The Effect of Accounting Conservatism On Earning Quality Marselinus Asri Atma Jaya Makassar University
[email protected] The purpose research is to examine other variables that also affect the relationship between conservatism and earnings quality. Good Corporate Governance is a set of mechanisms that can protect minority shareholders from expropriation by managers and insider shareholders with an emphasis on legal mechanisms. Data Population are companies listed in Indonesia Stock Exchange during the period 2010-20015. The sample selection is based on purposive sampling method with the purpose of obtaining a representative sample. An Alternative measure of accounting conservatism used is the instrumental variables of Accounting conservatism (VIKV) developed by Lo (2005). The quality of earnings can be measured through discretionary accruals calculated by way of setting aside total accruals (TACC) and nondiscretionary accruals (NDACC). In calculating DACC, Modified Jones Model is used because it is considered better among other models to measure earnings management (Dechow et al., 1995). The results of this study indicate that the Instrumental Variables Conservatism (VIK) has a significant positive effect on the Earning Quality. This means that management positively signals the application of accounting conservatism within the company and has an impact on improving the quality of earnings. The next investor is expected to provide more valuations by providing a high premium for the company's stock price. Keywords: Accounting Conservatism, Good Corporate Governance, Earning Quality, Modified Jones Model.
1.1 Introduction Investors and creditors have different interests in the company. Investors are trying to take advantage by taking excessive dividends from creditor funds. This condition is made possible with companies with a very large managerial ownership structure. The decision to pay an excessive dividend increases. Meanwhile creditors want the security of funds for future profits. To avoid the transfer of profits made by
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investors through excessive dividend withdrawal then the creditor wants a conservative financial reporting. The practice of each company's conservatism is usually different, due to the various choices of accounting methods. Conservatism is an accounting principle that tends to generate profit and asset values.Conservatism slows revenue recognition and accelerates cost recognition. The results show the surrounding the application of the principle of conservatism. Conservatism critics argue that this principle causes the financial statements to be biased so it can not be used as a tool to evaluate corporate risk. Conservatism is the principle that most influence accounting valuation (Chakrabarty & Moulton, 2012; ) (Watts, 2002). Conservatism is defined as a concept that delays the recognition of future cash inflows and as a conservative accounting which states accountants report the lowest accounting information of several possible values for assets and revenues, and the highest for liability and burden (Kothari, 2012).
Conservatism as a preference for
accounting methods that yields the lowest value for assets and income on the one hand, and produces the highest value for debt and fees, on the other. Or in other words, the conservatism produces the lowest equity book value. Conservatism supporters argue that conservatism produces higher-quality profits because this principle prevents corporations from exaggerating earnings and helps users of financial statements by presenting non-overstate earnings and assets (Feltham & Ohlson, 1995). They prove that earnings and assets calculated by conservative accounting can improve the quality of earnings so that it can be used to assess the company. There are two differences in the information the manager has and the information on the profits of the entrepreneur. First is that managers have information about future earnings that investors do not have. Both investors are information that is reflected in stock prices (Beaver, Mcnichols, & Price, 2007). Conservatism is part of an efficient contract mechanism between the company and various parties (Watts, 2003). On the basis of the contractual explanation, accounting conservatism can be used to avoid moral hazard caused by parties with asymmetric information, limited time harish, and limited responsibility. For example, a conservatism can withstand the manager's
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opportunistic
behavior
in
reporting
accounting
measures
used
in
the
contract.Accounting earnings that are used as contract media will be more useful to reduce agency costs arising from moral hazard, if presented conservatively (Kim, Kim, Kwon, & Lee, 2015) The contractual relationships proxyed with the ownership structure, debt structure, and firm size affect the accounting conservatism. In addition, these studies provide evidence of accounting conservatism practices in companies in Indonesia Accounting conservatism to deal with conflicts of interest around the dividend policy Researchers suspect that there are other variables that contribute to the relationship between conservatism and earnings quality.Good Corporate Governance is a set of mechanisms that can protect the minority shareholders from expropriation by managers and controlling shareholders (insider) With an emphasis on legal mechanisms. The legal approach of corporate governance means that the key mechanism of corporate governance is the protection of external investors, both shareholders and creditors, through a legal system that can be interpreted by law and its implementation. Of all the information about the company available throughout the year, some or more are derived from the income number of the year (Ball & Brown, 1968). The reported earnings quality can be affected by managerial share ownership. Managerial share ownership is one of the elements of Good Corporate Governance. The increase in operating current accrual changes being considered a specific risk reduction company. This is because the Indonesian capital market investors more trading within a short time (Asri, Ali, Habbe, & Rura, 2017) Pressure from capital markets causes firms with low managerial ownership to choose accounting methods that increase reported earnings, which in fact do not reflect the economic circumstances of the companies concerned. On the basis of this research institute, and enter the GCG seabagai variables that influence relationships accounting conservatism and earnings quality. This study tried to examine whether the selection of companies to adopt conservative accounting policies affect the earnings quality is moderated by Good Corporate Governance
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1.2. Formulation of the problem Based on the background of the problem that there are still pros and cons about the research about the effect of applying accounting conservatism to earnings quality. Researchers incorporate good corporate governance as a moderating variable, researchers want to obtain empirical evidence about the effect of accounting conservatism on the performance moderated good corporate governance. In this research the issues to be answered are:
1. Does Accounting Conservatism affect the earning quality 2. Does managerial ownership affect the relationship of accounting conservatism with earning quality
3. Does Institutional ownership affect the relationship of accounting conservatism with earning quality
4. Does the Number of Commissioners affect the relationship of accounting conservatism with the earning quality
5. Does the existence of the audit committee affect the relationship of accounting conservatism with earning quality
1.3. Research purposes This study is intended to assess the effect of accounting policy on accounting conservatism on earnings quality. The objectives of this research are:
1. To test whether Accounting Conservatism has an effect on the earning quality 2. To test whether managerial ownership affects the relationship of accounting conservatism with earning quality
3. To test whether institutional ownership affects the relationship of accounting conservatism with earning quality
4. To test whether the Number of Commissioners affects the relationship of accounting conservatism with the earning quality
5. To test whether the existence of the Audit committee influences the relationship of accounting conservatism with earning quality
1.4. Research Benefits The benefits of this study are as follows:
1. The results of this study can be useful information investor and management company about the application of conservative accounting as a signal to improve the quality of earning.
