* Corresponding author: [email protected]
The Effect of Director's Remuneration, Audit Fee, and Director's Expertise on Earnings Management with Sales
Growth as Moderating Variable
SEPTIANA INDRAWATI* DWI ASIH SURJANDARI Universitas Mercu Buana, Indonesia
Abstract: This study examines the factors influencing earnings management practices in state-owned companies and their subsidiaries on the Indonesia Stock Exchange. The samples used in this study were nine state-owned companies and subsidiaries listed on the IDX for 2013-2019, totaling 63 samples. The analytical tool used to analyze the hypothesis is Eviews 11.0. The results showed that the director's expertise significantly positively affects earnings management. However, the director's remuneration and audit fee do not affect earnings management. Sales growth did not moderate the relationship between director remuneration, audit fees, and the director's expertise in earnings management. This research has important implications for building informal control over an action that the directors will take through the perspective of religiosity in influencing the behavior and decisions that the directors will take.
Keywords: Director Remuneration, Audit Fee, Director Expertise, Sales Growth, Earnings Management
Abstrak : Tujuan dari penelitian ini yakni untuk menguji faktor-faktor yang mempengaruhi praktik manajemen laba pada perusahaan BUMN dan anak perusahaan yang terdaftar di Bursa Efek Indonesia. Sampel yang digunakan dalam penelitian ini adalah 9 perusahaan BUMN dan anak perusahaan yang terdaftar di BEI periode 2013- 2019, dengan total 63 sampel. Alat analisis yang digunakan untuk menganalisis hipotesis adalah Eviews 11.0. Hasil penelitian menunjukan bahwa keahlian direktur memiliki pengaruh positif signifikan terhadap manajemen laba. Namun Remunerasi direktur dan audit fee tidak memiliki pengaruh terhadap manajemen laba. Sales growth terbukti tidak mampu memoderasi hubungan remunerasi direktur, audit fee dan keahlian direktur terhadap manajemen laba. Penelitian ini memiliki implikasi penting untuk membangun pengendalian informal terhadap suatu tindakan yang akan dilakukan oleh para direktur melalui perspektif religiusitas dalam mempengaruhi perilaku dan keputusan yang akan diambil oleh para direktur.
Kata Kunci: Remunerasi Direktur, Audit Fee, Keahlian Direktur, Sales Growth, Manajemen Laba
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1. Introduction
The quality of financial reports has received special attention from those who use financial statements, especially investors, to effectively evaluate the risks of investing in the capital market. So it is essential to provide superior quality financial reports to protect users from making rational investment choices and to enrich market efficiency (Menicucci, 2020). Investors always look for quality financial statements and reliable information about the company's financial condition, mainly profits. Information about company profits can be used as a measure of management performance, as a basis for providing compensation and bonuses, as well as an indicator of the efficiency of the use of funds embedded in the company, which is manifested in the rate of return (Nurlis &
Indriawati, 2020).
However, the amount of profit cannot always be a good criterion for investor decision-making because sometimes earnings are manipulated by management, one of which is earnings management. Earnings management problems occur in state-owned companies, namely PT Asuransi Jiwasraya, Tbk., which recorded a profit in 2006. Still, the profit was suspected to be a false profit due to accounting manipulation or window dressing. The report also states that in 2017 Jiwasraya also earned a profit of IDR 360.3 billion but received an adverse or unfair opinion. The opinion was given because there was a shortage of reserves of IDR. 7.7 trillion. If the reserves were carried out according to the provisions, they should have been, and the company would suffer a loss (C. Akbar, n.d.).
Then there are also problems in the company P.T. Garuda Indonesia Tbk, which recognizes all revenues from the cooperation contract with PT Mahata Aero Teknologi in 2018 while the contract period is 15 years. Revenues related to these transactions should be recognized by reference to the completion stage of the transactions at the end of the reporting period. So that PPPK and OJK finally ordered PT Garuda Indonesia Tbk. to improve and restate PT Garuda Indonesia's LKT as of December 31, 2018.
Concerning the restatement of the 2018 Financial Statements, Garuda Indonesia recorded other operating income (other income) corrected to USD 38.8 million from USD 278.8 million. Garuda Indonesia recorded a net loss of USD 175.028 million in
109 this restatement report from the previous USD 5.018 million (Prabowo, n.d.; Rosan, n.d.).
The case experienced by Jiwasraya and Garuda Indonesia has tarnished the good name of BUMN (SOEs) companies in Indonesia. SOEs are some of the backbones of the economy in Indonesia because, in 2019 alone, BUMN (SOEs) contributed 415 trillion or around 19.2% of the total revenue to the state (APBN, n.d.; R.I., n.d.). The presence of SOEs should be maximized through a large number of investments invested by investors in SOEs in Indonesia, especially SOEs listed on the BEI. Of course, quality financial reports are needed so that investors are interested in investing in state-owned companies in Indonesia.
The most straightforward practice of financial statement manipulation is presenting items that are higher (overstated) or lower (understated) than they should be, meaning that earnings management has occurred in the financial statements. One of the motives is a bonus (Gugus & Nurlita, 2019), so various ways are taken by management to carry out earnings management. Previous research has confirmed that CEO incentives are positively related to the level of earnings manipulation, thereby reducing earnings quality (Bouaziz et al., 2020; Yustiningarti & Asyik, 2017; Zouari et al., 2015).
However, prior studies (Muslih, 2018; Nurbach et al., 2019) found different results.
