The Effect of Accounting Conservatism - Good Corporate Governance as a

moderator

Marselinus Asri

Atma Jaya Makassar University

marselinus.asri@yahoo.co.id

The purpose research is to examine other variables that also affect the
relationship between conservatism and earnings quality. Good Corporate Governance
is a set of mechanisms that can protect minority shareholders from expropriation by
managers and insider shareholders with an emphasis on legal mechanisms.
Data Population are companies listed in Indonesia Stock Exchange during the
period 2010-20015. The sample selection is based on purposive sampling method with
the purpose of obtaining a representative sample. An Alternative measure of
accounting conservatism used is the instrumental variables of Accounting conservatism
(VIKV) developed by Lo (2005). The quality of earnings can be measured through
discretionary accruals calculated by way of setting aside total accruals (TACC) and
nondiscretionary accruals (NDACC). In calculating DACC, Modified Jones Model is
used because it is considered better among other models to measure earnings
management (Dechow et al., 1995).
The results of this study indicate that the Instrumental Variables Conservatism
(VIK) has a significant positive effect on the Earning Quality. This means that
management positively signals the application of accounting conservatism within the
company and has an impact on improving the quality of earnings. The next investor is
expected to provide more valuations by providing a high premium for the company's
stock price.
Keywords: Accounting Conservatism, Good Corporate Governance,
Earning Quality, Modified Jones Model.

1.1 Introduction

Investors and creditors have different interests in the company. Investors are

trying to take advantage by taking excessive dividends from creditor funds. This
condition is made possible with companies with a very large managerial ownership
structure. The decision to pay an excessive dividend increases. Meanwhile creditors

want the security of funds for future profits. To avoid the transfer of profits made by
investors through excessive dividend withdrawal then the creditor wants a conservative
financial reporting.
The practice of each company's conservatism is usually different, due to the
various choices of accounting methods. Conservatism is an accounting principle that
tends to generate profit and asset values.Conservatism slows revenue recognition and
accelerates cost recognition. The results show the surrounding the application of the

principle of conservatism. Conservatism critics argue that this principle causes the
financial statements to be biased so it can not be used as a tool to evaluate corporate
risk. Conservatism is the principle that most influence accounting valuation
(Chakrabarty & Moulton, 2012; ) (Watts, 2002).
Conservatism is defined as a concept that delays the recognition of future cash
inflows and as a conservative accounting which states accountants report the lowest
accounting information of several possible values for assets and revenues, and the
highest for liability and burden (Kothari, 2012). Conservatism as a preference for
accounting methods that yields the lowest value for assets and income on the one
hand, and produces the highest value for debt and fees, on the other. Or in other
words, the conservatism produces the lowest equity book value.
Conservatism supporters argue that conservatism produces higher-quality
profits because this principle prevents corporations from exaggerating earnings and
helps users of financial statements by presenting non-overstate earnings and assets
(Feltham & Ohlson, 1995). They prove that earnings and assets calculated by
conservative accounting can improve the quality of earnings so that it can be used to
assess the company.
There are two differences in the information the manager has and the
information on the profits of the entrepreneur. First is that managers have information

about future earnings that investors do not have. Both investors are information that is
reflected in stock prices (Beaver, Mcnichols, & Price, 2007). Conservatism is part of an
efficient contract mechanism between the company and various parties (Watts, 2003).
On the basis of the contractual explanation, accounting conservatism can be used to
avoid moral hazard caused by parties with asymmetric information, limited time harish,
and limited responsibility. For example, a conservatism can withstand the manager's
opportunistic behavior in reporting accounting measures used in the
contract.Accounting earnings that are used as contract media will be more useful to
reduce agency costs arising from moral hazard, if presented conservatively (Kim, Kim,
Kwon, & Lee, 2015)
The contractual relationships proxyed with the ownership structure, debt

structure, and firm size affect the accounting conservatism. In addition, these studies

provide evidence of accounting conservatism practices in companies in Indonesia

Accounting conservatism to deal with conflicts of interest around the dividend policy
Researchers suspect that there are other variables that contribute to the relationship
between conservatism and earnings quality.Good Corporate Governance is a set of
mechanisms that can protect the minority shareholders from expropriation by
managers and controlling shareholders (insider) With an emphasis on legal

mechanisms. The legal approach of corporate governance means that the key

mechanism of corporate governance is the protection of external investors, both

shareholders and creditors, through a legal system that can be interpreted by law and
its implementation.
Of all the information about the company available throughout the year, some or
more are derived from the income number of the year (Ball & Brown, 1968). The
reported earnings quality can be affected by managerial share ownership. Managerial
share ownership is one of the elements of Good Corporate Governance.
The increase in operating current accrual changes being considered a specific risk
reduction company. This is because the Indonesian capital market investors more
trading within a short time (Asri, Ali, Habbe, & Rura, 2017)
Pressure from capital markets causes firms with low managerial ownership to
choose accounting methods that increase reported earnings, which in fact do not

reflect the economic circumstances of the companies concerned. On the basis of this

research institute, and enter the GCG seabagai variables that influence relationships
accounting conservatism and earnings quality. This study tried to examine whether the
selection of companies to adopt conservative accounting policies affect the earnings
quality is moderated by Good Corporate Governance
1.2. Formulation of the problem
Based on the background of the problem that there are still pros and cons about the
research about the effect of applying accounting conservatism to earnings
quality. Researchers incorporate good corporate governance as a moderating variable,
researchers want to obtain empirical evidence about the effect of accounting
conservatism on the performance moderated good corporate governance.
In this research the issues to be answered are:

1. Does Accounting Conservatism affect the earning quality

2. Does managerial ownership affect the relationship of accounting conservatism
with earning quality
3. Does Institutional ownership affect the relationship of accounting conservatism
with earning quality
4. Does the Number of Commissioners affect the relationship of accounting
conservatism with the earning quality
5. Does the existence of the audit committee affect the relationship of accounting
conservatism with earning quality

1.3. Research purposes

This study is intended to assess the effect of accounting policy on accounting
conservatism on earnings quality.
The objectives of this research are:

1. To test whether Accounting Conservatism has an effect on the earning quality

2. To test whether managerial ownership affects the relationship of accounting
conservatism with earning quality
3. To test whether institutional ownership affects the relationship of accounting
conservatism with earning quality
4. To test whether the Number of Commissioners affects the relationship of
accounting conservatism with the earning quality
5. To test whether the existence of the Audit committee influences the relationship
of accounting conservatism with earning quality
1.4. Research Benefits
The benefits of this study are as follows:

1. The results of this study can be useful information investor and management
company about the application of conservative accounting as a signal to
improve the quality of earning.
2. As reference material for those who want to do research with the same object
but with different background.

