The Effect Of Free Cash Flow, Size And Number Of Audit Committee Meetings On Earnings Management In Manufacturing Companies Listed On The Indonesia Stock Exchange In 2012-2015
The Effect of Free Cash Flow, Size, and Number of Audit Committee Meetings on Earnings Management in Manufacturing Companies Listed on the Indonesia Stock Exchange in 2012-2015
Introduction
The Indonesia Stock Exchange (BEI) is one of the largest stock exchanges in Southeast Asia, with a significant number of manufacturing companies listed on it. The financial performance of these companies is a crucial factor in determining their stock prices and investor confidence. However, the practice of earnings management, which involves manipulating financial statements to present a more favorable picture of a company's performance, is a common phenomenon in the corporate world. This study aims to investigate the effect of free cash flow, company size, and the number of audit committee meetings on earnings management in manufacturing companies listed on the BEI during the 2012 to 2015 period.
Literature Review
Earnings management is a complex issue that has been studied extensively in the field of accounting and finance. It involves the manipulation of financial statements to present a more favorable picture of a company's performance, which can be achieved through various means such as revenue recognition, expense recognition, and asset valuation. The practice of earnings management can have significant consequences for investors, creditors, and other stakeholders, as it can lead to inaccurate financial reporting and undermine investor confidence.
Free cash flow is a key factor in determining a company's ability to manage its earnings. Companies with high free cash flows tend to have more flexibility in managing their financial statements, which can lead to earnings management. On the other hand, company size can also play a significant role in determining earnings management. Larger companies tend to have more resources and information, which can lead to better governance practices and more transparent financial reporting.
The audit committee is a critical component of a company's governance structure, and its role in overseeing earnings management cannot be overstated. The audit committee is responsible for ensuring that a company's financial statements are accurate and reliable, and that earnings management is not practiced. The frequency of audit committee meetings can also play a significant role in determining earnings management. Companies with more frequent audit committee meetings tend to have better governance practices and more transparent financial reporting.
Methodology
This study used a multiple linear regression analysis to investigate the effect of free cash flow, company size, and the number of audit committee meetings on earnings management in manufacturing companies listed on the BEI during the 2012 to 2015 period. The sample consisted of 32 manufacturing companies, and the data source was secondary data. The selection of samples was carried out by purposive sampling method, and data processing was done using SPSS software to get valid and reliable results.
Results
The results of this study showed that free cash flow and the number of audit committee meetings had a significant influence on partial earnings management. This means that companies with higher free cash flows tend to be more able to manage reported profits to reflect better financial performance. On the other hand, the frequency of more audit committee meetings also contributes in increasing supervision of earnings management, thereby encouraging transparency and accountability in financial statements.
Furthermore, this study also found that the combination of free cash flow, company size, and the number of audit committee meetings simultaneously had a significant influence on earnings management. This shows that the combination of these three factors can influence management decisions in presenting reported profits. In this context, larger companies may have better access to resources and information, and tend to comply with tighter governance practices, thus affecting the way they manage profits.
Discussion
The results of this study provide a deeper understanding of the dynamics that exist between free cash flow, company size, and the number of audit committee meetings and the practice of earnings management in companies listed on the BEI. The findings of this study are consistent with previous studies that have investigated the effect of these factors on earnings management.
The results of this study also have significant implications for investors and other stakeholders. For investors, the results of this study can be an important reference in evaluating the company's financial performance and making wiser investment decisions. For companies, the results of this study can provide input for improving governance and transparency practices in their financial statements, which in turn can increase investor confidence.
Conclusion
In conclusion, this study confirms the importance of free cash flow, company size, and the role of the audit committee in creating more accountable and transparent earnings in the Indonesian manufacturing industry. The findings of this study are expected to encourage companies to optimize their management structure and practice to improve the quality of financial statements. Furthermore, this study provides a deeper understanding of the dynamics that exist between free cash flow, company size, and the number of audit committee meetings and the practice of earnings management in companies listed on the BEI.
Recommendations
Based on the findings of this study, the following recommendations are made:
- Companies should prioritize improving their governance practices, including the frequency of audit committee meetings, to ensure more transparent and accountable financial reporting.
