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Accounting Harmonization in ASEAN: Benefits, Models and Policy Issues

Shahrokh M. Saudagaran

Joselito G. Diga

This paper addresses policy issues on the feasibility and prospects for accounting harmoniza-

tion within ASEAN countries. It examines the benefits of harmonization for ASEAN countries

and discusses issues related to the harmonization of both broad accounting aims as well as

detailed accounting regulations within ASEAN. The paper examines institutional choices for pursuing regional harmonization and concludes with five policy recommendations forfurther-

ing the prospects of accounting harmonization within ASEAN.

Key Words: Accounting in ASEAN; Global Accounting Harmonization; Regional Account-

ing Harmonization; Emerging Capital Markets.

The growth of multi-country economic alliances such as the European Union (EU) and the North American Free Trade Agreement (NAFTA), among others, raises the question of whether there is a need for member countries to harmonize their accounting regulations. As policy makers in various countries consider the effects of accounting diversity on their constituents, the debate over the benefits, models and policy issues related to harmonization persists. While proponents of harmonization cite its vital role in facilitating cross-border flows of goods, ser- vices and capital, opponents of harmonization consider it unnecessary and in certain settings even harmful because of the imposition of accounting concepts and techniques that originate in developed countries but are inappropriate elsewhere.

Shahrokh M. Saudagaran l Leavey School of Business & Administration, Santa Clara University, Santa Clara, CA 95053. E-mail: [email protected]. Joselito G. Diga l SGV Anderson & Company, Makati City, Philippines.

Journal of International Accounting, Auditing & Taxation, 7( 1): 21-45 ISSN: 1061-9518 Copyright 0 1998 by JAI Press, Inc. All rights of reproduction in any form reserved.

22 INTERNATIONALACCOUNTING,AUDITING &TAXATION,7(1) 1998

Until now most of the literature on accounting harmonization has focused on industrialized countries in Europe and North America. This paper looks at accounting harmonization in the countries belonging to the Association of South East Asian Nations (ASEAN). Formed in 1967, ASEAN has emerged as an important economic and political entity. With a combined gross domestic product in excess of US $600 billion in 1995 and a population of 432 million, the ASEAN countries, despite their recent problems, represent a potential market greater than the EU and NAFTA. This paper discusses four salient policy issues relating to the desirability of accounting harmonization in ASEAN: 1) should accounting harmonization be pursued by ASEAN? 2) if accounting harmonization is to be pursued, what should be the broad aims of financial accounting? 3) what is the appropriate institutional arrangement for pursuing harmonization? and, 4) which set of accounting benchmarks, if any, should be used? These questions are complex and multifaceted. While this paper does not purport to provide a definitive set of answers, it provides a useful framework for analyzing arguments relevant to the above policy issues not only in ASEAN but also in other regional economic alliances among developing countries in Latin America, Africa and South Asia.

BENEFITSOFACCOUNTINGHARMONIZATION

This section considers whether the ASEAN countries should pursue accounting harmonization by evaluating harmonization’s net benefits. Initially, we adopt a broad concept of accounting harmonization under which accounting harmonization could refer either to a global approach, as advocated by the International Accounting Standards Committee (IASC), or a regional approach, as pursued by the EU. Most of the perceived benefits of harmonization, discussed next, apply equally well to both concepts of accounting harmonization. However, the subse- quent discussion focuses on the particular benefits of regional accounting harmonization for ASEAN.

Perceived Benefits

Advocates of accounting harmonization, whether on a regional or global basis, outline four primary benefits (IASC 1983; Aitken and Islam 1984; Purvis, Gemon and Diamond 1991; ICMG 1992). These are cost savings accruing to multinational companies (MNCs); enhanced comprehensiveness and comparability of cross-national financial reports; widespread dissemination of high quality accounting standards and practices; and, provision of low cost financial accounting standards to countries with limited resources. Primafacie, these benefits provide compelling reasons for ASEAN countries to pursue harmonization. It is essential, however, to consider whether these benefits are realizable; to whom

Accounting Harmonization in ASEAN 23

these benefits accrue; and whether other costs or disadvantages are associated

with harmonization.

Cost savings for MNCs. From the viewpoint of MNCs, harmonization

potentially provides at least two tangible benefits. The first is reduced compliance

costs associated with different sets of national rules. This benefit assumes that one

set of general purpose financial reports can be prepared by the MNC to satisfy the

information requirements of various users internationally. The second is eliminat-

ing potential “competitive disadvantages” arising from differential use of mea-

surement methods or the need to disclose “sensitive” proprietary information.

Debates over accounting for goodwill internationally illustrate this point (Dunne

and Rollins 1992; Lee and Choi 1992). According to advocates of accounting har-

monization, differences in accounting for goodwill disadvantage companies in

some countries because the companies have to comply with onerous requirements

that distort their reported financial condition and performance. In justifying the pursuit of accounting harmonization, national policy makers

will want to know whether benefits derived by MNCs also benefit their domestic economies. It appears, however, that such congruence of interests is remote. In

many less developed countries (LDCs), the relationship between host governments and foreign MNCs is one of caution. The information needs of host govern-

ments, labor groups and other interest groups are often different from the

information that MNCs are inclined to disclose (Fitzgerald and Kelley 1979;

Gray, McSweeney and Shaw 1984; O’Brien and Helleiner 1980). In ASEAN, government agencies often require specific information in response to uniquely

domestic circumstances (Saudagaran and Diga 1997a). Conversely, in an increasingly globalized environment, ASEAN govern-

ments are anxious to encourage foreign direct investment (FDI). One way of

encouraging such investments is to relax the disclosure requirements imposed on

MNCs. This condition suggests a subordination of domestic interests to those of MNCs, rather than an inherently harmonious set of interests. For example, the

choice of stock market listing location appears to be influenced by the level of

domestic listing requirements (Saudagaran and Biddle 1992, 1995). If so, then accounting harmonization in ASEAN could help create a “level playing field” for

the listing of foreign MNCs. The nature of financial reporting regimes, however, represents only one factor considered by MNCs and, in most cases, it probably is

not the decisive factor. Moreover, no evidence exists that financial reporting requirements influence MNC decisions regarding where to establish production facilities, the principal interest of most host governments with respect to FDI

(Dunning 1993). Consequently, even if accounting harmonization were to provide tangible net benefits to MNCs, it appears improbable that national regulators will view these benefits as an important rationale for pursuing accounting harmoniza-

24 INTERNATIONAL ACCOUNTING, AUDITING & TAXATION, 7(l) 1998

tion given the absence of compelling evidence that their domestic economies will

benefit, too.

