the effect of audit quality with earning management as an...

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 2013-

2015)

Undergraduate Thesis

By:

Melinda Octaviani

1113082100008

ACCOUNTING DEPARTMENT

INTERNATIONAL CLASS PROGRAM

THE FACULTY OF ECONOMICS AND BUSINESSES

SYARIF HIDAYATULLAH STATE ISLAMIC UNIVERSITY

JAKARTA

1437 H /2017 AD

i

CIRCULUM VITAE

DAFTAR RIWAYAT HIDUP

I. PERSONAL IDENTITY

1. Name : Melinda Octaviani

2. Place and Date of Birth : Bogor, 1 October 1995

3. Address : Jl. Ciomas I RT 001/ RW 011 No.14

Kecamatan Ciomas, Kelurahan Ciomas,

Kabupaten Bogor, 16610

4. Phone : 081296151539

5. Email : [email protected]

II. EDUCATION

1. TK Miftahul Salam Bogor 2000-2001

2. SD Rimba Putra Bogor 2001-2006

3. SMP Insan Kamil Bogor 2006-2009

4. SMAS Insan Kamil Bogor 2009-2012

5. S1 Ekonomi Akuntansi UIN Syarif Hidayatullah 2013-2017

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

mailto:[email protected]

ii

Akuntansi dan Ujian Sertifikasi Akuntan (CA) dan Akuntan Publik

(CPA)”. 2015.

2. Training “Forensic Audit to Enhance Accountability in the Public

Sector” by The 16th

ATV FEB University of Indonesia.

3. Company Visit “Forensic Audit to Enhance Accountability in the

Public Sector” by The 16th

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”. 2017.

IV. FAMILY BACKGROUND

1. Father : (PURN) Letkol TNI-AD Achmad Ramli (Alm)

2. Mother : Sundus Saleh Sanad

3. Child : 7 from 7 siblings

iii

Pengaruh Kualitas Audit dengan Manajemen Laba sebagai Variabel Intervening

terhadap Kualitas Laba

(Studi pada Perusahaan Jasa yang terdaftar di Bursa Efek Indonesia tahun 2013-

2015)

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 2015.

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.

iv

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 2013-2015)

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 2015.

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.

v

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.

vi

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

vii

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 ..................................................................................... 15

C. Purpose and Benefit of Research ................................................................... 16

1. Purposes of Research ......................................................................... 16

2. Benefits of Research .......................................................................... 16

CHAPTER II STUDY LITERATURE

A. Literature …………………………….……………………………............... 19

1. Agency Theory……..…….…………….…………………............... 19

2. Audit Quality ..................................................................................... 21

3. Earning Management ......................................................................... 27

viii

4. Earning Quality .................................................................................. 31

B. Previous Research .......................................................................................... 33

C. Conceptual Framework ……………………..……………………………… 42

1. Variable Interrelation ………………………..……………………... 42

a. Audit Quality and Earning Quality …………………………….. 42

b. Audit Quality and Earning Management …………………..…... 43

c. Earning Management and Earning Quality ……………………. 44

d. Audit Quality and Earning Quality through Earning

Management ……………….…………………………………... 46

2. Research Model ................................................................................. 48

D. Hypotheses ..................................................................................................... 48

CHAPTER III Research Methodology

A. Scope of Research .......................................................................................... 49

B. Sampling Method ........................................................................................... 49

C. Collection Data Method ................................................................................. 50

D. Data Analysis Method ................................................................................... 51

1. Descriptive Statistic ........................................................................... 51

2. Classic Assumption Test .................................................................... 52

3. Coefficient of Determination ............................................................. 55

4. Hypothesis Test ................................................................................. 56

E. Research Variables Operationalization .......................................................... 57

1. Earning Quality (Dependent Variable) .............................................. 57

ix

2. Earning Management (Intervening Variable) .................................... 59

3. Audit Quality (Independent Variable) ............................................... 63

CHAPTER IV FINDING AND ANALAYSIS

A. General Description of Research Object………........................................... 67

1. Research Object Description ............................................................. 67

2. Research Sample Description ............................................................ 68

B. Analysis and Discussion ................................................................................ 70

1. Descriptive Statistic Analysis ............................................................ 70

2. Classic Assumption Test Results ....................................................... 71

a. Normality Test Result .................................................................. 71

b. Multicollonearity Test Result ....................................................... 72

c. Heterocedasticity Test Result ....................................................... 73

d. Autocorrelation Test Result ......................................................... 74

3. Determination Coefficient Test Result .............................................. 75

4. Hypothesis Test Result ...................................................................... 77

a. Significant Partial Test (t-test) ...................................................... 77

