Accounts manipulation has been the subject of research, discussion and even controversy in several countries including the USA, Canada, the U.K., Australia, Finland and France. The objective of this paper is to provide a comprehensive review of the literature and propose a conceptual framework for accounts manipulation. This framework is based on the possibility of wealth transfer between the different stake‐holders, and in practice, the target of the manipulation appears generally to be the earnings per share and the debt/equity ratio. The paper also describes the different actors involved and their potential gains and losses. We review the literature on the various techniques of accounts manipulation: earnings management, income smoothing, big bath accounting, creative accounting, and window‐dressing. The various definitions of all these, the main motivations behind their application and the research methodologies used are all examined. This study reveals that all the above techniques have common elements, but there are also important differences between them.

Accounts Manipulation: A Literature Review and Proposed Conceptual Framework

The capitalization of research and development (R&D) costs is a controversial accounting issue because of the contention that such capitalization is motivated by incentives to manipulate earnings. Based on a sample of Italian listed companies, this paper examines whether companies' decisions to capitalize R&D costs are affected by earnings management motivations. Italy provides a natural context for testing our hypothesized relationships because Italian GAAP allows for the capitalization of R&D costs. Using a Tobit regression model to test our hypotheses, we show that companies tend to use cost capitalization for earnings-smoothing purposes. The hypothesis that firms capitalize R&D costs in order to reduce the risk of violating debt covenants is not supported.

Capitalization of R&D Costs and Earnings Management: Evidence from Italian Listed Companies

Accounting choice and future performance: The case of R&D accounting in France

Capitalization of R&D costs and earnings management: Evidence from Italian listed companies

The effect of management incentives and cross-listing status on the accounting treatment of R&D spending

During the recent recession (1991 to present), Japanese firms decreased their spending on R&D for the first time since World War II. The decreases have raised concerns that Japanese managers may be making suboptimal allocations to R&D. We test whether Japanese managers adjust R&D based on short-term performance. Our results show that Japanese firms in several industries adjust their R&D budgets to smooth profits. Interestingly, adjustments to R&D are larger in expansion years. These results, similar to those documented with U.S. managers, point to myopic decision making by Japanese managers.

Income Smoothing and Discretionary R&D Expenditures of Japanese Firms*

INTRODUCTION The Japanese economy was booming in the late 1980s. Now it is slowly trying to regain its economic glory days which preceded the market crash in 1990. Many of its leading industries lost their worldwide leadership positions to South Korea and other countries. Samsung has the highest market share in the world TV market surpassing Sony and Panasonic, even though Toyota is still the best auto manufacturing company in the world (http//news.chosun.com, February, 27, 2007). Since Japan does not own natural resources such as oil and lumber, most of their success depends on exports and the world economy. Currently China and other developing countries are demanding increasing quantities of oil. As a consequence, Japan still will continue to face hard times as long as oil prices remain high. Japan is a unique country from the capital structure perspective. The Japanese capital structure has moved toward that of the U.S. and other western countries' systems after the market crash,. However, their government still has a large impact and their system is more tax oriented than those of western countries. In addition, Japanese corporations have more reserve accounts than those of any other country in the world. It is interesting to see how their corporate managers use these reserve accounts to manage corporate earnings to meet their goals. Previous studies have used U.S. capital market data to understand managers' motivations regarding earnings management. Managers may have motivation to manage earnings to maximize their bonuses or to maintain target income levels. However, the U.S. and Japan have different capital and business environments. Under different capital and business environments, managers may or may not behave the same way to satisfy their self-interests. This is an interesting issue that we need to test using actual Japanese data. The purpose of this study is to test the earnings management behavior of Japanese managers using different types of reserve accounts. Typical Japanese firms maintain ten or more reserve accounts and they are legally allowed to set up reserves for their guaranteed obligations starting from April 20, 1982 (Takahashi, 1984). (1) The total amounts of these reserve accounts are very large for some firms, creating the proper environment for possible earnings management using these accounts. This is the first empirical study to study Japanese managers' earnings management motivations using different types of reserve accounts. The paper is organized as follows: Section 2 presents the background of earnings management and the different capital and business environments in Japan. The third section describes our research methodology and data collection procedures. The fourth section reports results and discusses sensitivity analyses. The last section concludes with a summary of our findings and future research avenues. BACKGROUND Evans and Sridhar (1996) defined "earnings management" as an activity which incorporates any accrual-based manipulation of economic earnings by the manager. Their study predicted that within less flexible financial reporting systems, managers' compensation would depend on reported earnings. However, if there are ten or more reserve accounts like may be present in the Japanese financial system, mangers are tempted to use some of these reserve accounts to manage earnings to meet their target income. Moses (1987) studied firm specific factors that may provide motivation for U.S. managers to manage earnings by choice of accounting methods. He showed that earning management was associated with factors such as firm size, the existence of bonus compensation plans, and the variation of actual earnings from expected earnings. Several studies used discretionary accruals to study managers' earnings management behavior. While these studies are not in the same context as our study, they found that managers used their discretion to adjust their firm's reserve accounts and some of the same motivational factors may be relevant for our study. …

Japanese Managers' Earnings Management Using Several Different Types of Reserve Accounts

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Papers

Income Smoothing and Discretionary R&D Expenditures of Japanese Firms*

Japanese Managers' Earnings Management Using Several Different Types of Reserve Accounts

4. big five personality traits and job satisfaction: a comparative study between private and public sector telecom employees