<![CDATA[Financial report is a tool of agent’s (management’s) responsibility toprincipal (owner) in the agency relationship. Recently, more parties need thefinancial report because the entity has more contract relationships. Thiscontract relationship is called nexus of contracts, which shows how managersand shareholders control costs to maximize the company’s value.In preparing financial report, management uses accrual accountingwhich is considered able to provide more accurate information than cashaccounting due to the possibility of applying matching principle. Earningsmanagement phenomenon exist in financial reporting of an entity becauseaccounting standards still provide opportunities to choose accountingtreatment to be used. This would give chance for earnings management tohappen.Assumptions laid behind earnings management are opportunisticconsideration (personal interest), efficient contract, and decisions made basedon accounting income. Earnings management is done through discretionaryaccruals which is a function of expected income. Various patterns of earningsmanagement include: (1) taking a bath; (2) income minimization; (3) incomemaximization; and (4) income smoothing.]]>
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