There are seven major divergent forces, which shape the Financial Reporting internationally. I am going to explore each one individually with references to UK, USA and Bulgarian Financial Reporting Practices.

University Degree Business and Administrative studies

Culture

As Gray (1988, page 5) notes:

Societal values are determined by ecological influences and modified by external factors… In turn, societal values have institutional consequences in the form of the legal system, political system, nature of capital markets, patterns of corporate ownership and so on.

Gray examines Hofstede cultural dimensions, based on his study of 100,000 IBM employees in 39 countries and renames his dimensions. Individualism vs. conservatism becomes professionalism vs. statutory control; large vs. small power distance becomes uniformity vs. flexibility; strong vs. weak uncertainty avoidance becomes conservatism vs. optimism; and masculinity vs. femininity becomes secrecy vs. transparency.

Hofstede did not study Bulgaria, but he studied Yugoslavia, which still was a country then. People from the Balkan region have very similar cultures, common sense aspect and values, that is why I think it is save to claim, that Hofstede’s findings can be applied to Bulgaria as well. Hofstede’s ratings for UK, USA and Yugoslavia in the different dimensions are as follows:

As it can be seen UK and USA are very close by scale, while Bulgaria is very different. Financial Reporting cannot be explained only by cultural differences, but yet they influence a lot the accounting practices. For example UK and USA accounting are very similar, they both belong to the so called by Gray ‘Anglo’ culture and yet there are some differences influenced by other forces. Yet they are very liberal (low uncertainty avoidance), professionally organized (high individualism), flexible (small power distance) but yet secret to some extend (high masculinity) systems. While the Bulgarian system, especially before it was influenced by the European Union, was just the opposite. There were and still are very strict rules, not much professionalism shown by accountants and auditors, the accountancy was very uniform and very secret. Financial statements were not shown to anyone but government, tax authorities and banks. This is still the case, although that some private companies are posting their statements online. Those are, however, mainly branches of multinational companies, or those that are listed on the Bulgarian stock exchange.

Legal Systems

The nature of the accounting system of a country is affected by its system of law. UK and USA practice the Common Law system and Bulgaria, whose law system is adopted from Germany, practices the Codified Roman Law.

Before accepting the Accountancy Act of 1991, in Bulgaria, there was no law for accounting, but rules established by the accounting community. The use of double entry system, was also introduced after Directive IV of the European Union and the International Accounting Standards was accepted with the Accountancy Act of 1991, which bring the Bulgarian accounting ...

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Legal Systems

Although the accounting standards become more and more the same in the different countries there are still many differences. Let’s take, for example, the contents of financial statements. In Bulgaria only balance sheet, profit & loss account and notes are used. This gives very limited information, compared to the UK and US financial statements, where in addition to the abovementioned already they have cash flow statement, a statement showing the change in the stockholder’s equity, the used accounting policies are stated in detail in the notes, there is also the manager’s report included and disclosures much more than the legally required. Without all this elements the Annual Report is incomplete.

Although that US and UK have generally the same financial statements, there are noticeable differences in technical accounting terms (P&L Account in UK = Income Statement in USA), as well as in the balance sheet and the cash flow statement. A major difference is also that US accountants are allowed to use LIFO for inventory valuation, which they do very often. This leads to reduced balance sheet figures, as opposed to the British FIFO.

The authorities setting up the accounting practices are also very different. In USA it is the Securities and Exchange Commission, in UK it is the Accounting Standards Board, and in Bulgaria it is the Government with the help of the Accountancy Act of 1991 and the National Accounting Standards, which were accepted with the Act, prescribe the format of the financial statements. However, enterprises are free to add items to the standard financial statements where it would result in better presentation of the financial information.

Providers of finance

The most likely key cause of differences in the financial reporting internationally is the distinction between credit/inside financing and equity/outside financing. The major type of business organizations and ownership also differ very much. In Bulgaria corporations are not largely introduced. The majority of the business legal entities belong to the small and medium enterprises. There are a lot of small family-owned companies, which accounting reports serve merely tax purposes. This could also question their fairness. For financing Bulgarian companies depend almost entirely on creditors and investors of the form of partnership. This can be an explanation of the lack of the statement showing the change of the stockholders’ equity. US and UK capital market-based financial systems means that financial reporting serves the needs of shareholders rather than of creditors and tax authorities. Usually shareholders do not have access to internal information, that is why there is need for disclosures, audit and fair information.

Taxation

The major problem and difference with taxation is the so-called deferred taxation, which results from timing differences between tax and accounting treatments. In UK and USA for example, it is paid a lot of attention to the problem of differed taxation, which results in detailed big disclosures. In Bulgaria on the other hand, where the conventional accounting is still ruling, this problem is minimized, since in this country where financial statements are prepared to serve tax purpose, the tax rules are the accounting rules. That is why Bulgarian financial statements do not provide differ taxation.

