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An Extended Contingency Model of Environmental Factors Influencing National Accounting and Disclosure Practices

Peter G. Gerhardy Senior Lecturer in Accounting

School of Commerce Flinders University Adelaide Australia

SCHOOL OF COMMERCE

RESEARCH PAPER SERIES: 02-8

ISSN: 1441-3906

Abstract

This paper outlines the development of an extended contingency model, proposed as a framework

for analysis of the relationship between accounting and the environment in which accounting is

practiced. The model is developed by enhancing the contextual contingency model proposed by the

American Accounting Association (AAA) (1993). The AAA (1993) model, like other similar

models that have been proposed, indicates the importance of environmental factors as influences

upon accounting practices, but does not offer a method of identifying and classifying such factors.

The enhancement to the model proposed in this paper is integration of an appropriately modified

version of Gernon and Wallace’s (1995) accounting ecology. It is argued that with this

modification the model can be used as a means of identifying and classifying environmental factors

related to accounting and disclosure practices in prior research. Further, it is suggested that the

factors which are likely to provide the most useful explanations of accounting development in

future empirical research can be identified.

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1. Introduction

A large body of research in international accounting is concerned with the enumeration and

investigation of the environmental factors influencing accounting and disclosure practices. Gernon

and Wallace (1995, p. 57) go so far as to suggest that ‘Essentially, the development of explanatory

IAR [international accounting research] theories has involved the interface between accounting and

its environment’. In this paper it is argued that the influence of environmental factors upon the

development of national accounting and disclosure practices is usefully conceptualised with the aid

of a contingency theory approach. The development of a strong theoretical base for the

identification and conceptualisation of those environmental factors likely to affect accounting and

disclosure practices is a necessary precursor to the empirical investigation of their relationship. As

suggested by Gernon and Wallace (1995, p.75):

Contingency theory offers a systematic approach toward the conceptualization of the national and foreign environmental variables which may have a significant bearing on the similarities and differences in accounting styles and practices across countries. The conceptualization has provided inspiration for empirical research concerned with determining the environmental causes and effects of accounting …

A decade earlier Schweikart (1985, pp. 89-90) observed that there was significant concern evident

in the international accounting literature relating to issues such as harmonisation and differences in

the accounting information presented across countries, as well as what he described at this time as

the ‘suggestion’ that accounting information needs in different countries are subject to

environmental influences. Schweikart’s (1985, p. 90) observation that there had been little

empirical work conducted to support the concept of environmental influences on accounting is no

longer a valid one (see for instance Cooke & Wallace 1990; Adhikari & Tondkar 1992; Doupnik &

Salter 1995; and Salter 1998). However, it is his other observation, that at this time there was a lack

of formal theory upon which to base such empirical research, which motivates him to propose

‘contingency theory as a vehicle to establish a theory of international accounting’ (Schweikart 1985,

p. 90).

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This paper proposes a contingency model, appropriately extended, as a framework for analysing the

relationship between accounting and the environment in which it is practiced. It proceeds as

follows. First a review of contingency theory as applied in business and accounting research in

general is provided. Following this the application of a contingency theory perspective in

international accounting research is examined. On this basis an extended contingency model, based

upon that suggested by the American Accounting Association (AAA) (1993), but expanded to

incorporate a classification of potentially significant environmental factors, using a modified

version of the accounting ecology expounded by Gernon and Wallace (1995), is developed. This

extended model is argued to provide a sound theoretical base for identification and evaluation of

those environmental factors that have been suggested and/or found to be significantly related to

accounting and disclosure practices in prior research. In this manner it is suggested that the factors

which are likely to provide the most useful explanations of accounting development in future

empirical research can be identified. Suggestions for future research directions based upon the

framework are then provided.

2. Contingency Theory in Business and Accounting Research

Contingency theory emerged in the management literature in the late 1960s and the 1970s, as an

alternative to the view of classical management theorists that there was a single ‘best way’ for

managers to achieve efficient organisational operations. The roots of a contingency approach to

management theory lay in the observation that in some cases the violation of classical management

principles led to positive outcomes (Bartol et al. 1995, p. 65). In its simplest form contingency

theory contends that what constitutes effective management is situational, depending upon the

unique characteristics of each circumstance. Bartol et al. (1995, p. 66) illustrate simply the

distinction between the classical and contingency views of management as shown in Figure 1.

