1.0 INTRODUCTION

The purpose of this paper is to synthesize the empirical studies on harmonization of accounting and reporting practices and compliance with international financial reporting standards (IFRSs) which have been extensively discussed and debated in the international accounting literature. Over the last two decades, companies and investors are increasingly pursuing business and investment opportunities around the world due to the globalization of capital markets, regional and international cooperation among countries and increasing international trade. These have created new problems among practitioners [Adhikari et al. 2002]. One of the major problems is accounting diversity which has been highlighted in various research studies over the years. Choi and Levich [1991] show that diversity in financial reporting affects capital market participants. As a result of the increased awareness of such diversity, attention was drawn to the need for international harmonization of accounting practices. In particular, national accounting differences may cause great problems for those companies that prepare financial statements domestically and seek capital from different countries. In the absence of universally acceptable set of accounting standards, these companies are required to undertake complicated and costly exercises in recasting or restating the financial statements prepared in accordance with their domestic generally accepted accounting principles (GAAP) to comply with the listing requirements in other jurisdictions. Differing accounting and reporting requirements around the world are also a source of great dilemma for the investors and financial analysts who are interested in comparing the financial performance of companies doing similar businesses but are located in different countries [Saudagaran 2000].

To overcome this and similar types of problems associated with dealing in an international environment, the International Accounting Standards Committee (IASC) (renamed as International Accounting Standards Board (IASB) in 2001) was established in 1973 to harmonize accounting standards throughout the world. It is generally believed that international accounting harmonization will contribute substantially towards facilitating the process of global economic integration by removing barriers to the cross-border movement of goods, services and capital. Apart from IASC/IASB’s global harmonization program, many regional agencies attempted to harmonize accounting practices on a regional basis. This resulted in extensive empirical research examining the extent of harmonization among countries. Simultaneously, the importance of compliance with International Accounting Standards (IASs) became a prominent issue creating as it did its nexus with harmonization. The IASC/IASB formulates and publishes IASs/IFRSs to be complied in the presentation of financial statements and to promote their worldwide acceptance and observance [El-Gazzar et al. 1999]. While the IASC/IASB has no power to enforce IASs/IFRSs in its member countries, the International Organization of Securities Commissions (IOSCO) has provided significant support for the compliance with IASs/IFRSs. A large number of developing and developed countries around the world have accepted the IASs/IFRSs due to the efforts of IASB and several international organizations. The growing acceptance of the IASs/IFRSs has encouraged many researchers to empirically investigate the level of compliance with the requirements of IASB standards.

Although a review of harmonization studies provides clear understanding of harmonization practices throughout the world, compliance studies also need to be synthesized in the same literature review to understand these two popular issues frequently addressed in international accounting. This has been highlighted by Tay and Parker [1990] and Van der Tas [1992a]. In a rejoinder to Tay and Parker, Van der Tas outlined conceptual differences between harmonization and compliance. This is because, quantifying the compliance level with a standard is not same as measuring accounting harmonization; international accounting standards allow different methods, so compliance may be high but degree of harmony may be low. Van der Tas [1992a] argued that international accounting harmonization, on the one hand, and compliance, on the other, are related because international standards setting may further harmonization.

Van der Tas identified two different phenomena to distinguish between the concept of harmonization and compliance. First, if a company uses different accounting methods from the several methods allowed by the IASB, the level of compliance may be high; however, the degree of harmonization may be low because different methods are applied by companies. Secondly, on the other hand, if all or a large number of companies employ the same accounting method, the degree of harmony will be high, and the degree of compliance may be low subject to this method is not allowed by the IAS/IFRS. The author suggested that the first problem will be eliminated if the number of options offered by the IAS/IFRS is reduced although this may increase the second problem. Since the high degree of compliance may not necessarily indicate a high degree of harmony, these two issues need to be considered simultaneously to have a better understanding about the success of IASB.

Much of the prior studies were descriptive in nature and discussed in international accounting literature. The literature reviewed within this paper is mainly based on empirical studies. When harmonization or compliance with IFRSs is measured, the researchers are curious to investigate the reasons for harmony/disharmony or compliance/non-compliance. This review is not simply a general discussion of prior harmonization/compliance studies but also it critically evaluates current empirical works and outlines insights about research methodology and theoretical foundations which are supposed to be helpful in making future research propositions. This will help international accounting researchers to conduct rigorous studies elsewhere in the world. Since accounting practices and compliance with IFRSs are measured in countries with different social, political and environmental settings, this paper would also help to find ways of improving the level of harmony/compliance in an environment.

The remainder of this paper is structured as follows. section 2 illustrates the policy debate surrounding harmonization while section 3 presents the concepts of harmonization. Survey and classification of financial accounting studies are not discussed in the paper because such studies are extensively reviewed by other researchers [see Meek and Saudagaran 1990; Chanchani and MacGregor 1999; d’Arcy 2001]. However, no studies have extensively reviewed international accounting harmonization and compliance with IFRSs studies. This gap is addressed by sections 4-6. Employing the theoretical framework, section 4 focuses on empirical studies on material (de-facto) harmonization and section 5 is concerned with formal (de-jure) harmonization studies. Compliance with international financial reporting standards is reviewed in section 6. section 7 concludes the paper with suggestions for future research.

2.0 POLICY DEBATE ON HARMONIZATION

Much of the interest in harmonization issues stems from a policy debate surrounding harmonization that has arisen over the years. A discussion of this debate is important because it sets the backdrop for the ensuing examination of the harmonization literature. This section presents the following three important issues under the policy debate over harmonization: 1) motivating factors for harmonization; 2) pressures for harmonization, and inhibiting factors; and 3) regional vs. international harmonization and harmonization vs. convergence.

2.1 Motivating Factors for Harmonization

The desirability of international accounting harmonization has been widely discussed in the literature. Many academics have argued that harmonization of accounting standards is unattainable and that differences in customs and laws are responsible for accounting diversity. Others, however, argue that harmonization holds merits and can be achieved. Emenyonu [1993] identified three motivating factors which are responsible for international accounting harmonization – globalization of capital markets, growth of multinational companies (MNCs) and participation of international organizations.

One of the principal arguments which is put forward by the advocates of international accounting harmonization is the development and expansion of global capital markets. Mueller [1965] conceded that volume of world trade and investment volume has increased dramatically. This sizeable business and investment volume is hard to evaluate and control without reliance on international accounting standards. In the last decade there has been tremendous growth in capital markets which brought a number of issues to the forefront. One issue this has raised is the diversity of accounting disclosure standards and practices in different countries which is a source of concern for many different groups [Adhikari and Tondkar 1992].

According to those who opposed the idea of international accounting harmonization, accounting diversity is not at all a formidable obstacle to the development of global capital markets [Fantl 1971; Samuels and Oliga 1982; Rivera 1989; Goeltz 1991; Hoarau 1995]. Goeltz [1991], for example, pointed out that global capital markets have already come into existence and that such markets are expanding at a faster rate despite that lack of harmonization in accounting practices among countries. Likewise, Rivera [1989] argues that the lack of harmonization has not created a barrier to the development of international financial markets and foreign operations. Hoarau [1995] asserts that international accounting harmonization is predominantly harmonization with the Anglo-Saxon accounting model; it thus conflicts with the economic, social and cultural environment of other accounting systems. He argues that in France international harmonization has broken down the homogeneity of the French accounting model which resulted in a reduction of the social functions of accounting. In a similar vein, Samuels and Oliga [1982], Briston [1978], Ndubizu [1984], Briston and El-Ashker [1984], Hove [1986 and 1989], Taylor [1987] and Perera [1989] argue that problems and information needs for developing countries are different from those of the developed countries and the international business community. Therefore, the Western style accounting system would be futile for developing countries [Abd-Elsalam and Weetman 2003].

The second motivation for international accounting harmonization is the growth of MNCs [Saudagaran 1997; Choi and Mueller 1992]. Multinational companies would benefit from the harmonization of accounting standards and reporting practices. Much of the new foreign investment by MNCs occurs in the developing nations and at the same time that there has been a sharp decline in new investments in industrialized nations [Saudagaran 1997]. These developments, in turn, mean that MNCs have had to prepare multiple consolidated financial statements according to the regulations for each country due to the tremendous differences between financial reporting in their domiciles and those in the developing nations where much of their new investment is taking place. This process involves time and resources which may be frustrating for MNCs. Harmonization of accounting standards tends to reduce the cost and time of preparing separate financial statements.

A number of international and regional organizations are providing a third motivation for harmonization. Although the professional accounting bodies were the first to raise the issue of converging worldwide accounting practice and have been the major source of development, a number of international and regional organizations are trying to harmonize accounting practices. These include the International Accounting Standards Board (IASB), the International Federation of Accountants (IFAC), the European Union (EU), the International Organization of Securities Commission (IOSCO), the Organization for Economic Cooperation and Development (OECD) and the United Nations (UN). The professional accounting bodies are represented by the IASB and the IFAC [Carlson 1997]. The IASB is responsible for the development of international accounting standards. Recently, the IOSCO has published IASs for cross-border offerings and initial listings by foreign issuers, and noted that IASs/IFRSs can play an important role in maintaining capital market stability [Frost and Ramin 2003]. The role played by these organizations towards harmonization can ensure a greater level of comparability of financial statements throughout the world despite cultural, social and economic differences among countries.

2.2 Pressures for Harmonization, and Inhibiting Factors

The debate on international harmonization of accounting standards started in the 1960s and is still continuing [e.g., Kraayenhof 1960; Mueller 1967; Stamp 1972; McMonnies 1977; Mason 1978; McComb 1979; Daley and Mueller 1982; Gray 1984; Gray et al. 1984]. There is a general consensus that a worldwide standardization of accounting principles could benefit users of financial information which originates in different geographical locations [Rivera, 1989]. A number of researchers have put forward arguments in favor of international accounting harmonization, including Mason [1978], Turner [1983], Choi and Bavishi [1982], Bisgay and Jayson [1989], Carey [1990], Rivera [1989], Chandler [1992] and Benson [1975, 1976, 1978]. Nobes and Parker [2005, p. 78] ague that “the pressure for international harmonization comes from those who regulate, prepare and use financial statements”.

Carey [1990] argues that the harmonization of accounting standards benefit investors and financial analysts who receive reliable information from the financial statements. As a result, private capital flows freely over international boundaries. Similar financial statements would help users of financial statements to make useful comparisons between countries and companies, hence, comparable transactions would be accounted for and reported in the same manner everywhere in the world [Epstein and Mirza 2001]. Harmonization would enable investors and financial analysts to make better decisions. Greater comparability results in better understanding, lower risks and more efficient selections of investments.

From the standpoint of preparers international companies are not interested in dealing with a new set of accounting standards in each country they invest in, rather harmonized accounting standards provide efficiency gains both internally and externally. MNCs would make savings if all their subsidiaries could use the same accounting system. One set of accounting standards could be used in various jurisdictions and capital markets. Further, international companies can realize significant cost savings if they do not have to change their financial statements to conform to each country’s rules when listing on securities exchanges.

Accounting standards setters and other regulators may benefit from harmonization by avoiding the costs of developing regulation [Ma et al. 1997]. Regulators insist that developing a more uniform set of standards will make international markets more efficient. securities regulators and markets favor the harmonization of accounting standards and intend to utilize IASs/IFRSs to do so, with the ultimate aim of achieving a unified set of standards. Regulators face higher costs with the growth of cross-border listings by companies as they need to monitor compliance by domestic firms as well as listed foreign firms in their jurisdiction [Saudagaran and Meek 1997].

Numerous arguments have been raised in opposition to the expenditure of time and resources in search of a set of standards that many believe can never become effective [Wyart 1997]. Amongst those who support harmonization, some believe that the harmonization of accounting will be difficult to achieve because of inhibiting factors [Wilkinson 1969; Arpan and Radebaugh 1985; Nobes and Parker 1985; Taylor 1987; Goeltz 1991]. These obstacles can be classified into two categories: economic and political [Saudagaran and Meek 1997].

