The Influence of Culture on Malaysian Accounting Practices
Accounting refers to the process of translating a company’s financial performance to documents utilized in financial reporting that constitute a balance sheet, income statement, statement of cash flows, and statement of changes in equity, among others (Abdullah et al., 2015, p. 344) These documents are published and presented to the public to interpret the firm’s performance. Accounting reporting follows guidelines encapsulated in the conceptual framework developed domestically and internationally. Presently, in Malaysia, accounting practice is mandated by the Malaysian Standards Board (MASB), which has significantly borrowed from the International Accounting Standards Board (IASB) (Abdullah et al., 2015, p. 345). These rules aim to standardize financial reporting across companies to facilitate comparison. Most importantly, these reports should be easily interpreted by various stakeholders, such as employees, investors, and others, by ensuring they are comprehensible to parties with minimum finance knowledge. Lastly, this framework is essential for multinational corporations that operate in different regions of the globe due to the need for streamlining reporting. Far from the guidelines, accounting practice is significantly influenced by the culture of a particular country. The reason is culture considerably influences the undertaking of operations. For instance, areas that feature high masculinity practices are bound to emphasize material rewards, while feministic cultures focus on building relationships with various shareholders. Culture is viewed from Hofstede’s and Gray’s dimension perspective to accurately establish its effect on Malaysian accounting.
Hofstede’s View on Culture and Its Effect on Accounting Practices
Culture is a term that has been under study for a significant period and, as a result, derives various definitions. Hofestede (1984) defined culture as “the collective programming of the mind which distinguishes the members of one group or society from those of another” (Ybema & Nyíri, 2015). In doing so, the author established six dimensions that depict culture from different perspectives. This report will cover five elements that include: the power distance index, individuals versus collectivism, masculinity versus femininity, uncertainty avoidance index, and long-term versus short-term orientation (Ybema & Nyíri, 2015).
Power Distance Index
Power distance refers to the hierarchal differences between employees in an organization. High power distance is characterized by unequal hierarchies stemming from differences in power (Asmuni et al., 2015). Moreover, people in this category are more likely to conform as they perceive their rank level in the system. High power distance is featured in centralized organizations, whereby a single authority guides the subjects and obtains guidelines from the same. In such cases, part of the organization’s culture relies on a directive issued by the centralized authority in undertaking operations in the organization. It also features in more complex hierarchies, whereby the subjects recognize the differential powers in existence. High power differences also manifest in organizations featuring large compensation gaps between employees relative to their hierarchy (Suhaimi et al., 2016). It is only natural for such situations to instill a sense of respect in the subjects. Organizations whose policies emphasize the need for respect for those in higher hierarchies are bound to result in high power differences. Lastly, companies featuring authoritarian leadership styles, such as bureaucratic, are bound to exhibit higher power differences. Lower power differences are featured in flatter organizations, whereby employees and managers are almost considered equals. It is common in companies that facilitate participatory decision-making whereby subjects can make decisions (Mohd Ghazali & Ismail, 2013). It also manifests whereby leaders delegate most of their tasks and practice contemporary leadership styles, such as a democratic style that places less emphasis on authority and respect. Low power distance refers to a situation of equality despite power differences. Malaysian organizations feature high power differences due to the significant difference in salaries and emphasis on respect for authority from the subjects. In fact, Malaysian employees are bound to take a task seriously if their managers order them. The same translates to their accounting practices, as they are bound to comply with the organization’s policy and management directives in financial reporting.
Individualism versus Collectivism
Weak connections between society members characterize individualism; hence, individuals are less likely to be responsible for each other. Collectivism is characterized by members’ loyalty towards their social group in exchange for benefits such as the defense of their interests (Abdullah et al., 2015). High individualism is characterized by respect for people’s privacy. Also, rewards and bonuses are undertaken individually rather than collectively. Besides, it encourages the expression of ideas on an individual basis. Lastly, it does not integrate social life with work and acknowledges personal accomplishments. Low individualism is characterized by work geared towards the attainment of intrinsic rewards. It emphasizes building skillsets or dexterity in certain skills. Lastly, it prioritizes building harmony with other group members. Malaysia, just like other Asian nations, features collectivism due to its communist culture. This culture is bound to affect Malaysian financial reporting significantly.