Enhanced Comprehensiveness and Comparability. The second benefit supposedly arising from harmonization is that it facilitates the comprehension and

comparison of financial reports from different countries. ASEAN accounting har-

mony, for example, would allow Malaysian investors to compare the performance

and investment opportunities of Indonesian and Malaysian enterprises. Such

understanding is likely to assist in promoting intra-ASEAN trade and investment. It is arguable whether ASEAN users will benefit equally from harmoniza-

tion. The benefits will, at best, be distributed disproportionately because these

countries have different information processing capabilities. Currently, Malaysia

and Singapore appear to have relatively more sophisticated financial accounting

systems than those in Indonesia, Thailand and the Philippines. These differences

could encourage regulators to “modernize” their financial accounting systems.

Conversely, it could also act as a disincentive to regional accounting harmoniza-

tion. Those likely to gain minimal benefits from ASEAN accounting harmoniza-

tion may be less inclined to pursue regional harmonization efforts vigorously. SGV (1984) suggests that financial reports are an important source of infor-

mation for users in ASEAN. No compelling evidence exists, however, that the

lack of accounting harmony in ASEAN poses a barrier to intra-ASEAN trade and

investment. Choi and Levich (1990) and Bhushan and Lessard (1992) found that

international users are able to compensate for the effects of financial reporting dif-

ferences and that their decision processes are not affected adversely by such dif-

ferences. Such behavior may be sub-optimal in the context of efficient capital

markets and greater accounting harmony may increase the efficiency of intema-

tional capital markets. Conversely, the financial reporting differences may them-

selves be vital sources of information for capital market participants (Meek 1983;

Dye 1985). Nonetheless, further research into this issue seems warranted in the

absence of direct and compelling supporting evidence.

Best Accounting Practices. Since its inception in 1977, the ASEAN Fed-

eration of Accountants (AFA) has urged ASEAN countries to harmonize their financial reporting practices in terms of worldwide “best practice.” The notion of

“best practice,” however, is unclear because of the different roles played by finan-

cial accounting systems in society (Meek and Saudagaran 1990). Fundamentally, the notion of “best practice” needs to be assessed in terms of whether a predominantly macro-user or micro-user set of objectives is adopted. The main difference between the two systems relates to the intended users of accounting information.

In macro-user oriented systems, government agencies, particularly the tax collec- tion and economic planning agencies, are the principal users of financial reports.


In comparison, a diverse set of capital providers is perceived to be the most important user group of accounting reports in micro-user oriented economies.

In the case of the ASEAN countries, all have adopted (or are in the process of adopting) a micro-user oriented financial accounting system, based largely on the international accounting standards (IAS). However, it is debatable whether current IAS represent “best practice” in an accounting sense. IAS are largely a distil- lation of acceptable practices in Anglo-North American settings (Rivera 1989; Hoarau 1995). Until very recently, the IASC has been a follower rather than a leader in worldwide financial reporting developments (Purvis et al. 1991). More- over, adoption of IAS does not necessarily imply that domestic financial accounting systems will be perceived to be of “better quality” by international investors (Saudagaran and Diga 1997a) or will lead to tangible macroeconomic benefits (Larson 1993). Later in this paper, we discuss the availability of an appropriate set of financial accounting benchmarks for ASEAN.

Low Cost Accounting Standards. A fourth benefit supposedly arising from harmonization relates to cost savings for ASEAN in formulating relevant and acceptable financial accounting standards. It seems apparent that R & D costs associated with adopting IAS or other foreign accounting standards are minimal. Furthermore, most ASEAN countries do not possess the financial reporting-related research capabilities and resources found in industrialized countries. Given other pressing socio-economic developmental priorities, it is unlikely that such resources will be made available in the absence of external assistance (e.g., World Bank accounting development project in Indonesia). These factors make it especially attractive for ASEAN to “borrow” foreign accounting standards for domestic use. However, the adoption of such standards for cost reasons by ASEAN countries begs the question of whether these are appropriate for their needs. Some authors seem to think otherwise (Hove 1986; Rivera 1989).

According to critics of Anglo-North American accounting systems, these systems overemphasize financial reporting for investment purposes to the detriment of other relevant financial reporting objectives. Furthermore, accounting education in these countries is geared towards the auditing profession, rather than a more holistic consideration of accounting’s role in society. These criticisms suggest that while the initial adoption costs of Anglo-North American accounting systems in ASEAN may be small, the resulting standards may be irrelevant to the needs of these countries. Consequently, the long-term “hidden” costs of adoption could be substantial, possibly sufficient to override any initial cost savings derived.

Realizable Benefits

The purported benefits of pursuing accounting harmonization in ASEAN are not as manifest as most of the normative and policy-oriented accounting literature


would assume. The evidence supporting these supposed benefits is, at best, scanty and incomplete. In the absence of more compelling evidence, a country’s decision to pursue harmonization represents an “act of faith,” with decisions made on intu- ition rather than fact. While this conclusion does not denigrate accounting harmonization efforts being undertaken, it does highlight unresolved questions regarding the rationales advanced for such efforts.

