ESC
Web of Science
Entrepreneurship and Sustainability Issues Open Access Q1
Scopus - coverage starting with 2017 material
Received: 2020-02-10  |  Accepted: 2020-05-25  |  Published: 2020-06-30

Title

Corporate governance mechanism and financial performance: role of earnings management


Abstract

The mechanism of good corporate governance is used to prevent the management of the company from engaging in unethical actions, such as the earnings management. It can be an effective way to control management. This study aims to analyse corporate governance, consisting of the size of the board of commissioners, the size of the sharia supervisory board, and the audit committee on financial performance, measured as return on assets (ROA), with earnings management as the mediating variable. The sample used for the study consists of nine Indonesian shariah banks and the period of analysis is 2013-2017. The results of the path analysis show that the size of the board of commissioners has a negative effect on the company’s ROA. The study also finds that the size of the sharia supervisory board, audit committee and earnings management do not have significant effects on financial performance. Earnings management has a positive mediating role on the relationship between the board of commissioners, the audit committee and ROA. This finding indicates that the existence of the board of commissioners is effective in supervising the management. Thus the mechanism corporate governance can limit the managers’ discretionary behavior and prevent earnings management.


Keywords

board of commissioners, sharia supervisory board, audit committee, financial performance, earnings management


JEL classifications

M41 , M48 , M49


URI

http://jssidoi.org/jesi/article/593


DOI


Pages

3395-3409


Funding

The research was conducted with the support of the Universitas Riau, Indonesia

This is an open access issue and all published articles are licensed under a
Creative Commons Attribution 4.0 International License

Authors

Savitri, Enni
University of Riau, Pekanbaru, Indonesia https://unri.ac.id
Articles by this author in: CrossRef |  Google Scholar

Andreas, Andreas
University of Riau, Pekanbaru, Indonesia https://unri.ac.id
Articles by this author in: CrossRef |  Google Scholar

Syahza, Almasdi
University of Riau, Pekanbaru, Indonesia https://unri.ac.id
Articles by this author in: CrossRef |  Google Scholar

Gumanti, Tatang Ary
University Bhayangkara Jakarta Raya, South Jakarta, Indonesia https://ubharajaya.ac.id
Articles by this author in: CrossRef |  Google Scholar

Abdullah, Nik Herda Nik
Taylor's University, Subang Jaya, Malaysia https://taylors.edu.my
Articles by this author in: CrossRef |  Google Scholar

Journal title

Entrepreneurship and Sustainability Issues

Volume

7


Number

4


Issue date

June 2020


Issue DOI


ISSN

ISSN 2345-0282 (online)


Publisher

VšĮ Entrepreneurship and Sustainability Center, Vilnius, Lithuania

Cited

Google Scholar

Article views & downloads

HTML views: 606  |  PDF downloads: 190

References


Abdelsalam, O.; Dimitropoulus, P.; Elhanass, M.; & Tergiosleventis. 2016. Earnings Management Behaviors under Different Monitoring Mechanism: The Case of Islamic and Conventional Banks. Journal of Economic Behavior & Organization 132(S): 155-173. https://doi.org/10.1016/j.jebo.2016.04.022

Search via ReFindit


Adeniran, A.O.; Hamid, M.J.; Noor, H.M. 2020. Impact of information technology on strategic management in the banking sector of Iraq. Insights into Regional Development 2(2): 592-601. https://doi.org/10.9770/IRD.2020.2.2(7)

Search via ReFindit


Afnan, A.; & Rahardja. 2014. The Influence of the Size of the BoCs and the Proportion of Independent Directors on Financial Performance with Earnings Management as Intervening Variable. Diponegoro Journal of Accounting 3(3): 1-13. Retrieved from https://ejournal3.undip.ac.id/index.php/accounting/article/view/6039

Search via ReFindit


Ajili, H.; & Bouri, Abdelfettah. 2018. Corporate Governance Quality of Islamic Banks: Measurement and Effect on Financial Performance. International Journal of Islamic and Middle Eastern Finance and Management 11(3): 470-487. https://doi.org/10.1108/IMEFM-05-2017-0131

