Managerial ability, corporate governance, and IFRS adoption as determinants of earnings management: Evidence from Indonesia

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Earnings management practices revealed in companies are primarily determined by the role of management in providing the best performance reports for shareholders. The purpose of this study was to analyze the effect of managerial ability, independent commissioners, audit committees, quality of external auditors, and the application of International Financial Reporting Standards (IFRS) on earnings management practices. The research data were retrieved from manufacturing sector companies listed on the Indonesia Stock Exchange from 2014 to 2018. These data are analyzed using a panel data regression model. The empirical findings of the study prove that managerial ability, quality of external auditors, and the application of IFRS have a positive effect on earnings management.
In contrast, independent commissioners have a negative effect. The audit committee does not affect earnings management. This study also reveals that the variables of corporate governance mechanisms, which consist of independent commissioners, audit committees, and the quality of external auditors, have different effects on earnings management practices. This indicates that corporate governance principles have not been appropriately implemented in a company. The managerial ability has a dominant role in carrying out old management practices with various manipulations of financial statements.

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    • Table 1. Variables’ operationalization
    • Table 2. Description of statistical data
    • Table 3. Correlation analysis
    • Table 4. Chow test results of earnings management as a dependent variable
    • Table 5. LM test results of earnings management as a dependent variable
    • Table 6. Hausman test results of EM_RM as a dependent variable
    • Table 7. Hypothesis testing
    • Conceptualization
      Luqman Hakim, Endri Endri
    • Formal Analysis
      Luqman Hakim, Endri Endri
    • Funding acquisition
      Luqman Hakim, Dewi Rahayu
    • Investigation
      Luqman Hakim
    • Methodology
      Luqman Hakim, Dewi Rahayu, Endri Endri
    • Software
      Luqman Hakim
    • Validation
      Luqman Hakim, Endri Endri
    • Visualization
      Luqman Hakim, Dewi Rahayu
    • Writing – original draft
      Luqman Hakim
    • Data curation
      Dewi Rahayu
    • Project administration
      Dewi Rahayu
    • Resources
      Dewi Rahayu
    • Supervision
      Endri Endri
    • Writing – review & editing
      Endri Endri