How to cite:
Ferry Wijaya. (2022). Value Relevance and Determinants of Financial
Statements. Journal of Eduvest. Vol 2 (9): Page 1800-1810
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2775-3727
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Eduvest – Journal of Universal Studies
Volume 2 Number 9, September, 2022
p- ISSN 2775-3735 - e-ISSN 2775-3727
VALUE RELEVANCE AND DETERMINANTS OF FINANCIAL
RESTATEMENTS
ABSTRACT
This research is a case study on Value Relevance And
Determinants. The purpose of this study is to analyze the
value relevance and determinants of financial restatements.
This study uses a quantitative approach method. This study
consists of 7 variables, namely the independent variable (X)
namely restatement, profitability, leverage, company size,
audit quality. The dependent variable (Y) is firm value,
restatement. The population used in this study are companies
that perform financial statement restatements, manufacturing
companies listed on the Indonesia Stock Exchange (BEl) in
the period 2014-2017. In this study the authors used two
sources of data, namely primary data and secondary data. The
results of this study indicate that based on the results and
discussion of the research, it can be concluded that; Financial
statement restatement has no effect on firm value;
Profitability, leverage, company size and audit quality
together can explain the possibility of a financial statement
restatement
KEYWORDS
Financial Statements, Restatement, Profitability, Leverage,
Company Size Quality
This work is licensed under a Creative Commons
Attribution-ShareAlike 4.0 International
INTRODUCTION
Reported financial statements have the general purpose of providing
information about a company's financial condition, performance and cash flows
that are useful to most users of financial statements in making investment
decisions and management's responsibilities for the use of entrusted financial
resources to Prove you. You. (PSAK No. 1, 2014). For the information in the
financial statements to be useful, the information in the financial statements must
meet essential characteristics that are relevant and appropriate for presentation
(Ali, Saffa, Besar, & Mastuki, 2018) .
Fery Wijaya
Value Relevance and Determinants of Financial Statements
1801
Information is considered relevant if it can influence the decisions of its
users (IASB, 2010). Not only the relevant information in the financial statements
must be properly presented. Fair representation means that illustrations and
descriptions correspond to existing or existing situations (Bailey Jr, McWilliam,
Buysse, & Wesley, 1998) . However, companies often have to adjust financial
statements (restatements) because the financial statements do not meet essential
quality, especially correct presentation, such as incomplete or incorrect
information that does not conform to GAAP (Gjerde, Knivsflå, & Saettem, 2008) .
On a global scale, financial statement adjustment has become a serious
problem, and the number of actually adjusted financial statements is increasing
year by year (Jurkowski et al., 2020) . In the U.S., high-profile financial-statement
restatement scandals such as Enron and WorldCom have done significant damage
to reputations and the stock market, and could even lead to bankruptcy. According
to the U.S. Government Accounting Office (GAO), there were approximately
2,705 restatements of financial statements, and the number continued to increase
over the 13 years from 2000 to 2013 (Ali et al., 2018) . Several previous studies
have found that the value of the company will weaken when restatement occurs
(Kieso, Weygandt, & Warfield, 2016) .
In addition to studying the correlation of degree restatement values, the
researchers also looked at the factors that lead to restatement. One of the reasons
that is usually the cause is the profitability factor. Profitability is the ability of a
company to generate profits and an indicator to measure the effectiveness of a
company's management (Watts & Zimmerman, 1986) . Managers will choose
accounting policies that transfer earnings reported in future periods to the current
period, making company earnings look high because managers want high
compensation. As a result, the reported earnings violated applicable accounting
principles requiring the company to adjust the reported earnings (Watts &
Zimmerman, 1986) . The practice of revenue recognition is the most common
reason for restatement (Bailey Jr et al., 1998) . However, the results of previous
studies (Netzer et al., 2011) , found that there was a negative relationship between
profitability and restatement.
