Earnings Management and Operating Performance

Ronald Tehupuringa*, Amor Marundab

Gadjah Mada University
a,b

Abstract

The purpose of this study is examine the effect of earnings management on the operating performance. This study uses a
sample of mining companies listed on the Indonesia Stock Exchange period 2012-2016. However, the year of analysis uses the
period 2014-2016. While the year 2012-2013 is used in calculating real earnings management that requires two years earlier. The
results showed that the accrual earnings management had a positive and significant effect on the operational performance.
Meanwhile, real earnings management has no effect on the operational performance. In the third test result of earnings
management proxy found that only ACFO have positive and significant effect on the operational performance. Meanwhile,
APROD and ADISX have no significant effect on the operational performance. The results of this study provide practical
implications that the average mining company in Indonesia Stock Exchange uses the accrual profit management to improve the
operational performance of the company compared to real earnings management.
Keywords: Accrual Earnings Management; Real Earnings management; Operating Performance

1. Introduction

One of the important issues in accounting research is earnings management. Schipper (1989) defined earnings
management as "a purposeful intervention in the external financial reporting process, with the intent of obtaining some
private gains." Cohen & Zarowin (2010), McVay (2006), and Roychowdhury (2006) suggest that previous studies
related to earnings management tend to focus on accrual earnings management. In fact, earnings management is not
only done by managers through the gap of financial accounting standards. However, earnings management can
also be done by managers through the real activities of the company. This is consistent with Zang (2012) statement
that earnings management is performed by managers not only through a single technique to meet expected earnings target.
Therefore, to detect the behavior of managers in earnings management, it must consider the two techniques of earnings
management are accrual earnings management and real earnings management. Scott (2003) stated that motivates
managers make earnings management as (1) to obtain bonuses, (2) tax savings, (3) the change of CEO, and (4) initial
public offering.
The negative implications of managers making earnings management are that earnings information becomes
inaccurate. Dechow and Dichev (2002) showed that accuracy of earnings information can be known through three
important characteristics were (1) earnings information can show the current operational performance accurately, (2)
earnings information can be a good indicator in assessing the company's performance in will come, and (3) earnings
information can be an appropriate measure in assessing the company's performance. Manager behavior in earnings
management can be known through agency theory. This theory explains that a conflict of interest between shareholders
and managers. Manager of the company try to fulfill its interests rather than interests of shareholders. Efforts to meet
the interests of managers lead managers tend to manage earnings to achieve the target earnings in accordance with the
wishes of the managers. Efforts to manage profits made by managers can be through an accrual or a real earnings
management.
The impact of using accrual based accounting to record transactions and the company's economic events is the
accrual income management. In principle, accrual-based accounting records all the financial transactions experienced
and recognized by the company regardless of whether cash is received and paid in cash. As a result, the emergence of
various accrual accounts in the company's financial statements such as, debt, accounts receivable, revenues
received in advance, fees paid in advance, depreciation expenses, and others. There are several components in the
financial statements that managers tend to use in the use of accounting election gaps. These components are
classified into current assets, fixed assets, current liabilities and profits. Current assets components that are often
used by managers as objects of earnings management are the components of cash or cash equivalents, receivables,
inventories, and prepaid expenses. Whereas, the object of earnings management of fixed asset components is the
method of depreciation and estimation of the economic life of the asset. Furthermore, the components of current
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debt that are used as the object of earnings management are short-term and long-term debt that will mature. Finally,
the earnings component that becomes the object of earnings management is the component of income and expense
(Sulistiyanto, 2008). Accrual earnings management is often used by managers depending on the motivation of either
manager to increase profits, lower profits, or even earnings.
Unlike the accrual earnings management, real earnings management is a manager action that deviates from the
