Undergraduate Thesis. By: Melinda Octaviani

Transcription

1 The Effect of Audit Quality with Earning Management as an Intervening Variable on Earning Quality (Study on Service Company Listed in Indonesia Stock Exchange year ) Undergraduate Thesis By: Melinda Octaviani ACCOUNTING DEPARTMENT INTERNATIONAL CLASS PROGRAM THE FACULTY OF ECONOMICS AND BUSINESSES SYARIF HIDAYATULLAH STATE ISLAMIC UNIVERSITY JAKARTA 1437 H /2017 AD

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6 CIRCULUM VITAE DAFTAR RIWAYAT HIDUP I. PERSONAL IDENTITY 1. Name : Melinda Octaviani 2. Place and Date of Birth : Bogor, 1 October Address : Jl. Ciomas I RT 001/ RW 011 No.14 Kecamatan Ciomas, Kelurahan Ciomas, Kabupaten Bogor, Phone : Melindaoctaviani6@gmail.com II. EDUCATION 1. TK Miftahul Salam Bogor SD Rimba Putra Bogor SMP Insan Kamil Bogor SMAS Insan Kamil Bogor S1 Ekonomi Akuntansi UIN Syarif Hidayatullah III. SEMINAR AND WORKSHOP 1. Seminar by Pusat Pembinaan Profesi Keuangan (PPPK) Sekretariat Jenderal Kementrian Keuangan and FEB UIN Syarif Hidayatullah Jakarta. Sosialisasi Perkembangan Terkini Profesi di Bidang i

7 Akuntansi dan Ujian Sertifikasi Akuntan (CA) dan Akuntan Publik (CPA) Training Forensic Audit to Enhance Accountability in the Public Sector by The 16 th ATV FEB University of Indonesia. 3. Company Visit Forensic Audit to Enhance Accountability in the Public Sector by The 16 th ATV FEB University of Indonesia. 4. Seminar by U.S. Embassy Jakarta and FEB UIN Syarif Hidayatullah Jakarta, Future Business Opportunities in the Global Islamic Economy IV. FAMILY BACKGROUND 1. Father : (PURN) Letkol TNI-AD Achmad Ramli (Alm) 2. Mother : Sundus Saleh Sanad 3. Child : 7 from 7 siblings ii

8 Pengaruh Kualitas Audit dengan Manajemen Laba sebagai Variabel Intervening terhadap Kualitas Laba (Studi pada Perusahaan Jasa yang terdaftar di Bursa Efek Indonesia tahun ) ABSTRAK Tujuan penelitian ini adalah untuk memberikan bukti seberapa besar pengaruh kualitas audit terhadap kualitas laba dengan menggunakan manajemen laba sebagai variabel intervening. Populasi penelitian adalah perusahaan yang tercatat di Bursa Efek Indonesia. Sampel penelitian adalah perusahaan jasa yang tercatat di Bursa Efek Indonesia. Teknik Pengambilan sampel menggunakan metode purposive sampling dengan sampel sebanyak 30 perusahaan untuk periode 2013 sampai dengan Metode analisis data menggunakan analisis jalur dengan menggunakan SPSS Versi 20. Variabel independen dalam penelitian ini adalah Kualitas Audit yang diproksikan oleh fee audit, variable dependen adalah kualitas laba dan variabel intervening adalah manajemen laba. Hasil penelitian menunjukkan bahwa nilai signifikan 0,652 atas pengaruh kualitas audit terhadap manajemen laba yang membuktikan tidak ada pengaruh kualitas audit pada manajemen laba. Dan hasil pengujian hubungan langsung kualitas audit terhadap kualitas laba menunjukkan hasil lebih besar yaitu 0,330 atau 33% dibandingkan dengan pengaruh tidak langsung melalui manajemen laba yaitu sebesar -0,014 atau -1,4%, sehingga manajemen laba tidak bisa dijadikan sebagai variable untuk kualitas audit terhadap kualitas laba. Keyword: kualitas audit, manajemen laba, kualitas laba. iii

9 The Effect of Audit Quality with Earning Management as an Intervening Variable on Earning Quality (Study on Service Company Listed in Indonesia Stock Exchange year ) ABSTRACT The purpose of this study is to provide evidence of how much the effect of audit quality on earning quality by using earning management as an intervening variable. The population of the research is Company listed on Indonesian Stock Exchange. The sample is service companies listed in Indonesian Stock Exchange. The sampling method is purposive sampling that were sampled are 30 companies for the period from 2013 to A method used of data analysis was path analysis using SPSS version 20. Independent Variable of the research is audit quality proxies by audit fees, dependent variable is earning quality and intervening variable is earning management. The results showed that significant value is 0,652 on the effect of audit quality towards earning management which proved there is no effect of audit quality on earning management. And test results direct effect of audit quality on earning quality is larger result that is 0,330 or 33% compared with the indirect effect of audit quality on earning quality through earning management which is -0,014 or -1,4%, so earning management is not an intervening variable for audit quality on earning quality. Keywords: audit quality, earning management, and earning quality. iv

10 FOREWORD Assalamualaikum Wr.Wb All praise to Allah SWT, the most merciful, seer, hearer, and all above abundance of grace, for given me your gifts and blessings, so I can finish this thesis. And also shalawat and salam always gives to our beloved prophet Muhammad SAW and all his families and friends who always helped him in establishing Dinullah in this earth. With patience, intelligence, and strong desire from Allah SWT, I am able to finish this thesis as requirement for bachelor degree in State Islamic University Syarif Hidayatullah Jakarta. My very special thanks for my beloved daddy (alm) Achmad Ramli. Thank you dad for given me your time, attention, prays, support and your patience in educate me, even now you re not here anymore for me, but you always be my best hero ever lived in this world. And I would like to extend my gratitude for my mom, for your all attention and prays for me. You re the one that always have your time to pray for me, devotes all your love, you always patience facing your annoying and stubborn daughter. Thanks a lot mom, thank you for being my mother, I always grateful to have you. I hope I can be the reason of your both, mom and dad, smiles and proud. On this occasion, with all my humility to thank for all helps, guidance, support, pray, and spirit both directly and indirectly in completion of this mini thesis, to: 1. For my relatives family. All my brothers and sisters for the support and pray for my success. Thank you for your all attention and loves for me. 2. Mr. Dr. Arief Mufraini, Lc., M.Si as Dean of Economic Faculty. 3. Mrs. Yessi Fitri, SE., M.Si., Ak., CA as Head of Accounting Major. 4. Mr. Hepi Prayudiawan, SE., MM., Ak., CA as Secretary of Accounting Major. v

11 5. Mrs. Yulianti SE., M.Si as thesis supervisor. You have given me your time to guide me to compile this thesis and share your knowledge to me. Thank you very much for all attention and advice for me, so I can finish this thesis. You re the best mentor I ve ever had. 6. Mr. Hepi Prayudiawan, SE., MM., Ak., CA as academic supervisor for given me all information and help during lectures and all the support and pray. 7. All lecturers who have taught me patiently, may they have given are recorded in Allah SWT almighty and all staff UIN Syarif Hidayatullah Jakarta, 8. Special thanks to Mr. Bonik. Thanks a lot for your provided information and official stuffs that I needed in UIN Syarif Hidayatullah. 9. All my best friends (almh) Indriyanti, Banan, Wulan, Fita, Sisi, Yuli, Denisa, Tari, Rani, Lia and Disa. Thank you for all time, support, and prays for me. You re all the best. 10. All friends in Accounting International Program 2013, Panji, Putra, Raisa, Aji, Syarah, Ryan, Riski dan Afri. Thank you for every support and pray for me and all story that we.ve been trough together. I m really glad to be part of you all. 11. All friends in International Program. I am fully aware this mini thesis is still has a lot of flaws and far from perfect due to many reasons including limited experience and knowledge I have. Therefore, I expect all suggestion and also criticism from various parties. Wassalamu alaikum Wr.Wb. Bogor, June 2017 Melinda Octaviani vi

12 TABLE OF CONTENTS Curriculum Vitae... i Abstrak... iii Abstract... iv Foreword... v Table of Content... vii List of Tables... xi List of Figures... xii List of Appendixes... xiii CHAPTER I INTRODUCTION A. Background... 1 B. Problem Formulation C. Purpose and Benefit of Research Purposes of Research Benefits of Research CHAPTER II STUDY LITERATURE A. Literature Agency Theory Audit Quality Earning Management vii

13 4. Earning Quality B. Previous Research C. Conceptual Framework Variable Interrelation a. Audit Quality and Earning Quality.. 42 b. Audit Quality and Earning Management c. Earning Management and Earning Quality. 44 d. Audit Quality and Earning Quality through Earning Management Research Model D. Hypotheses CHAPTER III Research Methodology A. Scope of Research B. Sampling Method C. Collection Data Method D. Data Analysis Method Descriptive Statistic Classic Assumption Test Coefficient of Determination Hypothesis Test E. Research Variables Operationalization Earning Quality (Dependent Variable) viii

14 2. Earning Management (Intervening Variable) Audit Quality (Independent Variable) CHAPTER IV FINDING AND ANALAYSIS A. General Description of Research Object Research Object Description Research Sample Description B. Analysis and Discussion Descriptive Statistic Analysis Classic Assumption Test Results a. Normality Test Result b. Multicollonearity Test Result c. Heterocedasticity Test Result d. Autocorrelation Test Result Determination Coefficient Test Result Hypothesis Test Result a. Significant Partial Test (t-test) Interpretation a. Effect of Audit Quality on Earning Quality b. Effect of Audit Quality on Earning Management c. Effect of Earning Management on Earning Quality d. Effect of Audit Quality on Earning Quality through Earning Management ix

15 CHAPTER V CONCLUSIONS A. Conclusions B. Implication C. Recommendation Reference Appendixes x

16 LIST OF TABLES No. Description Page 2.1 Previous Research Variable Operationalization Detail of Research Sample Research Sample Research Sample Distribution Descriptive Statistic Analysis in Period Klomogorov-Smirnov Test Result Multicollonearity Test Result Autocorrelation Test Result Coefficient of Determination Equation I Test Result Coefficient of Determination Equation II Test Result Direct Regression Test Result Regression I Test Result Regression II Test Result xi

17 LIST OF FIGURES No. Description Page 2.1. Research Model Scatterplot Graphic Path Analysis Result xii

18 LIST OF APPENDIXES No. Description Page 1. Sample Data Description Raw Data Description SPSS Output Result xiii

19 CHAPTER I INTRODUCTION A. Background A company s number one goal is to make money. Not only have profit at the end of every accounting period, but they also want the company financial statements to look as good as they can. The main purpose of a company when it s established is to gain revenue or earning as much as possible. The earnings of a company can be seen from the financial statement of the company. Public companies have an obligation to submit periodic financial statements, namely annual reports and mid financial statements or quarterly financial report which is in Indonesia is every 4 months (divided into quarterly 1, 2, and 3). The annual financial statement submitted to Badan Pengawas Pasar Modal (Bapepam) and should be announced to the public. Financial statement is a tool to deliver financial information regarding the management s responsibility of their performance (Novianti, 2012).However, because of many interests of individuals within the company, cannot be ensured if the financial statement made is truly what is happened. So it becomes a doubt for users of financial statements, especially investors, the quality of the financial statements which in this case is the earnings. Thus, it s necessary to have 1

20 evidence that can ensure the quality of earnings of the company to be reliable, this is called earnings quality. Because of management actions which reported earnings that do not describe the actual condition of the company resulted in profit generated becomes questionable quality. This phenomenon can be detrimental to many users of financial statements. Each party has their own interest from the financial statement (Novianti, 2012). In accordance with Schipper and Vincent (2003) mentioned, that earning quality in particular and quality of financial statement in general is important for those who use the financial statement due to contract purposes and investments decision making. Novianti (2012) stated the importance of earning information has expressly mentioned in Statement of Financial Accounting Concept (SAFC) No. 1 which states that in addition to assessing the performance of management, earnings also help estimate the earnings capacity representatively, as well as to assess the risks in the investment or credit (FASB, 1985). Earnings information reported by the company s management will be used by investors to take decision whether to invests their money or not, also forecasting the future earnings. Investors buy shares when they believe that earning in the future can increase the share price (Libby, et al., 2008). With the importance of earning quality that exists in the financial statement, then it is necessary to ensure that financial statement presented fairly by management. But on the other hand if the company is in bad 2

21 condition and the financial statements is worst, to keep the company and the investors, the management is required to always produce the interesting financial statements for shareholders and it could make the management acted dishonestly and manipulate the results of financial statement. In addition to the company's interests in order not to lose the trust of shareholders, also for the benefit of themselves in order to complete their task. The idea that the management can take action only provides benefits for himself based on an assumption that states everyone has the behavior of selfish or self-interested behavior. The desire, motivation and utilities are not the same between management and shareholders raises the possibility of management acts detrimental to shareholders, among others behave unethically and tend to do the accounting fraud. This conflict can result in the nature of management which reporting profits opportunistically to maximize his personal gain. If this occurs would resulting poor quality of earnings (Rachmawati and Triatmoko, 2007). Taruno (2013) mentioned that reporting financial scandal have been a lot going on, in abroad there are a lot of accounting scandals by doing management earnings, among others Enron, Merck, World Com and majority other companies in the United States. Some of the cases occurred in Indonesia such as PT. Lippo Tbk and PT. Kimia Farma Tbk also involves financial reporting originated from detected manipulation. PT Kimia Farma Tbk case proved overstated their net income from the initial 3

