An Extended Contingency Model of Environmental Factors Influencing National Accounting and Disclosure Practices 81
An Extended Contingency Model of Environmental Factors
Influencing National Accounting and Disclosure Practices1
Peter G. Gerhardy
Flinders University, Australia
Abstract This paper outlines the development of an extended contingency model, proposed as a framework
for analysis of the relationship between accounting and the environment in which accounting is practiced.
The model is developed by enhancing the contextual contingency model proposed by the American
Accounting Association (AAA) (1993). The AAA (1993) model, like other similar models that have been
proposed, indicates the importance of environmental factors as influences upon accounting practices, but does
not offer a method of identifying and classifying such factors. The enhancement to the model proposed in this
paper is integration of an appropriately modified version of Gernon and Wallace’s (1995) accounting ecology.
It is argued that with this extension the model can be used as a means of identifying and classifying
environmental factors related to accounting and disclosure practices in prior research. Further, it is suggested
that the factors likely to provide the most useful explanations of accounting development in future empirical
research can be identified. 81
Keywords Contingency theory; Environmental factors; Accounting and Disclosure Practices.
Introduction
A large body of research in international accounting is concerned with the enumeration
and investigation of the environmental factors influencing accounting and disclosure
practices. Gernon and Wallace (1995, 57) go so far as to suggest that ‘Essentially, the
development of explanatory IAR [international accounting research] theories has involved the
interface between accounting and its environment’. In this paper it is argued that the influence
of environmental factors upon the development of national accounting and disclosure
practices is usefully conceptualised with the aid of a contingency theory approach. The
development of a strong theoretical base for the identification and conceptualisation of those
environmental factors likely to affect accounting and disclosure practices is a necessary
precursor to the empirical investigation of their relationship. As suggested by Gernon and
Wallace (1995, 75):
Contingency theory offers a systematic approach toward the conceptualization of the
national and foreign environmental variables which may have a significant bearing on the similarities and
differences in accounting styles and practices across countries. The conceptualization has provided
inspiration for empirical research concerned with determining the environmental causes and
1
Helpful suggestions from Ian Eddie during the early development of this paper, and suggestions for
improvements by Carol Tilt and an anonymous reviewer, are gratefully acknowledged.
82 Gerhardy / Journal of Accounting and Finance 2 (2003) 81~98
effects of accounting …
A decade earlier Schweikart (1985, 89-90) observed that there was significant concern
evident in the international accounting literature relating to issues such as harmonisation and
differences in the accounting information presented across countries, as well as what he
described at this time as the ‘suggestion’ that accounting information needs in different
countries are subject to environmental influences. Schweikart’s (1985, 90) observation that
there had been little empirical work conducted to support the concept of environmental
influences on accounting is no longer a valid one (see for instance Cooke and Wallace 1990;
Adhikari and Tondkar 1992; Doupnik and Salter 1995; and Salter 1998). However, it is his
other observation, that at this time there was a lack of formal theory upon which to base such
empirical research, which motivates him to propose ‘contingency theory as a vehicle to
establish a theory of international accounting’ (Schweikart 1985, 90).
This paper proposes a contingency model, appropriately extended, as a framework for
analysing the relationship between accounting and the environment in which it is practiced. It
proceeds as follows. First, a review of contingency theory as applied in business and
accounting research in general is provided. Following this the application of a contingency
theory perspective in international accounting research is examined. On this basis an extended
contingency model, based upon that suggested by the American Accounting Association
(AAA) (1993), but expanded to incorporate a classification of potentially significant
environmental factors, using a modified version of the accounting ecology expounded by
Gernon and Wallace (1995), is developed. This extended model is argued to provide a sound
theoretical base for identification and evaluation of those environmental factors that have
been suggested and/or found to be significantly related to accounting and disclosure practices
in prior research. In this manner it is suggested that the factors which are likely to provide the
most useful explanations of accounting development in future empirical research can be
identified. Suggestions for future research directions based upon the framework are then
provided.
Contingency Theory in Business and Accounting Research
Contingency theory emerged in the management literature in the late 1960s and the 1970s,
as an alternative to the view of classical management theorists that there was a single ‘best
way’ for managers to achieve efficient organisational operations. The roots of a contingency
approach to management theory lay in the observation that in some cases the violation of
classical management principles led to positive outcomes (Bartol et al. 1995, 65). In its
simplest form contingency theory contends that what constitutes effective management is
situational, depending upon the unique characteristics of each circumstance. Bartol et al.
