THE EFFECT OF CORPORATE GOVERNANCE

AND NON FINANCIAL FACTOR ON

AUDIT OPINION

PROPOSAL

Proposed by:

Kezia Vanny
NIM : 201650167
NIRM :
Class: Thursday 10.30 (401)
Lecturer: Yulius Kurnia Susanto, S.E., M.Si.

ACCOUNTING MAJOR
TRISAKTI SCHOOL OF MANAGEMENT
JAKARTA
2019

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 Trisakti School of Management

STATEMENT

I hereby declare that in this Research Proposal, there is no work that has been

submitted in the course of “Seminar Penelitian” or used to obtain a bachelor

degree at any college or university, and no work or opinion that has been written

or published by another party unless those that are explicitly quoted and

mentioned in the references. If there is a violation related to that matter at least

one paragraph is exactly the same as another work or opinion written or

published, I am willing to be given “E” in the course of “Seminar Penelitian”.

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 TABLE OF CONTENTS

COVER .................................................................................................................................. i

STATEMENT..........................................................................................................................ii

TABLE OF CONTENTS........................................................................................................... iii

CHAPTER I INTRODUCTION

1.1 Research Background ............................................................................................. 1

1.2 Research Problems ................................................................................................. 5

1.3 Research Objectives and Benefit ............................................................................ 6

1.3.1 Research Objectives ............................................................................6

1.3.2 Research Benefit ........................................................................................... 6

1.4 Research Outline ................................................................................................... 8

CHAPTERII THEORETICAL FRAMEWORK AND HYPHOTESES DEVELOPMENT

2.1 Grand Theories .................................................................................................... 10

2.1.1 Agency Theory............................................................................................. 10

2.2 Research Variables .............................................................................................. 11

2.2.1 Earnings Management ................................................................................ 11

2.2.2 Boardof Director………... .............................................................................. 13

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 2.2.3 Independent Board……….... ......................................................................... 13

2.2.4 Audit Quality………… .................................................................................. 15

2.2.5 Managerial Ownership………….. ................................................................... 16

2.2.6 Tax Aggressivenes………… ............................................................................ 16

2.2.7 Firm Size…...…….. .................................................................................. 17

2.2.8 Leverage…………....... .......... ........................................................................ 18

2.2.9 Institutional Ownership ............................................................................. 19

2.3 Previous Research 20

2.3.1 Board of Director and Earnings Management ............................................ 20

2.3.2 Independent Board and Earnings Management ......................................... 20

2.3.3 Audit Quality and Earnings Management ................................................... 21

2.3.4 Managerial Ownership and Earnings Management ................................... 22

2.3.5 Tax Aggressiveness and Earnings Management ......................................... 22

2.3.6 Firm Size and Earnings Management .......................................................... 23

2.3.7 Leverage and Earnings Management .......................................................... 24

2.3.8 Institutional Ownership and Earnings Management .................................. 25

2.4 Research Model……. ............................................................................................ 26

2.5 Hypotheses Development 26

CHAPTERIII RESEARCH METHOD

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3.1 Research Design .................................................................................................. 28

3.2 Research Object .................................................................................................. 28

3.3 Operational Definition of Variables and Measurement .................................... 29

3.3.1 Dependent Variable .................................................................................... 29

3.3.2 Independent Variables .......................................................................... 30

3.3.2.1 Board of Director……......... ............................................................. 30

3.3.2.2 Independent Board………................................................................ 31

3.3.2.3 Audit Quality……......... ................................................................... 31

3.3.2.4 Managerial Ownership………….. ..................................................... 32

3.3.2.5 Tax Aggressiveness………… ............................................................. 32

3.3.2.6 Firm Size……….. 32

3.3.2.7 Leverage……......... .......................................................................... 33

3.3.2.8 Institutional Ownership ................................................................. 33

3.4 Data Collection Technique 33

3.5 Data Analysis Method .................................................................................. 34

3.5.1 Descriptive Statistics Test ..................................................................... 34

3.5.2 Data Quality Test ..................................................................................... 35

3.5.2.1 Normality Test ............................................................................... 35

3.5.2.2 Outlier Test .................................................................................... 35

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 3.5.3 Classical Assumption Test 36

