(Luận văn thạc sĩ) the influence the quality of financial reporting on firm value (survey on banks listed at IDX)

The Influence the Quality of Financial Reporting on Firm Value (Survey on Banks Listed at IDX) Usdi Suryana STIE Ekuitas, Indonesia Abstract This study aims to examine the effect of the quality of financial reporting on corporate value This study uses explanatory research method, data collection using census approach by distributing questionnaires to 31 banks listed in Indonesia Stock Exchange The unit of analysis is a bank listed on the Indonesia Stock Exchange with internal audit manager respondents and financial accounting managers The type of data used is the primary data of questionnaire responses responded by respondents and secondary data obtained from the bank's annual report Validity test and reliability test conducted to the responses of questionnaires collected for subsequent hypothesis testing Analysis of hypothesis testing data using path analysis The results showed that there is influence of financial reporting quality to firm value The value of the company will be higher if the quality of financial reporting prepared and presented meet the basic concepts, qualitative characteristics of financial statements, recognition and measurement of financial statements Keywords: financial reporting quality and company value Chapter I: Preliminary 1.1 Background Research The financial statements serve as the primary tool for corporate management to deliver financial and operational information as management accountability and to meet the needs of internal and external parties who lack the authority to obtain the information they need for economic decision-making (Schipper and Vincent, 2003) The same is stated in the basic framework for the preparation and presentation of financial statements (IAI, 1994) that the purpose of financial statements is to provide information pertaining to the financial position, performance, and changes in the financial position of an entity beneficial to a large number of users in economic decision-making One of the information that most concerns the user on the financial statements is the information about the firm's earnings, since profits represent the overall performance of the company The concept of profit in the semantic level includes the meaning of profit as a performance gauge, confirmation of investor expectations, and economic profit estimator Although accounting should not be able to measure and present economic profit, accounting should at least provide profit information that can be used by users to measure economic profit which in turn to determine the economic value of the company (Suwardjono, 2008) The Bank as a trust institution shall prepare and present the financial statements as a form of management accountability to stakeholders for the trust it has received (PBI, 2008) In recent years, the financial statements 171 of public companies in Indonesia have always been in the spotlight of interested parties Indonesia Stock Exchange (BEI) in 2012 noted there are 54 issuers late deliver the financial statements of the audit results in 2011 that must be reported in 2012 According to the Director of Corporate Valuation BEI, Hoesen, in BEI, Jakarta, some violations of issuers associated with financial statements are still frequent occurs in addition to delays in the delivery of financial statements, other violations of incomplete financial statement components, late submission of audit plans or limited review of financial statements Several other violations are the number of reports that are not in accordance with the explanation in the note, the information in the financial statements in the form of softcopy is not the same as the hardcopy financial statements announced in the mass media, the figures in the financial statements that can not be proved or subsequent explanation of the event is not adequate Merdeka.com, 13/08/2012) Similarly, the case of revision of the financial report of Bank Bukopin resulting in a decline in profits from Rp trillion to 183 billion due to errors in the recording of interest income from credit cards (Kontan 18/5/2018 In Indonesia a bit more happened is not yet done the Standard Operations and Procedures (SOP) and internal controls well, in addition to the lack of supervision from top leaders also although it has been implemented not infrequently procedures that are common and simple it is often found not conducted regularly Based on the above phenomenon and in an effort to implement governanace for commercial banks in delivering financial information through quality financial reporting, Bank Indonesia in accordance with PBI number 8/14 / PBI / 2006 has obliged the Commercial Bank to establish an audit committee The occurrence of a financial scandal is a failure of supervisory institutions, namely audit committee and internal audit in performing its role of producing financial reports that have high integrity and reliable to meet the information needs of users of the report (Nashwa George, 2003) Profit as part of the financial statements does not present the actual facts about the economic condition of the company so that the expected profit can provide information to support decision making into questionable quality Financial performance that does not indicate actual information about management performance may mislead the users of the report (Schipper and Vincent: 2003) In a capital market environment, published financial statements are an important source of information that most financial users and / or market participants and stakeholders need to