International Journal of Accounting & Information Management

The effect of culture on accounting conservatism during adoption of IFRS in the EU

Daniel Zeghal, Zouhour Lahmar,
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 The effect of culture on accounting conservatism during adoption of IFRS

in the EU
Abstract: Purpose – This paper examines the impact of culture on accounting conservatism during transition to
international standards.
Design/methodology/approach – The sample used in this analysis consists of 15 countries of the European Union that
have adopted IFRS pursuing Regulation N° 1606/2002. The study covers the 2000-2010 period. Two conservatism
measures are used, the Basu (1997) measure to account for conditional conservatism and the accruals measure to account
for unconditional conservatism. In order to test the impact of culture, the six dimensions of Hofstede (1980 and 2010) are
used.
Findings – The results of the analysis show that variation of conditional conservatism is influenced by the six cultural
dimensions. However, unconditional conservatism is only affected by power distance.
Originality/value – The results of our study are interesting and provide a better understanding of the adoption of IFRS
worldwide. The role of culture in explaining accounting practices after adopting a single set of accounting standards is
particularly highlighted.
Key words: IFRS, conservatism, cultural dimensions, European Union.
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Article classification : Research paper.

1. Introduction
Accounting conservatism is a fundamental principle that has always influenced accounting practices and
financial statements. In the accounting literature, this concept has been widely discussed, in terms of its variation over
time or across different legal and political regimes (Ball et al, 2008; Ball and Shivacumar 2005; Basu 1997; D’Arcy
2001; Gassen et al. 2006; Lara and Mora 2004; Pope and Walker 1999). Zeghal et al. (2012) introduced conservatism as
an attribute of the quality of results and found that it decreased following the mandatory adoption of IFRS. Moreover,
these authors found that a decrease in conservatism is more important for the group of countries whose local standards
diverge significantly from international standards.
In an effort to learn more about the consequences for accounting conservatism of adopting IFRS, it is
appropriate to examine the potential impact of culture. Indeed, accounting literature has shown that culture is a key factor
in explaining international differences. In their study of the differences in international standards, Ding et al. (2005)
found that culture significantly explains divergence between local and international standards. Moreover, the authors
underline that the legal system, which was often evoked in the accounting literature to explain accounting differences and
international harmonization, turns out to be less explanatory than culture does.
In this paper, our aim is to analyze the role of culture in explaining the consequences of IFRS adoption. More
specifically, we are interested in analyzing the effect of culture on variation in accounting conservatism following the
mandatory adoption of IFRS in the European Union. In fact, the application of these standards did not affect all countries
in the same way (Gassen et al. 2006; Hung and Subramanyam 2007; Prather-Kinsey et al. 2008; Soderstrom and Sun
2007; Zeghal et al 2011; Zeghal et al. 2012). In a recent study, Borker (2013) proposed to determine a favorable cultural
profile for IFRS. The author raised the issue of applying a set of standards known for their close resemblance to the
Anglo-American model in regions with different cultures.
The impact of culture on accounting systems and therefore on accounting principles seems important. At this
stage, we already expect that culture influences accounting conservatism. In fact, Gray (1988) established a link between
the cultural dimensions developed by Hofstede and accounting values. We believe that the results of this study will
contribute to a better understanding of the consequences of IFRS application This makes it possible to capture certain
biases in the accounting data of countries with different cultures, despite their adoption of IFRS.
The remainder of the paper is organized as follows: Section 2 presents a review of the relevant literature the
objectives of the study and the research hypotheses. Section 3 describes the methodology. Section 4 reports and discusses
the results. Finally, section 5 summarizes the findings and concludes the paper.
2. Literature review, the purpose of the study and the research hypotheses
2.1. Culture and accounting practices
Accounting literature has found that culture is one factor that significantly explains international accounting
differences. Similarly, Kanagaretnam et al. (2011) believe that culture explains banking behavior and also the quality of
disclosed results. Furthermore, the authors insist that this effect is particularly important for non-financial institutions. In
fact, the banking sector is already highly regulated, minimizing the influence of cultural characteristics. However, non-

