EFFECT OF AUDIT QUALITY ON FIRM VALUE

THESIS PROPOSAL

by

ALEXANDER STEVEN THEMAS

008201800046

FACULTY OF BUSINESS

ACCOUNTING STUDY PROGRAM

PRESIDENT UNIVERSITY

CIKARANG, BEKASI

2020

CHAPTER I

INTRODUCTION

1.1.Research background

The profit generated by the company is one measure of company performance

that is often used as a basis for decision making. Usually the profit is found on the

income statement of the company, and it explains all about how the company is from

its financial and business assessors. Earnings management itself affects how

important it is to stay in a business. The quality performed by auditors on auditing

financial statements varies widely (Mencapai et al. 2012)

Therefore, an effective earnings management deterrent acts as a high-quality

auditing, because the company’s value will decrease and can destroy its reputation if

this false reporting is detected and exposed (Ardiati., 2005 in Indriani., 2010).

Ratmono., (2010) in Rahmadika., (2011) argues that the client’s earnings management

can be detected by auditors who have high quality. The amount of discretionary

accruals will usually be limited by a manager (Christiani and Nugrahanti 2014).

Earning management cases that have occurred are cases experienced by PT PLN

(State Electricity Company). Where PT PLN experienced an increase in income that

was not proportional to the growth in expenses, PT PLN also experienced a loss on

foreign exchange. PLN experienced an increase in foreign exchange loss from IDR

2.93 trillion in 2017 to IDR 10.92 trillion in 2018. This means that PLN’s foreign

exchange loss has skyrocketed by 272.27%. Based on what was conveyed by PT

PLN, that they received compensation income from the government for reimbursing

the basic costs of providing electricity (Ulfa Arieza 2019)

Meutia, (2004) in Rusmin, (2010) revealed that KAP Non-big four has lower

audit quality than KAP Big four. and this is also supported by the statement of De

Angelo (1981) who argues that auditors come from the Non-Big Four. Less quality

than Big Four auditors. however, it does not mean that the auditors from the Non-Big

Four are not qualified, but that they are less competitive with the Big Four auditors.

Issuers can be prevented by using high quality auditors in presenting financial reports

to clients.(Villela 2013).

Audit quality is an important part of providing an audit report. The company will

be satisfied if the results of the audit itself are of a high level. For good audit quality,

an auditor must be professional in carrying out his duties or work in examining

financial statements. Auditors must have honest ethics so that fraud does not occur in

the work. In this case, making audit quality is an important thing in the auditing

process (Alzoubi 2018)

1.2. Research Problem

A company value will be seen from the results of the financial statements

especially the income statement to determine whether investors will invest or not.

Now, during this pandemic, many company prices have dropped due to COVID-19.

Here, of course, I will examine how much influence the audit quality has on firm

value. An auditor should be highly tested for his ability in the current pandemic era to

still produce high quality audits.

1.3.Research Objectives

The objectives in this proposal is to prove the influence of audit quality on firm

value with earnings management in the income statement as a benchmark for that

value. And also otherwise, namely proving the influence of earnings management on

firm value.

1.4.Research scope and limitation

The company is responsible to shareholders in presenting financial statements. To

find out how the company manages its business smoothly. of course the income

statement is very important for shareholders, especially profit. According to Schipper

(1989) earnings management is an important activity in the financial reporting

process. The aim is to know indirectly the value of the company which can be

assessed from the resulting audit quality. So here it can be concluded that earnings

management can affect the value of the company from the results of the audit

(Pangestika 2019)

1.5.Research Benefits

This research is expected to make those out there:

1. To understand the magnitude of the influence on audit quality on firm value

based on earnings management in an effort to increase firm value.

2. And it is also expected to be useful for accounting students who want to add

knowledge about the importance of earnings management in the company.

CHAPTER II

LITERATURE REVIEW

2.1.Theory Agency

Earnings management can be related to agency theory because it has the same

meaning as the relationship between owner and management. According to

Praptitorini and Januarti (2007), an independent third party acts as a mediator in

the relationship between and the agent. This third party functions to monitor the

behavior of the manager (agent) whether he has acted appropriately in accordance

with the wishes of the principal (owner or shareholder). In its most general form,

whenever an individual is involved which involves another person to do

something In such a relationship, the perpetrator is called the agent, while the

party who is affected is called the leader (Olson 2000)

Decision making of agents and principals uses the information contained in

agency theory, along with the work contract that has been agreed upon, adjusted

by evaluating and sharing the results. The application of agency theory is

manifested in a work contract that divides the rights and obligations of each party

while still being calculated as a whole. Several regulations that discuss the

mechanism for the results, both in luck, return both the risk that has been accepted

by the principal and the agent. The optimal contract is if it can balance between

the principal and the agent on the condition of getting a fair contract. The essence

of Agency Theory or agency theory is Scott (2000) said designing appropriate

contracts to align the interests of principals and agents in the event of a conflict of

interest (Stephanus 2014).

Problems will arise if there is information asymmetry in the relationship

between the agent and the principal. Scott (2003) stated the condition as

information asymmetry if some parties involved in a business relationship have

more information than other parties. Information that is scattered irregularly

between agents and principals is assumed to be information asymmetry, so that it

does not allow the efforts of agents to be directly observed. On the other hand, it

makes agents tend to behave like inappropriate behavior (Paino, Ismail, and