22 reported 132 billion Indonesian Rupiahs and that report was audited by Hans Tuanakotta & Mustofa (HTM). But Ministry of State-Owned Enterprise of Republic of Indonesia (BUMN) and Bapepam assessed that net earnings is too large and contains elements of manipulating act. The real earnings were only billion Indonesian Rupiahs or 24.7% lower than initial profit. Cases like this that make the shareholders doubted the quality of presented earnings. It is made should there is third party who can ensure the financial statement is presented fairly (Media: Kompasiana, 2015). Trusted party that is able to ensure the financial statement is an independent party that is auditor. Auditors are expected to provide information stating that the report made by the management has been fairly presented or not. Because, according to government regulations from Finance Ministry of Indonesia No: KEP-346/BL/2011 announced that public company in Indonesia should report periodic financial statement and annual reports to Badan Pengawas Pasar Modal (Bapepam) which must be accompanied by an opinion of public accountants who audited the financial statements. Auditors with carry out a series of audit process, if found any material misstatement in the financial statement, the auditor have a right to give justification recommendations.this makes the company requires the services of a public accountant (now called as an auditor). An auditor provides audit services on the client's financial statements to provide assurance to users of financial statements that the 4

23 financial statements have been prepared in accordance with accounting standards so that financial statements can be relied upon in making decisions. The decision makers of course expect the best results of the audit so as to make them believe the decision they should take. Audit services is a means of monitoring the possibility of conflict of interest between the owner and managers and the shareholders with a number of different ownership and can reduce the information asymmetry between managers and stakeholders of the company to allow outsiders to check the validity of financial statements (Jensen and Meckling, 1976). In principle, an audit is supposed to improve earnings quality. However, it is unclear which earnings attributes are considered by auditors as being indicative of high earnings quality and it is unclear which financial statement users benefit the most from having an audit (Lenox et.al. 2015).High quality information is important in making good judgments and decisions. It s important for many participants in the financial reporting process: investors (e.g., where and how much to invest, what is the investment risk), regulators (e.g., what is the quality of financial reporting standards), auditors (e.g., what is the quality of financial statements and audit performed), lenders (e.g., what is the credit quality of an entity), etc. It s used in many investment decision and valuation models. There is no single definition of the quality of earnings, as well as there is no single measure of this concept. According to the Statement of Financial Accounting Concepts No.1, higher earning quality 5

24 provide more information about the features of a firm s financial performance that are relevant to a specific decision made by a specific decision-maker. In general, the earnings quality can be looked at as the quality of information. High quality information is precise (accurate), relevant, comparable, unbiased, and timely. The concept of the quality of information is especially applicable in the context of capital markets. For example, from the precision perspective, the quality of earnings is high when earnings precisely reflect the underlying (i.e., true) operating risk and environment, business performance, and reporting quality of an entity. Dechow et.al. (2010) define the high-quality earnings number is one that accurately reflects the company s current operating performance, is a good indicator of future operating performance, and is a useful summary measure for assessing firm value. From that, Dechow et.al. (2010) define earnings to be of high quality when the earnings number accurately annuitizes the intrinsic value of the firm. Interest of knowing the quality of earning is not only for investors but also to regulators, standard setters, credit rating agencies, analysts, accounting researchers, and many other participants in the financial reporting process. As the result, there are numerous benchmarks and views used to measure the quality of earnings. Earnings quality can be viewed from such perspectives as (but this is not an exhaustive list): 6

25 1. Analyst expertise 2. Auditor independence 3. Balance sheet 4. Decision usefulness 5. Earnings management 6. Financial analysis/reporting 7. International Measurement For instance, from the decision usefulness perspective, the quality of earnings is how precisely the earnings reflect the changes in the wealth of a company. From the financial analysis perspective, the earnings quality is how precisely the earnings measure the value of the company and how accurately they (earnings) represent the firm s current and future performance. Determining earnings quality and its implications for firm value is complex. Understanding a company s quality of earnings requires expertise in finance, accounting, and corporate strategy and a strong knowledge of the industry in which the company operates and the governance mechanisms monitoring and rewarding employees and managers. As a result of failures occurred to business organizations and the subsequent collapse and bankruptcy of large and multinational firms, such as Enron, WorldCom, and other firms, and based on the clear relationship of these collapses with manipulating the accounts of these firms, doubts emerged among users of financial information regarding the credibility of 7

26 this announced information, where they depend on, in decision making. This incredibility and unreliability raise many questions, including the managements of these firms, and the effectiveness of accounting standards, and the applied procedures in firms. Auditors' responsibility and credibility, audit process, and audit quality, became questionable directly next to these collapses (Almomani, et al., 2015). Because of increasing number of collapsed firms, and losses incurred by investors and creditors, the issue of earnings quality became the focus of different interested groups of people. The issue of earnings quality stems its importance from the quality of reported earnings by business organizations in the financial and investments decisions that investors, creditors, and other users depend on, in taking decisions. Eisa (2008) in Almomani (2015) stated that earnings quality is used in performance evaluation of firms, and in determining the fair value of these firms. Moreover earnings quality is important in future estimations and contracting. Dechow and Schrand (2004) explained that earnings quality is strongly associated with quality of financial reports, where this quality of earnings can be achieved when firms adhere to the legal, professional, and control standards. Business organizations are required to issue reliable, free of errors and misstatement information, to provide a good base for the evaluation of current operating performance of firms, and to be appropriate for the estimation of its future operating performance, and for the determinations of the fair value of firms. Penman (2003), demonstrated that earnings quality is associated 8

27 with accounting profits, realized cash flows, so quality of earnings is achieved when the reported income reflects the actual profits, where future expected profits can be accurately estimated. Nowadays, auditors encounter several types of pressure by users of accounting information in order to improve the quality of audit, because of several financial problems exist in periodic financial reports. Audit profession is required these days to concentrate on efficient and qualified work force, to provide audit services with high quality, and to be able to reveal any incorrect practices that managements take to affect the accounting measurement. Audit report is considered one among the most important inputs for the decision making process. In addition, audit quality is a primary requirement for different groups of users. Actually, audit quality is difficult because of its difference in nature, to provide trust with audit reports and financial statements (Scott and Pitman, 2005). Audit quality means that audit profession has the ability to detect the significant errors, and limits information inconsistency between managements and shareholders, so it can protect the behalves of shareholders. Audit profession is expected to provide highly efficient services and to keep the trust of its services in minds of interested people (Eisa, 2008 in Almomani 2015). After all, the financial statements are what potential investors and creditors look at when they make the decision whether or not to lend the company money or to become an investor. This is where the concept of 9

28 earnings management comes into play. As a result, these effects of management interventions are reflected in the reported income, and led to a situation where income does not represent the actual situation, especially when managements' awards depend on the reported income. Earnings quality means that the reported income is actual and not overstated or manipulated, and at the same time reflects the actual economic events occurred in the entity during the accounting period (Bellovary et al., 2005). And because of that there is a potential action that maybe done by the management to arrange the earning based on their own interest or usually called as earning management. The definition of earnings management in a nutshell, is the creative use of different accounting techniques to make financial statements look better. Earnings management is a global phenomenon in financial reporting or reporting of information related to profits. The purpose of earnings management is to demonstrate reasonable earnings quality that meets either the shareholders expectations, or the requirement of obtaining relevant authorization from regulators (Ahmadpour and Shahsavari, 2016). But a lot of case proved that management acts opportunistic earning management by increasing or decreasing the accrual number of income statement which causes earning information is not appropriate with actual company s performance (Azhar, 2013). Thus, earnings management has much in common with earnings quality (represented by accruals quality, earnings persistence, earnings 10

29 predictability, and earnings smoothness in our study). For instance, highly managed earnings can yield low quality earnings (Lo, 2008), as the artificial information may lead to an incorrect decision. However, the absence of earnings management is insufficient to guarantee high quality earnings, because other factors (such as capital market and management compensation) contribute to the quality of earnings (Lo, 2008). Earning management is the use of accounting techniques to produce financial reports that present an overly positive view of a company s business activities and financial position. Healy and Wahlen (1999) describe earnings management (EM) as an action of managers to adjust financial reports using their judgment in order to influence contractual outcomes that based upon reported accounting data or to mislead stakeholder about firm s performance. The influence of audit quality towards the earning quality and earning management is also important to know because audit quality needs to be in accordance with certain accounting rules and it adds value if the quality enables financial statements to reflect the economic performance position of a firm and ensure that good performing firms can be distinguished from bad performing firms. In theory, a firm should select accounting methods and make estimations which best reflects the economical position. In practice this means that audit firms must be independent from the client, due to the liability and disciplinary sanctions. Because there is room for subjectivity when expressing an opinion on a 11

30 financial statement, the probability that an audit firm discovers a material error or the risk that the audit firm will report these errors and signals are a couple of the many contributing factors when it comes to audit quality (DeAngelo, 1981). As Velury & Jenkins (2008) states, earnings quality is influenced by the audit quality, because a high level of audit quality leads to a higher degree of earnings quality. But other research that is Pupperhart (2012) provided evidence that high audit quality is not significant associated with high earnings quality. Also research done by Gerayli et al. (2011) which use discretionary accruals as a measure of earning management reveal that discretionary accruals are negatively related to auditor size and auditor industry specialization which are the measurement of audit quality. Their findings also support our hypothesis of the negative association between auditor independence and discretionary accruals. Overall, this study provides evidence that firms which are audited by high quality auditors are more likely to have less discretionary accruals. Other research that tested the influences between audit quality, earning management and earning quality is the main reference of this study it s Almomani (2015) also tested the quality of audit to earning quality, He stated that audit quality have significant relations with quality of earnings. And also there are some researches that tested the quality of audit on earning managements. Research done by Nawaiseh (2016) stated that the audit quality which is used audit tenure, audit fees and international big auditing firms as proxies 12

31 have significant relations with earning management. But founded that are no relationship is found between leverage, return of asset (ROA), cash flow/total assets (CFO) towards earning management. As there has been a collection of massive accounting fraud, for example: Enron (special purpose entities to hide debt), WorldCom (of misstatements) and Parmalat (for cash balance overstatements), critics conclude that there was a correlation of various factors which have contributed to these accounting scandals. A few of the factors that contributed to the collapse of these firms included poor corporate governance, management compensation packages and also a decline in audit quality, with the adverse consequences of poor earnings quality. This has been the subject of significant debate among academics, practitioners and regulators. However, the empirical evidence on earnings quality is sparse and controversial. Examining one factor of lower earnings quality that has an impact on information asymmetry (e.g. a decline in audit quality) is one of the focuses in this research. Lower earnings quality increases the adverse selection risk and lowers liquidity in financial markets, especially for public firms where earnings represent the principal source of information for market participants (Pupperhart, 2012). Based on the above, researchers are motivated to do this study because the first quality of earnings of a company plays a very important for shareholders and creditors for decision making. With the good quality of earnings they can easily made decision whether to make investment for 13

32 investor or give loan for the creditors. Second, this study also test about is the earning management effect earning quality or not because earning management can change the value of confident of this quality of earning if don t done fairly. And last, earning management can influenced (based on the previous researches) the quality of audit if the auditor doesn t know nor can t find that the management do the illegal or unfairly earning management. Based on those reasons, the researchers conducted a study entitled The Effects of Audit Quality with Earning Management as an Intervening Variable on Earning Quality. This research is an extension of the previous research done by Taruno (2013), Almomani (2015), and Nawaiseh (2016). The differences of this study with the previous research are as follows: 1. The variable used in previous research is audit quality which is influenced the earning quality. Moreover, in this study, the researcher add one variable its earning management as an intervening variable to expand the scope of discussion and get more complex (Almomani, 2016). In addition, the management manages the earnings to profitmotivated, and implies earnings management reduces the information content of accounting items. On the other hand, some researchers have informative look-out earnings management, and these are considered as a way to raise awareness of favorable financial conditions to shareholders, 14

33 that it is done by management involvement in the process of income determination (Subramanyam, 1996, pp ). So it should be expected that earnings management not only does not reduce the income information content, but it also helps investors in the better interpretation of reported items (Ahmadpour and Shahsavari, 2016). 2. The population of this study is Services Company Listed in Indonesia Stock Exchange at the period suggested by previous research to study in other countries. Meanwhile, the study population before is the entire industry in Amman, Jordan. B. Problem Formulation From the background above, the problem formulation that will identify in this research are: 1. How much audit quality effect the earning quality? 2. How much audit quality effect the earning management? 3. How much earning management effect the earning quality? 4. How much audit quality effect the earning quality through earning management? 15