1
 bank companies, not subject to such regulations, are more likely to be affected by culture. Kanagaretnam et al. used the
Hofstede’s dimensions to measure culture: individualism, power distance, uncertainty avoidance and masculinity.
Prior to the study of Gray (1988), accounting research had not established a link between accounting and culture
(Borker 2013). In his study of the influence of culture on accounting systems, Gray, however, found a close link between
culture and the development of accounting systems. For example, he argues that the conservative attitude of accountants
could increase with the social value « uncertainty avoidance ». Indeed, it reflects the tendency to hedge against the
uncertainty of future events. The author provides no link with "power distance" but finds a negative relationship with
"individualism" and "masculinity".
Chand et al. (2012) confirmed the importance of culture in accounting through their study of a sample of
Australian and Chinese students. In fact, they found that cultural differences influence accounting judgments and
consequently accounting practice. This is in accordance with the results of Feleaga et al. (2010). In fact, these authors
examined provisions reported to total liabilities as a proxy of the degree of uncertainty. The results of their study confirm
that provisions are subject to managers’ discretion even under IFRS. Feleaga et al. conclude that national accounting
culture influences IFRS application for measurement and recognition of provisions.
Liu (2013) argued that cultural values matter in the eXtensible Business Reporting Language (XBRL)
implementation decision. In fact, he stated that the information can be used and interpreted differently in different
nations. Liu and O’Farrell (2013) conducted an analysis on six nations that mandatorily adopted XBRL by 2009 and
found that accounting sub-cultural values have significant impact on the information quality following XBRL adoption.
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Specifically, the authors found that all Gray’s cultural values influence the accuracy of the analyst forecast.
More recently, Fearnley and Gray (2015) examined the role of national institutional factors in explaining
accounting measurement choices following the IFRS adoption. They presented that the major differences in accounting
practices come from institutional influences which include cultural values. The authors reiterate that cultural values are
more important than legal and equity market development in explaining accounting practice.
2.2. IASB’s position and a favorable cultural profile for IFRS
Borker (2013) suggests identifying a profile that best suits the application of IFRS. The study shows that the
characteristics of the profile that best meets IFRS are in fact those of the Anglo-American model. The author added that
countries with significant differences from this profile encounter more difficulties when adopting IFRS.
The review of existing literature shows that IASB is often considered to be a mechanism that presents the
characteristics of the Anglo-American model. (Hung and Subramanyam 2007; Prather-Kinsey et al. 2008; Raffournier
2007). D'Arcy (2001) also clearly stated that preparing financial information under IASB is dominated by the Anglo-
American approach. Liu et al. (2014) stated that IFRS are more principles-based as opposed to rules-based standards.
Besides, the authors consider IFRS to be highly influenced by UK and US standards. Consequently, the adoption of the
international standards requires readiness for flexibility and openness. Dayanandan et al. (2016) stated that IFRS
adoption is still controversial. In fact, while some researchers consider that these standards improve information quality,
others raise the disadvantages of their adoption such as the earnings volatility.
2.3. Research objective
Over the past few decades, the use of IFRS has become increasingly significant. They were often considered to
be a solution to the diversity of accounting practices in so far as they establish a unique set of standards applicable all
around the world (Cardona et al. 2014; Ferreira et al. 2007; Noll 2013). These standards are adopted because they are
especially known for their transparency and for their ability to produce better quality information (Ball 2006; Daske
2006; Dayanandan et al. 2016; Dumontier and Raffournier 2005; Gassen et al. 2006).
Ball (2006) believes that uniformity of standards alone cannot ensure a harmonization of accounting practices.
The author finds, in fact, that this needs deeper changes. Moreover, recent studies have found different results with
respect to mandatory IFRS adoption and their impact. Anwer et al. (2013) noted a decrease in timeliness of loss
recognition and concluded that there is a decrease in accounting quality in the post-IFRS mandatory adoption. However,
according to Zhuang et al. (2014) mandatory IFRS adoption drew no change in accounting conservatism as measured by
Basu’s differential timeliness. According to Salter et al. (2013), accounting choices are usually attributed to management
decisions, but at the same time, they neglect the values and beliefs of people who made them. Lasmin (2012) conducted a
study in 81 developing countries. The study shows that the decision to adopt international standards is more influenced
by cultural dimensions than economic factors. Noll (2013) proposes to include cultural dimensions in order to assimilate
accounting practices. Following the same line of thought, Chand et al. (2012) suggested that standard setters should take
into account cultural differences because they can lead to differences in interpreting IFRS. According to Feleaga et al.
(2010), national culture influences accounting policies even when IFRS are adopted. Despite the importance of cultural
factors in explaining accounting choices, to the best of our knowledge, the role of these factors in deciding to adopt
international standards was not adequately studied. In fact, previous studies, even when they analyzed accounting
conservatism under IFRS (Anwer et al. 2013; Zhuang et al. 2014; Piot et al. 2010; André et al. 2015), often lack
explanations in terms of social and cultural factors. André et al. presented an original take on this by linking reduction of
2
 conditional conservatism in the post-IFRS period to audit quality and asset impairment tests. But they still ignored
cultural influence. In spite of considering cultural influences, Feleaga et al. only focused on the chapter of provisions to
measure uncertainty that is a proxy for conservatism. We would state that national cultures are not adequately proxied in
this study. Kanagaretnam et al. (2014) made an interesting contribution by linking national culture to accounting
conservatism and bank risk-taking. They found that individualism and uncertainty avoidance influence conservatism and
risk-taking of banks. Kanagaretnam et al. focused on banks, an extremely regulated sector that we consider not
representative of other sectors. In addition, they introduced two cultural factors while they have ignored other interesting
factors developed in previous works. Our research is more comprehensive and differs from prior studies in at least 3
important ways. First, we focus on a cornerstone accounting concept, conservatism, in a period of transition to IFRS,
with relation to cultural factors. Prior studies, have not stressed the importance of culture to explain the observed
variations of conservatism. We think that it is interesting to examine factors that explain variations in conservatism after
IFRS adoption. We believe that culture is one of the most crucial factors that influence accounting practice. Second, a
pioneering measure is employed in our study to account for culture. In fact, we introduce Hofstede’s cultural factors in
their most recent version. Third, our study is conducted in a large sample over a relatively long period, allowing a better
understanding of the impact of culture on conservatism under IFRS. In this study, we try to explore the relationship
between cultural factors and level of accounting conservatism during implementation of international standards. The
question that this study attempts to answer is as follows: What is the effect of culture in explaining variation in the level
of accounting conservatism following the mandatory adoption of IFRS in the European Union?
The purpose of this study is to examine the impact of culture on the level of accounting conservatism in
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European companies during the transition to international standards. We expect that variation of conservatism in post-
IFRS adoption will be influenced by culture. Specifically, we seek to answer the following questions: do cultural factors
reinforce the impact of IFRS on accounting conservatism? Are there any differences between cultures in the variation of
the level of accounting conservatism in the post-IFRS adoption period?
This study contributes to the existing literature on the adoption of international standards. It allows for a better
understanding of the consequences of the adoption of these standards. We highlighted the importance of culture
differences in determining IFRS effects. Thus, for IASB, it is important to understand the effect of its standards on
different contexts in order to take into account the specificities of the targeted countries or regions. IASB is thus called to
take into account cultural diversity in order to reach its goal of international accounting harmonization. For investors, it is
interesting to understand the nature of IFRS and the consequences of their application in order to better understand
financial information that is communicated to them. Finally, any country wishing to adopt these standards could better
assess the potential impact by taking into account the cultural characteristics.
2.4. The research hypothesis
As mentioned previously, The IFRS have common features with the Anglo-American model (Borker 2013;
D'Arcy 2001; Hung and Subramanyam 2007; Prather-Kinsey et al. 2008; Liu et al. 2014; Raffournier 2007). Gray’s
research shows that accounting practices in countries operating under an Anglo-American model are less conservative
than countries operating under a continental model. Zeghal et al. (2012) found that conservatism decreased following the
mandatory IFRS adoption. Specifically, the decrease in the conservatism level after adopting IFRS is more important for
countries with local standards different from international ones. Based on these previous studies, we expect a decrease in
the level of accounting conservatism following the IFRS adoption. We also expect that the decrease will be influenced by
the cultural dimensions. In fact, Salter et al. (2013) found that previous studies have often neglected the impact of
societal values and beliefs on accounting choices. Their study proved the existence of a relationship between these values
and accounting conservatism. Noll (2013) suggested including cultural dimensions in order to better understand
accounting practices in the post-IFRS adoption period. Thus, it would be interesting to examine the impact of culture on
financial information and see whether its inclusion may affect the relationship between IFRS adoption and conservatism.
Table 1 summarizes the predictions made by Borker (2013) about the relationship between Hofstede’s
dimensions and Gray’s accounting values.
TABLE 1 ABOUT HERE
A positive relationship is indicated with a positive sign (+) which becomes significant when it is dual (++).
Conversely, the signs (-) indicate a negative relationship, which becomes significant when it is dual (--). As shown in
table 1, conservatism has a positive relationship with “power distance”, “long-term orientation” and “uncertainty
avoidance”. The relationship is significant with the latter dimension. Thus, conservatism is higher for groups with a high
level of these three dimensions. With regard to the remaining dimensions, the relationship is negative. Therefore, the
lower a country ranks in terms of “masculinity”, ‘individualism” and “indulgence/restraint” the more likely it is to rank
highly in terms of conservatism. Taking into consideration the relationship between conservatism and the cultural
dimensions, we expect that the impact of IFRS will be more significant in cultures characterized by a higher level of
conservatism.
Bearing in mind the above assumptions, we formulate the main hypothesis of our study as follows:

