Weak corporate governance has always been cited as one of the causes Enron corporate scandal and East Asian financial crisis of 1997 to 1998. While weak corporate governance may not have a big deal the East Asian crisis, the corporate governance practices in East Asia could have made countries more vulnerable to a financial crisis and could have exacerbated the crisis once it began. Several researcher had highlights the significance of corporate governance in rising markets (Mitton,2002). Corporate governance is an important factor in development of financial market and firm value. Since the corporate governance was a significant factor in determining the performance of the company , then each component in corporate governance should be given special attention in avoiding the same tragedy as Enron. Boards have the mortgage responsibility to observe the management to prevent shareholder's interest. Since earning management misinform investors by giving them wrong information about a firm's true operating performance, boards may have a role in limitation the practice of earning management. ( Park & Shin, 2002).
Earning management is an important research topic because it is a application that potentially undermines the reability of financial statement, and such statement are a critical attribute of useful accounting information in wel-funtioning capital market. ( Haw,Ho and Li, 2008). Earning management is used to reduce outsider interference and protect insider's private control interest. For example , insiders can use their discretion in financial reporting to inaccurately reflect firm value and effect weaken outsider's ability to govern the firm. ( Hua Shen and Lin Chih , 2007) Due to that situation, investors who are concerned with the stock returns examine the earnings rapidly. There are two types of earning management which consist of earning smoothing and earning discretion. ( Hua Shen and Lin Chih, 2007 ; Siregar and Utama, 2008) . In addition, Haw et al. (2008) focusing on two types of general earning management which are accrual management and the manipulation of real economic activities. However in this paper most of the researcher tendly to use earning discreation as a proxy of earning management to indenfy the relationship between corporate governance and earning management. The characteristics of accrual accounting leads managers a great deal of discreation in determining the actual earnings a firm reports in any duration of accounting period. ( Xie, Davidson and Dadalt, 2002)
This paper is trying to identify the relationship between corporate governance and earning management from several countries that is Chinese, Canada, Pakistan, Iran, Taiwan as well as Asean countries. It is based on the result derived from the several study done by other researcher. Most of researcher done their good job in order to determine the relationship between corporate governance and earning management, while Liu and Lu ( 2007) come out with the introducing a tunnelling perspective in order to examine the relationship between earning management and corporate governance. The tunneling of firm value by controlling shareholders, including activities ranging from outright theft and loan guaratees to selling assets or product below market price. It is all the strategies that have been organise to make a higher value in order to have better feedbavk from all stakeholders.
The corporate governance mechanism that will engage with earning management are board independence ( Mecca and Ballesta (2009); Chin Chang and Gan Sun, 2009; Cornet, McNutt and Tehranien,2009; Siregar and Utama, 2008; Chen, Elder and Hsiesh, 2007; He et al, 2007 ; Park and Shin , 2004 ; Jean Jean, 2000 ) , board size ( Chin Chang and Gian Sun , 2009 ; Ali Shah, Ali Butt and Hassan , 2009; Shen and Chieh , 2007 ; Xie, Davidson and Dadalt , 2002; Jean Jean , 2000; Mashayeki and Noravesh , ; Anis , ) , board meeting (Xie, Davidson and Dadalt , 2002; Mashayeki and Noravesh , ) , board composition (Xie, Davidson and Dadalt , 2002), ownership concertration (Mecca and Ballesta (2009); Siregar and Utama, 2008) , CEO pay for performance sensitivity (Cornet, McNutt and Tehranien,2009) , CEO duality (Xie, Davidson and Dadalt , 2002; Anis, ) , audit commitee independence (Chin Chang and Gan Sun, 2009 ; Ali Shah, Ali Butt and Hassan , 2009 ; He et al, 2007 ; Mashayeki and Noravesh , ), audit committe effectiveness (He et al, 2007 ; Xie, Davidson and Dadalt , 2002) as well as financial expert (Chin Chang and Gan Sun, 2009 ; Chen, Elder and Hsiesh, 2007; Park and Shin , 2004 ) . The type of earnings management uses are being influence by these corporate governance mechanism .
This paper organized as follow. The next section describe the literature review regarding the relationship between corporate governance mechanism and earning management separately. Data collected for the study are taken from secondary data. We examine the relationship between corporate governance and earning management in several selected countries. We analyse several selected articles related to studies done in identify the relationship between corporate governance and earning management in several countries. We analyse and summary the results from the studies carried out on the different countries to examine whether there is significant relationship between corporate governance and earning management in that particular country. Finally is conclusion and suggestion for future research.
