Income Smoothing

Journal of Economics, Business and method of accountancy system Ventura Accreditation nary(prenominal) 110/DIKTI/Kep/2009 mass 14, No. 1, April 2011, pages 59 78 THE THEORETICAL verbalism OF INCOME SMOOTHING MEASUREMENT Alwan Sri Kustono Jember University E-Mail email&160protected com Tegal Besar Permai 2-E1,Jember,Propinsi Jawa Timur,Ind wizardsia bunco The income facileing is a dimension of the accounts manipulation nucleotide that has been a ttracting a great steering in the accounting literature. A coating of manipulation widely as cribed to managers is the pr peerlessness to smooth.Reported income, Income smoothing reflects reducing the possible income fluctuations so as to make it as stable as possible throughout the ism. Almost of income smoothing seek in Ind nonp areilsia using upd Eckels proponent to clasify smo former(a)(a) non smoother firms. Empirical evidences down abided support for the world of an income smoothing demeanor. The studies describeed inconsistent rough factors determining this smoothing. The decision of the present probe is twofold. First, we seek to determine if Eckel ability is a dependable instrument to measuring stick income smoothing behavior.Second, we impress to identify the new instrument to measure incidence of income smoothing. Our enquiry sample comprises manufacturing companies listed on the Indonesia Stock Exchange, over period of 1999-2008. This sketch confirms Eckels index is not considerableness instru ment. The new proposed index quantifies the incidence of income smoothing without depend on n periods. The results imply that researchers should re escort the conclusion of earlier studies, fussyly that determinant, factors and violence of income smoothing practices. Key words income smoothing, Eckels index, c oefficient of variation, reliability.INTRODUCTION It has been noticed that income statement is considered as one of the statements to be presented in financial describe. For that reason, the smart sets earning is considered vital information for it shtup be employ to measure the unified procedure. In other words, information of the earning exactlytocks be used to assess the performance or accountability of wariness and in addition predict the ability of companies in the suit of contri scarceing to the chase earning. In general, earning reporting is frequently not free from the accounting manipulation. Yet it appears opposite from the fraudulence.Accounting manipulation hindquarters be still in wide when it is put in the accounting rules. In contrast, fraudulence practices tend to be against the rules and accounting standards. Thus, it is delicately different from income smoothing. In fact, one 59 of the practices of accounting manipulation is income smoothing. In connection with the pursuit of analyzing income smoothing in the companies, roughly definitions of it buttocks be inferred. First of all, income smoothing is delineate as the e mphasis on the fluctuations in income directs that ar considered normal for the community (Barnea et al. 1976). For another(prenominal) thing, Beidleman, (1973) defines income smoothing as the counsel efforts to tighten supernormal variations in the earning to the extent permitted by the principles of solid management and accounting. Income smoothing in much(prenominal) instances, is as a tool used by management to reduce the variability of report income blow relative to the organise which is designedly change surface by using bionic or real variable. In addition, income smoothing is additive manipulation of accounts that attract the atten- ISSN 2087-3735 The Theoretical turn (Alwan Sri Kustono) ion of m both accounting literature in the realm of internet management. Beside, income smoothing reflects the concern to reduce the possibility of fluctuations in income by reservation a steady flow research on income smoothing in Indonesia generally examine several facto rs which atomic number 18 allegedly to be active management to do income smoothing. They identify the existence of such practices and followed by testing management motivation. The results of these studies have identified those most public companies in Indonesia have conducted income smoothing. All in all, most of the studies are uniform in terms of inferring he end results. scrutiny the triggering factor of income smoothing policy by the federation management has not consistently been recovered. Among the results of such studies are lots inconsistent to one another. For example, Kustono (2010) stated that the inconsistency of their findings was caused by the measuring devices. These devices are thought to be un true. For example, tycoon Eckel does not have the ability to mesmerise the practice of income smoothing between periods. In that situation, it shows that nigh companies are classified by scaling only in one particular year.This is considered to have deviated from the definition of income smoothing. The classification base on Eckel index for one company may withal change because of changes in the period used to determine the coefficient of variation. transplant of classification shows that the index is not reliable as a tool. In other words, Eckel is as an identifier of smoothing and not merely for smoothing. Kustono (2010) insist the image of the need for new instruments. This research is intended to correct weaknesses of the Eckel and construct an index measuring instrument which is more reliable income smoothing factor.This construction is very important because the use of measuring instrument error go away cause errors either in the level of conclusions related to the classification of sample or the determinants and impact of such classification. THEORETICAL manakin It is a fact that