support decision-making From some of the information obtained in the financial statements, profit becomes the center of attention of the users (Beattie et al., 1994) The published earnings may respond varied, indicating a market reaction to earnings information (Cho and Jung, 1991) The reactions given depend on the quality of profits generated by the company As a public company whose shares are owned by the public through the stock exchange, the presentation of financial statements must meet the requirements stipulated by the competent authority, in Indonesia this institution is the Financial Services Authority / OJK and this report must be published through mass media which can be used as important sources of information required by shareholders in particular and stakeholders in the company (stakeholders) in general One of the regulations is that issuers are required to disclose important information through annual reports including financial reports to shareholders and other reports to OJKs, Stock Exchanges, and to the public in a timely, accurate, understandable and objective manner (Bapepam LK, 2011) Based on the situation, the conditions and phenomena that have been mentioned above, and supported by some survey results that have been done before, it can be formulated the theme of this research as follows: "That if the quality of financial reporting is good then the probability of firm value will be affected" Based on the theme of the study the authors are interested to conduct research with the title "The Influence of Quality of Financial Reporting to Company Value" This research will be conducted on Banking companies listed in Indonesia Stock Exchange (BEI) 172 1.4 Usefulness of Research Results 1.4.1 Usefulness or Practical Use The results of this study are expected to contribute ideas and solutions to problem solving; Public bank, the results of this study provide input on the implementation of the preparation, presentation of financial reporting in accordance with the applicable financial accounting standards consistency 1.4.2 Usefulness in Science Development The results of this study are expected to contribute in the development of financial accounting studies, as follows; For the academic world, make a scientific contribution based on the results of empirical evidence conducted so as to support or complement the theories of the results of existing research related to accounting science, especially financial accounting The results of this study are expected to be used for further investigators with topics that are still relevant both complementary and continue similar research in the future Chapter II: Literature review 2.1 Quality of Financial Reporting Companies that have a good reputation for financial reporting will be able to increase their capital Moreover, an argument that with such financial reporting will also get lower capital costs because the company will reduce the issue when the company reports it more fully and reliably (Harry I Wolk et al., 1989) FSAB in Suwardjono (2008-157) The main purpose of financial reporting is to provide information about the economic resources of a business entity, claims against those resources (the obligation of a business entity to transfer economic resources to another entity and owner's equity) and the consequences of transactions, events and circumstances that alter the resources of the enterprise and claims against those resources A large number of new economic activities require additional capital resources Companies can accumulate the amount of capital needed to be met at a greater cost in the framework of industrialization It encourages the separation of management with owners so that management becomes more specific A new accountability is established between management and owners and is supported by regulation to facilitate corporate development and protection of all matters relating to the organization of the company, especially the owner / shareholder as a provider of capital The accountability has been satisfied by providing information by the management of the company to the shareholders as outlined in the annual report of which most of the contents of the financial statements (Michael Gaffikin, 2008) The Ross L Watss & Zuo Luo 2011 study proves that accounting conservatism affects the value of firms during the crisis of 2008, indicating that firms with more conservative accounting policies in financial reporting during the crisis period were significantly reduced Kristen L.Andersen and Teri Lombardi Yohn (2009) in his research examined the effect of restatement of financial statements and the disclosure of income recognition problems to market reaction The result of his research shows that there is a negative market reaction to the announcement of the accounting problem The same thing shows that companies announcing the restatement of financial statements relating to income recognition issues show a greater negative reaction The results of Zaenal Fanani's (2009) study stated that the quality of financial reporting with the attributes of relevance, timelines and conservatism has significant economic consequences relationship with the value of shares as the impact of information asymmetry Nevertheless, Abubakar Salisu's (2008) research findings indicate that accounting information of listed companies in the Nigerian stock exchange has little significant relevance value for users of information in making investment decisions 173 2.2 Paradigm of research, Quality of financial reporting SFAC,2010 Akhmad R Belkaoui, 2006, Harry, Walk 2003 Suwarjono, 2008 SAK (IAI:2012) Corporate