Corporate governance and earnings management in Indonesian public listed companies : the impact of IFRS' fair value accounting adoption

Abstract

With studies on the impact of IFRS’ fair value adoption on earnings management is sparse, this study aims to examine whether the adoption of IFRS’ fair value accounting affects earnings management in terms of the accrual and real activities. In addition, this study examines whether the adoption of IFRS’ fair value accounting affects the relationship between corporate governance variables and earnings management. The corporate governance variables are audit committee effectiveness (audit committee size, expertise, and meetings) and the independence of board commissioners. The variables are then regressed using panel data regression, dividing the pre- and post-period IFRS’ fair value accounting adoption. Using 123 Indonesian public listed companies, by a total of 738 observations, the study finds that the adoption of IFRS’ fair value accounting has significant impact on accrual and real earnings management. Moreover, when the corporate governance variables are regressed with earnings management, the result shows that the audit committee meetings and independent commissioners have a significant impact on lowering accrual earnings management after the adoption of IFRS’ fair value accounting. In terms of real earnings management, the study finds that the independent commissioners fail to lower the real activities manipulation in post-adoption of IFRS’ fair value accounting. This study provides an overall view of the impact of the adoption of IFRS’ fair value accounting by examining its impact on earnings management and corporate governance in Indonesian firms. This study also adds knowledge to the existing literature related to earnings management and extends the understanding of the impact of corporate governance on the issue of IFRS’ fair value accounting adoption. Apart from contributing to literature, this study provides recommendation for regulators to lower the earnings management practices by the adoption of IFRS’ fair value accounting.