Earning Management and the Effect Characteristics of Audit Committee, Independent Commissioners: Evidence From Indonesia

Abstract

This study examines whether companies listed Indonesia Stock Exchange conduct efficient or opportunistic earning management and to investigate the effect the Independent Commissioner and the Characteristics of the Audit Committee (measured by Auditor Size, Independence, Expertise, and Activities) on it. The sample consists of 186 observations of manufacturing companies in Indonesia Stock Exchange during the 2013-2018. Using Panel Regression Fixed Effect method, we find evidence that Independent Commissioners has a significant effect on reducing Earnings Management. The Positive Accounting Theory-the efficient perspective occurs when the compensation contract and internal control system, including monitoring by the board of commissioners, will 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 interest 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 of audit committee members in exercising oversight on management. Audit Committees with accounting and financial expertise can reduce earnings management. This finding indicates that the Audit Committee may tend to uphold conservative as accounting mechanism. Accounting conservatism has an important role in restricting opportunistic management behavior.

Related Party Transactions, Family Ownership, and Earnings Management in Indonesia

“…According to the agency theory, asymmetry information increases the possibility of opportunistic behavior in maximizing the utility of earnings management. This is due to the company's external parties' ignorance regarding all transactions carried out by the company's internal parties, such as debt agreements or political costs (Mardjono et al, 2020).…”

“…In Indonesia, there have been many cases related to company earnings management, such as PT Kimia Farma in 2002 and PT Indofarma in 2004 were proven to increase companies' revenue and present net income higher than the actual (Muda et al, 2018). Besides, In 2015, PT Garuda Indonesia also committed violations that affected the number of company profits and were found guilty of harming various interested parties (Mardjono et al, 2020). One way to manage reported earnings is through transactions with related parties (Maigoshi et al, 2016), which affect earnings quality (Rahmat et al, 2020) as has been done in Italy, which uses revenue transactions with related parties to manage earnings (Marchini et al, 2018b).…”

“…Opportunistic earnings management behavior is also affected by the inequality of information held by internal parties (asymmetry information) the company management with other parties, such as minority shareholders or external parties as users of financial reports (Mardjono et al, 2020). It creates a conflict of interest in the relationship between company management and minority shareholders (Jensen & Meckling, 1976).…”

Audit Committee Formation: The Case of Poland

“…Therefore, an AC may be an effective governance mechanism in the Anglo-Saxon world, but in civil law countries, it is difficult to enforce new practices (Köhler, 2005) as laws can only be passed by the legislature. Thus, the main role and advantage of having an AC is to provide efficient internal control and increase financial reporting quality (Dobija, 2015;Putri and Prasetyo, 2020;Mardjono et al, 2020). Therefore, we argue that shifting toward shareholder value, corporate governance systems experiment with a hybridization process, which means mixing Continental Europe practices with shareholder practices, such as the AC formation, developed in Anglo-American economies.…”

The Effect of Good Corporate Governance Mechanisms, Financial Ratio, and Financial Distress: A Study on Financial Companies

“…The study of [16]- [20] detects financial distress using corporate governance predictors. This variable was used by previous researchers to analyze the technical factors causing financial distress.…”