Managers Opportunistic Behavior and Discretionary

Accrual: An Evidence of Indonesian Manufacturing Firm

Muhammad Haykal

, Erlina

, Azhar Maksum

, and Iskandar Muda

Faculty of Economic and Business, Universitas Malikussaleh, Aceh, Indonesia

Faculty of Economic and Business, Universitas Sumatera Utara, Medan, Indonesia

amaksum@yahoo.com.au,ismuda.jurnal̶internasional@gmail.com

Abstract. This study aims to analyze and re-examine the impact of managers'

opportunistic behavior in detecting discretionary accruals. In a variety of

literature found managers have a very strong interest in managing accruals. This

study examines how managers manage accruals to get direct benefits for

managers by relying on the subjectivity and flexibility of accounting standards.

Taking samples of Indonesian manufacturing companies from 2006-2016 to

companies that issued financial reports continued. The findings prove that

managers do the discretionary accrual in the preparation of financial statements.

The bonus scheme is found to have a positive effect and the number of shares

outstanding has a negative effect on accrual discretion. The audit quality variable

was found to have a negative effect on the existence of discretionary accrual this

provides input that good audit quality can reduce the discretionary accrual. The

results of this study prove that there is a non-linear relationship between

discretionary accrual with the income reported in the financial statements, the

owner can suppress and have the ability to monitor the operation of the company

so that managers find it difficult to do discretionary accrual when referring to the

manager's own motives and interests.

Keywords: Discretionary accrual · Opportunistic · Bonus scheme · Number of

shares and audit quality

1 Introduction

The use of discretionary accruals is still one of the tools used by accounting researchers

in testing earnings management in financial statements. Various other literature

mentioned by [1] explains that managerial opportunistic behavior is driven by three

factors: there is room for opportunistic behavior, incentives for managers to engage in

opportunistic behavior, and managers' propensity for opportunism. This motive arises

because Opportunism refers to a lack of openness or honesty in transactions, to include

self-interest with deception. Previous studies have used various variables to measure

managers' opportunistic motives in conducting discretionary accrual such as ownership

structure, debt, and size, audit fees [4], contract and managerial ownership [5],

compensation [6], and IPO process [7].

The selection of accrual methods becomes very important for researchers to study,

users of financial statements, the compilers of accounting standards [8]. Accrual

changes that occur, can be considered as abnormal accrual. This change is the result of

Haykal, M., Erlina, ., Maksum, A. and Muda, I.

Managers Opportunistic Behavior and Discretionary Accrual: An Evidence of Indonesian Manufacturing Firm.

DOI: 10.5220/0010437700002900

In Proceedings of the 20th Malaysia Indonesia International Conference on Economics, Management and Accounting (MIICEMA 2019), pages 521-531

ISBN: 978-989-758-582-1; ISSN: 2655-9064

521

excessive management discretion and if at the same time management also has an

incentive / motive for discretionary accruals, accrual changes that occur are considered

as a form of earnings manipulation by management. Managers prefer to use abnormal

accruals and in real earnings management, this is mostly done in developing countries

that do not yet have strong regulations and weak law enforcement.

The practice of dealing with accruals by managers is not fully realized by investors

in analyzing financial statements. For investors, positive discretionary accrual ends to

mislead and influence their business decisions [10]. For example, investors cannot

detect engineered profits at the time of the initial offering coupled with an information

gap between the company and potential investors at the time of the initial offering,

increasing the opportunity for companies to increase profits and not be detected by the

market. The motivation of managers to do discretionary accruals is mainly to maintain

job security, managers will do income smoothing. Managers will tend to manage the

company's revenue so as not to report a decline in the value of profits or avoid a decline

in reported earnings levels. They are involved in earnings management when the

company's profits increase or when the company is financially healthy. The manager's

motives can change, resulting in company owners not being able to fully believe in the

financial statements submitted by the manager [13]. Other indications, sometimes

management may be involved in determining the board of commissioners and

independent commissioners.

Now day, there are still many different and inconsistent research results in

concluding the causes of the discretionary accrual in the financial statements. High

dividend policy, hiding weak performance, launching new products, weak corporate

governance and capital market motivation. Opportunistic manager motives arise when

managers want to get incentives to meet certain targets in company earnings.

