Determinants of Earning Management at Indonesia’s Coal Mining Companies

This study analyzes the determinant of earning management based on profitability, firm size, institutional ownership, and audit committee on Indonesia's mining sector companies. This study uses panel data from the 2014-2019 financial report of 9 mining companies listed on the Indonesia Stock Exchange (IDX). The sample is determined by the purposive method, which resulted in 54 observations data. Using the common effect model (CEM) panel data analysis, this study has revealed that firm size and audit committee has a negative, but institutional ownership has a positive effect on earning management. Besides, profitability does not affect earning management. This study implies that companies need to improve their monitoring quality by adding more audit committee to reduce the earning management. The government is expected to facilitate the role of institutional investors so that they can be more optimal in the aspect of supervision, not just profit orientation. Future studies are expected to increase the number of data observations, variables, and more method to obtain the robustness result about earning management determinants.


INTRODUCTION
For the last two decades, management earnings practices have been getting more highlight by accounting researchers (Gao & Gao, 2016). The intense concern is due to the ongoing accounting scandals involving earning management practice worldwide. Indonesia is also facing this issue, marked by the PT Garuda Indonesia scandal in 2018, also another scandal experienced by PT Jiwasraya. Further, the potential of earnings management tends to Purwanto (2017) (2018) and Kapoor & Goel (2017) that found a negative effect of profitability on earnings management. Additionally, researches by Agustia & Suryani (2018), Amelia & Hernawati (2016), and Gunawan et al. (2015) could not prove that profitability had any effect on earnings management. Consequently, there have been debates on profitability's effect in triggering earnings management and whether or not the high profitability will prevent a particular company from experiencing earnings management.
In addition to profitability, another financial characteristic that presumably correlates in causing earning management is the firm size. Research by Gunawan et al. (2015), Medyawati & Dayanti (2016), Lisboa (2016), and Lubis & Suryani (2018) proved that firm size had a positive effect on earnings management. The finding is supported by agency theory stating that the bigger a company is, the higher the agency cost will be, leading to opportunistic practices, primarily related to managerial bonuses (Jensen & Meckling, 1976). In addition, when a company gets bigger, its operational scope will become more extensive, leading to asymmetrical information issues.
Apart from the findings mentioned earlier, some research found the negative effect of firm size on earnings management. Some of the research are conducted by Santi & Wardani (2018), Prasetya & Gayatri (2016), Jao & Pagalung (2011), Taco & Ilat (2016), Arthawan & Wirasedana (2018), Swastika (2013), Sirat (2012), and Ahmad et al. (2014). However, the fundamental logic of the empirical findings on the mentioned research is relatively factual, indicating company profit follows the firm size; consequently, the management will reduce the profit to avoid high tax Accordingly, there has been debate on the effect of firm size on earning management results, increasing or reducing the risk.
Referring to agency theory from Jensen & Meckling (1976), one of the attempts to anticipate the agency problems is by using ownership structure. Institutional ownership has become an attempt to increase the shareholders monitoring towards agents to avoid earnings  (1992) as the basis to propose that institutional investors focused more on current earning and failed to serve adequate monitoring; thus, the directors incited to initiate earnings management. Besides, there is a tendency from the management to achieve targeted profit from the institutional investors; thus, it urges the earning management practices.
The number of institutional ownership needs to be in line with the enhancement of the audit committee. Some researches by Alzoubi (2019) A variety of research results has become the main motive in conducting this research.
The primary purpose of this research is to validate the earnings management determinants in Indonesian coal mining companies based on the company's financial characteristics and corporate governance aspects. The financial characteristics are represented by profitability and firm size, while the corporate governance is by institutional ownership and audit committee. Therefore, this research is expected to find dominant variables that affect earnings management in Indonesian coal mining companies.

