Abnormal Discretionary Expenses Earnings Management

MIICEMA 2014 10-11 November 2014 Hotel Bangi-Putrajaya, Malaysia 121 EMPIRICAL RESULTS AND DISCUSSIONS This research aims to analyze the role of corporate governance mechanisms in reducing earnings management with various approaches. The initial step analysis is to calculate the average value of each proxy of earnings management in each sample group. The mean values of earnings management with various models can be seen in the following table. Table 1 Earnings Management Value. No. Model Jakarta Islamic Index LQ-45 Index 1. LTDA 0,233685 0,604901 2. STDA -0,589799 -0,404240 3. ACCRUAL -0,356114 0,200661 4. Abn-CFO -0,012055 0,005118 5. Abn-PROD 0,006644 -0,002420 6. Abn-DSCR -0,004292 0,002336 7. REAL -0,009703 0,005033 8. INTEGRATED -0,075419 0,040803 Sources: Secondary data, processed. The table 1 shows that during the period 2004-2010, the manufacturing companies listed the in JII index had a negative mean value of accrual earnings management, real earnings management, and integrated earnings management. It means companies tend to perform with the pattern of decrease profit numbers. While the company is listed in the LQ45 had a positive mean value of earnings management. It means companies tend to perform earnings management with the pattern to increase profit numbers. By using an accrual earnings management approach, a company incorporated in the JII index have the higher value in short term approach -0,589799 rather than in the long term approach 0,233685. Most companies tend to decrease earnings numbers. This pattern gives an indication, that the earnings numbers performed with the selection of accounting methods for recording and recognition inventory, accounts receivable, current assets, accounts payable and taxes payable, While the companies incorporated in LQ-45 index have the higher value in long term approach 0,604901 rather than a short term earnings numbers -0,404240. This strategy is to raise the value of fixed assets by selecting the depreciation method. Moreover, it can also conducted by recognizing the long-term debt into current liabilities. However, the companies in the index JII and LQ-45 used the same approach to increase earnings numbers long term approach and to reduce the earnings numbers short term approach. With the real earnings management approach, the numbers of earnings management is higher in companies which incorporated in JII index -0,009703 compared with in the LQ-45 index 0,005033. The patterns tend to reduce earnings number conducted by discretionary costs DISC with raising the advertising and research costs. Based on the data analysis, the value of the highest real earnings management proxy is mostly done by manipulating cash flow Abn- CFO because it has the highest mean value compared to other proxies. Furthermore, through an integrated earnings management approach AGGR, the pattern of earnings management in the index JII is decreasing earnings numbers. While in the LQ-45 index companies tend to use pattern increasing earnings numbers. The integrated measurement of earnings management clearly gives more accurate results. The results of multiple regression MIICEMA 2014 10-11 November 2014 Hotel Bangi-Putrajaya, Malaysia 122 analysis related to describe the implementation of corporate governance mechanisms on earnings management in LQ 45 and JII can be described by the following table. Table 2. The result of multiple regression analysis VARIABLE ACCRUAL STDA LTDA REAL INTEGRATED CONSTANT 0,055 -0,479 0,534 -0,028 -0,006 MGROWN 0,209 -0,065 0,274 0,100 0,073 INSTOWN -0,083 -0,140 0,057 0,052 -0,012 BOARSIZE 0,040 0,001 0,039 0,001 0,009 BOARDINDP -1,416 -0,062 -1,354 -0,088 -0,282 AUDITCOM -0,301 -0,028 -0,273 0,016 -0,055 TYPE IND 0,535 0,180 0,356 0,017 0,112 F test 5,647 29,538 4,016 0,012 5,442 R square 0,114 0,402 0,084 0,513 0,110 Sources: Secondary data, processed. significant with 1 significant with 5 significant with 10 1. Hyphotesis 1 Managerial ownership describes the large number of shares owned by management of the total shares outstanding. In terms of economic value, it has incentives to align the interests of managers with the company. The result of hypothesis testing for managerial ownership variable indicates that stock ownership by management has no effect on earnings management with various models. This suggests that managerial ownership had no effect on earnings management with accruals, real and integrated approach in the LQ-45 index and the JII index. The result is in contrast with some studies that high managerial ownership will reduce earnings management practices Gabrielsen, et al. 2002; Midiastuty and Masud Mahfoedz 2003. The reason for this is in the study, the percentage of managerial ownership is very low 10. Thus, these results have not addressed that managerial ownership reduce the misalignment of interests between management by the owners or shareholders. 2. Hyphotesis 2 Hypothesis testing is intended to test the impact of institutional ownership on earnings management. The analysis shows that institutional ownership has no effect on the earnings management, except in the short term discretionary accrual approach STDA. In STDA approach has ß value of -0,140 with a probability value level of 0,001 0,05. It means institutional ownership negatively affect on earnings management with STDA models. These results support the research of Jensen and Meckling 1976, Warfield et.al., 1995, Dhaliwal et.al., 1982, Morck et al., 1988, Pranata and Masud 2003 and Cornertt et.al., 2006 which found a significant negative effect institutional ownership on earnings management. These results are also consistent with reason that institutional owners are more focused on current earnings Porter, 1992; Pranata and Masud 2003. As a result, managers are forced to take earning management in short-term period or focused on current asset. The result also supported by Cornett et.al., 2006, if institutional ownership will make the managers feel bound to meet profit targets of the investors, so they will tend to engage in MIICEMA 2014 10-11 November 2014 Hotel Bangi-Putrajaya, Malaysia 123 earnings manipulation. The monitoring by institutional investors may encourage managers to focus more attention on the companies performance and can reduce their behavior for its own interest. 3. Hyphotesis 3 Based on the analysis, board size has no effect on earnings management significantly with various models. It means the amount of the companys board size can not reduce the earnings management. These results contrast with the research Xie, Davidson, Dadalt 2003, Yu 2006, Zhou and Chen 2004, and Chtourou, Bedard and Courteau 2001 which showed that a larger board size will reduce the earnings management. This variable is not significant because the placement or additional board members is made on the formal regulation not for monitoring enterprises. While the majority shareholder controllers or founders still plays an important role, so the performance of the board is useful Gideon, 2005 . In addition, the size of the board size is not a key determinant of the effectiveness supervision of management on the company. However, the effectiveness of the control mechanism depends on values, norms and beliefs are accepted within an organization Jennings 2004a; 2004b; 2005a; Oliver, 2004. 4. Hyphotesis 4 The analysis showed that the proportion of independent board significant effect on earnings management with various earnings management models except for STDA models and real earnings management model. It means, the more proportion of independent board within the company reduce the earnings management. Thus, the proportion of independent board BOARDINP negatively affect earnings management practices with an integrated approach This study supports research Chashmi and Roodposhti 2011 about the impact of corporate governance mechanisms on earnings management. Research findings showed board independence is negatively related to earnings management. This results also supported by Dechow et al. 1995, Chtourou et al. 2001, Midiastuty and Mahfoedz 2003, and Xie et al. 2003. The results explain that companies with the compositions by commissioners who come from outside the company may affect the earnings management. Through its role in oversight, the composition of the board of commissioners from outside the company may affect the management in preparing the financial statements in order to obtain a qualified profit.

