Chapter 14

Creative Accounting and Accounting Scandals in Japan

Kazuyuki Suda


In Japan, there have been several high-profile accounting scandals in recent years (e.g. the Livedoor case, which caused the Tokyo Stock Exchange to shut down entirely for trading on 18 January 2006 and the Kanebo case, which has been referred to as a Japanese-style Enron accounting scandal). These followed a long history of creative accounting and accounting frauds in Japan. However, as there is insufficient space here to trace the long history of Japanese accounting, this chapter will mainly look at accounting scandals that have occurred since the 1980s.

This chapter focuses on individual accounting scandals. However, there is also aggregate evidence of creative accounting in Japan. Suda and Shuto (2007) investigate whether and how Japanese companies manage reported earnings to avoid earnings decreases and losses. They examine earnings distribution and study whether earnings management exists for Japanese companies. They then estimate discretionary accruals and investigate how company managers engage in earnings management. Their evidence suggests that the Japanese companies which reported small earnings or small earnings increases tend to engage in creative accounting.

The accounting scandals investigated in this chapter are characterized by their motivation and divided into three groups (i.e. accounting scandals to maintain high share price, accounting scandals designed to fulfil ...

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