value Tobin Q Mingzhi LIU, 2011 Ross LWatss, et al,2011 Jeffry Ng, 2008 Jonathan Berk and Peter DeMarzo, 2007 Joseph F Sinkey JR, 1992 Bringham, 1996 Fama, 1978 2.3 Hypothesis In accordance with the framework that has been described previously, it can be formulated research hypotheses The hypothesis formulation is H1 The quality of financial reporting affects the value of the company Chapter III: Research methods 3.1 Objects and Methods The object of research in this study is the quality of financial reporting and corporate value The focus of research is directed to the quality of financial reporting both weaknesses and advantages in increasing the value of the company The research method used in this research is explanatory research (expalanatory reserach), because it is a research that explains the causal relationship between variables (Cooper and Schindler, 2006: 154) through census research 3.2 Variable Operationalization Quality of financial reporting The main purpose of the financial reporting process is to provide high quality financial reports that present information on economic entities, the main financial conditions for use in economic decision making (IAI, 2012) Providing high quality financial reporting information is important because it positively affects capital providers and other interested parties in making investment, credit and allocation decisions that can improve market efficiency (IASB, 2008) Subsequently financial reporting quality is operationalized in the form of variable (X) Corporate value According to Fama (1978), the value of a company is a reflection of its share price The market price of a company's stock formed between the buyer and the seller in the event of a transaction is called the market value of the firm, since the stock market price is considered a reflection of the true asset value of the firm The value of a firm formed through an indicator of the market value of the stock is heavily influenced by investment opportunities The existence of investment opportunities can provide a positive signal about future company growth, so that will increase the stock price, with rising stock prices then the value of the company will increase Furthermore the concept of corporate value is operationalized in the form of variables (Y) 174 As a further elaboration of the operationalization of variables, in Table 3.1 presented measurement of observed variables consisting of variable elements, the concept of variables / dimensions, indicators and measurement scale Table 3.1 Operationalization Variable Variable Financial Reporting Quality (X) SFAC, Harry Wolk, at al, 2003 Ahmed R Belkaoui, 2006 Suwardjono, 2008 IAI, SAK, Revisi 2009 Corporate Value (Y) Tobin, 2001 W.Brigham, 2003 Jonathan Berk, 2007 Dimension 1.Basic Concept 2.Qualitative characteristics of financial statement Indicator Accrual basic Going concerns Understandable Relevant Reliability Comparable 3.Recognition of elements of financial statament measurement of elements of financial statement Share holder value Stock price/ Nominal value of the share Scall Ordinal Ordinal Ordinal Ordinal Ordinal Ordinal Item 3-4 5, 6,7 8-11 12-14 Ordinal 15 Ordinal 16 Rasio Source: data is processed from various sources 3.3 Data types, Research instruments and Measuring Instruments Type of data in this research is primary data and secondary data Primary data is used to measure the quality of financial reporting and secondary data used to measure company value To obtain the data the instrument used in this study is a questionnaire to obtain data quality reporting financial variables and make an analysis to examine existing data and information for corporate value variables In this study the party who will answer the proposed instrument item / respondent is the Financial Accounting Manager at the Bank listed on the Indonesia Stock Exchange For secondary data with data source obtained from daily data of share price at Indonesia Stock Exchange and annual report and financial report of Bank registered in Bursa Efek Indonesia The research measuring instrument used in this study, to change the qualitative data from the questionnaire into a quantitative data size is Summated Rating Method: Likert Schale (Likert Scale) With Likert scale, the variables measured as starting points to arrange the items of the instrument in the form of statements or questions scored in seven levels, moving from to 3.4 Population Research and Census The target population in this study were all bank companies listed on the Indonesia Stock Exchange in the year 2017, namely: (i) a banking service provider company during the period of observation (ii) companies issuing annual reports for the year ended 31 December 2015, 2016 and 2017 The number of banks listed on the Indonesia Stock Exchange up to 2017 is 31 Banks.5 In this study, the respondents are audit committee, internal supervisory unit and manager of Financial Accounting Division at a bank company listed in Indonesia Stock Exchange 3.5 Data Analysis Tool 175 Method of data analysis is by way to describe data according to the elements contained in each variable Data analysis here the main purpose is to test the research hypothesis The data analysis tool used is path analysis 3.6 Flow Chart Development (path diagram) The flow diagram will make it easier to see causal relationships normally expressed in terms of equations The theoretical basis for explaining relationships among variables has been described as in the framework of thought The path diagram or research model to be tested is as follows: Figure 3.1 Line Chart Model 3.7 Hypothesis Testing Research 