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The Influence of Good Corporate Governance and Profitability on Earnings Management in Banking Companies Listed on the Indonesia Stock Exchange (IDX) in 2015-2017

Introduction

Good Corporate Governance (GCG) is a set of practices and policies that underlie the way a company is managed and supervised. It is expected to increase transparency, accountability, and improve company performance. In the context of banking companies listed on the Indonesia Stock Exchange (IDX), GCG is measured through three main indicators: the size of the Board of Commissioners, the proportion of the Board Independent Commissioner, and Institutional Ownership. Additionally, profitability is determined using Return On Assets (ROA). This study aims to investigate the influence of GCG mechanisms on earnings management in banking companies listed on the IDX during the period 2015 to 2017.

Background

Earnings management is a practice where companies manipulate their financial reports to achieve specific goals, such as meeting earnings expectations or hiding losses. In the banking industry, earnings management can have significant consequences, including misleading investors and regulators, and undermining the stability of the financial system. Good Corporate Governance (GCG) is expected to mitigate earnings management by promoting transparency, accountability, and ethical behavior. However, the effectiveness of GCG in preventing earnings management is still a topic of debate.

Methodology

This study used a purposive sampling technique to select 20 banking companies listed on the IDX from a total of 44 companies. The data analyzed were secondary data obtained from the official website of the IDX, which includes financial reports from 2015 to 2017. The researchers used several techniques to analyze the data, including descriptive analysis, logistical regression analysis, and hypothesis testing with the help of statistical packages for the social sciences (SPSS).

Results

The results of the study showed that partially, the size of the Board of Commissioners and the proportion of the Board of Commissioners Independent had no significant influence on earnings management. Conversely, institutional ownership and return on assets (ROA) are proven to have a positive influence on earnings management in banking companies studied.

Analysis and Explanation

Understanding Good Corporate Governance (GCG) is essential to comprehend the findings of this study. GCG is a set of practices and policies that underlie the way a company is managed and supervised. It is expected to increase transparency, accountability, and improve company performance. From the results of the study showing that the size of the Board of Commissioners and the proportion of the Board of Commissioners Independent had no effect on earnings management, it might indicate that the presence of the board of commissioners who were large or more independent members did not always guarantee tighter supervision of the practice of earnings management.

Conversely, high institutional ownership has a positive effect on earnings management. This can be understood if we see that shareholder institutions tend to pay more attention to the company's long-term performance and can put pressure to maintain good accounting practices. Thus, they are more likely to encourage management to act ethically and transparently in reporting profit.

Return on Assets (ROA) also contributes significantly to earnings management. The higher ROA shows that the company uses its assets efficiently to generate profits, which has the potential to influence earnings management policies. Management may face a situation where they need to report higher profits to maintain investor confidence and improve the company's image.

Conclusion

The findings of this research are very relevant for investors, market regulators, and company management, providing deeper insights regarding the factors that influence the practice of earnings management in banking companies in Indonesia. Further attention is needed to aspects of GCG and profitability in order to improve company performance and reduce the potential for unethical accounting practices.

Recommendations

Based on the findings of this study, the following recommendations are made:

Improving GCG mechanisms: Companies should improve their GCG mechanisms, including the size of the Board of Commissioners and the proportion of the Board of Commissioners Independent, to ensure tighter supervision of earnings management practices.
Increasing institutional ownership: Institutional ownership should be increased to put pressure on management to maintain good accounting practices and act ethically in reporting profit.
Improving profitability: Companies should improve their profitability by using their assets efficiently to generate profits, which can reduce the potential for earnings management practices.

Limitations

This study has several limitations, including:

Sample size: The sample size of 20 banking companies listed on the IDX may not be representative of the entire population of banking companies in Indonesia.
Data availability: The data analyzed were secondary data obtained from the official website of the IDX, which may not be comprehensive or accurate.
Methodology: The study used a purposive sampling technique, which may not be the most effective method for selecting a representative sample.

Future Research Directions

Future research should focus on:

Investigating the effectiveness of GCG mechanisms: Further research should investigate the effectiveness of GCG mechanisms in preventing earnings management practices.
Analyzing the impact of institutional ownership: Research should analyze the impact of institutional ownership on earnings management practices.
Examining the relationship between profitability and earnings management: Research should examine the relationship between profitability and earnings management practices.

Conclusion

In conclusion, this study provides insights into the influence of Good Corporate Governance (GCG) mechanisms on earnings management in banking companies listed on the Indonesia Stock Exchange (IDX) in 2015-2017. The findings of this study are relevant for investors, market regulators, and company management, providing deeper insights regarding the factors that influence the practice of earnings management in banking companies in Indonesia. Further attention is needed to aspects of GCG and profitability in order to improve company performance and reduce the potential for unethical accounting practices.
Frequently Asked Questions (FAQs) about the Influence of Good Corporate Governance and Profitability on Earnings Management in Banking Companies Listed on the Indonesia Stock Exchange (IDX) in 2015-2017

Q: What is Good Corporate Governance (GCG)?

A: Good Corporate Governance (GCG) is a set of practices and policies that underlie the way a company is managed and supervised. It is expected to increase transparency, accountability, and improve company performance.

Q: What are the main indicators of GCG in the context of this study?

A: The main indicators of GCG in this study are:

Size of the Board of Commissioners: The number of members on the Board of Commissioners.
Proportion of the Board of Commissioners Independent: The percentage of independent members on the Board of Commissioners.
Institutional Ownership: The percentage of shares held by institutional investors.

Q: What is Return on Assets (ROA)?

A: Return on Assets (ROA) is a financial ratio that measures a company's profitability by dividing net income by total assets.

Q: What are the findings of this study?

A: The findings of this study show that:

Size of the Board of Commissioners and proportion of the Board of Commissioners Independent have no significant influence on earnings management.
Institutional ownership has a positive influence on earnings management.
Return on Assets (ROA) also contributes significantly to earnings management.

Q: What are the implications of this study?

A: The implications of this study are:

Companies should improve their GCG mechanisms to ensure tighter supervision of earnings management practices.
Institutional ownership should be increased to put pressure on management to maintain good accounting practices and act ethically in reporting profit.
Companies should improve their profitability by using their assets efficiently to generate profits, which can reduce the potential for earnings management practices.

Q: What are the limitations of this study?

A: The limitations of this study are:

Sample size: The sample size of 20 banking companies listed on the IDX may not be representative of the entire population of banking companies in Indonesia.
Data availability: The data analyzed were secondary data obtained from the official website of the IDX, which may not be comprehensive or accurate.
Methodology: The study used a purposive sampling technique, which may not be the most effective method for selecting a representative sample.

Q: What are the future research directions?

A: Future research should focus on:

Investigating the effectiveness of GCG mechanisms: Further research should investigate the effectiveness of GCG mechanisms in preventing earnings management practices.
Analyzing the impact of institutional ownership: Research should analyze the impact of institutional ownership on earnings management practices.
Examining the relationship between profitability and earnings management: Research should examine the relationship between profitability and earnings management practices.

Q: What are the practical implications of this study?

A: The practical implications of this study are:

Investors should pay attention to GCG mechanisms and institutional ownership when evaluating the performance of banking companies.
Market regulators should improve their oversight of banking companies to ensure that they are complying with GCG principles.
Company management should prioritize GCG and profitability to improve company performance and reduce the potential for earnings management practices.