Specification and Development a Model for Estimating of Accounting Conservatism in Iran

Subject Areas : Futurology

H.  Nikoomaram ¹ (نویسنده مسئول)
B.  Banimahd ² (ندارد)

Received: 2007-02-07 Accepted : 2007-08-22 Published : 2008-06-21

Keywords: accounting conservatism, return on assets, Cash Return Assets, Accrual Item, sale growth, financial leverage,

Abstract :

Accounting conservatism has recently been under attacked. For example, Financial Accounting StandardBoard (FASB) point out that conservatism increase conflict between qualitative characteristics such asrepresentational faithfulness, neutrality, and comparability. The Board concludes that any attempt tounderstate results consistently is likely to raise question about the reliability and integrity of informationabout those results. Recently, in the IASB and FASB joint conceptual framework, conservatism andprudence have been abolished. In other side, some of researchers such as Professor Watts from the universityof Rochester tried to provide a better understanding of accounting conservatism in Accounting Horizon(2003). He defended accounting conservatism by documenting of the research results.Watts suggests thatconservatism likely evolved from the contracting role of accounting. He argues that accounting conservatismhelps to reduce agent's opportunistic behavior and mitigates conflicts of interest over dividend policybetween shareholders and bondholders.This study, by adopting of new studies outcomes on accounting conservatism, develops a new firm-levelconservatism measure from Givoly & Hayn (2000) accrual model. This measure represents conservatismmeasure from an income statement and balance sheet perspective. The outcomes of the study indicated thataccounting conservatism measure has positively correlated to return on asset (ROA) and sale growth, on theother hand, has negatively correlated to leverage and cash flows from operations to total assets ratio.The research results show firms experiencing more severe bondholder-shareholder dividend policy conflictsadopt less conservative accounting and firms that use more conservative accounting incur a high debt ratio.The results also suggest existence of high income smoothing and show a strict decrease in accountingconservatism in Iranian financial reporting environment. This decrease accompanies with decreases ofprofitability index (ROA) and economic performance index (CFO/Asset). It seems governmental ownershipand governmental management and lack of management accountability are important factors of this problemin Iranian industries. The outcomes of this study differ from the US studies results.