Hicks and Gullett (1981, pp. 625-626) summarise the contingency view of organisations as ‘The

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“best” solution is the one that is most responsive to the characteristics of the unique situation being

faced’.

Figure 1: Classical versus Contingency Views of Management

Universal view: same managerial principles apply to every situation

Contingency view: appropriate managerial action depends on the situation

situation 1

situation 2

situation 3

Source: Bartol et al. (1995, p. 66), Figure 2.4.

Lawrence and Lorsch (1967) made one of the early contributions to the development of a

contingency theory of organisations; indeed, it has been suggested that they are the inventors of the

term as applied in the organisational/management literature (Donaldson 1995, p. xii). The

fundamental question posed in their study is ‘What kind of organization does it take to deal with

different environmental conditions?’ (Lawrence & Lorsch 1967, p. 3). Further, they describe the

major contribution of their study to be ‘the increased understanding of a complex set of

interrelationships among internal organizational states and processes and external environmental

demands’ (Lawrence & Lorsch 1967, p. 133).

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By comparing a number of effective organisations Lawrence and Lorsch (1967, pp. 156-157)

suggest it is possible to understand differences in their internal states and processes by reference to

differences in their external environments. They summarise the findings of their study as follows

(Lawrence & Lorsch 1967, p. 157):

These findings suggest a contingency theory of organization which recognizes their systemic nature. The basic assumption underlying such a theory, which the findings of this study strongly support, is that organizational variables are in a complex interrelationship with one another and with conditions in the environment.

Broadly, in their study Lawrence and Lorsch (1967) establish that the determinants of effective

internal organisational processes are dependent (or contingent) upon variations in the environment

in which the organisation operates. In their words, ‘These outside contingencies can then be treated

as both constraints and opportunities that influence the internal structure and processes [of the

organisation]’ (Lawrence & Lorsch 1967, p. 186). Financial reporting and disclosure practices can

be viewed as the outcome of an internal decision process of an entity. Thus, a simple extension of

Lawrence and Lorsch’s (1967) conclusion suggests it is possible to view the choice of accounting

and disclosure practices as the result of an internal process which is influenced by outside

contingencies. This suggests that variations in the environment in which companies operate, such

as those associated with differences in corporate nationality, will lead to differing decisions as to the

optimal methods of corporate reporting and levels of disclosure.

Another early exposition of what is now termed contingency theory was that of Thompson (1967).

In a similar vein to Lawrence and Lorsch (1967), Thompson (1967, p. 13) ‘suggest[s] that

technologies and environments are major sources of uncertainty for organizations, and that

differences in those dimensions will result in differences in organizations’. Of significance is that

in conceptualising the environmental constraints impacting upon organisations Thompson (1967, p.

68, emphasis in original) suggests that organisations generally find such constraints ‘located in

geographic space or in the social composition of their task environments’. While the methods

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suggested by Thompson (1967, pp. 68-69) to characterise or measure these dimensions are not

particularly useful in the accounting context, the general observation that environmental factors

have both a physical or locational dimension, as well as a social dimension, provides an important

perspective as to the breadth of the environmental factors potentially affecting accounting and

disclosure decisions.

While the roots of contingency theory are in the management and organisational theory literature,

application of the theory to accounting, and in particular to the area of management accounting,

followed quite quickly. Hayes’ (1977) work on organisational sub-unit performance assessment, in

which much of his model development is based on the work of Thompson (1967), represents one of

the early efforts at applying a contingency approach to management accounting. The use of

contingency theory in management accounting research has continued and developed. In a more

recent study, which adopted contingency theory as the basis for an examination of the impact of a

new accounting technology on accountants in various types of hospitals in the United States,

Rayburn and Rayburn (1991, p. 57) provide the following useful and succinct summary of

contingency theory as it is applied in management accounting research:

Contingency theory is based on the premise that there is no universally appropriate accounting system which applies equally to all organisations in all circumstances; instead, the optimal management control system depends on the specific elements of an organisation’s environment. Effective control systems are usually situation specific and tailored to the management of each organisation. The exercise of managerial choice and the interdependence of accounting systems and the environment are acknowledged.