3.5.3.1 Autocorrelation Test ...................................................................... 36

3.5.3.2 Multicollinearity Test ..................................................................... 37

3.5.3.3 Heteroscedasticity Test.................................................................. 38

3.5.4 Hypotheses Test ..................................................................................... 38

3.5.4.1 Correlation Coefficient (R Test) ..................................................... 39

3.5.4.2 Adjusted R-square Test (Adjusted R2) ............................................ 39

3.5.4.3 F Test……….40

3.5.4.4 t Test……….. .................................................................................... 40

References

Attachment

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 CHAPTER I

INTRODUCTION

1.1 Research Background

Audit becomes important these day. It happens because a lot of employees do

fraud to profitable theirself. On the other side, the company also do fraud like

decreasing their expense so the net income bigger etc. Why it happens? There are

main reasons, first pressure. Maybe the employee really need money at that time,

so they do fraud. Second, there are opportunity to do fraud. It can happen when

the company’s internal control is not good enough. Example, theres no access

control. So everyone can enter the wharehouse. Because of that, company often

suffer loss causing by loss of inventory. Last, there is no integrity. When people

have integrity, the rate of people who do fraud will be less.

To support the opinion, we will discuss about one case. The case is about

Sunprima Nusantara Pembiayaan (SNP Finance). The important background was

that the company failed to pay medium term notes (MTN) interest until the

process of postponing the Debt Payment Obligation (PKPU). They have so much

MTN that should be paid with the interests. The question is, why they can issued

lot MTN ? That’s because their audit opinion.

The auditor from Public Accountant Firm Satrio, Bing Eny that have do

audit for SNP Finance, MarlinnaandMerliyana Syamsul public accountantshad

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not fully complied with theAuditing Standards - Professional Standards of Public

Accountants in the implementation of general audits of SNP Finance's financial

statements for 20/12/2016. This problems can affect to their MTN because they

give unqualified audit opinion that can make SNP Finance. Because of this, they

got administrative sanctions after the Finance Ministry’s Financial Profession

Development Center (PPPK) received a complaint report from the OJK. Bank

Mandiri plans toprosecute the public accounting firms for doing improper audit.

According to Bank Mandiri Corporate Secretary RohanHafas, the problem was

Discovered after Mandiri audited SNP’s financial reports. After the Public

AccountantsAssociation (IAI) issued the examination results, Bank Mandiri will

file a lawsuit against the auditors.

Based on the case, it can be concluded that the auditor opinion is very

influential to the users. In this case, the users are the third parties specifically

creditor. Because they thought the opinion was unqualified so there is nothing to

worry about. But unfortunately, the auditor gave them the mislead opinion. The

auditor opinion didn’t describe the real situation of the company. On the other

side, financial statement also have a very important role. Financial statements can

describe the real conditions of company and it can be use to attract third parties

such as creditor. SNP mislead their financial statement, so the company looks fine

and the creditor wants to loan their money to SNP.

A good corporate governance structure help to make sure that

management use well the firm resources for the sake of owners who didn’t come,

and report the financial condition and company performance fairly. The role of the

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corporate governance structure in financial reporting is to make sure the

obedience of accounting principles which generally accepted (GAAP) and the

mechanism of corporate governance becomes a focus of new rules and previous

study are attributed that related with organization and put board into function in

general. The proper of structed corporate gorvernance.

. Audit opinion is auditor’s think about the firm, which from their

financial statement. There are 4 audit opinion that auditor can stated it to

company’s financial statement, which are unqualified opinion, Unqualified

Opinion with Explanatory Language, qualified opinion, and adverse opinion. So

we can draw the conclusion that corporate governance have influence to the audit

opinion When the firm have a good corporate governance, so does the audit

opinion.

This research is development by previous research Corporate Governance

and Audit Decision Making (Yulius Kurnia Susanto & Arya Pradipta 2017) .This

study was conducted by examining the effect of independent variables which are

earning management, audit quality, audit tenure, firm size, leverage, liquidity,

inventory, losses, and age and the dependent variable is audit opinion

Based on background research that has been described by the researcher

above, the researcher is interested to studying, researching, and analyzing, as well

as pouring in the form research entitled: “The Effect of Corporate Governance

and Non Financial Factor on Audit Opinion”.

