Thedifference between the legal systems in different countries directly affectsthe type of legal system that the state uses in accounting. In other words, anation’s legal system and its system of finance may be linked in acause-and-effect way.

Some countries have a legal system that relies upon alimited amount of statute law, which is then interpreted by courts, which buildup large amounts of case law to supplement the statutes. Such a ‘common law’system was formed in England, primarily after the Norman Conquest, by judgesacting on the king’s behalf (van Caenegem, 1988). (Nobes & Parker, 2008)Although the common law system emanates from England, affected many countriesinfluenced by England. For example: the federal law of the United States, thelaws of Ireland, India and Australia. This naturally influences commercial law,which traditionally does not prescribe rules to cover the behavior of companiesand how they should prepare their financial statements.

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To a large extentaccounting within such a context is not specified in detail in law. (Nobes& Parker, 2008) Instead, accountants themselves created rules foraccounting practice, which could be written down as recommendations orstandards. Other countries have a system of law that is based on the Roman iuscivile as compiled by Justinian in the sixth century and developed by Europeanuniversities from the twelfth century. Here, rules are linked to ideas ofjustice and morality; they become doctrine. The word ‘codified’ may beassociated with such a system.

This difference has the important effect thatcompany law or commercial codes need to establish rules for accounting andfinancial reporting. For example, in Germany, company accounting under domesticrules is to a large extent a branch of law. (Nobes & Parker, 2008) Case lawis less abstract than codified law; a case law rule seeks to provide an answerto a specific case rather than to formulate a general rule for the future. Acommon law legal system emphasizes shareholder rights and offers strongerinvestor protection than a code law system. (Elmer Tamayo.

2017) The outcome isthat strong capital markets develop in common law countries more than incodified-law countries. Relative to code law countries, firms in common lawcountries raise substantial amounts of capital through public offerings tonumerous outside investors. Because investors are at arm’s length to the firm,there is a demand for accounting information that accurately reflects thefirm’s operating performance and financial position. (Elmer Tamayo. 2017)Ownership of firms in code law countries tends to be concentrated in the handsof families, other corporations, and large commercial banks. Typical GermanMittelstand companies are the best example of it. Another difference betweentwo systems is that debt as a source of finance is relatively more important incode law countries than in common law countries.

Sources – Comparativeinternational accounting. Nobes, C., & Parker, R. (2008) Legal Systems: CommonLaw vs. Code Law Accounting. Elmer Tamayo.

2017

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