Factors affecting the integrity of financial statements

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Abstract

Financial statements can be a powerful way to disseminate information about a company’s finances or operations. Alchian’s (1950) evolutionary theory of economic change posits that market forces will naturally regulate businesses. This compiles and analyzes the empirical evidence to empirically explore, from an Indonesian perspective, how corporate governance, internal audit quality, and external pressures interact to affect the integrity of financial statements. Quantitative methods were used for this investigation. This information comes from a secondary source. The researchers here used a systematic sampling strategy called purposive sampling. This study used data from 96 samples collected over the course of three years. In this study, the researchers employed the panel data analysis technique with the help of the EViews software. Corporate governance is examined through the lenses of institutional ownership, managerial ownership, audit committees, and the proportion of independent commissioners. Financial statement integrity was found to be significantly affected by independent commissioners but not by institutional ownership, managerial ownership, or audit committees. The consistency of the financial statements is unaffected by either the quality of the internal audit or any external pressures. Managers are careful not to artificially inflate company profits in order to keep institutional investors happy, as they own a disproportionately large share of the company’s stock. This means that the stability of financial statements improves as institutional and managerial ownership grows.

Keywords: Financial Statements, Integrity, Corporate Governance, Institutional Ownership, Managerial Ownership, Audit Committees, Independent Commissioners

Authors’ individual contribution: Conceptualization — M.F.; Methodology — A.W., G.S., and L.; Investigation — M. and A.I.R.; Resources — A.W. and G.S.; Writing — Original Draft — M.; Writing — Review & Editing — M. and A.P.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: D21, H32, L2

Received: 17.06.2022
Accepted: 11.07.2023
Published online: 13.07.2023

How to cite this paper: Meiryani, Fahlevi, M., Robbani, A. I., Winoto, A., Salim, G., Purnomo, A., & Lusianah. (2023). Factors affecting the integrity of financial statements. Corporate Governance and Organizational Behavior Review, 7(3), 211–227. https://doi.org/10.22495/cgobrv7i3p17