2. As reference material for those who want to do research with the same object but with different background.
LITERATURE REVIEW AND DEVELOPMENT OF HYPOTHESES 2.1. Signal Theory Managers provide information through financial statements that they apply a conservatism accounting policy that results in higher-quality profits because this principle prevents corporations from exaggerating earnings and helps users of financial statements by presenting profits and assets that are not overstate. The signal theory explains that signals are performed by managers to reduce information asymmetry. In practice, management implements conservative accounting policies by calculating high depreciation that will result in relatively permanent low profits which means that it has no temporary effect on declining profits that will reverse in the future. Voluntary changes and differences in accounting techniques have an effect on investors, companies and managers (Lev & Ohlson, 1983). Managers
make
accrual
income
decresing,
as
long
as
import
relief
investigation. This is in line with the earnings management hypothesis (Jones, 1991). Companies operating in complex environments have a degree of difference in information asymmetry limited by the flexibility of acquiring reporting technology (Bartov, Givoly, & Hayn, 2002). The net asset presented in systematic or relatively permanent understatement is a hallmark of accounting conservatism, so it can be said that accounting conservatism produces higher-quality profits because this principle prevents corporations from exaggerating earnings and helps users with financial
statements presenting profits and assets that are not overstate (Watts, 2002). Financial statement analysts identify the aspects of the relevant financial statements for the decision on achievement (Penman & Zhang, 2006). On average, analyst reports have the power of information that is the market reaction on the date the analyst announces the report is greater than the previous result. The analyst's activity is sensitive to factors related to the demand and supply of information research (Frankel & Litov, 2009). Accounting conservatism reflects a permanent policy of accounting (. Penman & Zhang, 2002). Empirically their research indicates that qualified earnings are obtained if management applies conservative accounting consistently without any change in accounting methods or changes in estimates. Understatement profit and net assets are relatively permanent, demonstrated by the financial statements is a positive signal from management to investors that management has implemented a conservative accounting to produce quality earnings. Investors are expected to receive this signal and rate the company higher. 2.2. Alternative Size of Accounting Conservatism Conservatism and recognition delays (delayed recognition) is key in financial reporting systems (Beaver, 1968). Disclosure and recognition are the two main methods used by firms to communicate the results of financial statements to the investment community (Zach, 2003). Conservative accounting is concerned not only with the selection of accounting methods, but also the estimates that are often applied in relation to accrual accounting (Penman and Zhang, 2002). Conservatism is an accounting practice that reduces earnings (and lowers net assets) when faced with bad news, but does not increase profits (and increase net asset value) when responding to good news (Sewell, 2010) (Basu, 1997) ( Dechow, 1994). According to Watts (2003) the explanation of earnings management seems to fit the literature on conservatism for the following reasons: (1) establish a net assets reserve that is understate,
(2) remove the negative stock return, potentially giving An asymmetric earnings / stock return relationship, (3) the initial loss will be temporary, followed by higher profit Permanently generated by backup use. From the above explanations it is known that discretionary accruals can also be influenced by the financial condition of the company so that the users of financial statements need to understand the possibility that the changes in accounting profit in addition to influenced accounting conservatism policy also by earnings management. Accounting conservatism is not the result of earnings management. Therefore, this study will use an alternative measurement of accounting conservatism created by (Lo, 2005), a model based on the idea that accounting conservatism is one of the causes of discretionary accruals, in addition to earnings management.Using discretionary accruals resulting from the accounting conservatism policy alone and not using total discretionary accruals because in total discretionary accrual there is also a component of profit management. 2.3. Assessment of Earning Quality The main issues faced by economics, finance and accounting are related to the relationship between profits reported by companies and their stock prices (Kothari, 2012). There is a relationship between accounting earnings and stock returns. There are three theoretical relationships developed by Beaver (1998) as the initial framework for understanding the relationship of earnings with stock returns. The first relationship is the profit of the present period is useful information to predict future earnings. The second relationship is the prediction of future earnings is a useful input in developing dividend expectations. The third relationship is the present value of dividend expectations determining stock prices. This structure of theory presents a useful framework for understanding the relevant value of profit, and how to analyze the value implications of Profit information (Houqe, van Zijl, Dunstan, & Karim, 2012) (Martin, 2007). The research using market to book ratio proxy for equity valuation is strongly influenced by the selection of accounting methods used by firms.
use market to book
ratios that reflect market value relative to firm value. The ratio of market value to book value provides the final and perhaps most comprehensive assessment of the status of the company's stock market. This ratio summarizes the investor's view of the company as a whole, its management, its earnings, its liquidity, and its future prospects. Therefore, by looking at this ratio can be seen the market reaction of positive signals from the company about the implementation of accounting conservatism given through the financial statements. The quality of earnings can be measured through discretionary accruals (DACC) calculated by way of setting aside total accruals (TACC) and nondiscretionary accruals (NDACC). In calculating DACC, Modified Jones Model is used because it is considered better among other models to measure earnings management (Dechow, Sloan, & Sweeney, 1995). In this study the earning quality is measured by Modified Jones Model.
