EFFECT OF AUDIT QUALITY ON FIRM VALUE

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THESIS PROPOSAL
EFFECT OF AUDIT QUALITY ON FIRM VALUE
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
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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
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