Identification of Earnings Management on The Company Listed on The Index LQ 45 in Indonesia Stock Exchange

Abstract

Earnings management is a management action to maximize or minimize the portion of accruals in earnings. Management often perform earnings management for several reasons: first, because the use of the accrual basis of accounting. This is an opportunity for management to select accounting methods (Scott, 2006); Second, because of the asymmetry of information. In this case, management has greater information than the principal (Morris, 1987); Third, as regards the company as a nexus of contracts. It is based on the theory of agency that is the difference of interests between agents and principals. The action is related to earnings management bonus plans, debt covenants and political costs (Watts and Zimmerman, 1990). In this case, management has 2 related behavior of earnings management is opportunistic behavior and efficient behavior contract. The purpose of this study was to identify the trend of earnings management in companies incorporated in the BEI LQ45, and magnitude of earnings management by the management. The samples were incorporated in the LQ 45 from year 2004 to 2010 with a total samples 187 firm years. The results showed that the average value of EM 2004 = 4.01, EM 2005 = 0.15, EM 2006 = -0.24, EM 2007 = 0.54, EM 2008 = 0.87, EM 2009 = - 0.51, EM 2010 = -2.52, and the total average EM = 0.89, these results showed no significant average EM conducted by management. The results also indicate the trend of EM that do not give the same direction from year to year. However, the average total EM has positive value. This finding supports previous research done by Cahan (1992), DeFond and Jiambalvo (1994), Sweeney (1994); Kusumawati and Sasongko (2005), and Dechow et. al. (2010), which provides empirical evidence regarding the identification of trends of earnings management in the form of maximizing or minimizing the reported earnings. Earnings management perspective used in this study do not lead to opportunistic perspective or not. However, this study illustrates the tendency of earnings management performed.