16
3. Political cost hypothesis Political cost hypothesis talks about the greater the political cost faced
by a firm, the more likely the manager is to choose accounting procedures that defer reported earnings from current to future periods.
From those hypotheses, we can know that the existence of positive accounting theory is the door way of earnings management practices.
2.7 Earnings Management
Based on Scott 2009, earnings management is the choice by a manager of accounting policies, or actions affecting earnings, so as to achieve some
specific reported earnings objective. Earnings management may be defined as “reasonable and legal management decision making and reporting intended to
achieve stable and predictable financial results.” Earnings management is not to be confused with illegal activities to manipulate financial statements and report
results that do not reflect economic reality. Earnings management is the use of accounting techniques to produce financial reports that may paint an overly
positive picture of a companys business activities and financial position. Earnings Management takes advantage of how accounting rules can be applied and are
legitimately flexible when companies can incur expenses and recognize revenue. It can be difficult to differentiate these allowable practices from earnings fraud or
manipulation. Earnings management theoretically represents this grey area, but it is often used as a synonym for earnings manipulation or earnings fraud.
Discretionary Accrual – Earnings Management procedures that de
de fe
fer reported earni i
ng ng
s s
from current to future periods. From tho
ho se hypotheses, we can know that th
the e
existence of positive ac
c c
counting theory is the he
d d
oo o
r wa wa
y y
of of
e e
ar r
ni n
ngs manageme ment practices.
2.7 Ea Earnings M
M anagem
e ent
Ba Base
se d on
n S
Sco tt
2009, earnings management i
s th
th e ch
h oi
oi ce
ce b
b y
y a ma
a na
n ger
of a a
cc cc
ou o
ntin n
g g
policies, or actions a ff
ecting earni ng
s, so as
s to ac ac
hi hi
ev ev
e som me
sp sp
ec ec
if ific r
r ep
orted earnings o
bjective. Ea
rnings m
anagement ma y
y be d
d ef
efin in
ed as
s “r
“r ea
e son
na ble an
d legal mana
ge me
nt dec
isio n
making and r
ep orti
ng g
inten ende
ded to to
achiev ve
stable and pre di
ctab le f
in an
ci al res
ults .”
Ear ni
ngs manage me
ent is no o
t t to
o be
e c c
on n
fu sed with i
llegal a
ctivit ies to manip
ul at
e financ
ial st
atemen ts
s and nd rep
p or
or t
t results that do no
t t re
fl flect econ
n om
omic ic
rea a
li li
ty ty
. Ea
Earn i
ings management is the use se o
o f
f ac
ac co
co unting techniques to produce financial reports that may paint an
an o
o ve
ve r
rly po
posi si
ti ti
ve ve
p p
ic ic
tu tu
re re
o o
f f
a a
co co
mp mp
an an
y y
s s bu
bu si
si ne
n ss a
a ct
ct iv
ivit it
ie ie
s s
an an
d d
fi fi
na na
nc nc
ia ia
l l
po po
si si
ti tion
on. Ea
Ea rn
rn i
ings Ma
Mana na
ge ge
me ment
nt t
t ak
ak es a
a dv
dvantage o
o f how acco
o u
unting r ul
ul es
e c
an an b
b e
e ap
ap pl
plie ied
d and are legitimately flexible when compa
anies can i
i ncur expenses and recognize revenue.
It can be difficult to differentiate e
these allow wable practices from earnings fraud or
manipulation. Earnings managemen ent theo
o retically represents this grey area, but it
is often used as a synonym for earning gs
s manipulation or earnings fraud.
17
Accrual earnings management is the practice of earnings management which is carried out by the company through the accrual components in the
financial statements. Accrual itself is recognition of where the transactions are recognized, recorded, and presented in the financial statements when incurred
without regard whether the cash flow is received or paid. Because of the nature of accrual using assumptions or estimates, accruals are often used as a tool by
management to manipulate earnings. Accrual policy is divided into two discretionary accruals and nondiscretionary accruals. Discretionary accrual policy
is undertaken by the will of management with a specific purpose. In this case, discretionary accrual is closely related to earnings management because it is done
over the management of the company in which management will make adjustments to earnings to meet specific interests.
2.8 Previous Research
