The dynamic relationship between culture and accounting: An empirical examination of the Indonesian setting

This dissertation examines the relationships among the cultural characteristics of Indonesian society, financial reporting practices of Indonesian firms, and accounting standards promulgated by the Association of Indonesian Accountants. The examination covers the period between 1981 and 1992 and includes a sample of 108 financial reports of Indonesian firms. It is argued that an empirical relation exists between cultural values and accounting in Indonesia. Three related models are developed to capture the association between culture and accounting in Indonesia. The first model identifies significant cultural values present in Indonesian society. The second model relates accounting values and accounting practices in Indonesia. These two models are designed to test Hofstede's theory of the five dimensions of cultural values (power distance, uncertainty avoidance, individualism, masculinity, and time horizon) and Gray's four dimensions of accounting values (professionalism, conservatism, secrecy, and uniformity) as applied in Indonesia. We use results of these tests to construct the third model dealing with the relationships between cultural values and accounting values in the development of Indonesian accounting practices. Linear Struct ural Relations (LISREL) was used to test the validity of these models. Our findings suggest that while all four Gray's accounting values are confirmed in Indonesian accounting practices, four out of Hofstede's five dimensions of culture (excepting time horizon) are significantly apparent in Indonesian culture. We also find that while masculinity is a significant factor of Indonesian culture, it is not significantly related to any one of the four values of Indonesian accounting practices. In other words, three of Hofstede's five cultural values (power distance, uncertainty avoidance, and individualism) have significant relationships with one or more accounting value. Further examination reveals that the relations of these three cultural values with two of the accounting values, conservatism and unformity, confirm our hypotheses. Our results do not support the hypothesized relationships between these three cultural values and two other accounting values, professionalism and secrecy. We believe that conflicting influences of extensive government involvement in the economy and market competition on business decisions of Indonesian firms are a plausible explanation of these mixed results.
dynamic relationship; culture; accounting; empirical examination; Indonesian setting