A case for alternative research paradigms

Evaluation of the contingency-based approach in comparative international accounting: A case for alternative research paradigms

Saudagaran, Shahrokh M


The field of comparative international accounting has recently seen a growing debate between the culture free and the culturally grounded approaches to accounting. I This debate is important because it raises fundamental questions regarding the nature and purpose of accounting. Is accounting a set of techniques providing unbiased facts or is it the outcome of complex social forces where facts are culturally specific?

Among the proponents of the culture free approach, accounting is seen as a technical craft which provides a neutral and unbiased set of financial data about economic entities. As such, no compelling reason exists for the methods of generating or modes of applying accounting information to differ from one country to another. Aitken and Islam [1984], for example, question the premise that differences in national environments preclude the adoption of uniform accounting standards and practices worldwide, arguing that “since solvency, profitability, and gearing are aspects of the company in which shareholders, creditors, government, employees and customers are interested, it follows that the information needs of these parties are essentially similar” [p. 39, italics added]. In contrast, those who subscribe to the culturally grounded approach believe that accounting is a product of social norms and values. That is, accounting reflects the unique environmental characteristics of a country or region. Choi and Mueller [1978, p. 22] aptly express the central theme of the culturally grounded approach: “If we accept the proposition that the environments in which accounting operates are not the same in different countries or even in different organizations, it stands to reason that accounting must necessarily differ from case to case if it is to retain the sharp cutting edge of social utility”.

This paper discusses alternative explanations of why different patterns of financial accounting systems exist worldwide. We do this by conducting a critique of the contingency-based approach in comparative international accounting research pointing out its contributions and limitations. We make a case for other research paradigms as alternatives to the contingency-based approach which has erstwhile dominated the comparative international accounting literature. Our aim is to help establish a sound theoretical basis for understanding the current features, antecedents and future development of financial accounting systems in countries and to build upon the descriptive literature to explore how and why financial accounting system elements arise, are maintained, and transformed over time. The analysis also provides some insights in assessing the merits of a culture free approach and a culturally grounded approach to harmonization, particularly as it relates to developing countries.2

The paper proceeds as follows. The next section discusses salient methodological issues related to explaining the development of national financial accounting systems. A generic explanatory model is proposed to assess extant explanations in comparative international accounting research. The third section uses the proposed generic model to evaluate the contingency-based research in comparative international accounting. The fourth section examines the theoretical underpinning of alternative research paradigms as approaches to explaining the development of national financial accounting systems. The next section suggests future research on national accounting systems using alternative research paradigms. The final section provides conclusions about the potential contribution of the alternative paradigms to comparative international accounting research.


2.1 Importance of Developing Explanatory Frameworks

Surveys in comparative international accounting [e.g., Previts, 1975; Gray, 1983; Samuels and Piper, 1985; Meek and Saudagaran, 1990; Wallace and Gernon, 1991; Gernon and Wallace, 1995] claim that the lack of adequate explanatory theories impedes further progress in comparative accounting research. Wallace and Gernon [1991, p. 209, emphasis added] asserted that “where the literature extends beyond the descriptive, most of it has failed to develop a coherent explanation of how and why accounting systems differ from country to country.” They saw the major challenge to be to develop a theoretical framework through which similarities and differences between financial accounting systems may be evaluated and explanatory variables identified and generalizations developed. Wallace and Gemon [1991, p. 210, emphasis added] defined a theoretical framework as “the body of methods used by researchers to analyze the relationships between patterns of accounting and social structure, to discover the underlying universal or culture-specific characteristics of accounting principles.” Here, a theoretical framework refers to an interrelated set of explanations regarding why a particular configuration of financial accounting system elements arise in a country and how these elements are maintained or are transformed.

Formulation of a theoretical framework is also crucial to the ongoing debate on accounting harmonization. Specifically, explanations of how and why patterns of cross-national accounting systems develop will support either a “culture free” approach or a “culturally grounded” approach to accounting development. SyCip [1981, p. 861, an influential figure in the accounting harmonization debate within the Association of South East Asian Nations (ASEAN), explained that:

Accounting principles, standards, and practices are usually a direct product of the circumstances and influences of their environment and are most meaningful if viewed against such factors …. In the development of international accounting standards it is therefore essential that the diverse and differing environments where such standards are intended to be applied are first understood and appreciated. Failure to consider environmental differences or circumstances will likely deter the acceptance of any established international standards.

Thus, even if various elements in countries’ national financial accounting systems are similar, research still needs to establish why such similarities exist and the future likelihood that these elements will converge or diverge. Against the backdrop of debates between those who support and oppose accounting harmonization, the explanatory analyses in this paper seeks to provide insights to the reasons underlying empirically observed patterns of national financial accounting systems. For example, to what extent do specific features of financial accounting systems emerge from deeply-rooted cultural or political factors? To what extent can these financial accounting features be modified to serve common information requirements in two or more countries?

2.2 Generic Explanatory Models

Theoretical frameworks in comparative international accounting rely on explanatory models which attempt to identify variables of interest and linkages among these variables. The process of constructing explanatory models involves simplifying a complex array of factors and processes, without neglecting the essential characteristics of the phenomenon being studied. Progress in comparative accounting research depends on developing new models or refining existing ones.

The American Accounting Association’s International Accounting Section Committee on Research Methodologies [AAA, 1993] delineated the features of two generic models currently in use in comparative international accounting research: unidirectional models and recursive models. Unidirectional models are characterized by a one-way flow between explanatory variables and dependent variables. Two types of unidirectional models have been identified: the environmental causal model; and the environmental consequences model (Figure 1). Each is discussed in turn.

The environmental causal model asserts that particular environmental variables (i.e., factors in the national environment) explain the patterns or attributes of accounting systems. The early contingency-based research, discussed in the next section, conforms to this particular model. In comparison, the environmental consequences model treats accounting system attributes as explanatory variables and examines the effect of these attributes on a country’s political, economic or cultural environment. Research based on this model has inquired into the perceived usefulness of accounting information in various national settings [Chang et al. 1983], the impact of disclosure regulation on company listing behavior [Biddle and Saudagaran, 1991], the impact of accounting disclosures on overseas share prices of cross-listed companies [Brown, 1993], and the effects of international accounting diversity on decision-making [Choi and Levich, 1990; Bhushan and Lessard, 1992].

The recursive model (Figure 2) acknowledges the reciprocal effects between environmental variables and accounting system attributes and incorporates two sets of explanations: the causal dimension specifies the link between environmental variables and accounting system features; the consequences dimension stipulates how the accounting system, in turn, influences particular environmental variables. The fourth section of the paper discusses studies that have adopted a recursive model, emphasizing their potential to extend current understanding of accounting harmonization issues.

Although the recursive model is not used widely yet by comparative international accounting researchers, its ultimate use will help to overcome some extant theoretical hurdles. Principally, this approach to explanatory modeling potentially increases the comprehensiveness and coherence of explanations by recognizing the reciprocal effects of environmental variables and elements of national financial accounting systems.

2.3 An Expanded Recursive Model

The recursive model identified by the AAA [1993] can be enhanced further by highlighting the factors and entities involved, and their interrelationships, to assist in identifying relevant areas of research and inquiry. Moreover, the expanded recursive model (ERM) shown in Figure 3 can serve as a benchmark for evaluating alternative approaches to explaining observed patterns of national financial accounting systems. The unit of analysis here is a particular country, albeit from a comparative vantage point.

Figure 3 outlines four analytical elements of the ERM: 1) environmental factors; 2) social groups; 3) the accounting system; and 4) accounting practices. Accounting practice is one element of national financial accounting systems. It is highlighted here because it represents the distinctive output of a particular accounting system. The elements in the ERM comprise factors which vary systematically across countries and which can be subjected to various forms of empirical analysis. Environmental factors include domestic and international political, economic and socio-cultural variables. Social groups influence the financial accounting system and are themselves influenced by it. Environmental factors and social groups are related recursively. Social groups operate within a particular political, economic and socio-cultural milieu which structures the relationships of these groups. Conversely, environmental factors are maintained and transformed by competitive and/or cooperative interactions of various social groups. The interaction between groups in a particular social environment determines the nature and characteristics of a country’s financial accounting system. The financial accounting system, in turn, through its output (i.e., accounting practices) influences the broader environment and the well-being of social groups in this environment.

