REAL EARNINGS MANAGEMENT AND ACCRUAL BASED EARNINGSMANAGEMENT ON MANUFACTURING COMPANY IN INDONESIA

Dedi Adieb Nugroho Mercubuana University, Jakarta

e-mail: dedi_1412@yahoo.co.id

Abstract

Earnings Management is a management action to intervene in theprocess of preparing financial statements with a view to improving theirwell-being personally and also the interests of the company. Real earningsmanagement and accrual based earnings management are twointerchangeable tools depending on the level of each of the two charges ofthe earnings management tool. Zang (2012) have shown empirically theexistence of trade-off or exchange between two devices such strategies.This study the manipulation of real activity proxied follow Rowchodhurymodels (2006), while the manipulation of accruals proxies by accrualsdiscretional using Jones(1991) model.

      This study aims to empirically prove the existence of a manufacturingcompany in Indonesia indications for two earnings management tool. Theperiod of observation period was 3 years (2010-2012) and the method ofstatistical analysis used is multiple regression.

      These results indicate that the sample of manufacturing firms inIndonesia in the period of observation using two strategies, real earningsmanagement and accruals based earnings management on the relativecosts of each strategy. Audit tenure and accounting flexibility in samplefirms are more likely at higher levels using accrual-based manipulation.KAP Big4 more likely a higher level in using of real earnings management.Financial Distress and ownership institution tend to use accrual-basedearnings management at a higher level.

Keywords: Real earnings management, accrual based earningsmanagement, audit tenure, KAP Big4, accounting flexibility. financialdistress and ownership institution.

INTRODUCTION

       In Indonesia, cases of manipulation scandalfinancial statements, such as PT. Lippo Tbk andPT.Kimia Farma Tbk also involves financial reporting(financial reporting) that originated from undetectedmanipulation (Gideon, 2005). Case rejected Telkom'sfinancial statements audited by KAP Eddy Pianto by theUS SEC (US Securities and Exchange Commission) forperformance in 2002, double the financial reportingperformed by Lippo Bank in 2002. The phenomenon thatoccurred in recent years the existence of proof by someresearchers about the real activities manipulationcarried out by the company in various countries.Research conducted by Thomas and Zhang (2002), foundthat the company made large-scale production with theaim to increase reported earnings. Similarly, researchconducted by Rowchowdhury (2006), by using a proxyabnormal production costs, abnormal operating cash flowand abnormal discretionary expenses. Previous researchhas shown evidence that the company manipulates realactivity for profit management as Roychowdhury, (2006),Graham et al, (2005). Research conducted by Cohen etal, (2008), Cohen and Zarowin, (2010), Badertscher2011) , there is evidence that the company makes ordoes two choices between two earnings managementstrategy.

         Zang, (2012) points out that the implicationsof the decision of the trade-off of a manager due tocost issues and the different times of the two earningsmanagement strategies. First, because both of them areactivities that require expensive, option for theactions of the company doing the real trade offmanipulation of activity compared to the manipulationof accruals based on high and low costs of these twostrategies. That is, when one of the manipulationactivities are relatively more expensive, then thecompany will carry out activities other manipulations.Because companies face different costs and constraintsfor the two approaches earnings management, the managerwill show different abilities to use two strategies.Second, the real activities manipulation must be doneduring the fiscal year and realized at the end of thefiscal year, after the real activities manipulationthat is done then the manager still has the opportunityto adjust the accrual manipulation. This timedifference implies that the manager will adjust basedon the manipulation of real activity. Therefore thereis also a direct substitution relationship between thetwo, if the real activities manipulation unexpectedlyhigh or low, then the manager will decrease or increasethe amount of manipulation of accruals.

        In the study the trade-off between realactivity manipulation and manipulation of accruals.Cohen et al. (2008), Post-SOX, indicating a decrease inthe level of manipulation of accruals, while increasingthe level of real activity manipulation. both as aresult of the post-SOX is an increase oversight of theaccounting practices. Cohen and Zarowin (2010), showsthat the company indicated involvement in the form ofearnings management in company stock offering. Researchresults indicate that manipulation of real activity ispositively correlated with the cost accrualmanipulation. Empirical evidence research Zang (2012),that the implications of the time difference between

the two approaches due to the manipulation of earningsmanagement in real activity should occur during thefiscal year, but the accrual-based manipulation canoccur after the end of the fiscal year, and the managercan adjust the amount of the value of the latter basedon the realization previously. This study demonstratesa direct substitution between the two approaches at theend of the year when the real activities manipulationis realized. A real activities manipulation sudden highor low realized directly and then offset by the amountthat is higher or lower than the accrual-basedmanipulation.

LITERATURE

2.1 Agency Theory

       Agency theory concept introduced by Jensen &Meckling in 1976, this concept expressed in thescientific paper on the theory of the firm, whichdiscusses the relationship of managerial behavior,agency costs and ownership structure. Jensen andMeckling (1976) states that the managerial shareownership can help unite the interests between managersand shareholders alike would want a qualitypresentation of information in financial reporting.With an increasing proportion of managerial ownership,the manager not only as an agent but also the owner andit makes conflicts of interest between owners andmanagers manager. Reduced conflict between owners andmanagers due to decreasing bonus motives who want toobtain the manager, so that earnings management bymeans of the usual maximation income managers toachieve profit targets are also reduced.

2.2 Accrual-Based Manipulation

       One is the size of the company's performance is

often used as a basis for decision-making is the profitgenerated (Subramayam, 1996) measured on an accrualbasis. Accrual earnings considered a better measure theperformance of the company compared to operating cashflow due to the accrual reduce or can overcome theproblem of lack of time and lack of harmony containedin the use of cash flows in the short term (Dechow,1994). But the flexibility that is always open in theimplementation of generally accepted accountingprinciples, lead management can choose from a wideselection of accounting policies existing policy, whichin turn allows the flexibility of earnings managementby board board of directors of the company. Researchconducted by Healy, 1985, D'Angelo, 1986, Jones (1991)on discretionary Accruals has shown that firmsundertake capital market earnings management withaccrual-based manipulation techniques.

