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Imam Subekti

Anita Wijayanti

Komarudin Akhmad

(Universitas Brawijaya)


The present study aims to investigate earnings management behavior measured by real and accruals transactions i.e. abnormal cash flow of operation, abnormal production cost, abnormal discretionary, short-term discretionary accruals, and long-term discretionary accruals. The study apllies a perspective of prospect theory. One prediction of prospect theory is that managers tend to manage earnings to avoid earnings negative. It means that positive earnings around zero is earnings managed to avoid negative earnings.

The present study classifies samples become identified firms and unidentified firm engaging in earnings management based on EPS distribution. It is different with previous studies using ROA distribution. Distribution EPS is more usefullness for Indonesian’s investors especially minority shareholders beacuse EPS has more function than ROA to predict future return. The EPS distribution is based on exchange rate between Rupiah and US Dollar, and between Rupiah and EURO as sensitivity analysis. The present study also applies an adjusment on each model of earnings management proxy in order to obtain better regression parameter of the models.

Result of the present study shows that most of Indonesian publilc firms tend to manage earnings based on real transactions than accruals transactions. All proxies of real earnings management support hypothesis that positive earnings around zero are managed through the real transactions. On contrary, only long-short discretionary accruals which support hypothesis revealing that positive earnings around zero is managed through accruals accounts. These results are consistent with sensitivity analysis based on exchange rate between Rupiah and EURO.

Keywords: abnormal cash flow of operation, abnormal production cost, abnormal discretionary expenses, short-term discretionary accruals, long-term discretionary accruals, EPS distribution, and prospect theory.


The existence of fraud charges related to accounting issues occurring in many countries such as America, Europe and in Asia such as Enron, WorldCom, Xerox, Ahold and others have triggered a sharper accounting research in particular to the topic of earnings management. Information related to accounting cases revealed that some financial transactions have been manipulated and used as the basis for company management to manage earnings in order to achieve a predetermined profit targets. These conditions encourage researchers to investigate more detail about the practice of earnings management that is based on a real transaction or a company operating activities associated with the company’s cash flow (the real earnings management) in addition based on accrual transactions (accruals earnings management).

Operational transactions related to cash flow the company has a major influence on the survival of the company. If the company is one of managing it will have serious economic consequences than the corporate deals that are only accrual. Therefore, this study will attempt to reveal the presence of earnings management that is based on the operational activities of companies associated with the company’s operating cash flow and accrual transactions are short term and long term (short-term and long-term). This idea is supported by the results of the last decade that shows that more corporate managers based on real transactions compared with companies that are based on accrual transactions the company (Graham et al. 2005, Roychodhury 2006, Bushee 1998). ….

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