The ERM proposed here has three implications for comparative accounting research. First, research should attempt to study systematically the characteristics of each element in the model, e.g., which social groups are affected by the financial accounting system and how do these groups influence the financial accounting system. Second, research should attempt to specify the linkages between elements in the model. For example:

* environmental factors influence patterns of social interaction and are important for understanding the motives for, and constraints on, the behavior of social groups;

* social groups are agents of change and stability of national environments and financial accounting systems;

* the accounting system represents an outcome of interactions within a particular national environment; as such, it reflects the characteristics of social groups and the environment in which these groups operate; and

* the output of the financial accounting system, i.e., specific accounting practices, affects the behavior of social groups through the information provided.

Third, by using the ERM as a benchmark for comparison, researchers can evaluate the soundness of various theoretical frameworks developed to explain patterns of accounting systems worldwide. For example, theoretical frameworks which ignore the role of social groups probably would be considered theoretically deficient because such frameworks assume a deterministic relationship between environmental variables and the financial accounting system. Conversely, theories that assume that the financial accounting system is only a passive recipient of change overlook the powerful capacity of the accounting system to influence the perceptions and behavior of social groups.


3.1 Nature and Approach

Early research in comparative international accounting sought to develop a contingency perspective on accounting differences in relation to “extrinsic”, “intrinsic” and “hybrid” classificatory schemata of national financial accounting systems. The contingency approach has been defined as an “attempt to find variables that would explain the variation among countries” [AAA, 1993, p. 9]. Contingency studies are described also as being “deterministic, unidirectional and implicitly assume that accounting is the dependent variable” [AAA, 1993, p. 91. Such research therefore posits that financial accounting systems are related, on a contingent basis, to particular political, economic, and socio-cultural variables. The research aim is generally to identify and test the effects of these contingent variables.

Extant contingency-based research is discussed here because this approach has found substantial application in comparative international accounting. This research approach also provides some contribution to the debate on accounting harmonization by highlighting environmental factors likely to be important in explaining patterns of accounting in the countries considering harmonization. Contingency-based studies have been built upon “extrinsic”, “intrinsic” and “hybrid” descriptive frameworks. In particular, these studies have formulated hypotheses regarding the relationship between environmental variables and financial accounting system variables. However, variables in these studies have generally not been well-defined or subjected to rigorous empirical testing. The next section discusses some prominent contingency-based studies during the past three decades.

3.2 Principal Research Studies

Mueller [1967] is generally credited with developing the first comprehensive basis for explaining accounting patterns worldwide. His intrinsic classificatory schema provided the basis for his insights regarding the factors influencing national financial accounting systems. Based on empirical observations of accounting systems in North America and Europe, Mueller classified national financial accounting systems as “macro”, “micro”, “independent discipline” and “uniform”. He then argued that these patterns of accounting systems developed because of various economic, political, socio-cultural and enterprise-specific factors. Building upon Mueller’s [1967] work, Radebaugh [1975] specified eight sets of contingent variables that were hypothesized to determine accounting objectives, standards and practices. These were nature of enterprise; enterprise users; government; other external users; local environmental characteristics; accounting profession; academic influences; and international influences (Figure 4).

Radebaugh’s [1975] framework is distinctive because it recognized the importance of both domestic and international factors in shaping national financial accounting systems. His application of the framework to Peru has provided useful insights regarding factors relevant to the development of financial accounting, particularly in developing countries that have adopted a macro-user oriented accounting system. However, the framework’s explanatory contribution is limited because the theoretical links between the environmental variables and the accounting system have not been elaborated fully. For example, it is not clear how and why various international factors identified by Radebaugh [1975] (e.g., colonial influence, foreign direct investment) continue to strongly influence the development of accounting in some countries while having only a minimal impact on others.

The AAA [1977] presented a morphology for differentiating financial accounting systems on the basis of eight sets of underlying (explanatory) parameters: * political system;

* economic system;

* stages of economic development;

* objectives of financial reporting;

* source of, or authority for, accounting standards;

* education, training and licensing procedures; enforcement of ethics and standards; and

client background.

A principal limitation of the AAA [1977] proposal is that it does not differentiate between environmental parameters and accounting system parameters. Also, the framework is not linked to hypotheses regarding how and why particular configurations of morphological characteristics emerge, are sustained, and transformed over time. Nobes [1983] identified nine factors for differentiating accounting systems in developed market economies.3 According to him, these factors represent long-term fundamental differences of national accounting practices. Of the nine factors, only the first two are explanatory variables. The remaining factors are discriminating features of national financial accounting practices. Nobes [1983] also stated that his framework is applicable only to developed countries. This precludes the applicability of Nobes’ framework to most developing countries, although some of the factors mentioned could be used also to differentiate between accounting practices in such countries.

Other contingency-based studies rely on various statistical techniques to highlight the association between specific environmental variables and financial accounting system variables. Frank [1979] found statistical support for clusters of countries derived after correlating these clusters to cultural links (proxied by official languages), economic structure (proxied by per capita income); and international trade patterns. The study was extended by Nair and Frank [1980] who found that different sets of factors affected measurement groupings and disclosure groupings. Belkaoui [1983] studied the relationship between disclosure and political variables (political and civil liberties index), economic variables (GNP per capita, exports ratio) and a demographic variable (population size). In an extension of Belkaoui [1983], Belkaoui and Maksy [1985] did not find a significant association between disclosure levels and the degree of national economic and social well-being, measured by a derived Welfare of the Common Man (WCM) Index.

Schweikart [1985] proposed the development of international contingency models which related environmental variables (social, political, economic) to various institutional structures and information needs. The main research problem [Schweikart, 1985, p.97] was

isolating the environmental variables affecting [decision-makers’] information needs, since contingency theory implies that information needs should vary with variations in the favorability or certainty of the decision model.

Schweikart’s [19851 suggestion is difficult to apply in developing countries in the absence of a comprehensive framework for comparing institutions, information types, and decision problems among these countries. His recommendation, which was to conduct comparative research using nations with very similar accounting methods, institutions, and decision problems, is not readily applicable to developing countries given the diversity in these countries’ financial accounting systems and domestic environments.

Cooke and Wallace’s [19901 global study on the relationship of economic development, business risk, and financial disclosure regulation could be relevant for developing countries. They did not find level of economic development to be associated significantly with financial disclosure regulation. In comparison, level of business risk was found to be a significant explanatory variable for financial disclosure regulation in industrialized countries but insignificant in less developed countries. They concluded that financial disclosure regulation in economically developed countries was influenced more by “internal factors” (e.g., stage of economic development, type of economic system) whereas regulation in developing countries was affected more by “external factors” (e.g., colonial history, impact of MNCs). If so, accounting regulation in most developing countries can be expected to be influenced more by “external factors”. Saudagaran and Diga [1997] was concerned with the choice which ASEAN countries made between the global and regional paradigms of harmonization. Their analysis explained why ASEAN countries have chosen global harmonization over regional harmonization. Cooke and Wallace [1990] and Saudagaran and Diga [1997] hold similar views on the importance of not ignoring the impact of internal factors in the understanding of the accounting systems of developing countries. There is a need for more empirical research than theoretical speculation (or prediction) to determine the extent to which various factors (internal versus external) influence choices made by countries.

In terms of explanatory hypotheses developed, contingency-based research generally is not based on well-developed theoretical frameworks within which to study political, economic and socio-cultural effects. In particular, it is unclear how and why specific variables directly or indirectly affect national accounting systems and how these explanatory variables are related. Another limitation relates to ambiguous concepts used in these studies. For example, the categories of “national economies” used by the AAA [1977] overlap significantly. Many developing countries possess a dualistic economy characterized by a traditional subsistence agricultural sector which coexists with a relatively sophisticated manufacturing and services sector. Moreover, many developing countries, while subscribing to the rigors of market forces, are characterized also by strong and direct government intervention in markets (characteristic of a centrally planned economy). Recent developments suggest that the recent economic crises in Asia and elsewhere might result in increased intervention by governments, particularly in their capital markets.

