/10.1108/IJAIM-08-2016-0077
• Published date: 08 May 2018
• Date: 08 May 2018
• Author: Daniel Zeghal,Zouhour Lahmar
• Subject Matter: Accounting & Finance,Accounting/accountancy,Accounting methods/systems

The effect of culture on accounting

conservatism during adoption of

IFRS in the EU

Daniel Zeghal

Telfer School of Management, University of Ottawa, Ottawa, Canada, and

Zouhour Lahmar

CPA Canada Accounting and Governance Research Center, University of Ottawa,

Ottawa, Canada

Abstract

Purpose –This paper aims to examine the impactof culture on accounting conservatism during transition

to internationalstandards.

Design/methodology/approach –The sample used in this analysis consists of 15 countries of the

European Union that have adopted International financial reporting standards (IFRS) pursuing Regulation

N° 1606/2002. The study coversthe 2000-2010 period. Two conservatism measures are used, the Basu (1997)

measure to account for conditional conservatism and the accruals measure to account for unconditional

conservatism.To test the impact of culture, the six dimensions of Hofstede (1980, 2010) are used.

Findings –The results of the analysisshow that variation of conditional conservatism is influencedby the

six culturaldimensions. However, unconditional conservatismis only affected by power distance.

Originality/value –The results of the study are interesting and provide a better understanding of the

adoption of IFRSworldwide. The role of culture in explaining accountingpractices after adopting a single set

of accountingstandards is particularly highlighted.

Keywords European union, IFRS, Cultural dimensions, Conservatism

Paper type Research paper

1. Introduction

Accounting conservatism is a fundamental principle that has always influenced

accounting practices and financial statements. In the accounting literature, this concept

has been widely discussed, in terms of its variation over time or across different legal

and political regimes (Ball et al., 2008;Ball and Shivakumar, 2005;Basu, 1997;D’Arcy,

2001;Gassen et al., 2006;Garcia Lara and Mora, 2004;Pope and Walker, 1999). Zeghal

et al. (2012) introduced conservatism as an attribute of the quality of results and found

that it decreased following the mandatory adoption of International financial reporting

standards (IFRS). Moreover, these authors found that a decrease in conservatism is

more important for the group of countries whose local standards diverge significantly

from international standards.

In an effort to learn more about the consequences for accounting conservatism of

adopting IFRS, it is appropriate to examine the potential impact of culture. Indeed,

accounting literature has shown that culture is a key factor in explaining international

differences. In their study of the differences in international standards, Ding et al. (2005)

found that culture significantly explains divergence between local and international

standards. Moreover, the authors underline that the legal system, which was often

Effect of

culture on

accounting

311

Received8 August 2016

Revised18 December 2016

Accepted18 January 2017

InternationalJournal of

Accounting& Information

Management

Vol.26 No. 2, 2018

pp. 311-330

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-08-2016-0077

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/1834-7649.htm

evoked in the accounting literature to explain accounting differences and international

harmonization, turns out to be less explanatory than culture does.

In this paper, our aim is to analyze the role of culture in explaining the consequences of

IFRS adoption. More specifically, we are interested in analyzing the effect of culture on

variation in accounting conservatism following the mandatory adoption of IFRS in the

European Union. In fact, the applicationof these standards did not affect all countries in the

same way (Gassen et al.,2006;Hung and Subramanyam, 2007;Prather-Kinsey et al.,2008;

Soderstrom and Sun, 2007;Zeghal et al., 2011;Zeghal et al.,2012). In a recent study, Borker

(2013) proposed to determine a favorable cultural profile for IFRS. The author raised the

issue of applying a set of standards known for their close resemblance to the Anglo-

American model in regionswith different cultures.

The impact of culture on accounting systems and therefore on accounting principles

seems important. At this stage, we already expect that culture influences accounting

conservatism. In fact, Gray (1988) established a link between the cultural dimensions

developed by Hofstede and accountingvalues. We believe that the results of this study will

contribute to a better understandingof the consequences of IFRS application. This makes it

possible to capture certain biasesin the accounting data of countries with different cultures,

despite their adoptionof IFRS.

The remainder of the paper is organized as follows. Section 2 presents a review of the

relevant literature the objectives of the study and the research hypotheses. Section 3

describes the methodology. Section 4 reports and discusses the results. Finally, section 5

summarizes the findingsand concludes the paper.

2. Literature review, the purpose of the study and the research hypotheses

2.1 Culture and accounting practices

Accounting literature has found that culture is one factor that significantly explains

international accounting differences. Similarly, Kanagaretnam et al. (2014) believe that

culture explains bankingbehavior and also the quality of disclosed results. Furthermore,the

authors insist that this effect isparticularly important for non-financial institutions. In fact,

the banking sector is already highly regulated, minimizing the influence of cultural

characteristics. However, non-bank companies, not subject to such regulations, are more

likely to be affected by culture. Kanagaretnam et al. used the Hofstede’s dimensions to

measure culture: individualism,power distance, uncertainty avoidanceand masculinity.

Prior to the study of Gray (1988), accountingresearch had not established a link between

accounting and culture (Borker, 2013). In his studyof the influence of culture on accounting

systems, Gray, however, found a close link between culture and the development of

accounting systems. For example, he argues that the conservative attitude of accountants

could increase with the social value “uncertaintyavoidance”. Indeed, it reflects the tendency

to hedge against the uncertainty of future events. The author provides no link with “power

distance”but finds a negativerelationship with “individualism”and “masculinity”.

Chand et al. (2012) confirmed the importanceof culture in accounting through their study

of a sample of Australian and Chinese students. In fact, theyfound that cultural differences

influence accounting judgments and consequently accounting practice. This is in

accordance with the results of Feleaga et al. (2010). In fact, these authors examined

provisions reported to total liabilities as a proxy of the degree of uncertainty. The results of

their study confirm that provisions are subject to managers’discretion even under IFRS.

Feleaga et al. conclude that national accounting culture influences IFRS application for

measurement and recognitionof provisions.

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