“Conservatism as a moderating variable on the determinants of earnings management”

This study aims to provide empirical evidence about the determinants that can impact earnings management, through board diligence, ownership concentration, CEO ownership, and CEO tenure, as well as testing conservatism as a moderating variable. Secondary data, specifically information derived from annual financial reports, are utilized in this study. Information for financial reports is acquired from the Indonesia Stock Exchange (IDX) data stream and website from 2013 to 2022, the population of this study comprises all banking institutions listed on the Indonesia Stock Exchange. This study’s findings demonstrate that the presence of board diligence significantly hinders earnings management. Moreover, the findings of this study demonstrate that organizations characterized by a significant concentration of ownership will have the capacity to mitigate the prevalence of earnings management practices. Additionally, this study’s findings demonstrate that a reduction in earnings management activities is associated with greater CEO ownership. The findings of this study offer a practical illustration for stakeholders regarding the responsibilities of shareholders, which may prove beneficial in overseeing an organization’s operations. This study shows that high conservatism in companies actually mitigates the good effects of the ownership concentration and CEO ownership variables on earnings management. In summary, this study establishes that companies characterized by elevated levels of conservatism do not actively engage in earnings management practices that are beneficial to the organization.


INTRODUCTION
Banking is a key industry to ensure the leading role of finance in the economic development process.Frequently, management strives to preserve the bank's healthy condition.Profit data are frequently exploited for engineering objectives via opportunistic management practices.This is accomplished through the selection of a particular accounting method, which permits profits to be modified, increased, or decreased in accordance with management's preferences.According to Amin et al. (2017), income management is still evident in the financial statements of public companies in Indonesia, including those in the banking sector.In Indonesia, the subsequent financial institutions have been implicated in scandals involving earnings management: By selling cessie, or an organization's non-performing loans, to PT Perusahaan Pengelola Aset (PPA), PT Bank Tabungan Negara (Persero) engaged in the act of window dressing or manipulation of financial reports in 2018, then PT Bank Bukopin Tbk revised its 2016 net profit to IDR 183.56 billion from the initial IDR 1.08 trillion.The biggest decline was in the fees and commission income section, which is income from credit cards.This income decreased from IDR 1.06 trillion to IDR 317.88 billion.PT Bank Jawa Barat and Banten (BJB) Syariah incurred estimated losses of IDR 548 billion as a result of an alleged fictitious credit case.Each of the losses or irregularities incurred has a monetary impact exceeding 100 million IDR.Additionally, BJB Syariah encountered a circumstance in 2018 in which it surpassed the Maximum Fund Distribution Limit (BMPD).Consequently, in accordance with Bank Indonesia Regulation No. 13/5/PBI/2011 regarding the Maximum Limit for Distribution of Sharia Rural Bank Funds, the organization is obligated to disclose its action plan to enhance GCG.
Earnings management is an incentive for company executives to enhance the company's performance with the intention of enticing shareholders to allocate capital towards the organization.Earnings management is a deliberate attempt by company executives to manipulate financial reporting and transaction arrangements in order to alter financial statements in a way that misleads several stakeholders about the company's economic performance or to "influence contractual results" (Healy & Wahlen, 1998).The policy that allows bank executives to make decisions within the limits set by the regulator can have a significant impact on risks faced by the company (Rahim et al., 2020).Earnings management occurs when managers exercise discretion in financial reporting and execute transactions to modify financial statements, with the intention of deceiving stakeholders about the company's financial performance and influencing the outcomes of contracts that rely on the reported accounting figures.Researching earnings management is crucial due to the detrimental consequences that can ensue when it obfuscates the rational calculations of investors, thereby diminishing the caliber of information presented in financial reports.According to Mahrani and Soewarno (2018), the low quality of information contained in financial reports will have a negative impact on a company's financial performance; this study was conducted at 102 manufacturing companies listed on the Indonesia Stock Exchange in 2014.Tabassum et al. (2015), using the Generalized Least Square (GLS) method to analyze 119 companies listed on the Karachi Stock Exchange (KSE) from 2004 to 2011, found that companies that engaged in Real Earnings Management (REM) by manipulating sales to appear as though profits were substantial experienced a decline in future financial performance.Fama and Jensen (1983) explain that Board Diligence can serve as an intermediary between internal managers regarding issues that arise, as well as monitor and advise the board of directors on its policies.An additional determinant believed to impact earnings management is the tenure and ownership of the CEO.Di Meo et al. (2017) examine the impact of CEO ownership on earnings management in Delaware-domiciled and non-Dominant companies from 1992 to 2011.The focus is on regulated industries (SIC codes between 4400 and 5000) and financial institutions (SIC codes between 6000 and 6500).The results indicate that CEO ownership reduces the likelihood of shareholders being harmed by earnings management activities; thus, earnings management is less likely to occur.
In addition, two hypotheses -the monitoring hypothesis and the entrenchment hypothesis -contribute to the relationship between ownership concentration and earnings management.The monitoring hypothesis posits that certain researchers regard ownership concentration as a management discipline instrument that serves to sustain the process of value creation.According to Rahnamay Roodposhti and Nabavi Chashmi (2010), the presence of significant shareholders can serve as an effective mechanism to oversee management and prevent opportunistic earnings management practices.Conservatism is the moderating variable utilized in this study.Accounting conservatism is associated with earnings management practices characterized by a consistent decline in profits.García Lara et al. (2020) who examined Thomson financial-listed companies from 1990 to 2018 indicated that more conservative firms had a lower likelihood of employing any method to manage profits to meet profit benchmarks.Bertomeu et al. (2017) show that conservatism can foster earnings management incentives.The objective of this study is to examine the factors that impact earnings management, including board due diligence, ownership concentration, tenure of the CEO, and ownership concentration.In addition to examining the potential moderating effect of conservatism on the determinants of earnings management.

