Financial distress, cash holding, and its effect on earnings management with internal control as a moderator

https://doi.org/10.35912/ijfam.v7i3.2914
Published: Dec 3, 2025

Abstract:

Purpose: This study aims to analyze the effect of financial distress and cash holding on earnings management, with internal control as a moderating variable. The research seeks to explain how financial conditions and liquidity influence managerial decisions in presenting financial statements.

Methodology/Approach: The study uses manufacturing companies listed on the Indonesia Stock Exchange (IDX) that consistently published annual reports from 2021–2023, totaling 130 firms. Data were obtained from audited financial statements through the official IDX database. Multiple linear regression is used to examine the direct effects of financial distress and cash holding on earnings management, while moderated regression analysis tests the moderating role of internal control.

Results/Findings: The results show that financial distress has a positive effect on earnings management, indicating a higher likelihood of manipulation when firms face financial pressure. Cash holding has a negative effect on earnings management, suggesting that higher liquidity reduces incentives to manipulate earnings. Internal control does not moderate the relationship between financial distress, cash holding, and earnings management.

Conclusion: Financial distress and cash holding significantly influence earnings management, but internal control does not act as a moderating factor.

Limitations: This study is limited to manufacturing firms during 2021–2023, so results may differ in other sectors or periods.

Contribution: This study contributes by examining accrual earnings management with internal control as a moderating variable, a combination that remains underexplored in prior research.

Keywords:
1. Cash Holding
2. Earnings Management
3. Financial Distress
4. Internal Control
Authors:
1 . Christopher Verrel
Tarumanegara University, Jakarta, Indonesia
2 . Ignatius Roni Setyawan
Tarumanegara University, Jakarta, Indonesia
https://orcid.org/0000-0003-0678-4179
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How to Cite
Verrel, C., & Setyawan, I. R. (2025). Financial distress, cash holding, and its effect on earnings management with internal control as a moderator. International Journal of Financial, Accounting, and Management, 7(3), 407–417. https://doi.org/10.35912/ijfam.v7i3.2914
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Issue & Section
Vol. 7 No. 3 (2025): December
Articles
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References

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    Al-Shaer, H., & Zaman, M. (2021). Audit committee disclosure tone and earnings management. Journal of Applied Accounting Research, 22(5), 780-799. doi:https://doi.org/10.1108/JAAR-12-2020-0243

    Aljughaiman, A. A., Nguyen, T. H., Trinh, V. Q., & Du, A. (2023). The Covid-19 outbreak, corporate financial distress and earnings management. International review of financial analysis, 88, 102675. doi:https://doi.org/10.1016/j.irfa.2023.102675

    Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The journal of finance, 23(4), 589-609. doi:https://doi.org/10.2307/2978933

    Arisandi, A., Islami, H. A., & Soeprajitno, R. (2022). Internal control disclosure and financial reporting quality: Evidence from banking sector in Indonesia. E-Jurnal Akuntansi, 32(2), 3797-3806. doi:https://doi.org/10.24843/EJA.2022.v32.i02.p15

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    Cohen, D. A., Dey, A., & Lys, T. Z. (2008). Real and accrual?based earnings management in the pre?and post?Sarbanes?Oxley periods. The accounting review, 83(3), 757-787. doi:https://doi.org/10.2308/accr.2008.83.3.757

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    Edi, E. (2023). The relation between CEO reputation, financial distress, internal control, and earnings management.

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    Galatio, E., & Trisnawati, E. (2024). Earnings Management, Financial Performance and Its Influence on Tax Avoidance with Independent Commissioners as Moderation. Ganaya: Jurnal Ilmu Sosial dan Humaniora, 7(3), 77-90. doi:https://doi.org/10.37329/ganaya.v7i3.3318

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    Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Performance matched discretionary accrual measures. Journal of accounting and economics, 39(1), 163-197. doi:https://doi.org/10.1016/j.jacceco.2004.11.002

    Kusuma, Y. M., & Lukman, H. (2023). The Impact Of Tax Avoidance, Profitability, Leverage, And Company Size On Earnings Management. International Journal of Application on Economics and Business, 1(3), 1382-1394. doi:https://doi.org/10.24912/ijaeb.v1i3.1382-1394