2.4 Corporate Governance and agency Perspective Unresolved issues are theme markets (efficiency, and assessment), Individual Behavior (Investors, analysts and managers) and accounting structures. Accounting research becomes useful as far as confronting the first two themes with the third theme (Lafond, 2005). The choice of accounting policy relates to size and debt settlement with management compensation schemes. The agency relations perspective is the foundation that is used to understand corporate governance.The agency relationship arises when one or more people (principal) hire another person (agent) to provide services and then delegate decisionmaking authority to the agent (Jensen & Meckling, 1976). The agency relationship is a contract between the principal and the agent (Mueller, 2008)). The essence of the agency relationship is the separation between ownership (on the principal / investor side) and control (on the part of agent / manager). Agency theory developed by Mikhael Jhonson, considers that corporate management as an "agent" for shareholders will act with full awareness for its own interests, not as a wise and fair and fair to
shareholders. In subsequent developments, agency theory received a broader response because it looked more reflective of the reality. Investors have hope that managers will generate returns from the money they invest. Therefore a good contract between investor and manager is a contract that is able to explain what specifications will be done by managers in managing investors' funds,
the
specification
of
the
holder
of
returns
between
managers
and
investors. Ideally investors and managers should sign a complete contract, which specifies exactly what the manager will do in what the odds are and how the company's profits will be allocated. Most contingency factors are difficult to see or predict in advance so that a complete contract is difficult to manifest. Thus the investor is required to grant the residual return to the manager the right to make a decision under certain conditions not previously seen in the contract. The residual control rights owned by managers make it possible to be misappropriated and will create agency problems that can be interpreted with the difficulty of investors acquiring confidence that the funds they are investing are not in the correct school by the manager. The manager has the right to manage the company thereby, the manager has a discretionary right in managing investor funds. Based on the company's ownership structure found, La Porta et al. (1998,1999) and (Claessens, Djankov, & Lang, 1999) finds the agency problem to be considered in modern companies is an agency problem between controlling shareholders and minorities, especially in developing countries. On the other hand La suggests the importance of the role of corporate governance practices to protect minority shareholders. stated that companies with proprietary structures spread to outside investors need to implement corporate governance to increase the authority of public shareholders in order to balance management. Expropriation by managers can be done in various ways or forms ranging from embezzlement of investor funds, selling company products to companies owned by managers at lower prices at market prices, to selling other company assets to companies owned by managers. Even the most severe, expropriation made by managers can be in the form of retaining office or job position even though they are not berkopeten or quality again in running its business (Shleifer & Vishny, 1997) argues
that investor protection is crucial in corporate governance, as there is considerable expropriation of minority shareholders and shareholders of bonds by controlling stocks. According to them the legal approach is the most important approach to protecting foreign investors in corporate governance (Jensen & Meckling, 1976) indicate the presence of three additional elements that can limit the behavior of irregularities perpetrated by agents. These elements are the operation of the managerial labor market, the working of the capital market and the element of the market work for the desire to dominate and mamiliki or dominate the ownership of the company. The agent may not be in the future if the performance is bad so that it is dismissed by the shareholders. The managerial labor market will remove the chance of managers who are not performing well and behave in a way that defies the wishes of the shareholders of the company they manage. The efficient operation of capital markets can be a mirror of the manager's performance of the company's stock price. The working of the market for corporate control may inhibit the act of self-benefit, the manager himself in terms of stopping the manager from his position if the company under his management has a low performance that allows new shareholders to replace him with other managers after the company is taken over. The agency theory seeks to address agency problems that occur on the parties - parties working together have different goals and division of labor. In particular, agency theory discusses the existence of a relationship, in which a certain party (principal) delegate the work to another party (agent) who do the work.Agency theory is emphasized to address two issues that can occur in agency relationships. First is the agency problem arising when (a) the desires or purposes of the opposing principal and agent (b) and it is difficult or expensive for the principal to verify what the agent actually does. The problem is that the principal can not verify whether the agent has done something appropriately. The second is the problem of risk sharing that arises when the principal and the agent have different attitudes toward risk. Agency theory is based on several assumptions. These assumptions are divided into three types: assumptions about human nature, organizational assumptions and information assumptions. The assumption of human nature emphasizes that
human beings have selfishness and dislike risk. Organizational assumption is a conflict between members of an organization. The assumption of information is that information as a commodity that can be traded. Conflicts of interest are due to the possibility that the agent does not always act in the interests of the principal that leads to agency costs. The Principal may limit the divergence of its interests by establishing appropriate incentives by incurring monitoring costs designed to limit misbehavior by agents With regards to agency issues, corporate governance is a concept based on agency theory, expected to serve as a tool to give investors confidence that they will receive return on the funds they have invested.Corporate governance deals with how investors believe managers will not steal, embezzle and invest in unprofitable projects with funds invested by investors, and relate to how investors control managers. Corporate governance is a key element in improving economic efficiency which includes a series of relationships between the Management and the company's board of directors. Corporate governance also provides a structure that facilitates the determination of the objectives of a company and as a goal to achieve those goals and the means to determine performance monitoring techniques. 2.5.Corporate Governance. Based on the concept behind the development of corporate governance, there are various definitions of corporate governance. (Shleifer & Vishny, 1997) define corporate governance as "deals with the wais in which suppliers on finance to corporations assume themselves of getting a return on their investment" ie processes related to the ways in which stockholders Ensuring that they get a return on their investment. defines corporate governance as the effectiveness of mechanisms aimed at minimizing agency conflict in particular emphasis on legal mechanisms that prevent expropriation of minority shareholders. Corporate governance is a key element in improving economic efficiency which includes a series of relationships between the company's management, its board, its shareholders and other stekeholder.Corporate governance also provides a structure that facilitates the determination of suggestions from a company and as a means to achieve those goals and means for determining monitoring techniques.
