Syntax Literate: Jurnal Ilmiah Indonesia
p–ISSN: 2541-0849 e-ISSN: 2548-1398
Vol. 9, No. 5, Mei 2024
ANALYSIS
OF CURRENT TAX, DEFERRED TAX, AND DEFERRED TAX ASSETS ON EARNINGS MANAGEMENT
Thomas
Salim1*, Yuniarwati2
Universitas Tarumanagara, Jakarta, Indonesia1,2
Email: [email protected]*
Abstract
The goal
of this study is to examine the impact of current taxes, deferred taxes, and
deferred tax assets on earnings management. The research focuses on companies
operating in the industrial sector listed on the Indonesia Stock Exchange
during the years 2020, 2021, and 2022. A sample of 20 companies is selected
using purposive sampling. Data processing involves multiple regression analysis
assisted by Eviews 13 and Microsoft Excel. The findings indicate that current
taxes have a significant positive impact on earnings management, while deferred
taxes and deferred tax assets do not have a significant positive impact on earnings
management. The implications of this research highlight the role of current
taxes, deferred taxes, and deferred tax assets as detectors to track the
movements of managers who have engaged in earnings management in the financial
reports of companies, particularly in the income statement section.
Keywords: Current tax, Deffered tax, Deffered tax assets, Earnings Management
Introduction
The Income Statement is quite important for
investors to assess the profits derived from a company's net earnings, making
it one of the reports used for analysis by investors in decision-making. If the
Income Statement shows that the revenue generated is greater than the expenses
incurred, it results in a net profit for the period. Conversely, a company
faces a problem if the revenue generated is less than the expenses incurred,
leading to a net loss. Such losses experienced by a company make investors feel
uncertain and hesitant to invest their money, potentially leading to the
company being unable to secure investment funds from investors.
This issue prompts company managers responsible
for earnings to engage in actions known in the financial accounting world as
earnings management. This management is carried out by managers aiming to
increase company profits to achieve management goals by obtaining the highest
possible profits that can reflect activities within the company (Husni &
Idayu, 2022).
Numerous studies indicate that the practice of
earnings management often brings disadvantages to investors, such as
information related to internal company matters being known only to managers
who can manipulate earnings for their own benefit, while investors lack
information or are unaware of ev
ents within the company from an internal
perspective. Consequently, investors evaluating a company's performance through
Income Statements modified by managers will influence their investment
decisions.
Hence, it is necessary to conduct experiments to
find ways to understand the movements of figures within financial statements
that have been adjusted by company managers. Upon investigation, research
journals by other researchers were found to utilize current tax, deferred tax,
and deferred tax assets to determine their impact on earnings management.
This research is expected to provide input for
company managers to identify factors influencing earnings management for
transparency and integrity in financial statement presentation, and for
investors to make informed decisions.
Theory Review
Agency Theory. Agency theory concerns contracts
among members of a company or organization. The most widely used model focuses
on two individuals – the principal (or superior) and the agent (or subordinate)
and is viewed from both behavioral and structural perspectives (Jensen & Meckling, 2019). The principal delegates authority to the agent to
make decisions, assuming that both the principal and the agent act rationally in
economic terms, driven by personal interests. Although both are assumed to have
similar motivations, differences may arise in preferences, trust, and the level
of information held (Ghazali, 2020). According to Eisenhardt (1989), agency theory
operates based on three assumptions about human nature. First, that humans tend
to prioritize self-interest. Second, that humans have limitations in their
thinking regarding future assumptions (bounded rationality). And third, that
humans tend to avoid risk (risk-averse).
Watts and Zimmerman (1986) state that positive
accounting theory relates to explaining accounting practices designed to
predict which companies will and will not use certain methods, but it does not
specify which methods companies should use. The theory focuses on the
relationship between various individuals involved in providing resources to an
organization and how accounting is used to assist in the functioning of this relationship.
According to Ghozali (2020), there are three types of hypotheses indicating
what motives lead managers to adopt one accounting method over another, namely
the bonus plan hypothesis, political cost hypothesis, and debt-equity
hypothesis.
According to Scott (2000), earnings management
refers to management's efforts to determine policies on specific accounting
standards with the aim of increasing management-side prosperity and/or the
market value of the company. Factors motivating company managers to engage in
earnings management include bonus schemes, debt agreements, political
motivations, tax motivations, CEO turnover, initial public offerings (IPOs),
and communication of information to investors. Earnings management practices
are divided into four types: taking big bath, income smoothing, income
minimization, and income maximization (Scott, 2000).
Current tax refers to the total Income Tax payable
(recoverable) based on taxable profit (or tax loss) for a period. This profit
refers to the profit (loss) for a tax year calculated following the regulations
set by the tax authorities on the Income Tax payable (recoverable) (Indonesian
Institute of Accountants, 2022). The amount of current tax must be calculated
by the taxpayer based on taxable income multiplied by the tax rate, then paid
and reported in the Tax Return (SPT) in accordance with applicable tax
regulations. Taxable income is the result of fiscal adjustments to pre-tax net
income taken from commercial financial statements. Fiscal adjustments are
necessary because there are differences in the treatment of income and expenses
between accounting standards and the latest tax regulations (Suandy, 2011).