2.3 Real Activities Manipulation (REM)

        According Roychowdhury (2006) earningsmanagement activities through manipulation of realactivity is an activity that is moved from the normaloperational practice, which is motivated by a managerwho has a desire to mislead some stakeholders tobelieve that certain financial reporting purposes havebeen met in normal operation. Manipulation of realactivities conducted by management through the dailyactivities of the company during the current accountingperiod. There are two underlying reasons for choosingearnings management through real activitiesmanipulation rather than manipulation of accrualsnamely:(1) manipulation of accruals is often used as thecenter of observation or inspection by auditors andregulators. So that the accounting choices maderelating to the accrual at the company have a greaterrisk for inspection by the authorities in the capitalmarket and the company will get sanctions if found

guilty of irregularities generally accepted accountingstandards with the aim to manipulate earnings.(2) Only focuses attention on accrual manipulation is arisky action. In addition, companies may have limitedflexibility to adjust the accrual, such limitations inreporting discretionary accruals (Graham et al., 2005,in Murhadi, 2009).

2.4 Real Activities Manipulation Techniques

The technique can be performed in realactivities manipulation include sales management,overproduction, and a reduction in discretionaryspending (Roychowdhury, 2006). Sales managementcircumstances regarding the managers try to increasesales during the accounting period in order to increaseprofits to meet profit targets by offering a lowinterest rate loan until the end of the accountingperiod. The next technique is to perform large-scaleproduction (overproduction). Production on a largescale causing fixed overhead costs divided by thenumber of units of large goods so that the average costper unit and the cost of goods sold decreased. Thomasand Zhang (2002) find that firms undertake large-scaleproduction with the aim to increase reported earnings.Raise profits or avoid negative profit or loss can alsobe done by reducing discretionary spending.Discretionary costs can be reduced is the cost ofadvertising, research and development costs, and costof sales, general, and administrative expenses such asemployee training and repair costs and travel. Oktorinaand Hutagaol (2008) states that the purpose of the realactivities manipulation is performed to avoid reportinglosses by using factors that affect the reportedearnings that accounts into the income statement.Research Oktorina and Hutagaol (2008) find that firmstend to manipulate the real activity report cash flowsoperating activities abnormally lower than it should

be. Graham et al. (2005) found that managers prefer thereal activities manipulation compared using accrual-based manipulation. This is in line with the Zang(2012), states that the manager prefers manipulation ofreal activity compared to the accrual-basedmanipulation, but the manager retains these twotechniques to achieve the desired profit. This allowsthe company can make the accrual-based manipulationtechniques and manipulation of real activity togethereither by way of substitution or simultaneously.

2.5 Auditor Quality

         Related to the case of Enron and ArthurAndersen that caused the enactment of the Sarbanes-Oxley Act in July 2002. Following the enactment, theauditor is expected to use a more robust audit processand to take steps more conservative in deciding whetherto issue a going concern or opinion that meet anotherrequirement for the company financially distressedbecause of the risks associated with the audit, as wellas liability insurance and other related costs,increased significantly. As an intermediary betweenproviders and users of financial statements, the mostfundamental assessment of an auditor is to evaluate theability of the client to continue operating in itssurvival. Research on the quality of post sarbane-Oxley auditors such as Ryu et al (2006), Myers et al.(2003) in Zang (2012) states that a significant andnegative relationship between accrual manipulation andcontrol of the Big 8 auditors versus non-Big 8.Research conducted by Dwi Ratmono, (2010) measured thequality auditors proxy auditor industry specializationskills. Size of industry expertise to use proxy marketshares used by Khrisnan (2003).

2.6 Institutional Ownership

       Research results Jiambavo et al (1996), in

Herawaty (2008) found that the absolute value ofdiscretionary negatively related to institutionalownership. The results of the study states that thereis a feedback effect of institutional ownership mayreduce earnings management is done by the company. Ifthe efficient management of the profits highinstitutional ownership will boost earnings managementbut if the management of the company profits are justopportunistic, the high institutional ownership willreduce earnings management. And the companies whoseshares are owned by institutions will also restrictmanagers in earnings management practices. Shareownership by institutional investors, Moh'd et al.(1998) in Pratana and Mas'ud (2003) states thatinstitutional investors are the ones that can monitoran agent with a large percentage of ownership, so themotivation of managers to manage earnings to bereduced.

2.7 Accounting Flexibility

       The ability of a manager earning managementdepends on the availability of existing accountingflexibility. The higher level of flexibility in the useof accounting accounting methods to manage earnings,the higher the level of manipulation that will beperformed by a manager. With the strict supervisionconducted by outside parties will have an impactincreasingly difficult to perform earnings management,accounting practices have been arranged in the use ofthe method of accounting based on accounting principlesgenerally accepted, however due to the option of usingaccounting methods are used inconsistently then theresulting motivation to manipulate that motivated overparticular interests.2.8 Hypothesis

2.8.1 Relative Cost

        Consistent with previous research on someearnings management strategy, predicted that managersuse real activities manipulation and manipulation ofaccrual as a substitute for one another to achieve adesired profit target company. Manipulation of realactivity and accrual-based manipulation is an expensiveactivity. The company is likely to face differentlevels of constraints for each strategy, which willresult in a wide range of abilities to use. The trade-off decisions by managers depends on the relative costof the costliness of two methods of earningsmanagement, which in turn is determined by thecondition of the company's operations and accountingenvironment. That is, if desired income level, thepolicy is not limited to the earnings management tool,then the manager will make more use of otheralternatives. From these two hypotheses are formulated:

H1: The use of real activities manipulation strategy and manipulationof accrual depends on the cost of each strategy.

2.8.2 Auditor Quality

       For quality auditors, Zang (2012) uses theauditor tenure as a proxy, which auditors have auditedthe survival period or the same client for 6 years andKAP big8. While the proxy used by the author is alsofollowed in the study that the audit tenure for aperiod of 3 years but adapted to the prevailingregulations in Indonesia. Healy and Palepu (2000), inDamayanthi (2004) explains that the auditorindependence is very important for the auditor'sreputation will affect the credibility of the financialstatements and determining the quality of the audit.Balsam et al (2003) showed that the quality of auditorsis one factor that can limit the extent of discretionthat is done by the client. Reynolds and Francis

(2001), in Dwi Pratmono (2010), argued that high-quality auditor (proxy with brandname) capable ofdetecting earnings management and limit the behavior ofmanagers oppurtunis because the auditors have extensiveknowledge and superior to the less qualified auditors.The companies are audited by KAP Big4 have discretionallow accrual rate, is shown from the results of researchconducted Francis and Wang (2006). Therefore, theauthors formulate the following hypotheses:

H2: With the Auditor Tenure, companies are more inclined to use thereal activities manipulation.

