The lnternatlonal Journal of Accounting

Culture and Accounting in Indonesia: An Empirical Examination

M. Sudarwan and Timothy J. Fogarty Jakarta, Indones/a and Case Western Reserve llnlverslty

Key Words Culture FmsnLd rcpomng -kounrm~ rr~ula~on

The case ot Indonalan xcountlng IS lnterestmg for a \anety of reasons The emergence

ot rapidly expanding conglomerates and state enterpn>es ma> Increase the need tor flnns

to proi Ide more elaborate dlsslosure ot mformatlon to a u lder set ot mterehted primes

However. the persistence ot hlstoncal txtors such JS trade protectlon, entry bxners to

competition oligopoly. and the lack ol J uell developed apltal market tradltron. ma\

make firms less Inclined to pro\ldr Intormatlon to the public Since Dutch and U S

accounting practices ha\e Influenced Indonesian accountmg practice. the drtterences

betc\een Dutch Jnd U S xcountlng ma> explain some of the more unique aspect\ ot

accountmg development In Indonesld

TINS paper considers the rclntlonshlp between xcountlng and culture In the lndoneslan

setting Implementing estabhshed models in the literature lonytudlnal results are ottered

that suggest that the development ofxcountmg standards and disclosure prxtrces dre pat-

terned by change In cultural norms

The InternatIonal Journal of kcountmg \ 01 31 No 4. pp 463481 ISSN 0020-7063 -\I1 rights of reproductron m dn\ fornl reserved Coptrlght I_ 1996 Clnlrersltl of Illrnols

463 THEINTERNATIONALJOURNALOFACCOUNTING Vol 31 No -I 1996

LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT

The Dlmenslons of Culture

The theory ot cultur‘ll dlmen>lonb developed by Hothtede I 1980) has been wdelb stud-

led In the fields of sociology. organlzdtmnal theory, and more recently In accounting

Ineraure An dnalys of the SOCUI Citation Index re\ealb that over the penod 1981-1992.

the theory ha\ been cited In 583 studle\ In man> dlfterent field\ In addltlon to buggestlng

the existence of a wbstantlal consensus among researchers as to a theol?, ot culture It also

mltpte~ the need tar an elaborate lntroductlon Hotstede proposes fi\e cultural dlmen-

\ion> POH et Dtsrmm 15 a measure ot the Interpersonal power or Influence between \oc~al

groups It bho#> the extent to which the lee powerful members of mstltutlons ackno~vl-

edge that power IS dl\tnbuted unrqunllg Pouer dlstdnce pertain> to the relatlon>hlp

between supenors and subordinates and to the nature ot the communlcatlons that IS lIkeI>

to occur between there group!, L’tmtmttm motdmce measure\ xwlety levels ot the

member> of a society a\ to uncertain or unknown wuatlons In the future Socwtles 1 q In

the extent the) preter structure and stablllty In relatlonshlpb and m their demand3 trom

technology It~dr~ufmlrsttt meJ>ure> the extent perwnal autonomy IS pnvlleged o\er col-

lectl\ltles It relates to the strength of bond5 beween mdl\ Iduals, the need for loyslt! and

the extent of re\ponsrbll$ for others Mascrrlrtm I\ a measure of the deslrablllt> ot a,>er-

tl\e behavior and eltemal achievement Reflecting male-temale gender roles maxullnn>

15 contrasted wth societal dlsposmon\ toward modesty, nurturance. and cooperatl\e

beha mr Long-/ctttt ovwmutott reflect the extent to which bocletles rely on the AOH con-

struction of sjnthetlc >olutlons that do not produce short-run rerults This culturA

tolerance does not pnze persl\tent IncrementA progress or decomposltlonal ,~J>sI~

Hotstede hds shown that these dlmenslon> ot culture pro\ Ide a viable mean5 to compare

natIons Howxcr whether or not these dlmenwn> Ao pro\ Ide a meaningful NW of

dpproxhmg the change In culture within J \lngle socletv has not been addressed

Cultural Influence on Accountmg

Grq ( 1988) theorized connectlons between Hotstede s cultural lnlues and accounting

values By doing 50. he pro\lded the mobt comprehensl\e descnptron of the days that

xcountlng \ystemb can dltfer A a result of cultural \anatlon Grq’s model describes

xcountlng ~~lucs In tour dlmenslons Professrotdrsttr measures a preference for the ewr-

else ot Indl\lduJl protes\londl Judgment and the maintenance ot protessional

sclt-reguldtlon. a~ oppobed to compliance with prescnptl\e legal requirement\ and stdtu-

tory control C~tttfot-tttrn I\ a preference for the cntorccment ot umtorm accountmg

practlccs bewecn companle\ and tor the conwtent use ot such prxtlcrs o\er time a\

opposed to flevblllty In accordance ulth the umque CIrcumstJnces ot Indlwdual compa-

nies Cottwnwrtwtt 1s the preterence tor J cautlou\ approach to measurement as d

generalized 1 lew ot the uncert‘unty ot future event\ Th13 I\ opposed to a more optlmlstlc.

lalsbcz-faire, n\k tabng approach Sew-cc\ IS a preterrnce tor confidentlaIn> and the

restrIctIon ot dl\clowre ot buvnesb InformatIon to thohe who xe closely In\ol\ed wth Its

Cullure and Accounlmg In Indonesia 465

management dnd financing 4s such, It can be contra,ted to a more transparent. open and

publicly accountable preterence

Expected Relatlonshlps

The work of Hofstede md Gray creates d basis for the exploration ot the relatIonshIp

between changes In the fl\e cultural \Jues and changes In the tour accounting Lalues If

culture and accounting are reIdted through these dlmcn\lons In J meanmgful w+. the!

should be associated through time ulthln the confines ot a single nation Therefore