3
 H1: Culture is a moderating variable of the relationship between IFRS adoption and conservatism.
Considering the six cultural dimensions of Hofstede and based on the relationship between accounting
conservatism and cultural dimensions as presented in table 1, we formulate the following six sub-hypotheses:
H1.1: The higher a country ranks in terms of uncertainty avoidance, the higher is the impact of IFRS adoption on
conservatism.
H1.2: The lower a country ranks in terms of individualism, the higher is the impact of IFRS adoption on conservatism.
H1.3: The lower a country ranks in terms of masculinity, the higher is the impact of IFRS adoption on conservatism.
H1.4: The higher a country ranks in terms of power distance, the higher is the impact of IFRS adoption on conservatism.
H1.5: The higher a country ranks in terms of long-term orientation, the higher is the impact of IFRS adoption on
conservatism.
H1.6: The lower a country ranks in terms of indulgence, the higher is the impact of IFRS adoption on conservatism.
3. Research design and descriptive statistics
3.1. The sample characteristics
Fifteen countries from the European Union are included in this study. The companies included in the sample are
those adopting the IFRS for the first time in 2005 following the decision prescribed by Regulation 1606/2002. The list of
companies in our sample is obtained from "Worldscope" database in accordance with the procedure described in table 2.
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The data was taken from the database "Reuters Eikon." The study period extends from 2000 to 2010, except for the years
2005 and 2008i.
As shown in table 2, some companies lacked complete data for at least two years before and after IFRS adoption
and were therefore excluded from the analysis. In fact, according to He et al. (2008) an examination of the two years
before and the two years after this event are sufficient to conduct the analysis. Interestingly, this condition would be
fulfilled for the two measures of conservatism employed in our study (conditional and unconditional conservatism) as
described in the next sections. In fact, in the previous studies these two forms are commonly used to cover the two
definitions of conservatism (Ball and Shivakumar 2005; Beaver and Ryan 2005; Qiang 2007).
Our final sample consists of 1216 companies for the conditional conservatism and 1126 for unconditional
conservatism.
TABLE 2 ABOUT HERE
3.2. Conditional conservatism measurement:
Conditional conservatism reflects accountants’ tendency to ask for more monitoring when considering good
news than bad news. It can be measured by associating earnings and the positive and negative returns reflecting good and
bad news respectively. Basu's model (1997) is one of the most used to measure this type of conservatism and integrates
this approach of associating profits and returns. According to Basu accounting practices are conservative when reported
net income incorporates bad news more quickly than good news.
Nit = β0 + β1RNit + β2Rit + β3RNit*Rit + εit (1.1)
Where:
Nit: Net income before extraordinary items per share deflated by share price at the beginning of the period.
Rit: Return Rate of the firmii.
RNit: Dummy variable = 1 in case of a negative return rate and 0 otherwise.
ε = error term.
3.3. Unconditional conservatism measurement
This type of conservatism leads to undervaluation of assets and overvaluation of liabilities. The use of
discretionary accruals to measure unconditional conservatism is quite common in the accounting literature (Anwer and
Duellman 2007; He et al. 2008; Lobo and Zhou 2006). According to Lobo and Zhou (2006) a decrease in discretionary
accruals is interpreted as an increase in accounting conservatism. We estimate accruals using the Jones model modified
by Dechow et al. (1995) as it is usually employed in the literature. For that purpose, model (2.1) below is estimated each
year for each two-digit SIC industry. The extracted error term is then the discretionary accruals that we will regress as a
dependent variable in a new model.
TACi,t =α1 + (1/LTAi,t-1) + α2[(∆REVi,t-∆RECi,t)/LTAi,t-1)] + α3[(PPE i,t/LTAi,t-1)] + εi,t (2.1)
Where:
TACit: Total accruals scaled by LTAiii.
LTA: Lagged total assets.