Application of contingency theory in financial accounting research is a more recent development.

Thomas (1986) applied contingency theory to corporate reporting. He suggests that adopting a

contingency perspective captures the idea that reporting practices are associated with what he refers

to as particular circumstantial variables1 (Thomas 1986, p. 254). Further, Thomas (1986, p. 254)

1 The term ‘circumstantial variables’ used by Thomas (1986) was originally coined by Cadenhead (1970) to

refer to the environmental conditions affecting the feasibility of accounting methods applied and/or the objectivity of the resulting measures.

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conceptualises the constraints upon entities affecting management’s choice of reporting practices as

falling into two major classes, namely:

• the environment of the enterprise, and

• its organisational attributes.

Thus, contingent factors are argued to be both internal and external to the organisation.

At the time Thomas (1986) was writing there was a growing but relatively immature body of

accounting research now commonly referred to as positive accounting theory (see Watts &

Zimmerman (1990) for a review of this research). This literature investigates ‘relationships

between firm and/or industry characteristics and management’s choice of accounting methods based

on a theory concerning relative income effects’ (Thomas 1986, p. 256). Thomas (1986, p. 256)

suggests that the empirical research indicates a number of short-comings of such a theory,

including:

• inconsistent results across different independent variables, and for the same variables in

different studies,

• inconsistent results across different dependent variables, and

• an inability to explain the choice of reporting practices that do not affect reported profit.

In the context of corporate reporting, Thomas (1986, p. 256) contends that ‘Contingency theory

postulates the existence of similar associations but asserts management’s preferences with regard to

reporting practices are related to the nature of environmental and organisational constraints rather

than their relative income effects’. In some situations the relationships hypothesised by positive

accounting theory between management’s accounting policy choices and their relative income

effects will hold, but not necessarily for the reasons the theory suggests.

While recognising that contingency theory is not without its limitations, both as a general

theoretical model and in the context of its application to examining corporate reporting practices,

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Thomas (1986, pp. 256-257) suggests that it can still provide valuable insights, particularly in

relation to the political and economic aspects of the process of accounting standard setting (p. 257).

According to Thomas (1986, p. 257) these would include ‘a consideration of the process by which

adaptation to contingencies is brought about, the role of informal structures and the network of

social relations, and the possibility of reciprocal causality’. A strong case is therefore established

for the application of contingency theory to the examination of those factors affecting financial

reporting practices.

3. Contingency Theory as a Framework for Analysing National Accounting Development

Perhaps one of the most significant aspects of Thomas’ (1986, p. 255) paper in the current context

is his recognition that a significant body of research in comparative international accounting

conducted up to the mid-1980s adopted, all be it implicitly, a contingency approach. He states

(1986, p. 255):

Although only rarely explicitly articulated, the conceptual framework underlying such research is essentially a contingency approach. Most studies take the form of either testing for differences between certain reporting practices in various countries, or the grouping of national accounting systems into relatively homogeneous subunits. In both cases the results are usually attributed to differences or similarities in social, political or economic factors. There is thus an implicit underlying theory that the reporting practices of each country are contingent on certain social, political and/or economic variables.

This implicit adoption of a contingency framework continues to be common in the comparative

international accounting literature.2

Also of significance is Thomas’ (1986, p. 255) suggestion that an indication of the more general

applicability of contingency theory is provided by the then current, and still continuing, debate

regarding ‘the universal applicability of International Accounting Standards’. This is an issue

2 The framework has also been explicitly adopted in some studies of international accounting practices. More

recent examples include Eddie (1994) and Tan and Tower (1999). The latter study adopts a conceptual schema based on Thomas (1986, 1991).

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which, he suggests, when examined from a contingency theory perspective, involves issues which

‘are essentially the same as those relating to the flexibility vs uniformity of national Accounting

Standards’ (Thomas 1986, p. 255).

