abstrack - Centro Multi Akuntansi

THE ACCOUNTING ATTENDANCE IN TRADING ACTIVITY OF THE
BRAWIJAYA PERIOD: AN ARCHAEOLOGICAL PERSPECTIVE
Novrida Qudsi Lutfillah
Eko Ganis Sukoharsono
Aji Dedi Mulawarman
Yeney Widya Prihatiningtias
ABSTRACK
The purpose of this study are to examine and interpretation the existence of
accounting in trading activity in the reign of Brawijaya. Qualitative research by
integrating archaeological research methods have been used in this research. The
research data is artefaktual data and textual data. Analysis data was performed
by (1) identifying the context data of the reign of Brawijaya, (2) the process of
recognition of the similarities and differences, (3) alignment, (4) historical
imagination to reflect the value. The results showed the existence of accounting in
trading activity seen by the officials in charge of trade (tuha dagang), the
determination of the Psar, commodities trading, the use of money and trade tax.
Which reflected the value of these activities are the presence of harmony,
tolerance and the concept of tuna sitik bathi sanak.
Keyword: Market, Accounting, King of Brawijaya.
INTRODUCTION
The existence of accounting has always progressing in accordance with the
accounting
practice
where
environmental
factors.
Historical
constructions
can
provide a different view of the accounting practices that need to be understood
based on the scope of social life, from the smallest to the largest coverage, from
the past to the future. Historical research accounting issues become a topic among
researchers phenomenal accounting. Research related with it can be found through
the work of Parker (1997), Fleischman and Radcliffe (2005), Napier (2006).
According Their opinion accounting was strongly influenced by the social
context, politic and culture where accounting located. That means, accounting is
strongly associated with the dimension of time and environment where accounting
is (Napier, 2006: 445). So the issue of accounting practices in the reign of
Brawijaya (Kingdom of Majapahit) an interesting topic to be explored more
depth.
The existence of accounting was not for a single dimension. The
phenomenon of culture, economic system, political system and the particular local
social system, have important portion in the form of accounting. Accounting
forms in certain communities has own uniqueness and distinctiveness, so it cannot
be applied universally to other communities. The difference of the environment
accounting will give result in different accounting (Hopwood, 2005). Accounting
is not just a rational procedure to provide information for decision making and
control (as the study Watts and Zimmerman (1990), but accounting has
understood as a product that flexible to the environment in which accounting lived
and practiced (Napier, 2006). At this point, accounting can be said free value,
affected and affects the value of culture, economic system, political system and
social system in where the accounting is. It can be said accounting to be in every
pulse of life, ranging from past, current and future, including in the reign of
Brawijaya.
Make the kingdom as research sites is possible, given the richness of the
values contained in the traveling community and necessary for the time being.
Sukoharsono & Lutfillah (2007) in research the Kingdom of Singosari, stating:
"Accounting is not simply a method of calculation, but it is a
discipline with complex phenomena in which it is influences
the individual, organizational, and social order".
This article is in line with what has been described that accounting not only
limited to business affairs, but rather deals with a very broad social affairs. Based
on this statement, it can say that accounting is potentially occur in other
kingdoms, especially during the reign of Brawijaya
Based on this, the goal of this research is to examine and interpretation the
existence of accounting Indonesia, where accounting is not only viewed from the
side numerical computation and record. According Gerdin, Messner & Mouriksen
(2014) if the accounting practices focused only on the dimension calculative it
will lose another dimension that can provide a more comprehensive understanding
of accounting. Therefore this research see accounting on trading activity that can
not be separated from the social, cultural, economic, and political, by placing the
reign of Brawijaya as the focus of the investigation. Results of this study are
expected to contribute in the development of social science and culture, especially
as contribute ideas related to accounting science is influenced by aspects of social
life,
economy,
culture
and
politics
in
where
accounting
practice.
Another
contribution is to develop Indonesia accounting research by raising the value of
the local culture of Indonesia.
LITERATURE REVIEW
History and Accounting Concepts
Accounting has a long history, starting from emergence until existence
today. Accounting can be defined diverse depending on the angle of view and
emphasis used. Accounting means calculates can be used as accountability. Since
the
accounting
had
been
developed
which
includes
recording,
measuring,
sumarizing
and
disclosure
of
information
for
decision
making
in
business
organizations. Accounting can be considered as the language of business because
it is closely linked to the need to present the financial statements (Jusup, 2005).
Accounting, known as the media in providing information for interested
parties its presence has existed since prehistoric times. Schmandt and Besserat
(1988) in his research found that accounting has existed at 15000-10000 years ago
Paleolithic period (hunting). Accounting activity in this period is limited to keep
track of time by matching one by one mark (bones, pebbles, shells) with the
commodity.
The
need
for
accounting
is
actually
happening
to
8,000
years
ago,
which
began
when
humans
recognize
agriculture
(Neolithic).
For
survival,
farmers in is period using a token system (tablet) clay to explore basic goods.
The presence of Double Entry Bookkeeping originally developed from an
algebraic equation. The existence of these equations actually cannot be separated
from the involvement of Leonardo da Pisa in introducing the Hindu-Arabic
numerals and algebra to Western Europe (Storrar and Scorgie, 1988). Carruccio
(1954) in Storrar and Scorgie (1988) also mentions the development of algebra as
the most important contributions to modern mathematics comes from the Arabic.
India also has an important contribution in the form of mathematics Muslim India
as key findings Hindu figures, including zero number.
The Existence Of Accounting in Various World
The development of accounting history research during this more focused
on profit-oriented organization, while the distinctiveness of a non-profit and
religious organizations are always ignored (Kuasirikun and Constable, 2010).
Besides the discussion of accounting more to private companies with double-entry
method (Prieto, mate, and Old, 2006). According to Miller (1998, p. 619) There is
no essence or core accounting and there is no general principle that can bridge the
how the accounting should appear from the outside and behind the visible.
Accounting existence may change from time to time and exceed beyond
calculation.
The existence of accounting has seen in the most organizational settings in
Spain. In the 18th century the production of tobacco in the Royal Tobacco Factory
(RTF) Spain relocates. Displacement San Pedro is a factory located in the city
center of Seville to the new factory outside the city. Accounting controls in the
new plant is more focused on spatial models of production (Carmona, Ezzamel,
and Gutierrez, 2002). Strength of accounting as a tool that can facilitate the
transfer of ownership can be seen in the State of New Zaeland (1820-1890).
Documentation and record keeping are the key to commercial efficiency and
accountability in the public recognize letters. But, in the Maori community were
illiterate form of accountability in practice through oral testimonies and rituals
(accounting gramocentris).
The development of accounting and accountability occurred in Italy in
union Jesus XVI-XVII century. Accounting developed and refined on the basis of
absolute ideology from Roman Catholic doctrine during the Counter-Reformation.
Accounting rather than as a tool to measure and allocate economic resources that
facilitate the establishment of a hierarchy, but it is understood as the result of
complex
political
and
compromise
among
the
various
powers
(theological,
religious, political, institutional, and social) which marked the beginning of the
modern era (Quattrone, 2004 ). There are three systems of accountability Order
described in the report, namely: accounting for sin, accounting for the union, and
accounting for the soul. Accountability system is designed for accounting soul
and accounting sin. While accounting union is limited to the technical aspects of
accounting systems designed to manage the union of Jesus.
In Portugal, the development of management accounting can be seen with
the integration costs and the financial accounting system within the framework of
DEB at Silk Factory Company (SFC) in between the years 1745 to 1747
(Carvalho, Rodrigues, and Craig, 2007). In China, accounting changes based
dynasty (Auyeung, 2002). Starting from the Zhou dynasty (1100-771 BC) which
uses accounting Sanzhufu (method of balancing the three pillars) are almost the
same as the singlet entry bookkeeping. Accounting became more sophisticated
during the Ming Dynasty (1368-1644).
The existence of accounting in the history of Indonesia was exposed in the
implementation of accounting Indonesia in the Singosari Kingdom (1222-1292).
The study was conducted by Lutfillah, Sukoharsono & Djamhuri (2007) describe
the accounting period The Singosari kingdom is seen in the role of accounting in
the social life of society, the role of the market, the use of letters, language,
numbers and calculation of the tax mechanism. Subsequent research conducted by
Budiasih, Sukoharsono, Rosidi, and Mulawarman (2012). This study on the
existence of accounting in the Kingdom Singhamandawa in Bali (989-1011). The
results showed that the accounting practices had been applied. Accounting report
is called accounting period Udayana, which consists of five accounting reports,
namely: agriculture, tax, trade, assets and gifts.
Indonesia accounting track record in the Ancient Mataram future about
activity tax (VII-XI century AD) is describe in the research Lutfillah and
Sukoharsono (2013). Results of the study provide the interpretation that the
activity records and tax reporting will be undertaken by the kingdom contains the
value of sepi ingpamrih, rame ing gawe. Research on accounting activities in the
ancient Javanese seen in the establishment of Sima (Lutfillah, 2014). The research
concludes that the determination of accounting practices Sima has the motive and
purpose, namely: (1) give privileges to certain regions; (2) strengthen and balance
the power of the Sima institutions with religious social institutions. Accounting
practices and the role of accountants (called Citralekha) is evident in the ritual
ceremony SIMA determination. The values are reflected in accounting practices
SIMA determination, namely: the blessing and peace of life in building
prosperity, Purity themselves as servants of the covenant with the Creator.
Based on the discussion about the existence of accounting in various parts
of the world, it can be concluded that the accounting phenomenon not only be
understood within the scope is limited to an enterprise. State and religious
institutions can associate with accounting, where accounting forms also can not be
universe. Although many claim that the use of Double Entry Bookkeeping is the
best way of accounting, it is not necessarily simply be adopted by other countries
that have different social and cultural.
RESEARCH METHODS
The research method is a step that will be conducted by researchers to find
answers the research questions. This study is qualitative research that aims to
explore the problem and understand the complex issues in the field naturally and
not using statistics as a tool of analysis (Creswell, 2013). Therefore, this study
uses primary data from the field entirely through in-depth interviews, observation
and
documentation.
Additional
research
methods
using
historical
disciplines.
Archaeology is used in this study reveal the trading activities in the reign of
Brawijaya. Archeology associated with the legacy of the past from visual data,
The discipline aim to reveal the past of human life through the study of relics of
ancient objects. Research sites in this study is the kingdom of Majapahit.
Actually, the presence of Majapahit was gone. Then Trowulan Museum in
Mojokerto has been considered as heritage sites Majapahit is use as a starting
point for tracing Majapahit. Furthermore, the Jakarta Museum and other museums
are still associated with the relics in the Majapahit period.
Source of data in this research is secondary data source from books or
articles written by historians and historical researchers. Books and articles that can
be developed on specific topics that have been determined by the researchers, in
this case is about the existence of accounting in trading activity. While the
primary source of largely derived from historical data that document or practices
described by the informant. These sources can be found in the literature which
have libraries and museums. The data used in this study is artefaktual data and
textual data. The data in this study artefaktual shaped Majapahit heritage building
in the future, such as temples and infrastructure, and other shapes are statues of
gods, inscription, as well as currency. Textual data can be text inscriptions,
literature and travel records which originated from foreign news.
Selection of informants is necessary to uncover behind the look and
develop contextual strategy. The selected informant is an informant who really
know the history of Majapahit. The informants in this study are Prof. Hasan
Djafar (Professor of Archaeology and history researcher Majapahit, Trigangga
(National Museum archaeologist) and Nurika Retniyawati (part of research and
archeology at the Museum Trowulan). Efforts by researchers in finding and
examine historical data that can be described as the detective work. in this case
there were many factors that needed researchers in examining the existence of
accounting in the reign of Brawijaya, such as logic, intuition, perseverance and
common sense.
Data analysis was performed by interpreting the material heritage in the
reign of Brawijaya, namely to (1) identify the context of data that has meaning to
the existence of accounting from trading activities, (2) related to and apart from
the context of the identification process, there is the recognition of equality and
difference. it is formulated in the context of the events and material objects that
have the same meaning as trading activity in the reign of Brawijaya, (3) the
alignment of the data material has been interpreted by the science of accounting in
this study, (4) to be able to interpret and determine the value contained behind the
trading activity then used historical imagination (Tuchman, 2009, p. 414). The
purpose of the historical imagination in this study is certain impressions which
give clues to researchers. The instructions to find the value of the existence of
accounting in trading activity in the reign Brawijaya based on interpretation of
data derived from the past.
RESULTS AND DISCUSSION
Overview Trading in the Brawijaya Period
Brawijaya administration included
in
the
study
heyday
of
the
Majapahit
kingdom.
Majapahit
empire
has
a
proud
history,
not
only
illustrious
civilization
but also the glorious inheritance which was sent to Indonesia. Kingdom pioneered
by Raden Wijaya 1have a very long age that 185 years old (1293 AD to 1478 AD),
controlled almost the entire archipelago to the XV century (Adji, 2013, p.12).
Brawijaya name is believed to derive from the word Bhra Wijaya which stands
Bhatara Wijaya. Name Brawijaya according to Pires (1513) as cited from Adji
(2013, pp. 117-118) is the name of Batara Wijaya derived from the name of a king
named Batara Vigiaya that reigned in Dayo. Brawijaya can be said the title given
to the kings who ruled in the kingdom of Majapahit. Brawijaya I was given for the
first ruler Raden Wijaya and so on in order to rule in the kingdom of Majapahit
(See table 1).
The terms of trade is generally used to describe the interrelationships that
at least performed by the two parties. Trading activity is an attempt to get the
goods through exchange with emphasis needs and social aspects. Differences
environment, availability of raw materials, technology is a factor of formation of
trade relations. The terms relating to trade can be traced to the source written in
ancient Javanese period stated in the inscription of the reign Kayuwangi (Suhadi,
1978, p. 3). Their position as tuha dagang or juru dagang or clerk supervisor
traders, trade shows that trade is an important aspect. The existence of the market
there will be a change in values, ideas, norms, beliefs and pattern of human
activity in society.
Trade during the King of Brawijaya can be seen from the inscription that
issued the days of Majapahit (Pinardi & Mambo, 1997: 182). The inscription
which can provide a snapshot of trading in the Brawijaya reign are: the inscription
Katiden (1395 AD), which contains about taxes rice (Pigeaud, 1962: III, 174), the
inscription Biluluk (1366 M) about the limits of exploitation of salt (Th. Pigeaud,
1962 : 5, 115). In addition, there are provisions that regulate the buying and
selling in the trading book of Kutara Manawadharmasastra. One inscription
mentions about the terms of buying and selling cattle. Apparently, the settings in
trading activity created as a tool of social control. Market order and trade
regulations have been set up in detail on the official market, the taxation of trade
and the terms of sale and purchase. This setting performed by the king to create
stability kingdom. Besides the lack of legislation in trading activity not only
serves as a tool to organize any action taken by the citizens of the kingdom and
punish any person who violates the rules. With the provision of the king is
believed to bring prosperity and create a secure and peaceful conditions in the area
of the Majapahit kingdom.
Markets as Existence Accounting On Trade Activity
The existence of accounting in trading activity can be seen by identifying
the sales transaction that occurred in the market. Markets in the reign of
Brawijaya has rules, systems and clear mechanism. The role of market indirectly
1
The fourth offspring Singhasari ruler Ken Arok and Ken Dedes, son Dyah Lembu Tal, grand
children Mahisa Campaka (Narasinghamurti). As known Before the kingdom of Majapahit birth,
has stood first in the year 1222 AD the kingdom of Singosari. The founder and The first king are
Ken Arok, with place center in Malang (Tumapel)
depicts King Brawijaya success in maintaining and protecting the security of
people in trading activity. To maintain the stability of trade, the king put the
official in charge of the market. In ancient Javanese inscriptions mentioned officer
in charge of trade with mapkan, mangraksa pasar, tuha dagang, hulu waras,
pakalangkang and pakalingking (Boechori, 1981: 69). With the term of office
board market, can be described that the market has been known as a venue for the
transaction or exchange of goods that have been ordered and organized.
The market can be represented as a gateway that connects a group of
people with different cultures. The market is a meeting place for citizens, serves
as
a
center
of
communication,
entertainment,
and
social
interaction.
The
emergence of markets cannot be separated from the needs of the local and
regional economic activity. In the inscription, the market is called the pkan or
pken (Raharjo, 2011: 288). Sale and purchase transactions generally take place in
the market which takes place in turns follows the calendar system five days a
week (pancawara). One cycle of this rotation in the Java language is now called
by the term spasar. The classification is based cosmology adopted at that time,
namely manis/legi, Paing, Pon, wage andKliwon (Nastiti, 2003: 55).
The cycle of spasar has associated with the system arrangement of a
village called panatur desa. Application of the concept pancawarna against
settlement system panatur desa is set on a market day turn around particular
village. Nastiti (2003) provides an overview Kliwon market is considered as a
wholesale market is held in the main village, where on this day the earned income
trader greater than the other. Wagai, the market is held in the village north. Manis
/ legi market conducted on the east. Pahing the market is held in the village
south, and the Pon market is held in the west (Sumadio, 1984: 244). Spasar
presence is a sign of a sense of harmony concept of a village with all four
neighboring villages are located in the four cardinal directions (Ossenbruggen,
1975: 7). The sense of harmony among villagers also extends to other villages that
have located at distance apart. This concept, according Wuryanto (1981: 87) not
only meaningful harmony, but also related to the problem in agrarian settlements.
Usually associated with the flow of water to flow the rice fields and village
security. This condition causes the formation of comunity between neighboring
villages.
The Accounting And The Commodity Trading
Trade is one of the determining factors accounting. Littleton (as quoted by
Alexander, 2002) explained that the trade relationship that includes the exchange
of goods in larger volumes can create the business community. This community is
needed to spur the implementation of a wide range of recording systems.