Implementation of the principle of good corporate governance concretely has the objectives of the company, among others: facilitate access to domestic and foreign investment, get a cheaper cos of capital, give better decisions in improving the performance of the company, increase confidence and trustworthiness of stakeholders against the company, Directors and commissioners of lawsuits and protect the rights of minority shareholders. If the fulfillment of interest becomes balanced then the conflict of interest that occurs can be directed and controlled so as not to cause harm to each party. Therefore, the principles of good corporate governance memengang important role, among others: (1) the fulfillment of important information relating to the performance of an company as consideration for shareholders or potential investors to invest their capital. (2) the protection of the shareholder position from the misuse of authority and fraud which may be exercised by the directors or commissioners of the company (3) the responsibility of the company to fulfill and enforce any rules prescribed by its domestic law or place of domicile consistently, In the environment, business competition, employment, taxation and so on. This will be a strong reason for the severity of shareholders including minority shareholders to obtain justice through the implementation of GCG. The capital market also needs to apply GCG
principles to public
companies. This is demonstrated through various regulations issued by the Indonesia Stock Exchange, which states that all listed companies must implement GCG, are required to increase the protection of interests of investors, especially shareholders in public companies. Corporate governance perception index (CGPI) is a rating of corporate governance IICG based on 7 (seven) criteria, namely (1) corporate commitment to corporate governance, this explains the extent to which the company is concerned about the spirit of GCG (2) General Shareholders (AGM) and the treatment of minority shareholders, including timeliness of the GMS implementation and assurance of protection of the rights of shareholders including minority shares (3) board of commissioners, possessing competent board of commissioners in their fields and how optimal their roles and responsibilities Good governance, (4) the structure of the board of directors, the competent board of directors in their field and the role and
responsibility of the board of directors in the implementation of good corporate governance (5) relationships with stakeholders, bangaimana with relationships and responsibilities with the parties associated with Company (6) transparency and accountability, requiring open, timely, clear, comparable information regarding financial, management and ownership of the enterprise (7) responses to IICG research.The extent to which the seriousness of the respondents to follow this research. The existence of corporate governance ranking in the form of CGPI, we can surmise that the company that was ranked above better than the rank below. So as to allow for differences in market reaction among companies that enter the top ten and Non ten large. Benefits of implementing good corporate governance, for example: trusted investors, business partners and creditors, become more linear because the division of tasks and clear authority; Consideration of strength among the internal structure of the company ie directors, commissioners, audit committees, and so on; Decision making becomes more accountable and more cautious for sustainable companies. 2.6. Development of Hypotheses The researchers say there has been an increase in the conservatism of accounting standards globally.This increase is due to increased lawsuits, so that auditors and managers tend to protect themselves by always reporting conservative figures in their financial statements
(Bartov et al., 2002) . Empirically (Penman &
Zhang, 2002) research shows that quality earnings are obtained if management apply conservative accounting consistently without any change in accounting methods or estimation changes. Watts (2003) states that a systematic or relatively permanent net asset understatement as a hallmark of accounting conservatism has helped users of financial statements by presenting profits and assets that are not overstate. In Indonesia, the research on accounting conservatism proved that in general, firms choose accounting conservatism, which uses the C-Score as a proxy for conservatism prove that conservatism has a relevance value, so that the financial statements of companies that apply the principles of conservatism may reflect the market value of the company. Their research shows that the total accruals
(discretionary and non-discretionary accrual) significant positive effect on the value of the company The application of conservative accounting policies in the show through the financial statements is a positive signal from management to investors that management has implemented a conservative accounting to produce quality earnings. Based on the description above can be hypothesized as follows: H1: accounting conservatism positive effect on earning quality. Their results are pros and cons about research on the effect of the application of accounting conservatism on assessing the quality of corporate profits encourage researchers
to
incorporate
good
corporate
governance
as
moderating
variables. Researchers suspect that there are other variables that menginteraksi effect of accounting conservatism on accounting earnings quality associated with the principle of conservatism. The main objective of the company, is increasing the value of the company. The low quality of earnings will be able to make the decision-making errors of the wearer such as investors and creditors, so the value of the company will be reduced, stated the company's value will be reflected in the market price of its shares. Profit as part of the financial statements which do not present the true facts about the economic condition of the company can be questionable quality. Profits do not show the actual information about management performance can mislead the users of the report. If profits like this are used by investors to establish the market value of the company, then profits can not explain the actual market value of the company. The quality of reported earnings can be influenced by managerial stock ownership. The pressure from the capital markets led to the company with a low managerial ownership will choose accounting methods that increase reported earnings, which does not reflect the economic situation of the companies concerned, also examined the effect of managerial ownership on earnings quality as measured by discretionary accruals and the company's value as measured by Tobin's Q, concluded from the test results that managerial ownership affect positively on the quality of earnings, whereas the effect of managerial ownership on firm value is negative. Based on the description above can be hypothesized as follows: H2a:
managerial ownership affect
conservatism with earnings quality.
