Article Sidebar

Download
Download Article

Main Article Content

Abstract

This study investigates the perceptions of Chief Financial Officers (CFOs) in Indonesian companies regarding earnings quality and the factors influencing their reporting decisions. It aims to explore the implications of these perceptions for stakeholders, including investors and standard setters. Employing qualitative methodologies, the research collects data through in-depth interviews and surveys administered to CFOs across various sectors in Indonesia. The study examines the relationship between earnings quality and institutional ownership, credit ratings, and the professional backgrounds of CFOs. The findings reveal that nearly 95% of CFOs perceive earnings as critical for investors in valuing companies, with a strong emphasis on sustainability and the absence of one-time items as key attributes of high-quality earnings. Additionally, a significant correlation exists between institutional ownership and earnings quality, while CFOs with public accounting backgrounds report higher perceptions of earnings quality compared to their counterparts. The study highlights that firms with higher credit ratings tend to demonstrate greater earnings quality. The results underscore the importance of transparent and reliable financial reporting practices for CFOs, suggesting a need for improved accounting standards that address the complexities of earnings quality. Investors are encouraged to consider the sustainability of earnings when making investment decisions. This research contributes to the understanding of earnings quality in emerging markets, specifically within the context of Indonesian corporate governance. It bridges the gap between academic theories and practical insights from financial executives, offering valuable implications for future research and policy development.

Keywords

Earnings Quality CFO Perceptions Institutional Ownership Credit Ratings Corporate Governance

Article Details

Creative Commons License

This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Author Biography

Suswadi, Universitas Tunas Pembangunan UTP

Prof. Dr.Ir.Suswadi.,M.Si

How to Cite
Warsina, W., Suswadi, S., Budiana Kurniawati, S., & Dwanita Widodo, Z. (2024). Earnings Quality and Economic Narratives: Insights into Corporate Truth-Making from CFOs and Financial Standard Setters . Golden Ratio of Finance Management, 4(2), 264–276. https://doi.org/10.52970/grfm.v4i2.873
Download Citation
Endnote/Zotero/Mendeley (RIS)
BibTeX