Discretionary accrual made by accountants for various interests and purposes needs to

be reviewed ethically [15]. Professional accountants must review the decision that will

be made by considering who influenced his decision and how it will affect himself. This

is a big problem in the accounting profession, financial ethics needs to be addressed.

When managers and accountants change financial information, then the motive is

referred to as a form of manipulation and violates ethics [16]. Ethics is not only limited

to the rules (standards) but also to a value system that is mutually beneficial and fair.

In this paper, we would like to reexamine managers' opportunistic motives in conduct-

ing discretionary accrualon the Indonesian capital market. Dissent between academics

and practitioners and regulators. Academics claim that discretionary accrual has revealed

all activities and consider that discretionary accrual is good and not bad. While

practitioners assume that discretionary accrual will cause problems that can have an

impact everywhere. This is the reason why this motive needs to be reviewed and analyzed

to find solutions for investors' comfort and protection in investing in the capital market.

2 Literature Review and Hypotheses Development

2.1 Bonuses Scheme and Discretionary Accrual

Manager opportunistic behavior also arises when large shareholders tend to ignore and

sacrifice the interests of minority shareholders [18]. Research largely leads to evidence

MIICEMA 2019 - Malaysia Indonesia International Conference on Economics Management and Accounting

522

of a pattern of earnings management that increases earnings or income increasing and

carries out the big bath accounting or income decreasing when performance or earnings

are low [6] all of which aim to maximize bonus receipt (the bonus plan hypothesis).

Discretionary accruals that are opportunistic are conducted to increase their own wealth

in an effort to strengthen their position in conveying good financial performance

information [19].

Managers make accrual discretions to maximize their bonus payment plans [20],

this is also in accordance with Healy's findings [6]. Bonuses relate to manager

performance, so senior managers who approach retirement tend to have higher levels

of discretionary accrual[21]. Bergstresser & Philippon, [22] states that managers also

use discretionary accrual to manipulate reported earnings in companies where all profits

and compensation of managers are based on the value of shares and stock options. An

increase in bonuses for managers, also increases the discretionary accrual made by

managers in the company [4]. Based on the above literature, it can be seen how bonuses

affect managers' decisions in determining accrual policies, especially because of the

manager's personal interests. Therefore, the hypotheses developed are as follows:

H1: There is a significant positive association between managers' bonuses and

discretionary accruals.

2.2 Number of Shares and Discretionary Accrual

The number of shares outstanding is the quantity of shares circulating in the capital

market that can be transacted whether sold or bought by investors, the number of shares

outstanding in the community is intended to attract investors to invest in these shares.

Issuers do not sell all the shares they have, when the company will sell shares to the

public, they will offer a number of shares held for sale. The number of shares

outstanding is an important factor that will be considered by investors in the decision

to invest in a company. The number of shares offered to investors in accordance with

OJK regulations is 7.5% of the total shares. This proves that there is very little public

share ownership in the Indonesian capital market.

Managers carry out opportunistic discretionary accruals aimed at their own interests

and not the interests of shareholders [24]. The gap in incentives between managers and

shareholders can cause managers to use accounting policies to manage company

earnings. supervision carried out by shareholders can reduce the degree of discretionary

accrual [25]. Conversely ownership and control are separate in the management of the

company, can encourage managers to do the discretionary accrual in financial

reporting, but this practice can be prevented by implementing good governance [26].

Publicly traded companies in Indonesia are mostly family owned [27], thus allowing

them to control management well. As owners, they will take a large role to control the

company so that there is no conflict between deviated investors and managers who get

incentives to manage the company well [28]. Based on the explanation above, we

formulated the hypothesis as follows:

H2: There is a significant negative association between number of share and

discretionary accrual.

Managers Opportunistic Behavior and Discretionary Accrual: An Evidence of Indonesian Manufacturing Firm

523

2.3 Audit Quality and Discretionary Accrual

Asymmetric information often occurs between managers and stakeholders, managers

have an incentive to change and choose accrual policies in an effort to meet various

interests, especially incentives, debt, and capital markets. Company managers have a

high role in the process of determining and selecting accrual models in financial

reporting, they will also provide input to the amount of accruals made in the financial

statements [29]. Another literature states that to eliminate doubts about what is reported

by managers, it requires other parties such as accounting experts (auditors and audit

committees) to be able to control the accrual accounting process at the company. At the

moment the good audit quality is at big 4, namely a public accounting firm with an

office in America. De Fond (1993) states that large auditor office sizes are more

independent in determining and reporting audit results to clients, so that many large

companies request audit services to the big 4 auditors [5].