Despite the dearth of strong evidence regarding the benefits of accounting harmonization, the regional pursuit of accounting harmonization in ASEAN could still be justified. In lieu of the four benefits cited earlier, the process of pursuing accounting harmonization could itself prove advantageous for these countries. The process of harmonization could assist in creating and sustaining a dynamic

environment for change in ASEAN. Debates on how and what aspects of financial accounting systems to harmonize encourage policy-makers to be aware of developments elsewhere. Financial accounting innovations are occurring in industrialized countries and LDCs alike, whether these adopt a micro-user oriented or macro-user oriented accounting system. Innovations are taking place also within ASEAN (e.g., Malaysia’s development of accounting standards on aquaculture). With its emphasis on social and economic progress, ASEAN cannot afford to neglect these innovations.

The process of pursuing regional harmonization also provides an important developmental opportunity for individual ASEAN countries, especially for Brunei and Vietnam, which are currently in the process of transforming their financial accounting systems. Their participation in ASEAN regional forums allows them to gain insight to the experiences of other ASEAN countries, not simply as a way of emulating such experiences but, more importantly, as a way to avoid costly mistakes.

Pursuing harmonization is beneficial also because it strengthens awareness of ASEAN’s collective socio-economic goals. Policy goals such as those embod- ied by the ASEAN Free Trade Area (AFTA) highlight the synergies that could arise from a collective approach to common problems. The role of financial reporting in ensuring enterprise accountability is viewed here as an issue deserv- ing careful consideration. While each country’s political, economic and socio-cultural circumstances necessarily influence notions of accountability, scope exists for discussing how financial reporting can help address common ASEAN concerns regarding enterprise accountability. Even if ASEAN policy-makers decide, for example, that IAS provide the best option for developing their domestic accounting systems, discussion of accounting harmonization within ASEAN encourages a more active approach to IASC deliberations to ensure that ASEAN’s views are heard.

The “ASEAN way” is built upon principles of consensus and mutual accom- modation of interests (Suriyamongkol 1988; Kums 1995)’ On this basis, the outcome of accounting harmonization in ASEAN is likely to be a shared view about


Environment

Accounting Rules and Regulations

FIGURE 1. Elements of Financial Accounting Systems

which characteristics of financial accounting systems are likely to prove benefi-

cial to member countries. This view will benefit ASEAN countries individually and collectively because it provides an ideal toward which to strive. Such a model

needs to be explicit so that it provides workable guidelines for account preparers

and users to follow. It needs to be responsive and flexible, also, so that it reflects

current concerns and changing regional and national circumstances. We propose

that such a model should be framed so as to address specifically the three elements of national financial accounting systems laid out in Figure 1. This approach

broadens the debate on accounting harmonization and helps to avoid an overly

myopic view of financial reporting. The next three sections discuss policy options

relevant to each financial accounting system element.

HARMONIZING THE BROAD AIMS OF ACCOUNTING

Accounting harmonization suggests some form of consensus regarding the broad aims of financial accounting systems. Attaining such a consensus globally,

however, is improbable. Differences in views are influenced by functional, trans-

action cost, cultural and ideological factors. Within ASEAN, evidence indicates that the broad aims of financial account-

ing are quite similar. Financial accounting systems in these countries generally subscribe to a micro-user orientation, albeit with varying degrees of commitment (strongest in Malaysia and Singapore; somewhat weaker in the Philippines, Indo-

nesia and Thailand). Thailand, in particular, has exhibited an ambivalent attitude towards adoption of a micro-user oriented accounting system (Saudagaran and Diga 1997a).


Accounting harmonization in ASEAN has been understood largely in terms

of a micro-user orientation, i.e., an emphasis on the information needs of capital

providers. The dominant paradigm is one that views financial accounting prima-

rily as a tool for providing information regarding micro-level economic effi-

ciency. As such, it appears likely that the debate over ASEAN accounting

harmonization will focus on institutional mechanisms and detailed rules, while

neglecting issues relating to the fundamental aims of financial reporting. While

Craig and Diga (1996) appear to support the feasibility of accounting harmoniza-

tion in ASEAN along micro-user- oriented lines, doubts remain as to its desirabil-

ity. Briston (1990, 209) is particularly skeptical of the type of accounting harmonization currently being pursued in ASEAN. He asserts that the narrowly

based concept of harmonization, which focuses on decision-making by capital

providers, is inappropriate for ASEAN.

Too much emphasis on harmonization with its attention on financial reporting will most likely

divert resources away from other important areas of accounting, such as management account-

ing and government accounting. Those who cherish the thought of harmonization in ASEAN

becoming a reality must appreciate the fact that attempting to standardize the practice in all six

countries from different political, social and economic backgrounds is no easy task and it may

create more problems that it can ever solve.

In view of such criticisms, a broader view of financial reporting which recog-

nizes the accountability of enterprises to a wider set of stakeholders offers an

alternative approach to debates on ASEAN accounting harmonization (ASSC

1975; Gray, Owen and Maunders 1987). Ijiri (1983,75, emphasis added) broadly

describes an accountability-based framework as one

built on the accountability relation . [which] focuses on the relation between the uccountor,

the supplier of the accounting information. and the accountee, the user of the accounting

information.... In an accountability-based framework, the objective of accounting is to provide

a fair system of information flow between the accountor and the accountee.

Different views and approaches exist in regard to broadening the aims of

financial reporting systems. Nonetheless, it has been recognized generally that the

identification of stakeholders or accountees is an evolving process (Lessem 1977; Tower 1993). An accountability view also encourages accounting to play a trans-

formative role in society (Morgan and Willmott 1993; Tinker, Neimark and Leh- man 1991). In an ASEAN context, the accountability notion suggests that the

roles of financial reporting and, consequently of accounting harmonization,

should encompass issues of social equity and environmental sustainability. The current situation in ASEAN countries especially makes it desirable that their

financial accounting systems respond not only to issues of enterprise efficiency but also to those of enterprise social and environmental accountability. The argu-


ments against expanding the role of financial accounting systems will be identified fust.