Belkaoui (1983) is one of the early writers addressing the influence of environmental factors upon

accounting to acknowledge explicitly that such an approach adopts contingency theory as its basis.

He recognises ‘the need to look for the relations between measures of accounting development and

adequacy on one hand and measures of political, civil, and economic development and adequacy as

a first step in the formulation of a contingency theory of international accounting’ (Belkaoui 1983,

p. 216).

Schweikart (1985) was another early writer to explicitly recognise the application of contingency

theory as a framework for international accounting research. In the context of international

accounting Schweikart (1985, p. 92) suggests ‘National environmental differences represent both

external and internal contingencies on accounting information needs’, and based upon comparative

management research he identifies likely environmental variables for a contingency model as

falling into the categories of:

• educational,

• economic,

• political-legal, and

• social (socio-cultural).

Three of these four categories, economic, political and social, are also those identified by Thomas

(1986) as characterising the environmental variables suggested in comparative international

accounting studies as influencing accounting practices.

Figure 2 illustrates the financial accounting contingency model developed by Schweikart (1985).

The model treats the environment as an external contingency affecting organisational structure (A1)

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and the decision making process (A2). In turn the institutional and organisational structures

determine the external information available (Bi) and the types of decisions (Bj) required to be made

by parties external to the firm. Decision makers are also able to demand other information from

institutions if required for effective decisions, as illustrated by the broken lines, depicting a

feedback loop in the model. Importantly, Schweikart (1985, p. 97) claims ‘This … model can be

used to explain differences in accounting policies among nations with different national business

environments’. From the point of view of such research he indicates that the issue is one of

‘isolating the environmental variables affecting information needs (A2) … since contingency theory

implies that information needs should vary with variations in the favorability or certainty of the

decision environment’ (Schweikart 1985, p. 97). Schweikart (1985, p. 97) recognises that applying

such a model in an international financial accounting context poses a number of difficulties, since it

is not possible to hold institutions and information constant across countries. Further, the decision

problems faced by users may not be uniform across countries. Schweikart (1985, p. 97) suggests

the following as a means of minimising the impact of these difficulties:

… comparative research using nations with very similar accounting methods, institutions, and decision problems may be the only vehicle available to extract many significant environmental variables. This research design implies that the environments in such countries will have a high degree of similarity, but that subtle differences may be more reliable predictors of information-relevance predictors.

This provides a clear direction for future research, suggesting concentration on smaller regional

groupings of countries may provide more fruitful results than larger global studies. This issue is

more fully discussed in the final section of the paper.

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Figure 2: Schweikart’s (1985) Financial Accounting Contingency Model

Published accounting information

Published govt. and service

information

Informal information

Published accounting information Decision

makerDecision process

Decision

Problem

Organization and

structure

Environmental variables

Availability filter

A2

A1Bi

Bj

A1 , A2 Direct environmental contingencies (external)

Bi , Bj Indirect environmental contingencies (internal)

Source: Schweikart (1985, p. 96), Exhibit 3.

Thomas (1991) developed further the application of contingency theory to corporate financial

reporting systems, arguing ‘management’s choice of corporate financial reporting practices is

contingent upon the differing constraints on entities …’, which he indicated fall into four possible

classes, as illustrated in Figure 3.

Thomas (1991, p. 42) justifies inclusion of societal variables in his general contingency model for

financial reporting systems on the basis that ‘the theoretical framework underlying research in

comparative international accounting is essentially a contingency perspective’, where ‘the results

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are usually attributed to differences or similarities in social, political or economic factors’. He

characterises such variables as ‘those factors to which all enterprises within a particular country are

subject and which vary between nations’ (Thomas 1991, p. 42). He further suggests that societal

variables can be conceptualised broadly as comprising the economic, legal and political systems of

the country.

Figure 3: Thomas’ (1991) Contingency Framework for Corporate Financial Reporting Systems

Societal variables

Environment of the

enterprise

User characteristics

and other sources of information

Organisational attributes

Corporate financial reporting systems

Source: Thomas (1991, p. 42), Figure 1.

