Accounting and Cultural Values: The 3G Index Runner-up Countries

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1 Global Review of Accounting and Finance Vol. 5. No. 1. March Pp Accounting and Cultural Values: The 3G Index Runner-up Countries David R. Borker * The eleven Global Growth Generator (3G) countries are the latest candidates for strong economic growth through (Buiter and Rahbari 2011) This paper considers six countries that have 3G Runner-up status: Brazil, Iran, Mexico, North Korea, Thailand and Turkey. It combines two separate methods into a cultural approach to economic and accounting value analysis. (Borker 2013b) (Borker 2013a) The purpose is to provide comparative cultural and accounting perspectives reflecting economic growth potential in the six Runner-up countries. Each country is examined for Hofstede s six cultural value dimensions. An accounting profile is constructed based on Gray accounting values and compared to an independent IFRS favourable profile. This profile and other factors suggest the long-term success of IFRS implementation. Cultural accounting value profiling is shown to complement economic factors in evaluating a country s growth potential. An important finding of the study was that current anti- Western political extremism need not correlate with a less favourable cultural profile for IFRS. The two countries with the most extreme political regimes and lowest official recognition of IFRS were identified as ranking highest culturally for IFRS potential. Keywords: Accounting, IFRS, Gray, Hofstede, 3G Countries 1. Introduction In February 2011, Citigroup Economists Willem Buiter and Ebrahim Rahbari published a monograph in which they proposed a group they called the Global Growth Generator (3G) countries which were determined as having the highest growth prospects in the next five decades based primarily on a weighted average of six growth drivers. (Buiter and Rahbari 2011) These drivers are (1) domestic saving/investment, (2) demographic prospects, (3) health, (4) education, (5) quality of institutions and policies and (6) trade openness. Using a weighted average of the six growth drivers, the model produced the 3G group composed of the following eleven countries: Vietnam, China, India, Indonesia, Mongolia, Philippines, Iraq, Bangladesh, Egypt, Sri Lanka and Nigeria. The remainder of the monograph focused exclusively on these countries but there was mention of six Runner-up countries in the discussion: Brazil, Iran, Mexico, North Korea, Thailand and Turkey. They are listed below with their important economic statistics of 2010 GDP per capita, 2010 percent of US GDP and capital average growth rate, respectively. Brazil - $10,710, 14%, 3.3 Iran - $13,200, 2%, 5.2 Mexico - $14,400, 7%, 2.7 North Korea - $1,800, <1% (2009), 4.1 Thailand - $9,500, 2%, 3.8 Turkey - $13,700, 5%, 4.0 * Dr. David R. Borker, Department of Economics, Finance and Management, Manhattanville College, USA David.Borker@mville.edu

2 With the exception of the outlier North Korea (at $1,800), all of the 3G Runner-up economies have relatively high per capita GNP for emerging economies ranging from $9,500 to $14,400. This is considerably higher than for the 3G group where China is highest with $7,430. Brazil, at 14%, has, by far, the highest for GNP as a percentage of US GNP, followed by Mexico at 7%. The rest decline steeply from there, bottoming out with North Korea at less than 1%. In contrast, the 3G group has four countries with double digit percentages: China (16%); Egypt (13%); Sri Lanka (11%); and Indonesia (10%). The most telling difference between the Runner-up and the 3G groups is capital average growth rate. With the exception of Iran, at 5.2%, all of the Runner-up economies have lower growth rates than the 3G group which range from 5.0% to 6.9%. North Korea, at 4.1%, has the second highest growth rate. This supports Buiter and Rahbari in their identification of Iran and North Korea as the most promising Runner-up economies. The recent rapid economic and political disintegration process in 3G Egypt since 2010 is a good reminder of the merits of carefully examining 3G Runner-up economies. The goal of this study is to assess the effect that the specific cultural attributes of the individual 3G Runner-up countries may have on successful adoption and implementation of IFRS. The means chosen is to examine the cultural dimensional indices attributed to each of these countries using the six cultural value dimensions developed by Hofstede (1980) and Hofstede, Hofstede & Minkov (2010) and the derived cultural value dimensions constructed by S.J. Gray (1988) This analysis provides useful information about cultural values and attitudes of the individual 3G Runner-up countries that enables them to provide financial reporting that will support the efficient allocation of global and domestic capital and safeguard investors, all factors important for economic growth. This study is important to the international accounting scholar, the International Accounting Standards Board and the international investment community. It should be stressed that no comparable study of this group exists in the literature. A quick examination of the progress of the 3G Runner-up economies in implementing IFRS indicates that three of these countries permit or require the use of IFRS by domestic companies -- Brazil, Mexico and Turkey. The other three do not permit IFRS -- North Korea, Iran and Thailand. (PWC 2012) (Deloitte 2012) IFRS has been required in Brazil from 2008 (Bruce 2010) (Lopes 2006), in Mexico from 2010 and Turkey from end of (Gozluklu 2010) (Poroy 2012) Thailand requires use of its local IFRS which is in the process of converging with IFRS and scheduled for completion in Iran requires use of Iranian National Accouting Standard (INAS), which is moving towards convergence with IFRS (Mashayekhi 2008) (Iran Audit Organization 2007). Only North Korea, with its monolithic communist command economy, has no stock markets or western style accounting practices and uses stateplanning related accounting. The remainder of the paper consists of five sections. Section 2 provides a literature review focusing on the cultural value dimensions of Hofstede and the accounting cultural dimensions of Gray. Section 3 describes this study s driving research interest. Section 4 presents and analyzes the findings of applying Hofstede and Gray dimensions to the 3G Runner-up countries. Section 5 discusses the implications of this analysis for the successful implementation of strong IFRS-based financial reporting and the realization of economic growth by the 3G Runner-up countries. 2