the relationship
between accounting
In conjunction with a monitor function, institutional investors are believed to have the ability to monitor management actions better than individual investors. According to Lee et al., (1992) mentions two differences of opinion regarding institutional investors. The first opinion is based on the view that institutional investors are the temporary owner (owner transfer) so that only focused on current income (current earnings). Changes in current profits can influence decisions of institutional investors. If this change is not perceived benefit by the investor, the investor can liquidate their shares. The results of the research states that institutional investors typically have a large number of shares, so that if they liquidate its stock will affect the overall value of the stock.To avoid liquidation actions of investors, managers will perform earnings management. The second opinion institutional investors regard as an experienced investor (sophisticated). According to this opinion, investors are more focused on the future earnings (future earnings) greater relative of current profits. Shiller and Pound (1989) explains that the institutional investors have spent more time to analyze investment and they have access to information that is too expensive acquisition for other investors. Institutional investors will monitor effectively and will not be easily misled by the actions managers manipulation. Research states that the value of the company (Tobin's Q) is influenced by managerial ownership, institutional and size of the board of directors. Based on the description above can be hypothesized as follows: H2b : institutional ownership affects the relationship conservatism and earnings quality. Percentage of board of directors from outside the company independent significantly negative effect on discretionary accrual (Jiraporn, Miller, Suk, & Kim, 2008). Research (Zimmerman & Carter, 2003) concluded that the composition of the board of directors from outside better able to reduce fraudulent financial reporting than the presence of the audit committee. The study also shows that the size of the board and the characteristics of the commissioners who come from outside the company affects the likelihood of fraudulent financial reporting. (Jiang, Lee, & Anandarajan, 2008) examined the effect of corporate governance of operating performance (return on equity, profit margins, and sales growth), assessment (Tobin's Q) and the shareholder payout (dividend yield and share
repurchases). Corporate governance is measured by using the Gov-Score, which is based on data provided Institutional Shareholder Services. Gov-Score is a mixture of 51 factors that include eight categories of corporate governance among other audit and board of directors. Research results mention that companies with better governance is relatively more profitable, have more Tobin's Q and payments to shareholders better. (Wang, 2014)also found that companies with independent boards have a return on equity,profit margins and a higher dividend yield. Based on the description above, the hypothesis is: H2C: Number of Commissioners positive effect on the relationship between accounting conservatism with earnings quality. The Audit Committee, conservatism and Quality of Earnings (Jiraporn et al., 2008), (Chang, 2013) tested the effectiveness of audit committees in reducing earnings management performed by the management. Research results mention that the audit committee of external origin are able to protect the interests of shareholders of earnings management actions undertaken by management, that the existence of the audit committee have a positive impact on the quality of earnings and enterprise value which is calculated by Tobin's Q. This gives evidence that the existence of an audit committee can improve the effectiveness of the company's performance. From the description above, the hypothesis in this study are: H2D: Audit committee Presence affect relations accounting conservatism on earnings quality. Stages Model analysis is as follows: Model (1): KL = β 0 + β 1 VIKV + β 2 Ko + β 3 KI + β 4 KM + β 5 KA + ε Model (2a): KL = β 0 + β 1 VIKV + β 2 KM + ε Model (2b): KL = β 0 + β 1 VIKV + β 2 KM + β 6 VIK * KM + ε Model (3a): KL = β 0 + β 1 VIKV + β 2 Ko + ε Model (3b): KL = β 0 + β 1 VIKV + β 2 Ko + β 3 VIKV * Ko + ε Model (4a): KL = β 0 + β 1 VIKV + β 2 KA + ε Model (4b): KL = β 0 + β 1 VIKV + β 2 KA + β 3 VIKV * KA + ε Model (5a): KL = β 0 + β 1 VIKV + β 2 KI + ε Model (5b): KL = β 0 + β 1 VIKV + β 2 KI + β 3 VIKV * KI + ε Multiple Linear Regression Analysis: KL = β 0 + β 1 VIKV + β 2 KM + β 3 Ko + β 4 KA + β 5 KI + β 6 VIK * KM + β 7 VIKV * Ko +
