The effect of financial distress on earning management practices using classification shifting: The moderating effect of good corporate governance

Dodik Ariyanto,Cokorda Istri Eka Pratiwi,Herkulanus Bambang Suprasto,Maria Mediatrix Ratna Sari

doi:10.5267/j.ac.2021.7.002

Abstract

The existence of good corporate governance is expected to minimize the occurrence of earnings management practices when the company is in financial distress condition. This research aims to provide empirical evidence on the influence of financial distress on earnings management practices as well as the existence of good corporate governance projected by the proportion of independent commissioners and the proportion of audit committees in weakening the influence of financial distress on earnings management practices. The population of this study is property, real estate, and building construction sector companies listed on the Indonesia Stock Exchange for the period 2015-2019. Sampling techniques used are purposive sampling techniques and obtained samples as many as 185 samples. The earnings management tool used in this study was classification shifting. The data analysis techniques in this study used Eviews 10. The results of the analysis provide evidence that financial distress affects earnings management practices, while the proportion of independent commissioners is unable to moderate, and the audit committee strengthens the influence of financial distress on earnings management practices.

Highlights

The full financial statements consist of statements of end-of-period financial positions, statements of income and other comprehensive income during the period, reports of changes in equity during the period, statements of cash flows during the period, notes on financial statements, and statements of financial position at the beginning of the nearest period
This research was conducted on property, real estate, and building construction sector companies listed on the Indonesia Stock Exchange (IDX) for the period 2015-2019 with data analysis techniques using Eviews software tools
Based on the results of the analysis, the regression coefficient X1_M1 is -0.032609 with a significance level of 0.3001 which is greater than the 0.05 significance level, so it can be concluded that the second hypothesis is rejected, which means that the independent board of commissioners is unable to moderate or unable to weaken or strengthen the effect of financial distress on earnings management practices using classification shifting in property, real estate, and building construction sector companies listed on the Indonesia Stock Exchange (IDX)

Summary

Introduction

The full financial statements consist of statements of end-of-period financial positions, statements of income and other comprehensive income during the period, reports of changes in equity during the period, statements of cash flows during the period, notes on financial statements, and statements of financial position at the beginning of the nearest period. The reason is because the amount of profit generated can provide information about the company's ability to generate profit derived from the company's operations as well as those derived from other events that are not permanent Such investor habits can give rise to opportunistic behavior from management to manipulate the profit figures to be reported in the financial statements (Debbianita, 2016). Earnings management can improve biased information in financial statements and can annoy report users who believe in contrived profit figures as actual numbers. This manipulation negatively impacts the future of the company, as one of the parties who use financial statements to make decisions causes incorrect decisions (Supardi & Asmara, 2019)

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