Commodities generally defined commercial goods are bought and sold. In the
inscription
mentioned
about
the
commodity
being
traded.
Goods
of
daily
necessities of life include, among other foodstuffs, crops, animals (cattle, poultry
and fish), and clothing materials.
Rice is the highly developed trade at that period. The merchants of East
Java since XM centuries brought rice and other crops to Maluku and Nusa
Tenggara. As an illustration of the many rice consumption in the ancient Javanese
society in Taji inscription (901 AD) mentioned that in the framework of the
ceremony zoning freed (sima), needed 57 bag (sack) rice, 6 buffaloes, 100
chickens. Additionally In the inscriptions found feathers positions hulu wras, is
the one who takes care of the details of the production of rice. Similarly, the post
of hulu air (upstream water) who has been duty to controlling and regulating
irrigation. In the inscription Panggumulan (902 M) is known sellers of rice (rice
traders). They were asked to follow the ceremony sima determination when they
passed the village to go to the market Panggumulan Sindinan. Thus, rice is not
just a merchandise in the village but it is a merchandise between villages, even
between islands.
Other commodities are fruits. The inscription mentioned fruiterer among
other sellers. Among these fruits that can be identified is the pineapple, sugar cane
is cut and tied. Various types of fruits are planted in the Majapahit period can be
known from the news China. obtained information about the different types of
fruits in Java, including papaya, coconut, and banana (Groeneveldt, 1960: 16).
Goods other daily life generated in coastal and inland is salt. In coastal areas, salt
water is produced by drying the sea. Salt is commodity that is quite important,
especially for the population in the interior. In Biluluk inscription (1366 CE),
mentioned the pagagarem namely the rights granted to the public inBbiluluk to
make salt. Chinese news mentions that the Ho-ling (Java) is very rich, there is
even a source of water in the soil that secrete salt (Groeneveldt, 1960: 13).
The other goods in the form of an animal is livestock, poultry, and fish.
Besides crops and livestock, commodities that are sold are manufactured goods
craftsmen, such as items made of metal. Import commodity in international trade
relations is an item that is not usually production at the Majapahit. Chinese news
notes mention the many luxury commodity goods, especially ceramics and silk
fabrics in bring the port in Java. Of India especially in the fabrics bring in good
quality (Raharjo, 2011: 292). Commodities are traded in the market carried out by
the interaction between buyers and sellers with the bargaining process. Meetings
with buyers and sellers to communicate directly able to influence consideration in
the pricing of goods. The concept of tuna sitik bathi sanak (loss of money, but get
family) still applies in transactions in the market. The trader sometimes not gets a
big advantage (Satak), but a profit (bathi) in the form of fraternal relations
(sanak). Pure business concept on the market in the Brawijaya reign is not only
advantage in terms of money, but rather in the social relations.
The Payment Tool in Trading Activity
The Majapahit are two forms of transactions in the trade. First conducted
in barter transactions. Barter exchange is based on comparison of unity that has
been established by both parties. Second, the transaction is done by using the
currency as a means of exchange. News from China mention the use of Chinese
copper coins in exchange for a large number of commodities spices. It added that
in conducting trade transactions in the currency used kepeng (Groeneveldt, 1960:
52). Search results in museum Trowulan Chinese copper coins are used as
payment in trade activity (Figure 2).
The currency in trading activity King Brawijaya have varying types.
Money is symbol as means of exchange of goods. Money in accounting is
fundamental object for accounting, because apart from being medium of exchange
as well as the monetary unit in accounting. Majapahit inscriptions mention the
currency of gold and silver in Java ranging in size from largest to smallest in
abbreviated form. Gold currency unit from largest to smallest gold marked with
the abbreviation su (Suwarna), ma (massa), ku (kupang). The value of the
currency is 1 Suwarna = 16 time = 64 kupang, where 1 is equivalent to 0,035 gold
Swarna. While silver is the currency of kati, dharana, masa, dan kupang (Pinardi
& Mambo, 1997: 186). Gold and silver currency assessed based on the weight of
objects (intrinsic value). All trade, especially items of great value, paid with gold
or silver with a weight that has been determined.
Gold and silver currency in the period majapahit not often mentioned in
inscriptions and manuscripts. The currency of copper, tin and brass which was
widely used at that time. Currency made of brass can be identified as local money
Majapahit and kepeng China. This currency is derived from a growing number of
Chinese people who come to these areas Majapahit and settled in the long term.
Based on an interview with Trigangga (2015) kepeng use Chinese or local money
Majapahit called Pisis (Javanese), which means money. The term first appeared in
the tablets Bendosari (± 1350 AD) from the reign of King Hayam Wuruk. Silver is
still commonly used as means of payment. As stated in the news China from the
Song Dynasty that in Java, people use pieces of silver as currency. The number of
outstanding Chinese kepeng during the Majapahit reinforced by the findings of
various types of terracotta piggy bank in Trowulan area, indicating that the
tradition of saving has been known at the time of Majapahit. In addition to the
kepeng China, in Trowulan Museum there is a collection of local currency called
the Majapahit gobog and silver. Gobog money is form of imitation of kepeng
China, because of the shape and decoration similar to kepeng China, although the
figure depicted, characterized by local, like wayang kulit.
Besides the type of currency, also found a number of tools made of metal
scales. For unit weight during the Majapahit there is little guidance in the form of
scales of stone with different weight sizes. It is estimated that these scales are
heavy gauge for buying and selling goods which weighed on the market. In
museum collections there are 19 pieces Trowulan weights of stone, with a weight
range between 8 kg - 25 kg. According to records at the museum Trowulan, partly
the scales is the result of a survey conducted Maclaine Pont (founder of the
museum Trowulan) in 1924, and several others were found in the area of
Mojokerto. Based on this evidence, means of payment and unit of measure in the
trading activities encourage the development of the monetary system. This
development illustrates that the existence of accounting at the same time with the
trading mechanism.
Tax From Trading Activity
Historical sources allow that the tax collected
activity. Tax consequences to trade the king shall set
from crops and trading
the course of trade and
provide
facilities
for
the
smooth
running
of
trade.
The
facility
can
be
shaped
market and transportation. Tax provisions of the traded goods has seen in an
inscription Katiden (1317M) in respect of taxes crops such as rice. The supervisor
picked up a tenth of the gold trade from the sheer number of rice as much as 2.2
pikul. Inscription Coral Bogem known that fish including merchandise and set
taxes for the owner of the pond. To pond of 3.5 acres is taxed as much as 1000
fish (Groeneveldt, 1960: 16). The other provisions, in the trade of animals is
limited amount of non-taxable. (Dwiyanto, 1995). For example buffalo 30
individuals, 40 ox tail and ducks in measuring the container. If the number of
animals exceeds the provisions will be taxed.
Taxation of goods traded is a security guarantee obtained by traders from
royal officials (Priyatmoko, 2015). In addition, taxes can create economic stability
kingdom that affect to the social and political stability. In the tax collection
activity occurs the social fabric betwen the kingdom with the taxpayer based on
on going. Delivery of taxes from the people for the kingdom have show loyalty to
strengthen the government's power kingdom. Restrictive trade policies are taxed
has the intention to prevent the accumulation of vendors selling wares on the
territory liberated by royal tax. So there is no tax evasion.
In addition to strictly enforce the law, the king of Brawijaya also prudent
and smart in the implementation of market institutions. King always allow people
to complain directly if there are have difficulties and problems. Raja also oversees
personnel policy market irregularities. Prasodjo (1987) tells the events market
officer who did not submit taxes to nayaka (central tax officials). Then the king
called officers (named Wasana Dinamwan) to inquire about the taxes that are not
paid into the state treasury. From the official explanation of the market can be
seen that tax money is not handed over in use to entertain a tax collector who ask
for more than it should. Where the tax officials had received a fixed salary from
the royal. After knowing violated, then the tax officers dealt with firmly and
demoted. based on these events, the king take seriously the market which facilitate
economic transactions in Majapahit. That is, the king did not just accept the
results of the tax, but also fulfill the right to market traders who pay taxes.
Upon reflection existence accounting in Trading Activities
CONCLUSIONS AND LIMITATIONS OF RESEARCH
The existence of accounting on trading activities clearly illustrated in the
market. The role of the market in the king Brawijaya not subsistence but also meet
the needs of social life. Trading activity shows the interaction between market
players with the royal government. The role of the market is the picture of trading
activity. Market as a means of measuring the success king of Brawijaya in
ensuring the welfare of people. The market mechanism by the king arranged in
regulations made for the creation of trade stability. The official who take care of
the market, designated by the king as a supervisor course of trade. The trading
system is made in such a way by the king to be able to oversee the economic life
of the people. King Brawijaya directly reviewing transactions, distribution and
commodity market trading. on the other hand, the king did not just accept the
results of trade tax, but also fulfill the right to market traders who pay taxes. The
existence
of
accounting
in
trading
activities
provide
value
harmony.
Harmony
value refers to the value of life from patterns behavior that characterize habits that
take place mainly at pasar. King activity as the ruler of a policy to create a process
of orderly exchange of goods. Policy conducted is accountability of king to the
people and for God.
The market is quite important role in relation to social interaction. The
psaran day prevailing in the king of Brawijaya is an attempt to bridge the needs of
people who far from the market. The spasar has concept harmony of village with
other villages are located far apart. The bargaining process is normal happening in
market. In this process, price determination promised by both parties, with no
aggrieved party in the transaction. The concept of tuna sitik bathi sanak (loss of
money, but get family) still applies in transactions in the market. it can be said
prices created a blend of agreement and fraternity.
This study has major limitations in the use of data. Not many evidence in
the king Brawijaya can be used as reference to describing the life of this period.
Even if there are available of data form inscriptions, but there have been limited
information and could not give complete due to age. So that the meaning of the
existence of accounting in trading activity carried out by the interpretation of the
informant and the author himself. Meaning the results could not be said to
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Lampiran
_____ ___________ The List Chronology Of The Kings Majapahit
Nama Raja
Gelar
1
2
3
4
5
6
7
8
9
10
11
12
Raden Wijaya
Kalagamet
Bhre Kahuripan
Hayam Wuruk
Bhra Hyan Wisesa
Suhita
Dyah Krtawijaya, Bhre
Tumapel
San Sinagara, Bhre
Pamotan, Kelin, Kahuripan
INTERREGNUM2
Dyah Suryawikrama, Bhre
Wenker
Dyah Suraprabhawa, Bhre
Tumapel, Bhre Pandansalas
Bhre Krtabhumi
Girindrawarddhana
Source: Djafar (2012)
2
Without King, There was no emporer that governed
Krtarajasa Jayawarddhana
Jayanagara
Tribhuwana Wijayottunga Dewi
Rajasanagara
Wikramawardhana
Prabhu Stri
Wij ayaparakramawarddhana
Masa
Pemerintahan
1293 - 1309
1309 - 1328
1328 - 1350
1350 - 1389
1389 - 1429
1447 - 1451
Raj asawarddhana
1451 - 1453
Girisawarddhana
1453-1456
1456 - 1466
Sinhawikramawarddhana
1466 - 1474
-
1468 - 1478
1474 - 1519
Dyah Ranawijaya, Bhattara i
Klin
Figure 1. Relief Traders In Relief Tigawangi Temple, Kediri, East Java
(Pamikul means Bring Merchandise in shoulder)
(Source: The National Museum, Photo: Collection MUNAS)
Figure 2. The Payment Instrument
(Source: Museum Trowulan, Photo: Personal Collection)
Brawijaya Period
Figure 3. The Hierarchy Trade Distribution Center The
Raharjo, 2011: 293)
(Source:
THE EFFECT OF ORGANIZATIONAL CULTURE, BUDGETING, INTERNAL
AUDIT, CENTRAL GOVERNMENT ACCOUNTING SYSTEM OF QUALITY
INTERNAL FINANCIAL REPORTING AND THE IMPLICATIONS OF
PERFORMANCE ACCOUNTING UNIT MINISTRY OF HEALTH
ORGANIZATION
IN WEST JAVA REGION
By:
Dr. Nursito, M.Ak
Dr. Setyani Dwi Lestari, ME ([email protected])
UNIVERSITY OF BUDI LUHUR
Abstract
This study was aimed to examine the influence of organizational culture, budgeting, audit and
the internal accounting system of the central government to the quality of internal financial
reporting, as well as its implications on organizational performance. The research was
conducted on 495 respondents from 592 Employees,a population in the region accounting
unit of the Ministry of Health in West Java. Test questionnaire was also conducted on 95
respondents before the study was done. Model analysis was conducted using Path Analysis
(path analysis.) Sub-structure research results revealed that both simultaneously culture
organization, budgeting, internal audit and accounting system of central government
influenced positive and significant impact on the quality of financial reporting internal
accounting unit of The Ministry of Health in the region of West Java. The main structure
revealed that good simultaneous internal audit and accounting system and the positive
influence of the central government was significant to the performance of the organization in
the area of accounting unit of the Ministry of Health in West Java. While the culture of the
organization, budgeting and financial reporting internal quality have no real direct influence
on the performance of the organization in the accounting unit of The Ministry of Health in the
region of West Java. The empirical findings of this study, the performance of the organization
in the area of accounting unit The Ministry of Health in West Java should be improved
through qualifiedfinancial reporting and to improve the quality of the financial reporting,
accounting systems an important determinant of the central government first; Secondly,
important factor of internal audit; The third important factor budgeting and organizational
culture while the fourth important factor quality of internal financial reporting is an important
factor.
Keywords: organizational culture, budgeting, internal control structure, audit
internalgovernment accounting system, financial reporting and organizational performance.
1. INTRODUCTION
The Government of Indonesia has made reformation of the state's financial management
towards the enactment of legislation package field state finances, namely Law No. 17 Year
2003 on State Finance, Law.The Law No. 1 of 2004 on State Treasury and Law 15 years
2004 stated that the accountability of the implementation of state and local budgets,
strengthen the performance demands on tuitionof public institutions. Performance can be
defined as forms of obligation to account the success or failure of a mission done by the
organization in achieving its goals and predeterminedobjectives.The result of the evaluation
of the CPC is still there, accounting and reporting cases of weakness. The case such as in the
financial statements, many governments still presented data which is not appropriate. It is
also still a lot of deviationsthat are found by the Audit Board in auditing government’s
financial reports especially in determining the quality of financial reporting. Plan of
budgeting will produce a budgeting system that is not good, but the effectiveness of the
planning itself in value based on the benefits of the process on budgeting plan, use, revision
and realization of the budget, but it is more general based on the overall success of the
organizational commitment in doing the task. Organizations that have employees with a
commitment to the higher organization will be willing to take their time in order to
proceedinformation in accordance with a description that reflects the relative strength of an
individual's identification and involvement within the organization. Based on the description
above, it is done a research on the influence of cultural organization, budgeting, internal
audit, accounting system of central government to the quality of reporting as well as the
internal financial implications on the organizationperformance in the accounting unit of
Ministry of Health, West Java. Formulation of the problem that can be arranged as follows:
1. Do culture organization, budgeting, structure of internal control, internal audit, and the
central government accounting system affects the quality of reporting Internal financial
partially or simultaneously?
2. Do culture organization, budgeting, internal audit, government accounting system the
center and the quality of financial reporting internal affect the performance organization
either partially or simultaneously?
The research purposes based on the formulation of the problem above are:
1. Determine the influence of organizationculture, budgeting, internal audit, and system
influential central government accounting on the quality of financial reporting internal either
partially or simultaneously;
2. Knowing organization culture, budgeting, audit Internally, the system central government
accounting and quality Internal financial reporting impact the performance of the
organization either partially or simultaneously;
2. THEORITICAL REVIEW
Organizational Culture
Organizational culture is a pattern of stable belief and shared values that developed within the
organization according to Gordon and Ditominso; time in the bird, (2014). Meanwhile,
Schein in Dwyer, (2013) defines that organizationculture, the assumptions and basic beliefs
were shared with members of the organization and a solution consistently can work well for a
group in facing external and internal problems, so it can be taught to new members as a
perception, thinking and feeling relationship with issues.
Budget
Budget in government accounting forms the basis for an activity that can be financed by
financial institution within a country/region. According to the government budget Regulation
No. 71 (2010; 42) is a guideline to the actions to be taken by the government plan which
includes revenues, expenditures, transfers and financing that are measured in units of dollars,
which are arranged according to specific classification systematically for the period. Budget
is a financial operating plan which includes estimates of expenditure proposed, and the
expected sources of income for finance within a specific time period,Sumarno (2010; 47).
Budgeting
According to Arif (2009: 124) budgeting is a translation of financial resources to various
human purposes. BPKP (2010; 28) defines, budgeting is a financial plan that shows
systematic allocation of humanresources, material and other resources.
BudgetingParticipation
Budgeting participation is a budget process that is conducted from top to bottom or from
bottom to top, Anthony and Govindarajan (2005: 373). According Mahsumet al., (2009: 49)
budgeting participation is an important stage because the budget is ineffective and not
oriented as a performance that can actually thwart programswhich have been developed
previously.
Budget Discussion
Discussion of the budget is aseries of activities to give accountablenotions or ideas of
activities / programs to be budgeted and implemented for the betterment of the
organization,David (2009: 157). Hansen and Mowen (2009: 376) arrange a principle of how
the budget discussions; how the budget is formed and maintained, then budget goal is an
attempt to the budget which is discussed in the presence of attempt to pass the budget as
much as possibly proposed in the discussion budget.
Budget Usage
Budget usage constitutes the authority to carry out activities or the program that has been set
in the form of budget work plan activities, Muslims (2011: 29). While the usage of budget
according to David (2009; 180) is an authority specially provided by the employer to perform
a variety of activities that have been previously proposed and carried out responsibly for the
progress of the organization.