LITERATURE REVIEW AND DEVELOPMENT OF HYPOTHESES

2.1. Signal Theory

Managers provide information through financial statements that they apply a

conservatism accounting policy that results in higher-quality profits because this
principle prevents corporations from exaggerating earnings and helps users of financial

statements by presenting profits and assets that are not overstate. The signal theory

explains that signals are performed by managers to reduce information asymmetry. In

practice, management implements conservative accounting policies by calculating high

depreciation that will result in relatively permanent low profits which means that it has

no temporary effect on declining profits that will reverse in the future. Voluntary

changes and differences in accounting techniques have an effect on investors,

companies and managers (Lev & Ohlson, 1983).
Managers make accrual income decresing, as long as import relief

investigation. This is in line with the earnings management hypothesis (Jones, 1991).

Companies operating in complex environments have a degree of difference in

information asymmetry limited by the flexibility of acquiring reporting technology

(Bartov, Givoly, & Hayn, 2002). The net asset presented in systematic or relatively

permanent understatement is a hallmark of accounting conservatism, so it can be said

that accounting conservatism produces higher-quality profits because this principle
prevents corporations from exaggerating earnings and helps users with financial
statements presenting profits and assets that are not overstate (Watts, 2002). Financial

statement analysts identify the aspects of the relevant financial statements for the

decision on achievement (Penman & Zhang, 2006). On average, analyst reports have

the power of information that is the market reaction on the date the analyst announces

the report is greater than the previous result. The analyst's activity is sensitive to

factors related to the demand and supply of information research (Frankel & Litov,
2009).
Accounting conservatism reflects a permanent policy of accounting (. Penman &
Zhang, 2002). Empirically their research indicates that qualified earnings are obtained if
management applies conservative accounting consistently without any change in

accounting methods or changes in estimates. Understatement profit and net assets are

relatively permanent, demonstrated by the financial statements is a positive signal from

management to investors that management has implemented a conservative

accounting to produce quality earnings. Investors are expected to receive this signal

and rate the company higher.

2.2. Alternative Size of Accounting Conservatism

Conservatism and recognition delays (delayed recognition) is key in financial

reporting systems (Beaver, 1968). Disclosure and recognition are the two main

methods used by firms to communicate the results of financial statements to the

investment community (Zach, 2003). Conservative accounting is concerned not only

with the selection of accounting methods, but also the estimates that are often applied

in relation to accrual accounting (Penman and Zhang, 2002). Conservatism is an

accounting practice that reduces earnings (and lowers net assets) when faced with bad
news, but does not increase profits (and increase net asset value) when responding to
good news (Sewell, 2010) (Basu, 1997) ( Dechow, 1994).
According to Watts (2003) the explanation of earnings management seems to fit the
literature on conservatism for the following reasons:
(1) establish a net assets reserve that is understate,
(2) remove the negative stock return, potentially giving An asymmetric earnings / stock
return relationship,
(3) the initial loss will be temporary, followed by higher profit Permanently generated by
backup use.
From the above explanations it is known that discretionary accruals can also be
influenced by the financial condition of the company so that the users of financial
statements need to understand the possibility that the changes in accounting profit in
addition to influenced accounting conservatism policy also by earnings management.

Accounting conservatism is not the result of earnings management. Therefore,

this study will use an alternative measurement of accounting conservatism created by

(Lo, 2005), a model based on the idea that accounting conservatism is one of the
causes of discretionary accruals, in addition to earnings management.Using
discretionary accruals resulting from the accounting conservatism policy alone and not
using total discretionary accruals because in total discretionary accrual there is also a
component of profit management.

2.3. Assessment of Earning Quality

The main issues faced by economics, finance and accounting are related to the
relationship between profits reported by companies and their stock prices (Kothari,

2012). There is a relationship between accounting earnings and stock returns. There

are three theoretical relationships developed by Beaver (1998) as the initial framework

for understanding the relationship of earnings with stock returns. The first relationship

is the profit of the present period is useful information to predict future earnings. The

second relationship is the prediction of future earnings is a useful input in developing

dividend expectations. The third relationship is the present value of dividend

expectations determining stock prices. This structure of theory presents a useful

framework for understanding the relevant value of profit, and how to analyze the value
implications of Profit information (Houqe, van Zijl, Dunstan, & Karim, 2012) (Martin,
2007).
The research using market to book ratio proxy for equity valuation is strongly

influenced by the selection of accounting methods used by firms. use market to book
ratios that reflect market value relative to firm value. The ratio of market value to book

value provides the final and perhaps most comprehensive assessment of the status of

the company's stock market. This ratio summarizes the investor's view of the company

as a whole, its management, its earnings, its liquidity, and its future prospects.
Therefore, by looking at this ratio can be seen the market reaction of positive signals
from the company about the implementation of accounting conservatism given through

the financial statements. The quality of earnings can be measured through

discretionary accruals (DACC) calculated by way of setting aside total accruals (TACC)

and nondiscretionary accruals (NDACC). In calculating DACC, Modified Jones Model is

used because it is considered better among other models to measure earnings

management (Dechow, Sloan, & Sweeney, 1995). In this study the earning quality is

measured by Modified Jones Model.