H3: The Big4 Firm Quality Auditor, companies are more inclined to usethe real activities manipulation.

2.8.3 Financial Distress

       For a company in a poor financial condition, themargin costs deviate from optimal business activitiestend to be high. In this case, the manager may considermanipulation of real activity as relatively high cost,because the ultimate goal is to improve businessoperations. To make a selection of real activitiesmanipulation strategies are needed economic resourcesthat are not small and adequate funding. If the companyis experiencing financial difficulties it is impossibleto carry out overproduction and managers tend to makeother choices to meet the target. Research conducted byGraham et al. (2005) in Dwi pratmono (2010), empiricalevidence shows that managers prefer to manipulate realactivities rather than manipulation of accruals. Fromthe above, the authors make the following hypothesis:

H4: Companies with a poor financial condition, have a tendency to dothe accrual-based manipulation strategies.

2.8.4 Investors Institution

       Managers may avoid to use the real activitiesmanipulation strategy when operating, its activitiesare being monitored closely by institutional investors.Previous research suggests that institutional investorsplay the role of monitoring or monitoring in an attemptto reduce their real activities manipulation. Bushee(1998), found that when a high institutional ownership,companies tend to cut R & D spending to avoid adecrease in income or income. Roychowdhury (2006), alsofound a negative relationship between institutionalownership and manipulation of real activity to avoidlosses. Unlike accrual manipulation, manipulationstrategies in real activity has real economicconsequences for the long-term value of the company.Institutional investors have greater information anddetails (Sophisticated Investors) than other investors,tend to have an understanding of the long-termimplications of the decision of the company'soperations, leading to more effort to monitor andreduce the real activities manipulation than accrualmanipulation activities. From the above authors makepredictions in the following hypotheses:

H5: Companies with high institutional ownership has a higher rate ofaccrual-based manipulation.

2.8.5 Accounting Flexibility

        Due to the manipulation of accruals is limitedby the lack of oversight from outside parties and theavailability of accounting flexibility. For a managermay find it more difficult to convince high-qualityauditors on accounting aggressive action of the low-quality auditors. Managers may also feel that themanipulation of accruals would be more likely to be

detected when the regulator to improve oversight ofaccounting practices at the company. In addition to thesupervision of outside parties, manipulation ofaccruals is limited by the flexibility of the company'saccounting system. It is assumed that the Company hasthe flexibility ran for doing aggressive accounting inthe previous period and face higher risks detected bythe auditor and violate principles generally acceptedaccounting to accrual-based manipulation height.Therefore, the authors formulate the followinghypotheses:

H6: Companies that have lower accounting flexibility are more likelyto use the real activities manipulation strategies.

RESEARCH METHODOLOGY

3.1 Population and Sample        The population in this study are manufacturingcompanies listed in Indonesia Stock Exchange(www.idx.co.id). While the sampling method that I useis purposive sampling, using the audited financialstatements for period 2010-2012, the Company presentsits financial statements in full, firms are classifiedas entry in the manufacturing industry.

3.2 Measurement of Variables

3.2.1 Discretional Accrual

         In this study a proxy for accrual-basedmanipulation is a discretional accrual. According toresearch conducted by Dechow et al (1995). Generally,the first step in the measurement of Accrualsdiscretional is total accruals, where in the totalaccruals consist of non-discretional componentsAccruals (NDA) and discretional Accruals (DA).Furthermore, the model used in this study to apply themodel Jones (1991) to obtain the components of non-

discretional accruals. Earnings management is anintervention with the specific intent of the externalfinancial reporting process with the purpose to gainsome personal benefit (Schipper, 1989). Earningsmanagement in this study are described using a proxydiscretional Accruals and the model equations used tocalculate the discretional Accruals (DA) is as follows:

         TA it / A it-1 = α0 (1 / A it-1) + α1 (ΔREV / A it-

1) + α2 (ΔPPEit / A it-1) + e it (1)

Notation:TA it = Total Accruals for sample firm i in year tA it-1 = Total Assets for sample firm i at the end of year t-1ΔREVit = Revenue for sample firm i at the end of year t-1PPE it = Net Asset Value Fixed for firm i in year tєt = error term in year t

Model equation (1) will be estimated by pooling theentire sample firms. The residual value of theestimation equation is discretional accruals.

3.2.2 Real Activity Manipulation (REM)

        In detecting the existence of the allegedmanipulation of the sample companies do real activitiessuch as previous researchers, the authors follow themeasurement model manipulation of real activitiesconducted by Rowchowdhury (2006). As for the measure ofreal activity manipulation is through operating cashflow or cash flow operation, the cost of production orover-production, and discretionary costs or expensesdiscretional.

3.2.2.1 Real Activities Manipulation through Cash Flow OperatingActivities

         The initial steps before entering thehypothesis testing will be performed regression to findthe cash flow of normal operating activities.Regression models to find the cash flow from operatingactivities normally replicate the study Roychowdhury(2006) as follows:

CFOt / At-1 = α0 + α1 (1 / At-1) + β1 (St / At-1) + β2(ΔSt / At-1) + єt (2)

Notation:CFOt / At-1 = Cash flow operations in year t scaled bytotal assets in year t-1.α1 (1 / At-1) = Intercept scaled by total assets in yeart-1 with the goal of cash flow                  operations do not have a value of0 when the sales and sales lag is 0.St / At-1 = Sales in year t scaled by total assetsin year t-1.ΔSt / At-1 = Sales in year t minus sales in year t-1 scaled by total assets                     in year t-1.α0 = constant.Єt = error term in year t.

        Residuals from the estimation of equation (2)above is abnormal CFO (ABN_CFO) in firm i in year t.Therefore, in this study will be used is the cash flowof abnormal operations, then for each observation yearcash flow abnormal operating activities (ABN_CFO) isthe difference of the value of the cash flows of realoperations scaled by total assets of the previous yearreduced by the cash flow activities normal operationsare calculated using the coefficient estimates obtainedfrom the above equation models.