Deferred Tax. Deferred tax refers to the value of
deferred tax expense (or benefit) arising from the recognition of deferred tax
liabilities or assets (Waluyo, 2013). Deferred tax results in differences
between the Income Tax Payable (Income Tax calculated based on actual taxable
income paid to the government) and the income tax expense (Income Tax calculated
based on pre-tax income) as long as it concerns temporary differences (Sibarani
et al., 2015).
Deferred Tax Assets. Deferred tax assets refer to
the total Income Tax realized in future periods resulting from temporary
differences that can be deducted, unutilized tax losses, and unused tax
credits. Temporary differences that can be deducted refer to temporary
differences that generate deductible amounts in determining taxable profit (tax
loss) for future periods when the recorded amount of assets or liabilities is
recovered or settled (Indonesian Institute of Accountants, 2022).
Interrelationship
Between Variables
Current Tax with Earnings Management. Agency theory explains that managers exhibit a Risk Averse nature,
meaning they avoid risks in paying taxes by engaging in earnings management
practices to manipulate company profits by decreasing earnings and increasing
expenses through fiscal adjustments to reduce the Income Tax paid to the
government. This is because the motivation behind managers' actions is Taxation
Motivation, which prompts company management to try to reduce the reported net
profit level so that the tax liability can be minimized (Scott, 2003). Positive
accounting theory also explains that managers adopt the Political Cost Hypothesis
method, which leads managers to reduce company profits to lessen government and
public attention to the taxes paid.
Deferred Tax with Earnings Management. Deferred taxes arise due to differences in tax calculations between
fiscal regulations and commercial tax provisions with Financial Accounting
Standards (FAS) provisions. Agency theory explains that managers have Self
Interest, where managers prefer accounting methods under FAS provisions over
tax regulations when preparing financial statements (Febrianto, 2014).
Therefore, if financial statements made by managers become more liberal, the
greater the difference between commercial tax calculations and fiscal tax
(Hawkins, 1998). This is also supported by positive accounting theory, where
managers have opportunistic tendencies in using various accounting methods to
gain advantages for themselves.
Deferred Tax Assets with Earnings Management. Deferred tax assets arise because fiscal tax calculations are higher than
commercial taxes, resulting in deferred tax benefits included in the Income
Statement, while deferred tax assets are included in the balance sheet. Agency
theory explains that managers exhibit a Self-Interest nature, manipulating the
size of deferred tax assets to avoid company losses (Burgstahler, 2002). If the
value of deferred tax assets is higher, future tax liabilities can be
minimized, ultimately increasing future company profits and receiving positive
evaluations from shareholders, as well as compensation for their performance
(Rahma, 2020). This is supported by positive accounting theory using the Bonus
Plan Hypothesis, where managers manipulate accounting values to demonstrate
good company performance to receive compensation.
Hypothesis Development
The findings of this study are supported by the
research of Ningsih et al. (2019) and Amanda and Febrianti (2015), which reveal
that current tax has an influence on earnings management. However, the research
of Ayu and Susanto (2022) and Utami and Malik (2015) indicates that current tax has no
influence on earnings management. H1: Current tax has a positive influence on
earnings management.
The findings of this study are
supported by the research of Baradja et al. (2017) and Yulianti (2005), which
reveal that deferred tax has an influence on earnings management. However, the
research of Tartono et al. (2021) and Amanda and Febrianti (2015) suggests that
deferred tax has no influence on earnings management. H2: Deferred tax has a
positive influence on earnings management.
The findings of this study are supported by the
research of Saijan (2017) and Ningsih et al. (2019), which reveal that deferred
tax assets have an influence on earnings management. However, the research of
Tartono et al. (2021) and Suranggane (2007) indicates that deferred tax assets
have an influence on earnings management. H3: Deferred tax assets have a
positive influence on earnings management.
Research Methods
The methodology of this research is quantitative
research using secondary data obtained from the Indonesia Stock Exchange (BEI)
and Annual Reports for the period of 2020, 2021, and 2022. The sampling method
used is purposive sampling, involving companies from the industrial sector
meeting the following criteria: 1) companies listed on the Indonesia Stock
Exchange (BEI) publishing Annual Reports for the years 2020, 2021, and 2022, 2)
financial statements published using the Indonesian Rupiah currency, and 3)
financial statements published showing net profits for the years 2020, 2021,
and 2022. The total valid sample size from a population of 63 companies is 20
companies.