Thomas (1991, p. 43) conceptualises the environment of the enterprise in terms of perceived

uncertainty, while organisational attributes ‘are conceptualised in terms of the resources available to

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the enterprise and the way in which these are organised’. Finally, user characteristics are argued to

influence corporate financial reporting systems because of the existence of differing information

needs and abilities to process information resulting from ‘differing decision models, decision

making styles and cognitive traits’ (Thomas 1991, p. 44). As indicated in Figure 3, Thomas (1991)

suggests that not only are financial reporting systems influenced by contingent variables, but also

such systems in some cases will influence those variables. Further, there will be interrelationships

between the classes of contingent variables as indicated in the diagram.

In discussing research methodologies in international accounting, the AAA (1993, p. 9) describes

the contingency approach as being ‘concerned with the association between accounting and its

environment’. It distinguishes between global contingency approaches to cross-national financial

accounting research (C-NFAR), of which it identifies three, and the arguably more comprehensive

contextual contingency approach. Studies adopting a global approach are described as ‘usually

deterministic, unidirectional and implicitly assume that accounting is the dependent variable’ (AAA

1993, p. 9). The contextual contingency approach is described (AAA 1993, p. 10) as ‘bring[ing] to

the fore concerns for cultural relativism and national character’, and is elaborated in terms of the

diagram reproduced below as Figure 4. There are similarities with Schweikart’s (1985) model, as

depicted in Figure 2, and also Thomas’ (1991) framework depicted in Figure 3, in terms of both

some of the components of the models, and the relationships between those components. The

central role of environmental/contingent variables in determining the output of the organisation’s

accounting process is primary in all the models, as is the need for this output to in some way meet

the expectations/requirements of those who use it. In Schweikart’s (1985) model this most directly

relates to the ‘Decision maker’ and ‘Decision process’ components of the model. As mentioned

previously, inadequacies of information in the model are addressed by allowing for feedback by

decision-makers (via the dashed lines), who may demand additional or different information if

needed for effective decision making. Similar relationships are depicted in Thomas’ (1991) model,

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where user characteristics are one of the four classes of contingent variables affecting financial

reporting systems.

Figure 4: Contextual Contingency Approach to C-NFAR

Environmental variables

Nexus supplied by organizations, professional bodies and individuals

Accounting profile and attributes

Matching accounting with normative or actual expectations within a country

Test of effectiveness

within country

Global fit test

Compare with

foreign profiles

Inadequacy would lead to a clamor for a change in environmental factors such as attitudes and/or a change of accounting profile

If

okay

feedback

If inadequate

Source: AAA (1993, p. 19), Figure 2.

feedback

In the AAA (1993) model the requirement to meet national expectations is represented by the ‘Test

of effectiveness within country’, wherein extant accounting practices are compared with normative

or actual expectations within a country. A failure to pass the test again requires that change or

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adaptation occur, in this case either as changes in environmental factors, to align them more closely

with extant accounting practices, or as changes in the accounting practices to meet actual

expectations. In either case the process, as in Schweikart’s (1985) model, is depicted as a feedback

loop to the parties concerned with production of accounting information within the country.

Arguably, the AAA (1993) contingency model is the most comprehensive of the general models

discussed so far, and possibly the most relevant to comparative international accounting research.

In this respect, a significant contribution of the AAA (1993) model is the explicit introduction of a

second test, to be performed when the ‘within country’ test is satisfied, referred to as the ‘Global fit

test’. As indicated in the model in Figure 4, the global fit test involves comparison of accounting

practices within the country under examination with ‘foreign profiles’ of accounting practices.

These ‘profiles’ may comprise the accounting and disclosure practices of foreign companies, or the

preferred practices as promulgated by an international accounting standard setting organisation,

such as the International Accounting Standards Board (IASB)3. Once again this comparison is

performed with the purpose of allowing feedback to those domestic organisations, professional

bodies and individuals concerned with preparation of accounting reports within the country in

question. The importance of incorporating such a test in a contingency model cannot be understated

given the current interest in the issue of harmonisation of international accounting practices. In this

context such a test would involve the comparison of companies’ actual accounting and disclosure

practices with those required by international accounting standards, possibly using indexes or

similar measures of harmonisation to determine the extent of ‘global fit’. Such tests clearly can and

should incorporate examination of accounting practices in more than one country.

