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Vol. 22, No. 1, Juni 2020, Hlm. 113-120 E-ISSN: 2656 ± 9124
Akreditasi Sinta3 SK No. 23/E/KPT/2019 http://jurnaltsm.id/index.php/JBA

ACCOUNTING CONSERVATISM AND EARNINGS MANAGEMENT²

INDONESIAN EVIDENCE

KRISMIAJI
RATNA PUJI ASTUTI

Akademi Akuntansi YKPN Yogyakarta, Jl. Gagak Rimang No.2-4, Klitren, Gondokusuman, Yogyakarta, Indonesia
[email protected]

Abstract: This study empirically examines the effects of accounting conservatism on earnings management.
Earnings management is proxied by accrual earnings management (AEM) and measured by discretionary
accruals. Accounting conservatism is measured by accrual conservatism. This study uses data from 108
companies listed on the Indonesia Stock Exchange from 2016 to 2018. By using the Multiple Regression Model
that places earnings management as the dependent variable and accounting conservatism as an independent
variable, this study proves that accounting conservatism has a positive effect on earnings management.
Moreover, the business cycle (cycle), asset turnover (ROA), and sales growth (SG) are control variables that also
control this research model.
Keywords: Conservatism, earnings management, discretionary accruals

Abstrak: Penelitian ini secara empiris menguji pengaruh konservatisme akuntansi terhadap manajemen laba.
Manajemen laba diproksi dengan manajemen laba akrual (AEM) dan diukur dengan akrual diskresi.
Konservatisme akuntansi diukur dengan konservatisme akrual. Penelitian ini menggunakan data sebanyak 108
perusahaan yang terdaftar di Bursa Efek Indonesia dari tahun 2016 sampai tahun 2018. Dengan menggunakan
model regresi berganda yang menempatkan manajemen laba sebagai variabel dependen dan konservatisme
akuntansi sebagai variabel independen, penelitian ini membuktikan bahwa konservatisme akuntansi memiliki
pengaruh positif terhadap manajemen laba. Selain itu, siklus bisnis (cycle), perputaran aset (ROA), dan
pertumbuhan penjualan (SG) adalah variabel kontrol yang digunakan untuk mengontrol model penelitian.

Kata kunci: Konservatisme, manajemen laba, akrual diskresi.

INTRODUCTION Investors are the main supplier of

company resources. Therefore, investors need
This study investigates the effects of the complete and correct information to make
accounting conservatism on earnings investment decisions. In an efficient capital
management in the Indonesian zcompanies, market, all data should now be absorbed by
which are listed on the Indonesia Stock individuals and their influence is reflected in
Exchange (IDX) in 2016-2018. In contrast to securities (Karami et al. 2014). Financial
previous studies, this study does not separate statements present the financial position and
the accounting conservatism into the financial performance information as well as
conditional and unconditional dimensions. business financial flexibility, which is beneficial