β 8 VIKV * KA + β 9 VIKV * KI + ε KL = earnings quality TACC it = EBXT it - OCF it TACC it / TA i, t-1 = α 1 (1 / N i, t-1 ) + α 2 ((ΔREV it ) / TA i, t-1 ) + α 3 (PPE it / TA i, t- 1 ) + ε it NDACC it = α 1 (1 / TA i, t1 ) + α 2 ((ΔREV it - ΔREC it ) / TA i, t1 ) + α 3 (PPE it / TA i, t1 ). DACC it = (TACC it / TA i, t-1 ) - NDACC it TACC it = Total Accrual is measured as the difference between net income before extraordinary item (EBXT it ) with operating cash flow (OCF it ) VIKV = Variable conservatism Instruments Is the predicted value of the dependent variable regression with LBKNBLPJ where independent variables INVRPDA, UDA, ULUDA, and DEPA. 1. Accounts receivable, namely abnormal Cross-sectional regression residuals Receivable (PD) on net sales change (Δ Pjln jt ) for firm j in year t, using a total fixed assets as deflators (A) with the following formula: PD jt / A it-1 = β1 it (1 / A jt-1 ) + β2 it (Δ Pjln jt / A jt-1 ) + ε The study used reverse abnormal trade receivables (inv PDA) divided by total aktva year t-1 as a proxy for the level of accounting conservatism. Inv PDA calculated by multiplying the PDA to PDA to-1. INVPDA positive sign shows the organization of accounting knsrvatif and vice versa. 2. Preparations abnormal namely Cross-sectional regression residuals preparations (SDN) at perubahankos goods sold (ΔKBD jt ) for firm j in year t, using a total fixed assets as deflators (A) with the following formula: SDN jt / A it-1 = β1 it (1 / A jt-1 ) + β2 it (Δ KBD jt / A jt-1 ) + ε The study used reverse abnormal dosage (inv SDA) divided by total aktva year t-1 as a proxy for the level of accounting conservatism. Inv SDA SDA is calculated by multiplying by -1. INVSDA positive sign shows the organization of accounting knsrvatif and vice versa. 3. Debt abnormal trade is cross-sectional regression residuals Payable (UD) in Kos goods sold (Δ KBD jt ) for firm j in year t, using a total fixed assets as deflators (A) with the following formula: UD jt / A it-1 = β1 it (1 / A jt-1 ) + β2 it (Δ Pjln jt / A jt-1 ) + ε The study used reverse abnormal trade debt (inv UDA) divided by total aktva year t-1 as a proxy for the level of accounting conservatism. Inv UDA UDA is calculated by
multiplying by -1. INVUDA positive sign shows the organization of accounting knsrvatif and vice versa. 4. Good Debt other than trade debts abnormal namely Cross-sectional regression residuals in addition to the debt Trade Utanglancar abnormal (UL-UD) on net sales change (Δ PJLN jt ) for firm j in year t, using a total fixed assets as deflators (A) with the following formula: (UL- UD jt) / A it-1 = β1 it (1 / A jt-1 ) + β2 it (Δ Pjln jt / A jt-1 ) + ε The study used the good debt other than trade debts abnormal (UL- UDA) divided by total aktva year t-1 as a proxy for the level of accounting conservatism. UL UDA implementation of accounting is positive show knsrvatif and vice versa. Components of good debt is debt other than trade payables VAT, gifts debt, the debt commission, other yag contingent debt, and other fees that are unpaid. 5. Cost Depreciation and amortization abnormal namely Cross-sectional regression residuals Depreciation and amortization (DEP) on gross fixed assets (ATB ) for firm j in year t, using a total fixed assets as deflators (A) with the following formula: (DEP jt) / A it-1 = β1 it (1 / A jt-1 ) + β2 it (ATB jt / A jt-1 ) + ε This study uses abnormal depreciation and amortization expense (DEPA) divided by total aktva year t-1 as a proxy for the level of conservatism akuntansi.DEPA positive sign shows the organization of accounting knsrvatif and vice versa. The variable element of moderation Good Corporate Governance KM = Proportion Managerial Ownership Ko = Proportion of commissioners KA = Audit Committee KI = The proportion of institutional ownership VIK * KM = interaction variable conservatism instrument with Managerial Ownership VIK * Ko = Interaction Variable Composition instruments conservatism with Commissioner VIK * KI = interaction variable conservatism instrument with the audit committee VIK * KM = interaction variable conservatism instrument with Institutional Ownership ε = error
RESEARCH METHODS 3.1. Population, Sample and Data Collection Techniques The population of this research is all public companies listed in Indonesia Stock Exchange during the period 2011-2015. The sample selection is based on purposive sampling method with the purpose of obtaining a representative sample in accordance with the criteria specified. Criteria companies sampled in this research are included in this type of manufacturing companies listed in Indonesia Stock Exchange during the period 2011-2015, published financial statements for the period ended December 31 during the observation period 2003-2007. 3.2. Variables and measurement The independent variables: Instrumental Variable conservatism (VIK). Independent variable is accounting conservatism as measured by the instrumental variable accounting conservatism (VIKV) are made using 8 (eight) proxy that allegedly can catch construct conservatism based definitions accounting conservatism as a tendency to debase the value of assets, raising debt, recognizing revenue more slowly, and recognizes the costs more quickly. Alternative measures used accounting conservatism is an instrumental variable accounting conservatism (VIKV) developed by (Lo, 2005). VIKV formed from the predicted value LBKNBLPJ regression with the dependent variable and the independent variables INVRPDA, UDA, ULUDA, and DEPA. LBKNBLPJ = excess taxable income above the income before tax divided by total assets in year t-1. INVRPDA = residuals from a cross-sectional regression accounts receivable (PDjt) on changes in net sales (PJLNjt) for firm j in year t, using total assets t-1 as the deflator (A). The study used reverse abnormal trade receivables (INVRPDA) divided by total assets year t-1 as a proxy for the level of accounting konseravtisme. INVRPDA PDA is calculated by multiplying by -1. UDA = residuals from a cross-sectional regression payables (UDjt) on changes kos goods sold (KBDjt) for firm j in year t, using total assets t-1 as the deflator (A). ULUDA = residuals from a cross-sectional regression good debt other than trade payables [(UL-UD) jt] on changes in net sales (PJLNjt) for firm j in year t, using total assets t-1 as the deflator (A).