3 Under a new constitution adopted in May 2000 the IASB was established to conduct the business of the International Accounting Statndards Committee (IASC), including the setting of accounting standards (IASC 2001).

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4. Classification of Environmental Variables

One aspect of all the models discussed in the previous section that requires further specification is

the issue of what constitutes the ‘environmental variables’. In the AAA (1993) model it is these

variables, together with national accounting profiles and attributes, which impact upon the

outcomes of the financial reporting process, namely the accounting and disclosure practices actually

adopted by companies. On this issue the work of Gernon and Wallace (1995) provides a useful

perspective. In their review of international accounting research Gernon and Wallace (1995) adopt

what they describe as ‘the ecological perspective to provide an integrated, holistic, rather than

unidimensional, geopolitical view of the national accounting scene that takes account of both

cultural and non-cultural features’ (Gernon & Wallace 1995, p. 59). They describe their ‘national

accounting ecology’ in terms of the diagram reproduced as Figure 5, which includes five ‘slices of

the environment’, which are regarded as ‘separate but interacting’ (pp. 59-61). They describe these

five slices as follows:

1 societal slice: structural, demographic and cultural events and/or trends such as structural shifts that may affect the demand for financial reporting services,

2 organizational slice: events and/or trends bearing on rationalizations in the choice and design of accounting systems and the demand for accounting services,

3 professional slice: events and/or trends bearing on the determination of roles and relationships in the accounting profession …,

4 individual slice: accounting policy choices are made by individuals. This slice covers the actions of these individuals as persons, organizations and professional bodies in their efforts to pursue their respective self-interests, and

5 accounting slice: accounting practices, rules and/or trends that affect or are affected by the other slices of the environment (Gernon & Wallace 1995, p. 60).

They argue that this taxonomy of the accounting ecology provides a broader and somewhat richer

framework from which to view international accounting research than those offered by previous

researchers (Gernon & Wallace 1995, p. 60). In terms of specifying the types of variables likely to

influence accounting practices the model represents an advance upon the more general contingency

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Figure 5: Gernon and Wallace’s (1995) Accounting Ecology

Organizational environment

Actor environment Values of individuals such as

standard setters, preparers, auditors, and users of financial statements

Annual reports

Accounting standards

Accounting environment

Professional environment

Non-cultural variables(eg. land area, population,

government, economy, technology)

Cultural variables (eg. language, ethnic origin,

religion, belief systems, roles, knowledge, norms, attitudes - all

sets of shared values)

Societal environmentStructural variables

(eg. economic, political, legal system)

Internal factors

External factors

Source: Gernon and Wallace (1995, p. 61), Figure 1.

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models discussed in the previous section.4 As outlined below, however, some refinement of the

model seems necessary if it is to provide a useful basis on which to categorise the myriad of

environmental variables with the potential to affect accounting and disclosure practices.

As presented, Gernon and Wallace’s (1995) accounting ecology incorporates apparent overlap

between the variables they suggest might influence accounting. In particular, the distinction

between non-cultural and structural variables in Figure 4, two of the three groups they suggest

comprise the societal environment, is not entirely clear. If, as Nobes (1984, p. 33) suggests, one of

the desirable characteristic of any taxonomy or classification system is that the subsets ‘be mutually

exclusive in such a way that no element may fall into more than one of them’, it is apparent that the

classes of variables comprising the societal environment suggested by Gernon and Wallace (1995)

do not meet this criterion. Clearly it would be sufficient, although not as illuminating, to categorise

the societal environment into cultural and non-cultural variables, two subsets which by definition

must be mutually exclusive. However to sacrifice the subset of structural variables, which it is

suggested would include factors related to the economic, political and legal systems (see Figure 5),

would detract from the model’s usefulness, since these variables are the ones most often argued to

influence accounting (see for example the discussion of Schweikart’s (1986) and Thomas’ (1986,