Leverage or debt levels are also expected to have a significant impact on
financial statement adjustments. Solvency ratio or leverage ratio is a measure used
to regulate the extent to which a company's activities are financed by debt
(Kasmir, Senthilkumar, Britto, & Raj, 2011) . The higher the level of debt will
make the company seen by investors as having a high risk of default or violation
of credit agreements (Sembiring, 2005) . This tendency makes the company not
recognize debt as a whole. As a result, the financial statements are presented
incompletely so that the company is required to restate the financial statements on
the recognition of debt. In a study conducted by Alfonso (2018), it was found that
there was a negative relationship between debt levels and restatement, while
research (Netzer et al., 2011) found the opposite, namely a positive relationship
between debt levels and restatement.
Companies that are large and listed on the stock exchange tend to show
good performance, so it is possible for these companies to manipulate financial
statements. The results of previous studies (Bailey Jr et al., 1998) found a positive
relationship between firm size and the occurrence of restatement, but research
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(Netzer et al., 2011) found the opposite relationship, namely firm size had a
negative effect on restatement (Kirkulak & Balsari, 2009)..
Audit quality is also a factor that influences companies to restate financial
statements. Audit quality in general means the possibility of the auditor to detect
and report material misstatements contained in the client's financial statements or
accounting system. The higher the audit quality, the lower the possibility of
restatement. According to DeAngelo, 1981, big four KAPs have higher audit
quality than non- big four KAPs. Companies audited by the big four KAPs are
believed to have high audit quality so that the possibility of restatement of
financial statements is low. The results of previous research (Neumann et al.,
2018) , found that there was a negative effect of the size of the public accounting
firm on restatement. This study aims to analyze the effect of restatement of
financial statements on firm value and the effect of profitability, leverage, firm
size and audit quality on the occurrence of restatement of financial statements
(Liu et al., 2022) (Van Bergen et al., 2016) .
Based on the above background, research on the relevance of financial
statement restatement values and the factors that influence the occurrence of
restatements still has inconsistent results and is still rarely found in Indonesia
(Netzer et al., 2011) . This study aims to re-examine the relevance of the value of
the restatement of financial statements and the factors that cause the restatement
of financial statements. The results of this study are expected to support previous
research by providing additional empirical evidence and contributing as a useful
reference to the financial statement restatement literature.
RESEARCH METHOD
This study adopts quantitative research method. Quantitative methods aim
to test theories, establish facts, show relationships between variables, provide
statistical descriptions, and estimate and predict expected outcomes. This study
consists of 7 variables, the independent variable (X), namely restatement,
profitability, leverage, company size, audit quality. The dependent variable (Y) is
a fixed value, restated. The population used in this study is restatement of
financial statements, manufacturing companies listed on the Indonesian Stock
Exchange (BEl) for the period 2014-2017. In this study, the authors used two data
sources, primary data and secondary data. Data collection techniques performed in
this study consisted of distributing a list of questions in written or online format,
in the form of statements or questionnaires, with closed-ended answers. The data
analysis technique in this study is in the form of descriptive analysis, which is a
technique to express and explain the opinions of respondents based on answers
from research instruments that have been proposed by researchers. From the data
that has been collected, then a descriptive data analysis is carried out, namely by
describing objectively and systematically the situation in the field.
Fery Wijaya
Value Relevance and Determinants of Financial Statements
1803
RESULTS AND DISCUSSION
A. Analysis Results
In model 1 this study uses simple linear regression. Table 4.3 shows a
significant value of 0.627, which means it is greater than = 0.05 (5%), this result
shows that the Restatement variable has no significant effect on Company_Value.
Table 1
Value relevance results from restatement of financial statements
Coefficients
a
Model
Unstandardized
Coefficients
Standardize
d
Coefficient
s
T
Sig.
B
Std.