normal business activities of a company with the aim of achieving earnings targets (Cohen & Zarowin, 2010;
Roychowdhury, 2006). Real earnings management actions undertaken by managers can be classified into three
important parts: (1) sales manipulation relates to the actions of managers in increasing sales temporarily at a certain
period by offering a relatively low price (discount) or easier credit terms. The goal is to increase sales of the current
period, so that profit targets are achieved. (2) the decrease of discretionary expenses relating to general costs, sales,
and administration, research and development costs, and advertising costs. The goal is to improve current profit and
cash flow. (3) excessive production associated with an increase in production volume will reduce fixed costs per unit
of product, thereby reducing cost of goods sold and increasing operating earnings. These three real earnings
management techniques are performed by managers with the aim of increasing the earnings target of the current period.
However, the negative implication of using this method is that the company's long-term performance is reduced.
The phenomenon of earnings management by managers does not only happen to global companies such as Enron
Corporation, Worldcom, Tyco, Heal South, and Toshiba. However, the phenomenon of the case of earnings
management by managers also occurred in several companies in Indonesia, namely, PT. Ades Alfindo, Tbk; PT.
Katarina Utama, Tbk; PT. Lippo, Tbk; PT. Indofarma, Tbk; or PT. Kimia Farma, Tbk. Leuz et al. (2003) showed
that as a result of the protection of shareholders in Indonesia, the management of earnings performed by managers
tends to be more intensive than in countries with strong shareholder protection. Therefore, this research is important
to do with the aim to test the effect of good earnings management, accrual profit management and earnings
management real to the company's operational performance.
Various phenomenon of the above case shows that earnings management is still done by managers to meet their
interests. In particular, the phenomenon of earnings management cases also occur in some mining companies namely,
PT. Timah, PT. Ancora Mining, and PT. Bumi Resources. PT. Timah (Persero), Tbk is suspected of providing fictitious
financial statements in the first semester of 2015. This fictitious financial reporting activity was conducted to cover up
the worsening financial performance. According to the Chairman of the Timah Employee Association (IKT) that if
referring to the real condition that occurred in PT. Timah, Tbk, the financial statements of the first semester of 2015
PT. Timah, Tbk is fictitious because in the first semester of 2015 the operating profit of PT. Tin has incurred a loss of
Rp.59 billion (www.tambang.co.id).
Another case phenomenon in mining company that is, PT. Ancora Mining Service (AMS) was reported by Justice
Community Forum (FMPK) to the Directorate General of Taxation (DJP) of the Ministry of Finance regarding alleged
manipulation of financial statements. According to the head of the FMPK Investigation section, the indication of the
manipulation of financial statements is evident from the income of Rp.34.9 billion but there is no investment
movement. In addition, the company also found evidence of interest payment of Rp. 18 billion when AMS admitted to
not having debt. FMPK also found evidence of Rp.5.3 billion of receivables but no clarity of transactions. That is, the
company's business income is smaller than passive income (www.republika.co.ic.id).
Indonesian Corruption Watch (ICW) reported the sale of three coal mining companies belonging to the Bakrie
Group to the Directorate General of Taxation. ICW suspects the reporting engineering conducted by PT. Bumi
Resources, Tbk and its subsidiaries since 2003-2008 caused the state losses of US $ 620.49 million. ICW calculation
results using various primary data including audited financial statements indicate that the sales report of PT. Bumi
Resource, Tbk during 2003-2008 lower US$ 1.06 billion from the actual. As a result, it was also estimated that the
state losses from the shortage of revenue from the Coal Production Fund (royalty) of US $ 143.29 million
(www.bisnis.tempo.co).
Various phenomenon of earnings management in some mining companies above shows that motivation of managers
to make earnings management to improve company performance, thus showing the achievement of manager
performance in managing the company. Therefore, this study uses mining companies as research samples. Another
important reason is (1) the company contributes 95% to non-tax revenues from the overall revenue of 2016
(Katadata.com), (2) relatively complete mining company data, and (3) the behavior of managers of mining companies
in managing corporate earnings is relatively high.
The result of testing of the effect of accrual earnings management on the operational performance of the company
has inconsistent findings. Sanjaya & Devie (2017), Waseemullah et al. (2015), Yusnita, Mulyadi, & Erick (2015) and
Ardekani et al. (2012) shows that accrual earnings management has a positive and significant effect on firm