3.2.2.2 Real Activities Manipulation Through Production Costs

        The cost of production is used as a proxy inthis study due to perform at the top level of thenormal production operation of the company(overproduction) has the objective, among others, toobtain and report the cost of goods sold (COGS) whichis lower and this action is one of the ways in whichthe management to manipulate earnings throughmanipulation of real activity. The cost of productionis the sum of cost of goods sold (COGS) and changes ininventories (ΔINV) throughout the year or year supplyreal difference with the previous year. For formulaequation, the authors use the model to estimate thecost of normal production following the researchconducted Roychowdhury (2006), as follows:

PRODt / At-1 = α0 + α1 (1 / At-1) + β1 (St / At-1) + β2 (ΔSt /At-1) + β3 (ΔSt-1 / At-1) + єt (3)

Notation:PRODt / At-1: Cost of production in year t scaled bytotal assets in year t-1, where                    PRODt = COGSt + ΔINVt

α (1 / At-1) = intercept scaled by total assets in yeart-1 with the objective value of the cost                  production does not have a value of0 when the sales and sales lag is 0.St / At-1 = Sales in year t scaled by total assets inyear t-1.ΔSt / At-1 = Sales in year t minus sales in year t-1scaled by total assets                  in year t-1.ΔSt-1 / At-1= Changes in sales in year t-1 scaled bytotal assets in year t-1.α0 = Constantsєt = error term in year t.

       Similarly, the cash flow operations, the valueof the estimated coefficients of the regression

equation above is used to calculate the value of normalproduction costs. Thus, abnormal production costs(ABN_PROD) is obtained by subtracting the value of thereal production costs are scaled by total assets oneyear prior to the test period with normal productioncosts are calculated using the estimated coefficientsof the model equations above. Residuals from theestimation (3) an abnormal Production Cost (ABN_PROD)in firm i in year t.

3.2.2.3 Real Activities Manipulation Through Discretionary Costs

       To calculate the normal level of discretionarycosts, researchers use the following regression modelalso replicates of research Roychowdhury (2006):

                               DISEXPt / At-1 = α0 + α1 (1 / At-1) + β (St-1 / At-1) + єt (4)

Notation:

DISEXPt / At-1: discretionary costs in year t scaled bytotal assets in year t-1α (1 / At-1) : intercept scaled by total assets in yeart-1 with the aim of discretionary expenses that do nothave a value of 0 when the sales and lag sales value 0.St-1 / At-1 : Sales in year t-1 scaled by total assetsin year t-1.

        Residuals from the estimation (4) above isabnormal discretionary expenses (ABN_DISEXP) in firm iin year t. The next step is the residual value of theregression results of equation each proxy to the realactivities manipulation such as abnormal CFO, abnormalproduction costs and abnormal discretionary expensestotaled then used as the value of the dependentvariable in equation (5) that the real activitiesmanipulation (REM).

3.2.3 Real Activities Manipulation Cost (Cost of REM)

3.2.3.1 Financial Distress

       In measurements on the companies that arecategorized experiencing financial difficulties, I usethe formula Altman Z-score models (1968). As inprevious studies, I have assumed that firmsexperiencing financial difficulties tendency to commitan act of manipulating financial statements for avariety of motivations and objectives, in this case theearnings management. Of the whole company of the samplewill be obtained firms experiencing financialdifficulties which in turn will be used as samples forthe purpose of detecting the presence of earningsmanagement activities. The equation is:

Z-Score = T1 + T2 + T3 + T4 + T5

Notation:T1 = Working capital to total assets, T2 = Retainedearnings to total assets, T3 = Earnings before interestand taxes to total assets, T4 = Book value of equity tobook value of debt, T5 = Sales to total assets.

       Cut-off value for the category of companiesexperiencing financial difficulties is when the valueof the Z-score of less than 2,675 (Z <2,675). Thesecut-off values based on research conducted by Altman(2000), in predicting corporate bankruptcy samples inthe period 1969-1975, 1976-1995, 1997-1999 and accuracyrate reaches 82% - 94%. The high value of Z-score wouldindicate that the financial condition of the sample isgood and low cost (cost), related to do with themanipulation of real activity. Next to the companyindicated experiencing financial difficulties would besuspect samples were rated 1, and vice versa companiesthat are not indicated experiencing financial

difficulties (non-suspect) given the value 0. Thesevariables are dummy variables.

3.2.3.2 Institutional Ownership

        For institutional ownership, this researchrefers to research conducted by Zang (2012), which usesthe percentage of institutional ownership in thecompany sample and as a prelude to early observationsusing the previous year's percentage of institutionalownership (INSTt-1).

3.2.3.3 Market Shares

        In the measurement of market share in themanufacturing industry, the authors use a proxy saleswere scaled by total sales of all samples of themanufacturing sector (manufacturing sector researchobject). In a previous study using a sample of theentire industry, then scaled by total sales industryconcerned (Harris, 1998).

3.2.4 Cost Accrual Based Manipulation (Cost of AEM)3.2.4.1 Audit Tenure

        For quality auditors, Zang (2012) uses theauditor tenure as a proxy, which auditors have auditedthe survival period or the same company for 6 years andKAP big8. In this research I used the audit tenure butfor a period of 3 years adjusted with applicablelegislation indonesia,

3.2.4.2 KAP Big 4

       For the second proxy quality auditors, I use areputable accounting firm big four (KAP Big 4), becausethe firm is still considered to have a big 4 experience

and reliability in the eyes of investors. Ryu et alstudy results (2006), about the SOX act to perform theaudit. an audit of a client company that conducted byKAP Big 4 on average have an accuracy of 45.66% with asample period 1987 - 2005. KAP Big 4 empirically isstill eligible to be a proxy in this study. The Big 4Firm is Delloite, PWC, E & Y, and KPMG.

3.2.4.3 Accounting Flexibility          Accounting for the flexibility measurements onearnings management activities, at the stage of gettingthe previous period accrual manipulation authorsfollowed the method of research conducted by Barton andSimko (2002), in Zang (2012). Measurement of accountingchoices prior period using the Net Operating Assets asearly observations (NOA t-1, in the previous year) as aproxy to extend the accrual basis of previous periods.The reason for this measurement because it can bearticulated that the income statements and balancesheets, profit abnormal accruals reflected in the pastand are also reflected in net assets.