Furthermore, this study uses the audit fee variable. The audit fee depends on the report processing fee, the cost of the KAP structure, and other consideration costs (Whittington & Pany, 2016), so the audit fee reflects the auditor's independence. Prior research (Bala et al., 2018; Hai et al., 2019) found that audit fees showed a significant negative relationship with earnings management; thus, audit fees could improve the quality of financial reporting. However, this result contrasts with the research conducted by Donatella et. al. (2019).
This study uses the variable of the director's expertise; the board of directors has a daily basis for making the right decisions for the company's sustainability. For that, we need the proper knowledge and sufficient experience to make the decision correctly and quickly. However, in a study conducted by Zouari et al. (2015), found that CEO expertise positively influences CEO behavior in carrying out aggressive earnings
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management. Experienced managers tend to display biased optimistic estimates. This is also in line with the prior research results (Hakim et al., 2021; Zhang, 2019), which show that more similar backgrounds and long experience working together are more likely to misreport their financial statements. But these results are not supported by other research (Cherkasova & Markina, 2021; Rubin & Segal, 2019).
This study also uses the Sales Growth variable as a moderating variable. Sales growth is an increase in the number of sales from year to year or from period to period.
For creditors or debt investors, an analysis of the growth potential is critical because the company's prospects will determine whether or not the company can pay its obligations.
So that sales growth can moderate the relationship between the independent variables in this study on earnings management. Research conducted by Zakia et al. (2019) shows that sales growth had a significant positive effect on earnings management, while the research conducted by Octoviany and Herawaty ( 2019) found different results. From the research results and the phenomena found above, there are still differences in research results from previous researchers. This motivates the author to review the effect of director remuneration, audit fees, and director expertise on earnings management with sales growth as a moderating variable in state-owned companies and subsidiaries listed on the IDX.
In recent years, director bonuses have been linked to some of the biggest corporate accounting frauds, such as the case at Barclays Bank, where CEOs manipulated earnings to gain more incentives and thus reported poor quality financial information. This can happen because the management has the ability in accounting and finance and has more information about the company, so the CEO will present biased financial statements to the principal for his benefit. For this reason, this research is expected to contribute to the government in issuing better corporate governance policies to reduce the occurrence of agency conflicts.
Furthermore, the audit fee can reflect the auditor's independence, guaranteeing quality financial reporting. Still, trust in quality audits has decreased with several cases of freezing of Public Accounting Firms in various regions (T. Akbar, 2017). For this reason, this research is expected to contribute to the government being more selective
111 in choosing auditors to obtain quality financial reports to minimize agency conflicts that occur in state-owned companies in Indonesia, as well as provide a good signal for investors because these companies have quality reports. In addition, this research is also expected to be used as consideration for investors in making investment decisions, namely determining which companies can present quality financial statements, especially earnings.
The consideration of data not until 2020-2021 is considering the condition of the global pandemic effect in Indonesia, which will have quite an impact on the earnings management component. And in the remuneration component, the director requires a small bonus received by the director, whereas the bonus in 2021 will only be disclosed in the 2022 annual report. Furthermore, the author uses 2013 as the initial year of the study because the sample that the author uses is SOEs and subsidiaries listed on the IDX, whereas SOE companies and subsidiaries listed on the IDX only amount to 29 companies. Therefore the author uses more than five years of research; hence when processing the data, the author does not experience difficulties because many companies must be eliminated.
The selection of BUMN as a sample in this study is because the problems in BUMN companies will significantly affect the components of state revenues which will undoubtedly affect the state budget. BUMN contributed to the state, which is 19.2% of total state revenue in 2019. BUMN had the complete report among other publicly traded companies that helped researchers conduct this research, such as the nominal remuneration received by the director, the total shares owned by the director, and the nominal audit fee.
2. Theoretical Framework and Hypothesis Development 2.1 Agency Theory
According to Jensen & Meckling (1976), Agency theory describes a contract between a manager (agent) and an investor (principal). The conflict of interest between the owner and the agent occurs because the agent may not always act in the principal's interests. The existence of information asymmetry between management and external
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users of financial statements provides an opportunity. It encourages management to be opportunistic by improving the accounting profit profile, thereby triggering agency costs in the form of audit fees to monitor activities carried out by management.
2.2 Positive Accounting Theory
In positive accounting theory, several hypotheses form the basis for developing hypothesis testing to detect earnings management, one of which is the bonus plan hypothesis. To consistently achieve the level of a performance entitled to bonuses, the director plays with the size of the accounting numbers in the financial statements so that the bonus is always earned every year (Watts & Zimmerman, 1990).
2.3 Signaling Theory
Signaling Theory (Ross, 1977) emphasizes the importance of information issued by the company to the investment decisions of parties outside the company. This theory suggests that companies with superior performance use financial information to send signals to the market. So quality financial reports, especially earnings quality, are critical determinants to attracting investors to the company for auditors where audit fees provide a good signal about audit quality to the market. Audit fees are reflected by auditor independence, resulting in audited financial statements that reflect the actual situation without any material misstatement or fraud.
2.4 Earning management
Earnings management is a policy on financial reporting that abuses some of the contract's shortcomings, stakeholders' limited rationality, and information asymmetry in the market through some economical decisions, changes in accounting treatment, or other methods. Management's goal is to present income by increasing or decreasing the number of what they know to achieve personal gain by misleading stakeholders, even though such wisdom may not always be harmful to them (Diri, 2018).