Whether accounting regulators take the issue of economic consequences into account is the subject of debate. The preparation of financial statements imposes a financial cost on firms. Firms tend to resist accounting change as accommodating change raises costs. Similar resistance could arise against the harmonization of accounting standards [Blake, 199O]. Nair and Frank [1981, p. 76] argued that a “national accounting group would lobby in this fashion in order to minirnize the costs associated with changing to a new standard, or to avoid stigma of noncompliance if it chooses instead to ignore the new international standard”. Some [e.g., Solomons 1978; Stamp 1980] argue that accountants lose their credibility if they respond to the economic consequences pressures while others for example, Gerboth [1973] and Homgren [1976] argue it is an essential issue if accounting regulations are to command general support. Blake [1990] and Grinyer and Russell [1992] provide evidence of how accounting standard setters were influenced by economic consequence issues in different countries. They discuss the lobbying efforts in the UK in the case of accounting for goodwill and in the Republic of Ireland in the case of lease accounting. Economic consequence issues may cause diversity of accounting practices because they are a result of the national cultural and regulatory framework.

One of the political obstacles to mobilize harmonization may be nationalism. Nobes and Parker [2004] suggest that nationalism may lead to an unwillingness to accept accounting standards developed by other countries. Each country believes its systems is the best and is reluctant to adopt a system it perceives to be inferior or unsuitable [Arpan and Radebaugh 1985]. In some countries, companies and individuals prefer to retain the imperfections and inefficiencies caused by the differences in accounting in order to take advantage of them. The secrecy offered by Swiss banking and accounting is one example. In a like manner, Carlson [1997] concedes that governments may view attempts by the IASC to alter national accounting rules as infringements upon national sovereignty. Developing nations and those which have been colonies of imperial powers are particularly sensitive to intrusions. Wallace [1990] identifies three reasons in favor of survival of the IASC/IASB, including the increasing internationalization of business and finance, the composite nature of its standards, and the absence of rival in the development of global accounting standards.

The third political obstacle, which has been addressed by Nobes and Parker [2004] is the absence of strong professional bodies in several countries. The IASB sought to operate through national accountancy bodies but they are not effective in all countries. Alternatively, an international regulatory agency may work with the IASB, which is also absent in a number of countries. Currently, the IOSCO has recommended adoption of IASC/IASB standards as a permissible basis for the preparation of financial statements to member exchanges throughout the world. Hence, an organization seeking listing in another country does not need to adjust its reports to comply with particular national requirements if reports are already in accordance with IASB standards [Deegan 2005].

Overall, the afore-mentioned economic and political obstacles discussed above will be overcome because of the efforts made by the IASB and several international organizations to harmonize accounting practices in response to the increasing demands of the world business community since capital markets have become more global in scope [Wyatt 1997].

2.3 The Evolution of Harmonization

Despite the strong motivation for harmonization explained above, there is a debate among academics, professionals and international bodies whether harmonization can be pursued regionally or at a global level. Some argue that harmonization may be possible at the international level [e.g., Aitken and Islam 1984], while others, such as Perera [1989], Rahman et ai. [1994], Choi [1981], Rivera [1989], and Rivera and Salva [1995], advocate for harmonization at the regional level due to environmental differences among countries. Recently, the issue of convergence has become very important under the current mission of the International Accounting Standards Board. These issues are discussed below.

2.3.1 Regional (EU and ASEAN) vs. International Harmonization (IASC, IASB)

There are a wide variety of differences between the accounting practices adopted in different countries. The underlying reasons for these differences are essentially environmental because “accounting is a product of its environment, and a particular environment is unique to its time and locality” [Perera, 1989, p. 41]. The accounting environment in one country can differ from that of another in terms of a variety of factors including political, economic, social and religious environments [Frank 1979]. These differences are particulary significant between developed and developing countries. Global harmonization may thus be difficult because countries may not agree to a change in accounting practices so long as the underlying environmental factors are significantly different. Mathews and Perera [1996, p. 325] suggested that, “the most useful route towards harmonization could rest with the concept of regionalisation, wherein like-countries band together to form economic subgroups”. Harmonization on a regional basis is easier to achieve than that on a global basis. This is due to the fact that the harmonization problems that are encountered at the global level are of far greater dimensions than those encountered at the regional level. Regional harmonization may, however, lead to global harmonization if the various harmonizing agencies operating in different parts of the world cooperate with one another to develop harmonized accounting standards.

Over the past two decades, many arrangements for accounting harmonization on a regional basis have come into existence. The most prominent among the regional agencies currently endeavoring to promote harmonization in accounting practices among countries within their respective spheres of influence is the European Union (EU). Besides the EU, there are several other regional agencies, namely the Federation des Experts Comptable Européens (FEE), the Confederation of Asian and Pacific Accountants (CAPA), and within the developing nations, the African Accounting Council (AAC), the ASEAN (Association of Southeast Asian Nations) Federation of Accountants (AFA) and the South Asian Federation of Accountants (SAFA). These regional bodies have, among other things, attempted to harmonize accounting standards among their member countries.

A substantial amount of pressure has been put on the EU and other regional agencies in recent years to coordinate its efforts with the IASB, which is working on the development of international accounting standards as the basis for globally comparable accounts. The EU presented a proposal on 13 February 2001 that requires all EU companies listed on a regulated market, including bank and insurance companies, to prepare consolidated accounts in accordance with IASs as of 2005 [Pacter 2005]. Apart from the EU, most of the regional agencies support the IASB as the most appropriate body to promote harmonization in accounting practices among countries within the respective regions. Consequently, the member countries of these organizations have adopted many of the IASs and are now mainly concerned with making contributions to the deliberations of the IASB. If the IASs are used as the basis for harmonization at the regional level, this will inevitably help in achieving harmonization at the global level.

As discussed earlier many scholar [e.g., Benson 1975, 1976, 1978; Aitken and Islam 1984; Carrington 1977; Choi and Levich 1990; Adhikari and Tondkar 1992; Saudagaran 1997] advance arguments for accounting harmonization across the globe. There are several organizations that are actively involved in arrangements for the global harmonization of accounting. Of these, the IASB, formerly known as the IASC, is the main actor in pursuing international accounting. Prior to its recognition in 2000, the former International Accounting Standards Committee (IASC) worked towards harmonizing global accounting standards by developing standards that could serve as a model on which national standard setters could base their own standards. The IASC approach was supported by Aitken and Islam [1984, p. 45]. They reported that both national and international companies have a common interest in solvency and profitability. Therefore, a report to interested parties may be designed to include the same elements in financial statements of all companies.

2.3.2 Harmonization (IASC focus) vs. Convergence (IASB focus)

Over the past 32 years, the IASC/IASB has evolved into the most prominent international accounting standard-setting organization. The IASB is now responsible for setting International Financial Reporting Standards (IFRSs) and recently acquired greater legitimacy and stature [Choi et al. 2002; Herz 2003; Meek and Thomas 2004]. Under the lASC’s approach, IASs were generally modified at the national level. The mission of the IASB is far different from the one originally envisioned when the group was founded in 1973. Its mission became one of convergence of global accounting standards – development of a single set of high quality, understandable and enforceable global standards to help participants in the world’s capital markets and other users make economic decisions [Pacter 2005]. As capital markets became gradually more globalized in scope, a single set of global accounting standards can assist the user to make investment, credit and other decisions [IAS plus 2005].

In the 1990s, the IASB made considerable efforts to promote IASs including persuading the stock exchange institutions, and particularly IOSCO and its member the securities Exchange Commission (sec) to accept financial statements prepared in accordance with IASC standards for multinational registration on US exchanges. The sec has not accepted IFRSs, although the International Accounting Standards Committee Foundation (IASCF) and the IASB was formed in close consultation with the sec [Nobes and Parker 2004]. However, the IASB and the Financial Accounting Standards Board (FASB) have started a policy to work towards the convergence of the International GAAP and the US GAAP. This issue has been discussed at an informal level for several years through a variety of bodies such as the G4 + 1 and the Joint Working Group. In September 2002, the IASB and the FASB formally announced a convergence project to reduce differences between the US GAAP and IASB standards by 2005 by issuing a memorandum of understanding. The reason for emphasizing on convergence between IASB GAAP and US GAAP is that most of the countries accounting standards are influenced by either the IASB GAAP or the US GAAP subject to minor modification to suit local conditions. Therefore, a single set of global accounting standards may be achieved through convergence between the IASB and the US GAAP. The FASB also voted to authorize its staff to expand its research project on international convergence. It has already made a number of changes to its standards in the interests of convergence, and has proposed others [Alfredson et al. 2004].

The brief discussion of the evolution of harmonization has laid the foundation on which to engage in a broad survey of harmonization literature. The following section describes the relationship between harmony and harmonization; harmonization, standardization and uniformity; material and formal harmonization.

3.0 Harmonization Concepts

To facilitate a review of harmonization literature it is necessary to define the terms ‘harmony’ ‘harmonization’, ‘standardization’ and ‘uniformity’. A general definition of a harmonized system is that it should form ‘a consistent or orderly whole’ [Oxford Dictionary 1994]. This implies that legislation to promote harmonization should be concerned with removing inconsistencies [Turley 1983, p. 15]. First, we distinguish between harmony and harmonization followed by harmonization, standardization and uniformity.

3.1 Harmony vs. Harmonization

The terms “harmony” and “harmonization” have been defined by a number of authors. Tay and Parker [1990, p. 73] define harmony (a state) as, “a clustering of companies around one or a few available methods” and harmonization (process) as “movement away from total diversity of practices”. From this perspective, harmonization may be defined “as the process by which differences in national sets of financial accounting standards can be reduced” [Wolk and Heaston 1992, p. 96]. Parker and Morris [2001] describe harmony as a state measure at a point of time, and harmonization as a process measured by comparing harmony at different point of time. Similarly, Van der Tas [1988, p. 157] conceptualizes harmony as the correspondence between two or more objects at a particular point in time and harmonization as an increase in harmony, that is, a coordination or turning of two or more objects. The proponents of harmony take a liberal view of what is meant by similarity of financial reporting methods [Roberts et al. 2005].

3.2 Harmonization vs. Standardization vs. Uniformity

Harmonization can also be differentiated from standardization. Harmonization is “the reconciliation of different accounting and financial reporting systems by fitting them into common broad classifications, so that form becomes more standard while content retains significant differences” [Mathews and Perera 1996, p. 322]. On the other hand, the term ‘standardization’ refers to the reduction of alternatives while retaining a high degree of flexibility of accounting response. Tay and Parker [1990, pp. 73-74] draw line of demarcation between harmonization and standardization. According to Tay [1989], harmonization is a movement away from total diversity of practices (a state in which each firm use accounting methods which are different from those used by all other firms), and standardization can be explained as a movement towards uniformity (a situation in which only one method is used). In other words standardization implies a rigid and narrow set of rules, and may even apply a single standard or rule to all situations [Choi et al. 1999, p. 248]. Van der Tas [1992a, pp. 31-32] considers standardization as a part of the harmonization process, rather than a separate concept. It is an analogous process to harmonization, but applies to situations where regulations and practices are, or are becoming, increasingly strict or rigid. Therefore, the states to which harmonization and standardization lead are not dichotomous, but points on the same continuum.

Harmonization and Standardization

Harmonization and standardization may be difficult to distinguish because they may occur simultaneously, and the outcome of the two processes may be ‘complete harmonization’ or ‘uniformity’ [Tay 1989]. Harmonization may be achieved as a result of natural forces, including change in culture, growth of economic groupings, international trade, political dependency, or evolution of new securities markets. These forces promote firms and accounting regulators to imitate each other’s practices. In contrast, uniformity may be achieved by the intervention of a regulator or facilitator. The regulators may use powers of enforcement to ensure full compliance, with penalties in place for non-compliance [Roberts et al. 2005]. The distinction that exists between the two terms “harmonization” and “standardization” is, however, not strictly followed in the practical field and not even in the accounting literature. In fact, the two terms are often used in the literature almost interchangeably.

3.3 Material (De-facto) vs. Formal (De-jure) Harmonization

Tay and Parker [1990] state that harmonization may be achieved at dejure (formal) and de-facto (material) level as a result of either strict or flexible regulation and made a clear distinction between de-jure harmony and de-facto harmony. According to them, de-jure harmonization refers to the harmonization of rules and principles (which may be contained in the law and/or professional accounting standards), whereas de-facto harmonization is the harmonization of actual reporting practices by companies. De-facto or de-jure harmonization may exist side by side, or one may exist without the other. For instance, if the accounting regulations promulgated by an accounting body are not strictly used by companies in the preparation of their financial statements, there is an existence of de-jure harmonization without concurrent de-facto harmonization. A reverse situation may arise if all companies adopt the same accounting method without formal regulation. This situation can be considered as a case of de-facto harmonization.

