ijcrb.com INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS NOVEMBER 2014 VOL 6, NO 7

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1 THE RELATIONSHIP BETWEEN CONSERVATISM ACCOUNTING AND EARNING MANAGEMENT OF LISTED COMPANIES INTEHRAN STOCK EXCHANGE PeymanAmini 1 Departmentof Accounting,Sanandaj Branch, Islamic AzadUniversity, Sanandaj, Iran SnoorHosseini* 2 Departmentof Accounting,Sanandaj Branch, Islamic AzadUniversity, Sanandaj, Iran Abstract The present study investigated the relationship between conservatism and earnings management in Tehran Stock Exchange. In this study for survey of conservatism is used of Garcia model and for measurement of earnings management is used of joins model In the case of accrual-based earnings management and real earnings management is used. In this study, considering the limitations of the studied companies, 91 company is selected as sample. This study isbased on objective and based on the method of data collection is descriptive. The results of study is indicated, apply conservatism, accrual-based earnings management reduces. In constant, apply conservatism Real earnings management to improve. In the first case, earnings management to mislead the legal and regulatory organizations and the latterto mislead the shareholders. Key words: Conservatism,earnings management, Tehran Stock Exchange, accrual-based earnings management 1. Introduction Despite its long and pervasive influence on accounting around the world, conservatism has been subject to substantial controversy, culminating at it being eliminated from the FASB and IASB.s joint conceptual framework (FASB (2010)), which guides the making of future accounting standards. Some concerns about conservatism seem to arise from the premise that characterizes accounting measures as an informational input to decisions. Under this view, the asymmetric treatment of good versus bad news generates accounting measures whose in formativeness depends on their signs. Because a priori there does not seem to be a fundamental deference in the way good versus bad news abets decisions, the efficiency of conservatism from this view hardly matches its practical prevalence and profound influence in accounting. For example, Leuz (2001) points out that under-investment could be as severe a problem as over-investment and that an unduly tight covenant could be as detrimental to efficiency as an unduly loose one, a theme echoed also by 1 -Dr.PeymanAmini Assistant Professor, Department of Islamic Azad University, Sanandaj Branch, Iran 2 -SnoorHosseini Master Student Of Accounting In Islamic Azad University, Sanandaj Branch, Iran *(Corresponding Autor) COPY RIGHT 2014 Institute of Interdisciplinary Business Research 176

2 Guay and Verrecchia (2006) and Lambert (2010). Gigler, Kanodia, Sapra, and Venugopalan (2009) further observes that the fact that a project is financed extant means that a priori the cost of excessive liquidation exceeds that of excessive continuation, deepening the skepticism about conservatism. Similarly, FASB.s official reason for the abovedecision is that Understating assets or overstating liabilities in one period frequently leadsto overstating financial performance in later periods" (FASB 2010 BC3.28), implying thatwhatever value conservatism has in one period is inevitably reversed in others. On the other hand, conservatism has long been advocated as part of a firm s efficientcontracting technology. Watts and Zimmerman (1990) summarizes the argument concisely: "Reacting to the incentive of managers to exercise accounting discretion opportunistically,the accepted set includes "conservative" (e.g., lower of cost or market) and "objective" (e.g. Verifiable) accounting procedures.as long as the manager, who is able to ex post bias up-ward accounting measures used in contracts, benefits from the inflated accounting measuresopportunistic earnings management occurs ex post and the asymmetric verification requirement arises as an ex ante response to the ex post one-sided bias. The underlying premise ofthis view is that accounting measures are used to settle contracts, as opposed to influencingdecision maker sbeliefs.the analytical formalization makes the explanation more transparent and generalizable. Inparticular, it distinguishes the contracting explanation from the information view. The keydifference of the use of accounting measures for contracting versus for informing decision makers is that the former has to be pre-committed and thus is more vulnerable to ex post manipulation. The extra vulnerability requires special safeguards in the design of measurement rules. That is, accounting measures for contracting have to be not only informative (relevant) butalso robust to ex post opportunism (reliable). Further, accounting-based contracts are oftendesigned in such a way that the manager benefits from better ex post accounting measures,because otherwise the contracts would create perverse incentives. Therefore, the managersex post opportunism is one-sided and the special safeguard against it is asymmetric as well. By distinguishing the contracting explanation from the information view, the formalization provides a coherent setting to evaluate the different views on conservatism transparently.notwithstanding the empirical evidence, the lack of theoretical support for conservatism seems to be influencing standard setters both in the United States and around the world. Conservatism as a measurement principle was recently eliminated from the FASB and IASB s joint conceptual framework (FASB, 2010), which guides the making of future accounting standards. Given the enormous implications of the topic, Leuz (2001) has called for the reconciliation of this stark discrepancy between practice and theories, a theme echoed by Guay and Verrecchia (2006), Gigler et al. (2009), and Lambert (2010). A careful examination of the discrepancy between theories and empirical works reveals the inadequacy of the reduced- form representation of accounting measurement. For example, one rationale for conservatism, discussed in most empirical works (e.g., Ball, 2001; Watts, 2003a; Kothari et al., 2010), views conservatism as a differential verification requirement and emphasizes managers opportunistic COPY RIGHT 2014 Institute of Interdisciplinary Business Research 177