H,: Change m power distance IS related to the change In accounting \ alues

m the Indonesian context

Hz: Change m uncertainty dvoldance IS related to the change in accounting

values In the Indonesian conteYt

H3: Change m mdl\ IdualIsm IS related to the change in accounting values in

the Indonesian contekt

H1: Change in mascullmt) IS related to the change in accounting Lalues m

the Indonesian context

H5: Change in time onentation IS related to the change in accounting values

In the Indonesldn contekt

Specific expectations tor protesslonalrsm. umtormlty. conservatism md secrcc) can be

denominated as subparts A. B, C. and D wthln each hypothesis

METHODOLOGY

Measurement

Constructs In\ol\lng culture and accounting \dlues ue not readily observable Follou-

lng Hofstede t 1980) and Gray ( 1988). multiple measures were adopted for each theoretlcJ

construct and measured tor each lear m the sampling frame Table I detruls the operatlon-

ahzatlons of the constructs In this study Beyond this. a brief rationale tor the measures IS

appropriate More detailed Information can be found In Sudarwdn t 1995)

Hofstede (1980, 1991) suggests that the wealth of natlons IS one ot the predictor5 of the

vanance In po~w tfrsrance between nations Therefore rooting Its measure In educational

chardcterwlcs and In technological development statlstlcs appeals to Ideas about condo-

trons underprnnrng wealth creation Hotstede (1991) suggests that the amount and

coverage of codified laws Indicate degrees of utzcet-turtm m~ordance Accordingly, this

construct IS operatlonallzed In terms of the magnitude and scope of governmental deregu-

lation mltlatl\es Wealth provides people with resources to pursue Interest5 that may be

different from the Interests ot others (Hotstede 1991) This suggests that mcome per capita

and the urbanization rate will pro\ lde measures of rtrdr~wltmltsttt Smce tttmculttm maps

2 Ta

ble

1 Th

e Lm

k Be

twee

n C

ultu

re C

onst

ruct

s an

d Pr

oxy

Varia

bles

Culture and Accountmg In lndonesla

Table 1

The

Lmk

Betw

een

Cul

ture

C

onst

ruct

s an

d Pr

oxy

Varia

bles

C

onbn

ued

Culture and Accountmg m lndonesla

I

3

470 THElNTERNATlONALJOIJRNALOFACCOUNTlNG Vol 31 No 4 1996

Nell mto gender role> and mto the gendered dl\ IsIon of labor (Hotstede. 1980). the com-

posltlon of employment bl sex senes as a measure ot current societal mascullrut~ The

obsen anon ot the compo5mon by sex ot students pro\ Ides a tuture measure ot mdsculm-

lty Hotstede ( 1991 1. m his use of the ChInebe Value Survey to develop d ~IML’ !~rr.-err

Index, Indrc&ed the Importance of the conser\atl\e use ot re5ources For these purposes

the percentage ot Gross Fl\ed Investment m the Gross Domestlc Product Indicates d

deferral mentalltv A firm societal comnutment to spend more on educatlondl programs m

order to further the society s Investment In human capital also IS consldered

The mam charactenstlcs of pr,,fc?ss10t1(711stll are d preterence tor the exercise ot profes-

sional Judgment and the mdmtenance of professional selt-regulation (Gray 19881 For

\e\eral reasons, the nature ot auditors and the general debcnptlon ot their work product

provide appropnate mea>ures To address accounting standards, the protesslonallsm of

accountmg practice 15 measured with the number of accounting method5 not permltted by

Indonesian accounting standud> but Jpplled m tinanclal reports, and by the number ot

nccountlng and audltlng standards Issued by the Ab>oclatlon of Indone5lan Accountant\

Since 1rr~fi~7r~rn entail> conslstencq and compJrJblht!. measure5 for unIformIt> In

accountlnp practice Included the number ot accounting changes, comparatl\e accounting

pol~c) across firms wlthrn dn> one reporting penod and the number of nltemdtl\e

nccountlng method> pre>cnbed In the Indonesian dccountrng standards tar both balance

sheet cind Income statement Items Cor~n~rsr?r m accountmg prdctlce took on Its t!,plcal

meanly (see Hendnksen & Breda 1992, a5 It related to perml5slble accountmg method5

k-m-\ can be measured bl the number ot balance sheet Items and the number of Income

statement Items prehcnbed In the Indonesian accounting \tandards This can also be placed

In a relatlle context ~lth U S nccountlng standards henlng as a benchmark The more

U S accounting standard\ are approached. the le53 secretive IS Indonesian accounting

practice

Data Collection and Samplmg Frame

Thlb stud) used data that co\ers a t\helve year penod ( I98 I- 1991) This penod 15

umquelq Jppropnate because ot the significant transformation that occurred m Indonebla

dunng that time (Roblson 1991) Ddtd related to cultural Lalues uere obtained trom bun-

ous reports and archives mcludlng the Umted NatIon. Statlstlcs Reports. International

Statl,tlcs, Intematlonal Marketing Data, dnd Indone5lan Econonuc Trend5

Flnanclnl reports Here obtdmed from firm5 that publish financial reports m English

These firms Include both 5tdte enterpnses and pn\ate corporntlons Flnancldl reports of

state enterpnses were pro\ lded by the Development and Finance Superb~soq Board a

gotemment qenq \h hose tasks Include the audit of state enterpnses Flnanclal reports ot

pnvnte enterprises were provided by the International Finance Corporation a World Bank

orgamzatlon that pro\ldes long-term loans and Lenture capital to pn\dte enterpnses m

deleloplng countnes Another group of financial reports wa5 obtained from firm5 hsted m

the Jahdrtd Stock Exchange These findncldl reports were proklded by the Capital Muket

Supervlsorq Board to which firms listed in the Jakarta Stock Exchange submit their finan-

cial reports In total. 108 financial reports compnse the sample Fifty-5even reports were

publlshed In English nhlle the remammg 31 reports used the Indonesian language Fatty

