 Hello and welcome to the session. This is Professor Farhad. In this session we're going to be looking at reasons for accounting diversity and specifically it's going to be one reason rather than reasons and that reason will be cultural factors. We looked at other five reasons in the prior session and I'm going to only look at the cultural factor. I believe the cultural factors are important. That's why I want to emphasize them in one separate recording. This topic is usually covered in an international accounting course. I'm not really sure how much it's covered on the CPA exam. As always, I would like to remind you that's you, my viewers, to connect with me on LinkedIn. If you don't have a LinkedIn account, you should create one. It's very important for your professional image and network and ability. YouTube, please subscribe to my YouTube. This is where I house all my lectures. I have over 1500 accounting lectures on YouTube. Please like them, share them, put them in playlists. Let the world know about them. If you're benefiting, it means other people might benefit as well. This is my Instagram account. I'm trying to grow my Instagram account and this is my Facebook page. I also have a Gumroad account where I have premium CPA material and you could also access my website. In this session, we're going to be looking specifically for one reason for accounting diversity and that reason is the cultural factor, cultural factor. We looked at legal system basis of taxation, providers of financing, inflation and political ties in the prior session. I'm going to be focusing on this session separately. Now, we have to understand that the culture shapes the way we think, culture shapes the way we do business, culture shapes the way we communicate and different cultures or different countries have different cultures or sometimes there's many cultures within the same country. Understanding the cultural dimension will help you understand how accounting rules are set up. I'm not saying one culture is better than the other. Each culture is different. I just want to let you know that understanding those cultures will help you understand how to communicate with other people. That's the purpose of it. The way you are raised in a certain culture will influence the way you do accounting. The sixth reason for accounting diversity is national cultures. National is not really, I don't like the word national. I think it's exclusive because within some nations, there are many cultures. I'm going to call it national cultures. Just don't get hung on it where, well, I'm a nation, I'm a national of this country. Well, that's not really my culture. Again, within each country or with each geographical area, you have many, many cultures. To address this cultural aspect, we're going to look at Hofstad's cultural dimension, okay, which is a Hofstad cultural dimension theory is a framework for cross cultural communication developed by this psychologist, Gerd Hofstad. He's a Dutch psychologist. He classified countries into 10 different cultural areas. Again, you might have more, but he did it that way. Hofstad is a Dutch social sociologist. He's a former IBM employee and a professor of organizational anthropology and international management at Masquerick University in the Netherlands. He's a well known for his research. What he did, when he was working at IBM, he collected data from the employees across the globe at IBM and created this five cultural dimension. And if you study international management, you might learn about them. Sometimes there are four of them. Sometimes they say it's five, but definitely there are four. The first dimension is individual versus collectivism. And what does it mean individual versus collectivism? Basically, it's a preference for loose or tight social fabric. Simply put, this dimension focuses on the question about whether people prefer a close network or people prefer to basically be by themselves, be individualistic and fend for themselves. Now, I can tell you, for example, the U.S. versus Japan. Okay, the U.S. society is to a great degree, it's considered in quote aggressive society, they thrive on success, they thrive on competition, they thrive on individualism. Japan on the other side, they prefer collectivism. For example, in the U.S., we use a lot of A, I, I, I. In Japan, they use we as a company, as a society, as a country. The U.S. is more individualism versus collectivism. Nothing wrong with either or, it's just this is, this is just to understand this cultural, this cultural dimension. Another cultural dimension is power distance. What is a power distance? It's the extent of hierarchy accepted, or is it a egalitarian value are embraced in the organizations or institution? Basically, it's the degree in which the less powerful member of a society accept and expect that power to be distributed unequally. For example, I'll give you maybe an extreme example will be South Korea. In South Korea, if you are a manager, if you are a president, if you are a captain, like an airline captain, you are regarded very high and there's a power distance between you and the people that work underneath you. So there's this power distance and the people underneath you accept that power distance. A case in point about the power distance, one time there was South Korean flight. I don't remember the flight number, but there was a crash, South Korean crash. And what they did, they, you know, every time there's an airplane crash, they study what happened in the cockpit, in the cockpit of the airplane and from the black box. And what they did when they studied the communication and that black box, what they find out is the engineers who were on the plane, the engineers and the co-pilot, they were warning the pilot indirectly that something is not right, but they could not come out and communicate that information more forcefully. Why? Because that power distance, they kind of doubted themselves that since, you know, I'm an engineer, I'm a co-pilot, you know, the captain, the pilot knows better. So they tried to