34 C. Purposes and Benefits 1. Purposes of Research Based on the problems formulation above, the purposes of the research are: a. To test and analyze the effects of audit quality towards earning quality. b. To test and analyze the effects of audit quality towards the earning management. c. To test and analyze the effects of earning management towards the earning quality. d. To test and analyze the effects of audit quality towards the earning quality through the earning management. 2. Benefits of Research a. Theoretical Contributions 1) Student Accounting Department, this study is useful as reference material for future research and comparative increase knowledge. 2) Society, as information facilities about the earning management, audit quality and the earning quality and also to add the knowledge about auditing which may be useful in the future. 16

35 3) Subsequent researchers, as a reference for those parties who will carry out further research on this topic. 4) The author, as a means to broaden insight and make reference to auditing, especially on the earning management, audit quality and also about the earning quality which is expected to be useful for writers in the future. b. Practical contribution 1) Auditor and Public Accountant Office (KAP), a review which is expected to be used as information to improve the audit quality so can influence the earning quality of the client s company. 2) Company or User, expected to be useful in assessing the quality of audit and that influence to the earning quality of company. 3) Indonesian Institute of Accountants (IAI), the research is expected to contribute positively so that it can be used as a basis for considering audit activity especially about the audit quality and the effect to earning quality and earning management. 4) Indonesian Institute of Certified Public Accountants (Certified), as additional information about audit 17

36 quality and earning management and their influence to the earning quality of company. 18

37 CHAPTER II STUDY LITERATURE A. Literature 1. Agency Theory Agency theory explains the existence of a contract between the agent (management) and the principal (shareholders) which the agent received a mandate to manage the company of the principal. Jensen and Meckling (1976) an agency relationship as a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent. If both parties to the relationship are utility maximizers, there is good reason to believe that the agent will not always act in the best interests of the principal. The principal can limit divergences from his interest by establishing appropriate incentives for the agent and by incurring monitoring costs designed to limit the aberrant activities of the agent. In addition in some situations it will pay the agent to expend resources (bonding costs) to guarantee that he will not take certain actions which would harm the principal or to ensure that the principal will be compensated if he does take such actions. 19

38 However, it is generally impossible for the principal or the agent at zero cost to ensure that the agent will make optimal decisions from the principal s viewpoint. In most agency relationships the principal and the agent will incur positive monitoring and bonding costs (non-pecuniary as well as pecuniary), and in addition there will be some divergence between the agent s decisions and those decisions which would maximize the welfare of the principal (Jensen & Meckling, 1976). Agency costs arise in any situation involving cooperative effort by two or more people even though there is no clear-cut principal-agent relationship. Viewed in this light it is clear that our definition of agency costs and their importance to the theory of the firm bears a close relationship to the problem of shirking and monitoring of team production. Since the relationship between the stockholders and the managers of a corporation fits the definition of a pure agency relationship, it should come as no surprise to discover that the issues associated with the separation of ownership and control in the modern diffuse ownership corporation are intimately associated with the general problem of agency (Jensen & Meckling, 1976). Because of this potential conflict of agency, an agent (management) who knows more internal information about the company than the principal must provide information about the 20

39 condition of the company, especially which is mandatory and also voluntary as specified minimum additional disclosures. Information asymmetry occurs between management by the owners provide the opportunity for the manager to act opportunistically that for sake of personal gain. Under such circumstances the manager can use the information learned to manipulate financial reporting by way of earnings management (Azhar, 2013) or as Subramanyam (1996) called as opportunistic earnings management which means managers apply it to maximize their own interests and not the interests of the company and the investors. Therefore necessary to have an independent party that can be trusted entirely by the principal and the party is the auditors. Auditors are expected to ascertain whether the financial statements presented by management was fair or not because the principal interest in this case is the profits from the company so that the auditor is expected or even to be able to ensure the quality of the profit generated by the management. 2. Audit Quality Audit quality now is no longer a new concept under the scope of auditing. Not only the complete all procedures of audit that can guarantee that the audit have a good quality but also other factors. The important thing to know first is the definition of audit 21

40 quality. There are many different definitions but none of them has achieved universal acceptance. It can even be argued that quality itself is a concept that cannot be comprehensively defined (Pitkänen, 2016). Probably the most used definition of audit quality is created by DeAngelo (1981) which defines audit quality to be the market-assessed joint probability of discovering an error in the financial statements and reporting it to the stakeholders. In this definition quality requires both competence and independence from the auditor. Without adequate competence the auditor might not be able to detect the error so irregularities and without high level of independence auditor might not be willing to report his findings truthfully. With adequate independence and competence the auditor should be able to find the material misstatements and report them, thus completing the audit with high quality. Malihi et al. (2012) provides further explanation that audit quality could be a function of the auditor s ability to detect material misstatements and reporting the errors. Together with other similar definitions, they all emphasize on two of the most important aspects of audit quality, namely auditor ability or auditor effort, and auditor independence. Therefore, this stream of definitions is mainly about the auditors quality. Another stream of defining audit quality focuses on the accuracy of the information reported by the auditors. Titman and Trueman (1986) suggest that high 22

41 audit quality would improve the reliability of financial statement information and allows investors to make more precise estimate of the firm s value. Schauer (2002) also advises that a higher quality audit increases the probability that the financial statements more accurately reflect the financial position and results of operations of the entity being audited. In other words, audit quality is part of the quality of accounting information disclosed (Clinch et al., 2010). The audit process is considered a key important element in the structure of financial statements because it tests whether the financial information is in an independent and objective form, in order to increase the credibility of this information. The most important factor of audit quality is the ability of an auditor to detect errors and other significant misstatements and reducing the level of accounting information inconsistency between shareholders and management (Almomani, 2015).Quality auditor is when the auditor can give accurate information. Accurate information is information that can pin point the value of the company. DeAngelo (1981) defines quality audit as the probability that an auditor discovered and reported about the existence of a breach in the accounting system of its clients. Qualified auditors should provide proper information, not only wore a higher fee so the choice was really reflects the information contained in the company. In Indonesia 23

42 there are called as Big4 audit firms. Here is a list of the firm that belongs to the group Big Four in Indonesia: a) Public Accountant Firm of Osman Bing Satrio and Partners affiliated with Deloitte. b) Public Accountant Firm of Tanudiredja, Wibisana, and Fellow affiliated with Price Waterhouse Coopers (PWC). c) Public Accountant Firm of Purwanto, Suherman, Surja affiliated with Ernst & Young (EY). d) Public Accountant Firm of Siddharta and Widjaja affiliated with KPMG. There are a lot of proxies uses to measure the audit quality. Which is in DeAngelo (1981) stated audit firm size as a measurement of audit quality. Research did by Almomani (2015) use several measurements which are audit office size, auditors fees, period of customer retention, type of auditor s opinion, and the specialization in client s industry. The study finds that auditor fees have most important significant effect on earning quality, followed by auditors opinion, where others factors has no significant effect on earning quality. Ahmed (2012) in Almomani (2015) used audit fees, audit office size, client's retention period, association with international audit fees and professional qualification of audit office employees, as features of audit quality. 24

43 The features of audit quality that used by Hamdan (2012) in Nawaiseh (2016) include audit office size, audit fees, client's retention period, audit office specialization with the industry of the client, and association between audit office and the international offices of auditing. From that several proxies of measuring the audit quality, this research will use the auditor fees as a measurement of audit quality. Besides of many research done using the auditor fees as a measurement or proxy of audit quality (Ahmed, 2012 in Almomani, 2015, Hamdan and Ijaela 2012, and Nawaiseh 2016), already proved that auditor fees as a measurement of audit quality is significantly influence the earning quality. Hamdan and Ijaela (2012) in Nawaiseh (2016) investigate the existence of earnings management practices and earnings quality in the industrial public companies listed in Amman Stock Exchange (ASE), and tests the impact of auditing quality characteristics (the audit office size, the connection with global offices, client retention period, auditing fees, and specialty in client s industry) on reducing earnings management practices, and enhancement earnings quality. Data of 45 companies of the industrial sector for the period were arranged. The most important conclusion of that study was; the industrial public companies listed in (ASE) have practiced earnings management each year during the study period, the study 25

44 itself cannot prove the earnings quality in the companies of the industrial sector. Beatty (1989) argued that the nature and extent of agency costs vary across organizations and this variation may lead CPA firms to differentiate the quality of their services. Auditing firms which have relatively greater investments in reputation capital have greater incentives to maintain this reputation. Beatty (1989) further proposed that the accounting information disclosed in the financial statements audited by high reputation firms would be more precise than that audited by firms with lower investments in reputation, as this is one manner in which such firms can protect their reputation capital. Copley (1991) stated that it seems reasonable that differences in audit quality would be reflected in audit fees. Specifically, independent-audit consumers, seeking higher levels of audit quality, will be required to pay a premium price. Audit fees were regressed against variables intended to measure the marginal cost of performing the audit. Beatty (1989) argued that the residual reflects the price paid to a particular audit firm above or below the average price paid for auditor reputation. Beatty also stated that financial reports audited by high reputation firms are more precise, allowing investors to reduce risk by more precisely estimating the distribution of firm value. 26

45 3. Earning Management Scott (2000: 296) states that the selection of accounting policies done by manager for a particular purpose is called earnings management. Related to earning information, Statement of Financial Accounting Concept (SFAC) No.1 states that such information is a major concern for assessing the performance or accountability of management. Besides earnings information also helps users of financial statements in assessing the company's earnings power in the future. Therefore, management has a tendency to take action to provide an attractive financial statement (Guna and Herawati, 2010). Kitiwong et.al. (2012) stated there are several definitions of earning management and most widely used definitions of earnings management are Schipper s (1989) and Healy and Wahlen s (1999) definitions. The definitions indicate that a management s incentive to exercise earnings management, its intent to influence reported earnings, and its use of judgment in the financial reporting process are the main criteria for defining an activity as earnings management. However, these two definitions do not indicate how earnings management is associated with generally accepted accounting principles (hereafter GAAP), especially whether it is allowed by GAAP. Therefore it is difficult to distinguish earnings management from a misstatement resulting from error and/or fraud. Dechow and Skinner (2000) opines that 27

46 earnings management is the use of accounting choices which are allowed by GAAP; conversely, fraudulent accounting is those which do not comply with GAAP. Managed earnings are earnings which do not result from a neutral treatment but from the use of aggressive accounting or conservative accounting. In doing so, a management has to alter real events or to choose accounting choices. Kitiwong et.al., (2012) states adopting conservative or aggressive accounting practices through purposely selecting accounting estimations and assumptions is far preferable to through structuring real transactions because, as remarked by Goncharov (2005), operating earnings management is more costly than accounting earnings management since it affects real cash flows. Earnings management techniques are also divided into real operating decisions and pure financial reporting decisions (Schipper 1989, Peasnell, Pope and Young 2000, Ewert and Wagenhofer 2005, and Kitiwong et al., 2012). Schipper (1989) points out that real earnings management is designed to manage the timing of decision-making on a company s investments and production while accounting earnings management is designed to select accounting techniques allowed by GAAP. Ewert and Wagenhofer (2005) explain that the management s interpretation of accounting standards with intent to make existing standards apply to existing accounting events and transactions and/or with intent to 28

47 shift partial earnings between periods is one form of earnings management. In terms of real earnings management, manager is required to organize transactions or alter the timing of transactions to help him/her transform bad news into good news. The direction of earnings management can be in two directions, income-increasing earnings management and incomedecreasing earnings management. These depend on a management s purpose in managing earnings. Empirical studies document that management incentive to achieve high rewards, to take advantage of specific circumstances and to report desirable numbers are the major causes of earnings management. For example, in order to maximize bonuses, management s decisionmaking to manage reported earnings upwards or downwards depends on bonus conditions and the level of pre-managed earnings. However he/she tends to reduce reported earnings in order to maximize compensation in the future or to boost future earnings. A management is likely to use income-decreasing earnings management with the aim of gaining a government assistance and protection, deferring earnings to the lower tax rate period, writing all accruals off before a management s leaving and decreasing stock price before a management buyout. He/she however attempts to report earnings upwards so as to increase stock prices before stock-to-stock mergers. Smoothing reported 29

48 earnings is one form of earnings management; it occurs when a management intentionally fights to smooth a fluctuation of reported earnings. It leads a management to use income-increasing and/or income-decreasing accruals. Avoiding reporting losses or earnings drops and achieving analysts forecasts are also key drivers that induce a management to engage in income-increasing earnings management (Kitiwong et al., 2012). Earnings management have been considered as one of the methods used by the business leaders to mislead their stakeholders to report unrealistic numbers, despite the various check and balances (e.g. corporate governance code) on the process. Nawaiseh (2016) stated that Investors in a company have vital interest in the earnings reports, and company managers used earnings management as a strategy to deliberately manipulate company earnings to match a predetermined target and involves the planning and execution of certain activities that manipulate or smooth income, achieve high earnings level and sway the company s stock price. That is why the position of earning management is between legal and illegal because if the management do earning management for only their own interest but not do it rightly, that earning management is done illegally and influence the earning reports of a company. 30