2.4 Corporate Governance and agency Perspective

Unresolved issues are theme markets (efficiency, and assessment), Individual
Behavior (Investors, analysts and managers) and accounting structures. Accounting
research becomes useful as far as confronting the first two themes with the third theme
(Lafond, 2005). The choice of accounting policy relates to size and debt settlement with
management compensation schemes.
The agency relations perspective is the foundation that is used to understand
corporate governance.The agency relationship arises when one or more people
(principal) hire another person (agent) to provide services and then delegate decision-
making authority to the agent (Jensen & Meckling, 1976). The agency relationship is a
contract between the principal and the agent (Mueller, 2008)). The essence of the
agency relationship is the separation between ownership (on the principal / investor
side) and control (on the part of agent / manager). Agency theory developed by
Mikhael Jhonson, considers that corporate management as an "agent" for shareholders
will act with full awareness for its own interests, not as a wise and fair and fair to
shareholders. In subsequent developments, agency theory received a broader
response because it looked more reflective of the reality.
Investors have hope that managers will generate returns from the money they
invest. Therefore a good contract between investor and manager is a contract that is
able to explain what specifications will be done by managers in managing investors'
funds, the specification of the holder of returns between managers and
investors. Ideally investors and managers should sign a complete contract, which
specifies exactly what the manager will do in what the odds are and how the company's
profits will be allocated. Most contingency factors are difficult to see or predict in

advance so that a complete contract is difficult to manifest. Thus the investor is

required to grant the residual return to the manager the right to make a decision under
certain conditions not previously seen in the contract.
The residual control rights owned by managers make it possible to be
misappropriated and will create agency problems that can be interpreted with the
difficulty of investors acquiring confidence that the funds they are investing are not in
the correct school by the manager. The manager has the right to manage the company
thereby, the manager has a discretionary right in managing investor funds.
Based on the company's ownership structure found, La Porta et al. (1998,1999)
and (Claessens, Djankov, & Lang, 1999) finds the agency problem to be considered in
modern companies is an agency problem between controlling shareholders and
minorities, especially in developing countries. On the other hand La suggests the
importance of the role of corporate governance practices to protect minority
shareholders. stated that companies with proprietary structures spread to outside
investors need to implement corporate governance to increase the authority of public
shareholders in order to balance management.
Expropriation by managers can be done in various ways or forms ranging from
embezzlement of investor funds, selling company products to companies owned by
managers at lower prices at market prices, to selling other company assets to
companies owned by managers. Even the most severe, expropriation made by
managers can be in the form of retaining office or job position even though they are not
berkopeten or quality again in running its business (Shleifer & Vishny, 1997) argues
that investor protection is crucial in corporate governance, as there is considerable
expropriation of minority shareholders and shareholders of bonds by controlling
stocks. According to them the legal approach is the most important approach to
protecting foreign investors in corporate governance
(Jensen & Meckling, 1976) indicate the presence of three additional elements
that can limit the behavior of irregularities perpetrated by agents. These elements are
the operation of the managerial labor market, the working of the capital market and the
element of the market work for the desire to dominate and mamiliki or dominate the
ownership of the company. The agent may not be in the future if the performance is

bad so that it is dismissed by the shareholders. The managerial labor market will
remove the chance of managers who are not performing well and behave in a way that
defies the wishes of the shareholders of the company they manage. The efficient
operation of capital markets can be a mirror of the manager's performance of the
company's stock price. The working of the market for corporate control may inhibit the
act of self-benefit, the manager himself in terms of stopping the manager from his
position if the company under his management has a low performance that allows new
shareholders to replace him with other managers after the company is taken over.
The agency theory seeks to address agency problems that occur on the parties
- parties working together have different goals and division of labor. In particular,
agency theory discusses the existence of a relationship, in which a certain party
(principal) delegate the work to another party (agent) who do the work.Agency theory is
emphasized to address two issues that can occur in agency relationships. First is the
agency problem arising when (a) the desires or purposes of the opposing principal and
agent (b) and it is difficult or expensive for the principal to verify what the agent actually
does. The problem is that the principal can not verify whether the agent has done

something appropriately. The second is the problem of risk sharing that arises when
the principal and the agent have different attitudes toward risk.
Agency theory is based on several assumptions. These assumptions are
divided into three types: assumptions about human nature, organizational assumptions
and information assumptions. The assumption of human nature emphasizes that
human beings have selfishness and dislike risk. Organizational assumption is a conflict

between members of an organization. The assumption of information is that

information as a commodity that can be traded.
Conflicts of interest are due to the possibility that the agent does not always act
in the interests of the principal that leads to agency costs. The Principal may limit the
divergence of its interests by establishing appropriate incentives by incurring
monitoring costs designed to limit misbehavior by agents
With regards to agency issues, corporate governance is a concept based on
agency theory, expected to serve as a tool to give investors confidence that they will
receive return on the funds they have invested.Corporate governance deals with how
investors believe managers will not steal, embezzle and invest in unprofitable projects
with funds invested by investors, and relate to how investors control managers.
Corporate governance is a key element in improving economic efficiency which
includes a series of relationships between the Management and the company's board
of directors. Corporate governance also provides a structure that facilitates the
determination of the objectives of a company and as a goal to achieve those goals and
the means to determine performance monitoring techniques.
2.5.Corporate Governance.
Based on the concept behind the development of corporate governance, there
are various definitions of corporate governance. (Shleifer & Vishny, 1997) define
corporate governance as "deals with the wais in which suppliers on finance to
corporations assume themselves of getting a return on their investment" ie processes
related to the ways in which stockholders Ensuring that they get a return on their
investment. defines corporate governance as the effectiveness of mechanisms aimed
at minimizing agency conflict in particular emphasis on legal mechanisms that prevent
expropriation of minority shareholders.
Corporate governance is a key element in improving economic efficiency which
includes a series of relationships between the company's management, its board, its
shareholders and other stekeholder.Corporate governance also provides a structure
that facilitates the determination of suggestions from a company and as a means to
achieve those goals and means for determining monitoring techniques.
 Implementation of the principle of good corporate governance concretely has
the objectives of the company, among others: facilitate access to domestic and foreign
investment, get a cheaper cos of capital, give better decisions in improving the
performance of the company, increase confidence and trustworthiness of stakeholders
against the company, Directors and commissioners of lawsuits and protect the rights of
minority shareholders.
If the fulfillment of interest becomes balanced then the conflict of interest that
occurs can be directed and controlled so as not to cause harm to each
party. Therefore, the principles of good corporate governance memengang important
role, among others: (1) the fulfillment of important information relating to the
performance of an company as consideration for shareholders or potential investors to
invest their capital. (2) the protection of the shareholder position from the misuse of
authority and fraud which may be exercised by the directors or commissioners of the
company (3) the responsibility of the company to fulfill and enforce any rules prescribed
by its domestic law or place of domicile consistently, In the environment, business
competition, employment, taxation and so on. This will be a strong reason for the
severity of shareholders including minority shareholders to obtain justice through the
implementation of GCG.
The capital market also needs to apply GCG principles to public
companies. This is demonstrated through various regulations issued by the Indonesia
Stock Exchange, which states that all listed companies must implement GCG, are
required to increase the protection of interests of investors, especially shareholders in
public companies.
Corporate governance perception index (CGPI) is a rating of corporate
governance IICG based on 7 (seven) criteria, namely (1) corporate commitment to
corporate governance, this explains the extent to which the company is concerned
about the spirit of GCG (2) General Shareholders (AGM) and the treatment of minority
shareholders, including timeliness of the GMS implementation and assurance of
protection of the rights of shareholders including minority shares (3) board of
commissioners, possessing competent board of commissioners in their fields and how
optimal their roles and responsibilities Good governance, (4) the structure of the board
of directors, the competent board of directors in their field and the role and
responsibility of the board of directors in the implementation of good corporate
governance (5) relationships with stakeholders, bangaimana with relationships and
responsibilities with the parties associated with Company (6) transparency and
accountability, requiring open, timely, clear, comparable information regarding financial,
management and ownership of the enterprise (7) responses to IICG research.The
extent to which the seriousness of the respondents to follow this research.
The existence of corporate governance ranking in the form of CGPI, we can
surmise that the company that was ranked above better than the rank below. So as to
allow for differences in market reaction among companies that enter the top ten and
Non ten large.
Benefits of implementing good corporate governance, for example: trusted
investors, business partners and creditors, become more linear because the division of
tasks and clear authority; Consideration of strength among the internal structure of the

