JRSSEM 2023, Vol. 02, No. 6, 1008 – 1021

E-ISSN: 2807 - 6311, P-ISSN: 2807 - 6494

DOI: 10.36418/jrssem.v2i06.360 https://jrssem.publikasiindonesia.id/index.php/jrssem

EFFECT OF DIRECTORS' BONUS COMPENSATION,

INSTITUTIONAL OWNERSHIP AND SIZE OF THE BOARD

OF DIRECTORS ON PROFIT MANAGEMENT

Wike Handayani

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Abstract: The current business development is very fast, which encourages organizations to be able

to continue to present reliable and accountable financial information for their users. Reliable

financial information is very necessary for decision-makers, especially stakeholders and potential

investors, especially to make investments. Unqualified and reliable financial statements produce

of cause. The conclusion of the results of this study is that CEO bonus compensation and the size

of the board of directors have a positive effect on earnings management.

Keywords: Financial Statements; Investment; Earnings Management.

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INTRODUCTION

displays financial information as a form of

communication of an entity in a given

period quantified in monetary value to

interested parties with the information

(Weygandt et al., 2014). Financial

information that is reliable is free from

misleading notions, and material errors,

and can be relied upon by its users as a

faithful representation. The current

business development is very fast, which

encourages organizations to be able to

decision to invest will determine the

amount of a country's economic growth.

State-Owned Enterprises (BUMN) as

actors of economic activities in the national

economy based on economic democracy.

SOEs have an important role in the

implementation of the national economy

(GDP) in order to realize the welfare of the

community. The role of State-Owned

Enterprises in the national economy to

namely internal parties (management and

board of directors) and also external parties

(investors, creditors, and the government).

The government expects and designs

SOEs to become the locomotive of the

Indonesian economy. Economic actors such

as SOEs, cooperatives, and the private

sector must increase productivity, quality,

and efficiency so that Indonesia excels in

government consideredit was necessary to

role of SOEs needs to be encouraged to

revive the concept of Indonesia

Incorporated, which is an effort to raise

state-owned companies and their private

partners to boost the country's economy

The reality on the ground shows that

the performance in SOEs is not optimal due

to the low profit margin or profit due to

product competitiveness, service level and

1010 | Effect of Directors' Bonus Compensation, Institutional Ownership And Size of The Board

of Directors on Profit Management

Sumber: bps.go.id (triliun rupiah)

Figure 1.

Source: bps.go.id (trillion rupiah)

However, even so, the performance

of SOEs still cannot be said to be optimal.

This is evidenced by the many cases

Many cases show the lack of quality

of financial statements that arise, for

example, cases of financial statement

manipulation carried out by Jiwasraya,

Garuda Indonesia, Enron, World Com and

so on. Unqualified and reliable financial

statements produce Earning Management

and Financial Fraud Reporting.

The case that occurred in 2019 that

shocked the whole of Indonesia. This case

occurs in large state-owned companies

that practice profit management by

utilizing accounting policies regarding

utilizing the selection of accounting

policies. This case was known by two

commissioners, namely Chairul Tanjung

and Doni Oskaria who are shareholders of

28.08% of PT. Garuda Indonesia. They

refused to sign PT. PT's 2018 annual report.

Garuda Indonesia. Both of them disagree

with the revenue recognition of one of the

transactions with the PT. Mahata Aero

Teknologi with its subsidiary, Citilink

Indonesia. From the transaction, PT. Garuda

accounting PT. Garuda Indonesia earned a

net profit of Rp. 11.33 billion from the

previous loss. According to the OJK and the

Ministry of Finance on the annual report of

PT. Garuda Indonesia Persero Tbk. for the

2018 period is not in accordance with

Article 69 of Law Number 8 of 1995 Capital

Market (PM Law) and Bapepam and LK

regulations Number VIII.G.7 concerning the

Presentation and Disclosure of Financial

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Determination of Whether an Agreement

Contains Leases, and Statement of Financial

14 days after the sanctions letter was

determined. PT. Garuda Indonesia Tbk. PT.

