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Moderating earning management: Quality of internal auditors, business strategy, and sustainability reporting on economic performance

Moderating earning management: Quality of internal auditors, business strategy, and sustainability reporting on economic performance
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This research aims to determine the effect of internal auditor quality, business strategy, and sustainability reporting on economic performance with moderated by earning management partially on companies kompas100 index during the period 2013-2016.The population in this research is all companies kompas100 index listed on Indonesia Stock Exchange during the period 2013-2016. The total samples tested were 9 companies selected by purposive sampling technique. Data type in this research use secondary data obtained from Indonesia Stock Exchange and site respectively of company being sampled. Data analysis technique use panel data regression with Eviews 9.0 program.

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Moderating earning management: Quality of internal auditors, business strategy, and sustainability reporting on economic performance

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Nội dung Text: Moderating earning management: Quality of internal auditors, business strategy, and sustainability reporting on economic performance

Research Journal of Finance and Accounting www.iiste.org<br />
ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)<br />
Vol.11, No.2, 2020<br />
<br />
<br />
Moderating Earning Management: Quality of Internal Auditors,<br />
Business Strategy, and Sustainability Reporting on Economic<br />
Performance<br />
Arry Eksandy1 Vinola Herawaty2<br />
1.Trisakti University Jakarta<br />
2.Trisakti University Jakarta<br />
<br />
Abstract<br />
This research aims to determine the effect of internal auditor quality, business strategy, and sustainability reporting<br />
on economic performance with moderated by earning management partially on companies kompas100 index<br />
during the period 2013-2016.The population in this research is all companies kompas100 index listed on Indonesia<br />
Stock Exchange during the period 2013-2016. The total samples tested were 9 companies selected by purposive<br />
sampling technique. Data type in this research use secondary data obtained from Indonesia Stock Exchange and<br />
site respectively of company being sampled. Data analysis technique use panel data regression with Eviews 9.0<br />
program. The result indicates that internal auditor quality have a positive effect on economic performance but after<br />
moderated by earning management of internal auditor quality has no effect on economic performance. Business<br />
strategy have a positive effect on economic performance but after moderated by earning management of business<br />
strategy has a negative effect on economic performance. Sustainability reporting have no effect on economic<br />
performance but after moderated by earning management of sustainability reporting has no effect on economic<br />
performance and return on assets as control variable have a positive effect on economic performance.<br />
Keywords: Economic performance, Internal Auditor Quality, Business Strategy, Sustainability Reporting.<br />
DOI: 10.7176/RJFA/11-2-09<br />
Publication date: January 31st 2020<br />
<br />
1. Introduction<br />
The economic performance of the company can be seen through the annual Stock Returns within the company,<br />
the performance is seen from the perspective of the capital market through annual stock returns or the rate of stock<br />
returns on investments made by investors. Economic performance can be judged to be better if the rate of return<br />
on shares is good, which can provide high trust to investors to invest their shares in companies related to this can<br />
signal to potential investors to invest their shares so that it can provide convenience for companies in obtaining<br />
additional capital for operational activities (Wulandari, 2013).<br />
There are factors that influence economic performance including the quality of internal auditors, business<br />
strategies, sustainability report and Earning Management. According to Agoes (2004) in Rosnidah (2013: 301),<br />
said that internal audit is an examination carried out by the company’s internal auditor, both on the company’s<br />
financial statements and accounting records, as well as compliance with predetermined top management policies<br />
and adherence to government regulations and provisions of applicable professional ties. Internal auditors conduct<br />
studies, evaluate and provide recommendations independently and objectively to the activities of the company or<br />
organization so that the organization can achieve its objectives.<br />
According to Rosnidah (2013: 301), Audit quality is the probability that the auditor is able to disclose and<br />
report a violation in the client’s accounting information system. But the audit quality of internal auditors is still in<br />
the spotlight because internal auditors are within the organization and are paid by the organization so that the<br />
independence of internal auditors is sometimes still in doubt (Rosnidah, 2013). According to Rosnidah (2013)<br />
stated that as an internal company, then some of the activities in the audit process carried out might be more in<br />
favor of the benefits obtained by the company that allow it to cover up any unfavorable company activities.<br />
So it can be concluded that the quality of good internal auditors will describe the economic performance in<br />
the company will be good. It can be seen from the financial statements that have been audited by an independent<br />
auditor not separated from the contribution of an internal auditor. Financial statements are one means of<br />
information to assess the health or failure of a company. These audited financial statements will provide additional<br />