Masculinity and Femininity
Masculinity refers to the distinguishing of men’s and women’s responsibilities stemming from gender constructs. In areas where these roles are more prevalent, their tasks rarely overlap. High masculinity is characterized by the need to maximize profits/returns. It also emphasizes achievement more than the need to develop relationships with stakeholders. Femininity is characterized by the need to create a better quality of life. Feminist organizations are bound to spend more on servicing employee welfare to enhance their quality of living. It is also bound to foster good rapport with stakeholders, such as the company’s personnel and shareholders. The Malaysian culture features a masculine approach due to the division rule. This feature manifests in its company’s activities as it prioritizes wealth and projects that build its reputation (Mohd Ghazali & Ismail, 2013). Moreover, accounting practices are bound to produce reports that showcase the company’s strengths.
Uncertainty avoidance refers to policies put in place steered towards reducing risks. Societies featuring high uncertainties are bound to be conservative and rigid. They tend to follow societal norms and conventions (Thibeault et al., 2018). High-energy society features the feeling of being in control of their circumstances. Moreover, community members are more expressive of their feelings and ideas. Situations featuring low uncertainty indexes are bound to be more open to change and innovation since they do not avoid risk. Moreover, they are bound to undertake open-ended decision-making characterized by learning from past failures. Malaysia features a high uncertainty avoidance that focuses on risk reduction. Therefore, the accounting practices’ financial reporting is bound to be more uncertain than opportunistic.
Long-Term versus Short-Term Orientation
Long-term orientation focuses on truth by asking questions like what and how? In such cases, the accounting practice is bound to feature characteristics such as verifiability and transparency. How is it related to the method by which financial results were derived from the company’s financial performance. There is an emphasis on virtues and obligations, which manifest in a company’s accountability. It also relates to ethical and truthful financial reporting. Cultures characterized by long-term orientation are bound to provide precise accounting reports that portray a company’s actual performance (Husnin et al., 2016). Values and rights characterize short-term responses; in this case, accountants would most likely practice their rights as stated in the financial standards and guidelines. This category is more likely to ask questions such as why.
Gray’s View on Culture and Its Effect on Accounting Practices
Gray’s study attempts to establish the effect of contemporary culture on modern accounting by borrowing from Hofestede’s (1984) cultural dimensions (Ybema & Nyíri, 2015). Professionalism versus statutory control is Gray’s first dimension. Professionalism refers to relying on an accounting expert’s knowledge in decision-making rather than following rules governing the practice. Statutory control refers to the adherence to stringent legislation in Malaysian accounting practice. Notably, accounting practices are significantly influenced by the Malaysian Accounting Standards Board (MASB), which has established rules and standards to be followed by enterprises in financial reporting. Professionalism is suitable with small power distances since enterprises are least likely to face reprimand for failure to adhere to the accounting rules. At the same time, statutory control is preferred in circumstances that require following the law since it could affect the accountant’s output. In Malaysia, both professionalism and statutory control influence accounting practices.
Uniformity and Flexibility
Uniformity and flexibility are Gray’s second dimension. Uniformity refers to consistency in the representation of accounting information and financial reporting. This aspect follows the IASB comparability and consistency features of accounting information (Husnin et al., 2016). Companies whose financial reports exhibit this feature can be easily benchmarked since their financial statements are comparable. The globalization of companies in Malaysia calls for uniform reporting while following the FASB framework to ensure consistent reporting in a company’s various branches. Culture also allows for flexibility whereby a company develops its suitable policy for financial reporting. Uniformity is more ideal in companies exhibiting high power differences as accounting rules are bound to be acceptable.
Conservatism and Optimism
Conservatism and optimism refer to Gray’s third dimension; Conservatism refers to exercising a certain level of uncertainty in financial reporting. It does not follow optimism and risk in return. Conservatism manifests in statutory control through objectivity, verifiability, and reliability features of accounting information. Objectivity refers to reporting on the company’s actual performance, whereas verifiability refers to the precision of information such that if a different accountant repeats the process, it will arrive at the same results (Kim et al., 2016). Reliability refers to the usefulness of the accounting information in decision-making. Optimism refers to reporting while considering a business’ promising prospects in the near future.
Secrecy versus Transparency
Gray’s fourth framework is secrecy versus transparency. Secrecy refers to the need to conceal a company’s financial performance due to the intense industry rivalry. Hence, these firms contemplate that practicing transparency in financial reporting would make them vulnerable to competitors as they would gauge their performance. These firms face a compromise between truthful reporting to the public and the need to maintain their competitive niche by concealing most of their information. Companies that practice transparency are more feministic and tend to care for their shareholders more than the industry.
From the analysis, culture is viewed from Hofstede’s and Gray’s dimension perspective to accurately establish its effect on Malaysian accounting. The two cultural frameworks significantly impact an organization’s accounting reporting. Most importantly, these cultures facilitate the explicit explanation of the different attributes of Malaysian culture.
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