The Influence of Corporate Governance on Earnings Management: An Empirical Analysis on Islamic Banks
Abstract
The problem of financial statement fraud in the banking industry, including Islamic banks, has become an important issue because it has an impact on customer trust. This research aims to analyze the role of governance in reducing earnings management in Islamic banks in Indonesia. This study is relevant and important because there are still only a limited number of studies that examine governance and earnings management in Islamic banks and use the quality of auditing by public accounting firms as an additional variable. The sample comprises 80 firm-year observations from Indonesian Islamic banks during the 2017-2022 period. The independent variables analyzed are the effectiveness of the sharia supervisory board (SSB), the board of commissioners, and the audit committee. The dependent variable is earnings management as measured by discretionary loan loss provisions (DLLP). The moderator variable is auditor quality. The test results using the partial least squares (PLS) technique show that the effectiveness of the SSB has no influence on earnings management (β=0.081, p-value=0.21). Meanwhile, the effectiveness of the board of commissioners has a significant negative influence on earnings management (β=-0.402, p-value <0.01) and the audit committee has a negative influence on earnings management (β=-0.071, p-value=0.04). The results of testing the moderating role of the public accounting firm’s auditor quality show that only hypothesis 5 is supported (β=-0.187, p-value=0.03). The practical relevance of this study is the importance of regulators and the government in strengthening the role of the board of commissioners, audit committee, and auditing by public accounting firms and SSBs in preventing and reducing the practice of manipulating financial reports in Islamic banks.
References
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24. Mamatzakis, E., Alexakis, C., Yahyaee, K.A., Pappas, V., Mobarek, A. and Mollah, S. (2023), Does corporate governance affect the performance and stability of Islamic banks?, Corporate Governance, Vol. 23 No. 4, pp. 888-919. https://doi.org/10.1108/CG-05-2022-0217
25. Mangala, D., & Singla, N. (2021). Do corporate governance practices restrain earnings management in banking industry ? Lessons from India. Journal of Financial Reporting and Accounting https://doi.org/10.1108/JFRA-02-2021-0060
26. Mardjono, E. S., Chen, Y. S., & He, L. J. (2020). Earning management and the effect characteristics of audit committee, independent commissioners: Evidence from indonesia. International Journal of Business and Society, 21(2), 569–587. https://doi.org/10.33736/ijbs.3272.2020.
27. Mollik, Abu T.; Mir, Monir; McIver, Ron; and Bepari, Md. Khokan, (2020). Effects of Audit Quality and Audit Committee Characteristics on Earnings Management During the Global Financial Crisis – Evidence from Australia, Australasian Accounting, Business and Finance Journal, 14(4), 2020, 85-115. doi:10.14453/aabfj.v14i4.6
28. Mousavi, M., Grzegorz Zimon, Mahdi Salehi, & Nina Stepnicka. 2022. The Effect of Corporate Governance Structure on Fraud and Money Laundering. Risks 10: 176. https://doi.org/ 10.3390/risks10090176
29. Mukhibad, H., Jayanto, P. Y., & Anisykurlillah, I. (2021). Islamic corporate governance and financial statements fraud: A study of islamic banks. Journal of Governance and Regulation, 10(2 Special issue), 361–368. https://doi.org/10.22495/JGRV10I2SIART16.
30. Mutamimah, M. and Saputri, P.L. (2023), Corporate governance and financing risk in Islamic banks in Indonesia. Journal of Islamic Accounting and Business Research, Vol. 14 No. 3, pp. 436-450. https://doi.org/10.1108/JIABR-09-2021-0268.
31. Noor, NF & J. Mohamed. 2019. Profit Equalisation Reserve and Income Smoothing Practices in Malaysian Islamic Banks: Robust Statistical Analysis. Asian Academy of Management Journal 24(Supp.1):79-92 DOI:10.21315/aamj2019.24.s1.6.
