Earnings Management Case Study

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CHAPTER 1 INTRODUCTION Background Earnings management has been widely concerned as the security issues. The different perspectives of several researchers have led to some controversies of this practice. For some researchers, earnings management is believed still in the scope of the accounting standards. Poll (2004) found, “The practice of earnings management is facilitated in the flexibility of GAAP as well as the many possible interpretations of some of the principles put forward in GAAP” (p. 72). However, numerous publications have negatively interpreted this practice as the act of manipulating some accounting policies or accounting numbers which results in the less fair financial report. Earnings management is defined as “a purposeful intervention…show more content…
The Organization for Economic Cooperation and Development (OECD) (1999) in The Indonesia Corporate Governance Manual (2014) has defined the detail corporate governance as The internal means by which corporations are operated and controlled …, which involve a set of relationships between a company’s management, its board, its shareholders, and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and shareholders, and should facilitate effective monitoring, thereby encouraging firms to use resources more efficiently. (p. 30) The OECD principles of corporate governance have been widely accepted as the endorsement of international practices of the corporate governance…show more content…
Hepworth (1953) added that the practice of income smoothing boosts the confidence of the owner due to the reported stable earnings. Several studies found that there are many objects used as the tools to smooth the income, such as incentive compensation, pension and retirement expenses, research and development cost, and sales and advertising expenses (Beidleman, 1973), loan loss provisions and charge-offs (Ma, 1988), fully diluted earnings per share (EPS), net income, net income before extraordinary items (Imhoff, 1981; Michelson, Wagner, & Wootton, 2000), operating income, and gross margin (Imhoff, 1981), pretax income and operating income after depreciation (Michelson, Wagner, & Wootton, 2000). According to DuCharme et al. (2000) in Sulistyanto and Prapti (2003), the practice of income smoothing, in essence, is the allocation of the future earnings to the current earnings and to change the current cost to the future cost, which finally create income increasing in one

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