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performance. Meanwhile, Pae (1999) and Felthem & Pae (2000) showed that accrual earnings management has no
significant effect on firm performance. Akram et al. (2015) showed that the accrual earnings management has a
negative and significant effect on the firm performance. Furtermore, Prasetyo, Subchan, & Harjanto (2017) showed
that accrual earnings management has negative and significant effect on firm performance.
Gunny (2010) examines the economic consequences of real earnings management and shows that real earnings
management has a negative and significant on long-term performance. According to Gunny (2010), real earnings
management actions undertaken by managers will show short-term performance. However, real earnings management
will be detrimental to the company's long-term performance. The findings of Tabasssum, Kaleem, & Nazir (2014)
showed that real earnings management has a negative and significant effect on long-term performance. Wijayanti,
Irwandi, & Ahmar (2014) showed that real earnings management as ACFO and APROD has positive and significant
effect n firm perfoemance. Furtermore, Yusnita, Mulyadi, & Erick (2015) showed that real earnings management has
positive significant effect on firm performance. The background description described earlier, then the purpose of this
study to test the effect of earnings management on operating performance.

Hypothesis Development

Operational performance is the ability of managers in managing the company's operational activities by utilizing
the company's resources to achieve earnings targets. Through operational performance, stakeholders can know the
productivity and prospects of the company. One of the factors affecting operational performance is earnings
management. Earnings management becomes one of the factors influencing operational performance motivated by the
existence of conflict of interest between shareholder and manager. This conflict of interest causes managers tend to
manage earnings to achieve profit targets in accordance with the wishes of managers. Efforts to manage earnings
made by managers can be through accrual and real profit management. Accrual income management is the action
of managers in managing the profit figure through the applicable accounting standards (Frank et al., 2009).
Meanwhile, real earnings management is an action of managers deviating from normal business activities with the aim
of increasing the earnings of the present period (Cohen & Zarowin, 2010; Roychowdhury, 2006).
Sanjaya & Devie (2017), Waseemullah et al. (2015), Yusnita, Mulyadi, & Erick (2015) and Ardekani et al. (2012)
shows that the accrual income management has a positive and significant effect on the performance of the company.
Meanwhile, Pae (1999) and Felthem & Pae (2000) showed that accrual income management has no significant effect
on company performance. Akram et al. (2015) shown that the accrual income management has a negative and
significant effect on the performance of companies in the Pakistan Stock Exchange. Furtermore, Prasetyo,
Subchan, & Harjanto (2017) showed that accrual earnings management negatif dan significant effect on firm
performance. Scott (2009) showed that accrual earnings management (discretionary accrual) has reverse accrual
properties. The nature of the reverse accrual is that if a firm accrues a certain amount of accruals, thereby increasing
its profit in the current period, then the accrual value will reverse and reduce its profit in the next period.
Gunny (2010) examines the economic consequences of real earnings management and showed that real earnings
management has a negative and significant on long-term performance. According to Gunny (2010), the real earnings
management actions undertaken by managers will show short-term performance. However, real earnings management
will be detrimental to the company's long-term performance. The findings of Tabasssum, Kaleem, & Nazir (2014)
showed that real earnings management has a negative and significant effect on long-term performance. Wijayanti,
Irwandi, & Ahmar (2014) showed that real earnings management has positive and significant effect on firm
performance. Furtermore, Yusnita, Mulyadi, & Erick (2015) showed that real earnings management through ACFO
and APROD have positive and significant effect on firm performance. Based on the description, the hypothesis of this
study is as follows.
H1a : Accrual earnings management has a positive effect on the operational performance.
H1b : Real earnings management has a positive effect on the operational performance.

