STATE-OWNED COMPANY DECISION ON CHOOSING AUDITOR: EVIDENCE FROM EARNING QUALITY ANALYSIS

The importance of using big accounting firm may depend on governance level in each company. If they have good corporate governance and have high concern on improving governance, the company may prefer to use big accounting firm (Lina & Liub 2009; and Houqe, Zijl, Dunstan, & Karim 2015). State-owned enteprise (“BUMN”) may have higher agency problem as their objective is people welfare but still profit-oriented. So, they have higher ability to defer the earning than other company. We include research sample of all BUMN which listed on Indonesia stock exchange (IDX) except those which participate in banking and financial industry (JASICA 8). By using discretionary accrual as proxy of lower earning quality and accounting firm size as proxy of audit quality, we found negative relationship between those variable. In other words, if the company want to improve their earning quality they should consider on usinge big accounting firm. In additional analysis, we found that big accounting firm able to reduce management intention to defer earning and tax expense. I encourage government of Indonesia (“the Government”)to advise BUMN to consider on using big accounting firm to improve earning quality and reduce fraudulent act through financial reporting by management.

Some countries (e.g. Indonesia) regulate the listed companies to rotate the accounting firm each six year and partner each three year. However, the other countries which decide not to rotate the accounting firm (e.g. Australia, USA, and others) still regulate the partner rotation. Bandyopadhyay, Chen, & Yu (2014) argue that the benefit on rotating the accounting firm is less than the cost of the rotation. Their finding may not applicable for some countries due to the difference on quality.
According to Transparency International, corruption, openness, and governance score in Indonesia is low. Government audit or internal reporting division is not sufficient to ensure the financial report has properly reported based on accounting standard on BUMN, there may be conflict of interest because the auditor is supervised by the Government. Public investor will be suffered from this condition because management of BUMN may falsify the financial information. This will reduce stakeholder trust on BUMN then the cost of capital will be higher (Persakis & Iatridis 2015 (1981) conclude that bigger accounting firm will increase the audit quality. Comprix and Huang (2015) found more specific conclusion that smaller accounting firm does not have ability to prevent opportunistic management but they do not found evidence that shows the smaller accounting firm assist or advise their client to do fraud. not comply with this regulation because they concern on quality of financial report.

Accounting firm rotation in Indonesia
Audit partner rotation is regulated by authority in most of country in the world, and they have different view on accounting firm rotation. However, European Commision and US' PCAOB considering to implements rotation obligation on the accounting firm recently. The different views come from assumption that the rotation able to maintain the independence and quality of accounting firm, however some countries like Australia and USA view that cost of the rotation is less than its benefit (Bandyopadhyay et al. 2014).
Big accounting firms have a big resource so they do not need to worry by changing its business strategy significantly if they lose profitable client. This is one of the reason on why many researcher use this proxy to control the pressure from client (client importance) (Bandyopadhyay et al. 2014;dan Wahyuni & Fitriany 2012). By observing the advantage of big accounting firm, Carey & Simnet (2006) shows that audit quality in Australia increases because the impact of partner rotation. This research does not discuss those different views but to find the empiric evidence on relationship between audit quality and earning quality.

Audit quality and earning quality
On company level, by choosing competent accounting firm may signal the stakeholder that management has keep good corporate governance so the cost of capital will relatively lower compare to company which has weaker corporate governance. However, as rational people, management loss some of their chance to extract resources from their company for personal needed. So, in general, the Company which has weaker corporate governance will choose accounting firm which has lower competency, vice versa (Lina & Liub 2009;and Houqe, Zijl, Dunstan, & Karim 2015).
Earning quality usually measured by measuring the accretion of management to falsify the financial information or the chances on doing earning management. Earning management is fraudulent act which performed by the management through financial reporting fraudlent to influence the short term performance of company. One of the proxies of earning quality is using discretionary accrual.
If the balance is high (in absolute amount), the earning quality of the financial report is low because management able to manage transaction without any business essence or defer the transaction.
There are several methods on calculating discretionary accrual so we use a method which aligns with research objectives. This research use Dechow model because it does not require special specification between discretionary accrual with corporate financial performace (adjusting their performance with industry performance) and defer the excess performace.
Dechow model also more appropriate to be used because this research does not observe the changes on company's value in the long run and operating performance in specific but the implication of using big accounting firm.

Accounting firm choices on BUMN
Earning quality in each BUMN is different because each manager has different views.
However, Chen et al. (2011) argue that BUMN does not have higher motivation to manage their earning recognition than other listed company.
So BUMN has bigger agency problem because they are profit oriented by nature but the managers does not have enough ownership share on BUMN (Tang et al. 1999 (Bandyopadhyay et al. 2014).
The proxy of discretionary accrual is developed by Jones (1991)   Variable SHAR used to control company's experience on industry specific company. This paper use variable POWR to control the pressure from client. SHAR measured by using portion of total asset of the compay to total asset in related industry, where POWR is the portion of total asset compare to total asset audited by same accounting firm. SHAR and POWR calculated on each year by using data from Datastream for all listed BUMN.

RESEARCH RESULT
Desctiptive statistics on listed BUMN on IDX is described at