However, in another study Humayun Kabir [31] who discovered the fact that public

accounting firms in Bangladesh affiliated with Big 4 did not have a positive influence

on the quality of audits conducted on their clients. They tend to compromise with

clients, in fact auditors who tend to compromise with clients will produce poor quality

audits, although this can also happen to Big 4 firms [32]. Based on the explanation

above, the hypothesis is formulated as follows:

H3: There is a significant negative association between audit quality and

discretionary accruals.

3 Data, Variables and Methodology

3.1 Data

This study uses cross section data, on Indonesian manufacturing companies by taking

companies that report data for 11 consecutive years. The population and sample in this

study were 171 manufacturing companies listed on the Indonesia Stock Exchange

(IDX) from 2006 to 2016, which have and report complete financial reports and are

published in the Indonesian Capital Market Directory (ICMD).

Table 1. Sample Distribution.

No Manufacturing Sector Number of companies

from 2006-2016

1 Basic Material 45 0.28

2 Consumer Goods 74 0.42

3 Health Care 9 0.04

4 Industrial 39 0.23

5 Oil & Gas 4 0.01

Total 171 100%

MIICEMA 2019 - Malaysia Indonesia International Conference on Economics Management and Accounting

524

3.2 Variables Measurement

3.2.1 Discretionary Accruals Measure

Dechow et al (1995) tested various alternative accrual models and they stated that the

modified Jones model was the best model for testing earnings management. The

calculation is done by separating the non-discretionary accruals (the reasonable level

of accrual earnings) and the discretionary accrual(the level of abnormal accrual

earnings). Total accruals are the amount of discretionary accruals and non-accrual

accruals. The accrual component imposed by accounting regulators in adjusting a

company's cash flow is non-discretionary accruals.

𝐷𝐴



= 𝑇𝐴



− 𝛼



∗

+𝛼



∗



𝐴





+ 𝛼



∗



∆𝑅𝐸𝑉



−∆𝑅𝐸𝐶





+𝛼



∗



𝑃𝑃𝐸







DA : Discretionary accrual is the difference between total accruals and the fitted

non-discretionary accruals

TA : Total accruals, defined as the earnings before extraordinary items (NI) –

operating cash flows (CFO).

A : Total assets.

ΔREV : Change in revenues.

ΔREC : Change of accounts receivable

PPE : The gross value of fixed assets

4 Methodology

By using unbalance panel data from 171 manufacturing companies, this study uses

Covarian Analysis (Ancova) in regression analysis and the Generalize Least Square

(GLS) Model. In this study includes analysis using descriptive statistics and correlation

analysis. Hypothesis testing is done using general least square (GLS). Descriptive

statistics and correlation analysis are used to describe the variables in this study.

𝐷𝐴

,

= 𝛼



+ 𝛼



𝑆𝐵

,

+𝛼



𝑁𝑜𝑆ℎ

,

+𝛼



𝐾𝐴

,

+ ∈

,

= Discretionar

Accrual i,t

= Bonuses scheme i,t

Nosh

= Number of Share i,t

KA = Audit qualit

= Error term i,t

Managers Opportunistic Behavior and Discretionary Accrual: An Evidence of Indonesian Manufacturing Firm

525

5 Discussion of Results

5.1 Descriptive Analysis

Before discussing statistical data, we will first pay attention to descriptive data by

describing the variables in the following table. The analytical tool used is the mean,

standard deviation, minimum and maximum as presented. Based on Table 2, it can be

seen the discretionary accrual variable from the total N sample of 1879 manufacturing

companies. Statistical results show that the average value for the discretionary accrual

variable is -0.09996 with a standard deviation of 6.462458. SD value is very high

compared to the average value which means a large deviation from the number of

observations studied. Herawaty [33] found the average earnings management was -

0.013005 and the standard deviation of 0.2404, which means that the average company

in the study sample tended to use a decreasing income strategy. Average discretionary

accrual was also obtained by -0.008 and standard deviation of 0.095 [34] while finding

an average discretionary accrual of -0.0028 with a standard deviation of 0.1049.