(1995, 66) illustrate simply the distinction between the classical and contingency views of
management as shown in Figure 1. Hicks and Gullett (1981, 625-626) summarise the
contingency view of organisations as ‘The “best” solution is the one that is most responsive to
the characteristics of the unique situation being faced’.
Lawrence and Lorsch (1967) made one of the early contributions to the development of a
contingency theory of organisations; indeed, it has been suggested that they are the inventors
of the term as applied in the organisational/management literature (Donaldson 1995, xii). The
fundamental question posed in their study is ‘What kind of organization does it take to deal
with different environmental conditions?’ (Lawrence and Lorsch 1967, 3). Further, they
An Extended Contingency Model of Environmental Factors Influencing National Accounting and Disclosure Practices 83
describe the major contribution of their study to be ‘the increased understanding of a complex
set of interrelationships among internal organizational states and processes and external
environmental demands’ (Lawrence and Lorsch 1967, 133).
Contingency view:
appropriate managerial action
depends on the situation
situation 1
Universal view:
same managerial
principles apply to
every situation
situation 3
situation 2
Source: Bartol et al. (1995, 66), Figure 2.4.
Figure 1. Classical versus Contingency Views of Management
By comparing a number of effective organisations Lawrence and Lorsch (1967, 156-157)
suggest it is possible to understand differences in their internal states and processes by
reference to differences in their external environments. They summarise the findings of their
study as follows (Lawrence and Lorsch 1967, 157):
These findings suggest a contingency theory of organization which recognizes their
systemic nature. The basic assumption underlying such a theory, which the findings
of this study strongly support, is that organizational variables are in a complex
interrelationship with one another and with conditions in the environment .
Broadly, in their study Lawrence and Lorsch (1967) establish that the determinants of
effective internal organisational processes are dependent (or contingent) upon variations in
the environment in which the organisation operates. In their words, ‘These outside
contingencies can then be treated as both constraints and opportunities that influence the
internal structure and processes [of the organisation]’ (Lawrence and Lorsch 1967, 186).
Financial reporting and disclosure practices can be viewed as the outcome of an internal
decision process of an entity. Thus, a simple extension of Lawrence and Lorsch’s (1967)
conclusion suggests it is possible to view the choice of accounting and disclosure practices as
the result of an internal process which is influenced by outside contingencies. This suggests
that variations in the environment in which companies operate, such as those associated with
84 Gerhardy / Journal of Accounting and Finance 2 (2003) 81~98
differences in corporate nationality, will lead to differing decisions as to the optimal methods
of corporate reporting and levels of disclosure.
Another early exposition of what is now termed contingency theory was that of Thompson
(1967). In a similar vein to Lawrence and Lorsch (1967), Thompson (1967, 13) ‘suggest[s]
that technologies and environments are major sources of uncertainty for organizations, and
that differences in those dimensions will result in differences in organizations’. Of
significance is that in conceptualising the environmental constraints impacting upon
organisations Thompson (1967, 68, emphasis in original) suggests that organisations
generally find such constraints ‘located in geographic space or in the social composition of
their task environments’. While the methods suggested by Thompson (1967, 68-69) to
characterise or measure these dimensions are not particularly useful in the accounting context,
the general observation that environmental factors have both a physical or locational
dimension, as well as a social dimension, provides an important perspective as to the breadth
of the environmental factors potentially affecting accounting and disclosure decisions.
While the roots of contingency theory are in the management and organisational theory
literature, application of the theory to accounting, and in particular to the area of management
accounting, followed quite quickly. Hayes’ (1977) work on organisational sub-unit
performance assessment, in which much of his model development is based on the work of
Thompson (1967), represents one of the early efforts at applying a contingency approach to
management accounting. The use of contingency theory in management accounting research
has continued and developed (see for instance Gordon and Miller 1976; Waterhouse and
Tiessen 1978; Otley 1980; Ewusi-Mensah 1981; Jones 1985; and Evans et al. 1986). In a
more recent study, which adopted contingency theory as the basis for an examination of the
impact of a new accounting technology on accountants in various types of hospitals in the
United States, Rayburn and Rayburn (1991, 57) provide the following useful and succinct
summary of contingency theory as it is applied in management accounting research:
Contingency theory is based on the premise that there is no universally appropriate
accounting system which applies equally to all organisations in all circumstances;
instead, the optimal management control system depends on the specific elements of an
organisation’s environment. Effective control systems are usually situation specific and
tailored to the management of each organisation. The exercise of managerial choice and
the interdependence of accounting systems and the environment are acknowledged.