4
 ∆REVi,t: Change in revenues of firm i (Revenue in yeart – Revenue in yeart-1).
∆REC: Change in receivables of firm i (Receivables in yeart – Receivables in yeart-1).
PPE: Gross property plant and equipment.
3.4. Control variables
Control variables are used in our study in order to take into account some factors that may influence
conservatism. First, similar to Anwer and Duellman (2007) and Paananen and Lin (2009), we introduce size TA. This
variable is measured by the natural logarithm of the company’s total assets. Second, it is interesting to take into account
the possible effect of the company’s debts. In fact, previous studies have confirmed a link between level of accounting
conservatism and the conclusion of debt contracts (Anwer et al., 2002; Nikolaev, 2010; Zhang, 2008). The variable DR
(debt ratio) is measured by total debts standardized by the company’s total assets. Third, sales growth (SG) is also
introduced as a control variable. Finally, as in Lobo and Zhou (2006), the variable operating cash flow (CFO) is
introduced in the measurement model of unconditional conservatism. CFO is equal to total operating cash flows
standardized by lagged total assets.
3.5. Cultural dimensions measurement
The cultural dimensions of Hofstede remain one of the most used measures of culture in the literature. They have been
used in many studies in fields such as accounting and psychology (Ding et al. 2005) despite criticisms. Hofstede initially
identified four cultural dimensions in 1981 (individualism, power distance, uncertainty avoidance and masculinity), he
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then developed two others (long-term orientation and indulgence). The cultural factors developed by Hofstede are used in
many studies (Albuquerque et al. 2011; Borker 2013; Gray 1988; Kanagaretnam et al. 2011). It would be interesting to
explore the impact of each of these factors.

3.5.1. Individualism
It explains the behavior of the individual in relation to the group. It reflects the extent to which society members
care for the group. Thus, collectivist societies work for the group while the individualist societies look after individual
interests.
3.5.2. Power distance
Everyone has a different attitude towards hierarchical relationships. The power distance score reflects the degree
to which the less powerful members of a society accept the inequalities in power distribution.
3.5.3. Uncertainty avoidance
This dimension reflects the attitude of individuals to uncertain events. In fact, different cultures have different
ways to deal with anxiety brought by uncertain situations. The extent to which cultures avoid risky events is reflected in
uncertainty avoidance score.
3.5.4. Masculinity
Hofstede defines masculinity as follows: “Masculinity stands for a preference in society for achievement,
heroism, assertiveness, and material success”iv. However, femininity shows the human side of the society, its preference
for relationships, modesty and quality of life.
3.5.5. Long-term orientation
In a short-term oriented society, past and present are connected, traditional methods are favored, stability and
regularity are looked for. Nonetheless, long-term oriented societies are characterized by future-oriented expectations and
encouragement of investment.
3.5.6. Indulgence
This sixth dimension stands for measuring the degree to which societies try to control desires and impulses.
When a society or a culture allows its members to meet their personal desires, it is characterized by “indulgence”. In
contrast, seeking to impose strict standards to limit satisfaction, are characterized as showing “restraint”.