5. Interpretation ...................................................................................... 82

a. Effect of Audit Quality on Earning Quality ................................ 82

b. Effect of Audit Quality on Earning Management ........................ 83

c. Effect of Earning Management on Earning Quality.................... 84

d. Effect of Audit Quality on Earning Quality through

Earning Management ................................................................... 84

x

CHAPTER V CONCLUSIONS

A. Conclusions .................................................................................................... 87

B. Implication ..................................................................................................... 88

C. Recommendation ........................................................................................... 89

Reference ................................................................................................................... 91

Appendixes ................................................................................................................ 98

xi

LIST OF TABLES

No. Description Page

2.1 Previous Research .......................................................................................... 34

3.1. Variable Operationalization ........................................................................... 66

4.1. Detail of Research Sample ............................................................................. 67

4.2. Research Sample............................................................................................ 69

4.3. Research Sample Distribution ………………………………………..……. 70

4.4. Descriptive Statistic Analysis in Period 2013-2015...................................... 70

4.5. Klomogorov-Smirnov Test Result................................................................. 72

4.6 Multicollonearity Test Result ........................................................................ 73

4.7. Autocorrelation Test Result........................................................................... 75

4.8. Coefficient of Determination Equation I Test Result.................................... 76

4.9. Coefficient of Determination Equation II Test Result ………………...…… 76

4.10. Direct Regression Test Result ....................................................................... 79

4.11. Regression I Test Result ……........................................................................ 80

4.12. Regression II Test Result ............................................................................... 81

xii

LIST OF FIGURES


2.1. Research Model ............................................................................................. 48

4.1. Scatterplot Graphic........................................................................................ 74

4.2. Path Analysis Result...................................................................................... 82

xiii

LIST OF APPENDIXES


1. Sample Data Description ..................................................................................... 98

2. Raw Data Description ………………………………………………………….. 98

3. SPSS Output Result ........................................................................................... 104

1

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

2

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

3

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

4

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 99.56 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

5

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

6

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):

7

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

8

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

9

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

10

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

11

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

12

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

13

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

14

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 profit-

motivated, 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,

15

that it is done by management involvement in the process

of income determination (Subramanyam, 1996, pp.249–

281). 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 2014-2015

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?

16

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.

17

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

18

quality and earning management and their influence

to the earning quality of company.

19

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.

20

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

21

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

22

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

23

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

24

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.

25

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 2001-2006

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

26

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.

27

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

28

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

29

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 income-

decreasing 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 decision-

making 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

30

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.

31

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

32

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

33

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:

34

Table.2.1

Previous Research

No Title

(Researcher,

year)

Research Methodology Research Results

Differentiation Similarities

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)

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

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

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.

2 Impact of

External Audit

Quality on

Earnings

Management by

Banking Firms:

Evidence from

Jordan

(Mohammad

Ebrahim

Nawaiseh, 2016)

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

management

as variables,

used audit

fees as audit

quality

measurement

and used

discretionary

accruals as a

measurement

of earning

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

Continue on the next page

35

Table.2.1 (Continuous)

No Title

(Researcher,

year)



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

3 The effect of

Audit Quality on

Earning Quality

provided by

Dutch public and

private firms

(Mariska

Pupperhart,

2012)

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,

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


36


No Title

(Researcher,

year)



Momeni

Yanesari, and

Ali Reza

Ma'atoofi, 2011)

auditor industry

specialization

and auditor

Independence

as measurement

of audit quality

of earning

management

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

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)

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

Use earning

management

and earning

quality as

variables and

using

Discretionary

Accruals as a

measurement

of earning

management

The study finds

that the stressed/

bankrupt firms

prefer

opportunistic

earnings

management; the

non-stressed /non-

bankrupt 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


37


No Title Research Methodology Research

Results Differentiation Similarities

the sample

period; the

number of

stressed/

bankrupt firms

increased and the

number of non-

stressed/non-

bankrupt firms

decreased

6 Audit Quality,

Earnings

Quality and the

Cost of Equity

Capital

(Yang Li,

Donald Stokes,

Stephen Taylor,

and Leon Wong,

2009)

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

Use the 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.

7 Effects of Audit

Quality on

Earnings

Quality and

Cost of Equity

Capital:

Evidence From

India

Not use

intervening

variable which is

earning

management,

used two

measurements of

earning quality

Use same

variables which

are audit quality

and earning

quality

The study finds

firms which

employed high

quality auditors

experience

higher earnings

quality and

lower cost of


38


No Title

(Researcher,

year)

Research Methodology Research


(Noor Houqe,

Kamran

Ahmed, and

Tony Van, )

which one is

income

smoothing,

using

discretionary

accruals as a

measurement of

earning quality,

and also use cost

of equity capital

as variable

equity capital.