LITERATURE REVIEW
Corporate Governance
Corporate governance consist of the structures and processes for the direction and control of companies. Corporate governance are about the relationships among the management, Board of Directors, controlling shareholders, minority shareholders and other stakeholders. Good corporate governance contributes to sustainable economic development by attractive the performance of companies and increasing their access to outside capital. (ROSC, 2005). For rising market countries, improving corporate governance can provide a number of important public policy objectives. Good corporate governance reduces emerging market liability to financial crises, reinforces property rights, reduces transaction costs and the cost of capital, and leads to capital market development. Weak corporate governance frameworks reduce investor confidence, and can discourage outside investment. ( Nowroozi, 2005) Also, as pension funds continue to invest more in equity markets, good corporate governance is important for preserve leaving savings. Over the past several years, the importance of corporate governance has been highlighted by an increasing body of academic research.
Important corporate governance reforms have been implemented in Malaysia since 1998, when a high-level Finance Committee on Corporate Governance, consisting of both government and industry, was formed to identify and address weaknesses highlighted by the Asian financial crisis. Bursa Malaysia had introduction of a Code of Corporate Governance, and changes in the composition and role of its Board of Directors. Principle of corporate governance consist of ensuring the basis for an effective corporate governance , framework, the rights of shareholders and key ownership functions , the equitable treatment of shareholders the role of stakeholders in corporate governance disclosure and transparency the responsibilities of the board . ( Nowroozi, 2005)
Earning management
Accounting figures are the most important disclosure reported from financial information in annual repotr in order to get the overview of financial performance , indirectly attract interest to shareholders as well as investor. Mashayeki and Noravesh discuss earnings management as the scenario that managerial insist which is a prerequisite for earning management, but whether this insist should be opportunistic in nature is still blurly. However, when the firm engage in earning management, the information expose in the financial statement is not realiable. The earning's informativeness are being influencing by managers who are the potential parties that can manipulate earnings in order to maximize their own interest or to signal their private information. ( Mecca and Ballesta, 2009). Most of the articles use discretionary accruals as a proxy for earning management.
Discreationary accruals, the main area that had been disscussed are abnormal component of accrual. ( Park and Shin, 2002 ; Mecca and Ballesta, 2009 ; Hua Shen and Lin Chih , 2007 ; Ali Shah , Ali Butt and Hasan, 2009; Chen, Elder and Ming Hsieh, 2007; Xie, Davidson and Dadalt, 2002 ; Mashayeki and Noravesh , ; Anis ; Chang and Sun, 2009 ; He et al , 2007). Level of discretionary accruals is calculated as the difference between two accruals that is profit after income tax less cash flow from operation. While Chen, Elder and Ming Hsieh (2007 ) estimated the disretionary accruals by subtracting nondiscreationary accruals from total acrual , where all acrual variables are scale by lagged total asset to control for potential scale bias. Whether this is a good proxy for earning management depends on the ability of the model to correctly predict how changes in business circumtances affect accruals. Whatever it is, the discreationary accrual has being done by the interest towards stakseholders's interest.
As mentioned early, Hua Shen and Lin Chih ( 2007) who classify earning management into earning smoothing and earning aggresiveness. The initial smoothing measure captures the degree to which insiders use their discretion to modify the accounting component of reported earnings, that is accruals, reduce the variability of operating earning. Where, standard deviation of operating earning divide by standard deviation of cash from operation. A small value of this measure, is shown of insiders using their discretion to smooth reported earnings for their interest. Indirectly, the higher of this value shows that firm are less intention to manage earning. The second measure of earning smoothing is based on contemporaneous correlation between the changes in accounting and the change in operating cash flow using Spearman correlation coefficient. A negative correlation implies that use of discretionary accounting accruals to offset undesirable cash flow shocks, therefore large earning management.
Corporate governance and earning management
After several recent financial crisis mentioned earlier, there are international intention in order to adopt corporate governance to meet investor's confidency towards financial information. The extent literature shows that the relationship between corporate governance mechanism towards earning management.