32. Nurkhin, A, Kusmuriyanto, Widiyanto Widiyanto, Anna Kania Widiatami & Ida Nur Aeni (2023). Do corporate governance implementation and bank characteristics improve the performance of Indonesian Islamic banking? Before- COVID-19 pandemic analysis. Banks and Bank Systems, 18(3), 126-135. doi:10.21511/bbs.18(3).2023.11.
33. Othman, H. M. H. Ben. (2016). The impact of corporate governance mechanisms on earnings management in Islamic banks in the Middle East region. Journal of Islamic Accounting and Business Research, 7(4). https://doi.org/10.1111/j.1467-8381.2004.00182.x
34. Othman, H. Ben, & Mersni, H. (2014). The use of discretionary loan loss provisions by Islamic banks and conventional banks in the Middle East region: A comparative study. Studies in Economics and Finance, 31(1), 106–128. https://doi.org/10.1108/SEF-02-2013-0017.
35. Pahlevi, R.W. (2023), Mapping of Islamic corporate governance research: a bibliometric analysis. Journal of Islamic Accounting and Business Research, Vol. 14 No. 4, pp. 538-553. https://doi.org/10.1108/JIABR-12-2021-0314.
36. Ratmono, D & Frendy, (2022). Examining the fraud diamond theory through ethical culture variables: A study of regional development banks in Indonesia. Cogent Business & Management, vol. 9(1), pages 2117161-211, December. DOI: 10.1080/23311975.2022.2117161.
37. Salman, KR (2023). What drives the level of social reporting disclosure at Islamic commercial banks? Banks and Bank Systems, 18(4), 61-73. doi:10.21511/bbs.18(4).2023.06.
38. Shira, R. K. (2022). Corporate governance, competition and earnings management: evidence from Asian emerging economies. Journal of Financial Reporting and Accounting. https://doi.org/10.1108/JFRA-07-2022-0270
39. Sudiyatno, B. Batara Daniel Bagana, Widhian Hardiyanti, Elen Puspitasari & Siska Dwi Safitri (2024). The role of corporate social responsibility as a moderating factor in influencing bank performance in Indonesia. Banks and Bank Systems, 19(1), 1-11. doi:10.21511/bbs.19(1).2024.01.
40. Sueb, M., Prasojo, Muhfiatun, Lailatis Syarifah & Rosyid Nur Anggara Putra (2022). The effect of shariah board characteristics, risk-taking, and maqasid shariah on an Islamic bank’s performance. Banks and Bank Systems, 17(3), 89-101. doi:10.21511/bbs.17(3).2022.08
41. Suripto, Arif Sugiono & Havid Dasuki (2023). Comparing the resilience of Sharia and conventional banking to the financial crisis in the Association of Southeast Asian Nations. Banks and Bank Systems, 18(3), 192-204. doi:10.21511/bbs.18(3).2023.16
42. Usman, M., Nwachukwu, J., & Ezeani, E. (2022). The impact of board characteristics on the extent of earnings management: conditional evidence from quantile regressions. International Journal of Accounting and Information Management, 30(5), 600–616. https://doi.org/10.1108/IJAIM-05-2022-0112.
43. Yang, D., Jiao, H., & Buckland, R. (2017). The determinants of financial fraud in Chinese firms: Does corporate governance as an institutional innovation matter? Technological Forecasting and Social Change, 125(August 2015), 309–320. https://doi.org/10.1016/j.techfore.2017.06.035.
