The relation between CEO reputation, financial distress, internal control, and earnings management

Abstract

PURPOSE: The purpose of this research is to analyze the effect of internal control and financial distress on earnings management and add the CEO’s reputation as a moderating variable. The object of this study is to determine the companies that listed on Indonesia Stock Exchanges between 2019 and 2020. The research data were tested and analyzed using panel regression analysis on SmartPLS software.

METHODOLOGY: The research sample is chosen using the purposive sampling technique. Data analysis for the study employed the SmartPLS program. This research used accrual earnings management to measure the earnings management, springate model to measure financial distress, internal control index to measure internal control and CEO’s reputation index is used to measure CEO’s reputation.

FINDINGS: The research results found that financial distress and internal control positively affect earnings management. In addition, this research results also found that a CEO’s reputation can have a moderately significant and positive effect on the relationship between financial distress and earnings management.

ORIGINALITY/VALUE: This research finding is helpful for corporate governance in maximizing investment strategies. The consideration of the value of internal control is also a reference when investing. As such, it tends to assist company management in executing investment strategies to see the value of the CEO's reputation and internal controls. The novelty research provides new insight into how CEO’s reputation moderates the relationship between financial distress and earning management.