Culture and Accountmg In lndonesla 471

reports were trom state enterprises..“› dnd 58 reports nere from pnkate enterpnses Orgam-

zatlons span man} drtferent mdustnes mcludmg mnnufacturmg. tarming financial

services, hotel. and transportation

The sources of data related to Indonesian dccountmg ad audmng btandards are Prtnstp

AXutrtattsr Itldanesta 1984 and Nortna Petnerrhsaatt Auntan Both are the offlclnl publ~ca-

tlons ot the Assoclatlon ot Indonesian Accountants (Ikatan Akuntnasl Indonesia) that

contain. respectl\ely, Indonesian accountmg standards Issued hy the Assoclatlon before

1992. and Indonesian audrtlng standards promulgated bq the Assoclatlon until 1990

Data Analysis

The structural equations sottuare LISREL (Joreskog Br Sorbom, 1989) was used to ana-

lyze the data LISREL reduces the arbltrarmess of selecting the measures (obsenable

Lanablesl that compose latent kanables (theoretIcal constructs) LISREL pro\ Ides an

analysis to test the vahdlty of such a selectlon b> lncorporatmg estimates of the dlscrep-

ancy hetween observed lanables and Intent vanables In the test of the relatlonshlps among

constructs LISREL also considers all possible connectlons among constructs under stud!

as a single model Thus compare3 tavorably to tests that pro\ lde more selective tests of the

connectlons Jmong consnuct~ (I e . regrebslon dnd ANOVA)

RESULTS

Confirmatory Factor Analysis

As a prelude to the hqpothesls tests LISREL dssesseh the mtegnty of the proposed

model through confirmatory tactor analysis This information hds the potentId to alter the

exact nature ot the results that are sought through the hypotheses tests bv questioning the

vlablllt> of the theoretlcal constructs The accountmg values set forth by Gray (1988)

proved to he Independent constructs In the Indonesian context Professlonallsm. umfor-

mltv conser\atlsm and secrecy were not redundant nor non-parslmomous All measures

proved hlgmtlcantly related to the theoretIca constructs ds expected Four latent lanahles

for culture (porter dtstatice rrttcertatnm a\ ordance, tndt~~rdrralrsttt and tnascir~rtiih ) proved to be d >upenor evpresslon ot the Independent bdnables The fifth dlmenslon ot

culture. frttre hotr:otl was not found to he a independent factor H IthIn the cultural values

m Indonesia Theretore. the fifth hqpothesls set Involvmg time onentatlon eftects could

not he tested

Two observed vanables that were onglnally Intended to measure the drmenslon of ttttte

horr:ott (ratio of Gross Fixed Investment to Gross Domestic Product and the ratio of

spending on education to total government spending I IoJded slgnlficantly on ttzcftl rdual-

tsttt Therefore they were Included as addItIonal measures of Indlvlduahsm

Further analysis revealed that tourteen out of the other fifteen observed kanables ha\e a

significant relatlonshlp to the four remammg dlmenslons of Indonesian culture Homeker.

the ratio ot student enrollment to total population was not related to any of the latent ian-

ahles This measure was excluded from subsequent analysis

472 THElNTERNATlONALJOlJRNALOFACCOUNTlNG Vol 31 No 4 1996

Hypothesis Tests

The cultural \alurs were h!potheslzed to hae penalve relatIonshIps with protesslon-

all\m, conservatism. secrecy and umformlt~ of accounting practtce Figure I reports the

results ot the final LISREL model that rncludes all slgmficant etfects Comentlonal LIS-

REL presentation Involves the depIctIon of a tnmmed” model ~5 shown m Figure I This

15 the result of starting hlrth a model of all hypothesized effects (the tull model) ellmlnat-

Ing the not sqyficant effect> that Improve the overall fit of the model

CONSERVATISM

INDIVIDUALISM 4-Oll-

All coefflctents are slgnlflcant at 01

Figure 1 Structural Equahon Model for the relahonship between Culture and Accounbng Practice (Tested Model)

Culture and Accounlmg III Indonesia 473

1 Power Distance Effects Hypotheses IA-1D

Test results mdlcate a posltlve relntlonshlp between power distance and consenatlsm

The relatlonshlp has a regression coefficient ot 331 and d t-i alue of 5 218 Thus. the rela-

tionship IS srgmficant at 001 and Hlpothesls IC IS supported Reductions m power

distance IS related to decreases In conservatism

Hypothesis 1B predicts a relatIonshIp between power distance and umtorrmty The

t-value for such a relatIonshIp of 2 008 Indicates the reldtlonshlp has a slgmficance level

of p < OS Hypothesis 1 B IS supported

Results of the hypothesis testing indicate no slgnlficant relatIonshIp between power dls-

tance and professronnhsm Therefore Hypothesis I A 15 not supported This suggests that

changes m power distance In Indonesian society may not hn\e any Impact on changes m

professionalism ot accounting practice In Indonesia H> pothesls ID predicts J reldtlonshlp

between power distance and secrecy Results of the h>potheslb testing mdvxtes no slgmt-

Icant reldtlonshlp between power dlstdnce and >ecrecy The r-\~lue of the gamma between

secrecy and power distance IS not significant at p c OS Hypothesrs ID IS not supported

In sum. two out of the four hypotheses pertaining to the relatIonshIp between pouer d~s-

tdnce and accounting lnlues xe supported The supportive e\ ldence tor this hqpothesl\ set

IS nuved

2 Uncertamty Avoidance Effects Hypotheses 2A-2D

Teb\ts ot Hqpothesls 214 evdludte the ekpectatmn that protessionJll\m IS reIdted to uncer-

tainty a\oldnnce The test result sho\cs a pn.srtr\~ relatlonshrp between uncertainty

