CONCLUSIONS AND LIMITATIONS Behavior of Reading Nutrition Fact Label on Undergraduate Students of Bogor Agricultural University, Indonesia
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The Implementation of Corporate Governance Mechanism on Earnings Management
of Jakarta Islamics Index JII and LQ- 45 Index
WIYADI, RINA TRISNAWATI, NOER SASONGKO Management Department, Economic and Business Faculty
Universitas Muhammadiyah Surakarta Jl. A. Yani Tromol Pos I Pabelan
– Surakarta – Jawa Tengah
INDONESIA 57102
Phone: 062-271-717417; Fax: 062-271-715448 Email:
wiyadiums.ac.id
Abstract The purpose of this study examines the impact of Corporate Governance mechanism i.e
institutional ownership, managerial ownership, size of board committee, independence of board committee, and the audit committee on earnings management. The earnings management is
measured by various models such as accruals long term discretionary accrual and short term discretionary accrual, real abnormal operating cash flow, abnormal production costs, and
abnormal discretionary expenses and integrated model. The sample is 271 companies listed in Sharia JII and Conventional Index LQ45 during the 2004
– 2010 periods. The descriptive analysis showed that the companies incorporated in the JII index tends to decrease earnings
numbers pattern, while on companies incorporated in the LQ-45 index tends to increase earnings numbers pattern. Companies which incorporated in JII index focused on manipulated earning
number of current assets, while in the LQ 45 focused on fixed assets such as depreciation methods. In the real models, all of company manipulated earning number by manipulated on
abnormal cashlfow with sales accrued in short period.
Based on the multiple linear regression analysis, it found that corporate governance mechanism is quite effective in reducing earnings management. While in real earnings
management model, corporate governance mechanisms are not able to reduce earnings management. It means the earnings management are likely performed on accrual basis rather than
real basis. The variables proportion of independent board and the existence of Audit Committe have effect significantly on earning management. It means that corporate governance mechanism
from outside has more effective for controlling management. In the future, researchers should be using the corporate government perception index for measuring CG mechanism, consider the
characteristics of industries and analysis earning management with efficiency perspective. Key words:
Corporate governance mechanism, earnings management, sharia index, LQ-45 index.
INTRODUCTION.
The earnings management has be done as a result of an information asymetry between manager and the owners. According to Schipper 1989, earnings management is a management
intervention with the specific intent against external users to obtain some of personal profit.
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Encouragement for earnings management also occurs because the implementation of corporate governance is not eficient.
According to the Organization for Economic Co-operation and Development OECD 2004 and FCGI 2003, the corporate governance is a set of regulations governing the
relationship between shareholders, corporate managers, creditors, government, employees, and the other internal and external shareholders related to their rights and obligations, or is a system
which governing and controlling the company Effendi, 2009
In the agency theory perspective, the earnings management can be minimized through monitoring mechanism to align differences in the interests between owners and management, It
used by 1 increase the companys share ownership by management managerial ownership Jensen and Meckling, 1976, 2 increase the stock ownership by institutional because they are
considered a sophisticated investor Midiastuti and Machfoedz, 2003, 3 the larger proportion of independent board Peasnell, Pope and Young, 1998, 4 the size of board of commissioners,
where the more number of commissioners that is to reduce earnings management Midiastuty and Machfoedz, 2003 and 5 the existence of an audit committee also can reduce earnings
management Wilopo, 2004.
Research on earnings management with various earnings management models in the Indonesian capital market both in the Islamic and conventional indexes has been done by Wiyadi
et al.2011, 2012. Generally, previous studies Boediono 2005; Kusumawati 2005; Veronica and Bakhtiar 2005; Rahmawati, Suparno and Qomariyah 2006; Nasution and Setiawan 2007;
Ujiyantho and Pramuko 2007; Herawaty 2008, Sasongko and Fauziah 2011, Wiyadi and Prasnowo 2011, Trisnawati and Nugroho 2011, are measuring earnings management used
accruals aggregate approach. This approach separated total accruals into non-discretionary component and discretionary accruals accruals components are in management or policy
managers to intervene in the financial reporting process. This model frequently used is the modified Jones
Further models were developed to perform separation of components of discretionary accruals into short-term discretionary accruals component and long-term discretionary accruals.
The separation is expected to clarify the role of each of the components of discretionary accruals to measure earnings management Sasongko and Purbasari, 2012; Wiyadi and Safitri, 2012;
Romi, 2011; Zayene and Jilani, 2010; Subekti, Wijayanti and Ahmad, 2010 ;.
The accrual earnings management measurement model is considered by some researchers still have not been able to reveal the full of the earnings management practices because the model
ignores the relationship between cash flow transactions and accruals Dechow et al. 1995, Kothari et al., 2005, Subekti, et al. 2010. Accounting research drawing conclusions about the earnings
management only based on accrual adjustment alone may be invalid Roychowdhury, 2006. Furthermore, Trisnawati and Suhestiningsih 2012 measured earnings management based on real
activity. Survey Graham, Harvey and Rajgopal 2005 found the evidence that top management as respondents are much more willing to engage in real earnings management rather than
accruals management to achieve earnings targets
The integrated management model introduced by Leuz, Nanda and Wysocki 2003. This model is a combination of the values of smoothing earnings and reported earnings discretion
discretionary accruals and real earnings management. Later, this model adopted by Habib 2004. Subekti, Kee and Ahmad 2008 also conduct an integrated approach to earnings
management by performing factor analysis to determine the value of earnings management.
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Trisnawati et al 2012 conducted a study of earnings management by integrated approach with an average approach. They refer Baharudin and Satyanugraha 2008. Real earnings management
is measured by abnormal operating cash flow, abnormal production costs, and abnormal discretionary expenses Suhestiningsih and Trisnawati, 2012. While accrual earnings
management is measured by short-term discretionary accruals and discretionary long term accruals Wiyadi and Safitri, 2012; Sasongko and Purbasari, 2012. Integrated measurements
provide a more accurate model to measure earnings management in the Indonesian capital market Trisnawati et al, 2012.
This research is to analyze the role of corporate governance mechanisms in reducing earnings management. Corporate governance mechanism is measured by the managerial
ownership, institutional ownership, the proportion of independent board, the number of independent board and audit committee existence. While the measurement of earnings
management using discretionary accruals in to short-term discretionary accruals component and long-term discretionary accruals Sasongko and Purbasari, 2012; Wiyadi and Safitri, 2012; Romi,
2011; Zayene and Jilani, 2010; Subekti, Wijayanti and Ahmad, 2010, Real earning management Trisnawati and Suhestiningsih, 2012 and integrated earnings management Leuz, Nanda and
Wysocki, 2003; Habib, 2004, Subekti, Kee and Ahmad, 2008; Trisnawati et al., 2012. This study has explored the various earning management models with cases in JII and LQ 45. It used to
describe the role corporate government mechanism for reducing integrated earning management.
LITERATURE REVIEW