The Indonesian Accounting Review Vol. 11, No. 1, January - June 2021, pages 21 - 31 Beware of the existence of a big bath with asset impairment after pandemic covid-19! 1 1 2 Alwan Sri Kustono , Aisa Tri Agustini , Scherrgyo Agung Rhyo Dermawan 1University of Jember, Jember, East Java, Indonesia 2PT. Rekin, Jakarta, DKI Jakarta, Indonesia ARTICLE INFO ABSTRACT Article history This study attempts to investigate the relationship between big bath Received 26 June 2020 accounting and asset impairment. It used the sample consisting of 231 firm- Revised 28 February 2021 year observations from 33 mining companies listed on the Indonesia Stock Accepted 13 March 2021 Exchange during the 2012 to 2018 period. Logistic regression has been used to analyze a big bath accounting on assets impairment. The results provide evidence that companies that tend to do a big bath accounting JEL Classification: will recognize a loss of asset value. A big bath accounting is done because M21 managers assume that investors will respond when the company suffered Key words: large losses or small losses. The manager acknowledges the costs of Assets impairment, a big future periods and current period losses when unfortunate unavoidable bath accounting, circumstances in the current period. It will consequently make a profit earnings management, higher than expected in the next year. In the next period, the company’s loss performance will look better so that managers can maximize utility in the form of compensation for the targets that have been achieved. DOI: 10.14414/tiar.v11i1.2243 ABSTRAK Tujuan dari penelitian ini adalah untuk mengetahui hubungan antara big bath accounting dan penurunan nilai aset. Sampel penelitian adalah 231 firm-year observasi dari 33 perusahaan pertambangan yang terdaftar di Bursa Efek Indonesia selama periode 2012 hingga 2018. Regresi Logistik telah digunakan untuk menganalisis big bath accounting pada penurunan nilai aset. Hasil penelitian ini menemukan bukti bahwa perusahaan yang cenderung melakukan big bath accounting akan mengakui kehilangan nilai asetnya. Earnings management tersebut dilakukan karena manajer berasumsi bahwa investor akan memberikan respon yang sama ketika perusahaan mengalami kerugian besar atau kerugian kecil. Manajer mengakui biaya periode masa depan dan kerugian periode saat ini ketika keadaan tidak menguntungkan yang tidak dapat dihindari di periode saat ini. Harapannya adalah di periode depan perusahaan akan melaporkan laba lebih tinggi dari yang diharapkan. Pada periode selanjutnya kinerja perusahaan akan terlihat lebih baik sehingga manajer dapat memaksimalkan utilitas berupa kompensasi atas target yang telah dicapai. 1. INTRODUCTION interest between the managers and owners Managers have more internal information and of companies is called the agency problem. the firm’s prospect than the owners do. This Managers do earnings management by using condition is called information asymmetry. big bath accounting. Big bath accounting can Information asymmetry provides managers make the profit unable to match with the real with an opportunity to use the information economic condition. The earnings represent a they know as a tool to manipulate financial worse performance when the company incurs statements to maximize their prosperity losses. It makes the next period’s earnings (Agustia, 2013; Kustono & Effendi, 2016). higher than expected after the company incurs Problems that arise from a conflict of a massive loss in the current period. * Corresponding author, email address: [email protected] Alwan Sri Kustono et al., Beware of the existence of a big bath with asset impairment after pandemic covid-19! The COVID-19 pandemic that has bath accounting and asset impairment that occurred throughout the world, beginning at can be potential problems after the COVID-19 the end of 2019, has made many changes in pandemic. the industrial world’s behavior. Almost the One possibility of earnings management entire industrial sector has been affected by is taking a big bath (Andrews, 2012; Y. Cheng the pandemic. Many sectors have decreased et al., 2019; Ozili, 2020). A big bath is taken or slowed their growth. On the contrary, some by riding on impairment assets. Managers other sectors grow well. Pandemic has caused always have more internal information and the some companies to close their operations, company’s prospects than the owners do. This factories reduce and manage work schedules, condition is called information asymmetry decrease the amount of production, decrease (Hope & Wang, 2018; Rossi, 2014). Information the use of assets that trigger a decline in the asymmetry provides managers an opportunity value of assets. The hospitality, transportation, to use the information they know as a tool to manufacturing, and