1) Partial Testing t1 = 1-R PYX1 Y  x1 ,x  To test the Decision Criteria:  CR 11  n-k-1 hypothesis formulation above used t test with the formula, as follows: Not accepted Ho if thitung> t (0,05) (n-k-1) Accept Ho if thitung ≤ t (0.05) (n-k-1) Chapter IV: Research Result And Discussion 4.1 Research Results 4.1.1.Deskripsi Return Rate Questionnaire Distribution and collection of questionnaires was conducted for three months from December 2017 to March 2018 Questionnaires were given to 31 Banks, each Bank was given questionnaires to be addressed by the Chair / Member of the Audit Committee, Internal Audit Manager and Finance Manager with the number of questionnaires distributed 93 questionnaires Of the 93 questionnaires distributed, the number of returned questionnaires was obtained from 31 units of public bank analysis in Indonesia or 100%, with a total of 68 questionnaires from 93 submitted questionnaires or 73.12% The rate of return of the questionnaire according to Cooper and Schindler (2006: 314), the rate of return of 30% is good, and it would be better if it reached 70% Thus, the return of the questionnaire of 73.12% is a good rate of return based on the criteria proposed by Cooper and Schindler (2006: 314) 4.1.2 Views of Observation Unit The observation unit in this study is a public bank that has audit committee, internal audit, performing financial reporting and selling shares in capital market Respondents in this study are the Chairman / members of the Audit Committee, Internal Audit Unit Manager and Financial Accounting Manager as responsible persons in their respective fields / departments to respond to the statements described in the questionnaire to measure the role of the audit committee, internal audit and financial reporting quality Information on the value of the company in the observation unit of the Bank recorded in Indonesia, for the price of shares obtained from the source of the Indonesia Stock Exchange in 2015, 2016 and 2017 176 4.1.3 Test Results Validity and Reliability Research Data Testing the validity using product moment correlation (index validity) where the statement is declared valid if the correlation coefficient item statement  0.30 Then reliability testing using split-half method of Spearman Brown and the results are stated reliably if the reliability coefficient greater than 0.70 Based on the results of testing data obtained through the spread of questionnaires entirely valid and reliable 4.2 Testing 4.2.1 Testing The Effect Of Quality Of Financial Reporting To Company Value The hypothesis to be tested is the effect of the quality of financial reporting on company value Based on the results of data processing obtained coefficient path from the quality of financial reporting to corporate value can be seen in the table below Variable Y Path Coeficient 0.488 tcount 3.009 R2 = 0.238 Threshold Coefficient of T count R2 = 0.238 Source: Result by data From the table above obtained the total influence of financial reporting quality variable (X) to the value (Y) is 0.238 or 23.80% While the rest of 76.20% is the influence of other factors beyond the quality of financial reporting Visually, the path diagram of the influence of financial reporting quality on company value is shown in the following figure: Line Chart On Hypothesis Fourth Testing 1.000 – X 0.488  Y 0.762 Through the values contained in the picture above can be calculated the influence of independent variables (financial reporting quality) to the value of the company Y = 0.488 * X After the path coefficient is calculated, furthermore to prove whether the quality of financial reporting significantly influence the value of the company, then tested the following hypotheses: Hypothesis: H0: ρyx = H1: ρyx ≠ The quality of financial reporting does not affect the value of the company The quality of financial reporting affects the company's value Coefficient of Financial Reporting Quality Path Against Company Value Coefficient path tcount ttable (db:29) H0 H1 0.488 3.009 2.045 Not accept Accept Result of Testing Influence of Quality of Financial Reporting Against Company Value Based on the test results in the table above can be seen t count value of financial reporting quality variables of 3.009 and t table of 2.045 where the value t count = 3.009> t table = 2.045 Since the value of t count is greater than t table, with α = 5% it is decided not to be received H0 so that H1 is accepted 177 So based on the test results can be concluded that the quality of financial reporting has a significant positive effect on the value of the company The results of this test provide empirical evidence that the better / higher the quality of financial reporting will increase the value of the company 4.3 Discussion After the hypothesis test results are statistically, then in this section will be a descriptive discussion that explains the results of empirical tests compared with the theory put forward in the literature review (CHAPTER II) and the results of previous research 4.3.1 The Effect of Quality of Financial Reporting on Company Value The result of hypothesis testing shows that the quality of financial reporting has an effect on the value of the company Public Banks in Indonesia is 23.80% The magnitude of influence of 23.80%, according to the Guilford category, the quality of financial reporting has a weak influence on corporate value Strong weak influence refers to Guilford's opinion (1956), which determines that the magnitude of the interval 0.20 - 0.39 is in the weak classification The calculation of the condition of the value of public bank companies in Indonesia with