Investigating the Effect of Conservative Financial Reporting on the Relationship between Environmental Uncertainty and Accrual Anomaly

Objective: Conservative financial reporting can be considered a product of uncertainty and whenever accountants face ambiguity, they use conservatism. Today, interests’ conflict between different parties related to firms has increased as a result of business environment development and extensive role of accounting information. In this regard, accounting conservatism has received a large part of researchers' attention; Considering that effect of conservative financial reporting on environmental uncertainty and accruals abnormality has not been investigated in Iranian researches, this study has been conducted with the aim of investigating effect of conservative financial reporting role on the relationship between environmental uncertainty and accrual anomaly in firms listed on the Tehran stock exchange.



Methods: This study is a multiple correlation research and on the other hand, it is a type of post-event research, because firstly was examined correlation between more than two variables, Secondly, was used data and information after the event. The data of this study is based on figures and real information of accepted firms in the Tehran Stock Exchange and financial statements of this firms. Also, information and data needed to conduct this study were obtained from information base of Tehran Stock Exchange (CODAL) and referring to financial statements, notes and reports of this firms. In order to achieve the research objectives, research hypotheses were tested based on a statistical sample consisting of 167 firms during a 10-year period from 2012 to 2021 using correlation analysis through the combined data estimation method with Eviews software. To measure accruals abnormally was used balance sheet approach, to measure environmental uncertainty was used sales coefficient approach and to measure financial conservatism was used time asymmetry of profit approach. This study used all listed companies in the Tehran Stock Exchange. Organisations related to banks, financial institutions, foreign companies, investment and insurance companies were not included in the study as these types of companies operate in specific regulatory accounting environments.



Results: This study has four main hypotheses. 1) Environmental uncertainty has positive and increasing effects on accruals anomaly; 2) Conservative financial reporting has negative and reducing effects on accruals anomaly; 3) Conservative financial reporting weakens relationship between environmental uncertainty and accruals anomaly; 4) The weakening effect of conservative financial reporting on relationship between environmental uncertainty and accruals anomaly is not dependent on the firm’s size. The results of first hypothesis show that there is a positive and significant relationship between environmental uncertainty and accruals abnormally. Experimental estimates confirm this hypothesis, that in times of uncertainty, firms face problems related to investment decisions, but accounting conservatism reduces uncertainty and improves firm's investment decisions. In general, Exposure to greater uncertainty leads to more conservative reporting; Therefore, managers try to use appropriate strategies, to moderate effect of environmental uncertainties. If these strategies fail to reduce environmental uncertainties, then quality of financial reporting will drop. The main reason for using more conservative methods and reporting less income is demonstrating sustainable growth. From investors perspective, achieving sustainable growth means less risk. Therefore, the market price for firms with less risk is higher than firms with more risk. The results of second hypothesis show that there is a negative and significant relationship between conservative financial reporting and accruals abnormally. findings of the third hypothesis showed conservative financial reporting weakens relationship between environmental uncertainty and accruals anomaly. Although all organizations face uncertainty, but level of uncertainty varies among firms. When firms face high uncertainty, conservative financial reporting helps managers to make correct decisions. From the perspective of agency theory, which relates managers' rights and benefits to reported profits, managers have strong incentives to hide bad news that will reduces profits; Therefore, conservatism can be considered as a mechanism to control managers' motivations to overreport profits. Iran's business environment has faced a high level of uncertainty due to the inflation high rate and currency fluctuations in recent decades. In this situation, firms that have a higher level of awareness to business environment uncertainty, prepare their financial statements more conservatively; Therefore, these firms have less accruals anomalies compared to firms that act passively. Also, the results of fourth hypothesis show that the impact of conservative financial reporting and its interactive effect is different in small firms of Tehran Stock Exchange.



Conclusion: Applying conservatism to the preparation of financial statements has been considered as a practical way to assist managers to deal with uncertainty in business environments. In times of uncertainty, firms will face problems related to financial decisions, but accounting conservatism reduces uncertainty and improves the firm's financial decisions. In general, exposure to greater uncertainty leads to more conservative reporting, Therefore, managers try to moderate effect of environmental uncertainties by using appropriate strategies. Considering the role of financial conservatism in improving quality of firm's information environment, the results of this study can provide a better understanding of conservative accounting and financial reporting and important consequences of conservative methods for investors and firms.