Testing the violation of conservatism accounting principle. Case study on Romanian listed entities

Abstract

Abstract From the beginning of the debates regarding the conservatism principle, the concept experienced a significant development. As it is one of the most controversial and violated accounting principle, we started to seek how can we help one of the auditor’s challenge in the audit mission: to identify and evaluate the risks from the financial statement level. The most affected accounting principle in Romania is the conservatism principle. After a long time of debates, it was stated that the conservatism principle, considered to be complementary to the “fair view” concept, which means that financial reports shall be required to submit information so impartial and in such a manner as to enable the reader to understand them clearly. Considered as a risk that should be identified, this study demonstrates a relationship between the violation of the conservatism principle and the analysis of the financial indicators, such as: Long-Term-Debt-to-Equity Ratio; Debt-to-Equity Ratio; Global Solvency Ratio; Operating Margin Ratio; Current Finance Ratio; Period of Activity Indicator and Auditor Indicator. Based on a quantitative method, this analyze was realized through three econometric model performed on annual financial statements of the companies from Bucharest Stock Exchange. After validating the sample and analyzing the factorial variables, we selected the best model: the probit model. In conclusion, as can be seen in the paper, the econometric function is efficient, reliable and can be applied to assess the risk likelihood for violating the conservatism principle by a Romanian company.