3.6. Descriptive statistics

Table 3 summarizes the descriptive statistics of the variables of our study. Focusing on the cultural dimensions,
we find that they have similar values for both models. For example, the "uncertainty avoidance" score is on average equal
to 64.4 with a standard deviation of 28.332 and a median of 65. In our sample, Denmark is the least aversive country to
uncertainty. In contrast, Greece ranks first with a score of 112 Individualism varies between 27 and 89, with an average
of 64.267 and a standard deviation of 16.615. Portugal is thus the most collectivist country, while the UK is the most
individualistic. In terms of masculinity, Sweden is the most feminist country while Austria is the country with the highest
masculinity score. On average, the countries of our sample have a score of 45.800 for this dimension with a median of 50
5
 and a standard deviation of 22.998. As for power distance, the average score is 44.133 with a standard deviation of
18.943 and a median of 38. Luxembourg is characterized by a culture that accepts the existence of hierarchical positions.
Austria is the country of our sample that has the lowest score and therefore it is least likely to accept hierarchical
positions. Regarding short/long-term orientation, the score is on average equal to 53.467 with a standard deviation of
17.679 and a median of 53. Scores on this dimension range between 24 and 83 with a low for Ireland and a high for
Germany. Finally, the score on the dimension "indulgence/restraint" shows that, on average, countries in our sample have
a score of 55.200. Italy ranks last. Sweden has a score of 78 showing that the culture of this country promotes having fun.
TABLE 3 ABOUT HERE
4. Results of the empirical study
We intend to study the impact of culture by introducing cultural factors, explained earlier in this study, as
moderating variables. Indeed, these may be employed in the formulation of new research questions for which little
knowledge is available (Caceres and Vanhamme 2003). To our knowledge, the impact of culture on conservatism during
a transition to international standards has not been adequately studied. According to Baron and Kenny (1986), “a
moderator is a qualitative (e.g., sex, race, class) or quantitative (e.g., level of reward) variable that affects the direction
and/or strength of the relation between an independent or predictor variable and a dependent or criterion variable”v.
We define two subgroups for each cultural dimension to analyze the impact of culture on the relationship
between IFRS adoption and conservatism. The first group represents countries with a high level of the dimension, and the
second corresponds to those with a low level of the same dimension. Groups with low and high levels are determined by
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the median. The medians for the cultural dimensions used in this study are reported in table 3. Thus, countries with scores
below the median form the group with a low level of the considered dimension. Countries whose scores exceed (greater
than or equal to) the median form the high level group of the dimension.
4.1. Conditional conservatism analysis
Conditional conservatism is measured by the model of Basu (1997), to which we introduced the variables of our
study. Thus, the model to be tested is the following:
Nit = β0 + β1RNit + β2Rit + β3RNit*Rit + β4IFRSit + β5IFRSit*Rit + β6IFRSit*RNit + β7IFRSit*RNit*Rit + β8TAit + β9DRit +
β10SGit + εit (1.2)
IFRS: a dichotomous variable equal to 1 in the post-IFRS adoption period and 0 elsewhere. The other variables
are as defined above. Before testing the different hypotheses, a preliminary analysis was conducted to select the
appropriate method. In addition, a multicollinearity analysis of the independent variables was performed through the VIF
test (Variance Inflation Factor). The VIF analysis revealed that IFRSit*RNit presents a multicollinearity problem, and
will be removed from the analysis. We obtain the following model:
Nit = β0 + β1RNit + β2Rit + β3RNit*Rit + β4IFRSit + β5IFRSit*Rit + β6IFRSit*RNit*Rit + β 7TAit + β8DRit +
β9SGit + εit (1.2*)
According to Basu (1997) the coefficient β3 detects asymmetry in the recognition of good and bad news. Thus,
when β3 is positive and significant it indicates that the results incorporate bad news faster than good news and therefore
that accounting practices are conservative. In the above model (1.2*), the coefficient β6 allows us to judge the impact of
adopting IFRS on the level of conditional conservatism. Thus, a negative and significant coefficient indicates that the
conditional conservatism level decreases in the post-IFRS period. Table 4 summarizes the results of the estimation of
model (1.2*) by sub groups formed by the level (high/low) of the cultural dimensions.
TABLE 4 ABOUT HERE
A first interesting outcome relates to the level of conditional conservatism. Indeed, the results in table 4 report
that the coefficient β3 is positive and significant for all sub groups. Therefore, accounting practices are conservative for
all the studied cultures. More important, the results show that IFRS adoption reduces conditional conservatism in the vast
majority of cases.
As for "uncertainty avoidance," we found that the coefficient β6 is negative and significant at the 1% level for
the high-level group of this dimension. However, this coefficient is significant at the 5% level for the group with a low
uncertainty avoidance score. Hence, a decrease in conditional conservatism is more significant for the highly uncertainty
aversive cultures. Hypothesis H1.1 is thus validated.
Consistent with our expectations, the results of our study show that a reduction in the level of conditional
conservatism is more significant in collectivist cultures than individualist ones. In fact, while the coefficient β6 is
negative and significant (at the 10% level) for the low-scoring group of "individualism", it is not statistically significant
for the group with a high score on this dimension. This finding allows us to conclude that hypothesis H1.2 is validated.
The analysis of groups with high and low masculinity scores shows that the impact of adopting IFRS on
conditional conservatism is far more significant in feminine cultures. Indeed, the coefficient β6 is negative and significant

6
 (at the 1% level) for the group with a low score on the dimension "masculinity" while it is not significant for the group
with a high score of this dimension. This result confirms our expectations and validates hypothesis H1.3.
The groups with low and high "power distance" scores are significantly different. The results of our tests show
that the coefficient β6 is negative and significant at the 1% level for the group with a high score on this dimension.
However, when considering the low-score group, the result is statistically not significant. This result indicates that during
the post-IFRS period, conditional conservatism decreases in a more significant way in the group with a high "power
distance" score than in the group with a low score on this dimension. This finding is consistent with our expectations and
confirms hypothesis H1.4.
Regarding short-term/long-term orientation, β6 is negative and significant (at the 1% level) for the long-term
orientation group but not statistically significant for the short-term oriented group. Thus, hypothesis H1.5 is validated.
Finally, for the dimension "Indulgence/restraint", from table 4 we notice that IFRS adoption leads to a decrease
in conditional conservatism. This decrease is more significant in the group with low scores of the analyzed dimension.
Thus, the coefficient β6 is negative and significant at the 5% level for the latter group while it is significant at the 10%
level for the group with a high score on this dimension. Therefore, hypothesis H1.6 is also validated.
4.2. Unconditional conservatism analysis
To analyze unconditional conservatism, accruals are estimated as described in section 3. Discretionary accruals
are regressed on the variables of the study as shown in model (2.2) below:
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TDAit = β0 + β1IFRS + β2TAit + β3DRit + β4SGit + β5CFOit + εit (2.2)

