FORMOSA NEWS - Jakarta - shows that strong audit quality plays a crucial role in limiting earnings management among manufacturing companies listed on the Indonesia Stock Exchange. The research, published in 2026 in the Formosa Journal of Business and Economic Statistics, examines how financial distress, ownership structure, and company characteristics influence corporate profit reporting practices.
The findings highlight that companies audited with higher-quality standards are less likely to manipulate reported earnings. Other factors—such as financial distress, managerial ownership, institutional ownership, firm age, firm size, profitability, and leverage—did not show a statistically significant influence on earnings management in the dataset.
The research provides new insights for investors, regulators, and corporate governance experts seeking to improve transparency and trust in corporate financial reporting.
Why Earnings Management Matters
Financial statements are the primary source of information for investors, creditors, regulators, and other stakeholders. They describe a company's financial position, performance, and cash flow, allowing decision-makers to evaluate business health and future prospects.
Among the key indicators in financial reports, profit is particularly influential. Companies reporting higher profits often attract more investors and gain easier access to financing. This creates incentives for managers to adjust accounting decisions in ways that make earnings appear more favorable.
Such practices are commonly known as earnings management.
Earnings management may involve:
- Accelerating revenue recognition
- Delaying expenses
- Adjusting accounting policies
- Using discretionary accounting estimates
While some adjustments are allowed within accounting standards, excessive manipulation can distort financial information and reduce trust in the capital market.
Because of these risks, corporate governance mechanisms—such as ownership structure and independent audits—are often expected to limit earnings manipulation.
How the Study Was Conducted
Revinda and Maria analyzed publicly listed manufacturing companies on the Indonesia Stock Exchange (IDX) over a three-year period from 2022 to 2024.
The research examined how several corporate factors influence earnings management behavior. The variables included:
- Financial distress
- Managerial ownership
- Institutional ownership
- Audit quality
- Firm age
- Firm size
- Profitability
- Leverage
The researchers selected companies using purposive sampling, ensuring that only firms meeting specific financial reporting criteria were included.
From the IDX database, 70 manufacturing companies qualified for the study. With data collected across three years, the dataset contained 210 observations.
To identify relationships between the variables, the authors applied multiple linear regression analysis, a statistical method commonly used in financial and accounting research.
Key Findings
The study produced several important results regarding the drivers of earnings management in Indonesian manufacturing firms.
1. Audit quality significantly reduces earnings management
Companies audited by higher-quality auditors were less likely to manipulate earnings. High audit standards improve financial reporting reliability and strengthen external oversight.
2. Financial distress showed no significant effect
Contrary to expectations, companies experiencing financial pressure were not significantly more likely to manipulate profits in the sample.
3. Ownership structure did not influence earnings management
Both managerial ownership and institutional ownership showed no measurable impact on earnings manipulation practices.
4. Company characteristics were also insignificant
Firm age, company size, profitability, and leverage did not demonstrate a significant relationship with earnings management.
These findings suggest that audit oversight may be more influential than internal corporate characteristics in controlling financial reporting behavior.
What the Findings Mean for Investors and Policymakers
The study reinforces the critical role of independent, high-quality audits in maintaining transparent financial reporting.
For investors, the findings highlight the importance of reviewing audit credibility when evaluating company financial statements.
For regulators and policymakers, the research suggests that strengthening audit standards could significantly improve market transparency.
Potential implications include:
- Strengthening audit supervision policies
- Encouraging companies to use reputable auditing firms
- Enhancing regulatory frameworks for financial disclosure
- Improving investor confidence in capital markets
The results also indicate that internal governance factors such as ownership structure may not always be sufficient to prevent earnings manipulation without strong external oversight.
Author Insight
According to Felice Revinda and Maria of the Trisakti School of Management, audit credibility plays a central role in protecting the reliability of corporate financial reporting.
The authors explain that higher audit quality increases public trust in financial statements and reduces the likelihood that managers engage in earnings manipulation.
Their analysis highlights how professional auditing acts as an external monitoring mechanism that strengthens financial transparency.
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