LEGO Company


  • (i) Prepare a table showing the breakdown between mandatory and voluntary content and between numerical, narrative and visual disclosures.  


Annual report Mandatory Voluntary Words Numbers Visuals
LEGO at a glance   3 pages 1 page   2 pages
Corporate governance   9 pages 5 pages 1 page 3 pages
F/S 66 pages   18 pages 42 pages 6 pages
Total 66 pages 12 pages 24 pages 43 pages 11 pages



  • (ii) Discuss the nature of your findings and their implications for impression management.


Management performance is largely evaluated and rewarded based on the performance displayed on the annual reports of the firm. Managers are awarded increased remuneration and tenure based on perceived success or failure of the firm they are managing.


Since managers operate in an environment in which their remuneration and wealth is linked to the financial performance of the companies that employ them, managements have economic incentives to disclose messages that convey good performance more clearly than those conveying bad performance’ (Rutherford, 2003, p.189). Such opportunistic behavior is termed as impression management.


In Accounting, the concept of impression management in corporate reporting is used to explain discretionary narrative disclosures. Management is assumed to strategically select… the information [in corporate narrative documents] to display and present… that information in a manner that is intended to distort readers’ perceptions of corporate achievements’ (Godfrey et al., 2003, p.96).


Management is accountable to shareholders and stakeholders, for their decisions and actions. Corporate reports, particularly the annual report, serve as an accountability mechanism which addresses the concerns of external parties (Stanton and Stanton, 2002).


Incorporate reporting; management engages in impression management to counteract undesirable consequences in anticipation of an evaluation of its actions and decisions by shareholders.


If narrative in the corporate documents are regarded as an indicator of the decision behavior of management and thus reflecting managerial performance (Prakash and Rappaport, 1977, p.35), then managers may be prompted to engage in impression management to counteract undesirable consequences of information releases in the form of unfavorable analyst reports and credit ratings, adverse share price movements and loss of stakeholder support (Merkl-Davies et al., 2011).



  • Discuss the external influences on the company’s financial reporting (legal, taxation, corporate finance, the accounting profession).                   

There are no two countries with an identical accounting system. Accounting is a product of its external environment. This means that forces peculiar to its national environment shape it. (Radebaugh and Gray 1997).

In international accounting, there has been a considerable amount of effort by researchers to analyze and categorize the external influences on a company’s financial reporting. An extensive list of possible causes can be found in the writings of previous researchers, including Muller (1967), American Accounting Association (1977), Nobes (1981), Gray (1988), Radebaugh and Gray (1993), Lawrence (1996), and Walton (1998).


The following external Factors influence accounting systems:

  1. The Legal System

Over the years, two types of legal systems have been developed namely;

  • The common law system and
  • The code law system.
  1. The code law system

It originated from the Roman Empire, and it is based on obliged and written law. It is based on codes, for example, France. The government is responsible for the accounting regulation in code law countries, and that leads to condensed financial reporting to a minimum defined by the detailed set of legal rules (Alexander et al. 2009).


  1. The common law system

It originated from England, and it is found in many other countries influenced by England e.g. USA. Courts interpret them as the case arises resulting in case law and precedents. Qualified organizations of the private sector are responsible for accounting regulation in common law countries, and the accounting rules are not part of the law (Smith 2006).





  1. Corporate Finance

When companies require capital to finance expansion, they use different sources of Finance in different countries. The two most commonly used methods are;

  • Debt Finance
  • Equity Finance
  1. Debt Finance

In countries like France, Germany and Italy significant amounts of the corporate finances are provided by banks rather than equity. This is also referred to as debt financing. Finance is secured on the assets of the company.

The financial statements have a creditor orientation; they focus on creditor protection through careful and conservative accounting measurements.

The information presented by the annual accounts must be valuable to form an opinion of whether a company is a solvent and liquid.

  1. Equity Finance

In countries, like the USA and UK, the companies finance their expansion or investment needs from shareholders. In these countries, there is more pressure to use accounting reports to present the company in a favorable light to attract investors.

Their financial statements will have an investor or shareholder orientation. The financial statements must present information that will enable a shareholder to make the best investment choice.

  1. Taxation

Depending on the dependency or interdependency of tax and accounting.

Taxation and accounting are dependent

This is common in code law countries. The published financial statements are used for taxation. The fiscal authorities use the information given in the financial statements to find out the taxable income in countries like Sweden and Germany. In several states, tax regulations set the maximum depreciation rates to be applied for particular assets.

  1. Taxation and accounting are independent.


This is common in common law countries, e.g. USA and UK. The published financial statements are used as performance indicators instead of taxation purposes.

  1. Accounting Profession


  1. Common law countries – the profession is self-regulating, e.g. in the UK, US, and Canada. Various professional bodies have their own rules and examinations. Audited financial reports are more independent and reliable.


  1. Code law countries –This is common in code law countries. The profession is a function of the state. The professional bodies do not deliver their accounting qualifications; the state provides them. The quality of financial statements and independence of auditors are subject to dispute.


  1. Political and Economic


The impact of the political and economic system on accounting and reporting systems is often mentioned in the literature under the term of colonial inheritance (Nobes, 1998, 170).


Through history, it is evident that invading countries imposed their political, as well as

their accounting system on the countries they colonized.


It is also a fact that many countries, upon gaining independence, have continued to use the same accounting system even though it no longer suits their current needs and economic situation, e.g. Commonwealth nations’ accounting systems are under the significant influence of British accounting system.



  1. Concerning Hofstede, Gray and other relevant research, discuss any signs of culture within the financial reporting documents

Culture is a powerful influence underlying social values and human behavior, and therefore its impact on accounting practices cannot be overemphasized.