company ie directors, commissioners, audit committees, and so on; Decision making

becomes more accountable and more cautious for sustainable companies.

2.6. Development of Hypotheses

The researchers say there has been an increase in the conservatism of

accounting standards globally.This increase is due to increased lawsuits, so that
auditors and managers tend to protect themselves by always reporting conservative
figures in their financial statements (Bartov et al., 2002) . Empirically (Penman &
Zhang, 2002) research shows that quality earnings are obtained if management apply
conservative accounting consistently without any change in accounting methods or

estimation changes. Watts (2003) states that a systematic or relatively permanent net

asset understatement as a hallmark of accounting conservatism has helped users of

financial statements by presenting profits and assets that are not overstate.
In Indonesia, the research on accounting conservatism proved that in general,
firms choose accounting conservatism, which uses the C-Score as a proxy for
conservatism prove that conservatism has a relevance value, so that the financial
statements of companies that apply the principles of conservatism may reflect the
market value of the company. Their research shows that the total accruals
(discretionary and non-discretionary accrual) significant positive effect on the value of
the company
The application of conservative accounting policies in the show through the
financial statements is a positive signal from management to investors that
management has implemented a conservative accounting to produce quality
earnings. Based on the description above can be hypothesized as follows:
H1: accounting conservatism positive effect on earning quality.
Their results are pros and cons about research on the effect of the application of
accounting conservatism on assessing the quality of corporate profits encourage
researchers to incorporate good corporate governance as moderating
variables. Researchers suspect that there are other variables that menginteraksi effect
of accounting conservatism on accounting earnings quality associated with the
principle of conservatism.
The main objective of the company, is increasing the value of the company. The low
quality of earnings will be able to make the decision-making errors of the wearer such
as investors and creditors, so the value of the company will be reduced, stated the
company's value will be reflected in the market price of its shares. Profit as part of the
financial statements which do not present the true facts about the economic condition
of the company can be questionable quality. Profits do not show the actual information
about management performance can mislead the users of the report. If profits like this
are used by investors to establish the market value of the company, then profits can
not explain the actual market value of the company. The quality of reported earnings
can be influenced by managerial stock ownership. The pressure from the capital
markets led to the company with a low managerial ownership will choose accounting
methods that increase reported earnings, which does not reflect the economic situation
of the companies concerned, also examined the effect of managerial ownership on
earnings quality as measured by discretionary accruals and the company's value as
measured by Tobin's Q, concluded from the test results that managerial ownership
affect positively on the quality of earnings, whereas the effect of managerial ownership
on firm value is negative.
Based on the description above can be hypothesized as follows:
H2a: managerial ownership affect the relationship between accounting
conservatism with earnings quality.
 In conjunction with a monitor function, institutional investors are believed to
have the ability to monitor management actions better than individual investors.
According to Lee et al., (1992) mentions two differences of opinion regarding
institutional investors. The first opinion is based on the view that institutional investors
are the temporary owner (owner transfer) so that only focused on current income
(current earnings). Changes in current profits can influence decisions of institutional
investors. If this change is not perceived benefit by the investor, the investor can
liquidate their shares. The results of the research states that institutional investors
typically have a large number of shares, so that if they liquidate its stock will affect the
overall value of the stock.To avoid liquidation actions of investors, managers will
perform earnings management.
The second opinion institutional investors regard as an experienced investor
(sophisticated). According to this opinion, investors are more focused on the future
earnings (future earnings) greater relative of current profits. Shiller and Pound (1989)
explains that the institutional investors have spent more time to analyze investment and
they have access to information that is too expensive acquisition for other
investors. Institutional investors will monitor effectively and will not be easily misled by
the actions managers manipulation. Research states that the value of the company
(Tobin's Q) is influenced by managerial ownership, institutional and size of the board of
directors.
Based on the description above can be hypothesized as follows:
H2b : institutional ownership affects the relationship conservatism and earnings
quality.
Percentage of board of directors from outside the company independent
significantly negative effect on discretionary accrual (Jiraporn, Miller, Suk, & Kim,
2008). Research (Zimmerman & Carter, 2003) concluded that the composition of the
board of directors from outside better able to reduce fraudulent financial reporting than
the presence of the audit committee. The study also shows that the size of the board
and the characteristics of the commissioners who come from outside the company
affects the likelihood of fraudulent financial reporting.
(Jiang, Lee, & Anandarajan, 2008) examined the effect of corporate governance
of operating performance (return on equity, profit margins, and sales growth),
assessment (Tobin's Q) and the shareholder payout (dividend yield and share
repurchases). Corporate governance is measured by using the Gov-Score, which is
based on data provided Institutional Shareholder Services. Gov-Score is a mixture of
51 factors that include eight categories of corporate governance among other audit and
board of directors. Research results mention that companies with better governance is
