The Role of Accounting Conservatism in a well-functioning Corporate Governance System

This paper analyses accounting related to corporate governance and is organized as follows. The first section deals with understanding the concept of accounting conservatism. In the second section we analyzed the Relevance of Accounting Conservatism in Corporate Governance to the modern corporate world. The third section includes a Case Study on Ericsson, a Swedish Telecommunications company and conservatism in strong governance firms versus weak governance firms. The fourth part is devoted to the conclusion of our research efforts. From this study, we conclude that there are several reasons to use accounting conservatism in corporate governance and that current empirical evidence indicates that conservatism has increased in the last decades. The value of ƒÒ3 in Table 1 indicates that there is a positive significant level of conservatism in accounting practices followed by Ericsson. When the dependent variable is earnings (X), the asymmetric timeliness of earnings coefficient £]3 in Table 2 provides an estimate of the level of conservatism. We observe that strong governance firms are more conservative than weak governance firms (0.13 versus 0.04). We expect and hypothesize that strong governance structures will tend to favour accounting conservatism more than weak governance structures. However, excessive dependencies on old structures show poor growth that has been since the oil crisis.