Narcissistic CEOs, quality of internal audit function, real earnings management, cash flow from operation (CFO), production costs, discretionary expenses


This study aims to investigate the roles of internal audit quality on the effects of narcissistic Chief Executive Officers (CEOs) to earnings management through real activities manipulation.  The research design is quantitative method using secondary data. The sample used in this study consisted of  116 manufacturing Companies which are listed on Indonesia Stock Exchanges for the period of 2013 to 2015. Earnings management through real activities manipulation which is also called real earnings management is proxied with three patterns: cash flow from operation (CFO), production costs, and discretionary expenses as developed by Roychowdhury (2006). The results show that narcissistic CEOs has a positive and significant effect toward real earnings management in the pattern of cash flow from operation and in the pattern of discretionary expenses. Narcissistic CEOs has no effect toward real earnings management in production costs pattern. The results of this study also provide empirical evidence that quality of internal audit can alleviate the influence of narcissistic CEOs toward real earnings management in the pattern of cash flow from operation. Meanwhile, internal audit quality can not mitigate the effects of narcissistic CEOs toward real earnings management in the patterns of production costs and  discretionary expenses. 

Full Text : PDF

  1. Alarlooq, M.N.M., Aslani A., & Azadi B. (2014) Accounting Conservatism Impact on Real Earnings Management. International Journal of Acconting Research, 1 (12), 71-76.
  2. Amernic, J. H., & Craig, R.J. (2010) Accounting as a facilitator of extreme narcissism. Journal of Business Etchics, 96 (1), 79-93.
  3. Bapepam & LK decree no. Kep-496/BL/2008 about the Establishment and Standard for the Preparation of Internal Audit Charter.  28th November 2008. 
  4. Bruesch, T., & Pagan A. Pagan. (1980) The LM test and its Application to Model Specification in Econometrics, Review of Economic Studies, 47, 239-254
  5. Chatterjee, A., & Hambrick, D. C. (2007) It’s All about Me: Narcissistic CEOs and their Effects on Company Strategy and Performance. Administrative Science Quarterly, 52 (3), 351-386.
  6. Chatterjee, A., & Hambrick, D. C. (2011) Executive Personality, Capability Cues, and Risk Taking: How Narcissistic CEOs React to Their Successes and Stumbles. Administrative Science Quarterly, 56 (2), 202-237.
  7. Dang, C., Li, Z., & Yang C. (2017) Measuring Firm Size in Empirical Corporate Finance. Journal of Banking and Finance. [Online]. Available from: Doi:10.1016/j-jbankfin.2017.09.0006 [Accessed 20th April 2016)
  8. Dechow, P., & Dichev, I. (2002) The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, 77 (4), 35-59.
  9. Duchon, D., & Drake, B. (2009) Organizational narcissism and various behaviour. Journal of Business Ethics, 85 (3), 301-308.
  10. Dyreng, Scott D., Hanlon, M. & Maydew E.L. (2010) The Effects of Executives on Corporate Tax Avoidance, The Accounting Review, 85 (4), 1163-1189. 
  11. Edinburgh, L. G., Gunny, K. A., Hee, K. W., & Soderstorm, N. (2011) Earnings Management Using Real Activities: evidence from non profit hospitals. The Accounting Review, 86 (5), 1605-1630.
  12. Ege, S Matthew. (2015) Does Internal Audit Function Quality Deter Management Misconduct. The Accounting Review, 90 (2), 495-527.
  13. Feng, M., Ge, W., Luo, S. & Shevlin, T. (2011) Why do CFOs become involved in material accounting manipulations?  Journal of Accounting and Economics, 51, 21-36.
  14. Gitman, L. J., & Zutter, C. J. (2015) Principles of Managerial Finance. 14th edition London, Pearson Education Limited.
  15. Gramling, A. A., & Hermanson, D. R. (2009) Internal audit quality: Would we know it if we saw it. Internal Auditing, 24 (1), 36-39.
  16. Grijalva, E. & Harms, P.D. (2014) Narcissism: An Integrative Synthesis and Dominance Complementary Model. The Academy of Management Perspectives, 28 (2), 108-127.
  17. Gujarati, D. N., & Porter, D. C. (2009) Basic Econometrics. New York, McGraw-Hill
  18. Heij, C., & De Boer, P., Franses, P. H., Kloek, Teun.,  & Van Dijk, H. K. (2004) Econometric Methods wth Applications in Business and Economics.  New York, Oxford University Press. 
  19. Horne, J. C. V., & Wachowic, J. M. (2009) Fundamentals of Financial Management. 13th edition. London, Prentice Hall.
  20. Im, C. C., Kim, J. H., & Choi, M. K. (2015) Dividend policy and earnings     management: based on