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 1.2 Research Problems

Based on the research background, we can formulate the research

problems as following:

1. Does Earnings Management have influence on audit opinion?

2. Does Audit Quality have influence on auditopinion?

3. Does Audit Tenure have influence on auditopinion ?

4. Does Firm Sizehave influence on auditopinion ?

5. Does Leveragehave influence on auditopinion?

6. Does Liquidity have influence onauditopinion?

7. Does Inventory have influence onauditopinion ?

8. Does Losses have influence on audit opinion?

9. Does agehave influence onaudit opinion?

1.3 Research Objectives and Benefit

1.3.1 Research Objectives

Related on the research problem above, this research’s objective is to

examine and get the empirical evidence about:

1. The influence of Earnings Management on audit opinion

2. The influence of Audit Quality on audit opinion

3. The influence of Audit Tenure on audit opinion

4. The influence of Firm Size on audit opinion

5. The influence of Leverage on audit opinion

6. The influence of Liquidity on audit opinion

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7. The influence of Inventory on audit opinion

8. The influence of Losses on audit opinion

9. The influence of Age on audit decision making

1.3.2 Research Benefit

The results of this study are expected to provide benefits and contributions

for :

1. Investors

The results of this study are expected to provide information and

references to help investors in looking at the quality of a company and help

investor in decision making in investing to the company

2. Creditors

The results of this study are expected to provide adequate information such

as creditors in decision making in lending to the company.

3. Future Researchers

The results of this study are expected to provide information and can be

input for future researcher

1.4 Research Outline

To give a thorough overview of what would be the content of this study,

the researcher provided a systematic arrangement of each chapter as follows:

CHAPTER I: INTRODUCTION

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 This chapter contains the background of research, problem

formulation, research objectives, research benefits, and

systematics of writing.

CHAPTER II : THEORETICAL FRAMEWORK AND HYPOTHESIS

DEVELOPMENT

This chapter discusses the theories underlying research and serves

as the basis for reference to theories used in research analysis that

include theoretical frameworks, earlier research, research models,

and hypothesis development.

CHAPTER III: RESEARCH METHOD

This chapter describes the forms of research, research objects,

operational definitions of variables and measurement of variables.

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 CHAPTER II

THEORETICAL FRAMEWORK AND HYPOTHESES DEVELOPMENT\

2.1Grand Theory

2.1.1Agency Theory

Agency theory was focused by on individuals which are principal and

agent. Principal and agent was assumed by person who wants to maximizing their

own self-interest (maximize wealth). Rights and obligation of principal and agents

was written on agreement contract.

Because principal and agent have self-interest, conflict was arised. Iy

happened because there are separation between ownership and control. So each

parties only care about their self interest. So agent can make a decision which is

not maximizing principal’s wealth, but only give him benefit of self interest.

To minimize this conflict, there are 2 ways that firm can do. First, add

the number of dividend to the third parties. Second, add the number of assets that

is financed by debt. In mechanism, it purpose to reduce the free cash flow on firm.

Because, company have obligations to pay more dividend to third party. So the

agent can’t use the cash for unappropriate activities on firm.

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 Agency theory is relevant to this research, because the existence of

corporate governance. Corporate governance can prevent the mislead financial

statement, makes the company can get the right audit opinion.

2.2 Research Variables

2.2.1 Audit Opinion

Audit opinion is a important aspect for certain parties, such as investor

and creditor. From audit opinion, we can conclude the company real conditions.

There are 4 types of audit opinion : (1) unqualified opinion, (2) qualified opinion,

(3) adverse opinion and (4) disclaimer opinion.

According to Ni Nengah Devi Aryaningsih & I Ketut Budiartha (2014),

audit opinion is a place where auditor can give their own opinion about

company’s financial statements. Except financial statement, auditor also needs

liquidity, solvability, and profitability to give opinion (YK Susanto, 2009).

According to Ni Made Puspa Pawitri & Ketut Yadnyana (2015), audit

opinion is audior opini through company financial statement, and the opini is use

by external parties. Every manager wants to get unqualified opinion from the

auditor. This demand becomes a conflict when the auditor doesn’t give what they

demand. Usually, the manager will switching the auditor.

