Business Innovation and Development in Emerging Economies 978-0-429-43338-2, 0429433387

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BUSINESS INNOVATION AND DEVELOPMENT IN EMERGING ECONOMIES

PROCEEDINGS OF THE 5TH SEBELAS MARET INTERNATIONAL CONFERENCE ON BUSINESS, ECONOMICS AND SOCIAL SCIENCES (SMICBES 2018), BALI, INDONESIA, 17–19 JULY 2018

Business Innovation and Development in Emerging Economies

Edited by Irwan Trinugroho Universitas Sebelas Maret (UNS), Indonesia

Evan Lau Universiti Malaysia Sarawak, Malaysia

CRC Press/Balkema is an imprint of the Taylor & Francis Group, an informa business © 2019 Taylor & Francis Group, London, UK Typeset by V Publishing Solutions Pvt Ltd., Chennai, India All rights reserved. No part of this publication or the information contained herein may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, by  photocopying, recording or otherwise, without written prior permission from the publisher. Although all care is taken to ensure integrity and the quality of this publication and the information herein, no responsibility is assumed by the publishers nor the author for any damage to the property or persons as a result of operation or use of this publication and/or the information contained herein. Library of Congress Cataloging-in-Publication Data Names: Trinugroho, Irwan, editor. | Lau, Evan, editor. Title: Business innovation and development in emerging economies / edited by Irwan Trinugroho, Universitas Sebelas Maret (UNS), Indonesia, Evan Lau, Universiti Malaysia Serawak, Malaysia. Description: Leiden, The Netherlands : CRC Press/Balkema, [2019] | Includes bibliographical references and index. Identifiers: LCCN 2019015377 (print) | LCCN 2019018078 (ebook) | ISBN 9780429433382 (ebook) | ISBN 9781138359963 (hardcover : alk. paper) Subjects: LCSH: Industries–Developing countries. | Management–Developing countries. | Economic development–Developing countries. Classification: LCC HC59.7 (ebook) | LCC HC59.7 .B8656 2019 (print) | DDC 338.709172/4–dc23 LC record available at https://lccn.loc.gov/2019015377 Published by: CRC Press/Balkema Schipholweg 107C, 2316 XC Leiden, The Netherlands e-mail: [email protected] www.crcpress.com – www.taylorandfrancis.com ISBN: 978-1-138-35996-3 (Hbk) ISBN: 978-0-429-43338-2 (eBook) DOI: https://doi.org/10.1201/9780429433382

Business Innovation and Development in Emerging Economies – Trinugroho & Lau (Eds) © 2019 Taylor & Francis Group, London, ISBN 978-1-138-35996-3

Table of contents

Preface

xi

Auditing Audit firm selection and voluntary audit firm rotation: Which factors matter? Sulhani & N.K.E. Putri

3

Analysis of the effect of public accounting firm size on audit fee in Indonesia E. Nurjanah & V. Diyanty

15

The effects of gender, task complexity, obedience pressure, auditor experience, and knowledge audit on audit judgment M. Khaddafi, St. Dwiarso Utomo, Z. Machmuddah, I.D. Pamungkas & F. Milanie

25

The moderating effect of managerial ownership and institutional ownership on auditor opinion, and auditor switching for fraudulent financial statements Z. Machmuddah, St. Dwiarso Utomo & I.D. Pamungkas

34

The impact of debt covenants violation on audit fee J. Kania & Fitriany

47

Banking Accounting and capital measurement of banking risk: Evidence from the Indonesian banking industry 2011–2015 W. Ruben Lumbantobing

59

The effect of financial ratios to profitability bank BUKU 3 listed on Indonesia Stock Exchange R.F. Kaban, P. Hadiyati & O. Rahmawati

66

The impact of variables of macroeconomic and bank-specifics on non-performing loan in banking industry in Indonesia M.L.A. Kurniawan, S.A.T. Rahayu & A. Suryantoro

84

Business strategy Greengrocers, fish sellers, butchers, and chicken sellers at traditional markets: Model of business governance and business behavior T.A. Lubis, Firmansyah & R. Savitri

93

Corporate finance Bankruptcy prediction of manufacturing companies using Altman and Ohlson model A.M. Putri & I. Gandakusuma Valuation of stock using the discounted cash flow model and Ministry of Finance regulation: Study of PT Indosat Tbk A.M. Nathalia & Z. Dalimunthe

v

101

106

Do corporate governance, firm characteristics, and financial ratio affect firm performance? Evita & S. Christina

117

The effect of managerial ownership on liquidity, agency cost and performance of credit society banks in West Nusa Tenggara Province of Indonesia I.N.N.A. Putra, S.S.A. Mannan, T.A. Gumanti & N. Sukendri