relatively more profitable, have more Tobin's Q and payments to shareholders better.
(Wang, 2014)also found that companies with independent boards have a return on
equity,profit margins and a higher dividend yield.
Based on the description above, the hypothesis is:
H2C: Number of Commissioners positive effect on the relationship between
accounting conservatism with earnings quality.
The Audit Committee, conservatism and Quality of Earnings (Jiraporn et al., 2008),
(Chang, 2013) tested the effectiveness of audit committees in reducing earnings
management performed by the management. Research results mention that the audit
committee of external origin are able to protect the interests of shareholders of
earnings management actions undertaken by management, that the existence of the
audit committee have a positive impact on the quality of earnings and enterprise value
which is calculated by Tobin's Q. This gives evidence that the existence of an audit
committee can improve the effectiveness of the company's performance.
From the description above, the hypothesis in this study are:
H2D: Audit committee Presence affect relations accounting conservatism on
earnings quality.
Stages Model analysis is as follows:
Model (1): KL = β 0 + β 1 VIKV + β 2 Ko + β 3 KI + β 4 KM + β 5 KA + ε
Model (2a): KL = β 0 + β 1 VIKV + β 2 KM + ε
Model (2b): KL = β 0 + β 1 VIKV + β 2 KM + β 6 VIK * KM + ε
Model (3a): KL = β 0 + β 1 VIKV + β 2 Ko + ε
Model (3b): KL = β 0 + β 1 VIKV + β 2 Ko + β 3 VIKV * Ko + ε
Model (4a): KL = β 0 + β 1 VIKV + β 2 KA + ε
Model (4b): KL = β 0 + β 1 VIKV + β 2 KA + β 3 VIKV * KA + ε
Model (5a): KL = β 0 + β 1 VIKV + β 2 KI + ε
Model (5b): KL = β 0 + β 1 VIKV + β 2 KI + β 3 VIKV * KI + ε
Multiple Linear Regression Analysis:
KL = β 0 + β 1 VIKV + β 2 KM + β 3 Ko + β 4 KA + β 5 KI + β 6 VIK * KM + β 7 VIKV * Ko +
β 8 VIKV * KA + β 9 VIKV * KI + ε
KL = earnings quality
TACC it = EBXT it - OCF it
TACC it / TA i, t-1 = α 1 (1 / N i, t-1 ) + α 2 ((ΔREV it ) / TA i, t-1 ) + α 3 (PPE it / TA i, t- 1 ) + ε it
NDACC it = α 1 (1 / TA i, t1 ) + α 2 ((ΔREV it - ΔREC it ) / TA i, t1 ) + α 3 (PPE it / TA i, t1 ).
DACC it = (TACC it / TA i, t-1 ) - NDACC it
TACC it = Total Accrual is measured as the difference between net income before
extraordinary item (EBXT it ) with operating cash flow (OCF it )
VIKV = Variable conservatism Instruments
Is the predicted value of the dependent variable regression with LBKNBLPJ where
independent variables INVRPDA, UDA, ULUDA, and DEPA.
1. Accounts receivable, namely abnormal Cross-sectional regression residuals
Receivable (PD) on net sales change (Δ Pjln jt ) for firm j in year t, using a total fixed
assets as deflators (A) with the following formula:
PD jt / A it-1 = β1 it (1 / A jt-1 ) + β2 it (Δ Pjln jt / A jt-1 ) + ε
The study used reverse abnormal trade receivables (inv PDA) divided by total aktva
year t-1 as a proxy for the level of accounting conservatism. Inv PDA calculated by
multiplying the PDA to PDA to-1. INVPDA positive sign shows the organization of
accounting knsrvatif and vice versa.
2. Preparations abnormal namely Cross-sectional regression residuals preparations
(SDN) at perubahankos goods sold (ΔKBD jt ) for firm j in year t, using a total fixed
assets as deflators (A) with the following formula:
SDN jt / A it-1 = β1 it (1 / A jt-1 ) + β2 it (Δ KBD jt / A jt-1 ) + ε
The study used reverse abnormal dosage (inv SDA) divided by total aktva year t-1 as a
proxy for the level of accounting conservatism. Inv SDA SDA is calculated by
multiplying by -1. INVSDA positive sign shows the organization of accounting knsrvatif
and vice versa.
3. Debt abnormal trade is cross-sectional regression residuals Payable (UD) in Kos
goods sold (Δ KBD jt ) for firm j in year t, using a total fixed assets as deflators (A) with
the following formula:
UD jt / A it-1 = β1 it (1 / A jt-1 ) + β2 it (Δ Pjln jt / A jt-1 ) + ε
The study used reverse abnormal trade debt (inv UDA) divided by total aktva year t-1
as a proxy for the level of accounting conservatism. Inv UDA UDA is calculated by
multiplying by -1. INVUDA positive sign shows the organization of accounting knsrvatif
and vice versa.
4. Good Debt other than trade debts abnormal namely Cross-sectional regression
residuals in addition to the debt Trade Utanglancar abnormal (UL-UD) on net sales
change (Δ PJLN jt ) for firm j in year t, using a total fixed assets as deflators (A) with the
following formula:
(UL- UD jt) / A it-1 = β1 it (1 / A jt-1 ) + β2 it (Δ Pjln jt / A jt-1 ) + ε
The study used the good debt other than trade debts abnormal (UL- UDA) divided by
total aktva year t-1 as a proxy for the level of accounting conservatism. UL UDA
implementation of accounting is positive show knsrvatif and vice versa. Components of
good debt is debt other than trade payables VAT, gifts debt, the debt commission,
other yag contingent debt, and other fees that are unpaid.
5. Cost Depreciation and amortization abnormal namely Cross-sectional regression
residuals Depreciation and amortization (DEP) on gross fixed assets (ATB ) for firm j in
year t, using a total fixed assets as deflators (A) with the following formula:
(DEP jt) / A it-1 = β1 it (1 / A jt-1 ) + β2 it (ATB jt / A jt-1 ) + ε
This study uses abnormal depreciation and amortization expense (DEPA) divided by
total aktva year t-1 as a proxy for the level of conservatism akuntansi.DEPA positive
sign shows the organization of accounting knsrvatif and vice versa.
The variable element of moderation Good Corporate Governance
KM = Proportion Managerial Ownership
Ko = Proportion of commissioners
KA = Audit Committee
KI = The proportion of institutional ownership
VIK * KM = interaction variable conservatism instrument with Managerial Ownership
VIK * Ko = Interaction Variable Composition instruments conservatism with
Commissioner
VIK * KI = interaction variable conservatism instrument with the audit committee
VIK * KM = interaction variable conservatism instrument with Institutional Ownership
ε = error
 RESEARCH METHODS

3.1. Population, Sample and Data Collection Techniques

The population of this research is all public companies listed in Indonesia Stock
Exchange during the period 2011-2015. The sample selection is based on purposive
sampling method with the purpose of obtaining a representative sample in accordance
with the criteria specified. Criteria companies sampled in this research are included in
this type of manufacturing companies listed in Indonesia Stock Exchange during the
period 2011-2015, published financial statements for the period ended December 31
during the observation period 2003-2007.

