Earnings Manage Ment: an Evide Nce Based on Deferred Tax Expense

Abstract

Tyasari, Rachma (2006). Earnings Management: An Evidence Based on Deferred Tax Expense. International Program of Accounting Department Faculty of Economics. Universitas Islam Indonesia. Yogyakarta.

This research examine the usefulness of deferred tax expense as compared to accruals methods to detect earnings management in the three settings where earnings management are likely to occurs. Earnings plays important role in decision making process since it become the first face that will be viewed by investors to appraise the firm's economic condition. Therefore gaining knowledge of whether earnings is free from managerial discretion or not is important. One method to detect managerial discretion to manage earnings is by deferred tax expense (DTE). On the previous study, Philips et al (2002) found that DTE is rather useful in detecting earnings management and classifying earnings management as discretion and non discretion. The scope of earnings management studied in this research are divided into three settings where earnings management are likely to occurs; earnings management in concern to avoid reporting an earnings decline, to avoid reporting a loss and to meet or beat financial analysis forecast. To gain further understanding of the incremental usefulness of DTE in detecting earnings management, this study combining DTE with accruals method. The purpose of this study is to provide further evidence for Indonesian case. The research resulted that DTE is generally incrementally useful as detection of earnings management in Indonesian environment. But this evidence is not supported by the use of accruals method as the supporting measures.