Revised Budget
Revised budget is a gift authorization to the revised budget when original budget was
approved based on the basis of significant changes in conditions. According to Anthony and
Govindarajan (2005: 391), budget revisions may occur due to new developments, due to
changes in budget as the competence of the manager or led to rejuvenate or to complicate
changes in the budget, Siegel (2006: 6).
Actual Budget
An achievement level of income, shopping, transfer, surplus / deficit and financing of a
reporting entity, each of which is compared to the budget (PP 71. In 2010). According
Mahsum (2009: 155) it is a tool to implement the strategy of organizations that must be
prepared to the best to avoid deviations.
Internal Audit
Internal audit is an examination conducted by the internal audit organization, either on the
financial statements and notes byaccounting organization as well as adherence to policy,Arter
(2009; 34). Sawyer (2003; 30-31) argues thatindependent audits are concernedby
professional public accountants; internal auditsare conducted by regular employees of
company.
Government Accounting System
Government Accounting System is a series of manual procedures and the computerized
ranging from data collection, recording, and reporting positions financial and government
financial operations. Zeyn (2011: 4). Based on Government Regulation No. 71 year 2010,
government accounting system is set systematically from the procedures, organizers,
equipment, and other elements to materialize accounting functions since the analysis of the
transaction;up to financial reporting in the neighborhood of governmental organizations.
Quality of Financial Statements
Muslim (2011; 142) stated that quality reporting is the degree of achievement of financial
statements and financial reporting itself. Under PP 71 in 2010, quality of government
financial reporting is a normative measurement that needs to be realized into accounting
information so that it can fulfill its purpose.
Organizational Performance
OrganizationalPerformance is a form of achievement of the organizational goals in
accordance with which is expected,Sukmalana (2009: 281). According Mardiasmo (2009:
196) measurements of the organizational performance include financial and non-financial
performances. It is associated with the destination of organization. Performance indicators of
government include input indicators, process indicators, indicators of output, outcome
indicators, indicators benefit and impact indicators.
3. Theoretical Model Research
Figure 1. Theoretical Model Research
Based on the above framework, it can be determined some hypothesis:
1. There is a significant influence of organizational culture, budgeting, internal audit and the
central government of accounting system on the quality of financial reporting either partially
or simultaneously.
2. There is a significant influence of culture organization, budgeting, internal audit and the
central government accounting system both sparsely or in together with the quality of
reporting on the financial performance of the organization. The method used in this study is a
survey method using causal approach to analyze the influence between variables using path
analysis (pathanalysis) that run through SPSS V. 20 as a tool of analysis. Respondents were
used amounted to 495 people. This research implemented in units of technical
implementation in The Ministry of Health, inWest Java region.
4. DISCUSSION
Path testing Analysis
Figure 3 Calculation Results of path analysis
(Path analysis)
Figure 2 Calculation Results of path analysis
(T-value model)
Table 2. Results of Hypothesis Testing
Results Analysis
1.The influence of organizational commitment tothe quality of financial report
Based on the t-value of cultural influences towards the organization of the quality of financial
reporting is at -424> 2, so that it can be said to be insignificant, so it has partially no
significant effect of organizational culture on the quality of financial report; meaning more
and better yet, the organizational culture showed the lower the quality of financial
reportaccounting unit of the Ministry of Health region West Java.
2.Budgeting Effecttothe quality of financial reporting
T-value to influence budgeting to the quality of financial reporting by partial is equal to 1136 > 2, so budgeting has no significant effect on the quality of financial report; meaning
that the less budgeting,the quality of financial report will be worse.
3. Effect of auditinternaltothe quality of financial report
T-values to internal audits of the quality financial report is partially by 7136> 2, so that the
internal audit has significant effect to quality financial report; meaning that the better the
audit internal functioning, the quality of financial reportwill get better.
4.The influence of the central government accounting systemto the quality of financial
report
T-value to influence the accounting system of the central government to the quality of
financial reporting amounted to 20 191> 2, so it can be said to be significant, thus partially
affects the central government accounting system significantly to the quality of financial
reporting;meaning that the better management of the system the central government
accounting, the better quality of the financial report.
5.TheEffectoforganizational
culture,budgeting,
auditinginternalandgovernment
accounting system variablescenter, together againstthe quality of financial report
The effect of variable of organizational cultural influences, budgeting, internal audit and the
central government accounting system variables jointly affect to the variable quality.
Financial report is: 0766 x 100% = 76.6%, while the remaining 23.4% influenced by other
factors. On the value of F arithmetic is greater than the value of F table in the amount of 173
423>1,318, so the value P obtained from sig 0.000 <0.05. Thus the quality of financial
reporton accounting unit area of Ministry Of Health in West Java can be affected positively
by organizational culture, budgeting, internal control structures, internal audit and central
government accounting system
6. The influence of organizational culture onorganizational performance
T-value of the direct influence of variables organizational culture on performance variables of
the organization is at -2455> 2, so it can be said to be not significant; meaning that more is
not good then the organizational culture shows the lower performance of the organization
accounting unit The Ministry of Health West Java.
7. Influenceof budgetingtoorganizational performance
On the value of the direct influence of the variable t budgeting to variable performance
organization amounted to 1,646 <2, so it can be said to be not significant; meaning that even
then the performance is not good, budgeting organizations will be increasingly not good /
bad.
8.The Effect of internalaudittoorganizational performance
T-value of the direct influence of variables internal audits of the performance variables the
organization is at 4842 <2, so it can be said to be significant, which means that the proper
function of the internal audit is in organization, the performance of the organization will be
better.
9. The influence of the centralgovernment accounting systemto organizational
performance
T-value of the direct influence of variables accounting systems to the central government
variable organizational performance is equal to 44 046> 2 so it can be said to be significant. It
means that the functioning and management which are integrated within government
accounting system becomes well; then the center of the organization's performance will be
better.
10. The effect of financial reportqualitytothe organizational performance
The value of the direct influence of the quality of reporting to the financial performance of
the organization is at -6736> 2, so that it can be said not significant, meaning that the bad /
not good quality financial reporting obtained then the performance of the organization will be
increasingly bad / not good.
11. Influenceoforganizational culture,budgeting, internal audit central government
accounting systemand Financialreportqualitycollectivelyequal to the performance of the
organization
Joint-influence organizational culture variable, budgeting, structure internal control, internal
audit, system central government accounting and quality financial report to organizational
performance is equal to 0938 x 100% = 93.8%, the rest by 6.2% influenced by other factors
From F is equal to the value of 721 087> 1,318 (F table). From P value can be obtained sig
0.000 <0.05. Thus the performance the organization of the accounting unit of the Ministry
Health in West Java is influenced positively by culture organization, budgeting, internal
control structure, internal audit, the accounting system of the central government and quality
reporting Financial are well integrated.
5. CONCLUSION
1. Partially, organizational culture is not positive and has a significant impact on the quality
of financial reporting. That matter indicates that organizational culture employees owned less
then will further show lower quality of financial reporting.
2. Partially, budgeting is not positive and has no significant impact on the quality of financial
reporting. That matter shows that when budgeting is done properly, it will not increasingly
show better quality within financial reporting.
3. Internal Audit, partially, haspositiveinfluence and significant impact on quality of financial
reporting. This means, that if the internal audit is conducted, the better it will be to further
improve the quality financial reporting.
4. The central government accounting system partially has positive and significant impacts on
the quality of financial reporting. This caseindicates that if the accounting system of the
central government is applied, the better it will be to further improve the quality of financial
reporting.
5. Organizational culture, budgeting, internalaudit and central government accounting
systems simultaneously show positive effect and significant impact on the quality of financial
reporting. Of the four variables when they are seen partially, apparently central government
accounting system affects significantly to the quality of financial reporting. This means, that
the better system increasinglyapplied within central government accounting system,the better
quality of financial reporting. And in simultane, the culture is not good within organization
and budgeting, thus the audit internal and government accounting systems center will further
increase its function optimally in order to improve the quality of financial reporting.
6. Organizational culture had no effect significantly towards the performance of the
organization. This case indicates that the less organizational culture will increasingly degrade
the performance of the organization.
7. Budgeting has no significant effect towards the performance of the organization. It
meansthat if budgeting is getting better,it will further improve the performance of the
organization.
8. Internal audit has no significant effect towardsthe performance of the organization. It
meansthat if the internal audit is applied, the better it will further improve organizational
performance.
9. Central government accounting system has a significant effect on organizational
performance. This indicates that central government accounting system will further
increasinglyimprove the organizational performance.
10. The Quality of financial reporting has no significant effect (Y), to organizational
performance (Z). This means, that if the quality of financial reporting is increasingly
improved,it will increasingly improve organizational performance too.
11. Cultural organizations, budgeting, audit internal and government accounting systems join
together through the quality of financial reporting that affect the organizational performance.
Of the five variables when they are seen partially, the turn of the central government
accounting system shows that the most significant effect is on the organizational
performance. This means, that the better the government accounting system is,the center will
get better organizational performance.
Theoretical Implications
1. Cultural organizations
Judging from path analysis (path analysis),it indicates that organizational culture is not
proven to be capable of affecting the quality of financial reporting and organizational
performance as well. This is in line with the results of the study by Mayer, et, al., (1993),that
the commitment means more involve an active relationship and wishes to make a meaningful
contribution for the organization. Meaningful contribution in the management of state
finances is to produce financial reports presented in transparent and disclosed all financial
transactions as well as controlling all of the wealth in the hope of getting a reasonable opinion
without exception.
2. Budgeting
Judging from path analysis (path analysis), itindicates that budgeting is not proven to be
capable of affecting the quality financial reporting and organizational performance. Thus
incompatible with research conducted byKenis, (1979) and Otley DT (1987), budgeting
shows higher level of suitability budgeting that hassignificant and positive influence and
larger on the quality of financial reporting; thereby to improve the quality of financial
reporting, management needs to balance the benefits of a relative andtimely reporting and
provision of reliable information in budgeting effectiveness which will be better in a
relationship achievement of optimal organizational performance.
3. Internal Audit
Judging from path analysis (path analysis),it is proven that internal audit is able to affect the
quality of financial reporting and organizational performance. This is in line with the research
conducted byMahJabali. et., al,(2011), stating that internal audit shows evaluatedreporting
and monitoring of existing activities in a positive organization, causing opinions of the
quality of financial reporting on the CPC and assessment performance that can be determined
or can be seen clearly.
4. The central government accounting system
Judging from path analysis (path analysis), it shows that central government accounting
system has proven to be capable of affecting the quality of financial reporting and
organizational performance. This is in line the results of the study by De Lone and Lean
(1992), showing that the effects of the system accounting is very significant. Interrelated and
integrated to increase the quality of financial reporting, and system, this is a government
accounting confidence by one party, the relationship with other parties in an integrated
manner which is so important in influencing the achievement organizationtowards better
performance
5. The quality of financial reporting
Judging from path analysis (path analysis), it isnot proven that the quality of financial
reporting is capable of affecting the performance of the organization. It is not in line with the
results of the study byLibby, et., Al, (2003), showing the quality financial reporting is as a
form of the application of accounting systems and techniques, a presentation of reported
component that is positively implemented in improvingthe organizational performance.
Managerial Implications
1. Based on the fifth hypothesis, the writer obtained the significant influence that the quality
financial reporting will increase if the implementation of accounting systems integrate central
government, understand the function and purpose of the internal audit by changing
organizational culture that is less;causing less budgeting.
The effect also is evidenced by anorganizational management framework, understanding the
internal audit function as implementing monitoring and evaluation supported by orderly
budgeting, so that the quality of financial reporting that will increase significantly if this is
shown by the implementation as purposelyconducted together for gainingopinions, fairly
without exceptions (unqualified opinion) of CPC.
2. Based on hypothesis on the research results, it is obtained that the organizational culture,
budgeting, internal audit and accounting system central government together through the
quality of financial reporting affect the performance of the organization which increase when
organizational culture is appropriate with the development of scientificknowledge and
technology. It is with the placement of personnel or employees in accordance to disciplines
ofpossession with full awareness and responsibility in improving the quality financial
reporting after realizing opinions fairly without exceptions (unqualified opinion) of CPC as
expectedtogether.
Thus through qualityof financial report that is delivered in the auditor's opinion as audit
results contributes influence on Predicate or Grade on organizational performance of report
performance evaluation.
Suggestions
1. Organizational culture that has values is the lowest in terms of employees’ability or staffs’
working activities to achieve those objectives, determined by the leadership of the working
unit, by providing support for achieving the goal of the quality of financial reporting towards
good organization, so it will improve organizational performance.
2. Budgeting which has an average value is not achieving the lowest possible budget which
illustrates a strong influence about performance. To increase achievement of the required
budget, it has the ability to understand the budget based on performance. Thus the use of the
budget will reflect good quality onto the financial reporting in improving organizational
performance.
3. Internal audit which has an average value is the lowest in terms of planning and scope,
internal audit in the organization must be defined by the way management policy that gives
full access to internal audit for reviewing and assessing the policies, plans, procedures and
objectives of the work by achieving the goal of the quality of financial reporting towards
good organization, so it will improve organizational performance.
The central government accounting system which has the lowest average value is recognized
when the potential economic benefits are obtained by the government and the future has a
value or the costs can be measured. Leaders must be able to guarantee the achievement of
effectiveness and efficiency surgery in integrationthat will improve the quality of financial
reporting that is important in affecting the achievement of organization performance to be
better.
5. Quality financial reporting which has the lowest average value is easiness to understand
from users to determine the value of the resource economics that used to perform activity
operational governance, the results achieved in implementation of activities in a systematic
and structured in a reporting period. Thus if achieving the goal the quality of the
organization's financial reporting is good, so it will increase organizational performance.
6. The performance of an organization that has a mean value the lowest average in this study
is achievement of the quantity of activity. The resulting service is measure the performance
of the program in meeting the target. It can be achieved if employees be included in the form
of educational socialization as well as related training by improving the quality of employees
in providing services. Leadership was instrumental in encouraging and provide insight into
the plan
work, working methods and evaluation criteria working, socializing performance with
method that simple will resulting in quantity and quality employee services to the public will
better so that the performance of the organization will be increased well.
Advanced Limitations Research
There are many other aspects that can serve as a variable of this study. Thus enabling the
findings in this research there are still limitations.
These limitations include:
1. The first limitation: study using questionnaires as instrument to collect data. Factors
situations and psychological condition of the respondents are very effective when giving
answer statements that are filed.Then it is possible to produce data that less describes the
situation and conditions which are actual.
2. The second limitation: new research using seven variables (culture organization,
budgeting, internal audit, and the central government accounting system quality financial
reporting) to know and measure organizational performance, while according to researchers
there are othervariables that are alleged which also contribute or affect the performance of the
organization. As for the other variableshave purposes, namely among others, are: style of
leadership, style of communication leadership, professionalism, and education and training
3. The third limitation: the study is done in one unit of ministry at the accounting level region
(province), so as a result it is still not significant. It should be done and conducted more
extensively and frequently.
4. In connection with point three above, advanced research to researchers is recommended as
follows:
a. Research should be conducted regional level (Province) within all existing Ministry and the
good level of the Local Government and level two.
b. Research should be conducted within national level in all Ministries and Institutions
overall Countries.
c. Research should be conducted in national level within all Local Government, level one.
d. Research should be conducted within national level in all Local Government, level two.
e. Research should be doneby using analytical methods differently as SEM analysis byusing
LISREL, PLS, Amos, and other analytical software.
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Arter, DR 2009; Quality Audit Performance Improvement, ASQC Qualitas Press,
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BPKP. 2010. Guidelines for Preparation of Budget Based Performance (Revised)
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Colquitt Jason A. Jeffry A. Lepine and Michael J. Wesson 2009; Organizational Behavior,
McGraw Hill Irvin
David, N and Hayman 2009 Public Finance: A Contemporary Application of Theory to
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De Lone, WH, and Mc Lean, ER 1992; Information systems success: The quest for the
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Edward Bbosa 2011: Internal controlsand on the Quality of Financial Reporting in Local
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Wakiso District, Makerere University Journal of Accounting and Economics No. 9. P. 315347 Robert N. Antony Vijay Govindarajan 2005; Management Control System.
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Hansen &Mowen 2009; Management Accounting. Thomson Singapore Asia Pte Ltd
Kenis, I. 1979; Effects of budgetary Goal Characteristics on Managerial atitudes and
Performances. The Accounting Review
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Reporting University Of Tartu
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Governance, Accountability on the Quality of Financial Reporting and Performance
Companies in the Amman Stock Exchange, Middle Eastern Finance and
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Yogyakarta BPFE
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Hoboken, New Jersey Published Canada
Muhlis, Syarifuddin and Mediaty 2010; â € œEffect Of Participation On Preparing Budget
To Performance Of Local Government Officials With Organizational Culture And
Organizational Commitment As A Moderator (Case Study On Gevernment of Barru
Regency, sulphate Cell). Issue 11 Euro Journals Publishing, Inc.
Muslim 2011; Akuntantabilitas and reporting performance-based financial institutions.
Bandung IKAPI
Nainggolan Adolpino 2009; Effect of commitments organization, internal control structure,
internal audits of achievement company performance. Economic Journal,
Management and Accounting, University Budi Luhur.
Otley DT 1987; Budget Use and Managerial Performanceâ €. Journal of Accounting
Research Spring. pp. 122-149
Final, Bambang 2012; Pengaruh Implementation of the Public Accounting and Quality
Regulation Legislation To Quality Reporting Finance and Performance
Accountability Agencies pemerintahan.
