Extension of the study to other countries

Oct 13, 2025 by recoveryshake.com 106 views

Analysis of the Effect of Good Corporate Governance and Audit Quality Mechanisms on Profit Management

Introduction

Profit is a crucial indicator used to assess the success or performance of a company. In this context, profits are measured based on accrual principles, where managers have the power to engineer profit numbers in accordance with certain interests. This phenomenon is known as earnings management, namely actions taken by managers to manipulate financial statements so that the reported profits become higher, lower, or remain the same in a certain period. Profit management practices often arise because of the interests of various parties, both managers, shareholders, and creditors. Big cases such as Enron, Worldcom, and Merck in the United States show how serious the negative impact of this practice is. Therefore, the application of good corporate governance (GCG) mechanisms, as well as auditing carried out by quality accountants, as produced by leading public accountant companies (Big Four), is very important to prevent earnings management.

Background of the Study

Earnings management is a widespread phenomenon that has been observed in various companies across the globe. This practice can have serious consequences, including financial losses, damage to reputation, and even bankruptcy. In recent years, there has been a growing concern about the transparency and accountability of financial statements, particularly in the context of corporate governance. Good corporate governance (GCG) is a set of principles and practices that aim to promote transparency, accountability, and fairness in the management of a company. The application of GCG mechanisms, such as the proportion of the Board of Commissioners and the Independent Audit Committee, is considered essential to prevent earnings management.

Research Methodology

This study aims to analyze the effect of the good corporate governance mechanism and audit quality on earnings management, with a focus on companies listed on the Indonesia Stock Exchange (BEI) during the period 2008 to 2010. The research method used is causal research, where data is obtained from the population of all manufacturing companies listed on the IDX, which amounted to 124 companies. By using purposive sampling techniques, researchers received a sample of 56 companies that were observed for three years, so that the total observation in this study reached 168.

Data Analysis

Data analysis is carried out using multiple linear regression. The results of hypothesis testing show that, partially, the proportion of the Board of Commissioners Independent and the Independent Audit Committee has a significant influence on earnings management. Meanwhile, when seen simultaneously, it was found that the mechanism of good corporate governance, which included managerial ownership, institutional ownership, the proportion of the Board of Commissioners, and the audit quality, also had a significant effect on the practice of earnings management in these companies.

Results and Discussion

The results of this study provide valuable insights into the relationship between good corporate governance and audit quality mechanisms and earnings management. The findings suggest that the existence of a good corporate governance mechanism, especially in the form of the proportion of the Board of Commissioners and Independent Audit Committee, can be one way to suppress the company so as not to carry out adverse earnings management practices. This conclusion is consistent with the principles of good corporate governance, which emphasize the importance of transparency, accountability, and fairness in the management of a company.

Conclusion

In conclusion, this study highlights the importance of good corporate governance and audit quality mechanisms in preventing earnings management. The findings of this study provide valuable insights into the relationship between these mechanisms and earnings management, and suggest that the application of good corporate governance and audit quality mechanisms can be an effective way to suppress the company so as not to carry out adverse earnings management practices. Therefore, it is essential for companies to apply the principles of good corporate governance strictly and choose quality auditors so that transparency and accountability of financial statements are maintained.

Implications of the Study

The implications of this study are significant, particularly in the context of corporate governance and audit quality. The findings of this study suggest that the application of good corporate governance and audit quality mechanisms can be an effective way to prevent earnings management. This conclusion is consistent with the principles of good corporate governance, which emphasize the importance of transparency, accountability, and fairness in the management of a company. Therefore, it is essential for companies to apply the principles of good corporate governance strictly and choose quality auditors so that transparency and accountability of financial statements are maintained.

Limitations of the Study

This study has several limitations that should be noted. Firstly, the study is limited to companies listed on the Indonesia Stock Exchange (BEI) during the period 2008 to 2010. Secondly, the study uses a causal research design, which may not be able to capture the complex relationships between the variables of interest. Finally, the study relies on secondary data, which may not be comprehensive or accurate.

Future Research Directions

Future research directions include the following:

Extension of the study to other countries: The study can be extended to other countries to examine the relationship between good corporate governance and audit quality mechanisms and earnings management in different cultural and regulatory contexts.
Use of primary data: Future studies can use primary data to examine the relationship between good corporate governance and audit quality mechanisms and earnings management.
Examination of other variables: Future studies can examine the relationship between other variables, such as board composition, executive compensation, and corporate social responsibility, and earnings management.

Conclusion

Q: What is good corporate governance?

A: Good corporate governance (GCG) refers to a set of principles and practices that aim to promote transparency, accountability, and fairness in the management of a company. It involves the establishment of a board of directors, the appointment of independent directors, and the implementation of internal controls and risk management systems.

Q: Why is good corporate governance important?

A: Good corporate governance is essential for preventing earnings management and ensuring the transparency and accountability of financial statements. It helps to promote trust and confidence among investors, customers, and other stakeholders, and can lead to improved financial performance and long-term sustainability.

Q: What is audit quality?

A: Audit quality refers to the ability of an auditor to provide an independent and objective opinion on the financial statements of a company. It involves the application of professional standards and techniques to ensure that the audit is conducted in a thorough and unbiased manner.

Q: Why is audit quality important?

A: Audit quality is essential for ensuring the accuracy and reliability of financial statements. It helps to prevent earnings management and other forms of financial misstatement, and can lead to improved financial performance and long-term sustainability.

Q: What are the benefits of good corporate governance and audit quality mechanisms?

A: The benefits of good corporate governance and audit quality mechanisms include:

Improved financial performance and long-term sustainability
Increased transparency and accountability of financial statements
Enhanced trust and confidence among investors, customers, and other stakeholders
Reduced risk of earnings management and other forms of financial misstatement
Improved corporate reputation and brand value

Q: How can companies implement good corporate governance and audit quality mechanisms?

A: Companies can implement good corporate governance and audit quality mechanisms by:

Establishing a board of directors and appointing independent directors
Implementing internal controls and risk management systems
Conducting regular audits and reviews of financial statements
Ensuring that auditors are independent and objective
Providing training and development opportunities for employees

Q: What are the challenges of implementing good corporate governance and audit quality mechanisms?

A: The challenges of implementing good corporate governance and audit quality mechanisms include:

Resistance to change from employees and management
Limited resources and budget constraints
Difficulty in finding and retaining qualified and experienced auditors
Complexity of implementing and maintaining internal controls and risk management systems
Difficulty in ensuring the independence and objectivity of auditors

Q: How can companies overcome the challenges of implementing good corporate governance and audit quality mechanisms?

A: Companies can overcome the challenges of implementing good corporate governance and audit quality mechanisms by:

Providing training and development opportunities for employees
Allocating sufficient resources and budget to support the implementation of good corporate governance and audit quality mechanisms
Conducting regular reviews and assessments of the effectiveness of internal controls and risk management systems
Ensuring that auditors are independent and objective
Providing incentives and rewards for employees who demonstrate a commitment to good corporate governance and audit quality mechanisms.

Q: What are the future directions for research on good corporate governance and audit quality mechanisms?

A: Future directions for research on good corporate governance and audit quality mechanisms include:

Examining the relationship between good corporate governance and audit quality mechanisms and earnings management in different cultural and regulatory contexts
Investigating the impact of good corporate governance and audit quality mechanisms on financial performance and long-term sustainability
Developing and testing new models and frameworks for implementing good corporate governance and audit quality mechanisms
Examining the role of technology in supporting the implementation of good corporate governance and audit quality mechanisms.