The case for retaining the traditional paradigm, wherein accounting information is primarily a means of providing information with an investor focus, rests on at least three arguments. The most direct has been expressed by free market advocates, such as Friedman (1962, 133), who considers any goal other than profit maximization a “subversive doctrine”:2

[Tlhere is one and only one social responsibility of business-to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud.

Saudagaran and Diga (1997a) discuss the extent to which this view perme- ates recent economic policies regarding free trade and deregulation in ASEAN countries. Another reason is to maintain the credibility of financial accounting (Fogarty 1992). According to Solomons (1978), the credibility of financial accounting rests on its ability to remain neutral, that is, accurately represent economic reality. Accordingly, deliberate biases with respect to influencing the behavior of users should be avoided. The issue of neutrality, however, pertains to measurement issues rather than disclosure issues (Baydoun and Willett 1995). Solomons (1983) himself distinguished between the political (disclosure) and technical (measurement) dimensions of accounting. Consequently, in recognition of the predominantly micro-user oriented view of accounting in ASEAN, accounting measurements should seek to provide information useful for establishing fmancial accountability and performance. Such information is essential if ASEAN countries are to encourage further development of their domestic capital markets. Confidence in the neutrality and serviceability of accounting data is essential for this purpose.3

The third argument against the accountability paradigm of accounting is the difficulty of obtaining reliable data on externalities associated with an enterprise’s activities. Benston (1982, 12) asserted:

That social responsibility accounting has not lived up to its promise should not be surprising . . . The remaining area to which external reports of social responsibility might be directed, the imposition of negative externalities on the general public, is not likely to be self-regulating. But the inherent problems of measuring externalities places resolution of this problem outside the scope of accounting.

Admittedly, the area of measuring costs and benefits of externalities is still underdeveloped, and internationally accepted standards currently do not exist. This limitation, however, does not suggest that the debate over accounting harmonization in ASEAN should ignore issues of social equity and environmental sustainability. An agreed-upon methodology for measuring externalities is beneficial but not a prerequisite for expanding the broad aims of accounting. Rather, the cen-

30 INTERNATIONALACCOUNTING,AUDITING &TAXATION,7(1) 1998

tral issue is whether enterprises should be accountable to various stakeholders on social matters (e.g., employment generation and stability) and environmental matters (e.g., pollution control and abatement) (Gray et al. 1987). Expanding the scope of enterprise accountability would seem not only desirable, but also essential, for the continued well-being of ASEAN countries. In this regard, consideration could be given to adopting an appropriate set of social and environmental disclosure guidelines in ASEAN.

In contrast to the position of strict free market advocates, enterprise social accountability is critical in sustaining the economic development momentum and improving the overall quality of life of communities in ASEAN. The most significant social accountability issue in ASEAN is income disparity: the growing gap between rich and poor. Unchecked, this phenomenon exacerbates social instabil- ity and is likely to derail these countries’ efforts to achieve a higher level of economic and social development (Hewison, Robison and Rodan 1993; Simone and Feraru 1995). Disclosure of enterprise information relating to employment generation, training, and livelihood improvement would be useful for government planning and policy-making purposes. It would also encourage greater commitment among ASEAN enterprises to pursue social equity-oriented goals.

The need for environmental accountability is equally critical. Environmental degradation is currently a major problem in most ASEAN countries (Howard 1993; Parnwell and Bryant 1996). While ASEAN governments appear to recognize the importance of environmental protection, the over exploitation of irreplaceable natural resources for commercial purposes and polluting activities still remain largely unchecked. Often, the effectiveness of state agencies is hampered by inadequate resources and resistance from powerful vested interests (Kunio 1988; MacIntyre 1994). Mandated disclosures of an enterprise’s environmental impact could assist government agencies and private sector groups in monitoring compliance with extant regulations. It could also help encourage responsible behavior by enterprise managers with respect to environmental matters. While enforcement could initially be difficult, mandated disclosures are likely still to be beneficial because they can serve an educating role and raise awareness of the environmental responsibility (or irresponsibility) of enterprises operating in ASEAN.

These policy recommendations are not intended as panaceas for the social and environmental ills of ASEAN countries. Rather, they highlight the broader role that national financial accounting systems can play in addressing urgent concerns in these countries.

HARMONIZING INSTITUTIONALMECHANISMSFORACCOUNTING

REGULATION

An appropriate set of institutional mechanisms for pursuing accounting harmonization is crucial if the benefits of harmonization are to be achieved by


ASEAN countries. These institutional mechanisms comprise ways of setting, monitoring and enforcing accounting rules applicable to enterprises in ASEAN countries. Ideally, such an institutional structure should evolve in relation to the underlying political, economic and socio-cultural circumstances of individual countries (Fogarty 1992; Johnson and Solomons 1984). Several institutional options are available for pursuing ASEAN accounting harmonization: a merger of national standard-setting agencies; adoption of an European Union (EU) harmonization model; regional adherence to JASC pronouncements; and a free market approach. The feasibility and desirability of these options will be discussed briefly.

Merger of National Standard-setting Agencies

The first option is to effect an official merger of accounting standard-setting agencies in ASEAN countries, as suggested in the Australian-New Zealand context by Rahman, Perera and Tower (1994). The prototype for such a supranational body already exists-the ASEAN Federation of Accountants (AFA). At the moment, AFA comprises the duly recognized professional accounting bodies of six ASEAN countries (including Brunei), but not their accounting standard-setting agencies.