LITERATURE REVIEW AND THEORETICAL FRAMEWORK
The theory underlying the framework of this study consists of Agency Theory.According to Jensen and Meckling (1976), the interaction between agents (business management) and principals (shareholders) constitutes agency theory.Principals (stakeholders) and agents (management) in interaction are highly susceptible to agency conflicts.Agency issues are discernible when there are disparities in interests and insufficient information (referred to as information asymmetry) between the principal and agent.This may occur because the corporation's management, which shareholders have hired to oversee the business, does not always act in their best interests.The moderating variable in this study is conservatism.According to Basu (1997), conservatism is characterized by the practice of decreasing profits (and net asset value) in reaction to unfavorable information, while refraining from augmenting profits (and net asset value) in light of favorable news.This statement implies that accounting conservatism increases in tandem with the level of verification necessary to recognize profits.Conservatism pertains to a set of criteria for selecting accounting principles that promote the reduction of cumulative profit reporting through the implementation of the following measures: decelerating expense recognition, expediting revenue recognition, diminishing asset valuation, and increasing liability valuation (Givoly & Hayn, 2000).According to Watts (2003), conservatism is the response of management to foresee the absence of profit and expedite the recognition of losses.According to FASB Statement of Concept No. 2, accounting conservatism is a prudent response to the inher-ent uncertainty in a company, with the aim of ensuring that internal uncertainties and risks in the business environment are sufficiently considered.It is imperative that financial reports accurately reflect these uncertainties and risks to enhance their predictive value and neutrality.Prudent reporting will yield the greatest advantages for all stakeholders utilizing financial reports.
Fundamentally, the notion of conservatism is synonymous with the strategy of earnings management, which aims to minimize profits.The application of conservatism is motivated by the propensity for managers to manipulate financial reports; managers who possess an overly optimistic outlook may result in the excessive presentation of financial reports; this can be counterbalanced by the pessimistic approach of conservatism.García Lara et al. ( 2020) conducted research on companies listed on Thomson Financial from 1990 to 2018, the results showed that more conservative companies had a lower probability of managing profits with any method to achieve profit benchmarks.