124

Comparing properties of net income and total comprehensive income: A study on manufacturing industry in Indonesia R. Yulianti, A.K. Widagdo, D. Setiawan & B. Sutopo

134

Firm characteristics, financial leverage, corporate governance, and earnings management in Indonesia Y.K. Susanto & V. Agness

148

Profile analysis of the importance of equity financing decisions on Package IPO (PIPO) and Shares-only IPO (SIPO) in Indonesia C. Dhevi, Y. Soesetio & D.Q. Octavio

158

Factors influencing income smoothing in manufacturing companies listed on the Indonesia Stock Exchange B.K.D. Cahyo & N. Alexander

164

Development Model of Human Resource Development (HRD) in the context of Indonesian food security M. Ali, J. Siswanto, Sardiyo & F.C. Utomo

175

Does the tourism sector effectively stimulate economic growth in ASEAN member countries? A.A.A. Islam & L.I. Nugroho

183

Entrepreneurship Intrapreneurship of handwoven crafts toward economic democracy in the border area of SajinganBesar, Indonesia Elyta

191

Financial accounting Quality analysis of accounting information after adoption of International Financial Reporting Standards K.A. Rahayu, O.S. Heningtyas & Payamta

199

Financial reporting and disclosure Information content of forward-looking disclosure E. Gantyowati, Payamta, J. Winarna & A. Wijayanto

209

Sustainability report, financial performance and investor reaction: A partial least square perspective of Indonesian public companies I. Maulidya, I. Ulum, T. Nur & E.D. Wahyuni

217

Corporate governance supervision aspect and corporate characteristics on environment disclosure (case study in manufacturing companies in IDX 2012–2016 period) R.M. Zahri & Muthmainah

221

vi

HRM & OB A study of employee engagement at Bisnis Indonesia H.B. Winarko & S. Sihombing Analysis of leadership and work discipline in improving the performance of employees at the general bureau, staffing and organization of the Ministry of Tourism B. Hasmanto, U. Rusilowati & L. Herawaty

235

254

Innovation and strategic management Redesigning business model on small and medium-sized enterprises Faisal & S.K. Widhaningrat Exploring the empirical framework of sustainable innovation-supporting resources and their role in the control of market targets (An empirical study of Indonesian batik SMEs) Sudarwati & A.I. Setiawan

269

275

Intellectual capital Intellectual capital disclosure and post-issue financial performance W. Widarjo, Rahmawati, A.K. Widagdo & E.A. Sudaryono

289

Macro and monetary economics What do you want from me? Demand for skilled labor in the global value chain: The case of Indonesia’s apparel industry M.A.P. Prabowo, P. Wicaksono & T. Bakhtiar

299

Fair treatment in employment of global production networks: Lessons from the Indonesian footwear industry R.E. Mulyanti, P. Wicaksono & T. Bakhtiar

309

Decent work in global apparel production networks: Evidences from Indonesia F.N. Diana, P. Wicaksono & T. Bakhtiar

319

The implication of loan-to-value ratio on credit housing demand in Indonesia L.R. Fauzia, S.A.T. Rahayu & A.A. Nugroho

333

Globalization in automotive industry: Can Indonesia catch-up with Thailand? A.R. Hasiholan & K. Verico

344

Panel data regression and support vector regression for Indonesian private external debt analysis J. Diani & Z. Rustam Determinant factors of external debt in ASEAN-8, 2005–2016 A. Ariani & M. Cahyadin

366 373

Marketing A study of the role of altruism in the process of individual behavior in donating blood B. Haryanto, P. Suryanadi, B. Setyanta & E. Cahyono Self-monitoring in impulse buying: Effect of religiosity W. Maryati, S. Hartini & G.C. Premananto

vii

383 395

Effect of religiosity and reference groups on intention to use Sharia bank products: Mediation role of cognitive and affective attitudes Muthmainah & M. Cholil

402

Identifying antecedents of loyalty to public transportation: A case study of the online taxi motorbike service GrabBike V. Briliana & A.B. Adkatin

412

Celebgram endorsement: The influences of attractiveness, power, and credibility towards brand image and purchase intention C.H. Pangaribuan & A. Maulana

423

The factors affecting customer satisfaction, loyalty, and word of mouth towards online shopping for millennial generation in Jakarta M.G. Alif, C.H. Pangaribuan & N.R. Wulandari

432

How value co-creation works in agri-food context? A future thinking for horticulture product marketing H.N. Utami, E. Alamanos & S. Kuznesof

455

The impact of service innovativeness on self-congruity and functional congruity with motivation to innovate as moderation variable Kristiningsih, S. Hartini & U. Indrianawati

467

Micro, small and medium enterprises Training in bookkeeping and financial management for revitalization of traditional market (study case: Sukatani Market Depok, West Java) M. Safitry & R.F. Kaban