Using different terminology, Van der Tas [1988, p. 158] has also drawn the same distinction between de-facto and de-jure harmonization. He referred to harmonization of financial reports as material harmonization while he referred to harmonization of standards as formal harmonization. Van der Tas [1988, p. 157-158] argues that improving de-jure harmony is essential to achieving de-facto harmony. Although, de-jure harmony cannot guarantee defacto harmony, one could argue that, without decreasing the number of alternative practices at financial reporting regulation, de-facto harmony will never be achieved.

Figure 2 presented by Tay and Parker [1990] summarize the concepts of and distinctions among harmony, harmonization, standardization, uniformity, de-facto harmonization and de-jure harmonization. Both de-jure and de-facto harmonization may refer to the degree of disclosure or to the accounting method selected. The former is called disclosure harmonization and the latter measurement harmonization [Canibano and Mora 2000]. Measurement harmonization is related with the choice between alternative measurement methods. Disclosure harmonization is defined “as a state of convergence towards a particular disclosure method” [Diga 1996, p. 148]. It deals with the quantity and detail of information to be made available in corporate financial reports [Van der Tas 1992a]. According to Rahman et al. [1996], methodology and measurement techniques used in measuring harmonization are at an experimental level. Analytical techniques are proposed and tested on particular samples of selected accounting issues and countries. Therefore, results may vary in spite of similarities in their purpose, hi view of these circumstances, it is imperative to critically review both de-facto and de-jure harmonization studies on the basis of their objectives, data source, methodology and main conclusions. This task is undertaken in the succeeding parts of this paper on the basis of the following structural presentation.

4.0 MATERIAL (DE-FACTO) HARMONIZATION

Measurement and disclosure harmonization are essential for financial reporting harmony and each could be dealt with either at the de-jure or de-facto level. The principal reason for measuring material harmonization is that because “a particular practice is required by a professional standard does not necessarily indicate that it is practiced by all companies” [Herrmann and Thomas 1995, p. 255], The purpose of de-facto measurement harmonization is to facilitate comparability of financial reporting. To ensure comparability companies need to use same accounting methods between alternative accounting treatments, and to reduce the number of alternative accounting methods available for measuring the impact of similar economic events/transactions, hi contrast, de-facto disclosure harmonization deals with disclosure of specified information with a specified degree of detail, which is regarded as the minimum required for all financial reports [Diga 1996].

4.1 Material Measurement Harmonization

In the past, most of the empirical studies have examined the harmonization of measurement practices in different countries at a point in time. Prior measurement harmonization studies have mainly concentrated on countries within the European Union (EU) [see Nair and Frank 1981 ; Van der Tas 1988, 1992b; Emenyonu and Gray 1992; Herrmann and Thomas 1995; Archer et al. 1995, 1996; Canibano and Mora 2000; Peill 2000; Aisbitt 2001]. Furthermore, Parker and Morris [2001] examined the measurement harmonization practices for the U.K. and Australia; Diga [1996], Tarca [1997], Chong et al. [1999] and Astami et al. [2004] for the Asia-Pacific region; AIi et al. [2006] for the South Asian countries; Emenyonu and Gray [1996] and Emenyonu and Adhikari [1998] for France, Germany, the UK, Japan and the US, and; Parker and Morris [2001] for Australia, the UK and the US. Prior research into measurement harmonization is reviewed on the basis of regional blocks in the following discussion.

4.1.1 European Union

Nair and Frank [1981] examined 131 accounting practices common to the 1973, 1975 and 1979 surveys of international accounting practices made by Price Waterhouse (PW). Their study was limited to 37 countries which were common to the three PW surveys. With respect to the database of their study, they accepted that harmonization of a given practice has taken place if all countries are in the same category with respect to that practice. They found that in 1973 a majority of the thirty-seven countries in the sample were in agreement on mandating adherence to only eight of 131 practices, whereas by 1979 agreement had increased to 49 practices. Nair and Frank [1981] used Friedman’s Analysis of Variance to ascertain whether any statistically significant shift occurs in these 49 practices. The results showed that of the 49 practices, 29 practices experienced shifts during the periods covered in the study. They also found that for 25 out of the 29 practices, the shifts occur between 1975 and 1979. In every case the direction of change was in line with the position adopted by the IASC. Nair and Frank [1981] concluded that the period of the IASC’s existence had coincided with an increase in the harmonization of accounting standards between the countries.

Tay and Parker [1990] criticized the data validity, the operational definition of harmonization and the suitability of statistical methods used in Nair and Frank [1980]. Although the title of Nair and Frank’s [1981] article seems to suggest a focus on the measurement of formal harmony, their measurement method also contained material harmonization elements, measurement as well as disclosure [Van der Tas 1992b]. Even though Nair and Frank [1981] has been criticized by several researchers in some areas, their study provided the basis for conducting research into the extent of harmonization of international accounting practices and contributed to the measurement of diversity in international accounting practices.

After Nair and Frank, Van der Tas [1988] published a pioneer work in Accounting and Business Research and provided quantitative techniques in measuring the extent of harmonization. He examined the degree of harmonization of reporting practices by considering the accounting methods applied in preparing financial reports. Van der Tas [1988] used the H index to assess harmonization in the measurement for deferred taxation in the U.K., accounting for investment tax credit in the Netherlands and the US and accounting for investment tax credit equalization accounts in the Netherlands. He also used the C index to examine the accounting for valuation of land and buildings in the Netherlands, and the I index for accounting for the income tax credit in the US and the Netherlands. The calculated H index, the C index and the I index value indicated different levels of harmony for the different measurement issues during the period 1965-84. Van der Tas [1988] indices seem to be appropriate for evaluating the level of harmony and harmonization of financial reporting.

Van der Tas’s [1988] indices have been used by the same author in subsequent work. Van der Tas [1992a] measured the degree of harmony of the deferred taxation accounting policies of 154 European listed companies over the period 1978-1988. The sample was selected from the nine EC member states that implemented the Fourth EEC Directive before 1989. He examined both the individual and the consolidated accounts and took into account not only the accounting policy in the primary accounts, but also any data provided in the notes on the accounts that enable the reader to reconcile the financial report to a financial report based on another method of accounting for deferred taxation. Using the C index and regression analysis results, Van der Tas found that the degree of harmony of primary accounts, excluding reconciliation data in the notes on the accounts, is low and remained virtually the same over the period. However, the degree of harmony, taking reconciliation data in the notes into account, increased considerably. The regression results suggested that the impact of the Fourth Directive on harmony was not significant.

Van der Tas [1992b] argues that the C index produces better results in the measurement of harmony when reconciled data is used. However, caution should be taken while reconciling accounting methods based on multiple reporting. This problem notwithstanding, Van der Tas [1992b] introduced an important statistical test of significance by linking with the C index and advanced the concept of quantitative measurement of international harmonization.

Contemporaneously with Van der Tas, Emenyonu and Gray [1992] undertook research to examine the extent of measurement harmonization of accounting practices in France, Germany and the UK. They studied certain asset and profit measurement practices that could significantly affect measures of assets and profits depending on the choice of treatment adopted by companies in these countries. Twenty-six large industrial companies were selected from each of the countries for the year 1989. Emenyonu and Gray [1992] used chisquare tests and the I index to measure the extent of measurement harmonization. Chi-square tests were chosen to assess whether the patterns of usage of measurement practices by selected companies are significantly different. The 1 index was used to measure the degree of harmony among the three countries. Six accounting measurement practices, including stock valuation, depreciation, goodwill, research and development, fixed assets and extraordinary and exceptional items were used. The results indicated significant differences in the measurement treatment of a number of key items in France, Germany and the UK. Emenyonu and Gray [1992] suggested that this was due to the flexibility of measurement provisions of the EU Fourth Directive.

Later, Herrmann and Thomas [1995] assessed the degree of harmonization of selected accounting measurement practices among eight EC countries: Belgium, Denmark, France, Germany, Ireland, the Netherlands, Portugal and the UK. Their study was based on the annual reports of 217 large companies for the year 1991/92. They used non-parametric statistics in determining whether the level of harmonization for a given accounting practice is significantly different in the selected EC countries, and Van der Tas’s [1988] I index to measure the level of harmonization in selected accounting practices. Herrmann and Thomas [1995] found a higher degree of harmonization in the areas of foreign currency translation of assets and liabilities, treatment of translation differences, and inventory valuation. On the other hand, their results appeared to indicate a lower level of harmonization among selected countries. Their findings by the bi-country and four-country I index showed that the level of harmonization is greater among ‘fairness’ oriented countries than among ‘legalistic’ countries.

Murphy [2000] analyzed trends in the I index introduced by Van der Tas [1988] to determine if the choice of accounting methods by a sample of Swiss companies became more aligned with a sample of companies from three other countries: Japan, the UK, and the US. The study included a control sample of Swiss companies that did not switch from reporting using local Swiss standards during the same time period, from 1988 through to 1995. She collected data for 16 Swiss companies from the Worldscope database that adopted IASs in 1992 and had a fiscal year end of 1995, in order to determine if the adoption of IASs has increased the level of harmony. A control sample of Swiss companies using local accounting standards was used in order to determine if the change in harmony among the Swiss IASs companies was the result of the change to IASs. Eighteen Swiss companies who used local standards throughout the time period of interest made up the control group. A random sample of 20 US companies, 25 UK companies, and 25 Japanese companies were also included in the sample. Four accounting practices were examined: depreciation, inventory, financial statement cost basis, and consolidation practices. The overall results suggested that, across the eight-year period, the majority of the I indices comparisons were positive and statistically significant. However, there was little evidence that the adoption of IASs was the primary factor in increasing the level of harmony.

Peill [2000] examined the degree of measurement harmonization of selected accounting measurement practices between industries in the EU. Instead of comparing the accounting methods used by companies in different countries, she grouped companies by industry across countries and thereafter, compared these industry groups. Peill [2000] used the Worldscope Global Researcher database for twelve European Union member countries for the years 1987-1997. The total number of companies in the sample was 27,954, and the companies represent 13 different Unes of businesses. She selected seven accounting measurement practices including treatment of goodwill, inventory costing methods, valuation of fixed assets, foreign currency translation methods, accounting for deferred taxation and consolidation methods. To measure the degree of harmonization, Peill [2000] adopted two statistical methods: the chi-square test and Van der Tas’s [1988] I index. The author found a substantially higher level of harmonization of international industries than the level of harmony of countries in the European Union. The calculated I index values across industries were also higher than the corresponding values across countries. Moreover, the chi-square tests also indicated that statistically significant differences existed in the frequency of accounting policy choice regarding consolidation practices, treatment of goodwill and inventory costing methods over the period 1987-1997. The author found that the improvement of the extent of harmonization over periods was paralleled both between countries and between industries. The major strength of the Murphy [2000] and Peill [2000] studies is that they overcame some of the shortcomings of Van der Tas [1988] indexes by using a longitudinal design and using a control sample to provide benchmarks for the harmonization values obtained. However, the reliability of the database can be questioned [Nobes 1981; Tay and Parker 1990].

Archer et al. [1995] measured the degree of harmonization that existed in two separate periods, 1986/87 and 1990/91, among European countries. Eighty-nine companies were selected from eight countries: Belgium, France, Germany, Ireland, the Netherlands, Sweden, Switzerland and the UK. The accounting policies analyzed were the treatment of goodwill and accounting for deferred taxation. They developed a measure which was based on the Van der Tas’s [1988] C index and decomposed it into the within-country and between-country components. Unlike Van der Tas’s [1988] I index and C index, they used one index to measure changes in harmonization at the national and international level. With regard to deferred taxation, Archer et al. [1995] found a low level of harmonization, although the comparability index for the country sample increased from 14.94 to 21.63. While the within-country comparability remained low and showed no significant increase over 1986/87, the between-country comparability index increased substantially due to the fact that most Swedish companies abandoned the tax payable method in favor of the full provision method of deferred tax accounting. In respect of the treatment of goodwill, the total comparability index showed no significant increase (from 38.33 to 40.25). Their results showed that while the within-country comparability index decreased, the between-country index increased. This is because the EC Directives allowed considerable flexibility in the areas of deferred taxation and goodwill treatment.

Archer et al. [1995] argued that modified C index is statistically superior to Van der Tas’s C index. In this regard, Morris and Parker [1998] suggested that “Van der Tas’s [1988, p. 73] 1 index and the between-country C index introduced by Archer et al. [1995] are competing measures of international harmony”. Archer et al.’s [1995] comparability indices are used by Tarca [1997], Chong et al. [1999], Canibano and Mora [2000], Aisbitt [2001], Parker and Morris [2001] and Ali et al. [2006].