The study result

show that audit

quality will have

a positive effect

on earnings

quality (reducing

discretionary

accruals) and

income

smoothing.

8 The influence

of Corporate

Governance

towards Earning

Quality:

Earning

Management as

an Intervening

Variable

(Singgih Aji

Taruno, 2013)

Not use audit

quality as a

variable, using

corporate

governance

mechanism

(proportion of

independent

board

commissaries

and institutional

ownerships) as

variable

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

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


39


No Title

(Researcher,

year)



9 Earnings

Management,

Audit Quality

and Legal

Environment:

An International

Comparison

(Mehmet Ünsal

Memiş & Emin

Hüseyin

Çetenak, 2012)

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 audit

quality and

earning

management as

variables, using

discretionary

accruals as a

measurement of

earning

management

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

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)

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

accounting-

based earnings

attributes:

Use earning

management

and earning

quality as

variables, using

discretionary

accruals as

earning

management’s

measurement

Result using

regression

analysis shows

that earnings

management

performs better

than earnings

quality in

predicting future

profitability.

Meanwhile, the

non-

discretionary

earnings more

effectively than


40


No Title

(Researcher,

year)



accruals quality,

earnings

persistence,

earnings

predictability,

and relate the

study to the

bankruptcy level

future change of

earnings and

future cash flow

from operation

for providing a

future

profitability’s

picture of the

firm.

11 The Effect of

Information

Asymmetry of

Earnings

Quality to

Earnings

Management as

an Intervening

Variable

(Syahrul Azhar,

2013)

Use information

asymmetry as

independent

variable and use

earning response

coefficient as a

measurement of

earning quality

Use earning

quality as

dependent

variable,

earning

management as

an intervening

variable, and

using

discretionary

accruals as a

measurement of

earning

management

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.


41


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)

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

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

42

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

43

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

44

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

45

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

46

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

47

(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.

48

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

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.

Audit Quality Earning

Management

Earning

Quality

49

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 2013-2015.

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 2013-2015. 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.

50

2. The sample is the company that report audited financial

statements and annual reports on the time period 2013,

2014 and 2015.

3. 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

51

statements. Researchers obtained data by downloading

financial statement on the official website of the Indonesian

stock exchange that is www.idx.co.id 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.

http://www.idx.co.id/

52

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.

53

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

54

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 0.05. If more

55

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

56

the audited financial statement and annual report and published it

at Indonesia Stock Exchange In the period of time 2013-2015.

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:

EQit = β0 + β1LNFEEit + β2EDAit + 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

57

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

58

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

59

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

60

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:

TAt = DAt + NDAt

TAt = Total Accruals

DAt = Discretionary Accruals

NDAt = Nondiscretionary Accruals

At = Total Assets in year t

Which is to finds discretionary accrual is as follows

(Christiani and Nugrahanti, 2014):

DAt = (TAt - NDAt)/At

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:

TAi,t = NIBEi,t- CFOi,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.

61

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:

NDAt = β1 (1/At-1) + β2 (ΔREVt- ΔRECt/ At-1) + β3

(ΔPPEt/At-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

62

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 of this study using estimate of

discretionary accruals as measurement 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

63

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

64

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.

65

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:

66

Table.3.1

Variable Operationalization

No Variable Type of

Variable

Indicator Measurement

Scale

1 (X1)

Audit Quality

(Herawaty, 2011,

Hartadi, 2009)

Independent LNFEE = LN

Professional Fee

Ratio

2 (X2)

Earning

Management

(Nawaiseh, 2016,

Christiani and

Nugrahanti, 2014)

Intervening EDA = TAt/At-1 Ratio

3 (Y)

Earning Quality

(Taruno, 2013)

Dependent EQ = Net Cash

Flow from

Operations/EBIT

Ratio

67

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

2013-2015. 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

Exchange

103

2 Not published financial statement in period

between 2013-2105

10

3 Reported the financial statement besides in

Rupiahs unit

41

4 Not stated professional fees 22

The amount of company being sample 30

Observation period (2013-2015) 3

Total of Sample during study period 90

Source: Processed Data

68

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 2013-2015. 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.

69

Table.4.2

Research Sample

No Type of Business Year 2013 Year 2014 Year 2015

1 Advertising

Printing Media

1 1 1

2 Bank 3 3 3

3 Insurance 2 2 2

4 Hotel, Restaurant,

and Tourism

1 1 1

5 Property& Real

Estate

13 13 13

6 Construction &

Development

1 1 1

7 Energy 1 1 1

8 Toll Road, Airport,

Harbour and etc

1 1 1

9 Telecommunication 2 2 2

10 Transportation 3 3 3

11 Non Building

Construction

2 2 2

Total 30 30 30

Accumulation 90


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.

