The Practice of Earnings Management: Long Term and Short Term Discretionary Accrual Model (Empirical Studies On index of LQ-45 during 2004 to 2010 period)

This research aims to analyze the pattern of earnings management practices by the long term and short term discretionary accrual model in LQ 45 during 2004 to 2010. The samples are 165 firms by using the purposive sampling method. Based on the results of descriptive statistic analysis, earnings management practices in the long term discretionary accrual models tend to use a pattern of earnings increasing. While the practice of earnings management by short term discretionary accrual models tend to use pattern of earnings decreasing. The pattern of increasing earnings are carried by manipulating the amount of net income and total assets owned, the removal of fixed assets and intangible assets, recognizing the various expenditures as costs, changes in accounting methods to change the method of depreciation of fixed assets. Usage the pattern decrease in earnings figures are carried by manipulating the use of accounting methods: recording of inventory, other current assets recognition less, to reduce accounts receivable, to increase other current liabilities, recognized expenses in the future, the losses in the current period that are still recognized the receivable is recognized as a cost, and the reserve accounts of higher losses. Furthermore, from the results of Wilcoxon test states there are significant differences between long term discretionary accrual models with short-term discretionary accruals in earnings management practice (Prob. value 0,000). The future study, it would be added the other model such as real management and then compare among these models. Keyword : Discretionary Accrual Model, Short Term Discretionary Accrual Model, Long Term Discretionary Accrual Model, Index LQ – 45. Introduction Focus the attention of the investors and creditors is on the financial statement which containing information profit and cash flow that is very important for users, internal and extern the company. Financial report also serves as communication to link PROCEEDING The 13th Malaysia Indonesia Conference on Economics, Management and Accounting (MIICEMA) 2012 184 184 184 the various parties who have interests against the company and as a form of manager responsibility of resources to the owner. The most important parameters for measuring the performance of management are profit and cash flow. Profit and cash flow capable of being described better of the company conditions and the prospect of economic growth In addition, investors and creditors must also consider characteristic of corporate finance, because relevance of any accounting firm figures not equal. According to Ikatan Akuntan Indonesia (IAI), profit served in financial report is profit produced through an accrual method. Accrual profits are considered to be a better measure than cash flow from the company operating activities, because an accrual method consider a matter of time (Dechow, 1994). The practices of earnings management occurred because the companies use accrual method in preparing its financial statements. Transactions are not recognized in the event of cash or cash equivalents received or released. As a consequence, the profits in financial statements contain elements of cash and accrual (non -cash) in current period. The elements of accrual can be occurred because of nondiscretionary accruals and discretionary accruals. For example: in case nondiscretionary accruals, increasing in credit sales as the company's growth. While on discretionary accruals, changes in the cost of accounts receivable losses due to change in accounting policies made by management. Their implication is the accounting profits are determined by the magnitude of both discretionary and nondiscretionary accruals. Some researchers have difficulty in distinguishing between discretionary accrual with non discretionary accrual. Discretionary approach is substance accrual management interference in the financial reporting process. Then the allowance accounts receivable not collectible which do not suitable with the conditions noted, it lead to discretionary accrual changed. For example: in an economic growth period, the company expects no change accrued (e.g. receivables and debts) due to increased sales without the expected earning management. Previous studies (Healy 1985; DeAngelo 1986; Dechow and Sloan 1991; Gumanti 2000; Gomez, et al. 2000) generally use aggregate accruals approach for measuring the existence of earning management. This approach separates the total accrual in non discretionary accruals component and discretionary accruals component. One of the advantages of aggregate accruals approach is potentially to illustrate the increasing and decreasing the profits, because it means less attention to be known by external parties, Gumanti (2000). But in the aggregate accruals model, also reaped criticism from other researchers. According to Gomez, et al. (2000), this model did not heed a connection between accrual and cash flow, so some non-discretionary accruals incorrectly classified as discretionary. As a result an error occurred on the specification in this model. Whelan and McNamara (2004) offer a new model in the discretionary accrual approach which is a development of model of Jones (1991) and Dechow (1994). The difference lies in the discretionary accruals are separated into short term and long term discretionary accruals. The separation is expected to describe the role of discretionary accruals in earnings management clearly. The research of Whelan and McNamara (2004) stated that in the long-term and short-term discretionary accruals have different effects on the relevance of financial PROCEEDING The 13th Malaysia Indonesia Conference on Economics, Management and Accounting (MIICEMA) 2012 185 185 185 reporting information. These effects cannot be revealed with the older models, so the weakness of the old models are only short-term-oriented focus. Short-term and long-term discretionary accrual has different characteristics. The difference lies in the issue of return period and the accounting method used. Short-term discretionary accrual has a relatively short period of time (generally only one year). While the long term discretionary accrual has a relatively long period of time or long (over a year). Other causes are: the existence of differences in the selection of the accounting method is performed, the recording of inventory, accounts receivable, business assets, accounts payable and taxes payable, intangible assets, revenue and net income. Long term discretionary accrual model has stronger market responded, has time period relatively longer and will give us the time of return with relatively longer. The management was more found of the use of this model, because it provides an opportunity to perform manipulation of financial statements. This study is part of post graduate research grants in the second phase, which followed by Fauziah (2011). This research continues other models in measuring earnings management practices of companies listed in the LQ 45 index. The Research aims: (1) analyzing the practice earning management with short term and long term discretionary accrual model in n the company's go public the LQ 45 index, (2) testing the difference of earnings management practices with the approach of the long term and short term discretionary accrual model on the company's go public in LQ 45 index. Theoretical background and hypotheses Earnings management is a topic of interest for researchers and practitioners. Earnings management related to the accounting policy choice and is in the process of reporting financial interventions external to achieve a particular goal. Earnings management practices occur, because they use a particular management decisions in financial reporting and the preparation of transactions that change the financial statements with the intention of misleading the stakeholders about the condition of the economic performance of the company. Scott (2006: 344) showed the earnings management is the selection of accounting policies by the manager of Financial Accounting Standards that exist and naturally can be maximize their utility and or the company's market value. Schipper (1989) defines the earnings management as an intervention with specific intent against external financial reporting process on purpose to gain some personal benefit. Fischer and Rosenzweig (1995), earnings management is the act of a manager's by presenting reports profit increase (decrease) from running into their responsibilities, without incurring an increase in (decrease) in long-term economic profitability. Characteristics of the short-term and long-term discretionary accruals approach is different. Short term accrual is accrued which affected working capital accounts and describe changes in current assets and liabilities. While the long term describing the depreciation accounts, future tax benefits, employees rights, revaluation of assets, and reasonable value adjustments of financial instruments. Information content of accrual components has been established in the previous research (Wilson, 1986; Dechow 1994; Cotter, 1996; Loftus and Sin (1997); Chia et al, 1997; Guay and Sidhu, 2001). The results show that most of the short term accrual is more relevant value than the long term accrual. PROCEEDING The 13th Malaysia Indonesia Conference on Economics, Management and Accounting (MIICEMA) 2012 186 186 186 According to Dechow (1994), short-term discretionary accruals and discretionary long term accruals have different characteristics. Short-term discretionary accruals has characteristics: (1) a relatively short period of time i.e. one accounting period, (2) an accrual involves working capital account, and (3) describe the changes in current assets and debt accounts. While the long term discretionary accruals has characteristics: (1) a period of more than one accounting period, (2) includes depreciation, revaluation of assets, and reasonable value adjustments on fi