Application of contingency theory in financial accounting research is a more recent
development. Thomas (1986) applied contingency theory to corporate reporting. He suggests
that adopting a contingency perspective captures the idea that reporting practices are
associated with what he refers to as particular circumstantial variables1 (Thomas 1986, 254).
Further, Thomas (1986, 254) conceptualises the constraints upon entities affecting
management’s choice of reporting practices as falling into two major classes, namely:
 the environment of the enterprise, and
 its organisational attributes.
1
The term ‘circumstantial variables’ used by Thomas (1986) was originally coined by Cadenhead (1970) to
refer to the environmental conditions affecting the feasibility of accounting methods applied and/or the
objectivity of the resulting measures.
An Extended Contingency Model of Environmental Factors Influencing National Accounting and Disclosure Practices 85
Thus, contingent factors are argued to be both internal and external to the organisation.
At the time Thomas (1986) was writing there was a growing but relatively immature body
of accounting research now commonly referred to as positive accounting theory (see Watts
and Zimmerman (1990) for a review of this research). This literature investigates
‘relationships between firm and/or industry characteristics and management’s choice of
accounting methods based on a theory concerning relative income effects’ (Thomas 1986,
256). Thomas (1986, 256) suggests that the empirical research indicates a number of shortcomings of such a theory, including:
 inconsistent results across different independent variables, and for the same variables
in different studies,
 inconsistent results across different dependent variables, and
 an inability to explain the choice of reporting practices that do not affect reported
profit.
In the context of corporate reporting, Thomas (1986, 256) contends that ‘Contingency
theory postulates the existence of similar associations but asserts management’s preferences
with regard to reporting practices are related to the nature of environmental and organisational
constraints rather than their relative income effects’. In some situations the relationships
hypothesised by positive accounting theory between management’s accounting policy choices
and their relative income effects will hold, but not necessarily for the reasons the theory
suggests.
While recognising that contingency theory is not without its limitations, both as a general
theoretical model and in the context of its application to examining corporate reporting
practices, Thomas (1986, 256-257) suggests that it can still provide valuable insights,
particularly in relation to the political and economic aspects of the process of accounting
standard setting. According to Thomas (1986, 257) these would include ‘a consideration of
the process by which adaptation to contingencies is brought about, the role of informal
structures and the network of social relations, and the possibility of reciprocal causality’. A
strong case is therefore established for the application of contingency theory to the
examination of those factors affecting financial reporting practices.
Contingency Theory as a Framework for Analysing National
Accounting Development
Perhaps one of the most significant aspects of Thomas’s (1986, 255) paper in the current
context is his recognition that a significant body of research in comparative international
accounting conducted up to the mid-1980s adopted, all be it implicitly, a contingency
approach. He states (1986, 255):
Although only rarely explicitly articulated, the conceptual framework underlying
such research is essentially a contingency approach. Most studies take the form of
either testing for differences between certain reporting practices in various countries, or
the grouping of national accounting systems into relatively homogeneous subunits. In
both cases the results are usually attributed to differences or similarities in social,
86 Gerhardy / Journal of Accounting and Finance 2 (2003) 81~98
political or economic factors. There is thus an implicit underlying theory that the
reporting practices of each country are contingent on certain social, political and/or
economic variables.
This implicit adoption of a contingency framework continues to be common in the
comparative international accounting literature.2
Also of significance is Thomas’s (1986, 255) suggestion that an indication of the more
general applicability of contingency theory is provided by the then current, and still
continuing, debate regarding ‘the universal applicability of International Accounting
Standards’. This is an issue which, he suggests, when examined from a contingency theory
perspective, involves issues which ‘are essentially the same as those relating to the flexibility
vs uniformity of national Accounting Standards’ (Thomas 1986, 255).