Board Independence
Board of directors can play an important role in dealling with agency problem (Mecca and Ballesta, 2009 ; Chen, Elder and Ming Hsiesh, 2007). Board of directors might be able to monitor the firm and avoid the management from dealing in earnings management. According to Mecca and Ballesta (2009) , the relationship of director must be identify which are employment by the corporation or an associate within the last five years. Firstly, any family relationship closer than second cousin. Next, the association within one or two years with an investment banker that has completely done services for the company . Besides, the relationship of the director should be identify whether they holding control of corporate stock and finally their connection with the law firm that associate by the corporation. Nonetheless, previous research that analyzes the impact of board independence towards earning management ( Mecca and Ballesta (2009); Chin Chang and Gan Sun, 2009; Cornet, McNutt and Tehranien,2009; Siregar and Utama, 2008; Chen, Elder and Hsiesh, 2007; He et al, 2007 ; Park and Shin , 2004 ; Jean Jean, 2000 ). Board independence is measured as separation of roles of CEO and Chair , exestence of a nomination committee, proportion of non-executive directors on the board and the proportion of independent director on the boards ( He et al. 2007 pg 13).
There is no significant relationship between the proportion of independent board members towards discretionary accruals. (Siregar and Utama, 2008 ; Chen, Elder and Ming Hsieh, 2007) This is because independent boards have been shown to effectively monitor management in part because they only been operating for a short period. In addition, publicly listed firms hired independent boards only comply with regulation, therefore independent boards are not utulized as a monitoring mechanism. Their result also consistent with Xie et al. (2002) and Jeanjean (2000) which state that independent board members are more prefer to manage firm rather than involve on those things. It's show that board independence is important in constraining manager discretion in earning management. Certain criteria that may applied to clarify independent director are the director is not a significant owner of the firm equity and the director is not salaried or a former manager of the firm.
Board Size
Another characteristic that is seen to sway a board's talent to monitor is board size ( Chin Chang and Gian Sun , 2009 ; Ali Shah, Ali Butt and Hassan , 2009; Shen and Chieh , 2007 ; Xie, Davidson and Dadalt , 2002; Jean Jean , 2000; Mashayeki and Noravesh , ; Anis , ). Most of the studies done that the size of a firm's boards should be positively related to earning management. If small boards move towards effective monitoring in a firm they should also be indicate less earning management. If the board size is larger, it will be more difficult for the the board members to interact efficiently with one another (Mashayeki and Noravesh ). In addition, they seems that larger board may be able to draw from a broader range of experience. In the case of earning management, a larger board could be more likely to have independent directors with corporate as well as financial experience. Xie et al. (2002) and Masyayekhi and Noravesh discover the the coefficient for board size is negative and significant. Its acquire that larger connected with lower of discretionary current accruals.
Board Meeting
Mashayeki and Noravesh suggested that the frequency of meetings is an important dimension of an effective board. As for that board which meets more frequent should be able to dedicate more time to issues such as earning management ( Xie et al. 2002) . However, the board that seldom meets may not focus on these. Therefore they hypothesized that the emergence of earning management tend to be inversely related to the number of board meetings. Its supported by Xie et al. (2002) which confirmed the number of board meetings has a negative coefficient. Implicitly, when boards meet more often, discretionary accruals are lower. Due to this situation, when they have to attend meeting frequently, the decision making are more focusing on the improvement and development of company rather than have to manipulate earnings.
Board Composition
There are related literature regarding the relationship of the board composition on firm performance. If outside directors on the board influence monitoring they shouls connected with the lower use of earning management to manipulate earning. (Xie, Davidson and Dadalt , 2002 ; Cornet et al. 2009). The extent to which increased levels of outside director representation on the board of directors benefit shareholders is subject of much debate. Xie et al. had been analyze the relationship between board composition and earning management and found that the potential for managers to deal with earning management may negatively affect the long-run stock market performance of the firm.
Ownership Concertration
The majority of previous research done on the effect of ownership concentration towards earnings management claim that the quality of manegerial decisions making can improve by the monitoring from owners and thus indirectly its will increases firm value. ( Mecca and Ballesta , 2009 ; Siregar and Utama, 2000) . Ownership concertration in most of the articles is disscussing the determined as the ownership detained by the largest shareholder. Siregar and Utama (2008) founf that the effect of discretionary accruals on future profitability is higher for firms with high family ownership and no business group than for other firms.
