of understanding of a specific country’s accounting principles and disclosures, and
concerns about the reliability of financial statements.
Another example of a business decision that might be affected by accounting in-
formation is a bank’s credit extension decision. For credit appraisals, banks rely on
accounting information in deciding whether to lend funds. If the bank is not familiar
with the implications of accounting differences, it runs the risk of making the wrong
decision. An example of this is a bank’s use of the interest coverage ratio for lending
decisions. The components of this ratio are interest expense and pretax income be-
fore interest expense. If a company is located in a country whose standards require
goodwill to be amortized or research and development (R&D) costs to be expensed
as incurred, its pretax income may be significantly different from what it would be if
the company were in a country where the accounting standards allow goodwill to be
written off directly against equity or the deferral of R&D expense. As a result, the ra-
tios between two nearly identical companies could be drastically different solely be-
cause of the application of different accounting principles.
12.5 ENVIRONMENTAL INFLUENCES ON ACCOUNTING. One might ask why the
accounting standards in two countries would differ. After all, aren’t accountants sim-
ply supposed to keep track of a company’s assets, liabilities, revenues, and expenses?
Should not there be only one right answer? The truth is that the “right” answer de-
pends a great deal on one’s perspective. A given country’s accounting standards can
be influenced by a multitude of factors. The objectives of an accounting system are
very much a function of the economic, social, and political environment of the coun-
try in which the system exists. The objectives are often linked, from an historical per-
spective, to the goals and objectives of the perceived end users of the financial state-
ments (e.g., lenders, investors, or the government). Accounting standards in a
particular country are often influenced by the standards followed in other countries
for one reason or another; for example, Canadian accounting principles are strongly
influenced by U.S. principles (and vice versa) because of geographic proximity and
economic interdependence.
The volume of accounting standard codification that countries have developed dif-
fers greatly. Certain countries have promulgated elaborate sets of rules and regula-
tions that govern the manner in which financial information is to be presented and
disclosed. Economically developed countries have established institutional struc-
tures, including professional accounting societies, stock exchanges, securities regu-
lators, and national legislative bodies, to create national standards. The objective has
generally been to resolve accounting issues and to ensure consistency in accounting
practices within a single nation. A national accounting system promotes one set of ac-
counting standards that makes the system useful to investors, creditors, auditors, and
companies’ management within the given country. The United States uniformly is
looked on as having developed the most extensive set of accounting standards and
disclosures. This exhaustive set of rules was developed in response to what was ar-
guably the most advanced economic system in the world–an economy that has given
rise to extensive markets for both equity and debt securities. The SEC was called on
to be the watchdog for the large population of investors and creditors. Consequently,
the SEC has overseen the development of an elaborate set of rules and regulations.
Similarly, while not as comprehensive and detailed as those in the United States, the
accounting standards in Canada and the United Kingdom are becoming more and
more codified—a trend due, in large part, to the growth of the economies and capital
12.5 ENVIRONMENTAL INFLUENCES ON ACCOUNTING 12 • 9