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

Published date08 May 2018
Date08 May 2018
AuthorDaniel Zeghal,Zouhour Lahmar
Subject MatterAccounting & Finance,Accounting/accountancy,Accounting methods/systems
The eect 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
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 nancial 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 inuencedby 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 inuenced
accounting practices and nancial 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;DArcy,
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 nancial reporting
standards (IFRS). Moreover, these authors found that a decrease in conservatism is
more important for the group of countries whose local standards diverge signicantly
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 signicantly explains divergence between local and international
standards. Moreover, the authors underline that the legal system, which was often
Eect of
culture on
Received8 August 2016
Revised18 December 2016
Accepted18 January 2017
InternationalJournal of
Accounting& Information
Vol.26 No. 2, 2018
pp. 311-330
© Emerald Publishing Limited
DOI 10.1108/IJAIM-08-2016-0077
The current issue and full text archive of this journal is available on Emerald Insight at:
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 specically, 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 prole 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 inuences 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 ndingsand 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 signicantly 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-nancial institutions. In fact,
the banking sector is already highly regulated, minimizing the inuence 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 Hofstedes 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 inuence 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 reects the tendency
to hedge against the uncertainty of future events. The author provides no link with power
distancebut nds a negativerelationship with individualismand masculinity.
Chand et al. (2012) conrmed the importanceof culture in accounting through their study
of a sample of Australian and Chinese students. In fact, theyfound that cultural differences
inuence 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 conrm that provisions are subject to managersdiscretion even under IFRS.
Feleaga et al. conclude that national accounting culture inuences IFRS application for
measurement and recognitionof provisions.

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