mining industries are the manipulate financial statements to maximize sectors that have declined due to the pandemic. their prosperity. Problems that arise from a A drastic change in the company’s conflict of interest between managers and financial condition raises a variety of potential owners of companies is called the agency changes in management behavior. In this case, problem. agency theory suggests that management is One possibility of earnings management the party that controls information compared is taking a big bath (Andrews, 2012; Y. to other parties. There is a possibility that the Cheng et al., 2019; Ozili, 2020). A big bath is financial information presented is of efficiency performed using impairment assets. Managers and opportunistic nature. For example, in a always have more internal information and the pandemic or natural disaster, accounting also company’s prospects than the owners do. This has affected (Y. Cheng, Park, Pierce, & Zhang, condition is called information asymmetry 2019; Ozili, 2020; Stenheim & Madsen, 2016). (Hope & Wang, 2018; Rossi, 2014). Information Therefore, the managers who have moral asymmetry provides managers an opportunity hazard intentions, the condition of this force to use the information they know as a tool to majeure can be utilized for opportunistic manipulate financial statements to maximize purposes. Management can make use of a their prosperity. Problems that arise from a pandemic by accounting engineering. They can conflict of interest between managers and use earnings management techniques by riding owners of companies is called the agency COVID-19. This research will investigate the problem. relationship between a big bath accounting In management with moral hazard and asset impairment that can be potential intentions, the condition of force majeure problems after the COVID-19 pandemic. can be utilized for opportunistic purposes. A drastic change in the company’s Earnings management techniques can be financial condition raises a variety of potential done by making use of COVID-19. Managers changes in management behavior. In this case, do earnings management by using a big bath agency theory suggests that management is accounting. A big bath accounting can make the the party that controls information compared profit unable to macth with the conditions of to other parties. There is a possibility that the economic reality. The profit represents a worse financial information presented is of an efficient performance when the company incurs losses. and opportunistic nature. For example, in a It makes the next period’s earnings higher than pandemic or natural disaster, accounting also expected after the company incurs a massive has affected (Y. Cheng et al., 2019; Ozili, 2020; loss in the current period (Gonçalves, Ferreira, Stenheim & Madsen, 2016). Therefore, the Rebelo, & Fernandes, 2019). managers who have moral hazard intentions, In management with moral hazard the condition of this force majeure can be intentions, the condition of force majeure utilized for opportunistic purposes. Managers can be utilized for opportunistic purposes. use crises to strategically direct the statements Earnings management techniques can be of financial position according to their interests. done by taking advantage of the COVID-19 They can use earnings management techniques situation. Managers do earnings management by taking advantage of the chaos caused by by using a big bath accounting. A big bath the COVID-19 outbreak. This research will accounting can make the profit unable to investigate the relationship between a big match with the conditions of economic reality. 22 The Indonesian Accounting Review Vol. 11, No. 1, January - June 2021, pages 21 - 31 The profit represents a worse performance 2. THEORITICAL FRAMEWORK AND when the company incurs losses. It makes the HYPOTHESIS next period’s earnings higher than expected Agency Theory after the company incurs a massive loss in the Agency relationship as a contract-under which current period (Gonçalves et al., 2019). one or more persons (the principal) engage The company owners use profitability as another person (the agent) to perform some a reference for investment in a company listed service on their behalf-involves delegating on the stock exchange (Grace & Ambrose, some decision-making authority to the agent 2013). The previous researches show that (Shapiro, 2005). In that case, agency theory management would prefer to adopt when a also solves potential lack of harmonious goals, company’s performance is below the desired preferences, and actions between managers level (Ayedh, Fatima, & Mohammad, 2019; and shareholders. Therefore, companies should Hope & Wang, 2018; Karlsson & Reimbert, tie manager compensation to