2.5 Director's Remuneration
According to Nurbach et al. (2019), executive compensation is the company's compensation to motivate management to follow company goals, considering the
113 stakeholders' interests. This is done to balance the interests of management and stakeholders. There are regulations in Indonesia that regulate the remuneration that directors are entitled to receive, namely in the Minister of SOEs Regulation PER- 12/MBU/11/2020, which explains that SOE directors will receive (1) Salary/honorarium, including facilities and allowances, (2) bonus compensation, in the form of bonuses or stock options. However, the nominal amount to be received by the director is regulated separately in the GMS of each company.
2.6 Audit Fee
According to Lubis and Dewi (2020), the auditor must determine the amount of audit fees to be adequately controlled before planning fieldwork. An audit fee or service fee is the fee received by the public accountant from the client entity in connection with risk assessment, evaluation of sustainability relationships, the complexity of services, length of the audit process, and fulfillment of audit preconditions as outlined in the engagement letter. Where the service fee for auditing financial statements is too low, it can pose a threat in the form of personal interests that have the potential to cause non- compliance with the code of ethics of the accounting profession so that audit fees reflect high auditor independence (IAPI, 2016).
2.7 Director’s Expertise
The director has a daily basis for making the right decisions for the company's sustainability. For that, we need the right knowledge and sufficient experience to make the decision correctly and quickly. One of the determinants of cognitive abilities and decision-making abilities is the level of education (Muhammad & Pribadi, 2020).
2.8 Sales Growth
Sales Growth is an important factor in all financial analysis and company valuation.
Companies whose business activities are growing rapidly, stagnant, growing slowly, getting lower, or depressed will face different problems. Sales growth forms the basis for all financial analysis. Sales growth needs to be analyzed in terms of volume (amount sold) and price trends (including changes in exchange rates where relevant) as well as external (i.e., driven by acquisitions) (Vernimmen et al., 2018).
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2.9 The effect of a director's remuneration on earnings management
The director's remuneration is a reward or remuneration given by the company to the director for the achievements or performance that has been given to maintain and motivate the director. So that a director is expected to continuously provide optimal performance to support the company's vision and mission. But in reality, the director is an internal party of the company who has more information about the condition of the company than external parties; this, of course, causes the possibility of actions taken by the director to report profits that do not describe the actual condition of the company for personal interests. If this happens, it will result in low earnings quality (Tanjung, 2019).
According to Kieso et al. (2020), companies with incentives to manage earnings to meet revenue targets or make earnings look less risky have eroded earnings quality. This concept is in line with positive accounting theory (Watts & Zimmerman, 1990), where the concept discusses that bonuses or remuneration promised by the owner to company managers not only motivate managers to work better but also motivate managers to commit managerial fraud so that the bonus is always earned every year. Previous research has confirmed that CEO incentives are positively related to the level of earnings manipulation, thereby reducing earnings quality (Bouaziz et al., 2020;
Yustiningarti & Asyik, 2017; Zouari et al., 2015). Thus the following hypothesis is proposed :
H1: Directors' remuneration has a significant positive effect on earnings management.
2.10 The effect of audit fees on earnings management
The financial statements presented still contain asymmetric information when the assertion reaches the user. Auditing is needed to eliminate the risk of asymmetric information. Auditors use management assertions from financial statements submitted to users to assure users. Auditing will see the fairness of the financial statements presented with Financial Accounting Standards (SAK) and then submitted to external users. The agency theory will trigger agency costs in the form of audit fees to monitor activities carried out by management. The agency theory will trigger agency costs in the form of audit fees to monitor activities carried out by management.
115 One of the reasons for misrepresenting accounting information is due to the tendency of earnings manipulation in the form of earnings management by management so that another party (auditor) is needed to bridge the two different interests (Lubis &
Dewi, 2020). Audit independence is a crucial element in auditing practice. High audit fees reflect the auditor's efforts related to financial reporting quality because audit fees are assumed to have a wider audit scope, resulting in better financial reporting quality.
Prior research (Bala et al., 2018; Hai et al., 2019) found that audit fees showed a significant negative relationship with earnings management. Thus audit fees could improve the quality of financial reporting. Therefore, the second hypothesis is : H2: Audit fees have a significant negative effect on earnings management.
2.11 The effect of a director's expertise on earnings management
For a company, the presentation of financial statements, in particular, is one of the responsibilities of top management, namely the director. Suppose there is a change in forecasts and correction of errors. In that case, the company must determine whether the company ignores the information in the previous period (error) or obtains new information (make changes in estimates). Proper classification is important because the accounting treatment differs for correcting errors and changes in estimates. Companies must consider careful estimates that are later proven to be incorrect as changes in estimates. Supposedly for changes in estimates that affect several periods, companies must disclose their effect on income from continuing operations (Kieso et al., 2020).
The concept that should make business management problems be eliminated to a minimum because it is managed by people who know and understand how to run a business is distorted to create new problems that harm the interests of various parties.
There is a tendency for a manager to always look for gaps in certain rules or guidelines that can be used for his interests (Sulistyanto, 2018). This is in line with agency theory, where information asymmetry between management and external users of financial statements provides opportunities and encourages management to be opportunistic by improving the accounting profit profile. Prior studies (Hakim et al., 2021; Zhang, 2019;
Zouari et al., 2015) showed that CEO expertise positively influences CEO behavior in
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aggressive earnings management. Experienced managers tend to display biased optimistic estimates. Thus the following hypothesis is proposed :
H3: Director's expertise has a significant positive effect on earnings management.
