TOP MANAGEMENT EXPERTISE AND REAL PROFIT MANAGEMENT: MODERATING ROLES OF AUDIT COMMITTEES AND INDEPENDENT COMMISSIONERS

Fajar Odiatma; Atika Zarefar; Rheny Afriana Hanif; Rezi Abdurrahman; Raja Multi Konvokesen Adiman

doi:10.37301/jkaa.v22i1.291

Authors

Fajar Odiatma Faculty of Economic & Business, University of Riau
Atika Zarefar Faculty of Economic & Business, University of Riau
Rheny Afriana Hanif Faculty of Economic & Business, University of Riau
Rezi Abdurrahman Faculty of Economic & Business, University of Riau
Raja Multi Konvokesen Adiman Faculty of Economic & Business, University of Riau

DOI:

https://doi.org/10.37301/jkaa.v22i1.291

Keywords:

Audit Committees, Good Corporate Governance, Real Earnings Management, Top Management Teams

Abstract

This study examines the effects of independent board and audit committee expertise on Top Management Teams (TMT) and Real Earnings Management (REM) relationships.The sample in this study is manufacturing companies listed on the Indonesia Stock Exchange (IDX) for the period 2015 – 2024 with a total of 240 companies. Analysis of the research model using General Least Square (GLS). TMT financial and accounting skills are positively associated with REM. On the other hand, the financial and accounting expertise of the independent board and audit committee has a negative impact on the relationship between TMT and REM expertise. Other findings show consistent results for family firms and non-family firms. These findings are relevant and have implications for public policies related to good corporate governance (GCG), especially in countries with a two-tier system. The impact of the financial and accounting expertise of independent board and audit committee as a moderating variable in the relationship between TMT expertise and REM practices is still rare, especially in countries with two-tier systems. The results of this study show the importance of financial and accounting expertise from independent board and audit committees for effective control mechanisms that can ultimately reduce information asymmetry, especially information related to company profits.

References

Abbott, L. J., Parker, S., & Peters, G. F. (2004). Audit Committee Characteristics And Restatements. In Auditing (Vol. 23, Issue 1).

Agrawal, A., & Chadha, S. (2005). Corporate Governance And Accounting Scandals. Journal Of Law And Economics, 48(2), 371–406. Https://Doi.Org/10.1086/430808

Agustia, D., Muhammad, N. P. A., & Permatasari, Y. (2020). Earnings Management, Business Strategy, And Bankruptcy Risk: Evidence From Indonesia. Heliyon, 6(2). Https://Doi.Org/10.1016/J.Heliyon.2020.E03317

Aladwey, L., Elgharbawy, A., & Ganna, M. A. (2022). Attributes Of Corporate Boards And Assurance Of Corporate Social Responsibility Reporting: Evidence From The UK. Corporate Governance (Bingley), 22(4), 748–780. Https://Doi.Org/10.1108/CG-02-2021-0066

Alqatamin, R. M., Aribi, Z. A., & Arun, T. (2017). The Effect Of The CEO’s Characteristics On EM: Evidence From Jordan. International Journal Of Accounting And Information Management, 25(3), 356–375. Https://Doi.Org/10.1108/IJAIM-10-2016-0099

Aluchna, M., Mahadeo, J. D., & Kamiński, B. (2020). The Association Between Independent Directors And Company Value. Confronting Evidence From Two Emerging Markets. Corporate Governance: The International Journal Of Business In Society, 20(6), 987–999. Https://Doi.Org/10.1108/CG-08-2019-0263

Arora, A., & Sharma, C. (2016). Corporate Governance And Firm Performance In Developing Countries: Evidence From India. Corporate Governance, 16(2), 420–436. Https://Doi.Org/10.1108/Cg-01-2016-0018

Badolato, P. G., Donelson, D. C., & Ege, M. (2014). Audit Committee Financial Expertise And Earnings Management: The Role Of Status. Journal Of Accounting And Economics, 58(2–3), 208–230. Https://Doi.Org/10.1016/J.Jacceco.2014.08.006

Barth, M., Beaver, W., & Landsman, W. (1996). The Relevance Of Value Relevance Research. Value-Relevance Of Banks’ Fair Value Disclosures Under SFAS No. 107, 71(4).

