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 15a 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-tttrnI\ 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
Table 1 The Lmk Between Culture Constructs and Proxy Variables
2
Culture and Accountmg In lndonesla
Table1 The Lmk Between Culture Constructs and Proxy Variables Conbnued
Culture and Accountmg m lndonesla

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 1B 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
(JWUPI tirsrlwce w~cc~~~w~n (11orriw~ 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
CultureandAccountingIn 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 111pomer 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 15d
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 w111hale 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 15opposite 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 12~5an\-
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~~sot 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

REFERENCES

Gray S J 1988 Towards a Theory of Cultural Intluenw on the De\rlopmrnt of Accounrlng Sj\-
terns lnlemationally -thac~rr 2-l I-IS

~ 1991 Cllltwtv c7nd Orgonr:nfrotts Sop urc of r/w M~rrd Ne\\ Yorh McGra-Hill
Ikaran Ahuntnacl Indonssla 1990 A+wrrru Ptwrerr~ns~7~7 4Auttrutr Jakarta P T Rlneka Clpta
_ I990 Prrnsrp -\krrtrrutrsr Indotmru 198-i D~lettgXupr Detwtrtt Pcvtr\cmcttt h/o I 4 d17tr ltuer
prmsr No 1-9 Jakarta P T Rmeha Opta
JoreAog K G and D Sorbom 1989 LlSREL 7 Irstv-s Rtp-rnce Gttrdc Moorss! 111s IN Scwntific
Software
Roblson R I99 I Pou er Ad EC ottom rn Sdrarro’s Itrdotmro Wollongong Austraha Journal of
Contemporary Asia Puhhshers
Sudorman M 1995 The Dvnamlc RelatIonshIp Betueen Cuture and Accounting An Empmcnl
Evamlnatlon of the Indonesian Setting Unpuhllshed dlssertatwn Case Western Reserve
Lrm\ersitj