477

Operation management Freedom of parties to determine the form and content of the agreement in a contract of construction services D. Anggraeni

485

Engineering–Procurement–Construction (EPC) mega project: Analysis of the dominant cost factors and viable solutions M.A. Rezky & Arviansyah

493

Cost inefficiency of large and medium industries in Indonesia A. Riyardi, Triyono & Triyono

507

Performance analysis of tinplate’s main raw material procurement process using the SCOR (Supply Chain Operations Reference) model R.D. Wulandari & R.D. Kusumastuti

519

Offshore workover rig barge optimization in support of oil and gas well operation activity in CNOOC SES Ltd using mixed-integer programming method M. Abdillah & M.E. Harahap

531

Development strategies for the sharia banking industry in Indonesia using an analytic network process method A.S. Rusydiana, F.F. Hasib & L.N. Rani

548

Production allocation and scheduling at a pharmaceutical plant C.P. Sari & R.D. Kusumastuti

viii

555

Application of fuzzy kernel robust clustering for evaluating the internationalization success of companies Z. Rustam, F. Yaurita & M.J. Segovia-Vergas

568

Public sector accounting and governance Open government: Does local wisdom matter? (Case from East Java, Indonesia) I. Supheni, A.N. Probohudono & A.K. Widagdo

581

Risk management Corporate governance, risk, firm size, financial performance and social performance: Granger causality and path analysis L. Desiana, F. Africano & Aryanti

593

Default risk modeling of working capital loans to palm oil farmers in Nagan Raya Regency, Aceh Province, Indonesia Y. Nugroho & K.S. Maifianti

618

Comparative financial risk of conventional and Islamic bank O.S. Heningtyas, K.A. Rahayu & Payamta

622

Social sciences Social performance measurement through local culture in microfinance institutions I.P. Astawa, I.M. Sudana, N.G.N.S. Murni & I.G.N. Sanjaya How to develop cultural capital in order to improve academic achievement from a gender perspective D.R. Swaramarinda

633

642

Technology management and information system The intention to use information technology system: Survey of hospital employees in Solo D. Setyawan, D.A. Pitaloka, N.A. Budiadi, Y. Kristanto & B. Setyanta

651

Factors affecting the quality of accounting information systems in Indonesian’s higher education (research model) C.D.K. Susilawati, Jerry, Y. Carolina & Rapina

659

The role of management control systems in aspects of managerial entrepreneurship S.A. Syahdan, Rahmawati, Djuminah & E. Gantyowati

672

Tourism management Determinants of health-visit appeal in terms of medical tourism R.T. Ratnasari, Sedianingsih & A. Prasetyo

689

Author index

698

ix

Business Innovation and Development in Emerging Economies – Trinugroho & Lau (Eds) © 2019 Taylor & Francis Group, London, ISBN 978-1-138-35996-3

Preface

This publication contains a selection of papers presented at the 5th Sebelas Maret International Conference on Business, Economics and Social Sciences (SMICBES) 2018, held in Bali, Indonesia on July 17–19, 2018. This conference, with the particular theme “Business Innovation and Development in Emerging Economies”, is organized by the Faculty of Economics and Business, Universitas Sebelas Maret (FEB UNS) and supported by some other institutions. SMICBES was first organized by FEB UNS in 2013 under a different name. It has been the regular event of FEB UNS since 2016. The conference objective is to provide a forum for researchers and policymakers to exchange their views about current issues related to business, economic and social sciences and the intersection among those fields. More than 300 papers, either empirical or theoretical, were presented in this conference. This conference and this publication were made possible by support from many people. We  therefore would like to thank the Dean of FEB UNS Dr. Hunik Sri Runing Sawitri, Vice-deans, the organizing committee of the conference led by Mr. Linggar Ikhsan Nugroho, M.Ec.Dev, participants, reviewers and all supporting institutions for their valuable support to the conference. Editors Irwan Trinugroho (Universitas Sebelas Maret) Evan Lau (Universiti Malaysia Sarawak)

xi

Auditing

Business Innovation and Development in Emerging Economies – Trinugroho & Lau (Eds) © 2019 Taylor & Francis Group, London, ISBN 978-1-138-35996-3

Audit firm selection and voluntary audit firm rotation: Which factors matter? Sulhani & N.K.E. Putri Sekolah Tinggi Ekonomi Islam Tazkia, Jawa Barat, Indonesia