Data and Methodologies

3.1 Data and Sample Selection

This research uses mining company period 2012-2016 as research sample. However, this study will only use the
year 2014-2016 in the analysis. The reason is the period 2012-2013 as the previous year is used to calculate real
earnings management. Selection of sample using purposive sampling that is, (1) mining company in industry sub-
sector at least amount 8 companies during period 2012-2016, and (2) have complete of data. An important reason for
the number of companies at least 8 companies to obtain variations in profit management calculations as suggested by
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Cohen & Zarowin (2010) and Cohen et al. (2008). Based on the results of sample selection, this study obtained 34
sample companies for 3 years, so the number of observation samples is 102 observations.
3.2 Earnings Management
This study uses accrual earnings management and earnings management to measure manager behavior in managing
corporate profits. Accrual earnings management calculations using the modified cross sectional Jones Model (Jones
1991) as described in Dechow et al. (1995). Estimates of modified Jones model calculations are as follows.
𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1 = k1t 1

TAit 𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1 + k2 ∆ 𝑅𝐸𝑉𝑖𝑡

𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1 + k3 𝑃𝑃𝐸𝑖𝑡
𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1 + ε it ................................ . (1)
Notes:
TAit = NI – CFO
Assets i,t-1 = Lag total assets
∆ REVit = Change in revenue
PPEit = Gross value of property, plant, and equipments.

The estimation coefficient is then used to estimate the normal accrual as follows.

NAit = k1t 1 + k2 (∆ 𝑅𝐸𝑉𝑖𝑡−∆ 𝑅𝐸𝐶𝑖𝑡) + k3 ......... 𝑃 𝑃 𝐸 𝑖 𝑡 ( 2 )

Furthermore, the measurement of discretionary accrual is as follows.

𝑇 𝐴 𝑖𝑡
DAit = Nait ............................................................................. (3)
𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1

In our robustnes test, we used two alternative measures of discretionary accruals. In one alternative measure we
estimated the following in the first stage:

TAit
= k1t + k2 ∆ 𝑅𝐸𝑉𝑖𝑡− ∆ 𝑅𝐸𝐶𝑖𝑡 + k3
1 𝑃 𝑃 𝐸 𝑖 𝑡 . . . . . . . . . . . . . . . . . . . . . . . . . . . . + εit
𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡
−1 (4) −1 𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1

This study further adopts real profit management calculations from Roychowdhury (2006), Cohen et al. (2008),
Cohen & Zarowin (2010), and Wu et al. (2015). The following are real earnings management calculations through
normal estimate of level of production cost, cash flows from operations, and discretionary expenditures.
PRODit = k1t 1 + k2 𝑆𝑎𝑙𝑒𝑠𝑖𝑡 + k3 ∆ 𝑆𝑎𝑙𝑒𝑠𝑖𝑡 + k3 ∆ 𝑆𝑎𝑙𝑒𝑠𝑖𝑡−1 + ε i t . . . . . . . . . . . . . . . . . . . . . (5)
𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1 𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1 𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1 𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1 𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1

CFOit = k1t 1 + k2 𝑆𝑎𝑙𝑒𝑠𝑖𝑡 + k3 ∆ 𝑆𝑎𝑙𝑒𝑠𝑖𝑡 + ε i t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6)

𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1 𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1 𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1 𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1

DISXit = k1t 1 + k2 𝑆𝑎𝑙𝑒𝑠𝑖𝑡−1 + ε i t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7)

𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1 𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1 𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1

After estimating the calculation of the three real earnings management, then the next researcher calculate the third
abnormal level of each real earnings management with the following equation.
PRODit [k1t 𝐴 𝑠 𝑠 𝑒 𝑡 𝑠 𝑖1, 𝑡 − 1 + k2𝑆𝑎𝑙𝑒𝑠𝑖𝑡
APRODit = - ] ..........................
𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1
- [k1t 𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1 + k3 ∆ 𝑆 𝑎𝑙𝑒𝑠𝑖𝑡
CFOit 𝐴 𝑠 𝑠 𝑒 𝑡 𝑠 𝑖 , 𝑡1− 1 + k 2 𝑆 𝑎 𝑙 𝑒𝐴 𝑠𝑠 𝑠𝑖 𝑡𝑒 𝑡 𝑠 𝑖 𝑡 + 𝑆k𝑎3𝑙
ACFOit = 𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1 + k3 ∆ 𝐴 𝑠 𝑠 𝑒] 𝑡 ..................................
𝑆𝑎𝑙𝑒𝑠𝑖𝑡
𝑠 𝑖 𝑡 (9)
𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1 𝑒𝑠𝑖𝑡
𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1
DISXit
ADISXit = - [k1t 1 ~ .............................................................
𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1 𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1 + k2 𝑆𝑎𝑙𝑒𝑠𝑖𝑡−1
𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1

𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡

−1 𝐴𝑠𝑠𝑒𝑡𝑠 𝑖,𝑡−1

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The third comprehensive proxy of real profit management can be calculated as follows.

𝑅 𝐸 𝑀 = 𝐴 𝑃 𝑅 𝑂 𝐷 - 𝐴 𝐶 𝐹 𝑂 - 𝐴 𝐷 𝐼 𝑆 𝑋 . . . . . . . . . . . . . . . . . . . . . . . . (11)

Notes:
PROD = Production cost (sum of cost of good sold)
CFO = Cash flow operation
DISX = Discretionary accrual (sum of SG&A expenses, Research & Development
expenses) APROD = Abnormal production cost
ACFO = Abnormal cash flow operation
ADISX = Abnormal discretionary accraul
REM = Real earnings management

3.3 Operating Performance

Operational performance is the ability of managers in managing the company's operational activities through
the sacrifice of corporate resources to achieve profit targets. This study uses Return on Assets (ROA) to measure
operating performance. The following is the calculation of the measurement of operating performance.
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅 𝑂 𝐴 = _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ (12)
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

Based on previous research, this research uses leverage, sales growth, and company size adopted Dechow &
Sloan (1991) and Jones (1991). The following is a table of operational definitions of variables used in the
study.

Table 1. Operational Definition

Categories Variable Name Symbol Definition
Dependent Variable Operating Performance ROA Net Income/Total Assets
Accrual Earnings Management AEM Discretionar Accrual
Proxy comprehensive of Sum of APROD-
REM ACFO-ADISX indicates a higher degree of
earnings management.
Abnormal Cash Flow From Operation
indicates a higher degree of earnings
ACFO management.
Abnormal Production indicates a higher degree
Independent variables Real Earnings Management of earnings management.
APROD
Abnormal Discretioner indicates a higher degree
ADISX of earnings management.

Leverage DAR Total Liabilities/Total Assets

Control Variables Sales Growrh SGW (Total Salest Total Salest-1)/Total sales t-1
–

Size LTA The natural logarthm of total assets.

Results

4.1 Descriptive Statistics

Table 2 shows the results of descriptive statistics of research variables. The minimum ROA value is -0.643,
while the maximum value reaches 0.153, with the standard deviation of 0.118391, showing that degree of
operating performance of the mining firm of the listed in the Indonesian Stock Exchange. Table 2 also shows that
the minimum value of AEM is -0.445, while the maximum value reaches 0.222, with the standard deviation of
0.112117, showing that degree of accrual earnings management. Then, the minimum REM value is -3 8.034,
while the maximum value reaches 77.875, with the standard deviation of 8.618023, showing that degree of real
earnings management.

© 2018 The 3rd International Conference on Management in Emerging Markets (ICMEM 2018) Page | 5
 Table 2. Descriptive Statistics

Variable N Minimum Maximum Mean Std. Deviation

AEM 102 -0.445 0.222 -0.05244 0.112117
REM 102 -38.034 77.875 0.33885 8.618023
ACFO 102 -0.262 0.311 0.01937 0.077570
APROD 102 -37.551 0.213 -0.37338 3.718216
ADISX 102 -0.092 0.315 0.03164 0.058784
ROA 102 -0.643 0.153 -0.00861 0.118391
LEV 102 0.007 1.898 0.50860 0.305949
SGW 102 -1.000 33.979 0.21588 3.414173
SIZE 102 5.519 12.593 8.89169 1.943019

4.2 Regression Results

Table 3 reports the correlation matrices of variables and AEM and ROA, while the negative correlation
between LEV, SIZE and ROA. Then. Table 4 shows that positive correlation between AEM. ACFO and ROA,
while negative correlation between LEV, SIZE and ROA.

