The Relation between Accounting Conservatism and Corporate Social Performance: An Empirical Investigation

• Author: James Mattingly,Rick N. Francis,Lori Olsen,Steven Harrast
• DOI: http://doi.org/10.1111/basr.12008
• Date: 01 June 2013
• Published date: 01 June 2013

The Relation between

Accounting Conservatism and

Corporate Social Performance:

An Empirical Investigation

RICK N. FRANCIS, STEVEN HARRAST, JAMES MATTINGLY, AND

LORI OLSEN

ABSTRACT

Accounting conservatism and corporate social responsi-

bility have received much attention in the recent litera-

ture. The current study draws upon Watts, who

recognizes that one role of conservatism is to reduce the

likelihood of excess wealth transfers to its stakeholder

groups and Post et al., who assert that a key aspect of

positive corporate social performance is the (equitable)

distribution of corporate wealth. Accordingly, this study

empirically investigates and finds a positive relation

between conservatism and strong social performance.

Rick N. Francis is Associate Professor at Department of Accounting, University of Texas at El

Paso, El Paso, TX. E-mail: rnfrancis@utep.edu. Steven Harrast is Associate Professor at School

of Accounting, Central Michigan University, Mount Pleasant, MI. E-mail: harra1sa@cmich.edu.

James Mattingly is Associate Professor at Department of Management, University of Northern

Iowa, Cedar Falls, IA. E-mail: jim.mattingly@uni.edu. Lori Olsen is Associate Professor at

School of Accounting, Central Michigan University, Mount Pleasant, MI. E-mail: olsen2l@

cmich.edu.

Authors’ names are listed in alphabetical order.

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Business and Society Review 118:2 193–222

© 2013 Center for Business Ethics at Bentley University. Published by Blackwell Publishing,

350 Main Street, Malden, MA 02148, USA, and 9600 Garsington Road, Oxford OX4 2DQ, UK.

INTRODUCTION

Both corporate social responsibility (CSR) and accounting

conservatism are long-standing issues in their respective

domains. At the heart of CSR is an organization’s citizen-

ship, or how that organization treats its internal and external

constituents. Thus, an accepted framework for evaluating how

well a firm conducts its CSR, its corporate social performance

(CSP), is the organization’s management of relationships with its

stakeholders (Wartick and Cochran 1985; Wood 1991; and

Clarkson 1995). Any person or group on whom an organization’s

activities have an impact is considered a stakeholder where

employees, shareholders, suppliers, creditors, and governments

provide examples.

Stakeholders often have a financial interest in the firm and,

accordingly, Clarkson (1995) recognizes that an important aspect

of managing stakeholder relations is the equitable distribution of

corporate wealth. He proposes that if a firm distributes excess

wealth to one stakeholder group at the expense of the others, the

result will be stakeholder dissatisfaction (1995, p. 110) and under

the stakeholder framework, relatively lower CSP. Conversely, firms

that do not distribute excess wealth to a single stakeholder group

would exhibit higher CSP. The underlying presumption is that the

organization would preserve the necessary resources to balance

the interests of its various stakeholders. Hence, a key to positive

CSP is to avoid excess wealth transfers to a single stakeholder

group, and certain organizational practices are associated with

this preservation of firm resources.

Accounting conservatism refers to the idea that gains should be

deferred and losses should be accelerated, resulting in net assets

and cumulative net income being understated relative to alterna-

tive accounting methods. Watts (2003) discusses motivations for

and implications of conservatism. He notes that the differential

treatment of gains and losses acts as a constraint for managers’

opportunism and optimism, reducing the probability of excess

distributions to managers and current shareholders. More con-

servative treatment in determining net income and asset values is

also less likely to generate asymmetric shareholder payoffs result-

ing from litigation (Watts 2003, p. 209) and will tend to minimize

current tax payments (Guenther et al. 1997). In sum, accounting

194 BUSINESS AND SOCIETY REVIEW