Influence of Culture on Accounting Procedures

Influence of Culture on Accounting Procedures
Influence of Culture on Accounting Procedures

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Influence of Culture on Accounting Procedures


    Culture can be defined in relation to accounting procedures as the communal encoding of mind which differentiates a group of people from another. Culture puts into consideration factors such as the groups beliefs, morals, their background knowledge, the groups laws and customs, and any other abilities and habits that individuals from that particular society posses. Some of these cultural elements have been known to have a great influence on the labor circumstances of many organizations and business institutions.

Accounting procedures are structured set of handbook and programmed accounting techniques, systems and control methods that are introduced to collect, record, analyze, and present financial information to guide in decision making processes. Several theories have been used to illustrate the relationship and interconnections between cultural values and accounting procedures.

The theories can be categorized into two large groups which are economical and sociological approaches. Economical theories includes; principle agent theory, transaction cost theory and managerial accounting system design approach. Accounting systems may include; internal and external tax accounting and expense accounting procedures. Cultural behaviors have influenced the operations of businesses globally.

Influence of Culture on Accounting Procedures

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Problem Statement

       Cultural values have not been completely embraced by many organizations in their financial and accounting systems. Business organizations need to incorporate important cultural values that will influence accounting procedures positively. Professionalism of individuals needs to be given priority when it comes to making decisions. Organizations have to create room for independent expert judgments by individuals with enough knowledge on the subject matter.

Their decision must be respected as long as they adhere to the set legislations that govern accounting procedures and at the same time the judgments they make should promote fairness to all workers ( Gregg, 2005). Cultural knowledge need to be used more in businesses since it provides valuable cultural information that can influence the making and implementation of more informed decisions.

        Businesses will need to employ accounting secrecy and transparency to limit the disclosure of valuable financial information to competitors. Professional individuals must therefore create assurance for the security of any important financial information that may be used by competitors to their advantage. At the same time, transparency and accountability need to be practiced in the accounting and financing systems to avoid cases of a business losing money for individual gains.

Certain cultural beliefs and some set code of ethics promote transparency since they prohibit individuals from certain societal backgrounds from activities that may discredit them in providing financial results that lack accountability (Rand, 2006). Therefore, organizations need to employ workers with cultural values that promote accountability and transparency in the financial systems.

There is need for all businesses to ensure transparency and accountability in all its departments which can be achieved more efficiently by embracing set societal beliefs and morals. Both the managers and stakeholder should be in the forefront to in making sure that transparency and accountability is observed among all workers. They should be the role models to all other employees.

Influence of Culture on Accounting Procedures

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       Organizations also need to employ conservatism which is one of the most ancient ways of valuing accounting procedures. The concept can be associated with uncertainty- avoidance aspect which tries to avoid the uncertain outcomes in the future. Conservative measures need to be taken that will help in the adapting of careful measures that will deal with uncertain results happening in the future.

A company that values its cultural conservatism highly is in most cases able to predict future outcomes thus avoiding occurrence of uncertain events in the future. An organization may opt for a lesser conservative theory to achieve consistency with short- term goals since the expected results are attained within their estimated time. Furthermore, this approach is more optimistic when adopted where the organization is trying to conserve its resources and investing these resources to achieve their long- term goals (Newing, 1995).

This is clearly shown when determining the total value of the business. In addition, the approach has tried to outline how various cultural values such as good behavior and customs can be used within an organization to facilitate good accounting and financial systems.

Influence of Culture on Accounting Procedures

Effect of cultural values and societal rule on accounting procedures

 Written laws which can include societal rules need to be incorporated in the structural working of organizations to achieve uniformity in accounting and financial systems. Individualism is an aspect where culture has influenced both accounting and financial systems greatly, since it motivates individual performance towards realization of goals of an organization.

