Is UK financial reporting becoming less prudent?

Abstract

This paper seeks to discover whether as a result of the removal of prudence as a concept within the revised 2010 Conceptual Framework, the accounts of companies in the FTSE100 in the UK have displayed any trends to be more or less conservative/prudent. The research design uses the two most popular measures of accounting conservatism (prudence) used in literature, Market-to-Book ratio and the Basu Asymmetric Timeliness model (Basu 1997) and compares the period prior to the change in the 2010 Conceptual Framework with the same measures post the change. The study finds that using both measures of conservatism, the levels of conservatism have fallen since the removal of prudence from the Conceptual Framework. This paper has implications for the users of financial statements and standard setters as the lower levels of prudence or accounting conservatism are associated with higher levels of risk (litigation) and costs (agency costs) which can affect stock valuations.