The Effect Of Good Corporate Governance, Profitability And Company Size On Earnings Management In Manufacturing Companies Listed On The IDX For The 2016-2018 Period

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The Effect of Good Corporate Governance, Profitability, and Company Size on Earnings Management in Manufacturing Companies Listed on the IDX for the 2016-2018 Period

Introduction

Earnings management is a crucial aspect of corporate governance, as it can significantly impact a company's financial performance and reputation. In the context of manufacturing companies listed on the Indonesia Stock Exchange (IDX), understanding the factors that influence earnings management is essential for investors, regulators, and company stakeholders. This study aims to investigate the effect of good corporate governance, profitability, and company size on earnings management in manufacturing companies listed on the IDX during the 2016-2018 period.

Research Methodology

The research population consists of 144 manufacturing companies listed on the IDX. A purposive sampling method was used to select 26 companies as samples for three years of observation (2016-2018), resulting in a total of 74 observations. The research data was collected from the IDX website and analyzed using descriptive statistical analysis and multiple regression analysis. The analysis process began with descriptive statistics, followed by a classic assumption test, multiple regression analysis, and ended with hypothesis testing.

Research Results

The results of this study showed that partially, managerial ownership, audit committee, and profitability had a significant effect on earnings management. However, the proportion of the Board of Commissioners and company size did not show a significant effect on earnings management. Simultaneously, a combination of managerial ownership, the proportion of the Board of Commissioners, the Audit Committee, Profitability, and Size of the Company affects earnings management.

Analysis and Discussion

Good Corporate Governance

Good Corporate Governance (GCG) is a key factor in increasing company transparency and accountability. In the context of this research, managerial ownership and audit committee play an important role in overseeing the practice of earnings management. High managerial ownership can reduce the potential of manipulation of financial statements, because managers will be more careful in decision making that can harm shareholders. This is because managers with high ownership stakes have a vested interest in maintaining the company's reputation and financial performance.

Profitability

Profitability is one of the significant variables affecting earnings management. Companies with high profitability tend to have more incentives to carry out earnings management to show better performance to investors. This shows that good profitability is not only seen from numbers, but also from how the company reports its performance. Companies with high profitability may engage in earnings management to maintain their market value and attract investors.

Company Size

The size of the company, although it does not have a significant influence in this study, still has relevance in other contexts. Large companies usually have better resources and access to information that can influence managerial decisions. However, other variables such as the level of internal supervision and organizational structure can also play an important role in determining how much the company's size can affect earnings management. For instance, large companies may have more complex organizational structures, which can lead to a lack of coordination and communication among departments, ultimately affecting earnings management.

Proportion of the Board of Commissioners

Although it is expected that the proportion of the Board of Commissioners can provide better supervision of the practice of earnings management, the results of the study show the opposite. This may be caused by the lack of independence and active involvement of the Board of Commissioners in making strategic decisions, which should be their responsibility. The Board of Commissioners should play a crucial role in overseeing the company's financial performance and ensuring that earnings management practices are transparent and fair.

Conclusion

This study provides an important insight into the factors that influence earnings management in manufacturing companies listed on the IDX. With the results showing the significant effect of managerial ownership, audit committee, and profitability, it is hoped that this research can be a reference for academics and practitioners in understanding the dynamics of earnings management and the importance of implementing effective good corporate governance. Further research can explore other variables and different contexts to gain a more comprehensive understanding of earnings management.

Recommendations

Based on the findings of this study, the following recommendations are made:

  1. Implement effective good corporate governance practices: Companies should prioritize good corporate governance practices, including the establishment of an independent audit committee and the disclosure of financial information.
  2. Monitor and regulate earnings management practices: Regulators and investors should closely monitor and regulate earnings management practices to prevent manipulation of financial statements.
  3. Invest in internal supervision and organizational structure: Companies should invest in internal supervision and organizational structure to ensure that earnings management practices are transparent and fair.
  4. Conduct further research: Further research is needed to explore other variables and different contexts to gain a more comprehensive understanding of earnings management.