44. Zainuldin, M. H., & Lui, T. K. (2020). Earnings management in financial institutions: A comparative study of Islamic banks and conventional banks in emerging markets. Pacific Basin Finance Journal, 62(July 2017), 101044. https://doi.org/10.1016/j.pacfin.2018.07.005
2. Aleqab, M. M., & Ighnaim, M. M. (2021). The impact of board characteristics on earnings management. Journal of Governance and Regulation, 10(3), 8–17. https://doi.org/10.22495/JGRV10I3ART1
3. Almarayeh, T., Abdullatif, M. and Aibar-Guzmán, B. (2022), "The role of audit committees in mitigating earnings management: evidence from Jordan", Journal of Accounting in Emerging Economies, Vol. 12 No. 5, pp. 882-907. https://doi.org/10.1108/JAEE-09-2020-0235
4. Alves, S. (2013). The impact of audit committee existence and external audit on earnings management. Journal of Financial Reporting & Accounting, 11(2), 143–165. https://doi.org/10.1108/jfra-04-2012-0018
5. Alzoubi, E. S. S. (2018). Audit quality, debt financing, and earnings management: Evidence from Jordan. Journal of International Accounting, Auditing and Taxation, 30(December 2017), 69–84. https://doi.org/10.1016/j.intaccaudtax.2017.12.001
6. Anzelya, Y., & Kurniawati. (2020). Pengaruh komite audit, internal audit, dan eksternal audit terhadap manajemen laba. Jurnal Insan Akuntan, 5(1), 99–112.
7. Ashraf, A., Kabir Hassan, M., & Basher, S. A. (2015). Loan loss provisioning in OIC countries: Evidence from conventional vs. Islamic banks. In Journal of King Abdulaziz University, Islamic Economics (Vol. 28, Issue 1). https://doi.org/10.4197/Islec.28-1.2
8. Aslam, E & R. Haron. (2020). Does corporate governance affect the performance of Islamic banks? New insight into Islamic countries. July 2020. Corporate Governance ahead-of-print(ahead-of-print). DOI:10.1108/CG-11-2019-0350
9. Athief, FHN Rafiq Ahmad Zaky, Rheyza Virgiawan, Muhammad Anwar Fathoni & Azidni Rofiqo (2024). Capturing Islamic bank performance in Indonesia during the COVID-19 crisis: RGEC and SCNP approaches. Banks and Bank Systems, 19(2), 15-29. doi:10.21511/bbs.19(2).2024.02
10. Bhatti, M., & Bhatti, M. I. (2010). Toward Understanding Islamic Corporate Governance Issues in Islamic Finance. Asian Politics and Policy, 2(1), 25–38. https://doi.org/10.1111/j.1943-0787.2009.01165.x
11. Boulila Taktak, N. (2011). The nature of smoothing returns practices: the case of Islamic banks. Journal of Islamic Accounting and Business Research, 2(2), 142–152. https://doi.org/10.1108/17590811111170548
12. Choudhury, M. A and Ziaul Hoque, M. (2006), Corporate governance in Islamic perspective, Corporate Governance, Vol. 6 No. 2, pp. 116-128. https://doi.org/10.1108/14720700610655132
13. Christiani, I., & Nugrahanti, Y. W. (2014). Pengaruh Kualitas Audit Terhadap Manajemen Laba. Jurnal Akuntansi Dan Keuangan, 16(1), 52–62. https://doi.org/10.9744/jak.16.1.52-62
14. DeAngelo, L. E. (1981). Auditor size and audit fees. Journal of Accounting and Economics, 3(3), 183–199.
15. Donaldson, L., & Davis, J. H. (1991). Stewardship Theory or Agency Theory: CEO Governance and Shareholder Returns. Australian Journal of Management, 16(1), 49–64. https://doi.org/10.1177/031289629101600103.
16. Dwiharyadi, A. (2017). Pengaruh Keahlian Akuntansi Dan Keuangan Komite Audit dan Dewan Komisaris Terhadap Manajemen Laba. Jurnal Akuntansi Dan Keuangan Indonesia, 14(1). https://doi.org/10.21002/jaki.2017.05
17. Elnahass, M., Salama, A., & Yusuf, N. (2022). Research in International Business and Finance Earnings management and internal governance mechanisms : The role of religiosity. Research in International Business and Finance, 59(October 2020), 101565. https://doi.org/10.1016/j.ribaf.2021.101565
18. Farook, S., Hassan, M. K., & Clinch, G. (2014). Islamic bank incentives and discretionary loan loss provisions. Pacific Basin Finance Journal, 28, 152–174. https://doi.org/10.1016/j.pacfin.2013.12.006
19. Gerayli, M. S., Yanesari, A. M., & Ma’atoofi, A. R. (2011). Impact of audit quality on earnings management: Evidence from Iran. International Research Journal of Finance and Economics, 66(66), 77–84.