70

Table.4.3

Research Sample Distribution

No Type of Business Frequency Percentage

(%)

1 Advertising Printing Media 1 3,33

2 Bank 3 10

3 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

and etc

1 3,33

9 Telecommunication 2 6,67

10 Transportation 3 10

11 Non Building Construction 2 6,67

Total 30 100


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.

71

Table.4.4

Descriptive Statistic Analysis in Period 2013-2015

N Minimum Maximum Mean Std.

Deviation

LNFEE 90 18.83 28.64 22.2494 1.97576

EDA 90 -.41 1.50 .0287 .19049

EQ 90 -3.14 5.97 .4819 1.31652

Valid N

(listwise)

90


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

72

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 Parametersa,b

Mean 0E-7

Std. Deviation 1.18493141

Most Extreme

Differences

Absolute .134

Positive .134

Negative -.094

Kolmogorov-Smirnov Z 1.267

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

73

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.

Table.4.6

Multicollonearity Test Result

Model Collinearity Statistics

Tolerance VIF

1 (Constant)

LNFEE

EDA

.998

.998

1.002

1.002

Source: SPSS Output

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.

74

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

75

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 Valuea -.08546

Cases < Test Value 45

Cases >= Test Value 45

Total Cases 90

Number of Runs 50

Z .848


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

76

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 R

Square

Adjusted

R Square

Std. Error of

the Estimate

1 .048a .002 -.009 .19135

Source: SPSS Output

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 Adjusted R

Square

Std. Error of

the Estimate

1 .436a .190 .171 1.19847

Source: SPSS Output

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

77

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

78

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).

79

1) Direct Regression

Table.4.10

Direct Regression Test Result

Coefficientsa

Model Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

1 (Constant) -4.408 1.498 -2.943 .004

LNFEE .220 .067 .330 3.278 .001

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.

80

2) Regression I

Table.4.11

Regression I Test Result

Coefficientsa


Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

1 (Constant) -.075 .229 -.326 .745

LNFEE .005 .010 .048 .453 .652

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

81

variable shows negative and significant result which is -

0,285 and 0,004.

Table.4.12

Regression II Test Result

Coefficientsa


Coefficients

Standardized

Coefficients

t Sig.

B Std.

Error

Beta

(Constant) -4.555 1.437 -3.170 .002

LNFEE → EDA .005 .010 .048 .453 .652

LNFEE → EQ .229 .064 .344 3.556 .001

EDA → EQ -1.971 .668 -.285 -2.952 .004

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.

H3: earning management effect earning quality

is accepted.

H4: audit quality effect earning quality through

earning management is rejected.

82

Figure.4.2

Path Analysis Result

0,990 0,330

0,048 -0,285

0,900

5. 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 0.001. 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

Audit

Quality

e1

Earning

Quality

Earning

Management

e2

83

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

84

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

85

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

86

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.

87

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

88

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.

89

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, one-

time events, liberal accounting practices and other economic

90

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.

91

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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