    Putri, M., & Ary Binsar Naibaho, E. (2022). The influence of financial distress, cash holdings, and profitability toward earnings management with internal control as a moderating variable: the case of listed companies in ASEAN countries. Jurnal Akuntansi Dan Keuangan Indonesia, 19(1), 6. doi:https://doi.org/10.21002/jaki.2022.06

    Rahman, S. A. Y., Rahayu, A., & Hendrayati, H. (2025). Digital marketing evolution: Understanding the role of AI and Big Data in shaping marketing strategies. International Journal of Financial, Accounting, and Management, 7(2), 197-211. doi:https://doi.org/10.35912/ijfam.v7i2.2593

    Ramadhan, M., & Firmansyah, A. (2022). The Supervision Role of Independent Commissioner in Decreasing Risk From Earnings Management and Debt Policy. Accounting Analysis Journal, 11, 31-43. doi:https://doi.org/10.15294/aaj.v11i1.58178

    Ridanti, P. P., & Suryaningrum, D. H. (2021). The effect of financial distress, internal control, and debt structure on earnings management in companies registered in Indonesia Stock Exchange. JASa (Jurnal Akuntansi, Audit dan Sistem Informasi Akuntansi), 5(3), 458-472. doi:https://doi.org/10.36555/jasa.v5i3.1630

    Saniamisha, I. M., & Jin, T. F. (2019). Faktor-faktor yang mempengaruhi manajemen laba pada perusahaan non keuangan di BEI. Jurnal Bisnis dan akuntansi, 21(1a), 59-72. doi:https://doi.org/10.34208/jba.v21i1a-1.709

    Setiany, E. (2021). The effect of investment, free cash flow, earnings management, and interest coverage ratio on financial distress. Journal of Social Science, 2(1), 64-69. doi:https://doi.org/10.46799/jss.v2i1.86

    Sitanggang, T., Aryati, T., Pamungkas, B., & Agoes, S. (2022). The Role of the Audit Committee to Increase the Influence of Audit Quality and Internal Control on Earning Management. Technium Soc. Sci. J., 29, 399. doi:https://doi.org/10.47577/tssj.v29i1.6051

    Spence, M. (1978). Job market signaling Uncertainty in economics (pp. 281-306): Elsevier.

    Sugiarto, C., Trisnawati, E., & Verawati, V. (2024). Pengaruh Karakteristik Direktur Utama Dan Kebijakan Dividen Terhadap Manajemen Laba Dengan Komisaris Independen Sebagai Variabel Moderasi. Ganaya: Jurnal Ilmu Sosial dan Humaniora, 7(3), 124-138. doi:https://doi.org/10.37329/ganaya.v7i3.3360

    Triadji, I., Busnetty, I., & Sihombing, P. (2024). Alternative solution to achieve abnormal returns on the Indonesian Stock Exchange. International Journal of Financial, Accounting, and Management, 6(3), 347-359. doi:https://doi.org/10.35912/ijfam.v6i3.2000

    Wilamsari, F., Wardayati, S. M., & Winarno, A. W. (2022). Financial Distress and Earnings Management: The Role of Internal Control as Moderating Variable. International Journal of Social Science and Business, 6(3), 304-309.

    Wilson, W. (2019). Pengaruh Mekanisme Good Corporate Governance, Leverage, dan Ukuran Perusahaan Terhadap Manajemen Laba (Studi Empiris pada Perusahaan Kategori Indeks Sri-Kehati yang Terdaftar dalam Bursa Efek Indonesia Periode 2013-2017)/Wilson/35150090/Pembimbing: Ari Hadi Prasetyo.

