University of Groningen Corporate Governance and Managerial Misconduct Wijayati, Nureni

University of Groningen

Corporate Governance and Managerial Misconduct

Wijayati, Nureni

DOI:

10.33612/diss.131947533

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Publication date: 2020

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Wijayati, N. (2020). Corporate Governance and Managerial Misconduct: Evidence from Indonesia. University of Groningen. https://doi.org/10.33612/diss.131947533

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Corporate Governance and

Managerial Misconduct

Evidence from Indonesia

Publisher : University of Groningen Groningen, the Netherlands

Cover photo : Humam S. Dawa

Sudirman Central Business District (SCBD), a bustling business area in Jakarta where the Indonesia Stock Exchange is located

Lay-out : Nureni Wijayati

Cover design : Devi Kristiana

Printed by : ProefschriftMaken

https://www.proefschriftmaken.nl

© Nureni Wijayati, 2020

All rights reserved. Copyright of the published articles is with the corresponding journals or otherwise with the author. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without prior written permission of the publisher or the copyright-owning journal.

Corporate Governance and

Managerial Misconduct

Evidence from Indonesia

PhD thesis

to obtain the degree of PhD at the University of Groningen

on the authority of the

Rector Magnificus Prof. C. Wijmenga and in accordance with

the decision by the College of Deans This thesis will be defended in public on Thursday 17 September 2020 at 11.00 hours

by

Nureni Wijayati

born on 11 November 1971 in Semarang, Indonesia

Supervisors

Assessment Committee

Acknowledgments

In the name of Allah, the Most Gracious, the Most Merciful

I had enjoyed my career in several private companies as an accountant until 2009, when I switched my path to be a full-time academic staff. Until that moment, taking a doctoral study abroad had never crossed my mind. However, the academic atmosphere encouraged me to go for a PhD scholarship. Praise be to Allah the Almighty, that my scholarship application (the Netherlands Fellowship Programme - NFP) was approved by Nuffic. Big thanks to NFP, a scholarship programme funded by the Dutch Ministry of Foreign Affairs, for its financial support, which helped me to manage my life during my study in the Netherlands and during my field study in Jakarta.

Completing a PhD trajectory was a long long journey for me. I had no experience as a researcher when I first arrived in Groningen. I felt that writing a good academic paper was so challenging. Nevertheless, I was very lucky to be surrounded by three genious and generous supervisors. First and foremost, I would like to express my great appreciation to Professor Ronald Holzhacker who opened the door by giving me a precious opportunity to pursue my doctoral degree at the University of Groningen. I never thought that I could broaden my perspective. He gave me a lot of insights and different points of view for my dissertation. He occasionally invited and entertained us (the SInGA members) at his home in Groningen. Moreover, he monitored me regularly by visiting Jakarta, introduced me to various notable persons, and more importantly motivated me to remain being optimistic.

My sincere gratitude to Professor Niels Hermes who not only encouraged me to finish my work on time, but also provided related references to my papers. Honestly, at times I felt that I was not able to fulfill his minimum requirements. However, step by step he mentored me patiently and guided me persistently. He frequently sent feedback and suggestions in weekends. No matter how busy he was, he always gave me constructive comments, which I will never forget. Every single comment of his was simply superb.

Many things I have learned from him, such as scholarly professionalism, humblenesss, simplicity, parenting, and many more. He is not only a great guru, but also a nice person to discuss with.

I am also indebted to Professor Sidharta Utama, my supervisor at Universitas Indonesia, who shared corporate governance cases and practices from Indonesia. I was engrossed in discussing with him as he knows much about the real implementation of corporate governance in Indonesia. He also introduced me to the Indonesian Institute for Corporate Directorship (IICD) for gaining data on the ASEAN Corporate Governance Scorecard (ACGS). In addition, I am very grateful for his valuable comments and suggestions particularly for chapters 3 and 5.

Related to IICD, I would like to thank to Ms. Vita Diani as Executive Director of IICD who supplied me with the detailed corporate governance scorecards. Without her kind help, chapter 5 would never have been completed.

I would also like to say thank you to the Indonesian Institute of Certified Public Accountants (IICPA) who gave me access that enabled me to distribute the questionnaires to its members. Chapter 3 would not have been possible without the help of Indonesian public accountants. Special thanks to Mr. Tarkosunaryo, MBA, CPA, President of IICPA (IAPI) who allowed me to contribute at the Certification Division. I have gained many insights from Mr. Tarko regarding auditing issues in Indonesia. Much appreciation is given to the members of the assessment committee i.e., Professor Herman Hoen, Professor Trond Randøy, and Professor Reggy Hooghiemstra. Thank you for reading, assessing, and giving thoughtful suggestions for my manuscript. I would also like to express my gratitude to Marijke Wubbolts for her kind assistance from the beginning of my PhD journey to the end of the journey. Many thanks also go to Hans Stavast who managed all matters related to my scholarship funding.

