Conservative Accounting Profitable, Not Just Prudent

What’s the Latest Development?

The global financial crisis has forced companies to consider new ways of doing things, especially the ways in which they achieve profitability and growth. One of them is conditional conservatism, an accounting practice that imposes more stringent verification requirements on economic gains than economic losses. It results in earnings that reflect losses in a timelier manner than gains.

What’s the Big Idea?

Perhaps despite corporate fears to the contrary, the research discussed here shows that conditional conservatism leads to positive economic outcomes, helping firms “to lower their cost of capital, and hence, compete more effectively, leading to more innovation, growth and job creation.”