One form of corporate responsibility to stakeholders at the end of the period is to make financial reports. In addition to functioning as a form of responsibility, financial statements are also a medium of corporate communication with interested parties. Usually what concerns the users of financial statements is earnings management performance related to company profits.
The tendency of attention to earnings is certainly realized by management, so managers usually make how profits or profits in financial statements are used to benefit the company. The method used is usually referred to as earnings management (earning management).
Definition of Earnings Management
According to Schipper (1989), earnings management is an intervention activity with specific objectives in the external financial reporting process, to obtain several benefits. Meanwhile, Asih and Gudono (2000) define earnings management as a process carried out deliberately within the limits of GAAP (General Addopted Accounting Principle) to direct the level of reported earnings. So if it is concluded this management is a deliberate act or manipulation of profits in the financial statements in order to get more profits.
Profit Management Motives & Objectives
Every action taken is of course based on motives and goals, including also with earnings management. Here are some things related to the motivation and purpose of doing this management:
a. Bonus Purposes
The purpose of this bonus is because usually managers get a bonus measured by how much profit. The manager has information on the company’s net profit, so he will act to make management by maximizing current profits.
b. Political Motivation (Political Motivation)
This management does not mean always increasing profits but also can reduce profits that occur in the current period. If to get a bonus, managers will tend to increase profits, then for the benefit of the government profits will tend to be reduced. Companies will reduce reported profits due to public pressure so the government sets stricter regulations. In addition, by reducing the company’s profits can also save taxes.
c. Initial Public Offering / IPO (Initial Public Offering)
This IPO is an initial public offering, companies that have never had market value and will go public will conduct earnings management. It is intended that the company’s share price rises.
d. Information to Investors
This information to investors is a common goal and motivation in managing business profits. The company must submit a report to investors at the end of the period or the end of the month. So that companies are considered to have good performance, the company carries out management so that profits increase.
Profit Management Patterns
There are 4 earnings management patterns that are often used by managers, four of these patterns are:
a. Income Smoothing
Maybe you often hear this term? Income smoothing is a management pattern that is often used by managers. The way to do this is by leveling reported earnings. The aim is that the profits obtained are stable, so investors will like the company’s performance.
b. Income Maximization
Judging from its name, this activity is carried out when profits are down. This method can be used to protect companies when dealing with debt activities. In addition, in order to get greater profits, you can do this pattern by manipulating accounting data in the financial statements.
c. Income Minimization
As explained in the goals and motives, this management can be used to reduce the tax burden and so that companies do not get the attention of the government. This income minimization pattern can be used for this purpose. How, you can remove costs that are not considered by the readers of financial statements such as advertising costs, R&D costs; or you can delete intangible assets and capital goods.
d. Taking A Bath
The fourth management pattern is taking a bath. This pattern is carried out by way of imposing future costs and removing some assets. In addition, you can also do clear the desk, so that reported profits can increase.