Some of these limitations were considered by Doupnik and Salter [1995] who formulated a “general model of international accounting development” in which they suggested that a country’s accounting development was influenced by its external environment, cultural values, and institutional structure. An empirical test of specific factors (legal system, capital markets, tax laws, inflation, level of education, level of economic development, and cultural values) generally supported the proposed model. However, the authors recommended more in-depth analysis to determine how specific environmental and institutional variables affected accounting practices. Like Cooke and Wallace [1990], Doupnik and Salter [1995] adopted a model which suggested that a country’s accounting development is expected to be influenced by its external environment (e.g., foreign direct investment, regional cooperation, regional and international capital markets) and its internal environment (e.g., institutional structures, enforcement climate).

The studies discussed in this section, thus far, adopt the causal approach in contingency-based research. However, studies have been conducted that adopt the consequences approach. Adhikari and Tondkar [1992] examined the impact of economic factors on stock exchange disclosure requirements of 35 stock exchanges (including those in several developing countries). They found that equity market size was associated with the extensiveness of disclosure requirements. Their results need to be juxtaposed against Saudagaran and Biddle’s [1992] findings which indicated that a capital market regulator (e.g., the SEC in the United States, the Ministry of Finance in Japan) that imposes stringent disclosure requirements on foreign firms that are seeking to list on its stock exchanges could pose a threat to the competitiveness of those domestic stock exchanges relative to stock exchanges in other countries. Adhikari and Tondkar [1992] and Saudagaran and Biddle [1992] are complementary in that the former was concerned with the relationship between the size of the domestic equity market and the extensiveness of the disclosure requirements on that market while the latter examined the relationship between cross-listing by foreign firms on a stock exchange and the stringency of disclosure regulations in the country where the stock exchange is located.

3.3 Contributions and Limitations

Overall, contingency-based research studies have highlighted the possible relationship between some environmental factors and accounting system elements. Mueller [1967] and Radebaugh [1975] provided evidence drawing attention to areas requiring further investigation. Evidence provided by such research should lead to further theoretical refinement, for example, in terms of specifying the nature of interplay among domestic factors which influence accounting in subtle ways [Zeff, 1972].4

Contingency-based research has shown also that environmental variables selectively affect financial accounting systems. Some economic factors (e.g., per capita income) are associated differentially with disclosure and measurement practices [Nair and Frank, 1980]. Furthermore, the relative importance of explanatory variables differs from one country to another. Much still needs to be done to improve the theoretical foundation of comparative international accounting research. In particular, greater emphasis on specifying the links between dependent and explanatory variables is required. This would enhance the potential contribution of contingency-based studies, as Radebaugh [1975, p. 54] explained:

A more thorough investigation of the factors leading to the principles and practices of a country will help identify common situations where universal principles may be adopted, and unique situations where compromise may be necessary or where uniform standards and practices are simply impracticable.

The inherent limitations of contingency-based research also need to be recognized. The most important of these are: the static nature of the models used; their inability to specify the underlying process linking the variables; and their neglect of the role of human agency. First, the models test the relationship between environmental variables and financial accounting system variables on a cross-sectional basis and ignore the historical specificity of the findings. Rather than being immutable, patterns of accounting groups are dynamic and sensitive to changes in the underlying variables. Contingencybased models are therefore of relatively limited use in analyzing most developing countries considering the profound transformations experienced by these countries during the past 30 years.

Another limitation of contingency-based models is their inability to explain persuasively how and why explanatory variables relate to accounting system variables. For example, why is the political system an important explanatory variable in one country while demonstrably less important in another country? The explanatory framework should be able to specify the causal links between environmental variables and accounting system elements and demonstrate how these linkages explain systematic variations between countries. Also, the theory needs to be able to deal with empirically-observed “anomalies” revealed in prior descriptive research. For example, Thailand’s accounting system is a fusion of a macro-user oriented and micro-user oriented accounting system. It is unlikely that extant contingency-based research could explain such a feature unless the shifting political, economic and socio-cultural factors influencing Thailand’s financial accounting system are considered.

The third, and probably most important, limitation of contingency-based research is that it fails to analyze the crucial role of human agency. Rather, the research emphasizes use of macro-level, often quantitative, characteristics of the national environment (e.g., GDP, per capita income, consumption levels). Little attention is given to the processes involved in creating, sustaining and transforming accounting-related institutions and the role of various groups in shaping these processes. As such, explanations provided by contingency-based research are often reductionist and deterministic. It is particularly important to consider how the interactions of groups and institutions influence the characteristics of financial accounting systems over time.


Contingency-based studies usually assume a direct relationship between environmental variables and financial accounting system variables. In contrast, studies based on emerging research paradigms consider the two-way relationship between environmental factors and accounting system variables. That is, while contingency-based research adopts implicitly a unidirectional model, emerging research approaches use a recursive model to explain patterns of accounting development worldwide. This section discusses three emerging approaches in terms of the proposed generic ERM.

The discussion here is motivated by a need to understand the positions supported by these research approaches. These positions are likely to differ because each approach is associated with a particular research paradigm or approach to inquiry. Kuhn described a research paradigm as “the entire constellation of beliefs, values, techniques, and so on, shared by members of a given [scientific or research] community” [1970, p.175]. Scientific inquiry, according to Kuhn, was guided by one dominant paradigm.5 An understanding of the research paradigms used in comparative international accounting research is crucial because paradigms “define what should be studied, what questions should be asked, how they should be asked, and what rules should be followed in interpreting the answer obtained” [Ritzer, 1975, p. 15, emphasis added].

Accounting research in general, and comparative international accounting research in particular, can be described as a multi-paradigmatic field of inquiry [Belkaoui, 1993]. Burrell and Morgan [1979], Hopper and Powell [1985] and Chua [1986] have outlined several paradigms of accounting research described as mainstream/functionalist; naturalistic/interpretive; and critical/radical. Drawing from these earlier classifications, three emerging paradigms are discussed here in the context of comparative international accounting research: positivism (which includes the mainstream/functionalist and the positive-transaction cost economic paradigms), realism, and naturalism (which includes the naturalistic/interpretive and the critical/radical paradigms). Each is based on a coherent, albeit different, set of assumptions on how comparative international accounting research ought to be conducted.

(a) Ontological assumptions

Ontology refers to the underlying belief regarding the nature of the phenomenon being studied, in this case, national financial accounting systems. In a positivism ontology, the real world exists independently of the subjective consciousness of the researcher (which is irrelevant to explanation). Positivism is characterized by an insistence that science can only deal with observable entities known directly to experience. The positivist aims to construct general laws or theories which express relationships between phenomena. A realist or objectivist ontology views accounting systems as a phenomenon distinct from the observer and is consistent with the view of accounting as a technical discipline. Realists reject the insistence of positivists that only observable phenomena can be analyzed. Realists argue that causal explanation proceeds by identifying underlying mechanisms, perhaps non-observable, which connect phenomena. In comparison, a naturalistic ontology treats accounting systems as being “socially constructed” or a reflection of people’s shared cognition, consistent with the “culturally grounded” view of accounting. The accounting system, in turn, helps to determine and reinforce a particular way of “viewing” enterprises (e.g., financially profitable or unprofitable) while circumscribing others (e.g., environmentally responsible or ecologically reckless). Thus, a financial accounting system is seen as primarily serving an ideological function.

(b) Epistemological assumptions

Epistemology refers to beliefs regarding how knowledge is acquired. It provides the basis for establishing criteria used to evaluate claims to knowledge. Positivism is the belief that truth and knowledge can be obtained through detached observation of real-world phenomena. This belief is consistent with ontological realism or objectivism.6 This view supports use of the scientific method (e.g., quasi-experiments and statistical tests). In comparison, naturalism or interpretivism is the belief that knowledge can be obtained by understanding accounting systems from the vantage point of people within the system. The validity of research conclusions is assessed by how closely the researcher’s own interpretation matches the “common-sense” interpretation of persons being studied.