Research conducted on companies in Malaysia found an average discretionary accrual

in earnings management of 0.033 [36] greater than the average practice in Indonesia.

Table 2. Descriptive Statistic.

N Mean Maximum Minimum Std. Dev.

DA 1879 -0.09996 54.48708 -274.246 6.462458

BS 1879 3.118066 3865.341 -197.865 90.67291

NOS 1879 4435164 97021700 0 9594168

KA 1879 0.538052 1 0 0.498683

Source: Appendix (data processed, 2018)

DA = Discretionary accrual, BS (bonus scheme), Nosh (number of shares) AQ (audit quality).

The average value of the bonus scheme variable is 3.118066, with a standard

deviation of 90.67291. Bonus schemes are improved by managers in an effort to

increase income, not to reduce income [37]. The average value of the total outstanding

shares is 4,435,164 shares, with a standard deviation of 9,594,168 shares. Concentrated

share ownership results in many public companies that are performing well, but have a

small number of outstanding shares. As a result, the profitability obtained by the

company does not spread to general shareholders. The average value of audit quality is

0.54 with a standard deviation of 0.49. Manufacturing companies in Indonesia have a

maximum audit quality value of 1 and a minimum value of 0. Audit quality is measured

using the size of a public accounting firm. The public accounting firm that is generally

considered for quality assurance and experience is known as the big four. The greater

the size of the public accounting firm, the more pressing the existence of discretionary

accrual practices in public companies [38].

MIICEMA 2019 - Malaysia Indonesia International Conference on Economics Management and Accounting

526

5.2 Selecting the Panel Data Model

Using the chow test and Hausman test, it shows that all the test models above have a

calculated F value greater than the F table. So that it can be concluded that the panel

data model selection is the Fixed Effect Model, because H0 is rejected and accepts H1.

Based on the table below the Hausman Test output found all probability values of

0.00000. This value is the p value of the hausman test. P value of 0,000 is less than 0.05

then all models accept H1 which means the best method to use is the fixed effect model.

5.3 Regression Results

Based on Table 3 opportunistic models obtained Adjusted R Square value of 0.1261.

When using R Square of 0.2065. Because the use of variables is more than two, the

value used is Adjusted R Square. This shows that 12.61% Variable Discretionary

accrualcan be explained by variable bonus schemes, the number of shares outstanding,

and audit quality. The remaining 87.39% is influenced by other variables not explained

by this research model.

Table 3. Estimation Result.

Variable Coefficient t-Statistic

C -0.12616 -4.5995

9.36E-05 0.459816

NOS

-5.97E-10 -0.73329

-0.03884 -2.97772***

R-s

uare

0.330072

usted R

0.259491

F-statisti

4.676503

Prob

(

F.Stat

)

Durbin-Watson stat

1.8293

Based on Table 3. the partial independent variable will be tested. Testing partially

independent variables that have a positive effect is a bonus scheme (not significant).

The audit quality variable has a negative and significant effect, while the variable

number of shares outstanding has a negative and significant effect on Indonesian

manufacturing companies. Based on the table above, it can be seen that the regression

model coefficient is formed:

𝑌=−0,0814 + 0,000169 𝐵𝑆





− 0,000000000145 𝑁𝑜𝑆





− 0,02333 𝑄𝐴





+𝜀

Previous research has seen a non-linear relationship between discretionary

accrualand income reported in the financial statements. This relationship shows the

position of income and discretionary accrualinto a system that is not fixed, easy to

change, difficult to control, and difficult to predict. Much of the literature does provide

evidence of an empirical relationship between executive compensation packages and

Managers Opportunistic Behavior and Discretionary Accrual: An Evidence of Indonesian Manufacturing Firm

527

their incentives to manipulate earnings (Balboa et al, 2013). This non-linear

relationship is also caused by conflicts between management and outsiders. Healy [6]

found an association of profit-based bonus schemes with the practice of discretionary

accrual to maximize their personal incentives. Shuto, (2008) found how discretionary

accrual affects bonus planning on managers in Japan. Managers use discretionary

accrual to increase their compensation, although there is a relationship that varies

between bonuses and accrual concepts according to company variations. In this study

it was found that bonuses have a positive effect on accrual discretion, according to

positive accounting theory, bonus policies are heavily influenced by accounting

decisions [20].