~\oldance and professlonahsm of the Indonesian accounting practice >lgmficdnt p c OS

Contrary to mtumon a decreasing trend of uncertnrnt) avoidance IS not assocldted with a

stronger comnutment to professronallsm In the preparation ot flndnclJ reports

Hypothesis 2B predicts J posltl\e relatlonshlp bet\\een uncertalntv aioldance and unl-

fornutg The tests ot this hypothesis provide supportlie evidence ot the posltlle

relatIonshIp between uncertainty a\oldance and umforrruty The represslon coefficient ot

Z 586 is significant dt p c 001

Tebt> ot hypothesis 2C proirde supportl\e elldence tor the expected relatIonshIp

between uncertainty aloldance and conservdtlbm The r-\Jue ot 4 418 Indicate> that the

structural equation coefficient hdls J clgmficance Ie\el of p < 001 Hypothesis 1C IS

supported

Hypothesis 7D predicts a relatIonshIp between uncertruntg avoidance and the becrecq of

accounting practice Tests ot this hypothesis 1D prollde support~\e ebldence tor dn

Inverse relatIonshIp A decrease m uncertamt) avoidace IS slgmficantl> sssoclated ulth a

more secretike nccountrng practice This dIrectIon IS Ao not IntuItIke

In sum. all four hypothe\eb between uncertamty dvordance and accountmg values are

significant Homeler. the curious dlrectron of tno ot these ettects cannot be Ignored

3 lndlviduahsm Effects Hypotheses 3A-3D

Hypothesis 3A predicts a relatIonshIp between Indlvlduahsm and professlonallsm The

test resulted m a regression coetficlent ~lth a t-value of 3 018 The results Indicate that a

47-l THElNTERNATlONALJOURNALOFACCOUNTlNG Vol 31 No 3 1996

posrtl\e relatronshlp between Indl\ ~dual~srn and protesslonallsm In nccountlng practice IS

vgmflcant at p < 001 A> lndl\lduallsm Increases, the protewonallsm of accounting

prxtice also increases

Hypotheslh 3C predicts a rclatlonshlp between mdr\Iduallsm and consen’atlsm Test

results show J coettlclent between Indl\lduallsm and conser\atlsm of accountmg practice

ot I 651 with d t-\dlue ot I1 302 The results suggest that such a posltl\e reklonshlp IS

slpmttcJnt at p < 001 Thuc mcreJse In Indl\lduJw-n IS associated with Increase> In the

con3er\,Ulsni ot accounting practice

Te\t re\ult\ show J ncgatl\e reldtlon>hlp betueen mdl\IduJllsm dnd the 3ecrecq of

dccountmp prxtlce The regrewon coefflclent between Indl~Iduallsm and secrecy I\ - 935

mlth d r-value of -!5S? The negatl\e reldtronshlp between the tuo \anables m

Hypothew 3D I< slgmflcant at !) < 00 I The results suggest that a decreasmg trend In the

mdl\ Iduallwi of the Indonevan toclety IS associated wth the Increahmg trend of secrecy of

accounting practice

Hlpothesls 3B predicts a negatr\e reldtlon>hlp between Indl\lduJlsrn and unitormity

Home\er te\t rewlts \hon a po>ltlve relatIonshIp between mdlvldu&m and umformlt~

ot J sutficrent magnitude to produce a hlgmficance Ie\el ot 1’ c 001 A decrease m the

Indl\ IdualIsm ot the Indoneblan wclety 13 as>oclJted ~lth a decrease m the unitormity ot

xcountlng prxtlce Thus. hipothebls 3B WJ\ not supported

4 Mascuhndy Effects

Results of the hypothesis testing tor the fourth set Indicates no slgmficant relationship

betkseen rndxulmlt> and nccountmg values The r-values for these gamma coetficlent> did

not approach the necessary levels No hypotheses pertdmmg to this cultural value HIS

supported

DISCUSSION

The Nature of Cultural and Accountmg Values In Indonesia

The tIndIng> of thl\ stud> suggest that only four ot Hotstede’s five culturJ \Jues

(JWU PI tirsrlwce w~cc~~~w~n (11 orriw~ rnrit~~ttfrr~tlrsttr and ttrrrscir~rtrrh 1 are necessary to

the descnptlon ot Indonewn culture The fitth dlmenslon of Hofstede’s cultural kdlues

mte~ /rorr:ott was not tound to be a unique dlmenslon ot Indoneslnn culture The fact that

thl> dlmenslon H JS added retrospectl\el! to the other tour (Hofstede 199 I ) also suggests

that It 13 conceptualI\ redundant

Unllhe other Asian n&on\ that are steeped In Confucldmsm. the Indonesian soclet)

ma> not consider that the tuture IS more u-nportant than the present The Importance ot the

tuture 15 Llppreclated onI> through Its tangible Impact on the present condltlon Thus, the

structure of the Indone>lan culture does not require the separate statement ot this

dlmerwon

The development ot accounting prxtlce In Indonesia can be clasblfied Into the compo-

nent\ ot protesslon~lism conservatism. secret!. and umtorrmtv developed by Gray

Culture and Accounting In lndonesla 475

( 1988) Thus findlng suggests that the development ot xcountmg practice In Indonesra IS

comparable to that of other ndtlons. Insofar as these four dlmenslons are required for a par-

~Imonlous dnd complete e\planatlon

Cultural Change and Accountmg Change In lndonesla

The hypotheses tests sought >upport tor slYteen specific relatIonshIps Slgnlficant level\

ot assoclatlon were reached In rune cases These rnlued results validate the plduslblllt> ot

tahng a detailed look at the connectlon between xcountlng practrce and culture In one

nation oker ,I penod of time At the \dme time they also Indicate that the specific relatlon-

ships that compnbe the xcountlng-culture news are quite ~anable The 3pec1fic patterns

of reldtlonshlps are worthy of dttentlon

The professwnJlsm ot xcountlne prxtlce HIS tound to be posItIveI\ related to Inch-

~ldu~llsm but not reIdted to power distance or to uncertalnt) J\oldancc An increase In

natmnJ uenlth drives \ocletle> toward IOU poiter distance societal nomis (Hofstede.