99

B. Raw Data Description

1. Audit Quality (X1)

Code 2013 2014 2015

PF LNF

EE

PF LNF

EE

PF LNF

EE

ACST 1,031,852,781 20.75 2,464,000,000 21.63 2,065,000,000 21.45

AGRO 3,459,477,000 21.96 3,877,450,000 22.08 3,632,747,000 22.01

AMAG 1,619,571,000 21.21 3,961,630,000 22.10 3,644,764,000 22.02

APLN 8,824,863,000 22.90 11,009,926,000 23.12 9,734,222,000 23.00

APOL 11,435,805,540 23.16 6,949,899,771 22.66 17,873,458,626 23.61

ASSA 438,000,000 19.90 373,000,000 19.74 1,383,137,748 21.05

BALI 538,205,300 20.10 564,754,195 20.15 945,958,404 20.67

BAPA 941,847,448 20.66 382,989,186 19.76 480,589,409 19.99

BBNI 68,112,000,000 24.94 51,376,000,000 24.66 47,904,000,000 24.59

BMRI 1,978,886,000,000 28.31 2,380,440,000,000 28.50 2,750,772,000,000 28.64

CASS 2,762,389,000 21.74 3,470,581,000 21.97 3,174,589,000 21.88

COWL 175,000,000 18.98 11,111,941,189 23.13 5,553,087,970 22.44

CTRA 12,712,032,584 23.27 4,431,472,704 22.21 12,712,032,584 23.27

DART 2,280,000,000 21.55 1,110,000,000 20.83 2,275,000,000 21.55

DILD 6,736,515,120 22.63 8,906,064,879 22.91 15,885,968,697 23.49

EMDE 817,290,528 20.52 808,746,428 20.51 1,877,760,603 21.35

EXCL 141,503,000,000 25.68 148,567,000,000 25.72 184,629,000,000 25.94

FREN 4,380,858,661 22.20 9,559,153,996 22.98 3,924,636,677 22.09

GPRA 2,322,854,493 21.57 2,387,738,404 21.59 7,048,356,490 22.68

GWSA 5,034,216,219 22.34 3,647,344,547 22.02 4,535,655,066 22.24

IBST 1,662,354,837 21.23 937,487,992 20.66 2,781,293,839 21.75

JIHD 1,081,175,000 20.80 1,348,129,000 21.02 1,068,392,000 20.79

JRPT 10,338,874,000 23.06 19,345,140,000 23.69 22,812,719,000 23.85

JSMR 35,483,080,000 24.29 10,338,874,000 23.06 10,338,874,000 23.06

KBLV 46,037,000,000 24.55 108,064,000,000 25.41 63,872,000,000 24.88

KIJA 4,664,120,071 22.26 14,558,742,608 23.40 22,058,454,388 23.82

LAMI 404,780,000 19.82 437,180,000 19.90 499,877,000 20.03

LAPD 234,872,000 19.27 253,563,000 19.35 151,293,000 18.83

LPCK 1,949,660,396 21.39 3,041,055,129 21.84 989,508,103 20.71

LPGI 1,596,859,215 21.19 1,217,285,700 20.92 1,348,862,200 21.02

100

2. Earning Management (X2)

Code Year TAC Ait-1 EDA

ACST 2013 (13,002,354,706) 754,771,051,363 -0.02

AGRO 2013 330,952,821,000 4,040,140,235,000 0.08

AMAG 2013 56,167,786,000 1,349,457,388,000 0.04

APLN 2013 (558,807,415,000) 15,195,642,352,000 -0.04

APOL 2013 (920,227,365,657) 3,008,036,943,936 -0.31

ASSA 2013 204,119,245,470 2,108,998,307,963 0.10

BALI 2013 (9,156,121,796) 453,500,503,264 -0.02

BAPA 2013 12,997,344,610 159,093,151,873 0.08

BBNI 2013 (714,376,000,000) 333,303,000,000,000 0.00

BMRI 2013 1,296,962,000,000 635,618,708,000,000 0.00

CASS 2013 7,844,585,000 795,015,458,000 0.01

COWL 2013 37,153,217,853 1,778,428,912,031 0.02

CTRA 2013 (1,329,242,092,656) 15,023,391,727,244 -0.09

DART 2013 266,344,487,000 4,293,161,447,000 0.06

DILD 2013 83,916,707,556 6,091,751,240,542 0.01

EMDE 2013 (41,191,817,111) 886,378,756,878 -0.05

EXCL 2013 (6,134,094,000,000) 35,455,705,000,000 -0.17

FREN 2013 (1,676,926,352,175) 14,339,809,990,815 -0.12

GPRA 2013 84,905,797,970 1,310,251,294,004 0.06

GWSA 2013 207,737,041,191 2,074,853,325,402 0.10

IBST 2013 468,867,527,101 2,155,203,153,294 0.22

JIHD 2013 315,399,887,000 4,454,535,086,000 0.07

JRPT 2013 194,084,932,000 4,998,260,900,000 0.04

JSMR 2013 (1,157,043,783,000) 24,753,551,441,000 -0.05

KBLV 2013 (365,235,000,000) 4,306,576,000,000 -0.08

KIJA 2013 (844,318,157,370) 7,077,817,870,077 -0.12

LAMI 2013 12,184,978,000 598,919,130,000 0.02

LAPD 2013 (374,827,504,000) 1,155,885,012,000 -0.32

LPCK 2013 576,985,329,247 2,832,000,551,101 0.20

LPGI 2013 60,367,324,025 1,447,602,269,216 0.04

ACST 2014 60,610,000,000 1,298,358,202,545 0.05

AGRO 2014 (57,354,397,000) 5,124,070,015,000 -0.01

AMAG 2014 145,116,623,000 2,154,132,214,000 0.07

APLN 2014 359,776,141,000 19,679,415,197,000 0.02

APOL 2014 125,923,967,771 2,577,604,342,335 0.05

ASSA 2014 141,389,137,785 2,172,247,370,275 0.07

BALI 2014 (41,169,932,149) 658,360,482,153 -0.06

BAPA 2014 14,184,592,731 175,635,233,972 0.08

BBNI 2014 380,220,000,000 386,654,815,000,000 0.00

BMRI 2014 (436,908,000,000) 733,099,762,000,000 0.00

CASS 2014 11,220,905,000 91,675,213,300 0.12

COWL 2014 113,068,496,985 1,944,913,754,306 0.06

CTRA 2014 (189,739,517,276) 20,245,534,912,143 -0.01

DART 2014 6,391,719,000 4,768,449,638,000 0.00

DILD 2014 1,173,468,891,386 7,536,320,166,520 0.16

EMDE 2014 (38,887,530,839) 938,536,950,089 -0.04

EXCL 2014 (9,343,830,000,000) 40,277,626,000,000 -0.23

FREN 2014 (1,001,563,075,466) 15,850,435,440,807 -0.06

GPRA 2014 17,225,678,660 1,332,646,538,409 0.01


101

Earning Management (Continuous)