49 In sum, earnings management occurs when management intends to alter the neutral reporting process in order to report what he/she wants, rather than to report neutral earnings. However, neutral earnings (Dechow and Skinner, 2000) or un-managed earnings (Burgstahler and Dichev, 1997) or real/true earnings (Copeland, 1968) are difficult to measure and define. This leads to the problem of how managed earnings are distinguished from neutral earnings. In essence, discretionary accruals, abnormal accruals or managed accruals are used to estimate managed earnings (Kitiwong et al., 2012). 4. Earning Quality Earnings quality is a central topic in financial accounting research. Dechow et.al (2010) define earning quality is higher quality earnings provide more information about the features of a firm s financial performance that are relevant to a specific decision made by a specific decision-maker. And recording to Schipper and Vincent (2003) the definition of earning quality is an expansion, where income statement was reported appropriately and in which there a change of economic assets out of the transactions with the owner. The terms quality of earnings and earnings quality have no single, agreed-upon meaning. Both terms are used when making accounting choices; considering the business cycle, including timing of transactions; and discussing earnings management. Some 31

50 use quality of earnings to mean the degree to which management s choices of accounting estimates can affect reported income (these choices occur every period). Some who refer to earnings quality suspect that manager usually will make choices that enhance current earnings and present the firm in the best light, regardless of the firm s ability to generate future, similar earnings (Weil, 2009). Dechow and Schrand (2004) stated that the objectives of financial analysis are to evaluate the performance of the company, to assess the extent to which current performance is indicative of future performance, and based on this analysis, to determine whether the current stock price reflects intrinsic firm value. From this perspective, a high-quality earnings number is one that accurately reflects the company s current operating performance, is a good indicator of future operating performance, and is a useful summary measure for assessing firm value. We define earnings to be of high quality when the earnings number accurately annuitizes the intrinsic value of the firm. Such earnings are referred to as permanent earnings in the accounting literature (e.g., Black 1980; Beaver 1998; Ohlson and Zhang 1998). Another way to think about this concept is that earnings are of high quality when return on equity is a good measure of the internal rate of return on the company s current portfolio of projects. An earnings number 32

51 that represents the annuity of expected future cash flows is likely to be both persistent and predictable. Persistence and predictability in earnings alone, however, are not sufficient to indicate that earnings are high quality. Managers often want earnings to be highly persistent and predictable because these characteristics can improve their reputations with analysts and investors. If such earnings do not annuitize the intrinsic value of the firm, however, the earnings are low quality. Earnings quality can vary among companies as a function of accruals even in the absence of intentional earnings manipulation. Unlike the determination of cash flows, the determination of earnings requires estimations and judgments, and some companies require more forecasts and estimates than others (Dechow and Schrand, 2004). B. Previous Research Below are the results from several researches from several researchers which became the references of this study. The results can be seen in Table.2.1 below: 33

52 Table.2.1 Previous Research No Title (Researcher, year) 1 The Impact of Audit Quality Features on Enhancing Earnings Quality: The Evidence of Listed Manufacturing Firms at Amman Stock Exchange (Mohammad Abdallah Almomani, 2015) 2 Impact of External Audit Quality on Earnings Management by Banking Firms: Evidence from Jordan (Mohammad Ebrahim Nawaiseh, 2016) Continue on the next page Research Methodology Differentiation Similarities Not use earning management as an intervening variable and evidence is not from Indonesia Stock Exchange. The study use indicators of quality of audit, audit office size, period of customer's retention, type of auditor's opinion, and the specialization in client's industry, were used to measure audit quality Not use earning quality as dependent variable and not use earning management as an intervening variable, used Audit tenure (AT) and the international big audit firms (INT) as audit quality Use audit quality and earning quality as variables, used audit fees as an audit quality measurement and also use earning of continuity as a measurement of earning quality and also used hypotheses testing Use audit quality and earning management as variables, used audit fees as audit quality measurement and used discretionary accruals as a measurement of earning Research Results The study finds that the earnings of listed manufacturing firms at Amman Stock Exchange are with good quality, and that there is a linear relationship between external audit quality and the quality of reported earnings. Auditors' fees have most important significant effect on earnings quality, followed by auditors' opinion, where others factors has no significant effect on earnings quality. Audit tenure (AT), audit fees (AF), and the international big audit firms (INT) have significant relations with earning management. It means, future earning management forecast is predictable based 34

53 Table.2.1 (Continuous) No Title (Researcher, year) 3 The effect of Audit Quality on Earning Quality provided by Dutch public and private firms (Mariska Pupperhart, 2012) Research Methodology Differentiation Similarities Research Results measurements management on audit quality leading indicators (audit tenure, audit fee, and international big audit firms). In addition to company size, that is, when external auditing is conducted, earning management mitigates. Moreover, no relationship is found between Leverage, ROA, CFO, and Earning management Not use earning management as an intervening variable, used utilizing conservatism as a measure of earnings quality and auditor size as a measure of audit quality Use audit quality and earning quality as variables also use public companies as sample of study High audit quality enhances confidence in the integrity of the financial reporting and reduces the risk attached, which lead to high earnings quality 4 Impact of Audit Quality on Earnings Management: Evidence from Iran (Mahdi Safari Gerayli, Abolfazl Earning quality is not use as variables and use earning management not as intervening variable, used auditor size, Continue on the next page Use audit quality and earning management as variables, used discretionary accruals as a measurement The results reveal that discretionary accruals are negatively related to auditor size and auditor industry specialization The study also findings the negative 35

54 Table.2.1 (Continuous) No Title (Researcher, year) Momeni Yanesari, and Ali Reza Ma'atoofi, 2011) 5 Earnings management and the effect of earnings quality in relation to stress level and bankruptcy level of Chinese listed firms (Feng Li, Indra Abeysekera, and Shiguang Ma, 2011) Continue on the next page Research Methodology Differentiation Similarities auditor industry specialization and auditor Independence as measurement of audit quality Not use audit quality as variable and not use earning management as intervening variable, used measurements of earning quality by four separate earnings attributes: accruals quality, earnings persistence, earnings predictability, and earnings smoothness of earning management Use earning management and earning quality as variables and using Discretionary Accruals as a measurement of earning management Research Results association between auditor independence and Discretionary Accruals. Overall, this study provides evidence that firms which are audited by high quality auditors are more likely to have less Discretionary accruals The study finds that the stressed/ bankrupt firms prefer opportunistic earnings management; the non-stressed /nonbankrupt firms are more likely to choose more efficient earnings management than the stressed/ non- Bankrupt firms. They find that earnings management performs better than earnings quality in predicting future profitability. And they also find that the earnings quality has deteriorated over 36

55 Table.2.1 (Continuous) No Title Research Methodology Research Differentiation Similarities Results the sample period; the number of stressed/ bankrupt firms increased and the number of nonstressed/nonbankrupt firms decreased 6 Audit Quality, Earnings Quality and the Cost of Equity Capital (Yang Li, Donald Stokes, Stephen Taylor, and Leon Wong, 2009) 7 Effects of Audit Quality on Earnings Quality and Cost of Equity Capital: Evidence From India Not use earning management as an intervening variable, utilize total accruals as a measure of earnings quality and auditor choice, auditor effort and auditor opinion based audit quality proxies and for audit quality dimensions to estimate a cost of equity model Not use intervening variable which is earning management, used two measurements of earning quality Continue on the next page Use the same variables which are audit quality and earning quality Use same variables which are audit quality and earning quality The key results of this study show that switching to a higher quality auditor mitigates the positive relation between total accruals and the cost of equity capital. And the presence of a qualified audit opinion issued by the auditor increases the extent to which lower quality accruals are associated with an increased cost of equity capital. The study finds firms which employed high quality auditors experience higher earnings quality and lower cost of 37

56 Table.2.1 (Continuous) No Title (Researcher, year) (Noor Houqe, Kamran Ahmed, and Tony Van, ) 8 The influence of Corporate Governance towards Earning Quality: Earning Management as an Intervening Variable (Singgih Aji Taruno, 2013) Research Methodology Differentiation Similarities which one is income smoothing, using discretionary accruals as a measurement of earning quality, and also use cost of equity capital as variable Not use audit quality as a variable, using corporate governance mechanism (proportion of independent board commissaries and institutional ownerships) as variable Continue on the next page Use earning quality as independent variable and also use earning management as an intervening variable, use annual report as sample, using same collection data method through documentary method and also use path analysis as an analysis method Research Results equity capital. The study result show that audit quality will have a positive effect on earnings quality (reducing discretionary accruals) and income smoothing. Partial test results shows that corporate governance mechanisms affect the quality of earnings but do not affect the earnings management. The test results of path analysis showed that earnings management is not an intervening variable between corporate governance mechanisms on the quality of earnings, because the direct effect is greater than the indirect effects through earning management 38

57 Table.2.1 (Continuous) No Title (Researcher, year) 9 Earnings Management, Audit Quality and Legal Environment: An International Comparison (Mehmet Ünsal Memiş & Emin Hüseyin Çetenak, 2012) 10 Earnings management and the effect of earnings quality in relation to bankruptcy level: Firms listed at the Tehran stock exchange (Ahmad Ahmadpour and Masoumeh Shavsavari, 2016) Research Methodology Differentiation Similarities Not use earning quality as variable, not use earning management as an intervening variable, and using Big4 and non-big4 audit firms as audit quality proxy Use earning management as dependent variable not as an intervening variable and not use audit quality as variable, the earnings quality is measured by four separate accountingbased earnings attributes: Continue on the next page Use audit quality and earning management as variables, using discretionary accruals as a measurement of earning management Use earning management and earning quality as variables, using discretionary accruals as earning management s measurement Research Results From 8 emerging countries as samples, only for Brazilian and Mexican companies, there is significant relationship between the discretionary accruals and audit quality. For the other countries there is not significant relationship. Along with results, the big four auditors do not constrain the earnings management incentives in every emerging Country Result using regression analysis shows that earnings management performs better than earnings quality in predicting future profitability. Meanwhile, the nondiscretionary earnings more effectively than 39

58 Table.2.1 (Continuous) No Title (Researcher, year) 11 The Effect of Information Asymmetry of Earnings Quality to Earnings Management as an Intervening Variable (Syahrul Azhar, 2013) Research Methodology Differentiation Similarities accruals quality, earnings persistence, earnings predictability, and relate the study to the bankruptcy level Use information asymmetry as independent variable and use earning response coefficient as a measurement of earning quality Continue on the next page Use earning quality as dependent variable, earning management as an intervening variable, and using discretionary accruals as a measurement of earning management Research Results future change of earnings and future cash flow from operation for providing a future profitability s picture of the firm. The result show positive significant result between information asymmetry on earning management that proved high information asymmetry will increase earning management acts. And research result proved that information asymmetry was not predictor to earnings quality. In conclusion, earnings management become intervening variable between information asymmetry and earnings quality. 40

59 No Title (Researcher, year) 12 The Relationship among Audit Quality, Earnings Management, and Financial Performance of Malaysian Public Listed Companies (Cheoing Pei Ching, Boon Heng Teh, Ong Tze San, and Hong Yong Hoe, 2015) Table.2.1 (Continuous) Research Methodology Differentiation Similarities Use financial performance as dependent variable and not only use audit as proxy of audit quality but also audit firm size and audit partner tenure. Also earning management not only use discretionary accruals as proxy but also absolute of discretionary accruals Use audit quality as independent variable and use audit fee as proxy of audit quality. And also use earning management as mediating variable Research Results The findings indicate that audit quality does not actually constrain earnings management practices and high audit quality can contribute to better company financial performance, since large-scale audit firms are always perceived to have higher audit quality that can increase the confidence of investors. And also, when earnings management is added as a mediating variable, it mediates the relationship between audit quality and financial performance 41

60 C. Conceptual Framework 1. Variable Interrelation a. Audit Quality and Earning Quality As a result of failures occurred to business organizations and the subsequent collapse and bankruptcy of large and multinational firms, such as Enron, WorldCom, and other firms, and based on the clear relationship of these collapses with manipulating the accounts of these firms, doubts emerged among users of financial information regarding the credibility of this announced information, where they depend on, in decision making. This incredibility and unreliability raise many questions, including the managements of these firms, and the effectiveness of accounting standards, and the applied procedures in firms. Auditors' responsibility and credibility, audit process, and audit quality, became questionable directly next to these collapses (Almomani, 2015). Nowadays, auditors encounter several types of pressure by users of accounting information in order to improve the quality of audit, because of several financial problems exist in periodic financial reports. Audit profession is required these days to concentrate on efficient and qualified work force, to provide audit services with 42