VIF was performed and it revealed the absence of any multicollinearity problems. Table 5 summarizes the
findings of the model (2.2) estimation.
TABLE 5 ABOUT HERE
The first interesting result is that the coefficient of the variable IFRS is positive and significant for all the sub-
groups. Lobo and Zhou (2006) explained that a decrease in discretionary accruals reveals a higher accounting
conservatism. In our analysis, the positive sign of β1 allows us to confirm that for all the studied cultures, adopting
international standards leads to higher discretionary accruals. Therefore, there is a decrease in unconditional conservatism
in the post-IFRS period. This is well in line with our expectations of the impact of adopting IFRS on accounting
conservatism.
As to the role of culture, we examined the coefficient of the variable IFRS in the different sub-groups. From
table 5 we notice that "power distance" is the only dimension which presents differences. Indeed, for the high-scoring
group of this dimension the coefficient of the IFRS variable is positive and significant at the 1% level. However, this
same coefficient is only significant at the 10% level for the low-scoring group. Therefore, we can conclude that a
decrease in conservatism in the post-IFRS period is more significant for cultures with a high "power distance" score. The
result is consistent with our expectations, allowing us to conclude that hypothesis H1.4 is validated. For the other cultural
dimensions, as shown in table 5, the results are similar for the groups with high and low scores. In fact, we detect a
positive and significant coefficient β1 for the subgroups concerning "uncertainty avoidance", "individualism",
"masculinity", "long-term orientation" and "indulgence/restraint".
To sum up the results on unconditional conservatism, only the H1.4 hypothesis is validated while hypotheses
H1.1, H1.2, H1.3, H1.5 and H1.6 are not. Variation of unconditional conservatism is therefore not influenced by all the
cultural dimensions. It may be influenced mainly by a change in accounting standards. In addition, there may be other
factors that could have influenced the relationship between IFRS and unconditional conservatism. Furthermore, even if
we remain with the cultural factors, the literature shows that there are other measures that could probably give different
results. For example, Zeghal and Mhedhbi (2006) categorized a country as belonging to a cultural group according to
language, Anglo-Saxon colonization and illiteracy rate.
5. Analysis of the results and conclusion
The objective of this study is to examine the impact of culture on accounting conservatism in European
companies during a transition to international standards. In fact, little is known about factors influencing accounting
choices after IFRS adoption. Fearnley and Gray (2015) found that cultural values are determinant in explaining
accounting choices even after IFRS adoption. We investigate this issue on the basis of Hofstede’s cultural dimensions.
The study examined 15 countries of the European Union that had adopted IFRS in 2005 in accordance with Regulation
N°1606/2002. Two conservatism measures have been used to reflect its two forms. The first one is developed by Basu
(1997) and measures conditional conservatism. The second estimates discretionary accruals by the modified Jones model
and it measures unconditional conservatism.
Regarding conditional conservatism, the results of our study show that culture is a moderating variable of the
relationship between IFRS and the level of accounting conservatism. Thus, a decrease in conditional conservatism was
more significant for groups with high "uncertainty avoidance", "power distance" and "long-term orientation" scores. It is

7
 also more significant for groups with low "individualism", "masculinity" and "indulgence/restraint" scores. This result is
consistent with our expectations and prior research. Especially, Borker (2013) predicted a positive relation between
conservatism on the one hand and power distance, uncertainty avoidance and long-term orientation on the other. For
unconditional conservatism, there are differences in the impact of culture only for the subgroups formed according to the
"power distance" dimension. In fact, the decrease in unconditional conservatism was more significant in cultures with a
high level of this dimension. This is in line with our expectations and with the result obtained for conditional
conservatism. However, for the other five dimensions, the results show that the impact of IFRS is similar for subgroups
with high and low scores of the above mentioned dimensions. Thus, we can conclude that these cultural dimensions have
no impact on unconditional conservatism when IFRS are applied. The variation of conservatism may be mainly attributed
to the application of the international standards. In this regard, we can refer to André et al. (2015) who stated that “The
form of ‘prudence’ that the Board intended to eliminate from the conceptual framework (and financial reporting) can be
clearly related to unconditional conservatism”vi. So we can conclude that accounting practices under IFRS lead to a
reduction of unconditional conservatism regardless of culture differences. Moreover, the result on unconditional
conservatism could be due to the measure employed which, probably, leaves less opportunity to exercise discretion
influenced by culture.
The results are quite interesting and enable a better understanding of the consequences of IFRS adoption and the
factors that could influence the transition to these international standards. They support the view that IFRS adoption does
not ensure complete homogeneity of accounting data prepared from different cultures. We extended the existing literature
by explaining that differences in accounting practices remain after adopting a single set of international standards. More
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interestingly, the role of cultural values in explaining accounting practices is highlighted. In fact, cultural differences
across nations are found to influence accounting practices even when a single set of accounting standards is
implemented.
The research findings have some caveats. According to our results, cultural variables act as moderating factors
on conservatism of accounting data when adopting IFRS. It would be interesting for future studies to conduct similar
studies over a longer period to investigate if the conclusions drawn by our study hold true with more recent data.
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[1]
The year 2005 is eliminated because it is the year of IFRS adoption and 2008 is also eliminated because it is the
financial crisis year which could have affected the results of the study.
[2]
Similar to Lara and Mora (2004), Giner and Rees (2001) return is calculated as follows: Pt - Pt-1 / Pt-1.
[3]
TAC = Net profit – Operating Cash flow.
[4]
Gray S. J. (1988) p7.
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[6]
André S et al. (2015) p 483.

