National Accounting Culture and Empirical Evidence on the Application of Conservatism

Prudence in accounting is a corner-stone concept which has shaped accounting theory, as well as ordinary financial reporting, sometimes in obscure and perverse ways. The qualitative nature of our contribution is apparent in the critical analysis of the degree of conservatism as a fundamental attribute of any national accounting culture. We classified the 17 European countries in our sample in three groups according to how domestic standards recognize and measure provisions for risks and charges, in comparison with IFRS. Thus, the companies in our sample belong to the following accounting environments: IFRS-compliant (147 firms), conservative (179) and liberal (62). On the quantitative side of the study, we developed a proxy for accounting conservatism, namely the degree of uncertainty associated with the settling of a company's obligations. To this purpose, we hand-collected accounting data for 388 business groups from 17 European countries. The companies are representative for the main industrial and consumer sectors, excluding financial institutions. For these companies we computed the provisions-to-liabilities ratio (PLR) and performed several group tests, according to the following original classification of national accounting cultures.The results indicate that companies incorporated in countries that are classified as ‘conservative' do assign a significantly higher degree of uncertainty to their total amount of liabilities. If we take into account that all the companies in our sample prepare their annual accounts in compliance with IFRS, we can conclude that national accounting culture – when classified as prudent – exhibits a significant influence on the IFRS policies that companies apply with regard to the recognition and measurement of provisions