Limitations

This study has several limitations, including:

  1. Sample size: The sample size of 26 companies may not be representative of the entire population of manufacturing companies listed on the IDX.
  2. Data availability: The data used in this study may not be comprehensive or up-to-date, which may affect the accuracy of the results.
  3. Methodology: The use of multiple regression analysis may not be the most appropriate methodology for this study, as it may not capture the complex relationships between the variables.

Future Research Directions

Future research should explore the following directions:

  1. Investigate other variables: Investigate other variables that may affect earnings management, such as company culture, industry, and market conditions.
  2. Examine different contexts: Examine earnings management practices in different contexts, such as small and medium-sized enterprises (SMEs) and non-listed companies.
  3. Develop a more comprehensive model: Develop a more comprehensive model of earnings management that incorporates multiple variables and contexts.
    Frequently Asked Questions (FAQs) about Earnings Management in Manufacturing Companies Listed on the IDX

Q: What is earnings management?

A: Earnings management is the practice of manipulating financial statements to achieve a desired outcome, such as increasing profits or reducing losses. It can involve a range of activities, including accounting manipulations, revenue recognition, and expense recognition.

Q: Why is earnings management a concern for investors and regulators?

A: Earnings management can lead to inaccurate financial reporting, which can mislead investors and affect their investment decisions. It can also lead to a lack of transparency and accountability, which can undermine trust in the financial markets.

Q: What are the key factors that influence earnings management in manufacturing companies listed on the IDX?

A: The key factors that influence earnings management in manufacturing companies listed on the IDX include managerial ownership, audit committee, profitability, and company size. These factors can affect the incentives and motivations of managers to engage in earnings management practices.

Q: What is the role of the audit committee in preventing earnings management?

A: The audit committee plays a crucial role in preventing earnings management by providing independent oversight of the company's financial reporting process. They can review financial statements, identify potential accounting issues, and ensure that the company's financial reporting is accurate and transparent.

Q: How can companies prevent earnings management?

A: Companies can prevent earnings management by implementing effective internal controls, such as regular audits and reviews of financial statements. They can also establish a strong culture of transparency and accountability, and ensure that managers are held accountable for their actions.

Q: What are the consequences of earnings management for companies and investors?

A: The consequences of earnings management can be severe for companies and investors. Companies that engage in earnings management practices may face penalties, fines, and reputational damage. Investors who rely on inaccurate financial reporting may suffer losses and damage to their reputation.

Q: How can investors protect themselves from earnings management?

A: Investors can protect themselves from earnings management by conducting thorough research on companies, reviewing financial statements carefully, and seeking advice from independent experts. They can also monitor companies' financial reporting and seek to understand the underlying drivers of their financial performance.

Q: What is the role of regulators in preventing earnings management?

A: Regulators play a crucial role in preventing earnings management by establishing and enforcing accounting standards, conducting audits and reviews of financial statements, and imposing penalties on companies that engage in earnings management practices.

Q: How can companies and investors work together to prevent earnings management?

A: Companies and investors can work together to prevent earnings management by establishing a culture of transparency and accountability, and by seeking to understand the underlying drivers of financial performance. They can also work together to establish and enforce accounting standards, and to monitor companies' financial reporting.

Q: What are the future directions for research on earnings management?

A: Future research on earnings management should focus on investigating other variables that may affect earnings management, such as company culture, industry, and market conditions. It should also examine earnings management practices in different contexts, such as small and medium-sized enterprises (SMEs) and non-listed companies.

Q: What are the implications of this study for policymakers and regulators?

A: The findings of this study have implications for policymakers and regulators, who should prioritize the establishment and enforcement of accounting standards, and the monitoring of companies' financial reporting. They should also work to establish a culture of transparency and accountability in the financial markets.

Q: What are the limitations of this study?

A: The limitations of this study include the sample size, data availability, and methodology used. Future research should aim to address these limitations and provide a more comprehensive understanding of earnings management in manufacturing companies listed on the IDX.