Belkaoui (1983) is one of the early writers addressing the influence of environmental
factors upon accounting to explicitly acknowledge that such an approach adopts contingency
theory as its basis. He recognises ‘the need to look for the relations between measures of
accounting development and adequacy on one hand and measures of political, civil, and
economic development and adequacy as a first step in the formulation of a contingency theory
of international accounting’ (Belkaoui 1983, 216).
Schweikart (1985) was another early writer to explicitly recognise the application of
contingency theory as a framework for international accounting research. In the context of
international accounting Schweikart (1985, 92) suggests ‘National environmental differences
represent both external and internal contingencies on accounting information needs’, and
based upon comparative management research he identifies likely environmental variables for
a contingency model as falling into the categories of:




educational,
economic,
political-legal, and
social (socio-cultural).
Three of these four categories, economic, political and social, are also those identified by
Thomas (1986) as characterising the environmental variables suggested in comparative
international accounting studies as influencing accounting practices.
Figure 2 illustrates the financial accounting contingency model developed by Schweikart
(1985). The model treats the environment as an external contingency affecting organisational
structure (A1) and the decision making process (A2). In turn the institutional and
organisational structures determine the external information available (Bi) and the types of
decisions (Bj) required to be made by parties external to the firm. Decision makers are also
able to demand other information from institutions if required for effective decisions, as
illustrated by the broken lines, depicting a feedback loop in the model. Importantly,
Schweikart (1985, 97) claims ‘This … model can be used to explain differences in accounting
policies among nations with different national business environments’. From the point of
view of such research he indicates that the issue is one of ‘isolating the environmental
2
The framework has also been explicitly adopted in some studies of international accounting practices.
More recent examples include Eddie (1994) and Tan and Tower (1999). The latter study adopts a
conceptual schema based on Thomas (1986; 1991).
An Extended Contingency Model of Environmental Factors Influencing National Accounting and Disclosure Practices 87
variables affecting information needs (A2) … since contingency theory implies that
information needs should vary with variations in the favorability or certainty of the decision
environment’ (Schweikart 1985, 97). Schweikart (1985, 97) recognises that applying such a
model in an international financial accounting context poses a number of difficulties, since it
is not possible to hold institutions and information constant across countries. Further, the
decision problems faced by users may not be uniform across countries. Schweikart (1985, 97)
suggests the following as a means of minimising the impact of these difficulties:
… comparative research using nations with very similar accounting methods,
institutions, and decision problems may be the only vehicle available to extract many
significant environmental variables. This research design implies that the environments
in such countries will have a high degree of similarity, but that subtle differences may
be more reliable predictors of information-relevance predictors.
This provides a clear direction for future research, suggesting concentration on smaller
regional groupings of countries may provide more fruitful results than larger global studies.
This issue is more fully discussed in the final section of the paper.
Published
accounting
information
Decision
maker
Decision
process
Published
govt. and service
information
Decision
Informal
information
A
Problem
2
B
j
Availability
filter
B
i
Organization
and
structure
A
Environmental
variables
1
A , A2
Direct environmental contingencies
(external)
B , Bj
i
Indirect environmental contingencies
(internal)
1
Source: Schweikart (1985, 96), Exhibit 3.
Figure 2. Schweikart’s (1985) Financial Accounting Contingency Model
Thomas (1991) developed further the application of contingency theory to corporate
financial reporting systems, arguing ‘management’s choice of corporate financial reporting
88 Gerhardy / Journal of Accounting and Finance 2 (2003) 81~98
practices is contingent upon the differing constraints on entities …’, which he indicated fall
into four possible classes, as illustrated in Figure 3.
Environment
of the
enterprise
Societal
variables
Corporate financial
reporting systems
User
characteristics
and other sources
of information
Organisational
attributes
Source: Thomas (1991, 42), Figure 1.
Figure 3. Thomas’s (1991) Contingency Framework for Corporate Financial Reporting Systems
Thomas (1991, 42) justifies inclusion of societal variables in his general contingency
model for financial reporting systems on the basis that ‘the theoretical framework underlying
research in comparative international accounting is essentially a contingency perspective’,
where ‘the results are usually attributed to differences or similarities in social, political or
economic factors’. He characterises such variables as ‘those factors to which all enterprises
within a particular country are subject and which vary between nations’ (Thomas 1991, 42).