Scientific Journals Ranggading. Volume 12 No. 1, April 2012
Government Regulation No. 24 of 2005; Standard Accounting Reign Bandung Fokusmedia
Joe G. Siegel, 2006; Budgeting. Jakarta Erland
Measuring the potential for Financial Reporting Fraud in a
Highly Regulated Industry
Yunita Awang*a, Suhaiza Ismail b, Abdul Rahim Abdul Rahman c
*a
Lecturer at the Faculty of Accountancy, Universiti Teknologi MARA (UiTM) Malaysia and PhD candidate at
Kulliyah of Economics and Management Science, International Islamic University Malaysia (IIUM), Malaysia.
E-mail: [email protected].
b
Associate Professor at Kulliyah of Economics and Management Science, International Islamic University
Malaysia (IIUM), Malaysia.
c
Professor at Faculty of Economics and Muamalat, Universiti Sains Islam Malaysia (USIM), Malaysia.
Abstract
Fraud in financial reporting is an intentional misstatement of financial statements to mislead
the users. It caused huge losses to the organizations, erodes accounting profession’s image
and affects the public confidence on published financial statements. This paper aims to
examine the relevance of the theory of reasoned action in measuring the intention towards
fraud in financial reporting in a highly regulated industry. Partial least squares structural
equation modelling was used for data analysis. Findings indicate that the attitude and
subjective norms influenced intention for fraud in financial reporting among the participants
in financial reporting process, controlling for the effect of firm type. The findings expand the
applicability of the theory of reasoned action to the highly regulated industry and provide
better understanding on the factors influencing fraud in financial reporting to the top
management within the industry. This paper concludes with limitations and avenues for
future research.
Keywords: Attitude, subjective norms, fraud in financial reporting, highly regulated industry,
firm type, partial least squares structural equation modelling
1.
INTRODUCTION
Fraud resulted in loss of assets and business reputation, declined in staff moral and damaged
business relations (Mung-Ling, Sze-Ling, & Chin-Hong, 2008). Fraud cost about 6% of
company’s total revenue (Watson, 2003) and, 7% or $994 billion in total of revenue per year
(Bierstaker, 2009). Fraud is a significant ethical dilemma for businesses and believed to be
the most serious corporate problem in the present business environment (Palshikar, 2002; M.
Smith, Normah Haji Omar, Syed Iskandar Zulkarnain Sayd Idris, & Ithnahaini Baharuddin,
2005). The people who were implicated in fraud are those entrusted with company’s sensitive
information and controls, especially dealing with finance functions or finance-related role
(KPMG, 2011; Rezaee, 2005). The cited reasons were economic pressures, weakening
society’s values and insufficient emphasis on prevention and detection (Abdolmohammadi &
Owhoso, 2000).
Fraud occurs both in private and public companies, with no exception to the banking
industry. According to the Global Fraud Survey, banking and financial services accounted to
16.7% of the reported 1, 388 occupational fraud cases (ACFE, 2012). This is about a similar
percentage of 16.6% in year 2010 (ACFE, 2010). This caused a median loss of $232,000,
with 229 reported cases, which placed the banking and financial services industry as the fifth
highest median loss due to fraud, after other industries including Mining, Real Estate,
Construction, and Oils and Gas.
Although the issue of fraud in financial reporting in banking institutions is not widely
documented locally or abroad, it does not necessarily indicate that accountants in the banking
industry exhibit superior ethical standards. In analysing the cases of distress in Islamic banks
of Bank Taqwa, Faisal Islamic Bank, Kuwait Finance House, International Islamic Bank of
Denmark, it was concluded that banks failed due to bad management, improper accounting
and management system (Rajhi & Hassairi, 2011). The problems of making fraud cases as a
determinant of banking crisis are due to lack of paper trail, difficulty to establish the actual
intentions of the agents involved, and restricted accessibility of the information to the public
(Soral, İşcan, & Hebb, 2006).
Being a highly regulated industry, banking institutions are perceived to be safeguarded
from fraud occurrences. However, as fraud in financial reporting involves people, the ethical
loophole in banking industry may well open the room for fraud occurrences.
2.
THEORETICAL BACKGROUND
2.1
Fraud in Financial Reporting
Being the prime source of reference in making economic decisions among the capital market
participants, financial statements are expected to be reliable, transparent and comparable.
Management decisions may influence the quality of financial reports whether the reports are
of ‘high quality’ in one end or fraud at the other end (Kalbers, 2009). Attempts to mislead the
financial report may be detrimental to these stakeholders.
Beyond the reliability expectation of financial statements, the financial statement
fraud or fraud in financial reporting keeps occurring in the business environment (ACFE,
2012; KPMG, 2009; Rezaee, 2005). It is an “intentional material misstatement of financial
statements or financial disclosures or the perpetration of an illegal act that has a material
direct effect on the financial statements or financial disclosures,” (Beasley, Carcello, &
Hermanson, 1999: 11).
Methods used include illegitimate revenue recognition, inappropriate deferral of
expenses, understatement of expenses/liabilities, fictitious sales, premature sales, reversal or
use of unjustified reserves, overstatement of assets other than accounts receivable,
misappropriation of assets, inappropriate disclosure, and other miscellaneous techniques
(Beasley et al., 1999; Rezaee, 2002).
2.2
Intention for Fraud in Financial Reporting
As human deviant behaviour factor is involved in fraud in financial reporting, the root causes
for such behaviour need to be identified (Siti Noor Hayati, Kamil, Rashidah, & Wah, 2011).
Unfortunately, the actual fraud in financial reporting is not easily detected as the decisions for
fraud in financial reporting are aggregated into financial statements (Carpenter & Reimers,
2
2005). Little research was done measuring the actual ethical/unethical behaviour as the
sensitivity and the difficulties for observing the occurrence of ethical/unethical behaviour
(Ahmed, 2010; Haines & Leonard, 2007; Sweeney & Costello, 2009; Trevino, 1992).
However, strong link was indicated between behavioural intention and the actual behaviour,
allowing researchers to measure behavioural intention rather than the actual behaviour
(Carpenter & Reimers, 2005). Behaviour intention acts as a proxy for behaviour as the
intention to behave unethically provide a basis to influence the behaviour (Buchan, 2005;
Gibson & Frakes, 1997).
Thus, to measure the likelihood of fraud in financial reporting the individuals’ intention
of committing such fraud is examined. Human behaviour intention are subjective
probabilities for the likelihood of choosing a given behavioural alternative (Ajzen &
Fishbein, 1980). Understanding behavioural factors that motivate behavioural intention could
give guidance to management, regulators and minority shareholder group to develop
strategies to curb its occurrence (Siti Noor Hayati et al., 2011). Pertaining to accounting and
auditing practices, identifying the behavioural intention for fraud in financial reporting is
relevant due to the difficulties and costs associated with its deterrence (Rezaee, 2005). Prior
studies examined the intention for fraudulent financial reporting include namely Gillett and
Uddin (2005); Carpenter and Reimers (2005); and, Siti Noor Hayati et al., (2009; 2011).
Researches on intention towards cheating behaviour that has characteristics similar to
fraudulent financial reporting as both behaviours were done for personal gain or reward and
led to ethical implications were also conducted in other fields (e.g. Chang, 1998; Kurland,
1995; Randall & Gibson, 1991; Stone, Jawahar, & Kisamore, 2009).
2.3
Theory of Reasoned Action (TRA)
The theory of reasoned action was considered as the best known theory for measuring ethical
intention (Leonard, Cronan, & Kreie, 2004). The major goal of TRA is to predict and
understand an individual’s behaviour and posits that an individual’s intention to perform (or
not to perform) the behaviour is the immediate determinant of behaviour (Ajzen & Fishbein,
1980; Dubinsky & Loken, 1989). Intentions are “assumed to capture the motivational factors
that influence a behaviour; they are indications of how hard people are willing to try, of how
much an effort they are willing to exert in order to perform the behaviour,” (Ajzen &
Fishbein, 1980: 181).
According to TRA, behavioural intention is depicted as a function of two basic
determinants of attitude and subjective norm. Attitude reflects one’s feeling towards
performing a behaviour or whether the person is in favour of doing it, whilst subjective norm
refers to the influence of referent groups (i.e. family members, friends or those who are close
to an individual) that could change one’s opinion or ideas, or how much the person feels
social pressure to do it (Carpenter & Reimers, 2005; Francis et al., 2004).
Past studies indicated that attitude toward behaviour is a significant predictor of
behavioural intention (e.g. Ajzen & Fishbein, 1980; Buchan, 2005; Doll & Ajzen, 1992;
Harding, Mayhew, Finelli, & Carpenter, 2007; Peterson, 2002). It is predicted that if an
individual evaluates performing a particular behaviour as favourable, it is more likely he or
she will intend to perform that particular behaviour (Fishbein & Ajzen, 1975). Specific to
fraud in financial reporting, if an individual had a positive attitude for a transaction and felt
that it was the right thing to do, even if those procedures would violate generally accepted
3
accounting principle, then it is predicted that he or she would be willing to violate generally
accepted accounting principle to reach a specific earnings prediction or goal (Carpenter &
Reimers, 2005). Hence, more positive attitude toward the specific behaviour would lead to
higher intention of fraudulent financial reporting (Gillett & Uddin, 2005). Thus, it is
hypothesized that:
H1: There is a significant positive relationship between attitudes and the intention for
fraud in financial reporting among Muslim accountants.
As for the subjective norm, the referent group especially the superiors influenced the
behavioural intention and consequent behaviour (N. C. Smith, Simpson, & Huang, 2007).
The social network of relationships at work or personal communities where individuals are
integrated into, comprising of family, relatives, friends, and associates, or the set of people
that directly involved with the individuals (Cornwall, 1989) had also contributed towards
unethical behaviour (Brass, Butterfield, & Skaggs, 1998). Other studies also concluded on the
significant effect of referent groups of both peer groups and top management influences on
ethical decision behaviour namely the intenders more likely to feel pressure from referents
especially top management and supervisors (Dubinsky & Loken, 1989); and, absence of top
management actions against unethical behaviour resulted in stronger approval of questionable
practices (Akaah & Riordan, 1989).
The more an individual perceives that referent groups think he should engage in a
behaviour, the more likely he intends to do such behaviour (Fishbein & Ajzen, 1975). In the
case of fraud in financial reporting, an individual who perceive that referent group would
approve or support the violation of generally accepted accounting principle (i.e. fraudulent
financial reporting), he or she will highly likely to violate generally accepted accounting
principle thus committing fraud in financial reporting to meet earnings predictions (Carpenter
& Reimers, 2005; Siti Noor Hayati et al., 2009). This study hypothesized that:
H2: There is a significant positive relationship between subjective norm and the
intention for fraud in financial reporting among Muslim accountants.
2.4
Bank Type as a Control Variable
Control variable is defined as “any exogenous or extraneous variable that could contaminate
the cause-and-effect relationship, but the effects of which can be controlled through a process
of either matching or randomization,” (Sekaran & Bougie, 2010: 437). Control variables are
included in the investigation to address problems related to the potential threat of alternative
explanations (Troy, Smith, & Domino, 2011) and to ensure that the results are not biased by
excluding them (Cooper & Schindler, 2011).
In the current study, two major types of banks with different underlying philosophy
and values were involved. The Islamic banks are considered as having ethical identity as their
business philosophy was grounded on religion with the social goal are at least of equal
important as making profit, unlike its conventional counterparts which is interest based
(Haniffa & Hudaib, 2007). The principle underlying the operation and activities of Islamic
banks is the Shari’ah law, whereas conventional banks are operating solely for business
purpose with no religious aspect (Sudin & Wan Nursofiza, 2009).
As religion is the basis for its establishment, Islamic banks are expected to internalize
the teaching of religion not only in terms of its operations which need to conform to Islamic
4
principles, but their employees are also expected to embed the religion or religiosity in
fulfilling their professional obligations. Those who manage and govern Islamic banks are not
only expected to make economic decisions on behalf of the shareholders and fund depositors
in enforcing the rules of God, but to be believers imbued with piety and righteousness
(Haniffa & Hudaib, 2007). Moreover, it was found that firms with strong religious social
norms generally experience lower incidences of financial reporting irregularities (Dyreng,
Mayew, & Williams, 2012; McGuire, Omer, & Sharp, 2012). Thus, to avoid making any
improper inferences and reduces the possibility of spurious statistical influences, bank type
was measured in the analysis as a control variable by a dummy variable. No specific
prediction was made for bank type and the expected sign of bank type was not hypothesized.
It was dummy coded as 1 (conventional) and 0 (Islamic).
2.5
Research Model
This study used TRA as the main theoretical framework to examine the intention for fraud in
financial reporting with the inclusion of bank type as a control variable. The research model
is depicted in Figure 1.
Figure 1: Research model
3.
RESEARCH METHODOLOGY
3.1
Sample and Data
The unit of analysis in this study is the Muslim accountants that had a minimum of five
years’ experience in financial reporting process at the head office of Malaysian banking
institutions. As the list of all the elements of the population could not be obtained, this study
used a non-probability purposive sampling. As such only Muslim accountants that involved
in the financial reporting process for a minimum of five years, in both Islamic and
conventional banks, either locally-owned or foreign-owned banking institutions were chosen.
5
A total of two hundred and six self-administered questionnaires were distributed to
forty four banks through personal hand-delivery to the respective bank’s contact in thirty six
banks and secured postage (courier service) to the remaining eight banks. The distribution
and collection process took over a two months’ period. Ultimately, 127 questionnaires were
returned (61.7%) but only 121 questionnaires (58.7%) were valid for further analysis due to
the incomplete responses, irrelevant respondents and outliers.
3.2
Measures
A scenario on an ethical dilemma related to the deferring of office supplies expense into the
following year to meet the current year’s net income target was presented in the questionnaire
to examine the influence of attitude and subjective norm on the intention towards fraud in
financial reporting. Deferring expenses to future period is the type of unethical financial
reporting similar to that alleged at Enron and WorldCom (Burns, 2002 & Pulliam, 2003 in
Carpenter & Reimers, 2005). The deferment of expense can mislead the information
provided in financial statements and possibly deliberately deceive investors, crossing the line
from earnings management to fraud (Carpenter & Reimers, 2005).
In evaluating the hypothetical scenario, 20 statements were presented, comprised of 7
statements for measuring intention; 7 statements for measuring attitude; and, 6 statements for
measuring subjective norm, phrased and scaled using semantic differential scales based on a
seven-point likert scale. The statements were mainly adapted from Carpenter and Reimers
(2005), which have also been previously used by Madden et al. (1992) and Chang (1998).;
and also partially adapted from other studies (Ajzen & Fishbein, 1980; Carpenter & Reimers,
2005; Cohen, Pant, & Sharp, 2001; Francis et al., 2004; Gillett & Uddin, 2005; Godin,
Conner, & Sheeran, 2005; Hanudin, Abdul Rahim, Stephen, & Ang Magdalene, 2011;
Hanudin, Abdul Rahim, & T. Ramayah, 2009; Montesarchio, 2009; Morris, Venkatesh, &
Ackerman, 2005).
3.3
Data Analysis
This study used partial least squares structural equation modelling (PLS-SEM) SmartPLS
Version 2.0 M3 developed by Ringle, Wende and Will (2005). PLS-SEM analysis involves
the assessment of the measurement models and the structural models.
In the assessment of measurement model, the reliability and validity of the items were
examined through convergent and discriminant validity based on item loadings and crossloadings, composite reliability (CR) and average variance extracted (AVE). Convergent
validity is the degree to which multiple items used to measure the same concept are in
agreement as assessed through outer loadings, CR and AVE. Outer loadings are the results of
single regressions of each indicator variable on their corresponding construct; CR is the
degree to which the construct indicators indicate the latent construct; and, AVE is the overall
amount of variance in the indicators accounted for by the latent construct. The cut-off value
for item loading, CR and AVE are 0.5, 0.7, and 0.5 respectively (Hair, Black, Babin, &
Anderson, 2010).
Meanwhile, the discriminant validity is “the extent to which a construct is truly distinct
from other constructs by empirical standards,” (Hair, Hult, Ringle, & Sarstedt, 2014: 104). In
assessing the discriminant validity of the model, an indicator’s outer loadings on a construct
6
should be higher than all its cross loadings with other constructs; and the square root of each
construct’s AVE is greater than its highest correlation with any other construct referred to as
Fornell-Larcker Criterion (Hair et al., 2014) .
Once the measurement model was satisfied, the next step is to evaluate for the
structural model. This covers the assessment of collinearity issue, significance and relevance
of structural model relationships, coefficient of determination (R2 values), effect size and
predictive relevance of the constructs.
4.
RESULTS AND DISCUSSION
4.1
Respondents’ Profile
Based on 121 valid and usable responses, the respondents’ profile is shown in Table 1 below.
58 (47.9%) are male respondents and 55 (45.5%) are female respondents, fall within the age
group of 40 years and above (35 or 28.9%). Most of the respondents are at managerial
position (50.4%), while 38.8% are at executive level. The executive level are those
respondents designated as executives in the accounting or finance department; and, the
managerial level are those respondents designated as Assistant Vice President/Manager/Head
of accounting or finance department; or, Vice President/Senior Manager in accounting or
finance department of the related banking institutions.
Besides, 61 respondents (50.4%) worked in Islamic banks with most respondents
(69.4%) had 5 to 15 years working experience in banking sector, 44.6% had less than 5 years
working experience at their present bank and 60.3% had 5 to less than 10 years financial
reporting experience in banking institutions. Hence the respondents’ profile indicates the
credibility of the respondents for this study purpose as they represent both male and female
groups working in Islamic and conventional banks, with adequate length of working
experience as well as financial reporting experience in banking institutions.