The task of bringing together the standard-setting agencies of ASEAN countries is facilitated by the prominent role played by professional bodies in setting national accounting standards. AFA’s powers, with the agreement of national standard-setters, can be expanded to include promulgating accounting standards applicable to member countries. A second advantage is that if, as envisaged, this supranational agency is comprised of professional accounting bodies, it would be more likely to respond quickly to changing commercial demands for information. A third advantage is that such an agency would be more likely to focus on the urgent needs of ASEAN countries collectively, rather than simply mimic standards developed in Western, industrialized countries.

One possible disadvantage of this option is the conservative attitude of professional accountants (Johnson 1972). Based on experiences in the UK and USA, accountants are generally reluctant to expand the broad aims of accounting. In ASEAN, these professional bodies are more inclined to adopt ready-made “solu- tions” developed by the JASC or by other micro-user oriented industrialized countries, as evidenced by the analysis in Saudagaran and Diga (1997a).

Several issues need to be resolved, however, before AFA (or a similar body) can assume the role envisioned above. First, such a body will have to receive official support from each of the ASEAN governments. Currently, AFA enjoys very limited authority because it is a grouping only of mostly private sector professional accounting bodies. Without official support, it is unlikely that AFA-backed accounting standards will be implemented widely in ASEAN. Differences in the


domestic institutional standing of these professional bodies is a second issue. In some ASEAN countries, there are multiple professional accounting bodies which results in the dilution of the membership and political clout of each body. For example, Malaysia has two professional accounting bodies - the Malaysian Asso- ciation of Certified Public Accountants (MACPA) and the Malaysian Institute of Accountants (MIA)-which often compete with each other. In other countries, membership in the professional accounting body is not required for licensed auditors and practitioners. This is the case in Thailand where the Institute of Certified Accountants and Auditors of Thailand (ICAAT) only represents a small propor- tion of registered auditors. Third, such a body probably is not equipped to deal with differences in extant company laws, securities market laws and tax legislation, which exert a profound influence on financial accounting in the six countries. A supra-national body possessing adequate political powers probably will be required. ASEAN, currently a fairly loose economic grouping, does not have the political or administrative machinery at present to establish such an entity.

EU Harmonization Model

ASEAN could consider adopting the harmonization model adopted in the EU. Following this option, the ASEAN Secretariat (or a similar joint political body) could propose Directives (which, if approved, would be enacted into law by each ASEAN member country) or Regulations (which would become law without need for supporting legislation).4 This option relies on having a well-developed regional political infrastructure in place which, at present, does not exist in ASEAN. Its principal advantage is that of addressing, and possibly reconciling, the disparate companies, securities market and tax laws affecting financial accounting among the member countries. Support for this option would be consistent, also, with the current trend in ASEAN of formulating a common economic policy through multilateral arrangements such as establishment of the ASEAN Free Trade Area (AFTA). Discussions are already underway to extend such economic policies to rules on portfolio and direct investments. If successful, they could encourage harmonization of companies and securities market legislation in ASEAN. Within such a framework, AFA could play an advisory role with respect to proposed accounting directives or regulations applicable to the member countries.

The crucial issue is whether such a political grouping is likely to emerge in ASEAN. It appears that this option is not yet practicable, at least in the short-term. Much depends on the outcome of AFTA, scheduled to be implemented fully by 2001 (Kondo 1992; Yuan 1994). Furthermore, the situation in ASEAN is also quite dynamic, with the entry of Vietnam in 1995 Myanmar and Laos in 1997, and Cambodia probably before 2000. Concessions in regard to ASEAN’s timetable for trade and investment co-operation are likely to be made to accommodate the


different levels of economic development among the member countries. It is

unlikely that accounting harmonization will receive high priority in ASEAN when

the legal infrastructure for a market-based economy is still being determined in

Vietnam, Myanmar, Laos and Cambodia. In the long run, however, this option

appears to be the most attractive if the political will to achieve regional accounting

harmony strengthens.

IASC-Based Harmonization

The third option involves regional adherence to IASC initiatives. The unilat-

eral adoption of IAS by individual ASEAN members demonstrates that this repre-

sents a viable and low cost institutional option. While consistent with a global

notion of accounting harmonization, it does not necessarily imply that accounting

harmonization, particularly in terms of enterprise financial reporting practices,

will occur at a regional ASEAN level. Several issues need to be addressed if adherence to IASC pronouncements is

to contribute positively to regional accounting harmony in ASEAN. First, of the original five member countries studied, only the Philippines has not yet adopted

IAS. But neither have other Southeast Asian countries already (or likely to be)

members of ASEAN: Brunei, Myanmar, Cambodia, Laos and Vietnam. It is pos-

sible that these countries will eventually adopt IAS, but no signs exist as yet that

they will. Second, IAS have been adopted selectively by Indonesia, Malaysia, Sin-

gapore and Thailand (Saudagaran and Diga 1997b). In most countries, some

domestic standards have been promulgated where pertinent IAS do not exist or

where current IAS conflict with domestic legislation. Third, IAS allow substantial flexibility in choice of accounting methods and

disclosure items. The 1993 revisions of 10 IAS and ongoing study to further reduce

available options (scheduled for completion in 2000 as part of IOSCO-supported ini-

tiatives) could remedy this situation (IASC 1993). Their adoption by ASEAN coun-

tries will depend primarily on the level of support these revised IAS will receive from accounting regulators in key capital-exporting countries (Taylor 1987).

Fourth, current IAS focus narrowly on micro-user oriented systems and are

unlikely to lead to a broader debate over the accounting harmonization issues pro-

posed in the previous section. If a more responsive financial accounting system is

to emerge, ASEAN will have to take the initiative, at least on particular issues, after recognizing needs that are specific to the region and to member countries. These issues include, inter alia, accounting for joint ventures between ASEAN

enterprises, accounting for the environment, accounting for agricultural and natural resources, and linkages between micro-enterprise accounting and macroeco-

nomic goals. Conversely, as suggested by Saudagaran and Diga (1997b), ASEAN


countries should participate more vigorously in IASC deliberations to ensure that issues relevant to these countries are considered.

