We hypothesize that managers use their hierarchical role as reviewers of accounting judgments and estimates to manage earnings, which we call indirect earnings management (IEM). Across a series of experiments using highly experienced financial executives as participants, we provide evidence that IEM (1) is likely used by managers to achieve current and future earnings targets, (2) reduces both cognitive dissonance associated with managing earnings and the extent to which managers think that their behaviors constitute earnings management, and (3) is more likely to be used when corporate governance is strong than when corporate governance is weak. The results of this study suggest new directions for future research on earnings management and highlight the important role of the hierarchical structure of the accounting function in efforts to understand how earnings are managed.

Accounting rules require that certain R&D expenditures be capitalized, but academic research often states that all R&D expenditures must be immediately expensed. An accurate understanding of actual R&D accounting practices is critical because that understanding influences research questions and design choices. To examine the competing R&D accounting perspectives, we survey 184 experienced financial officers. Our survey reveals that R&D capitalization is common and extensive in practice. Over 90% of respondents indicate that their firm capitalizes at least some R&D expenditures, and our evidence shows that about 22% of annual R&D expenditures are capitalized. When facing an earnings shortfall, respondents indicate that firms are often willing to cut R&D expense. However, respondents also indicate an unwillingness to cut types of R&D expenses that cause long‐term harm—for example, laying off scientists or delaying the execution of trials—and they often redirect the freed‐up R&D resources to R&D expenditures that are capitalized. Using archival data, we also corroborate our survey finding about the pervasiveness of capitalized R&D, and we demonstrate its empirical implications. Our study helps to align the characterization of R&D accounting rules in the academic literature with the authoritative professional literature and provides a more nuanced understanding of firms’ R&D response to an earnings shortfall.