THE INTERACTION EFFECT OF CLIENT BARGAINING POWER AND AUDITOR INDUSTRY SPECIALIZATION ON EARNINGS MANAGEMENT OF INDONESIAN COMPANIES LISTED IN BEI '

Abstract

This study aims to examine the interaction effect of firm size, as the proxy for client bargaining power, and auditor industry specialization on the magnitude of earnings management among public listed companies in Indonesia. The sample of the study covers 5 years observations of public listed companies in the Jakarta Stock Exchange in 1998 - 2003 in all industries except banking and financial institutions. There are 762 companies meet the sampling criteria. The final samples consist of 603 firm years which restricted for only the client of Big N affiliated audit firms in Indonesia. The analyses are applied using single pooled regression. The result of the regression suggested that the firm size negatively affect the magnitude of earnings management. This finding confirms the monitoring theory that the larger the firm the more sophisticated control mechanism and, hence, the lower level of opportunistic agent's behavior The auditor industry expertise is not found to be a quasi moderator variable on the association between earnings management and firm size. The positive sign of the interaction term indicates the higher bargaining power in term of economic dependence and complexity inherent on larger client served by auditor industry specialist in Indonesia. Keywords: earnings management, discretionary accruals, client bargaining power, auditor industry specialization.