Free Market Approach to Harmonization

This approach presupposes defucto harmonization occurring within ASEAN by allowing market forces to dictate which financial reporting practices will pre- vail. Evidence indicates that such a trend is already apparent in ASEAN (Sauda- garan and Diga 1997a). From the viewpoint of ASEAN policy-makers, this option is consistent with policies of economic deregulation, privatization and market reform currently being pursued in ASEAN. These policies represent increasingly the dominant economic paradigm in ASEAN. A free market approach to accounting harmonization ensures maximum flexibility in terms of responding to shifting demands for information. It could also substantially reduce associated regulatory costs (Benston 1980; Dye 1985).

TABLE 1 Institutional Approaches to ASEAN Accounting Harmonization*

Characteristic

Type of agency

Standard-setting approach

Principal advantage( s)

Principal disadvantage(s)

Inter-ASEAN Mergers Model

Regional private sector-based agency

Professional accounting bodies (AFA members) jointly promulgate regional standards

Standards will probably have strong ASEAN focus; more responsive to regional changes

Conservative attitude; could lack statutory authority

EU

Model

Regional govem- ment body

Government elected or appointed ofti- cials from ASEAN promulgate regional standards

Reconciles disparate legal requirements; probably enjoy adequate statutory authority

Probably slow- moving. unre- sponsive; unlikely to emerge given ASEAN’s current structure

IASC Model

Global private- sector body

ASEAN standard-setters endorse and adhere to IASC initiatives

Demonstrated viability; negligi- ble set-up costs

Standards lack ASEAN focus

Free Market

Model

None

No official standards; companies may select most appropriate financial reporting practices

Maximum flexibility and responsiveness

Not likely to contribute to greater accounting harmony; could abet regulatory lapses

Note: *The above institutional options are not exhaustive. Other approaches could emerge depending on evolving circumstances in ASEAN.


Nonetheless, a relatively high degree of accounting harmony in a statistical sense does not necessarily imply that harmony has been achieved in a practical sense (Van der Tas 1992). Within specific accounting policy areas, the norm is still to use different accounting methods. While this is consistent with the flexibility inherent in ASEAN’s micro-user oriented accounting systems, comparability suffers in the absence of adequate disclosures. Kurus (1995) suggested that the laissez-faire view is inappropriate in an ASEAN environment, where cultural norms emphasize collective, networked and personalized relationships in commercial affairs. A free market harmonization policy is unlikely also to benefit ASEAN capital markets. Similar to other emerging capital markets, appropriate regulation and prudential supervision is necessary if confidence in these markets is to be maintained and strengthened. Finally, this option takes for granted that capital providers should be the principal beneficiaries of general-purpose reports. In order for accounting to play an educative and transformative role, as suggested earlier, regulatory attention to social and environmental accountability issues is likely to be necessary still. Table 1 summarizes the four institutional options available for pursuing accounting harmonization in ASEAN and their principal

advantages and disadvantages.

HARMONIZING SPECIFIC ACCOUNTING RULES AND PRACTICES

According to the FASB (1980, xii), comparability between enterprises is desirable because it “increases the informational value of comparisons of relevant economic opportunities or performance.” A particular notion of comparability is referred to here in terms of two enterprises adopting the same accounting measurement methods or, having used different measurement methods, disclosing sufficient information to allow users to recast the financial statements from one accounting basis to another. This notion of substantive harmony (i.e., harmony of measurement and disclosure practices) between countries depends on two conditions: the availability of pertinent accounting rules and the effectiveness by which such rules are enforced. Both these conditions depend, in turn, on the institutional mechanisms present. With respect to the availability of accounting rules, the FASB (1980, xii, emphasis added) asserted that “the significance of information, especially quantitative information, depends to a great extent on the user’s ability to relate it to some benchmark. ” The key issue analyzed in this section is the desirability of such benchmarks being used or potentially available to ASEAN.

Macro-user Versus Micro-user Orientation

What constitutes an appropriate benchmark depends on the broad aims of financial accounting. The accounting systems in countries are often classified as


macro-user oriented or micro-user oriented based on the relative importance attached to particular roles of accounting in society. There are few references to ASEAN in extant comparative accounting research. When ASEAN countries have been included in previous classification studies, the research suggests that accounting systems in Malaysia, the Philippines and Singapore have adopted a micro-user perspective (Berry 1987; Frank 1979; Nair and Frank 1980; Nobes 1984) while Thailand adopted a macro-user approach (Doupnik and Salter 1993). lndonesia was not included in these studies.

As regards their securities market development, ASEAN countries fall into two groups: the early developers (Malaysia, the Philippines and Singapore) and the late bloomers (Indonesia and Thailand). The early developers evidenced a continuity of the importance of securities markets and colonial-era accounting systems which facilitated and reinforced a preference for micro-user oriented accounting systems in these countries’ post-independence history. In contrast, the dominance of banks and financial institutions among the late bloomers was con- ducive to adopting a macro-user oriented accounting system dominated by the needs of government users. Reflective of the underlying environment, accounting regulation in Thailand has traditionally preferred a more conservative, credi- tor-oriented and tax-driven accounting system similar broadly to accounting systems in Germany and Japan. Indonesia, during the 1960s and 1970s hardly had any government regulation dealing with corporate financial accounting (Yunus 1988).

As securities markets gained in importance as a source of capital in Indone- sia and Thailand, however, the accounting systems in these countries would grad- ually come to resemble the micro-user oriented accounting systems in Malaysia, the Philippines and Singapore. Recent developments in accounting regulation in Indonesia and Thailand indicate that both countries have moved towards a regime requiring more extensive financial disclosures and based on standards widely accepted in the UK and USA. The strong regulatory endorsement of standards set by the International Accounting Standards Committee (IASC) for domestic use in Indonesia and Thailand in the past decade affirms further the decisive shift towards a micro-user oriented accounting system.