References

  1. Ahmed, B. (2020). Understanding the impact of investor sentiment on the price formation process: A review of the conduct of American stock markets. The Journal of Economic Asymmetries, 22, e00172. https://doi.org/https://doi.org/10.1016/j.jeca.2020.e00172
  2. Al-Absy, M. S. M., Ku Ismail, K. N. I., & Chandren, S. (2019). Audit committee chairman characteristics and earnings management. Asia-Pacific Journal of Business Administration, 11(4), 339–370. https://doi.org/10.1108/APJBA-10-2018-0188
  3. Alam, N., Ramachandran, J., & Nahomy, A. H. (2020). The impact of corporate governance and agency effect on earnings management – A test of the dual banking system. Research in International Business and Finance, 54, 101242. https://doi.org/https://doi.org/10.1016/j.ribaf.2020.101242
  4. Alhadab, M., & Clacher, I. (2018). The impact of audit quality on real and accrual earnings management around IPOs. The British Accounting Review, 50(4), 442–461. https://doi.org/https://doi.org/10.1016/j.bar.2017.12.003
  5. Alzoubi, E. S. S. (2018). Audit quality, debt financing, and earnings management: Evidence from Jordan. Journal of International Accounting, Auditing and Taxation, 30, 69–84. https://doi.org/https://doi.org/10.1016/j.intaccaudtax.2017.12.001
  6. Babar, M., & Habib, A. (2021). Product market competition in accounting, finance, and corporate governance: A review of the literature. International Review of Financial Analysis, 73, 101607. https://doi.org/https://doi.org/10.1016/j.irfa.2020.101607
  7. Baker, V. L., Gracia, C., Glassner, M. J., Schnell, V. L., Doody, K., Coddington, C. C., Shin, S. S., Marshall, L. A., Alper, M. M., Morales, A. J., Pavone, M. E., Behera, M. A., Zbella, E. A., Shapiro, B. S., Straseski, J. A., & Broyles, D. L. (2018). Multicenter evaluation of the Access AMH antimüllerian hormone assay for the prediction of antral follicle count and poor ovarian response to controlled ovarian stimulation. Fertility and Sterility, 110(3), 506-513.e3. https://doi.org/https://doi.org/10.1016/j.fertnstert.2018.03.031
  8. Bao, Y., Ke, B., Li, B., Yu, Y. J., & Zhang, J. (2020). Detecting Accounting Fraud in Publicly Traded U.S. Firms Using a Machine Learning Approach. Journal of Accounting Research, 58(1), 199–235. https://doi.org/10.1111/1475-679X.12292
  9. Bilal, Komal, B., Ezeani, E., Usman, M., Kwabi, F., & Ye, C. (2023). Do the educational profile, gender, and professional experience of audit committee financial experts improve financial reporting quality? Journal of International Accounting, Auditing and Taxation, 53, 100580. https://doi.org/https://doi.org/10.1016/j.intaccaudtax.2023.100580
  10. Boachie, C., & Mensah, E. (2022). The effect of earnings management on firm performance: The moderating role of corporate governance quality. International Review of Financial Analysis, 83, 102270. https://doi.org/https://doi.org/10.1016/j.irfa.2022.102270
  11. Bouteska, A. (2019). The effect of investor sentiment on market reactions to financial earnings restatements: Lessons from the United States. Journal of Behavioral and Experimental Finance, 24, 100241. https://doi.org/https://doi.org/10.1016/j.jbef.2019.100241
  12. Chang, K., Kim, Y. S., Li, Y., & Park, J. C. (2022). Labor unions and real earnings management. Journal of Corporate Finance, 75, 102242. https://doi.org/https://doi.org/10.1016/j.jcorpfin.2022.102242
  13. Chen, X., Cheng, Q., Hao, Y., & Liu, Q. (2020). GDP growth incentives and earnings management: evidence from China. Review of Accounting Studies, 25(3), 1002–1039. https://doi.org/10.1007/s11142-020-09547-8
  14. Chew, N. W. S., Lee, G. K. H., Tan, B. Y. Q., Jing, M., Goh, Y., Ngiam, N. J. H., Yeo, L. L. L., Ahmad, A., Ahmed Khan, F., Napolean Shanmugam, G., Sharma, A. K., Komalkumar, R. N., Meenakshi, P. V, Shah, K., Patel, B., Chan, B. P. L., Sunny, S., Chandra, B., Ong, J. J. Y., … Sharma, V. K. (2020). A multinational, multicentre study on the psychological outcomes and associated physical symptoms amongst healthcare workers during COVID-19 outbreak. Brain, Behavior, and Immunity, 88, 559–565. https://doi.org/10.1016/j.bbi.2020.04.049
  15. Choi, A., Choi, J.-H., & Sohn, B. C. (2018). The Joint Effect of Audit Quality and Legal Regimes on the Use of Real Earnings Management: International Evidence. Contemporary Accounting Research, 35(4), 2225–2257. https://doi.org/https://doi.org/10.1111/1911-3846.12370
  16. de Souza, J. A. S., Rissatti, J. C., Rover, S., & Borba, J. A. (2019). The linguistic complexities of narrative accounting disclosure on financial statements: An analysis based on readability characteristics. Research in International Business and Finance, 48, 59–74. https://doi.org/https://doi.org/10.1016/j.ribaf.2018.12.008
