In general, earnings management is defined as the efforts of company managers to intervene or influence information in financial statements with the aim of tricking stakeholders who want to know the performance and condition of the company. The term intervention is used as a basis for some parties to assess earnings management as cheating. Meanwhile, other parties still consider this managerial engineering activity not as cheating. The reason, the intervention was carried out by company managers within the framework of accounting standards, which is still using accounting methods and procedures that are generally accepted and recognized.
Earnings management occurs when managers use certain decisions in financial statements and change transactions to change financial statements so as to mislead stakeholders who want to know the economic performance obtained by the company or to influence the results of contracts that use accounting numbers reported in financial statements.
Profit Management Motivation
In general, there are several things that motivate individuals or business entities to take creative accounting or earnings management actions. What are there?
In a business agreement, shareholders will provide a number of incentives and bonuses as feedback or evaluation of the manager’s performance in carrying out the company’s operations. Meanwhile, relatively higher bonuses will only be given when the manager’s performance is in the area of achieving bonuses set by shareholders.
One of the manager’s performance is measured by the achievement of operating profit. Performance measurement based on earnings and bonus schemes motivate managers to give their best performance so that it does not close their chances of making earnings management actions in order to perform well in order to get maximum bonuses.
In addition to conducting business contracts with shareholders for the sake of company expansion, managers often enter into several business contracts with third parties, in this case creditors. In order for creditors to invest their funds in the company, surely managers must show good performance from their companies. To obtain maximum results, namely loans in large amounts, the creative behavior of managers to display the good performance of their financial statements also often arise.
Earnings management actions not only occur in companies going public and always in the interests of stock prices, but also in the interests of taxation. This interest is dominated by companies that have not yet gone public. Companies that have not yet gone public tend to report and want to present a fiscal profit report that is lower than the actual value. This tendency motivates managers to act creatively in earnings management actions so that it is as if the reported fiscal earnings are indeed lower without violating tax accounting rules and policies.
Initial Public Offering (IPO) Motivation
Companies that will go public will make their first public offering to the public or better known as the Initial Public Offering (IPO) to obtain additional venture capital from potential investors. Likewise with companies that have gone public for the continuation and expansion of their businesses.
Motivation for Substitution of Directors
Earnings management practices usually occur around the turn of the board of directors or chief executive officer (CEO). Towards the end of their tenure, directors tend to act creatively by maximizing profits so that their work performance will still look good in the last year he served.
This motivation usually occurs in large companies whose fields of business touch a lot of the wider community, such as strategic companies such as oil, gas, electricity, and water. In order to keep getting subsidies, these companies tend to maintain their financial position in certain circumstances so that their performance or performance is not very good because if it is already good, it is likely that subsidies will no longer be given.
From the explanation above, there are several motivations that encourage earnings management, but which is in line with this research that is in terms of taxation motivations. However, tax authorities tend to impose their own tax accounting rules for calculating taxable income.