Accounting conservatism and economic conditions: Evidence from the GIPS and the UK

Abstract

In this article we analyse whether the level of conservative accounting practice is associated with economic conditions in Greece, Ireland, Portugal, Spain (GIPS) and the UK. For that purpose, we study conditional conservatism surrounding the 2007/08 global financial crisis, using an approach that consists in examining two stages of the crisis, which we denote by the earlier stage of the crisis and the later stage of the crisis. Furthermore, we analyse the impact of the intensity of economic changes and institutional factors by comparing conservatism in the GIPS, which were more severely affected by the crisis, with the UK. The results are consistent with a conservative accounting practice in those countries over the sample period from 1998 to 2018. Besides, we find evidence of a decrease in conservative accounting in the earlier stage of the crisis and an increase in the later stage. In addition, the results suggest an incremental sensitivity of conservatism in countries that were more severely affected by financial crisis. Our findings are consistent with managers adjusting financial reporting in response to the economic environment, sometimes they appear to respond to the demand for a conservative practice from stakeholders, but other times they act as if they wanted to mislead outsiders. Therefore, this study brings some insights to the debate about the use of accounting conservatism and its relation to economic conditions.