1980 I99 I ) An anal) 31s ot Indonesldn economic de\ elopment howe\ er Indicate> that

the creation ot ndtlonal wealth depends heavily on gokemment inmdtl\es In this sltua-

tlon. the process of national wealth credtlon does not reduce the Importance ot goiemment

authority to the key parties m\ol\ed rn ruch a proce>s Thus. tar such parties. the rncreJse

In natlonal uealth m+ not necessarll\ result In a reduction In pouer dlstdnce or an

increase in protessionali\m

The succes\ ot both state and pn\ate enterprises to some degree has been the result of

J great relldnce on government pollcle\ oruf access to gokemment authontj Prote>slonal-

~sm m conductmg buslne\\ m+ hd\e become beconddq to the dblllt> to make

arrangements \h Ith the go\ emment Since the prepxatlon ot fln~ncl~l report3 ~lco reflects

this pdttem of doing buslnes\ protewonahsm mw not be a ke) txtor

The go\emment’s Influence I\ apparent In many aspects dnd stage> of the xcountmg

protewon This ma) m&e the xcountmg prote>$lon \erq cdutlous In settmg xcountmg

dnd audrtlng 3tandards Necessdlr?, steps are t&en to alord dn!, conflict between protes-

slorwl btandxds and go\emment regulation This en\lronrncnt IS not conducl\e to the

emergence ot selt-reguldtlon H lthln the xcountmg proteswn

The attachment of buqmess xtl\ltle.\ to government authonty ma) negate the conre-

quences of the Increase In natlondl health and the reduction rn government regulation tor

the changer 111 pomer distance and uncertnlnt) ~\oldance ot the xcountln,o communrtl

A\ a result changes In the aboLe emu-onment\ ma) not hale an4 Impact on the Indone-

sl.ln nccountlng practice Thl\ Interpretation. however, doe< not nece\\anly appll to other

segments ot the Indonesian society For soclet) at large. the Incredhe In natlondl Health

and the reduction In golemment reguldtlon ma!, hd\e had an Impact on socwtal norms

related to power dlstdnce and uncertainty avoidance But fol certnln segments ot the WCI-

et) buch as the accounting comrnunrt~ mbtttutlonrll con3equences ot the changes In

socletnl norms are not automdtlc A reduction In the reliance of the accountmg communltl

on government authontl m+ be J necessru). condltlon tor such substantl\e change In the

Indonesian nccountlng professlon

That lndlwdu~llsm IS posltlvelv related to the profewonatlsm ot xcountlng prxtlce

may be bJsed on the Increa\lng cornpetItIon among firms In such an en\ lronment manag-

476 THElNTERNATlONALJOURNALOFACCOUNTlNG Vol 31 No 4 1996

en of firms are under constant pressure to exercise their profewonal &~lls to outperform

their competitors Thus could also mean that professlonahsm IS needed In the preparation

ot financial report\

Thl> result, however, 15 not consistent ulth the tlndmgs ot the tests mhlch suggests that

mxket competition In the processeb of flrni’s wealth creation IS not associated wth the

increase m the protesslonJl>m ot xcountlng practice Exarnltwtlons of datd that meawre

mdlvldualrsm and ot the confirrndtor> txtor analysis shou that the result5 do Indicate that

mdlvlduallsm of Indonewm >oclet> may ha\e decred>ed over the 1980s This suggests

that the Indl\lduallsrn ot society and that of busme\\ management may he different

constructs

An Increase In competmon does not a>soclate with an lncredbe In the profewonalrsm of

xcountlng practice when access to government authontl can clrcum\ent the need tor pro-

tewonahhm In a competltl\e en\lronment. especIalI\ It the self-governance structure of

the profewonal community IS relatl\ely Immature

The test5 of hypotheses proklde wpport~\e e\ldence of the pobltlve relJtlonshlp

between uncertainty aioldance and the con>enatlsm ot accounting prxtlce TINS lmphes

that L\\ the go~emment lessen3 control o\er economic actl\ltles through Its deregulation

pol~q firms have to deal wth Increawyg competltlon CornpetItIon does not alloy man-

agerr ot timis to deal onI\ with secure bwme>ses An o\ercmphasls on J conservatl\e

approach to doing hwness ma) force firms to pah,s Investment opportumtws to other5

This ma! attect the firm\ pcrformdnce m product and tmanclal markets

In tlnanclal market> competltlon requires that firms seehng funds tram the markets

pro\lde e\ ldence to con\ lnce potenwl Investor5 ot pronusmg returns gIlen rusks In this

cJxe. J firm 5 cost of capital becomes a function ot firm\’ success In this process Imprebs-

Ing potential Investors HIth a firm’s succecs potential 15 crucial to Irnpro\e firm’s

competm\eness In tlnanclal markets Since firms’ financial reports are an important

source ot mtormatmn In competltl\e capltdl markets, firms seek to pro\ Ide lntormatlon In

their financial reports look good In the short-run firms ae less Ilkcl! to choo>e consena-

tl\ e xcountlng methods to measure Jnd dlsclose firms \ Jues In the flnanclal reports

Test results show a po\ltl\e relatlon>hlp between the tmo constructs As dlscussed In the

prewous section. mdl\Iduallsm had a decreasing trend Thu> the findlngs suggests that

both the Indl\ Idu,.tllbm ot the Indonrsw socletb dnd the consenatlsm of xcountmg prac-

tice tvere IOH

The pre\~ou\ dlscuwon also euplalned that Athough the lndl\Idudllsm of the Indone-

wn society In general N JS decreaslnp, firms’ en\ u-onrnents had an mcreasmg trend of

