ANALYSIS OF FINANCIAL REPORT COVERAGE RATIO EFFECT OF EARNINGS MANAGEMENT (Emperical Study on Manufacture Enterprises Listed in Jakarta Stock Exchange, 2001-2003)

Siti K, N.A.

2007 | Skripsi | S1 Extention - Accounting

Earnings management is a new phenomenon, which has contributed to the development of accounting theory. The term earnings management occurs as a direct consequence of the efforts undertaken by managers or preparers of financial statements in an attempt to affect accounting information, especially earnings, for his/her own and/or company"s benefits. Earnings management can not be interpreted as a negative action since it does not solely concern with earnings manipulation. Practically earnings management occurs in condition of asymmetric information between among internal-external enterprises. Detection of the possibility of earnings management practices can be traced by accrual usage. Accrual accounting model used in earnings management can be arranged in both discretionary and non discretionary accrual. Non discretionary is part of component accusing during the enterprise activity changes. In contrast, discretionary accrual is component which the manager practices earnings management. Accrual policy addressed by manager should be covered in financial report. Such coverage in financial report can be transformed in the form of a notes an financial report used to minimize information gap between managers as financial reporters and outsider as financial report users. Coverage ratio in financial report will always be influenced by managers judgment. The higher ratio, that almost reaches full disclosure, will decrease asymmetric information between manager and financial report users. Asymmetric information is necessary condition for earnings management practices (Trueman and Titman, 1998, as ciced in Veronica, 2003). Therefore coverage ratio is negatively related to earnings management, enterprise with minimal coverage ratio sends to practice earnings management and vice versa (Lobo and Zhoo, 2001 as cited in Veronica, 2003). Keywords: Earnings management, Discretionary Accrual, Nondiscretionary Accrual, Coverage Ratio Effect, Asymmetric Information.

Kata Kunci : Earnings management, Discretionary Accrual, Nondiscretionary Accrual, Coverage Ratio Effect, Asymmetric Information