Search via ReFindit


Akpey, I.G.; Azembila.; & Benjamin, A. 2016. The Effect of Audit Committees on the Performance of Firms Listed on the Ghana Stock Exchange. Journal of Business and Management 18(11): 55-62. http://www.iosrjournals.org/iosr-jbm/papers/Vol18-issue11/Version-5/H1811055562.pdf

Search via ReFindit


Akram, M.A.; Hunjra, A.I.; Butt, S.; & Ijaz, I. 2015. Earnings Management and Organizational Performance: Pakistan vs India, Basic Research Journal of Business Management and Accounts 4(9): 211-220. Retrieved from https://www.researchgate.net/publication/316430399_Earnings_management_and_organizational_performance_Pakistan_VS_India

Search via ReFindit


Arens, A. A.; Randal, J. E.; Mark, S. B.; Amir, A.J. 2011. Audit Services dan Assurance, Jakarta: Salemba Empat.

Search via ReFindit


Arniati, T.; Puspita, D.A.; Amin, A.; & Pirzada, K. 2019. The Implementation of Good Corporate Governance Model and Auditor Independence in Earnings’ Quality Improvement. Entrepreneurship and Sustainability Issues 7(1): 188-200. 10.9770/jesi.2019.7.1(15) https://doi.org/

Search via ReFindit


Arora, A.; & Sharma, C. 2016. Corporate Governance and Firm Performance in Developing Countries: Evidence from India. The International Journal of Business in Society 16(2): 420-436. https://dx.doi.org/10.1108/CG-01-2016-0018

Search via ReFindit


Bhatt, R. R.; & Bhattacharya, S. 2015. Board Structure and Firm Performance in Indian IT firms. Journal of Advances in Management Research 12(3): 232-248. https://doi.org/10.1108/JAMR-07-2014-0042

Search via ReFindit


Collier, P. & Gregory, A., 1999. Audit committee activity and agency costs. Journal of Accounting and Public Policy, 18(4-5), pp.311–332. Available at: https://doi.org/10.1016/S0278-4254(99)00015-0

Search via ReFindit


Corrina, F. 2018. The Influence of Independent Commissioners and Audit Committees on The Financial Performance of Manufacturing Companies Listed on The Indonesia Stock Exchange in 2015-2017. Jurnal Manajemen dan Bisnis 7(4): 137-142. 10.34006/jmb.v7i4.29 https://doi.org/

Search via ReFindit


Elghuweel, M. I.; Ntim, C. G.; Opong, K. K.; & Avison, L. 2017. Corporate Governance, Islamic Governance and Earnings Management in Oman: New Empirical Insights from a Behavioral Theoretical Framework. Journal of Accounting in Emerging Economies 7(2): 190-224. 10.1108/JAEE-09-2015-0064 https://doi.org/

Search via ReFindit


Farook, S.; Hassan, M. K.; & Clinch, G. 2012. Profit Distribution Management by Islamic Banks: An Empirical Investigation. The Quarterly Review of Economics and Finance 52(3): 333-347. 10.1016/j.qref.2012.04.007 https://doi.org/

Search via ReFindit


Firdaus, M. 2007. Sharia Supervision System and Mechanism. Jakarta: Renaisan.

Search via ReFindit


Hamdi, F. M.; & Zarai, M. A. 2013. Perspective of Earnings Management in Islamic Banking Institutions. International Journal of Business and Management Invention. 2(91): 26-38. https://pdfs.semanticscholar.org/0ad0/2ced864e7bffb1ac625c751ad6cec5de313e.pdf

Search via ReFindit


Healy, P. M. & Wahlen, J. M. 1999. A Review of The Earnings Management Literature and Its Implications for Standard Setting. Accounting Horizons, 13(4): 365–383. https://doi.org/10.2308/acch.1999.13.4.365

Search via ReFindit


Hermalin, B. E. & Weisbach, M. S. 2003. Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature. FRBNY Economic Policy Review 9(4): 7-26. https://www.newyorkfed.org/medialibrary/media/research/epr/03v09n1/0304herm.pdf