Indl\Idualw-n This lead\ to an lnterpretdtlon that apart tram the general condmon of the

Indonevan socwt!. Indlvlduall~m ah It relates to a business entity s en\ ironment has

Incred\lng N hlle the cowen ntlsrn of xcountlng prxtlce NJ~ low If so, the Increase In the

Indl\ IduJlsm of wch firms would correspond to a ncgatl\e relatlonshlp with the conser-

vatism ot xcounting prnctlce Increwng competltlon motl\dtcs firm\ to tavor nsk tdkmg

beha\ Ior dnd to select les\ con>enatl\e accountmg methods

The tebt results alho shah dn unexpected posm\e relatIonshIp between power distance

and the consenatlsm of xcountlng practice The process of n&londl wealth creation pro-

\ldeb ,In explanation for this result Modem lndoneslan wealth cre&on requires capital

partwpdtlon tram LUIOUS sources When this depends on go\emment authonty there 15 d

Ixk of competltlon among tlrrnb to attrxt fund\ from capital markets AccordIngI\ tums

Culture and Accountmg III lndonesla 477

are not subject to pubhc scrutmy Intormatlon ot firms’ operating results and asset POW

tlon can be lImIted to a fern well-connected groups Firms do not need to be concerned about provldmg mtormatlon regarding their success to outside investors and other parties

But as wealth dccumulatlon Increases the accumulated capital ot the estJblrshed.

well-connected groups may not be sufficient to tulfill the expanded needs for firms capi-

tal Fu-ms then must look to cdpltal markets for addmonal sources In an efficient capital

market, publicly a\allable InformatIon of a firm s performance influences a firm s attrac-

tiveness Since financial reports serve as one medium tor firms to dispense mtormatlon ot

their performance. firms mdly choose aggresslle accounting policies Competition IS again

ldentlfied as the possible dnvmg factor tor less consen atI\ e approaches to the preparation

of financial reports

The tests of the hypotheses Indlcdte no hlgmficant relatlonshlp betKeen pomer distance

and the secrecy ot accounting practice The results ~150 do not pro\lde support~\e e\~-

dence ot the posltl\e reldtlonshlp bctaeen uncertalnt) a\olddnce ,ind the becrec! of

accounting practice The results howr\er. do pro\ Ide supportive e\ ldence of the negative

relatlonshlp between mdl\ lduahsm and the secrecy of accounting practice

Reliance of the business commumty on golemment authonty may Ao negate the

etfects ot the lncredse In nJtlonal uenlth on the proce>s ot lessenmg the secrecy of

accounting practice The Importance ot being able to deal with government authority gl\es

Incentrkes to business to build personal access to the source ot such duthonty and to pre-

vent others tram shnnng such personA access Therefore, the Increahe In natlonal wealth

may not be tollo\hed by a reduction In po\\er distance and In the becrecg ot xcountmg

practice

This result. hoaeker IS In contrast to the suggestion ot a positive relatronshlp betbeen

power distance dnd the consen atlsm ot xcountlng prxtlce As discussed In the pre\ IOU

section, the wealth creation process required to support Ixrge scale enterpnseh. regardle>s

of the reliance on government duthonty neces>lt&b that firms develop capltal sources

tram potentId Investors especIalI> ah the need tar capital Increases In magnitude Once

the firms succeed m gaming funds tram general cdpltal markets they hale to make more

mformatlon akallable to Investors Consequently, firms w111 hale to reduce the sccrec) ot

accounting practice It 15 not clea that thrs has to occurred In any great degree In

Indonesia Indonesian firms and the ndtlon 5 accounting protewon hale depended on gobemment

guidelines for certnmtj Go\emment deregulation lessen> the a\culablllty ot such gulde-

lines The accountmg commumtq may not be read!, to face this wudtlon Accordmgly

Instead of boosting confidence deregulation may IncreaSe the Jnxlety among firms and the dccountlng protewon Th15 may ha\e resulted In a more secretl\e nccountlng practice,

and theretore underlies the negdtr\e relatIonshIp with uncertant\ d\oldance TINS result

suggests a residual ettect ot the pre\~ouslj hIghI> regulated business emlronments that

acts as dn Impediment to the process ot lncreasmg disclosure In external financral reporting

Lou Indlvldu.4lsm ot the Indonesian society 1s associated with J high secrecy ot the

Indonesian dccountlng practice As dlrcussed earher, It ma! be useful to contrast the busl- ness firm en\ wonment with the general Indl\ iduahsm of the society Firm en\lronments

mdlc‘ue increasing firm mdl\lduallsm Thus. confined to the \lew ot a busmess ent$‘s

strategic ad\antage. the above rebults suggest th,lt an Increasing trend ot firm mdl\ldual-

478 THElNTERNATlONALJOlJRNALOFACCOUNTlNG Vol 31 No -1 1996

I>rn 1s assoclnted urth a greater concern to mamtam secreq and protect propnetq

intormation

The results ot the te\t\ of h) potheses show a posm\e relatlonshtp hetween Indl\ Idual-

Ism and the umfomuty of accountmg practice However. since Indl\ldualtsm as It relates

to a business firm environment 15 opposite to Indl\ Idudllsm In society at large the result5

give \upportlve evidence for J negatlle relationship between the mdlvlduahsm ot firms

en\ lronments and the urufomut) of accounting prdctlce

4n nnalysls ot the dmienslon> ot nccountmg practice Indicates that the number ot

accounting changes has the highest loadrnp on the umformlty dlrnenston of accountmg

prJctlce In this context. the test results of hypothesis IC could suggest that as the wealth

creation process ot the firms Increahes complexIt occurs and firms tend to apply more

neu accounting methods to their financldl reporting As the wealth creation process

becomes more open more complexrt> penetrate firms’ operation and reporting practrces