DEPA = residuals from a cross-sectional regression in depreciation and amortization (DEPjt) on gross fixed assets (ATBjt) for firm j in year t, using total assets t-1 as the deflator (A). Dependent variables: Quality of Earnings Earnings quality can be measured by discretionary accruals are calculated by menselisihkan total accruals (TACC) and nondiscretionary accruals (NDACC). In calculating the DACC, Modified Jones model used for this model is considered better among other models to measure earnings management (Dechow et al, 1995). The model calculation is as follows:
TACC it = EBXT it - OCF it TACC it / TA i, t-1 = α 1 (1 / N i, t-1 ) + α 2 ((ΔREV it ) / TA i, t-1 ) + α 3 (PPE it / TA i, t- 1 ) + ε it NDACC it = α 1 (1 / TA i, t1 ) + α 2 ((ΔREV it - ΔREC it ) / TA i, t1 ) + α 3 (PPE it / TA i, t1 ). DACC it = (TACC it / TA i, t-1 ) - NDACC it
Variable Moderation: Good Corporate Governance (GCG) Variable Moderation is the Good Corporate Governance (GCG) associated with GCG elements, namely: The proportion of Managerial Ownership (KM) The proportion of commissioners (Ko) Audit Committee (KA) The proportion of institutional ownership (KI) 3.3. Data analysis method A. Correlation analysis This analysis is used to determine the relationship between the variables studied. This variable consists of variables Instrument conservatism (VIK), earnings quality, managerial ownership, Commissioner, the Committee and Institutional Ownership. B. Multiple Linear Regression Analysis This analysis is used to examine the effect of which is Independent Variable Variable conservatism Instruments (VIK) and Variable Moderation consists of: managerial ownership, Commissioner, the Committee and Institutional Ownership on the Quality of earnings The model Multiple Linear Regression Analysis to test the following hypothesis:
KL = β 0 + β 1 VIKV + β 2 KM + β 3 Ko + β 4 KA + β 5 KI + β 6 VIK * KM + β 7 VIKV * Ko + β 8 VIKV * KA + β 9 VIKV * KI + ε KL = earnings quality VIKV = Variable conservatism Instruments Is the predicted value of the dependent variable regression with LBKNBLPJ where independent variables INVRPDA, UDA, ULUDA, and DEPA. KM = Proportion Managerial Ownership Ko = Proportion of commissioners KA = Audit Committee KI = The proportion of institutional ownership ε = error
DISCUSSION 4.1 Variable Instruments conservatism (VIK) the predicted value of the dependent variable regression with LBKNBLPJ where independent variables INVRPDA, UDA, ULUDA, and DEPA. 1. Accounts receivable, namely abnormal Cross-sectional regression residuals Receivable (PD) on net sales change (Δ Pjln jt ) for firm j in year t, using a total fixed assets as deflators (A) with the following formula: PD jt / A it-1 = β1 it (1 / A jt-1 ) + β2 it (Δ Pjln jt / A jt-1 ) + ε The study used reverse abnormal trade receivables (inv PDA) divided by total aktva year t-1 as a proxy for the level of accounting conservatism. Inv PDA calculated by multiplying the PDA to PDA to-1. INVPDA positive sign shows the organization of accounting knsrvatif and vice versa. 2. Preparations abnormal namely Cross-sectional regression residuals preparations (SDN) at cost of goods sold (ΔKBD jt ) for firm j in year t, using a total fixed assets as deflators (A) with the following formula: SDN jt / A it-1 = β1 it (1 / A jt-1 ) + β2 it (Δ KBD jt / A jt-1 ) + ε The study used reverse abnormal dosage (inv SDA) divided by total aktva year t-1 as a proxy for the level of accounting conservatism. Inv SDA SDA is calculated by
multiplying by -1. INVSDA positive sign shows the organization of accounting knsrvatif and vice versa. 3. Debt abnormal trade is cross-sectional regression residuals Payable (UD) in Kos goods sold (Δ KBD jt ) for firm j in year t, using a total fixed assets as deflators (A) with the following formula: UD jt / A it-1 = β1 it (1 / A jt-1 ) + β2 it (Δ Pjln jt / A jt-1 ) + ε The study used reverse abnormal trade debt (inv UDA) divided by total aktva year t-1 as a proxy for the level of accounting conservatism. Inv UDA UDA is calculated by multiplying by -1. INVUDA positive sign shows the organization of accounting knsrvatif and vice versa. 4. Good Debt other than trade debts abnormal namely Cross-sectional regression residuals in addition to the debt Trade Utanglancar abnormal (UL-UD) on net sales change (Δ PJLN jt ) for firm j in year t, using a total fixed assets as deflators (A) with the following formula: (UL- UD jt) / A it-1 = β1 it (1 / A jt-1 ) + β2 it (Δ Pjln jt / A jt-1 ) + ε The study used the good debt other than trade debts abnormal (UL- UDA) divided by total aktva year t-1 as a proxy for the level of accounting conservatism. UL UDA implementation of accounting is positive show knsrvatif and vice versa. Components of good debt is debt other than trade payables VAT, gifts debt, the debt commission, other yag contingent debt, and other fees that are unpaid. 5. Cost Depreciation and amortization abnormal namely Cross-sectional regression residuals Depreciation and amortization (DEP) on gross fixed assets (ATB ) for firm j in year t, using a total fixed assets as deflators (A) with the following formula: (DEP jt) / A it-1 = β1 it (1 / A jt-1 ) + β2 it (ATB jt / A jt-1 ) + ε This study uses abnormal depreciation and amortization expense (DEPA) divided by total aktva year t-1 as a proxy for the level of conservatism akuntansi.DEPA positive sign shows the organization of accounting knsrvatif and vice versa. 4.3 Descriptive Statistics The sampling process generates 28 companies for research period 2003 to 2007, resulting in 112 observations. To obtain an overview of the research data samples can be seen descriptive statistics such research in table 4.10 presents the descriptive statistics of data samples ( data panel ) in the period 2003 to 2007
variable
N
Institusional ownership
table 4.10 Descriptive statistics Minimum
Maximum
Mean
Std. Deviation
112
.27500
.97950
.7530938
.17378429
Managerial ownership
112
.00000
17.31000
.005020045
1.94662991
Independent Com.
