Question

Based on the understanding of the causes of differences in accounting practice among contries, critically discuss how the different degree of interference by governments in accounting could lead to differences in financial reporting practices

Answer 1

The basic reason of global differences in financial reporting practices is the different degree of interference by governments in accounting. Government have a major impact on the financial reporting practices, and as in different countries different governments may focus on distinct financial problems, thus, there are a huge number of international differences in financial reporting. The three main factors due to which financial reports across countries may not be comparable are financing systems, legal systems, and tax systems.

There are major differences in the extent to which accounting information is disclosed in common law countries in comparison to code law countries. All over the world different stakeholders use the information that is shown in the financial statements for making decisions; and such differences effect to the diversity of specific requirements of individual corporations in a shareholder-oriented corporate governance environment.

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Due to the disharmonization of the accounting system, a main factor is the asymmetry of information, which determines the level of transparency and disclosure of information, i.e. entity's responsibility in preparing financial statements. Due to it a greater requirement for audit is created to decrease the sense of doubt and mistrust in released financial statements.