CEO Pay For Performance Sensitivity
The relation between payfor performance sensitivity in the manager's compensation contract and shareholder wealth has been well documented in the finance literature. (Cornet, McNutt and Tehranien,2009). Cornet et al (2009) found that in order to force CEOs to maximize shareholder wealth, boards should construct compensation contracts that are performance or stock price oriented. When a highest portion of CEOs total compensation is composed of incentive-based stock options, executives can seek to deal with earning management. As a result, higher CEO stock based incentive pay likely encourages the use of earning management to enhance the firm performance. A natural measure of the sensitivity of CEO wealth to firm performance would compare the value of option holdings to other compensation. Cornet et al. (2009) through their research done at the largest publicly traded bank holding companies in the United State and bring into being that pay for performance sensitivity is positively correlated with earnings. Not surprisingly, banks that have a strong board are more expected to be those that tie the CEO's pay for performance. However, the higher CEO pay for performance increases earning management, but firms with low levels of earnings management increase CEO pay for performance.
CEO Duality
CEO duality suggested that less organize is expected to be work out over the activities and behavior of management( Mecca and Ballesta, 2009; Xie, Davidson and Dadalt , 2002; Anis, ). Chang and Sun (2009) argue the issue regarding whether the CEO of a firm should serve as the chairman of the board has raised much controversy. The duality of the CEO encourage a firm's performance by having a focus direction for the firm's strategies and operations. They also claimed that the duality of the CEO might also increase the risk of the CEO having the final word on the financial reporting and increase the monitoring costs on earning management. Nevertheless, Xie et al. (2002) claimed that CEO duality is unrelated to discretionary current accrual.
Audit Committee Independence
The audit committe is a sub- committee of the board of directors that provides a formal communication between the board , the internal monitoring system and external auditor. The audit committe has the oversight responsibility for firm's financial reporting process and its primary purpose is to improve the the true ad fair view of financial statement. In observing the financial carefulness of management , shareholder are being endow with the most protection in maintaning the credibility of firm's financial information by the audit committee . Thus, the quality, credibility as well as realibility can be improve by the independence of audit committe . (Mecca and Ballesta, 2009 ; Chang and Sun , 2009 ; Ali Shah, Ali Butt and Hassan , 2009 ; He et al, 2007 ; Mashayeki and Noravesh). Audit committe independence is measured as existence of audit committee , proportion of independence directors on audit committee, proportion of non- executive directors on audit committee. As for that , earning management will be less likely. ( He at el. 2007 ; Xie et al, 2003). Audit committe members with corporate and financial background should have the experience and training to understand earning management. Ali Shah et al. found that there is a positive relationship between audit committe independence and discretionary accrual. In contrast, Chang and Sun ( 2009) found that there is no significant connected between earning management and audit committee.
Audit Committe Effectiveness
Audit committee effectiveness is measured as existence of a formal written charter, existence of an internal audit function, size of the committe, Use of Big 4 audit firm as external auditor, number of directors on audit committee and number of meeting held by audit committe. ( He et al, 2007 pg 13). Xie et al. (2003) state that audit committee with a large proportion of independent outside director to be more effective monitors. Board and audit committe members with corporate of financial background are connected with firm that have smaller discretionary current account. Mostly, previous studies suggest that finacial expertise on the board as well as audit committees have the ability to improve the quality of financial reporting. ( Chen, Elder and Ming Hsieh, 2007). Moreover, the size of audit committe and the percentage of blockholders are insignificantly negative related to the discretionary current accruals. (Xie et al. 2003).
CONCLUSION
This paper studies the relationship of corporate governance and earning management. Corporate governance have negatively related to the extent to which firm manage earning ( Hua shin and Lin Chih, 2007) . Firms with better corporate governance tend to carry out less earning management ( Chen, elder and Ming Hsieh, 2007). The previous analyses suggest that the persistent of earning management is related to corporate governance characteristics. In spite of this, the corporate governance characteristics that contributes most important determinants of earning management are board size and CEO duality
( Masyayeki and Noravesh). In addition, Mecca and Ballesta (2009) conclude that audit committee independence is one of the major corporate governance mechanisms in constraining earning management. This study is subject to a number of limitation. First, this is only reported from previous research for the mechanism of corporate governance as well as earning management and the result done by other researcher. Despite these limitation, this study makes an significant theoretical and practical contribution.Future research on corporate governance and earning performance could consider another corporate governance mechanism such as audit and accountability or directors remuneration.