20. Hair, J. F. . G. T. M., Hult, C. M. R., & M.Sarstedt. (2022). A Primer on Partial Least Square Structural Equation Modeling (PLS-SEM). SAGE Publication, inc.
21. Harianto, S. (2022). Political Connection, Auditor Quality, Family Ownership, and Earnings Management: Real and Accrual. Journal of Economics, Business, & Accountancy Ventura, 25(2), 204. https://doi.org/10.14414/jebav.v25i2.3012
22. Lennox, C., & Pittman, J. A. (2010). Big five audits and accounting fraud. Contemporary Accounting Research, 27(1), 209–247. https://doi.org/10.1111/j.1911-3846.2010.01007.x
23. Lestari, E., & Murtanto, M. (2018). Pengaruh Efektivitas Dewan Komisaris Dan Komite Audit, Struktur Kepemilikan, Dan Kualitas Audit Terhadap Manajemen Laba. Media Riset Akuntansi, Auditing & Informasi, 17(2), 97–116. https://doi.org/10.25105/mraai.v17i2.2063
24. Mamatzakis, E., Alexakis, C., Yahyaee, K.A., Pappas, V., Mobarek, A. and Mollah, S. (2023), Does corporate governance affect the performance and stability of Islamic banks?, Corporate Governance, Vol. 23 No. 4, pp. 888-919. https://doi.org/10.1108/CG-05-2022-0217
25. Mangala, D., & Singla, N. (2021). Do corporate governance practices restrain earnings management in banking industry ? Lessons from India. Journal of Financial Reporting and Accounting https://doi.org/10.1108/JFRA-02-2021-0060
26. Mardjono, E. S., Chen, Y. S., & He, L. J. (2020). Earning management and the effect characteristics of audit committee, independent commissioners: Evidence from indonesia. International Journal of Business and Society, 21(2), 569–587. https://doi.org/10.33736/ijbs.3272.2020.
27. Mollik, Abu T.; Mir, Monir; McIver, Ron; and Bepari, Md. Khokan, (2020). Effects of Audit Quality and Audit Committee Characteristics on Earnings Management During the Global Financial Crisis – Evidence from Australia, Australasian Accounting, Business and Finance Journal, 14(4), 2020, 85-115. doi:10.14453/aabfj.v14i4.6
28. Mousavi, M., Grzegorz Zimon, Mahdi Salehi, & Nina Stepnicka. 2022. The Effect of Corporate Governance Structure on Fraud and Money Laundering. Risks 10: 176. https://doi.org/ 10.3390/risks10090176
29. Mukhibad, H., Jayanto, P. Y., & Anisykurlillah, I. (2021). Islamic corporate governance and financial statements fraud: A study of islamic banks. Journal of Governance and Regulation, 10(2 Special issue), 361–368. https://doi.org/10.22495/JGRV10I2SIART16.
30. Mutamimah, M. and Saputri, P.L. (2023), Corporate governance and financing risk in Islamic banks in Indonesia. Journal of Islamic Accounting and Business Research, Vol. 14 No. 3, pp. 436-450. https://doi.org/10.1108/JIABR-09-2021-0268.
31. Noor, NF & J. Mohamed. 2019. Profit Equalisation Reserve and Income Smoothing Practices in Malaysian Islamic Banks: Robust Statistical Analysis. Asian Academy of Management Journal 24(Supp.1):79-92 DOI:10.21315/aamj2019.24.s1.6.