3 Section 6 serves as the conclusion in which limitations of the current research are indicated and suggestions for further research are provided. 2. Literature Review Hofstede Cultural Surveys In 1980, Geert Hofstede published Culture s Consequences: International Differences in Work Related Values, based on data from individual questionnaires distributed to IBM managers and employees in 72 countries. (Hofstede 1980) Both the Hofstede original four dimensions and his subsequent work, which added two more dimensions (Hodstede and Bond 1988) (Hofstede 2001) (Hofstede, Hofstede and Minkov 2010), have been the subject of much research and debate. (Sondergaard 1994) (Hofstede 1994) (Spector 2001) (Baskerville 2003) (Huang 2007) Hofstede Cultural Dimensions Hofstede developed six dimensions that differentiate cultures from the country data he collected. a. Power/Distance (PDI) - PDI reflects the extent to which the less powerful members of institutions and organizations within a country expect and accept that power is distributed unequally. b. Individualism/Collectivism (IDV) - IDV deals with whether people s self-image is defined in terms of I (individualistic societies) or We (collectivist societies). c. Masculinity/Femininity (MAS) - A high score (masculine) on MAS indicates societies that are driven by competition, achievement and success. A low score (feminine) on MAS means that the dominant values in society are caring for others and quality of life. d. Uncertainty/Avoidance (UAI) - UAI indicates the degree to which uncertainty and ambiguity are found threatening and are avoided within a given culture. e. Long-term/Short-term Orientation (LTO) - LTO is the extent to which a society shows a pragmatic future-orientated perspective rather than a conventional historical short-term point of view. f. Indulgence/Restraint (IVR) - IVR is bipolar. Indulgence is a tendency to allow relatively free gratification of desires to enjoy life and have fun. Restraint reflects a conviction that such gratification needs to be curbed and regulated by strict norms. Other dimensions have been posited in subsequent work by others, but none of those data have been as consistent. Gray Accounting Value Dimensions Extending the concepts of the Hofstede original four dimensions to accounting, Gray suggests that accounting values are derived from such cultural dimensions and, in turn, influence accounting systems. Gray identifies four key accounting values or dimensions. (Gray 1988) Professionalism versus Statutory Control - Professional judgment and selfregulation in contrast to compliance with rigid legal requirements and legislative control. 3

4 Uniformity versus Flexibility - The level of enforcement of standardized and consistent accounting practices. Conservatism versus Optimism - A vigilant approach to accounting measurement, as opposed to a more optimistic and risk-taking approach. Secrecy versus Transparency - Confidentiality and the constraint of disclosure of information, as opposed to a more transparent and publicly accountable approach. Gray offered four hypotheses to explicate the relationship between his own culturally based accounting dimensions and Hofstede s original four cultural value dimensions. (Gray 1988) Based on Gray s four hypotheses and other statements in his article, the relationships between Hofstede s original four cultural value dimensions and Gray s four accounting values were summarized by Baydoun and Willet in1995. They used a plus (+) to indicate a direct relationship and a minus (-) to indicate an inverse relationship between Gray and Hofstede dimensions. (Baydoun & Willet 1995) A question mark (?) was used to indicate that the nature of the relationship was indeterminate. The direct and inverse relationships between the Gray hypotheses and the Hofstede dimensions are summarized in the first four dimension columns of Table 1. The relationships between Gray accounting value dimensions and Hofstede cultural dimensions have been expanded to include links to the Hofstede fifth and six dimensions, based on an examination of Hofstede value indices for the United States, United Kingdom, Australia, Canada, and New Zealand. (Borker 2013a) The last two columns of Table 1 provide relational linkages of Gray dimensions to the Hofstede values of Long-term Orientation (LTO) and Indulgence versus Restraint (IVR). Table 1: Hofstede-Gray Relationships PDI IDV MAS UAI LTO IVR Conservatism Uniformity + - -? Professionalism - + +? Secrecy Borker proposed a favourable cultural profile based on Gray accounting and on an examination of Hofstede value indices for the United States, the United Kingdom, Australia, Canada, and New Zealand. (Borker 2013a) This IFRS favourable profile is summarized in Table 2. This IFRS favourable profile is used as a point of reference and comparison in analyzing results from the 3G Runner-up countries. Table 2: IFRS Favorable Accounting Value Profile based on Gray Dimensions Accounting Dimension Professionalism/ Statutory Control Uniformity/Flexibility Conservatism versus Optimism Secrecy versus Transparency IFRS Favorable Profile Professionalism Flexibility Optimism Transparency The current study investigates the relative closeness of the accounting value profiles 4

