Does Corporate Governance Can Reduce the Agresiveness of Earning Management in Banking Industry

DOES CORPORATE GOVERNANCE CAN REDUCE THE AGRESIVENESS OF EARNING MANAGEMENT IN BANKING INDUSTRY

Vera Diyanty

Lucky Hadian Wibisono

Abstract

This research aims to provide empirical evidence on the impact of corporate governance (CG) on the practice of earnings management in the banking industry in Indonesia. The existence of asymmetry information can provide an opportunity for management to take action in the form of opportunistic earnings management. The research was conducted on a sample of banking companies which listed in Indonesia Stock Exchange (IDX) for the years of 2005 through 2008. Indicator which used to assess corporate governance is index of CG obtained from The Indonesian Institute for Corporate Directorship (IICD), and for assessing earnings management is use discretionary accruals as measured by the model of Beaver and Engle

The results of this research show that the CG does not affect the practice of earnings management. The main reason for this is because the CG was applied in the banking industry based on an assessment of the IICD range in “fair” rating, where this shows that being “fair” was still insufficient to reduce the motivation for earnings management.

Key words: agency theory, corporate governance, earnings management.

1. INTRODUCTION

There are two forms of agency relationship in existence: (1) Separation of roles between managers and shareholders (2) Separation between managers and lenders. In separating the roles between managers and investors, it is possible that there is a lack of harmony in the relationship between the two entities. This lack of harmony is collectively referred to as agency conflict, which may lead to agency costs to be borne by the principals.

The existence of agency conflict encourages the management to take opportunistic actions that could affect the quality of earning, one of which is by performing earnings management. The motivations in doing opportunistic actions undertaken...