Barth, M. E. (1994). Fair Value Accounting: Evidence From Investment Securities And The Market Valuation Of Banks. The Accounting Review, 69(1), 1–25. Http://Www.Jstor.Org/Stable/248258

Beasley, M. S., Carcello, J. V., Hermanson, D. R., & Neal, T. L. (2009). The Audit Committee Oversight Process. Contemporary Accounting Research, 26(1), 65–122. Https://Doi.Org/10.1506/Car.26.1.3

Bédard, J., Chtourou, S. M., & Courteau, L. (2004). The Effect Of Audit Committee Expertise, Independence, And Activity On Aggressive Earnings Management. Auditing, 23(2), 13–35. Https://Doi.Org/10.2308/Aud.2004.23.2.13

Bédard, J., & Gendron, Y. (2010). Strengthening The Financial Reporting System: Can Audit Committees Deliver? International Journal Of Auditing. Https://Doi.Org/10.1111/J.1099-1123.2009.00413.X

Beeks, W., Pope, P., & Young, S. (2004). The Link Between Earnings Timeliness, Earnings Conservatism And Board Composition: Evidence From The UK. Corporate Governance (Bingley), 12(1), 47–59.

Bhagat, S., & Bolton, B. (2008). Corporate Governance And Firm Performance. Journal Of Corporate Finance, 14(3), 257–273. Https://Doi.Org/10.1016/J.Jcorpfin.2008.03.006

Bouaziz, D., Salhi, B., & Jarboui, A. (2020). CEO Characteristics And Earnings Management: Empirical Evidence From France. Journal Of Financial Reporting And Accounting, 18(1), 77–110. Https://Doi.Org/10.1108/JFRA-01-2019-0008

Cannella, B., Finkelstein, S., & Hambrick, D. C. (2009). Strategic Leadership: Theory And Research On Executives, Top Management Teams, And Boards. Strategic Leadership: Theory And Research On Executives, Top Management Teams, And Boards, 1–448. Https://Doi.Org/10.1093/Acprof:Oso/9780195162073.001.0001

Chan, L. H., Chen, K. C. W., Chen, T. Y., & Yu, Y. (2015). Substitution Between Real And Accruals-Based Earnings Management After Voluntary Adoption Of Compensation Clawback Provisions. Accounting Review, 90(1), 147–174. Https://Doi.Org/10.2308/Accr-50862

Chatterjee, R., & Rakshit, D. (2020). Association Between Earnings Management And Corporate Governance Mechanisms: A Study Based On Select Firms In India. Global Business Review. Https://Doi.Org/10.1177/0972150919885545

Cohen, D. A., Dey, A., & Lys, T. Z. (2008). Real And Accrual-Based Earnings Management In The Pre- And Post-Sarbanes-Oxley Periods. Accounting Review, 83(3), 757–787.

Cohen, D. A., & Zarowin, P. (2010). Accrual-Based And Real Earnings Management Activities Around Seasoned Equity Offerings. Journal Of Accounting And Economics, 50(1), 2–19. Https://Doi.Org/10.1016/J.Jacceco.2010.01.002

Cornett, M., Marcus, A., & Tehranian, H. (2008). Corporate Governance And Pay-For-Performance: The Impact Of Earnings Management. Journal Of Financial Economics, 87, 357–373. Https://Doi.Org/10.1016/J.Jfineco.2007.03.003

Dechow, P. M., Myers, L. A., & Shakespeare, C. (2010). Fair Value Accounting And Gains From Asset Securitizations: A Convenient Earnings Management Tool With Compensation Side-Benefits. Journal Of Accounting And Economics, 49(1–2), 2–25. Https://Doi.Org/10.1016/J.Jacceco.2009.09.006

Dechow, P., & Skinner, D. (2000). Earnings Management: Reconciling The Views Of Accounting Academics, Practitioners, And Regulators. Accounting Horizons, 14. Https://Doi.Org/10.2139/Ssrn.218959

Dezoort, F. T., & Salterio, S. E. (2001). The Effects Of Corporate Governance Experience And Financial-Reporting And Audit Knowledge On Audit Committee Members’ Judgments. Auditing, 20(2), 31–47. Https://Doi.Org/10.2308/Aud.2001.20.2.31

Dhaliwal, D., Naiker, V., & Navissi, F. (2010). The Association Between Accruals Quality And The Characteristics Of Accounting Experts And Mix Of Expertise On Audit Committees. Contemporary Accounting Research, 27(3), 787–827. Https://Doi.Org/10.1111/J.1911-3846.2010.01027.X

Dieu, M. V. T. (2019). The Effect Of Board Of Directors’ Characteristics On Earnings Management-Empirical Evidence From Finnish Non-Financial Listed Companies. Hanken School Of Economics.