3.2. Variables and measurement

The independent variables: Instrumental Variable conservatism (VIK).

Independent variable is accounting conservatism as measured by the instrumental
variable accounting conservatism (VIKV) are made using 8 (eight) proxy that allegedly
can catch construct conservatism based definitions accounting conservatism as a
tendency to debase the value of assets, raising debt, recognizing revenue more slowly,
and recognizes the costs more quickly.
Alternative measures used accounting conservatism is an instrumental variable
accounting conservatism (VIKV) developed by (Lo, 2005).
VIKV formed from the predicted value LBKNBLPJ regression with the dependent
variable and the independent variables INVRPDA, UDA, ULUDA, and DEPA.
LBKNBLPJ = excess taxable income above the income before tax divided by total
assets in year t-1.
INVRPDA = residuals from a cross-sectional regression accounts receivable (PDjt) on
changes in net sales (PJLNjt) for firm j in year t, using total assets t-1 as the deflator
(A). The study used reverse abnormal trade receivables (INVRPDA) divided by total
assets year t-1 as a proxy for the level of accounting konseravtisme. INVRPDA PDA is
calculated by multiplying by -1.
UDA = residuals from a cross-sectional regression payables (UDjt) on changes kos
goods sold (KBDjt) for firm j in year t, using total assets t-1 as the deflator (A).
ULUDA = residuals from a cross-sectional regression good debt other than trade
payables [(UL-UD) jt] on changes in net sales (PJLNjt) for firm j in year t, using total
assets t-1 as the deflator (A).
DEPA = residuals from a cross-sectional regression in depreciation and amortization
(DEPjt) on gross fixed assets (ATBjt) for firm j in year t, using total assets t-1 as the
deflator (A).
Dependent variables: Quality of Earnings
Earnings quality can be measured by discretionary accruals are calculated by
menselisihkan total accruals (TACC) and nondiscretionary accruals (NDACC). In
calculating the DACC, Modified Jones model used for this model is considered better
among other models to measure earnings management (Dechow et al, 1995). The
model calculation is as follows:

TACC it = EBXT it - OCF it

TACC it / TA i, t-1 = α 1 (1 / N i, t-1 ) + α 2 ((ΔREV it ) / TA i, t-1 ) + α 3 (PPE it / TA i, t- 1 ) + ε it
NDACC it = α 1 (1 / TA i, t1 ) + α 2 ((ΔREV it - ΔREC it ) / TA i, t1 ) + α 3 (PPE it / TA i, t1 ).
DACC it = (TACC it / TA i, t-1 ) - NDACC it
Variable Moderation: Good Corporate Governance (GCG)
Variable Moderation is the Good Corporate Governance (GCG) associated with GCG
elements, namely:
The proportion of Managerial Ownership (KM)
The proportion of commissioners (Ko)
Audit Committee (KA)
The proportion of institutional ownership (KI)

3.3. Data analysis method

A. Correlation analysis

This analysis is used to determine the relationship between the variables studied. This
variable consists of variables Instrument conservatism (VIK), earnings quality,
managerial ownership, Commissioner, the Committee and Institutional Ownership.

B. Multiple Linear Regression Analysis

This analysis is used to examine the effect of which is Independent Variable Variable
conservatism Instruments (VIK) and Variable Moderation consists of: managerial
ownership, Commissioner, the Committee and Institutional Ownership on the Quality of
earnings The model Multiple Linear Regression Analysis to test the following
hypothesis:
 KL = β 0 + β 1 VIKV + β 2 KM + β 3 Ko + β 4 KA + β 5 KI + β 6 VIK * KM + β 7 VIKV *
Ko + β 8 VIKV * KA + β 9 VIKV * KI + ε
KL = earnings quality
VIKV = Variable conservatism Instruments
Is the predicted value of the dependent variable regression with LBKNBLPJ
where independent variables INVRPDA, UDA, ULUDA, and DEPA.
KM = Proportion Managerial Ownership
Ko = Proportion of commissioners
KA = Audit Committee
KI = The proportion of institutional ownership
ε = error