Error
Beta
1
(Constant)
-
6,45
4
7,366
-,876
,38
1
restatement
7.52
4
15,47
8
,024
,486
,62
7
a. Dependent Variable: Company_Value
Source: Results of data processing
In Model 2, the logistic regression model feasibility test was analyzed
using the initial results of the Hosmer and Lemeshow tests shown in Table 4.4
before assumptions were made. The test of fit value for goodness of fit measured
by chi-square in the Hosmer and Lemeshow test yields a significance level of
0.634, a significance ratio greater than 0.05. Therefore, it can be said that the
initial hypothesis (H0) cannot be explained, this result can be concluded that the
results of this study can predict the observed values, or the model can be said to
be acceptable because it is consistent with the observed data, as expected.
Variables such as profitability, leverage, firm size, and audit quality together can
explain trends in firms' restatement of financial statements.
Table 2
Feasibility Analysis of the Hosmerdan Lemeshow Test Model
Hosmer and Lemeshow Test
Step
Chi-square
df
Sig.
1
6,118
8
,634
Except for testing the ensemble model - by paying attention to the number
-2 log-likelihood, the ensemble model conforms to Table 4.5. The -2 log
probability for the constant-only model (block number = 0) is 444,580, while the -
2 log probability for the constant and independent variable model (block number
= 1) is -2 log probability 436,773. According to Ghozali (2011: 79) reducing this
number means that H0 is rejected and adding the independent variables
profitability, leverage, firm size, audit quality to the model improves the fitted
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model and shows a better logistic regression model to Running a regression model
can be used for further testing.
Table 3
Table -2 Log likelihood CONCLUSION
Iteration History
a,b,c
Iteration
-2 Logs
likelihood
Coefficients
Constant
Ste
p 0
1
445,940
-1.096
2
444.581
-1,227
3
444.580
-1,231
4
444.580
-1,231
a . Constant is included in the model.
b. Initial -2 Log Likelihood: 444,580
c. Estimation terminated at iteration number 4 because parameter estimates
changed by less than .001 .
Iteration Historya,b,c,d
Iteration
-2 Logs like
elimination
Coefficients
Consta
nt
Profitabi
lity
Leverage
Compan
y_Size
Quality_A
udit
Step
1
1
440.54
0
-2.856
-
,21738
4
-,010
,128
-,136
2
437,47
9
-3.691
-,
-,028
,180
-,202
3
436,78
3
-3,799
-,437
-0.059
,189
-,230
4
436,77
3
-3.815
-,433
-,063
,191
-,234
5
436,77
3
-3.815
-,433
-,063
,191
-,234
a. Method: Enter
b . Constant is included in the model.
c. Initial -2 Log Likelihood: 444,580
d. Estimation terminated at iteration number 5 because
parameter estimates changed by less than .001 .
Source: Results of data processing
From table 4.6, it can be seen from the value of Nagelkerke's R Square of
0.028, which means that the variability of companies performing financial
statement restatements (the dependent variable) can be explained by the
variability of the independent variables (profitability, leverage, firm size, audit
quality) of 2.8%. While the remaining 97.2 % is explained by other variables
outside the model.
Fery Wijaya
Value Relevance and Determinants of Financial Statements
1805
Table 4
Nagelkerke R Square
Model Summary
Step
-2 Logs likelihood
Cox & Snell
R Square
Nagelkerke R
Square
1
436,773
a
0.019
0.028
a. Estimation terminated at iteration number 5 because parameter estimates
changed by less than .001 .
Multicollinearity testing was conducted to test whether there was a
correlation between independent variables. Whether or not multicollinearity
occurs, it can be seen from the Variance Inflation Factor (VIF) and Tolerance
values in Table 4.7.
Table 5
Multicollinearity Test
Coefficients
a
Model
Collinearity
Statistics
Tolerance
VIF
1
(Constant)
Profitability
,991
1.009
Leverage
,994
1.006
Company_Size
,732
1.366
Quality_Audit
,727
1.376
a. Dependent Variable: Financial_Restatement
Source: Results of data processing
From the test results, it is known that VIF < 10 and Tolerance > 0.10 for
all independent variables, which means that there is no multicollinearity between
the independent variables in this study.