Ewert, R., & Wagenhofer, A. (2005). Economic Effects Of Tightening Accounting Standards To Restrict Earnings Management. In Accounting Review (Vol. 80, Issue 4, Pp. 1101–1124). Https://Doi.Org/10.2308/Accr.2005.80.4.1101

Fama, E. F., & Jensen, M. C. (1983). Separation Of Ownership And Control. Journal Of Law And Economics, 26(2), 301–325. Https://Doi.Org/10.1086/467037

Farooq, M., Noor, A., & Ali, S. (2022). Corporate Governance And Firm Performance: Empirical Evidence From Pakistan. Corporate Governance (Bingley), 22(1), 42–66. Https://Doi.Org/10.1108/CG-07-2020-0286

Ge, W., & Kim, J. B. (2014). Real Earnings Management And The Cost Of New Corporate Bonds. Journal Of Business Research, 67(4), 641–647. Https://Doi.Org/10.1016/J.Jbusres.2013.01.021

Githaiga, P. N., Muturi Kabete, P., & Caroline Bonareri, T. (2022). Board Characteristics And Earnings Management. Does Firm Size Matter? Cogent Business And Management, 9(1). Https://Doi.Org/10.1080/23311975.2022.2088573

Gounopoulos, D., & Pham, H. (2018). Financial Expert Ceos And Earnings Management Around Initial Public Offerings. International Journal Of Accounting, 53(2), 102–117. Https://Doi.Org/10.1016/J.Intacc.2018.04.002

Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The Economic Implications Of Corporate Financial Reporting. Journal Of Accounting And Economics, 40(1–3), 3–73. Https://Doi.Org/10.1016/J.Jacceco.2005.01.002

Gunny, K. A. (2005). What Are The Consequences Of Real Earnings Management? [University Of California]. Https://Doi.Org/10.1063/1.1774702

Gunny, K. A. (2010). The Relation Between Earnings Management Using Real Activities Manipulation And Future Performance: Evidence From Meeting Earnings Benchmarks. Contemporary Accounting Research, 27(3), 855–888. Https://Doi.Org/10.1111/J.1911-3846.2010.01029.X

Haji-Abdullah, N. M., & Wan-Hussin, W. N. (2015). Related Party Transactions, Audit Committees And Real Earnings Management: The Moderating Impact Of Family Ownership. Advanced Science Letters, 21(6), 2033–2037. Https://Doi.Org/10.1166/Asl.2015.6195

Hambrick, D. C. (2007). Upper Echelons Theory: An Update. The Academy Of Management Review, 32(2), 334–343. Http://Www.Jstor.Org/Stable/20159303

Hambrick, D. C., Finkelstein, S., & Mooney, A. C. (2005). Executive Job Demands: New Insights For Explaining Strategic Decisions And Leader Behaviors. The Academy Of Management Review, 30(3), 472–491. Http://Www.Jstor.Org/Stable/20159139

Hambrick, D. C., & Mason, P. A. (1984). Upper Echelons: The Organization As A Reflection Of Its Top Managers. Academy Of Management Review, 9(2), 193–206. Https://Doi.Org/10.5465/Amr.1984.4277628

Healy, P. M., & Wahlen, J. M. (1999). A Review Of The Earnings Management Literature And Its. Accounting Horizons, 13(4), Pp.365-383. Http://Www.Aaajournals.Org/Doi/Abs/10.2308/Acch.1999.13.4.365

Hiebl, M. (2014). Upper Echelons Theory In Management Accounting And Control Research. Journal Of Management Control, 24, 223–240. Https://Doi.Org/10.1007/S00187-013-0183-1

Ho, J., Huang, C. J., & Karuna, C. (2020). Large Shareholder Ownership Types And Board Governance. Journal Of Corporate Finance, 65(June), 101715. Https://Doi.Org/10.1016/J.Jcorpfin.2020.101715