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for users. One important information is the quality of reporting is the same, which is the
earnings information that is presented in the impact of unfairness in the financial statements.
income statement. Earnings calculations are Conservatism arises because it follows
influenced by management's standards and accounting standards, while earnings
judgments, including the timing of revenue and management is a personnel action (Ewert &
expense recognition. Management can use Wagenhofer 2011). Such situations lead to
non-conservative procedures to show the different biases between conservatism and
results of company growth (Watts 2003). earnings management. Moreover, conservatism
Although the amount of income reported is is considered good whereas earnings
important for investors and useful for their management is considered bad. Based on the
decisions, the earnings quality features are also above description, the research problem is
considered by investors (Francis et al. 2005). stated as follow:
Useful information contains quality RQ1: What is the effect of conservatism on
features. The main qualities associated with earnings management?
information content are relevant and faithful
representation. One element of faithful This manuscript is presented as
representation is neutrality. In practice, the follows. After describing the introduction in part
report compiler often faces uncertainty. one, this paper presents a literature review and
Therefore, they apply the principle of caution hypotheses development in part two. Part three
(conservatism or prudence) in justifying the outlines the research method. After outlining
uncertainty. Conservatism means that in the analysis and discussion in section four, this
uncertain conditions, the financial report paper present the conclusions, limitations of the
preparer will choose the solution that is least study, and further research opportunities in
likely to overestimate the reporting of assets or section five.
income, and or lower the burden or loss. The This study is based on agency theory.
conceptual framework of financial reporting The agency theory predicts and explains
identifies that prudence or conservatism agency relationships between principals and
conflicts with the quality of neutrality. Therefore, agents (Jensen & Meckling 1976). The
in the conceptual framework of financial principals and agent's relationship is colored by
reporting, the term conservatism is omitted in personal interests that conflict with each other.
the element of accounting information quality. This conflict of interest results in the information
Another factor that also results in the asymmetry between them. This asymmetry
bias of financial statements is earnings arises because management carries out
management, which is a considered action by a information engineering for personal gain, using
person to distort financial information from the earnings management mechanisms. This
actual conditions (Scott 2015). Earnings happens because most of the sources of stock
management connotes perversion, fraud, or market activity are financial reports issued by
mystery, similar to other criminal acts (Lo public companies that are used as a basis for
2008). Accounting scandals and the increasing making investment decisions by current and
need for tighter accounting regulations reinforce potential investors. By increasing resources
this perception (Ewert & Wagenhofer 2011). under management authority, the number of
Consistent with this view, the majority of beneficiaries associated with the company will
previous studies found that earnings also increase and conditions will create
management generally harms the financial conflicts of interest. Managers who are at the
reports quality. The consequence of center of this conflict must reduce the conflict
conservatism and earnings management on the by presenting financial information. They are

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motivated to present the management version Duellman (2012) found cross-sectional

of company information because of the differences in conservatism. Besides, Beaver
authority and opportunities they have. and Ryan (2005) implicitly acknowledge the
Therefore, there is a need for a control and possibility that conservatism can vary with
monitoring mechanism in protecting the earnings management activities.
investors' interests. Accounting principles and Extant research report mix results.
procedures for safeguarding the interests of Nahandi et al. (2012), Gao (2013), Haque et al.
stock market participants and controlling (2016), and Li & District (2018) report a negative
opportunistic incentives for managers suggest association between accounting conservatism
the principle of limiting conservatism. and earnings management, whereas Mashoka
Chen et al. (2010) state that et al. (2018) find a positive association
conservatism is a mechanism that inhibits beetween conservatism and earnings
profit-seeking incentives by managers and at management and Kermani et al. (2018) reports
the same time reduces their power to speed up that conservatism affects earnings
the good news reporting and delay the bad management. Finally, García Lara et al. (2012)
news reporting. Thus, a more conservative report mix finding. He find that conservatism
accounting procedure will reduce the effort to negatively affects accruals manipulation, and
hide bad news. Therefore, Chen (2010) positively affects real earnings management,
predicts that more conservative companies will whereas Alarlooq et al. (2014) find that
face fewer crises due to sudden bad news conditional accounting conservatism negatively
publishing. Karami et al. (2014) state that affect real earnings management, whereas
accrual accounting gives managers the right to unconditional accounting conservatism
determine profits in different time frames. Thus, positively real earnings management. Based on
managers have control over time recognition of the description above, the hypothesis
some expenses, for instance, research and formulation is as follows:
development cost, advertising expenses and so H1: Accounting conservatism is significantly
on. associated with earnings management.
García Lara et al. (2012) find that
conservatism is a tool to monitor the choice of RESEARCH METHOD
accounting procedures by management,
therefore, it can reduce the opportunities for The data used in this research is
accrual earnings management, whereas Pae Indonesian companies, which are listed on the
(2007) found that there is a negative Indonesia Stock Exchange (IDX) in the year
relationship between conservatism (conditional 2016 to 2018. The data comes from the
and non-conditional) and accruals. Beaver & company's annual report and the Indonesian
Ryan (2005) state that conditional Capital Market Directory (ICMD). Samples were
conservatism is a practice of reducing net selected by purposive sampling method with
assets value if bad news but never increase net criteria: (1) companies are listed on the IDX for
assets when the company obtains profitable three consecutive years, which is from 2016
information. The application of conditional to2018; (2) the companies have complete data
conservatism refracts earnings decline, thus it needed in this research; (3) the companies are
can function as a mechanism to overcome not the financial companies.
earnings management in the form of profit This study used one measure of
bubbles (Dunbar et al. 2007). Companies have earnings management, accrual earnings
different levels of conservatism from each management (AEM), which is measured by the
other. Beaver and Ryan (2005) and Ahmed &