Item
Gender
Age
Qualification
Income
Table 1: Respondents’ Profile
Category
Male
Female
No information provided
Less than 30 years
30- less than 35 years
35- less than 40 years
40 years and above
No information provided
Bachelor
Master
Professional
Diploma and below
No information provided
RM5000 and below
RM5001-RM7000
RM7001-RM10000
7
Frequency
58
55
8
25
28
21
35
12
75
15
21
9
1
44
31
27
%
47.9
45.5
6.6
20.7
23.1
17.4
28.9
9.9
62.0
12.4
17.4
7.4
.8
36.4
25.6
22.3
Job Level (Position)
Working experience in banking
sector
Working experience in financial
reporting in banking
Working experience at present bank
Bank type
Bank ownership
4.2
Above RM10000
No information provided
Executive level
Managerial level
No information provided
5- less than10 years
10- less than 15 years
15 years and above
No information provided
5- less than10 years
10- less than 15 years
15 years and above
No information provided
Less than 5 years
5- less than10 years
10- less than 15 years
15 years and above
Islamic banks
Conventional banks
Local-owned bank
Foreign-owned bank
12
7
47
61
13
60
24
36
1
73
26
19
3
54
32
15
20
61
60
95
26
9.9
5.8
38.8
50.4
10.7
49.6
19.8
29.8
.8
60.3
21.5
15.7
2.5
44.6
26.4
12.4
16.5
50.4
49.6
78.5
21.5
Testing the Measurement Model
Firstly the convergent validity of the model based on the items loading, AVE and CR need to
be established. The results of the measurement model from Table 2 indicate all item loadings,
CR values and AVE exceed the recommended value of 0.5, 0.7 and 0.5, respectively (Hair et
al., 2010). Hence, convergent validity of the model is established.
Table 2: Results of measurement model
Construct
Label
Loadings AVEa
Attitude
aAtt01B20
0.912
0.809
aAtt02B21
0.886
aAtt03B22
0.936
aAtt04B23
0.891
aAtt05B24
0.865
aAtt06B25
0.901
aAtt07B26
0.903
Subjective Norms
bSn01B04
0.884
0.663
bSn02B05
0.890
bSn03B08
0.874
bSn04B09
0.782
bSn05B10
0.766
bSn06B19
0.665
Intention
gInt01B01
0.925
0.831
gInt02B02
0.931
8
CRb
0.967
0.921
0.972
gInt03B03
gInt04B06
gInt05B07
gInt06B14
gInt07B15
0.915
0.943
0.834
0.904
0.925
a
Average variance extracted (AVE) = (summation of the square of the factor loadings) / {( summation of the
square of the factor loadings) + ( summation of the error variances) }
b
Composite Reliability (CR) = (square of the summation of the factor loadings)/ {(square of the summation of
the factor loadings) + (square of the summation of the error variance)}
Next is testing for the discriminant validity of the model. The Fornell-Larcker
Criterion reveals a discriminant problem between two constructs of subjective norm and
intention as indicated by the off-diagonal value greater than the diagonal value (as italicized
in Table 3). The off-diagonal values are the correlations values for the relevant latent
construct, whereas the diagonal values are the square root value of each construct’s AVE.
Table 3: Discriminant Validity Problem of Two Constructs (Italicized)
Attitude Subjective Norms Intention
Attitude
0.899
Subjective Norms 0.783
0.814
Intention
0.823
0.895
0.912
Further examination on the loadings and cross-loadings indicate some offending items
(Table 4) that cross-load on more than one latent variable (Farrell, 2010) with difference in
cross-loadings of lesser than 0.1 (Gefen & Straub, 2005). Low difference suggests that the
respondents were unable to discriminate between the items to their respective constructs.
Construct
Attitude
Subjective Norms
Table 4: Items with cross-loading problem
Label
Attitude Subjective Norms Intention
0.731
0.818
aAtt07B26
0.903
0.725
0.859
bSn03B08
0.874
0.501
0.743
bSn05B10
0.766
0.612
0.573
bSn06B19
0.665
These items represent “I like-dislike the idea of deferring this office supply (aAtt07B26)”; “It
is expected of me that I will defer this office supply expense into 2013 (bSn03B08)”; “I
usually do what others think I should do (bSn05B10)”; and, “If I defer this office supply
expense into 2013, most people who are important to the company will disapprove-approve
(bSn06B19)”, respectively. These offending items were deleted to overcome the discriminant
validity problem. The revised results of discriminant validity (Table 5) show the FornellLarcker Criterion is satisfied. Similarly, offending items no longer exist (Table 6). This
suggests that adequate discriminant validity is established.
Table 5: Discriminant validity of constructs
Attitude Subjective Norms Intention
Attitude
0.903
Subjective Norms 0.725
0.904
Intention
0.804
0.796
0.912
9
Table 6: Loadings and cross-loadings
Construct
Label
Attitude Subjective Norms
Attitude
aAtt01B20 0.915
0.701
aAtt02B21 0.895
0.661
aAtt03B22 0.943
0.666
aAtt04B23 0.905
0.709
aAtt05B24 0.867
0.523
aAtt06B25 0.890
0.660
Subjective Norms bSn01B04 0.719
0.944
bSn02B05 0.671
0.957
bSn04B09 0.569
0.803
Intention
gInt01B01 0.711
0.756
gInt02B02 0.742
0.763
gInt03B03 0.761
0.748
gInt04B06 0.757
0.800
gInt05B07 0.656
0.682
gInt06B14 0.759
0.637
gInt07B15 0.743
0.684
4.3
Intention
0.810
0.665
0.715
0.699
0.683
0.766
0.764
0.737
0.652
0.925
0.932
0.916
0.944
0.833
0.903
0.924
Assessing the Control Variable
Prior to testing for the hypothesized relationships, the influence of control variable on the
intention for fraud in financial reporting was examined using a bootstrapping technique.
Bootstrapping is “an approach to validate a multivariate model by drawing a large number of
sub-samples and estimating models for each subsample. Estimates from all the subsamples
are then combined, providing not only the “best” estimated coefficients, but their expected
variability and thus their likelihood of differing from zero; that is are the estimated
coefficients statistically different from zero or not,” (Hair et al., 2010: 2). Bank type as a
control variable was linked directly to the criterion or endogenous variable in the model. The
control variable was specified in a formative way with the dummy-category (0 and 1) served
as the indicator (Falk & Miller, 1992 in Berghman, 2006).
The bootstrapping result indicates a significant relationship between bank type and
intention (t-value = 2.535). Further assessment on the effect size based on the f-squared value
of the difference between R2 included (0.757) and R2 excluded (0.743) of the control variable
shows small effect size (f2= 0.060) of bank type on intention for fraud in financial reporting.
The control variable should be included regardless whether it is significant or not, and the
results for control variables are usually not further interpreted (Hair, Ringle, & Sarstedt,
2013). However, when the effect of control variables are significant, the findings should
carefully be used when drawing conclusions or initiating additional analyses (Hair et al.,
2013). Hence, bank type as control variable is included in further analysis of structural
relationship to test for the hypothesized relationships in this study.
4.4
Testing the Structural Model
The key assessment criteria in testing for the hypothesized relationships are the significance
of the path coefficients, the value of variance explained (R2), the f2 effect size, the predictive
10
relevance (Q2) and the q2 effect size (Hair et al., 2014). The path coefficients are the
relationships between the latent variables in the structural model (Hair et al., 2014) that
measure the strength of a relationship between a dependent variable and an independent
variable, while holding constant the effects of all other independent variables (Allison, 1999
in Berghman, 2006). The R2 shows the amount of explained variance of endogenous latent
variables in the structural model (Hair et al., 2014), with higher value indicates the better the
construct is explained jointly by all latent variables in the structural model via path
relationship. In this study the significance levels for loadings and path coefficients were
determined based on the bootstrapping method, with 121 cases and re-sample of 500.
The resulted R2 of intention at 0.757 suggests that 75.7% of the variance in the
intention for fraud in financial reporting among Muslim accountants can be explained by the
predictors in this study. The path coefficients and hypotheses testing results are shown in
Table 7.
Table 7: Path Coefficients and hypothesis testing
Research Hypotheses
Relationship Standard Standard t-value Decision
Beta
Error
H1: There is a significant positive
relationship between attitudes
and the intention for fraud in
financial reporting among
Muslim accountants.
H2: There is a significant positive
relationship between subjective
norm and the intention for fraud
in financial reporting among
Muslim accountants.
Attitude ->
Intention
0.465
0.074
6.259** Supported
Subjective
Norms ->
Intention
0.442
0.068
6.498** Supported
**Significant at p<0.05
Based on Table 7, attitude was positively related to the intention for fraud in financial
reporting among Muslim accountants (β = 0.465, ρ <0.05), thus supported H1. The higher the
attitude of respondents towards fraud in financial reporting the higher is their intentions to
commit fraud in financial reporting. This findings is in line with previous findings that
attitude toward behaviour is a significant predictor of behavioural intention (e.g. Ajzen &
Fishbein, 1980; Doll & Ajzen, 1992; Harding et al., 2007; Peterson, 2002). If an individual
evaluates performing a particular behaviour as favourable, it is more likely he or she will
intend to perform that particular behaviour (Fishbein & Ajzen, 1975). The more the
respondents are in favour of fraud in financial reporting, the higher their intentions to commit
fraud in financial reporting. Hence, more positive attitude toward the behaviour leads to
higher intention of fraudulent financial reporting (Gillett & Uddin, 2005), and the individual
would reflects such intention to report unethical or fraudulent financial reporting (Carpenter
& Reimers, 2005; Siti Noor Hayati et al., 2009).
Similarly, subjective norm was found to be positively related to the intention for fraud
in financial reporting among Muslim accountants (β = 0.442, ρ <0.05), thus supported H2.
This is in line with the prediction that the more an individual perceives that referent groups
think he should engage in a behaviour, the more likely he intends to do such behaviour
11
(Fishbein & Ajzen, 1975). In the case of fraud in financial reporting, an individual who
perceive that referent group would approve or support the violation of generally accepted
accounting principle (i.e. fraudulent financial reporting), he or she will highly likely to violate
generally accepted accounting principle thus committing fraud in financial reporting to meet
earnings predictions (Carpenter & Reimers, 2005; Siti Noor Hayati et al., 2009).
The next step in assessing for the structural relationship is the “blindfolding”
procedure. Blindfolding is “a sample reuse technique that omits every dth data point in the
endogenous construct’s indicators and estimates the parameters with the remaining data
points,” (Hair et al., 2014: 178). Blindfolding procedure was conducted to measure the
model’s predictive relevance (Q2). The Q2 determines how well observed values are
recommended by the model and its parameter estimates (Chin, 1998) and used to assess the
relative predictive relevance of a predictor construct on an endogenous construct (Hair et al.,
2014). Predictive relevance is established when the model has Q2 value of greater than zero.
Omission distance (OD) of 7 was utilized for blindfolding calculation as any value between 5
and 10 is feasible (Chin, 1998). The blindfolding result (CV red = 0.619 > 0) indicates model
prediction is good or the model has predictive relevance for intention towards fraud in
financial reporting.
Further assessment for structural relationships involves the effect size of blindfolding
(q2) to identify which predictor is more important in the model’s predictive relevance. The
results as summarized in Table 8 indicate that attitude and subjective norm had medium
effect on the predictive relevance of the model. Thus, both predictors are equally important
for the model’s predictive relevance.
Table 8: Results of effect size of blindfolding (q2)
CV redundancy Excluded predictor CV redundancy q2
Effect size
Attitude
0.537
0.217
Medium
(included)
(excluded)
0.619
Subjective Norms 0.540
0.208 Medium
5.
CONCLUSION
The findings of this study indicate that the attitude and subjective norms significantly
influenced the intention for fraud in financial reporting among Muslim accountants in
banking institutions, controlling the effect of different bank type.
The findings indicate the relevance of TRA in predicting intention for fraud in
financial reporting in banking, thus broaden the applications of the TRA model in the context
of a highly regulated industry and add up to the scarcity of literature on the ethics in banking
industry. The findings provide better understanding on the factors influencing fraud in
financial reporting to the top management of banking institutions. Besides, the application of
PLS-SEM shows the suitability of the PLS-SEM for data analysis in the field of accounting
and business ethics.
However, the findings need to be interpreted in consideration for its limitations.
Firstly, although scenarios are widely used in business ethics research (e.g. Ampofo,
Mujtaba, Cavico, & Tindall, 2011; Carpenter & Reimers, 2005; Chun-Chang, 2007; Flannery
& May, 2000; Randall & Gibson, 1991; Uddin & Gillett, 2002), the scenarios presented to
the respondents are artificial and can only examine hypothetical situations (Brief, Dukerich,
Brown, & Brett, 1996). Hence, the responses received represent, at best, the tendencies of
12
Muslim accountants’ intention for fraud in financial reporting. Secondly, the issue of social
desirability bias also present in using scenarios but steps already taken in this study to
minimize the issue. These included the use of self-administered questionnaire with the
covering letter assuring anonymity and confidentiality of the responses received and the
adaptation of the measurement items which were presented in a non-offensive and neutral
manner to the respondents (Flannery & May, 2000; Fritzsche, 2000; Nederhof, 1985). Thus,
future research using survey method should adopt similar precautionary steps but
incorporates different scenarios to represent various ethical dilemmas in the Muslim
accountants’ financial reporting decision. The research scope could be extended to include
accountants in other financial services to enhance the comparison of research results.
Future research should also examine the influence of perceived behavioural control on
the intention for fraud in financial reporting in banking industry using the theory of planned
behaviour (TPB) to compare on the relevance of the TRA and TPB in measuring the
behavioural intention in banking industry.
ACKNOWLEDGEMENTS
The first author expresses her gratitude to Universiti Teknologi MARA and Kementerian
Pengajian Tinggi Malaysia for the scholarship under ‘Skim Latihan Staf UiTM/KPT-SLAB.’
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17
Is voluntary disclsoure and Audit Comiitee Characteristic linked to earning
informativeness?
(Indonesia Listed Manufacturing Company)
ALOYSIUS HARRY MUKTI
Business School
Pelita Harapan University
Tangerang, Indonesia
[email protected]
Abstract
This study aims to examine the impact of voluntary disclosure and characteristics of
the audit committee towards earnings informativeness. The sample in this study focuses on the
manufacturing sector company with the observation period 2011-2013. The statistics are used
is multiple regression with Eviews software. This study found that the voluntary disclosure can
not increase earnings informativeness. Furthermore, audit committee characteristics that are
proxied by tthe audit committee members who have legal competence, finance accounting
competence and total audit committee showed mixed results, only audit committee with legal
competence and the total number of audit committee members can increase earnings
informativeness.
Keyword: voluntary disclsoure, Earning, audit committee
1. PENDAHULUAN
Studies related to the disclosure of the company is growing rapidly today, one reason
is that the disclosure in the annual report is considered to minimize the gap asymmetry of
information between stakeholders and the company. After the Asian financial crisis,
information transparency of companies have the caused much concern busniness Among
members of the community. According to the World Bank and the Asian Wall Street Journal,
publicly listed companies in South Asian countries are still grappling with the problem of low
information transparency (World Bank, 1999 in Chien, 2007). purpose of this paper is to
examine the effect of voluntary disclosure and audit committee characteristic on earnings
informativeness manufacturing listed company in Indonesia.
Research related to the relationship of voluntary disclosure and earnings quality have
been carried out, studies that examine the value relevance of voluntary disclosure made by
(Banghoj & Plenbor, 2008) showed that more voluntray disclosure does not improve the
association between current returns and future earnings. Different result Came from Lundholm
and Myers (2002) and Gelb and Zarowin (2002) in (Banghoj & Plenbor, 2008) based on US
Data both studies find that firms with are relatively more informative disclosure "bring the
future forward" so that current stock returns reflect more in earnings news. The research found
that from them also enhanced disclosure annual report do not make the current stock price more
informative.
Chien et al., 2007 examined the relationship information transparency and
informativeness of accounting earnings, the results of their study showed that information
transparency infromativeness it will reduce the level of accounting profit for the sample of
firms listed on the Taiwan stock exchange. A similar study tries to examine the level of
informativeness of accounting profit with the implementation of corporate governance.
Hermawan (2011) in his study to test the effectiveness of the board and the audit committee of
Commissioners on earnings informativeness with measurement Earnings Response Coefficient
(ERC) results showed that the more effective board of Commissioners would increase the
informativeness of earnings. The results for the influence of the audit committee effectiveness
are still mixed. The findings indicate that the effectiveness of the audit committee does not
affect the informativeness of earnings, but further analysis indicates that the audit committee
effectiveness has a positive effect on the ERC when the board of commissioners is not effective
in performing its role. Based on reviews this study indicates that the audit committee is an
integral part of the board of Commissioners so that the role of board of Commissioners still
have significant role in the monitoring function because the audit committee actually act on
Behalf of and report to the board of Commissioners. Therefore, the role of the audit committee
more will be revealed when the board itself is actually less effective.
The contribution of this study was to test the simultaneous impact of several previous
studies carried out separately ie voluntary disclosure and audit committee characteristics to
earnings informativeness with a sample in the Indonesia manufacturing company. Studies that
examine the factors that influence earnings informativeness has been done (hermawan, 2011);
Woitdke and Yeh (2013); Okatvia (2014); (Banghoj & Plenbor, 2008) but studies have
attempted to examine the characteristics of voluntary disclosure and audit committee
simultaneously to earnings informativeness with the conditions listed company in Indonesia is
still very rare
2. LITERATURE REVIEW AND HYPHOTHESIS DEVELOPMENT
2.1 Voluntary Disclosure and Earnings informativeness
Research conducted by Gelb and Zarowin (2000) is a quite different, they are examined
the relationship between voluntary disclosure with the informativeness of stock prices, the
results indicate that enhanced results in voluntary disclosure in stock prices that are more
informative about earnings, will be greater disclsoure provides information benefits to the
stock market. Furthermore, Chien et al., (2007) examined the relationship information
transparency of companies listed on the Taiwan stock exchange of the informativeness of
accounting earnings, empirical results show that information transparecy is positively
associated with the informativeness of accounting earnings. Roychowdhury & Sletten (2012)
uses a different approach related to voluntary disclosure are grouped into two groups: voluntary
disclosure bad news and good news disclsoure to withhold voluntary. The result shows
consistent with their prediction, that earnings' informativeness relative to other sources is
higher in bad-news quarters than in good-news quarters. Their results can not necessarily be
generalized to the context of Indonesia. Therefore, this research develops the research from
(Banghoj & Plenbor, 2008) and trying to re-examine the impact of voluntary disclosure and
the characteristics of the audit committee towards company's earnings informativeness using
samples in Indonesia. Based on the descriptioan above, then the following research hypothesis
will be:
H1: Voluntary disclosure will increase earnings informativeness.