Garuda Indonesia Tbk is also subject to

administrative sanctions, namely a fine of

Rp. 100,000,000 for violations of OJK

regulation Number 29 / POJK.04 / 2016

containing the Annual Report of Issuers or

Public Companies. Fines are also given to

all members of the board of directors of PT

Garuda Indonesia Tbk. namely

administrative sanctions of fines of Rp.

PT Garuda Indonesia Tbk. who signed the

Annual Report of PT Garuda Indonesia Tbk.

in 2018 for violating OJK Regulation

Number 29/POJK.04/2016 concerning the

Annual Report of the Issuer or Public

Company. According to Chairul Tanjung

and Doni Oskaria, PT. Garuda Indonesia

should still record losses if the transaction

with PT. Mahata Aero Teknologi is not

recognized as revenue by PT. Garuda

management of PT. Garuda Indonesia is a

legal matter where the management of PT.

Maximization pattern by utilizing

accounting policies that do not violate

regulations.

Unqualified and reliable financial

statements produce Earning Management

and Financial Fraud Reporting. A frequent

phenomenon of top executives in America,

announced by FOX in 1980, reporting that

ninety percent of companies in America use

bonus packages based on accounting

earnings to reward managers. The case

financially and non-financially (financial

reward) given to employees for achieving

performance to the company (Mujanah,

2019). Compensation is classified into 2

(two) types, namely cash and non-cash or

commonly known as long-term

compensation ((Assenso-Okofo et al.,

in his book Personnel Management

(translation), which states that

1012 | Effect of Directors' Bonus Compensation, Institutional Ownership And Size of The Board

of Directors on Profit Management

financial programs (indirect compensation).

Compensation of directors is an important

part of building a company. The Directors

of SOEs are agents for the State because

the State is the owner of the company. Each

measures of financial performance,

especially company profits. The guidelines

are regulated in the Regulation of the

Minister of SOEs Number: PER-04 / MBU /

2014 which is amended by PER-01 / MBU /

06/2016, PER-01 / MBU / 06/2017 and PER-

06 / MBU / 06/2018 concerning guidelines

for determining the income of directors,

board of commissioners and supervisory

boards of state-owned enterprises.

Tantiem (bonus) is the most interesting

the relevant year and budget targets. The

existence of bonus compensation in the

company will provide motivation to agents

to manipulate profits in order to obtain

maximum profit so that compensation in

the form of bonuses can be achieved

beyond the target. Management can carry

out profit management actions through

discretionary accruals so that the

compensation they receive will be greater.

of PT. Kimia Farma (Persero) Tbk, and PT.

Indofarma (Persero) Tbk. This profit

management action is indicated by the

existence of a profit management motive

to obtain a good assessment of the

accruals that increase profits in order to

maximize the bonuses they receive. This is

because the amount of the bonus depends

on the amount of profit obtained, the high

profit obtained by the company will affect

the bonus obtained. In line with research

from Panjaitan & Muslih (2019) and Almadi

& Lazic (2016). Executive bonus

compensation is the main motivation for

executives to engage in income

manipulation (Alkebsee et al., 2021);

support is reflected in customers who are

loyal to the company, and employees who

work optimally for the benefit of the

company so as to improve financial

performance (Kim et al, 2014). Managers

who manipulate profits for their personal

interests will lower the level of trust of

stakeholders because the company is

considered to be endangering the interests

of its stakeholders. Research by Uwuigbe et

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The effectiveness of the supervisory

function by the board of commissioners

independent board of commissioners, and

an audit committee. The board of directors

is a management system that is responsible

for the implementation of Good corporate

governance to achieve company goals. The

results of Ardiansyah's research (2014)

show that the board of directors negatively

affects profit management.

In the research Putri & Fadhlia (2017)

states that executive compensation does

not affect profit management practices.

Institutional ownership is the ownership of

company shares owned by an institution or

institution (Tarjo, 2008). Managers who

hold shares of the company will be

reviewed by parties involved in the contract

such as the selection of an audit committee

that creates a request for quality financial

reporting by shareholders, creditors, and

users of financial statements to ensure the

efficiency of the contracts concluded in.

utilization of discretionary accruals (profit

management) by the management side. In

by independent commissioners has no

significant effect on profit management.

