Abstract
This study examines whether corporate governance measured by audit quality, ownership structure, and board of commissioners quality has an effective role in constraining earnings management in Indonesia. The sample of this research is 163 companies in non-financial sectors listed on the Indonesia Stock Exchange in the period 2014-2018. Regression analysis is used to test the research hypothesis. Discretional accruals were used to measure earning management. The results show that the audit firm’s reputation as a proxy of audit quality has a negative significant influence (at the 5% level) on earning management practices. Contrary to the hypothesis, we found that the size of the board of commissioners has a positive significant influence (at the 5% level) on earnings management. These findings provide practical advice for the government and shareholders in providing effective corporate governance mechanisms in constraining earnings management.
Highlights
Schipper (1989) defining earnings management as an opportunistic behavior of managers which is done by manipulating the numbers in the financial statements with specific goals and objectives such as the desire to create stable financial performance reports
It means that 65% of the companies have followed the government of the Government Regulation of the Republic of Indonesia Number 20 the Year 2015 which regulates that the auditor is allowed to audit for 5 years in a row
This study aims to examine the role of corporate governance measured by audit quality, ownership structure, and board of commissioner's quality in constraining earnings management in Indonesia
Summary
The researchers began to research earnings management since Jensen and Meckling (1976) introduced the concept of agency theory. Schipper (1989) defining earnings management as an opportunistic behavior of managers which is done by manipulating the numbers in the financial statements with specific goals and objectives such as the desire to create stable financial performance reports.Healy and Wahlen (1999) explain that earnings management occurs when managers change financial statements to mislead shareholders or to influence the outcome of contracts that depend on accounting numbers. Earnings management research in various countries seeks to reveal what factors influence managers' incentives to engage in opportunistic behavior. Gonzales and Meca (2013) examined the phenomenon of earnings management in Latin America. They use corporate governance variables and find that internal ownership, ownership concentration, the board size, and board activity are factors that can prevent earnings management. Yang et al, (2012) discuss corporate governance related to earnings management practices in China. It was found that corporate governance variables such as the size of the supervisory board, the frequency of the supervisory board, insider ownership, the size of the board of directors, and the independence of the board of directors were proven to significantly improve earnings management in China. The presence of an audit committee and audit reputation can significantly be a barrier
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