2.2 Characteristics of the Audit Committee and earnings informativeness
Research conducted by Hermawan (2011) tried to examine mechanisms of governance
structure on earnings informativeness, board of Commissioners and the audit committee will
be a proxy of the governance structure in the study. Results showed that the existence of
governance structure such as board of Commissioners and the audit committee function implies
a better monitoring on the financial reporting process that will result in higher informativeness
of earnings. Nevertheless, the quality of the monitoring function depends on how effective the
board and the audit committee performed their duties. Previous research examines how the
effectiveness of the board of Commissioners and the audit committee in a two-tier board
structure influences the informativeness of earnings the which is measured by Earnings
Response Coefficient (ERC). The level of effectiveness is defined as the extent to the which
the board of Commissioners and the audit committee performed their duties according to their
responsibilities, which is associated with the board and audit committee characteristics.
Results of this study provide robust evidence that a more effective board of
commissioners improves the informativeness of earnings. However, the results for the
influence of the audit committee effectiveness are still mixed. The findings indicate that the
effectiveness of the audit committee does not affect the informativeness of earnings, but further
analysis indicates that audit committee effectiveness has a positive effect on ERC when the
board of commissioners is not effective in performing its role. Based on these findings, this
study indicates that audit committee is an integral part of board of commissioners so that the
role of board of commissioners still have significant role in the monitoring function because
the audit committee actually act on behalf of and report to the board of commissioners
Penelitian serupa dilakukan oleh Gillan et al, (2003) yang menguji hubungan antara
content of earnings (earnings response coefficients) and board and audit committee structure,
the results shows that earnings are more informative the greater is the independence and the
activity of the full board. Moreover, firms that have separated the CEO and board Chair
positions appear to have more informative earnings. The results also found that audit committee
characteristics influence the information content of earnings. In particular, firms that have
smaller audit committees have more informative earnings. This study will use three proxy for
measuring the characteristics of the audit committee (Oktavia, 2014), that are: (i) Audit
Committee who has expertise in Accounting (ii) Audit Committee who has expertise in the
field of law, and (iii) The number of members of the audit committee
Based on the description above,then it was developed following research hypothesis:
H2a : Expertise in the field of financial accounting that are owned by members of the audit
committee increase earnings informativeness
H2b : Expertise in the field of law which is owned by members of the audit committee increase
earnings informativeness
H2c : The number of audit committee members improve earnings informativeness.
3. RESEARCH METHOD
3.1. Research Model
This model was used to test the effects of voluntary disclosure and audit committee
characteristics to earnings informativeness. This model in this study were adopted from a
model developed by Woidtke and Yeh (2013) and Chien et al., (2007). This research model
differences with the model Woidtke and Yeh (2013) this research will add another one
independent variables that is voluntary disclosure Chien et al., (2007). the model (1) in this
study:
Model 1
CARit
=
α0 + α1Earningsit + α2Earnings*Voldisct + α3Earnings*Akunit + α4Earnings*Hukum
+ α5Earnings*Totkomit + α6 Lev + α7 Size1it + α8 Size2it
Variabel Operasionalization:
a. CAR (Cumulative abnormal return)
1) This variable is calculated by using the following steps:
Calculated actual return company i and month t, with this following equation:
Rit 
Pit  Pit 1
Pit 1
Desc:
Rit
= Actual return stock i in month t
Pit
= Closing price of the stock i in month t
Pit-1
= Closing price of the stock i in month t-1
2) Determine the market return (composite index) in month t, which is calculated by the
following formula:
Rmt 
IHSGt  IHSGt 1
IHSGt 1
Desc:
Rmt
= Market return
IHSGt
= IHSG (closing price) in month t
IHSGt-1
= IHSG (closing price) pada bulan t-1
3) Determine abnormal stock returns for each month, which is calculated by the following
formula:
ARt  Rit  Rmt
Desc:
ARt
= Abnormal stock returns in month t
Rit
= Actual return stock i in month t
Rmt
= Return market in month t
4) Determine the Cumulative Abnormal Return (CAR) company i, which is calculated by
the following formula:
n
CARi ,t   ARi ,t
i
CAR is a cumulative abnormal return over 12 months, from April in year t to March in
year t + 1 and calculated on a monthly basis.
b. Voldisc
Voluntary disclosure index (voldisc) will adopt from Wondabio (2009) research
instruments. The study used an instrument consisting of 67 items. Which detail the
instrument can be seen in the apendix 2, to determine the value content analysis is used in
each disclosure in the annual report the company and then next step will give a value of 1 if
it is disclosed and the value 0 if not disclosed (dummy variable). Furthermore, the level of
disclosure of information by each company (in an annual report which examined) will be
calculated with total disclosure scoring divided by total disclosure item.
c. Earnings
This variable was measured by using net income before extraordinary items of firm i in year
t-1 deflated by lagged total assets
d. Audit Committee characteristics
It uses several proxy variables (oktavia, 2014), that are:
1) AKUN
This variable was measured by using a number of audit committee members who have
expertise in the field of financial accounting. Members are said to have financial
accounting expertise if it meets one of the following criteria:
• Have a working experience in public accounting firms
• Has the profession as a public accountant (CPA certified)
• Have experience working as chief financial officer
• Having a financial accounting profession as a lecturer
• In the profile of the audit committee stated that the member is an expert in the field of
financial accounting
2) HUKUM
This variable was measured by using a number of audit committee members who have
expertise in law. Someone said experts in the fields of law if it is a law graduate from
university or have a profession as a lawyer.
3) TOTKOM
This variable was measured by using the total number of audit committee members.
e. Leverage
Variable leverage is control variables measured by the ratio of total debt divided by total
assets lagged firm i in year t.
f. Size1
This variable is a control variable in this study. Size1 measured using the natural logarithm
of the total assets of firm i in year t.
g. Size2
This variable is a control variable in this study. Size2 measured using the natural
logarithm of the market value of equity of firm i in year t.
3.2. Research Data
The data will be analyzed in this research is secondary data obtained from the
publication of the financial statements by the Indonesian Stock Exchange (BEI). The data is in
the form of an annual report for the period 2011-2013 were downloaded from www.idx.co.id.
3.3. Sampel
The population in this study is a company listed on the Indonesia Stock Exchange (BEI).
Samples in this study is a company engaged in the manufacturing sector. Samples companies
engaged in the financial sector was not examined because it is different respect to their specific
regulations. Summary selection of samples for the model (1) is presented in Table 1.
Tabel 1. Summary selection of samples
Description
The number of observations for 3 years (2011-2013)
Profile of the audit committee are unclear
Data is incomplete
Outlier
Final sample for testing models (1)
Jumlah
420
(35)
(37)
(8)
340
4. ANALISIS DAN HASIL
4.1 Descriptive Statistic
Table 4.1 presents the descriptive statistics of the variables that used to test the model
(1). From the table it is known that the average voluntary disclosure of 29 items, it indicates
that the sample in the average, their level of voluntary disclosure manufacturing companies
tend to be lower when compared to the maximum value of disclosure of 65 items.
Tabel 4.1 Descriptive statistics Model 1
Variable
Mean
Median
Maximum
Minimum
Std. Deviation
EARNINGS
4.16E+08
16788599
2.27E+10
-2.04E+09
2.01E+09
VOLDISC
29.48824
27.00000
65.00000
10.00000
10.42673
KOMAKUN
1.555882
2.000000
3.000000
0.000000
0.767977
KOMHUKUM
0.141176
0.000000
2.000000
0.000000
0.357076
TOTKOM
3.052941
3.000000
4.000000
2.000000
0.282462
LEV
0.654142
0.567264
2.491080
0.034703
0.429408
LNTA
20.55423
20.76958
26.05878
0.130000
2.335838
LNMVE
27.47341
27.30302
32.86711
23.35875
2.247508
N
340
Tabel Desc: This table represents the estimation models using multiple linear regression. The dependent
variable in this model is the CAR. the independent variable (i) EARNINGS measured by net income before
extraordinary items of firm i in year t-1 dideflate by lagged total assets. (ii) VOLDISC measured by the ratio
of the disclosure of the items listed in the annual report divided by the total of voluntary disclosure of items
(iii) KOMAKUN measured by total audit committee members who have competence in the field of financial
accounting (iv) KOMHUKUM measured by the total members of the audit committee who have the
competence in the field of Law (v) TOTKOM measured by total members of the audit committee (vi) LEV is
measured by the ratio of total debt divided by lagged total assets (vii) LNTA measured by total assets, natural
companies (viii) LNMVE measured by the natural logarithm of the market value of equity
From the variable characteristics of the audit committee, audit committee members who
have expertise in the field of financial accounting tend to be larger on average than companies
that have an audit committee members in the field of law or equal to 0.1411 compared to
1.5558.
Tabel 4.2 Hasil Regresi Model 1
(Hipotesis 1 dan Hipotesis 2)
ModelTesting:
CARit
=
α0 + α1Earningsit + α2Earnings*Voldisct + α3Earnings*Akunit + α4Earnings*Hukum
+ α5Earnings*Totkomit + α6 Lev + α7 Size1it + α8 Size2it
Dependen Var: CAR
Independen Var
Expected sign
Coef
Probability
EARNINGS
EARNINGS*VOLDISC
EARNINGS*AKUN
EARNINGS*HUKUM
EARNINGS*TOTKOM
LEV
LNTA
LNMVE
F Test
Adj R Square
Durbin Watson
N
+
+
+
+
+
+
+
0.002973***
0.000402
-5.51E-05
0.001351*
-0.001070**
0.307532**
-0.060163**
0.061026**
0.000019
0.083154
1.869402
340
0.0806
0.3519
0.5259
0.0024
0.0403
0.0149
0.0366
0.0164
* Sig level 1%
** Sig level 5 %
*** Sig level 10%
Tabel Desc: This table represents the estimation models using multiple linear regression. The dependent
variable in this model is the CAR. the independent variable (i) EARNINGS measured by net income before
extraordinary items of firm i in year t-1 dideflate by lagged total assets. (ii) VOLDISC measured by the ratio
of the disclosure of the items listed in the annual report divided by the total of voluntary disclosure of items
(iii) KOMAKUN measured by total audit committee members who have competence in the field of financial
accounting (iv) KOMHUKUM measured by the total members of the audit committee who have the
competence in the field of Law (v) TOTKOM measured by total members of the audit committee (vi) LEV is
measured by the ratio of total debt divided by lagged total assets (vii) LNTA measured by total assets, natural
companies (viii) LNMVE measured by the natural logarithm of the market value of equity
4.2 Results
Before conducting the research hypothesis testing, first tested the classic assumption in
advance and this research has been free from classical assumptions. Table 4.2 presents the
results of testing the model (1) which aims to test whether voluntary disclosure and audit
committee characteristics related to earnings informativeness. The first test conducted was to
test the relationship wheater accounting earings can explain the abnormal return of stocks
(Chien et al, 2007). In the test model 1 show that, earnings and average abnormal returns have
significant positive relationship. The results are consistent with research Chien et al, 2007,
which means that the higher the reported earnngs, the larger the average abnormal returns on
company stocks.
Testing Hypothesis 1 stated that the voluntary disclosure of company will increase
earnings infromativeness not proven. This suggests that voluntary disclosure by the company
did not have an impact on earnings informativeness, these results was different with research
that conducted by (Chien et al, 2007; Roychowdhury & Sletten, 2012) Their research showed
a significant positive correlation between the earnings disclosure voluntray informativenss.
Voluntary disclosure is the disclosure of the items that are not regulated by the regulatory
institution so that voluntary disclosure can display a very different kind of information between
companies and the different market conditions. Chien et al, 2007, using the ratio of long-term
investment as a proxy for voluntary disclosure and this was different with this study. Probably
selection of the appropriate information that is not addressed by market resulted in no
significant relationship between voluntary disclosure and earnings informativeness.
hypothesis 2a testing showed that the relationship between audit committee members
who have competence in the field of financial accounting and earnings informativeness not
proven. These results are not in line with the research oktavia, 2014 in his research that the
audit committee has competence in the field of Accountancy significant negative effect on
earnings informativeness. The different results shown on hypothesis testing 2b, the audit
committee has the legal competence positive significant effect on earnings informativeness. In
this study dutunjukkan that competence in the field of law is fairly small in amount, on average,
it can provide a response to earnings informativeness.
hypothesis 2c testing showed that total audit committee has a significant positive effect
on earnings informativeness, these results are not in line with the research oktavia (2014). Total
audit committees could be improved earnings informativeness, the mechanisms of good
governance with the audit committee the supervisory role is able to raise earnings
informativeness.
5. Conclusions, Limitations and Suggestions
This study aims to examine the impact of voluntary disclosure and characteristics of
the audit committee towards earnings informativeness. voluntary disclosure Proxy in this
research adopting the disclosure of wondabio (2009) item with some aspects (customer focus,
internal business process, learning and growth, asset utilization, productivity improvement,
revenu growth and other financial measurement). This study found that the voluntary disclosure
with those proxy can not increase earnings informativeness. Furthermore characteristics audit
committee are proxied by the of the audit committee members who have legal competence,
financial accounting competence and total audit committee showed mixed results only legal
competence and the total number of audit committee members can increase earnings
informativeness.
Limitations of this study were (1) proxy of voluntary disclosure needs to be renewed,
it might the reason voluntary disclosure variable was not significantly associated with earning
informatuvess. (2) the use of expertise in financial accounting definition less precise that
causing variable accountancy expertise in the field of financial audit committee is not related
to earnings informativeness. Further research is expected to contribute the most significant to
be a proxy for voluntary disclosure items, the need for further research related items voluntary
disclosure of information that is considered can provide incremental information for capital
market participants. Furthermore, next research is expected to provide a more comprehensive
description of relevant members of the audit committee who have competence in the field of
financial accounting.
References
Banghoj, Jesper and Thomas Plenborg. 2008. Value Relevance of Voluntary Disclsoure in the
Annual Report. Accounting and Finance 48. Page 159-180
Chien, Hao. Yu Chih Lin. Shaio Ya Huang. Ya Fen Chang. 2007. The Relationship Between
Information Transparency and the Informativeness of Accounting Earnings. The Journal of
Applied Business Research. Page 23-33
Hermawan, Ancella Anitawati. 2011. The Influece of Effecive Board of Commissioners and
Audit Committee on the Informativeness of Earnings: Evidance from Indonesia Listed Firms.
Asia Pacific Journal of Accounting and Fnance. Page 1-38
Yeh, Yin Hua and Tracie Woidtke. 2013. The Role of the Audit Committee and the
Informativeness of Accounting Earnings in East Asia. Pacific-Basin Finance Journal. Page 124
Roychowdhury, Sugata and Ewa Sletten. 2012. Voluntary Disclosure Incentives and Earning
Informativeness. The Accounting Review vol 87. Page 1679-1708
Wondabio, Ludovicus Sensi. 2009. Analisis pengaruh karakteristik perusahaan terhadap
tingkat pengungkapan pengukuran non keuangan serta hubungannya terhadap biaya ekuitas
dan penilaian value relevance perusahaan publik, Disertasi Program Studi Ilmu Akuntansi
Pascasarjana Fakultas Ekonomi Universitas Indonesia
Oktavia. 2014. Karakteristik Komite Audit dan Dampaknya terhadap Earning Informativeness
dan Kemampuan Investor dalam Memprediksi Laba Masa Depan. Program Studi Ilmu
Akuntansi Pascasarjana Fakultas Ekonomi Universitas Indonesia
Gelb, David and Paul Zarowi. 2000. Corporate Disclsoure Policy and the Informativeness of
Stock
Prices.
Social
Science
Research
Network
Electronic
Paper
Collection.
http://papers.ssrn.com/paper.taf?abstract_id=235009
Gillan, Stuart L. Kirsten L Anderson. Daniel N Deli. 2003. Board of Directors, Audit Committees and the
Information Content of Earnings. Working Paper Seris Learner College of Business and Economics
Appendix
1.