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  2. Al-Shaer, H., & Zaman, M. (2021). Audit committee disclosure tone and earnings management. Journal of Applied Accounting Research, 22(5), 780-799. doi:https://doi.org/10.1108/JAAR-12-2020-0243
  3. Aljughaiman, A. A., Nguyen, T. H., Trinh, V. Q., & Du, A. (2023). The Covid-19 outbreak, corporate financial distress and earnings management. International review of financial analysis, 88, 102675. doi:https://doi.org/10.1016/j.irfa.2023.102675
  4. Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The journal of finance, 23(4), 589-609. doi:https://doi.org/10.2307/2978933
  5. Arisandi, A., Islami, H. A., & Soeprajitno, R. (2022). Internal control disclosure and financial reporting quality: Evidence from banking sector in Indonesia. E-Jurnal Akuntansi, 32(2), 3797-3806. doi:https://doi.org/10.24843/EJA.2022.v32.i02.p15
  6. Binekasri, R. (2023). Soal Dugaan Laporan Keuangan WSKT Dipoles, OJK Buka Suara: CNBC Indonesia. https://www. cnbcindonesia. com/market/20230704153444-17 ….
  7. Chen, H., Yang, D., Zhang, J. H., & Zhou, H. (2020). Internal controls, risk management, and cash holdings. Journal of Corporate Finance, 64, 101695. doi:https://doi.org/10.1016/j.jcorpfin.2020.101695
  8. Cohen, D. A., Dey, A., & Lys, T. Z. (2008). Real and accrual?based earnings management in the pre?and post?Sarbanes?Oxley periods. The accounting review, 83(3), 757-787. doi:https://doi.org/10.2308/accr.2008.83.3.757
  9. Dechow, P. M., Hutton, A. P., Kim, J. H., & Sloan, R. G. (2012). Detecting earnings management: A new approach. Journal of accounting research, 50(2), 275-334. doi:https://doi.org/10.1111/j.1475-679X.2012.00449.x
  10. Edi, E. (2023). The relation between CEO reputation, financial distress, internal control, and earnings management.
  11. Eladira, E., Lubis, Y., & Sakti, I. (2024). The effect of e-assessment on performance, competency, worklife balance, and motivation on civil servant performance. International Journal of Financial, Accounting, and Management, 6(2), 165-181. doi:https://doi.org/10.35912/ijfam.v6i2.1825
  12. Galatio, E., & Trisnawati, E. (2024). Earnings Management, Financial Performance and Its Influence on Tax Avoidance with Independent Commissioners as Moderation. Ganaya: Jurnal Ilmu Sosial dan Humaniora, 7(3), 77-90. doi:https://doi.org/10.37329/ganaya.v7i3.3318
  13. Gunawan, B., & Putra, H. (2021). Determinant of Financial Distress: Empirical Study of Manufacturing Companies Listed on the Indonesia Stock Exchange and Malaysia Stock Exchange Period 2017 – 2018.
  14. Ikwuo, A. K., Nworie, G. O., & Moedu, V. O. (2024). Implementation of AI-driven automation: A game-changer in accounting research. International Journal of Financial, Accounting, and Management, 6(3), 385-398. doi:https://doi.org/10.35912/ijfam.v6i3.2522
  15. Jensen, M. C., & Meckling, W. H. (2019). Theory of the firm: Managerial behavior, agency costs and ownership structure Corporate governance (pp. 77-132): Gower.
  16. Jessica, E. I. (2021). Internal Control Sebagai Moderasi Dalam Hubungan Financial Distress Dengan Accrual Earnings Management. Jurnal Paradigma Akuntansi, 3(4), 1699-1708. doi:https://doi.org/10.24912/jpa.v3i4.15280
  17. Jones, J. J. (1991). Earnings management during import relief investigations. Journal of accounting research, 29(2), 193-228. doi:https://doi.org/10.2307/2491047
  18. Kalbuana, N., Utami, S., & Pratama, A. (2020). Pengaruh pengungkapan corporate social responsibility, persistensi laba dan pertumbuhan laba terhadap manajemen laba pada Perusaaan yang terdaftar di Jakarta Islamic Index. Jurnal Ilmiah Ekonomi Islam, 6(2), 350-358. doi:https://doi.org/10.29040/jiei.v6i2.1107
  19. Khafid, M., Tusyanah, T., & Suryanto, T. (2019). Analyzing the determinants of financial distress in Indonesian mining companies.