(c) Methodological assumptions

Methodology defines the methods appropriate to satisfy research conclusions (i.e., truth claims). An inductivist methodology emphasizes the need to develop universal laws and/or theories based upon past observations or a priori reasoning. These general theories are, in turn, tested against subsequent empirical observations (hypotheticodeductivism). A falsificationist methodology asserts that theory can be falsified through careful testing and observation and emphasizes structured hypotheses formulation and testing. A hermeneutic approach seeks to reconstruct the meaning and significance of social arrangements and practices. Emphasis is given to understanding the socio-cultural importance of financial accounting systems. Finally, material historicism inquires into the origins and effects of social arrangements and institutions that constrain the scope of individual action. In an accounting context, it analyzes the way users’ beliefs and behaviors are influenced by historically specific institutional arrangements.

(d) View of human agency Beliefs regarding human agency are concerned with whether individuals are able to choose freely and act purposively. Voluntarism views individuals as possessing complete autonomy to pursue their chosen course of action. In comparison, structural determinism is the belief that individual actions are caused by factors extraneous to the individual (i.e., structural conditions). Research studies in accounting adopt either an assumption of voluntarism or structural determinism. Theoretical frameworks that emphasize notions of individual rationality, i.e., that individuals act towards specified and personally defined ends, adopt a voluntaristic belief. In comparison, theories which emphasize the physical, material and socio-cultural conditions underlying human behavior adopt a structurally deterministic view. These opposing views are relevant in supporting either a “free market” or a “regulated” approach to pursuing accounting harmonization. Voluntarism suggests that competitive markets are likely to result in an optimal degree of accounting harmony; structural determinism, in contrast, is more likely to support the imposition of regulations.

(e) Teleological orientation of society

Accounting theories adopt alternative beliefs of society’s ultimate orientation, which are particularly important in comparing countries and in studying accounting harmonization. Some theories assume that society is oriented towards increased order or harmony. Changes and disturbances are regarded as temporary events which ultimately lead back to the status quo. Societal arrangements, including national financial accounting systems, are studied in terms of how they contribute towards maintaining a particular social order. As such, this view implicitly supports the desirability of pursuing accounting harmonization. In comparison, other theories are oriented towards society as being constantly in a state of change and transformation. The focus is on factors that effect change and guide the transformation of society, even if such factors lead to greater accounting disharmony.

The preceding discussion suggests that positions adopted in regard to the feasibility and desirability of accounting harmonization are based on alternative theoretical assumptions. By explicitly identifying these assumptions, the discussion contributes to clarifying explanatory and normative positions taken in relation to debates on accounting harmonization. The discussion helps to highlight various approaches to conducting comparative international accounting research. Table I provides a summary of the principal differences among the three research paradigms. Next, each research paradigm is discussed in terms of its application and potential contribution to comparative international accounting research.

4.1 Positivist Paradigms

This positivist paradigm emphasizes the economic incentives of individuals and groups to influence national financial accounting systems. Currently, there are two streams of research under the positivist paradigm: functionalist and agency theory/transaction cost economics. Both research streams share the belief that accounting systems are central to wealth transfers that occur among individuals. Differences in access to information and the tendency towards opportunistic individual behavior coalesce to create specific forms of accounting institutions designed to regulate the behavior of market participants. The positivist paradigm is illustrated by a recursive model that emphasizes the link between broad environmental variables, the economic incentives of individual agents and specific features of financial accounting systems.

4.1.1 Functionalist

The functionalist paradigm is consistent with the common view of accounting as a useful technical craft concerned with assigning measurements to economic phenomena to reflect accurately the financial condition and performance of economic enterprises [Sterling, 1970; Solomons, 1978, 1991]. The functionalist paradigm focuses on the contribution of national financial accounting systems to ensuring effective management and administration (in government bureaucracies and private enterprises), efficient allocation of economic resources (through the operation of capital markets) and a stable government revenue base (through its role in taxation systems) [Burchell, et al. 1980]. Despite unresolved debates regarding the technical merits of alternative systems of valuation and measurement, the usefulness of the accounting craft itself remains unquestioned.7

Following the functionalist paradigm, the role of accounting, irrespective of national differences, is linked inextricably to notions of accountability [Ijiri, 1983]. Observed differences in accounting concepts and practices between macro-user and micro-user oriented systems are traceable, therefore, to different concepts of accountability. As Chan [1975] explained, in some countries accountability is understood in legalistic terms, i.e., compliance with established rules set by the contracting parties or by the state. In others, accounting adopts a “decision usefulness” function consistent with making individual investment and credit decisions.

Differences exist within the functionalist paradigm as to whether financial accounting is an outcome of, or a prerequisite to, modern capitalist development. This question is particularly relevant to developing countries contemplating the harmonization of their financial accounting systems. While most believe that accounting emerged in response to the needs of rapid industrialization, others assert that economic progress would not have been possible in the first place without the existence of modern accounting concepts.

The functionalist paradigm is currently the dominant paradigm in comparative international accounting research. Its ideas permeate debates on accounting development at both the theoretical level and practical level. Research under the functionalist paradigm is generally supportive of accounting harmonization. First, this paradigm emphasizes the importance of understanding international economic trends, particularly the increasing interdependence and convergence of national economies. The emergence of a “borderless global economy” [Ohmae, 1990; Axford, 1995] is viewed as an inexorable trend. Integration into the global economic system is seen as the only feasible path to economic growth. Consequently, the pursuit of accounting harmonization through global market forces and/or regulatory fiat becomes unavoidable. Second, research under this paradigm has provided evidence that accounting differences affect the decision processes of users, another common rationale for supporting greater accounting harmony [Bhushan and Lessard, 1992; Bricker, et al. 1992]. Third, the lack of accounting comparability increases the costs incurred by multinational enterprises, the principal agents of integration and exchange in the emerging global economy. Finally, perceived inadequacies in the accounting systems of developing countries are viewed as impediments to foreign and domestic capital flow into these countries.

4.1.2 Agency Theory/Transaction Cost Economics

As shown in Figure 5, the model underlying this positive paradigm views national financial accounting systems as outcomes of competition among enterprises and their agents to secure specific economic advantages. In return, financial accounting systems provide the basis for mediating wealth transfers occurring between economic enterprises and agents. For example, the capital allocation process operates on the basis of performance measures furnished by competing enterprises through financial reports.8 While positive accounting research generally uses firms as the focal point for analysis [Jensen and Meckling, 1976], a national financial accounting system may also be treated analytically as a “nexus of contracts” between capital providers, government bureaucracies, accountants and other parties involved in the financial reporting regulatory process.

Based on an agency theory approach, principals (e.g., capital providers) monitor the performance of agents (e.g., enterprise managers) through financial accounting systems. In addition, financial accounting systems help to mitigate conflicts of interest between principals and agents through employment and remuneration contracts based, in part, on reported accounting measures [Watts and Zimmerman, 1978]. While agency theory research has focused on explaining how and why individual firms choose particular accounting policies, this approach can be used also to explain accounting policy (i.e., regulatory) choices at a national level [Daley and Vigelend, 1983; Kelly, 1982; El-Gazzar, et al. 1986]. At an international level, this paradigm draws attention to an organization’s incentives to influence the outcome of IASC deliberations. Guenther and Hussein [1995] found that support for LIFO during IASC discussions originated exclusively from countries where use of LIFO provided clear tax benefits to companies. Kenny and Larson [1993] also present evidence that large professional associations and organizations have lobbied strongly in the development of IASs for economic reasons.

The transaction cost economic approach can be used to explain how specific types of institutional arrangements emerge [Williamson, 1988].9 Financial accounting systems are viewed as mechanisms which help minimize overall transaction costs. They play an important role in increasing the efficiency through which economic exchanges take place. Consequently, observed differences in national financial accounting systems may be explained by differences in international transaction cost environments. Some countries have relatively large and complex capital markets, which require correspondingly large investments in “sophisticated” accounting systems (i.e., more comprehensive and detailed rules), to reduce problems arising from information asymmetry and opportunism. This explanation is consistent with empirical evidence showing that characteristics of capital markets are important variables for explaining observed accounting patterns worldwide [Meek and Saudagaran, 1990; Gray et al. 1995; Saudagaran and Meek, 1997].