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 PDI IND MAS UNC LTO IVR

Conservatism + - - ++ + -

Uniformity + -- ? ++ + -

Professionalism - ++ ? -- - +

Discretion ++ -- - ++ + -

Table 1: Relationship between cultural dimensions of Hofstede and accounting values of Gray (Source: Borker
D.R. 2013)
PDI: power distance; IND: individualism/collectivism; MAS: masculinity/femininity; UNC: uncertainty
avoidance; LTO: long/short-term orientation; IVR: Indulgence/Restraint.
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Description Number
Conditional Unconditional
conservatism conservatism
Starting Population 6026 6026
Exclusion of companies with a closing date of the accounting period different from 4080 4080
December 31 and companies that do not meet the selection criteria

Exclusion of companies from the financial sector 399 399

Subtotal1 1547 1547
Companies that do not have data for at least two years before and after the adoption of IFRS 331 421
FINAL SAMPLE 1216 1126
Table 2: Description of the data collection process

1
 Variable Mean STD Median Minimum Maximum

VARIABLES OF BASU MODEL

Nit 0.015 0.168 0.020 -0.906 0.515

Rit 0.109 0.560 0.028 -0.844 2.446
PS 26.353 26.368 13.261 2.69 70
TA 5.815 2.115 5.576 1.678 11.198
DR 0.579 0.212 0.596 0.082 1.259
SG 0.099 0.379 0.055 -0.833 2.358

VARIABLES OF ACCRUALS MODEL

TAC -0.013 0.059 -0.012 -0.114 0.082

TDA -0.026 0.054 -0.014 -0.122 0.038
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TA 5.878 1.812 5.697 3.326 8.967

DR 0.582 0.170 0.602 0.292 0.827
SG 0.070 0.171 0.054 -0.190 0.387
CFO 0.071 0.069 0.073 -0.045 0.181

CULTURAL DIMENSIONS

UNC 64.400 28.332 65 23 112

IND 64.267 16.615 70 27 89
MAS 45.800 22.998 50 5 79
PDI 44.133 18.943 38 11 70
LTO 53.467 17.679 53 24 83
IVR 55.200 14.194 57 30 78
Table 3: Descriptive statistics
Nit: Net income before extraordinary items per share deflated by share price at the beginning of the period;
Rit: Rate of return of the firm; PS: Share price 3 months after the end of the year; TAC: Total accruals scaled
by lagged Total assets; TDA: Total discretionary accruals as estimated by modified Jones model; TA: Natural
logarithm of end-of-year total assets; DR: Total debt normalized by the total assets of the firm; SG: sales
growth; CFO: cash flow from operational activities scaled by beginning total assets; Cultural dimensions are
as defined in Table 1.

