CHAPTER 1
INTRODUCTION
1.1. Background
The
agency
theory
performs
as
the
foundation
for
earnings
management
practices
in
which affirms
that every
individual
have
the tendency
to
maximize personal
satisfaction. The agent engaged
in the activities of performing
jobs
in order to satisfy
the
principal.
In
a
company
generally, the
shareholders act
as
the
principal
and
the
management
or
the
Chief
Executive
Officer
(CEO)
execute responsibility as
the
agent.
According to the agency theory developed by Jensen and Meckling (1976), the
issue that
leads
managers
(agents)
to
perform
an
opportunistic earnings
management in
order
to
increase
their
personal
welfare
by
sacrificing the
owners
(principal)
of
an
organization
was caused by
the separation between ownership and control between those two parties.
In
the agency theory,
there are
information asymmetry between the
management and
the
shareholders, in
which
the
management got
earlier
access
to
company’s
information
rather
than
the
shareholders. Along
with
this
privilege,
the
management has
the
opportunity
to
perform
accounting
manipulations which
are
seeking
for
personal
advantages.
On
contrary,
the
principals
cannot
continuously monitor
the
agent’s
performance in gratifying their obligations to the shareholders.
Furthermore, the
management is
on
the
pursuit of
getting
incentives
for
several
reasons.
There are
several
incentives
for
reported earnings
manipulation to
be
done
by
managers according to
Healy and Wahlen (1999),
they are as
follows: (1) job security,
 |