Confucianism in Chinese and Japanese Accounting Systems free essay sample

In this paper we will discuss how the influence of Confucianism has directly affected both China and Japan in a cultural and economic sense. After a brief discussion of Confucianism and the history of East Asian accounting we will thoroughly examine the consequences of these nations regimes post 2005. We will discuss how these events have changed the Chinese and Japanese accounting systems of today and how Confucianism is the underlying factor in these reforms. The definition of Confucianism Confucianism elaborates on the values of loyalty, filial piety, honesty, benevolence, righteousness, rituals, and truthfulness. This doctrine was developed over 2000 years ago by Confucius, who provided a to guide people for dealing with all types of crisis’s using right moral conduct and the right behaviour in the future (Aiken, 1998). Basically, Confucius provided a framework to identify what is right and glorious, especially for encouraging people continue to achieve their objectives when they face adversity. Also, he suggested that both the rulers and the ruled could establish certain relations in order to decrease adversarial relationships (Gao, Handley-Schachler, 2003). In the theory there is an emphasis on change, which means everything is changing all the time and even people belong to this dynamic process (Tang, 2000). People will interrelate with each other and cannot live alone. Confucius states that the communal welfare is more important than self-interests. Confucianism also emphasises that education plays a significant role in society. It abandons discrimination and also can facilitate the development of society and the growth in the economy (Aiken, 1998). It favours teaching moral behaviours and ethical practice; for instance, common people usually efficiently heed moral examples rather than government’s edicts. However, it can also be true that individuals are influenced by law and edicts, which compels people to only pay attention to legal form. According to People’s Republic of China (2001), competition is a fundamental and important standard in the society. However, competition can be viewed as â€Å"counterproductive† in the East Asia. This is because they believe the most important standard is cooperation. In the western perspective, auditing has violated the main tenet of Confucianism, which is trust. The concept of transparency can justify its auditability by a pragmatic realism. Therefore, Confucianism believes that avarice drives the process of business and the purpose of a merchant, and the accountant is an unworthy occupation, especially for the senior. Implications of Confucianism for East Asian accounting According to News Release (2001), the implications of Confucianism results in the accounting system tending to focus on structure and form. This deals with the conformity of traditional practices rather than innovative procedures. Therefore, people adhere to traditions and century long rituals. Confucianism leads people to loyalty to nation, family, friends, and filial piety, which can bring the relationship of nepotism. Nepotism refers to the secrecy of accountants. In the doctrine of means from Confucius emphasizes of the concept of moderation. This means that choosing a middle approach can be taken to deal with uncertainty situations. The pathway has been manifested in accounting in terms of more extensive risks disclosure in the published annual report (Aiken, 1998). In East Asian accounting, it also follows the doctrine of means. Based on conservatism, they usually defer gains until it is clearly realisable. This method is a crude way for dealing with downside risk and illustrating losses soon. Another approach which widely utilise in East Asian countries is income smoothing in order to cope with uncertainties in accounting (People’s Republic of China, 2001). This method stabilizes earnings which is general involved in tempering the peaks and valleys to make stable. It usually occurs in the performance of income measurements. Both approaches can be considered as a long-term performance, which is involved in Confucianism. The suggestion of full disclosure of Chinese and Japanese financial report seems to attribute to the concepts of honesty and truthfulness in the Confucianism. Unfortunately, honesty and truthfulness does not occur in either country. In fact, they do not really accept the economic substance in their accounting systems. They traditionally adhere to the pattern of legal form. In the accounting report, they usually ignore the valuations of fair market. Instead, they focus on the historical costs. However, substance over form is used when there is new accounting issued in China. Additionally there is a hierarchical order, which means that people must consider relations, such as family finances and business transactions exist in Chinese society (Tang, 2000). Confucianism ideals mean that there are no accounting principles and no governmental supervising, but it does not exist in those countries. Therefore, there is a low degree of professionalism in society and accountants play a limited role in those countries. Chinese Accounting and Confucianism Chinese accounting has been reformed from the Mixed Market accounting model to the recent accounting model based on increasing international business activities and boosting development of culture, economy and politics during the last decade. Confucianism, which is the main source of Chinese culture includes ideal, personality, ideological concept, sense of worth and social psychology, has a great influence on different characters of accounting. The reform of Chinese accounting Understanding how Chinese accounting has changed in previous periods will benefit the researching of the relationships between Confucianism and accounting. History shows that Chinese accounting and auditing had emerged six thousand years ago and had the most advanced system in the world. Researchers even found calculations and records noted on wood (Lu W Aiken M 2003, p. 1). In the ancient periods, Chinese accounting had low development due to governments not paying attention or supporting research in accounting and the society. The government did not regard accounting and accountants as parts of a professional activity (Lu W Aiken M 2003, p. 1). In recent centuries, China has become the second largest destination of investment in the world, however greater annual accounting and financial reports are needed for foreign investors and creditors to attract more foreign investment. Therefore, the Chinese accounting model, standards and the provision of professional guidelines have been accompanied and facilitated to develop. The current Chinese accounting system is built on a juridical basis and harmonized with other countries. Regardless of basic accounting standard, elements, bookkeeping methods, or the system of financial report, the Chinese accounting harmonized with external accounting principles and that has motivated more potential investors to acquire efficient information through the reading of financial reports. The influence of Confucianism in Chinese accounting . ) The Government People in China have been accustomed to obeying the government because the concept of stratified society which has been deeply instilled in the public. Nowadays, the function of Chinese government is wide and strong which includes legislation, judicature and administration. Authorities gaining strong power from Confucianism leads to the high power distance that public will probably fear, admire and essentially follow decisions from the government. Therefore, the government to a great extent decides the Chinese accounting principles. In the value of duty right right, Confucianism preaches that duty is more important than right. People will be regarded as gentle, moral and honest if they contribute themselves more to society and others. Another crucial view from Confucianism, is profit of collective needs to be considered first. This determines China’s strong government a control over the public. Thus, China’s government has an essential role in making decisions in accounting. 