The economic crisis of 2008 will likely lead to public demands for increased regulation of market participants and for increased transparency in financial reporting. While it is appropriate for the public, and its institutions, to focus on these recent financial market abuses, it is also important not to lose sight of previously identified and ongoing schemes used to perpetrate fraud in the financial markets. The results of a SEC study of its own enforcement actions, covering the period July 31, 1997 to July 30. 2002, found that the most common type of abuse during this period was that of earnings manipulation or inappropriate earnings management. While the study found that improper revenue recognition led to the largest number of enforcement actions, there were also numerous enforcement matters involving improper expense recognition. These included improper capitalization or deferral of expenses, improper use of reserves, and other misstatements. The purpose of this paper is to provide evidence on this other, less common, approach to earnings management, the misstatement of expenses. In particular, the paper reports on the improper capitalization of expenses as a means to manipulate earnings. In order to provide evidence on the ways companies have improperly capitalized expenses to manipulate their reported income, the author chose to review the SEC's "Accounting and Auditing Enforcement Releases (AAERs)" issued over the last seven years. A total of 16 AAERs citing improper capitalization were identified. These were examined to determine the specific reason(s) capitalization was deemed inappropriate. THE NATURE OF EARNINGS MANAGEMENT In 2000, the Panel on Audit Effectiveness stated that"… the term "earnings management" covers a wide variety of legitimate and illegitimate actions by management that affect an entity's earnings." In the broadest sense, almost all of management's decisions have a potential impact on earnings and, therefore could be said to constitute earnings management. However, in the more general case, earnings management is normally interpreted as those actions taken by management to either smooth earnings over two or more interim or annual accounting periods or to achieve a designated earnings level. In its attempts to manage earnings to achieve either one or both of these goals, managers can choose from a continuum of activities which range from complete legitimacy at one end to fraud at the other. Even in circumstances where the earnings management activity is deemed legitimate, its use may call into question the quality of the reported earnings for the period. Given the wide array of options normally available to managers to help them achieve certain earnings objectives, what distinguishes, for the accountant or auditor, the legitimate ones from those that lead to a misstatement of earnings? The answer to that question lies in the acceptability of the accounting policy under Generally Accepted Accounting Principles (GAAP). When managers implement legitimate earnings management techniques, there may be concern over the quality of the company's earnings, but not over whether the financial statements are presented fairly, in all material respects, in conformity with GAAP.