Detection of Earnings Management Practices Through Discretionary Loan Loss Provisions at Rural Banks in West Java, Central Java, and East Java During the Sak Ep Transition Period (2023–2025)

This study examines whether the transition from the rule-based PPAP provisioning regime to the judgment-based CKPN regime under the Indonesian Financial Accounting Standards for Private Entities (SAK EP) is accompanied by a change in the intensity of earnings management through discretionary loan loss provisions (DLLP) in rural banks (Bank Perekonomian Rakyat/BPR). The novelty of the study lies in using 2023–2025 as a transition window that combines the last two years of the PPAP regime and the first year of the CKPN regime in a single sample, allowing the link between the scope of accounting discretion and income smoothing to be observed among small, unlisted banks, a segment rarely examined in the bank earnings management literature. Panel data of 556 conventional BPRs (1,649 bank-year observations) in West Java, Central Java, and East Java are analysed using a two-stage estimation approach. The results show that non-performing loans are an important determinant of loan loss provisions, whereas pre-managed earnings are positively associated with DLLP, consistent with income smoothing. This association is weak under the PPAP regime but becomes markedly stronger in the first year of CKPN adoption, accompanied by a higher share of banks showing strong discretion, mostly in the form of over-provisioning. The findings enrich positive accounting theory by suggesting that the intensity of income smoothing is not constant but is associated with the scope of judgment permitted by accounting standards, and they offer implications for risk-based supervision by OJK and LPS during the early implementation of SAK EP.