Bundle manipulation: the use of accounting and textual obfuscation

Abstract

Purpose The purpose of this study is to explore whether managers and firms engage in bundle manipulation. It examines the effect of discretionary accruals and real activities manipulation on the level of complexity in annual reports. Design/methodology/approach The findings from the examination of the 1,435 annual reports of Canadian listed firms engaging in discretionary accruals and real activities manipulation indicate that these firms produce complex annual reports. Findings The authors, therefore, suggest that managers and firms use bundle manipulation, both accounting and textual, to mislead shareholders and stakeholders. The analyses also suggest that it is more difficult to detect the manipulation of real activities than discretionary accruals through textual analysis. Originality/value The authors propose an in-depth examination of how accruals and real activities manipulations affect the level of readability of firms’ reports. Furthermore, the authors suggest that firms engage in bundle manipulation, including accounting and textual manipulation. This paper aims to provide an in-depth analysis of the relationship between accounting and linguistic manipulations. The study suggests that investors could use the complexity of annual reports to detect earnings management. More specifically, it seems that firms engaging in discretionary accruals produce complex annual reports.