This study has examined whether managers use income-increasing or decreasing discretionary accruals under different financial distress situations. The study is based on financially distressed firms with debt covenant violations and/or debt restructuring during the 1989-96 period. The firms with debt covenant violations are categorized into waiver and nonwaiver firms, and permanent and temporary waivers firms. Discretionary accruals are calculated based on modified Jones's time-series and cross-sectional models as well as CFO and performance-matched models.