ABSTRACT: Investigations related to voluntary audit firm rotation are still rare, whereas voluntary audit firm rotation can be an indication of the particular situation that is being faced by the company. This study was conducted with the aim to understand the influence of a company’s financial condition, earnings management and financial statement manipulation to the company’s tendency in audit firm selection when perform voluntary audit firm rotation. The sample of this study is all companies listed on the Indonesia Stock Exchange, except the financial industry, which performed voluntary audit firm rotation in the period 2010 to 2015. The data is tested using the ordinal logistic regression method because the dependent variable is ordinal scale data. The results of this study indicate that a company’s financial condition have no significant effect on the tendency of audit firm selection when voluntary audit firm rotation is performed. Meanwhile, earnings management has a negative significant effect and the manipulation of financial statements has a positive significant effect on the tendency audit firm selection in the event of voluntary audit firm rotation. Companies that do earnings management tend to switch the audit firm to a lower-quality, while when companies are facing manipulation of financial statements they will switch the audit to better quality audit firm. The implication of this study is that voluntary audit rotation conducted by the company is an indication of certain events that exist in the company that can be taken into consideration by decision making. Keywords: Voluntary Audit Firm rotation, Financial Condition, Earnings Management, Manipulation of Financial Statement

1

INTRODUCTION

Audit firm rotation began to be an interesting topic since the Enron case in the United States in 2001. To prevent similar cases from recurring, the United States government issued the Sarbanes-Oxley Act (SOX) in 2002 and one of its contents was that corporate must switch their audit firm periodically. According to Kim et al. (2015) audit firm rotation aims to improve the quality of corporate governance and financial reporting. Due to the importance of firm rotation audits in the financial reporting process, the Indonesian government also acted swiftly by issuing KMK RI number 423/KMK.06/2002 which was updated with PMK number 17/ PMK.01/2008 on Public Accounting Services, which is providing audit services to financial statements by audit firm into six consecutive yearbooks. This regulation requires companies in Indonesia to replace the audit firm if the audit engagement period has reached the six-year deadline, known as mandatory audit firm rotation (Siregar et al., 2012). Besides, due to regulatory requirements, audit firm rotation can also come from the client’s desire to terminate audit firms before the engagement ends, which is better known as voluntary audit firm rotation. According to Davidson et al. (2005), voluntary audit firm rotation generally occurs due to opportunistic behavior of management. The results of Nasser et al. (2006) stated that one important factor in decision-making audit firm selection is the condition of the company. When the company’s financial condition is down, management tends to look for smaller audit firms. This is because small audit firm are reluctant to show 3

their disagreement with the company. While Lennox et al. (2014) states that the voluntary audit firm rotation can also occur when the client lays off the existing audit firm to look for another audit firm at a cheaper cost or look for another non-conservative audit firm. Conservative auditors that are not in line with management often leads to conflict between client and auditor (Khrisnan, 1994; Defond & Subramanyam, 1998; and Kim et al. 2003). The emergence of such conflicts is due to the auditor not being willing to comply with the wishes of the client. So it can be concluded that the company avoids auditors who behave conservatively to reduce the possibility of detection of manipulation and earnings management by previous auditors (Lou et al., 2009). In addition, low financial condition and firm performance often encourage management to hide the actual financial condition of the company so that the company can avoid reporting the company’s losses (Wasiuzzaman et  al., 2015). Companies typically also manipulate financial statements when debt levels are high and liquidity levels are low (Dechow et al., 2011). Companies with this cases tend to switch to other non-conservative audit firms or those who can give a better opinion of the existing audit firm. This is done to maintain corporate image (Davidson et al., 2005). Manipulation of financial statements is often done by the company when the company’s financial condition is declining (Dechow et al., 1995). Besides that, the company also performs earnings management for the purpose of avoiding extreme performance degradation (Davidson et al., 2005). In contrast to manipulation, earnings management is allowed to be made while still complying with accounting standards. Earnings management can have a positive or negative impact on the company. Earnings management is done with the aim to affect the profit for the purpose of achieving targeted earnings. Earnings management will have a negative impact if it is done for management to get compensation (Erickson et al., 2015). Under these circumstances, a conservative auditor may create conflict-related incentive reporting between managers and auditors. So that company will replace their existing audit firm that is considered conservative. Previous research on voluntary audit firm rotation was done by Johnson et al. (1990) and Lennox et al. (2011). Johnson et al. (1990) conducted a study of the financial characteristics and performance of a firm’s stock price against the decision to perform voluntary audit firm rotation. The results of this research mentioned that clients tend to replace the audit firm to get an audit firm with lower costs. In addition, Lennox et al. (2011) conducted a study of credit ratings on private companies in the UK as a sample. The results suggest that moving from mandatory to voluntary audit firm rotation has an important role in providing a bad signal for the capital market, where CFOs in private companies tend to manipulate earnings to maintain their corporate credit rating. This is done with the aim of avoiding the possibility of breach of the contract of debt. This study is different from previous research, because this study wanted to test whether the tendency to perform voluntary audit firm rotation can be a bad signal for the stakeholder, by examining the factors of financial condition, earnings management and financial statement manipulation of voluntary audit firm rotation. This study focuses only on voluntary audit firm rotation and overrides companies that perform mandatory audit firm rotation. In addition, this study will also test the tendency of companies in choosing audit firms if they are not in a good financial condition, have high earnings management and the tendency of manipulation of financial statements at the time of voluntary audit rotation.