the parameters of the value of shares in the ratio of price to book value in the last three years both the value of the ratio and growth mostly in the category of less good value The value of public bank companies in Indonesia for the value of the stock range is very wide ranging from the low of 0.427 and the highest of 102,667 The share price of the public bank is still relatively weak with only entities with two-digit ratios (above 10) and 22 entities below 10, even entities with ratios below This indicates that fundamental conditions that can increase the value of shares still need to be improved The quality of financial reporting of public banks in Indonesia shows the grand mean of 6.38 is at 6-7 intervals (very good) Although in some cases still needs to be improved as in the application of accrual and cash basis principles for revenue recognition is still not consistent, the presentation of market variant information as a feedback material for users of financial statements is still incomplete, the presentation of information in outline about the bank's annual yields both positive and negative has not been clearly disclosed There are still some weaknesses in the financial reporting process of public banks in Indonesia that is related to the consistency of the implementation of accrual basis and cash basis as the basis of measurement and recognition of income, the process of auditing financial statements by the Public Accounting Firm that still takes relatively more than months after the end of the book year to produce the financial statements of audit results, so that the publication of audited financial statements of the bank to lose momentum to meet the needs of investors The relative audit process takes time considering the complexity and many transactions and fully electronic data processing that makes public accountants more cautious before expressed their opinion on the financial statements The value of the firm is the perception of investors to the company often associated with stock prices High stock prices make the company's value high and commonly indicated by price to book value High corporate value is very important because with high corporate value will be followed by high shareholder wealth, the higher the stock price the higher the value of the company (Brigham: 1996) The results of this study are consistent with the results of research conducted by Michael Gaffikin (2008), Mingzhi (2011), Ross et.al (2011) with results showing empirical evidence that, there is a significant positive effect of financial reporting quality on stock returns, reduce the low level of investment and increase the value of the company From result of hypothesis test show that there is positive influence of financial reporting quality to public bank company value in Indonesia equal to 23,80% while the rest equal to 76,20% influenced by other factors like ownership, governance process, management integrity, condition of capital market and macro economy overall (Fama, 1978; Gerald White, 2010; Korajzyck & Levy, 2003; Kakani Ram et.al., 2001) 178 Chapter V: Conclusions And Suggestions 5.1 Conclusion Based on the formulation of the problem, the formulation of hypotheses and research results, it can be concluded as follows: The quality of financial reporting affects the value of the company, although the quality of financial reporting generated by the bank still needs to be improved in terms of: consistency of implementation of accrual basis and cash for recognition and measurement of income, process and completion of financial statement audit by public accountant which is still late 5.2 Suggestions 5.2.1 Operational Suggestions Improving the quality of bank financial reporting by applying consistently the applicable financial accounting standards, in particular the application of the accrual and cash basis principles for recognition and measurement of revenue supported by adequate accounting information system technology Accelerate the audit process of financial statements by public accountants by preparing early the process of selecting a public accounting firm that will audit financial statements It should be included in the audit committee's annual work program 5.2.2 Science Development Advice In connection with the development of accounting science, especially financial accounting, internal audit, and governance, this study has proven that the role of audit committee and internal audit has an influence on the quality of financial reporting For the next researcher can include other variables that can improve the quality of financial reporting, such as risk management, and independent commissioner, which is not writer enter as research variable This research has not revealed the influence of the quality of financial reporting to the value of the company as a whole, then for further research can examine other variables of financial reporting quality such as risk accounting, and discretionary election of accounting policy Reference Abubakar Salisu 2011 Value Relevance of Accounting Information of Listed new economy Firms in Nigeria: An empirical Investigation using Ohlson Model Journal of Management and Enterprises Development Nigeria Arnold Schneider.1999 A Test of Audit different to Financial Reporting Irregularity Using the Randomized Response Technique, The Accounting Review, American Accounting Association Bank Indonesia Regulation number 116 / PBI / 1999 on 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of the company in the observation unit of the Bank recorded in Indonesia, for the price of shares obtained from the source of the Indonesia