Canibano and Mora [2000] tested whether there has been spontaneous harmonization of the financial reporting practices in spite of obstacles to achieving harmonization of accounting standards in the European Union. Eighty-five companies were selected from thirteen European countries whose shares were traded internationally for the periods 1991-92 and 1996-97. The authors identified four accounting measurement issues, deferred taxation, goodwill, leasing and foreign currency translation, to measure the extent of harmonization in the EU. Canibano and Mora [2000] used the C index and decomposed the index into a within-country comparability index and a between-country comparability index, as with Archer et al. [1995]. Besides comparing the value of the index in the two periods for the four accounting issues, they analyzed if there was a statistically significant increment in the level of harmony between the two periods by firstly analyzing the difference in the value of the index with a bootstrapping method and secondly using chi-square tests. Canibano and Mora [2000] found a higher value of the harmony index in the period 1996-97 and this increase was identified as being significant in all cases by using the bootstrapping procedure. The comparability indices indicated that companies are in a process of spontaneous measurement harmonization.

Aisbitt [2001] examined the usefulness of Archer et al.’s [1995] decomposed C index in measuring harmony. She studied four Nordic countries, Denmark, Finland, Sweden and Norway, by examining harmony within and between countries. Four dates were chosen in the period between 1981 and 1998 to demonstrate and to generate debate about methodology issues associated with the measurement of accounting harmonization. She selected twelve companies listed on the stock exchange of each of the four Nordic countries for the study. Aisbitt [2001] identified twenty-nine items of financial reporting, including a mixture of measurement and disclosure issues. She found a higher level of within-country harmony than the level of between-country harmony with different regulations in each country. The level of total, within-country and between-country harmony was greater in 1998 compared to 1981. However, harmony had not increased between each period and within-country harmony decreased between 1992 and 1994. The driving factor in changing the level of harmony was the European Company Law which is designed to promote harmony.

4.1.2 Asia Pacific Region

Within the Asia-Pacific region, Diga [1996] examined the extent of harmonization of 15 measurement practices among five ASEAN countries: Indonesia, Malaysia, the Philippines, Singapore and Thailand. He randomly selected 30 companies from Indonesia, Malaysia, the Philippines, and Singapore and 25 from Thailand. Company annual reports were collected for the fiscal year 1993. Two statistical methods, the chi-square test and the Van der Tas [1988] I index were used to test the extent of material measurement harmonization in ASEAN. The results showed that ASEAN countries achieved a relatively high degree of measurement harmonization in the area of inventory, marketable securities, long term investments, business combinations, consolidated financial statements, research and development expenditures and foreign currency translation methods. In contrast, he found a low level of harmonization in the accounting for property, plant and equipment, goodwill, income taxes and leases. Diga [1996] explained that the possible reasons for a low level of harmonization in ASEAN countries were the uses of flexible and discretionary accounting treatments for similar transactions including the absence of pertinent accounting standards in some areas, and non-disclosure of accounting policies.

The strength of Emenyonu and Gray [1992], Hermann and Thomas [1995] and Diga [1996] is that they used both the chi-square test and Van der Tas’s [1988] I index to measure the extent of measurement harmonization. However, the major problem is that these studies were based on small sample sizes and were not deemed to be representative, therefore, caution should be taken in the generalisation of the study results. Besides this detraction, these studies contributed substantially to the measurement of international accounting harmonization literature.

Tarca [1997] compared the level of harmonization of accounting measurement practices between lAS-reporting companies and Australian Accounting Standards Board (AASB) reporting companies (from Malaysia, New Guinea, Hong Kong, Bermuda and Isle of Man) for the year 1996. She identified eight accounting measurement practices, including segment reporting, cash flow statements, inventory valuation, inventory costing, goodwill recognition and goodwill amortization. Tarca used the C index, the I index and chisquare tests to compare the extent of harmonization between IAS-reporting companies and AASB-reporting companies. Her calculated C index showed a higher level of harmonization for AASB-reporting companies than the C index for IAS-reporting companies. The calculated I index between AASB-reporting and IAS-reporting companies showed a high degree of harmony for inventory valuation. The I indices also showed that a moderate level of harmony existed for segment reporting, cash flow statements and revaluation of non-current assets, while a low level of harmony was found for inventory costing, research and development costs, goodwill recognition and goodwill amortization. The chi-square test results indicated significant differences in accounting measurement practices between AASB-reporting companies and IAS-reporting companies for seven accounting policies, excluding inventory valuation. Tarca argued that formal harmonization alone is inadequate to achieve the material harmonization of financial reports.

The major limitation of Tarca’s [1997] study is that the IAS sample was dominated by companies from Malaysia (82 percent of the sample), therefore, the comparison was to a large extent between Malaysian companies and Australian companies. Nevertheless, using Van der Tas’s [1988] I index and the C index provided Tarca’s [1997] study with statistical superiority to present a comparative result regarding measurement harmonization.

Chong et al. [1999] examined the level of accounting measurement harmonization for 130 listed manufacturing companies randomly selected from five Asian Pacific countries for the 1997 financial year-end. The countries include Australia, Hong Kong, Indonesia, Malaysia and Singapore. They calculated Archer et al.’s [1995] between-country and within-country C indices and found variations in the degree of harmony across selected Asia Pacific countries for three accounting measurement practices. Their results indicated a high level of harmonization in regard to depreciation methods and a low level of harmonization for non-current assets and goodwill across the five countries.

Rahman et al. [2002] analyzed the factors that were associated with accounting practice harmonization between New Zealand and Australia. The accounting practices and firm characteristics data were collected from 81 New Zealand and 75 Australian companies for the year 1993. Twenty-eight mandatory measurement items were selected to measure the degree of harmony and their association with firm specific characteristics. The authors used six proxies such as industry, size, ownership concentration, leverage, decentralization and auditor type for measuring firm characteristics. Their Jaccard coefficient, T-tests and chi-square tests results identified the areas where accounting practice harmony has been achieved between Australia and New Zealand and areas where more efforts were needed. The results also indicated that accounting practice was associated with firm characteristics suggesting the firm specific characteristics have an important role in the harmonization process.

Astami et al. [2004] measured the degree of harmony for accounting of the four key accounting policy choices, fixed asset valuation, inventory measurement, depreciation policies and goodwill treatment, for 442 companies in five Asian Pacific countries: Australia, Hong Kong, Indonesia, Malaysia and Singapore. They introduced a new measurement index, the T index, using assumptions implicit within the H, C and I indices augmented with the additional analytical power. Their overall results showed a relative high degree of comparability for depreciation policies but goodwill measurement, asset valuation and inventory policies demonstrated far lower harmony. The results indicated that in the Asian-Pacific region there remains large level of different accounting policies chosen by countries. The T index is a recent introduction in the measurement of harmonization literature. Astami et al. [2004] claimed that their T index is superior than Van der Tas [1988] and Archer et al.’s [1995] indices. However, the authors’ claimed superiority about the index has not been tested by others in other countries to measure the extent of harmonization.

4.1.3 South Asia

Ali et al. [2006] examined the extent of harmonization in selected accounting measurement practices in three South Asian countries, namely India, Pakistan and Bangladesh. The study was based on a sample of 566 non-financial companies for the financial year 1997-98. The degree of harmonization was measured using chi-square tests, and Van der Tas’s [1988] I index and Archer et al.’s [1995] modified C index. The values of the I index and C indices showed a relatively higher degree of harmonization in the areas of property, plant and equipment, foreign currency translation and long-term investment, and a lower level of harmonization in the areas of inventory, amortization of goodwill and leases. The results suggested that low harmonization levels are due both to the degree of flexibility available in selecting benchmark treatments in some national standards and also to non-compliance by companies with the requirements of national standards in South Asia. Significant further work is required by SAFA and the other regional accounting bodies if the goals of regional and international accounting harmonization are to be achieved.

The studies of Canibano and Mora [2000], Aisbitt [2001], Chong et al. [1999], Tarca [1997] and Ali et al. [2006] contributed extensively to the methodology of measuring material harmonization by using Archer et al.’s [1995] within-country and between-country comparability indices, which seems an attractive means of assessing harmony and harmonization.

4.1.4 Other Studies

Within developed countries, Emenyonu and Gray [1996], Emenyonu and Adhikari [1998] and Parker and Morris [2001] measured the extent of harmonization. Emenyonu and Gray [1996] attempted to examine the extent of harmonization of accounting measurement and associated disclosure practices by large listed companies among five industrialized countries: France, Germany, the UK, Japan and the US. This study is an improvement of their prior study of 1992 where they used only one year of data. They used 293 companies in the survey that were found to be reporting in both 1971/72 and 1991/92. Chi-square tests and the I index were used, similar to their 1992 study, to determine the changes in measurement and associated disclosure practices, and to assess the extent of international harmonization at two time periods: 1971/72 and 1991/1992. In detail, Emenyonu and Gray’s [1996] found that there have been substantial increases in international accounting harmonization since 1971/72 with regard to consolidation, together with the treatment of exchange differences, the treatment of gains/ losses on long-term investments, and the treatment of research and development expenditure. They also found a relatively high level of harmonization in the measurement of consolidation methods, investments in associates, the treatment of gains and losses on the disposal of property, plant and equipment, the treatment of gains/losses on the disposal of current investments, and accounting for extraordinary and exceptional items. In contrast, they found significant decreases in international harmonization since 1971/72 in respect of the treatment of goodwill, the costing of inventories, the method of depreciation, the valuation of long-term investments, the treatment of borrowing costs, the basis for providing deferred taxes and the method of determining the cost of pensions. Consistent with the conclusions presented in Emenyonu and Gray’s [1992] study, the authors argued that these findings were due to the flexibility and use of alternative accounting methods by large listed companies in the selected five countries.

Emenyonu and Adhikari [1998] also assessed the level of harmony using 413 large companies from France, Germany, Japan, the UK and the US for the year 1991. They examined three accounting measurement practices, accounting for inventories, accounting for fixed assets and accounting for investment, since these measurement practices have an important impact on profit measurement and asset valuation. Emenyonu and Adhikari [1998] used chi-square tests and Van der Tas’s [1988] I index to measure the degree of harmony in the financial reporting practices in the study countries. The study showed significant differences in accounting for inventory, fixed assets and investments in their five study countries. Their results indicated that depreciation methods had the lowest I index score and treatment for gain/loss on disposal on current investment had the highest I index. A possible explanation Emenyonu and Adhikari [ 1998] provided for why they found a low level of harmony for depreciation and inventory methods was that many accounting options were allowed in the national accounting regulations and international accounting standards. They also observed that the other three subtopics, namely treatment of gains or losses on the disposal of fixed assets, short-term investments and long term investments, enjoyed a higher degree of harmony. The authors concluded that despite the legal authority of the EU accounting harmonization program, it has not been completely successful because of the flexibility inherent in the EU accounting Directives.

Parker and Morris [2001] examined the influence of the US GAAP by studying the harmony of eleven accounting measurement policies in matched pairs of 40 large companies from the UK and Australia in 1993. International harmony was measured by the between-country C index and chi-square test. Parker and Morris found considerable or complete international harmony for three accounting policies, that is, inventory valuation, finance leases and interest on construction. Major differences were observed in the areas of valuation of tangible fixed assets, depreciation of tangible fixed assets, research and development, goodwill on consolidation, foreign exchange translation of subsidiaries, other identifiable intangibles, deferred taxation liabilities and method of depreciation. They concluded that the influence of the US GAAP was responsible for the poor degree of UK/Australia international harmony and that Australian companies appeared to follow the US GAAP to a greater extent than UK companies.

4.2 Material Disclosure Harmonization

To the knowledge of the author, only one study [Emenyonu and Gray, 1996] has been devoted to measuring the extent of disclosure harmony using quantitative methods. This study is also reviewed in the prior section because it measures both measurement harmony and disclosure harmony. The authors used chi-square statistics to measure whether significant differences exist in the disclosure practices among five developed countries, namely Japan, the US, France, Germany and the U.K. Emenyonu and Gray [1996] found significant differences in the disclosure practices for business combination, foreign income statements, translation differences, foreign currency transactions, disclosure of policy on pensions, disclosure of policy on long-term contracts and disclosure of policy on government grants. However, no significant differences were observed in the practices of disclosure of policy on long-term investments, disclosure of policy on borrowing costs and disclosure of policy on extraordinary items. A deficiency of the Emenyonu and Gray [1996] study was that they did not measure each disclosure item for individual standards. Therefore, conclusions cannot be drawn for itemized disclosure harmonization, that is, to what extent a particular disclosure item is harmonized during the survey period.