He further suggests that societal variables can be conceptualised broadly as comprising the
economic, legal and political systems of the country.
Thomas (1991, 43) conceptualises the environment of the enterprise in terms of perceived
uncertainty, while organisational attributes ‘are conceptualised in terms of the resources
available to the enterprise and the way in which these are organised’. Finally, user
characteristics are argued to influence corporate financial reporting systems because of the
existence of differing information needs and abilities to process information resulting from
‘differing decision models, decision making styles and cognitive traits’ (Thomas 1991, 44).
As indicated in Figure 3, Thomas (1991) suggests that not only are financial reporting
systems influenced by contingent variables, but also such systems in some cases will
influence those variables. Further, there will be interrelationships between the classes of
contingent variables as indicated in the diagram.
In discussing research methodologies in international accounting, the AAA (1993, 9)
An Extended Contingency Model of Environmental Factors Influencing National Accounting and Disclosure Practices 89
describes the contingency approach as being ‘concerned with the association between
accounting and its environment’. It distinguishes between global contingency approaches to
cross-national financial accounting research (C-NFAR), of which it identifies three, and the
arguably more comprehensive contextual contingency approach. Studies adopting a global
approach are described as ‘usually deterministic, unidirectional and implicitly assume that
accounting is the dependent variable’ (AAA 1993, 9). The contextual contingency approach is
described (AAA 1993, 10) as ‘bring[ing] to the fore concerns for cultural relativism and
national character’, and is elaborated in terms of the diagram reproduced below as Figure 4.
There are similarities with Schweikart’s (1985) model, as depicted in Figure 2, and also
Thomas’s (1991) framework depicted in Figure 3, in terms of both some of the components of
the models, and the relationships between those components. The central role of
environmental/contingent variables in determining the output of the organisation’s accounting
process is primary in all the models, as is the need for this output to in some way meet the
expectations/requirements of those who use it. In Schweikart’s (1985) model this most
directly relates to the ‘Decision maker’ and ‘Decision process’ components of the model. As
mentioned previously, inadequacies of information in the model are addressed by allowing for
feedback by decision-makers (via the dashed lines), who may demand additional or different
information if needed for effective decision making. Similar relationships are depicted in
Thomas’s (1991) model, where user characteristics are one of the four classes of contingent
variables affecting financial reporting systems.
feedback
Matching accounting
with normative or
actual expectations
within a country
Environmental
variables
Nexus supplied
by organizations,
professional bodies
and individuals
Test of
effectiveness
within country
If
okay
inadequate
Inadequacy would lead
to a clamor for a change
in environmental factors
such as attitudes and/or
a change of accounting
profile
Accounting
profile and
attributes
Global
fit
test
If
Compare
with
foreign
profiles
feedback
Source: AAA (1993, 19), Figure 2.
Figure 4. Contextual Contingency Approach to C-NFAR
In the AAA (1993) model the requirement to meet national expectations is represented by
the ‘Test of effectiveness within country’, wherein extant accounting practices are compared
with normative or actual expectations within a country. A failure to pass the test again
90 Gerhardy / Journal of Accounting and Finance 2 (2003) 81~98
requires that change or adaptation occur, in this case either as changes in environmental
factors, to align them more closely with extant accounting practices, or as changes in the
accounting practices to meet actual expectations. In either case the process, as in Schweikart’s
(1985) model, is depicted as a feedback loop to the parties concerned with production of
accounting information within the country.
Arguably, the AAA (1993) contingency model is the most comprehensive of the general
models discussed so far, and possibly the most relevant to comparative international
accounting research. In this respect, a significant contribution of the AAA (1993) model is the
explicit introduction of a second test, to be performed when the ‘within country’ test is
satisfied, referred to as the ‘Global fit test’. As indicated in the model in Figure 4, the global
fit test involves comparison of accounting practices within the country under examination
with ‘foreign profiles’ of accounting practices. These ‘profiles’ may comprise the accounting
and disclosure practices of foreign companies, or the preferred practices as promulgated by an
international accounting standard setting organisation, such as the International Accounting
Standards Board (IASB) 3 . Once again this comparison is performed with the purpose of
allowing feedback to those domestic organisations, professional bodies and individuals
concerned with preparation of accounting reports within the country in question. The
importance of incorporating such a test in a contingency model cannot be understated given
the current interest in the issue of harmonisation of international accounting practices. In this
context such a test would involve the comparison of companies’ actual accounting and
disclosure practices with those required by international accounting standards, possibly using
indexes or similar measures of harmonisation to determine the extent of ‘global fit’. Such
tests clearly can and should incorporate examination of accounting practices in more than one
country.
