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The interaction between accruals management and financial engineering with special purpose entities

Hamadi Matoussi (Laboratoire Interdisciplinaire de Gestion Université‐Entreprise (LIGUE), Institut Supérieur de Comptabilité et d' Administration des Entreprises, Manouba, Tunisia)
Mohamed Chakib Kolsi (Laboratoire Interdisciplinaire de Gestion Université‐Entreprise (LIGUE), Institut Supérieur de Comptabilité et d' Administration des Entreprises, Manouba, Tunisia)

Journal of Human Resource Costing & Accounting

ISSN: 1401-338X

Article publication date: 1 May 2006

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Abstract

Purpose

In response to recent financial corporate scandals, this study aims to provide a helpful understanding for investors and accounting regulators on how firms manage their reported earnings. This leads to a better firm valuation by financial intermediaries and more useful accounting standards.

Design/methodology/approach

Estimating discretionary accruals and opportunistic special purpose entities and using a simultaneous equation approach, the aim is to check how managers trade off between such tools of earnings management. Based on real earnings manipulation and accruals management of earnings, the goal is to understand if such tools are used simultaneously or as substitute by firms.

Findings

After controlling for each cost determinants of such earnings management tool, firms use discretionary accruals and financial engineering with special purpose entities as substitutes. Additional analyses show that managers use such tools in a sequential process. Indeed, they first use special purpose entities during the course of the year but they manipulate discretionary accruals especially at the end of the year.

Research limitations/implications

Despite sensitivity checks, measurement error in discretionary accruals proxy and opportunistic SPE estimation model remains an alternative explanation for the results. The sample size and the lack of accurate information about the size of special purpose entities may limit the extent of the findings.

Practical implications

It is a very useful tool for regulators when they plan to disclose new accounting standards. For investors, this study can help them in assessing the firm's value more accurately for investing and financing purposes.

Originality/value

Providing a new methodology and new models to detect pervasive earnings management strategies adopted by firms.

Keywords

Citation

Matoussi, H. and Chakib Kolsi, M. (2006), "The interaction between accruals management and financial engineering with special purpose entities", Journal of Human Resource Costing & Accounting, Vol. 10 No. 2, pp. 72-91. https://doi.org/10.1108/14013380610703102

Publisher

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Emerald Group Publishing Limited

Copyright © 2006, Emerald Group Publishing Limited