3.2.5 Control Variables

         Control variables used in the model ofequation (5) that the real activities manipulationdenoted by REM there are 3 variables. The controlvariables are the ratio of return on assets. The ratioof return on assets is calculated using net incomescaled by total assets during the year to control theperformance of the company. The first control variableis denoted by ROA. The second control variable is theamount of total assets are denoted by Asset, then tothe third control variable is the ratio of market tobook value are denoted by MBV. This ratio is the valueof the stock market Stock Market scaled with the valueof the shares is recorded by the sample companies. Forthe control variables in the model equation (6), iemanipulation of accruals-based control variables are

used as described above, but added one more controlvariables that predicted results of the regressionequation (5) the real activities manipulation denotedby PRED_REM. Proxy-proxy control variable follows theresearch conducted by Zang (2012).

3.3 Trade-Off Between Real Activities Manipulation (REM) AndManipulation Accrual (AEM)

       To determine the relative cost of the realactivities manipulation and manipulation of accruals,following the formulation used by Zang (2012).Companies that are likely to experience financialdistress as a suspect sample used in the followingequation:

REM = β0 + Σ β1 Cost of REMt + Σ β2 Cost of AEMt + Σ β3Control t + e (5)

AEM = γ0+ Σγ1 Cost of AEMt + Σγ2 Cost of REMt + Σγ3Unexpected REMt Σγ4 Controlt +e (6)

Notation:REM = Real Activities Manipulation AEM = Accrual-Based ManipulationCost Of REM t = Total cost of real activitiesmanipulation in year tCost Of AEM t = Total cost of manipulation of accrualsin year tControl t = Control variable in year tUnexpected REM t = Value of the regression residualsreal activities manipulation (REM)e = error term in year t

       Both of these strategies depends on the relativecosts of each cost, if the cost relationships with highaccrual-based manipulation of the companies tend to usereal activities manipulation. Vice versa, if the costs

related to the manipulation of real activity higherthen companies tend to use accrual-based manipulation.Therefore for the coefficient β2 in equation (1) andthe coefficient γ2 in equation (2) the expectedpositive. Because each element of the strategy alreadycontains both the expected cost coefficient β1 inequation (1) and γ1 coefficient in equation (2)negative.

RESULT

4.1 Descriptive Statistics Real Activities Manipulation

        For the main test in equation (5) The fifth isthe manipulation of real activity in REM variables havea minimum value of -3.54, the maximum value of 2.74,the average value (mean) of 0147, and the rate ofspread of the data deviation (standard deviation) of1.230. In COS_REM variable has a minimum value of41.08, the maximum value of 99.98, the average value(mean) of 73.51, and the degree of deviationdissemination of data (standard deviation) of 14 035.In LN_COSAEM variable has a minimum value of 22:09, themaximum value of 32.13, the average value (mean) of27.22, and the degree of deviation dissemination ofdata (standard deviation) of 1,748. In the controlvariables are represented by ROA has a minimum value of-0.55, the maximum value of 3:11, the average value(mean) of 0312, and the rate of spread of the datadeviation (standard deviation) of 0.554. In the controlvariables are represented by LN_ASSET have a minimumvalue of 23:08, the maximum value of 32.84, the averagevalue (mean) of 27.92, and the degree of deviationdissemination of data (standard deviation) of 1.596. Inthe control variables are represented by MBV has a

minimum value of -2.88, the maximum value of 47.27, theaverage value (mean) of 2324, and the rate of spread ofthe data deviation (standard deviation) of 4169.

4.2 Descriptive Statistics Accrual-Based Manipulation

        For accrual based on variable manipulation AEMhas a minimum value of -0.94, the maximum value of0.89, the average value (mean) -0.02, and the level ofdata dissemination deviation (standard deviation) of0242. In LN_COSAEM variable has a minimum value of22:09, the maximum value of 32.13, the average value(mean) of 27.22, and the degree of deviationdissemination of data (standard deviation) of 1,748. InCOS_REM variable has a minimum value of 41.08, themaximum value of 99.98, the average value (mean) of73.36, and the degree of deviation dissemination ofdata (standard deviation) of 14:06. In the controlvariables ROA has a minimum value of -0.55, the maximumvalue of 0.56, the average value (mean) of 0.09, andthe rate of spread of the data deviation (standarddeviation) of 0133. Furthermore, the control variablesLN_ASSET have a minimum value of 23:08, the maximumvalue of 32.84, the average value (mean) of 27.92, andthe degree of deviation dissemination of data (standarddeviation) of 1.596. And the control variables MBV hasa minimum value of -2.88, the maximum value of 47.27,the average value (mean) 2:32, and the level of datadissemination deviation (standard deviation) of 4169.In Unexpect_RM variable has a minimum value of -3.46,the maximum value of 2.82, the average value (mean) of0.000, and the rate of spread of the data deviation(standard deviation) of 0973.

4.3 Normality Data Test

        Data distribution normality test results can beseen in Table 4.9 below :

                                                  Table 1.3 Test of Normality

Kolmogorov SmirnovEquation 1

Equation 2

Equation 3

Equation 4

Equation 5

Equation 6

0.061 0.592 0.057 0.522 0.065 0.094

        From Table 1.3 above shows that from equation(1) to the equation (6) results Asymp.Sig residualvalue (2-tailed) is greater than alpha (0.05). From theanalysis of the normality test for residual value, itcan be concluded that the distribution of normaldistribution of data.