5.0 FORMAL (DE-JURE) HARMONIZATION

Formal measurement harmony refers to the level of agreement in measurement methods specified in different national financial reporting standards, while in formal disclosure harmonization the introduction of minimum standards is essential [Liyanarachchi, 1995]. The principal objective of formal harmonization is to improve material harmonization and to remove the conflicting and substantially different standards. Formal harmonization is important in inducing greater harmony in financial reports [Van der Tas 1992a]. Although material harmonization might take place without formal harmonization, formal harmonization would make an important contribution to achieving material harmonization, especially in countries where the public sector is responsible in setting accounting standards [Adhikari and Tondkar, 1995].

5.1 Formal Measurement Harmonization

A limited number of researchers have investigated formal measurement harmonization employing different statistical methodologies [e.g., Garrod and Sieringhaus 1995; Lainez et al. 1996; Rahman et al. 1996, 2000]. Garrod and Sieringhaus [1995] examined the extent of de-jure harmonization regarding leased assets in the UK and Germany. They found significant differences in the lease accounting regulations due to the different regulations concerning the assignment of leased assets. Most leases which were assigned to the lessee in Germany would be assigned to a UK lessee, whilst the reverse was not necessarily the case. The valuation of assets varied between countries. Whilst the UK lessee was expected to make a detailed disclosure, notes of German companies did not give further information with respect to lease commitments. The major limitation of the study is that the authors have examined only one accounting issue to measure the de-jure harmonization.

Adhikari and Tondkar [1995] assessed the degree of harmony of EU stock exchange disclosure requirements with reference to the three EU Directives (admission, listing and interim reporting). They included 11 stock exchanges of the 12 EU countries and identified 44 disclosure items as part of the listing and filing requirements of stock exchanges for the financial year 1989-1990. In this study, the authors developed a composite disclosure index to measure the overall quantity and quality of disclosure. They found that five stock exchanges had 100 percent compliance with EU Directives, four had compliance of over 90 percent, and two had compliance of under 90 percent. Their results indicated that EU stock exchange disclosure requirements for none of the eleven EU stock exchanges were largely coordinated in terms of the minimum conditions specified in the EU Directives. They concluded that the successful implementation of the EU Directives did not eliminate all of the variation in the disclosure requirements between the different EU stock exchanges.

Lainez et al. [1996] measured the formal measurement harmonization of reporting required by the stock markets of 13 countries: Australia, Belgium, Canada, France, Germany, Italy, Japan, Luxemburg, Holland, Spain, Switzerland, the United Kingdom and the United States of America. They identified 21 periodical reporting requirements and 11 additional reporting requirements for share offering documents. They used Van der Tas C-index, Friedman’s non-parametric test and Wilcoxon’s non-parametric test to evaluate the degree of harmonization which exists in the stock markets of the different countries with respect to the level of reporting requirements that are demanded from companies quoted on them. Regarding periodical reporting requirements, Lainez et al. [1996] found greater harmonization for description of resolutions submitted to shareholders, financial statements and financial data selected, and lowest degree of harmonization in financial information on national and foreign operation, description of fixed assets, description of foreign shareholders and taxation. With regard to the requirements to be included in the offer documents, a high level of harmonization was found in material changes and risk factors, and a minimum degree of harmonization was observed in information included by reference to other already published reports or available upon request. Overall, the degree of harmonization in the level of reporting requirements exercised by the different countries with respect to periodical information was 40 percent; and harmonization with regard to additional information in offering documents was 72 percent.

Diga [1996] also assessed the extent of formal measurement harmonization among five ASEAN countries: Indonesia, Malaysia, the Philippines, Singapore and Thailand. Using a correlation matrix, he found a higher degree of intra-ASEAN accounting disclosure harmony. He also observed that Singapore (93%), Malaysia (89%) and Thailand (86%) have substantially adopted IASs disclosure requirements into their domestic rules. In comparison, the Philippines (69%) and Indonesia (55%) show significantly less input from IASs. The major weakness of Diga [1996] is that the study was based on a small sample size, therefore, generalization of the results is questionable.

Rahman et al. [1996] examined the measurement of formal harmonization between Australian and New Zealand. The data included in their study was based on statutory requirements, stock exchange listing requirements and accounting standards for the year 1993. They used multiple discriminant analysis to measure the level of harmony between the two countries’ disclosure and measurement requirements. With regard to accounting standards’ disclosure requirements, Rahman et al. [1996] found the greatest differences in the areas of earnings per share, reserves and accounting for partnerships. In respect of legislative requirements for disclosure, they observed significant differences for inventories, receivables and other supplementary disclosure with respect to assets and liabilities. They also found that the stock exchange listing requirements for disclosure are identical for both countries. For measurement requirements they found significant differences in the case of blood-stock, earning per share, pensions and investment properties.

5.2 Formal Disclosure Harmonization

Apart from the above reviewed formal measurement harmonization studies, Rahman et al. [1994], Agami and Monsen [1995] and Saudagaran and Diga [1997] analyzed formal disclosure harmonization among countries. Rahman et al. [1994] examined the existing formal harmonization between Australia and New Zealand. They found significant similarities between these countries in regard to accounting regulation. Accounting standards between Australia and New Zealand for the most part covered similar issues and had comparable accounting requirements. Accounting requirements within their standards, exposure drafts and other supplementary promulgations were generally similar, although some differences existed in certain areas such as business combination accounting and cash flow accounting. It was found that the accounting regulations were similar to the latest developments in this area in New Zealand. Based on these observations Rahman et al. [1994] suggested the need for accounting harmonization and that New Zealand should directly participate in the Australian scheme. They argued that the formal harmonization of accounting regulation would be cost effective and that the comparability of financial reports produced in the two countries could be greatly enhanced. The problem involved with this study is that they did not include all accounting standards.

Agami and Monsen [1995] investigated the harmonization efforts made by four Nordic countries: Denmark, Finland, Norway, and Sweden. They compared the accounting standards in the Nordic countries with European Union Directives and the international accounting standards to determine harmonization. Their analysis demonstrated that the Nordic countries achieved a high degree of accounting standards harmonization. Comparing accounting standards in three Nordic countries (Denmark, Finland, and Sweden) with the European Union’s Fourth and Seventh Directives they found that the Nordic countries were in harmony with the European Union Directives. The authors also compared the accounting standards in each of the Nordic countries with IASs and found that the accounting standards in those countries were consistent with IASs.

Saudagaran and Diga [1997] used a comparative framework to explore the similarities and differences in the regulatory environment of the five ASEAN countries: Indonesia, Malaysia, Philippines, Singapore and Thailand. Although they found substantial similarities in accounting regulation, some differences were observed. Among the five ASEAN countries, Indonesia needed to improve the quality of its accounting standards and regulations. The authors argued that similarities in accounting regulations in most of the ASEAN countries would lead to the dominance of the global paradigm of harmonization. The study failed to detailed legislation for financial reporting practices among ASEAN countries, that is, company law, securities and exchange law, accounting law for companies and law regulating auditors.

Measuring the extent of harmony, especially formal disclosure harmony, is still in an exploratory stage [Adhikari and Tondkar 1995]. The above studies developed a measurement framework to assess the level of formal harmony with respect to disclosure requirements. Thus, further research in this area is warranted. Future research can be conducted by incorporating statistical tests of significance in the disclosure measurement framework and assessment of formal disclosure initiatives of organizations.

5.3 Measurement Methods of Harmonization

Early research on measurement harmonization including those of Nair and Frank [1981], Doupnik and Taylor [1985], and McKinnon and Janell [1984] employed descriptive statistics and variance to examine the achievement of the IASC. The methodological limitations of these studies were discussed by Nobes [1987], Tay and Parker [1990] and Van der Tas [1992a]. Other empirical studies mainly used two types of measures – indexes and statistical methods – to examine the extent of harmonization. Lopes and Rodgigues [2004] commented that statistical models are suitable to measuring the level of harmony between countries while construction of indexes is suitable for determining if companies adopt the same accounting method. One of the major deficiencies in indexes is that no test of significance was included in the prior research [Canibano and Mora 2000]. Therefore, indices and statistical tests are both necessary to measure the extent of harmonization.

5.3.1 Indexes

Many indexes including Van der Tas’s [1988] H index, C index and I index, and their variants are used to measure national and international harmonization of accounting policies. These indexes have different properties based on several criteria. The H index (Hirschmann-Herfindahl) is one of the measures developed by industrial economists in order to quantify industrial concentration [Tay and Parker 1990]. Its use in the context of financial reporting harmonization implies an analogy between accounting harmonization and industrial concentration. Comparability increases if methods of the parties involved concentrate on one or a limited number of alternative methods [Canibano and Mora 2000]. The H index is identified by weighting the relative frequencies of the alternative methods against each other. Referring to the analogy in accounting harmonization literature, the H index is the sum over accounting methods of their squared frequencies of use within a single country. The H index is a suitable method of measuring harmonization of accounting policies if more than two alternative accounting methods can be distinguished. However, the primary weakness of the H index is that it fails to consider multiple reporting. This problem has been solved by Van der Tas’s [1988] C index which can incorporate multiple reporting. The H index and the C index may be used to measure the degree of national harmony. However, these indexes are less suited for the measurement of international harmony. To overcome this . problem, Van der Tas [1988] provided the I index for international comparison of the measurement of accounting policies.

Though the I index provides a measure of the degree of harmonization, Tay and Parker [1990] were critical of using the I index to measure international harmony. The use of concentration indexes was criticized since these do not have tests of significance to indicate how significant differences exist in the accounting measurement practices among countries. These indexes have different properties based on several criteria. Herrmann and Thomas [1995] reported problems with the sensitivity of the I index to relative frequencies of 0 and proposed the adjusted I index as an alternative index to control sensitivity to 0 propositions. Archer and McLeay [1995] criticized Van der Tas’s [1988] comparability or C index which is used as a means of dealing with companies using multiple accounting policies for the same issue (that is via footnote disclosures), although the index can be employed as an alternative to the H and I indexes. It should be noted that Van der Tas [1988] did not differentiate between national and international effect to measure international harmony. To correct this deficiency, Archer et al. [1995], decomposed Van der Tas’s C index into a between-country (inter-national) C index and a withincountry (intra-national) C index. For international comparisons, Archer et al. [1995] suggested the use of a between-country comparability index. They propose a comprehensive ‘disclosure-adjusted’ comparability index incorporating non-disclosures. The C index was regarded as one of the most useful tools for measuring harmony. Krisement [1997] criticized the Van der Tas [1988] C index on the basis that the index was affected by the number of analyzed observations. She also outlined problems of Archer et al.’s [1995] modified C index and argued that the sum of the within-country and between-country index did not sum up to the value of the total index. She proposed a methodology that links the C index and entropy. Morris and Parker [1998] analyzed statistical properties of Van der Tas’s [1988] I index and Archer et al. [1995] C index and showed that Archer et al.’s comparability index was more suitable when the number of countries increased. Pierce and Weetman [2000] also examined the consequences of non-disclosure on measurement indexes. Taplin [2004] introduced the T index that allows the user to choose an index with the desired properties based on several criteria without sacrificing one desirable property in order to achieve another desirable property. However, no study has been so far carried out based on T index. The value of the all indexes ranges from 0 (indicates no harmony, with an infinite number of alternative methods all with the same frequency) to 1 (all apply the same accounting method). The ‘ movements of the indexes indicate the level of harmony/disharmony of accounting practices in countries.

5.3.2 Statistical Methods

The second tool is to use chi-square test for testing whether significant differences exist in the accounting policy choices by selected companies within a country or between two or more countries. This test was first proposed by Tay and Parker [1990]. Although this test has been used in many harmonization studies, Healy [1990] has mentioned two potential difficulties with the chi-square test. The first occurs with small samples and the second occurs with large samples. When sample size is small it is not expected that the sampling distribution of all possible sample test statistics will be accurately described by the chi square distribution. Like other tests, the chi-square test is also sensitive to larger samples that may lead to the decision to reject the null when the actual relationship is trivial. In fact, the chi-square test is more responsive to changes in sample size than other test statistics. Several other measures have been employed to calculate the degree of harmonization. Krisement [1997] used the V test to measure harmonization in the European Union countries. Archer et al. [1995] and McLeay et al. [1999] used generalization of linear regression model to distinguish between harmonization and standardization effects. Canibano and Mora [2000] applied a bootstrapping test of the C index as a way of measuring the significance of the change in its value. Aisbitt [2001] used the Wilcoxon test to analyze the significance of harmony with comparability indexes. Taplin [2003] criticized Van der Tas H and C indexes because an index is calculated from a sample but guidance is not provided concerning likely values of the index in the population from which they sample is drawn. He used the standard error of the H and C indexes in order that differences between index values can be judged as being either significantly different or explainable by sampling variation alone. The following table captures the different indexes and statistical tests used in measurement studies of harmonization.