METHODOLOGY
This study used secondary data.The data for this study originates from annual financial statements, which are publicly available on the Indonesia Stock Exchange website for the 2013-2022 period, with a total sample size of 290 companies.The analysis method used in this study is panel data regression.
where EM -Earnings Management; BD -Board Diligence (as a proxy for board quality); BI -Board Independence (as a proxy for board quality); CT -CEO tenure (as a proxy for managerial entrenchment); CO -CEO ownership (as a proxy for managerial entrenchment); OC -Ownership concentration; KO -Conservatism; Control variables: CAR and LDR.
Earnings management is measured using the formula of model ( , _ where LLP it -Loan Loss Provisions; BEGLLR it -Beginning Loan Loss Reserves; LASSET it -Natural Log Of Total Assets; LCO it -net loans that have been written-off after after deducting any recoveries as a percentage of total loans; CHLOAN it -The Change In Total Outstanding Loans (change in total outstanding loans) in the end of year t; NPL it -Loans that are more than 90 days past due and are still subject to interest; L_CATEGORE it -different loan categories such as individual, corporate, other bank, and government loans ; ε it -the error term of model 1.where RSLG it -Realized Securities Gains And Losses (realized securities gains and losses from securities held until maturity (HTM) and available for sale (AFS) as a percentage of total assets; LASSET it -Natural Log Of Total Assets; URSGL itunrealized securities gains and losses from AFS as a percentage of total assets.So, the earnings management model is like that in model ( 4 CEO tenure is measured with a dummy variable taking the value 1 if the CEO has a tenure of more than three years, and 0 otherwise.CEO Ownership is measured like model (6) shares owned by the 100%, outstanding shares where CO -CEO Ownership Conservatism is measured by formula (7): where NOACC it -Accounting Conservatism Index; AKO -Cash Flow from Operating Activities; Dep -Accumulated Depreciation of Fixed Assets; TA -Tot a l Asset s.

RESULTS AND DISCUSSION
The research objective is to empirically test the influence of Board Diligence, Ownership Concentration, CEO Tenure, and CEO Ownership on earnings management with conservatism as a moderating variable.Table 1 is the regression results from the research model (1).
According to the regression results presented in Table 1, there is substantial evidence to suggest that earnings management is negatively impacted by the board diligence variable.Specifically, an increase in board diligence is associated with a decrease in earnings management.This indicates that as the board of commissioners attends meetings more frequently, the company's level of earnings management decreases.Additionally, it has been demonstrated that the CEO_OWNERSHIP variable has a substantial adverse impact on earnings management.This implies that an increase in the CEO's ownership stake in a company will result in reduced earnings management.This indicates that the CEO has a greater number of company shares, which reduces the company's earnings management.Concerning the subsequent variable, CEO_TENURE, the outcomes are inconsequential.The final independent variable is CONCENTRATION_OWNERSHIP, which has a significant positive effect on earnings management, according to the results of regression model 1.Thus, the degree of earnings management in a company is proportional to the proportion of ownership held by its five largest shareholders.
The regression model incorporates two control variables: the CAR variable exhibits a negative direction, indicating that an increase in the company's Loan to Deposit Ratio correlates with a decrease in earnings management actions; and the LDR variable also displays a negative direction, indicating that an increase in a company's Capital Adequacy Ratio corresponds to a decrease in earnings management actions.Conversely, this study offers empirical support for the notion that a significant proportion of chief executive officers (CEOs) of banking institutions in Indonesia pos-sess over three years of service.This is indicated by the proportion of results approaching 57% and the count of 165 companies out of 290 samples whose CEOs possess such tenure (Refer to Appendix B).
The findings of this study align with agency theory, which proposes various mechanisms to reconcile the concerns of shareholders and managers, as well as controlling and non-controlling shareholders, including implementers of corporate governance.Agency theory subsequently demonstrates that the presence of a monitoring mechanism can mitigate opportunistic conduct that arises from agency conflict.This underscores the critical significance of the board of directors in corporate governance mechanisms, as evidenced by the agency conflict.Consequently, a competent board can mitigate earnings management.This study contributes to the accounting literature on earnings management and offers an alternative viewpoint on the moderating effect of accounting conservatism on earnings management determinants.The vulnerability of this study is that the tenure of the CEO is assessed using a dummy variable.Additional research may be undertaken to ascertain the reasons why companies exhibiting a pronounced conservatism may enhance or diminish earnings management-influencing factors in specific business contexts.Further research can examine more specific activities of conservatism, such as which activities resemble earnings management the most and why.