4.4 Testing Classical Assumption4.4.1 Multikolinierity

        The results of the analysis using the VarianceInflation Factor (VIF) can be seen in Table 1.4 below:

Table 1.4 Test Multicollinearity

Multikolinieritas

KETEquation

1Equation

2 Equation 3

Equation4

Equation5

Equation6

TOL > 0.1 > 0.1 > 0.1 > 0.1 > 0.1 > 0.1VIF < 10 < 10 < 10 < 10 < 10 < 10

       In Table 1.4 TOL value ranges between 0 and 1,and if TOL = 0, then there is a high and perfectcollinearity between the independent variables whilethe default SPSS for tolerance figure is 0.0001. Fromtable 1.4 above, Value Tolerance (TOL) for allindependent variables in this study is greater than

0.10 if it is greater than 0.10 then there is nomulticollinearity in regression models were used. ValueVariance Inflation Factor (VIF) for all independentvariables in this study is less than 10, if the VIFvalue is less than 10 then there is nomulticollinearity. Thus, based on the results of theanalysis using the tolerance (TOL) and VarianceInflation Factor (VIF), it can be detected that allmodels there is no multicollinearity.

4.4.2 Autocorrelation

        The identification of this assumption can beseen from the value of the Durbin-Watson. Autokolerasidoes not occur if the Durbin-Watson numbers are inbetween -2 to +2. if the Durbin-Watson numbers below -2means there autokolerasi positive and if the Durbin-Watson figure above +2 means no negative autokolerasi.

Table 1.5 Test AutocorrelationEquation 1

Equation 2

Equation 3

Equation 4

Equation 5

Equation 6 Result

1.848 1.985 1.729 1.947 1.942 1.899 Not Autocorellation

        In Table 1.5 shows the value of the DurbinWatson in the first equation has a value of 1848, forthe second equation has a value of 1.985, the thirdmodel equation has the value 1729 and for the fourthequation has a value of 1,947. As for the fifthequation has a value of 1,942. In the sixth equationhas a value of 1,899. The value of the overall equationis at the threshold ranges between -2 to +2, it can beconcluded that there is no autocorrelation in thisstudy.

4.4.3 Heteroscedasticity

       Detection of the presence or absence ofheteroscedasticity can be done by looking at whetherthere is a specific pattern on the charts and scatterplots between sresid zpred, where Y is the Y axis thathas been predicted and the X axis is the residual. Onthe basis of the analysis if there is a specificpattern such as dots that there is a certain patternregular shape (wavy, widened and then narrowed), itindicates there has been a heteroscedasticity. If thereis no clear pattern and dots spread above and below thenumber 0 on the Y axis, then there is noheteroscedasticity. In this study the model results innot indicated the presence of heteroskedatisitas.

4.5 Test of Goodness of Fit (R2)

       R2 value indicates how large a proportion of thetotal variation in the dependent variable (dependent)variable that can be explained by penjelasnya(independent). The higher the value of R2, the greaterthe proportion of the total variation in the dependentvariable (dependent) which can be explained by theindependent variables. R2 shows how much variationexplanatory variables (independent) affects variationof the dependent variable (dependent). The results ofthe test of goodness of fit test can be seen in thetables below are in accordance with the stages:

Tabel 1.6 Goodness of Fit Test

Equation1

Equation2 Equation 3 Equation 4

Equation5

Equation6

0.022 0.026 0.845 0.795 0.072 0.026

       

The coefficient of determination (R2) in Table1.6 shows that in model 1 figure of 0.022, 0.026, andadjusted R Square of 0001. It gives the sense that the2.6% of the total variation in the dependent can beexplained by the model presented, while the remaining97.4% is explained by other factors that are notincluded in this research model.

4.6 Hypothesis Testing Results

4.6.1 Hypothesis First

H1: The use of real activities manipulation strategyand manipulation of accrual depends on the cost of eachstrategy.

        The statistical results of equation (5) thevalue of the real activities manipulation costcoefficient (COS_REM) of 0.001, while the cost accrual-based manipulation (LN_COSTAEM) with a coefficient of0.224. Increased cost of manipulation of real activityonly by 0.1%, while the cost accrual-based manipulationindicated an increase of 22.4%. From the statisticaldata of the above can be interpreted that the realactivities manipulation cost lower than the costaccrual-based manipulation. Thus because of the cost toperform the manipulation of real activity is low,managers make decisions on the choice of doing the realaktfitas manipulation strategy in advance with theexisting conditions of economic resources within thecompany, then the accrual-based manipulation strategiestailored realized the magnitude of accruals to achieveearnings targets that have been set.

       Statistical results for equation (6) is themanipulation of accrual (AEM) results show that thecost accrual-based manipulation (AEM) decreased withthe coefficient value of -0.049. Instead of real

activities manipulation cost no activity withcoefficient of 0.000. It can be concluded that thesample firms accrual manipulation costs decreased by4.9% on an accrual-based manipulation manipulationwhile the cost of real activity or no activity at 0% ofthe accrual-based manipulation. Without the variablecost of both earnings management tool that is both realactivities manipulation costs and the cost accrual-based manipulation of existing real activitiesmanipulation and accrual-based manipulation of 3.2%.

Manipulation of accrual (AEM) is positivelycorrelated with the variable costs of the realactivities manipulation or Cost of REM (COS_REM)Pearson correlation values obtained by 0.02. Thiscorresponds to the predicted or hypothesized that theaccrual-based manipulation (AEM) with real activitiesmanipulation cost (Cost Of REM) are positivelycorrelated. From the results of these two equationsboth the equation (5) real activities manipulation(REM) and equation (6) manipulation of accruals (AEM)linkage correlation cost of each of the two activities,and the more bracing is in equation (5) manipulationreal activity (REM) there is a negative correlationwith a coefficient of -0.02 between the cost of thereal activities manipulation or Cost of REM (COS_REM)with real activities manipulation (REM).

Neither the equation (6) negative correlationwith a coefficient of -0.041 between the cost accrualmanipulation or Cost Of AEM (LN_COSAEM) by manipulationof accruals (AEM). Both activities were negativelycorrelated due to equation (5) REM and equation (6) AEMalready contained elements of the cost of each of thesestrategies. From these results it can be concluded thatthe sample of manufacturing firms in Indonesia use two

earnings management strategies that real activitiesmanipulation (REM) and accrual-based manipulation (AEM)based on the relative costs of each. So it can bestated that every act of doing two strategies in realactivities manipulation and manipulation of accrualsdepends on the relative costs of the costliness of thetwo strategies.