2.12 The effect of director's remuneration, audit fee, and director's expertise on earnings management moderated by sales growth
High sales in a company will increase the company's profit, and equity payments can also help companies with more significant growth opportunities achieve a more effective alignment of incentives, which will increase company value and support company growth. However, the presence and prevalence of growth opportunities can make it more difficult for shareholders to determine whether managers are making decisions that maximize firm value, referring to agency theory, where the problem of information asymmetry can be greater for growing companies. As a result, higher agency costs can be associated with high-growth firms (Li & Kuo, 2016). In addition, greater growth opportunities should lead to executive pay contracts that increase managers' incentives to exploit these opportunities (Smith & Watts, 1992).
H4: Remuneration of directors affects earnings management which is moderated by sales growth.
H5: Audit fee affects earnings management which is moderated by sales growth.
H6: The director's expertise affects earnings management which is moderated by sales growth.
Figure 2.1
Theoretical Framework Model H1
H1
H4 H2 H5
H6
H3 Director's Remuneration
Audit Fee Earnings
Management Director's Expertise
Sales Growth
117 3. Research Method
This research design is causal research and categorized as quantitative research. The data in this study were obtained from financial and company annual reports on the Indonesia Stock Exchange (IDX) website or related company websites. The sample used in this study was nine state-owned companies and subsidiaries listed on the IDX for 2013-2019, with 63 samples. The sampling technique was the purposive sampling method. The requirements used to determine the sample are:
a. State-owned companies and subsidiaries are listed on the IDX for the 2013- 2019 periods.
b. State-owned companies and subsidiaries that consistently publish financial reports in 2013-2019
c. State-owned companies and subsidiaries that consistently clearly disclose the nominal remuneration of directors and the number of shares owned by directors in 2013-2019
d. State-owned companies and subsidiaries that IPO after 2013
This study involves panel data, so that regression analysis is used, which is supported by Eviews version 11.0 through the following steps: a) Descriptive Statistical Analysis, b) Model Selection, c) Model Estimation, d) Classical Assumption Test, and e) The Hypothesis Test consists of Coefficient of Determination Test (R2), F-Statistical Test, t-test and Multiple Linear Regression Analysis.
The following regression model is used in this study:
DA = 𝛼 + 𝛽1𝐄𝐑𝐄𝐌 + 𝛽2𝐀𝐮𝐟𝐞𝐞 + 𝛽3𝐄𝐱𝐩 + 𝛽4𝐄𝐑𝐄𝐌 ∗ 𝐒𝐆 + 𝛽5𝐀𝐮𝐟𝐞𝐞 ∗ 𝐒𝐆 + 𝛽6𝐄𝐱𝐩 ∗ 𝐒𝐆 + ɛ
Remarks:
DA: Earnings Management EREM: Director's Remuneration Aufee: Audit fee
Exp: Director's Expertise S.G.: Sales Growth
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The following operational variables used in this study:
Table 3.1
Variable Measurement Scale
Variables Indicators Sources
Director’s Remuneration
𝐸𝑅𝐸𝑀 = 𝑂𝑁𝐸𝑃𝐶𝑇
𝑂𝑁𝐸𝑃𝐶𝑇 + 𝑆𝐴𝐿𝐴𝑅𝑌 + 𝐵𝑂𝑁𝑈𝑆 Where Onepct = Share price company X (total
shares + Stock options)
(Kumawat &
Singh, 2020;
Sivanandan &
Wahab, 2020)
Audit Fee Ln (Audit Fee) (Okedzie O &
Uchenna, 2019)
Director’s Expertise
Score 1 If the board of directors consists of a majority of directors who are financial experts (Financial expertise of directors must include academic and professional qualifications in finance and a minimum of 5 years experience handling financial issues in the industry), and 0 if it is the opposite.
0 = Opposite
(Kankanamage, 2015)
Sales Growth Sales t – Sales t-1
Sales t (Li & Kuo, 2016)
Earnings
Management DAit = TAit/Ait-1 - NDAit
(Kohlbeck & Luo, 2019; Mohmed et al., 2020)
4. Results and discussions 4.1 Descriptive statistics
Table 4.1 presents descriptive statistics in this study. Based on table 4.1, it can be seen that the average DA is 0.005644, which is smaller than the standard deviation (0.050431). This shows that earnings management is not a strategy that the sample companies often use. This finding shows the success of good governance mechanisms so that it is proven to have suppressed earnings management figures in companies managed by the Indonesian government. The maximum value of 0.143595 was found in one of our mining companies in 2017.
The average value of EREM is 0.001560, which indicates that the directors get a 0.15% increase in remuneration from shares and stock options on the total remuneration due to the increase in the value of the company's equity. This value shows how much
119 benefit the manager gets through shares and stock options throughout the period; the maximum value of 0.015454 was found in one of our banking companies in 2014.
The average AUFEE value is 21, 94076 (equivalent: IDR. 8,383,689,785) which is about 14% of the maximum value, with a maximum value of 24, 80292 (equivalent:
IDR. 59,125,000,000) found in one of our telecommunication companies in 2019.
Table 4.1 also shows that of the 63 samples studied, 44 samples (70%) have the majority of directors who are financial experts, and 19 (30%) have the majority of directors who are not financial experts. The data shows that most BUMN companies have been managed by directors who have the right skills to manage the company.
