Development of Banking Earnings Management Software
Nurika Restuningdiah
1
, Heny Kusdyanti
1
, Vega Wafaretta
1
and Mika Marsely
1
1
Universitas Negeri Malang, Jl. Semarang No. 5, Malang, Indonesia
Keywords: Earnings Management Software, Banking Sector, Learning Media
Abstract: Earnings management is the way taken by the management to affect the numbers in the financial statements.
Certain techniques are used to reduce earnings fluctuations by reducing or increasing the amount of profit
for specific motivation. Earnings management can occur in all business sectors, among services, trade, and
manufacturing. However, although earnings management taught in the subject of financial accounting
theory, college students in accounting major still seems unfamiliar with the calculation of earnings
management. Therefore, this study aims to develop earnings management software that can be used to
detect earnings management in the banking sector. This study focuses on earnings management in the
banking sector because of the different characteristics of banks. It is expected that this software becomes a
supplementary media in the learning process to increase students' understanding of earnings management.
The development process consists of the Analysis Stage, Design Stage, and Development Stage. Earnings
management software then was improved based on the validation by expert judgment and the commentary
by students as main users.
1 INTRODUCTION
Agency theory studies the contract design to
motivate agents to deal with the principal’s interest.
Agency problems are conflicts of interest between
agents (management) and principals (owners of
capital) often arise in various companies. Agency
theory studies the problem information asymmetry
of designing a contract to control moral hazard. The
most efficient contract does so with the lowest
possible agency cost. Company directors manage
earnings to satisfy bondholders and shareholders.
The need to influence the financial market
perception is one of the motivations for earnings
(Scott (2015), Neffati et al. (2011), Hu (2010)).
Earnings management is a management choice
for accounting policies or real action. There are
several patterns of earning management such as a.
Taking a bath (If a company must report a loss, then
management also reports a large loss. Taking a bath
usually occurs in periods of organizational stress or
organizational restructuring. An example of his
actions is the write off assets); b. Income
minimization; c. Income maximization; d. Income
smoothing (managers smooth reported earnings to
receive constant compensation) (Scott, 2015). One
example is the result of the research by
Restuningdiah and Wafaretta (2017) that when the
realization of profit exceeds expectations, the
manager will avoid the risk of accrual based
manipulation. Accrual earnings management can be
conducted and detected through many techniques as
to reduce the fluctuation of earnings.
Earnings management can be viewed from both a
financial reporting and a contracting perspective.
From a contracting perspective, earnings
management is used to protect companies from
unexpected events due to rigid and incomplete
contracts. Earnings management influences
managers' motivation to facilitate compensation they
receive from time to time. From a financial
reporting perspective, managers use earnings
management to avoid reporting losses so that the
company's reputation does not go down, which will
result in a decline in stock prices (Scott, 2015).
Company directors manage earnings to reach a
situation that satisfies bondholders and shareholders.
Indeed, one of the motivations for earnings
management is the desire to influence the financial
market perception associated with the firm risk,
namely the change in net income (overall risk), the
Restuningdiah, N., Kusdyanti, H., Wafaretta, V. and Marsely, M.
Development of Banking Earnings Management Software.
DOI: 10.5220/0009504110851089
In Proceedings of the 1st Unimed International Conference on Economics Education and Social Science (UNICEES 2018), pages 1085-1089
ISBN: 978-989-758-432-9
Copyright
c
2020 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
1085
change in total sales (operational risk) and the debt-
to-equity ratio (financial risk) (Neffati et al. 2011).
As an effort to protect the interests of the owner
(investor), information is needed regarding the
practice of earnings management carried out by
management. But until now no tool can quickly
detect the existence of earnings management
practices in the company, so investors who are
unfamiliar with various income smoothing
calculation techniques have not been able to utilize
income smoothing information in their decision
making.