2. ) Accounting Ethics Furthermore, Confucianism emphasizes actuality such as natural regulation and ational logic may have negative effects on accounting ethics. Confucianism supposes that people should believe the life your living rather than ghosts, gods, and death, which has become a part of Chinese principles of behaviour. This evidence suggests that Chinese will not worry about blame by anybody morally, or going to the hell and making gods angry after they breaking the rules. Therefore, operation of Chinese accounting sys tem may have some serious disadvantages because of the faultiness of accounting ethics. 3. ) Conservatism Conservatism is another main characteristic of Confucianism. It affects Chinese accountants that are not willing to cope with the risks or potential losses from the uncertainty in a business environment. This results from the fact that China has changed to a market-oriented economy in recent years. Accounting reforms need to speed up the process of development and start having employees practicing how to deal with risks in order to provide reliable accounting information for both domestic and international investors (Lin J Chen F 1999, p. 33). Japanese Accounting and Confucianism The foundation of Japanese accounting standards is based on Commercial Code, which was come from German Commercial Law (McKinnon, 1986). The Japanese accounting system has been greatly influenced by Confucianism. Areas such as emphasizing long-term financial performance and seeking consistency in keiretsu, has Confucian roots but it has not completely adhered to Confucianism (Bloom, 2003). Japan has continu ously revised the accounting standard since the late 1990’s. This is due to the loopholes and weaknesses of the accounting and auditing system, which has caused a loan crisis in Japan. Meanwhile, with the acceleration of globalization, Japan is facing pressure to keep up with the pace of the international financial requirements and development. The â€Å"big bang† time has come and the financial markets have been reformed (Gordon, 1999). In terms of consistency with Confucianism, Japanese companies emphasize collectivism more than individualism (Bloom, 2003). Keiretsu in Japan reflects what Confucianism emphasizes on â€Å"filial piety†. Keiretsu is a large closely linked business organization where several companies experience close relationship and have effect on a mutual basis (Gordon, 1999). Members in the same group may not only share the same bank and share information, but also comply with the same rules and standards. Moreover, like filial piety emphasizes, members in Keiretsu are expected to seek consistency and ethical behaviour in terms of financial and accounting practice. In Japan, accounting practice tends to be relatively conservative (Bloom et al. , 1994). Confucianism prefer the â€Å"doctrine of the means†, which means moderation. Traditionally, Japanese accounting relied on debt rather than equity, and legal form rather than economics substance to keep balance between risk avoidance and long-term performance. According to â€Å"doctrine of the means†, Japanese tried to find a moderate way to deal with uncertainty and risk, such as smoothing income and accelerated depreciation methods that could make their earnings and external report more stable (Bloom, 2003). Japan has a unique business and regulatory environment, where companies are reluctant to full disclosure of their financial accounting report (Bloom, 2003). This is in contrary to honesty and truthfulness, which is the view of Confucianism. However, Japanese accounting standards have been continuously revised since 1997 due to the grey areas of accounting and auditing system, acceleration of globalization and The Asia Financial Crisis. Firstly, in Japan, institutions, such as banks and no-financial companies have controlled the ownership of company shares of stock, so that accounting information tends to be in favour of internal companies of Keiretsu. In addition, many companies used to hold a big amount of hidden profits to cover losses by selling asset (Hisao, 1999). The weaknesses of accounting standards and the Asian Financial Crisis have contributed to the reform of Japanese financial system. Secondly, as Japan was facing pressure to keep pace with international business development and meet international financial requirement, traditional ways were not suitable any more. As a result, Japanese corporations began to increasingly focus on extensive disclosure of financial report, which is more closely tied to Confucianism. However, some aspects of Japanese accounting do not completely adhered to Confucianism. For example, Confucianism advocates morals and virtue and less governmental control in society, because it is believed that human nature is good and if individuals could conduct ethical behaviour instead of being supervising by government, it would bring harmony to society (Bloom, 2003). However, the reality is the opposite of ways of Confucianism. Japanese government has played an important role in accounting system, and the accounting standards were established by governmental institution rather than an independent, non-governmental organization (Gordon, 1999). Conclusion The focus of this paper has been on Confucian ideas and how it has been applied to East Asian accounting, particularly in China and Japan. Confucianism encourages time honoured principles and traditions and governing the state with virtue and morality instead of rigid laws. An emphasis of long-term orientation is prevalent in Confucian teaching and making short term sacrifices for the benefit on the future. In summary these teachings have a key characteristic of conservatism, which is clearly seen in their accounting methods. Across the world in Western Europe, the same conservative characteristics in accounting can be seen, however these characteristics came about through a following of a legalistic model and rigid laws. Regardless of where you practice accounting, conservatism can lead to income smoothing, historical cost accounting, stockholder’s equity legal reserves, and operating lease accounting because it’s the most cautious way to deal with uncertainty. China and Japan are realizing that they are major players in the international market, but the only way to reach the top is to attract international investments. To do this investors need to feel comfortable with where their money is going, so the move to adopting economic substance over legal form is underway. Overall, neither China nor Japan can confidently conclude that their accounting systems directly correlate with Confucian views because of the significant governmental presence in their accounting systems. However, no one can argue that they don’t have origins in these teaching despite the ever-strong current government control of accountancy.