The
difference between the legal systems in different countries directly affects
the type of legal system that the state uses in accounting. In other words, a
nation’s legal system and its system of finance may be linked in a
cause-and-effect way. Some countries have a legal system that relies upon a
limited amount of statute law, which is then interpreted by courts, which build
up large amounts of case law to supplement the statutes. Such a ‘common law’
system was formed in England, primarily after the Norman Conquest, by judges
acting on the king’s behalf (van Caenegem, 1988). (Nobes & Parker, 2008)
Although the common law system emanates from England, affected many countries
influenced by England. For example: the federal law of the United States, the
laws of Ireland, India and Australia. This naturally influences commercial law,
which traditionally does not prescribe rules to cover the behavior of companies
and how they should prepare their financial statements. To a large extent
accounting within such a context is not specified in detail in law. (Nobes
& Parker, 2008) Instead, accountants themselves created rules for
accounting practice, which could be written down as recommendations or
standards. Other countries have a system of law that is based on the Roman ius
civile as compiled by Justinian in the sixth century and developed by European
universities from the twelfth century. Here, rules are linked to ideas of
justice and morality; they become doctrine. The word ‘codified’ may be
associated with such a system. This difference has the important effect that
company law or commercial codes need to establish rules for accounting and
financial reporting. For example, in Germany, company accounting under domestic
rules is to a large extent a branch of law. (Nobes & Parker, 2008) Case law
is less abstract than codified law; a case law rule seeks to provide an answer
to a specific case rather than to formulate a general rule for the future. A
common law legal system emphasizes shareholder rights and offers stronger
investor protection than a code law system. (Elmer Tamayo. 2017) The outcome is
that strong capital markets develop in common law countries more than in
codified-law countries. Relative to code law countries, firms in common law
countries raise substantial amounts of capital through public offerings to
numerous outside investors. Because investors are at arm’s length to the firm,
there is a demand for accounting information that accurately reflects the
firm’s operating performance and financial position. (Elmer Tamayo. 2017)
Ownership of firms in code law countries tends to be concentrated in the hands
of families, other corporations, and large commercial banks. Typical German
Mittelstand companies are the best example of it. Another difference between
two systems is that debt as a source of finance is relatively more important in
code law countries than in common law countries. Sources – Comparative
international accounting. Nobes, C., & Parker, R. (2008) Legal Systems: Common
Law vs. Code Law Accounting. Elmer Tamayo. 2017

x

Hi!
I'm Erica!

Would you like to get a custom essay? How about receiving a customized one?

Check it out