DETERMINANTS OF ACCOUNTING CONSERVATISM IN POLITICALLY CONNECTED FIRMS

This study aims to examine the effect of corporate attributes and corporate governance mechanisms on accounting conservatism in politically connected firms. This study uses 806 company-year observations consisting of large companies registered for 13 years from 2005-2017. Moderation regression analysis panel data is used for the analysis. Using two conservatism measurements, namely accrual and book-market, the results of the study show that the two models are inconsistent in producing tests for the influence of company attributes but are consistent in producing tests of corporate governance mechanisms. Firm size, profitability, audit committee, independent board, and audit litigation are the determinants of accounting conservatism in large companies. Independent Commissioners and audit committees as an internal mechanism of corporate governance negatively affects the application of accounting conservatism. The results of this study are also consistent with testing the interaction of political connections that strengthen the audit committee’s negative influence on the level of corporate conservatism. These results provide empirical evidence that the existence of an independent commissioner or audit committee weakens the influence of corporate governance mechanisms on the application of accounting conservatism in politically connected companies. Looking at the educational background and work experience and free from political elements, so that the existence of the board of commissioners and the audit committee are no longer considered a rubber stamp for the policies that have been made by management. This study is the first to investigate the moderation of political connections on corporate attributes and GCG mechanisms towards comprehensive accounting conservatism. been made by management. The results of testing the effect of audit litigation on accounting conservatism have a significant positive effect both using the accrual model and the market model. This research shows that the role of Big 4 accounting firms in auditing companies can encourage the use of the principle of higher conservatism in the company’s financial reporting process. The results of this study are consistent with Khan et. al. (2018) and Rahayu and Gunawan (2018). Based on the test results, leverage, capital intensity, and growth opportunity based on the results of ac crual models and market models are not determinants of the level of corporate accounting conservatism. These Based on the results of testing the accrual and market models, political connections can moderate the influence of leverage, firm size, profitability, audit committee and audit litigation on accounting conservatism. Political connections can strengthen the influence of corporate leverage on accounting conservatism using both the ac crual and market models. This empirical evidence shows that the higher the company’s debt, the higher the con servatism of accounting in politically connected companies. The results of this study support previous studies conducted in Indonesia which document that leverage positively influences accounting conservatism (Yuliarti The results of testing the interaction of political connections on the effect of firm size with the level of corporate conservatism based on the accrual model have a significant positive effect. These results indicate that the higher the size of a politically connected company, the company will tend to use accounting principles that can reduce earnings reports to reduce political costs (conservatism). These results support the political cost theory where political costs will increase along with firm size. Hence, the larger the size of a company, the greater the politi cal costs to be paid. This results in managers reducing profits during this period so that political costs can also be reduced or more conservative. The results of this study support the research of Agustina et. al., (2015), Xia and Zhu (2009) and El-Bannany (2017). However, based on testing the market model, firm size has a negative effect on accounting conservatism. opportunity growth towards conservatism has a significant negative effect. These results indicate that the higher the growth opportunities of companies, politically connected companies will use less conservative accounting principles. The results of testing the audit committee and the independent commissioners, which are corporate governance mechanisms, produced mixed results from the two conservatism measurement models. Based on the accrual model, political connections strengthen the negative influence of the audit committee on the level of corporate conservatism, while according to the market model the interaction of political connections on the audit com mittee and the independent board of commissioners on conservatism is not significant. The results show that the existence of an independent board of commissioners and the audit committee as a corporate governance mechanism of the company was not able to carry out its control functions properly in politically connected companies. These results support the findings of Mohammed et. al. (2017) which reveals that the structure of corporate governance in terms of boards and audit committees negatively affects the conservatism of politically connected companies. The results of this study also support the findings of Wati (2017) which shows that the existence of the board of commissioners with active and inactive background and their activities in politically connected companies is quite effective and has an impact on the company’s value both short and long term. This finding indicates that the existence of officials as an independent commissioner or chief commissioner in the company one of the benefits is to become a bridge for companies to obtain the benefits of political con nections including various facilities. They ignore the GCG where the board of commissioners as a monitoring function for management is used as a place to seek political rents. The results of this study provide empirical evidence that the existence of an independent commissioner or audit committee in the company weakens the influence of corporate governance mechanisms on accounting conservatism in politically connected compa -nies. The increasing number of independent commissioners and audit committees will reduce their ability to control management. These results are in line with Yermack (1996) and Wati (2017) who say that the ability of the board of commissioners to monitor will decrease with the increasing size of the board of commissioners because it will cause problems in coordination communication and decision making. The results of testing the influence of audits litigation have a positive effect