Fundamental Evidences Of Accounting Conservatism From Chinese Listed Companies

Based on the Watts(2003) that four factors influence accounting conservatism, the paper investigates the characteristics of listed companies in China from 1992 to 2007, and tests the influences of accounting rule, auditor's risks and the demand of banks on the accounting conservatism.The paper finds: 1. Exclusion of samples that listed companies receive modified audit opinion is important. Inclusion of these samples will lead us to overestimate the extent of accounting conservatism or make wrong judgment ("big bath" earnings management is regarded as accounting conservatism). 2. More conservative accounting standards result in more conservative financial reporting. Financial reporting is conservative only in 2001-2005. Accounting standards and other institutional factors are both complements and substitute, and all determine the quality of financial statements. 3. Auditor especially pay attention to the risks(pressures) from regulations with right offering or keeping listing status that lead listed companies to report more earning , and when ROE is in (-2%, +2%) ((-2%,+5%)),(5%, 7%) or (7%, 13%) , financial reporting is conservative. 4. Regulation environment affects auditor's demand for accounting conservatism, which leads to the extent of conservatism in financial reporting. It is the demand for auditors that leads to conservative financial reporting in 1995. That the proportion and the extent of punishment from regulators (CSRC) are decreased after 2003 leads to auditor's demand for conservatism lower. 5. Financial reporting audited by Big 4 is less conservative than that audited by Non-Big 4 audits, and the view that Big 4 audit quality is higher than Non-Big 4 is worthy of suspicion. 6. Debt from creditors (mainly banks)-to-assets ratio, resource embezzlement from controlling shareholders, insider control and government intervention all affect accounting conservatism. Banks consider government intervention and resource embezzlement as most important factors when they demand accounting conservatism, and insider control and higher creditors -to-assets ratio are secondary. Only in circumstances that government intervention and resource embezzlement are higher, listed companies with insider control or higher creditors -to-assets ratio are significantly conservative in 2001-2005.