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.

The Effect of Political Connection, Independent Commissioners And Sales Growth On Earning Management with Company Size as A Moderating Variable

“…The existence of an independent commissioner will further strengthen the supervision of the board of commissioners because it is not affiliated with the company and will reduce profit management. The results of the research conducted by (Mardjono & Chen, 2020) and (Christina & Alexander, 2019) are in line with the research conducted by (Fitriana & Purwohandoko, 2022). Based on the above, then the hypothesis can be formulated as follows: H2: Independent Commissioner negatively affects Profit Management.…”

“…Independent commissioners are members of the board of commissioners who are not affiliated with the board of directors, other commissioners, and controlling shareholders. In addition, they are free from business relationships or other relationships because it can affect their ability to act independently or act solely for the benefit of the company (Mardjono & Chen, 2020). Monitoring by independent commissioners can limit opportunistic managers because effective corporate governance can reduce agency costs as management prioritizes the best interests of shareholders by maximizing company resources so as to suppress profit management.…”

“…So the company tends to modify profits when there are fluctuations in sales. When a company's revenue growth declines, management tends to do profit management because investors like stable or increasing revenue growth (Mardjono & Chen, 2020).…”

“…Based on the above, the hypothesis can be formulated as follows : H1: Political Connection has a positive effect on Profit Management. (Mardjono & Chen, 2020) stated that the existence of an independent commissioner can encourage managers to be opportunistic and motivate managers to have the right accounting policies. This is in line with research conducted by (Fitriana & Purwohandoko, 2022) and (Christina & Alexander, 2019) where independent commissioners have a significant effect on profit management because independent parties have no ties or interests with management so that they are free from managerial pressure and intervention.…”

Investigating earnings management practices and the role of the board and committees in emerging markets: Evidence from Malaysian public companies

“…With the globalization of businesses and financial markets, there has been a strong demand for high-quality information from business corporations throughout countries so that investors can compare risk and return across markets, placing higher significance on good CG mechanism. Nevertheless, previous literatures tended to explain audit and board composition separately although these two components work together synergistically in ensuring CG effectiveness (Al-Haddad & Whittington, 2019;Alhossini et al, 2021;Eldaia et al, 2023;Gerged et al, 2021;Hernawati, 2021;Inaam & Khamoussi, 2016;Mardjono & Chen, 2020;Zalata et al, 2018Zalata et al, , 2022Zehri & Zgarni, 2020). These studies indicate a gap in the current literature.…”