5 to the IFRS favorable profile using Gray accounting dimensions for each of the six 3G Runner-up countries to characterize the relative cultural potential of each country to implement successfully and sustain IFRS. Such an investigation of this group has not been conducted previously. 3. Methodology Hypotheses and Relevant Concepts A basic assumption of this study is that a country s cultural values and its culturally determined accounting values have an impact on its ability successfully to implement and maintain high level accounting standards, such as IFRS. More specifically, it is assumed that we can identify an appropriate accounting value profile for each country based on its mix of Gray s defined accounting dimensions derived from the Hofstede cultural value dimensions using interrelationships between the two, as discussed above. It is hypothesized that each country s accounting value profile can be ranked in terms of its closeness to the IFRS favourable accounting profile identified in Table 2, and that this can be used to assess the relative potential for each country, from a cultural standpoint, to implement successfully and maintain IFRS over the long term. This information is highly important for the 3G Runner-ups, as these are economies with projected high growth, for which the success of IFRS implementation could have a positive impact. Data Selection The focus of this paper is on the six economies identified by Buiter and Rahbari (2011) as Runner-up candidates for inclusion in the 3G group. Investigation of this group complements accounting cultural analysis already performed in the 3G group itself (Borker 2013c). The necessary Hofstede survey data are available for all these countries. Research Design The research process consisted of developing a Gray accounting value profile for each of the six 3G Runner-up countries. This was done by examining their existing Hofstede cultural dimension index data and deriving Gray accounting dimensions from the data through the use of the inter-relationship assumptions presented in Table 2 above. This information was then translated into a specific accounting value profile, which was compared to the IFRS favourable profile developed by the author in previous research. The final result of the analysis is a ranking/relative positioning of the countries with respect to accounting value profiles in terms of closeness to the IFRS favourable profile. This method has already been applied successfully to the eleven 3G countries designated by Buiter and Rahbari (2011). 5

6 4. Findings and Analysis Hofstede Cultural Dimension Scores for 3G Runner-ups The Hofstede cultural dimension scores of the 3G Runner-up countries are presented in Figure 1. Numbers on top of each column are scores. Definitions and discussion of the dimensions are taken directly from Hofstede (Hofstede 2001) (Hofstede, Hofstede and Minkov 2010). Figure 1: Graph of Hofstede Six Cultural Dimension by 3G Runner-up Country brazil iran mexico *north korea* thailand turkey pdi idv mas uai lto ivr In the analysis, survey results for South Korea are used as a proxy for North Korea. Hofstede s dimensions are assumed to be long-term national cultural characteristics that transcend political events such as the political situation in North Korea since the Korean War. Analysis of Results for 3G Runner-up Countries by Dimension A comparative analysis of the 3G Runner-up countries scores for each of the six Hofstede cultural dimensions follows. a. Power/Distance (PDI) Four of the 3G runners-up countries have high PDI scores, ranging from 60 to 88. This is consistent with results for other developing countries as well where there is often a significant gap between a small and powerful elite and a poor majority. Iran and Mexico are exceptions with scores of 38 and 49, respectively. b. Individualism/Collectivism (IDV) All the 3G runners-up scored low for Individualism with scores ranging from 18 to 41. Low IDV scores are characteristic of developing countries. c. Masculine/Feminine (MAS) 6

