Can Accounting Flexibility Increase or Decrease Earnings Quality?
A Case Study of Public Companies in Indonesia
DOI:
https://doi.org/10.20525/ijfbs.v14i3.3802Keywords:
Accounting Flexibility, Accrual Earning Management, Earning Response Coeficient, Earnings PersistensiAbstract
This study looks at the effect of accounting flexibility on earnings quality in public companies listed on the Indonesia Stock Exchange during the period 2016 to 2019. This study uses two models to measure earnings quality, namely ERC and earnings persistence. The results showed that accounting flexibility, namely the limitations of companies to carry out accrual earnings management, can reduce earnings quality, as shown by the abnormal accrual model which shows a significant positive coefficient direction, and for the ERC model and earnings persistence which shows a negative and significant coefficient direction. The higher the level of accrual earnings management up to a certain limit point, the more incentive company managers will have to increase accounting flexibility and switch to real earnings management (Xu and Yang, 2013; Masri, 2018). Theoretical contributions show that the higher the level of accrual earnings management up to a certain limit point, the more incentive company managers will have to increase accounting flexibility and switch to real earnings management (Xu and Yang, 2013; Masri, 2018; Purba, Surya, Joshi & Tiagy, 2023). The Implications of this research show that accounting flexibility is carried out when abnormal accruals reach the highest limit point reflected in accounting choices in net operating assets in the balance sheet, so in this case it results in a low level of earnings informativeness and earnings persistence.
Downloads
References
Abowd, J. M., Kramarz, F., & Margolis, D. N. (1999). High wage workers and high wage firms. Econometrica, 67(2), 251-333. https://doi.org/10.1111/1468-0262.00020
Barton, J., & Simko, P. J. (2002). The balance sheet as an earnings management constraint. The accounting review, 77(s-1), 1-27. https://doi.org/10.2308/accr.2002.77.s-1.1
Baik, B., Choi, S., & Farber, D. B. (2020). Managerial ability and income smoothing. The accounting review, 95(4), 1-22. https://doi.org/10.2308/accr-52600
Barari Nokashti, S., Banimahd, B., & Yaghobnezhad, A. (2018). Identifying Effective Factors on Abnormal Net Operating Assets: Testing the hypothesis of Positive Theory and Accounting Flexibility. Journal of Management Accounting and Auditing Knowledge, 7(27), 217-230. https://www.jmaak.ir/article_12917_en.html
Callao, S., Wroblewski, D., & Jarne, J. I. (2021). A systematic approach to the motivations for earnings management: A literature review. Int. j. emerg. trends soc. sci., (ART-2021-135087). 10.20448/2001.101.1.20
Chan, L. H., Chen, K. C., Chen, T. Y., & Yu, Y. (2015). Substitution between real and accruals-based earnings management after voluntary adoption of compensation clawback provisions. The Accounting Review, 90(1), 147-174. https://doi.org/10.2308/accr-50862
Cheng, C. A., & Thomas, W. B. (2006). Evidence of the abnormal accrual anomaly incremental to operating cash flows. The Accounting Review, 81(5), 1151-1167. https://doi.org/10.2308/accr.2006.81.5.1151
Chen, C., Kim, J. B., & Yao, L. (2017). Earnings smoothing: does it exacerbate or constrain stock price crash risk?. Journal of Corporate Finance, 42, 36-54. https://doi.org/10.1016/j.jcorpfin.2016.11.004
Christensen, T. E., Huffman, A., Lewis?Western, M. F., & Scott, R. (2022). Accruals earnings management proxies: Prudent business decisions or earnings manipulation?. Journal of Business Finance & Accounting, 49(3-4), 536-587. https://doi.org/10.1111/jbfa.12585
Collins, D. W., Kothari, S. P., Shanken, J., & Sloan, R. G. (1994). Lack of timeliness and noise as explanations for the low contemporaneuos return-earnings association. Journal of accounting and economics, 18(3), 289-324. https://doi.org/10.1016/0165-4101(94)90024-8
Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. Accounting review, 193-225. https://www.jstor.org/stable/248303.
