Conservatism Study Of Accounting Earnings And Accruals

Accounting conservatism is traditionally defined by the adage "anticipate no profit, but anticipate all losses" (Bliss, 1924). In the empirical literature the adage is interpreted as representing "the accountant's tendency to require a higher degree of verification to recognize good news as gains than to recognize bad news as losses" (Basu, 1997).Under conservatism, bad news is recognized more timely than bad news in contemporaneous earnings. This interpretation implies systematic differences between bad news and good news periods in the timeliness and persistence of earnings.This paper examines the effects of conservatism in Chinese accounting practice. Following Basu (1997), I find the asymmetric timeliness and persistence of earnings, which are arisen from conservatism, under Chinese GAAP. The results in this study show that the earnings are more conservative than operating cash flows, earnings before extraordinary items more conservative than earnings after extraordinary items, To ascertain the mechanism of this difference the earnings between before and after extraordinary items and cash flows, this paper analyzes the conservative effects on the disaggregated accrual components. This study indicates that total accruals are more conservative than operating cash flows, while nonoperating accruals are more conservative than operating accruals, the part reason is that extraordinary items are more conservative than other accrual components. operating accruals do not that type of asymmetry.In additional, this paper examines the effects of CPA firms on conservatism. This study indicates that Big four in china are significantly (Sig.1%) less conservative than the rest of six CPA firms that ranked the first before ten from 2002 to 2004 by the Chinese institute of certified public accountants. The first before six CPA firms excluding big four in china are significantly (Sig.5%) more conservative than the other CPA firms excluding big four.