Further, this aspect has increased individual contribution towards the teams that runs various departments (Khan, 2002). Furthermore, an organization that chooses a more uniform financial and accounting theory, it is associated greatly with avoiding incidences of uncertainty. This has resulted to a lot of concern in matters pertaining laws and regulations which have forced these bodies to come up with strict code of ethics that monitors accounting and financial systems in any business organization.

These codes of ethics should go hand in hand with cultural morals that must be adhered to by all individuals. The organization also has role of ensuring that all set regulations of the firm must be followed to the letter without favors. For any business to be successful in the future consideration of individualism must be given more weight and priority since personnel’s with high cultural values will be more committed towards working with the sets regulations (Becker, 1991).

Influence of Culture on Accounting Procedures

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       Economic theories of organizations control, makes the assumption that the firm is a lawful body that is composed of the manufacturing procedures whose information is accessible by other organizations. Executives are responsible for choosing a certain manufacturing process and provide a suitable environment for maximization of the present and the future revenues. In addition, it is also the responsibility of the managers and stakeholders to offer all required material and financial resources and also equip employees with required skills by offering training courses (Anthony, 2001).

Economic theories that have been discussed to help managers in business operations include; the principle agent theory, the transaction cost theory and the management accounting system design. The three theories all focuses on profit maximization where executives, workers, stakeholders and accounting controllers works together to achieve the organizations common goal of increasing the firms total output.

Economic theories should always try to adapt to mechanisms that describes the organization. On the other hand, non- economic approaches need to work towards filling the existing gap and expound on the firms’ knowledge behavior (Mullins, 2002). 

Influence of Culture on Accounting Procedures

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      There has been concern on whether principal agent theory helps in understanding the concept of profit maximization by the management. The approach refers to a point where the owners of the business are interested in capitalizing on profit or are concerned in functions that add value to their enterprise. The theory is also referred to as principle agent problem, since senior staffs may exploit subordinate staffs by for instance, installing financial programs that these junior staffs do not have skills to operate.

On the other hand, managers, concentrates on exploiting the available resources that include their salary and money to maximize on profit which is the main functions of their business (Warren, 2005). As managers tries to maximize on profits, it results to an argument of concern on how managers should be controlled in the way they should run their commerce and at the same time do their best to capitalize on  the state of ownership.

For example, managers must consult investors on a certain decision before implementing so as to get the approval of the stakeholders. This facilitates effective decision making and implementation, since there thorough research on matters of concern and enough consultation is conducted before making a conclusive and final decision ( Harrison, 2004).  

Influence of Culture on Accounting Procedures

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   Despite managerial power system in relation to organizational activities not encouraging executives to express their open behavior, stakeholder do not have much information on managers day to day activities and the available information on profits. Ownership can therefore not force the management to work towards achieving the companies’ objectives by just highlighting the objective purpose. The solution to this is to design an efficient scheme that aligns the objectives of the stakeholder and those of the management (Whiting, 1986).

The scheme will tend to carry more weight on the objectives of the managers in comparison to those of the stakeholders. On the contrary, despite the approach trying to close on the gap within organizations, it faces a problem in that executive tend to utilize their power to enforce rules that may oppress the subordinates. For instance, the manager may authorize the purchase of an expensive machine for production to favor the seller while on the other hand; the manager is oppressing the subordinates who do not understand how to operate the machines.

It can be seen that the theory helps managers to maximize on profits as the management is given freedom to exploit resources at their disposal without stakeholders’ interruption. Further, the manager is given the mandate to set the rules and goals of an organization in order to maximize on profits (Bryan, 1999).

Influence of Culture on Accounting Procedures

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Effect of social cultural factors on profit maximization

  Social cultural factors also influence the extent to which are managers able to maximize on profits from signing the right contracts which are cheaper compared to their market price. According to the transaction cost theory, a firms’ existence is validated by the ability of the entrepreneur to agree on contracts at lower price than the market price which can be negotiated. 

