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

Conservative financial reporting can be considered a product of uncertainty and whenever accountants face ambiguity, they use conservatism. Today, interest conflicts between different parties related to firms have increased due to the development of the business environment and the extensive role of accounting information. In this regard, accounting conservatism has received a large part of researchers' attention. Considering that the effect of conservative financial reporting on environmental uncertainty and accruals abnormality has not been investigated in Iranian research, this study has been conducted to investigate the effect of conservative financial reporting on the relationship between environmental uncertainty and accrual anomaly in firms listed on the Tehran stock exchange. 

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

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

Applying conservatism to preparing financial statements has been considered a practical way to assist managers in dealing 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 the effect of environmental uncertainties by using appropriate strategies. Considering the role of financial conservatism in improving the quality of a firm's information environment, the results of this study can provide a better understanding of conservative accounting and financial reporting and the critical consequences of conservative methods for investors and firms.