5. Hyphotesis 5

The hypothesis aims to test whether the presence of an audit committee negatively affect earnings management practices with an various models except on real earning management modekl. These results indicate that hypothesis 5 is supported. So the existence of an audit committee may reduce the companys earnings management practices. These results are consistent with the research Xie, Davidson, Dadalt 2003, Veronica and Bachtiar 2004, Wedari 2004, and Wilopo 2004, where the existence of an audit committee negatively affect on the action of earnings management. So that, indicates an important corporate governance mechanism to ensure the implementation of the companys actions were fair and transparent. While on the real models, variable presence of an audit committee does not negatively affect on the earnings management. So these results are consistent with the research Veronica and Main 2005 that the existence of an audit committee does not affect on the action of earnings management. 6. Hyphotesis 6 Based on the analysis, earnings management on various models is mostly occurs in the companies incorporated in the LQ-45 index compared with companies in the JII index. This is MIICEMA 2014 10-11 November 2014 Hotel Bangi-Putrajaya, Malaysia 124 caused the company in JII more ethics and more compliants to the regulation.These results supported the research by Hanafi 2006 and Nugroho 2011, They found that the cost of capital is lower in JII index compared with in LQ-45. The lower cost of capital is indicating a lower level of risk, lower information asymmetry, and lower agency costs so the investors are not interest for profit numbers. CONCLUSION Based on the results of descriptive analysis, generally, 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. The use of accrual earnings management model and real earnings management is complement for measuring earnings management that combines both integrated earning management. It provides the better results rather than single models. 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 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 which measured by the percentage of corporate board member from outside parties instead of management and owner and the existence of Audit Committe have effect significantly on earning management. It means that corporate governance mechanism from outside has more effective controlling management. The monitoring mechanism from outside parties are expected to align differences in the interests between owners and management, so the earning management doing by management can be reduced. There are some limitations of this study, such as 1 the need for the other variables in the corporate governance mechanisms. By looking at the value of R² is relatively small, then for subsequent studies have examined the use of Corporate Governance Issued Index by ICGI so the role of the mechanism of CG is able to reduce the earnings management by management more accurate 2 earnings management perspective used in this study is the opportunistic perspective. It means that earnings management as the actions taken by management to deceive stakeholders. For further research of earnings management needs to be reviewed from the others perspective, such as efficiency perspective. Efficiency perspective states that managers perform the accounting policy choice to provide better information about impending cash flow and to minimize the agency cost that occurs due to a conflict of interest between stakeholders and managers Jiambalvo, 1996. 3 Variable corporate governance mechanism which proxies by institutional ownership, managerial ownership, board composition, board size, and the existence of an audit committee. These five variables can not be a comprehensive measure of corporate governance practices in the company, so the need for an index that reflects the corporate governance mechanism are more appropriate. 4 Develop a measurement model that is more accurate for counting earnings management each industry. So, the characteristics of different industries can also identify differences in the pattern of earning management each industry. Ackowledgement : This research is is funded by DP2M DIKTI : Surat Perjanjian Pelaksanaan Hibah Penelitian No: 008K6KLSP2013, on May 16 th 2013.