The Rule Of Conservatism Reexamined

Accountants have held tenaciously to a combination of attitudes that they consider to be conservative. Yet, there has been little precision and clarity in setting forth the goals they are trying to achieve. For example, the moth-eaten adage: "Anticipate no profits and provide for all possible losses," is a typical instruction that has often been used by older generations to impart wisdom to the new. This handy nostrum, if taken literally, would require the immediate write down of all prospects to zero and would lead to the immediate liquidation of a substantial portion of the accounting profession. Certainly, the admonition to "anticipate no profits" is worthless unless it is supplemented with instructions for deciding when profits are or are not anticipated. We must have a starting point for determining when we anticipate, and we need a base line and a measuring scale for determining how much we anticipate. The purpose of this paper is to review the accountant's historical position on conservatism, to speculate on the factors that might have led to his current position, and to compare this attitude with similar attitudes somtimes displayed by statisticians and utility economists. It is only fair to point out that the current position of avant garde accountants in America is that conservatism is not a defense for anything and therefore is not a positive force in argument. The accountant is expected to exercise his own best judgment and to reveal facts and opinions that meet professional tests for importance and relevance. The responsibility to exercise and report professional judgment is seemingly contrary to any rule that permits wholesale deductions "just to be conservative." Realization of this apparent incompatibility has led to the modern position that conservatism as a rule for action should be applied only when the "distribution" of judgments is essentially flat, i.e., when there is no preference and therefore no judgment at all. Rather than being a defense for a particular position, this rule now functions in America as a polite admission that the