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

Accounting conservatism has recently been under attacked. For example, Financial Accounting Standard Board (FASB) point out that conservatism increase conflict between qualitative characteristics such as representational faithfulness, neutrality, and comparability. The Board concludes that any attempt to understate results consistently is likely to raise question about the reliability and integrity of information about those results. Recently, in the IASB and FASB joint conceptual framework, conservatism and prudence have been abolished. In other side, some of researchers such as Professor Watts from the university of 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 that conservatism likely evolved from the contracting role of accounting. He argues that accounting conservatism helps to reduce agent's opportunistic behavior and mitigates conflicts of interest over dividend policy between shareholders and bondholders. This study, by adopting of new studies outcomes on accounting conservatism, develops a new firm-level conservatism measure from Givoly & Hayn (2000) accrual model. This measure represents conservatism measure from an income statement and balance sheet perspective. The outcomes of the study indicated that accounting conservatism measure has positively correlated to return on asset (ROA) and sale growth, on the other 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 conflicts adopt 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 accounting conservatism in Iranian financial reporting environment. This decrease accompanies with decreases of profitability index (ROA) and economic performance index (CFO/Asset). It seems governmental ownership and governmental management and lack of management accountability are important factors of this problem in Iranian industries. The outcomes of this study differ from the US studies results.