Then the average acquisition of S.G. is 0.158424, which shows that from a total of 7 years of observation, the proportion of sales growth is only 15.8%, which means that growth in state-owned companies and subsidiaries is very low. The maximum value gain of 1.106197 was found in construction companies in 2017.
Table 4.1
Descriptive statistics
DA EREM AUFEE EXPERT SG
Mean 0.005644 0.001560 21.94076 0.698413 0.158424 Median 0.005257 0.000577 21.37819 1.000000 0.123724 Maximum 0.143595 0.015454 24.80292 1.000000 1.106197 Minimum -0.149088 0.00000593 20.27424 0.000000 -0.287467
Std. Dev. 0.050431 0.002912 1.325584 0.462633 0.201180 Skewness 0.200132 3.504068 0.532604 -0.864643 2.016868 Kurtosis 4.683353 15.55658 2.058206 1.747608 10.32248 Jarque-Bera 7.858964 542.8019 5.306819 11.96716 183.4608 Probability 0.019654 0.000000 0.070411 0.002520 0.000000 Sum 0.355551 0.098308 1382.268 44.00000 9.980715 Sum Sq. Dev. 0.157683 0.000526 108.9447 13.26984 2.509360
Observations 63 63 63 63 63
Source: Output E-Views version 11, 0
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4.2 Model Selection
Table 4.2 shows the common effect model, and the following is the common effect model:
Table 4.2
Common Effect Model
Variable Coefficient Std. Error t-Statistic Prob.
C 0.140414 0.107733 1.303347 0.1978
EREM 4.352662 6.328716 0.687764 0.4944
AUFEE -0.007012 0.004770 -1.470026 0.1472
EXPERT 0.033025 0.016048 2.057826 0.0443
EREM*SG -3.197848 28.12267 -0.113711 0.9099
AUFEE*SG 0.002255 0.002936 0.768301 0.4455
EXPERT*SG -0.136078 0.069303 -1.963527 0.0546
R-squared 0.175105 Mean dependent var 0.005644
Adjusted R-squared 0.086724 S.D. dependent var 0.050431 S.E. of regression 0.048195 Akaike info criterion -3.122704 Sum squared resid 0.130072 Schwarz criterion -2.884578 Log-likelihood 105.3652 Hannan-Quinn criteria. -3.029048 F-statistic 1.981239 Durbin-Watson stat 2.731521 Prob(F-statistic) 0.083721
Source: Output E-Views version 11,0
Table 4.3 shows the fixed effect model; the following is the fixed effect model:
Table 4.3
Fixed Effect Model
Variable Coefficient Std. Error t-Statistic Prob.
C -0.250596 0.668699 -0.374752 0.7095
EREM 7.549117 7.568664 0.997417 0.3236
AUFEE 0.010912 0.030420 0.358721 0.7214
EXPERT 0.020224 0.025825 0.783123 0.4374
EREM*SG -22.58734 33.17670 -0.680819 0.4993
AUFEE*SG 0.003263 0.003240 1.006998 0.3190
EXPERT*SG -0.103586 0.076897 -1.347079 0.1843
Effects Specification Cross-section fixed (dummy variables)
R-squared 0.237476 Mean dependent var 0.005644
Adjusted R-squared 0.015073 S.D. dependent var 0.050431 S.E. of regression 0.050049 Akaike info criterion -2.947358
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Sum squared resid 0.120237 Schwarz criterion -2.437088 Log-likelihood 107.8418 Hannan-Quinn criteria. -2.746666 F-statistic 1.067773 Durbin-Watson stat 3.014082 Prob (F-statistic) 0.408627
Source: Output E-Views version 11,0
Table 4.4 shows a random effect model; the following is a random effect model:
Table 4.4
Random Effect Model
Variable Coefficient Std. Error t-Statistic Prob.
C 0.140414 0.111880 1.255045 0.2147
EREM 4.352662 6.572286 0.662275 0.5105
AUFEE -0.007012 0.004954 -1.415546 0.1624
EXPERT 0.033025 0.016666 1.981562 0.0524
EREM*SG -3.197848 29.20501 -0.109497 0.9132
AUFEE*SG 0.002255 0.003049 0.739828 0.4625
EXPERT*SG -0.136078 0.071970 -1.890758 0.0638
Effects Specification
S.D. Rho
Cross-section random 0.000000 0.0000
Idiosyncratic random 0.050049 1.0000
Weighted Statistics
R-squared 0.175105 Mean dependent var 0.005644
Adjusted R-squared 0.086724 S.D. dependent var 0.050431 S.E. of regression 0.048195 Sum squared resid 0.130072 F-statistic 1.981239 Durbin-Watson stat 2.731521 Prob(F-statistic) 0.083721
Unweighted Statistics
R-squared 0.175105 Mean dependent var 0.005644
Sum squared resid 0.130072 Durbin-Watson stat 2.731521
Source: Output E-Views version 11, 0
A model selection test was conducted to determine which of the three models above is best used in this study.
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4.3 Model Selection Test 4.3.1 Chow Test
Prob. The chi-square value for the Chow test's estimated results in table 4.5 is 0.7626 > 0.05, so the Common Effect is better than the Fixed Effect.
Table 4.5 Chow Test
Redundant Fixed Effects Tests Equation: Untitled
Test cross-section fixed effects
Effects Test Statistic d.f. Prob.