The old ways of doing things may not be suitable for an Increasing compleuq ot firm>

operation and reporting processe\. dnd changes In these processes become Ine\ltnble In

thl5 sltuatlon. managers ot funms mutt he able to be creatl\e. Inno\atlve and flexclhle to

dddpt to the necessq changes Changes In accounting methods ma! signal the creatlk lty

and flexclblllty of firms’ manager\

In searching for alternative dccountlng method>, firms encounter the fact that the

accounting protesslon m Indonesia may not hake contemporanly appropnate accounting

standards This Iea\es firm\ with different sources of accounting methods tram which to

choose The sources ot neu accounting method3 rnq Include, but are not lImIted to. the

lntematlonal accounting \tdndards and the U S accounting standards Due to the many

dlscrepancles among these choices. the unltormlty of accounting practice 15 likely to

decrease

The results of the tests of hypothesis X Indicate that In the absence ot gokemment reg-

ulation. business firms become anylous as to business sltuatlon5 At the sdme time the

accounting professlon does not seem prepared to pursue an expanded agenda of account-

ing standard setting The combined bltudtlons can lead to more secretive accounting

practices HomeLer, this could lead to an lnterpretdtmn that firms are mature enough and

ha\e enough confidence to accept the nsk ot reporting under dltterent accounting meth-

ods Le55 unltorm accounting practices are then reflections ot this flexlhlllt\, Thus the

pressures of uncertainty contnbute to managenal discretion In tmanclal reporting Manag-

ers Internal needs for new ,Iccountlng methods that can cope with the Increasing

complexIt> of firms control and fmanclal reportmg maq be the pnnclpal factor atfectmg

the lower urutormlty ot accountmg practice The development ot such needs may not he

necessmlq associated wrth the tums’ competltlve en\u-onment As long a5 thebe needs

mlse and external uniform guidelines tor the desired accounting method\ are not avdllable

the practrce of e\temal hnancldl reporting will vary It may ha\e little to do with the

fim-15 competltl\e en\ Ironment or Indl\ IdualIsm

Importdntlj theretore. this study pro\ Ides new e\ ldence for the universal role ot mana-

genul dlscretlon In the process ot accounting choice Managenal dlscretlon, we n%ert.

exists not only In a tradltlonnlly tree market envu-onment but charactenstlcall!, in sltua-

non5 where there 15 lehs voluntary dlszlosure ot mformntlon about firms, and where

golemment Influence mixes with market mechamsms The presence of manqenal dlscre-

tlon complicates the apprecldtlon ot cultural Influence on accounting Manapenal

Culture and Accounting in lndonesla 479

dlscretron emerges from a firm s specific sltuatlon, which mq or ma) not represent the

general en\lronment that Influences the culture ot society at large State enterpnses, pn-

LateI> held companies. and puhl~cl) held corporatlonr. for Instance, ma!, operate in

dltterent organIzational cultures through which the management dccwon proces\ IS

shaped This further demonstrates that the relatlonshlp between culture and accounting IS

compllcJted and dltficult to generalize

Malsculmlt> was hypothesized to be negatrlelq related to all accounting knlues The

results, however, Indicate no slgmficant relatlonshlps The findings mq lead to an mter-

pretatlon that xcountmg practice m Indonehld 1s still wthm the domain of the CI~~SIC

male gender t>pe The Involvement of more skIled and educated Indone\lan Homen ha>

not yet rmpnnted a meanmgful altematlle gender value It IS also notable that demogrdph-

Icall> the m\olvement ot women m the accounting communlt> thus far IS so mammal that

this lack ot Impact should not be surpnslng

The practice ot external financial reporting bv Indonesian firms seem> more adaptl\e to

en\lronmental changes than does the process ot Indonesian accounting standard hettlng

Indonesian firms may prepare their financial reports partly In accordance ~11th U S

accounting standards, InternatIonal accounting standards or accounting htandards applied

rn other nation Maket competmon and the reliance of the busmess commumty on access

to golemment authonty are factors which appear to confirm dnd distort the hypothcblzed

relstlonshlps between cultural values and the dimensions ot accounting practice The rell-

ante of the busmess community on go\emment authority may hake caused the

relatlonshlps between cultural values and protesslonallsm and secrecy of the Indonesian

accounting prdctlce to be the rererse ot the conventlondl dlrectlons Market competition.

on the other hand, seems to stimulate the reallzatlon of the tradItIona relatIonshIps

between cultural value5 and conservatism of accountmg practice

Market competition and psychologlcal motives provide competing c\planatlons ot the

relatlonshlps between cultural values and the unltorrmty ot accounting practice Manage-

nal drscretlon oler finan reporting 1s not necessanly hmlted by economic reasons

Identified with fun15 operating m established competltl\e capital markets Managers of

firms not operating In such an enklronment also hake polItIcal or pslchologlcal motl\es

that underlie discretionary reporting practices

lmphcatlons for Future Research

This study questions the extent that a smgle model of cultural kdlues can be generalized

across nations While the Indonesian case cdlled for the use ot the tour onglnal dlmen-

slons. this IS not necessanly true tor other ndtions OnI! through the repllcatlon ot this

study m dlfterent countnes can the generahzablllty of Hotstede’s dlmenslons of cultural