2. 2.1

THEORETICAL FRAMEWORK AND HYPOTHESIS Audit firm rotation

Independence of the auditor becomes a contentious issue among the accounting profession. This becomes an important issue because independent auditors will effect audit quality. Therefore, the government as a regulator is obliged to intervene in dealing with the problem by establishing rules on the period of audit services that can be provided by the audit firm to its clients. Given this provision, the government may work on the parties concerned, both the 4

company and the auditor. In Indonesia, a mandatory audit rotation became regulated in the Decree of the Minister of Finance of the Republic of Indonesia Number 423/KMK.06/2002 concerning Public Accounting Services. The rules governing that the general audit of the financial statements of the entity become six consecutive yearbooks. Auditor independence is a foundation for a reliable auditor’s report (Public Oversight Board, 2000). Therefore, there have been many studies that discuss mandatory audit firm rotation. A mandatory audit firm rotation is considered to have a positive impact and is likely to improve audit quality (Johnson et al., 2002; Chung et al., 2003; Vanstralen, 2000), whereas there are also studies that find that mandatory audit firm rotation can negatively impact and tend to decrease audit quality (Geiger & Raghunandan, 2002; Gao, 2003; Myers et al., 2003; Jackson et al., 2008). Mandatory audit firm rotation could have positive impact because it will maintain the independence of the auditor but on the other side, when mandatory audit firm rotation is performed, the company will engage with a new auditor that could be have less information about the client. According to Davidson et  al. (2005) and Lennox et  al. (2014), the election of an audit firm becomes an important decision for a company. Companies must be careful in deciding which audit firm will give a good opinion for the company. Unlike the mandatory audit firm rotation in Indonesia that is regulated in KMK.06/2002, the decision to adopt voluntary audit firm rotation is the management authority. There are several reasons for the company’s voluntary audit firm rotation: a. Requires more effective and independent audit firm. The company does a voluntary audit firm rotation when a company wants to improve its image in the public eye. A more independent audit firm can improve the trust of shareholders and creditors. This is an advantage for shareholders (Nasser et al., 2006). b. Reduce the cost of audit services. Previous research has suggested that the decrease in audit service costs encourages management to perform voluntary audit firm rotation. There is a decrease in audit service costs if company growth is decreasing (Johnson et al., 1990). c. Stopping the conservative audit firm. Khrisnan (1994) finds that voluntary audit firm rotation is more due to the conservative attitude of the auditor when compared with the Exceptional Exclusion by the auditor. In fact, the voluntary audit firm rotation rate is increased when the auditor is skeptical and provides a reasonable opinion to the company. In addition, Davidson et al. (2005) state that the choice of managers to perform voluntary audit firm rotation is motivated by the desire to report better corporate financial condition. Therefore, companies tend to choose a less conservative audit firm. Therefore, earnings management is considered as one of the mechanisms that can be allowed in order to make as if the target of the company has been achieved. d. Looking for a lower quality audit firm. DeFond & Subramanyam (1998) state that companies that do not get unqualified opinions are likely to make an audit rotation using the Big 6 audit firms rather than the non-Big 6 audit firms. It is strongly suspected that the company conducts an opinion audit with the non-Big 6 audit firm.

2.2

Financial condition

According to Wang et al. (2007), financial conditions are defined as financial performance as measured by cumulative changes of net assets, equity and net cash flows. Financial achievement can be seen from the ability of the company to meet its financial obligations in a timely manner. In conducting its business activities, the company creates financial liabilities in the form of expenses, costs and debts. All these types of obligations require payment at this time, as well as deferred in the future. If a company can pay its liabilities without causing significant financial hardship, then it can be assumed that the company is in sound financial condition. Summers & Sweeney (1998) revealed that the low performance of the company will worsen the financial condition. The impact of this low financial condition tends to motivate the internal company to take action aimed at improving the appearance of the company’s financial position. The insiders of this company are focused on management, where management 5

knows the company’s financial information and condition with certainty. This is done so that management does not lose their job. Financial condition becomes one of the factors that influences the client’s decision to maintain its audit firm. Insolvent clients tend to seek audit firms that have a higher level of independence to increase creditor and shareholder confidence. Insolvency is a condition in which the client is unable to meet its short-term obligations due to lack of liquidity. The inadequacy faced by these clients indicates that the lack of management competence in managing corporate assets (Nasser et al., 2006). In many studies the measurement of corporate finance often uses the Altman Z Score model (1968). This model is a commonly used model as an indicator for measuring financial distress. The Altman model is regarded as the most superior model because of its simplicity, its practicality and its accuracy in measuring the company’s financial condition. Altman performs an analysis of financial ratios that can be used to assess profitability and corporate risk. The financial ratios used are the five elements of the ratio that have an important value in describing the ability of management in managing its assets. The five elements of the ratio include working capital to total assets, retained earnings to total assets, earnings before interest and tax to total assets, market value to book value of total debt and total revenue to total assets (Rawi et al., 2008; Ramadhani et al., 2009: Sudiyatno et al., 2010). 2.3