61 high quality, and to be able to reveal any incorrect practices that managements take to affect the accounting measurement. Audit report is considered one among the most important inputs for the decision making process. In addition, audit quality is a primary requirement for different groups of users. Actually, audit quality is difficult because of its difference in nature, to provide trust with audit reports and financial statements (Scott and Pitman, 2005). Therefore some parties hope that good quality of audit can make sure the quality of earnings. Taruno (2013) used quality of income as variable measurement of earning quality. And Almomani (2015) used audit office size, auditors' fees, period of customer's retention, type of auditor's opinion, and the specialization in client's industry as measurement of audit quality. He found Auditors' fees have most important significant effect on earnings quality. So the hypothesis is: H1 = Audit quality effect Earning Quality b. Audit Quality and Earning Management Every audit process done by auditor wishes by user to have a good quality so they can believe the financial report of the company is done correctly or fairly. Several researches done by a lot of researcher that used the audit 43

62 quality and the relation with the earning management. A lot of research done and some from that are done by Almomani (2015), Nawaiseh (2016) and Li and Lin (2005). Those researches are using the audit fees as an indicator measurement of audit quality and using some measurements to measure the earning management. Audit fees as a measurement of audit quality here there are some research proved that audit fees influence the earning management. Li and Lin (2005) provide evidence that total fees and audit fees are positively associated with earnings restatements (as a measurement of earning management). Other research done by Nawaiseh (2016) finds that audit fees have significant influence of earning management. So the hypothesis is as follows: H2 = audit quality effect earning management c. Earning Management and Earning Quality Earning management is an act of managers to influence the earnings report to become more interesting to the investors and creditors. Earning management acts will negatively influence the earning quality that is because the earning management will not report the actual earning s condition (Taruno, 2013). That means the quality of that earning is in doubt. Generally, about the relationship 44

63 between earnings management and earnings quality there are two points of view; in one of them, earnings management has a useful aspect, and earnings quality is improved, and the other approach is due to the opportunistic nature and should improve earnings quality (Ahmadpour and Shavsavari, 2016). A lot of study done proved that earning management is better from earning quality in prediction future profitability. One of the study from Ahmadpour and Shavsavari (2016) which using four separate accounting-based earnings attributes: accruals quality, earnings persistence, earnings predictability; earnings and is also examined by testing the relationship between discretionary accruals as a measure of earnings management, being opportunistic or efficient earnings management, finds that earnings management performs better than earnings quality in predicting future profitability. Other research done by Rosner (2003) also showed that bankrupt firms manage their earnings in a continuing way. Also, the results showed that the quality of earnings have not as much potential at predicting future profitability. In other words, in the prediction of future profitability, earnings management, that is better earnings quality. That means earning management have better 45

64 performance in predict future probability rather than earning quality, but there is no found that proved the earning management effect the earning quality even from some perspectives shows indirectly that earning management effect the earning quality. Then the hypothesis is as follows: H3 = earning management effect the earning quality d. Audit Quality and Earning Quality through Earning Management Several researches that has been done by many researchers proved that the audit quality influence the earning management and also influence the earning quality with several measurement. And that are also many research that done (many of) which is proved that earning management has effect on the earning quality. Then in the opinion of the researcher that maybe there is some measurement that will be done in this research that can proved that earning management can also be a reinforcement (strengthen) or weakening when the audit quality affects the quality of earnings. Almomani (2015) finds audit fees as a measurement of audit quality have most significant effect earning quality, followed by type of auditor s opinion. And Nawaiseh 46

65 (2016) proved that the audit fees as a measurement of audit quality have significant relations to the earning management. High audit quality can contribute to better company financial performance, since large-scale audit firms are always perceived to have higher audit quality that can increase the confidence of investors. However, when earnings management is added as a mediating variable, it mediates the relationship between audit quality and financial performance (Ching et al., 2015). Which are the earnings also part of financial statement that represents financial performance. Other research done by Li and Lin (2005) stated contrary to the concerns of many in accounting practice and research, as well as the results in prior research, this study finds no statistically significant relationship between earnings restatements and non-audit fees. This does not support the claim that non-audit fees paid to the auditor are the primary reason for auditor independence impairment that results in lower audit and earnings quality. Therefore the hypothesis is as follows: H4 = audit quality effect the earning quality through earning management. 47

66 2. Research Model Based from the variable interrelation explained above, the relations between independent, dependent, and intervening variable in this study can be described as follows: Figure.2.1 Research Model Audit Quality Earning Management Earning Quality Source: Data Processed D. Hypotheses Based on the conceptual framework that has been put forward before, it can be concluded hypotheses of this study as follows: 1. H1 = audit quality effect earning quality 2. H2 = audit quality effect earning management 3. H3 = earning management effect the earning quality 4. H4 = audit quality effect the earning quality through earning management. 48

67 CHAPTER III RESEARCH METHODOLOGY A. Scope of Research This research purposes to analyze the causality relation between independent variable, audit quality towards dependent variable, earning quality with earning management as an intervening variable. The population of this research is Services Company listed in Indonesia Stock Exchange (IDX) in period of time B. Sampling Method Samples of this research are the audited financial report of the services company listed in Indonesia Stock Exchange (IDX) in period of time The method that used in the selection of research sample is the selection of the sample aiming (purposive sampling), with techniques based on the consideration (judgment sampling) which is a type of sample selection is not random that the information obtained by using certain considerations (generally adapted to the purpose or issue research) (Nur Indriantoro and Bambang Supomo, 2002: 131). The criteria of samples for this research are as follows: 1. The sample is a company engaged in services that have gone public and listed in Indonesia Stock Exchange. 49

68 2. The sample is the company that report audited financial statements and annual reports on the time period 2013, 2014 and The financial statements used are expressed in Rupiahs. 4. Stated professional fees account in financial statement. C. Collection Data Method In obtaining the data in this study, researchers used two ways, library research and documentations research. 1. Library Research Library Research Studies conducted by processing the data, journals, articles, and other written media related to the topic of discussion of this study. Researchers obtain data relating to the issues being researched through books, journals, thesis, internet, and other devices related to the title of the study. 2. Documentation Research Documentation Research study documentation is a method of data collection by collecting secondary data used for settlement in this study. The main data of this research is secondary data. Researchers obtained data from the Indonesia Stock Exchange website. In this study, which became the subject of research is the annual report and audited financial 50

69 statements. Researchers obtained data by downloading financial statement on the official website of the Indonesian stock exchange that is and websites of each company. D. Data Analysis Method The analytical tool used in this research is multiple linear regressions using SPSS, where the regression equation contains elements of interaction (Multiplication of two or more independent variables). This interaction test used to determine the extents of interaction between variables which are audit quality, earning management and earning quality. 1. Descriptive Statistic Descriptive statistics provide an overview or description of the data seen from the mean, standard deviation, variance, maximum, minimum, sum, range, kurtosis, and skewness (Ghozali, 2012). Descriptive statistics are based on data that has been collected and then analyzed. This analysis is used to provide a description of the research variables (audit quality, earnings management, and earning quality) which can be seen from the amount of data, maximum, minimum, average number, range, and standard deviation. 51

70 2. Classic Assumption Test Classic assumption test aims to obtain regression results can be accounted for and have results that are not biased or Best Linear Unbiased Estimator (BLUE). Assumptions that must be met are the normality test, multicollinearity test, heterocedasticity test, and autocorrelation test. a. Normality Test The test will be conducted to audit quality, earning management, and earning quality. Normality test aims to test whether the regression model, the independent variable, dependent variable or both have a normal distribution or not. The regression model that has a data distribution is normal or near-normal regression model is said to be good (Ghozali, 2011). There are two ways to detect whether or not residual normal distribution, namely by looking at the analysis graph normal probability plot and statistical tests. But this research will perform the process of normality tests for the data with Kolmogorov-Smirnov (K-S) test. K-S test done by looking the probability number under the condition: 1) Significant value or probability value is < 0,05; the distribution is not normal. 52

71 2) Significant value or probability value is > 0,05; the distribution is normal. Beside of K-S test, the normality of data can also detect through histogram graph plot, it s just that the graph sometimes can mislead because it looks that the distribution is normal but statistically is not normal (Ghozali, 2012). b.multicollinearity test Multicoloniarity test aims to test whether the regression model found a correlation between independent variables (Ghozali, 2012). To test the multicollinearity, can be done by using Variance Inflation Factor(VIF) test with conditions, namely: 1) If VIF (variance inflation factor) is < 10; 2) Have Tolerance value close to > 0,10; and 3) If both criteria above are fulfilled, so can be concluded that independent variables is not have multicollinearity problem. Good regression model should not occur correlation between independent variable (Ghozali, 2012). c. Heterocedasticity Test Heterocedasticity test aims to test whether the regression model occurred inequalities residual variance 53

72 from one observation to another observation. If the variance of the residuals of the observations to other observations remains, then called Homoscedasticity, and if different called Heterocedasticity. Good regression model are homoscedasticity and not occurs the heterocedasticity (Ghozali, 2012). This test can be done by looking at the graph plot between the predicted values of the variable (ZPRED) with residual value (SREID). A good regression model is if the residual variance from one observation to another permanent, so that there is no identifiable heterocedasticity (Ghozali, 2011). d. Autocorrelation Test This test aims to test whether in linear regression model there is a correlation between confounding error on period t with confounding error on period t-1 (previous year). This symptoms cause consequences that confidence interval becomes wider and also the variance and standard error will be interpreted too low. Autocorrelation test done in this research is using Run test. This test is aims to test whether there is a high correlation between residuals. There is an autocorrelation between residuals is when the value of Asymp. Sig (2-tailed) is significant or below If more 54

73 than 0.05 or not significant, it s mean that there is no autocorrelation between residuals (Janie, 2012). 3. Coefficient of Determination Test To test how far the ability of research model in explaining dependent variable, by calculating coefficient of determination (R²). The greater adjusted R² of independent variable, so the more dominant influence of independent variable on dependent variable. The adjusted R² value is between zero and up to one. The R² value which is close to one means the ability of independent variables gives almost all the information needed to predict the dependent variable (Ghozali, 2011). The small or under 0,5 of R² value, means that the ability of independent variables in explaining dependent variable is very small. And according to Ghozali (2011), if in the empirical test obtained negative adjusted R² value, then the value is considered to be zero. 4. Hypothesis Test In accordance with the data already obtained the appropriate approach in this study is a quantitative approach, the approach that emphasizes the figures in the research. From the data that has been obtained, the number is expected to provide the appropriate conclusions. This study used samples which are the services company listed in Indonesia Stock Exchange that report 55

74 the audited financial statement and annual report and published it at Indonesia Stock Exchange In the period of time If a dependent variable depends on more than one independent variable, the relation between both variable is called multiple regression analysis. The test results will provide result from rejection or acceptance of research hypotheses. Multiple regression analysis using path analysis is used to test the hypotheses in this research. Path analysis is the expansion from multiple regression analysis, or in other words path analysis is the use of regression analysis to interpret the causality relations between predefined variables based on theory. The regression model for this research is as follow: EQ it = β0 + β1lnfee it + β2eda it + e Where: EQ = Earning Quality LNFEE = Audit fee as proxy of audit quality EDA = Estimate discretionary accruals as proxy of earning management β1, β2 = each variable coefficient e = error To know the truth of prediction from regression testing done, then carried search value of the coefficient of determination. And also this study did a testing to support the hypothesis which is 56

75 t test. T test done to know how far the effect of the independent variable on dependent variable. And below will explain how to measure of each variable. E. Research Variables Operationalization In this section will describe the definition of each variable used along with operations and measures. 1. Earning Quality (Dependent Variable) Dependent variable in this study is earning quality, which is a quality of company s earning to determine whether the company has a good quality of earning or not. Quality of Income is used in the study as a proxy variable to represent quality of earnings. Based on the literature, one method for measuring earnings quality is through the quality of income which is determine whether the earnings quality has a high quality or low quality (Taruno, 2013). In accounting, accruals earnings do not necessary reflect cash flow. Then logic behind the quality of income ratios is high quality of earnings should reflect the cash flow (from operation) of the organization or in other words, the quality of income is how accurately the net income reflects the operating performance of an entity. This concepts related to the concepts of earnings quality that 57

76 usually indicates how precisely the earnings measure the value of an entity and reflect the entity s current and future performance. First variable measure is earning quality. Based on the literature, there is a lot of method for measuring earnings quality, such as earning continuity or earning persistence, income smoothing, quality of income and etc. Whether this study used the quality of income ratios which is in accordance with previous research done by Taruno (2013). The formula is as follows: Quality of Income = If the results is higher than 1 it s usually indicates high quality of earnings, while the ratio is lower than 1 is considered to indicate low quality of earnings. This research used the quality of income ratios as a measurement of an earnings quality. 2. Earning Management (Intervening Variable) Intervening variable is a variable that can strengthen or weaknesses the other variable. Intervening variable in this study is an earning management. Earning management is an act of managers to adjust financial reports using their judgment in order to influence contractual outcomes that based upon reported accounting data or to mislead 58