Having discussed the different measurement methods of harmonization, some methodological problems need to be considered. These are highlighted in the next section.

5.4 Methodological Problems in Harmonization Studies

Tay and Parker [1990], Gernon and Wallace [1995], Aisbitt [2001], Rahman et al. [2002] and Taplin [2004] identified several problems of using indexes in the measurement of harmonization. These are separately discussed below.

Studies on Measurement Hamonization using Indexes and Statistical Test

1. Difficult in Establishing Causation

The harmonization indexes can provide indication as to whether harmonization has improved but these cannot isolate the cause for it. The harmonization studies attempt to associate changes in harmony with a single factor i.e. legislation. However, preparing annual reports are also influenced by other factors including change in non-legislative regulations, development in accounting practice and thought, industry factors and demands of the market which are not possible to control [Aisbitt 2001]. Peill [2000] tried to crosscheck indexes measured by reference to different criteria. She compared the results of indexes determined by industry with indexes calculated by country to examine an indication of industry effects. However, it may not be possible to identify/or control all possible causes.

2. Lack of Benchmarks

For studies that are measuring degree of harmony, it is difficult to interpret the results and form inferences because of lack of benchmarks. For example, it is difficult to comment whether a H-index reading of .70 for a particular accounting practice is good or bad or an improvement. For example, Ali et al. [2003] interpreted the extent of harmonization and the compliance with IASs results as follows: high – if index/ratio is 80 percent or more, moderate – if it lies between 60 percent and 79 percent, and low – if it is less than 60 percent. This is a judgmental approach. In addition to this problem, it is also difficult to compare across the different studies because authors use dif- . ferent samples (companies, countries etc.) and also often examine different accounting practices.

3. Lack of Theoretical Framework

Gemon and Wallace [1995] argue that harmonization studies are basically psychometric exercises with no theoretical content. Since these studies are not motivated by theory, we do not have a priori expectations making it difficult to interpret results of these studies. The lack of theory also constrains gener- , alizability of these studies. They argue that the extent of harmonization should evolve from theory or empirical study which has the ability to capture features * of companies’ choices of accounting treatments that are relevant to questions of comparability of accounting numbers. Therefore, different theories of harmonization may be appropriate to different accounting item, to different industries, countries and/or time periods. In a similar vein, Rahman et al. [2002] opined that there is an absence of coherent and comprehensive theory of accounting harmonization which creates a problem in setting up a single empirical model in harmonization studies.

4. Self-selection Bias

The measurement indexes used are very sensitive to the sample size, number of countries and number of accounting practices examined. Moreover, how the researchers specify the options for an accounting choice being examined greatly affects the values obtained under the index. Most of the studies provide very little or weak rationale why certain accounting practices were selected. These problems may be overcome through: (i) attention being given when possible accounting treatments differ between items, (ii) ensuring that categories and/or the way accounting methods are allocated are mutually exclusive and (iii) making more information available from preparers of the annual reports, or analysis should be based on companies with sufficient disclosure. This may, however, create self-selection bias to the sample and results. More research needs to be done to overcome the above problems [Aisbitt 2001]. Some of the later studies [e.g., Murphy 2000; Peill 2000] attempted to address some of these shortcomings by using a longitudinal design and using a control sample to provide benchmarks for the harmonization values obtained.

5. Reliability and Validity Problems

According to Aisbitt [2001], reliability problems are associated with technical constructs of indexes and their application. Harmonization measure- , ment using indexes is dependent on the information provided in the annual reports, but non-disclosure of information is problematic because it is very difficult to identify whether a disclosure item is applicable or the company failed to disclose an item in the annual report. Treating nondisclosure as a specific method may create a false impression of harmony. In contrast, validity problems are concerned with the ability or inability of the indexes to capture increases or decreases of harmony. The result of indexes does not always indicate the actual extent of harmonization. Data needs to be examined to get clear harmonization results. Increase/decrease in the indexes does not mean an increase/decrease in the level of harmony. For example, using ‘mixture of methods’ by most of the companies may not necessarily indicate that the financial statements are comparable.

The above reviewed empirical harmonization studies show that significant harmonization has been achieved in some measurement and disclosure areas where limited options are allowed in the standards. On the other hand, the studies show a low level of harmonization was achieved in the areas where flexibility was available in the accounting treatments of national standards. As discussed earlier, harmonization results may not explain the extent of compliance with national accounting standards. It is imperative, therefore, that harmonization results be examined and explained in the context of compliance studies. The following section synthesizes empirical studies on compliance with the International Financial Reporting Standards (IFRSs).

6.0 COMPLIANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs)

Recent, international accounting literature evidences an interest in studying compliance with IFRSs. The rationale has been that financial reporting that provides quality financial information that is vital to the growth and development of capital market. Kothari [2000] argues that the quality of financial information is a function of compliance of accounting standards. The IASB was established to develop a single set of enforceable accounting standards that can be applied internationally [Street and Gray 2001]. However, the IASB has no authority to enforce lASs/IFRSs. Compliance is primarily a matter for auditors, professional accounting bodies, IFAC, national enforcement agencies and supranational bodies such as the International Organization of securities Commissions (IOSCO) and Basel Committee. There is evidence that IASs are gradually gaining in popularity since its formation in 1973 and differences in accounting regulations have been diminished significantly in recent years. Internationally, both the IASB and groups such as the IOSCO and International Federation of Stock Exchanges are working together to promote greater disclosure by firms and transparency of financial information. These bodies require expanded disclosure to reduce information asymmetry. The IOSCO, an affiliation of almost fifty national security regulators, assessed 30 IASB standards considering their suitability for use in cross-border offerings and listings. The IOSCO recommended that its members permit incoming multinational issuers to use the IASB core standards to prepare their financial statements for cross-border offerings and listings [IAS Plus 2005]. Due to the efforts provided by the IASB, IOSCO, IFAC and other international bodies, a number of developing and developed countries have adopted IASs/IFRSs as issued by the International Accounting Standards Board (IASB) either wholly or with minor , modifications.

Although IASs/IFRSs are accepted by the majority of the countries, if compliance is inadequate, IASB standards will be of little value. If accounting rules are not complied with, the rules remain requirements only on paper [Hope 2003]. Saudagaran and Diga [1997] and Frost and Ramin [1997] found significant variation in accounting disclosure practices within and across countries although accounting disclosures are required by most countries and IAS 1, Presentation of Financial Statements. The IASB and the IFAC are concerned that some companies claiming to comply with IASs/IFRSs may not in fact be complying with all the requirements of IASB standards. As a result, auditors have been criticized for providing clean audit opinions stating that financial statements are prepared in accordance with IASs/IFRSs, though accounting policies and notes to accounts show otherwise [Cairns 1997; cited in Street and Gray 2001]. IAS 1 (Revised) prohibits firms from claiming compliance to IASs/IFRSs unless they actually do comply. With the passage of IAS 1 (Revised), many companies that formerly claimed full compliance with IASs/IFRSs ceased to use the Standards, since full compliance can no longer be claimed unless firms actually do comply [Street and Bryant 2000].

Compliance with IASs/IFRSs is a concern of standard setters, regulators, and investors. It has been argued that strong compliance of accounting standards makes reporting decision more predictable, and that reducing uncertainty about firms’ reporting choice makes forecasting easier. Compliance with accounting standards ensure consistent accounting methods are used over time which may reduce complexity involved in forecasting. This may prohibit managers from manipulating accounting numbers to maximize their own interest. Without compliance the analysts’ task may be more difficult because choices of methods may exist in accounting standards [Hope 2003]. Therefore, the compliance provides an avenue to researchers to empirically examine the level of compliance in countries whose national standards are based on IASB standards.

International accounting researchers emphasize the importance of compliance with IASs/IFRSs as a significant element in the quality of financial reporting practices. The studies that have been conducted in this area are reviewed in the following section. A synthesis of the compliance studies will provide a more complete understanding of the level of compliance and the factors driving noncompliance. This should assist the IASB, the IFAC and other interested parties in dealing with the factors that hinder compliance.

Evans and Taylor [1982] undertook the pioneer study examining whether the IASC’s standards were being followed by the member countries and investigated the effect of IASs on financial reporting practices in France, Japan, UK, USA and West Germany. The IASs selected for the study were: IAS 2, Valuation and Presentation of Inventories, IAS 3, Consolidated Financial Statements, IAS 4, Depreciation Accounting, IAS 6, Accounting Responses to Changing Prices, and IAS 7, Statement of Changes in Financial Position. Evans and Taylor [1982] relied on an average of nine or ten financial reports of selected companies in each of the countries from 1975-80 for data. Their analysis consisted of computing the percentage of compliance with each IASC standard by annually. They concluded that the IASC had very little impact on accounting practices in surveyed countries. The major drawback of the Evans and Taylor [1982] study was that no statistical tests were performed to determine if there were any significant changes in compliance between years.

McKinnon and Janell [1984] examined the compliance with IASs by countries over a much broader geographical scale. They selected three topics covered by the IASC, depreciation, the equity method, and foreign currency translation, in order to measure the degree of acceptance of IASC standards. They used the Price Waterhouse (PW) International survey data for 1979. Sixty-four countries were surveyed including thirty-three that are members of the IASC. Two hundred and sixty-seven practices were classified into categories of acceptance, ranging from ‘Required’ to ‘Not Permitted’. McKinnon and Janell [1984] adopted a descriptive analysis of accounting regulations of IASC members and discussed the IASC influence on the Accounting Standards Committee (ASC) of the U.K. and FASB statements on foreign exchange translation. They concluded that the IASC had not succeeded in changing existing standards or setting new standards. There are a number of disadvantages of the PW International survey data [Nobes 1981, 1987; Tay and Parker 1990].

Doupnik and Taylor [1985] examined the extent to which 16 countries of Western Europe were conforming to a ‘basic core accounting practice’, using IAS 1-8 and examined the change in the level of conformity over the period from 1979 to 1983. The Price Waterhouse (PW) survey 1979 included propositions representing measurement procedures and disclosure requirements recommended in the first eight IASC standards. The researchers updated that portion of the PW survey related to these standards to January 1, 1983 by mailing a questionnaire containing 53 accounting propositions to PW offices worldwide. Response categories were weighted and average scores were calculated for regions and countries. Non-parametric tests were used to differentiate re- ‘ gions and groups. In their study, Doupnik and Taylor [1985] found that although Europe had the lowest level of compliance in both 1979 and 1983, it showed the greatest percentage increase in mean score over the period 1979 to 1983. In general, the English-speaking countries, France, and the Netherlands demonstrated the highest conformity, and the German-speaking and Southern European countries were most lacking in conformity. Members of the EU were found to exhibit a higher level of compliance with IASC standards than non-member European countries. The efforts of the EU to harmonize accounting practices within the community possibly helped to improve the overall quality of financial reporting in those countries.

Apart from using unreliable PW data, one of the major criticisms of Doupnik and Taylor’s [1985] work is that their study failed to define the * meaning of compliance with IASs. According to Doupnik and Taylor [1985], France complied with IASs in relation to the 53 propositions in 1979. However, Nobes [1987] commented that French law, French Standards and French companies did not fully comply with IASC standards in 1979.

In a later study, Nobes [1990] assessed compliance by U.S. listed corporations with IASC standards. He chose three accounting issues where there are IASC standards but no U.S. GAAP, so that it was possible to observe whether companies follow IASC standards. He conducted a survey of the 1985 annual reports of 200 randomly chosen listed corporations. The asset life and minority interest disclosures compliance were investigated for this sample. For pooling, all examples in three years of American Institute of Certified Public Accountants (AICPA’s) survey 1984-86 were examined. Simple ratios were calculated to show the extent of compliance with the IASC standards. Nobes [1990] found that the compliance level was 33.3 percent for minority interest disclosures and 41 percent for depreciation disclosures. In both cases, noncompliance was significantly higher than 50 percent. With regard to pooling, IAS requires disclosure in the first financial statements following the combination of: the effective date of the combination for accounting purposes; the percentage of each enterprise’s voting share exchanged to effect the combination, and; the amounts of assets and liabilities contributed by each enterprise. For pooling disclosures, compliance levels were 50 percent, 38 percent and 0 percent for the three requirements. The results suggest that requirements of IASs were not complied with by the most of the sampled companies in the U.S. and IASs were accepted informally by U.S. listed companies but have no direct impact.

