Question

(a) Briefly discuss the environmental factors affecting accounting information system. (5 marks) (b) Assume that you have been asked to evaluate a particular theory of accounting. Discuss the factors would you consider before making a judgement that the theory appears 'sound? (10 marks)

Answer 1

Answer a: Environmental factors affecting accounting system:

1. Economic Environment

2. Political Environment

3. Legal Environment

4. Business environment

5. Cultural Environment

6. International Environment

They are explained further:

1. Economic Environment: Economic environment is important in development of accounting. The econimic environment include two aspects: macro and micro For the macro aspect, the level and growth rate of income, the extent of government rules and regulations, inflation ad level of exports etc. may imply specific impact on environment of accounting development. For micro aspect, source of funds, differences in size and complexitiy of business firms,finacial community etc. also influence accounting system. Other factors like ties to ther countries, degree of international activity may also make great impact on economic environment.

2. Political Environment: Certain political factors can influence accounting system, especcially in the developing countries. Political fators exerts infulence on accounting most probably via its system and the level of freedom.

• Political system can determine one country's economic system and hence its accounting patterns.
• Political systems also export and import accounting standards and practices.
• The political freedom is important to the development of accounting,reporting and particulary disclosure.

3. Legal Environment: Legal factors are concerned with one country's legal system, taxation and accounting legislation. The legal and tax environment have direct effect on how accounting is regulated. Different countries have different legal system. So it was suggested that many countries in the world can be put into one of two categories with respect to their main legal system: common law and civil law. The type of legal system can substantially influence the orientation of accounting regulations and of the related laws such as commercial law and company law. It thus determines the form and the objectives of financial statements. Civil law is basically legislative and comman law is non-legislative system. The main diiferences of these type of systems are clearly discussed in the accounting literature.

4. Business Environment: In accounting system, different firm characteristics are believed to affect the accounting system. The most influential characteristics are: size, industry sector and legal form.

Size: Many studies conclude that firm's size affects the adoption of IFRSs and degree of compliance with their requirements.

Industry Sector: Financial reporting frameworks are influenced by dominant industries such as oil and banking are influential in orienting the accounting standards and practices.

Legal Form: Accounting policies are highly affected by the legal status of the firm. Some companies are having strict and rigid tax slabs and some are having flexible.

5. Cultural Environment: Culture consists of patterns, of and for behaviour acquired and transmitted by symbols, traditions, different religions, body language, actions, ethical values and moral values. Hundreds of cultural factors influence the accounting system. Among them most important that influence accounting system are: degree of conservatism, secrecy

• Conservatism: The use of lower-of-cost-of market principles, allowance for bad debts; both reflect a high level of conservatism i.e. a desire to make a firm appear less profitable than it actually is.
• Secrecy: The higher level of secrecy, lower level of disclosure, which then affects the auditing function, making it more difficult to obtain necessary information, verification of accounting data that required.

6. International Environment: The local financial reporting framework is not only influenced by the local environment but international environment also contribute heavily in shaping the the characteristics of accounting system; especially in developing countries. Pressures to change international accounting have become stronger and stronger. These international pressures come from growing internatioanl economic/political interdependence, new trends in FDI, change in multinational companies strategies, impact on new technology, rapid growth of international financial markets and activities of international regulatories.

Conclusion: In this, we explore different types of fators that influence the accounting system. Many factors inspite of above mentioned also make impact on our accounting system. It is essential that accounting setters are aware of these differences within or between countries in order to achieve better objective of international or domestic accounting harmonization.