I want to express my credit to the Spirit Indonesia Groningen (SInGa) members consisting of Kang Tatang Muttaqin, Mas Taufiq Hidayat, Laksmi Kusumawati, Mala Sondang, Suwatin Miharti, Kuswanto, Annisa Paramita, Titissari Rumbogo, Yoga

Permana, Tri Efriandi, Isti Hidayati, and Petrus Farneubun. They always encouraged each other to finish their study, especially during hard times.

I would like to extend my grateful thanks to Ronny who was very helpful during ups and downs, cleaning and processing data, and brainstorming econometrics issues. We talked not only about how to finish the dissertation, but also about how to fix our bikes. I missed my beloved friends around Harmonie complex/ Academie Gebouw: Stanati, Aynur Erde, Stefan Baack, Alisa Van der Haar, Yu Sun, Yingruo Wang, Joёlle Swart, Yara Marusyk. Thank you for sharing and having fun.

Thank you to Indonesian community in Groningen, especially Isti, Yassaroh, Fitrilia, Nahdia, Nuril, Achmad Suryadi, Icha, and Ali Syari’ati who assisted me in preparing the defense ceremony; Oom Yon-Tante Indah, Bude Ari-Oom Herman, Mbak Lia-Mas Yayok, Oom Rudie, Oom Archi-Tante Merry, Uwak Asiyah-Oom Menno, Bude Nunung. To all PPIG-ers Irawaty, Amak, Tiur, Kadek, Acul, Elda, Amirah, Angela, Putri, Doti, Karina, Nur Qom, Desti, Iging, Didik, Adhiyat, Radit, Nia, Ali, Ima, Ira S., Vera, Rosyta, Pak Asmoro, and others.

Last but not least, I am very grateful to my parents and my family who have continuously supported me throughout the PhD life. Most importantly, my sincere thanks go to my handsome boy, Humam Dawa. As a mother, I felt guilty that I was thousands of miles away from him when he faced the junior high school and senior high school national exams. I also apologised that I was unable to cuddle him when he was sick. I am very proud of him for being strong and courageous.

i

Table of Contents

Table of Contents ... i

List of Tables ... v

List of Figures ... vii

List of Appendices ... viii

Chapter 1 Introduction ... 1

1.1 Introduction ... 1

1.2 Corporate Governance in Asia... 3

1.3 Research Questions... 5

1.4 Theoretical Background ... 7

1.4.1 Agency theory ... 7

1.4.2 Resource dependence theory ... 8

1.5 Structure of the Thesis ... 9

Chapter 2 Corporate Governance and Corruption: A Comparative Study of Southeast Asia ... 17

2.1 Introduction ... 18

2.1.1 Background ... 18

2.1.2 Research questions ... 22

2.1.3 Scientific and social significance ... 22

2.2 Literature Review ... 24

2.2.1 Corporate governance ... 24

2.2.2 Agency problem and corruption ... 28

2.2.3 Corporate governance and misconduct... 29

2.2.4 Shareholder rights ... 30

2.2.5 Board of directors ... 31

2.2.6 Accounting and auditing practices ... 32

ii

2.3 Institutional Setting ... 34

2.4 Methodology ... 37

2.5 Discussion and Analysis ... 38

2.5.1 Comparative corporate governance institutional framework ... 38

2.5.2 Shareholder rights ... 39

2.5.3 Board of directors ... 42

2.5.4 Accounting and auditing... 44

2.5.5 Transparency ... 51

2.6 Conclusions ... 52

Chapter 3 Fraud Risk Assessments and External Auditors’ Perceptions... 55

3.1 Introduction ... 56

3.2 Literature Review ... 59

3.2.1 The fraud risk assessment model: an overview ... 59

3.2.2 Fraud risk assessments ... 60

3.2.3 Fraud risk factors ... 61

3.2.4 Materiality judgment ... 61

3.2.5 Professional scepticism ... 63

3.2.6 Litigation risk ... 64

3.3 Hypothesis Development ... 64

3.3.1 Fraud risk factors and fraud risk assessment ... 64

3.3.2 Materiality judgment and fraud risk assessment ... 65

3.3.3 Professional scepticism and fraud risk assessment ... 66

3.3.4 Litigation risk and fraud risk assessment ... 67

3.3.5 Certification and fraud risk assessment ... 67

3.3.6 Experience and fraud risk assessment ... 68

3.3.7 Audit firm size and fraud risk assessment... 69

3.4 Methodology ... 69

3.4.1 Questionnaire ... 70

3.4.2 Fraud risk factors evaluation ... 71

iii

3.4.4 Professional scepticism ... 73

3.4.5 Litigation risk for auditors ... 75

3.4.6 Fraud risk assessments ... 75

3.4.7 Questionnaire distribution ... 76

3.4.8 Research model... 78

3.5 Results ... 80

3.5.1 Descriptive statistics... 80

3.5.2 Responses ... 82

3.5.3 Measurement models — confirmatory factor analysis ... 83

3.5.4 Structural equation modelling results ... 85

3.5.5 Bias tests ... 92

3.6 Conclusions ... 93

Chapter 4 The Value of Political Connections: The Impact of the Changing Political Landscape in Indonesia ... 103