Table 6
Classification Table 2 x 2
Classification Table
a
Observed
Predicted
restatement
Percentage
Correct
,00
1.00
Step 1
restatement
,00
322
0
100.0
1.00
93
1
1.1
Overall Percentage
77.6
a. The cut value is ,500
Source: Results of data processing
From table 4.8 above, it can be seen that the accuracy of the model is 77.6
% . To test the hypothesis in model 2, namely about profitability, leverage, firm
size, audit quality on financial statement restatements using Wald's test, and the
results are as follows:
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Table 7
Wald test
Variables in the Equation
B
SE
Wa
ld
df
Si
g.
Exp
(B)
95% CIfor
EXP(B)
Low
er
Upp
er
Ste
p 1
a
Profitability
-,433
,7
43
,34
0
1
,5
60
,649
,151
2,78
2
Leverage
-,063
.0
44
2,1
15
1
,1
46
,939
,862
1.02
2
Company_Siz
e
,191
,0
86
4,8
76
1
0.
02
7
1,21
0
1.02
2
1,43
3
Quality_Audi
t
-,234
,2
95
,63
0
1
,4
28
,791
,443
1,41
1
Constant
-
3.81
5
1,
20
5
10,
019
1
,0
02
,022
a. Variable(s) entered on step 1: Profitability, Leverage, Company_Size, _Audit
Quality .
Source: Results of data processing
Based on the results of the Wald test, it can be seen that the most significant
result, namely the sig value at the 5% level (Sig 0.05 ) is size (firm size). While
the rest, namely profitability, leverage, audit quality has no evidence / insufficient
evidence affects the dependent variable, namely the restatement of financial
statements.
B. Discussion of Research Results
1. Effect of restatement of financial statements on firm value
Table 8
Simple Regression Test
Model Summary
Model
R
R
Square
Adjusted
R Square
Std. Error
of the
Estimate
dimension0
1
,024
a
.001
-,002
131.97991
a. Predictors: (Constant), Financial_Restatement
Source: Processed Data
The results of the feasibility test on model 1, the simple linear
regression test showed that the value of the coefficient of determination
(R2) in the simple linear regression test in table 4.10 showed a value of
0.001. This means that 0.1 % of the variation in firm value can be
explained by the financial statement restatement variable. The remaining
Fery Wijaya
Value Relevance and Determinants of Financial Statements
1807
99.9 % change in firm value is influenced by other variables outside the
research model.
The financial statement restatement variable has a significance
value of 0.627 with a beta value of 7.524 which means that there is not
enough evidence that financial statement restatement has an influence on
firm value. This result is not in accordance with the research hypothesis
which states that the financial statement restatement has a negative effect
on firm value. The results of this study do not support the results of
previous studies (Netzer et al., 2011) that the value of the company will
weaken when the restatement occurs.
The results of this study also do not support the theory of market
efficiency which states that market prices always perfectly reflect available
information and react immediately to new information. This is indicated
by the absence of the effect of restatement of financial statements on firm
value. This can be due to the number of companies that did restatement of
financial statements during the study period only 22.6% of the total sample
of 416. This number is so low that it cannot prove that restatement has an
effect on firm value.
2. Factors Affecting the Occurrence of Financial Statement
Restatements
The feasibility test results of Model 2 show that profitability,
leverage ratio, firm size and audit quality together can explain the
tendency of firms to adjust financial statements, and the explanatory
power/determination value (R2) value of this model is 0.028. This means
that 2.8% of the variability in financial statement restatements can be
explained by variables such as profitability, leverage, company size, and
audit quality. The remaining 97.2% of financial statement adjustments are
explained by other variables outside the research model. The impact of
each variable on financial statement adjustments:
a. The effect of profitability on the restatement of financial
statements
The test results show a significant value of 0.560 and beta -0.433,
which means that profitability has no effect on the restatement of financial
statements. These results are inconsistent with research hypotheses, which
suggest that more profitable firms are more likely to report financial
adjustments. The results of this study are inconsistent with those of Wang
& Wu, 2011; Chi et al., 2011; Chi & Sun, 2014, pointing out that
profitability affects the restatement of financial statements. This finding
contradicts an opportunistic form of agency theory, which explains that
executives eager for high compensation choose accounting policies that
shift profits reported in future periods to the current period (Oswald, 2008)
As a result, the reported income may violate the applicable
regulations, thereby allowing for a restatement of revenue recognition. The
absence of a significant effect between profitability and financial statement
restatement can be caused by the achievement of a fairly low level of
profitability in manufacturing companies during the 2014-2017 period,
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where on average the company's ability to generate profits is only around
6%. With the average profitability ratio of only about 6%, it can be
concluded that the level of profitability of manufacturing companies is not
too high or still below 10%. With profitability conditions that are not too
high, it does not encourage the company's management to restate the
financial statements.