Dechow, P. M., Kothari, S. P., & Watts, R. L. (1998). The relation between earnings and cash flows. Journal of accounting and Economics, 25(2), 133-168. https://doi.org/10.1016/S0165-4101(98)00020-2
Dechow, P., Ge, W., & Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of accounting and economics, 50(2-3), 344-401. https://doi.org/10.1016/j.jacceco.2010.09.001
DeFond, M. L. (2002). Discussion of the balance sheet as an earnings management constraint. Accounting Review, 29-34. https://link.gale.com/apps/doc/A97390233/AONE?u=anon~50b15a3e&sid=googleScholar&xid=2ff1fb69
Demerjian, P., Lewis-Western, M., & McVay, S. (2020). How does intentional earnings smoothing vary with managerial ability?. Journal of Accounting, Auditing & Finance, 35(2), 406-437. https://doi.org/10.1177/0148558X17748405
Fan, J. P., & Wong, T. J. (2002). Corporate ownership structure and the informativeness of accounting earnings in East Asia. Journal of accounting and economics, 33(3), 401-425. https://doi.org/10.1016/S0165-4101(02)00047-2
Francis, J., Schipper, K., & Vincent, L. (2005). Earnings and dividend informativeness when cash flow rights are separated from voting rights. Journal of accounting and economics, 39(2), 329-360. https://doi.org/10.1016/j.jacceco.2005.01.001
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
Habib, A., Ranasinghe, D., Wu, J. Y., Biswas, P. K., & Ahmad, F. (2022). Real earnings management: A review of the international literature. Accounting & Finance, 62(4), 4279-4344. https://doi.org/10.1111/acfi.12968
Hunt, A., Moyer, S., & Shevlin, T. (2000). Earnings volatility, earnings management, and equity value. Unpublished working paper. University of Washington. https://faculty.washington.edu/shevlin/hms2vol.pdf
Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Performance matched discretionary accrual measures. Journal of accounting and economics, 39(1), 163-197. https://doi.org/10.1016/j.jacceco.2004.11.002
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. The International Journal of Accounting, 49(1), 101-136. https://doi.org/10.1016/j.intacc.2014.01.001
Masri, I. (2018). The role of corporate governance in the relationships of family company with real earnings management. Jurnal Akuntansi, 22(1), 51-67. https://doi.org/10.24912/ja.v22i1.322
Purba, G. K., Surya, A. N., Joshi, P. L., & Tyagi, A. (2023). Is the Earnings Quality of Family Businesses Better Than Non-family Businesses?. Accounting & Finance Review (AFR), 8(2). https://doi.org/10.35609/afr.2023.8.2(1)
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
Roychowdhury, S., Shroff, N., & Verdi, R. S. (2019). The effects of financial reporting and disclosure on corporate investment: A review. Journal of Accounting and Economics, 68(2-3), 101246. https://doi.org/10.1016/j.jacceco.2019.101246
Sloan, R. G. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings?. Accounting review, 289-315. https://www.jstor.org/stable/248290
Subramanyam, K. R. (1996). The pricing of discretionary accruals. Journal of accounting and economics, 22(1-3), 249-281. https://doi.org/10.1016/S0165-4101(96)00434-X
Tucker, J. W., & Zarowin, P. A. (2006). Does income smoothing improve earnings informativeness?. The accounting review, 81(1), 251-270. https://doi.org/10.2308/accr.2006.81.1.251
Wang, D. (2006). Founding family ownership and earnings quality. Journal of accounting research, 44(3), 619-656. https://doi.org/10.1111/j.1475-679X.2006.00213.x
Wang, S., & D'Souza, J. (2006). Earnings management: The effect of accounting flexibility on R&D investment choices. Johnson School Research Paper Series, (33-06). http://dx.doi.org/10.2139/ssrn.878345
Xie, H. (2001). The mispricing of abnormal accruals. The accounting review, 76(3), 357-373. https://doi.org/10.2308/accr.2001.76.3.357
Xu, R. Z., & Yang, Y. (2013). Effect of Accounting Flexibility on Earnings Management through Stock Repurchases. International Business Research, 6(10), 40. http://dx.doi.org/10.5539/ibr.v6n10p40.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2025 Indah Masri
This work is licensed under a Creative Commons Attribution 4.0 International License.
Authors contributing to IJFBS agree to publish their articles under the Creative Commons Attribution- 4.0 license, allowing third parties to share their work (copy, distribute, transmit) and to adapt it, under the condition that the authors are given credit, that the work is not used for commercial purposes, and that in the event of reuse or distribution, the terms of this license are made clear. Authors retain copyright of their work, with first publication rights granted to IJFBS. However, authors are required to transfer copyrights associated with commercial use to the Publisher. The authors agree to the terms of this Copyright Notice, which will apply to this submission if and when it is published by this journal
Submission of an article implies that the work described has not been published previously( except in the form of an abstract or as part of a published lecture or academic thesis), that it is not under consideration for publication elsewhere, that its publication is approved by all authors and tacitly or explicitly by the responsible authorities where the work was carried out, and that, if accepted, it will not be published elsewhere in the same form, in English or in any other languages, without the written consent of the Publisher. The Editors reserve the right to edit or otherwise alter all contributions, but authors will receive proofs for approval before publication.