4.2 Realism Paradigm10

In opposition to positivists, realists claim that explanation in both natural and social science consists in uncovering the real underlying and often non-observable mechanisms that connect phenomena causally, not merely in showing that the phenomena are instances of some observed pattern or regularity. Realism, as a research paradigm, refers to attempts to describe the interface between accounting and its environment, without idealization or romantic subjectivity. To realists, it represents an unembellished rendering of accounting in its natural setting. Philosophically, realism is the position that universals or general accounting concepts have a real substantial existence, independent of being thought (i.e., independent of both the human mind and individual objects). Philosophical realism “rests on the premise that Reality exists “out there” – and is unambiguously and faithfully expressed in a system of signs or symbols” [Tinker, 1991, p. 2981. In accounting, positivism is identified with a conviction that accounting can be scientific in the same way as, say, physics [Kinney, 1986]. In that context, realism is a position directly opposite to positivism in that realists argue that accounting theorists must pay some attention to the intentions and motives of actors. Since the latter phenomena are unique to the social world and do not characterize the objects of the natural world, the quantitative rigor of the physical sciences cannot be utilized in the understanding of accounting sociology.

In epistemology, realism represents the theory that individual things exist independently of the mind’s perception of them, as opposed to idealism, which holds that reality exists only in the mind. Thus understood, realism obviously reaffirms the standpoint of common sense, and it achieves the status of philosophy only because a case against it has been seriously argued. A good example of a study which uses realism as the thrust of its argument is Tinker [1984]. In that article, Tinker argues that the neoclassical theory of the state is inadequate and needs to be abandoned for a radical theory of the state which would promote a more mature and balanced understanding of social conflicts in accounting regulation.

Many scholars, on various grounds, have been puzzled over how perceptions (or experiences of any sort) can yield knowledge of a mind-independent world. Some have concluded that such a world is unknowable or non-existent, and that what are described as physical objects are, in fact, mind-dependent because their “being” consists in being perceived. I

However, realists have replied that idealists see themselves favoring conduct that is natural to most of us. Because that is something to which most of us are naturally inclined, therefore, the argument goes, it must be at least licit if not positively obligatory. For example, because many countries have professional accounting bodies (which are private sector organizations that are self-regulatory) in charge of setting auditing standards and professional licensing and codes of conduct regulations, it is often assumed erroneously that all countries should have professional accounting bodies in the private sector and that those bodies should be self-regulatory. Realists argue that this is fallacious.

4.3 Naturalism Paradigm

4.3.1 Interpretive

The interpretive paradigm focuses on the role of accounting in socially constructing a version of reality [Davis, et al. 1982; Chua, 1986; Lavoie, 1987; Hines, 1988; Morgan, 1988). Rather than viewing accounting as an objective reality, this paradigm emphasizes that accounting reflects the shared perceptions of individuals in society [Berger and Luckman, 1967; Geertz, 1973].12 Morgan [1988, p. 480] emphasized that:

[t]he idea that accountants represent reality “as is” through the means of numbers that are objective and value free, has clouded the much more important insight that accountants are always engaged in interpreting a complex reality, partially, and in a way that is heavily weighted in favor of what the accountant is able to measure and chooses to measure, through the particular schemes of accounting to be adopted. The perceived objectivity of accounting measures and processes is essential in the way that different forms of accounting construct particular views of organizations and societies. The alternative “accounting metaphors” created [Morgan, 1988] shape decision processes according to the values and assumptions underlying the accounting principles used. Accordingly, accounting research needs to be sensitive to different dimensions of realities being “accounted for” as a basis for informed and relevant actions. Figure 6 illustrates a financial accounting system viewed under an interpretive paradigm.

Figure 6 shows that a financial accounting system is embedded in the society where it is located. Societies, in turn, are distinguished by their underlying culture. While different anthropological concepts of culture exist [Smircich, 1983], “culture” here refers to the collective mental programming which distinguishes one group from another [Hofstede, 1980]. That is, culture forms the basis of human activity and provides people with the unique lens for interpreting reality [Sekaran and Snodgrass, 1986; Wildavsky, 1989]. Choi et al. [1983] concluded, in a comparative study of accounting practices in Japan, South Korea and the USA, that ascribing a fixed meaning to financial ratios derived from enterprises in different countries was risky and probably also irrelevant because the appropriate interpretation of these ratios (e.g., financial leverage) depended on an in-depth understanding of country-specific cultural and institutional conditions. Corollary to these findings, Belkaoui [1978] drew upon the Sapir-Whorf linguistic relativity hypothesis to explain how language is an important determinant of cognitive and judgment processes. 13

Two approaches are available in applying the interpretive paradigm to comparative international accounting research: emic and etic. The emic approach studies behavior from within the socio-cultural system while the etic approach studies behavior from outside the socio-cultural system. Another distinguishing feature is that studies using the emic approach conduct an in-depth study of a single culture [e.g., McKinnon, 1984; McKinnon and Harrison, 1985] while studies using the etic approach compare two or more cultures [e.g. Jaggi, 1975; Gray, 1988]. The principal distinctions between these two approaches, as discussed by Berry [1969], are summarized in Table 2.

Jaggi [1975] applied an etic approach in analyzing the impact of managers’ cultural value orientations on the reliability of financial disclosures. Using Parsons and Shils’ [1950] framework,14 Jaggi hypothesized that the reliability of financial statements from less developed countries was low because these countries had particularistic value systems. In comparison, financial reports from more developed countries with universalistic value systems were considered to be more reliable. In our view, this theoretical framework is of limited value in many countries because it associates uncritically the notion of particularism with economic underdevelopment, a link that is not necessarily supported in the economics literature.15 Gray’s [1988] framework, which draws from Hofstede’s [1980] classification of cultural dimensions, is an etic approach relevant to assessing the feasibility of accounting harmonization in ASEAN. Gray hypothesized that accountants’ values were related to broader cultural values of power distance, uncertainty avoidance, individualismcollectivism and masculinity-femininity.16 These accounting values, in turn, influenced the development of national financial accounting systems.

Several studies have expanded Gray’s [1988] framework. Perera and Mathews [1990] asserted that national cultural values influenced the nature and extent of corporate social accounting. They found evidence that Anglo-North American accounting systems were less concerned with employee reporting but were more willing to disclose environmental impacts in annual reports. In contrast, Continental European countries had more employee-related disclosures but dealt less with environmental disclosures. Fechner and Kilgore [1994] proposed some modifications of Gray’s [1988] framework17 but did not test these changes empirically. Salter and Niswander [1995] statistically tested Gray’s [1988] model and found that the model helped to explain measurement practices and disclosure practices. However, the regression model was less successful in explaining the institutional characteristics of financial accounting systems such as degree of government regulation and professionalism. These etic studies could help explain overall patterns of institutional regulation and practices observed in countries.

The emic approach is exemplified by McKinnon and Harrison’s [1985] and Harrison and McKinnon’s [1986] proposal to use a cultural systems theory, based on Smith’s [ 1973] social change framework, to analyze the development of national financial accounting systems. Their research approach differs from Gray’s [1988] etic approach in four ways. First, their study focused on financial accounting systems as distinct social systems, albeit within the larger national system; Gray, in comparison, emphasized accounting sub-culture values. Second, the cultural environment was viewed as having an indirect effect on financial reporting regulation, i.e., it “serves to constrain or facilitate change through its influence on the nature of this interactivity [between the financial reporting system and other social systems]” [Harrison and McKinnon, 1986, p.239]. In comparison, Gray hypothesized that accounting cultural values had a direct impact on accounting regulation (i.e., professionalism versus statutory control). Third, Harrison and McKinnon’s study emphasized the longitudinal development of accounting systems rather than features of the system at a point in time as emphasized by Gray’s study. Fourth, the study focused on the experiences of one country, Japan, as opposed to a broader analysis of two or more countries. Harrison and McKinnon [1986] found that Japan’s cultural values, characterized inter alia by an aversion to litigation and strong beliefs regarding the moral legitimacy of government, constrained and modified the interactions among groups involved in accounting regulation. Similar to other emic cultural research, their analysis was particularistic and made no claim that the cultural norms observed in Japan existed elsewhere. Their analysis underscores the need for sensitivity regarding the unique cultural factors present in individual developing countries. Their research indicates, too, that while accounting concepts and practices could be transferred from one country to another (e.g., US consolidation concepts used by Japanese companies), differences in historical, institutional and cultural conditions could still preclude valid cross-country comparisons of accounting measures developed using the same sets of accounting rules [McKinnon, 1984].