trust to investors and prospective investors that the financial statements presented are in accordance with generally<br />
accepted standards. So an auditor, especially internal auditor, must show his quality in carrying out the audit<br />
process and its quality as an auditor.<br />
Talking about the role of managers is inseparable from their role in determining the company’s business<br />
strategy. In its capacity as a provider of financial statements on the one hand as a determinant of the company’s<br />
business strategy, the quality of earnings that exist in the company is potentially also a function of business strategy<br />
(Widyasari et al, 2017). The company’s business strategy affects all company activities because all business<br />
process activities, operational activities, and transactions carried out and all business decisions made by managers<br />
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must be in line with business strategies (Arieftiara et al, 2013).<br />
Research on business strategies is generally about the effect of business strategies on tax avoidance as<br />
research conducted by Arieftiara et al. in 2013. This study uses two types of business strategies, namely prospector<br />
and defender of Miles and Snow typology (1978) (Arieftiara et al, 2013: 6). Prospector is a company that is<br />
committed to innovation and looking for new market opportunities (Widyasari, Harindahyani, and Rudiawarni,<br />
2017). Defender focuses on the efficiency of production and distribution of goods or services. They maintain the<br />
current market rather than looking for new market opportunities (Miles & Snow, 1978 in Houqe et al, 2013).<br />
Defender focuses on efficiency and not on innovation (Wardani and Isabela, 2017). Defender has the motivation<br />
to maintain his reputation as a stable company that tends to meet investor expectations. While prospectors tend to<br />
prioritize their interests in innovating and seeking new market opportunities, resulting in lower fulfillment of<br />
investor expectations (Widyasari et al, 2017).<br />
From the explanation of the two types of business strategies according to Miles and Snow (1978) it is known<br />
that business strategy defenders and prospectors have very different directions in improving the economic<br />
performance of a company. The defender strategy, for example, if a company prefers to carry out a defender<br />
business strategy by issuing products that follow the competitor’s market share, can be advantageous in terms of<br />
the company’s stability in the eyes of its investors. But if the company chooses to conduct a business strategy<br />
prospector who innovates in creating a product that is not the same as a competitor’s market, this is permitted, but<br />
has a high risk if the new innovation is issued and not accepted by the market share, the company must be prepared<br />
to bear unwanted risks but if the innovation is accepted in its market share, this can be profitable for the company<br />
and increase economic performance (economic performance) of the company, especially if the innovation can<br />
make the company become a company that dominates market share with similar products.<br />
According to Pardede (2014), the issue of sustainability begins with the issue of global warming and<br />
environmental damage that is increasingly happening throughout the world. At first this sustainability was a social<br />
issue, which subsequently developed into a strategic issue for the company. Companies should not only report on<br />
the condition of the company in terms of profits, but also from the social and environmental aspects.<br />
According to Pardede (2014), Sustainability reporting is the practice of measuring, expressing, and<br />
accountability to internal and external stakeholders on organizational performance towards sustainability goals.<br />
Disclosure of sustainability reports as a form of voluntary disclosure that is expected to increase transparency of<br />
the company. Previous researchers have shown how the level of disclosure can provide financial benefits to the<br />
company. The higher the level of disclosure of continuous reports, the greater the level of transparency of the<br />
company will indicate an increase in corporate governance (Pardede, 2014). Good corporate governance will affect<br />
the reflection that is good for the company or activities that exist in the company. This will provide a role to<br />
improve economic performance within the company.<br />
Research on factors that influence economic performance began to be carried out by many researchers. The<br />
renewal of the research carried out is one of them by using the element of earnings management as a moderating<br />
variable. According to Sulistyanto (2008: 6), earnings management is defined as the efforts of company managers<br />
to interpret or influence information in financial statements with the aim of tricking stakeholders who want to<br />
know the performance and financial conditions. Actions of earnings management are actually based on various<br />
objectives and purposes contained therein. This means that earnings management actions carried out contain<br />
certain motivations, because the level of profits or profits obtained are often associated with management<br />
performance (Timuriana and Muhamad, 2015: 13). Therefore, management often takes action so that the financial<br />
statements presented look good with the earnings management method.<br />
Management, which is assessed for its achievements in generating profits, will tend to manage earnings<br />
opportunistically (Mahiswari and Nugroho, 2014: 01). This results in a decrease in the level of economic<br />
performance (economic performance) as a result of earnings management practices based on the opportunistic<br />
behavior of a manager.<br />
<br />
2. Theory Review<br />
2.1 Stewardship Theory<br />
This stewardship theory states that there is no relation between common problems that occur with management<br />
motivation. Given the absence of internal motivational problems among executives, the question is how far<br />