  21.      discretionary accruals and real earnings management. International Journal of u- and e- Service Science and technology, 9 (2), 137-150.
  22. Jafarpour, M., & Soumehsaraei, B. G. (2012) Investigate REM and AEM     from the perspective of Income Smoothing. International Journal of Innovative Research in Science, 2 (12), 7256-7263.
  23. Jensen, M.C., & Meckling, W.H. (1976) Theory of The Firm: Managerial Behavior, Agency Costs, and Ownership Structure. Journal of Financial Economics, 3, 305-360.
  24. Jeong, W. G. E. (2014) Boards, Takeover Protection, and Real Earnings Management. Review of Quantitative Finance Accounting, 43(4), 651-682.
  25. Jiang, J. X., Petroni, K. R., & Wang, I. Y. (2010) CFOs and CEOs: Who have the most influence on earnings management? Journal of Financial Economics, 96, 513-526.
  26. Judge, T.A., Piccolo, R,F., & Kosalka, T. (2009) The bright and dark sides of leader traits: A Review and Theoritical Extension of the Leader Trait Paradigm. The Leadership Quarterly, 20, 855-875.
  27. Kalgo, S. H., Noordin, B. A. A., Nahar, H. S., & Turmin, S. Z. (2015) The Impact of Institutional Investors on Real and Accruals Earnings Management around IPO: Evidence from Malaysia Emerging Market. Capital Market Review, 23, 65-83.
  28. Lubojacky, C. (2017) The effects of CEO Tenure on entrepreneurial orientation a firm performance. Academy of Management Proceeding [Online] Available from: doi: 10.5465/AMBPP [Accessed 14th April 2016].
  29. Littrell, R. F., & Nkomo, S. M. (2005) Gender and race differences in leader behaviour preferences in South Africa. Women in Management Review, 20 (8), 562-580.
  30. Malik, M. (2011) Corporate Governance and Real Earnings Management: the role of board and institutional investors. Journal of  Knowledge Globalization, 8 (1), 37-87.
  31. McMahon, G., & Rosen, A. (2009) Narcissism at Work. [Online] Available from: http://training [Accessed 11th April 2016].
  32. Murwaningsari, E., Utama, S., & Rossieta, H. (2015) The Combined Effects of Financial Derivatives and Discretionary Accruals on the Value relevance of Earnings and the Book Value of Equity, Gadjah mada International Journal of Business, 17 (2), 179-198.
  33. Nurcahyo, R. & Wibowo, A. D. (2015) Manufacturing Capability, Manufacturing Strategi and Performance of Indonesia Automotive Componen Manufacturer, 12th Globar Conference on Sustainable Manufacturing, Procedia IEP, 26, 653-657.
  34. Ouimet, G. (2010) Narcissistic Leadership in Organizations: towards an integrated research model. Journal of Managerial Psychology, 25.
  35. Olsen, K. J., Dworkis, K. K., & Young, S. M. (2014) CEO Narcissism and Accounting: A Picture of Profits. Journal of Management Accounting Research, 26 (2), 243-267.
  36. Olsen, K. J., & Stekelberg, J. M. (2016) CEO Narcissim and Corporate Tax Sheltering, The journal of the American taxation association, 38 (1), 1-22.
  37. O’Reilly III, C. A., Doerr, B., Caldwell, D. F., & Chatman, J. A. (2013) Narcissistic CEO and Executive Compensation. Leadership Quarterly, 25, 218-231.
  38. Powell, G. N., & Butterfield, D. A. (2003) Gender, gender identity, and aspirations to top management. Women in Management Review, 18 (1/2), 88-96.
  39. Prawitt, D. F., Smith, J. L., & Wood, D. A. (2009) Internal audit quality and earnings management.The Accounting Review, 84(4), 1255-1280.
  40. Qi, B., Yang, R., & Tian G. (2014) Can Media Deter Management from Manipulating Earnings: Evidence from China. Review of Quantitative Finance and Accounting, 42 (3), 571-597.
  41. Rijsenbilt, A. (2016) CEO Narcissistic: Measurement and Impac. Erasmus Research Institute of Management, 2011. Retrieved on 13 April 2016.
  42. Rijsenbilt, A., & Commandeur H. (2013) Narcissus Enter the Courtroom: CEO Narcissism and Fraud, Journal of Business Ethics, 117, 413-429.
  43. Roychowdhury, S. 2006. Earnings Management Through Real Activities Manipulation. Journal of Accounting and Economics, 42, 335-370.
  44. Scott, W. R. (2015) Financial Accounting Theory. Pearson: Toronto
  45. Sawyer, L. B., Dittenhofer, M. A. & Scheiner, J. H. (2003) The Practice of Modern Internal Auditing. The IIA (The Institute of Internal Auditors).
  46. Serfling, M. (2014) CEO Age and the Riskiness of Corporate. Journal of Corporate Finance, 25, 251-273.
  47. Widarjono, A. (2013) Ekonometrika: Pengantar dan Aplikasi. Jakarta, Ekonisia. 
  48. Zang, A. Y. (2012) Evidence on the tradeoff between real activities manipulation and accrual-based earnings management. The Accounting Review, 87 (2), 675-703.
  49. Zhu, D. H., & Chen, G. (2015) CEO Narcissism and the impact of Prior Board Experience on Corporate Strategy. Administrative Science Quarterly, 60 (1), 31-65.