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Modified Jones Model (Dechow et al. 1995) in Hayn, 2000). The more negative the accrual
equation (1) as follows: rate for three years, the more negative the
§ · accounting. The three-year average calculation
TAC it D1,it ¨¨
1 ¸ D 2it ' Re vit 'ARit D 3t
PPE it
H it
¸
© TAi ,t 1 ¹ TAi ,t 1 TAit 1 also guarantees the mitigation of large
TAC is total accrual divided by total assets, TA temporary accruals, because accruals tend to
LV WRWDO DVVHWV û5(9 is the change in revenue, reverse in one or two periods (Richardson et al.
û$5 LV WKH FKDQJH LQ DFFRXQW UHFHLYDEOHV 33( 2005). This study uses three control variables,
is gross property, plant, and equipment. The which are the business cycle (Cycle), asset
discretionary accrual for the year is the residual turnover (ROA), and sales growth (SG). The
value of equation (1). The absolute value of cycle is calculated as follows
discretionary accruals (ABSDA) is the proxy Cycle = AP cycle ± (AR cycle + Inv. cycle) (3)
and measure of accrual earnings management Asset turnover is a ratio that makes it easy to
(AEM). The higher the ABSDA number, the get data about the level of efficiency in the use
greater the AEM. of company resources and the optimal level of
To test the hypothesis, this study uses use of limited assets by management. As such,
accounting conservatism as the dependent asset turnover is calculated by dividing
variable. Givoly & Hayn (2000) state that earnings by the total assets at the beginning of
conservatism is the decrease in cumulative the period (García Lara et al. 2012). Sales
earnings for the period. They propose growth is a change in the level of annual sales
cumulative sign and volume accruals in the and is calculated by reducing the current year's
same time frame as the conservatism sales with last year's sales then the result is
measurement scale. In the absence of divided by last year's sales. To test the
conservatism, the entire profit will turn into cash hypothesis the regression model (4) is:
inflows and eventually the accrual cycle AEMit = .it + 1CONit + 2Cycle + 3ROAit +
changes to zero. The spread of negative 4SGit + 0it (4)
accruals remains over a long period, taking into
account the consistency of other conditions, RESULT
called the conservatism index. This study
follows Ahmed & Duelman (2007) who measure Descriptive statistics for research
conservatism with the accrual method and variables are presented in Table 1. As
present the measurement methods as follows. presented in Table 1 that all variables have a
NI - CFO + Dep rational variation level. The mean of AEM is
Con-Acc = (2)
AVAt 4.46 and it has a standard deviation of 0.44.
NI is net income, CFO is cash flow operation This variable has a small data distribution,
activities, Dep is depreciation expense, and which is indicated by a minimum and maximum
AVA is an average asset. Con-Acc is calculated value of 2.25 and 6.06 respectively. The mean
as a mean for 3 years, namely t-1, t1, and t + 1, of CON is 15.09 with a maximum and minimum
then multiplied by negative 1. Therefore, the value of 929.43 and of -326.18 respectively. It
calculation of the three-year mean is intended indicates that the variation of this variable data
to reduce the effects of large and temporary is quite large. This can be indicated by a
accruals. If Con-Acc is positive, it means it is standard deviation of 79.95. This means that
more conservative. The concept underlying this the sample companies have high variation
measurement is that accounting conservatism levels of conservatism.
results in persistent negative accruals (Givoly &

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Table 1 Descriptive Statistic

Variable Minimum Maximum Mean Std. Dev.
AEM 2,25 6,06 4,46 0,44
CON -326,18 929,43 15,09 79,95
Cycle -97.848 715 -1.482,49 8.397,5
ROA -0,55 3,207 0,07 0,21
SG 0,00 890,96 2,92 49,5

Table. 2 Bivariate Correlation

Variable AEM SG ROA Con-Acc
SG 0.031
ROA 0.004 0.015
Con-Acc 0.178 ** -0.003 0.054
Cycle -0.117 ** -0.824 ** 0.006 -0.104
**, *: Correlation is significant at the 0.01 level and 0.05 level respectively (2-tailed).