2.2.2 Earning Management

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2.2.3 Audit Quality

Audit quality is a probability that auditor can fine some mislead or

violation on company financial statement and report it. The probability depends

on auditor’s ability while the action of report when there are mislead is depends

on auditor independence. This audit quality is important because the better the

quality, the more credible the financial statements that can be use for decision

making (De Angelo, 1981). But according to Standard Profesional Accountant

Public (SPAP), audit quality was based when you can fullfil the procedure or

standard.

Auditor often got a problem when perform their task. It happened

because there is a conflict between manager and auditor. This conflict arise

because there are different interest. Managers want the number of company profit

looks bigger, cause it makes the manager’s performance on the company looks

good (Pancawati Hardiningsih, 2010)

2.2.4 Audit Tenure

According to Adeyemi and Oakpala (2011), audit tenure means the

length of public accountant audit some company, and it has probabilitiy auditor

losing their independence A long relationship between auditor and company that

they are audit, makes the auditor difficult to show their credibility.

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 According to Blandon & Bosch (2013) , a long audit tenure will make

the conflict between auditor and client arise. It happened because the auditor

wasn’t satisfied with the manager’s decision about company’s financial statement.

Because of this, the external auditor rotation has been suggested to protect

auditor’s independence.

2.2.5 Firm Size

2.2.6 Leverage

2.2.7 Liquidity

Liquidity show that firms can fullfil their financial obligation on short

term by using their current assets . But if the liquidity is too big, it means

company can’t manage their current assets. It means, the financial’s performance

becomes not good enough and there are probability that company mislead their

financial statement so it looks good. (Kadek Prawisanti Dira & Ida Bagus Putra

Astika, 2014)

Level of liquidity can be measure using current ratio. Current ratio is

ratio between current assets and current liabilities. This ratio can show us till

where current assets can cover current liabilities. The bigger current ratio, means

the bigger company’s ability to fullfil their obligation on short term.

2.2.8 Inventory

2.2.9 Losses

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2.2.10 Age

2.3 Previous Research

2.3.1Earning Management and Audit Opinion

2.3.2 Audit Quality and Audit Opinion

2.3.3 Audit Tenure and Audit Opinion

From the research Knechel and Vanstraelen (2007), they concluded that

audit tenure have influence to auditor independence. Because the auditor afraid to

loss the client, so the auditor tend to support the client.

2.3.4 Firm Size and Audit Opinion

2.3.5 Leverage and Audit Opinion

2.3.6 Liquidity and Audit Opinion

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2.3.7 Inventory and Audit Opinion

2.3.8 Losses and Audit Opinion

2.3.9 Age and Audit Opinion

2.4 Research Model

From the theoretical framework that already explained before, the

researcher will do research about the factor that affecting job satisfaction that
describe in following model :\

Earning Management

Audit Quality

Audit Tenure

Firm Size

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 Leverage
Audit Opinion
Liquidity

Inventory

Losses

Age

Figure 2.1

Research Model

2.5 Hypotheses Development

Based on the theories described above, the researcher formulates of the

hypothesis as follows is:

Ha1 Earning management has influence on audit opinion

Ha2 Audit quality has influence audit opinion

Ha3 Audit tenure has influence on audit opinion

Ha4 Firm size has influence on audit opinion

Ha5 Leverage has influence on audit opinion

Ha6 Liquidity has influence on audit opinion

Ha7 Inventory has influence on audit opinion

Ha8 Losses has influence on audit opinion

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Ha9 Age has influence on audit opinion

CHAPTER III

RESEARCH METHOD

3.1 Research Design

This study is classified into causal research because based on the

characteristics of the problem under study, these problems are a causal

relationship between two or more variables. According to Sekaran and Bougie

(2016, 44), casual research aims to test how much influence independent variables

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that are board director, independent board, audit quality, manager+ial ownership,

tax aggressiveness, firm size, leverage, and institutional ownership of the

dependent variable, earnings management.

3.2 Research Object

The research object used in this research is a financial company listed on

the Indonesia Stock Exchange.

