Corruption and earnings quality: further evidence and exploration from Indonesia

Abstract

Corruption within corporate entities continues to be a relatively overlooked yet significant issue to date. This study seeks to investigate the impact of corruption on the quality of earnings. The sample comprises 846 firm-years listed on the Indonesian Stock Exchange. Earnings quality encompasses factors such as earnings persistence, earnings value relevance, and earnings predictability. Corruption is gauged by the corruption per capita in the region where the firms are headquartered. The data analysis employs regression models incorporating firm and province effects. Broadly, the findings of this study indicate that corruption diminishes earnings quality. Heightened corruption is associated with weakened controlling and monitoring functions, increased information asymmetry, and diminished managerial quality, all contributing to a decline in earnings quality. This research not only expands upon previous studies but also reaffirms the relevance of the social capital concept while presenting new empirical evidence within a context of a country with a higher corruption perception index, such as Indonesia.

IMPACT STATEMENT

The relationship between corruption and earnings quality becomes a new insight for public. Regulator and society can maintain the good norm and value to reduce the bad impact of corruption into social capital. Indonesia has an increasing corruption perception so regulator, society, and business participants can improve the controlling and monitoring function to avoid misbehavior. Specifically, business participants can avoid misbehavior of report the lower quality earnings. It is new evidence in Indonesia and expected to be a consideration to formulate public and business policy in Indonesia

Keywords:

• Corruption
• earnings quality
• earnings persistence
• earnings value relevance
• earnings predictability

REVIEWING EDITOR:

• Chris Jones, Aston University, United Kingdom of Great Britain and Northern Ireland

SUBJECTS:

• Business, Management and Accounting
• Finance
• Economics

Authors’ contributions

Eko Arief Sudaryono contributes to do the conception and design, analysis and interpretation of the data, the drafting of the paper, revising it critically for intellectual content, and the final approval of the version to be published. Wahyu Widarjo contributes to do the conception and design, analysis and interpretation of the data, revising it critically for intellectual content, and the final approval of the version to be published. Agung Nur Probohudono contributes to do the conception and design, analysis and interpretation of the data, revising it critically for intellectual content, and the final approval of the version to be published. Adhitya Agri Putra contributes to do analysis and interpretation of the data and revising it critically for intellectual content. Frank Aligarh contributes to do analysis and interpretation of the data and revising it critically for intellectual content. All authors agree to be accountable for all aspects of the work.

Data availability statement

Financial data are accessed from financial reports published on the firms’ website or the Indonesian Stock Exchange website (www.idx.co.id). Corruption data were accessed from the corruption level report published on the Indonesian Corruption Eradication Committee website (www.kpk.go.id).

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Notes on contributors

Eko Arief Sudaryono

Eko Arief Sudaryono is a lecturer in Faculty of Economics and Business, Universitas Sebelas Maret (UNS), Indonesia. Research interests including financial accounting, financial reporting, corporate tax, corporate social responsibility, and corporate governance.

Wahyu Widarjo

Wahyu Widarjo holds a PhD in Accounting from Universitas Sebelas Maret (UNS) in Surakarta and is a Lecturer in the Faculty of Economics and Business at Universitas Sebelas Maret.

Agung Nur Probohudono

Agung Nur Probohudono holds a PhD from Curtin University, Australia, and is a Professor in the Faculty of Economics and Business at Universitas Sebelas Maret in Surakarta, Indonesia.

Adhitya Agri Putra

Adhitya Agri Putra is a lecturer in Faculty of Economics and Business, Universitas Riau, Indonesia. Currently, he is attending a doctoral program in Faculty of Economics and Business, Universitas Sebelas Maret, Indonesia. Research interests including financial accounting, financial reporting, corporate social responsibility, and corporate governance.

Frank Aligarh

Frank Aligarh is an assistant professor at the Universitas Islam Negeri Raden Mas Said Surakarta, Indonesia. The author’s interest research mainly concentrates on Financial Technology, Behavioral Accounting, and Accounting Information Systems. Frank Aligarh is pursuing his PhD at Universitas Sebelas Maret (UNS) Surakarta, Indonesia.