77 stakeholder about firm s performance (Nawaiseh, 2016). This variable is using estimate discretionary accruals (EDA) as a variable measurement. Earning management can occur because in preparing the financial statement using accrual basis. Accounting with accrual basis using the accrual procedure, deferral, allocation aimed to connect the earning, expense, gains and losses to describe the company s performance during the period, although cash has not been received and expanded (Sulistyanto, 2008). And according to Healy (1985) accrual concept has two components, and one of them is discretionary accruals. Discretionary accrual is an accrual component which can be arranged and manipulated in accordance with the managerial policy. Manager will conduct earnings management by manipulating the accruals to achieve the desired level of earnings. Second variable in this study is earning management, which researcher used estimate discretionary accruals to measure earnings management. Discretionary accruals are used in many earnings management studies such as Jones (1991), Subramanyam (1996) and also Memiş and Çetenak (2012). Basically, discretionary accruals are equal to difference between total accruals and 59

78 non discretionary accruals so following equation has been used to find the discretionary accruals. The formula that use for looking total accruals is as follows: TA t = DA t + NDA t TA t = Total Accruals DA t = Discretionary Accruals NDA t = Nondiscretionary Accruals A t = Total Assets in year t Which is to finds discretionary accrual is as follows (Christiani and Nugrahanti, 2014): DA t = (TA t - NDA t )/A t The empirical estimation of modified Jones model required to compute total accruals. Along the lines of prior research (Healy, 1985; Jones, 1991; and Memiş and Çetenak 2012), this study uses the cash flow approach to compute total accruals as follows: TA i,t = NIBE i,t - CFO i,t NIBEi,t = company i s net income before extraordinary items in year t. CFOi,t = company i s net cash flow from operations in year t. 60

79 Dechow et al., (1996) provides evidence that the modified Jones model is the most powerful to detect earnings management among the alternative models to measure discretionary accruals. Thus the study used a modified version of the Jones model to obtain discretionary accruals from regressions of total accruals on changes in sales and on property, plant, and equipment within industries. Jones model attempts to control for the effects of changes in a firm's economic circumstances on nondiscretionary accruals. The Jones Model for nondiscretionary accruals in the event year is: NDA t = β 1 (1/A t-1 ) + β 2 (ΔREV t - ΔREC t / A t-1 ) + β 3 (ΔPPE t /A t-1 ) Where: NDAt = the nondiscretionary accruals in year t scaled by lagged total assets; REVt = revenues in year t less revenues in year t 1, RECt = net receivables in year t less net receivables in year t 1, PPEt = gross property plant and equipment at the end of year t; At 1 = total assets at the end of year t 1; and 61

80 β1, β2, β3 are company-sector parameters for each company. Estimates of the industry-specific parameters, β1, β2 and β3, are obtained by using the following model in the estimation period for each sector of company: TAt/At-1 = NDAt = β1 (1/At-1) + β2 (ΔREVt- ΔRECt/ At-1) + β3 (ΔPPEt/At-1) + Ԑ t Where: β1, β2 and β3, denote the company-sector specific OLS parameters, and TAt is total accruals in year t, εt is the residual, which represents the discretionary portion of total accruals. Because discretionary of this accruals as study using measurement estimate of of earning management which is in accordance with previous research done by Taruno (2013) and also Syarifah and Bandi (2010). Then the formula to measure estimate discretionary accruals is using Healy model and the following is formula of measuring estimate of discretionary accruals. EDAit = TAit: Ait-1 Where: EDA = estimate discretionary accruals TA = total accruals A = Total assets 62

81 it = current year 3. Audit Quality (Independent Variable) Independent variables are variables that affect the dependent variable, either positively or negatively. If there is a dependent variable, the independent variables must also be present, and in each unit increase in the independent variable nature there will be also an increase or decrease in the dependent variable. Independent variable in this study is audit quality. Audit quality is how the quality of the audit done by auditor. Malihi et al. (2012) provides further explanation that audit quality could be a function of the auditor s ability to detect material misstatements and reporting the errors. From the explanation conclude that good quality of audit is guarantee that the audited financial statement has already free from material misstatement. The audit quality as an independent variable using audit fee as a variable measurement. As Copley (1991) and Nawaiseh (2016) proved that the audit fees can used as a variable measurement, because independent-audit consumers, seeking higher levels of audit quality, will be required to pay a premium price. The audit fee is amount that independent auditor earn from the company. Copley (1991) stated that the 63

82 financial statements audited by high reputation firms would be more precise than that audited by firms with lower investments in reputation, as this is one manner in which such firms can protect their reputation capital, which shows differences in audit quality would be reflected in audit fees. Specifically, independent-audit consumers, seeking higher levels of audit quality, will be required to pay a premium price. That s mean the quality of audit is can be reasonably to use audit fees as a measurement. Picconi and Reynolds (2013) regressing the natural logarithm of fees on a set of predictor variables, including the natural logarithm of assets, which has become the de facto standard functional form for estimating audit fees. They demonstrate, this represents a multiplicative model of fees in which all the predictor variables interact and where predicted coefficients represent elasticities; constant elasticity between fees and assets, and linearly increasing elasticity between fees and the other predictors. They also showed that the actual elasticities do not exhibited these properties, but that regressing by year and size partitions improves the estimation, greatly increases the explanatory power of the model, and produces residuals uncorrelated with size. 64

83 Based on Pambudi and Ghozali (2013) an audit fee was measured by natural logarithm professional fees contained in the financial statements. Using professional fees as proxy for audit fees because in Indonesia still few company disclose their audit fees on their financial statements. The use of measurement with professional fees also based on research done by Herawaty (2011) that stated the used of other services also effect audit fees. Below is the variable operationalization of this study: 65

84 No Variable Type of Variable 1 (X1) Audit Quality (Herawaty, 2011, Hartadi, 2009) 2 (X2) Earning Management (Nawaiseh, 2016, Christiani and Nugrahanti, 2014) 3 (Y) Earning Quality (Taruno, 2013) Table.3.1 Variable Operationalization Independent Indicator LNFEE = LN Professional Fee Measurement Scale Ratio Intervening EDA = TA t / At-1 Ratio Dependent EQ = Net Cash Flow from Operations/EBIT Ratio 66

85 CHAPTER IV FINDING AND ANALYSIS A. General Description of Research Object 1. Research Object Description The population of this research is go public service company listed in Indonesia Stock Exchange (IDX) in period The services company has listed in IDX before January first 2013 and during the research period the company does not get out from IDX or delisting. Service industry is chosen because in Indonesia, service sector is very developing either in construction, transportations, etc. In addition to avoid the existence of industrial effect, namely the risk of different industries between one industry sector to another. Table.4.1 Detail of Research Sample No Details Amount 1 Service Company Listed in Indonesia Stock 103 Exchange 2 Not published financial statement in period 10 between Reported the financial statement besides in 41 Rupiahs unit 4 Not stated professional fees 22 The amount of company being sample 30 Observation period ( ) 3 Total of Sample during study period 90 Source: Processed Data 67

86 The table above is present the amount of research sample which appropriate with predefined criteria. The number of service companies that being sampled in this research are 30 companies. The company being sample in this research has been met with predefined criteria before in previous chapter of this research. The length of the study period is 3 years, i.e. from So the total of sample in this research is 90 sample observations. The focus of this research is to see the effect of audit quality on earning quality with earning management as intervening variable on service industry. 2. Research Sample Description The samples used in this research were selected by purposive sampling method using criteria that have been determined. Samples are selected for companies that present required data in this study, such as professional fees account, some accounts required to calculate estimate discretionary accruals as proxy of earning management, and also some accounts required to calculate quality of income as a proxy of earning quality. Summary of study sample is presented in the following table. 68

87 Table.4.2 Research Sample No Type of Business Year 2013 Year 2014 Year Advertising Printing Media 2 Bank Insurance Hotel, Restaurant, and Tourism 5 Property& Real Estate 6 Construction & Development 7 Energy Toll Road, Airport, Harbour and etc 9 Telecommunication Transportation Non Building Construction Total Accumulation 90 Source: Processed Data Table 4.3 below shows that selected sample is randomly distributed in 11 service industry sectors. Most companies come from property and real estate sector which is 13 companies or 43,33%, followed by transportation and also bank sector with 10% and the remainder sector of other type of business. Below is the distribution of research sample. 69

88 Table.4.3 Research Sample Distribution No Type of Business Frequency Percentage (%) 1 Advertising Printing Media 1 3,33 2 Bank Insurance 2 6,67 4 Hotel, Restaurant, and Tourism 1 3,33 5 Property& Real Estate 13 43,33 6 Construction & Development 1 3,33 7 Energy 1 3,33 8 Toll Road, Airport, Harbour 1 3,33 and etc 9 Telecommunication 2 6,67 10 Transportation Non Building Construction 2 6,67 Total Source: Processed Data B. Analysis and Discussion 1. Descriptive Statistics Analysis Descriptive statistic analysis done by comparing minimum, maximum and mean values of each variable. Descriptive statistic analysis on table 4.4 is a descriptive analysis for variable used in this study which is (audit quality, earning management and earning quality. 70

89 Table.4.4 Descriptive Statistic Analysis in Period N Minimum Maximum Mean Std. Deviation LNFEE EDA EQ Valid N (listwise) 90 Source: Processed Data Based on the table 4.4, from 30 companies being sample, the mean value of LNFEE that represent audit quality is 22,2494 and maximum and minimum value is 28,64 and 18,83. LNFEE variable have mean value bigger than standard deviation which means that distribution data of variable is good. EDA or estimate discretionary accrual represent earning management variable have mean value 0,0287, minimum -0,41 and maximum 1,50. And for earning quality variable which represent by EQ have mean value 0,4819. And the minimum and maximum value is -3,41 and 5,97. EDA and EQ variable has mean value smaller than standard deviation which means the distribution data of both variables is not quite good. 2. Classic Assumption Test Result a. Normality Test Result Normality test aims to test whether in regression model, independent variable, dependent variable, or both has normal distribution or not. Good regression model has normal 71

90 distribution of data or close to normal (Ghozali, 2012). Data normality tests in this research done by klomogorov-smirnov (K-S) test. Table.4.5 Klomogorov-Smirnov Test Result Unstandardized Residual N 90 Normal Parameters a,b Mean 0E-7 Std. Deviation Most Extreme Differences Absolute.134 Positive.134 Negative Kolmogorov-Smirnov Z Asymp. Sig. (2-tailed).081 Source: SPSS Output Asymp. Sig (2-tailed) on klomogorov-smirnov test result is 0,081 which is more than 0,05. From the result can be concluding that the distribution of data in this research is normal. b. Multicollonearity Test Results This test aims to examine whether regression model found correlation between independent variable. Multicollonearity test done by using Tolerance value or Variance Inflation Factor (VIF).To know the existence or absence of multicollonearity by 72

91 looking a tolerance value or Variance Inflation Factor (VIF). General Cut Off value use to show the existence of multicollonearity is tolerance value 0,10 or equal to VIF value 10. If tolerance value is under 0.10 or VIF value above 10 then there is a multicollonearity. Multicollonearity test result is on the table below. Model Table.4.6 Multicollonearity Test Result 1 (Constant) LNFEE EDA Source: SPSS Output Collinearity Statistics Tolerance VIF The table above show that there is no independent variable has tolerance value less than 0,10 or tolerance value > 0,10. VIF result is 1,002 shows that there is no independent variable more than 10 or VIF < 10. So can be concluding that there is no multicollinearity in this regression model. c. Heteroscedasticity Test Result Heteroscedasticity test aims to test whether in regression model there is an inequality variance of the residual of one observation to others. If variance of residual one observation to another observation fixed or same, then it is called homocedasticity and if different it is called heteroscedasticity. 73

92 Good regression model is homoscedasticity or does not occur heteroscedasticity (Ghozali, 2012). Figure 4.1 Scatterplot Graphic From the scatterplot chart above shows that the spots are randomly distributed either above or below 0 (zero) on Y axis and do not form certain pattern dominantly. This result shows the regression model is not experiencing heteroscedasticity disturbance or called homoscedasticity. d. Autocorrelation Test Result Autocorrelation test is used to determine and detect the presence of autocorrelation. The autocorrelation test aims to test whether in the linear regression model there is a correlation between confounding error in period t and period t-1 (previous 74

93 year). A good model is a regression model that is free from autocorrelation (Ghozali, 2012). Autocorrelation in this research is using Run Test to see there is an autocorrelation between residuals. From the run test result below shows that Asymp. Sig. (2- tailed) is 0,396 which is more than 0,05. Its means that regression model in this research is free from autocorrelation problem or the other words, there is no autocorrelation. (Janie, 2014) Table.4.7 Run Test Result Unstandardized Residual Test Value a Cases < Test Value 45 Cases >= Test Value 45 Total Cases 90 Number of Runs 50 Z.848 Asymp. Sig. (2-tailed).396 Source: SPSS Output 3. Coefficient of Determination Test Result The coefficient of determination (R²) essentially measures how far the model s ability to explain the variation of dependent variable. The value of coefficient of determination is between zero and one. Small R² value means the ability of independent 75