The number of contracts that can be negotiated within the firm is always less than the number outside. The contract should only state the power limits of the entrepreneurs and the details of the contract should only be defined after the two parties have agreed on all matters. Due to this, there is a possibility of the firm emerging in cases where short term agreements are not satisfactory.

Further, the approach would be seen as the expense incurred while trying to cater for goods by purchasing from the market instead of the organization providing from within. In addition, many organization tend to provide for their needs from within which allows the organization to save more on production cost, thus maximizing on the total income generated (Laffont, 2002).

Influence of Culture on Accounting Procedures

       According to this theory, the control of an organization is related to the control that the firm has over the marketing expenses. In addition, the theory claims that issues relating to organizations details play a vital role in defining the firms’ nature which is determined by the optimal production of available workers which is most likely promoted by the already existing inputs within the firm (Gebert, 2014).

In fact, resources with lesser value are priced at a lower cost since they can only generate products with lesser value, whereas, resources of high value are priced at a higher cost due to the high profit incomes that they generate. The approach faces a problem where, before managers undertake any transaction in the market, they have to know who are the willing seller/ buyer in order to initiate a bargain to get into contract and to conduct an inspection required to ascertain the validity o the contract.

The long processes involved in acquiring of industrial goods and services delays production by an organization since a lot of time is consumed/ lost between the time of identifying the needed resource and the time of acquiring the good. In addition, time may be also lost as the managers tries to fulfill legal procedures that are required for acquisition and installation of equipment (Flamholtz, 1996).

Influence of Culture on Accounting Procedures

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     According to the theory, it can be seen that market prices determines the interactions between organizations. Furthermore, managers are responsible for making and implementing business set rules. For example, when a manager wants to purchase a machine that will be used in production department, he first of all consults an expert, then finds a willing seller, bargains, signs contract and finally makes the purchase (Chandler, 1992).

The approach involves three types of costs which are, “search and information cost “,”bargain and decision costs” and “policing and enforcement cost”. Without taking into consideration the transaction cost, managers will not understand well how the economic system work therefore making it hard to implement economic policies. The theory proves that managers are able to strike the right deals when they agree contracts before going to the market to strike at a market price.

Influence of Culture on Accounting Procedures

                       Effect of team work and organization culture on profit maximization

  In the current business world, most organizations are using accounting and financial data in making critical decisions which in most cases is provided by management agents and controllers. The only question in this is whether the agents and the controllers have different perceptions with the managers on variable designs and the output quality (Chenhall, 2003).

Therefore, there is a need for the integration of the accounting controllers and the management involved in the decision making which would result in a consistent accounting language which benefits both the manager and the controllers.

      The controllers do not seem to understand how vital their work relies on business success since they provide intangible and harmonizing information to the management. Therefore there exists a gap between the accounting controllers and the executives concerning on how to put into use the financial information. By providing information that promotes the growth of the organization, they improve their position as business consultants thus gaining highly influential positions within the enterprise.

On the other hand, managers must be transparent on the type of details they require and use while the controllers should not see themselves as specialists but instead be just like any other employee with the aim of realizing the organizations set targets (Sautet, 2000). Further, when both mangers and controllers agree to examine the policy that runs the business together, they tend to understand the matters concerning the social- economic factors m, thus leading to faster goal achievement of the organization within a short time.

In addition, managerial designs have assisted managers in maximizing on profits as decisions made by the two parties, when they work as a team, are implemented as agreed. When both the managers and the accounting controllers work together, it can be seen from the approach that there is quick goal achievement and higher profit maximization.

Influence of Culture on Accounting Procedures

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         The above three discussed approaches do interrelate as all are aimed at realizing the long term profit maximization of the firm. First, Principal Agent theory illustrate on a scheme that is aimed at having the management and the stakeholders aligning their objectives so as make and implement efficient decisions that will enhance overall productivity.  Though the senior staffs have a higher hand of determining the best course since they understand better the business environment, they still need to consult the investors.