DISCUSSION
4.1 Variable Instruments conservatism (VIK)
the predicted value of the dependent variable regression with LBKNBLPJ where
independent variables INVRPDA, UDA, ULUDA, and DEPA.
1. Accounts receivable, namely abnormal Cross-sectional regression residuals
Receivable (PD) on net sales change (Δ Pjln jt ) for firm j in year t, using a total fixed
assets as deflators (A) with the following formula: PD jt / A it-1 = β1 it (1 / A jt-1 ) + β2 it (Δ
Pjln jt / A jt-1 ) + ε
The study used reverse abnormal trade receivables (inv PDA) divided by total aktva
year t-1 as a proxy for the level of accounting conservatism. Inv PDA calculated by
multiplying the PDA to PDA to-1. INVPDA positive sign shows the organization of
accounting knsrvatif and vice versa.
2. Preparations abnormal namely Cross-sectional regression residuals preparations
(SDN) at cost of goods sold (ΔKBD jt ) for firm j in year t, using a total fixed assets as
deflators (A) with the following formula:
SDN jt / A it-1 = β1 it (1 / A jt-1 ) + β2 it (Δ KBD jt / A jt-1 ) + ε
The study used reverse abnormal dosage (inv SDA) divided by total aktva year t-1 as a
proxy for the level of accounting conservatism. Inv SDA SDA is calculated by
multiplying by -1. INVSDA positive sign shows the organization of accounting knsrvatif
and vice versa.
3. Debt abnormal trade is cross-sectional regression residuals Payable (UD) in Kos
goods sold (Δ KBD jt ) for firm j in year t, using a total fixed assets as deflators (A) with
the following formula:
UD jt / A it-1 = β1 it (1 / A jt-1 ) + β2 it (Δ Pjln jt / A jt-1 ) + ε
The study used reverse abnormal trade debt (inv UDA) divided by total aktva year t-1
as a proxy for the level of accounting conservatism. Inv UDA UDA is calculated by
multiplying by -1. INVUDA positive sign shows the organization of accounting knsrvatif
and vice versa.
4. Good Debt other than trade debts abnormal namely Cross-sectional regression
residuals in addition to the debt Trade Utanglancar abnormal (UL-UD) on net sales
change (Δ PJLN jt ) for firm j in year t, using a total fixed assets as deflators (A) with the
following formula:
(UL- UD jt) / A it-1 = β1 it (1 / A jt-1 ) + β2 it (Δ Pjln jt / A jt-1 ) + ε
The study used the good debt other than trade debts abnormal (UL- UDA) divided by
total aktva year t-1 as a proxy for the level of accounting conservatism. UL UDA
implementation of accounting is positive show knsrvatif and vice versa. Components of
good debt is debt other than trade payables VAT, gifts debt, the debt commission,
other yag contingent debt, and other fees that are unpaid.
5. Cost Depreciation and amortization abnormal namely Cross-sectional regression
residuals Depreciation and amortization (DEP) on gross fixed assets (ATB ) for firm j in
year t, using a total fixed assets as deflators (A) with the following formula:
(DEP jt) / A it-1 = β1 it (1 / A jt-1 ) + β2 it (ATB jt / A jt-1 ) + ε
This study uses abnormal depreciation and amortization expense (DEPA) divided by
total aktva year t-1 as a proxy for the level of conservatism akuntansi.DEPA positive
sign shows the organization of accounting knsrvatif and vice versa.

4.3 Descriptive Statistics

The sampling process generates 28 companies for research period 2003 to 2007,
resulting in 112 observations. To obtain an overview of the research data samples can
be seen descriptive statistics such research in table 4.10 presents the descriptive
statistics of data samples ( data panel ) in the period 2003 to 2007
 table 4.10
Descriptive statistics
variable N Minimum Maximum Mean Std. Deviation

Institusional ownership 112 .27500 .97950 .7530938 .17378429

Managerial ownership 112 .00000 17.31000 .005020045 1.94662991

Independent Com. 112 .00000 .66667 .2318812 .22462852

audit committee 112 0 1 .51 .502
Conservatism 112 -0.61 0.33 0.10 0:14

Earning Quality 112 -3682 2.608 .00000 .986394

Valid N (listwise) 112

Source: Appendix SPSS

VIK dependent variable showed an average of 0:10 to 0:14 while the standard
deviation Earnings Quality variable as an independent variable has an average of
0.000 with a standard deviation of 0.986394. VIK dependent variable showed that the
average standard deviation 0:10 to 0:14 .Variabel moderation proportion of institutional
ownership represents the average deviation standar0 0 .7530938 with .17378429. The
proportion of institutional ownership moderating variable indicates the average
deviation standar0 0 .7530938 with moderation .17378429..Variabel Proportion
Managerial ownership shows the average standard deviation 0.5020045dengan
0. 1.94662991.
Moderating variable proportion of independent commissioners showed the average
standard deviation 0,2318812dengan. 0.22462852
4.4 Hypothesis Testing
Simple Analysis 4.4.1 Regression Coefficients
Regression analysis serves to measure the effect of variable VIK against the
quality of earnings. Therefore, before described a discussion of regression analysis, it
first has to be presented the results of the regression data processed by using SPSS
version 17 that can be seen through Table 7 below:

table 4.11
Variable Regression Instruments conservatism and Quality of Earnings
 Model unstandardized Coefficient t count Sig Ket.
B Std error
1. Constant -0.374 0102 -3671 000 Significant
Conservatism 3,587 0593 6.053 0.00
R = 0.500
R 2 = 0.250 Sig = 0,000
Source: Appendix SPSS
Based on the results table 7 regression data processing between VIK with
earnings quality companies listed on the Indonesia Stock Exchange regression
equation, it can be presented as follows: Earning Quality = - 0.374 + 3,587 VIK
The regression equation above statistics can be translated as follows:

a. The constant of -0.374 states that if VIK equal to zero (0), then the earnings
quality is equal to -0.374. Accounting policy choices that are conservative cause
the performance of the company to be ugly and ultimately have an impact on
the financial statements produced by the company. If the company has a bad
performance, the quality of the profit generated by the company is also ugly.
b. VIK regression coefficient for states that every increase of 1% VIK, will improve
the quality of the profit of 3587%.

The above test results show that conservative accounting policy choices
significantly and positively impact on the quality of earnings because the value
of p value = 0.000 less than the value of α = 0.05. This means that Vikt within the
company. With the selection of accounting conservatism policies have an impact on the
quality of the profit generated by the company to be qualified
4.4.2 Analysis of Determinant Coefficient
Determination coefficient analysis was conducted to determine how large the
percentage of variation of the independent variables used in the model is able to
explain the variation of the dependent variable. As the results of the model
output summary in table 8, visible determination coefficient of 0.250 means that
variations in the dependent variable earnings quality can be explained by variations in
the independent variable of the audit committee only by 25%, and the rest of 75% is
explained by other variables outside the model that are not included in the this
analysis.
table 4.12
The determinant coefficient
R R Square adjusted R
.500 .250 Square
0,243

Source: Appendix SPSS

The sampling process generates 28 companies for research period 2011 to 2015,
resulting in 112 observations. To obtain an overview of the research data samples can
be seen as the study of descriptive statistics in Table 4.1 presents the descriptive
statistics of data samples (panel data) from 2011 to 2015
The dependent variable quality of earnings as a proxy showed an average of 0.000
with a standard deviation of variables Instrument .986394 while conservatism (VIK) as
an independent variable has an average of 0:10 with standar0.14 deviation. Moderating
variable proportion of independent commissioners showed the average .2318812 and
managerial ownership shows the average .005020045 which means most of the
sample company shares not owned by the manager. Institutional ownership shows the
average .7530938 which means most of the company's shares are owned by
institutional sample.
Classic assumption test was not performed because this study uses panel data types
that allow the identification of specific parameters without the need to make
assumptions tight or do not require the fulfillment of all the assumptions of classical
linear regression on Ordinary Least Square (Borgers, Derwall, Koedijk, & Horst, 2015).
According to (Gujarati & Porter, 2003) the techniques of estimation using panel data,
accommodate heteroscedasticity problems as they relate to the company's specific
variables (data cross section ) and the autocorrelation problem (data time series ).

