The Role of Corporate Governance in Constraining Earning Management

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.

Hexagon Fraud: Detection of Fraudulent Financial Statement in Indonesia

“…Director change is a reorganization that occurs in a company within a certain period involving the board of directors. Every change of directors is often associated with the interests of several parties and the game of power politics that triggers conflict in the work environment [26,27]. So that there is information asymmetry and instability of company control, parties with interests and capabilities can design strategies to determine the right time for fraud when instability occurs.…”

Dinamika Karakteristik Dewan Perusahaan Dan Komite Audit Terhadap Manajemen Laba Riil

“…Rapat dewan direksi yang rutin memiliki dampak namun tidak cukup efektif untuk mengurangi manipulasi laporan keuangan oleh manajemen (Dinatu, 2021;Kajola et al, 2020;Tang & Shandy, 2021), hal ini juga disebabkan karena rapat dewan direksi menghabiskan waktu singkat dan mayoritas hanya mendiskusikan kebijakan perusahaan dalam praktiknya (Kirana et al, 2020). H3: Rapat dewan direksi tidak memiliki pengaruh terhadap manajemen laba.…”

“…Hasil probabilitas sebesar 0,063 dan artinya hipotesis 3 terbukti. Hal ini menunjukkan bahwa rapat dewan direksi yang rutin memiliki dampak namun tidak cukup efektif untuk mengurangi manipulasi manajemen karena dalam rapat dewan direksi menghabiskan waktu singkat dan mayoritas hanya mendiskusikan kebijakan perusahaan dalam praktiknya (Dinatu, 2021;Kajola et al, 2020;Kirana et al, 2020;Tang & Shandy, 2021).…”

Earnings Management as an Finance Strategy for Company Image

“…Big four KAPs are more competent than non-big four KAPs, so they know more about detecting and manipulating financial reports and earnings management actions. Study Jaya Kirana et al (2020) study state that audit quality has a positive and significant effect on earnings management. This is because, in general, companies use the services of the big four KAPs only to increase the credibility of financial statements so that they can be more trusted by investors but have not been able to limit the occurrence of earnings management the company does.…”

“…Audit Quality Audit quality uses a dummy variable, namely giving a point of 1 if the company is audited by a KAP affiliated with the big four KAP and assigning a score of 0 if a non-big four KAP audits the company (Jaya Kirana et al, 2020). …”