4.3.2 Critical

The aim of the critical paradigm is to raise consciousness to the role of accounting and to question the belief that accounting is only a technical craft. Morgan and Willmott [1993, p. 41 articulated the central aim of this research paradigm as one which:

contrives to render visible, and amplifies, accounting’s wider social and historical constitution and significance as a technology of social and organizational control …. [to] highlight and question accounting’s technocratic pretensions and applications through which it operates to ‘translate the moral into the factual’.

One approach under this paradigm is to analyze the historical emergence of the accounting profession in the context of a country’s social, political and economic conditions. The critical paradigm examines the redistributive role of accounting in terms of creating, maintaining and transforming systems of societal power expressed in materialist (economic), political and ideological terms. The recursive model of an accounting system as viewed under a critical research paradigm is shown in Figure 7.

Financial accounting systems are contested by different social groups aiming to achieve political, economic and ideological hegemony. The current accounting system, in turn, helps legitimate the current bases of social exchange and uneven distribution of social power [Tinker, 1980; Cooper and Sherer, 1984; Richardson, 1987; Lehman and Tinker, 1987; Miller and O’Leary, 1987). Rather than merely being a neutral set of calculative techniques and a purveyor of rational economic facts, accounting plays an ideological role in creating and sustaining systems of exchange associated with the efficient accumulation and appropriation of capital.

So far, the critical research paradigm has not been applied extensively to discuss comparative international accounting research issues. Tinker [1980], using a “political economy” approach, examined how an MNC’s financial reporting practices in a less developed country (LDC) failed to address income distribution concerns. Puxty et al. [1987] compared alternative modes of accounting regulation in four industrialized countries. Willmott et al. [1992] analyzed the historical development of accounting standards on R&D expenditures in Germany, Sweden, UK and USA. Other studies have examined historical tensions in the relationship between state agencies and professional accounting in Australia [Chua and Poullaos, 1993], Canada [Richardson, 1989], Sweden [Jonson, 1991], the UK [Sikka and Willmott, 1995], and the USA [Hunt and Hogler, 1993].

Political processes associated with obtaining widespread acceptance of IASs have also been discussed. Rahman [1993] asserted that the ascendancy of IASC harmonization efforts over related moves by the UN and OECD to improve the disclosure of MNCs demonstrates the social power exercised by professional accounting bodies in international accounting regulatory matters. This power has emerged, in part, from the increasing transnationalization of accounting practices through multinational accounting firms [Taylor, 1987; Parker, 1989; Hanson 1990; Dezalay 1995].

The critical paradigm can be used to analyze how IAS contribute to the perceived legitimacy of accounting in the ASEAN countries and whether the adoption of foreign accounting standards, including IAS, reinforces dominant political and economic interests. As Hopwood [1989, p.4, emphasis added] asserted, the analysis is premised on accounting’s role within a network of domestic and transnational interests:

All too clearly international pressures cannot be analyzed in isolation of national ones …. Interests in new and different accountings, internationally orientated or otherwise, have to confront the nexus of national institutions, regulations and practices, and prob lem agendas that give particular significance to accounting and embed it in a quite specific institutional setting such that it functions in particular ways.

Among the ASEAN countries, these problem agendas relate to alternative discourses of “development” or “modernization” [Frieden, 1991; Preston, 1994]. These ideas have exerted a subtle, yet powerful, normative influence in rational policy-setting agendas. “Modernization” and “development” is construed in terms of an increasing level of integration of a country’s domestic economy to the global economy [Wallerstein, 1979, 1980],18 which in the case of the ASEAN countries, began during the colonial era [Darling, 1979; Booth, 1991; Dixon, 1991; Osborne, 1995]. It was during this period that foreign accounting concepts and practices were first introduced into these countries to facilitate the commercial exploitation of resources. During ASEAN’s post-colonial era, accounting’s ideological role was embodied in attempts to build a consensus or hegemonic view of interests served by accounting [Cox, 1987; Gill and Law, 1989; Overbeek 1990].19 It is possible to analyze the development of ASEAN accounting systems in terms of continuing attempts to redefine accounting according to shifting hegemonic interests designed, in part, to maintain the privileges enjoyed by the accounting profession in the context of extant capitalist arrangements [Johnson, 1972, 1977; Burrage and Torstendahl, 1990; Puxty, 1990).

4A Alternative Typology

Another typology of comparative international accounting research can be derived from using the object of study as the basis for the classification. Using this approach we can distinguish between the unitary form, the gestalt form, the reduced form and the hybrid form. Each is described below.

Unitary form. Under this approach, a researcher is neither concerned with cultural/national systems nor is it reductionist from the comparative perspective; rather, emphasis is placed on a single instance of a phenomenon. This style of research is similar to what was described earlier in this paper as “emic” (e.g., Berry, 1990). The emic approach to cross-cultural research emphasizes on understanding a single cultural group or nation on its own terms and using its own constructs. Wallace and Naser [1995] presented work of this type in their assessment of the comprehensiveness of mandatory disclosure by firms listed on the Stock Exchange of Hong Kong. Although this type of research is very important for understanding groups, it does not provide an opportunity to establish universal principles, assuming such universals exist.

Gestalt form. The emphasis of this research approach is on examining a system as a whole rather than breaking it apart. The gestalt form has several features. First, relationships among variables are examined as they occur across different cultural or national systems. Second, constructs and hypothesized relationships are derived from general principles rather than from the systems themselves. Third, interpretations of findings from a given cultural or national system must be developed with reference to specifics of the system. These interpretations inform the researcher as to the universality of the given principle. Wallace and Naser’s [1995] comparison (with other nations) of the comprehensiveness of mandatory disclosure in the annual report issued by firms listed on the Stock Exchange of Hong Kong demonstrates this research form. First, they used a disclosure template based on the regulatory framework in Hong Kong and on previous disclosure templates as a comparator for interpreting many of their observations. Second, although their focus was primarily on Hong Kong firms, their conceptual orientations reflected disclosure practices evolved from other cultural systems (predominantly the United Kingdom) in order to explain their observations concerning Hong Kong. Third, they interpreted a number of their findings, such as those concerning relationships between disclosure level and firm-specific determinants, within the context of how the firms operate in Hong Kong.

Although the gestalt form shares features with the unitary form, there are several differences. For instance, constructs used in the gestalt form do not necessarily emerge from a researcher’s interaction within the system. Also, it is not assumed that a system can only be understood on its own terms. With the gestalt form, understanding comes from explicit comparisons with similar systems in different, larger contexts (e.g., nations). It is the comparative focus that distinguishes the gestalt from the unitary form.

Reduced form. This approach emphasizes breaking a system down into components in order to better understand the functioning of processes within it. Several features characterize this form. First, the system itself can be separated into components. Second, relationships in the system can be studied away from other relationships in the cultural system. Third, constructs and hypothesized relationships are typically derived from other systems, cultures or nations. Fourth, relationships are not interpreted in terms of the overall system in which they are embedded, rather they are interpreted in terms of specific aspects of the system.

A study by Ball, Kothari and Robin [1998] who examined the effects of international institutional factors on properties of accounting earnings exemplifies this reduced form. They hypothesized that the strong stakeholder governance (private communication) orientation of some code-law countries (i.e., France, Germany and Japan) would result in the earnings of their firms being less timely in incorporating value-relevant information than in common-law countries (i.e., Australia, Canada, U.S. and U.K) which have a strong shareholder corporate governance (public disclosure) orientation.

