NAVIGATING EARNINGS MANAGEMENT: THE ROLE OF FINANCIAL STABILITY AND CREDIT RISK IN RURAL BANKS

Abstract

This study aims to examine the influence of Non-Performing Loans (NPL), Return on Assets (ROA), Net Interest Margin (NIM), Capital Adequacy Ratio (CAR), and Loan Loss Provision (LLP) on earnings management practices in rural banks (BPR) in the Jember-Indonesia. The findings reveal that among the five variables tested, only NPL significantly impacts earnings management decisions. The operational activities of BPRs, which are more straightforward and focused on providing credit services, particularly to small and medium-sized enterprises, make credit distribution their primary source of income, resulting in a more homogeneous credit portfolio. High NPL values, due to poor credit management, can negatively affect the financial health of BPRs and, ultimately, their financial performance. Therefore, BPR management endeavors to maintain control over the NPL ratio, with one of the efforts being through earnings management practices. The study also finds that although ROA, NIM, CAR, and LLP do not significantly influence earnings management individually, they do have a combined effect on these practices. The combination of credit risk, profitability pressure, capital requirements, and credit risk management needs can motivate management to engage in earnings management to maintain reported performance stability