Lalues be determined It IS likely that a \arymg number ot dimensions with Important

qualltatl\e dlfterences tie needed to descnbe culture in dltterent countnes Although this

may erode the straightforward nature ot comparatl\e studies. It would Increase the confi-

dence that can be placed In this work Only by having such a country-specific grasp on

culture that IS laIrdated ober penods ot time can we determme the usefulness ot Hofst-

ede s cultural \ alues m explammg and prechctmg the development of accounting practice

across nations

480 THElNTERNATlONALJOlJRNALOFACCOUNTlNG Vol 31 No 4 1996

Past research has dlv.ays attempted to use culture as a va&Ae that unproblematlcall>

descrrbed natIon> While thrs may have some \alldltl tor cross-ndtlonal comparison pur-

poses. the present research shows that lanatlons rn culture occur In that this occurs. the

bnap-shots’ provided h> the culture-dccountlng literature dre of lImIted value What we

need to Inlest more heavily m IS research designs capable of provldlng m>lghts Into the

dlnamlcs ot culture JS It relate, to accounting

Future study ot culture could be extended to Include dn Inquiry Into the basic \Aue> ot

all human beings regardlebb ot their race or natIonal+ Insights Into these basic values

ma\ supplement the posalbly mlsslng dlmenslons ot culture a\ currently understood b>

Hofstede and other\ This may enable u\ to have dn understandlng not onlv about cultural

dltferences but also about cultural slrrulantles among nations which m turn would be ot

value In seekmp to harmomze standards for external financlJ reporting These Insights

ma! JI\O resurrect the study of culture tram the posslbl) Western bias ot Hotstede’s con-

cept, which tends to equate economic development urlth cultur‘ll progress As J result. we

md\ also be better equipped to cope H Ith the development of a global culture

Another research Issue related to the study of culture deal\ with the inquiry into the

Intro-relatlonshlps among the dlmenslons ot culture The tindings of thlb btudy suggest

several anomdlles It remdlns unclear. tor Inbtdnce uhb the Influence of market competl-

non I\ limited to the relatIonshIps between the dlmenblon> of culture and the consenatlhm

of accounting prdctlce Neither 15 the Influence ot market competition on the secrecy ot

Indonesian accounting prdctlce dppdrent An equally unresolved Isbue 15 H h) the reliance

on goiemment duthontb beems to Influence only the eftects ot culture on the professlonJ-

rbm dnd the secrecy ot accounting prdctlce These IWM\ Indicate that Hotstede’b model ot

culture ma> be too broad to e\plJln and predict the development Jccountrng practice A

uell-developed theor! ot the Intr+relatlonshlps among the dlmenslons of culture could

elaborate on the speclflc direct and Indirect effect\ ot each cultural Lalue on accounting

prdcrice

Llmliatlons

Debplte widespread acceptance Hotstede 5 the00 IS not without ImperfectIons m Its

measure ot the dlrnemlons ot culture For example Hotstede clas\lfie\ cultural dlttuslon

b> nationalit) This cla>slficatlon onglnate> trom J premise that shared values are the

basis for natmdl eul\tence It cultural dltiusm does not tallow the border ot ndtlonh. cth-

mc and race cntena rnJ.1 proklde more \~lld wa>s to delmeate cultural differences The

Indoneblan population comprises several different ethnic groups ~lth dltferent language\

rellglons, dnd customs The tocus on national culture borrowed from the literature rng

overlook the Impact ot the dltferent cultures ot these ethnic groups on Indonesian account-

ing practice However. the reliance ot the Indonesian business commumty on the ‘luthorlty

ot the po\emment could molllty the Impact ot these disparate ethnic cultures

Hotstede’s theory of culture also does not address the InteractIon eftects among each

dmienslon ot culture For e~rnple. his theoF predicts that when more people become bet-

ter educated. power distance In rl society WIII decrease It 15 possible however. that the

decrease In power dlstdnce ma> also be marked by a decrease m uncertainty ~\oldance

Better education ma ~lco enable people to teel confident about thcmsel\es and 12~5 an\-

Culture and Accountmg In lndonesla 481

IOUS about uncertainty In this regard. uncertdlntl a\ oldance may decrease whether or not

there are government deregulation pohcleh In Hofstede’b model government deregula-

tlon policies are one 01 the en\ Ironmental Indicators of change In uncertdrnty avolddnce

This posslblhty huggests that change In uncertainty Jvoldance mdy be due to change in

poher distance Without there InsIghts, the theory may fall to explain and predict the

direct and Indirect effects ot change m en\ lronmentdl tactors on cultural values

The financial reportmg sample used In thrs study Include companies with a wide range

ot lines of mdustrq. ownershlp types dnd organIzatIonal structures Howeirr data JVJII-

ablllty constraints precluded achle\mg d random relectlon of reporting entitles The

a\allable hampIe did not tdclhtate a separate e\amlnatlon of the relatIonshIp between cul-

ture and dccountlng practice by mdustD classltlcatlon. o~nershlp type, or orgamz~tlon~l

structure Accordingly. this stud! could not conduct an aninnlq~~s ot the Influence ot firm

speclflc culture on accountmg practice OrganIzatIonal >tructures and management decl-

slon processes of state cnterpnseb rnq dltfer trom thohe of pnvdte enterprrses The\e

dltterences ma> cause btate and prr\dte enterpn>es to take dlfterent course> of action m

response to changes In en\ Ironmental factors Ldckrng a wider sample this stud! cannot

provide such InsIght>

This study co\ers d penod horn 1981 to 1992 Dunng this twelve-bear penod. Indone-

\lan society underwent a qnlficant transfomwtlon process from a predomln~ntlq

agncultural to a more lndustrlal \oclet> Although thlr penod reprebents dppro\lmatelJ a

quarter of the hIsto of this ndtlon it IS relate\ ely short tor d stud) of A society and Its cul-

ture The Impact ot en~lronmental change, on \ocletdl llte ma) not be Immedldtel>

notlceable A longer transrtlon penod may have to elapse betore the effects of mterdctlons

among the changes In en\ IronmentA tactor> >ocletal norms and their lnstltutlondl conse-

quences can be obserk ed

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