Cross-section F 0.490770 (8,48) 0.8567
Cross-section Chi-square 4.953171 8 0.7626
Source: Output E-Views version 11, 0
4.3.2 Hausman Test
Prob. Chi-square value for the estimated results of the Hausman test in table 4.6 is 0.8113 > 0.05, so the Random Effect is better than the Fixed Effect. However, because the two tests got different results, a third test was conducted to determine the best model for this study.
Table 4.6 Hausman Test
Correlated Random Effects - Hausman Test Equation: Untitled
Test cross-section random effects
Test Summary
Chi-Sq.
Statistic Chi-Sq. d.f. Prob.
Cross-section random 2.980375 6 0.8113
Source: Output E-Views version 11,0
4.3.3 Lagrange Multiplier Test
Table 4.7 shows that the prob. value chi-square for the Lagrange multiplier test estimation results with Breush-Pagan in cross-section, time, and both tests has a value >
0.05. So it can be concluded that the approach using the Common Effect model is better than the Random Effect.
123 Table 4.7
Lagrange Multiplier Test
Lagrange Multiplier Tests for Random Effects Null hypotheses: No effects
Alternative hypotheses: Two-sided (Breusch-Pagan) and one-sided (all others) alternatives
Test Hypothesis
Cross-section Time Both
Breusch-Pagan 1.878967 0.737351 2.616318
(0.1705) (0.3905) (0.1058) Source: Output E-Views version 11,0
The Common Effects model in panel data regression uses the assumption of Ordinary Least Square, so it must meet several assumption tests before testing the hypothesis. Panel data regression to meet the BLUE (Best Linear Unbiased Estimation) assumption, then at least the classical assumption test must be tested for multicollinearity, autocorrelation, and heteroscedasticity so that the normality test can be ignored (Ekananda, 2016).
4.4 Classic assumption test 4.4.1 Multicollinearities Test
Based on table 4.8, it can be seen that the value of the correlation coefficient between the independent variables is < 0.8; it can be concluded that there is no multicollinearity between each independent variable in this study.
Table 4.8
Multicollinearities Test
EREM AUFEE EXPERT SG
EREM 1 0.02691 0.18616 0.10390
AUFEE 0.02691 1 -0.17874 -0.18013
EXPERT 0.18616 -0.17874 1 0.19822
SG 0.10390 -0.18013 0.19822 1
Source: Output E-Views version 11,0
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4.4.2 Autocorrelation Test
Based on table 4.9, it can be seen that the prob. chi-square on Obs*R-squared is 0.0724, which is greater than 0.05. So it can be concluded that there is no autocorrelation in the regression model.
Table 4.9
Autocorrelation Test
Breusch-Godfrey Serial Correlation LM Test:
Null hypothesis: No serial correlation at up to 3 lags
F-statistic 2.202637 Prob. F(3,53) 0.0985
Obs*R-squared 6.983944 Prob. Chi-Square(3) 0.0724
Source: Output E-views version 11,0 4.4.3 Heteroscedasticity Test
Based on table 4.10, it can be seen that the acquisition of prob. The chi-square on Obs*R_Squared is 0.0243, which is lower than 0.05, so it can be concluded that the model in this study has a heteroscedasticity violation.
Table 4.10
Heteroscedasticity Test
Heteroscedasticity Test: Glejser Null hypothesis: Homoscedasticity
F-statistic 2.797241 Prob. F(6,56) 0.0189 Obs*R-squared 14.52744 Prob. Chi-Square(6) 0.0243 Scaled explained SS 18.79681 Prob. Chi-Square(6) 0.0045 Source: Output E-views version 11,0
But basically, the common effect model will have heteroscedasticity violations because this model uses the OLS (Ordinary Least Square) assumption. So to treat heteroscedasticity violations in the common effect model, the model must be weighted and compared with the unweighted model (Wati, 2018).
Table 4.11 shows that the weightless model is affected by heteroscedasticity symptoms; by giving weights, the model becomes better visible from all parameters.
Therefore, the next analysis is based on the Common Effect with weights (Table 4.12).
125 Table 4.11
Common Effects Model Comparison
Parameter Unweighted Weighted
Statistics t probability 1 variable < 0.05 1 variable< 0.05
R-Squared 0.086724 0.311535
F-Statistic Probability 0.083721 0.000116 Source: Output E-views version 11,0
Table 4.12
Weight Common Effect model
Variable Coefficient Std. Error t-Statistic Prob.
C 0.063530 0.049347 1.287420 0.2032
EREM 6.291748 3.199579 1.966430 0.0542
AUFEE -0.003609 0.002195 -1.644752 0.1056
EXPERT 0.026505 0.006688 3.962995 0.0002
EREM*SG -10.71131 14.19391 -0.754641 0.4536
AUFEE*SG 0.000281 0.001561 0.180108 0.8577
EXPERT*SG -0.053113 0.038184 -1.390970 0.1697 Weighted Statistics
R-squared 0.378160 Mean dependent var 0.011103 Adjusted R-squared 0.311535 S.D. dependent var 0.059073 S.E. of regression 0.044874 Sum squared resid 0.112766 F-statistic 5.675896 Durbin-Watson stat 2.183660 Prob(F-statistic) 0.000116
Source: Output E-views version 11,0 4.5 Hypothesis testing
4.5.1 Coefficient of Determination Test
Table 4.12 shows that the Adjusted R-squared value is 31.15%. This value indicates that the correlation or relationship between variables in this study is not strong because it has a low correlation value.
