Earning Management and the Effect Characteristics of Audit Committee, Independent Commissioners: Evidence from Indonesia

Abstract

This study aimed to investigate the effect of the independent commissioner and of the characteristics of the audit committee (measured by auditor size, independence, expertise, and activities) on the efficient or opportunistic earnings management. In terms of those companies listed on Indonesia Stock Exchange. The sample consists of 186 observations of those manufacturing companies in Indonesia Stock Exchange during the 2013-2018. Using panel regression fixed effect method, independent commissioners are found to have a significant effect on reducing earnings management. Based on The Positive Accounting Theory, the efficient perspective will occur when the compensation contract and internal control system, including monitoring done by the board of commissioners, limit the common view opportunistic manager and motivate the manager to choose the right accounting policy. The effective monitoring conducted by an independent commissioner can reduce agency costs because management prioritizes the best interests of shareholders by maximizing company resources. Furthermore, it was found that audit committee size can reduce earning management. It is due to the wide range of skills possessed by audit committee members to exercise oversight over management. Audit committees with accounting and financial expertise can reduce earnings management. This part of finding indicates that audit committee may tend to uphold conservative as accounting mechanism. Accounting conservatism has an important role to play in restricting opportunistic management behavior.