  1. Hofstede Model


Hofstede defined culture as (2007) “the collective programming of the mind which distinguishes the members of one human group from another” (p. 17). In a major survey of employee attitudes in the worldwide subsidiaries of IBM Corporation, he identified four contrasting sets of cultural dimensions that can be used to describe general similarities and differences in cultures around the world.


These are:

  • Individualism versus collectivism– Individualism refers to individuals taking care of themselves. As for its opposite – Collectivism, individuals can expect their relatives or members of a particular group to look after them in exchange for unquestioning loyalty.


  • Strong versus weak Uncertainty avoidance-this dimension refers to the extent to which individuals feel threatened by uncertain situations. Strong Uncertainty Avoidance societies tend to be rigid in adherence to rules and are intolerant towards new ideas. Weak Uncertainty Avoidance countries maintain a more relaxed attitude in uncertain situations.


  • Large versus small power distance– this dimension describes the extent to which the members of a society accept that the power is unequally distributed in organizations and institutions.


  • Masculinity versus Femininity- Masculinity stresses traditional masculine values of performance such as achievement, heroism, assertiveness, and material success while Femininity stands for a preference for cooperation, modesty, caring for the weak and quality of life. The crucial issue of this dimension is the way societies allocate social roles to the sexes.


  • Extended versus short – term orientation- This dimension stands for the way people favor future-oriented virtues.



The significance of Hofstede’s dimensions is the national culture’s influences on the nature of accounting practices.


  1. The Anglo cultural area, for instance, is characterized by high individualism, low uncertainty avoidance, and power distance and moderate masculinity.


  1. The Less Developed Latin cultural area (e.g., Colombia, Ecuador, Mexico, and Venezuela) is described by low individualism, high uncertainty avoidance, and power distance and quite high masculinity.


It is argued that in countries with high uncertainty avoidance, efforts are made to minimize uncertainty. In accounting, rules and regulations tend to be rather detailed and rigid. Individualism affects accounting in terms of disclosure practices and income measurement rules.




Gray (1988) used Hofstede’s cultural dimensions to define four accounting values as follows;


  • Professionalism versus Statutory Control –a preference of individual professional judgment and the maintenance of professional self-regulation as opposed to compliance with legal requirements and statutory control.


  • Uniformity versus Flexibility – a preference for uniform enforcement of accounting practices between companies and the consistent use of such methods over long periods as opposed to flexibility according to the circumstances of individual companies.


  • Conservatism versus Optimism – a preference for a conservative approach to measurement to cope with the uncertainty of future events as opposed to an optimistic, risk-taking attitude.


  • Secrecy versus Transparency – a preference for confidentiality on disclosure of information about the business only to related parties as opposed to an open and publicly accountable approach, fundamental in accounting.


In identifying the dimensions that characterize accounting systems, Gray distinguishes between

  • The statutory authority for accounting systems, and their enforcement
  • The measurement and disclosure characteristics of accounting systems.


Gray further classes cultural areas according to his four accounting values.


  1. Cultural areas according to their attitudes towards regulations. The values that correspond to these attitudes are professionalism versus statutory control and uniformity versus flexibility.
  2. Cultural areas according to measurement and disclosure practices. The values are named as conservatism versus optimism and secrecy versus transparency.


Gray characterizes the Anglo cultural area by a relatively low rank on conservatism and secrecy (or high on optimism and flexibility).


The countries of the less developed Latin cultural area (e.g., Colombia, Mexico) tend to rank relatively high in conservatism and secrecy.


Schwartz’s Cultural Dimensions


Schwartz (1994) tried a different analysis; he organized values based on two  basic dimensions:

  1. Openness to change versus conservation, with the opposing value types of autonomy versus conservatism.
  2. Self-transcendence versus self-enhancement, with the opposing value types of egalitarianism and harmony versus hierarchy and mastery.

The collectivism/Individualism dimension has been popularly used as the explanatory variable in subsequent research on culture.




  • Alexander, D., Britton, A. &  Jorissen, A. (2009). International financial reporting and analysis. London: Cengage Learning.
  • Godfrey, J., Mather, P. & Ramsay, A. (2003). Earnings and impression management in financial reports: the case of CEO changes. Abacus, 39(1), 95-123.
  • Gray, S.J., (1998), «Towards a Theory of Cultural Influence on the Development of Accounting Systems Internationally», ABACUS, 24 (1): 1 – 15.
  • Merkl-Davies, D.M., Brennan, N.M., and McLeay, S.J., 2011. Impression management and retrospective sense-making in corporate narratives: a social psychology perspective. Accounting, Auditing and Accountability Journal, 24(3), forthcoming.


  • Mueller, G. G. (1967). International accounting. New York: Macmillan.


  • Nobes, W. and Parker, R. (1998) Comparative International Accounting. 5th ed, Prentice Hall, London.


  • Prakash, P. and Rappaport, A., 1977. Information inductance and its significance for accounting. Accounting, Organizations and Society, 2(1), 29–38.


  • Rutherford, B.A., 2003. Obfuscation, textual complexity and the role of regulated narrative accounting disclosure in corporate governance. Journal of Management and Governance, 7(2),



  • Stanton, P. and Stanton, J., 2002. Corporate annual reports: research perspectives used. Accounting, Auditing and Accountability Journal, 15(4), 478–500.
  • Smith, M., & Taffler, R.J. (2000). The chairman’s statement: a content analysis of discretionary narrative disclosures. Accounting, Auditing and Accountability Journal, 13(5), 624-646.

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