Regression Output
Dependent Variable: CAR
Method: Least Squares
Date: 04/29/15 Time: 01:43
Sample(adjusted): 2 340
Included observations: 339 after adjusting endpoints
White Heteroskedasticity-Consistent Standard Errors & Covariance
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
EARNINGS
EARNINGS*VOLDIS
C
EARNINGS*AKUN
EARNINGS*HUKUM
EARNINGS*TOTKO
M
LEV
LNTA
LNMVE
LAGCAR
-0.484313
0.002973
0.000402
0.364096
0.001696
0.000432
-1.330179
1.752866
0.932266
0.1844
0.0806
0.3519
-5.51E-05
0.001351
-0.001070
8.68E-05
0.000441
0.000520
-0.634912
3.061474
-2.058362
0.5259
0.0024
0.0403
0.307532
-0.060163
0.061026
0.193747
0.125699
0.028661
0.025291
0.077184
2.446565
-2.099140
2.412923
2.510201
0.0149
0.0366
0.0164
0.0125
R-squared
Adjusted R-squared
0.107567
0.083154
Mean dependent var
S.D. dependent var
0.187723
0.559821
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
0.536040
94.53463
-264.5629
1.869402
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)
1.619840
1.732702
4.406123
0.000019
2. Voluntary Disclsoure Item
BASIC MANUFACTURING INDUSTRY (WONDABIO, 2009)
No
1
2
3
4
Kriteria Pengungkapan
Pengiriman tepat waktu
Kualitas produk
Keamanan produk
Kemampuan kustomisasi produk
BSC
Group
Code
CF
CF
CF
CF
Jenis
Disclosure
Voluntary
Voluntary
Voluntary
Voluntary
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
Harga/ product range
Survey pelanggan/ hubungan dengan pelanggan
Layana purna jual
Komplain pelanggan
Penjualan berulang/ loyalitas pelanggan
Kebutuhan/ kepuasan pelanggan
Pengakuan/ pengembangan merek (brand awareness)
Citra/ reputasi perusahaan
Defect rates/ yield rates/ produktivitas
Penurunan waktu produksi/ pengembangan produk
Sistem persediaan/ produksi
Sistem distribusi/ pengiriman/ logistik
Pengelolaan kapasitas
Perbaikan proses atau re-engeneering
Efisiensi/penghematan
Kompetitor/ persaingan usaha
Kejadian/kondisi khusus yang mempengaruhi bisnis perusahaan
Outsourcing
Hubungan dengan pemasok
Service responsiveness
Diversifikasi geografis/pelanggan/produk (segmentasi)
Aktivitas riset dan pengembangan produk
Penjualan produk baru
Konsep baru/ inovatif/ kreatif (paten)
Pertumbuhan pada unit terjual
Aliansi stratejik/kerjasama terkait bisnis perusahaan
Kecelakaan, kesehatan dan keselamatan kerja
Tenaga paruh waktu dari mahasiswa/ pelajar
Total jam/ biaya training tenaga kerja
Rencana/ pengembangan karier
Dana pensiun/ imbalan kerja lainnya
Perputaran tenaga kerja/ loyalitas tenaga kerja
Pengembangan sistem informasi/ teknologi
Hubungan manajemen dan tenaga kerja
Kepuasan / kesejahteraan karyawan
Kesempatan bekerja yang sama
Keterlibatan tenaga kerja
Upah minimum, kompensasi/ penghargaan lainnya (karyawan)
CF
CF
CF
CF
CF
CF
CF
CF
CF
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
IB
LG
LG
LG
LG
LG
LG
LG
LG
LG
LG
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
Asset utilization rates
Analisis average capital employed
Rasio cost of good sold terhadap inventory
Rasio account receivable terhadap sales
Program cost reduction atau cost efficiency
Pengungkapan operating cost per employee
Rasio sales per employee
Analisis trend operating expenses
Analisis trend operating expenses terhadap competitor
Rasio biaya R&D terhadap sales
Analisis rasio operating expense terhadap sales
Analisis rasio indirect expense terhadap sales
Informasi tentang customer dan product line productivity
Informasi pertumbuhan pada unit terjual (quantity)
Future performance (growth) target
Asset disposal dan impairment
Analisis capital expenditures
Cash flow history
Informasi risiko fluktuasi kurs atau suku bunga
Tinjauan operasi segmen aktiva
Pertumbuhan harga pasar per lembar saham
Pertumbuhan nilai buku per saham
Pertumbuhan market capitalization
Informasi dan analisis cash flow terkait operating activity,
investing activity, financing activity dan cas flow pershare
Informasi dan penjelasan ikatan (komitmen) yang material untuk
aktiva atau investasi barang modal
Penjelasan :
CF
:Customer Focus
IB
: Internal Business Proccess
LG
: Learning and Growth
AU
: Asset Utilization
CR
: Cost reduction/Productivity Improvement
RG
: Revenue Growth
OFM : Other Financial Measures.
AU
AU
AU
AU
CR
CR
CR
CR
CR
CR
CR
CR
RG
RG
RG
OFM
OFM
OFM
OFM
OFM
OFM
OFM
OFM
OFM
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
Voluntary
OFM
Voluntary
EARNING INFORMATIVENESS AND REPUTATION OF AUDIT
FIRMS: DOES MARKET CONSIDER THE AUDIT QUALITY OF
THE BIG FOUR AND MID-TIER FIRMS?
Clarissa Kristina
Universitas Pelita Harapan
Antonius Herusetya*
Universitas Pelita Harapan
* Correspondence Author:
Antonius Herusetya, Faculty of Business, Universitas Pelita Harapan. Jalan MH Thamrin 1100,
Building F, Lippo Karawaci, 15811. Banten. Telp. +6221 5460901. Email:
[email protected].
ABSTRACT
This study investigates the impact of size/reputation of public accounting firms toward the earnings
informativeness measured by the Earnings Response Coefficient (ERC). We first examine whether
Big 4 audit firms as a measure of high audit quality have higher ERC than non-Big 4 firms. Secondly,
because of the significant growth of the Mid-tier audit firms in Indonesia recently, we should consider
these Mid-tier firms as an alternative to the Big 4 audit firms. We then examine whether the Big 4
audit firms have higher ERC than the Mid-tier firms. Our sample consist of 685 firm-years
observation for our first test and 567 firm-years observation for our second test from all listed
companies in the Indonesian Stock Exchange (IDX) during 2004-2008. Using pooled Ordinary Least
Squared (OLS), we found no evidence that Big 4 audit firms have higher ERC than non-Big 4 firms,
and we also found no evidence that Big 4 firms have higher ERC than Mid-tier firms. Our results give
interpretation that the market does not capture or differentiate the difference of audit quality among
the Big 4, Mid-tiers and the rest of audit firms in their investing decision.
Keywords: audit quality, earning response coefficient (ERC), audit firms, earnings informativeness
INTRODUCTION
Earnings Response Coefficient (ERC) is one way to measure earnings
informativeness or earnings quality (Balsam et al., 2003; Dechow et al., 2009; Sun et al.,
2011). ERC measures stock market responsiveness to unexpected earnings announcement.
Earnings will give information to investors. If earnings information has more information
content, the investor’s response will be stronger. It can be seen through the value of ERC
(Herusetya, 2012). Therefore, higher ERC value indicates higher earnings quality.
One thing that relates with earnings information and the reported financial statements
is the role of auditors from the public accounting firms that perform attestation service
(Riyatno, 2007). In the attestation service, the auditor issues an opinion about the reliability
of financial statements of a company based on the current accounting principle (Arens et al.,
2012; Riyatno, 2007). Opinion issued by an auditor will add client’s confidence towards
information reported by the company.
The quality of audit done by public accounting firms can be measured by the
size/reputation of the audit firms (Becker et al., 1998; DeAngelo, 1981; Reynolds & Francis,
2001; Teoh & Wong, 1993). Large public accounting firms (Big 4 firms) perform better audit
quality compared to the small public accounting firms (non-Big 4), shown by the higher
value of ERC (Teoh & Wong, 1993). This happened because larger public accounting firms
have more resources and clients, so they are not dependent on one or a few clients only. In
addition, the reputation of larger public accounting firms has been considered good by the
public, causing them to conduct audit more careful (Riyatno, 2007).
However, the accounting scandals that occurred in large companies in the United
States such as Enron, WorldCom, Xerox, and Merck result in a decline of public trust,
especially from investors, towards companies financial reporting in the capital market
(Riyatno, 2007). The mistake was addressed to the public accountants who should act as
public watchdog of financial information prepared by the companies. The same thing also
happened in Indonesia, for the case of Telkom and Indofarma, which require earnings
reassessment because the earnings management did not found by the previous auditor
(Riyatno, 2007). Those companies were audited by large public accounting firms that have
good reputation. Unfortunately, it did not guarantee that the company’s financial statements
reflect the company’s true value (Riyatno, 2007).
The collapse of Arthur Andersen in the United States resulted in significant changes
in the market of audit services, such as the growth in the Second-tier firms. The emergence of
new evidence that the role of Second-tier firms1 increased along with the implementation of
SOX in America (Carver et al., 2011). Second-tier financial reporting credibility is improved
and the audit quality of the Second-tier firms are comparable to the Big 4 post-Andersen
(Cassell et al., 2011; Boone et al., 2010). In Indonesia, instead of Second-tier firms Hayes
and Torrijos (2010) found the average growing rate for Mid-tier firms is 18 percent.
This research is investigating the impact of size/reputation of public accounting firms
towards earning informativeness measured by ERC in the context of Indonesia, through
samples from listed companies in Indonesia Stock Exchange (IDX) during the period of
2004-2008. Our study differs from prior research for two reasons, firstly there is very limited
research investigating this topic, especially in the context of Indonesia. Secondly, since Midtier firms in Indonesia are growing rapidly, our research explores how market reacts to the
audit quality of Mid-tier firms by examining how companies audited by Big 4 and Mid-tier
1
Second-tier includes the fifth and the sixth largest rank i.e., the Grand Thornton and BDO Seidman. Boone et
al. (2010) did the rankings in 2006, while the seventh and the eighth ranking are Crowe Chizek, and McGladrey
Pullen that are relatively smaller than Grant Thornton and BDO Seidman. This study uses the Mid-tier grouping
for its research purpose, which includes among others are Paxity, Mazars, RSM AAJ Associates, Moores
Stephens International, in addition to the Grant Thornton (Hendrawinata Gani & Hidayat) and BDO
International (Tanubrata Sutanto & Partners) as been categorized as the Second-tier by Boone et al. (2010).
firms differ in their ERC. Based on the arguments above, we want to investigate the impact of
size/reputation of public accounting firms towards the earnings informativeness and also the
difference in ERC between companies audited by the Big 4 and Mid-tier firms.
Further discussions in this study are as follows. Section II discusses literature review
and hypothesis development. Section III discusses empirical methodology. Section IV
discusses the findings of the test, and Section V is the conclusions.
HYPHOTESIS DEVELOPMENT
Reputation of the Public Accounting Firms
One of the most common proxies of audit quality is the size/reputation of public
accounting firms (e.g., Becker et al., 1998; DeAngelo, 1981; Reynolds & Francis, 2001; Teoh
& Wong, 1993). According to DeAngelo (1981), auditors from big audit firms, which
measured by the number of clients, will have greater probability to detect and reveal error in
financial statements. They tend to be less likely to compromise with their independencies or
behave opportunistically. Watkins et al. (2004) added that auditor reputation relates with the
market’s perception of auditor competence and independence since it represents the auditor’s
ability to enhance financial statements’ credibility.
Several studies found that size/reputation of public accounting firms does matters to
audit quality. Reynolds and Francis (2001) found that Big 5 auditors do not report more
favorably for larger clients compared to smaller clients. Becker et al. (1998) conclude that the
discretionary accruals of firms with Big 6 auditors are lower than firms with non Big 6
auditors. Therefore, Big 6 auditors are of higher quality than non Big 6 auditors. Moreover,
Francis and Yu (2009) found that larger offices of Big 4 provide higher quality audits, as they
are more likely to issue going-concern audit opinion and more accurate in predicting
bankruptcy. In addition, clients audited by larger offices of Big 4 are more likely to meet
earnings benchmark, consistent with less earnings management behavior.
Previous studies concludes a strong evidence that larger size/better reputation of
public accounting firms (e.g., Big 4) generates better audit quality compared to smaller public
accounting firms (non-Big 4). Big 4 companies include PricewaterhouseCoopers (PwC),
Deloitte, Ernst and Young (EY), and KPMG. Auditors from Big 4 companies have more
competencies and higher reputation compare to auditors from non Big 4 companies (Sanjaya,
2008). Therefore, auditors from Big 4 companies earnestly maintain market share, public
trust, and the company reputation by giving protection to the investor. If an auditor fails to
maintain reputation of the company, the public will not trust that Big 4 firms anymore. This
happened to Arthur Andersen regarding the Enron case (Sanjaya, 2008).
Earnings Informativeness
Earnings information is important for investors to decide about making an investment
or divestment since it portrays performance of the company in managing its resources
(Harahap, 2004). When annual earnings is announced, investors will respond towards the
earnings data announced. To the investors, earnings information can be bad news or good
news, depends on their expectation.
The process of predicting and understanding how investors respond to earnings data
has implications for understanding earnings quality (Dechow & Shrand, 2004). Earnings
response coefficient (ERC) is a measure of investor responsiveness to earnings information.
Scott (2009, p. 154) claimed that ERC “measures the extent of a security’s abnormal market
return in response to the unexpected component of reported earnings of the firm issuing that
security.” A stronger investor response is expected when earnings are more value relevant.
Therefore, ERC can be viewed as a proxy for earnings informativeness or earnings quality
(Balsam et al., 2003; Dechow & Shrand, 2004).
Previous empirical research studies proved the relationship between ERC and the
quality of earnings. Imhoff (1992) found that companies that had higher rankings on the basis
of their accounting quality had larger ERCs (as cited in Dechow & Shrand, 2004). Therefore,
a strong ERC indicates higher-quality earnings. Defond and Park (2001) also suggests that
ERCs are associated with earnings quality. When abnormal accruals suppressed the
magnitude or earnings surprises, they found higher ERCs. When abnormal accruals
exaggerated the magnitude of earnings surprises, they found lower ERCs (Dechow & Shrand,
2004).
Balsam et al. (2003) are also consistent with the interpretation of the ERC as a
measure of earnings quality. Considering the positive relation between auditor industry
specialization and ERC, Balsam et al. (2003) interpret that on average, specialized auditors
increase the market’s perception about earnings quality. Using ERC as a proxy of earnings
quality, Ghosh and Moon (2005) found that auditor tenure improves earnings quality.
Furthermore, Teoh and Wong (1993) found that Big 8 clients have significantly larger ERCs
than non Big 8 clients, as larger ERCs reflect more precise earnings.
Big 4 Firms and Earnings Response Coefficient
Earnings generate information to investors and investors respond to earnings data,
measured by ERC (Dechow & Shrand, 2004; Scott, 2009). Previous studies documented that
ERCs will be lower when earnings quality is lower, and higher when earnings quality is
higher (Dechow & Shrand, 2004; Defond & Park, 2001). Several previous researches test
investors perception towards the relationship between audit quality and reported earnings
quality, and found that higher quality of audits reduce the uncertainty and noise of financial
reporting, shown by higher ERCs (Balsam et al., 2003; Ghosh & Moon, 2005; Teoh & Wong,
1993).
As a proxy of audit quality, evidence from the previous studies found that the larger
size/better reputation of public accounting firms improves earnings quality (Becker et al.
1998; Francis & Yu, 2009; Reynolds & Francis, 2001; Sanjaya, 2008; Teoh & Wong, 1993).
Since ERC is a measure earnings informativeness or earnings quality, the larger size/better
reputation of public accounting firms will results in higher ERC. The research conducted by
Teoh and Wong (1993) found in the United States that larger auditors are more credible. This
shown by larger ERCs found in companies audited by Big 8 compare to the companies
audited by the non-Big 8.
Little research has been done in Indonesia regarding the impact of size/reputation of
public accounting firms towards earnings informativeness measured by ERC. However,
consistent with the evidence shown in previous studies, we conjecture that the larger
size/better reputation of public accounting firms (Big 4) will also give positive impact
towards earnings informativeness measured by ERC in Indonesia. The ERC of companies
audited by the Big 4 is predicted higher than the ERC of the companies audited by non-Big 4.
Based on the above argument, our hypothesis to be tested is:
H1: Big 4 firms have higher earnings informativeness measured by ERC compared to nonBig 4 firms.
ERC of the Big 4 and Mid-tier Firms
Several recent studies indicate the development of audit firms’ role for Second-tier
firms post-SOX legislation, and found that the audit quality of the Second-tier firms are not
as much different as the Big 4 firms (Carver et al., 2011; Boone et al., 2010; Cassel et al.,
2008). The study also found that the Mid-tier role in Indonesia is growing (Hayes and
Torrijos, 2010), but as far as we know there is no evidence that the Mid-tier firms in
Indonesia have higher audit quality than the Big 4, including their reporting accuracy.
Our study is in the context of Indonesia, which no studies have directly examined this
problem regarding the difference between the Big 4 and Mid-tier audit quality towards
earnings informativeness. We conjecture that in Indonesia, companies audited by Big 4 will
have higher ERC compared to companies audited by Mid-tier firms. Based on the above
arguments, we suspect that the ERC of the Big 4 firms is higher than the Mid-tier firms, so
our hypothesis to be tested is:
H2: Big 4 firms have higher earnings informativeness measured by ERC compared to Midtier firms.
EMPIRICAL METHODOLOGY
Data and Sample Selection
The population in this research contains all non-financial companies listed in
Indonesia Stock Exchange (IDX) 2004-2008 (five years). The sample selection is determined
through purposive sampling method. The data is taken from secondary data of firms’ audited
annual report and auditor opinion in JSX Watch, Indonesia Capital Market Directory
(ICMD), and/or the listed companies, whether published by IDX or available in IDX
website. Data for year end stock price data to calculate cumulative abnormal return is taken
from PRPM Institut Bisnis dan Informatika Indonesia (IBII). Based on our criteria we obtain
685 firm-years observation for Model 1 and 567 firm-years observation for Model 2. Table 1
shows the description of sample.
===================
======================
Insert
Table
1.