  20. Khuong, N. V., & Liem, N. T. (2020). Earnings management and cash holdings: Evidence from energy firms in Vietnam. Journal of international studies, 13(1). doi:https://doi.org/10.14254/2071-8330.2020/13-1/16
  21. Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Performance matched discretionary accrual measures. Journal of accounting and economics, 39(1), 163-197. doi:https://doi.org/10.1016/j.jacceco.2004.11.002
  22. Kusuma, Y. M., & Lukman, H. (2023). The Impact Of Tax Avoidance, Profitability, Leverage, And Company Size On Earnings Management. International Journal of Application on Economics and Business, 1(3), 1382-1394. doi:https://doi.org/10.24912/ijaeb.v1i3.1382-1394
  23. Putri, M., & Ary Binsar Naibaho, E. (2022). The influence of financial distress, cash holdings, and profitability toward earnings management with internal control as a moderating variable: the case of listed companies in ASEAN countries. Jurnal Akuntansi Dan Keuangan Indonesia, 19(1), 6. doi:https://doi.org/10.21002/jaki.2022.06
  24. Rahman, S. A. Y., Rahayu, A., & Hendrayati, H. (2025). Digital marketing evolution: Understanding the role of AI and Big Data in shaping marketing strategies. International Journal of Financial, Accounting, and Management, 7(2), 197-211. doi:https://doi.org/10.35912/ijfam.v7i2.2593
  25. Ramadhan, M., & Firmansyah, A. (2022). The Supervision Role of Independent Commissioner in Decreasing Risk From Earnings Management and Debt Policy. Accounting Analysis Journal, 11, 31-43. doi:https://doi.org/10.15294/aaj.v11i1.58178
  26. Ridanti, P. P., & Suryaningrum, D. H. (2021). The effect of financial distress, internal control, and debt structure on earnings management in companies registered in Indonesia Stock Exchange. JASa (Jurnal Akuntansi, Audit dan Sistem Informasi Akuntansi), 5(3), 458-472. doi:https://doi.org/10.36555/jasa.v5i3.1630
  27. Saniamisha, I. M., & Jin, T. F. (2019). Faktor-faktor yang mempengaruhi manajemen laba pada perusahaan non keuangan di BEI. Jurnal Bisnis dan akuntansi, 21(1a), 59-72. doi:https://doi.org/10.34208/jba.v21i1a-1.709
  28. Setiany, E. (2021). The effect of investment, free cash flow, earnings management, and interest coverage ratio on financial distress. Journal of Social Science, 2(1), 64-69. doi:https://doi.org/10.46799/jss.v2i1.86
  29. Sitanggang, T., Aryati, T., Pamungkas, B., & Agoes, S. (2022). The Role of the Audit Committee to Increase the Influence of Audit Quality and Internal Control on Earning Management. Technium Soc. Sci. J., 29, 399. doi:https://doi.org/10.47577/tssj.v29i1.6051
  30. Spence, M. (1978). Job market signaling Uncertainty in economics (pp. 281-306): Elsevier.
  31. Sugiarto, C., Trisnawati, E., & Verawati, V. (2024). Pengaruh Karakteristik Direktur Utama Dan Kebijakan Dividen Terhadap Manajemen Laba Dengan Komisaris Independen Sebagai Variabel Moderasi. Ganaya: Jurnal Ilmu Sosial dan Humaniora, 7(3), 124-138. doi:https://doi.org/10.37329/ganaya.v7i3.3360
  32. Triadji, I., Busnetty, I., & Sihombing, P. (2024). Alternative solution to achieve abnormal returns on the Indonesian Stock Exchange. International Journal of Financial, Accounting, and Management, 6(3), 347-359. doi:https://doi.org/10.35912/ijfam.v6i3.2000
  33. Wilamsari, F., Wardayati, S. M., & Winarno, A. W. (2022). Financial Distress and Earnings Management: The Role of Internal Control as Moderating Variable. International Journal of Social Science and Business, 6(3), 304-309.
  34. Wilson, W. (2019). Pengaruh Mekanisme Good Corporate Governance, Leverage, dan Ukuran Perusahaan Terhadap Manajemen Laba (Studi Empiris pada Perusahaan Kategori Indeks Sri-Kehati yang Terdaftar dalam Bursa Efek Indonesia Periode 2013-2017)/Wilson/35150090/Pembimbing: Ari Hadi Prasetyo.