On Several Issues of Earnings Management －A Review of Prior Literature－

This paper focuses on summarizing and understanding several issues that are closely related to the Generally Accepted Accounting Principles (GAAP) violation. In addition, this paper is also aimed at identifying fruitful areas for future academic research on earnings management by documenting unsolved questions and conflicting perspectives in this area. Overall, the earnings management literature currently provides only modest insights and evidences. Prior research has focused almost exclusively on understanding whether earnings management exists and why. The findings are likely to confirm the intuition that firms do manage earnings. However, we need additional evidence on the following questions：What is the frequency of managers’ use of reporting judgment to manage earnings rather than to communicate firm performance to investors?What factors limit earnings management? Answers to these questions are difficult to infer from current studies because most academic studies do not provide evidence on the extent and scope of earnings management. In contrast, regulator’s enforcement actions provide useful information we need to extend our knowledge of earnings management. Therefore, the studies using these extreme forms of earnings management help practitioners and academics understand the frequencies and the magnitude of earnings management because, despite some limitations, this approach shows the actual ways managers use to manipulate earnings. In this paper, I review prior earnings management studies and summarize academic approaches,perspectives on which most of researchers depend to find and interpret earnings management evidences. The primary purpose of this review is to summarize the implications of scholarly evidence on earnings management to help researcher assess the overall integrity of prior literature. This review is also aimed at identifying fruitful areas for future academic research on earnings management by documenting unsolved questions and conflicting perspectives in earnings management research. Finally, this paper extends the scope of the literature review on earnings management by adding and summarizing the additional evidences of the studies that utilize the data from regulators’ enforcement actions (e.g., Accounting and Auditing Enforcement Releases：AAER) and restatements.