1991) models above). Instead, it would be preferable to recategorise the non-cultural variables into

two subsets, demographic and structural variables. Indeed, it appears that this was Gernon and

Wallace’s (1995, p. 62) intention, as they state in the text of their paper that the ‘Societal

environment refers to cultural and two non-cultural elements (demographic and structural)’. The

non-cultural subsets are then further described as follows (Gernon & Wallace 1995, p. 63):

4 It must be recognised that a number of earlier studies have enumerated the types of factors likely to influence

the development of accounting, including Radebaugh (1975), AAA (1977) and Cooke and Wallace (1990). These studies are, however, less explicit than the one developed here regarding the theoretical basis of the models/taxonomies they propose, and in particular the use of contingency theory as a conceptual underpinning to them.

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Demographic and structural societal variables refer to those macro aspects which distinguish one society from another. Demographic variables include the size of a country’s population, land area, and geographical location. Structural variables include the level of technological, economic and political development.

The modified accounting ecology would then appear as in Figure 6. This model then provides a

useful schema for the identification and analysis of the environmental factors influencing the

development of national accounting systems. The environment and the classes of variables it

comprises, as suggested by the model, are:

• Societal environment

Demographic variables

Structural variables

Cultural variables

• Professional environment

• Organisational environment

• Actor environment

• Accounting environment

Future research could usefully adopt this schema as a basis for analysis of past studies of

environmental influences on accounting, in order to identify those factors most likely to be related

to accounting development. Further, it provides a useful theoretical basis for identification of

variables potentially related to accounting and disclosure practices not previously investigated in

empirical studies. In this manner a comprehensive inventory of variables that could be used in

empirical research might be developed.

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Figure 6: Modified version of Gernon and Wallace’s (1995) Accounting Ecology

Organizational environment

Actor environment Values of individuals such as

standard setters, preparers, auditors, and users of financial statements

Annual reports

Accounting standards

Accounting environment

Professional environment

Demographic variables(eg. land area, population,

geographical location)

Cultural variables (eg. language, ethnic origin,

religion, belief systems, roles, knowledge, norms, attitudes - all

sets of shared values)

Societal environment

Structural variables (eg. economic, political,

legal system, government, technology)

Internal factors

External factors

Adapted from Gernon and Wallace (1995, p. 61), Figure 1.

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5. An Extended Contingency Model of National Accounting Development

Based on the foregoing analysis of theoretical developments in the application of contingency

theory to comparative international accounting research, and the need for such models to more

clearly specify the nature of the environmental influences impacting on accounting development, an

extended contingency model of national accounting development is proposed. The proposed model

comprises a fusion of the AAA (1993) contextual contingency model discussed in Section 3 and the

modified Gernon and Wallace (1995) accounting ecology outlined in Section 4. A depiction of this

extended model appears in Figure 7.

In the extended model the modified Gernon and Wallace (1995) accounting ecology is separated

into three components, each complementing or elaborating specific aspects of the AAA (1993)

model. First, Gernon and Wallace’s (1995) accounting environment and its various components

replace two parts of the AAA (1993) model. This modification is required to avoid overlap, and to

integrate the two models. As can be seen in Figure 7, the AAA (1993) contingency model separates

the influence of formal accounting requirements, such as those contained in national accounting

standards and regulations, from the other environmental variables affecting accounting practices. A

further modification is the explicit inclusion of annual reports, reflecting the measurement and

disclosure practices adopted by companies, as the output of the process. This modification provides

more specific focus to this part of the model. These reports result from the bringing together of

accounting with its environment, part of which is reflected in the nexus supplied by various entities,

including companies as reporting entities, professional bodies and individuals. This nexus is

elaborated in the model as the organisational, actor and professional slices of the environment

identified by Gernon and Wallace (1995). Their societal environment, with variables sub-classified

as detailed above, elaborates the environmental variables in the extended model. Further, the

foreign profiles forming the basis of the global fit test, have been explicitly specified as comprising

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foreign companies’ reporting practices and/or the requirements of IASB Standards. This is an

important clarification of detail from the perspective of the future research directions discussed in

the next section of the paper.