Classification of Environmental Variables
One aspect of all the models discussed in the previous section that requires further
specification is the issue of what constitutes the ‘environmental variables’. In the AAA (1993)
model it is these variables, together with national accounting profiles and attributes, which
impact upon the outcomes of the financial reporting process, namely the accounting and
disclosure practices actually adopted by companies. On this issue the work of Gernon and
Wallace (1995) provides a useful perspective. In their review of international accounting
research Gernon and Wallace (1995) adopt what they describe as ‘the ecological perspective
to provide an integrated, holistic, rather than unidimensional, geopolitical view of the national
accounting scene that takes account of both cultural and non-cultural features’ (Gernon and
Wallace 1995, 59). They describe their ‘national accounting ecology’ in terms of the diagram
reproduced as Figure 5, which includes five ‘slices of the environment’, which are regarded as
‘separate but interacting’ (Gernon and Wallace 1995, 59-61). They describe these five slices
as follows:
1. societal slice: structural, demographic and cultural events and/or trends such as structural
3
Under a new constitution adopted in May 2000 the IASB was established to conduct the business of the
International Accounting Standards Committee (IASC), including the setting of accounting standards
(IASC 2001).
An Extended Contingency Model of Environmental Factors Influencing National Accounting and Disclosure Practices 91
shifts that may affect the demand for financial reporting services,
2. organizational slice: events and/or trends bearing on rationalizations in the choice and
design of accounting systems and the demand for accounting services,
3. professional slice: events and/or trends bearing on the determination of roles and
relationships in the accounting profession …,
4. individual slice: accounting policy choices are made by individuals. This slice covers the
actions of these individuals as persons, organizations and professional bodies in their
efforts to pursue their respective self-interests, and
5. accounting slice: accounting practices, rules and/or trends that affect or are affected by the
other slices of the environment (Gernon and Wallace 1995, 60).
They argue that this taxonomy of the accounting ecology provides a broader and
somewhat richer framework from which to view international accounting research than those
offered by previous researchers (Gernon and Wallace 1995, 60). In terms of specifying the
types of variables likely to influence accounting practices the model represents an advance
upon the more general contingency models discussed in the previous section.4 As outlined
below, however, some refinement of the model seems necessary if it is to provide a useful
basis on which to categorise the myriad of environmental variables with the potential to affect
accounting and disclosure practices.
As presented, Gernon and Wallace’s (1995) accounting ecology incorporates apparent
overlap between the variables they suggest might influence accounting. In particular, the
distinction between non-cultural and structural variables in Figure 5, two of the three groups
they suggest comprise the societal environment, is not entirely clear. If, as Nobes (1984, 33)
suggests, one of the desirable characteristics of any taxonomy or classification system is that
the subsets ‘be mutually exclusive in such a way that no element may fall into more than one of
them’, it is apparent that the classes of variables comprising the societal environment suggested
by Gernon and Wallace (1995) do not meet this criterion. Clearly it would be sufficient,
although not as illuminating, to categorise the societal environment into cultural and noncultural variables, two subsets which by definition must be mutually exclusive. However to
sacrifice the subset of structural variables, which it is suggested would include factors related
to the economic, political and legal systems (see Figure 5), would detract from the model’s
usefulness, since these variables are the ones most often argued to influence accounting (see
for example the discussion of Schweikart’s (1986) and Thomas’s (1986; 1991) models above).
Instead, it would be preferable to recategorise the non-cultural variables into two subsets,
demographic and structural variables. Indeed, it appears that this was Gernon and Wallace’s
(1995, 62) intention, as they state in the text of their paper that the ‘Societal environment refers
4
It must be recognised that a number of earlier studies have enumerated the types of factors likely to
influence the development of accounting. For instance, Radebaugh (1975) presents a model that categorises
the variables suggested to affect accounting under eight headings: Nature of the enterprise, Enterprise
users, Government, Other external users, Local environmental characteristics, Accounting profession,
Academic influence and International influence. AAA (1977) provides a morphology for comparative
accounting systems based on eight parameters: Political system, Economic system, Stages of economic
development, Objectives of financial reporting, Source of standards, Education, training and licensing,
Enforcement, and Client. More recently Cooke and Wallace (1990) proposed a model distinguishing
internal and external environmental influences and their influence upon corporate financial disclosure
regulation. These studies are, however, less explicit than the one developed here regarding the theoretical
basis of the models/taxonomies they propose, and in particular the use of contingency theory as a
conceptual underpinning to them.
