Theoretical Framework and Hypotheses Development

Risk propensity is the inclination to take or to avoid risks in an uncertain decision making environment. Risk propensity is a tendency to take risky actions. Individuals with high-risk propensity are more likely to take a risky action. Firm accountants are assigned to manage firm accounting system. They make decisions about accounting methods and estimates that are used. They must consider the effect of choosing certain accounting methods and accounting estimation policies. Hence, there are risks in decisions that they have made. Master and Deines (2011) investigated the difference in risk taking propensity between non- certificated and certificated controllers and found that there was a significant difference between both groups. They also found that there was a difference in risk-taking propensity between female and male controllers.

Need for achievement is a part of McCleland‘s theory of needs. Need for achievement is the drive to excel, to achieve a set of standards, and to strive to succeed (Robins and Judge, 2009, p. 214). Need for achievement is the personal striving of individuals to attain goals within their social environment (Cassidy and Lynn, 1989). Islahuzzaman (2010) found that there was a significant correlation between achievement motives and entrepreneurial orientation among public accountants. He found that public accountants have achievement motivation and entrepreneurial orientation at intermediate level.

Agency relationship is a relationship between a principal and an agent in which the principal hires the agent to give some services and the principal delegates some decision making authorities to the agents (Anthony and Govindarajan, 2007, p. 530). In an employment contract, managers and accountants are agents and shareholders are principals. Agency theory assumes that people are self-interest (Eisenhardt, 1989). Managers and accountants tend to do opportunistic behavior to increase their wealth. This deduction is consistent to hypotheses in positive accounting theory that were developed by Watts and Zimmerman (1986, pp. 208, 216, 235). The hypotheses involve bonus plan, debt covenant, and size hypotheses.

Earnings management is the usage of certain accounting methods, accrual estimations, and real activities manipulation by a manager to achieve certain objectives. Scott (2012, p. 423) mentioned that there are two ways of thinking about earnings management. First, earnings management is opportunistic behaviors. Managers want to maximize their utility by doing earnings management, in relation with compensation contract, debt covenant, and political costs. Second, earnings management is efficient behaviors. Managers want to protect themselves and the company in the face of unanticipated state realizations, to the advantage of all the contracting parties. Managers want to deliver private information about the company prospect to outside stakeholders by doing earnings management. This way of thinking is from efficient contracting or information perspectives.

158 The ways to do earnings management can be categorized into three categories. First is accounting method change, for example, choice of average rather than FIFO for inventory cost flow assumption. Gopalakrishnan (1994) found that unlevered firms tend to choose income increasing accounting methods more than levered firms, by choosing certain inventory methods. Second is accounting estimation change, for example, changing the useful life of certain fixed assets. Kurdi (2010) found that oil and gas companies opportunistically revise their oil and gas estimate to increase depreciation, depletion, and amortization expense during periods of high oil prices. Third is real activity manipulation to avoid reporting annual losses (Roychowdhury, 2006). It is done by accelerating the timing of sales, overproduction to report lower cost of goods sold, and reducing discretionary expenditures to improve reported margins among firms that reporting small annual profits. Jackson and Wilcox (2000) found that firm managers grant sales price reductions in the fourth quarter to meet annual financial reporting targets.

2.1 Hypothesis Development: Need for Achievement, Agency Theory, and Earnings Management

Need for achievement is the strong desire to be successful. Need for achievement may play an important role in affecting earnings management behavior. Agency theory assumes that people are self-interest (Eisenhardt, 1989). It is deducted that accountants tend to behave opportunistic by doing earnings management. Therefore, it is believed that accountants with a high need for achievement have a strong desire to succeed and consequently more likely to do income increasing earnings management. The hypothesis is developed as follows:

H1: Need for achievement positively influences income increasing earnings management. 2.2 Hypothesis Development: Risk Propensity, Agency Theory, and Earnings Management

An individual‘s risk preference can be defined as an individual‘s orientation toward taking chances in uncertain decision making context (Koh, 1996). Certified management accountants or controllers tend to be moderate risk takers. However, non-certified management accountants or controllers have a greater propensity to take risk than certified management accountants or controllers (Master and Deines, 2011). It is believed that accountants prefer to take risks in environment where they have some degree of control or skill to manage earnings. If it is related to agency theory‘s assumption that people are self- interest, then it can be deducted that accountants with a high risk-taking propensity will tend to do income increasing earnings management. The hypothesis is formulated as follows: H2: Risk propensity positively influences income increasing earnings management. 3. Research Method

3.1 Sample

This study uses a sample that consists of accounting students in YKPN business school in Yogyakarta, Indonesia. Liyanarachchi (2007) found that accounting students may be adequate surrogates for practitioners in many decision making experiment. This research uses purposive sampling method. Criteria for selecting sample are: (1) accounting students of undergraduate degree, or accounting profession education program, or graduate degree, and (2) accounting students taking accounting theory subject or have passed accounting theory

159 subject. If these criteria are met, then chosen students are sample subjects as they have good understanding about earnings management. There are a total of 60 students that fulfilled these criteria, in second semester of 2014. Out of 60 students, 56 are usable responses and 4 are unusable responses.

3.2 Measurement of Variables

Research variables are measured by using questionnaire as follow:

1. Need for achievement variable is measured by using 5 items of questions. Each question has a 1 to 7 scale with 1 as strongly disagree and 7 as strongly agree. These question items are adapted from Yosuf et al. (2007).

2. Risk propensity variable is measured by 5 question items. The items have seven-point scale. The scale ranges from 1 (strongly disagree) to 7 (strongly agree). The questions are adapted from Paunescu and Cantaragiu (2012).

3. Six question items are developed to measure income increasing earnings management. These consist of 2 questions of accounting method change, 2 questions of accounting estimation manipulation, and 2 questions about real activity manipulation. The questions have scales of 1 to 7 with 1 as strongly disagree and 7 as strongly agree.

3.3 Data Analysis Method

Data analysis involves validity and reliability testing of instrument and multiple regression analysis is used to test hypothesis 1 and 2. The dependent variable is earnings management and the main independent variables are need for achievement and risk propensity. These variables are measured as metric scales. Job is used as control variable. It is a non-metric variable. The multiple regression equation that is used to test the hypotheses is as follow:

EM= β0 + β1.NA + β2.RP + β3.JOB + ε (1)

where EM= Earnings management; NA= Need for achievement; RP= Risk propensity; JOB= Job (1= students, 2= lecturers, and 3= professionals or managers)