Criteria of the samples to be taken in this study are as follows:

1. Financial companies listed consistently on the Indonesia Stock Exchange

during the period 2016-2018

2. Financial company issuing financial statements in rupiah currency

3. Financial companies issuing financial statements ending on 31 December

4. Financial companies consistently audit by the same public accounting

firm minimum 1 year and maximum 6 years

3.3 Operational Definition of Variables and Measurement

3.3.1 Dependent Variable

Dependent variables is something that depends on independent variables

and it can be affect to one or more independent variable. The dependent variable

of this research is audit opinion. Dependent variable that we use in this research is

audit opinion. Audit opinion is the final product of the auditing process. At the

end of auditing process, auditors disclose their opinions to the public. Adverse

audit opinion is issued when financial statements prepared by the firm are not

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 fairly presented, and material misstatements have significant adverse impacts on

the financial statements (Johnstone et al. 2013). Variable Audit Opinion is

measure by dummy codes, which means “one’ for the company which get

unqualified opinion, and “zero” if otherwise.

Audit Opinion = 1 for company that received unqualified audit opinion

(Dummy Variable) = 0 if otherwise

3.3.2Independent Variables

Independent Variable is a factor that is affecting the value of dependent

variable, it stands alone and is not affected by any other changes that happens on

other variable. This variable is used in research to study whether there’s a

relationship between the independent variable with the dependent variable,

whether it is significant or insignificant. In this research, independent variables

used are earning management, audit quality, audit tenure, firm size, leverage,

liquidity, inventory, losses, and age. The following describes the measurements

and formulas to be used to measure each of the independent variables and the

measurement scale to be used to measure each of the independent variables.

3.3.2.1 Earning Management

According to Schipper (1989) tells the meaning of earnings management is an

intervention in the process of financial reporting in order to gain personal benefits

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 that are deliberately done by managers. In this study the measurement used to

measure earnings management is a model known as Performance-Matched

Discretionary Accruals by Kothari et al. (2005).

Stagesthe determination of a discretionary accrual is:

(1) Calculates total accruals:

𝑇𝐴𝑖𝑡 = 𝑁𝐼𝑖𝑡 − 𝐶𝐹𝑂𝑖𝑡

TAit = Total accruals of firm i in year t

NIit = Cash net income from operating activity of company i in period t

CFOit = Cash flows from company's operating activities i in period t

(2) Determine the coefficient of the accrual total regression:

𝑇𝐴𝑖𝑡 1 ∆𝑅𝐸𝑉𝑖𝑡 −∆𝑅𝐸𝐶𝑖𝑡 𝑃𝑃𝐸𝑖𝑡 𝑅𝑂𝐴𝑖𝑡−1

= ∝ (𝐴 ) + 𝛽1 ( ) + 𝛽2 ( 𝐴 ) + 𝛽3 ( ) + 𝜀𝑡 (1)
𝐴𝑖𝑡−1 𝑖𝑡−1 𝐴𝑖𝑡−1 𝑖𝑡−1 𝐴𝑖𝑡−1

TAit = Total accruals of firm i in year t

Ait-1 = Total asset of company i at the end of year t-1

ΔREVit = Changes in company earnings i in year t

ΔRECit = Change of net receivable of company i in year t

PPEit = Property, plant and equipment company i in year t

ROAit-1 = Return on assets of company i at the end of year t-1

E = Error

(3) Determining Nondiscretionary Accruals:

1 ∆𝑅𝐸𝑉𝑖𝑡 −∆𝑅𝐸𝐶𝑖𝑡 𝑃𝑃𝐸𝑖𝑡 𝑅𝑂𝐴𝑖𝑡−1

𝑁𝐷𝐴𝐶𝐶𝑖𝑡 = ∝ (𝐴 ) + 𝛽1 ( ) + 𝛽2 ( 𝐴 ) + 𝛽3 ( ) (2)
𝑖𝑡−1 𝐴𝑖𝑡−1 𝑖𝑡−1 𝐴𝑖𝑡−1

NDACCit = Nondiscretionary accrual of company i in year t

(4) Determining Discretionary Accruals:

𝑇𝐴𝑖𝑡
𝐷𝐴𝐶𝐶𝑖𝑡 = ( ) − 𝑁𝐷𝐴𝐶𝐶𝑖𝑡
𝐴𝑖𝑡−1
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DACCit = Corporate Accrual Discretionary i in year t

3.3.2.2 Audit Quality

Based on research conducted by Alexander and Christina (2017) that

variable used is variable big four audit corporation used to represent audit

company. Variable audit quality is measured by dummy codes, which means

“one” is used if the company is audited by one of the big four firms, and “zero” is

used if the company is audited by none of the big four firms.