Code Year TAC Ait-1 EDA

GWSA 2014 837,220,884,708 4,688,677,189,263 0.18

IBST 2014 (52,381,147,793) 2,874,873,089,584 -0.02

JIHD 2014 62,907,738,000 6,463,220,155,000 0.01

JRPT 2014 613,686,212,000 6,163,177,865,000 0.10

JSMR 2014 (522,371,523,000) 28,064,480,458,000 -0.02

KBLV 2014 7,846,216,000,000 5,242,465,000,000 1.50

KIJA 2014 107,829,465,626 8,257,711,872,648 0.01

LAMI 2014 6,994,634,000 611,947,289,000 0.01

LAPD 2014 (94,758,263,000) 1,017,147,148,000 -0.09

LPCK 2014 827,969,538,236 3,854,166,345,345 0.21

LPGI 2014 262,286,578,440 1,714,825,405,214 0.15

ACST 2015 17,254,000,000 1,473,649,000,000 0.01

AGRO 2015 (65,462,061,000) 6,388,305,061,000 -0.01

AMAG 2015 164,635,273,000 2,490,388,023,000 0.07

APLN 2015 1,591,516,757,000 23,685,737,844,000 0.07

APOL 2015 (762,044,618,034) 1,858,227,455,118 -0.41

ASSA 2015 127,667,274,104 2,507,277,315,256 0.05

BALI 2015 36,511,734,613 808,759,668,656 0.05

BAPA 2015 5,501,676,003 176,171,620,663 0.03

BBNI 2015 (4,956,829,000,000) 416,573,708,000,000 -0.01

BMRI 2015 10,950,944,000,000 855,039,673,000,000 0.01

CASS 2015 63,544,786,000 1,085,103,430,000 0.06

COWL 2015 (142,944,306,068) 3,682,393,492,170 -0.04

CTRA 2015 288,030,144,540 23,538,715,238,878 0.01

DART 2015 171,048,019,000 5,114,273,658,000 0.03

DILD 2015 1,476,993,741,399 9,007,692,918,375 0.16

EMDE 2015 (39,854,407,843) 1,179,018,690,672 -0.03

EXCL 2015 (7,531,745,000,000) 63,630,884,000,000 -0.12

FREN 2015 258,009,127,808 17,743,607,008,364 0.01

GPRA 2015 108,283,572,094 1,517,576,344,888 0.07

GWSA 2015 1,354,448,779,856 5,340,991,746,366 0.25

IBST 2015 48,073,784,523 3,832,398,770,295 0.01

JIHD 2015 (370,389,775,000) 6,486,495,861,000 -0.06

JRPT 2015 767,972,544,000 6,684,613,561,000 0.11

JSMR 2015 (394,342,483,000) 31,859,962,643,000 -0.01

KBLV 2015 (506,732,000,000) 12,951,946,000,000 -0.04

KIJA 2015 (7,347,358,043) 8,508,937,032,120 0.00

LAMI 2015 125,128,361,000 631,282,689,000 0.20

LAPD 2015 (122,791,645,000) 937,789,696,000 -0.13

LPCK 2015 565,932,455,545 4,390,498,820,383 0.13

LPGI 2015 69,698,431,616 2,189,245,744,968 0.03

102

3. Earning Quality (Y)

Code Year CFFO EBIT EQ

ACST 2013 112,217,697,097 130,038,161,878 0.86

AGRO 2013 (278,513,113,000) 267,070,994,000 -1.04

AMAG 2013 96,601,830,000 175,973,057,000 0.55

APLN 2013 1,489,047,912,000 1,506,125,256,000 0.99

APOL 2013 (45,445,581,526) (947,126,766,364) 0.05

ASSA 2013 (112,076,444,306) 106,423,635,309 -1.05

BALI 2013 94,759,081,110 120,309,996,125 0.79

BAPA 2013 (7,971,607,459) 11,342,947,580 -0.70

BBNI 2013 9,772,317,000,000 11,278,165,000,000 0.87

BMRI 2013 17,532,972,000,000 24,061,837,000,000 0.73

CASS 2013 242,172,511,000 324,678,760,000 0.75

COWL 2013 11,558,703,530 76,611,799,917 0.15

CTRA 2013 2,742,630,542,979 1,709,491,785,185 1.60

DART 2013 (85,544,196,000) 241,451,997,000 -0.35

DILD 2013 245,691,834,305 473,627,877,489 0.52

EMDE 2013 75,194,293,493 57,111,977,571 1.32

EXCL 2013 7,166,911,000,000 1,374,898,000,000 2.47

FREN 2013 (857,536,876,544) (2,331,537,789,373) 0.37