  17. Dechow, P. M., Larson, C. R., & Resutek, R. J. (2022). The Effect of Accrual Heterogeneity on Accrual Quality Inferences. The Accounting Review, 97(5), 245–273. https://doi.org/10.2308/TAR-2019-0200
  18. Dubey, R., Gunasekaran, A., & Samar Ali, S. (2015). Exploring the relationship between leadership, operational practices, institutional pressures and environmental performance: A framework for green supply chain. International Journal of Production Economics, 160, 120–132. https://doi.org/https://doi.org/10.1016/j.ijpe.2014.10.001
  19. Ed-Dafali, S., Patel, R., & Iqbal, N. (2023). A bibliometric review of dividend policy literature. Research in International Business and Finance, 65, 101987. https://doi.org/https://doi.org/10.1016/j.ribaf.2023.101987
  20. Efendi, J., Srivastava, A., & Swanson, E. P. (2007). Why do corporate managers misstate financial statements? The role of option compensation and other factors. Journal of Financial Economics, 85(3), 667–708. https://doi.org/https://doi.org/10.1016/j.jfineco.2006.05.009
  21. El Diri, M., Lambrinoudakis, C., & Alhadab, M. (2020). Corporate governance and earnings management in concentrated markets. Journal of Business Research, 108, 291–306. https://doi.org/https://doi.org/10.1016/j.jbusres.2019.11.013
  22. Farinha, J., Mateus, C., & Soares, N. (2018). Cash holdings and earnings quality: evidence from the Main and Alternative UK markets. International Review of Financial Analysis, 56, 238–252. https://doi.org/https://doi.org/10.1016/j.irfa.2018.01.012
  23. Ferramosca, S., & Ghio, A. (2018). Earnings Management in Family Firms BT - Accounting Choices in Family Firms: An Analysis of Influences and Implications (S. Ferramosca & A. Ghio (eds.); pp. 103–138). Springer International Publishing. https://doi.org/10.1007/978-3-319-73588-7_3
  24. Fiedler, B. A. (2020). 1 - Intersecting global health metrics with personal change (B. A. B. T.-T. F. of P. H. and P. to I. Fiedler (ed.); pp. 3–29). Academic Press. https://doi.org/https://doi.org/10.1016/B978-0-12-819008-1.00001-8
  25. García Lara, J. M., García Osma, B., & Penalva, F. (2020). Conditional conservatism and the limits to earnings management. Journal of Accounting and Public Policy, 39(4), 106738. https://doi.org/https://doi.org/10.1016/j.jaccpubpol.2020.106738
  26. Garel, A., Martin-Flores, J. M., Petit-Romec, A., & Scott, A. (2021). Institutional investor distraction and earnings management. Journal of Corporate Finance, 66, 101801. https://doi.org/https://doi.org/10.1016/j.jcorpfin.2020.101801
  27. Habib, A., Ranasinghe, D., Wu, J. Y., Biswas, P. K., & Ahmad, F. (2022). Real earnings management: A review of the international literature. Accounting & Finance, 62(4), 4279–4344. https://doi.org/https://doi.org/10.1111/acfi.12968
  28. Hanley, K. W., Jagolinzer, A. D., & Nikolova, S. (2018). Strategic estimation of asset fair values. Journal of Accounting and Economics, 66(1), 25–45. https://doi.org/https://doi.org/10.1016/j.jacceco.2018.01.004
  29. Jana, S., & McMeeking, K. (2021). Alternative Performance Measures: Determinants of Disclosure Quality – Evidence from Germany. Accounting in Europe, 18(1), 102–142. https://doi.org/10.1080/17449480.2020.1829655
  30. Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
  31. Jensen, M. C., & Meckling, W. H. (2019). Theory of the firm: Managerial behavior, agency costs and ownership structure. Corporate Governance: Values, Ethics and Leadership, 77–132. https://doi.org/10.4159/9780674274051-006
  32. Kamarudin, K. A., Islam, A., Habib, A., & Wan Ismail, W. A. (2022). Auditor switching, lowballing and conditional conservatism: evidence from selected Asian countries. Managerial Auditing Journal, 37(2), 224–254. https://doi.org/10.1108/MAJ-01-2020-2530
  33. Lennox, C., & Wu, J. S. (2022a). A review of China-related accounting research in the past 25 years. Journal of Accounting and Economics, 74(2–3), 101539. https://doi.org/10.1016/j.jacceco.2022.101539
  34. Lennox, C., & Wu, J. S. (2022b). A review of China-related accounting research in the past 25 years. Journal of Accounting and Economics, 74(2–3), 101539. https://doi.org/10.1016/J.JACCECO.2022.101539
  35. Liu, T., Liu, Y., Ullah, B., Wei, Z., & Xu, L. C. (2021). The dark side of transparency in developing countries: The link between financial reporting practices and corruption. Journal of Corporate Finance, 66, 101829. https://doi.org/https://doi.org/10.1016/j.jcorpfin.2020.101829
  36. Macdonald, K. (2020). Private sustainability standards as tools for empowering southern pro-regulatory coalitions? Collaboration, conflict and the pursuit of sustainable palm oil. Ecological Economics, 167, 106439. https://doi.org/https://doi.org/10.1016/j.ecolecon.2019.106439
