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 harmonization 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 forfurthering the prospects of accounting harmonization within ASEAN.
Key Words: Accounting in ASEAN; Global Accounting Harmonization;
ing Harmonization; Emerging Capital Markets.

Regional Account-

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, services 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: ssaudagaran@mailer.scu.edu.
Joselito G. Diga l SGV Anderson &
Company, Makati City, Philippines.
Journal of International Accounting, Auditing & Taxation, 7( 1): 21-45
Copyright 0 1998 by JAI Press, Inc.
All rights of reproduction

ISSN: 1061-9518
in any form reserved.

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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 harmonizations 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 subsequent 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

these benefits accrue; and whether other costs or disadvantages

with harmonization.

23

are associated

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 eliminating potential competitive disadvantages arising from differential use of measurement 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 harmonization, 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 governments, 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; OBrien 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 governments 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-

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tion given the absence of compelling

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1998

will

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 harmony, 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 harmonization. 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 harmonization. Those likely to gain minimal benefits from ASEAN accounting harmonization may be less inclined to pursue regional harmonization efforts vigorously.
SGV (1984) suggests that financial reports are an important source of information 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 differences and that their decision processes are not affected adversely by such differences. Such behavior may be sub-optimal in the context of efficient capital
markets and greater accounting harmony may increase the efficiency of intemational capital markets. Conversely, the financial reporting differences may themselves 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 Federation 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 financial 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 collection and economic planning agencies, are the principal users of financial reports.

Accounting Harmonization in ASEAN

25

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 distillation 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). Moreover, 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 accountings 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

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would assume. The evidence supporting these supposed benefits is, at best, scanty
and incomplete. In the absence of more compelling evidence, a countrys decision
to pursue harmonization represents an act of faith, with decisions made on intuition 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., Malaysias 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 ASEANs collective socio-economic goals. Policy goals such as those embodied 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 deserving careful consideration. While each countrys 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 ASEANs
views are heard.
The ASEAN way is built upon principles of consensus and mutual accommodation of interests (Suriyamongkol
1988; Kums 1995) On this basis, the outcome of accounting harmonization in ASEAN is likely to be a shared view about

Accounting

Harmonization

27

in ASEAN

Environment

Accounting

Rules and Regulations

FIGURE1. Elementsof FinancialAccounting

Systems
which characteristics of financial accounting systems are likely to prove beneficial 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 BROADAIMS 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, transaction cost, cultural and ideological factors.
Within ASEAN, evidence indicates that the broad aims of financial accounting 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, Indonesia and Thailand). Thailand, in particular, has exhibited an ambivalent attitude
towards adoption of a micro-user oriented accounting system (Saudagaran and
Diga 1997a).

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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 primarily as a tool for providing information regarding micro-level economic efficiency. 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 harmonization in ASEAN along micro-user- oriented lines, doubts remain as to its desirability. 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 accounting 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 recognizes 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 transformative role in society (Morgan and Willmott 1993; Tinker, Neimark and Lehman 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-

Accounting Harmonization

in ASEAN

29

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 permeates 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 enterprises
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-

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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 instability 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 enterprises 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
REGULATION

INSTITUTIONALMECHANISMSFORACCOUNTING

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

Accounting Harmonization

31

in ASEAN

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. AFAs 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 solutions 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

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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 Association 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 proportion 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 ASEANs timetable
for trade and investment co-operation are likely to be made to accommodate the

Accounting Harmonization in ASEAN

33

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 unilateral adoption of IAS by individual ASEAN members demonstrates that this represents 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 possible 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, Singapore 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 initiatives) could remedy this situation (IASC 1993). Their adoption by ASEAN countries 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 proposed 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 macroeconomic goals. Conversely, as suggested by Saudagaran and Diga (1997b), ASEAN

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countries should participate more vigorously in IASC deliberations

issues relevant to these countries are considered.
Free Market Approach

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to ensure that

to Harmonization

This approach presupposes defucto harmonization occurring within ASEAN

by allowing market forces to dictate which financial reporting practices will prevail. Evidence indicates that such a trend is already apparent in ASEAN (Saudagaran 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).

Institutional

Approaches

TABLE 1
to ASEAN Accounting Harmonization*

Inter-ASEAN
Mergers Model

EU
Model

Type of agency

Regional private
sector-based
agency

Regional govemment body

Global privatesector body

None

Standard-setting
approach

Professional
accounting bodies (AFA members) jointly
promulgate
regional standards

Government
elected or
appointed ofticials from
ASEAN promulgate regional
standards

ASEAN standard-setters
endorse and
adhere to IASC
initiatives

No official standards; companies may select

most appropriate financial
reporting practices

Principal advantage( s)

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

Reconciles disparate legal

requirements;
probably enjoy
adequate statutory authority

Demonstrated
viability; negligible set-up costs

Maximum flexibility and

responsiveness

Principal disadvantage(s)

Conservative
attitude; could
lack statutory
authority

Probably slowmoving. unresponsive;

unlikely to
emerge given
ASEANs current structure

Standards lack
ASEAN focus

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

Characteristic

Note:

IASC
Model

Free Market
Model

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

35

Accounting Harmonization 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 ASEANs 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 users 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
financial accounting. The accounting

benchmark depends on the broad aims of

systems in countries are often classified as

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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 conducive 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, creditor-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 Indonesia and Thailand, however, the accounting systems in these countries would gradually 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

Accounting Harmonization in ASEAN

37

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 intemational context, the IASCs (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;

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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 implications (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) Intergovernmental 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 ASEANs 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

Accounting Harmonization

39

in ASEAN

Comparison

TABLE 2
of ASEAN and EU Trade Statistics
1993

Panel A:

Percentage of Total (%)

Total Worldwide ASEAN exports ($millions)

Intra ASEAN

40,959

19.9

USA

42,122

20.5

Japan

30,946

15.0

Rest of the World

91,779

44.6

205,806

100.0

Total

Panel B:

Total Worldwide EU exports ($millions)

Intra EU

880,946

USA

105,012
28,598

Japan
Rest of the World
Total
Sources:

436,670
1,45 1,226

60.7
7.2
2.0
30.1
100.0

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 dramatic 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 economically 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

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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:
broad aims of financial accounting;
institutional mechanism for achieving ASEAN harmonization; and
nature of specific measurement and disclosure requirements.
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.
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
a separate governmental body comprising ASEAN standard-setting
agencies with similar authority.
The measurement rules adopted by ASEAN from Anglo-North American 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;
accounting for the environment;
accounting for agricultural and natural resources; and
l

2.

3.

4.

Accounting Harmonization

in ASEAN

41

Links between micro-enterprise accounting practices and macroeconomic goals.

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.
l

5.

NOTES
1.

2.

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 foundation 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
enterprises 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 Saudagaran acknowledges financial support received from the Accounting Development Fund at Santa Clara University.
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