Several factors coalesced to favor the adoption of micro-user oriented accounting systems in the five ASEAN countries being studied despite the traditional dominance of the banking sector in some of these countries. These factors included the influence on domestic policy exerted by multilateral lending institutions such as the Asian Development Bank, the World Bank and, in the economic crisis faced by Thailand and Indonesia in 1997, the International Monetary Fund. At various times each of these organizations has required more transparency in the financial reporting regulations and practices in the region. The perceived information demands associated with growing securities markets and an influx of private foreign capital has also favored micro-user oriented accounting systems in


ASEAN. The policy of most ASEAN governments of allowing strong private sector participation in developing financial accounting policy also assured that professional accounting bodies in these countries, receptive as they were to influences from the UK and USA, could further promote a micro-user view of accounting in their respective countries.

Assuming that a country prefers a micro-user orientation, as in the five ASEAN countries studied, such a benchmark could be defined by “the quality of serviceable information” provided (Aitken and Islam 1984, 41). In an intema- tional context, the IASC’s (1988) conceptual framework proposed that the principal criterion should be information useful for economic decision-making. However, the framework was designed so that it accommodated “a range of accounting models and concepts of capital and capital maintenance” (IASC 1988, Preface).

The above benchmarks have been stipulated in broad and idealistic terms. In practice, little agreement exists as to what constitutes an appropriate benchmark, either in terms of measurement or disclosure (Baydoun and Willett 1995). The issue of which specific attribute of economic transactions to measure (e.g., historical costs, current replacement costs, current selling prices) has been debated fiercely since the 1950s (Wells 1976). Debates on the appropriate measurement scale to use (i.e., nominal values or price-level-adjusted values) are also ongoing. Consequently, accounting measurements in micro-user oriented accounting regimes are a heterogeneous mix of various attributes based largely on historical conventions (Chambers 1991). Neither have sophisticated and well-crafted conceptual frameworks been successful in improving the logical or even conceptual consistency of issued accounting standards (Agrawal 1987; Dopuch and Sunder 1980). ASEAN policy-makers need to be cognizant of these shortcomings. As Clarke and Dean (1992, 189) assert:

Financial reporting standards and auditing standards are being “harmonized” internationally, under the rhetoric of eliminating the use of optional accounting treatments in order to improve comparability . . . [However] internationally, accounting and corporate reporting practices are becoming equally and uniformly unserviceable.

IAS and other Anglo-North American accounting “benchmarks” used currently by ASEAN countries do not represent immutable truths, nor do they, for some inherent reason, epitomize superior accounting methods.

The current state of flux affords ASEAN policy-makers some scope for discussing the serviceability of accounting measurements used in their countries. Baydoun and Willett (1995) distinguished between fundamental measurements that involve direct assignment of a number to an item or event using a relatively objective procedure; and indirect or derived measurements that involve higher level calculations based upon fundamental measurements.5 Ideally, both measurements should have real world economic referents (Baydoun and Willett 1995;


Solomons 1978). Compliance levels with accepted accounting rules in many micro-user oriented countries, however, do not necessarily provide a reliable picture of the financial status or performance of an enterprise. Numerous arbitrary rules on asset valuation and profit measurement6 provide scope for “creative accounting” practices.7 As such, without addressing these fundamental issues, mere adoption of extant rules from Anglo-North American countries will not improve the quality of financial accounting practices in ASEAN. Thus, an approach that seeks to reduce the number of alternatives (e.g., IASC 1993) could prove fruitful.’ Determination of the appropriate measurement benchmark could be made with respect to user requirements (Al Hashim 1973) or cash flow impli- cations (Wolk and Heaston 1992).

In the fourth section of the paper, some measurement issues of particular relevance to ASEAN have been suggested. In addition, it is proposed that ASEAN policy-makers re-examine the fundamental measurement bases adopted in ASEAN to ensure that enterprises are accountable financially and that scope for “creative accounting” is minimized, if not eliminated. Although challenging, the potential rewards for ASEAN of re-examining its measurement practices are high.

With respect to accounting disclosures, evidence suggests the need for adequate oversight over corporate disclosure activities internationally (Meek and Saudagaran 1990; Zarzeski 1996). We recommend that a minimum list of financial and non-financial (i.e., social and environmental) disclosures be considered for use in ASEAN. Comparability of financial disclosures will help reduce the level of information asymmetry between users in these countries. As such, it is likely to lower transaction costs and help facilitate intra-ASEAN investment activities. With respect to financial disclosures, the requirements provided in IAS supplemented by additional disclosures relating to measurement issues identified in the fourth section of the paper could be considered as a basis for developing such requirements. As regards non-financial disclosures on social and environmental matters, the minimum disclosures recommended by the UN (1977) Inter- governmental Group of Experts provide a useful starting point for discussing possible ASEAN requirements.

CONCLUSIONS AND POLICY RECOMMENDATIONS

Though regional accounting harmonization offers certain theoretical benefits in terms of ASEAN’s aims of promoting trade and investment within the region ASEAN members have not yet pursued regional harmonization seriously. It is instructive to draw comparisons between ASEAN and the EU to understand their differing attitudes towards regional accounting harmonization.