CONCLUSION
The objective of this study is to determine the impact of conservatism as a moderating variable in addition to earnings management determinants, including board diligence, ownership concentration, CEO ownership, and CEO tenure.The findings of this study indicate that organizations that have diligent boards will engage in less earnings management.This demonstrates that board diligence can motivate organizations to cease earnings management practices.The findings of this study demonstrate that organizations characterized by a significant concentration of ownership will have a greater capacity for engaging in earnings management activities within a company.According to the findings of this study, companies with a high CEO ownership rate will be less likely to engage in company earnings management activities.In relation to the moderating variable, empirical evidence suggests that conservatism mitigates the impact of board diligence, ownership concentration, and CEO ownership on earnings management, respectively.Nonetheless, there is no empirical evidence to suggest that conservatism mitigates the impact of CEO tenure on earnings management.This study's findings offer a useful illustration for stakeholders who ought to be more cognizant of the responsibilities of shareholders with regard to monitoring the company's operations.
BD -Board Diligence or number of board meetings attended; ∑DK Number of board of commissioners; ∑RDK: Number of board of commissioners' meetings (Chatterjee, 2020).
that rely on the reported accounting figures to mislead stakeholders regarding the economic performance of the company.This is accomplished using discretion in financial reporting and transaction preparation.In contrast, Parfet (2000) revealed that good earnings management is "reasonable and appropriate practices that are part of well-managed business operations and provide value to shareholders."He views good earnings management as occurring "where management takes action to try to create stable financial performance with acceptable voluntary business decisions.According to San Martin Reyna (2018), earnings management is a key device for managers to influence investor perceptions as measured by the wisdom that managers can have in their financial reporting.Talab et al.
ing process, with the intention of gaining some personal benefit.Healy and Wahlen (1999) found that earnings management takes place when managers alter financial reports and manipulate results in contracts (2018) stated earnings management is one of the practices that has the greatest impact on the quality of financial reporting in a company's financial reports, because it affects the accounting policy method's process for determining the company's actual performance.Furthermore, regarding board diligence, the board of commissioners is an organ within the company which has the task of supervising the actions of the directors and providing advice (Aprilian et al., 2020).Chatterjee (2020) states that Board Diligence is an additional important measure of the quality of the Board of Commissioners.Board Diligence measurements used in the study by Chatterjee (2020) is the average percentage of board meetings attended by the Board of Commissioners.In the Republic of Indonesia Financial Services Regulation Number 57/POJK.04,(2017), Article 27 paragraphs 1 and 2, the Board of Commissioners is obliged to hold a meeting at least 1 (one) time in 3 (three) months, which is attended by the majority of Investment Management and Financial Innovations, Volume 20, Issue 4, 2023 http://dx.doi.org/10.21511/imfi.20(4).2023.26 Investment Management and Financial Innovations, Volume 20, Issue 4, 2023 Econometric Views (Eiviews 11) is used to analyze the data collected.In this work, panel data regression equation model is shown in model (1): 26tp://dx.doi.org/10.21511/imfi.20(4).2023.26

Table B1 .
CEO tenure dummy percentage