112
.00000
.66667
.2318812
.22462852
112
0
1
.51
.502
Conservatism
112
-0.61
0.33
0.10
0:14
Earning Quality
112
-3682
2.608
.00000
.986394
Valid N (listwise)
112
audit committee
Source: Appendix SPSS VIK dependent variable showed an average of 0:10 to 0:14 while the standard deviation Earnings Quality variable as an independent variable has an average of 0.000 with a standard deviation of 0.986394. VIK dependent variable showed that the average standard deviation 0:10 to 0:14 .Variabel moderation proportion of institutional ownership represents the average deviation standar0 0 .7530938 with .17378429. The proportion of institutional ownership moderating variable indicates the average deviation standar0 0 .7530938 with moderation .17378429..Variabel Proportion Managerial ownership shows the average standard deviation 0.5020045dengan 0. 1.94662991. Moderating variable proportion of independent commissioners showed the average standard deviation 0,2318812dengan. 0.22462852 4.4 Hypothesis Testing Simple Analysis 4.4.1 Regression Coefficients Regression analysis serves to measure the effect of variable VIK against the quality of earnings. Therefore, before described a discussion of regression analysis, it first has to be presented the results of the regression data processed by using SPSS version 17 that can be seen through Table 7 below:
table 4.11 Variable Regression Instruments conservatism and Quality of Earnings
Model
unstandardized Coefficient
t count
Sig
Ket.
Significant
B
Std error
1. Constant
-0.374
0102
-3671
000
Conservatism
3,587
0593
6.053
0.00
R = 0.500 R 2 = 0.250 Sig = 0,000
Source: Appendix SPSS Based on the results table 7 regression data processing between VIK with earnings quality companies listed on the Indonesia Stock Exchange regression equation, it can be presented as follows: Earning Quality = - 0.374 + 3,587 VIK The regression equation above statistics can be translated as follows:
a. The constant of -0.374 states that if VIK equal to zero (0), then the earnings quality is equal to -0.374. Accounting policy choices that are conservative cause the performance of the company to be ugly and ultimately have an impact on the financial statements produced by the company. If the company has a bad performance, the quality of the profit generated by the company is also ugly.
b. VIK regression coefficient for states that every increase of 1% VIK, will improve the quality of the profit of 3587%. The above test results show that conservative accounting policy choices significantly and positively impact on the quality of earnings because the value of p value = 0.000 less than the value of α = 0.05. This means that Vikt within the company. With the selection of accounting conservatism policies have an impact on the quality of the profit generated by the company to be qualified 4.4.2 Analysis of Determinant Coefficient Determination coefficient analysis was conducted to determine how large the percentage of variation of the independent variables used in the model is able to explain the variation of the dependent variable. As the results of the model output summary in table 8, visible determination coefficient of 0.250 means that variations in the dependent variable earnings quality can be explained by variations in the independent variable of the audit committee only by 25%, and the rest of 75% is
explained by other variables outside the model that are not included in the this analysis.
R
table 4.12 The determinant coefficient
R Square
adjusted R
.250
Square 0,243
.500
Source: Appendix SPSS The sampling process generates 28 companies for research period 2011 to 2015, resulting in 112 observations. To obtain an overview of the research data samples can be seen as the study of descriptive statistics in Table 4.1 presents the descriptive statistics of data samples (panel data) from 2011 to 2015 The dependent variable quality of earnings as a proxy showed an average of 0.000 with a standard deviation of variables Instrument .986394 while conservatism (VIK) as an independent variable has an average of 0:10 with standar0.14 deviation. Moderating variable proportion of independent commissioners showed the average .2318812 and managerial ownership shows the average .005020045 which means most of the sample company shares not owned by the manager. Institutional ownership shows the average .7530938 which means most of the company's shares are owned by institutional sample. Classic assumption test was not performed because this study uses panel data types that allow the identification of specific parameters without the need to make assumptions tight or do not require the fulfillment of all the assumptions of classical linear regression on Ordinary Least Square (Borgers, Derwall, Koedijk, & Horst, 2015). According to (Gujarati & Porter, 2003) the techniques of estimation using panel data, accommodate heteroscedasticity problems as they relate to the company's specific variables (data cross section ) and the autocorrelation problem (data time series ).
4.2. Hypothesis Testing Results Testing Hypotheses H1: accounting conservatism positive effect on earnings quality perusahaann In testing this hypothesis figures adjusted R-square showed a value of 0.342, this means that 34.2% Earning quality can be explained by the independent variables in the
model, while the rest is explained by other factors not included in the research model. Although the adjusted R-square value is low but statistically significant models of 0.000 ( 0.05). The negative sign on the coefficient of interaction can be interpreted that managerial ownership weakens the relationship or negatively affect the accounting conservatism relationship with the quality of earnings, while the level of significance that is> 0.05 indicates that based on the study sample, managerial ownership variable is not a variable that can menginteraksi relationship with the accounting conservatism earnings quality. Thus the hypothesis H2a stating that managerial ownership affect positively on the relationship between accounting conservatism with earnings quality can not be supported or fail to reject Ho.It is possible that managerial ownership structure in Indonesia is still very small and is dominated by the family. Other factors such as differences in the period of the study and the sample allowed differences in outcomes research. Testing Hypothesis H2b: Institutional Ownership affect the relationship between accounting conservatism with earnings quality. Figures interaction coefficient between variables accounting conservatism with institutional ownership amounted -1.770 with significance level of .475 (> 0.05). The negative sign on the coefficient of interaction can be interpreted that weaken institutional ownership relationship or negatively affect the accounting conservatism relationship with the quality of earnings, while the level of significance that is> 0.05 indicates that based on the study sample, ownership variables l \ institutional not a variable that can menginteraksi relationship conservatism accounting with earnings quality. Thus the hypothesis H2a stating that institutional ownership has a positive effect on the relationship between accounting conservatism with earnings quality can not be supported or fail to reject Ho.It is possible that institutional ownership structure
in Indonesia is dominated by companies that are interconnected. Other factors such as differences in the period of the study and the sample allowed differences in outcomes research. H2C Hypothesis Testing: The number of Independent Commissioners affect the relationship between accounting conservatism with earnings quality. Figures interaction coefficient between variables accounting conservatism with a total of 7,680 independent commissioners with a significance level of .013 (