Sample
Descriptions
Empirical Research Model
Empirical model 1 and 2 are used to test hypothesis H1 and H2, respectively. The
purpose of hypothesis H1 is to test the impact of Big 4 accounting firms towards the earnings
response coefficients compared to non-Big 4 firms. While H2 is to test the impact of Big 4
firms towards the earnings response coefficients compared to Mid-tier firms. The following is
the empirical model used to test hypothesis H1 and H2:
CARit=
α0 + α1UEit + α2UEit*BIG4it + α3UEit*SIZEit + α4UEit*SALESGRWit +
α5UEit*LEVit + α6UEit*LOSSit + α7UEit*PRIORGCit + α8BIG4it + α9SIZEit +
α10SALESGRWit
+α11LEVit
+ α12LOSSit
+ α13PRIORGCit
+
eit.......................................................................................(Model 1)
CARit=
λ0 + λ1UEit + λ2UEit*BIG4MTit + λ3UEit*SIZEit + λ4UEit*SALESGRWit +
λ5UEit*LEVit + λ6UEit*LOSSit + λ7UEit*PRIORGCit + λ8BIG4MTit +λ9SIZEit
+ λ10SALESGRWit + λ11LEV it+ λ12LOSSit + λ13PRIORGCit +
eit...................................................................................... (Model 2)
The main variable in Model 1 and 2 are α2 (UE*BIG4) and λ2 (UE*BIG4MT),
respectively and predicted to be positive and significant. Some controlling variables are
included in Model 1 and 2 to control other factors that may influence the ERC. Since larger
companies are more in the news, the company size (SIZE) can be used as a proxy for the
informativeness of price although it is not a significant explanatory variable for the ERC
(Easton & Zmijewski, 1989 in Scott, 2009). Companies with high growth rates
(SALESGRW) have higher ERCs compared to companies with low growth rates (Dechow &
Shrand, 2004; Collins & Kothari, 1989 in Scott, 2009; Scott, 2009). Therefore, SALESGRW
coefficient is predicted to be positive. LEV coefficient is predicted to be negative since ERCs
are lower for highly levered companies (Scott, 2009). The market also assess negative
earnings and negative unexpected earnings differently, which ERC for negative earnings
surprise lower that positive earnings surprise (Scott, 2009). Therefore, LOSS is predicted to
be negative. PRIORGC is negatively related with abnormal return, thus ERC will be low
(Chen et al., 2000 in Meek & Thomas, 2004). Based on the arguments above, interaction
coefficient for UE*SIZE has no prediction sign for ERC, UE*SALESGRW is predicted to be
positive and significant, while negative for UE*LOSS, UE*LEV, and UE*PRIORGC.
Variable Measurement
Earnings Response Coefficient (ERC)
Following Ghosh and Moon (2005) and Herusetya (2012), we use cumulative market
adjusted return to measure cumulative abnormal return (CAR) as a dependent variable.
Monthly abnormal return is calculated as the difference between the stock returns for
company i and the return from the market m, with the formula ARit = Rit – Rmt. CAR is the
cumulative abnormal return for 12 months up to 3 months period after fiscal year using the
following formula:
Rit = ISPIit - ISPIit-1
ISPIit-1
Rmt = CSPIit - CSPIit-1
CSPIit-1
ARit = Rit – Rmt
Where:
AR
R
ISPI
=
=
=
the company abnormal return
stock returns company i, and market m
individual stock price at the end of month t, and t-1
CSPI
Subscript i,t
=
=
composite stock price at the end of month t, and t-1
identification for company i and year t
Earnings response coefficient is calculated using the following equation (Dechow and
Shrand, 2004):
CARit = α + δ UEit + eit
Where:
CAR
=
δ
UE
UEit
=
=
=
Where:
EPS
P
Subscript i, t
=
=
=
cumulative abnormal return from company i for 12 months from 3months period after fiscal year
earnings response coefficient (ERC)
unexpected earnings, calculated by:
(EPSit – EPSit-1)
P it-1
earnings per share for company i in year t, and t-1
stock price of the company
identification for company i and year t
UE is variable used to capture earnings surprise i.e., current year EPS minus previous
year EPS (Hermawan, 2009 in Herusetya, 2012). Based on the previous researches, UE
variable is interacted with other controlling variables in the research model since those
controlling variables affect ERC and contribute variation in ERC (for example, Balsam et al.,
2003; Hackenbrack & Hogan, 2002 in Balsam et al., 2003; Herusetya, 2012).
TESTS AND RESULTS
Descriptive Statistic and Correlation
Table 3 presents descriptive statistics for all variables in the analysis of Model 1 and
2. Overall, the data is normally distributed, except for SALESGRW. CAR has a positive
mean of 0.023 and 0.003 for Model 1 and 2, respectively. This shows that the firm-years
observation on average has a positive abnormal return. In Table 3 Panel A, BIG4 has a mean
of 0.500, means that on average 50% of the sample companies are audited by Big 4
companies. While in Panel B, BIGMT has 0.610, represent 61% of the firm-years
observations are audited by the Big 4 compared to Mid-tiers firms. The mean of unexpected
earnings (UE) is negative, which is -0.017 and -0.014 for Model 1 and 2, respectively shows
that on average the firms-year observation reports a decreasing profit compared to the
previous year.
================ Insert Table 3. Descriptive Statistics of Variables in Model
1========
Table 4 provides the Pearson Correlation between variables for Model 1 and 2. The
correlation between UE and BIG4 (Panel A), and UE and BIG4MT (Panel B) are not
significant even though with positive sign. For Panel A and B, UE has a negative correlation
with LEV and LOSS, each at 1% consistent with our early prediction, and a negative
correlation with PRIORGC at 10% consistent with early prediction. However, UE is not
significant towards other controlling variables for both Panel A and B.
============== Insert Table 4. Correlation among Variables in Model 1 and 2
==========
Result of Hypothesis Testing Model 1: The Impact of Big 4 Firms toward Earnings
Response Coefficient compared to Non-Big 4 Firms
The result of hypothesis testing of Model 1, in Table 5 shows adjusted R-squared of
3.79% and F-statistic is 3.073 significant at 0.01. The main coefficient α2 (UE*BIG4), which
represents the additional ERC for audit quality of Big 4 firms compared to non-Big 4 firms is
not significant (α2= 0.009, t-stat=0.109). The result of our test of Model 1 does not find any
evidence that the Big 4 audit firms have more incremental earnings response coefficient
(ERC) compared to the non-Big 4 firms. This interprets that the market is probably not
considering the difference between Big 4 and non-Big 4 firms as a determinant in responding
to the stock returns of the public listed companies in Indonesia. Therefore, hypothesis H1 is
rejected.
Meanwhile, the test result of controlling variables in Table 5 can be described as
follows. Coefficient of variable UE*SALESGRW, UE*LEV, UE*PRIORGC, UE*SIZE are
all insignificant for Model 1, except UE*LOSS which is negative and significant at 1%.
These show that almost all other variables have no impact towards the ERC.
============== Insert
===============
Table
5.
Result
of
Hyphotesis
Testing
Model
1
Result of Hypothesis Testing Model 2: The Impact of Big 4 Firms toward Earnings
Response Coefficient compared to Mid-Tier Firms
Model 2 test the difference in ERC between companies audited by Big 4 and Mid-tier
firms. The result of hypothesis testing Model 2 in Table 6, shows that empirical model has
adjusted R-squared of 4.23%. The F-statistic of Model 2 is 2.922, significant at 0.01. The
main coefficient of Model 2 is λ2 (UE*BIG4MT) which represents the additional ERC for
audit quality of Big 4 firms compared to the Mid-tier firms. Our testing result of Model 2
shows that λ2 (UE*BIG4MT) is not significant (λ2=0.006, t-stat=0.069). We do not find any
evidence regarding the difference in ERC between audited companies by the Big 4 and the
Mid-tier firms. In other words, our result does not show that Big 4 firms generate higher ERC
than Mid-tier firms since the coefficient UE*BIG4MT is not significant. Our results give
interpretation that the market probably is not considering the difference between Big 4 and
Mid-tier firms as a determinant in responding to the stock returns of the public listed
companies in Indonesia. Therefore, hypothesis H2 is rejected.
The testing result of controlling variables in Table 6 can be described as follows.
Coefficient variable of UE*SALESGRW, UE*LEV, UE*PRIORGC are all insignificant for
Model 2, except UE*LOSS which is negative significant at 0.01, and UE*SIZE which is
positive significant at 0.05. These show that almost all other variables have no impact
towards ERC.
===============
===============
Insert
Table
6.
Result
of
Hyphotesis
Testing
Model
2
CONCLUSIONS
This study tests the impact of Big 4 firms as a measure of audit quality towards the
earnings informativeness measured by the Earnings Response Coefficient (ERC). We also
test the difference in ERC between companies audited by the Big 4 and Mid-tier firms. Our
tests are done using the pooled Ordinary Least Squared (OLS) from total sample of 685 firmyears observation to test the impact of Big 4 firms toward ERC compared to non-Big 4 firms,
and 567 firm-years observation to test the impact of Big 4 firms toward ERC compared to
Mid-tiers firms. Both tests are done during five year period (2004-2008).
We found no evidence of the impact of the size/reputation of audit firms using Big 4
and no-Big 4 firms towards ERC. This result interprets that the market is probably not
considering the difference between Big 4 and non-Big 4 firms as a determinant in responding
stock returns of the listed companies in Indonesia. Our result is contradict with the previous
research, e.g., Teoh and Wong (1993) who found evidence that companies audited by the Big
8 have higher ERCs compare to the non-Big 8. Our second main test also found no evidence
regarding the difference in ERC of companies audited by the Big 4 and Mid-tier firms. The
result does not show that the Big 4 firms generate higher ERC than the Mid-tier firms.
In summary, we conclude that the market probably does not capture or differentiate
between the audit quality of the Big 4 and non-Big 4, and also the Big 4 and Mid-tier firms.
Alternative explanation for this condition is probably because the capital market in Indonesia
contains a lot of noise, and the reputation of the audit firms is not the main factor for their
investing decisions. Further research are suggested to examine the audit quality of Mid-tier
firms, because the role of Mid-tiers firms in Indonesia increase significantly and Mid-tier
firms can be considered as an alternative of higher audit quality in addition to the Big 4 firms
(Carver et al., 2011; Boone et al., 2010).
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Attachments:
Table 1
Sample Description
Description
Number of firm-years observations listed in IDX in 2004-2008
Total
2850
Number of firm-years of the financial industry
(715)
The preliminary sample in firm-years
2135
Number of firm-years which are listed and delisted during 2004-2008
Number of firm-years which do not provide the complete data of observations in
2004-2008
The final sample of Model 1 in firm-years
Number of firm-years that are not used in Model 2
The Final sample of Model 2 in firm-years
(880)
(570)
685
(118)
567
Observation sample should be recorded since 2003, because data for UE, SALESGRW, and PRIORGC need
information of the financial statements in 2003.
Table 2
Variable Description
Model 1- 2
CAR
=
UE
=
BIG4
BIG4MT
=
=
Control Variables
Cumulative abnormal return of firm i for 12 months period, ending in 3 months of the end of
fiscal year
Unexpected earnings, calculated by the formula:
(EPSit - EPSit-1)
UEit =
Pit-1
Where: EPS is earnings per share, and P is price of the company's stock
Dummy variable, 1 if the firm i is audited by Big 4, 0 otherwise
Dummy variable, 1 if the firm i is audited by Big 4, 0 if audited by Mid-tiers firms
SIZE
SALESGRW
LEV
LOSS
PRIORGC
εit
Subscript i,t
=
=
=
=
=
=
=
Natural logarithm of total assets
Sales/revenues growth, defined as (sales t – sales t-1)/sales t-1
Leverage ratio, defined as total liabilities divided by total assets at the end year t
Dummy variable for loss firm, 1 if the company report net loss in the current year t, 0 otherwise
Dummy variable, 1 if the company receive going-concern opinion in the prior year, 0 otherwise
Residual errors
Identification for firm i and year t
Table 3
Descriptive Statistics
Variable
Mean
Minimum
Maximum
Std.
Skewness
Deviation
Panel A. Model 1
CAR
0.023
-1.426
1.519
0.664
0.365
BIG4
0.500
0.000
1.000
0.500
-0.009
UE
-0.017
-3.907
3.692
0.803
-0.672
SIZE
13.588
10.149
17.038
1.642
0.159
SALESGRW
0.402
-0.958
43.459
2.904
14.354
LEV
0.577
0.005
1.585
0.344
1.372
LOSS
0.248
0.000
1.000
0.432
1.169
PRIORGC
0.469
0.000
1.000
0.499
0.126
CAR
0.003
-1.426
1.519
0.657
0.374
BIG4MT
0.610
0.000
1.000
0.489
-0.438
UE
-0.014
-3.907
3.692
0.699
-0.771
SIZE
13.828
10.149
17.038
1.624
0.022
SALESGRW
0.298
-0.859
43.459
1.881
21.519
LEV
0.552
0.024
1.585
0.300
1.352
LOSS
0.219
0.000
1.000
0.414
1.365
PRIORGC
0.451
0.000
1.000
0.498
0.195
Panel B. Model 2
Variable Definition:
All variables are defined as in Table 2. Winzorization procedures are done using 3 deviation
standards from the mean for all continuous data to avoid data outliers.
Table 4
Correlation among Variables
Variable Name
CAR
UE
BIG4
Panel A. Model 1
CAR
1.000
UE
0.052*
1.000
-0.128***
0.018
BIG4
1.000
SIZE
SALESGRW
LEV
LOSS
SIZE
-0.083**
-0.007
0.368***
1.000
SALESGRW
0.091***
0.012
-0.027
0.002
1.000
LEV
0.045
-0.189***
-0.091***
-0.033
-0.053*
1.000
LOSS
0.024
-0.207***
-0.111***
-0.252***
-0.008
0.401***
1.000
PRIORGC
0.060*
-0.060*
-0.194***
-0.151***
0.024
0.306***
0.361***
CAR
UE
BIG4MT
SIZE
SALESGRW
LEV
LOSS
Panel B. Model 2
CAR
1.000
UE
0.058*
1.000
-0.121***
0.019
1.000
-0.056*
0.002
0.277***
1.000
SALESGRW
0.007
0.008
0.018
0.086**
1.000
LEV
0.038
-0.261***
-0.028
-0.017
-0.019
1.000
LOSS
-0.023
-0.195***
-0.054*
-0.255***
0.045
0.384***
1.000
PRIORGC
0.063*
-0.065*
-0.198***
-0.155***
0.040
0.232***
0.360***
BIG4MT
SIZE
***, **, * is significance, each in level 1%, 5%, and 10% (two-tailed test).
Variable Definition:
All variables are defined as in Table 2. Winzorization procedures are done using 3 deviation standards from the mean for all continuo
data outliers.
Table 5
The Results of Hypothesis Testing H1
Model 1
α0 + α1UEit + α2UEit*BIG4it + α3UEit*SIZEit +
α4UEit*SALESGRWit + α5UEit*LEVit + α6UEit*LOSSit +
α7UEit*PRIORGCit
+
α8BIG4it
+
α9SIZEit
+
α10SALESGRWit + α11LEVit + α12LOSSit + α13PRIORGCit +
eit
CARit =
Dependent Variable: CAR
Variable
Prediction
Coefficient
t-Statistic
pvalue
VIF
(Constant)
?
0.262
1.080
0.281
UE
+
0.008
0.022
0.982
84.650
UE*BIG4
+
0.009
0.109
0.913
1.502
UE*SIZE
+/-
0.020
0.707
0.480
93.228
UE*SALESGRW
+
0.011
0.338
0.735
1.341
UE*LEV
-
-0.033
-0.422
0.673
7.534
UE*LOSS
-
-0.253***
-2.602
0.010
3.358
UE*PRIORGC
-
-0.076
-0.707
0.480
9.065
BIG4
+
-0.136**
-2.404
0.017
1.194
SIZE
+/-
-0.015
-0.806
0.421
1.255
+
0.018*
1.603
0.109
1.219
SALESGRW
LEV
-
0.034
0.394
0.694
1.334
LOSS
-
-0.021
-0.294
0.769
1.415
PRIORGC
-
0.023
0.428
0.669
1.245
Adj R-squared (%)
3.79
F-statistic
3.073
Prob (F statistic)
0.000
***, **, * is significance, each in level 1%, 5%, and 10% (two-tailed test).
Variable Definition:
All variables are defined as in Table 2. Winzorization procedures are done using 3 deviation standards
from the mean for all continuous data to avoid data outliers.
Table 6
The Results of Hypothesis Testing H2
Model 2
λ0 + λ1UEit + λ2UEit*BIG4MTit + λ3UEit*SIZEit
λ4UEit*SALESGRWit + λ5UEit*LEVit + λ6UEit*LOSSit
λ7UEit*PRIORGCit + λ8BIG4MTit + λ9SIZEit
λ10SALESGRWit + λ11LEV it+ λ12LOSSit + λ13PRIORGCit
eit
CARit =
+
+
+
+
Dependent Variable: CAR
Variable
Prediction
Coefficient
t-Statistic
pvalue
VIF
(Constant)
?
0.232
0.897
0.370
UE
+
-0.587
-1.304
0.193
103.273
UE*BIG4MT
+
0.006
0.069
0.945
1.902
+/-
0.068**
1.982
0.048
110.159
UE*SALESGRW
+
0.061
1.092
0.275
2.379
UE*LEV
-
0.016
0.165
0.869
7.778
UE*LOSS
-
-0.415***
-3.417
0.001
3.878
UE*PRIORGC
-
-0.125
-0.863
0.389
10.663
BIG4MT
+
-0.139**
-2.216
0.027
1.142
UE*SIZE
SIZE
+/-
-0.013
-0.688
0.492
1.225
SALESGRW
+
0.015
1.198
0.232
1.826
LEV
-
0.067
0.700
0.484
1.337
LOSS
-
-0.124
-1.554
0.121
1.453
PRIORGC
-
0.051
0.862
0.389
1.233
Adj R-squared (%)
4.23
F-statistic
2.922
Prob (F statistic)
0.000
***, **, * is significance, each in level 1%, 5%, and 10% (two-tailed test).
Variable Definition:
All variables are defined as in Table 2. Winzorization procedures are done using 3 deviation standards
from the mean for all continuous data to avoid data outliers.