The impact of conditional conservatism on creative accounting: A suggested framework

Abstract

This paper provides a framework of how conditional conservatism contributes to the reduction of creative accounting which in turn affects auditor fees, litigation risk, auditor independence and improved auditing quality. All these factors are reflected in the degree of stakeholders’ confidence in financial reports. The absence of conservatism in the Financial Accounting Standards Board’s (FASB) conceptual framework is due to its belief that conditional conservatism causes a bias in accounting information and that it compromises neutrality. However, by supporting conservatism with a set of controls including upgraded training, intensified effort of auditors, increased professional skills and activated audit committees, users’ financial statement become more reliable which helps users make the right decisions.