Theoretical Framework and Hyphotesis Development
Earnings management is a strategy of a company to deliberately manipulate its accruals by exploiting the flexibility of accounting regulation to temporarily improve its financial performance (Dechow & Skinner, 2000). Both theoretically and practically, there is much evidence that managers tend to improve the current year earnings by flatting out the incoming year earnings (Gao & Gao, 2016). According to Gao & Gao (2016), earnings management has two definitions: accruals-based management and real earnings management.
The most common motives for earnings management are to achieve earning target bonus for the management, to increase the company's image in attracting the investors, and to answer the rivalry in achieving funding.
Accounting researchers employ the company's financial performance characteristics as a significant determinant of earning management. Profitability, for example, has been proven to have effects on earnings management. Nevertheless, the impact varies due to the different measurement proxy of the earnings management itself (Gao & Gao, 2016). profitability is to decrease the earning value, anticipate any political effect, and carry taxation motive at the same time (Scott & others, 1997).
Other research by Fahmie (2018) and Kapoor & Goel (2017) proposed that profitability negatively affected earnings management. Thus, high profitability causes shareholders to perform rigid monitoring, and simultaneously, the regulator is deemed to One of the main causes of the emergence of earnings management is information asymmetry. According to Sehar et al. (2013), the firm size directly proportional to the information asymmetry. Furthermore, based on agency theory from Jensen & Meckling (1976), the appearance of information asymmetry and other agency problems can cause the emergence of opportunistic practices, including earnings management concerning managerial bonuses. Thus, the manager(s) will achieve a higher bonus upon reaching a particular level of the company's earnings. Therefore, firm size is considered to increase the potential of earnings management. Furthermore, some research by Gunawan et al. (2015), Medyawati & Dayanti (2016), Lisboa (2016), and Lubis & Suryani (2018) suggested that firm size positively affects earnings management. For example, Lisboa (2016) stated that the company's size directly proportional to the earnings management level in terms of cost of goods sold and production cost, as the company tends to address the investors' expectation, especially during the crisis.
However, on the other hand, the big-sized company can have a more efficient control system that eventually leads to the reduction of earnings management (Watts & Zimmerman, 1986). Moreover, some studies proved company size had a negative effect on earnings management; such as research by Santi & Wardani (2018) Institutional investors tend to focus more on the current year earning has become the reason to increase earnings management more than the institutional ownership (Potter, 1992).
Therefore, management responds to the situation by applying earnings management to achieve the target for the current year earning established by the investors. Despite the debate among findings of the study, by employing agency theory, this study proposes the following hypothesis: H3: Institutional ownership negatively affects earnings management.
Based on the agency theory, the audit committee is also considered one of the controlling mechanisms to reduce earnings management. Furthermore, the primary purpose of an independent and qualified audit committee establishment is to avoid any fraudulence by the directors. By employing agency theory, several studies conducted by Alzoubi (2019)