Figure 7: An Extended Contingency Model of National Accounting Development

ART 2

Organizational environment

Actor environment

Professional environment

Demographic variables

Cultural variables

Structural variables

Accounting profile/

standardsAccounting environment

Matching accounting with normative or actual expectations

within a country

Test of effectiveness

within country

Global fit test

Compare with

foreign reports/ IASB andards

Inadequacy would lead to a clamor for a change in

environmental factors such as attitudes and/or a change of

accounting profile

If

okay

feedback

If inadequate

feedback

ANNUAL REPORTS

Adapted from AAA (1993, p. 19), Figure 2 and Gernon and Wallace (1995, p. 61), Figure 1.

Economic

Political

Legal

Other

Nexus supplied by organisations, professional bodies and individuals

Societal environment

Pst

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6. Conclusions and Future Research Directions

This paper brings together, in a slightly modified specification, two frameworks which it is argued

provide in combination a richer and more complete theoretical basis for examination of the

environmental factors influencing the development of national accounting and disclosure practices.

In this manner it provides a useful basis for future research in the area. In particular, it is suggested,

in line with the form of the model developed here, that such research could progress in two stages.

The first stage would involve identifying the specific environmental variables influencing the

development of accounting and disclosure practices. To this end the model provides a framework

for classification and analysis of variables identified in prior research, and for development of

further hypotheses relating to variables not previously identified, or not yet empirically tested in the

literature. In this manner a comprehensive inventory of environmental variables found or

hypothesised to be related to accounting development can be produced. The need for such a broad

approach is suggested by Gernon and Wallace’s (1995, p. 75) observation that whilst a significant

amount of empirical research on the relationship between accounting and its environment has been

carried out since the early 1970s, ‘Results have, however, been inconsistent’.

As indicated previously, an important aspect of the model developed in this paper is the inclusion of

a ‘global fit test’. This notion requires further development, especially in relation to comparison of

national accounting and disclosure practices with the requirements of IASB standards.5 The current

move toward international harmonisation of many countries’ accounting practices, focussing in

large part on the requirements of IASB standards, suggests that the influence of these standards

warrants close examination. However, the model clearly indicates that in order to measure the

extent to which such standards influence companies’ practices (ie. the extent of ‘global fit’) it is

necessary to control for the influence of those environmental variables which also impact upon

5 Eddie (1996) develops the notion by formulating measures of global fit of consolidation disclosures and

applying them to the practices of companies from 10 countries in the Asia-Pacific region.

24

them. A further issue to consider in such research is that of selection of the countries from which to

draw the practices to be examined. In this respect Gernon and Wallace (1995, p. 74) recognise that

‘the need for mutual recognition of mutual economic problems’ is a reason for formation of

regional groups of countries, which they argue ‘offer accounting scholars self-selected samples of

countries for cross-national study of the diffusion of accounting’. This is consistent with the view

of Schweikart (1986, p. 97) noted earlier, that concentration on smaller regional groupings, where

countries’ environments have a relatively high degree of similarity, is likely to be more fruitful

since subtle differences in environments are likely to be highlighted. Thus, a clear suggestion that

this research might most fruitfully focus on countries located in regional areas emerges. Already a

significant amount of research of this type has been carried out, concentrating almost exclusively on

countries in the European Union (EU), formerly the European Community (EC).6 Countries in the

South-East Asian region, such as Indonesia, Malaysia, the Philippines, Singapore and Thailand, are

a further instance of such a grouping which could form the basis of future research.

In terms of the current state of research into those factors which affect the development of

accounting, perhaps Gernon and Wallace (1995, p. 76) sum up the situation best when they state

‘More empirical work is needed to test the theory that accounting is a function of its environment’.

This paper provides a theoretical framework upon which such further work could be based and,

based upon it, some firm suggestions for future directions in such research, in the hope that a small

advance in theoretical development may lead to advances in the empirical arena.

6 Examples of such studies, all of which are concerned with measurement of harmonisation in EU countries,

include Emenyonu and Gray (1992), van der Tas (1992), Herrmann and Thomas (1995), Archer et al. (1995, 1996) and Krisement (1997).

25

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