Real and accrual-based earnings management in Islamic Banks in Indonesia

Islamic banks have tendency to tinker the earnings to present positive income. Therefore, it now becomes important to examine the relationship between real earnings management (REM) and accrual-based earnings management (AEM) that they both contribute in promoting earnings, especially in Islamic banks. This study also examines variables costs of REM or AEM. This study adds one part of a formula to calculate REM by including reserves as unpaid revenue sharing and attempts to explain the relationship between REM and AEM using prospect theory. 11 Islamic banks during the 2013-2018 period were tested. This study found that REM is done through generating operational revenue and reducing distributed revenue sharing beyond the normal activities. REM affects AEM negatively that managers will adjust AEM based on the results of REM during the financial period. These findings confirm the prospect theory when the realized income has been over the profit expectation, managers will avoid the risk of doing the accrual manipulation. Audit quality, accounting flexibility, and financial health are found as cost restricting AEM and positively correlated with REM. Market share and institutional ownership don’t have any impact. The implication of this study is to provide findings how Islamic banks engage in earnings management