The transaction cost theory explains on how managers need to give priority to contracts that can be implemented at lower costs than the market price. The management there focuses on resources that can be acquired at a cheaper cost but at the end yield more products which can generate more incomes. Lastly, the managerial accounting system design like the other two approaches focuses on making decisions that are aimed at maximizing the firms’ profits (Radebaugh, 2005).

The theory tries to integrate the company’s management with the accounting controllers so as to enhance the making of more informed decisions that would increase the firms’ total revenue. The three theories therefore summarize the role of different firm organs and departments in the realization of the goals of an organization which are to increase the total income revenue.

Influence of Culture on Accounting Procedures

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Sociological theories of organizational control are approaches that try to describe managerial behavior by stressing on main affinity of teams. Sociologists do not concentrate more on understanding individuals’ psychology and how they interact with others but emphasize more on group interactions.

According to the theory, managerial control is executed by set laws, policies and the chain of command (Klewes, 2008). Further, the sociological approach has been described using several other theories that include; functionalism, general system theory approach, contingency theory and theory of bureaucracy.

     The theory of functionalism is based on the hypothesis that the social world has a strong, genuine continuation, and an orderly trait oriented to come up with a structured and maintained state affairs. The theory has been applied in social sciences and how they relate to the business world.  According to the approach, the organization can be approached in two dimensions; from an internal view and an external perspective.

The internal view distinguishes the managerial, the technical and the institutional level. The managerial section takes part in the administration section of the organization (Chenhall, 1990). The technical level focuses on the activities involving practical work. The institutional part has to make sure that the objectives of the company are at par with the social goals.

   The second approach is the General system theory approach studies an organization as a program of parts interconnected to each other but each specialized to perform a specific task towards achieving the goals of the organization. Further, the theory explains the common principles and regulations that an organization operates under. The principles must be in agreement with the cultural norms of the involved communal groups.

In addition to this, environmental laws must also be adhered to regardless of the firms’ laws and regulations. The cultural values of the society will therefore play a bigger role on the organization during its making of financial and accounting decisions (Bryan, 1999).

       Another approach that is used by sociologists is the contingency theory which argues that, individuals cannot be expected to just follow set gestures unless they can respond to own worth and interest. The theory therefore recognizes enabling factors that facilitates capacity building within the firm. Capacity building in an organization can be limited by business environmental factors which always need to be addressed so as to enhance business productivity. 

Organizations variables have to match with environmental traits so as to ensure an excellent working condition (Klewes, 2008). In addition, the approach also shows that the most successful firms are connected with administrative practices which best matches environmental circumstances with the techniques used for production.

Influence of Culture on Accounting Procedures

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     The last approach is the theory of bureaucracy which is based on the official area of jurisdiction, the hierarchy of command, written agreement, training of the office management, the capacity of the employees and lastly the general rules by the management. In addition, the theory emphasizes on the rule of law which focuses on all formal structures of the firm. All employees have equal rights as does the consumers. All customers have to be provided with equal services regardless of their cultural beliefs, morals and the principles that monitor and maintain their behaviors (Radebaugh, 2005).

     In conclusion, the impact of cultural values on accounting procedures can be seen clearly in the context. Various theories that include; principle agent theory, transaction cost theory and managerial accounting system design approach have all tried to explain the success of organizations based on how managers makes and implements decisions.

Further, sociological theories, such as, functionalism, general system theory approach, contingency theory and theory of bureaucracy have also been used by scholars to explain how cultural values influences financial systems in a business. Cultural values that influences these accounting procedures includes; cultural beliefs, morals, individual habits and the customs of the groups.

The above approaches have successfully been able to solve the gap that exists in many business organizations.  Further, the study explains more on cultural behaviors which includes; professionalism, secrecy and transparency, conservatism and individualism. These concepts illustrates how cultural values affects the accounting systems and designs.

Influence of Culture on Accounting Procedures

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Influence of Culture on Accounting Procedures

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