Volume 3 Number 1 2004
Accounts Manipulation: A Literature Review and Proposed Conceptual Framework by Hervé Stolowy, HEC School of Management (Groupe HEC), Department of Accounting and Management Control, 1, rue de la Libération, 78351 - Jouy en Josas Cedex, France and Gaétan Breton, Université du Québec à Montreal, Department of Accounting Sciences, P.O.B. 8888, Succursale Centre-Ville, Montréal (Québec), H3C 3P8 - Canada Abstract 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 stakeholders, 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. I. Introduction Finns have been manipulating accounts for a long time, and this practice, well known in the literature, has been given various names: earnings management, income smoothing, big bath accounting, creative accounting, and window dressing. This paper aims to provide a comprehensive review of the literature and propose a conceptual framework for accounts manipulation. The structure of this review is designed to assess the importance of each element as part of the overall picture. Consequently, there will be no detailed discussions of certain papers per se, although they will be cited in the references and in the appendices. Dechow and Skinner (2000) discuss the basic definition of manipulation, but they mainly set out to investigate a new orientation in the research based on new motivations, linked to market expectations. In doing so, their goal is to reconcile the views of academics and practitioners about earnings management. Healy and Wahlen (1999), on the other hand, aim to provide useful information for standard setting purposes. For instance, they emphasize the specific accruals that have been found in the literature to be particularly frequently "managed". They then investigate the effect of manipulation on market participants. Like Dechow and Skinner (2000), although they consider the possibility that users may not be able to make appropriate
Review of Accounting and Finance
adjustments to eliminate the effect of the manipulation, they mostly remain within the concept of market efficiency. We discuss the possibility that the market may not be efficient, and the opportunities this creates for managers and shareholders to generate wealth transfers to their own advantage. In substance, both Healy and Wahlen (1999) and Dechow and Skinner (2000) propose an oriented review of literature, while the aim of this paper is to remain as comprehensive and inclusive as possible. In the present review, we include all forms of manipulation under one general heading: accounts manipulation. This survey, based on a comprehensive approach, is new in the literature. Previous reviews of the literature (Imhoff 1977; Ronen et al. 1977; Ronen and Sadan 1981; Buckmaster 1992, 1997; Healy and Wahlen 1999; Dechow and Skinner 2000; Jeanjean 2001 and Fields et al. 2001) generally cover one aspect of accounts manipulation, income smoothing or earnings management, and seldom review works published outside of the USA. The limited focus...
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