Search via ReFindit


How, J. C. Y.; Abdul Karim, M.; & Verhoeven, P. (2005). Islamic Financing and Bank Risks: The Case of Malaysia. Thunderbird International Business Review 47(1); 75–94. http://doi.org/10.1002/tie.20041

Search via ReFindit


Jensen, M. 1993. The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems. Journal of Finance 48(3): 831-80 https://doi.org/10.1111/j.1540-6261.1993.tb04022.x

Search via ReFindit


Jensen, M.C.; & Meckling, W.H. 1976. Theory of The Firm: Managerial Behaviour, Agency Cost and Ownership Structure, Journal of Financial Economics 3(4): 305-360. 10.1016/0304-405X(76)90026-X https://doi.org/

Search via ReFindit


Kasznik, R. 1999. On the Association between Voluntary Disclosure and Earnings Management. Journal of Accounting Research, 37: 57-81 http://doi.org/10.2307/2491396

Search via ReFindit


Kholid, M.N.; & Bachtiar, A. 2015. Good Corporate Governance and Performance of Maqasid Syariah at Sharia Banks in Indonesia. Jurnal Akuntansi dan Auditing Indonesia 19(2): 126-136. 10.20885/jaai.vol19.iss2.art4 https://doi.org/

Search via ReFindit


Kieso, D.E.; Weygent, J.J.; & Warfield, T.D. 2011. Intermediate Accounting, 12th Ed, New York: Jonn Willey and Sons, Inc.

Search via ReFindit


Klein, A. 2002. Audit Committee, Board of Director Characteristics, and Earnings Management. Journal of Accounting and Economics 33(3): 375-401. 10.1016/S0165-4101(02)00059-9 https://doi.org/

Search via ReFindit


Komite Nasional Kebijakan Governance (KNKG). 2006. General Guidelines of Good Corporate Governance in Indonesia. Jakarta. Indonesia

Search via ReFindit


Larbsh. MM. 2015. Islamic Perspective of Corporate Governance. Accounting Department Faculty of Economic and Commerce. Al-Asmarya Islamic University. https://bulletin.zu.edu.ly/issue_n17_1/Contents/E_10.pdf

Search via ReFindit


Luhn, A.; Aslanyan, S.; Leopoldseder, Ch.; & Priess, P. 2017. An Evaluation of The Knowledge Management System's Components and Its Financial and Non-Financial Implications. Entrepreneurship and Sustainability Issues 5(2): 315-329. 10.9770/jesi.2017.5.2(11) https://doi.org/

Search via ReFindit


Makhrus, M. 2013. The Influence of the Audit Committee on Company Performance through Earnings Management as an Intervening Variable, Jurnal Sekolah Tinggi Ekonomi Islam 1(1): 53-77. 10.35836/jakis.v1i1.57 https://doi.org/

Search via ReFindit


McNichols, M.F. & Stubben, S.R., 2008. Does Earnings Management Affect Firms’ Investment Decisions? The Accounting Review, 83(6), pp.1571–1603. Available at: https://doi.org/10.2308/accr.2008.83.6.1571

Search via ReFindit


Mollah, S.; & Zaman, M. 2015. Shari’ah Supervision, Corporate Governance, and Performance: Conventional vs. Islamic Banks, Journal of Banking & Finance 58(c): 418-435. 10.1016/j.jbankfin.2015.04.030 https://doi.org/

Search via ReFindit


Muneeza, A.; & Hassan. R. (2014). Shari'ah Corporate Governance: The Need for a Special Governance Code. Corporate Governance 14(1): 120-129. https://doi.org/10.1108/CG-02-2011-0015

Search via ReFindit


Musibah, A. S.; & Sulaiman. W. 2014. The Mediating Effect of Financial Performance on the Relationship between Shariah Supervisory Board Effectiveness, Intellectual Capital and Corporate Social Responsibility, of Islamic Banks in Gulf Cooperation Council Countries. Asian Social Sciences 10(17): 139-164. 10.5539/ass.v10n17p139 https://doi.org/

Search via ReFindit


Nabila, A.; & Daljono. 2013, The Effect Proportion of Independent Commissioners, Audit Committee and Auditor’s Reputation Towards Earnings Management, Diponegoro Journal of Accounting. 2(1): 1-10. https://ejournal3.undip.ac.id/index.php/accounting/article/view/2286/2305