GPRA 2013 21,605,667,371 154,676,683,511 0.14

GWSA 2013 (63,376,730,735) 110,444,665,494 -0.57

IBST 2013 401,523,281,959 924,190,446,338 0.43

JIHD 2013 1,451,077,829,000 1,922,652,624,000 0.75

JRPT 2013 352,184,687,000 631,664,497,000 0.56

JSMR 2013 2,085,831,530,000 1,310,638,031,000 1.59

KBLV 2013 385,172,000,000 81,011,000,000 4.75

KIJA 2013 945,214,157,370 200,583,572,897 4.71

LAMI 2013 42,155,041,000 62,255,431,000 0.68

LAPD 2013 110,827,504,000 (262,960,954,000) -0.42

LPCK 2013 13,631,600,894 665,682,618,221 0.02

LPGI 2013 20,544,679,366 102,130,756,901 0.20

ACST 2014 43,287,000,000 103,490,075,000 0.42

AGRO 2014 116,762,331,000 421,048,287,000 0.28

AMAG 2014 57,458,049,000 222,549,661,000 0.26

APLN 2014 621,187,784,000 1,416,819,217,000 0.44

APOL 2014 (105,746,227,441) 31,000,514,617 -3.41

ASSA 2014 (98,398,141,231) 56,375,711,826 -1.75

BALI 2014 130,221,584,966 122,542,645,628 1.06

BAPA 2014 (7,138,086,935) 11,831,170,501 -0.60

BBNI 2014 10,449,159,000,000 33,524,310,000,000 0.31

BMRI 2014 21,091,691,000,000 26,008,015,000,000 0.81

CASS 2014 260,393,578,000 356,052,341,000 0.73

COWL 2014 51,567,383,375 206,079,263,977 0.25

CTRA 2014 1,984,333,277,303 2,205,398,300,573 0.90

DART 2014 401,634,080,000 495,034,985,000 0.81

DILD 2014 (740,690,472,062) 614,737,721,730 -1.20

EMDE 2014 83,983,094,030 71,357,934,284 1.18

EXCL 2014 8,540,116,000,000 (1,003,427,000,000) 5.13

FREN 2014 (380,920,995,342) (1,078,422,491,479) 0.35

GPRA 2014 75,002,346,091 122,707,626,199 0.61


103

Earning Quality (Continuous)

Code Year CFFO EBIT EQ

GWSA 2014 (266,959,239,883) 563,563,459,113 -0.47

IBST 2014 241,939,143,570 194,529,120,441 1.24

JIHD 2014 74,580,178,000 232,560,230,000 0.32

JRPT 2014 113,990,308,000 835,742,168,000 0.14

JSMR 2014 1,759,385,695,000 1,850,661,310,000 0.95

KBLV 2014 39,936,000,000 8,193,598,000,000 0.00

KIJA 2014 290,997,155,681 565,062,658,699 0.51

LAMI 2014 31,392,034,000 39,251,761,000 0.80

LAPD 2014 22,767,899,000 (72,140,814,000) -0.32

LPCK 2014 18,002,279,281 861,026,179,916 0.02

LPGI 2014 (134,298,752,859) 143,039,485,050 -0.94

ACST 2015 24,968,000,000 84,013,000,000 0.30

AGRO 2015 145,953,941,000 541,733,697,000 0.27

AMAG 2015 29,114,979,000 211,949,051,000 0.14

APLN 2015 (474,753,310,000) 1,554,857,910,000 -0.31

APOL 2015 (24,114,285,602) (776,382,357,754) 0.03

ASSA 2015 (93,490,934,465) 56,854,925,672 -1.64

BALI 2015 84,285,422,707 164,162,731,641 0.51

BAPA 2015 (4,297,033,029) 6,352,004,735 -0.68

BBNI 2015 14,097,361,000,000 11,466,148,000,000 1.23

BMRI 2015 10,201,454,000,000 26,369,430,000,000 0.39

CASS 2015 230,026,726,000 386,828,206,000 0.59

COWL 2015 (35,747,880,656) (137,598,547,081) 0.26

CTRA 2015 1,452,270,017,886 2,223,233,525,626 0.65

DART 2015 6,717,789,000 240,176,803,000 0.03

DILD 2015 (1,057,949,545,935) 603,434,004,139 -1.75

EMDE 2015 101,122,686,777 107,339,738,899 0.94

EXCL 2015 7,506,407,000,000 (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) 100,481,493,717 -0.35

