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Abstract

This study examines earnings quality and the effects of Corporate Governance (CG) towards earnings quality in Islamic and Conventional Banks. Earnings quality in this study analyzed by investigating earnings volatility that affect the predictability of earnings and by detecting income smoothing using loan loss provision. Bank’s earnings volatility predicted to increase because the financial instruments are reported using fair value method after PSAK 50/55 revision. Previous studies report that bank’s manager use their accrual discretion to manage earnings volatility by smooth their income. Using samples of Islamic and conventional banks from period 2007-2014 and pooled least square method, this study finds that earnings volatility only significant in conventional banks’s acccrual discretion. Earnings volatility has no effect on Islamic banks’s accrual discretion. However, the income smoothing is significant in Islamic and conventional banks. CG mechanism which is measured using self-assessment scores proven to weaken the income smoothing on both banks. This study also finds that difference in CG self-assessment mean value score is significant on both banks.