- Investors should consider the company's free cash flow, size, and governance practices when evaluating the company's financial performance and making investment decisions.
- Regulators should consider implementing stricter regulations to prevent earnings management and ensure more accurate financial reporting.
Limitations
This study has several limitations that should be noted. Firstly, the sample size was relatively small, which may limit the generalizability of the findings. Secondly, the study only investigated the effect of free cash flow, company size, and the number of audit committee meetings on earnings management, and did not consider other factors that may influence earnings management. Finally, the study only focused on manufacturing companies listed on the BEI, and did not consider other industries or stock exchanges.
Future Research Directions
Future research should aim to investigate the effect of other factors on earnings management, such as board composition, executive compensation, and corporate governance practices. Additionally, future research should consider other industries and stock exchanges to provide a more comprehensive understanding of the dynamics that exist between free cash flow, company size, and the number of audit committee meetings and the practice of earnings management.
Frequently Asked Questions (FAQs) about the Effect of Free Cash Flow, Size, and Number of Audit Committee Meetings on Earnings Management
Q: What is earnings management, and why is it a concern for investors and regulators?
A: Earnings management refers to the practice of manipulating financial statements to present a more favorable picture of a company's performance. This can be done through various means such as revenue recognition, expense recognition, and asset valuation. Earnings management is a concern for investors and regulators because it can lead to inaccurate financial reporting and undermine investor confidence.
Q: What is the role of free cash flow in earnings management?
A: Free cash flow is a key factor in determining a company's ability to manage its earnings. Companies with high free cash flows tend to have more flexibility in managing their financial statements, which can lead to earnings management.
Q: How does company size affect earnings management?
A: Larger companies tend to have more resources and information, which can lead to better governance practices and more transparent financial reporting. However, larger companies may also be more prone to earnings management due to the complexity of their financial statements and the pressure to meet investor expectations.
Q: What is the role of the audit committee in preventing earnings management?
A: The audit committee is a critical component of a company's governance structure, and its role in preventing earnings management cannot be overstated. The audit committee is responsible for ensuring that a company's financial statements are accurate and reliable, and that earnings management is not practiced.
Q: How often should audit committee meetings be held to prevent earnings management?
A: The frequency of audit committee meetings can play a significant role in determining earnings management. Companies with more frequent audit committee meetings tend to have better governance practices and more transparent financial reporting.
Q: What are the implications of this study for investors and regulators?
A: The findings of this study have significant implications for investors and regulators. For investors, the results of this study can be an important reference in evaluating the company's financial performance and making wiser investment decisions. For regulators, the results of this study can provide input for implementing stricter regulations to prevent earnings management and ensure more accurate financial reporting.
Q: What are the limitations of this study, and how can they be addressed in future research?
A: This study has several limitations that should be noted. Firstly, the sample size was relatively small, which may limit the generalizability of the findings. Secondly, the study only investigated the effect of free cash flow, company size, and the number of audit committee meetings on earnings management, and did not consider other factors that may influence earnings management. Finally, the study only focused on manufacturing companies listed on the BEI, and did not consider other industries or stock exchanges. Future research should aim to address these limitations by investigating the effect of other factors on earnings management and considering other industries and stock exchanges.
Q: What are the recommendations for companies, investors, and regulators based on the findings of this study?
A: Based on the findings of this study, the following recommendations are made:
- Companies should prioritize improving their governance practices, including the frequency of audit committee meetings, to ensure more transparent and accountable financial reporting.
- Investors should consider the company's free cash flow, size, and governance practices when evaluating the company's financial performance and making investment decisions.
- Regulators should consider implementing stricter regulations to prevent earnings management and ensure more accurate financial reporting.
Q: What are the future research directions based on the findings of this study?
A: Future research should aim to investigate the effect of other factors on earnings management, such as board composition, executive compensation, and corporate governance practices. Additionally, future research should consider other industries and stock exchanges to provide a more comprehensive understanding of the dynamics that exist between free cash flow, company size, and the number of audit committee meetings and the practice of earnings management.