Hossain, M., Mitra, S., Rezaee, Z., & Sarath, B. (2011). Corporate Governance And Earnings Management In The Pre- And Post-Sarbanes-Oxley Act Regimes: Evidence From Implicated Option Backdating Firms. Journal Of Accounting, Auditing And Finance, 26(2), 279–315. Https://Doi.Org/10.1177/0148558X11401218

Ibrahim, G., Mansor, N., & Ahmad, A. U. (2020). The Mediating Effect Of Internal Audit Committee On The Relationship Between Firms Financial Audits And Real Earnings Management. International Journal Of Scientific And Technology Research, 9(4), 816–822.

Jensen, M. C., & Meckling, W. H. (1976). Theory Of The Firm: Managerial Behaviour, Agency Cost And Ownership Stucture. Journal Of Financial Economics, 3, 305–360. Https://Doi.Org/10.1177/0018726718812602

Kalbers, L.P. And Fogarty, T. . (1993). Audit Committee Effectiveness An Empirical Investigation. Auditing, 12(1), 24–29.

Kao, L., & Chen, A. (2004). THE EFFECTS OF BOARD CHARACTERISTICS ON EARNINGS MANAGEMENT. Corporate Ownership & Control, 1(3), 96–107. Https://Doi.Org/10.3969/J.Issn.1004-132X.2015.18.023

Kao, M. F., Hodgkinson, L., & Jaafar, A. (2019). Ownership Structure, Board Of Directors And Firm Performance: Evidence From Taiwan. Corporate Governance (Bingley), 19(1), 189–216. Https://Doi.Org/10.1108/CG-04-2018-0144

Khatib, S. F. A., Abdullah, D. F., Elamer, A., & Hazaea, S. A. (2022). The Development Of Corporate Governance Literature In Malaysia: A Systematic Literature Review And Research Agenda. Corporate Governance (Bingley), 22(5), 1026–1053. Https://Doi.Org/10.1108/CG-12-2020-0565

Kim, B. H., Lei, L., & Pevzner, M. (2010). Debt Covenant Slack And Real Earnings Management.

Kuo, J. M., Ning, L., & Song, X. (2014). The Real And Accrual-Based Earnings Management Behaviors: Evidence From The Split Share Structure Reform In China. International Journal Of Accounting, 49(1), 101–136. Https://Doi.Org/10.1016/J.Intacc.2014.01.001

Li, C., Tseng, Y., & Chen, T. K. (2016). Top Management Team Expertise And Corporate Real Earnings Management Activities. Advances In Accounting, 34, 117–132. Https://Doi.Org/10.1016/J.Adiac.2016.07.007

Ma, Z., Novoselov, K. E., Zhou, K., & Zhou, Y. (2019). Managerial Academic Experience, External Monitoring And Financial Reporting Quality. Journal Of Business Finance And Accounting, 46(7–8), 843–878. Https://Doi.Org/10.1111/Jbfa.12398

Mangena, M., & Pike, R. (2005). The Effect Of Audit Committee Shareholding, Financial Expertise And Size On Interim Financial Disclosures. Accounting And Business Research, 35(4), 327–349. Https://Doi.Org/10.1080/00014788.2005.9729998

Masmoudi Mardessi, S., & Makni Fourati, Y. (2020). The Impact Of Audit Committee On Real Earnings Management: Evidence From Netherlands. Corporate Governance And Sustainability Review, 4(1), 33–46. Https://Doi.Org/10.22495/Cgsrv4i1p3

Mishra, R., & Kapil, S. (2017). Effect Of Ownership Structure And Board Structure On Firm Value: Evidence From India. Corporate Governance (Bingley), 17(4), 700–726. Https://Doi.Org/10.1108/CG-03-2016-0059

Mizruchi, M. S. (1983). Who Controls Whom? An Examination Of The Relation Between Management And Boards Of Directors In Large American Corporations. The Academy Of Management Review, 8(3), 426–435. Https://Doi.Org/10.2307/257831

Mohiuddin, M., & Karbhari, Y. (2010). Audit Committee Effectiveness: A Critical Literature Review. AIUB Journal Of Business And Economics, 9, 97–125.