Nobes’ [1990] study is considered to be a pioneering empirical work because he used companies’ annual reports of companies instead of PW International survey data. Although this study contains some interesting features, it is based on a small number of disclosure items from only three IASs. Purvis et al. [1991] provided an overview of compliance with the first 26 IASC standards among 54 countries. The conformity index was calculated for each of the 54 countries responding to the IASC survey. This represented the percentage of the 26 IASs with which each country complied. The average compliance level was 76.3 percent, although there was substantial inter-country variation. Fifteen countries scored 90 percent or more while five scored lower than 50 percent. A higher level of compliance was observed for the earlier standards. For instance, compliance with IAS 4, ‘Depreciation’ was 98.2 percent. In contrast, relatively recent standards had lower levels of compliance. It was observed that only 40.7 percent of the countries were in compliance with IAS 26, ‘Accounting and reporting by retirement benefit plans’. The authors argued that compliance with the earlier standards was higher because those dealt with more fundamental issues and were easier to comply with.

Street et al. [1999] examined the extent to which companies claim to comply with IASs and the nature of and significance of measurement and disclosure noncompliance. They selected 49 major companies from 12 countries for the year 1996. Companies were included in the sample if the annual report states that IASs were followed, that IASs were followed with limited exception, or that exception to IASs was immaterial in nature. Street et al. [1999] described the IASs requirements with regard to measurement and disclosures and analyzed the level of compliance with IASs in numbers. Ten IASs were examined to measure the extent of measurement and disclosure compliance. In their study, Street et al. [1999] observed that the degree of compliance by companies claiming to comply with IASs was very mixed. They found that only 20 of the 49 companies surveyed complied with all IASs. Their analysis indicated significant noncompliance with IASs including use of lower of cost or market for inventories; violation of the all-inclusive requirement for reporting profit/loss and of the strict definition of extraordinary items; failure to capitalize certain development costs; failure to provide all required disclosures for property, plant and equipment; for companies operating in hyperinflationary economies, failure to restate foreign entities in accordance with IAS 29, and charging goodwill to reserves or amortizing goodwill over a period in excess of a 20 year limit. Their results suggest that national standard-setters and regulators needed to work more closely with the IASC to eliminate significant differences between national accounting guidelines and IASs. Apart from working with IOSCO, the IASC needed to encourage national regulators to support IASs without exception.

More recent research has showed a higher degree of compliance. OwusuAnsah [2000] empirically examined the degree of compliance with mandatory disclosure requirements in Zimbabwe. A disclosure instrument, consisting of 214 mandated information items from three regulatory sources, was employed to derive an index of the disclosure in the annual report and accounts of 49 nonfinancial listed companies in Zimbabwe. Mandatory disclosure items included in the study were all information items required under the Companies Act, the adopted IASs, and the Zimbabwe Stock Exchange (ZSE) listed companies. He analyzed 22 IASs from IAS 2 to IAS 30, to measure the extent of compliance under mandatory disclosure items. Compliance/noncompliance results were presented in percentage terms. The empirical results indicated a high level of compliance in respect of IASs 2, 4, 7, 8, and 19. Full compliance was also observed with respect to IAS 18. In contrast, there were several instances of non-compliance in IASs disclosure, including IASs 10-12, 14, 16, 17, 21-23, and 26-28. His results suggested that the mechanism for monitoring and enforcing corporate mandatory disclosure requirements in Zimbabwe is not stringent.

Owusu-Ansah’s [2000] study suffered from a number of deficiencies. First, the study did not consider problems of information overload that can result with large volumes of disclosure. secondly, he investigated a predetermined checklist of information items deemed to be important to users of corporate annual reports in Zimbabwe by the country’s standard-setters. The preferences of standard-setters may not coincide with those of users. An attitudinal survey of users may reveal a different set of information items that is preferred by them.

Chamisa’s [2000] study is also in the context of Zimbabwe. He examined the extent of de-facto compliance with IASC standards by a sample of Zimbabwe listed companies. He collected four published annual reports (one each for 1975, 1980, 1985, and 1990) for all 40 listed companies. The study tried to assess the compliance level before and after the publication of the first 22 standards issued by the IASC, except for IAS 1 issued in 1975. A disclosure/measurement checklist was prepared based on the requirements of IASs 1 to 22, and the four published annual reports of the 40 listed companies were examined for compliance with the 46 requirements of IASs 1 to 22. The disclosure check list excluded from the examination those provisions of IASs 1 to 22 which the Zimbabwe Companies Act also required companies to disclose. . ; The results of the examination for de-facto compliance, and the impact of the IASC standards, on the measurement and reporting practices were shown in percentage terms. Percent change was also shown to indicate the trend in compliance levels from 1975 to 1990.

The empirical analysis showed two strong suggestions. First, listed Zimbabwe companies complied significantly with the disclosures required by the IASs, which were not required by the Zimbabwe Companies Act. These include: IASs 1-7, 10, 12-13, 16, 19, and 21 in 1990. secondly, he found that the IASs had a significant impact on the reporting practices of listed Zimbabwe companies, especially, IAS 2, IASs 4-7, 10, 12, 14, 16, 19, and 21. This was also supported by the finding that, in 1990, 48 percent of the companies in the sample disclosed cases of non-compliance with the IASs. Chamisa’s [2000] results suggest that listed companies in Zimbabwe voluntarily and significantly complied with certain provisions of IASs. This provided indirect evidence that IASs are relevant in Zimbabwe.

Al-Basteki [1995] examined the extent to which Bahraini publicly traded corporations adopt international accounting standards. The data were collected from the 1991 annual reports of the 26 Bahraini publicly traded corporations. The results showed, from the analysis of auditors’ reports, that 15 firms (58 percent) had adopted IASs. The auditors in these firms had explicitly stated in their audit reports that the financial statements were prepared in accordance with international accounting standards. Therefore, it was observed that the majority of the Bahraini publicly traded corporations reported adoption of IASs.

Later, Joshi and Ramadhan [2002] examined the level of adoption of IASs in Bahrain by closely held companies. They selected 85 companies at random, 36 of which returned the completed questionnaires about the adoption of IASs. They found that 86 percent (31) of the 36 companies responding to the questionnaire applied IASs in the preparation of their financial statements, while only five firms followed the US or UK GAAP. However, the degree of adoption varied considerably from one standard to another. They found that all the surveyed firms adopted IAS 4, Depreciation Accounting and IAS 13, Presentation of Current Assets and Current Liabilities. This is due to the fact that these standards relate to basic accounting practices. The adoption rate was also high regarding IAS 2, Inventories and IAS 5, Information to be in Disclosed Financial Statements. A moderate level of adoption was observed in the areas of IAS 7, Cash Flow Statement; IAS 16, Property, Plant and Equipment; IAS 18, Revenue Recognition; IAS 24, Related Party Disclosures; IAS 10, Contingencies and Events Occur after Balance Sheet Date; and IAS 19, Retirement Benefit Costs. However, the adoption rate was found to be low for the remaining IASB standards. It has also been observed that about 84 percent of those who adopted IASs strongly agreed that using IASs improves their organization’s ability to acquire financial assistance from the banking sector. Also, about 90 percent of the respondents fully agreed that IASs help to achieve the objectives and improve the effectiveness of financial reporting.

The major weakness of Al-Basteki [1995] and Joshi and Ramadhan [2002] studies is that they evaluated a small proportion of the company population. However, these studies provide some vital evidence with respect to the adoption of IASs in developing countries, and especially in Bahrain. More recently, Lopes and Rodrigues [2003] analyzed the financial instruments accounting practices applied by Portuguese companies in terms of compliance with the measurement and disclosure requirements of IAS 32 and IAS 39. The author used 55 listed companies and examined the 2001 annual reports. They found that non-derivative financial instruments accounting varied considerably from the IAS 32 and IAS 39 requirements. In respect of financial instruments, fair value measurement was not adopted by a large number of derivative users. The level of compliance was very low for hedging transactions. One of the major limitations of the study is that the sample size was too small and only one IAS has been examined. The inclusion of more standards in the study could present a clearer compliance picture of Portuguese listed companies.

Another recent important work has been conducted by Hope [2003] who emphasized the importance of compliance with capital market effects. Using a sample of 1,553 firm-years from 22 countries, the author investigated the compliance of accounting standards on the accuracy of financial analysts’ earnings forecasts. He constructed a comprehensive measure of compliance based on five country-level factors: audit spending, insider trading laws, judicial efficiency, rule of law, and shareholder protection. The author found that compliance is associated with higher forecast accuracy. His results suggested that compliance encourages managers to follow prescribed accounting rules which reduce analyst’s uncertainty about future earnings. He also found evidence that compliance is more important when more choice among accounting methods is allowed. The major weakness of the study is that the sample period of the 1990s is dated.

The above compliance studies show that the extent of compliance with IASs in developing countries is higher compared to developed countries. This is due to the fact that companies in developed countries are more likely to voluntarily comply with IASB standards. Nevertheless, the level of compliance by developing and developed countries seems to be increasing due to the pressures of the IASB and other concerned multilateral organizations. The research discussed so far was directed to comparatively examine and analyze compliance with IASB as between different countries, and different periods of time. Another major area of study related to compliance is the association between : firm characteristics and compliance with IFRSs.

6.1 Association between Firm Characteristics and Compliance with IFRSs

There are some studies which examined the association between compliance with IASs and firm characteristics. These include Solas [1994], Dumontier and Raffoumier [1998], Murphy [1999], Tower et al. [1999], GarciaBenau [2000], Street and Bryant [2000], Street and Gray [2001], Glaum and Street [2003], and AIi et al. [2004]. Solas [1994] assessed the extent of compliance with IAS 1 which requires the disclosure of significant accounting policies, and IAS 5 which specifies the minimum disclosure of information in financial reports in Jordan. Annual reports of forty-five manufacturing and service companies were examined for the period 1988. The author developed an index on the basis of the requirement of IAS 1 and IAS 5 and identified four firm characteristics including asset size, rate of return, number of shareholders, and earnings margin. He found that the overall compliance level was not an acceptable level (46.35 percent) and showed no significant association with corporate characteristics variables. Apart from the sample size, the study was limited to two IASs.

Dumontier and Raffoumier [1998] examined why Swiss listed companies voluntarily comply with IASs. They selected Switzerland for the study because of its low level of accounting regulations and its accounting permissiveness. They selected 133 Swiss listed companies in the sample to measure the level of compliance and used univariate and multivariate statistics to analyze the results. Their univariate analyses showed a positive influence of size, internationality, listing status, auditor type and ownership diffusion on voluntary compliance with IASs. Inversely, they found no significant relationship for leverage, profitability and capital intensity. Multivariate analyses showed that firms which complied with IASs are larger, more internationally diversified, less capital intensive and have a more diffuse ownership. Similar results were obtained in opposing firms complying with IASs to those which refer only to the EU. Overall, the findings of the Dumontier and Raffoumier [1998] study suggested that political costs and pressures from outside markets played a major role in the decision to apply IASs.

El-Gazzar et al. [1999] examined the characteristics of multinational firms that voluntarily elect to prepare financial statements under IASs. They included 87 IASC conforming firms and selected a control sample from nonIASC conforming firms for the three years of their study. The Wilcoxon test was used to analyze the characteristics of IAS firms in comparison to those of non-IAS firms. The Logit regression model was used to test the relationship between a firm’s compliance with IASs and multinational listings, foreign sales, leverage and membership of the European Union. They found that firms were motivated to voluntarily adopt IASs in order to enhance their exposure to foreign markets, to improved customer recognition, to secure foreign capital, and reduce potential costs of operation abroad.

Murphy [1999] examined firm specific characteristics of Swiss companies that voluntarily elected to prepare financial statements using IASs. Six independent variables – foreign sales activity, foreign stock exchange listings, debt/equity ratio, market value of the firm, firm size and size of the audit firm were identified to examine the association between firm characteristics and the level of compliance with IASs. Murphy [1999] used MANOVA and stepwise discriminants analysis to determine if differences existed between a sample of 22 Swiss companies that adopted IASs and a control group of 22 Swiss companies that used local standards for the year 1995. The author found that the foreign activity variables, foreign exchange listings and foreign sales were significantly associated with the level of compliance with IASs. The major weakness of the study was the small sample size.