income smoothing becomes a phenomenon which has been often proved in well-nigh previous studies. This practice has been investigated through variou s levels of different samples. Furthermore, income smoothing is considered to be an important factor. Research by Moses (1987) and Atik &038 Sensoy (2005) shows that at least 60% of he sample used in the necessitate bear be classified as smoothing the company earnings. Another proponent, such as Barnea et al. (1976) classified accounting income smoothing as inter-temporal smoothing and classification. Inter-temporal smoothing is found on the situation when cost and expenses are recognized and smoothing classification is done with the classification under ordinary cost and impressive one in which the ordinary conduct finally becomes flat. Eckel (1981) distinguishes between income smoothing as a natural smoothing and intended smoothing. Natural smoothing is he alignments resulting from transactions that congenitally produce a smoothed earning. In other words, the companys trading operations to gene respect income by collecting revenues and expenses are inherently to eliminate f luctuations in income flows. In other words, the process of generating income itself generates a stream of smoothed income. Alignment occurs without the intervention of any party. Income smoothing is accidentally triggered by the motivation which is ground on the management actions. There are two types of income smoothing intentional, that is income smoothing of the real intention nd the other one is artificial income smoothing. trustworthy income smoothing indicates management actions that seek to control stinting causations that directly affect corporate earnings in the cartridge clip to come. In addition, this real income smoothing affects funds flow. On the contrary, artificial income smoothing finish show manipulation which is undertaken by management to smooth the earning. Thus, the action of this manipulation resulted in a fundamental or economic condition that endure affect cash flow, but shifts 60 Journal of Economics, Business and method of accounting Ventura Accre ditation No. 10/DIKTI/Kep/2009 the cost and/or income from one period to another. By winning for granted, such a trend can be traced from several research. several(prenominal) studies, in fact, have been conducted to identify the smoothing behavior, such as motivation and its impact on future transactions, a company that has been doing income smoothing. This can also be found in other studies such as (Lev &038 Kunitzky, 1974 Ammihud et al. , 1983, Wang &038 Williams, 1994 Michelson et al. , 1995 Iniguez &038 Poveda, 2004). These proponents also provide empirical support toward statement that management reduces he variability of cash flows and earning for the purpose of minimizing the risk of the company. Income smoothing is also intended to join on the value of the firm (Gordon, 1964 Trueman &038 Titman, 1988 Gibbins et al. , 1990 and Chaney &038 Lewis, 1995 1998). Estimator of Income smoothing Income smoothing can only be investigated through some periods by suspecting a certain earning rate of the rear ended, e. g. , both highand low-digits earning reports. Some researchers use a two-period influence by assuming that the earning target is proportional to the income report in the previous year Copeland, 1968). In other words, the surface of alignment is the magnitude of changes in the earning from one year to the next. Other researchers also evaluated the earning target using multi-period test. The underlying assumption is that it should be an evenly increasing trend (Gordon, 1966). Some of the forms used are the exponential model (Dascher and Malcolm, 1970), linear time series models (Barefield and Comiskey, 1972), time trend semi-logaritma (Beidleman, 1973) and model of the market consecrate index (Ronen &038 Sadan, 1975). For example, Dopuch &038 Watts (1972) suggest the use ofBox-Jenkins techniques to crack the alignment model is applicable. Models of earning target are differentiated from the real earning. Often, these models contain errors inhe rent profit target 61 Volume 14, No. 1, April 2011, pages 59 78 because its harshness can not be observe empirically. In that case, Ronen &038 Sadan (1975) suggested that we do income smoothing approach. In particular, income smoothing can be identified if the researcher is set about by the following four questions. 1. What is the objective lens alignment implemented by the management? 2. What is the dimension of management s used to perform smoothing. 3. What instrument of smoothing is used by management 4. What is the object of such smoothing behavior? In connection with the above efforts, Imhoff (1977) and Eckel (1981) develop a methodology based on testing the variability of income associated with the variability of gross sales. The model used to predict the existence of income smoothing or earnings variation is inter-period variant. They assume that the level of earning depends on the level of sales. The basic idea is that the change in sales can affect the earning. If the version of income is less than the variance f sales, it can be cerebrate that the smoothing has been done. Eckel (1981) model of the income smoothing is done by basing on the following premises. 1. Income is a linear billet of the sales = sales-cost variable-fixed cost. 2. The ratio of variable cost to sales is in constant quantity coin units 3. Fixed costs are constant or increasing from period to period, but not likely to decline. 4. Gross sales can only be smoothed by real smoothing gross sales can not be by artificial means smoothed. Mathematically, Eckel illustrates all the above as the following when, I=S-VS-FC, and FC0, and FC t+1 =FC t, and 0