Nielsen, C., & Dane‐Nielsen, H. (2010). The Emergent Properties Of Intellectual Capital: A Conceptual Offering. Journal Of Human Resource Costing & Accounting, 14(1), 6–27. Https://Doi.Org/10.1108/14013381011039771

Nugroho, B. Y., & Eko, U. (2011). Board Characteristics And Earning Management. Journal Of Administrative Science & Organization, 18(1), 1–10.

Osma, B. G. (2008). Independent board And Real Earnings Management: The Case Of R&D Expenditure. Corporate Governance (Bingley), 16(2), 116–131. Https://Doi.Org/10.1111/J.1467-8683.2008.00672.X

Pareek, R., & Sahu, T. N. (2022). How Far The Ownership Structure Is Relevant For CSR Performance? An Empirical Investigation. Corporate Governance (Bingley), 22(1), 128–147. Https://Doi.Org/10.1108/CG-10-2020-0461

Park, M., Park, T., & Ro, B. (1999). Fair Value Disclosures For Investment Securities And Bank Equity: Evidence From SFAS No. 115. Journal Of Accounting, Auditing And Finance, 14. Https://Doi.Org/10.1177/0148558X9901400311

Qi, B., Lin, J. W., Tian, G., & Lewis, H. C. X. (2018). The Impact Of Top Management Team Characteristics On The Choice Of Earnings Management Strategies: Evidence From China. Accounting Horizons, 32(1), 143–164. Https://Doi.Org/10.2308/Acch-51938

Razzaque, R. M. R., Ali, M. J., & Mather, P. R. (2016). Real Earnings Management In Family Firms: Evidence From An Emerging Economy. Pacific Basin Finance Journal, 40, 237–250. Https://Doi.Org/10.1016/J.Pacfin.2015.12.005

Roychowdhury, S. (2006). Earnings Management Through Real Activities Manipulation. Journal Of Accounting And Economics, 42(3), 335–370. Https://Doi.Org/10.1016/J.Jacceco.2006.01.002

Ruch, G. W., & Taylor, G. (2015). Accounting Conservatism: A Review Of The Literature. Journal Of Accounting Literature, 34(C), 17–38. Https://Econpapers.Repec.Org/Repec:Eee:Joacli:V:34:Y:2015:I:C:P:17-38

Sae-Lim, P., & Jermsittiparsert, K. (2019). Audit Committee And Earnings Quality. International Journal Of Innovation, Creativity And Change, 6(2), 335–347. Https://Doi.Org/10.108/CG-02-2011-0009

Salleh, Z., & Stewart, J. (2012). The Impact Of Expertise On The Mediating Role Of The Audit Committee. Managerial Auditing Journal, 27(4), 378–402. Https://Doi.Org/10.1108/02686901211217987

Sharma, V., Naiker, V., & Lee, B. (2009). Determinants Of Audit Committee Meeting Frequency: Evidence From A Voluntary Governance System. Accounting Horizons, 23(3), 245–263. Https://Doi.Org/10.2308/Acch.2009.23.3.245

Siregar, S. V., & Utama, S. (2008). Type Of Earnings Management And The Effect Of Ownership Structure , Firm Size , And Corporate-Governance Practices : Evidence From Indonesia. The International Journal Of Accounting, 43, 1–27. Https://Doi.Org/10.1016/J.Intacc.2008.01.001

Sy, A., & Tinker, T. (2005). Archival Research And The Lost Worlds Of Accounting. Accounting History, 10(1), 47–69. Https://Doi.Org/10.1177/103237320501000103

US Goverment. (2020). SARBANES-OXLEY ACT OF 2002.

Vorst, P. (2016). Real Earnings Management And Long-Term Operating Performance: The Role Of Reversals In Discretionary Investment Cuts. Accounting Review, 91(4), 1219–1256. Https://Doi.Org/10.2308/Accr-51281

Watts, R. L., & Zimmerman, J. L. (1990). Positive Accounting Theory: A Ten Year Perspective. The Accounting Review, 65(1), 131–156.

Zalata, A. M., Tauringana, V., & Tingbani, I. (2018). Audit Committee Financial Expertise, Gender, And Earnings Management: Does Gender Of The Financial Expert Matter? International Review Of Financial Analysis, 55(October 2017), 170–183. Https://Doi.Org/10.1016/J.Irfa.2017.11.002