  37. Maradona, A. F., & Chand, P. (2018). The Pathway of Transition to International Financial Reporting Standards (IFRS) in Developing Countries: Evidence from Indonesia. Journal of International Accounting, Auditing and Taxation, 30, 57–68. https://doi.org/https://doi.org/10.1016/j.intaccaudtax.2017.12.005
  38. Michael Spence. (2002). Signaling in Retrospect and the Informational Structure of Markets Michael Spence. American, The Review, Economic Jun, No, 92(3), 434–459.
  39. Michelon, G., Trojanowski, G., & Sealy, R. (2022). Narrative Reporting: State of the Art and Future Challenges. Accounting in Europe, 19(1), 7–47. https://doi.org/10.1080/17449480.2021.1900582
  40. Mongrut, S., & Winkelried, D. (2019). Unintended effects of IFRS adoption on earnings management: The case of Latin America. Emerging Markets Review, 38, 377–388. https://doi.org/https://doi.org/10.1016/j.ememar.2018.11.004
  41. Muawanah, U., Yusuf, G., Adrianto, L., Kalther, J., Pomeroy, R., Abdullah, H., & Ruchimat, T. (2018). Review of national laws and regulation in Indonesia in relation to an ecosystem approach to fisheries management. Marine Policy, 91, 150–160. https://doi.org/https://doi.org/10.1016/j.marpol.2018.01.027
  42. Nazir, M. S., & Afza, T. (2018). Does managerial behavior of managing earnings mitigate the relationship between corporate governance and firm value? Evidence from an emerging market. Future Business Journal, 4(1), 139–156. https://doi.org/https://doi.org/10.1016/j.fbj.2018.03.001
  43. Niso, G., Krol, L. R., Combrisson, E., Dubarry, A. S., Elliott, M. A., François, C., Héjja-Brichard, Y., Herbst, S. K., Jerbi, K., Kovic, V., Lehongre, K., Luck, S. J., Mercier, M., Mosher, J. C., Pavlov, Y. G., Puce, A., Schettino, A., Schön, D., Sinnott-Armstrong, W., … Chaumon, M. (2022). Good scientific practice in EEG and MEG research: Progress and perspectives. NeuroImage, 257, 119056. https://doi.org/https://doi.org/10.1016/j.neuroimage.2022.119056
  44. Nor Ahmad, S. N. H. J. N., Amran, A., & Siti-Nabiha, A. K. (2022). Symbolic or substantive change? How a Malaysian palm oil company managed sustainability issues in words and deeds. Qualitative Research in Accounting & Management, 19(4), 473–510. https://doi.org/10.1108/QRAM-05-2020-0061
  45. Nurunnabi, M. (2021). Implementation of International Financial Reporting Standards (IFRS) in Developing Countries. In International Financial Reporting Standards Implementation: A Global Experience (pp. 11–76). Emerald Publishing Limited. https://doi.org/10.1108/978-1-80117-440-420211002
  46. Obeng, V. A., Ahmed, K., & Miglani, S. (2020). Integrated reporting and earnings quality: The moderating effect of agency costs. Pacific-Basin Finance Journal, 60, 101285. https://doi.org/https://doi.org/10.1016/j.pacfin.2020.101285
  47. Oyewo, B. (2022). Enterprise risk management and sustainability of banks performance. Journal of Accounting in Emerging Economies, 12(2), 318–344. https://doi.org/10.1108/JAEE-10-2020-0278
  48. Ravenscroft, S., & Williams, P. F. (2021). Sustaining discreditable accounting research through ignorance: The mainstream elite’s response to the 2008 financial crisis. Accounting, Organizations and Society, 95, 101280. https://doi.org/https://doi.org/10.1016/j.aos.2021.101280
  49. Ray, P. P. (2023). ChatGPT: A comprehensive review on background, applications, key challenges, bias, ethics, limitations and future scope. Internet of Things and Cyber-Physical Systems, 3, 121–154. https://doi.org/https://doi.org/10.1016/j.iotcps.2023.04.003
  50. Rezaee, Z., & Tuo, L. (2019). Are the Quantity and Quality of Sustainability Disclosures Associated with the Innate and Discretionary Earnings Quality? Journal of Business Ethics, 155(3), 763–786. https://doi.org/10.1007/s10551-017-3546-y
  51. Srivastava, A. (2019). Improving the measures of real earnings management. Review of Accounting Studies, 24(4), 1277–1316. https://doi.org/10.1007/s11142-019-09505-z
  52. Tseng, M.-L., Bui, T.-D., Lim, M. K., Fujii, M., & Mishra, U. (2022). Assessing data-driven sustainable supply chain management indicators for the textile industry under industrial disruption and ambidexterity. International Journal of Production Economics, 245, 108401. https://doi.org/https://doi.org/10.1016/j.ijpe.2021.108401
  53. Van Driel, H. (2019). Financial fraud, scandals, and regulation: A conceptual framework and literature review. Business History, 61(8), 1259–1299. https://doi.org/10.1080/00076791.2018.1519026
  54. Waweru, N. M., & Prot, N. P. (2018). Corporate governance compliance and accrual earnings management in eastern Africa. Managerial Auditing Journal, 33(2), 171–191. https://doi.org/10.1108/MAJ-09-2016-1438
  55. Zeng, X., Momin, M., & Nurunnabi, M. (2022). Photo disclosure in human rights issues by fortune companies: an impression management perspective. Sustainability Accounting, Management and Policy Journal, 13(3), 568–599. https://doi.org/10.1108/SAMPJ-06-2019-0243