communicate this information about the weather, but they did not do it forcefully. And that's what the black box shows. Okay? Versus in Sweden, in Sweden, basically the power distance is very low. You know, the managers and the employee, the prime minister and the regular citizen, they're very close in a sense that there is no power distance in between. Okay? This is basically, again, a cultural dimension. The third cultural dimension is uncertainty avoidance. And uncertainty avoidance basically state how uncomfortable are you with uncertainty and ambiguity? In some countries, people, generally speaking, are very comfortable with uncertainty and ambiguity. In other cultures, they are not. So we have to understand. For example, the U.S., the U.S., uncertainty and avoidance, we embrace uncertainty and avoidance. Okay? Japan, the Japanese culture, they are a little bit less, they don't embrace uncertainty avoidance. And just because you embrace uncertainty avoidance, this is why you have many entrepreneurs in the U.S., this is why you have companies like Facebook, Google, people take chances. Now you're not going to succeed every time, but the point is the culture encourages this risk taking. So uncertainty avoidance is not if you take a chance, you are not being ashamed. Actually, you are considered a hero because you took a chance. In other countries, if you took a chance and you failed, you know, the society may shame you. So uncertainty avoidance is another one of those important cultural dimension that half-sits talk about. Okay? The fourth one is masculinity. Now, masculinity doesn't mean man versus woman. It just basically, it's do you value performance, achievement, heroism versus caring and nurturing. This is what masculinity is. It's a preference. You have a preference for achievement, heroism, assertiveness, material reward for success. And in the U.S., we are a masculine society to a great degree. Or do you prefer cooperation? Do you prefer modesty? Do you prefer caring for the week? Do you prefer for the quality of life? Like in Japan, they more care about the quality of life. Okay? In the U.S., not as much in terms of work environment. It's basically a byproduct, but not a main dish. Okay? The fifth dimension is long-term orientation. Basically, this came about later on. Basically, what is your focus? Is your focus short-term orientation? Or do you look at the long-term perseverance and threat? Certain societies deals with, right now, I want the profit right now. Like in the U.S., we want the profit now. And this is why we report on a quarterly basis. This is why we watch Wall Street. This is why stocks go up and down very quickly because we are short-term oriented. In other societies, they look at the long-term, the long-term effect. So understanding those cultural dimension would help you understand that different countries have different cultures, and your culture would influence the way your accounting system or your accounting set up, your accounting organization set up the rules based on the cultural dimension because you are what your culture is. Along with half-study cultural dimension, we're going to look at Sydney John Gary. Sydney John Gary is actually an English professor of international business at the University of Sydney Business School. He identified four widely recognized accounting values. So now that I'm looking at accounting values, then we're going to combine the accounting values with half-study's cultural dimension that can be used to define a country's accounting subculture. So what he did, he kind of identified from the literature four widely recognized accounting values. And by the way, he was the president of the International Accounting Association. So the first accounting value is professionalism versus statuary control. And basically, what is this value? It's the preference for professional judgment versus prescribed legal requirement. For example, in the US, to a great degree, the accounting profession is self-regulated. Self-regulated means the accounting profession regulate itself. Now, the reason I said to a great degree is because up until the 2002, when Sarbanes-Axley, when Sarbanes-Axley occur, when we had the fraud and Ron Ward come in, Sarbanes-Axley was enacted by Congress. To a great degree, we will self-regulate it. The accounting profession and the auditing profession was self-regulated. Then comes Sarbanes-Axley and they created the PCAOB, the public company accounting oversight board, which is a government organization that started to overseas the auditing profession. Yes, the SEC does play a role, but to a great degree, the profession is self-regulated. In other countries, it's more prescriptive legal requirements. What they do, they look at laws in order to know the rules for the accounting. So it's drafted by laws. And we talked a little bit about this in the legal system in the prior session. Another accounting value is uniformity versus flexibility. And what is uniformity versus flexibility? Uniformity accounting practices between companies, so are using the same accounting practices between companies versus flexibility between companies and over time vis-a-vis flexibility in according with perceived circumstances of individual companies. So simply put, do you prefer that all companies use the same accounting practices or are you going to allow flexibility for companies of the company have different circumstances? You allow the company to record, to recognize, to measure the transaction differently, inserting certain countries or certain culture. They prefer uniformity. This way it's easy. It's all the same. We don't have to worry about it. I'm going to tell you in the US, we have more flexibility. The way you book a transaction might be a little bit different depending on your industry, depending on the circumstances. So some accounting, in some countries they value uniformity and some they value flexibility. Conservatism versus optimism. What is our views of business? Are we, do we take cautious approach or are we risk taken? Are