The pairwise correlation between This indicates that the research model can be
independent variables and the correlation used for analysis. Moreover, the table shows a
between the independent variable and the coefficient of determination (R²) of 8%. This
dependent variable are presented in Table 2. explains the relationship between the
The results of testing the correlation matrix for dependent and all independent variables. The
the study variables showed that there were no coefficient of determination for cross-data is
multicollinearity problems. The correlation relatively low because of the large variations
between the SG variable (sales growth) and the between each observation. Yet, this is simply
Cycle variable is indeed quite high, namely - one of the criteria for choosing a good model.
0,824, but this is because in the cycle variable To test the hypothesis, the variable to
calculation there is a component of sales be tested is CON, which is a proxy for
revenue. This indicates that there is no accounting conservatism. Table 3 shows that
multicollinearity problem in this study. The CON has a coefficient value of 0.013 and this is
correlation between Con-Acc (conservatism) significant at the 1% level. This result indicates
and AEM (accrual earnings management) that CON has a positive effect on AEM. This
shows a positive and significant sign. These means that accounting conservatism positively
results provide an initial indication of the effect affects for accrual earnings management. Thus,
of accounting conservatism on earnings hypothesis 1, which states that there is a
management practices and show the direction significant association between accounting
under the hypothesis. Nevertheless, the conservatism and earnings management, is
hypothesis test will be elaborated further by proven and supported by empirical data.
conducting a multivariate regression analysis in Earnings management measured using
the next session. ABSDA. The greater the ABSDA number, the
This study empirically tests the greater the accrual earnings management. The
association between accounting conservatism results of this study indicate that the
and earnings management. The regression implementation of accounting conservatism
analysis for hypothesis testing is presented in increases the accrual earnings management
Table 3. This table shows that the F value is practice. This contradicts the prior research
8.661 and significant at a level of 1% (p<0.01). conducted by Dunbar et al. (2007) who find that

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the implementation of conditional conservatism research performed by Garcia Lara et al. (2012)
refracts earnings decline so that it can function which concluded that conservatism is a tool to
as a mechanism that has the potential to monitor the choice of accounting procedures by
overcome earnings management in the form of management.
profit bubbles. This result also disputes prior

Table 3 Regression Test Result

AEMit = .it + 1CONit + 2Cycle + 3ROAit + 4SGit + 0it
Variable Coefficient t-Statistics
Intercept 4.421 *** 1411.199
SG -0.001 *** -54.193
ROA -0.038 *** -10.961
CON 0.013 *** 15.721
CYCLE -0.001 *** -21.949

Adj. R2 0.087
F-statistics 8.661 ***
***, **, *: the coefficient is significant at the level of 0.01, 0.05, and 0.1 respectively

Therefore, conservatism can reduce the associated with accrual earnings management.
opportunities for accrual earnings management This study has several limitations as follows.
and Pae (2007) who find that both conditional First, this study does not divide accounting
conservative and unconditional conservative conservatism into conditional conservatism and
have negative association with discretionary unconditional conservatism. Consequently, the
accruals. The difference results of this research results of this study are not in line with the
to the previous study is likely due to the results of previous studies. Nevertheless, this
methodology used. In this study, accounting fact provides a new discourse about the
conservatism is not broken down into measurement of accounting conservatism. This
conditional and unconditional conservatism, condition opens up the opportunity to conduct
whereas previous studies detail and examine further research by conducting an elaboration
the effect of each type of conditional of comparing two versions of conservatism
conservatism and unconditional conservatism measurement, namely accrual conservatism
on earnings management. used in this study with conditional and
unconditional used in previous studies, using
CONCLUSIONS the same data. The second limitation, this study
does not decompose accounting conservatism
This research investigates the data. The decomposition of conservatism data
association between accounting conservatism that has a large variation is likely to give more
and accrual earnings management. The results that are complete. Therefore, further
hypothesis testing result proves that accounting research needs to be done in the future by
conservatism positively affects the accrual analyzing the conservatism data that has a
earnings management. It means that large variation
accounting conservatism significantly

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