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.