Chapter 2 enrironmental influence on accounting development

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Legalistic approach

Arpan (1985:19) made a definition of legalistic approach as to the countries which laws determine accounting practices. In such countries, their governments play an active, even dominant role in the economic sector, and their accounting profession is often relatively weak. In most of these countries, there is no difference between tax accounting and financial accounting. And Arpan asserted, “the legalistic approach to accounting is found to some degree in all countries of the world, regardless of their stage of economic development of the level of their accounting profession’s development” (1985:19). He took the United States’ tax law and the regulations promulgated by the Securities and Exchange Commission (SEC) as an example to demonstrate the legalistic approach to accounting. He concluded: “The main distinctions among countries are the pervasiveness of the legal approach and whether other approaches are permitted”(Arpan, 1985:19).

In fact, the legalistic approach to accounting is predominant in most countries, with some countries completely relying on it and others permitting other approaches.


Concerning the relationship between tax and accounting, Seidler (1981) made this point:

Worldwide tax collections constitute the greatest source of demand for accounting services. The tax on income, both on the individual and business enterprise level, is the largest source of revenue for governments of countries with literate populations. Clearly, the collection of tax revenues, the life-blood of government, outweighs the niceties of accounting theory. Income tax evasion is frequently grounded in distortions of records or in absence of records. Therefore, tax collecting governments initially become involved in the bookkeeping and accounting procedures followed by individuals and companies, to provide some assurance of collecting taxes (Seidler, 1981)

Taxation may have a strong influence on one country’s accounting practice, especially for accounting measurements. Countries have different national tax systems which define most directly and most frequently the conduct of business and hence the practice of accounting. In many countries, law, and particularly tax law, is the only reason that accounting is done at all. In these countries accounting rules and practices are spelled out in laws, often called companies’ acts, which also contain the general laws for all business operations and activities. In most of these countries, there is no difference between tax accounting and financial accounting. Such as in Germany, the tax account should be the same as the commercial accounts before 1983. In addition, tax laws in virtually all countries specify accounting procedures to be used in the tax area.

In other countries, such as United Kingdom, the United States and the Netherlands, published accounts are designed particularly as performance indicators for investment decisions, where commercial rules operate separately from tax rules in a number of accounting areas. In most cases, there is not the degree of separation between tax and financial reporting that is found in the United Kingdom in the shape of capital allowances. However, in all such countries the taxation authorities have to adjust the commercial accounts for their own purposes, after exerting only minor influence directly on them.

Accounting legislation is strongly influenced by the legal system. In countries with legalistic approaches, laws set the details of accounting regulation. Accounting standards possess legal effects, and government mostly decided accounting functions and objectives.

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