IFRS CONVERGENCE AND EARNINGS MANAGEMENT

This study aims at providing empirical evidence about the impacts of IFRS convergence on earnings management and examining the differences of the level of earnings management between before and after full IFRS convergence. The research objects were manufacturing companies registered on the Indonesia Stock Exchange (BEI) for 4 years (2010-2013). The sampling technique used was purposive sampling. The number of samples taken from the purposive sampling for each year was 85 companies. The main variables used in this study were IFRS and earnings management. The hypothesis analysis used multiple regression analysis of data by using discretionary accruals developed by Jones (1991) and the analysis of t-test difference test. The results show no difference between the earnings in the period of before and after convergence. The results of the difference test analysis also reveal that there is no difference in the level of earnings management between the period of before and after convergence. Based on this study it can be concluded that the IFRS convergence does not guarantee a decrease in earnings management of manufacturing companies listed on BEI.


INTRODUCTION
Globalization leads to the development of Multi National Corporations (MNC).When the business world is becoming borderless there will be problems emerging if the accounting standard used in a particular country differs from the one used in other countries.This issue leads to the emergence of the need for international accounting standards to facilitate investors/ potential investors and International Financial Reporting Standards (IFRS), formerly known as International Accounting Standards (IAS), was issued to achieve the objective of preparing high quality international financial reporting standards.A number of studies have shown that the IFRS convergence can improve the quality of accounting information, one of which is shown by a decrease in earnings management in some countries (Capkun et pISSN : 1412-629X eISSN : 2579-3055 JURNAL AKUNTANSI DAN PAJAK, VOL. 18, NO. 01, JULI 2017 -95 al., 2007, Liu and Liu, 2007, Barth et al., 2008Chen et al., 2010, Chua et al., 2012and Kargin 2013).
Indonesia as one of the G20 countries decided to conduct PSAK (Statement of Financial Accounting Standard) convergence with IFRS.IFRS convergence as a whole is effective and mandatory for all companies that have gone public since January 1, 2012.Cai et al. (2008) state that one of the objectives of IFRS establishment by the IASB is to simplify various alternatives of permitted accounting policies that are expected to limit the management's discretions towards profit manipulation.Various studies have been conducted to examine the impacts of IFRS convergence on earnings management in both manufacturing and banking sectors.One of them is the study conducted by Wang and Campbell (2012) which reveals that the IFRS convergence lowered earnings management but this evidence is not strong enough and still needs further research.Lin and Paananen (2006) examined changes in the pattern of earnings management activities and stated that the IASB was not effective in reducing overall earnings management activities.Callao and Jarne (2010) compared the discretionary accrual of companies listed on 11 European stock markets shortly after IFRS converging.They discovered that the IFRS supported discretionary accounting and opportunistic behavior.Rudra and Bhattacharjee (2012) examined whether IFRS affected earnings management in India and found that earnings management increased significantly because of the IFRS convergence.Meanwhile in Indonesia, Widhiastuti's study (2011) shows that there is a decrease in the relevance value of accounting information due to earnings management in manufacturing companies post IFRS convergence.In addition to manufacturing companies there are several studies examining the banking sector.Research on the effect of IFRS convergence on the level of earnings management in the banking sector has been done by Santy et al. (2012) resulting a conclusion that IFRS convergence has no significant effect on earnings management and that there is no difference in the level of earnings management significantly between before and after IFRS convergence.The level of earnings management in a company's financial statements can be shown by calculating (discretionary accruals) or accrual policy arising from management policies.Discretionary accruals calculation is performed by employing accrual aggregate measurements modified by Jones (Rudra, 2012).In addition to IFRS convergence, there are several other factors that need to be controlled in calculating earnings management such as company size, financial leverage, market to book value and institutional investors (Rudra, 2012).This research would analyze the impact of IFRS convergence on earnings management in companies registered on the Indonesia Stock Exchange.The data used in this study were the financial statements of Indonesian manufacturing company registered on the Indonesia Stock Exchange from 2010 until 2013.2010 and 2011 data were used as the data prior to the convergence of IFRS, whereas the financial statements in 2012 and 2013 as the data of the period after IFRS convergence.The reason for using 2010 and 2011 as observation data before convergence and in 2012, 2013 as the data after IFRS convergence is because IFRS convergence became effective and was mandatory for go public companies as of January 1, 2012.
The objective of this study is to provide empirical evidence about the effect of the IFRS convergence on earnings management and examine the differences in the level of earnings management before and after the IFRS convergence in companies registered on the Indonesia Stock Exchange in Indonesia.Earnings management in this research utilized discretionary accrual proxy developed by Jones (1991).
This study is expected to be one of information sources for readers and an additional literature for further research on the impact of IFRS convergence on the quality of accounting information projected by earnings management.It is also expected that this study can contribute for regulators, in this case the Board of Financial Accounting Standard (DSAK) in relation to IFRS convergence benefits for improving the quality of accounting information.

LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT Agency Theory
Jensen and Meckling (1976) define an agency relationship as a contract between one or more persons (the principal) by engaging another person (the agent) to provide services on their behalf that involves the delivery of some decisionmaking authority to the agent.Principals are shareholders or owners who can give a mandate to the agent to act on behalf of the principal, while the agents are the management who are given a mandate by the principal to act on behalf of the principal and are required to account for the actions taken to the principal.The Agency Theory describes the conflict between the management as an agent with the owner as the principal who can be detrimental to both sides.In that regards, manager as an agent who holds the power of the principal normally tends to perform dysfunctional behavior.The reason is because of the asymmetry of information in the presenting financial statements.
The difference of interest between the principal and the agent in the agency theory leads to the asymmetry of information.Asymmetry of information is the uneven distribution of information between the agent and the principal resulting in an imbalance of information receipt between the two.The forms of information asymmetry are moral hazard and adverse selection.The manager has more information than the principal does.In order for the principal to assess manager's performance properly, a measuring instrument in the form of financial statement is needed.The content of the statement should be disclosed (full disclosure) so that the principal can be accurate in decision-making and the quality of accounting information can be held accountable (Scott, 2009: 1-18).

Earnings Management
Earnings management has been exhaustively defined by researchers.Scott (2006) defines earnings management as a way of presenting the profit that aims to maximize the utility of management and or to increase market value through the selection of accounting procedure policy set by the management.There are two perspectives in understanding the earnings management carried out by company managers: firstly, it is aimed at maximizing management utility (opportunistic behavior).Secondly, it aims to share the earnings to all parties involved in the contract (efficient contracting).Fisher and Rosenzberg define earnings management as an action of managers serving financial statements by raising (or lowering) the profit during an on-going period of business units for which they are responsible, without causing increase (decrease) of the economic profitability of a particular unit in a long term.Healy and Wahlen in Ujiyantho and Scout (2007) describe that earnings management occurs when managers use judgment in financial reporting and transactions depreciation to alter financial statements for the purpose of manipulating the amount (magnitude) of earnings to some stakeholders about the economic performance of companies or to influence the results of agreement (contract) which depend on the figures in the accounting reported.According to Scott (2006) Zimmerman 1986in Pramudji, Trihartati, 2010) claim that motivation for earnings management, among others are: 1) Bonus plan hypothesis in which profit serve as the basis in providing bonuses to employees.For example, when profit is used as a benchmark in providing bonuses, it will create the impetus for managers to organize financial data in order to receive the bonus as desired 2) Debt (equity) hypothesis confirms that companies with bigger debt to equity ratio tend to choose accounting procedures that enable them to raise their profit 3) Political hypothesis cost, companies tend choose accounting methods that can lower reported net profit.Earnings management conducted by managers will decrease the quality of the earnings.Earnings management will cause earnings capability in predicting future earnings to shrink.
According to Gunny (2005)  Cohen and Zarowin ( 2008) argue that companies that manage higher earnings are likely to have one or all of the various characteristics below: unusually low operational cash flow, unusually low discretionary cost, and unusually high production costs.

IFRS (International Financial Reporting Standards)
International Financial Reporting Standards (IFRS) is a standard of financial reporting compilation which is encouraged to be implemented by many countries in the world in regard to convergence towards the realization of the use of the same standard.

IFRS Convergence in Indonesia
IFRS convergence can be done with two kinds of adoption strategy, namely big bang strategy and gradual strategy.Big bang strategy fully adopts IFRS at once, without going through certain stages.This strategy is used by the developed countries.On the other hand, in the gradual strategy IFRS adoption is done gradually.This strategy is used by developing countries such as Indonesia.
The following is the development of the convergence of PSAK to IFRS planned by the Board of Financial Accounting Standards (DSAK) of IAI:

Hypothesis Development
There have been numerous researches conducted to examine the impact of IFRS adoption on the quality of information and the accounting profit.The empirical studies provide results variously.Research conducted by Barth et al. (2008), Armstrong et al. (2010, Wang and Campbell (2012), Zeghal et al (2012) and Chua et al ( 2012) conclude that the adoption of IFRS can improve the quality of accounting information which is measured by a decrease in profit.Meanwhile study conducted by Lin and Paananen (2006), Callao and Jarne ( 2010) and Rudra and Bharttachrjee (2012) conclude conflicting results stating that earnings management conducted by companies has increased after the adoption of IFRS.
Results of research in Indonesia also show there are still differences, Widhiastuti (2011) and Santy et al. (2012) in their research explain that the adoption of IFRS has no significant effect on earnings management and there is no difference in the level of earnings management significantly between before and after the adoption of IFRS.While the research conducted by Rohmah and Yuni (2013) concludes that the quality of accounting information projected by value relevance will increase after the adoption of IFRS.Likewise, the results of research by Suprihatin and Tresnaningsih (2013) also propose the same results.
One of the objectives of the establishment of IFRS is to equalize the use of rules in accounting practices in different countries, so this can facilitate investors in detecting earnings management performed by companies.Ewert and Wagenhof (2005) state that stricter accounting standards can reduce earnings management and improve the quality of financial reporting.IFRS requires more and more detailed disclosures.Based on the research results and the above explanation it can be hypothesized that: H1: There are effects of the IFRS adoption on earnings management in manufacturing companies registered on the Indonesia Stock Exchange.
The adoption of principle-based IFRS is expected to reduce the level of earnings management.Wang and Campbell (2012) suggest that the adoption of IFRS lowered earnings management while Rudra and Bhattacharjee (2012) research concludes that the adoption of IFRS positively affect earnings management, but more research will be done in order to obtain more powerful evidence.The adoption of IFRS in previous studies resulted in two directions, i.e. increasing and decreasing earnings management.However, referring to the IAI statement in 2012 it is stated that IFRS may complicate earnings management action through the implementation of fair value and the balance sheet approach.The study assumption is there are differences in the level of earnings management in companies before and after IFRS, companies that adopt IFRS tend to have smaller earnings management.Based on the explanation above it can be concluded: H2: There is a difference in the level of earnings management among companies registered on the Indonesia Stock Exchange before and after the full adoption of IFRS.

RESEARCH METHODS Population and Sample
The populations used in this study are all companies listed on the Indonesia Stock Exchange (BEI) in 2010,2011,2012  This study analyzes the quality of accounting information before and after the adoption of IFRS proxied by earnings management.The adoption of IFRS was particularly used effectively as of January 1, 2012.Therefore, taking into account the availability of data, the period after the adoption (post IFRS period) was elected 2012 and 2013.Meanwhile, the period before adoption was elected 2010 and 2011.
The total number of companies listed on the Indonesia Stock Exchange in 2013 was 139 companies (idx statistical quarter 1 2014).But the amount of the final sample used after purposive sampling remained 85 companies.It can be shown in Table 1.The number of initial observations in 2010, 2011, 2012 and 2013 was the same amounting to 139 companies.After investigation it turned out that companies conducting an IPO prior to January 1 st 2010 were 27 companies, the companies that did not use IDR currency were 24 and the companies closed the books not on December 31 were 3 companies.Samples temporarily used were 85 companies for each of the year 2010, 2011, 2012 and 2013.So the total observations used before and after the adoption were 170 companies.The research data was obtained from various sources that complement each other like the financial report of the companies, IDX Fact Book, ICMD, and monthly stock price of BEI website

Descriptive Statistics Analysis
Based on Table 2, the results of descriptive statistics indicate that mean of discretionary accruals of manufacturing company is 4.96 with a standard deviation of 0.68.The value of maximum discretionary accruals is 7.00 and the minimum value of discretionary accruals is 2.94.IFRS is dummy variable which means that the value of 1 is used if companies apply IFRS and the value of 0 is used if companies have not applied IFRS.174 samples scored one in 2012-2013 when the application of IFRS has been enforced and other 174 samples obtained zero in the 2010 -2011 when the mandatory implementation of IFRS has not been implemented by companies listed on the Indonesia Stock Exchange.The mean value of the IFRS is 0.48 with a standard deviation of 0.50.The size of manufacturing companies on mean is at 4.87 with a standard deviation of 1.48.The maximum value of the size of the companies is 7.84 and the minimum value of the size of the companies is 0.5.The highest value of D/E ratio is 18.28 and the lowest one is -10.34.The mean value of D/E ratio is 1.3 with a standard deviation of 2.20.The lowest value of M/B is -9.27 and the highest one is 47.27.The mean M/B value of the companies is 2.84 with a standard deviation of 5.99.The mean value of institutional ownership of manufacturing companies is overall at the number of 2.88 with a standard deviation of 14.18.

Table 2
Based on the results of t statistical testing in Table3for the first hypothesis testing it can be concluded that the independent variable which is IFRS is not significant to earnings management.The significance value obtained is 0.343 which is bigger than 0.05.The variabel financial leverage (D/E) insignificant because significance value 0.555 is bigger tahan 0.05.The variable