Search via ReFindit


OJK. 2018. Indonesian Islamic Banking Statistics. Retrieved from . https://www.ojk.go.id/id/kanal/Syariah/data-dan-statistik/statistik-perbankan-syariah/default.aspx

Search via ReFindit


Okafor. Tochukwu, G.; Ezeagba.; Charles, E.; & Innocent, O. C. 2018. Effect of Earnings Management on Performance of Corporate Organisation in Nigeria. International Journal of Business Management and Economic Review 1(3): 88-101. http://ijbmer.org/uploads/BMER_1_17.pdf

Search via ReFindit


Prasojo. 2015. The Effect of Implementation of Good Corporate Governance on the Financial Performance of Sharia Banks. Jurnal Dinamika Akuntansi dan Bisnis 2(1): 59-69. Retrieved from http://jurnal.unsyiah.ac.id/JDAB/article/view/3613

Search via ReFindit


Quttainah, M. A.; Song, L.; & Wu, Q. 2013. Do Syariahic Banks Employ Less Earnings Management. Journal of International Financial Management & Accounting 24(3): 203-233. https://doi.org/10.1111/jifm.12011

Search via ReFindit


Rustam, B.R. 2013. Syaria Banking Risk Management in Indonesia, Jakarta: Salemba Empat.

Search via ReFindit


Savitri, E. 2018. Relationship between Family Ownership, Agency Costs Towards Financial Performance and Business Strategy as Mediation. Business: Theory and Practice 19(6): 49-58. 10.3846/btp.2018.06 https://doi.org/

Search via ReFindit


Scott, W. R. 2015. Financial Accounting Theory, 7th Ed. Toronto: Canada: Pearson Education.

Search via ReFindit


Shabri, M.; Majid, A.; Salina. H.; Kassim. 2015. Assessing the Contribution of Islamic Finance to Economic Growth: Empirical Evidence from Malaysia. Journal of Islamic Accounting and Business Research 6(2): 292-310. https:// doi: org/10.1108/JIABR-07-2012-0050

Search via ReFindit


Shin, H.; & Kim, S.I. 2019. The Effect of Corporate Governance on Earnings Quality and Market Reaction to Low-Quality Earnings: Korean Evidence. Sustainability 11(1): 102. 10.3390/su11010102 https://doi.org/

Search via ReFindit


Siddique, A.; Masood, O.; Javaria, K.; Huy, D.T.N. 2020. A comparative study of performance of commercial banks in ASIAN developing and developed countries. Insights into Regional Development, 2(2): 580-591. https://doi.org/10.9770/IRD.2020.2.2(6)

Search via ReFindit


Soewarno, N.; & Mahyarni, M. 2018.The Effect of Good Corporate Governance Mechanism and Corporate Social Responsibility on Financial Performance with Earnings Management as Mediating Variable, Asian Journal of Accounting Research 3(1): 41-60. 10.1108/AJAR-06-2018-0008 https://doi.org/

Search via ReFindit


Taufiq, M.; Lubis, A.F.; & Mulyani, S. 2014. The Effect of Implementation of Good Corporate Governance on Financial Performance With Earnings Management as an Intervening Variable. Jurnal Telaah & Riset Akuntansi 7(1): 66-75. Retrieved from http://jurnal.unsyiah.ac.id/TRA/article/view/10136

Search via ReFindit


Wild, J.J. 1996. The Audit Committee and Earnings Quality, Journal of Accounting, Auditing, and Finance 11(2): 247-276. 10.1177%2F0148558X9601100206 https://doi.org/

Search via ReFindit


Yermack, D. 1996. Higher Market Valuation of Companies with a Small Board of Directors. Journal of Financial Economics 40(2): 185-212. 00844-5 http://dx.doi.org/10.1016/0304-405X(95)

Search via ReFindit


Zack M.; McKeen, J.; & Singh S. 2009. Knowledge Management and Organizational Performance: An Exploratory Analysis, Journal of Knowledge Management 13(6): 392-409. https://doi.org/10.1108/13673270910997088

Search via ReFindit