4.1 Introduction ... 104

4.2 Literature Review and Hypothesis Development ... 106

4.2.1 The value of political connections ... 106

4.2.2 Hypothesis development ... 109

4.3 Data and Methodology ... 115

4.3.1 Data sources and sample ... 115

4.3.2 Variables ... 116 4.3.3 Model ... 120 4.3.4 Data description... 121 4.4 Results ... 125 4.4.1 Main results... 125 4.4.2 Additional analyses ... 131 4.4.3 Endogeneity ... 135

4.5 Discussion and Analysis ... 140

iv

Chapter 5 Boards, Transparency, and Earnings Management: Evidence from

Indonesian Listed Firms ... 145

5.1 Introduction ... 146

5.2 Literature Review and Hypotheses Development ... 148

5.2.1 Earnings management, information disclosure and transparency, and the board of directors ... 148

5.2.2 Hypotheses development ... 152 5.3 Methodology ... 159 5.3.1 Sampling ... 159 5.3.2 Research models ... 160 5.4 Results ... 169 5.4.1 Descriptive statistics... 169

5.4.2 Regression results and discussion ... 174

5.5 Conclusions ... 187

Chapter 6 Conclusions ... 201

6.1 The Main Findings of Each Study ... 203

6.2 Policy Recommendations ... 208 6.3 Future Research... 211 References ... 213 Summary ... 245 Samenvatting ... 251 Ringkasan... 257

v

List of Tables

Table 1.1 Summary of the empirical studies of the dissertation ... 10

Table 2.1 Corruption rank in Southeast Asian countries, 2002-2012 ... 19

Table 2.2 The percentage of family controlled firms in 2008 ... 35

Table 2.3 Corporate governance score ... 36

Table 2.4 Key corporate governance institutional frameworks ... 45

Table 3.1 Fraud risk factors measurement ... 72

Table 3.2 Descriptive statistics ... 81

Table 3.3 Sample distribution ... 82

Table 3.4 Descriptive statistics – respondents’ answers ... 82

Table 3.5 Goodness-of-fit results ... 84

Table 3.6 Standardized factor loadings ... 84

Table 3.7 CR and AVE results ... 85

Table 3.8 Covariance matrix – latent variables ... 85

Table 3.9 Univariate estimation ... 87

Table 3.10 Structural equation results – initial model ... 88

Table 3.11 Goodness-of-fit indices – SEM ... 89

Table 3.12 SEM results —modified model ... 89

Table 4.1 Political connections, 2000-2011 ... 122

Table 4.2 Descriptive statistics ... 123

Table 4.3 Comparing politically and non-politically connected firms ... 124

Table 4.4 Correlations ... 125

Table 4.5 Regression results ... 126

Table 4.6 Small firms versus large firms ... 129

Table 4.7 Multiple regressions – business groups... 136

Table 4.8 Balancing test ... 138

vi

Table 4.10 Average treatment effects ... 140

Table 5.1 Descriptive statistics ... 171

Table 5.2 Mean scores of main variables ... 172

Table 5.3 Correlations ... 173

Table 5.4 Earnings management and board skills ... 174

Table 5.5 Earnings management and board commitment ... 175

Table 5.6 Earnings management and board structure ... 175

Table 5.7 Earnings management and board inputs ... 176

Table 5.8 Voluntary disclosure and board inputs ... 178

Table 5.9 Mandatory disclosure and board inputs ... 179

Table 5.10 Board inputs, disclosure, and discretionary accruals ... 182

Table 5.11 Sobel test and Goodman test results – voluntary disclosures ... 185

Table 5.12 Sobel test and Goodman test results – mandatory disclosures ... 185

Table 5.13 SEM results – voluntary disclosures ... 186

Table 5.14 SEM results – mandatory disclosures ... 186

vii

List of Figures

Figure 1.1 Corporate governance mechanisms ... 7

Figure 2.1 A theoretical framework ... 26

Figure 3.1 Fraud risk assessment model ... 60

Figure 3.2 Fraud risk assessment – the research model ... 79

Figure 3.3 Full modified SEM ... 91

Figure 4.1 Distribution of PCF1 by industry ... 123

viii

List of Appendices

Appendix 3.1 The Case Material ... 95

Appendix 3.2 Distribution of the Questionnaires ... 98

Appendix 3.3 Goodness of Fit Statistics –CFA ... 100

Appendix 3.4 Goodness of Fit Statistics –Modified (Final) SEM ... 101

Appendix 4.1 Variable Definitions ... 144

Appendix 5.1 Earnings Management Model ... 190

Appendix 5.2 Company List ... 191

Appendix 5.3 Responsibilities of the Board Scorecard ... 194

Appendix 5.4 Three Constructs ... 198