RESULTS AND ANALYSIS
This study also applied descriptive statistical analysis to describe the central tendency of the data of the study. The statistical analysis result of this study is as follow: Source: Data processed 2021 Table 2 shows that the earnings management average reaches -14% with a relatively equal distribution based on its deviation standard. The negative value indicates a negative earnings management, also known as an earning decrease. A negative symbol indicates a strong relationship between earnings management and tax avoidance. Company management tends to avoid high taxes. Next, the average profitability reaches 11.8%, indicating a better value than the average value of ROA in other industries.
Based on table 2, institutional ownership is predominant by 66%. Thus, an optimum role of investors in institutional ownership can effectively proceed with the monitoring and reduce the risk of information asymmetry. On the other hand, big firm size can increase the agency conflict and information asymmetry upon the lack of audit committee. Nevertheless, the average value of the audit committee in table 2 is 3, with the maximum number of members reaching 4. The following is the classical assumption result and the assigned research model: and fixed effect of being free of autocorrelation disturbance. Meanwhile, the data normality quality based on the Jaque Berra value shows that the normality model of the common effect tends to be more qualified than the fixed effect as its value is nearly 1. Accordingly, this study decided to apply the common effect, also known as pooled ordinary least square. The following table shows the multicollinearity test of this study:  Table 4 shows that the correlation between free variables in this study does not exceed 0.9; therefore, the research model does not indicate any multicollinearity disturbance. The following table shows data panel regression results by using pooled OLS model, also known as the common effect model:  The equation indicates the notion that the institutional ownership and firm size do not meet the prediction. In comparison, the profitability and audit committee produced the expected symbols. The profitability is marked with a positive symbol; thus, the correlation between ROA and earnings management is positive. Upon hypothesis acceptance, the high profitability proxied by ROA will result in earnings management. The audit committee is marked with a negative symbol; thus, it is expected to reduce the potential risk of earnings  (2018), Amelia & Hernawati (2016), and Gunawan et al. (2015). The primary reason for the insignificant effect of ROA on earnings management is the absence of an effective controlling mechanism provided by the firm, especially in minimizing the potential risk of earnings management. Besides, the result also indicates that the earnings management's motive in coal mining industry firms is not to attract potential investors or improve the appearance of financial statements for funding purposes.
By referring to table 5, the firm size negatively affects earnings management.
argument The finding is in line with Watts & Zimmerman (1986) (2014). Therefore, this study indicates that a firm with a bigger size tends to have an adequate controlling mechanism. Besides, the firm size also leads the regulator enrolment in controlling the firm activities to create a conducive business situation.
This study also found a positive effect of institutional ownership on earnings management. In other words, institutional investor ownership has a direct proportion to earnings management Nevertheless, this finding contradicts the agency theory of Jensen & Meckling (1976)  The third hypothesis' test result proves that the improvement of the controlling process does not accompany the high institutional ownership in coal mining industry firms, despite the descriptive analysis result that shows the average institutional ownership in coal mining industry firms is relatively high. This condition results from the institutional investors that are more interesting in the current year earning (Jao & Pagalung, 2011) and the urge for the management to achieve investors target earning, which encourages the management to perform earnings management. Therefore, the managerial ownership and the increase of shareholders' monitoring process are necessary to balance the situation.
Further, this study proves that the audit committee negatively affects earnings management, which means that the fourth hypothesis is accepted; the audit committee quantity is directly proportioned to the reduction potential of earnings management The finding is in line with previous study by Alzoubi (2019) (2017). This study also indicates that the audit committee quantity can serve the function of reducing earnings management. Further, the study results indicate that currently, the audit committee in firms tends to be proportional and independent; thus, it can work efficiently to avoid the emergence of earnings management. The more significant the audit committee is, the more professional the work process and decision-making are within the committee.

CONCLUSION
Based on the analysis result, this study becomes empirical evidence that firm profitability does not affect earnings management. This condition indicates that the high profitability does not increase nor reduce the managerial tendency to perform earnings management. Besides, this study found a negative effect of firm size on earnings management.
Big firms relatively cause the increase in the controlling process, both from shareholders and regulator sides, which eventually reduce the potential risk of earnings management.
Another result of this study is that institutional ownership has a positive effect on earnings management. This finding indicates that the orientation of coal mining institutional investors still on the current year earning. Therefore, the institutional investors are expected to maximize their function in monitoring the managerial performance to avoid the earnings management practices. This study reveals that audit committee has a negative effect on earnings management, which means the more independent and significant quantity the committee is, the more effective the monitoring is to minimize the earnings management potential.
The stakeholder, in this terms, is the Financial Authority Service of Indonesia (OJK), which is expected to increase the monitoring service to minimize the potential risk of earnings management practices to respond to the institutional ownership's inability to maximize the reduction of the practice. Therefore, future studies are expected to add the number of sample and data observations and employ more than one research method to produce more robust results related to the determinant factors of earnings management. Additionally, future studies are suggested to include other variables, such as audit quality, the number of commissioners members, leverage, managerial ownership, and the involvement of the chief of commissioner boards in the audit committee as the free variable assumed to have effects on earnings management.