3 influence on accounting measurement as the main justification, but neither feature shows up in the above framework that treats accounting measurement as a black box emanating an accounting report with certain statistical properties. Opening the black box of accounting measurement invites a number of interesting questions. Conceptually, accounting measurement converts a firm s transactions and events into accounting reports by accounting rules, with the aim to capture the economic substance of the transactions. What is an accounting rule? How does an accounting rule relate the economic substance of a transaction to an accounting report? What are the major frictions in the process? What instruments does a rule designer control to influence the quality of an accounting report? What do we mean by a conservative accounting rule? As an institutional feature of accounting measurement, conservatism cannot be fully understood without answering these questions. 2. Conceptual framework In this study for investigation relationship between earning management and conservatism is used of below model: Conservatism Earning management Accrual-based earnings management Real earnings management Figure 1: conceptual model 3. Hypotheses 3.1. Main Hypothesis There are meaningful relationship between Conservatism and earning management 3.2. Sub Hypothesis 1. There are meaningful relationship between Conservatism and Accrual-based earnings management 2. There are meaningful relationship between Conservatism and Real earnings management 4. Methodology In this study for tested the research hypotheses is used of below model: 1)AMt = α + β1 COt + δ Σ Cotrolst + εt 2) RMt = α + β1 COt + δ Σ Controlst+εt 3) TAccrt /Assetst-1 = α + β0 1/Assetst-1 + β1 (ΔSalest ΔRECit) /Assetst-1 + β2ppet/assetst-1 + β3 ROAt-1 + β4 SGt+ ET COPY RIGHT 2014 Institute of Interdisciplinary Business Research 178

4 4) وCFOit/Assetsi t-1=k1t (1/ وAssetsi t-1) +K2t (Salesit /Assets وi t-1) +K3t ( Salesit /Assets وi t-1) +εit 5) وPROUDit/Assetsi t-1=k1t و 1/Assetsi ) t-1 -t ) +K2t وSalesit/Assetsi ) t-1) K3t (Salesit/ Assetsi ( 1 و وK4t(Salesi + t-1/ وAssetsi t-1) +εit 6) DiscExpit/Assetsiوt-1=K1t (1/Assetsiوt-1) +K2t (Sales وi وt-1/Assetsi t-1) +εit DiscExpit 7) Conservatism=B/M 5. Results: In current study, in first is presented descriptive statistics and latter interfere statistical. The descriptive statistical is presented in table 1. Statistics ACC1 ACC2 CO ROI SIZ N Valid Missing Mean E E Median E E Std. Deviation E E Variance 6.614E E Skewness Std. Error of Skewness Kurtosis Std. Error of Kurtosis Range 8.68E6 1.04E Minimum -3.46E6 3.36E Maximum 5.22E6 1.04E Based on table 1, the mean for Accrual-based earnings management about 91 studied companies is 2.41 and for real earning management is In other hand means for real earning management is more than Accrual-based earnings management. Also mean for Conservatism is 0.54, for ROI is 0.17 as well as for control variable (size) is 5.8. COPY RIGHT 2014 Institute of Interdisciplinary Business Research 179