executives can achieve the good corporate performance they aspire to. Thus, the theory of stewardship occurs<br />
because there are differences in performance arising from structural situations where executive management<br />
facilitates effective actions (Donaldson and Davis, 1991). The problem that occurs is whether the organizational<br />
structure helps executives to formulate and implement plans for good corporate performance (Donaldson 1985).<br />
This structure will facilitate objectives as long as they provide clear and consistent expectations and empower and<br />
empower senior management (Donaldson and Davis, 1991).<br />
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2.2 Positive Accounting Theory<br />
This theory was pioneered by Watts and Zimmerman (1989) who explained that certain economic factors can be<br />
related to the behavior of managers or financial statement makers. There are three specific hypotheses that are<br />
most often tested are the bonus plan hypothesis, the debt or equity hypothesis, and the poitical cost hypothesis.<br />
The relationship of positive accounting theory with economic performance lies in the attitude of management that<br />
seeks to use capabilities, accounting knowledge, accounting policies to look forward to the economic performance<br />
that will occur in the future based on the three hypotheses in the positive accounting theory.<br />
<br />
2.3 Economic Performance<br />
Economic performance (economic performance) is a description of the financial condition of a company and<br />
company performance analyzed by financial analysis tools, so that it can be known about the good or bad financial<br />
condition of a company that reflects work performance in a certain period. (Wulandari and Hidayah, 2013).<br />
Economic performance is expressed in a calculated scale:<br />
P − P + Div<br />
EcP = − Me”#<br />
P<br />
Source: Widarto (2015)<br />
Where:<br />
EcP : Economic Performance (Economic Performance)<br />
1 : Year-end stock price<br />
0 : Stock price at the beginning of the year<br />
: Dividend distribution<br />
: Median annual stock return (annual median stock return).<br />
<br />
2.4 Quality Of Internal Auditors<br />
According to Junaidi and Nurdiono (2016), argues that audit quality is a concept that shows that auditors can carry<br />
out professional duties based on professional ethics, competence, and independence. According to Prawitt, Smith,<br />
and Wood (2008), the quality of internal audit is one of the four pillars of effective corporate governance, together<br />
with the audit committee of the board of directors, executive management, and external auditors. According to<br />
Rosnidah (2013), there are four measurement methods in determining the quality of internal audit including<br />
competence, independence, professionalism, and motivation. Internal auditor quality measurement methods<br />
include competence, independence, professionalism, and motivation. Therefore, the measurement of the quality of<br />
internal auditors is seen from the competencies that have been taken in terms of this education, namely seeing the<br />
professional positions that have been obtained by internal auditors. As in Auditor Competency Standards article 3<br />
paragraph (2), the auditor must maintain his Competence through Continuing Professional Education to ensure<br />
that his Competencies are in accordance with the needs of the organization and the development of a monitoring<br />
environment. Continuing Professional Education and Training is obtained through membership and participation<br />
in professional associations, Auditor Functional Position Certification (JFA) education, conferences, seminars,<br />
courses, training programs in their own offices and participation in research projects that have substance in the<br />
field of supervision. So it can be concluded that the measurement of the quality of internal auditors is seen from<br />
how many internal auditors have obtained expertise certification. The more expertise certification obtained the<br />
more the quality of internal auditors is illustrated.<br />
<br />
2.5 Business Strategy<br />
According to Arieftiara et al (2013: 2), the company’s business strategy affects all company activities because all<br />
business process activities, operational activities, and transactions carried out and all business decisions made by<br />
managers must be in line with business strategies.<br />
Miles and Snow (1978) distinguish strategies based on organizational adaptation processes to changes in their<br />
environment, and the three main strategy typologies are Defender or defense, having behavioral characteristics,<br />
namely closing part of the total market in order to create a stable market area, defender companies try aggressively<br />
to preventing competitors from entering their land by focusing on Prospector prices, contrary to defender strategies,<br />
but both have similarities in terms of consistency overcoming three adaptive issues. The prospector’s main focus<br />
is how to find and make maximum use of products, market areas and new opportunities. competitive or high quality<br />
products. To obtain the strategy value, this study uses measurements from the research of Bentley et al (2017),<br />
namely:<br />
a) RnD Intens<br />
<br />
=<br />
<br />
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Research Journal of Finance and Accounting www.iiste.org<br />
ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)<br />
Vol.11, No.2, 2020<br />
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b) Sales Effort<br />
‘, ‘ & ) *)+<br />
$$%& =<br />
<br />
<br />
c) Employee Intensity<br />
-.+/ & %$ + %,<br />
+ %, ,=<br />
<br />
d) Capital Intensity<br />
&% & ,, ) 1. +<br />
0 ,=<br />
Total Asset<br />
<br />
e) Employee Fluctuation<br />
+ %, − + %, −1<br />
+ %, 9 .: . % =<br />
+ %, −1<br />
<br />
<br />
f) Sales Growth<br />
− −1<br />

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