4.2. Hypothesis Testing Results

Testing Hypotheses H1: accounting conservatism positive effect on earnings
quality perusahaann
In testing this hypothesis figures adjusted R-square showed a value of 0.342, this
means that 34.2% Earning quality can be explained by the independent variables in the
model, while the rest is explained by other factors not included in the research
model. Although the adjusted R-square value is low
but statistically significant models of 0.000 (<0.05) with variable coefficients
Instruments conservatism of 3,587. This means that based on the study sample, the
variable accounting conservatism significant positive effect on firm value. Thus the first
hypothesis which states that accounting conservatism positive effect on earnings
quality is acceptable.
Testing Hypotheses H2a: managerial ownership affect the relationship between
accounting conservatism with earnings quality. perusahaann
Figures interaction coefficient between variables accounting conservatism with
managerial ownership of -.139 with a significance level of .570 (> 0.05). The negative
sign on the coefficient of interaction can be interpreted that managerial ownership
weakens the relationship or negatively affect the accounting conservatism relationship
with the quality of earnings, while the level of significance that is> 0.05 indicates that
based on the study sample, managerial ownership variable is not a variable that can
menginteraksi relationship with the accounting conservatism earnings quality. Thus the
hypothesis H2a stating that managerial ownership affect positively on the relationship
between accounting conservatism with earnings quality can not be supported or fail to
reject Ho.It is possible that managerial ownership structure in Indonesia is still very
small and is dominated by the family. Other factors such as differences in the period of
the study and the sample allowed differences in outcomes research.
Testing Hypothesis H2b: Institutional Ownership affect the relationship between
accounting conservatism with earnings quality.
Figures interaction coefficient between variables accounting conservatism with
institutional ownership amounted -1.770 with significance level of .475 (> 0.05). The
negative sign on the coefficient of interaction can be interpreted that weaken
institutional ownership relationship or negatively affect the accounting conservatism
relationship with the quality of earnings, while the level of significance that is> 0.05
indicates that based on the study sample, ownership variables l \ institutional not a
variable that can menginteraksi relationship conservatism accounting with earnings
quality. Thus the hypothesis H2a stating that institutional ownership has a positive
effect on the relationship between accounting conservatism with earnings quality can
not be supported or fail to reject Ho.It is possible that institutional ownership structure
in Indonesia is dominated by companies that are interconnected. Other factors such as
differences in the period of the study and the sample allowed differences in outcomes
research.
H2C Hypothesis Testing: The number of Independent Commissioners affect the
relationship between accounting conservatism with earnings quality.
Figures interaction coefficient between variables accounting conservatism with a total
of 7,680 independent commissioners with a significance level of .013 (<0.05). A
positive sign on the interaction coefficients can be interpreted that the number of
independent commissioners strengthen relationships or positive effect on accounting
conservatism relationship with the quality of earnings, while the level of significance
that <0.05 indicates that based on the study sample, the number of independent
commissioners are variables you can menginteraksi relationship with the accounting
conservatism earnings quality.Thus H2b hypothesis which states that the number of
independent commissioners positive effect on the relationship between accounting
conservatism with the quality of earnings can be supported This may occur because
the commissioner structure in Indonesia is very large and is dominated by institutions
and governments.
H2D Hypothesis Testing: The existence of the Audit Committee an effect on the
relationship between accounting conservatism with earnings quality.
Figures interaction coefficient between variables accounting conservatism with the
existence of the audit committee of -1.8927 with a significance level of 0.50387 (>
0.05). The results of this regression showed that based on the study sample, the
variable existence of audit committee is moderating variables that can not be make
accounting conservatism relationship with earnings quality. However, the marked
positive coefficient indicates that the variable number of commissioners positive effect
on accounting conservatism relationships with earnings quality.The structure of
management in Indonesia as their cross-Directorship (the connection between
members of the audit commitee company with another company audit committee
members) may be able to weaken the function of service and control committee aud. If
investor know that members of the audit committee of a company into another
company official investors will give low ratings on the company. This is reasonable
considering the conditions in Indonesia can be considered as collusion and nepotism
which tends to be negative. However, this still requires further research. Another
possibility requirements independent audit committee members and the educational
background of finance and accounting as required by the regulations are not met.Thus
H2D hypothesis which states that the existence of an audit committee positive effect on
accounting conservatism relationships with earnings quality, can not be supported.

Conclusion Remarks
5.1. Conclusion

From the results of research conducted at the manufacturing companies listed in

Indonesia Stock Exchange that meet criteria for the selection of the sample, then a
number of conclusions as follows:
(1) The results of this study indicate that conservatism Instrumental Variables (VIK)
positive and significant effect on the Quality of Earnings. This means that the
management gives a positive signal about the application of accounting conservatism
in the company and have an impact on improving the quality of earnings next. Investor
expected to give more votes to give high premium to the stock price of the
company. The results of this study are consistent with research found a positive
relationship between accounting conservatism with Ratings equity firm.
(2) The results of this study also proves that the variable amount komisarisindependent
board as one of the mechanisms of corporate governance is moderating variables that
can make relationship between accounting conservatism with the quality of earnings
and positive influence.
(3) Instead proportion of managerial ownership, institutional ownership proportion and
the existence of an audit committee is not a moderating variable that can make
relationships accounting conservatism and earnings quality. The results of this study do
not support the research find that audit committees positively influence the quality of
earnings

5.2. Limitations of Research

In this study it was likely there was an error that led to the results of this study can not
be generalized. Several limitations of this study are:
(1) The period of observation that short could not show the understatement of net
assets and profit systematic or relatively permanent as the hallmark of conservatism
better. This is due to the study sought to connect with the GCG is still new so that the
sample used was that meets these criteria,
(2) The number of samples is limited to manufaktur industries only, so do not do a
comparison of industries that apply accounting conservatism, (3) This study did not
examine all the variables included in the mechanism of corporate governance such as
the audit committee, institutional ownership and board of directors.

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