The Key Factors Leading to GAAP Being Different around the World

Topics: Economic system, Economic development, Developing country Pages: 6 (1956 words) Published: April 29, 2011
Individual Essay One
The Key Factors that Led to GAAP being Different around the World

Accounting is a general business language in the world. This “language” is expressed by Financial Statements, which have many different users such as creditors, shareholders, customers, employees, suppliers and so on. Though accounting is a general language, some limitations exist. As we know, Financial Statements should follow some specific GAAP, which established and regulated the accounting system. However, different countries may have diverse accounting systems, according to their own environments. That means the GAAP will be different around the world. In this essay, I will analyze the affecting factors that led to GAAP being diverse and use some examples to support my opinion.

GAAP are different around the world because of diverse factors, including type and level of economy, history and culture, legal system, stability of currency, level of education, and political system. As we known, the environment will influence accounting system. Nations have different histories, values, cultures, and political and economic systems, and they are also in various stages of economic development. These factors may directly affect the accounting standards or have some indirect effects in a specific country, which will finally result in diverse GAAP in different countries around the world. The followings are some specific examples of affecting factors. History and culture: The culture means the collective programming of the mind that distinguishes one category of people from another, which will result from the diverse history of the country. The culture of a country influences not only its business practices but also its accounting procedures. Therefore, if the cultures are different, the accounting systems will be diverse, because treatments for the same issue will be various. Level of Education: There tend to be a direct correlation between the level of education obtained by a country’s citizens and the development of the financial accounting reporting practices in that country. Countries with better-educated populations are associated with more advanced financial accounting systems, where the GAAP may also diverse. Political System: The type of political system (socialist, democratic, totalitarian, etc.) can influence the development of accounting standards and procedures. The accounting system in a country with a centrally controlled economy will be different from the accounting system in a market-oriented economy. Companies will be required to use different methods to treat the same accounting issue. Thus, GAAP in different political environment will be diverse. Level of Economy: The level of a country’s economic development influences both the development and application of its financial reporting practices. Countries with Countries with low levels of economic development will have relatively less need for a sophisticated accounting system than countries with high levels of economic development. Legal System: Similarly, legal system will also result in the GAAP diverse in the world. The extent to which a country’s laws determine accounting practice influences the strengths of that country’s accounting profession. When governments prescribe accounting practices and procedures, the authority of the accounting profession is usually weak. Conversely, the non-legalistic establishment of accounting policies by professional organizations is a characteristic of common-law countries. Based on those discussions above, I deem that GAAP should be different in the world, in order to fit their own special environments. As I mentioned before, some elements will influence GAAP directly; while others may have indirect effects. In the following parts, I will illustrate two specific factors: one is a direct factor, economy; the other is an indirect factor, political system. I expect to use some examples and...
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