First, the current level of economic integration in ASEAN is considerably less than in the EU. Thus the idea of an “ASEAN Inc.“, a regional body with a


TABLE 2 Comparison of ASEAN and EU Trade Statistics

1993 Percentage of Total (%)

Panel A: Total Worldwide ASEAN exports ($millions)

Intra ASEAN 40,959

USA 42,122

Japan 30,946

Rest of the World 91,779

Total 205,806

Panel B: Total Worldwide EU exports ($millions)

Intra EU 880,946

USA 105,012

Japan 28,598

Rest of the World 436,670

Total 1,45 1,226

19.9

20.5

15.0

44.6

100.0

60.7 7.2 2.0

30.1 100.0

Sources: International Marketing Data and Statistics (I 996) published by Euromonitor International Inc European Marketing Data and Statistics (1996) published by Euromonitor International Inc. AFTA Unit ASEAN Secretariat

coherent and coordinated set of economic policies, is yet to take shape. The worldwide exports of EU and ASEAN member countries in 1993 reveals dra- matic differences in the levels of economic dependence on inn-a-regional markets within the two economic blocs. While EU countries depend on other EU countries for over 60% of their total exports, ASEAN countries’ exports within their region only accounts for 20% of their worldwide exports. As is apparent from Table 2, the major trading partners for the individual ASEAN member countries are US, Japan and EU. In summary, individual countries in ASEAN are less eco- nomically dependent on other ASEAN countries than are EU countries on other EU countries.

Second, unlike EU, ASEAN lacks an organizational structure that would support harmonization. During the period when the EU was moving towards regional harmonization, it had a well-developed infrastructure for regional decision-making which included a separate political body (Van Hulle 1992). ASEAN does not have a comparable structure to facilitate regional decision-making. Also, the regional accounting bodies in Europe such as the Federation des Experts Comptables Europeens (FEE) have had a fairly long history of intra-regional cooperation. The ASEAN Federation of Accountants (AFA) on the other hand has yet to establish sufficient political muscle to play a significant role in the harmonization of corporate accounting regulations in ASEAN.

In a similar vein, ASEAN has not been able to articulate a clear rationale for why regional harmonization is a preferred course of action for member countries. Until individual member countries perceive tangible benefits from regional harmonization they remain reluctant to discard traditional approaches to accounting


regulation. The EU was able to present a clear case for regional harmonization within the broader parameters of common economic objectives. The European Commission wanted a level playing field that would allow EU-based companies to remain competitive anywhere in the region. To the extent that the presentation

of corporate information was an important component to maintaining regional competitiveness, it appeared sensible to harmonize accounting regulations throughout the EU. Ironically, the current economic problems being experienced by several ASEAN member countries might result in them taking a closer look at coordinating their financial reporting practices since the absence of adequate transparency is one of the factors contributing to the high levels of questionable and non-performing loans held by financial institutions in these countries.

The discussion of some normative issues on accounting harmonization has highlighted ambiguities relating to the purported benefits of harmonization for ASEAN. Some realizable benefits for ASEAN were identified in regard to the process of seeking harmonization and in the shared views of what constitutes an appropriate financial accounting system in an ASEAN context. We make the following policy recommendations with respect to pursuing regional harmonization:

1. ASEAN should pursue regional harmonization. In doing so, policy-makers should address separately issues regarding the: l broad aims of financial accounting; l institutional mechanism for achieving ASEAN harmonization; and l nature of specific measurement and disclosure requirements.

2. The broad aims of accounting need to be viewed not merely from a micro-user oriented decision-usefulness perspective. Rather, a broader accountability perspective should be adopted, recognizing the potential role of accounting in addressing social equity and environmental concerns in ASEAN countries.

3. An institutional mechanism dealing with ASEAN accounting harmonization should be established. Two options are recommended: . a reconstituted AFA with power to promulgate accounting rules

applicable to ASEAN countries; or l a separate governmental body comprising ASEAN standard-setting

agencies with similar authority.’ 4. The measurement rules adopted by ASEAN from Anglo-North Ameri-

can countries should be reviewed critically from the viewpoint of the serviceability of the accounting information for establishing financial accountability. Moreover, ASEAN should seek to develop measurement standards dealing with the following issues: . accounting for joint ventures between ASEAN enterprises; l accounting for the environment; l accounting for agricultural and natural resources; and


1.

2.

l Links between micro-enterprise accounting practices and macroeconomic goals.

5. ASEAN should seek to develop a minimum list of required financial and non-financial disclosures. For financial disclosures, supplemented IAS disclosure requirements could be used as a starting point for further discussion. Consideration could also be given to the UN (1977) proposals in regard to non-financial and other disclosures which address enterprise social and environmental accountability.

NOTES

Known in ASEAN circles as musyawaruh dun muufuht, the ASEAN decision process entails painstaking negotiations, support for the state least able to benefit from particular activities and a focus on issues that all member states can agree upon (Kurus 1995,406). Friedman (1962, 133) asserted: “Few trends could so thoroughly undermine the very founda- tion of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for the stockholders as possible.” Lev (1988) argued that an equitable disclosure policy, i.e., providing equal access to information for making investment decisions, is also essential. The merits and demerits of the EU accounting harmonization process are discussed by Nobes (1992) and Van Hulle (1992). For example, the historical cost of a piece of equipment represents afinuizmentul measurement whereas calculation of depreciation on that equipment represents a derived measurement. Some examples are historical cost depreciation ofbuildings and equipment, deferred tax accounting, accounting for R & D, and accounting for leases. In a multinational setting, these include translation of foreign financial statements and product costing for transfer pricing purposes. Refers to the practice of using accounting methods that portray a misleading picture of an enterprise’s liquidity, solvency and profitability. Such practices might, however, still be considered acceptable by extant accounting rules. See Naser (1993) for a discussion of common application in Anglo-North American setings. Cf. Criticisms of this approach by Benston (1980) and Dye (1985). AFA could serve as an advisory body to this entity.

Acknowledgments: The authors would like to dedicate this paper to the memory of Dr. Titin Suwandi, Research Director at the Jakarta Stock Exchange. Dr. Suwandi was killed in a plane crash in Indonesia in September 1997. We appreciate the comments of participants at the IAAER 8th International Conference in Paris in 1997 and the Asia-Pacific Conference in Bangkok in 1997. Shahrokh Sau- dagaran acknowledges financial support received from the Accounting Develop- ment Fund at Santa Clara University.

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