3.3.2.3 Audit Tenure

Audit tenure is the period of time a public accounting firm conducts

engagement with clients in providing financial statement audit services. Another

definition of audit tenure according to Geiger and Rughunandan (2002) is the

length of the auditor and client relationship measured by the number of years. A

auditors who have long assignments with client companies will encourage the

creation of business knowledge so as to enable auditors to designing effective

audit programs and audit financial reports high quality. Audit tenure has a

minimum value of 1 year and maximum value for 6 years. Variable audit tenure is

measured by the number of companies was audited by the same auditor.

3.3.2.4 Firm Size

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 Firm size is used to measure how big or how small a company.

Company size can be assessed in several ways, such as total assets, total sales,

average sales, market value of a company's stock, and other things (Yuliana and

Trisnawati 2015).In this study, firm size is measured by scale ratio, following the

research of Alexander and Hengky (2017):

𝑆𝑖𝑧𝑒 = 𝑁𝑎𝑡𝑢𝑟𝑎𝑙 𝑙𝑜𝑔 (Total aset)

3.3.2.5 Leverage

Leverage is the ratio between the amount of the company's liabilities and the

amount of its assets. This variable can be measured by dividing the amount of

liabilities by total assets. The scale used for this variable is the ratio scale. The

measurement used to measure this variable isas follows based on Alexander and

Hengky (2017):

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡

3.3.2.6 Liquidity

The ability of a company to fulfill all its obligations, which must be repaid

immediately in a short time. To be able to fulfill all these short-term obligations,

the company must have the means of payment, namely in the form of current

assets. In this case the amount of current assets must be greater than the sum of all

obligations that must be fulfilled by the company in a short period of time. Below

are three common ratios used to measure a company's liquidity or how well

a company can liquidate its assets to meet its current obligations :

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 1. Calculate the current ratio

The term current refers to short-term assets or liabilities that are

consumed (assets) and paid off (liabilities) is less than one year. The current ratio

is used to provide a company's ability to pay back its liabilities. A company

should ideally have a ratio greater than 1, meaning they have more current assets

to current liabilities. However, it's important to compare ratios to similar

companies within the same industry for an accurate comparison.

𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜 =
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

2. Calculate the quick ratio

Sometimes called the acid-test ratio, is identical to the current

ratio, except the ratio excludes inventory. Inventory is removed because it is

the most difficult to convert to cash when compared to the other current assets

like cash, short-term investments, and accounts receivable. In other words,

inventory is not as liquid as the other current assets. A ratio value of greater

than one is typically considered good from a liquidity standpoint, but this is

industry dependent.

3. Calculate the operating cash flow ratio

It measures how well current liabilities are covered by the cash flow generated

from a company's operations. The operating cash flow ratio is a measure

of short-term liquidity by calculating the number of times a company can pay

down its current debts with cash generated in the same period. The ratio is

calculated by dividing the operating cash flow by the current liabilities. A

26
 higher number is better since it means a company can cover its current

liabilities more times. An increasing operating cash flow ratio is a sign

of financial health, while those companies with declining ratios may have

liquidity issues in the short-term.

3.3.2.7 Inventory

According to Sofjan Assauri (1993: 169) inventory can be defined as inventory is

an asset which includes goods belonging to a company with a view to being sold

within a normal business period. To calculate inventory, we can see the total cost

of produce or the price of inventory.

3.3.2.8 Losses

Losses are a one-time removal or decrease in a business resource or

asset. Losses are unrecoverable and unanticipated. Losses will occur when cost or

expense arre bigger that income. To measure this variable we can use the formula

below :

𝐿𝑜𝑠𝑠𝑒𝑠 = 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝐶𝑜𝑠𝑡/𝑒𝑥𝑝𝑒𝑛𝑠𝑒

3.3.2.9 Age

Age of firm is the number of firm since established. Age become important since it

influence the company performance, reputation, and also audit opinion. To measure this

variable by calculate the number from the firm established until this research begin.

3.4 Data Collection Technique

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 The process of collecting data in this study using the technique of

secondary data collection, data obtained through the official website of Indonesia

Stock Exchange (BEI) is www.idx.co.id. The secondary data used in this study

were collected from the financial statements of financial companies ending on 31

December from 2013 to 2017.