There are several differences and similarities among the reduced and the unitary and gestalt forms. First, unlike the users of other approaches, those taking the reduced approach assume that individual relationships are meaningfully taken out of context Second, it is assumed that out-of-context relationships can be placed back into a complex cultural context system without loss of meaning. As in the gestalt form, theoretical relationships are typically arrived at deductively and are based on general principles researchers observe/discern in various cultural systems.

Hybrid form. This form utilizes aspects of both a gestalt and a reduced perspective. The features are as follows: * In developing research questions, researchers study gestalt systems to identify their important aspects;

* Hypothesized relationships are derived across systems and are not necessarily unique to a given system;

Constructs and relationships are assumed to be separable from the system in which they are embedded, but the mapping back onto an existing system may not be simply linear or additive;.and

* Specific relationships are interpreted in terms of reduced parts of the system but with reference to the general system. These interpretations can, in turn, lead to a further refinement of general principles. Each of the different classifications of research approaches is not meant to imply universal rank-ordering or a preference structure. Each research approach/type has its own unique strengths and none should be viewed as inherently superior to any other form. The crucial question is one of appropriateness for the task at hand.

The preceding discussion suggests that there are several important challenges for comparative international accounting research (CIAR). First, the impetus for CIAR is the researchers’ desire to make accurate outcome predictions in various countries or cultural settings. In this instance, the gestalt form, whether applied to the culture or nation in which a study is conducted, captures the potential for generalizability. By using a model in various nations, a researcher can assess when the model does and does not enable the making of good predictions. But outcome prediction and generalizability are not the only criteria of good theories. As researchers continue to generalize their models, they also need to provide explanations for observed phenomena. Thus, the critical questions shifts from “Will it work here?” to “How and why does it work?”


In this section, we discuss international accounting research topics that might be addressed by using the alternative research paradigms outlined in this paper. Given the dearth of quality research on developing countries in the international accounting literature, much of the future research we suggest focuses on developing countries with emerging capital markets. However, these alternative paradigms can also be used in researching international accounting questions in the context of developed economies and sophisticated capital markets.

As mentioned previously, the functionalist approach within the positivist paradigm focuses on the contributions of national financial accounting systems towards ensuring the effective administration in the public and private sector and the efficient allocation of economic resources through capital markets. In light of the recent economic crises in Asia, Brazil, and Russia an interesting research question is what role did the financial reporting infrastructure and the audit function play within the countries affected by the crises? In the case of Asia, anecdotal evidence suggests a link between the magnitude of the economic problems and the quality of financial disclosure in the countries affected. Countries with relatively strong accounting and capital market enforcement regimes (such as Hong Kong and Singapore) were relatively unscathed by the financial crisis while countries with weaker accounting and enforcement regimes (such as Indonesia and Thailand) saw significant negative impact on their economies. Large multilateral financial institutions such as the World Bank have been critical of the uneven auditing standards used by the Big Five accounting firms between developed and developing economies and have blamed the lax auditing standards in some of the Asian countries for part of the crisis.20 A study using the functionalist paradigm could provide valuable evidence on the role of inadequate accounting and auditing practices in the Asian crisis.

As an ever increasing number of developing countries attempt to move from planned economies to free market economies, they are required to choose from among a menu of accounting systems and models. Since a national financial accounting system may be treated analytically as a “nexus of contracts” between capital providers, government bureaucracies, accountants and others involved in the financial reporting regulatory process, researchers could use the agency theory approach to address the question of how and why countries with emerging capital markets choose from among a menu of accounting models available to them? A number of groups, both within the country and elsewhere, have a stake in the accounting model that a country selects. For example, in recent years the United States Agency for International Development (USAID) has funded projects aimed at establishing accounting and capital market regimes in a number of developing countries. Since most of these projects are undertaken by US accounting experts, the accounting systems suggested for the developing country typically mirror US GAAP and the US standard-setting and capital market institutional structure. One assumes that USAID’s programs in this arena are not driven entirely by altruism since establishing an accounting and capital market regime which is based on a US model will certainly facilitate future economic activity in these countries by US companies by helping to reduce the transactions cost of doing business there. Research using the agency theory/transaction cost approach can provide useful insights on how developing countries select their national accounting systems.

A criticism of the contingency-based approach is that it is static in nature and ignores transformation experienced by countries over time. In our discussion of the realist paradigm we questioned the assumption that every country should have a private sector self-regulated accounting profession. A related research question is how accounting institutions and practices have evolved in developing countries during their post-colonial periods? This research question applies to any country that was formerly a colony. The countries belonging to the Association of Southeast Asian Nations (ASEAN) present an interesting context in which to address this question since they were all (with the exception of Thailand) colonies of Western developed countries in their recent history. Each ASEAN country has an accounting regime which resembles, to a considerable extent, that existing in a Western industrialized country. This feature of their accounting systems has been attributed to each country’s colonial history, e.g., British-oriented accounting in Malaysia and Singapore, US-based accounting in the Philippines, the Dutch accounting model in Indonesia. Besides being simplistic and unsatisfactory in light of shifting patterns of each country’s post colonial political economy, these explanations beg the question of how a foreign accounting system, emanating from countries with significantly different historical backgrounds, have come to dominate accounting thought and practice in these Southeast Asian countries. The persistence and expansion of these foreign accounting systems is even more intriguing since the ASEAN countries have experienced periods of strong nationalism, where practices associated with the previous colonial power were questioned and, in certain cases, spurned [Booth, 1991; Osborne, 1995]. In our view, such a research project would be richer ij it engaged persons having an inside understanding of local political

processes and drew upon research which attempts to understand relevant events and developments from the vantage point of domestic participants.

In many developing countries, capitalist interests have been subtly, yet powerfully, associated with various views of “development” and “modernization” [Frieden, 1991]. That is, the expansion of capitalist modes of exchange have become synonymous with achieving modernization in society. As such, notions of modernization have exerted a pervasive influence on the setting of policy agendas in developing countries, including those pertaining to the proper role of accounting in society. It is through these “frames of reference” [Puxty et al., 1987] that we can understand how policy makers in ASEAN respond to perceived opportunities and threats with different forms of accounting.

In our view, environmental reporting is another area that offers interesting possibilities for research within international accounting. Environmental reporting is no longer just for environmentalists. Increasing public consciousness, high profile environmental disasters, and stricter government regulations in a number of countries have resulted in a growing demand for environmental impact reporting by corporations. Corporate environmental reporting represents a flow of information that, in the absence of mandatory disclosure requirements, the company can control and thereby use as a strategic tool. From the company’s point of view, environmental reporting may serve different objectives: a public relations tool to improve the company profile, a means to inform and motivate employees, a means to inform top management, or a means to placate external stakeholders. The purpose of the report is likely to impact the level of resources that the company devotes to environmental reporting. Since one observes widely varying levels of environmental reporting globally, an interesting research question is what are the determinants of environmental reporting in countries (or regions)? Since Scandinavian companies provide relatively high levels of environmental reporting, it would be interesting to address the research question in the Scandinavian context using the interpretive approach under the naturalism paradigm. Few countries have a well-defined environmental reporting infrastructure at this time. Evidence from the Scandinavian countries could provide useful insights in how social, economic, and regulatory pressures impact the type and level of environmental reporting.

Accounting harmonization has been touted as an inevitable and beneficial process to the growing globalization of business [IASC, 1997]. Far from being neutral and pluralist in its orientation, the specific approach to harmonization advanced by the IASC represents a partial set of interests associated with financial elements of global capital. Doubts have also been raised on whether IASs really constitute harmonization, given their flexible and accommodative structure [FASB, 1999]. It is undisputed that IASs embody an investor-oriented notion of accounting, one firmly rooted in AngloAmerican concepts. Thus, the brand of accounting espoused as being suitable for universal use reflects a fairly narrow view of accounting as one primarily designed to serve the needs of capital providers. Critics argue that IASs could have unforeseen, possibly detrimental, consequences for developing countries that uncritically adopt such standards [Hove, 1986; Baydoun and Willett, 1995]. Since a number of developing countries started adopting IASs in the seventies and have therefore had IASs as their domestic standards for many years, the time is opportune to conduct a study that investigates the effect of adopting IASs in developing countries. Using the critical paradigm, the study would examine how the adoption of IASs impacted the dominant political and economic interests in adopting countries and whether the adoption of IASs have resulted in measurable benefits for these countries. It would also study the redistributibe role of accounting in terms of creating, maintaining, and transforming systems of social power expressed in economic, political and ideological terms.