Not only investors but accounting students are
also not familiar with earnings management. Most
learning process still provides theoretical
information only and has not yet linked to the real
information of earnings in the capital market. It
encourages needs to build earnings management
software to ease the understanding of earnings
management for students. Based on the background,
the objectives of this study to develop earnings
management software in the banking sector as an
ICT-based learning media for accounting students,
Although earnings management can occur in all
business sectors, this study focuses on the banking
industry due to the different characteristics of other
industries. The banking industry has tighter
regulations compared to other industries, for
example, a bank must meet a minimum Capital
Adequacy Ratio (CAR) and provide financial
statements as one indicator of the healthy bank by
Bank Indonesia (Setiawati and Na'im, 2001 in
Nasution and Setiawan, 2007).
2 RESEARCH METHOD
According to the purpose of research, the
development process took six (6) months for the
development of earnings management software,
obtaining the validation results of the expert of
material, and doing the trial test to the student. The
development process contains three (3) stages,
namely Analysis Stage, Design Stage, and
Development Stage, whereas each stage has an
output that supports the process of content
development of earnings management software as
illustrated in figure 1 below.
Figure 1: Development of Banking Earnings
Management Software
In design stage, the formula of earnings
management input in the software are model by
Healy (1985) and DeAngelo (1986) (Callao et al.,
2017). The formula are shown as follows.
Healy (1985):
1
∑
1
Notes:
TA
it
: Total Accruals in year t
A
it-1
: Total Assets in year t -1
n : number of years in the estimation
period
DeAngelo (1986):
1
2
Notes:
TA
it-1
: Total Accruals in year t -1
A
it-2
: Total Assets in year t -2
2.1 Validation by Experts
This study used primary data by questionnaire to
infer the validity of earnings management software.
The indicators validated are the suitability of the
material and the accuracy of the material. The
questionnaire uses a Likert scale of 4. Criteria for
each rating scale is score 4 for very clear, 3 for clear,
2 for unclear, and 1 for very unclear. The data
UNICEES 2018 - Unimed International Conference on Economics Education and Social Science
1086
analysis used is by calculating the percentage,
according to the formula:
Σ
Σ1
100%
Notes:
P = percentage
∑
x
= Score of respondents’ answer in 1 item
∑
x1
= Maximum score in 1 item
Each item is validated by several criteria such as
valid, valid enough, less valid and not valid. The
score for each criterion can be seen in table 1.
Table 1: Validation Criteria
ANSWER CRITERIA
80 – 100 Valid
60 – 79 Quite Valid
40 – 59 Need Revision (Less Valid)
0 – 39 Need Revision (Not Valid)
Source: Sudjana (2005)
The questionnaire gave to an accounting lecturer
as a material expert in investment management
system and a practitioner as a media expert. The
questionnaire of earnings management software also
includes additional forms of comments, criticisms,
and suggestions from the validator related to the
software. Feedbacks from the material and media
expert judgments then are used as the basis for the
revision of the earnings management software.
2.2 Trial Test to the Students
After validation by an expert, the software tested to
accounting students who have been taking
investment management course. It was based on the
consideration that the investment management
course discusses how to evaluate the firms’
performance including earnings management
tendency as the basis for investing.
3 RESULTS
Table 2 shows the results of material expert
validation. The suitability of the material is 87,5 %
(valid), and the accuracy of the material is 100%
(valid). Based on this validation, earnings
management software for the banking sector was
declared valid and did not need revision.
Table 2: Material Expert Validation
No Explanation Score % Result
X Xi
1 The Suitability
of the Material
a. The material
presented is by
the prevailing
theory
4 4 100 Valid
b. The material
presented is by
the learning
outcome
3 4
75
Quite
Valid
Average
3,
5
4
87,5 Valid
2 The Accuracy
of the Material
a. The accuracy of
the definition
4 4 100 Valid
b. The accuracy of
the formula
4 4 100 Valid
Average
4 4
100 Valid
Table 3 shows the results of media expert
validation. The technical quality, the key function,
and the display quality of earnings management
software are 100% (valid), 100% (valid), and
93,75% (valid), respectively.
