Income Smoothing

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Journal of Economics, Business and Accountancy Ventura
Accreditation No. 110/DIKTI/Kep/2009

Volume 14, No. 1, April 2011, pages 59 – 78

THE THEORETICAL CONSTRUCTION OF
INCOME SMOOTHING MEASUREMENT
Alwan Sri Kustono
Jember University
E-Mail: alwankustono@yahoo.com
Tegal Besar Permai 2-E1,Jember,Propinsi Jawa Timur,Indonesia

ABSTRACT
The income smoothing is a dimension of the accounts manipulation theme that has been a ttracting a great attention in the accounting literature. A goal of manipulation widely as cribed to managers is the desire to smooth. Reported income, Income smoothing reflects reducing the possible income fluctuations so as to make it as stable as possible throughout the ism. Almost of income smoothing research in Indonesia used Eckel’s index to clasify smoother non smoother firms. Empirical evidences have provided support for the existence of an income smoothing behavior. The studies showed inconsistent about factors determining this smoothing. The purpose of the present investigation is twofold. First, we seek to determine if Eckel index is a reliable instrument to measure income smoothing behavior. Second, we pretend to identify the new instrument to measure incidence of income smoothing. Our research sample comprises manufacturing companies listed on the Indonesia Stock Exchange, over period of 1999-2008. This study confirms Eckel’s index is not reliability instru ment. The new proposed index quantifies the incidence of income smoothing without depend on n periods. The results imply that researchers should re-examine the conclusion of previous studies, particularly that determinant, factors and effect of income smoothing practices. Key words: income smoothing, Eckel’s index, c oefficient of variation, reliability. INTRODUCTION

It has been noticed that income statement is
considered as one of the statements to be
presented in financial reporting. For that reason, the company’s earning is considered vital information for it can be used to measure the corporate performance. In other words, information of the earning can be

used to assess the performance or accountability of management and also predict the ability of companies in the effort of contributing to the following earning. In general, earning reporting is frequently not free from the accounting manipulation. Yet it appears different from the fraudulence. Accounting manipulation can

be still in tolerant when it is put in the accounting rules. In contrast, fraudulence practices tend to be against the rules and accounting standards. Thus, it is delicately different from income smoothing. In fact, one 59

of the practices of accounting manipulation
is income smoothing.
In connection with the pursuit of analyzing income smoothing in the companies, some definitions of it can be inferred. First
of all, income smoothing is defined as the
emphasis on the fluctuations in income levels that are considered normal for the company (Barnea et al., 1976). For another thing, Beidleman, (1973) defines income
smoothing as the management efforts to reduce abnormal variations in the earning to the extent permitted by the principles of
good management and accounting. Income
smoothing in such instances, is as a tool
used by management to reduce the variability of reported income stream relative to the target which is intentionally smoothed by
using artificial or real variable. In addition,
income smoothing is one-dimensional manipulation of accounts that attract the atten-

ISSN 2087-3735

The Theoretical Construction … (Alwan Sri Kustono)

tion of many accounting literature in the
realm of earnings management. Beside, income smoothing reflects the concern to reduce the possibility of fluctuations in income by making a steady flow
Research on income smoothing in Indonesia generally examine several factors which are allegedly to motivate management
to do income smoothing. They identify the
existence of such practices and followed...
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