3.5 Data Analysis Method

This research uses data analysis method that is stastical method. The

purpose to solve research problem which want to be proved empirically. The

method used is multiple regression method because this research examining the

influence of several independent variables to one dependent variable.

3.5.1 Descriptive Statistics Test

Descriptive statistics are procedures for organizing and summarizing

sample data so that we can communicate and describe their important

characteristics. Descriptive statistics are used to summarize and describe the

important characteristics of sample data and to predict an individual’s score based

on his or her score. The descriptive statistical test was conducted on all variables

contained in this study.

All variables used in this study are audit opinion as a dependent variable

and then earning management, audit quality, audit tenure, firm size, leverage,

liquidity, inventory, losses and age.

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 3.5.2 Data Quality Test

3.5.2.1 Normality Test

Ghozali (2016, 154) commented that residual normality test is a data test

that has the objective to see and test whether the residual data from the study is

normally distributed or not, in the regression model. In multiple linear regression,

this test is not performed for each variable, but on the residual data. Statistically

the normality test can use plotting, skewness and tangency, and by Kolmogorov-

Smirnov test. If using Kolmogorov-Smirnov test, then the means of taking a

decision in the normality test are as follows: (1) If the significance of the

Kolmogorov-Smirnov table <0.05, Ha cannot be denied, then the data is not

normally distributed; (2) If significance on the Kolmogorov-Smirnov table ≥ 0.05,

Ho cannot be rejected, then the data is normally distributed.

3.5.2.2 Outlier Test

According to Ghozali (2018) the outlier test is testing data with unique

characteristics that look different from other observations and appears in the form

of extreme values for both a single and a variable combination variable. There are

several causes that can cause arising data outlier, which are :

a. Error when entering data

b. Failure to specify the missing value in the program computer

c. Outliers are not members of the population we take as samples

d. Outliers come from populations we take as samples, but distributions of the

variables in the population have extreme values and not normally distributed.

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 The detection of univariate outlier can be done by determining the value

boundaries that will be categorized as outlier data by converting the value of the

data into a standardized score or commonly called the z-score, those with means

are zero and the standard deviation is the same with one. In Ghozali's book

(2018), Hair (1998) states that in small sample cases (less than 80) then the

standard score with a value of ≥ 2.5 data stated outliers while in large samples,

scores are expressed by outliers if the value is in the range of 3 to 4.

3.5.3 Classical Assumption Test

Classical assumption test conducted in this study is to test whether the

data satisfy the classical assumptions. Classical assumption test is done to avoid

recall bias estimates which are not at all the data can be applied to regression. The

classical assumption test that are performed in this research are multicollinearity

test, autocorrelation test and heteroscedasticity test.

3.5.3.1 Multicollinearity Test

Multicollinearity test is used to determine existence of high correlation

between variables in a multiple regression model. If there is a high correlation

between the independent variables, then relation between them of the dependent

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variable will be disrupted. As such, a good regression model should not be a

correlation between independent variables, or may be mutually collinear but not

highly correlated (Gani, 2015).

Multicollinearity testing can be done by looking at value of Variance

Inflation Factors (VIF) and Tolerance. VIF is a function of R2 between

independent variables that can be written with formula below (Nachrowi, 2006):

1
𝑉𝐼𝐹 =
(1 − 𝑅𝑛2 )

Where :

𝑅𝑛2 = Coefficient of determination variables at n-th

𝑏1 Σ𝑋1 𝑌+ 𝑏2 Σ𝑋2 𝑌+⋯+ 𝑏𝑛 Σ𝑋𝑛 𝑌

𝑅𝑛2 =

n = Number of independent variable (1, 2, …, n)

Basis of decision: if VIF 0.10, then not multicollinearity. Conversely, if the value

of VIF> 10 and the value of Tolerance 5, then it must be careful.

3.5.3.2 Heteroscedasticity Test

Heteroscedasticity test: is used to test there is a regression model

residual variance inequality from one observation to another observation.

Regression formula obtained by assuming confounding variables (error) has a

constant residual variance (range of errors approximately equal).

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Heteroscedasticity occurs if there is residual variance is not constant. The

regression model to be good if there is not heteroscedasticity (Ghozali, 2007).