Table 3. Pearson Correlations of Real Earnings Management Comprehensive

Variables ROA AEM REM LEV GROWTH SIZE
ROA 1
AEM 0.612*** 1
REM 0.079 0.026 1
LEV -0.382*** -0.202** -0.060 1
SGW -0.032 -0.080 0.000 0.028 1
SIZE -0.248** 0.023 -0.004 -0.036 0.189** 1
Notes: *, **, *** indicate significance at the level of 0.10, 0.05, and 0.01, respectively

Table 4. Pearson Correlation of Real Earnings Management No Comprehensive

Variables ROA AEM ACFO APROD ADISX LEV SGW SIZE
ROA 1
AEM 0.612*** 1
ACFO 0.051 -0.420*** 1
APROD 0.004 -0.014 -0.279** 1
ADISX 0.078 0.106 0.004 -0.372*** 1
LEV -0.382*** -0.202** 0.011 0.002 -0.182** 1
SGW -0.032 -0.080 -0.058 0.007 0.069 0.028 1
SIZE -0.248** 0.023 -0.171** 0.026 0.191** -0.036 0.189** 1
Notes: *, **, *** indicate significance at the level of 0.10, 0.05, and 0.01, respectively

The result of hypothesis testing of the effect of accrual earnings management and real profit management
(comprehensive proxy) on operating performance is shown in table 5 below.
Table 5. OLS Regression of The Effects of Earnings Management on Operating Performance
Dependent Variable (ROA)
Independent Variables Predicted Sign Main Test Robustness Test
AEM ± 0.599*** 0.547***
REM + 0.001 0.001
LEV - -0.107*** -0.117***
SGW + 0.003 0.002
SIZE ± -0.017*** -0.018***
Constant 0.231*** 0.234***
F 21.214 18.588
Prob. 0.000 0.000
Adjusted R2 0.500 0.465
Sample Size 102 102
Notes: to avoid the normality, multicollinearity, autocorrelation and show free of thre problem; *, **, *** Represent
significance at the level of 0.10, 0.05, and 0.01, respectively

Table 5 shows that accrual income management has a positive and significant impact on operational
performance. Meanwhile, real profit management has no significant effect on operational performance. These

© 2018 The 3rd International Conference on Management in Emerging Markets (ICMEM 2018) Page | 6
findings prove that mining companies use discretionary accruals to increase corporate profits. Accrual policies
are used by managers through various loopholes of financial accounting standards. Consistent with the
characteristics of mining companies that tend to have high risk, then the manager of this company prefer to use
accrual profit management when compared with real profit management. Mining companies are companies that
are risk-intensive. That is, when the exploration
stage does not find the minerals that have certain advantages, it will affect the company's profit. This
characteristic indicates that the tendency of mining companies to produce on a large scale, reducing the burden of
discretionary not being intensively undertaken by managers. However, sales manipulation is still possible for
managers to do. This is because sales manipulation is related to lighter credit terms. Table 5 also shows that the
robustness test results are consistent with the main test results. The results of this study are consistent with the
research of Sanjaya & Devie (2017), Waseemullah et al. (2015), Yusnita, Mulyadi, & Erick (2015) and Ardekani
et al. (2012) shows that the accrual earnings management has a positive and significant effect on the firm
performance.
The results of the impact of accrual earnings management and earnings management (ACFO, APROD, and
ADISX) on operating performance are shown in table 6 below.
Table 6. OLS Regression of The Effects of Earnings Management on Operating Performance
Dependent Variable (ROA)
Independent Variables Predicted Main Test Robustness Test
Sign
AEM ± 0.699*** 0.633***
ACFO + 0.330** 0.299**
APROD + 0.003 0.003
ADISX + 0.080 0.094
LEV - -0.099*** -0.110***
AGW + 0.003 0.003
SIZE ± -0.016*** -0.017***
Constant 0.212*** 0.217***
F 16.880 14.445
Prob. 0.000 0.000
Adjusted R2 0.524 0.482
Sample Size 102 102
Notes: to avoid the normality, multicollinearity, autocorrelation and show free of thre problem; *, **, *** Represent
significance at the level of 0.10, 0.05, and 0.01, respectively