However, in the research of Nurlan Orazalin

(2019), Aprajita Pandey and J.K. Pattanayak

(2021), Deepa (Mangala & Singla, 2021),

Shafi Mohamad et al. (2020), and (Grada,

independent board of commissioners had

a significant effect on reducing the

occurrence of profit management. Shuto

(2008) examined the relationship between

effect of accrual with compensation for SOE

directors in Indonesia is still very rarely

carried out so that there is still a similar

research gap in Indonesia. The bonus plan

hypothesis states that a bonus plan or

managerial compensation would make

managers more likely to choose and use

accounting methods that would make

reported profits higher (Watts and

Zimmermann, 1986). In companies that

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DOI: 10.36418/jrssem.v2i06.360 https://jrssem.publikasiindonesia.id/index.php/jrssem

(IDX)

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Indies or the Back Indies. Since the new era

of the Dutch East Indies government, they

was carried out by the Plantation Company

in Batavia, namely Cultuur Maatschappij

Goalpara, it was written that the company

sold 400 shares at a price of 500 guilders

per share outstanding. Four years later, Het

Centrum also released a prospectus for the

sale of shares that had a value of up to 105

thousand guilders with a price per share of

100 guilders. After making careful

preparations, the first capital market in

Indonesia was finally established precisely

Indonesia where bonds issued by the

provincial and municipal governments

have share certificates of companies issued

by administrative offices in the Netherlands

and then securities of other Dutch

companies. The development of the capital

market in Batavia was so rapid that it

attracted other urban people.

Almost half a century has passed

since the stock exchange was first formed

believes that with this association, the

development process can run well. The

reopened as well as formed two new stock

exchanges in Indonesia, namely the

Surabaya Stock Exchange and the

Semarang Stock Exchange. Unfortunately,

this exciting news did not last long because

the IDX was faced with an Economic

Recession in 1929 and the outbreak of

World War II. The worsening situation

made the Surabaya and Semarang Stock

Exchanges closed, which was also followed

by the Jakarta Stock Exchange on May 10,

issuance will hinder the process of

completing transactions. The year 2003 was

entered with optimism. JCI opened at the

beginning of the year on January 1, 2003

with a value of 4,005.44. In 2004 the JCI had

broken through the 1,000 level and at the

end of 2004 on December 30, 2004 the JCI

closed at a value of 1,000.23. In 2005, on

January 3, 2005 the JCI opened at a value

of 1,038.82 points and at the end of the

1016 | Effect of Directors' Bonus Compensation, Institutional Ownership And Size of The Board

of Directors on Profit Management

after the Extraordinary General Meeting of

Shareholders held on October 30, 2007, JSE

and BES merged into the Indonesia Stock

Exchange.

On November 30, 2007, the Surabaya

Appraiser (PHEI) was formed in 2009. In

addition, in 2009, the Indonesia Stock

Exchange changed the old trading system

(JATS) and launched its newest trading

system used by the IDX until now, namely

JATS-NextG. Several other bodies were also

established to increase trading activities,

such as the establishment of PT Indonesian

Capital Market Electronic Library (ICaMEL)

in August 2011. The Financial Services

Authority (OJK) in January 2012, and at the

year the Lot Size and Tick Price were

adjusted again, and in 2015 TICMI merged

with ICaMEL.

The Indonesia Stock Exchange also

created a campaign called "Yuk Nabung

Saham" which is aimed at all Indonesians to

want to start investing in the capital market.

IDX introduced the campaign for the first

time on November 12, 2015, and this

campaign is still being implemented today,

IDX Channel was launched, and IDX this

year participated in the success of Tax

Amnesty activities and inaugurated the Go

Public Information Center. In 2017, IDX

Incubator was inaugurated, margin

Display to the Registered Company code.

The Indonesia Stock Exchange also

has a vision and mission to achieve the

company's goals. The vision of the

Indonesia Stock Exchange is to become a

competitive exchange with world-level

credibility, with the mission of providing

infrastructure to support the

implementation of securities trading that is

orderly, reasonable, and efficient and easily

accessible to all stakeholders. In 2012, the