32. Nurkhin, A, Kusmuriyanto, Widiyanto Widiyanto, Anna Kania Widiatami & Ida Nur Aeni (2023). Do corporate governance implementation and bank characteristics improve the performance of Indonesian Islamic banking? Before- COVID-19 pandemic analysis. Banks and Bank Systems, 18(3), 126-135. doi:10.21511/bbs.18(3).2023.11.
33. Othman, H. M. H. Ben. (2016). The impact of corporate governance mechanisms on earnings management in Islamic banks in the Middle East region. Journal of Islamic Accounting and Business Research, 7(4). https://doi.org/10.1111/j.1467-8381.2004.00182.x
34. Othman, H. Ben, & Mersni, H. (2014). The use of discretionary loan loss provisions by Islamic banks and conventional banks in the Middle East region: A comparative study. Studies in Economics and Finance, 31(1), 106–128. https://doi.org/10.1108/SEF-02-2013-0017.
35. Pahlevi, R.W. (2023), Mapping of Islamic corporate governance research: a bibliometric analysis. Journal of Islamic Accounting and Business Research, Vol. 14 No. 4, pp. 538-553. https://doi.org/10.1108/JIABR-12-2021-0314.
36. Ratmono, D & Frendy, (2022). Examining the fraud diamond theory through ethical culture variables: A study of regional development banks in Indonesia. Cogent Business & Management, vol. 9(1), pages 2117161-211, December. DOI: 10.1080/23311975.2022.2117161.
37. Salman, KR (2023). What drives the level of social reporting disclosure at Islamic commercial banks? Banks and Bank Systems, 18(4), 61-73. doi:10.21511/bbs.18(4).2023.06.
38. Shira, R. K. (2022). Corporate governance, competition and earnings management: evidence from Asian emerging economies. Journal of Financial Reporting and Accounting. https://doi.org/10.1108/JFRA-07-2022-0270
39. Sudiyatno, B. Batara Daniel Bagana, Widhian Hardiyanti, Elen Puspitasari & Siska Dwi Safitri (2024). The role of corporate social responsibility as a moderating factor in influencing bank performance in Indonesia. Banks and Bank Systems, 19(1), 1-11. doi:10.21511/bbs.19(1).2024.01.
40. Sueb, M., Prasojo, Muhfiatun, Lailatis Syarifah & Rosyid Nur Anggara Putra (2022). The effect of shariah board characteristics, risk-taking, and maqasid shariah on an Islamic bank’s performance. Banks and Bank Systems, 17(3), 89-101. doi:10.21511/bbs.17(3).2022.08
41. Suripto, Arif Sugiono & Havid Dasuki (2023). Comparing the resilience of Sharia and conventional banking to the financial crisis in the Association of Southeast Asian Nations. Banks and Bank Systems, 18(3), 192-204. doi:10.21511/bbs.18(3).2023.16
42. Usman, M., Nwachukwu, J., & Ezeani, E. (2022). The impact of board characteristics on the extent of earnings management: conditional evidence from quantile regressions. International Journal of Accounting and Information Management, 30(5), 600–616. https://doi.org/10.1108/IJAIM-05-2022-0112.
43. Yang, D., Jiao, H., & Buckland, R. (2017). The determinants of financial fraud in Chinese firms: Does corporate governance as an institutional innovation matter? Technological Forecasting and Social Change, 125(August 2015), 309–320. https://doi.org/10.1016/j.techfore.2017.06.035.
44. Zainuldin, M. H., & Lui, T. K. (2020). Earnings management in financial institutions: A comparative study of Islamic banks and conventional banks in emerging markets. Pacific Basin Finance Journal, 62(July 2017), 101044. https://doi.org/10.1016/j.pacfin.2018.07.005
Published
2024-12-23
How to Cite
Ratmono, D., Darsono, D., Cahyonowati, N., Tantri, M., & Ilmawan, F. (2024). The Influence of Corporate Governance on Earnings Management: An Empirical Analysis on Islamic Banks. Annual International Conference on Islamic Economics and Business (AICIEB), 4, 306-316. https://doi.org/https://doi.org/10.18326/aicieb.v4i0.748
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