Table 6 shows that accrual earnings management and abnormal cash flow have a positive and significant effect
on operational performance. The results of this study consistent with Yusnita, Mulyadi, & Erick (2015)
showed that abnormal cash flow from operation has a positive and significant effect on firm performance.
Meanwhile, abnormal production cash flow and abnormal discretionary burden have no significant effect on
operational performance. These findings prove that abnormal cash flow can still be done by managers in improving
corporate profits. In contrast to manufacturing companies, mining companies tend to be less intensive in large-
scale production or reduce the burden of discretionary. This is done because the characteristics of mining companies
are different from the characteristics of manufacturing companies. Mining companies require estimation of
accuracy in exploring or extracting natural resources, so that if the exploration estimate bias, it will affect the
target profit of the company. Robustness test results also support the main test results of this study.

Conclusions

This study aims to examine the effect of earnings management, both the accrual profit management and real
profit management on the company's operational performance. The sample used is a mining company listed on the
Indonesia Stock Exchange period 2012-2016. However, the year of analysis uses the period 2014-2016. While
the year of 2012 until 2013 is used in calculating real profit management because it requires two years earlier.
The results showed that the accrual income management had a positive and significant effect on the operational
performance. Meanwhile, real earnings management has no effect on operational performance. The real earnings
management test results separately show that ACFO has a positive and significant effect on the operational
performance.
These findings suggest that mining companies tend to use discretionary accruals to increase corporate profits
rather than real earnings management. Accrual policies are used by managers through various loopholes
of financial
ccounting standards. This is consistent with the characteristics of high-risk mining companies, so managers
prefer to use accrual earnings management as compared to real profit management. Mining companies are
companies that are risk-intensive. Solids of this risk can be known through the stages of exploration of
minerals that if not done well, it will affect the company's profits. This characteristic indicates that the tendency

© 2018 The 3rd International Conference on Management in Emerging Markets (ICMEM 2018) Page | 7
of mining companies to produce on a large scale, reducing the burden of discretionary not being intensively
undertaken by managers. However, sales manipulation is still possible by managers in managing corporate
profits. The reason is that sales manipulation deals with lighter credit terms in increasing sales targets.
This study provides the theoretical implication that in developing countries the tendency of accrual
earnings management is more intensively used by managers. This shows that there is still a conflict of interest
between the manager and the shareholders. To reduce these conflicts of interest, a goal alignment between
managers and shareholders is required. That is, managers strive to meet the interests of shareholders and vice versa
shareholders pay attention to the welfare of managers. One form of shareholder concern for the welfare of managers
is managerial share ownership. The implication for the policy is the effectiveness of the monitoring system to
the mining companies, so that the behavior of earnings management can be reduced and even eliminated.
Regulatory monitoring system can be known through institutional share ownership.
This research has several limitations: (1) the conclusion is based only on the various proxies of earnings
management based on accrual, real, and operating performance, (2) generalization of research result can only
be used for mining company, and (3) this research only use year 2014-2016 to explain the data phenomenon of
earnings management last three years. Finally, further research is expected (1) to use real and accrual profit
management proxies in addition to Dechow et al. (1995), Roychowdhury (2006), Cohen & Zarowin (2010), Wu
et al. (2015); (2) the sample of the company can be expanded by using a nonfinancial firm to know earnings
management trends; and (3) increase the number of years of research to earn earnings management trends over
several years, eg data of the last ten years.

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