The Glejser test regresses residual absolute values against the

independent variables. How to make decisions in the heteroscedasticity test is the

value of significance ≥ 0.05, then there is no problem of heteroscedasticity, on the

contrary, if the significance value ˂ 0.05, then there is a problem of

heteroscedasticity in the regression model.

3.5.3.3 Autocorrelation Test

Ghozali (2016, 107) stated that the autocorrelation test aims to test

whether there is a correlation between the confounding error in period t with the

fault error in period t-1 in the linear regression model. If there is correlation, then

this is called autocorrelation. Autocorrelation can occur when observations made

over time are related to each other. This problem can arise if the residual data is

not free from one observation to another.

One way that can be used to assess whether there is autocorrelation in

the data or not is to use Durbin Watson test and Lagrange Multiplier test. The use

of the DW test can only be used for first-degree correlations and requires intercept

in the regression model and no lag variables among independent variables. The

way used in decision making with LM test is if the significance value of

LAG_RES ≥ 0.05, then there is no autocorrelation, but if the value of significance

LAG_RES ˂ 0.05, then there is autocorrelation.

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3.5.4 Hypotheses Test

Tests for hypotheses using multiple linear regression analysis. Multiple

regression analysis is used to determine the effect of board of directors,

independent board, audit quality, managerial ownership, tax aggressiveness, firm

size, leverage, and institutional ownership of earnings management.

The model of multiple linear equations used is as follows:

𝐴𝑂 = ∝ +𝛽1 𝐸𝑀 + 𝛽2 𝐴𝑄 + 𝛽3 𝐴𝑇 + 𝛽4 𝐹𝑍 + 𝛽5 𝐿𝑉 + 𝛽6 𝐿𝑄 + 𝛽7 𝐼𝑁𝑉 + 𝛽8 𝐿𝑂 +
(3)
𝛽8 𝐴 + 𝜀𝑡

Information:

AO Audit Opinion

EM Earning Management

AQ Audit Quality

AT Audit Tenure

FZ Firm Size

LV Leverage

LQ Liquidity

INV Inventory

LO Losses

A Age

ε Error Term

3.5.4.1 Correlation Coefficient (R Test)

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 Based on research conducted Ghozali (2016, 93) states that the analysis

of correlation coefficient (R) can be used to measure how strong the linear

relationship between two variables. In addition to measuring the strength of the

relationship between two variables, the R test can also be used to determine the

direction of the relationship between the dependent variable with the independent

variable. If the correlation coefficient value ≥ 0.5, then the relationship between

the variables is strong, on the contrary, if the correlation coefficient value ˂ 0.5,

then the relationship between the variables is weak.

3.5.4.2 Adjusted R-Square Test (Adjusted R2)

Ghozali (2016, 95) states that the coefficient of determination (R2) is

used to measure how much the model's ability to explain variations of dependent

variables with values ranging from “zero” to “one”. The value of R2 increasingly

close to “zero” indicates that the ability of independent variables is increasingly

limited in explaining the variation of the dependent variable. A value that is

approaching “one” means independent variables have relevant information to

predict the variation of the dependent variable. The value of Adjusted R2 can be

negative, and if it happens, then the value is considered “zero”.

3.5.4.3 F Test

According to Hair et al. (2014, 193) that the F statistic test is essentially

used to determine whether all the independent variables used in the study have an

influence on the dependent variable as a whole. Statistical F test is used to

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determine whether a model is fit or not. If the value of F ˂ 0.05, then the

regression model used by the researcher influence the overall between

independent variables to the dependent variable, it means that the regression

model used is a fit model so it is feasible and appropriate, however, if the value of

F ≥ 0.05, it can be concluded that variable independent in the regression model

tested and used by the researcher in this study did not have a comprehensive

influence on the dependent variable, meaning that the regression model used is a

model that is not fit so it is not feasible and inappropriate.

3.5.4.4 t Test

Ghozali (2016, 97) said that the t test aims to show how much the

influence of one independent variable individually in explaining the variation of

the dependent variable. The t test is an example of the parametric test model used

to compare the mean or the mean values of the variables to each other to

determine the existence of statistical significance. If the significance of t ˂ 0.05,

Ha cannot be rejected, then any independent variable has an influence on the

dependent variable, however, if the significance of t ≥ 0.05, Ha cannot be rejected,

then each independent variable has no effect on the dependent variable.

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36