b. The effect of leverage on the restatement of financial statements
The results of this study show a significant value of 0.146 and a
beta value of -0.063, which means that there is not enough evidence that
leverage has an effect on Financial Statement Restatement. This result is
inconsistent with the research hypothesis which states that the higher the
level of leverage, the more likely the company is to restate its financial
statements. The results of this study do not support previous research
(Neumann et al., 2018) which found that there was an influence between
the level of debt and the restatement of financial statements (Sembiring,
2005) .
There is not enough evidence that leverage has an effect on
financial statement restatement, perhaps due to the company's debt
activities, most of their funding levels are not obtained from debt.
Therefore, leverage is not a significant factor in the occurrence of financial
statement restatements. This is indicated by the high value of the leverage
ratio of manufacturing companies which reached 2,578 in 2016.
c. The effect of company size on the restatement of financial
statements
The test results show a significance value of 0.027 and a beta value
of 0.191, which means that it is proven that the size of the company has a
significant effect on the restatement of financial statements. The results of
this study are in accordance with research (Bailey Jr et al., 1998) which
found that firm size has an effect on the occurrence of restatement (Park &
Gao, 2006) .
The results of this study are in accordance with the statement of
Stolowy & Breton, 2000 which states that large companies, when viewed
from reported earnings in a stable position, will provide more confidence
for company owners accompanied by the aim of increasing shareholder
satisfaction through growth and stability. reported earnings, but still within
the limits of applicable accounting rules.
d. The effect of audit quality on the restatement of financial
statements
The results of this study indicate a significant value of 0.428 and a
beta value of -0.234, which means that there is insufficient evidence that
audit quality has an effect on Financial Statement Restatement. This result
is inconsistent with the research hypothesis which states that the lower the
audit quality, the more likely companies are to restate their financial
statements. The results of this study do not support previous research
conducted (Neumann et al., 2018) and (Liu et al., 2022) which found that
Fery Wijaya
Value Relevance and Determinants of Financial Statements
1809
there was a significant effect between the size of public accounting firms
and the occurrence of restatements. This shows that the size of the KAP
has no effect on the possibility of a financial statement restatement
(Siagian & Utami, 2022) .
There is no influence between audit quality and financial statement
restatement in manufacturing companies in this study, one of which is due
to only a small number of companies or less than 50% of companies using
the services of the big four KAPs during the 2014-2017 period. This can
be seen from the average maximum audit quality score that only reached
38.5 % in 2017, and the lowest was 34.6% in 2014 and 2015. Thus, it can
be concluded that on average less than 50% companies that use KAP
services are included in the big four.
CONCLUSION
Based on the results and discussion of research, this research can be
concluded that; Financial statement restatement has no effect on firm value;
Profitability, leverage, firm size and audit quality together can explain the
possibility of a financial statement restatement. The influence of each variable is
described as follows (a) There is insufficient evidence that the greater the
profitability, the more likely the company to restate its financial statements. (b)
There is insufficient evidence that the higher the leverage owned by the company,
the more likely the company is to restate its financial statements. (c) It is proven
that the larger the size of the company, the more likely it is that the company will
restate its financial statements. (d) There is insufficient evidence that the poorer
the audit quality, the more likely the company is to restate the financial
statements.
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