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UNC IND MAS PDI LTO IVR

Low High Low High Low High Low High Low High Low High
RN β1 0.0010 0.0105 0.0001 0.0004 0.0016 0.0019 0.0005 0.0095 0.0085 -0.0009 0.0092 0.0017
(0.79) (3.95***) (0.11) (0.69) (0.70) (0.74) (0.39) (3.57***) (3.66***) (-0.37) (3.38***) (1.05)
R β2 -0.0017 0.0244 -0.0009 -0.0010 -0.0067 0.0024 -0.0012 0.0156 -0.0019 -0.0004 0.0221 -0.0018
(-1.20) (5.52***) (-0.87) (-1.55) (-2.12**) (0.71) (-0.78) (3.59***) (0.74) (-0.13) (4.81***) (-1.03)
RN*R β3 0.0314 0.1111 0.0289 0.0220 0.1083 0.0508 0.0315 0.1176 0.0554 0.1145 0.1062 0.0375
(7.29***) (10.72***) (11.11***) (11.74***) (13.65***) (5.66***) (6.75***) (11.70***) (7.48***) (13.19***) (10.10***) (7.30***)
IFRS β4 -0.0039 -0.0113 -0.0037 0.0008 -0.0095 -0.0019 -0.0029 -0.0148 -0.0093 -0.0028 -0.0108 -0.0041
(-3.04***) (-4.45***) (-4.27***) (1.36) (-4.19***) (-0.82) (-2.19**) (-5.80***) (-4.25***) (-1.25) (-4.16***) (-2.66***)
IFRS*R β5 0.0024 0.0162 0.0015 -0.0012 0.0103 -0.0047 0.0004 0.0241 0.0033 0.0047 0.0169 0.0025
(1.10) (2.61***) (0.94) (-1.13) (2.21**) (-0.97) (0.19) (4.00***) (0.82) (0.94) (2.65***) (0.94)
IFRS*RN*R β6 -0.0141 -0.0425 -0.0077 -0.0003 -0.0376 0.0155 -0.0102 -0.0529 0.0074 -0.0370 -0.0397 -0.0147
(-2.13**) (-2.58***) (-1.84*) (-0.12) (-2.82***) (1.14) (-1.43) (-3.28***) (0.62) (-2.64***) (-2.39**) (-1.85*)
TA β7 0.0022 0.0101 0.0024 0.0005 0.0066 0.0085 0.0020 0.0106 0.0076 0.0057 0.0100 0.0023
(9.73***) (21.38***) (15.10***) (5.63***) (16.83***) (18.48***) (8.24***) (21.90***) (16.94) (14.24***) (20.87***) (8.31***)
DR β8 -0.0148 -0.0988 -0.0112 0.0038 -0.0593 -0.0806 -0.0180 -0.1072 -0.0457 -0.0699 -0.0994 -0.0186
(-6.59***) (-16.79***) (-7.91***) (3.63***) (-12.75***) (-17.85***) (-7.38***) (-17.85***) (-10.79***) (-14.61***) (-16.27***) (-7.11***)
SG β9 0.0044 0.0463 0.0058 0.0019 0.0274 0.0214 0.0049 0.0457 0.0229 0.0231 0.0440 0.0057
(3.31***) (12.82***) (7.11***) (3.32***) (9.08***) (7.28***) (3.55***) (12.54***) (8.03***) (8.01***) (12.03***) (3.35***)
Constant β0 0.0030 0.0486 0.0293 0.0192 0.0371 0.0210 0.0066 0.0540 0.0004 0.0518 0.0488 0.0074
(1.52) (12.35***) (22.63***) (20.39***) (10.49***) (5.98***) (3.21***) (13.49***) (0.14) (15.12***) (12.08***) (3.16***)
Observations 3845 5778 2896 6727 5292 4331 3967 5656 3936 5687 5446 4177
2
Wald Khi 235.89*** 1398.91*** 790.57*** 431.56*** 901.61*** 713.89*** 214.88*** 1417.88*** 533.38*** 963.32*** 1293.04*** 220.63***
Table 4: Analysis of the IFRS impact on conditional conservatism level following the cultural dimensions
Nit =β0 + β1RNit + β2Rit + β3RNit*Rit + β4IFRSit+β5IFRSit*Rit + β6IFRSit*RNit*Rit + β7TAit + β8DRit + β9SGit + εit (1.2*)
Significant at: ***1 percent; **5 percent; *10 percent; IFRS: Dichotomous Variable equal to 1 in the IFRS post adoption period and 0 elsewhere. The other variables are as
defined in Table 3.

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UNC IND MAS PDI LTO IVR

Low High Low High Low High Low High Low High Low High
IFRS β1 0.0009 0.0009 0.0042 0.0054 0.0007 0.0011 0.0005 0.0012 0.0016 0.0006 0.0009 0.0009
(3.08***) (4.31***) (3.29***) (8.62***) (3.51*** (4.03***) (1.95*) (5.42***) (4.93***) (3.20***) (4.23***) (3.33***)
)
TA β2 0.0001 -0.0032 -0.0056 -0.0017 -0.0017 -0.0018 0.0010 -0.0040 -0.0026 -0.0014 -0.0032 -0.0001
(0.69) (-22.44***) (-14.86***) (-9.05***) (-12.48***) (-9.54***) (5.93***) (-26.73***) (-12.48***) (-10.42***) (-21.52***) (-0.76***)
DR β3 -0.0067 -0.0020 -0.0153 -0.0296 -0.0055 -0.0046 -0.0093 -0.0015 -0.0058 -0.0053 -0.0024 -0.0070
(-5.69***) (-1.91*) (-3.39***) (-14.48***) (-6.06***) (-3.55***) (-7.92***) (-1.40) (-3.80***) (-5.82***) (-2.21**) (-6.04***)
SG β4 -0.0037 -0.0035 -0.0184 -0.0212 -0.0025 -0.0053 -0.0038 -0.0038 -0.0058 -0.0029 -0.0035 -0.0040
(-7.00***) (-8.26***) (-4.45***) (-10.47***) (-6.43***) (-9.44***) (-7.36***) (-8.56***) (-8.77***) (-7.57***) (-7.91***) (-7.73***)
CFO β5 -0.0098 -0.0069 -0.1407 -0.1556 -0.0041 -0.0119 -0.0109 -0.0067 -0.0101 -0.0065 -0.0070 -0.0102
(-5.74***) (-5.22***) (-13.41***) (-31.64***) (-3.53***) (-6.64***) (-6.58***) (-4.87***) (-4.88***) (-5.55***) (-5.17***) (-6.14***)
Constant β0 -0.0018 0.0003 0.0005 0.0265 0.0066 -0.0098 -0.0102 0.0072 -0.0025 0.0015 0.0012 -0.0021
(-1.60) (0.37) (0.17) (19.19***) (7.03***) (-7.14***) (-8.37***) (6.51***) (-1.73*) (1.61) (1.12) (-1.81***)
Observations 3390 5191 1842 6739 4864 3717 3853 4728 2716 5865 4873 3708
2
Wald Khi 128.69*** 686.43*** 742.86*** 1903.59*** 296.62*** 298.18*** 187.24*** 914.60*** 351.71*** 275.01*** 633.36*** 157.35***

Table 5: Analysis of the IFRS impact on unconditional conservatism level following the cultural dimensions
TDAit =β0 + β1IFRS + β2TAit + β3DRit + β4SGit + β5CFOit + εit (2.2)
Significant at: ***1 percent; **5 percent; *10 percent. The variables are as defined above.