7 All 3G Runner-up countries are characterized by feminine values, with scores ranging from 39 to 49, except Mexico. Feminine orientation means that the dominant values in society are caring for others and quality of life. Doing something you like to do is valued over being the best. d. Uncertainty/Avoidance (UAI) All countries in the group had relatively high scores for UAI, with scores ranging from 59 to 85, except North Korea. The extent to which the members of a culture feel threatened by ambiguous/unknown situations and have created beliefs and institutions that try to avoid these is reflected in the UAI index. Societies may adopt laws and controls to avoid uncertainty. North Korea, like the 3G country Vietnam, has a low score for UAI in spite of its highly controlling form of government. e. Long-Term Orientation (LTO) Half of the group has high long-term orientation, with scores ranging from 56 to 75. These countries are North Korea, Brazil and Thailand. Iran, Mexico and Turkey, have low LTO scores ranging from 14 to 46. The long-term orientation dimension reflects a pragmatic futureorientated perspective rather than a conventional historical short-term point of view. These societies emphasize traditions and saving for the future. Correlations between LTO and economic growth have been cited. Interestingly, the correlation appears to be predominantly positive for poorer countries and negative for richer developed countries. (Hofstede, et al., 2010) (European Value Studies Group; World Values Survey Association, 2006) f. Indulgence/Restraint (IVR) As with LTO the countries are split on this dimension. Indulgence is scored high by Brazil, Mexico and Turkey. The rest score on the Restraint portion of this dimension. Hofstede claims there is a correlation between the combination of high LTO and low IVR (restraint) with economic growth for poor developing countries, but notes that this relationship does not hold for richer more developed countries. From this cultural value standpoint, North Korea and, to a lesser extent, Thailand are better positioned for strong sustained economic growth. Richer and relatively more developed economies like Iran and Mexico might manage growth with the reverse combination of LTO and IVR dimensions. Hofstede s original four cultural dimensions, PDI, IDV, MAS and UAI, form the basis for Gray s culturally derived accounting value dimensions discussed below. Gray Results for 3G Runner-up Group Ranked by Closeness to IFRS Favourable Profile Table 3 juxtaposes the IFRS accounting profile to the Gray accounting value profile derived for each of the 3G Runner-up countries. 7

8 Table 3: 3G Runners up Ranked from Closest to Most Remote from IFRS Favourable Profile IFRS Rank Countries Individual Country Profile 1 Iran Statutory Control Uniformity/Flexibility Optimism/Conservatism Secrecy (-) 2 North. Korea Statutory Control (-) Uniformity (-) Conservatism/Optimism Secrecy (-) 3 Mexico Statutory Control Uniformity Conservatism (-) Secrecy 4 Brazil Statutory Control Uniformity Conservatism/Optimism Secrecy 5 Thailand Statutory Control Uniformity (+) Conservatism Secrecy (+) 6 Turkey Statutory Control Uniformity (+) Conservatism (+) Secrecy (+) All of the 3G Runner-up countries exhibit, to a greater or lesser degree, a cultural accounting value profile that is opposite to the IFRS Favourable Profile shown in Table 2. This pattern consists of Statutory Control, Conservatism, Uniformity and Secrecy. This profile also characterizes most of the former Soviet Union, the Balkan countries and much of the developing world. It is no accident that people often refer to IFRS as a product of the Anglo-American and modern Western European cultural orientation where financial reporting is seen as critical information for facilitating the allocation of capital and protecting the interests of individual equity investors. 4. Discussion Although all of the 3G Runner-up countries have a more or less homogeneous profile, i.e., opposite to the IFRS favourable profile, there are sufficient subtle differences to allow for a ranking of the members in terms of degree of closeness to the IFRS profile. Curiously, the two highest ranking countries are Iran and North Korea, both outspoken in their enmity for the capitalist west. The point is, these accounting values are based on long-standing cultural values that, presumably, transcend the extremism of Iran s current government. In addition, Buiter and Rahbari identified these two countries as the closest 3G Runner-ups. They both have Gray dimensional profiles that come closest to the IFRS favourable profile. In a previous analysis of the 3G countries, it was shown that all but one of the top five performers on the 3G Index were within the top four rankings for closeness of accounting value profile to IFRS, 8