Comparative international accounting is likely to benefit substantially from recognizing that research can be undertaken from the vantage point of alternative paradigms. Each of these paradigms provides a rich and varied foundation for developing theoretical frameworks that can explain empirically observed patterns of accounting worldwide. Each, in its own right, could also overcome the principal limitation of contingency-based research, specifically the absence of clear explications regarding the process by which national financial accounting systems develop.

Application of these alternative paradigms is essential in gaining a holistic understanding of the feasibility and appropriateness of pursuing accounting harmonization at the regional level. An understanding of dynamic processes involved in accounting development helps to highlight whether factors in a particular country lead toward greater convergence or divergence vis-ei-vis accounting systems in another country. Each paradigm contributes unique insights to how and why accounting systems have developed the way they have and whether the future is likely to accommodate a greater degree of accounting harmony.

Overall, three principal advantages arise from using the research paradigms discussed here to analyze the development of national financial accounting systems. First, these research paradigms provide explanations that are comprehensive, yet coherent. By using these paradigms comprehensiveness is pursued by adopting an interdisciplinary approach which recognizes the theoretical contributions of such fields as economics, political science, sociology and cultural anthropology, among others. Coherence is strengthened because each research paradigm provides a way of understanding the interrelated (and recursive) roles of social agents (individuals and groups), structural and environmental factors and accounting system elements.

Second, the explanatory frameworks address not only the current features of national financial accounting systems, but also how and why these systems have changed over time. As earlier discussed, the explanatory dimension of research needs to consider carefully the domestic and international factors that are causing profound changes in financial accounting systems worldwide. An in-depth understanding of the processes involved will assist, not only in predicting the likely development of financial accounting systems, but also in formulating appropriate ways of attaining desired policy aims.

Finally, the explanatory frameworks developed from these paradigms recognize the importance of adopting a comparative approach to international accounting research. Prior descriptive research has established that national financial accounting systems worldwide exhibit patterns of similarities and differences. In turn, the research paradigms discussed here provide plausible reasons why specific elements are unique to a particular country’s financial accounting system. These paradigms also focus on reasons for observed similarities in two or more countries. By delving into the reasons underlying the commonalties and idiosyncrasies of national financial accounting systems, these explanatory frameworks provide insights relevant to policy deliberations not just in the domestic context but also in the regional and international arenas of accounting standard setting activity.

Here, a broad concept of culture is adopted to include the range of political, economic and social variables that distinguish one group from another. To the extent that the unique set of historical and spatial circumstances create a sense of shared identity for people in a particular geographic boundary, culture can be seen to reside in particular nation states.

2 Wallace and Gernon [1991. p. 220] suggest that in international accounting research, theories need “to be examined in countries other than those in which they were developed” in order to “either support or deny the universality of each theory”. With this in mind, we use developing countries to provide a contextual setting to our discussion throughout the paper. We choose developing countries for this purpose because they have generally received short shrift in the comparative international accounting literature. In our view, the growing economic importance of these countries along with their sheer numbers require that they be considered in gauging the strengths and weaknesses of research paradigms. Similarly, while discussing harmonization, we focus on ASEAN countries as a counter to the EU countries which have been the subject of most of the harmonization research.

3 They were 1) type of users of published accounts of listed companies, 2) degree to which law or standards prescribe in detail and exclude judgment, 3) importance of tax rules in measurement, 4) conservatism/prudence, 5) strictness of application of historical cost, 6) susceptibility to replacement cost adjustments in main or supplementary accounts, 7) consolidation practices, 8) ability to be generous with provisions (as opposed to reserves) and to smooth income, and 9) uniformity between companies in application of rules.

4 In an early comparative accounting study, Zeff [1972] found that accounting development in five countries – Canada, England, Mexico, Scotland and the US – depended as much on technical accounting arguments as on political and economic “power centers” (e.g., government, industry, investor groups).

5 In comparison, Lakatos [1978] asserted that two or more research programs, each with its own set of “negative heuristics” or core of fundamental assumptions, could coexist. The latter situation appears to more closely describe current research in comparative international accounting.

6 Intersubjective testability (i.e., that different researchers arrive at similar conclusions regarding the principles underlying specific observations) is important in a positivist sense because it allows a theory to explain empirical patterns and regularities.

Wells [ 1976] asserts that alternative valuation proposals (e.g., historical cost, current cost, current exit prices) constitute distinct accounting paradigms in a Kuhnian sense.

8 Cooper and Keim [1983] discuss the economic incentives of firms to disclose information in order to overcome information asymmetry problems related to obtaining capital.

9 Transaction costs arise from the effort needed to carry out economic transactions, which include costs of searching for economic opportunities, bargaining costs and enforcement costs.

10 We thank the reviewer for suggesting the addition of this section, for providing input on it and on the related table (i.e., Table 1).

11 See the debate between Solomons (1991] and Tinker [1991] in Accounting, Organizations and Society.

12 Consistent with Geertz’s [1973] concept of culture as a system of shared symbols and meanings and with Belkaoui’s (1990] view of accounting as a pattern of symbolic discourse or language.

13 According to Whorf [1951, p. 2291 “observers are not led by the same physical evidence to the same picture of the universe, unless their linguistic backgrounds are similar, or in some way may be calibrated.”

14 This framework distinguished between universalistic societies (where cultural values emphasized institutionalized obligations to society) and particularistic societies (where cultural values were based more on a system of personal relationships and obligations).

Is For example, the newly industrialized economies of South Korea, Singapore and Taiwan could, in some respects, be considered particularistic societies. See Whitley [1992], Macintyre [1994] and Doner and Hawes [1995].

16 These accounting values were professionalism versus statutory control (preference for self-regulation as opposed to legalistic state control of accounting standard-setting); uniformity versus flexibility (preference for standardized as opposed to flexible accounting standards and practices); conservatism versus optimism (how assets are valued and profits measured); and secrecy versus transparency (extent of accounting disclosures).

17 In their model, economic factors had a moderating influence on the association between accounting subculture values and measurement practices; in comparison, national cultural factors had a moderating influence on the relationship of accounting subculture values and disclosure practices.

Is Development of the global capitalist economy has proceeded on three fronts. First, through commodity trade which has allowed enterprises to supply goods overseas and obtain raw materials for producing goods locally [Wallerstein, 1979; Rosecrance, 1986]. Second, flows of financial capital, using international banking networks and sovereign loans, which generate returns on surplus capital accumulated through production and trade [Gill and Law, 1989; Frieden, 1991]. Third, through production structures, by multinational enterprises setting up branches and subsidiaries overseas to control resources, markets, and production sites [Hymer, 1976; Dunning, 1993].

19 Overbeek [1990, p. 26] conceptualized this hegemonic role through his notion of “comprehensive concept of control” defined as “a coherent formulation of the ‘general interest’ which transcends narrowly defined fractional interests and which combines mutually compatible strategies … entailing specific economic and/or ideological rewards for the dominated classes and class fractions involved.”

20 See “Big Five criticised over global audit standards” Financial Times (October 19, 1998, p. 1).


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Shahrokh M. Saudagaran

Santa Clara University

Joselito G. Diga

Australian National University

The authors thank the reviewer who provided voluminous suggestions and insights. We also thank Bipin Ajinkya (the editor), Allan Hodgson, and Hamid Pourjalali for their helpful comments. We appreciate the comments of participants at the Asian-Pacific Conference on International Accounting Issues, the Conference of the Hong Kong Society of Accountants, and a research colloquium at Australian National University. Shahrokh Saudagaran acknowledges the financial support of the Accounting Development Fund at Santa Clara University.

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