Earnings management

Healy & Wahlen (1998) state that earnings management occurs when managers use judgment in financial reporting and change the financial reporting value of the value that should be reported. The value of this financial reporting relates to the fundamental economic performance figures of the company and the contractual results. Thus, the change in figures in these financial statements will outwit the stakeholders in the framework of decision making. According to Scott (2015), earnings management is included in accounting policies that managers can choose to influence earnings so that specific earnings reporting objectives can be achieved. Earnings management is done for various reasons, among others, to improve management compensation, and affect the performance of stock prices. Thus, the impact of the existence of earnings management will affect the figures and financial statement data used by stakeholders as a source of information in decision making, especially for investors. Scott (2015) also argues that earnings management can be viewed from two different perspectives, namely opportunistic earning management and efficient earning management. From an opportunistic perspective, earnings management is made by choosing accounting policies appropriate to management interests, although the accounting policy cannot achieve the goals and interests of investors. Earnings management is made to maximize the benefit to be received by management, such as obtaining compensation, maintaining management reputation and meeting investor earnings expectations. Failure of management in achieving earnings of investor expectations affect the decline in stock prices of the company. Furthermore, this will affect the reputation of the management. Meanwhile, earnings management based on efficient perspective is done by choosing an accounting policy that can control the cost faced by the company. This is done with the aim of improving the quality of profit value information that has not been reflected in the financial statements and convey certain information to stakeholders. Thus, this can reduce the level of agency costs arising from conflicting interests between managers and stakeholders. 2.4

Manipulation of financial statement

Fama (1980) argues that goals and interests between principals and agents are often contradictory. This will lead to conflict between the two parties. According to Jensen & Meckling (1976), conflicts between principals and agents are due to information asymmetries, whereas the information asymmetry occurs when the information possessed by the agent is greater than the principal. Thus, the agent is compelled to do intentionally things that should not be done. An example is to manipulate financial reporting. Manipulation is 6

deliberated by preparing financial statements to be materially miss-stated, so the financial statements become unreliable because it contains elements of fraud and also cause losses. The Association of Certified Fraud Examiners (ACFE, 2016) classifies report manipulation as one of three forms of fraud acts. Two other acts considered fraud are asset misappropriation and corruption. The case of asset abuse is the most frequent case, accounting for over 83% of reported cases. Furthermore, corruption is 35% and the manipulation of financial statements is 10%. However, if sorted based on nominal losses generated, the manipulation of financial statements causes the greatest loss compared to the other two categories. 2.5

Financial condition and the tendency of audit firm selection in voluntary audit firm rotation

Financial condition becomes one of the factors that influences the client’s decision to maintain its audit firm. Companies that are experiencing growth tend to maintain auditors to maintain audit quality. And so is the case if the company’s financial condition is decreasing. Companies tend to retain their existing auditors. This is because the changes of audit firm will further complicate the company’s financial condition due to the possibility of increasing the audit service fee. In addition, companies experiencing insolvency circumstances and an unhealthy financial position will be more likely to retain their auditors to maintain the confidence of investors and shareholders, and to prevent litigation risks (Nasser et al., 2006). This is in line with the study of Chung et al. (2003) that found that the Big 6 audit firms emphasize conservative accounting on clients when clients’ financial performance has decreased from expectations, thereby reducing the likelihood that firms will overestimate revenue recording. Meanwhile, Hudaib et al. (2005) found that firms with diminishing financial conditions will be more likely to replace audit firm due to business uncertainty run by the company. The decline in business processes leads to a decrease in the rate of profit gained in a period. So the selection of an audit firm with a cheaper cost is done to reduce the cost of company expenses. So based on the argument, a hypothesis can be drawn as follows: H1: The financial conditions affect the tendency of audit firm selection when voluntary audit firm rotation is performed. 2.6

Earning management practices and the tendency of audit firm selection when voluntary audit firm rotation is performed