92 Gerhardy / Journal of Accounting and Finance 2 (2003) 81~98
to cultural and two non-cultural elements (demographic and structural)’. The non-cultural
subsets are then further described as follows (Gernon and Wallace 1995, 63):
Source: Gernon and Wallace (1995, 61), Figure 1
An Extended Contingency Model of Environmental Factors Influencing National Accounting and Disclosure Practices 93
Figure 5. Gernon and Wallace’s (1995) Accounting Ecology
Source: Adapted from Gernon and Wallace (1995, 61), Figure 1
94 Gerhardy / Journal of Accounting and Finance 2 (2003) 81~98
Figure 6. Modified version of Gernon and Wallace’s (1995) Accounting Ecology
Demographic and structural societal variables refer to those macro aspects which
distinguish one society from another. Demographic variables include the size of a country’s
population, land area, and geographical location. Structural variables include the level of
technological, economic and political development.
The modified accounting ecology would then appear as in Figure 6. This model then
provides a useful schema for the identification and analysis of the environmental factors
influencing the development of national accounting systems. The environment and the classes
of variables it comprises, as suggested by the model, are:








Societal environment
Demographic variables
Structural variables
Cultural variables
Professional environment
Organisational environment
Actor environment
Accounting environment
Future research could usefully adopt this schema as a basis for analysis of past studies of
environmental influences on accounting, in order to identify those factors most likely to be
related to accounting development. Further, it provides a useful theoretical basis for
identification of variables potentially related to accounting and disclosure practices not
previously investigated in empirical studies. In this manner a comprehensive inventory of
variables that could be used in empirical research might be developed.
An Extended Contingency Model of National Accounting Development
Based on the foregoing analysis of theoretical developments in the application of
contingency theory to comparative international accounting research, and the need for such
models to more clearly specify the nature of the environmental influences impacting on
accounting development, an extended contingency model of national accounting development
is proposed. The proposed model comprises a fusion of the AAA (1993) contextual
contingency model discussed earlier in the paper and the modified Gernon and Wallace
(1995) accounting ecology outlined in the previous section. A depiction of this extended
model appears in Figure 7.
In the extended model the modified Gernon and Wallace (1995) accounting ecology
(Figure 6) is separated into three components, (1) the accounting environment, (2) a grouping
of three slices of the environment, namely the organisational, actor and professional
environments, and (3) the societal environment. Each of these three groups complements or
elaborates specific aspects of the AAA (1993) model (Figure 4). First, Gernon and Wallace’s
(1995) accounting environment and its specified components, accounting standards and
accounting reports, are explicitly incorporated into the AAA (1993) model. This modification
is required to avoid overlap, and to integrate the two models. As shown in Figure 4, the AAA
An Extended Contingency Model of Environmental Factors Influencing National Accounting and Disclosure Practices 95
(1993) contingency model separates the influence of formal accounting requirements, such as
those contained in national accounting standards and regulations (described as ‘Accounting
profile and attributes’), from the other environmental variables affecting accounting practices.
This separation is maintained in the modified framework as depicted in Figure 7. A further
modification incorporated in Figure 7 that relates to the accounting environment is the explicit
inclusion of annual reports, reflecting the measurement and disclosure practices adopted by
companies, as the output of the process. This modification provides more specific focus to the
model. These reports result from the bringing together of accounting with other slices of the
environment in which it operates, part of which is reflected in the nexus supplied by various
entities, including companies as reporting entities, professional bodies and individuals. On
this basis, the second major enhancement of the model, as presented in Figure 7, is the
elaboration of this nexus as comprising the organisational, actor and professional slices of the
environment identified by Gernon and Wallace (1995). Finally, Gernon and Wallace’s (1995)
societal environment, with variables sub-classified as detailed above, elaborates in the
extended model (Figure 7) the ‘environmental variables’ component of the AAA (1993)
model (Figure 4). Finally, the foreign profiles forming the basis of the global fit test have
been explicitly specified in the extended model as comprising foreign companies’ reporting
practices and/or the requirements of IASB Standards. This is an important clarification of
detail from the perspective of the future research directions discussed in the next section of
the paper.
