Special Purpose Entities - A Legitimate Financing Mean or a Real Manipulation Tool?

Recent financial scandals have shown the abuse in special purpose entities (SPE) use by firms in order to manipulate their annual reports. The objective of this paper is to define SPE as legitimate financing means used by firms. Second, we review two goals consistent with SPE formation: securitization of financial assets and sales leaseback transactions. Then, we review fewer benefits associated with SPE sponsorship. We also focus on accounting standards related to SPE and consolidation of majority-owned subsidiaries. Finally, we adopt an analytical procedure to check the impact of SPEs transactions on firm reporting. Overall, our developments suggest that SPE can be opportunistically used by managers to manipulate reported earnings.