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Wulandari (Alumni Program MSi FEB Universitas Gadjah Mada)

Ratu Ayu, S.W.M.A. (FE Universitas Jenderal Soedirman)

[Jurnal Akuntansi (SNA 13) – Akuntansi Keuangan dan Pasar Modal]



This research aims to provide empirical evidence concerning the effect of different legal systems (common and civil law) on earnings management and the influence of legal system on earnings management which is weakened by institutional ownership. The differences of legal systems are pointed out in many characteristic that follows them. One of them is the different implementation level in same accounting standard. We distinguish between accruals and real-based earnings management and assume that corporations in common law countries (tight implementation accounting standard) apt to opting real-based earnings management, and corporations in civil law countries (lax implementation accounting standard) apt to opting accruals-based earnings management.

To investigate this issues, we compare the level earnings management in England (common law) and France (civil law). The data for our tests is took from the OSIRIS database. The sample comprises 112 firm-year observations for England companies and 58 firm-year observations for France companies for the years 2005-2008.

The result of the examination indicates that England yield higher level real-based earnings management than France. On the other hand, France yield higher level accrual-based earnings management than England. Besides that the results, we also document that institutional ownership can weakened the influence of legal system on real-based earnings management. However, institutional ownership fail to weak the influence of legal system on accrual-based earnings management, because corporations in France generally have bank-based financial system with low institutional ownership. Higher debt level in corporation encourage to make earnings manipulation because they fell attached to meet earnings target from the creditors. Low institutional ownership decline directly to the monitoring on manager, so this can give incentive for manager to make earnings management.

Keywords: earnings management (accruals and real), institutional ownership, legal systems (common and civil law).


Inevitable that today almost all countries in the world have been referring to and do convergence on IFRS accounting standards which leads to the principle-based accounting standards. Principle-based accounting standards has the characteristics of accounting standards are more lax than the rules-based accounting standards (Kusuma, 2007). Arifin (2008) empirically found that companies in the U.S. state with a rule-based accounting standards would prefer to make real profit because of the tight management of existing accounting standards make accrual earnings management activities can no longer be done.

Companies in Germany with principle-based accounting standards would prefer to perform accrual earnings management due to lax standards still allows management to perform activities of accrual earnings management is less expensive. The finding is consistent with Nelson (2003), Demski (2004) and Ewert and Wagenhofer (2005) that accounting standards are more stringent (tighter) can reduce the practice of accrual earnings management, but increase the real earnings management……

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