Tower et al. [1999] investigated the level of compliance with IASs by examining company reporting in six countries in the Asia Pacific region. They identified six independent variables, including country of reporting, size, leverage, profit, industry and number of days an enterprise takes to issue the annual report, in order to test possible influences upon compliance with IASs. Sixty companies were surveyed from those listed on the stock exchanges in Australia, Hong Kong, Malaysia, Philippines, Singapore and Thailand. Tower et al. [1999] analyzed ten listed companies’ 1997 annual reports in each of the six Asia Pacific countries to measure the degree of compliance with IASs. The twenty-six IASs were applicable to 1997 fiscal year-ends. They scrutinized each annual report and obtained 512 data points of compliance information. Multivariate regression techniques were utilized to explain possible compliance patterns derived from each of the 60 annual reports, as the dependent variable. The compliance measure was calculated as a ratio of deemed compliance over total possible compliance.

In their study, Tower et al. [1999] found an overall high mean of a 90.68 percent level of compliance with IASs. The highest and lowest compliance level was 81 percent and 100 percent respectively. The high mean was because of the substantial reliance placed on IASs in Australia, Thailand, Malaysia and Singapore. Even in Hong Kong and the Philippines, the compliance level was 89 percent and 88 percent respectively. However, the compliance indices were much lower (28 percent to 54 percent) under the assumption that nondisclosure of an item was considered as noncompliance. In respect of the determinants of compliance, the results suggested that the country of location is the clear driving force. Therefore, the results provided evidence of de-facto harmony even in countries where IASs are not necessarily used as the basis for the development of national accounting standards.

Garcia-Benau [2000] assessed the characteristics of firms from the European Union claiming to comply with International Accounting Standards on a voluntary basis. She selected seven firm characteristics hypothesized as being determinants of compliance with IASs. These included internationality, size, leverage, capital intensity, profitability and auditors’ reputation. The data was collected from the FT Extel Company Analysis Database. She relied on the IASC list of companies using IASs to identify the population of companies from the European Union claiming to comply with IASs and selected 56 companies from six European countries for the study. Univariate and multivariate analyses were employed to examine the results. The results indicated that only two determinants (size and internationality) of IASs compliance were found to be significant. The results implied that small size seems to be a deterrent of adherence to IASC standards. Therefore, the prompt EU Commission’s decision to finally require that companies’ consolidated accounts are prepared according to IASs is appropriate as small size companies are rarely listed. With regard to internationality, Garcia-Benau [2000] concluded that potential endorsement of IASs by the sec would imply a higher motivation for European companies to simply prepare their financial statements according to IASs.

Street and Bryant [2000] investigated the extent to which the disclosure requirements of the IASB were complied with or exceeded by companies claiming to use IASs. In addition, they also examined significant differences between those companies with U.S. listings, U.S. filings, and those with no U.S. listings or filings with regard to compliance with IASB-required disclosures, and level of disclosure. The authors used 82 company annual reports for the year 1998 for all IAS companies identified with U.S. listings or filings. They found that the overall level of disclosure was greater for companies with U.S. listings. It was also observed that greater disclosure was associated with an accounting policies footnote that specifically stated that the financial statements were prepared in accordance with IASs and an audit opinion that states that International Standards of Auditing (ISAs) were followed when conducting the audit. Using multiple regression the authors identified seven firm characteristics, namely firm size, listing, profit, type of industry, policy (footnotes indicated IASs were the basis for the financial statements), OPACCT (audit opinion indicates companies financial statements are prepared in accordance with IASs), and OPAUDIT (audit opinion indicates company followed international standards of audit) to examine the level of compliance with IASs. Their multiple regression results indicated that the extent of compliance with IASs was greater for companies with U.S. listings or filings. A higher level of compliance was associated with an audit opinion that stated that the financial statements were prepared with the requirements of IASs and that IASs were followed when conducting the audit. However, firm size, listing, profit, type of industry and policy were not associated with the level of compliance.

Street and Gray [2001] extended the work of Street and Bryant [2000] by examining a larger sample of companies thereby allowing for further segregation of companies without US listings/fillings. The authors examined the extent of compliance with international accounting standards and factors associated with noncompliance around the world. They identified a sample of 279 companies to assess the extent of noncompliance with IASs using a checklist of IASC-required disclosures and measurement practices. With regard to compliance with IASs disclosure requirements, compliance was found to be higher for companies with a non-regional listing; that were in the transportation, communications and electronics industries; that referred to the use of IASs; that were audited by a Big 5+2 firm; and that were domiciled in China or Switzerland. Nevertheless, significantly lower levels of compliance were observed for companies domiciled in France, Germany, or other Western European countries. In respect of compliance with IASs measurement, the authors ; found higher level of compliance for companies that made exclusive reference to the use of IASs, were audited by a Big 5+2 firm, and that were domiciled in China. A lower level of measurement compliance was found for companies domiciled in France and Africa. They also attempted to explain the extent of noncompliance by testing for association with factors such as listing status, company size, profitability, industry, the manner in which companies referred to IASs, type of auditor, type of accounting standards as stated in the audit report, type of audit standards as stated in the audit report, country of domicile and size of the home stock market. Using multiple regression modeling they found that listing status, type of auditors, the manner of reference to IASs in the accounting policy note and country of domicile were associated with the level of noncompliance. This study is important because it included a large number of sample over a broad geographic range.

Glaum and Street [2003] examined compliance with both international accounting standards and US GAAP for companies listed on Germany’s New Market. They investigated the extent to which companies comply with IASs and US GAAP disclosure requirements on the basis of a sample of 100 firms that applied IASs and 100 that applied US GAAP for the financial year 2000. They found that the level of compliance varied from 100 percent to 41.6 percent, with an average of 83.7 percent. The average compliance level was lower s for companies that used IASs as compared to companies that used US GAAP. Using multiple regressions the authors found that the overall level of compliance was positively related to the size of the audit firm, audit report (audit report refers to the use of international standards of auditing or US GAAP), choice (firms using IASs or US GAAP) and listing status, but unrelated to size of the firm.

Ali et al. [2004] empirically examined the level of compliance with disclosure requirements mandated by fourteen LAS-based national accounting standards for a large sample of 566 listed companies in three major countries in South Asia – India, Pakistan and Bangladesh, and evaluated the corporate attributes which influence the degree of compliance with these standards. They selected five corporate attributes that affect the variation in disclosure compliance levels with IASs. These were company size, profitability, multinationality, leverage and quality of external auditors. Using a scoring system to develop a total compliance index (TCI) for each sample company, the results indicated significant variation in total disclosure compliance levels across countries and different national accounting standards. Compliance levels were found to be positively related to company size, profitability and multinationalcompany status, and unrelated to leverage levels and the quality of external auditors.

Prior to the studies reviewed in the foregoing discussion, there were substantial research on compliance of voluntary disclosure [see, Cooke 1989a, 1989b; Ahmed and Nicholls 1994; Hossain et al. 1994; Adams and Hossain 1998]. However, these previous studies did not consider compliance with IASs as the dependent variable in the analysis. The major contribution of the studies outlined above is that, they used IASs as the dependent variable in their studies. Sophisticated quantitative statistical techniques were also used to analyse the results. Nevertheless, these studies show inconsistent results with regard to association between firm-specific characteristics and the compliance level with IFRSs which is shown in Table 2. For instance, Dumontier and Raffournier [1998], AIi et al. [2004] and Garcia-Benau [2000] found positive association between firm size and compliance with IFRSs, while Solas [1994], Tower et al. [1999], Murphy [1999], Street and Bryant [2000], Glaum and Street [2003], and Street and Gray [2001] found no significant association. Therefore, there is a need to use more countries in the samples to develop a theory which can provide consistent results. There have been a number of studies which concentrated not only on firm specific characteristics, but also on variables external to the reporting firm. These include, Imhoff [1992], Lang and Lundholm [1993], Tan and Tower [1999] and Chong et al. [1999]. However, no empirical studies examined IASs/IFRSs compliance and the influence of contingent variables within the accounting literature. Substantial studies are therefore needed to test whether environmental factors are associated with the compliance with IASs/IFRSs. For example, research can be conducted using explanatory micro and macro economic variables.

The ten studies reviewed above used a quantitative approach to measuring the extent of compliance with IASs/IFRSs. The studies developed a scoring sheet for each company to determine the extent of compliance by each company within each country. The approach employed in these analysis do not discriminate between the relative importance of different disclosure items. As such, the studies adopted a dichotomous procedure rather than a weighted scoring scheme. The reason for assigning weights was to distinguish between more important items and less important items. However, weighting may introduce two potential problems, namely that the importance of disclosure items may vary from one user to another and it may also vary among firms as well as at an industry level [AIi et al. 2004]. Libby [1981, pp. 40-43] noted that the revealed perceptions of respondents to an opinion survey do not often represent what the respondents actually do; hence, it is possible to argue that this weight derived from opinion pools may not mirror reality [Wallace and Naser 1995, p. 331]. Further, attaching weight to the importance of different items of information does not usually affect real economic consequences for the subjects whose opinions were pooled [Chow and Wong-Boren 1987, p. 536], nor do they reflect a stable perception on similar items of information across subjects over time [Dhaliwal 1980, p. 386] and from similar subjects across countries [Firer and Meth 1986, p. 178]. An item is assigned a value of one if it is disclosed and zero, otherwise [Cooke 1989a]. Under this approach, the consideration is whether or not firms disclose items of information in their corporate annual reports. However, one major problem with this type of scoring system is that some companies might be penalized by assigning a score of zero when the company is not expected to disclose that item because it is irrelevant due to the nature of operations or for other reasons. Therefore, the issue of discriminating between non-disclosed and non-applicable items should be an important consideration for the future research.

7.0 CONCLUSIONS AND FUTURE RESEARCH DIRECTIONS

The purpose of this paper has been to synthesize the empirical research on international accounting harmonization and compliance with IASs/IFRSs by companies. Prior reviews fell short of incorporating all the empirical studies on material and formal harmonization. Those were mostly focused on descriptive harmonization studies. Moreover, as far as we are aware, studies on compliance with IFRSs were not explored in previous studies. The review in this paper indicates that while the extent of harmonization has been low in some studies, others have identified significant progress in international harmonization. The overall findings of this paper suggest although some progress has been achieved, there is still a lack of measurement and formal harmonization among countries throughout the world.

Similarly, in respect of compliance with IFRSs, the review suggests that the extent of compliance is not satisfactory due to non-compliance by companies with the requirements of IASB standards. Recently, however, compliance appears to be gradually increasing both in developing and developed countries. One reason for the existing lower level of compliance with IFRSs may be that the mechanisms for monitoring and enforcing disclosure requirements in some countries were not stringent. There are a few studies that examined the association between firm characteristics and the level of compliance with IFRSs. Some studies observed that firm characteristics were positively associated with compliance, whereas others showed inconclusive results, demanding more research.

The reviewed studies raise severed implications for future research. The researchers working on harmonization and compliance with IFRSs have methodological problems to deal with. Scholars are still searching for better measurement tools to examine harmony/compliance, therefore, the examination of harmony and compliance with existing tools is somewhat questionable. I have addressed several problems associated with harmonization and compliance studies including the lack of benchmarks and theoretical frameworks, which may result in inconclusive research results. These methodological problems need to be solved by future research. At the same time, international accounting researchers involved in harmonization and compliance studies should continue their present research endeavors with a view to including more countries in the samples in order to provide a clearer picture of accounting practices around the world. For example, no quantitative studies have been conducted in countries of the former Soviet Union countries after its break up in 1991. Asian countries also deserve further attention from researchers as their economies continue to grow and integrate with the global economy. Harmonization studies in Asia have focused on South East Asian countries. China deserves more attention as it can now be described as one of the major driving forces in the global economy. Research on harmonization in South Asia has largely ignored Sri Lanka, Nepal, Bhutan and the Mal Dives. Studies in Africa have been limited to compliance with IFRSs in Zimbabwe and it is now time to draw other African countries into the research agenda.

As discussed earlier, the IASB has issued a single set of core standards which may provide relevant and reliable information to the users. Consistent with the efforts provided by the IASB and other international agencies, a large number of developing and developed countries have adopted IFRSs as their national accounting standards. As follow-up to this, future research is needed among IFRSs adopting countries to examine whether harmonization or compliance with IFRSs has been significantly improved after the adoption of IFRSs as their national standards.

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