When the cost of real activities manipulation(REM) higher then the manager as the manager of thecompany will be more likely to use accrual-basedmanipulation strategies (AEM). It can be concluded thatthe hypothesis H1 is accepted or supported, this is inaccordance with the results of previous researchconducted by Zang (2012), that the activities of twogood strategies that real activities manipulation andmanipulation of accruals depends on the relative costsof the two strategies, or can be called using astrategy real activities manipulation (REM) andmanipulation of accruals (AEM) as a substitutionstrategy.

4.6.2 The second hypothesis:

H2: The Auditor Tenure, the Company is more inclined touse the real activities manipulation.

        In Table 1.9 below can be seen on thestatistical results of equation (5) REM that the auditperiod that audit_tenure variable has a value of -0021where as β coefficient of equation (6) AEM audit_tenureβ coefficient value of 0.024.

                               

Table 1.9 The trade off REM and AEM

Variabel

Persamaan (5)REM

Persamaan(6)AEM

PredSign

Koefisien

PredSign

Koefisien

Intercept       1.254Unexpected REM   -   -0.007Hubungan Biaya dengan REM        Financial Distress (Z-score) + -0.272 - -0.1Kepemilikan Institusi (Inst) - -0.003 + -0.001Market Share (Market_SH) + 3.606 - -1.028Hubungan Biaya dengan AEM        Audit_Tenure + -0.021 - 0.024KAP Big4 + 0.167 - -0.131Fleksibilitas Akuntansi(Flex_Acct) + -0.193 - 0.02         Variabel Kontrol        ROA   0.735   -0.339ASSET   0.064   -0.025MBV   0.013   0.014PRED_REM       -0.103Adj R2 (%)   8.4   4.4F-Statistic   0.018   0.431

        This indicates that the presence of audittenure, manipulation of real activity decreased by2.1%, while in the presence of audit tenure, accrual-based manipulation increased by 2.4%. It can bearticulated that experienced auditors who have auditedthe company sample manufacturing industry in Indonesiafor three consecutive years does not necessarily knowthe accrual rate used by the sample companies and makethe managers or directors of the company as the managerof the company tendency to a higher level using astrategy of manipulation accrual basis. Thus for thesecond hypothesis (H2) is rejected or not supported andthe results of this testing is contrary to previousresearch conducted by Zang (2012), which statescompanies face greater scrutiny from auditors and

regulators have a higher level of real activitymanipulation. (on research using 6 year tenure audit).

4.6.3 The third hypothesis:

H3: The Big4 Firm Quality Auditor, the Company is moreinclined to use the real activities manipulation.

        In table 1.9 above can be seen that thevariable has a value of KAP Big4 β coefficient of 0167,while from equation (6) Big 4 Firm AEM coefficient βvalue of -0131. This indicates that the presence of KAPBig4, manipulation of real activity increased by 16.7%,while in the presence of KAP Big4, accrual-basedmanipulation decreased by 13.1%. In the statisticalresults of equation (5) REM, that the variable qualityauditors proxied by KAP Big4 positively correlated withthe dependent variable is the real activitiesmanipulation with Pearson correlation value by 0.094.In the statistical results of equation (6) that thevariable quality of KAP Big4 auditors are negativelycorrelated with the dependent variable is the accrual-based manipulation Pearson correlation value of -0.159.This corresponds to the predicted or hypothesized thatthe real activities manipulation (REM) with the costaccrual manipulation that Big 4 Firm positivelycorrelated, and otherwise manipulating the accrualbasis of the cost accrual manipulation that KAP Big 4are negatively correlated. It can be articulated thatthe auditors who have a great reputation and certainlymore famous have the experience and knowledge and alsohas a high professional level. The use of accrualtechnique is easily detected by KAP Big 4 auditors andDirectors of the company as the manager of the companywill be using real activities manipulation strategythat is more difficult to be detected by the auditor.Thus for the third hypothesis (H3) is accepted orsupported and the results of this test according to

research conducted or supported previously by Zang(2012), which states companies face greater scrutinyfrom auditors and regulators have a higher level ofreal activity manipulation with using proxy KAP Big 8.

4.6.4 The fourth hypothesis:

H4: Companies with a poor financial condition have atendency higher on accrual-based manipulation.

        In table 1.9 above for equation (5) REM, it canbe seen that the Financial Distress variable has avalue of -0.272 whereas β coefficient of equation (6)AEM, Financial Distress β coefficient value of -0.100.This indicates that the presence of Financial Distress,manipulation of real activity decreased by 27.2%, whilein the presence of Financial Distress, accrual-basedmanipulation decreased by 10%. Variable financialdistress negatively correlated with real activitiesmanipulation with Pearson correlation value of -0.166.For the case of the sample companies manufacturingindustry in Indonesia limitations will haveimplications for the limited sources of funding toconduct large-scale production or over-production.Sample firms tend to reduce the level of real activitymanipulation on the sample period or the company is notaggressive in the use of real activities manipulationstrategies during bad financial condition and then inequation (6) variable of financial distress (Z_score)negatively correlated with the accrual-basedmanipulation of the value of the Pearson correlation of-0.032. It can be concluded that the companies withpoor financial condition can not realize maximum inproducing massive and maximize sales through softloans, shortage of funds resulted in the company morelikely to use accrual-based manipulation strategies.Thus for the fourth hypothesis (H4) is accepted, thenthe result of this study is consistent with previousstudies conducted by Zang (2012) which states that

companies with poor financial conditions have a higherrate of accrual-based manipulation.

4.6.5 The fifth hypothesis:

H5: Companies with high institutional ownership has atendency higher on accrual-based manipulation.           In table 1.9 above can be seen that theinstitutional ownership variable has a value of -0.003whereas β coefficient of equation (6) AEM,institutional ownership has a value of β coefficient of-0.001. This indicates that the presence ofinstitutional ownership, manipulation of real activitydecreased by 0.3%, while in the presence ofinstitutional ownership, accrual-based manipulationdecreased by 0.1%. In the regression results ofequation (5), variable institutional ownership (INST)is negatively correlated with the real activitiesmanipulation, (Pearson correlation value of -0.017).This suggests that institutional investors do not exertmore pressure on companies to limit the use of realactivities manipulation strategies but do not also putpressure on the manipulation of accrual-basedsupervision, supervision contributed statistically verylow institutional ownership on manufacturing companiesin Indonesia against the real activities manipulationand manipulation accrual basis. In regression to theequation (6), variable institutional ownership (INST)is negatively correlated with the accrual-basedmanipulation, (Pearson correlation value of -0.037). Itis possible to sample the company with future researchperiod, the decline in real activities manipulation 2%higher than the decrease in the accrual-basedmanipulation due to the composition of the changes inthe ownership structure of the institution. So that thetest results for the fifth hypothesis (H5) above can beaccepted. Therefore, the results of this study are

consistent with previous studies conducted by Zang(2012), which states that with high institutionalownership companies have a tendency to use accrual-based manipulation strategies.