we more optimistic or are we less optimistic or more careful? We take a cautious approach. And depending how we look at business, we set our accounting rules. So certain countries are more cautious. Again, I always mentioned the US because I'm most familiar with the US. In the US, we are more kind of toward the risk taking, although we have the concept of conservatism, but our conservatism still less conservative, less conservative relatively speaking to other countries. Secrecy versus transparency. Do we value secrecy or do we value transparency? For example, in the US, as I mentioned earlier, because the shareholders are public shareholders, we value transparency. We want more disclosure. In other countries, they value secrecy. For example, in Latin America and Mexico, Colombia, they, they like secrecy. In Japan, in Germany, they prefer secrecy. Okay, so it's the preference for confidentiality or restriction of disclosure, like in some Asian countries or Latin America versus transparency and openness, like in the US, in the UK. So those are the four accounting values. Now, what we're going to do, we're going to look at the accounting values in conjunction with half-stated cultural dimension. Okay, and what we will see is this. For example, let's take, since we're talking about conservatism, let's look at conservatism. What we will see, we will see that conservatism is a positively link to uncertainty avoidance and is a positively link to long-term orientation. And hopefully this makes sense. When you are a conservative, and if your nature is conservative, if your cultural dimension is conservative, you are going to avoid uncertainty. You're going to have strong a tendency toward uncertainty avoidance because your nature is conservative. Also, you're going to have, you're going to have a more orient, long-term orientation. You're looking at the long-term, you're not looking for quick results. And the opposite is true. If you are less conservative, if you are, if you are, if you are less conservative generally, you're going to be negative on the uncertainty avoidance. You don't care about uncertainty and avoidance. Okay. And also, you're going to have, rather than long-term orientation, you will have short-term orientation, short-term orientation. Okay. Let's look at another one. For example, if you, if it's, if, if you value, if your accounting values are professionalism, you're going to be high on individualism and high on masculinity. Why? Because as an individual, you are self-regulated. You self-regulate yourself. You don't want somebody to tell you what to do. It's individualism. You don't want an organization. You don't want the legal system. You want to, you want to use your own judgment. And also, you'll be high on masculinity. Again, you'll be negative. You'll be negative on long-term orientation. Why? Because if you have high professionalism, most probably you're looking for short-term. You are looking most likely for short-term, for short-term results. I would look at secrecy as well. We noticed that if you are, if you are, if your accounting value, if your accounting values are of secrecy, okay, you are positive on power distance. Why? Because power distance preserve the secrecy. Okay. So if you are up high, I know you don't need to know because you're down below. So there's a power distance. So secrecy will be high. Also, uncertainty avoidance, uncertainty avoidance. You don't want, we don't want any ambiguity. We want everything to be clear in a sense that there are certain things you need to know and others you don't know. So we want to preserve that secrecy. Okay. Also, you'll be high on long-term orientation. You're looking for the long-term. You're not looking for the short-term. Okay. And as a result, if you have any information, you might keep it to use it later on. You're preserving your secrecy. Okay. And you could take a look at uniformity, just FYI. Okay. So those are basically the cultural dimension of half-study in conjunction with the accounting values. Now, many studies were conducted. It doesn't mean this is not a scientific method. This is just basically to give you an idea. So if you are dealing with an international situation, you have an idea how different culture, how different culture value, different values basically. And here, this is another, this is another ranking. For example, the Anglo countries, who are the Anglo countries, the U.S., the U.K., English-speaking countries, Canada, New Zealand, Australia, they are low on secrecy and low on conservatism. There's a relationship. If you are low on secrecy, you are low on conservatism. Okay. You don't value secrecy and conservatism, you're low on conservatism. Versus, if we're going to go to the other extreme, less developed Latin countries, they're high on secrecy and they are more conservative. They are more conservative. Here, we're talking companies, countries like Colombia, Mexico. Then there's some in between. For example, Japan, they're high on secrecy, but not as high as Latin America and high on conservatism. Okay. So, nor the countries, Sweden, Norway, they're low on secrecy and low on conservatism. Again, those, just the reason you are learning this or the reason you are being exposed to this, just you know that there are different factors that affect accounting, the fact how we book transaction and cultural dimension play an important role in how accounting, accounting rules are created, how accounting organization, what, what do they value? Well, they're going to value their culture and whatever their culture is, it's going to factor into their institutions, into their accounting institution. In that factor, it's going to flow down into the way they do accounting. Hopefully, you would appreciate the cultural factor. Make sure if you have the book, read the book, read the textbook. If you have any questions, any comments, please let me know. If you happen to visit my website for additional lectures, please consider donating. If you're studying for your CPA exam, as always, study hard, it's worth it.