FORMOSA NEWS - Jakarta - reveals that audit quality and corporate leverage play a significant role in limiting earnings management among manufacturing companies listed on the Indonesia Stock Exchange. The study, published in 2026 in the Formosa Journal of Business and Economic Statistics (FJBES), analyzed financial data from manufacturing firms between 2022 and 2024, offering new insights into how corporate governance and financial structure influence the credibility of financial reporting.
The findings are important for investors, regulators, and business leaders who rely on financial statements to assess corporate performance. Earnings manipulation can distort financial information, potentially misleading investors and weakening trust in capital markets. By identifying the factors that help prevent such practices, the research contributes to improving transparency in corporate reporting.
Financial Transparency and the Risk of Earnings Management
Financial statements are one of the most important tools used by investors, creditors, and policymakers to evaluate a company’s performance. Ideally, these reports present accurate and transparent information about profits, assets, and liabilities. However, companies sometimes engage in earnings management, a practice in which managers adjust accounting methods or operational decisions to influence reported profits.
Earnings management does not always involve illegal activity, but it can obscure the real financial condition of a company. Managers may attempt to smooth profit fluctuations, meet market expectations, or present stronger financial performance to attract investors.
Cases of disputed financial reporting in several large companies have demonstrated how different accounting treatments can significantly change the appearance of corporate profitability. These situations have increased attention from researchers and regulators seeking to understand why companies engage in earnings manipulation and how it can be prevented.
The study by Josephine Laurentia and Maria of Trisakti School of Management addresses this issue by examining a range of corporate characteristics that may influence earnings management behavior.
Research Approach and Data
The researchers analyzed manufacturing companies listed on the Indonesia Stock Exchange (IDX) over a three-year period from 2022 to 2024. The manufacturing sector was chosen because it represents one of the largest and most active sectors in Indonesia’s capital market.
Using a purposive sampling method, the researchers selected companies that met specific research criteria. After the screening process, the final dataset consisted of 70 companies with 210 observations across the three-year period.
The study examined the relationship between earnings management and eight independent variables:
- Managerial ownership
- Institutional ownership
- Revenue growth
- Audit quality
- Profitability
- Leverage (corporate debt level)
- Board size
- Firm size
The researchers applied multiple linear regression analysis to evaluate how each factor affects earnings management while controlling for the influence of other variables.
Earnings management was measured using an established accounting model that estimates discretionary accruals—financial adjustments that may indicate managerial intervention in profit reporting.
Key Findings
The results show that only two variables significantly influence earnings management in the sample of Indonesian manufacturing companies.
1. Audit Quality Reduces Earnings Manipulation
Companies audited by higher-quality auditors show lower levels of earnings management.
High-quality auditors are more likely to apply strict auditing standards and thorough examination procedures. This stronger oversight reduces opportunities for managers to manipulate accounting figures.
In practical terms, the presence of a reputable auditor can increase the credibility of financial statements and strengthen investor confidence.
2. Higher Leverage Limits Managerial Manipulation
The research also finds that leverage has a significant negative effect on earnings management.
Companies with higher levels of debt tend to face stricter monitoring from creditors and lenders. Because these external stakeholders closely examine financial statements, managers have fewer opportunities to manipulate reported earnings.
In other words, the pressure created by debt obligations can indirectly encourage companies to maintain more transparent reporting practices.
3. Other Variables Show No Significant Influence
Several variables commonly believed to affect earnings management were not statistically significant in this study:
- Managerial ownership
- Institutional ownership
- Revenue growth
- Profitability
- Board size
- Firm size
These findings suggest that ownership structure and internal governance mechanisms alone may not always be sufficient to prevent earnings manipulation.
Implications for Investors, Businesses, and Regulators
The research offers practical insights for multiple stakeholders in Indonesia’s financial ecosystem.
- For investors, the findings highlight the importance of evaluating the quality of a company’s external auditor and its financial leverage when assessing the reliability of financial statements.
- For corporate managers, the study underscores the value of strong auditing practices. Engaging high-quality auditors not only strengthens compliance with accounting standards but also enhances credibility with investors and business partners.
- For regulators and policymakers, the results support the importance of maintaining strong audit oversight systems. Strengthening audit standards and monitoring the quality of external audits could reduce earnings manipulation across the market.
According to Josephine Laurentia and Maria from Trisakti School of Management, companies audited by high-quality auditors tend to present more reliable financial reports because stricter auditing procedures reduce the opportunity for earnings manipulation.
Strengthening Trust in Financial Reporting
Reliable financial reporting remains essential for the stability of capital markets. Investors depend on transparent information to evaluate risk and allocate capital effectively.
The study by Josephine Laurentia and Maria of Trisakti School of Management demonstrates that external monitoring—particularly through high-quality auditing and creditor oversight—plays a critical role in maintaining the integrity of financial statements.
Future research could expand on these findings by examining other sectors, extending the observation period, or including additional governance variables such as board independence, ownership concentration, or macroeconomic conditions.
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