According to Wasiuzzaman et al. (2015), the motivation for earnings management varies across industries. The main motivation for management to do earnings management is to manage earnings in such a way that reported earnings do not decrease from the previous year, not to avoid reporting losses. Earning management is done by distorting the relationship between stock returns and reported earnings, which can degrade the quality of financial information. The impact of earnings management is to present information about the performance of a company that is misleading for creditors and competitors and not to be observed by them. According to Davidson et al. (2005), by doing earnings management, the chances of managers being laid off will decrease because with earnings management the earnings performance of the company can be managed better. Usually companies do earnings management because the company’s operating performance deteriorates. So then the company will conduct audit firm rotation to obtain an audit firm that is not conservative and is therefore willing to approve the level of earnings management conducted by the company. Management tends to shift from the Big 6 audit firms to the non-Big 6 audit firms when it receives a modified audit opinion from previous auditors to obtain a non-conservative audit firm (Davidson et  al., 2005). Non-conservative audit firms tend to use less stringent rules in the auditing process. Consistent with Muttakin et al. (2017) that the Big 4 audit firm is more sceptic to client reporting misstatements. This is done on the basis of investor protection. According to Dechow et al. (2011), when company performance declines, managers make earnings management to maintain their company’s stock price. Motivation to maintain or 7

increase the company’s stock price arises because the manager wants compensation related to the performance of the stock. In other words, earnings management is done to convince investors that the prospect of the company is going well. Based on the above literature, the authors propose a hypothesis in this study as follows: H2: Earnings management practice has an effect on the tendency of audit selection when voluntary audit firm rotation is performed. 2.7

Manipulation of financial statements and the tendency of audit firm selection when voluntary audit firm rotation is performed

The Association of Certified Fraud Examiners (ACFE, 2016) states that there are three main categories in the case of fraud: misuse of assets, corruption and manipulation of financial statements. Compared to the case of misuse of assets, the rate of financial manipulation is considered low. However, the nominal losses incurred from the manipulation of these financial statements are much greater than other two categories. In addition, cases of financial report manipulation are reported to increase each year (ACFE, 2016). According to Carcello & Nagy (2004), cases of manipulation in financial statements tend to occur two to three years early in the audit engagement. Most cases of financial report manipulation are generally done by companies that have been listed on the exchange. This arises because the public company is driven to achieve the profit target, so the greater the incentive to achieve profit, the greater the chance to manipulate. This is consistent with the results of the research by Lou & Was (2009), which states that 36% of cases of fraud occur in the first two years of the engagement. Thus, in the early engagement, the client performs firm rotation audits to reduce the likelihood of detecting manipulations in the financial statements. This is contrary to the results of research conducted by Hastuti & Gozali (2015) that there is no evidence of manipulation in the financial statements of companies that effect the audit firm rotation. Research conducted by Francis (2004) and Francis & Wang (2006) states that the Big 4 audit firms have the competence to conduct tighter and better audits than non-Big 4 audit firms, so the Big 4 audit firms probability of finding misstatements is greater. In addition the Big 4 audit firms are considered to provide higher audit quality than non-Big 4 audit firms. This happens because the Big 4 audit firms are required to maintain their reputation, so the Big 4 audit firms tend to report misstatements they find during the audit process. In addition, Francis & Wang (2006) also stated that the Big 4 audit firms in a law-abiding state are considered to be very protective of the interests of investors. Big 4 audit firms are very conservative on behalf of their clients with the aim of protecting the interests of investors; not infrequently the Big 4 audit firms are demanding a non-conservative auditor. Strict protection against these investors will make the quality of audits higher. This means that when manipulation is high, it will impact on low audit quality and high risk of litigation. It can be concluded that the board of commissioners of independent companies will tend to avoid the risk of manipulation by management to avoid the high risk of litigation. This is in line with Payamta’s (2006) research findings that non-Big 4 audit firms will be more often faced with litigation risk than the Big 4 audit firms. Therefore, based on the argument previously described, the proposed hypothesis is as follows: H3: Financial statements manipulation effect the tendency of audit selection when voluntary audit firm rotation is performed.

3

RESEARCH METHOD

This research is explanatory research which aims to test whether a company’s financial condition, earnings management and financial statement manipulation influence the tendency of audit firm selection in the event of voluntary audit firm rotation. 8

3.1

Population and sample

The population in this study is all non-financial sectors of companies listed in the Indonesia Stock Exchange (IDX) from 2010–2015. Sampling in this study uses the purposive sampling technique and the sampling is based on the criteria that have been set to fit the research objectives. The following are the sample selection criteria in this study. a. b. c. d.

Non-financial public companies listed on the Indonesia Stock Exchange from 2010–2015. Companies whose financial statements have currency Rupiah. The company replaces the public accounting firm prior to the end of the engagement. The company has all the data required for the calculation of the variables in this study.

3.2

Research variables

Table 1.

Operationalzation variables.