4.6.6 The sixth hypothesis:

H6: The smaller the flexibility of accounting, theCompany is more likely to        using real activities manipulation.

            In table 1.9 above can be seen that theaccounting flexibility variable has a value of -0.193whereas β coefficient of equation (6) AEM, accountingflexibility has value β coefficient of 0.020. Thisindicates that the sample period with the flexibilityof accounting, manipulation of real activity decreasedby 19.3%, while the flexibility of accounting, accrual-based manipulation increased by 2%. In equation (5),accounting Flexibility is shown by the negativecorrelation coefficient with the manipulation of realactivity (Pearson correlation value of -0.066). Samplefirms manufacturing industry in Indonesia with timeperiod of this study, a low accounting flexibilitymakes no real activities manipulation activities at ahigher level but tend to reduce the level of activityof the real activities manipulation. The reduced levelof real activity manipulation because of increasedactivity manipulation of accruals in previous years.and then in equation (6) variable accountingflexibility negatively correlated with the accrual-based manipulation (Pearson correlation coefficientvalue of -0.059). thus it can be concluded that theaccounting firm of samples with low flexibility aremore likely to use accrual-based manipulationstrategies at a higher level, so the sixth hypothesis(H6) is rejected. Thus the results of this study arenot consistent with previous studies conducted by Zang(2012) which states that firms with lower accounting

flexibility has a higher level of real activitymanipulation.Thus the results of all tests the hypothesis that hasbeen described above by the author. Further discussionof the conclusions and suggestions contained in chapterfive.

5.1 Conclusion

1. From the second equation, both the model of equation(5) real activities manipulation and the model equation(6) are accrual-based manipulation linkage correlationcost of each of the two activities. There is a negativecorrelation between the cost of real activitiesmanipulation or Cost Of REM with real activitiesmanipulation. Neither the equation (6), there is anegative correlation between the cost accrual-basedmanipulation or Cost Of AEM with accrual-basedmanipulation. Both activities were negativelycorrelated due to equation (5) and equation (6) isalready contained elements of the cost of each of thesestrategies. From these results it can be concluded thatthe sample of manufacturing firms in Indonesia use twoearnings management strategies based on the relativecosts of each. So it can be stated that every act ofdoing two strategies in real activities manipulationand manipulation of accrual depends on the relativecosts of the costliness of the two strategies. If thehigh cost of real activities manipulation of themanager as the manager of the company will be morelikely to use accrual-based manipulation strategies andvice versa.

2. Audit tenure indicated increase in the accrual-basedmanipulation of the sample period. Auditors who haveaudited the company sample manufacturing industry inIndonesia within a period of 3 years is not necessarilyknow the accrual rate used by the company to make thesample and managers or directors of the company as themanager of the company would be inclined at a higher

level in the use of accrual-based manipulationstrategies.

3. KAP Big4 indicated increasing manipulation of realactivity. It can be articulated that KAP Big4 which hasa great reputation and certainly more famous have theexperience and knowledge and also has a highprofessional level. The use of accrual technique canalso be detected by the auditor KAP Big 4 and from itcan be concluded that the sample period in amanufacturing company in Indonesia, as the manager ofthe company managers tend to use real activitiesmanipulation strategies at a higher level.

4. Financial Distress indicated to reduce the level ofreal activity manipulation activities higher thanaccrual-based manipulation activities. Companies withbetter financial conditions would use a higherpercentage rate on real activities manipulationstrategies. For the case of the sample companiesmanufacturing industry in Indonesia limitations willhave implications for the limited sources of funding toconduct large-scale production or over-production.Sample firms tend to reduce the level of real activitymanipulation on the sample period or the company is notaggressive in the use of real activities manipulationstrategies at the time of poor financial condition. Itcan be concluded that the companies with poor financialcondition can not realize maximum in producing massiveand maximize sales through soft loans, shortage offunds resulted in the company more likely to useaccrual-based manipulation strategies.

5. Ownership institutions indicated decreased activitymanipulation of real activity at a higher rate than therate of decline in activity accrual-based manipulation.It shows that institutional investors to exert morepressure on companies to limit the use of realactivities manipulation strategies. Can be possiblealso in future periods sample firms with research done

to lower accrual rate due to the composition of thechanges in the ownership structure of the institution.It was concluded that the sample period in amanufacturing company in Indonesia is more inclined toa greater extent using accrual-based manipulationstrategies.

6. Flexibility indicated to decrease the activityaccounting manipulation of real activity at a higherrate than the rate of increase in the accrual-basedmanipulation. Sample firms manufacturing industry inIndonesia with time period of this study, a lowaccounting flexibility makes no real activitiesmanipulation activities at a higher level but tend toreduce the level of activity of the real activitiesmanipulation. The reduced level of real activitymanipulation due to the accrual-based manipulationactivities in previous years. It was concluded that thesample period manufacturing company in Indonesia withlow accounting flexibility are more likely to useaccrual-based manipulation strategies at a higherlevel.

5.2 Implications

1. With the earnings management, both real activitiesmanipulation and accrual-based manipulation willhave implications for reducing the credibility ofthe financial statements and add bias in thefinancial statements as well as interfere withusers of financial statements. Because asdescribed theoretically that earnings managementis done basically for specific purposes. So withthis study will provide crucial information forinvestors to know the techniques of earningsmanagement itself.

2. With the phenomenon of accounting scandals thatoccurred, to safeguard the interests of investors,

the authors expect the existence of an independentagency that oversees and provides certification ofthe results of audits conducted like KAP. Withinthe scope of the face of global competition isvery important, the company has been audited bythe firm and that audit has been certified by anindependent agency that will improve investorconfidence and impact on the level of investmentin Indonesia.

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