94 variables in explaining dependent variable variation is limited (Ghozali, 2012). a. The Coefficient of Determination Equation I Table.4.8 Coefficient of Determination Equation I Test Result Model R 1.048a Source: SPSS Output R Square.002 Adjusted R Square Std. Error of the Estimate The table above is known R² value is 0,002. This means 0,2% earning management variation can be explained by independent variable variation which is audit quality. While the remainder are (100% 0,2% = 99,8%) explained by other causes beyond model such as company size, leverage, audit committee, independence commissioner, and etc. e1 = = = = 0,999 b. The Coefficient of Determination Equation II Table.4.9 Coefficient of Determination Equation II Test Result Model R R Square 1.436a Source: SPSS Output.190 Adjusted R Std. Error of Square the Estimate From the table above, known the R² value is 0,190 or 19%. This means 19% of earning quality variation can be explained by the variation of 76

95 independent variable which is audit quality and earning management. While the remainder is 81% (100% - 19%) explained by other variable that not include in regression model, such as information asymmetry, audit adjustment, and etc. e2 = = = = 0,900 c. Coefficient of Determination Total R² = 1 (e1)2 x (e2)2 = 1-0,998 x 0,810 = 0,192 Based on the calculation above, total coefficient of determination is 0,192. This means that earning quality variable can be explained by audit quality variable with earning management as intervening variable is 19,2%. While the remainder is 80,8% explained by other variable outside the regression model, such as inflation, asymmetry information, audit tenure, audit committee, and others variable that may influence earning quality. 4. Hypothesis Test Result The hypotheses test in this research is using path analysis. According to Sarwono (2007) there is several definition of path 77

96 analysis which first by Robert D. Rutherford and Minja Kim Chloe (1993) defines path analysis as a technique to analyze the causality relation that happens on multiple regressions if independent variables influence the dependent variable not only directly or indirectly. And according to Paul Webley (1997) path analysis is the direct development of multiple regression forms with the aim of providing an estimate of the level of magnitude significance hypothetical causality relation in asset of variables. So based on several definitions above, path analysis is used to analyze the pattern of relationship between variables with the aim to determine the direct and indirect influence of a set of independent variables to the dependent variable. a. Significant Partial Test (t-test) Individual parameter significance test is (t statistics test) used to see partially effect of independent variable on dependent variable. To interpret coefficient of independent variable can used unstandardized coefficients or standardized coefficients. This study used standardized coefficients so there is no the constant. The benefit of using standardized beta is that able to eliminate the different of size unit on independent variable (Ghozali, 2012). 78

97 Model 1 1) Direct Regression Table.4.10 Direct Regression Test Result Coefficients a Unstandardized Coefficients Standardized Coefficients B Std. Error Beta t Sig. (Constant) LNFEE Source: SPSS Output Based on the result on the table above, known that standardized coefficient of LNFEE is 0,330 or 33%, which explain that effect of LNFEE to EQ is 33% ant the rest 67% is effect from other variable that not include in this study. And Sig. value shows 0,001 which is less than 0,005 or 0,001<0,005. From the Sig. value can conclude that audit quality (LNFEE) is positive and significant effect the earning quality (EQ). H1 = Audit quality effect earning quality is accepted. 79

98 Model 1 2) Regression I Table.4.11 Regression I Test Result Coefficients a Unstandardized Coefficients Standardized Coefficients B Std. Error Beta t Sig. (Constant) LNFEE Source: SPSS Output Based on the regression on table above, audit quality (LNFEE) statistically show standardized coefficient value is 0,048 and Sig. 0,652. LNFEE variable show positive and insignificant result on α=0,005, it s 0,652. So it can be concluded that audit quality (LNFEE) to earning management (EDA) is rejected. Therefore, audit quality is not effect earning management. H2: Audit quality effect earnings management is rejected. 3) Regression II The table below shows LNFEE and EDA variable has Standardized Coefficient Beta value are 0,344 and - 0,285. LNFEE variable has positive result 0,344 and significant result 0,001 which is less than α 0,005. But EDA 80

99 variable shows negative and significant result which is - 0,285 and 0,004. Table.4.12 Regression II Test Result Model Coefficients a Unstandardized Standardized Coefficients Coefficients t Sig. B Std. Error Beta (Constant) LNFEE EDA LNFEE EQ EDA EQ Source: SPSS Output The indirect effect of audit quality to earning quality (which is through earning management) is 0,048 x -0,285 = -0,014. Therefore, direct effect of audit quality to earning quality is bigger than indirect effect through earning management (0,330 > -0,014). So it can be concluded that earning management as intervening variable is rejected. And the value of e1=0,999 and e2=0,900. is accepted. H3: earning management effect earning quality H4: audit quality effect earning quality through earning management is rejected. 81

100 Figure.4.2 Path Analysis Result e1 0,990 0,330 Audit Quality 0,048 Earning -0,285 Management Earning Quality e2 0, Interpretation a. Effect of Audit Quality on Earning Quality From the results above, audit quality has effect to earning quality. This result is appropriate with the previous research done by Almomani (2015), on research title The Impact of Audit Quality Features on Enhancing Earnings Quality: The Evidence of Listed Manufacturing Firms at Amman Stock Exchange. From t-test results show that audit quality on earning quality has significant value This significant value indicates that audit quality has effect on earning quality. And standardized coefficient result is 0,330 which mean the effect of audit quality is 33% on the earning quality. Because of the association exists between audit quality and quality of financial information, and since these statements had been audited by professional, qualified, and independent auditors, the financial 82

101 information is assumed to be of high quality, and this is the base to enhance trust among different interested parties with the firm. So, on the other words, the client who is the principal will believe the earnings information stated after audited (Almomani, 2015). b. Effect of Audit Quality on Management Earning Hypothesis testing results shows that audit quality is not effect the earning management. This not appropriate with previous research done by Nawaiseh (2016) on his research title Impact of External Audit Quality on Earning Management by Banking Firms: Evidence from Jordan which stated that audit quality with audit fee as a proxy is effect earning management. However this results appropriate with research done by Ananthanarayan (2008) that audit fee is not effect earning management. This is because the data of audit quality which use audit fee as proxy in this research is used professional fee which is general, maybe it will be different if using the accurate data of audit fee especially not general like professional fee (Herawaty, 2011). Beatty (1986) stated that company especially large company tends to pay audit fee more to get best quality of audit from the public accountant. With big audit fee gives by the client, they expect to get fair result on their earnings. So the 83

102 earnings on financial statement is can be trusted the validity and the quality. Therefore, expected that auditor cannot be affected act of management and report whatever happened and done by management including management of the company s earnings. So audit result will show real and fair result. c. Effect of Earning Management on Earning Quality This research gives result that earning management is negative significant influence on earning quality. Test result show negative result and negative sign on path coefficient indicate that improvement of earnings management have an effect on the decrease of earning quality. This result is appropriate with previous research done by Azhar (2013) which stated negative significant result on the effect of earning management towards the earning quality. But, this result is opposite with the result done by Taruno (2013) which shows that earning management have positive and significant result on earning quality. According to him, earning management effect earning quality based on the path analysis results done. d. Effect of Audit Quality on Earning Quality through Earning Management as an Intervening Variable The result showed that audit quality on earning quality has a direct relationship. Therefore, indirect relationships between 84

103 audit quality on earning quality towards earning management as intervening variable is rejected. Because t-test results indicate that direct relation audit quality on earning quality is bigger than indirect. This test result proved earning management is not effect earning quality and according to Ahmadpour and Shavsavari (2016) earning management is performs better than earning quality in predicting future probability than earning quality. The research that also found the relation between audit quality on earning quality is research done by Almomani (2015), which is in accordance with this study result. This because of good audit quality can help the principals to believe on earnings result stated in financial statement presented by management with no manipulation or other illegal act that can decrease quality of the earnings. Analysis test results also indicate that direct relations has bigger results (0,330 > -0,014) compare with indirect result through the earning management. This because effect of earning management on earning quality is negative significant which means that increasing of earning management will decrease quality of earnings (Azhar, 2013). And the other side audit quality has positive insignificant result on the effect of earning management. And that so principals ask help from auditor to 85

104 audit the earnings on financial statement is to ensure that management not done illegal earning management that will affect quality of the earnings. But the other side with high level of audit quality (with audit fee as proxy) expects that auditor will not influence act by management. Therefore there is no relation between audit fees on earning management. This result is consistent with previous research done by Taruno (2013) that also proved earning management variable cannot be intervening variable of earning quality. 86

105 CHAPTER V CONCLUSIONS A. Conclusions Based on collected data and tests that have been done to the problems by using multiple regression analysis model which is path analysis, so can be concluded as follows: 1. Test result proved earning quality has direct effect on earning quality and from standardized coefficient result from t test result, the effect of audit quality on earning quality is as much as 33%, and the remainder is from other variable which not include in this study. This result appropriate with previous research done by Almomani (2015) which stated audit quality with audit fee as a proxy is effect the earning quality. 2. There is no direct effect of audit quality on earning management based on the test results which show significant value is 0,652. This result is consistent with the research result done by Ananthanarayanan (2008) which stated audit quality not effect earning management. 3. The test results show there is negative effect of earning management on earning quality with sig. value 0,004 and standardized coefficient is -0,285 or -28,5%. This result is 87

106 consistent with research done by Azhar (2013) which stated increase of earning management will decrease quality of earning. 4. Indirect effect of audit quality on earning quality through earning management as an intervening variable is rejected, because based on the result already explained before that direct effect of audit quality on earning quality is bigger than indirect effect through earning management. Therefore, earning management as intervening variable of audit quality to earning quality is rejected so the earning management is not intervening variable of audit quality and earning quality. This result consistent with the previous research done by Taruno (2013). B. Implications Conclusions above stated that the quality of audit is positively effect on earning quality through the earning management. Therefore, these things need to be concern for all parties, namely: 1. For company, it is expected this research results can give an idea that earning management practices effect the earning quality that can cause unexpected things for the company. So the company will be more thorough and tighten rules for employee even its top, middle and bottom to minimize the probability to do the harmful actions or behavior in the future. 88

107 2. For auditor, it is expected that this research results can be a special concern so auditor can increase their level of independency and quality of their audit. Auditor should increase their integrity so they can limits the earning management practices for internal auditor and for external auditor it is expected that they can successfully detect the earning management practices that can influence the quality of earnings of the client's financial statement so they can give correct and complete information for their client and not influence by the other parties even they paid for high audit fee. 3. For external parties, such as shareholder and investors, it s better to not simply believe that audited company can limit the practice of earning management. Investor control should also be increased so as to minimize the practice of earnings management so cannot effect or manipulate the quality of the resulting earnings. C. Recommendation In the future, this research expected can present better quality of research results with some input on several things, including: 1. For future research, it is expected to add research variables such as information asymmetry, financial status, leverage, inflations, onetime events, liberal accounting practices and other economic 89

108 conditions that may affect earning quality or other variables that are still rarely used in research until the present period. 2. For future research, expect can consider to use all of company listed in Indonesia Stock Exchange as research population. Because the sample size in this study is considered too little which is limited only to service companies in some subsectors of service industry that listed on the Indonesia Stock Exchange. 3. Next research is expected to expand or extend the research period so can get more research results and accurate conclusions which describe the relation between audit quality and earning management on earning quality. 90

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116 APPENDIXES A. Sample Description 1. Research Sample Name No Company Name Code 1 PT AcsetIndonusaTbk and Subsidiaries ACST 2 PT Bank Rakyat Indonesia AgroniagaTbk AGRO 3 PT Asuransi Multi ArthaGunaTbk and Subsidiaries AMAG 4 PT AgungPodomoro Land Tbk and Subsidiaries APLN 5 PT ArpeniPratama Ocean Line Tbk and Subsidiaries APOL 6 PT AdiSarana Armada Tbk and Subsidiaries ASSA 7 PT Bali Towerindo Sentra Tbk and Subsidiaries BALI 8 PT BekasiAsriPemulaTbk and Subsidiaries BAPA 9 PT Bank Negara Indonesia (Persero) Tbk and Subsidiaries BBNI 10 PT Bank Mandiri (Persero) Tbk and Subsidiaries BMRI 11 PT Cardig Aero Services Tbk and Subsidiaries CASS 12 PT Cowell Development Tbk and Subsidiaries COWL 13 PT Ciputra Development Tbk and Subsidiaries CTRA 14 PT Duta Anggada Realty Tbk and Subsidiaries DART 15 PT Intiland Development Tbk and Subsidiaries DILD 16 PT Megapolitan Developments Tbk and Subsidiaries EMDE 17 PT XL Axiata Tbk and Subsidiaries EXCL 18 PT Smartfren Telecom Tbk and Subsidiaries FREN 19 PT Perdana Gapuraprima Tbk and Subsidiaries GPRA 20 PT Greenwood Sejahtera Tbk and Subsidiaries GWSA 21 PT Inti Bangun Sejahtera Tbk IBST 22 PT Jakarta International Hotels & Development Tbk and Subsidiaries JIHD 23 PT Jaya Real Property Tbk and Subsidiaries JRPT 24 PT Jasa Marga (Persero) Tbk and Subsidiaries JSMR 25 PT First Media Tbk and Subsidiaries KBLV 26 PT Kawasan Industri Jababeka Tbk and Subsidiaries KIJA 27 PT Lamicitra Nusantara Tbk and Subsidiaries LAMI 28 PT Leyand International Tbk and Subsidiaries LAPD 29 PT Lippo Cikarang Tbk and Subsidiaries LPCK 30 PT Lippo General Insurance Tbk and Subsidiaries LPGI 98