Variable

Name

Proksi

Scale

Dependent

Voluntary Audit Firm Rotation

Ordinal 0 = if the change of audit firm Big 4 to non-Big 4 audit firm 1 = if change audit firm from non-Big 4 to non-Big 4 or Big 4 to Big 4 audit firm 2 = if the change of audit firm from non-Big 4 to Big 4 audit firm Z = 0.717Z1 + 0.847Z2 + 3.107Z3 + 0.420Z4 + 0.998Z5 Ratio

Independent Financial Condition Earnings TACCit / TAit-1 = α1 (TAit−1) + α2 (ΔREVit – ΔRECit)/ Management TAit−1 + α3 PPEit/TAit−1 + εit Manipulation of M Score = −4.840 + 0,920DSRI + 0,528GMI + 0,0404  financial statement AQI + 0,892SGI + 0,115DEPI – 0,172SGAI + 4,679 (Benish Model) TATA – 0,327 LVGI Control Year YEAR

4

Ratio Ratio

Ratio

RESULT AND DISCUSSION

Objects used in this study are all sectors of companies listed in the Indonesia Stock Exchange during the years 2010–2015, except companies listed in the financial sector. There are 380 listed companies in the Indonesia Stock Exchange during the 2010–2015 period consisting of six sectors, namely agriculture, mining, property, real estate and building construction, infrastructure, utility and transportation, trade, service and investment manufacturing sector. The following is the result of company selection based on the criteria established in this research: 4.1

Sample procedures

Based on Table 2 it can be seen that companies listed in the IDX during the 2010–2015 period amounted to 380 companies, then companies that use the dollar currency in the financial statements totaled 68 companies, then companies that do mandatory audit firm rotation amounted to 281 companies, then companies that do not have complete data to be used in this research totaled 7 companies. So the total sample companies that do voluntary audit firm rotation amounted to 24 companies. 4.2

Descriptive statistics

Descriptive statistical tests on research models of a company’s financial condition, earnings management and manipulation of financial statement on tendency of KAP selection in the event of voluntary audit firm rotation is used to see the spread of data of variables used in the model. The results of statistical test descriptive of the four variables in this study are as follows. 9

Table 2.

Sample selection procedures.

Sample Selection

Number

Non-financial companies listed in IDX 2010–2015 period continuously Companies that use dollar currency Companies that perform mandatory audit firm rotation Companies whose financial statements are incomplete Total Sample (Company that conduct voluntary audit rotation)

380 (68) (281) (7) 24

Table 3.

Statistics descriptive.

Variable

N

Mean

Std. deviation

Min.

Max.

VAR FCOND EAR_MGT MNPLT

24 24 24 24

1 1.292 0.076875 –0.017791

0.417028 2.186096 0.060759 2.413439

0 0.158 0.01 –2.242

2 11.147 0.222 8.312

Table 4.

Statistic output.

Variable

Odds ratio

Coef.

P > |z|

FCOND EAR_MGT MNPLT YEAR

1.248887 2.320006 1.538714 1.637597

0.2222526 –12,97539 0,4309469 0,4932298

0,202 0,086* 0,028** 0,395

* Significant at the level of 10%. ** Significant at the level of 5%.

4.3

The feasibility of data and hypothesis testing

The Likelihood Ratio is a substitute for F-stat that serves to test whether all the slope of independent variable regression coefficient (company’s financial condition, earnings management and financial statement manipulation) and control variable (year) together influence the dependent variable. The probability of a statistical likelihood ratio is 0.0392 chi2 of 0.0392 indicates that simultaneously, the independent variable in this research model can explain the dependent variables in the research model. Partial test (z statistic test) is performed instead of statistical test t. Partial test is done to find out the influence of the relationship of each independent variable with the dependent variable. This can be done by looking at Prob> chi2 from each of the independent variables as listed in the Table 4. The following is the result of the statistical test z of the four variables. 4.4

Financial condition and the tendency of audit firm selection in voluntary audit firm rotation

In testing the financial condition to the tendency of audit firm selection when performing voluntary audit firm rotation, it was found that the value of P value is greater than the 0.05 (5%) significance level that is 0.202. From these results it can be concluded that this variable has no significant effect on the tendency of audit firm selection when doing voluntary audit firm rotation. Hence hypothesis 1 is rejected in this study. This study does not support the results of research of Chung et al. (2003) and Hudaib & Cooke (2005). The results of this study indicates that the company’s financial condition does not affect the tendency of companies to choose audit firm when doing voluntary audit firm 10

rotation. Voluntary audit firm rotation that done by companies not influenced by the financial condition of the companies. This could be happening because, based on sample research data, it can be seen that 83.33% of samples or as many as 20 companies use non-Big 4 audit firms and companies that experience poor financial condition (Z Score