The Paradox of Earnings Management under Indonesian Financial Accounting Standards (PSAK): Evidence after IFRS Convergence

Abstract

The convergence of Indonesian Financial Accounting Standards (PSAK) with the International Financial Reporting Standards (IFRS) aims to enhance financial reporting quality by improving transparency, comparability, and the faithful representation of economic transactions. However, empirical evidence regarding its effectiveness in constraining earnings management remains inconclusive. While previous studies generally report a decline in accrual-based earnings management following IFRS convergence, emerging evidence suggests that managers may substitute accrual manipulation with real operational decisions. This study investigates the paradoxical effect of IFRS-based PSAK implementation on earnings management by simultaneously examining Accrual Earnings Management (AEM) and Real Earnings Management (REM) among non-financial companies listed on the Indonesia Stock Exchange during the 2018–2025 period. Using a quantitative explanatory research design, the study employs panel data regression with the Modified Jones Model to measure accrual earnings management and the Roychowdhury model to capture real earnings management. Corporate governance is incorporated as a moderating variable to evaluate its role in strengthening the effectiveness of PSAK implementation. The findings indicate that PSAK implementation significantly reduces accrual earnings management but is positively associated with real earnings management, suggesting that managers shift from accounting-based manipulation toward operational activities under principle-based accounting standards. Furthermore, strong corporate governance significantly weakens both forms of earnings management and enhances the effectiveness of PSAK in improving financial reporting quality. These findings contribute to the earnings management literature by providing evidence that IFRS-converged PSAK does not completely eliminate opportunistic financial reporting but rather transforms its underlying mechanism. The study offers important implications for accounting standard setters, regulators, auditors, and investors by emphasizing that high-quality accounting standards should be complemented by effective governance and regulatory enforcement to achieve transparent and reliable financial reporting.