Executives are expected (and encouraged) to use their talents and skills to achieve

better levels of compensation payments, but in practice they can also use their accrual

discretionary policies to artificially manipulate reported performance measures. In the

perspective of income smoothing hypothesis that managers and controlling owners

have an incentive to manage reported earnings to cover the actual performance of the

company and reduce the possibility of outside intervention [41].

When the company will sell shares to the public, they will offer a number of shares

held for sale. The number of shares outstanding is an important factor that will be

considered by investors in the decision to invest in a company. The number of shares

offered to investors in accordance with OJK regulations is 7.5% of the total shares.

Investors will tend to choose liquid stocks, relying on information from financial

statements investors will consider the ownership aspects and the number of outstanding

shares held by the public. Investors will assess the accuracy of estimated earnings by

considering the number of shares outstanding and by the ownership structure [42].

The results of this study indicate that there is a negative and significant relationship

between the number of shares outstanding with the discretionary accrual in Indonesian

manufacturing companies. This is in line with research conducted by [5] who found a

negative relationship between various company shareholdings and discretionary

accrual in public companies in Australia. A positive relationship is found when a high

level of managerial ownership is associated with accrual discretion, this condition

results in a bid ask spread as an indication of stock price liquidity [43]. When managers

who are also part of the controlling shareholders have more power they can take actions

or policies that more or only benefit them but also disadvantage minority shareholders.

This phenomenon is often called the managerial entrenchment hypothesis. Research

conducted by [44] in countries that embrace civil law place more emphasis on

predictable laws and trust in legislation to regulate self-interest behavior. Laws in the

civil law system are made by legislators [27]. This is an incentive for controlling

shareholders to creatively regulate unfair transactions so that they are in accordance

with the contents of the law. The value obtained by Indonesia reflects the very weak

protection of non-controlling shareholders. This is an incentive for controlling

shareholders to expropriate non-controlling shareholders.

Audit quality is very decisive in public accountability, the case of the collapse of

Enron and WorldCom, in America is one of the results of errors in reporting public

finances that are detrimental to investors. The American government reacted

immediately by issuing regulations, one of the most well-known of these regulations

was the Sarbanes-Oxley Act (SOX) 2002 [46]. Another literature conveys that

accounting experts (auditors and audit committees) are indispen

sable in controlling the

accrual accounting process in the company.

MIICEMA 2019 - Malaysia Indonesia International Conference on Economics Management and Accounting

528

The monitoring process at Indonesian manufacturing companies has been going

well. Providing incentives to managers as a part of the contract, gives managers the

responsibility to work for shareholders. Audits conducted by independent parties

require a cost (monitoring cost). Jensen & Meckling stated that auditors are parties who

bridge the interests of shareholders and managers. This finding supports the agency

theory, whereby the role of the auditor can reduce conflicts of interest between

management and owners (shareholders).

External auditors examine financial statements independently, professionally for

the relevance and reliability of the presentation of a company's financial statements in

accordance with the standards issued by the government. The control mechanism can

be carried out by an auditor to the client so that management presents information in

the financial statements free from cheating practices. This activity can be carried out

well if the auditor conducts his work with quality audits [37].

6 Conclusion

The managers of Indonesian companies are opportunistic to achieve predetermined

profit targets, they use the accrual policy in planning manager bonuses. This finding

supports agency theory and does not support positive accounting theory where

managers tend to use changes in earnings in accrual discretion. Public ownership

proxies by the number of shares outstanding was found to have a significant

insignificant effect on accrual discretion. The average ownership of Indonesian public

companies is owned by block holders. The number of shares outstanding is very small

when compared to shares owned by institutions, in general the shares of many public

companies are owned by families. Discretionary accrual can be suppressed when

majority ownership is in the company. Audit quality is also very decisive in limiting

opportunistic managers in making accounting decisions. This is evident, in companies

audited by reputable public accountants who are able to suppress earnings management

practices. The results of this study support the agency and stewardship theory. Where

the owner can suppress and have the ability to monitor the operation of the company so

that managers find it difficult to do discretionary accrual if it refers to the motives and

interests of the manager itself.

Limitations of this study, only using a sample of manufacturing companies and

using empirical data comparison analysis and previous research so that it may not

reflect the true motives of the opportunistic motives of managers in doing discretionary

accrual on public companies in Indonesia.

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