Table 1. Operational
Variables and Measurements
|
Variable |
Measurement |
Scale |
Source |
|
Earnings
Management |
|
Nominal |
Amanda and
Febrianti (2015) |
|
Current
Tax |
|
Ratio |
Utami and
Malik (2015) |
|
Deferred
Tax |
|
Ratio |
Utami and
Malik (2015) |
|
Deferred
Tax Assets |
|
Ratio |
Baradja et
al. (2017) |
Results
and Discussion
Statistical Test Results
Classical
Assumption Tests. Before hypothesis testing is conducted, classical assumption
tests consisting of Normality Test, Autocorrelation Test, Heteroskedasticity
Test, and Multicollinearity Test are performed. In the Normality Test using the
Jarque-Bera Test, the obtained value is 0.097403, which is greater than 0.05,
indicating that the data distribution is considered normal. For the
Autocorrelation Test using the Durbin-Watson Test, the obtained DW value of
1.935601 falls between the dU (1.69) and 4-dU (2.32) ranges, indicating no
autocorrelation. The results of the Multicollinearity Test show that the
correlation values between independent variables are less than 0.85, indicating
no multicollinearity. For the Heteroskedasticity Test using the ARCH test, the
Chi-Square probability value of 0.3364 is above 0.05, indicating no
heteroskedasticity issue.
The
influence test results (t-test) are conducted after all classical assumption
tests meet the requirements, and the results can be seen in the table below.
Table 2. Multiple Linear Regression Test
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Dependent Variable: EM |
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Method: Panel Least Squares |
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Date: 11/14/23
Time: 23:19 |
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Sample: 2020 2022 |
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Periods included: 3 |
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Cross-sections included: 19 |
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Total panel (balanced) observations: 57 |
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|
Variable |
Coefficient |
Std. Error |
t-Statistic |
|
Prob. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.57644 |
1.686530 |
|
0.0976 |
||
|
0.159376 |
0.143484 |
1.110755 |
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||
|
CTE |
3.621666 |
3.883796 |
|
0.0003 |
|
|
C |
0.280611 |
0.102280 |
2.743555 |
|
0.0083 |
|
|
|
|
|
|
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|
|
|
|
|
|
|
R-squared |
0.228456 |
Mean dependent var |
|
0.596491 |
|
|
Adjusted R-squared |
0.184783 |
S.D. dependent var |
|
0.494962 |
|
|
S.E. of regression |
0.446898 |
Akaike info criterion |
|
1.294619 |
|
|
Sum squared resid |
10.58504 |
Schwarz criterion |
|
1.437991 |
|
|
Log likelihood |
-32.89664 |
Hannan-Quinn criter. |
|
1.350338 |
|
|
F-statistic |
5.231136 |
Durbin-Watson stat |
|
1.935601 |
|
|
Prob(F-statistic) |
0.003085 |
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Based on the test results in the table above, the equation used for
this research is as follows:
Based on the regression results, current tax has a positive (Coef. =
14.06581) and significant influence (Prob. = 0.0003) on earnings management. In
the study by Ayu and Susanto (2022), it
is explained that current tax has a significant positive influence on earnings
management, where an increase in current tax prompts managers to engage in
earnings management. Current tax enables companies to engage in earnings
management because it can reflect taxable income resulting from fiscal
reconciliation.
As for deferred tax, it has a positive influence (Coef. = 31.32973) but is
not significant (Prob. = 0.0976) on earnings management. This is contrary to
the findings of Baradja et al. (2017), which explain that the influence of
deferred tax on earnings management is positive, meaning that any increase in
deferred tax expense will increase the likelihood of companies managing
earnings. Thus, it can detect the influence of accrual manipulation to minimize
taxes in earnings management.
Deferred tax assets have a positive influence (Coef. = 0.159376) but are
not significant (Prob. = 0.2717) on earnings management. This contradicts the
findings of Baradja et al. (2017), which explain that deferred tax assets have
a positive influence on earnings management because during Income Tax
calculations, there is a timing difference between accounting and tax treatment
in the future, so when companies pay higher taxes now, they may potentially
reduce future tax liabilities.
To understand the correlation of all independent variables with the
dependent variable, a determination correlation test (R2) and an F-test are
conducted. The Adjusted R2 has a value of 0.184783 or 18.47%, and the F-test
indicates that the independent variables in this study have a significant
influence (Prob. = 0.003085) on earnings management collectively.
Discussion
Based on the results of this research,
the role of current tax can be utilized to detect movements in earnings
management stemming from taxable income generated from fiscal reconciliation.
However, deferred tax cannot detect movements in earnings management because
when companies engage in earnings management in their commercial financial
statements and transfer them to fiscal financial statements, the amount of
temporary differences reflected in deferred tax is too small and insignificant,
thus deferred tax cannot detect earnings management (Tartono et al., 2017). As
for deferred tax assets, they cannot detect movements in earnings management
because managers will avoid manipulating earnings on deferred tax assets, which
could risk the evaluation of those accounts at the end of the period, where
financial statement users will question the impact on deferred tax asset
accounts. Additionally, if managers engage in earnings management on deferred
tax assets, it will result in higher current taxes, potentially harming the
company (Tartono et al., 2017).
Conclusion
The
limitations of this research include the use of only current tax, deferred tax,
and deferred tax asset as the independent variables studied. The research
period is limited to the years 2020, 2021, and 2022. The subjects used are only
companies in the industrial sector listed on the Indonesia Stock Exchange
(BEI). For future research, it is possible to add other independent variables,
extend the research period, and expand the subjects of the research to
companies operating in other sectors.
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|
Copyright holder: Thomas Salim,
Yuniarwati (2024) |
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First publication right: Syntax Literate:
Jurnal Ilmiah Indonesia |
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