The Changing Time-Series Properties of Earnings, Cash Flows and Accruals : Has Financial Reporting Become More Conservative?

This paper documents changes in the patterns of earnings, cash flows and accruals over the last four decades that provide an indication of a trend in reporting conservatism. In the absence of a generally accepted definition of conservatism, a number of measures consistent with the general notion of reporting conservatism are identified and examined. These measures rely on the accumulation of nonoperating accruals, the timeliness of earnings with respect to bad and good news, characteristics of the earnings distribution, the association between cash flows and earnings and the market-to-book ratio. The patterns that emerge are consistent with more conservative financial reporting beginning in the late 1970s. The findings have implications for accounting standard setting, the regulation of financial information and financial statement analysis