Table 3: Media Expert Validation
N
o
Explanation Score % Result
X Xi
1 Technical
Quality
a. The application is
easy to use
4 4 100 Valid
b. Entry and exit
process is easy to
use
4 4 100 Valid
Average
4 4 100
Valid
2
Key Function
a. Key functions are
easy to use
4 4
100 Valid
b. Accuration of key
functions
4 4
100 Valid
c. Speed reaction of
key functions
4 4
100 Valid
Average
4 4
100 Valid
3
Display quality
a. Compatibility of
color selection
4 4
100 Valid
b. The effectiveness
of the layout
screen
4 4
100 Valid
c.
Font size
4 4
100 Valid
d. Data
Completeness
3 4
75 Valid
Average
3,75 4 93,7
5
Valid
Development of Banking Earnings Management Software
1087
Revision of Banking Earnings Management
Software is related to data completeness. The media
expert suggested adding data for five years, such as
the annual report from 2012 until 2017. After
revision, the learning media is ready to be
implemented and evaluated (field test) by the
accounting students as the user in the learning
process. Field validation was carried out on thirty-
three (33) accounting students.
Table 4 shows the result of the field test. The
technical quality of media is 98,6 % (valid), the key
function of media is 95,8% (valid), and the display
quality of media is 81,9% (valid). The suggestions
from the respondents that The Banking Earnings
Management Software should be able to: a. Be used
in offline mode, b. Automatically update the data
(annual report), c.Analyze and support short-term
decision making from the quartal financial report, d.
Encompass not only the banking sector but all
industry sectors, d. Add the logo of Universitas
Negeri Malang (UM) or IDX, e. Append more
colors and pictures to make this software more
interesting, and f. Can be downloaded through play
store or app store in the future so that this software
can be more accessible as learning media.
Table 4: Field Test
No Explanation Score % Result
X Xi
1. Technical Quality
a. The application is
easy to use
141 144 97,9 Valid
b. Entry and exit
process is easy to
use
143 144 99,3 Valid
Average
142 144 98,6 Valid
2. Key Function
a. Key functions are
easy to use
138 144
100 Valid
b. Accuration of key
functions
141 144
97,9 Valid
c. Speed reaction of
key functions
129 144
89,6 Valid
Average
136 144
95,8 Valid
3.
Display quality
a. Compatibility of
color selection
110 144
76,4 Valid
b. The effectiveness
of the layout screen
119 144
82,6 Valid
c.
Font size
125 144
86,8 Valid
Average
118 144 81,9 Valid
4 DISCUSSION
Learning media helps to simplify the learning
process, by connecting learners, lecturers, and
teaching materials. The optimal use of media can
improve the effectiveness of the learning process. In
accounting learning in the classroom, many books
used are in English, and often many accounting
terms are rarely used, so it needs a tool or media that
can help students in studying accounting.
Besides that, in student-centered teaching, the
emphasis is on students as active learners. The
students find information and problem-solving
independently. Multimedia technology supports the
self-exploration and active participation by students
to solve a problem (Malik and Agarwal, 2012).
5 CONCLUSIONS
This study produced earnings management software
for the banking sector which has been validated by
an expert. The software was designed to enhance
students' ability in self-study and help the accounting
learning process.
This study limits designed earnings management
software for consolidated banks. Further projects
may take to expand the scope by adding more
comprehensive calculation as per entity; such as for
insurance companies, sharia banks, and sharia
insurance banks which are subsidiary companies of
the conventional bank as parent company;
conventional parent bank itself; and the consolidated
banks. Furthermore, the software may comprise all
industry sectors.
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Detecting earnings management investigation on
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International Journal of Research -
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Malik, S. and Agarwal, A. (2012). Use of
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– a study. International Journal of Information
and Education Technology, 2 (5).
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