117 B. Raw Data Description 1. Audit Quality (X1) Code PF LNF EE PF LNF EE PF LNF EE ACST 1,031,852, ,464,000, ,065,000, AGRO 3,459,477, ,877,450, ,632,747, AMAG 1,619,571, ,961,630, ,644,764, APLN 8,824,863, ,009,926, ,734,222, APOL 11,435,805, ,949,899, ,873,458, ASSA 438,000, ,000, ,383,137, BALI 538,205, ,754, ,958, BAPA 941,847, ,989, ,589, BBNI 68,112,000, ,376,000, ,904,000, BMRI 1,978,886,000, ,380,440,000, ,750,772,000, CASS 2,762,389, ,470,581, ,174,589, COWL 175,000, ,111,941, ,553,087, CTRA 12,712,032, ,431,472, ,712,032, DART 2,280,000, ,110,000, ,275,000, DILD 6,736,515, ,906,064, ,885,968, EMDE 817,290, ,746, ,877,760, EXCL 141,503,000, ,567,000, ,629,000, FREN 4,380,858, ,559,153, ,924,636, GPRA 2,322,854, ,387,738, ,048,356, GWSA 5,034,216, ,647,344, ,535,655, IBST 1,662,354, ,487, ,781,293, JIHD 1,081,175, ,348,129, ,068,392, JRPT 10,338,874, ,345,140, ,812,719, JSMR 35,483,080, ,338,874, ,338,874, KBLV 46,037,000, ,064,000, ,872,000, KIJA 4,664,120, ,558,742, ,058,454, LAMI 404,780, ,180, ,877, LAPD 234,872, ,563, ,293, LPCK 1,949,660, ,041,055, ,508, LPGI 1,596,859, ,217,285, ,348,862,

118 2. Earning Management (X2) Code Year TAC A it-1 EDA ACST 2013 (13,002,354,706) 754,771,051, AGRO ,952,821,000 4,040,140,235, AMAG ,167,786,000 1,349,457,388, APLN 2013 (558,807,415,000) 15,195,642,352, APOL 2013 (920,227,365,657) 3,008,036,943, ASSA ,119,245,470 2,108,998,307, BALI 2013 (9,156,121,796) 453,500,503, BAPA ,997,344, ,093,151, BBNI 2013 (714,376,000,000) 333,303,000,000, BMRI ,296,962,000, ,618,708,000, CASS ,844,585, ,015,458, COWL ,153,217,853 1,778,428,912, CTRA 2013 (1,329,242,092,656) 15,023,391,727, DART ,344,487,000 4,293,161,447, DILD ,916,707,556 6,091,751,240, EMDE 2013 (41,191,817,111) 886,378,756, EXCL 2013 (6,134,094,000,000) 35,455,705,000, FREN 2013 (1,676,926,352,175) 14,339,809,990, GPRA ,905,797,970 1,310,251,294, GWSA ,737,041,191 2,074,853,325, IBST ,867,527,101 2,155,203,153, JIHD ,399,887,000 4,454,535,086, JRPT ,084,932,000 4,998,260,900, JSMR 2013 (1,157,043,783,000) 24,753,551,441, KBLV 2013 (365,235,000,000) 4,306,576,000, KIJA 2013 (844,318,157,370) 7,077,817,870, LAMI ,184,978, ,919,130, LAPD 2013 (374,827,504,000) 1,155,885,012, LPCK ,985,329,247 2,832,000,551, LPGI ,367,324,025 1,447,602,269, ACST ,610,000,000 1,298,358,202, AGRO 2014 (57,354,397,000) 5,124,070,015, AMAG ,116,623,000 2,154,132,214, APLN ,776,141,000 19,679,415,197, APOL ,923,967,771 2,577,604,342, ASSA ,389,137,785 2,172,247,370, BALI 2014 (41,169,932,149) 658,360,482, BAPA ,184,592, ,635,233, BBNI ,220,000, ,654,815,000, BMRI 2014 (436,908,000,000) 733,099,762,000, CASS ,220,905,000 91,675,213, COWL ,068,496,985 1,944,913,754, CTRA 2014 (189,739,517,276) 20,245,534,912, DART ,391,719,000 4,768,449,638, DILD ,173,468,891,386 7,536,320,166, EMDE 2014 (38,887,530,839) 938,536,950, EXCL 2014 (9,343,830,000,000) 40,277,626,000, FREN 2014 (1,001,563,075,466) 15,850,435,440, GPRA ,225,678,660 1,332,646,538, Continue on the next page 100

119 Earning Management (Continuous) Code Year TAC A it-1 EDA GWSA ,220,884,708 4,688,677,189, IBST 2014 (52,381,147,793) 2,874,873,089, JIHD ,907,738,000 6,463,220,155, JRPT ,686,212,000 6,163,177,865, JSMR 2014 (522,371,523,000) 28,064,480,458, KBLV ,846,216,000,000 5,242,465,000, KIJA ,829,465,626 8,257,711,872, LAMI ,994,634, ,947,289, LAPD 2014 (94,758,263,000) 1,017,147,148, LPCK ,969,538,236 3,854,166,345, LPGI ,286,578,440 1,714,825,405, ACST ,254,000,000 1,473,649,000, AGRO 2015 (65,462,061,000) 6,388,305,061, AMAG ,635,273,000 2,490,388,023, APLN ,591,516,757,000 23,685,737,844, APOL 2015 (762,044,618,034) 1,858,227,455, ASSA ,667,274,104 2,507,277,315, BALI ,511,734, ,759,668, BAPA ,501,676, ,171,620, BBNI 2015 (4,956,829,000,000) 416,573,708,000, BMRI ,950,944,000, ,039,673,000, CASS ,544,786,000 1,085,103,430, COWL 2015 (142,944,306,068) 3,682,393,492, CTRA ,030,144,540 23,538,715,238, DART ,048,019,000 5,114,273,658, DILD ,476,993,741,399 9,007,692,918, EMDE 2015 (39,854,407,843) 1,179,018,690, EXCL 2015 (7,531,745,000,000) 63,630,884,000, FREN ,009,127,808 17,743,607,008, GPRA ,283,572,094 1,517,576,344, GWSA ,354,448,779,856 5,340,991,746, IBST ,073,784,523 3,832,398,770, JIHD 2015 (370,389,775,000) 6,486,495,861, JRPT ,972,544,000 6,684,613,561, JSMR 2015 (394,342,483,000) 31,859,962,643, KBLV 2015 (506,732,000,000) 12,951,946,000, KIJA 2015 (7,347,358,043) 8,508,937,032, LAMI ,128,361, ,282,689, LAPD 2015 (122,791,645,000) 937,789,696, LPCK ,932,455,545 4,390,498,820, LPGI ,698,431,616 2,189,245,744,

120 3. Earning Quality (Y) Code Year CFFO EBIT EQ ACST ,217,697, ,038,161, AGRO 2013 (278,513,113,000) 267,070,994, AMAG ,601,830, ,973,057, APLN ,489,047,912,000 1,506,125,256, APOL 2013 (45,445,581,526) (947,126,766,364) 0.05 ASSA 2013 (112,076,444,306) 106,423,635, BALI ,759,081, ,309,996, BAPA 2013 (7,971,607,459) 11,342,947, BBNI ,772,317,000,000 11,278,165,000, BMRI ,532,972,000,000 24,061,837,000, CASS ,172,511, ,678,760, COWL ,558,703,530 76,611,799, CTRA ,742,630,542,979 1,709,491,785, DART 2013 (85,544,196,000) 241,451,997, DILD ,691,834, ,627,877, EMDE ,194,293,493 57,111,977, EXCL ,166,911,000,000 1,374,898,000, FREN 2013 (857,536,876,544) (2,331,537,789,373) 0.37 GPRA ,605,667, ,676,683, GWSA 2013 (63,376,730,735) 110,444,665, IBST ,523,281, ,190,446, JIHD ,451,077,829,000 1,922,652,624, JRPT ,184,687, ,664,497, JSMR ,085,831,530,000 1,310,638,031, KBLV ,172,000,000 81,011,000, KIJA ,214,157, ,583,572, LAMI ,155,041,000 62,255,431, LAPD ,827,504,000 (262,960,954,000) LPCK ,631,600, ,682,618, LPGI ,544,679, ,130,756, ACST ,287,000, ,490,075, AGRO ,762,331, ,048,287, AMAG ,458,049, ,549,661, APLN ,187,784,000 1,416,819,217, APOL 2014 (105,746,227,441) 31,000,514, ASSA 2014 (98,398,141,231) 56,375,711, BALI ,221,584, ,542,645, BAPA 2014 (7,138,086,935) 11,831,170, BBNI ,449,159,000,000 33,524,310,000, BMRI ,091,691,000,000 26,008,015,000, CASS ,393,578, ,052,341, COWL ,567,383, ,079,263, CTRA ,984,333,277,303 2,205,398,300, DART ,634,080, ,034,985, DILD 2014 (740,690,472,062) 614,737,721, EMDE ,983,094,030 71,357,934, EXCL ,540,116,000,000 (1,003,427,000,000) 5.13 FREN 2014 (380,920,995,342) (1,078,422,491,479) 0.35 GPRA ,002,346, ,707,626, Continue on the next page 102

121 Earning Quality (Continuous) Code Year CFFO EBIT EQ GWSA 2014 (266,959,239,883) 563,563,459, IBST ,939,143, ,529,120, JIHD ,580,178, ,560,230, JRPT ,990,308, ,742,168, JSMR ,759,385,695,000 1,850,661,310, KBLV ,936,000,000 8,193,598,000, KIJA ,997,155, ,062,658, LAMI ,392,034,000 39,251,761, LAPD ,767,899,000 (72,140,814,000) LPCK ,002,279, ,026,179, LPGI 2014 (134,298,752,859) 143,039,485, ACST ,968,000,000 84,013,000, AGRO ,953,941, ,733,697, AMAG ,114,979, ,949,051, APLN 2015 (474,753,310,000) 1,554,857,910, APOL 2015 (24,114,285,602) (776,382,357,754) 0.03 ASSA 2015 (93,490,934,465) 56,854,925, BALI ,285,422, ,162,731, BAPA 2015 (4,297,033,029) 6,352,004, BBNI ,097,361,000,000 11,466,148,000, BMRI ,201,454,000,000 26,369,430,000, CASS ,026,726, ,828,206, COWL 2015 (35,747,880,656) (137,598,547,081) 0.26 CTRA ,452,270,017,886 2,223,233,525, DART ,717,789, ,176,803, DILD 2015 (1,057,949,545,935) 603,434,004, EMDE ,122,686, ,339,738, EXCL ,506,407,000,000 (453,892,000,000) 5.97 FREN 2015 (1,823,419,290,017) (1,626,441,544,034) 1.12 GPRA 2015 (35,390,247,927) 100,481,493, GWSA 2015 (90,584,303,847) 1,286,634,256, IBST ,821,154, ,549,572, JIHD ,219,278, ,527,916, JRPT ,804,634, ,884,792, JSMR ,713,543,029,000 2,068,304,233, KBLV 2015 (1,006,982,000,000) (1,933,397,000,000) 0.52 KIJA ,790,021, ,234,038, LAMI ,410,090, ,122,174, LAPD ,393,811,000 (82,550,456,000) LPCK ,056,823, ,517,532, LPGI ,959,770,865 94,803,867,

122 C. Results of Research Normality Test Result using K-S Test One-Sample Kolmogorov-Smirnov Test Unstandardized Residual N 90 Normal Parameters a,b Mean 0E-7 Std. Deviation Most Extreme Differences Absolute.134 Positive.134 Negative Kolmogorov-Smirnov Z Asymp. Sig. (2-tailed).081 a. Test distribution is Normal. b. Calculated from data. Normality Test using Histogram Graphic 104

123 Normality Test using P-Plot Graphic Multicollonearity Test Result Coefficients a Model Unstandardized Standardized t Sig. Collinearity Statistics Coefficients Coefficients B Std. Error Beta Tolerance VIF (Constant) LNFEE EDA a. Dependent Variable: EQ 105