Factors affecting the Quality of Financial Reports: A Value Relevance Based Analysis

Vol. 1, No. 1 (Des, 2023) Page 01-11 DOI : https://doi.org/10.5281/zenodo.10695247 The Effect Of Firm Size, Financial Leverage, Liquidity, And Good Corporate Governance On The Quality Of Financial Reporting Value Relevance Approach Nasrullah Djamil Universitas Islam Negeri Sultan Syarif Kasim Riau, Pekanbaru *Email : ARTICLE INFO : Keywords : Financial Reporting Quality; Company Size; Financial Leverage; Liquidity; Corporate Governance Practice --------------------------Article History : Received :2023-09-08 Revised : 2023-10-28 Accepted :2023-12-28 Online :2023-12-31 ABSTRACT This research seeks to investigate the impact of company size, financial leverage, liquidity, and corporate governance practices on the quality of financial reporting within the framework of value relevance. The study focuses on publicly-listed state-owned enterprises (BUMN) during the period spanning from 2017 to 2019. The research sample comprises 20 BUMN companies, selected using a purposive sampling method and totaling 60 observations based on specific criteria. This study adopts a quantitative descriptive research approach, utilizing secondary data for analysis. Panel data regression analysis serves as the primary analytical tool. The findings of this study reveal that firm size, financial leverage, liquidity, and corporate governance significantly influence the quality of financial reports in the value relevance context. The coefficient of determination test demonstrates an adjusted value of 77.5%, indicating that these variables collectively account for 77.5% of the variation in financial report quality in the value relevance approach. The remaining 22.5% is attributed to unexamined variables. INTRODUCTION On the contrary, the presentation of financial information comes with several inherent limitations, including its historical nature, generality, susceptibility to erroneous estimations, conservative nature, and the fact that it doesn't consistently align with real-world conditions. Accounting was established with a specific purpose: to provide essential services to customers and users of financial information required in the decisionmaking process (Harahap, 2011). The outcome of various accounting activities is the creation of financial reports. These reports serve as a medium to convey information to parties interested in a company's financial affairs (Kieso, 2017). Within the framework of financial reporting concepts, the primary aim of financial statements is to furnish financial information about reporting entities that proves valuable for current and prospective investors, creditors extending loans, and other stakeholders when making decisions concerning resource allocation to the entity (KKPK, 2015). Therefore, it's imperative to provide comprehensive, lucid, and precise financial information regarding the company's financial health, ensuring the company's ongoing operations. Financial reports also serve as a tool employed by management to demonstrate corporate responsibility in the utilization of resources entrusted to the company (IAI, 2018). This is because the information contained in these reports can be utilized as a means to gauge the company's performance. Furthermore, financial reports play a crucial role in determining aspects of future business planning. Consequently, the information contained in financial reports plays a pivotal role in decision-making. In 1 This is an open access article under the CC BY- SA license. Corresponding Author : Nasrullah Djamil Vol. 1, No. 1 (Des, 2023) Page 01-11 DOI : https://doi.org/10.5281/zenodo.10695247 essence, the information presented in financial reports must possess high value and quality. Companies that prepare financial reports diligently enhance transparency for users of financial statements, as noted by Komalasari and Permana (2015 in Purba 2018). To date, there exist diverse definitions of the quality of financial reports. Essentially, the quality of financial statements can be understood from two perspectives (Susanti, 2017). The first perspective suggests that financial statements are considered high quality if the current year's profit is a strong indicator of future profitability or closely linked to current cash flows in the upcoming period (Pagalung, 2012). The second perspective posits that the quality of financial reporting is related to a company's performance in the market capitalization, as manifested through share price movements (Fanani 2009 in Susanti 2017). This perspective aligns with the growing demand for companies to operate their management systems transparently and accountably, as fraudulent reporting attempts become more widespread in the corporate world (Prena, 2012). In terms of the characteristics of financial statements, the International Accounting Standards Board (IASB) underscores that financial information can be more useful for decision-making (quality) if it fulfills qualitative characteristics, which can be categorized as fundamental characteristics (relevance and faithful representation) and enhancing characteristics (comparability, verifiability, timeliness, and understandability) (Kieso, 2017). Financial reports serve as a pivotal decision-making tool for company owners, investors, and various stakeholders (Rohmah, 2017). The quality of financial reports is indispensable, as it directly influences the quality of decisions made by the company and its stakeholders. This aligns with the concept of assessing financial report quality within the relevance framework. The relevance framework in accounting information describes how investors respond to accounting information disclosures. Information is considered relevant if it has the capacity to impact economic decisions by assisting in the evaluation of past, present, and future decisions. Djamil, N. (2018) Hence, it is hoped that these issues can be mitigated to reduce the occurrence of irrelevant financial report presentations. The background of this concern is the prevalence of presenting financial statements that lack relevance due to information asymmetry issues in agency theory. Such modifications to financial reports, although intended to align with certain theories, can ultimately mislead users of financial reports. The repercussions of these actions extend to various parties, including CEOs, board members, audit committees, internal auditors, and external auditors, leading to questions arising from various quarters. According to Stice (2004, as cited in Rohmah 2017), internal company interests may pressure financial report creators to include information that could pique the interest of potential investors for external funding, potentially yielding future profits. This practice is often associated with information asymmetry in the form of modified financial reports. Therefore, external users must exercise caution and ensure that financial statements are presented objectively. However, as of now, Indonesia still witnesses instan (...truncated)