GWSA 2015 (90,584,303,847) 1,286,634,256,104 -0.07

IBST 2015 266,821,154,499 356,549,572,052 0.75

JIHD 2015 462,219,278,000 230,527,916,000 2.01

JRPT 2015 101,804,634,000 991,884,792,000 0.10

JSMR 2015 1,713,543,029,000 2,068,304,233,000 0.83

KBLV 2015 (1,006,982,000,000) (1,933,397,000,000) 0.52

KIJA 2015 338,790,021,204 408,234,038,859 0.83

LAMI 2015 28,410,090,000 154,122,174,000 0.18

LAPD 2015 40,393,811,000 (82,550,456,000) -0.49

LPCK 2015 349,056,823,669 930,517,532,765 0.38

LPGI 2015 7,959,770,865 94,803,867,025 0.08

104

C. Results of Research

Normality Test Result using K-S Test

One-Sample Kolmogorov-Smirnov Test

Unstandardized

Residual

N 90

Normal Parametersa,b

Mean 0E-7

Std. Deviation 1.18493141

Most Extreme Differences

Absolute .134

Positive .134

Negative -.094

Kolmogorov-Smirnov Z 1.267


a. Test distribution is Normal.

b. Calculated from data.

Normality Test using Histogram Graphic

105

Normality Test using P-Plot Graphic

Multicollonearity Test Result

Coefficientsa


Coefficients

Standardized

Coefficients

t Sig. Collinearity Statistics

B Std. Error Beta Tolerance VIF

1

(Constant) -4.555 1.437 -3.170 .002

LNFEE .229 .064 .344 3.556 .001 .998 1.002

EDA -1.971 .668 -.285 -2.952 .004 .998 1.002

a. Dependent Variable: EQ

106

Heterocedasticity Test

Autocorrelation Test using Run

Test

Runs Test

Unstandardized

Residual

Test Valuea -.08546

Cases < Test Value 45

Cases >= Test Value 45

Total Cases 90

Number of Runs 50

Z .848


a. Median

107

Regression Result of Direct Relation between Audit Quality on Earning

Quality

Variables Entered/Removeda

Model Variables

Entered

Variables

Removed

Method

1 LNFEEb . Enter


b. All requested variables entered.

Model Summaryb


Square

Std. Error of the

Estimate

1 .330a .109 .099 1.24988

a. Predictors: (Constant), LNFEE

b. Dependent Variable: EQ

ANOVAa

Model Sum of Squares df Mean Square F Sig.

1

Regression 16.782 1 16.782 10.742 .001b

Residual 137.475 88 1.562

Total 154.257 89


b. Predictors: (Constant), LNFEE

Coefficientsa

Model Unstandardized Coefficients Standardized

Coefficients

t Sig.

B Std. Error Beta

1 (Constant) -4.408 1.498 -2.943 .004

LNFEE .220 .067 .330 3.278 .001


108

Regression I Results


Model Variables

Entered

Variables

Removed

Method

1 LNFEEb . Enter

a. Dependent Variable: EDA


Model Summary


Square

Std. Error of the

Estimate

1 .048a .002 -.009 .19135

a. Predictors: (Constant), LNFEE

ANOVAa


1

Regression .008 1 .008 .205 .652b

Residual 3.222 88 .037

Total 3.230 89


b. Predictors: (Constant), LNFEE

Coefficientsa


Coefficients

t Sig.

B Std. Error Beta

1 (Constant) -.075 .229 -.326 .745

LNFEE .005 .010 .048 .453 .652


109

Regression II Results


Model Variables

Entered

Variables

Removed

Method

1 EDA, LNFEEb . Enter



Model Summaryb


Square

Std. Error of the

Estimate

1 .436a .190 .171 1.19847

a. Predictors: (Constant), EDA, LNFEE

b. Dependent Variable: EQ

ANOVAa


1

Regression 29.295 2 14.648 10.198 .000b

Residual 124.962 87 1.436

Total 154.257 89


b. Predictors: (Constant), EDA, LNFEE

Coefficientsa


Coefficients

t Sig.

B Std. Error Beta

1

(Constant) -4.555 1.437 -3.170 .002

LNFEE .229 .064 .344 3.556 .001

EDA -1.971 .668 -.285 -2.952 .004


the effect of audit quality with earning management as an...

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