5 Also the tested for data normalization is done. The results of this test is below diagrams: Figure 2. Histogram diagram for Accrual-based earnings management Figure 3. Histogram diagram for Real earnings management COPY RIGHT 2014 Institute of Interdisciplinary Business Research 180

6 Figure4. Histogram diagram for Conservatism COPY RIGHT 2014 Institute of Interdisciplinary Business Research 181

7 Interfere statistical In this study for determining relationship between research variables is used of regression equation. The results for investigate relation betweenconservatism and earnings management is presented on table2. Correlations ACC1 ACC2 CO SIZ ROI ACC1 Pearson Correlation ** **.220 * Sig. (2-tailed) ACC2 Pearson Correlation.436 ** **.302 ** Sig. (2-tailed) CO Pearson Correlation ** Sig. (2-tailed) SIZ Pearson Correlation.321 **.633 ** * Sig. (2-tailed) ROI Pearson Correlation.220 *.302 **.794 **.247 * 1 Sig. (2-tailed) **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). COPY RIGHT 2014 Institute of Interdisciplinary Business Research 182

8 Model Coefficients a Unstandardized Coefficients Standardized Coefficients B Std. Error Beta 1 (Constant) CO a. Dependent Variable: ACC1 t Sig. Model Coefficients a Unstandardized Coefficients Standardized Coefficients B Std. Error Beta 1 (Constant) CO a. Dependent Variable: ACC2 t Sig. Based on above table we interfere there are meaningful and positive relationship between two kind of earning management (Accrual-based earnings management and Real earnings management) and Conservatism. 6. Conclusion The results of study is indicated, apply conservatism, accrual-based earnings management reduces. In constant, apply conservatism Real earnings management to improve. In the first case, earnings management to mislead the legal and regulatory organizations and the latter to mislead the shareholders. COPY RIGHT 2014 Institute of Interdisciplinary Business Research 183

9 References Ball, Ray, Infrastructure requirements for an economically efficient system of public financial reporting and disclosure. In: Brookings-Wharton Papers on Financial Services, pp FASB, 2010.Statement of Financial Accounting Concepts No. 8. Financial Accounting Standards Board of the Financial Accounting Foundation Gigler, F., Kanodia, C., Sapra, H., Venugopalan, R., 2009.Accounting conservatism and the efficiency of debt contracts. Journal of Accounting Research 47, Guay, W., Verrecchia, R.E., 2006.Discussion of an economic framework for conservative accounting. Journal of Accounting and Economics 42, Kothari, S.P., Ramanna, K., Skinner, D.J., Implications for GAAP from an analysis of positive research in accounting. Journal of Accounting and Economics 50, Lambert, R.A., 2010.Discussion of implications for GAAP from an analysis of positive research in accounting. Journal of Accounting and Economics 50, Leuz, C., Comment and Discussion. Brookings Wharton Papers on Financial Services 2001, pp Watts, R.L., 2003a. Conservatism in accounting. Part i: explanations and implications. Accounting Horizons 17, Watts, R.L., 2003b. Conservatism in accounting. Part ii: evidence and research opportunities. Accounting Horizons 17, Watts, R.L., Zimmerman, J.L., Positive accounting theory: a ten year perspective. The Accounting Review 65, COPY RIGHT 2014 Institute of Interdisciplinary Business Research 184