96 Gerhardy / Journal of Accounting and Finance 2 (2003) 81~98
feedback
Societal
environment
Economic
Demographic
variables
Political
Matching accounting
with normative or
actual expectations
within a country
Structural
variables
Cultural
variables
Legal
Other
ANNUAL
REPORTS
Organizational
environment
Nexus supplied
by
organisations,
professional
bodies
and individuals
Test of
effectiveness
within country
If
Actor
environment
Professional
environment
Accounting
profile/
Accounting
standards
environment
If
okay
Global fit
test
inadequate
Inadequacy would lead to a
clamor for a change in
environmental factors such as
attitudes and/or a change of
accounting profile
Compare
with
foreign
reports/
IASB
standards
feedback
Source: Adapted from AAA (1993, 19), Figure 2 and Gernon and Wallace (1995, 61), Figure 1.
Figure 7. An Extended Contingency Model of National Accounting Development
Conclusions and Future Research Directions
This paper brings together, in a modified specification, two frameworks which it is argued
provide in combination a richer and more complete theoretical basis for examination of the
environmental factors influencing the development of national accounting and disclosure
practices. In this manner it provides a useful basis for future research in the area. In particular,
it is suggested that such research could progress in two stages. The first stage would involve
identifying the specific environmental variables influencing the development of accounting
and disclosure practices. To this end the model provides a framework for classification and
analysis of variables identified in prior research, and for development of further hypotheses
relating to variables not previously identified, or not yet empirically tested in the literature. In
this manner a comprehensive inventory of environmental variables found or hypothesised to
be related to accounting development can be produced. The need for such a broad approach is
suggested by Gernon and Wallace’s (1995, 75) observation that whilst a significant amount of
empirical research on the relationship between accounting and its environment has been
carried out since the early 1970s, ‘Results have, however, been inconsistent’.
An Extended Contingency Model of Environmental Factors Influencing National Accounting and Disclosure Practices 97
As indicated previously, an important aspect of the model developed in this paper is the
inclusion of a ‘global fit test’. This notion requires further development, especially in relation
to comparison of national accounting and disclosure practices with the requirements of IASB
standards. 5 The current move toward international harmonisation of many countries’
accounting practices, focussing in large part on the requirements of IASB standards, suggests
that the influence of these standards warrants close examination. However, the model clearly
indicates that in order to measure the extent to which such standards influence companies’
practices (ie. the extent of ‘global fit’) it is necessary to control for the influence of those
environmental variables which also impact upon them. A further issue to consider in such
research is that of selection of the countries from which to draw the practices to be examined.
In this respect Gernon and Wallace (1995, 74) recognise that ‘the need for mutual recognition
of mutual economic problems’ is a reason for formation of regional groups of countries,
which they argue ‘offer accounting scholars self-selected samples of countries for crossnational study of the diffusion of accounting’. This is consistent with the view of Schweikart
(1986, 97) noted earlier, that concentration on smaller regional groupings, where countries’
environments have a relatively high degree of similarity, is likely to be more fruitful since
subtle differences in environments are likely to be highlighted. Thus, a clear suggestion that
this research might most fruitfully focus on countries located in regional areas emerges.
Already a significant amount of research of this type has been carried out, concentrating
almost exclusively on countries in the European Union (EU), formerly the European
Community. 6 Countries in the South-East Asian region, such as Indonesia, Malaysia, the
Philippines, Singapore and Thailand, are a further instance of such a grouping which could
form the basis of future research.
In terms of the current state of research into those factors which affect the development of
accounting, perhaps Gernon and Wallace (1995, 76) sum up the situation best when they state
‘More empirical work is needed to test the theory that accounting is a function of its
environment’. This paper provides a theoretical framework upon which such further work
could be based and, based upon it, some firm suggestions for future directions in such
research, in the hope that a small advance in theoretical development may lead to advances in
the empirical arena.
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