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4.5.2 F Statistic Test
Table 4.12 shows that the acquisition value of Prob (F-statistic) is 0.000116, which is lower than 0.05, so it can be concluded that the model in this study is declared fit.
4.5.3 Statistical t-test
The partial significance test in table 4.12 shows that EREM obtains a prob value of 0.0542 greater than 5%, so H1 is rejected, meaning EREM does not affect DA. AUFEE obtained a prob value of 0.1056, which is greater than 5%, so H2 is rejected, meaning that AufEE does not affect DA. EXPERT obtains a prob value of 0.0002 at a significance level of <5%, and seen from the regression coefficient is positive, so H3 is accepted, meaning that EXPERT has a significant positive effect on DA. Furthermore, the three moderating variables obtain prob values greater than 0.05 such as EREM*SG (0.4526), AUFEE*SG (0.8577), and EXPERT*SG (0.1697), are not significant, so H4, H5, and H6 are rejected.
4.5.4 Multiple Regression Analysis
Based on the results of data processing in table 4.12, the form of the regression equation is obtained as follows:
DA = 0.063530 + 6.291748 EREM – 0.003609 AUFEE + 0.026505 EXPERT- 10.71131 EREM*SG + 0.000281 AUFEE*SG - 0.053113 EXPERT*SG
Table 4.12 shows that sales growth is not a moderating variable because it causes all hypotheses to be rejected. The researchers tried to do additional tests by changing the sales growth variable as an independent variable.
Table 4.13
Test the moderating variable as an independent variable
Variable Coefficient Std. Error t-Statistic Prob.
C 0.063872 0.042838 1.491009 0.1414
SG -0.040078 0.016240 -2.467789 0.0166
Source: Output E-views version 11, 0
127 Based on the 4.13 iteration model, the sales growth variable tends, in this case, to be an independent variable, not a moderating variable. From the output table, it can be seen that the acquisition of the prob value of sales growth of 0.0166 <0.05 with a negative regression coefficient. This shows that S.G. has a significant negative effect on earnings management; this indicates that sales growth acts more as an independent variable than a moderating variable.
4.6 Discussion
4.6.1 The effect of a director's remuneration on earnings management
EREM obtains a probability value of 0.0542, which is greater than 0.05, so H1 is rejected. This means that the director's remuneration does not affect earnings management. Remuneration is only considered as an award given by shareholders for the performance that has been done by the directors, referring to Maslow's hierarchy of needs theory which states that the most basic need for top management in the company is to focus on self-actualization. This study's results align with research conducted by (Muslih, 2018; Nurbach et al., 2019), but this result is not in line with the statement (Gugus & Nurlita, 2019; Kieso et al., 2020).
The results of this study are certainly very contrary to the Positive Accounting Theory (Watts & Zimmerman, 1990), in which, according to this theory, the director will manage the size of the accounting numbers in the financial statements so that the bonus is always earned every year. This may be because only a few state-owned companies are listed on the IDX, even though using Eviews is recommended for using many samples.
In addition, this ineffective result may occur because there have been several changes to the composition of the board of directors by the Ministry of SOEs so that the new director does not yet have stock bonuses or stock options. Sample companies mostly only carried out the MSOP program at the time of the IPO. This makes most directors who serve in state-owned companies not own shares in the company. The use of inaccurate data may also cause the rejection of the hypothesis in this study. For example, calculating directors' remuneration is to add up the entire nominal received by
128
top management, which perhaps should only examine the CEO and CFO because the director is more responsible for the financial reporting.
4.6.2 The effect of audit fees on earnings management.
AUFEE obtains a probability value of 0.1056, which is greater than 0.05, so H2 is rejected. This means that the audit fee does not affect earnings management. This shows that each auditor has a different professional and commercial logic tradeoff. This study's results align with research conducted by Donatella et al. (2019). However, these results are not in line with other research (Bala et al., 2018; Hai et al., 2019).
This unaffected result is probably due to this study's inaccurate calculation of the audit fee. The audit fee in this study is measured using the natural log of the nominal audit fee. The amount of audit fees incurred by each type of company is certainly different, especially on assignment risk. The complexity of the services provided and the level of expertise for each type of company must be different.
In addition, the rejection of the hypothesis in this study may also be caused by the absence of a control variable to see whether the KAP is a big four, so the number of audit fees issued by the company may not reflect the quality of the actual audit report.
High audit fees have the potential for more economic ties between client and auditor, and auditors may place a risk premium on clients who charge higher fees without exerting more effort.
4.6.3 The effect of a director's expertise on earnings management
EXPERT obtains a prob value of 0.0002 at a significance level lower than 0.05 and seen from the regression coefficient is positive, so H3 is accepted, meaning that the director's expertise has a significant positive effect on earnings management. This problem is, of course, not only caused by the weaknesses inherent in the management concept but also driven by the moral hazard of the people who use it. There is a tendency for a director to always look for loopholes in certain rules or guidelines that can be used for his interests. As a result, managerial concepts that have positive aims are distorted (Sulistyanto, 2018).
129 This is certainly in line with the Agency Theory, where conflicts of interest between the owner and the agent occur because the agent may not always act in the principal's interests. The existence of information asymmetry between management and external users of financial statements provides an opportunity and encourages management to be opportunistic by improving the accounting profit profile. The director will only disclose the information if benefits are obtained because the director is the superior party in controlling all information in a company. The director will delay or withhold the information if no benefit is gained. These results are supported by other research (Zhang, 2019; Zouari et al., 2015).