9 specifically, India, Mongolia, Vietnam and China. The ordinal ranking on the 3G Index was positively correlated with closeness to IFRS accounting value ranking (r=0.67; r- squared =0.44). (Borker 2013c) All of this suggests that a country s cultural IFRS predisposition may be a factor relevant to successful IFRS implementation and economic growth. Comparison of the accounting value profiles of the Runner-up group to the 3G group indicates that all of the 3G Runner-up countries rank no higher than the bottom quartile of the 3G group for closeness to the IFRS favourable profile and that Turkey and Thailand rank below the lowest ranked 3G country. This does not mean that Turkey and Thailand, or the entire 3G Runner-up group, are less likely to be successful in their long-term implementation of IFRS. A brief review of the status of the various 3G Runner-up countries with regard to IFRS adoption attests to the fact that there is not a sure connection between cultural readiness and timely success. North Korea and Iran are, respectively, at stage 0 and stage 1 for IFRS adoption. Turkey already requires IFRS, and Thailand is on schedule for full convergence by Nonetheless, countries with cultural accounting values more remote from the IFRS value profile may have more to overcome in adopting and continuing to evolve with IFRS since, by their nature, IFRS standards evolve and adapt to changes in the nature of business transactions over time. In addition to the issues that any nation encounters in the complex process of IFRS adoption, all of the 3G Runner-up countries also have specific cultural challenges to overcome. Countries with cultural accounting values that are more remote from IFRS could find it useful to utilize a variety of ameliorating strategies to adopt and maintain accounting values supportive of IFRS, including, culturally sensitive education and professional training programs, upgrade programs for existing accounting professionals, empowering national accounting standard setting bodies, setting realistic time-frames and deadlines for the transition to IFRS, a comprehensive change-management program for accounting professionals, businesses, government and the public and robust support infrastructures for IFRS implementation. (Borker 2012a) (Borker 2012b) A review of the history and current status of IFRS implementation makes it clear that other factors besides cultural accounting values play an important role in success of IFRS implementation. Major events, such as the Korean War and the revolution in Iran, can have a profound political effect on the development of accounting standards. Implementation of stable and sustainable IFRS in the 3G Runner-up countries is critical to meeting their economic growth potential. IFRS will also have a profound impact on each country s growth potential. Nationally supported IFRS will increase stability, stewardship, accountability and transparency at both the company and government institutional level. It will increase the general level of professional education of accountants and accounting standards setting bodies and improve their policies and decision making. It will help to democratize the domestic equity capital market by involving more individual investors. IFRS can contribute to a general atmosphere of accountability and transparency that could help to decrease the level of corruption in these countries at the personal, company and government level. All of these outcomes would remove major impediments to growth common in these emerging economies. 9

10 In contrast to previous studies by other authors on Gray accounting value dimensions derived from Hofstede s cultural value surveys, this study, along with its sister studies of other national groups, is characterized by the development of a comprehensive IFRS favourable profile and of individual accounting value profiles that are evaluated for closeness to that profile. 5. Conclusion The present study supports previous research indicating that emerging economies with accounting value profiles closer to the IFRS favourable profile tend to be associated with higher economic growth prospects than do countries with profiles more remote from the IFRS profile. (Borker 2013b) (Borker 2013c) In comparison with the 3G Group, the 3G Runner-up group has significantly lower ranking with regard to closeness to the IFRS favourable profile. The Gray culturally derived accounting value analysis was derived from cultural dimensional classifications developed by Geert Hofstede. The results of the preliminary Hofstede dimensional analysis presented here offer other cultural information about the 3G Runner-up countries relevant to the evaluation of their sustainable growth prospects. For example, North Korea and Thailand have LTO and IVR scores consistent with strong sustained growth for poor emerging economies and Iran and Mexico have scores more consistent with richer, more developed, growth economies. The study also evidences the fact that current regime ideological extremism, whether political or religious, need not correlate with a less favourable cultural profile for IFRS. The two countries with the most extreme political regimes, North Korea and Iran, are identified as ranking highest culturally for longterm IFRS potential in spite of having the lowest official recognition of IFRS. Further investigation of Hofstede dimensional profiles for the 3G Runner-up countries, as well as, both Gray and Hofstede analyses of a broader array of emerging and developing countries would offer further insights and a larger body of data for further analysis. In as much as this study is limited to a consideration of the accounting values proposed by Gray on the basis of Hofstede cultural dimensions, there is also an opportunity for broadening the focus. In future investigations of national accounting culture, the scope can be broadened to include other accounting values, such as stewardship. Other cultural information about national cultures can be included in determining a country s cultural potential for sustained IFRS implementation. References Baskerville, R 2003, 'Hofstede Never Studied Culture', Accounting, Organizations and Society, Vol. 28, No. 1, pp Baydoun, N & Willet R 1995 'Cultural Relevance of Western Accounting Systems to Developing Countries', ABACUS, Vol.31, No. 1, pp Borker, DR 2013c, 'Accounting and Cultural Values: IFRS in 3G Countries', International Business & Economics Research Journal, Vol. 12, No. 6, pp Borker, DR 2012b, 'Accounting, Culture and Emerging Economies: IFRS in Central and Eastern Europe', International Business & Economics Research Journal, Vol. 11, No. 9, pp

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