Earnings management practices in Indonesia’s energy sector are strongly influenced by free cash flow and financial leverage, while corporate social responsibility (CSR) helps reduce such practices. This finding comes from a 2026 study by Yael Andriyani and Endri from Universitas Mercu Buana, analyzing energy companies listed on the Indonesia Stock Exchange during 2019–2024. The results are significant as they reveal key drivers and controls of financial reporting manipulation in a strategic industry.
The energy sector plays a critical role in the national economy but is also vulnerable to earnings manipulation, especially during periods of financial pressure such as the COVID-19 pandemic. Companies often face pressure to maintain performance in the eyes of investors, which can lead to strategic adjustments in financial reporting.
Research Approach
The study examined 25 energy companies over six years, resulting in 150 observations. Data were obtained from company financial reports and analyzed using statistical models to identify relationships between variables.
The key variables include:
- Free cash flow
- Financial leverage
- Corporate social responsibility (CSR)
- Good corporate governance (GCG) as a moderating factor
Key Findings
The research highlights several important results:
- Free cash flow has a significant positive effect on earnings management
- Financial leverage also shows a significant positive effect
- CSR has a significant negative effect, reducing earnings manipulation
- GCG has no significant direct effect
Additionally:
- GCG weakens the impact of leverage on earnings management
- GCG does not significantly moderate the effects of free cash flow and CSR
Statistical data (page 5) show substantial variation across companies, indicating different financial conditions and managerial strategies within the energy sector.
Interpretation of Findings
The study indicates that companies with higher free cash flow have greater flexibility to manage reported earnings. Meanwhile, firms with higher debt levels tend to engage in earnings management due to financial pressure and obligations.
In contrast, CSR acts as a controlling mechanism. Companies actively involved in social and environmental responsibility tend to be more transparent and less likely to manipulate earnings.
According to Yael Andriyani and Endri from Universitas Mercu Buana, CSR functions as a “moral mechanism” that can suppress earnings management, although corporate governance alone is not yet strong enough to directly control such practices.
Implications for Business and Policy
These findings provide several practical insights:
- Companies should manage cash flow and debt transparently
- Regulators need to strengthen oversight of financial reporting practices
- CSR can serve as an effective non-financial control mechanism
- GCG implementation must be strengthened to be substantive, not merely formal
For investors, the study underscores the importance of critically evaluating financial statements, particularly in capital-intensive sectors like energy.
Author Profile
- Yael Andriyani-Universitas Mercu Buana
- Endri- Universitas Mercu Buana
Source
Title: The Effect of Free Cash Flow, Financial Leverage and Corporate Social Responsibility on Earnings Management: The Moderating Role of Good Corporate Governance
Journal: International Journal of Business and Applied Economics (IJBAE)
Year: 2026
DOI: https://doi.org/10.55927/ijbae.v5i2.11
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