However, to be able to provide stronger results, it is hoped that future researchers can use control variables, namely the characteristics of the directors (including the length of time they have worked together and the previous director's work background).
This will reinforce previous studies and reflect the meaning of the previous research.
Director's actual expertise. Because, in theory, the director's expertise should have a positive effect on financial statements because people with the right knowledge have managed it, this is also supported by prior research (Cherkasova & Markina, 2021;
Rubin & Segal, 2019).
4.6.4 The effect of director's remuneration, audit fee, and director's expertise on earnings management moderated by sales growth
The three moderating variables obtained prob values greater than 0.05 such as EREM*SG (0.4526), AUFEE*SG (0.8577), and EXPERT*SG (0.1697) are not significant, so H4, H5, and H6 are rejected. Sales growth only describes the investment achievements of the past period and can be used as a measure of growth in the future.
Directors who want a large remuneration are not interested in playing with sales figures because later, the director will face a new problem: whether the company can maintain profits and sales in the next period (Nugrahani, 2019). Mistakes in determining the pattern of action will force directors to pay higher taxes or fail to earn bonuses. For this reason, before carrying out his intention to carry out earnings management, a director must consider whether the costs incurred are commensurate with the benefits he gets
130
(Sulistyanto, 2018). So that there are no high agency costs for companies with high sales growth, but this is excluded for companies with abnormal sales growth. Companies with abnormal sales growth may have higher agency costs because they have to check in more detail about their sales growth. This aligns with the statement (Melinda &
Widyasari, 2019).
5. Conclusion, Implication, and Limitation 5.1 Conclusion
This study examines the factors influencing earnings management practices in state- owned companies and subsidiaries listed on the Indonesia Stock Exchange for the 2013- 2019 periods. Based on the data analysis and discussion that has been carried out, it can be concluded that the director's remuneration does not affect earnings management. This may be because the sample of this study is a state-owned company where the government takes part in creating supervision in the distribution of remuneration. It is known that there is a remuneration committee chaired by an independent board of commissioners in the sample company, which has responsibilities related to the nomination and remuneration of members of the board of directors. While according to Setiyawati et al. (2020), applying the principles of good corporate governance significantly affects the quality of financial reporting, so later, it will minimize earnings management practices.
The author also finds that the expertise of directors has a significant positive effect on earnings management. Agency problems are not only caused by inherent weaknesses in management concepts but are also driven by the moral hazard of the people who use them. As a result, managerial concepts with a positive purpose are misappropriated, so external parties are needed to mitigate agency problems. However, the audit fee that reflects the auditor's independence is proven to not affect earnings management, which indicates that the audit function is not working properly. This could be due to a different tradeoff between professional and commercial logic for the auditor. It can be seen in the case experienced by P.T. Garuda Indonesia that the auditor supports P.T. Garuda Indonesia in making wrong records, so it can be concluded that regardless of the audit
131 fees incurred by the company, it still cannot mitigate the asymmetric information that occurs between the agent and the principal.
In addition, sales growth is proven unable to moderate directors' remuneration, audit fees, and directors' expertise in earnings management because there are still many ways management uses to practice earnings management. Sales growth only describes the investment achievements of the past period and can be used as a benchmark for future growth so that the directors do not play with profit figures for their interests. Directors who want large remuneration are not interested in playing with sales figures because later they will face new problems. Mistakes in determining the action pattern will force directors to pay higher taxes or fail to get bonuses.
5.2 Implication
The results of this study have important implications for establishing informal control over an action that the directors will take through the perspective of religiosity in influencing the behavior and decisions that the directors will take. A director appointed by the Ministry of SOEs has gone through the selection and careful consideration stages, so it can be concluded that the company has been run by people who are competent in their fields.
There have been many regulations and sanctions in Indonesia. Still, this opportunistic problem does not occur because there are no regulations governing all actions taken by the directors but because of ethical and moral deviations from the people who use them. Religiosity is an essential factor as an informal control instrument to examine every decision made by the directors. According to research conducted by Abdelsalam et al. (2020), religiosity significantly positively impacted earnings quality.
This indicates that religiosity will reduce the number of earnings manipulation carried out by top management, in which religious norms have turned the emotions of guilt and shame into a sense of accountability among top management by directing them to choose ethical decision-making.
5.3 Limitation
There are several limitations in this study that require further research, and the first is that the rejected hypothesis is most likely due to the small number of samples. State-
132
owned companies and subsidiaries listed on the IDX only amount to 29 companies, whereas E-views used in the analysis tool require a large sample. So, it is recommended that further researchers conduct a re-examination with loose sample criteria or use other types of samples; besides, state-owned companies have very strong government intervention, so this study has limitations in measuring earnings management. Then, future researchers are advised to conduct research using the variable of religiosity to provide empirical evidence on whether the variable can suppress earnings management practices or not. This may improve the quality of financial reports.
Future researchers are also expected to use control variables such as auditor characteristics, auditor tenure, and directors' characteristics (including the length of time they have worked together and the previous director's work background).
In addition, it is hoped that further researchers will examine the remuneration of the CEO and CFO remuneration only because the director is the one who is more responsible for the financial reporting of a company so that it will get better results.
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