The effect of internal control and corporate social responsibility on conditional accounting conservatism: Evidence from France

Abstract

This study examines the impact of internal control (IC) and corporate social responsibility (CSR) on conditional accounting conservatism (CAC). We employ legitimacy theory to understand whether managers adopt CSR reports and IC systems to seek legitimacy through symbolic actions or whether they do so to provide substantive actions to their stakeholders.We adopt a multivariate analysis for a sample of 98 French companies belonging to the SBF 120 index during the period between 2012 and 2021. All accounting and stock market information is extracted from the Thomson Reuter database (Datastream) and the Thomson Reuters ASSET4 ESG database. We found that both IC and CSR have a negative and significant impact on CAC; hence, managers may use CAC levels as a legitimizing tool for corporate activities. French companies are generally characterized by strong IC systems, suggesting a low demand for conditional conservatism. Socially responsible companies may have fewer agency issues and therefore will not practice accounting conservatism (AC) in a pronounced way. Distinct from the previous literature, our study examines the impact of IC as well as CSR on CAC, which provides useful insights regarding how stakeholder pressure, in terms of reporting on social responsibility and maintaining effective control systems, interacts with and impacts upon managers' decisions to adopt CAC in the French context. Given the position of France after Brexit and the new laws adopted regarding an emphasis on the social dimension in corporate reporting, protecting stakeholders' interests, and adopting conservatism, it is worth using such a context to gain a better understanding of AC, as this will enrich the literature.

Foreign ownership, subjective willing, and internal control level

“…From a motivation perspective, foreign investment is primarily driven by profitability. A sound internal control system can curb non-compliant behavior and drive overall development goals [ 48 ]. The goals of host country firms align with the foreign investment objectives, which drive both to achieve good cooperation and jointly strive to improve internal control quality.…”

“…This improvement not only strengthens the capacity for sustainable development but also fosters positive synergy among businesses, the environment, and society, establishing a solid foundation for future sustainability. That is to say, foreign shareholders, by improving internal control, advance responsible and sustainable business practices, aligning with ESG principles [ 48 , 69 ]. Therefore, our study will explore the further effect of foreign ownership on sustainable development.…”

Political and Economic Aspects of Brexit Impact on Accounting Legislation in the UK – New Directions in Standards (GAAP UK and IFRS)

“…Craig (2016).12 Böckli et al (2017).13 Wu (2020).14 Bodellini (2017).15 Böckli et al (2017).16 Trueblood (2020). 17Inglehart and Norris (2016).…”

New Guidelines for the Application of International Accounting and Reporting Standards After Brexit

“…Second, there is growing interest in the consequences of Brexit for various aspects of British politics (Inglehart & Norris, 2016;Trueblood, 2020;Meyenburg, 2022), and social and economic phenomena (Arnorsson & Zoega, 2016;Ringe, 2018;Heald & Wright, 2019;Howley & Waqas, 2020), including accounting (Böckli et al, 2017;Heald & Wright, 2019;Boulhaga et al, 2022) and taxation (Strobel, 2017). Further development of accounting and financial reporting, audit and taxation rules in the UK depends on whether the UK remains in the EU single market.…”