Depreciation rules can be very crucial for the taxation, since bigger depreciation leads to earnings before taxes and thus to smaller tax. In UK and USA the depreciation is supposed to be systematically allocated among the useful life of the tangible asset, usually by the straight-line method with scrap value usually of zero, because it is easier. The standard is defined more through convention rather than rules. In the opposite extreme, in Bulgaria, the tax authorities lay down maximum depreciation rates to be used for the assets, which are generally based on the expected useful life of years.

Due to the way deferred taxation and depreciation reflect the actual taxable income, very often two types of financial statements are prepared: one for the tax authorities, serving tax purposes, and one for investors and shareholders, serving merely as a performance indicator. It is possible, therefore, to distinguish between US and UK separation of tax and accounting, and the Bulgarian close connection.

The profession

The lack of substantial body of private shareholders and publicly owned companies in Bulgaria means that the need for auditors is not very big. The companies using auditors are mainly the multinational companies. The existing certified auditors are mainly usually part from the big international accounting and financing companies established in Bulgaria, like PriceWaterhouseCoopers, KPMG, the Holland TMF and other. Having or not auditors and certified public accountants for sure would influence the accounting practice. There are many students graduating as accountants from the Bulgarian universities, but few of them understand accounting in depth and even fewer would practice it fairly. In the UK and USA on the other hand, there is a great need for auditors and standardization of the rules. In these two countries also without having the appropriate certificate is impossible for someone to practice the accounting profession.

Inflation

Any country may respond to massive inflation, but the reaction of a country’s accounting system to inflation is an illustration of the basic nature of the system. Right now Bulgaria has stable inflation. During the transition between Communism and Democracy, though, there were many rough years. During those years the government was responding to the inflation, which was symptomatic of the regulation of accounting. By contrast, in UK and USA it was mainly committees of accountants that developed responses to inflation during the difficult 1970s.

Theory

In the US and UK, theory was traditionally of little importance in accounting practice, although the development of conceptual framework since the mid 1970s has changed this. I have no observation on how theory influences Bulgarian accounting practices, but I believe that it had some influence before, when the country was still forming its accounting system. Nowadays though, the accounting practice is mainly guided by the change coming with the future entry in the EU and the harmonization of standards, thus accepting of International Accounting Standards.

Accidents and External Influence

The best example of external influence is the abovementioned harmonizing of accounting standards of Bulgaria with the EU. Another such influence could be the UK accounting, influencing the US one, since the latter is based on the former. And vise versa after developing some of the practices and proving them serving right the accounting purposes, US influences UK accounting and IAS. Therefore influencing even Bulgarian accounting standards, after the country adopted some IAS.

A major accident that could be mentioned is the US economic crisis in the late 1920s and early 1930, which produced the Securities Exchange Act, which introduced extensive disclosure requirements and state control of accounting standards.

Bibliography:

Nobes & Parker. International Comparative Accounting. Gosport: Ashford Colour Press Ltd. 2002
Gray, S. J. Towards a theory of cultural influence on the development of accounting systems internationally. Abacus. March 1988
Hofstede’s Dimensions of Culture Scales. URL: http://spectrum.troyst.edu/~vorism/hofstede.htm
Kodar Ltd., Bulgaria. Accounting Auditing and Taxation. URL: http://www.bulgaria2net.com/business/accounting.html

APPENDIX A Hofstede’s dimensions

Individualism vs. collectivism – Individualism stands for a preference for a loosely knit social framework in society wherein individuals are supposed to take care of themselves and their immediate families only. The fundamental issue addressed by this dimension is the degree of interdependence that a society maintains among individuals.
Large vs. small power distance – Power distance is the extent to which the members of a society accept that power in institutions and organizations is distributed unequally. People in societies that have large power distance accept a hierarchical order in which everybody has a place which needs no further justification. The fundamental issue addressed by this dimension is how society handles inequalities among people when they occur.
Strong vs. weak uncertainty avoidance – Uncertainty avoidance is the degree to which the members of a society feel uncomfortable with uncertainty and ambiguity. This feeling leads them to beliefs promising certainty and to maintaining institutions protecting conformity. Strong uncertainty avoidance societies maintain rigid codes of belief and behavior and are intolerant towards deviant persons and ideas. Weak uncertainty avoidance societies maintain a more relaxed atmosphere in which practice counts more than principles and deviance is more easily tolerated. A fundamental issue addressed by this dimension is how a society reacts to the fact that time only runs one way and that the future is unknown: whether it tries to control the future or to let it happen.
Masculinity vs. femininity – Masculinity stands for a preference in society for achievement, heroism, assertiveness and material success. Its opposite, femininity, stands for a preference for relationships, modesty, caring for the weak, and the quality of life.