Corporate governance and audit decision making

Abstract

The purpose of this study is to investigate the factors that affect qualified opinion. This study use earnings management, audit quality, audit tenure, firm size, leverage, liquidity, inventories, and losses to predict qualified opinion. The qualified opinion was measured using dummy variables, value 0 for unqualified opinion, 1 other unqualified opinion (Blandón & Bosch, 2013). If the auditor provides an unqualified opinion then the audit opinion is clear. Conversely, if the auditor provides qualified opinion such as going concern, litigation, asset realizing then the audit opinion is unclear (Dopuch et al., 1987). The study uses purposive sampling from financial statement of manufacturing company in Indonesia Stock Exchange for period 2011-2015. This study uses binary logistic regression to test the hypothesis. The result of the research showed that earnings management, audit quality, and tenure can increase the probability of the unqualified opinion. Firm size and losses can increase the probability of the qualified opinion. Meanwhile, leverage, liquidity, and inventories didn’t have statistically significant to predict qualified opinion. Companies that make earnings management, auditors rarely provide a qualified opinion. This is due to the behavior of auditors who are less independent in auditing the financial statements. It is proven that the auditor is likely to give an unqualified opinion to a company that has long been a client. British Telcom conducts Accounting Fraud by making an unfair increase in corporate earnings. For 33 years British Telcom obtained an unqualified opinion from the Public Accounting Firm Price Waterhouse Coopers (PWC). This suggests that the higher the earnings management, audit quality and tenure the higher the likelihood of obtaining an unqualified opinion.

Factors that Influence the Auditors in Issuing Qualified Opinion

“…According to [1], audit opinion results from the auditor's assessment of the company's performance as assessed through the company's financial statements. In SA 508 [6], it is stated that there are several types of audit opinions that are usually given by auditors when auditing the financial statements, including Unqualified Opinion, Qualified Opinion, Modified Unqualified Opinion, Adverse Opinion, and Disclaimer Opinion.…”

“…According to [8], the periodic system and perpetual system have three ways of valuing inventory: First-in-First out, Last-in-First-out, and Average Method. High inventory shows that the company has less efficiency in running operational activities [1]. H7: Inventory has an effect on Qualified Opinion.…”

“…Two things can cause losses. First, the amount of expenses is higher than the revenue, and the second, due to misstatements, the company can experience losses in the financial statements [1]. H8: Losses has an effect on Qualified Opinion.…”

“…The auditor gives an audit opinion through several stages so that the auditor can provide conclusions and opinions from the audited financial statements. According to [1], to generate a good audit report, there are many factors that influence it, from the company's financial ratios, performance level, competence, objectivity, and skepticism held by auditors [2]. In this study, the company's financial ratios are discussed using Earnings Management, Company Size, Leverage, Liquidity, Inventory, Losses, and Profitability.…”

Factors Affecting Real Earnings Management

“…This result is inconsistent with the Sun et al 2014's research who said it has positive correlation with REM. Meanwhile Susanto and Pradipta (2016) said it has negative effect towards real earnings management.…”