The implementation of good corporate governance model and auditor independence in earnings' quality improvement

Abstract

The general objective of this research is to explore the model of earnings quality monitoring and to examine the effect of auditor independence on the relationship between corporate governance mechanism and earnings quality. Specifically, this research is aimed to investigate the impact of ownership structure, commissioner board structure, audit committee structure, internal audit function, and internal control activity, on earnings quality by involving an interaction of these variables with auditor independence. Earnings quality is measured with two proxies. The first proxy is performance-adjusted discretionary accruals or also called Total Accrual, while the second utilizes Total Current Accrual. Achieving all objectives above, the author develops a model and analyses this model in two stages. In the first stage, the model is explored using analysis technique of correlation and regression. Second, fittingness of model is attested using regression analysis with a variety of variable controls and sample controls. Research object is the manufacture companies listed in Indonesia Stock Exchange in period 2011-2015. The Sample includes 112 companies with 560 data of research. After conducting outlier test, the suitable amount of data is 553. The Result of hypothesis test indicates that the model of earnings quality monitoring is constructed from the interaction of many variables. Corporate governance mechanism consists of variables such as ownership structure (managerial ownership and institutional ownership), commissioner board structure, audit committee structure, internal audit function, and internal control activity. Adjusted R-Square value is reaching for 3.3% with significance-value of 0.001. Partially, commissioner board structure, internal audit function, and internal control activity have a significant effect on earnings quality. Auditor independence does not moderate the impact of corporate governance components on earnings quality.

Corporate governance mechanism and financial performance: role of earnings management

“…If the risks and challenges cannot be managed properly, then it can result in losses, especially in the financial industry (Soewarno & Mahyarni, 2018). Corporate governance mechanisms are needed to ensure that a company is performing well without abuse (Arniati et al, 2019).…”

“…In this context, the company is expected to be profitable as profit is one of the key indicators of successful governance. Profit is the measure which attracts the most attention when assessing the success of a company's management (Arniati et al, 2019;Siddique et al, 2020). Given that profit is commonly used as the indicator of management success, managers may have as strong intention to perform in various ways that will positively influence the reported profits.…”

Earning Quality Effect on Stock Returns: GCG and CSR Mechanism

“…According to the report, managerial ownership has an impact on Earning Quality. Arniati et al (2019) conducted the same research and concluded that the Independent Board of Commissioners impacted Earning Quality. According to Hamdan (2020) and Mahdi et al (2020).…”

Institutional Governance Practices in Jordan Government Units

“…Some of them examined governance related to specific functions, such as financial, audit, procurement functions. Some of them concentrated mainly on top management and board of directors (Chen and Shapiro, 2011;Dipendra, 2016;Nourredine and Brahim, 2017;Arniati et al, 2019;Agnihotri and Gupta, 2019;Awadallah, 2020).…”

“…Mishra and Mohanty (2018) highlighted that the association between corporate governance and companies' financial performance is debatable. Arniati et al (2019) indicated that the earnings quality-monitoring model is constructed from many variables' interaction. The governance mechanism incorporates ownership, commissioner board, audit committee and internal audit function, and internal control activity.…”