jai | Journal of Accounting and Investment
Article Type: Research Paper
Transfer Pricing, Agency Costs, and Financial
Reporting Aggressiveness: An Empirical Study
in Indonesia
Eva Herianti*
1
and Amor Marundha
2
Abstract: The purpose of this study is to explore the effect of transfer pricing
strategy and agency cost on financial reporting aggressiveness. This paper used
61 manufacturing industries listed on the Indonesia Stock Exchange from 2013 to
2017 period among which 305 companies were selected by purposive sampling
method to be studied. The research questions were tested using panel data
regression analysis. This study found that transfer pricing strategy had no
significant effect on financial reporting aggressiveness but agency cost had
negative and significant effect on financial reporting aggressiveness.
Furthermore, control variables as growth and return on asset had positive and
significant effect on financial reporting aggressiveness while size had negative and
significant effect on financial reporting aggressiveness. Results of this study
indicated that managers did not use transfer pricing strategy in managing
earnings because there was regulation of OECD to control manager behaviour in
implementing transfer pricing strategy. In addition, agency cost was one of the
important factors in reducing manager behaviour to meet their interests.
Keywords: Transfer Pricing; Agency Cost; Financial Reporting Aggressiveness.
Introduction
Aggressiveness of financial reporting is earnings management action taken
by managers within or beyond the limits of applicable accounting
principles (Frank, Lynch, & Rego, 2009). Watts and Zimmerman (1990)
explained that one of the motivations for managers to aggressively
engage in financial reporting is to obtain bonus/incentives, debt contracts,
or political cost. Therefore, managers need to convince shareholders that
their performance has been met through optimization of accounting profit
figures. This condition results in managers trying to manage profits
opportunistically to meet their interests.
Several cases of financial reporting aggressiveness that occur in global
companies prove that managers manage earnings to meet their interests,
such as the case of Toshiba that occurred in 2015 (Sofyani & Rahma,
2017). In addition to the Toshiba case, several cases of financial reporting
aggressiveness have occurred globally, namely the Enron, Worldcom,
Tyco, Health South, and Xerox cases (Ujiyantho & Pamungkas, 2007).
AFFILIATION:
1
Department of Accounting,
Universitas Muhammadiyah
Jakarta, Indonesia.
21
Department of Accounting,
Universitas Bhayangkara Jakarta
Raya, Jakarta, Indonesia
*CORRESPONDENCE:
heriantieva@gmail.com
THIS ARTICLE IS AVALILABLE IN:
http://journal.umy.ac.id/index.php/ai
DOI: 10.18196/jai.2003132
CITATION:
Herianti, E., & Marundha, A.
(2019). Transfer Pricing, Agency
Cost, and Financial Report
Aggressiveness: An Empirical Study
in Indonesia. Journal of Accounting
and Investment, 20(3), 325-338.
ARTICLE HISTORY
Received:
23 March 2019
Reviewed:
4 August 2019
Revised:
12 August 2019
Accepted:
29 August 2019
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http://journal.umy.ac.id/index.php/ai/article/view/6045
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Cases of financial reporting aggressiveness do not only occurr in global companies, but
also in Indonesian companies, such as the cases of PT. Kimia Farma, Tbk; PT. Indofarma,
Tbk; PT. Lippo, Tbk; PT. Katarina Utana, Tbk; PT. Bumi Resources, Tbk; and PT. Ades
Affindo, Tbk (Vajriyanti, Widanaputra, & Putri, 2015). These cases prove that the
aggressiveness of financial reporting is still managers’ strategy in managing profits
opportunistically to meet their interests.
The aggressiveness of financial reporting action can be done through transfer pricing
policies to manage earnings. In this case, the transfer pricing scheme carried out by
managers is to set accounting profit figures as the managers wishes. The aim is to
achieve the accounting profit target, so as to provide a positive signal to shareholders
regarding the company's prospects. Scott (2015) stated that the manager's opportunistic
policy to manage earnings is motivated by the amount of tax that is borne by the
company, so that the tax burden owed becomes smaller as accounting profits have been
set by the manager.
Santosa and Suzan (2017) explained that transfer pricing is the price contained in each
product or service from one division to another in the same company or between
companies that have a special relationship. Transfer pricing is carried out by managers
to manipulate accounting profit figures through transactions with parties that have a
special relationship either through transactions with business groups that obtain tax
holiday facilities, transfer profits to business groups that have suffered losses, as well as
making transactions to business groups in tax-exempt countries or low tax rates.
The Director of International Taxation in Indonesia stated that several companies in one
business group in Indonesia tended to adopt a transfer pricing policy to multiply profits
from one company to another that had smaller tax obligations. The method used in
Indonesia for transfer pricing policies is, (1) transfer pricing transactions are carried out
when there is one company in a business group that receives tax holiday facilities. This is
done because companies that get tax holiday facilities do not have tax obligations, and
(2) transfers a portion of profits to companies in a business group that records net
losses. This condition is done because the company that loses has no tax obligations.
The results of research conducted by Hwang, Chiou, & Wang (2013) shows that most
transactions with related parties are arranged to meet the interests of managers.
Beuselink and Deloof (2014) stated that business groups are more likely to be involved
in aggressiveness of financial reporting than non-business groups. Rasheed, Abdul, &
Mallikarjunappa (2018) and Marchini (2018) stated that the higher transfer pricing policy
undertaken by related parties shows the higher aggressiveness of corporate financial
reporting. Meanwhile, Ying and Wang (2013) showed that companies do aggressiveness
in financial reporting followed by excessive tunneling to control shareholders in
removing profits imported from companies that conduct IPOs.
Aharony, Wang, and Yuan (2010) stated that many companies use related party
transactions to improve company performance during the initial public offering (IPO)
period. His findings prove that sales transactions with related parties are mostly used by
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companies that conduct IPOs with the parent company to enable companies to regulate
accounting profit figures, so they can affect the market, although this transaction can
benefit the company.
The transfer pricing policy that occurred in Indonesia caused the Indonesian government
to issue Regulation of the Minister of Finance (PMK) Number 213 / PMK.03 / 2016
regarding Additional Documents and / or Information that Must Be Stored by Taxpayers
conducting Transactions with Parties with Special Relationships. This Regulation of the
Minister of Finance (PMK) is an improvement to the Regulation of the Director General
of Tax Number 23 / PJ / 2013 which regulates transfer pricing. This Regulation of the
Minister of Finance (PMK) not only regulates the requirement for making additional
transfer pricing documents for transactions with related parties that are abroad, but
with related parties that are in the country. The purpose of the issuance of this
regulation is to increase the transparency of the transfer pricing policy, so that this
policy can minimize opportunistic managerial actions.
One of the factors that can influence the behavior of company management in reducing
the aggressiveness of financial reporting is the existence of agency costs used by
companies in monitoring management behavior to suit the interests of shareholders.
Agency costs are costs incurred by the principal to the agent to act in accordance with
the interests of the principal. The aim is to reduce conflicts of interest between
principals and agents. Agency costs incurred by the company, namely, (1) audit fees to
control opportunistic managerial actions, (2) bonding costs to ensure that agents will
not make decisions that are detrimental to the principal, and (3) residual loss as a result
of manager decisions that should be able to optimize shareholder profits. This condition
affects managers to reduce opportunistic behavior in managing company profits.
Some previous research findings about the effect of transfer pricing and agency costs on
financial reporting aggressiveness are the results of Rasheed et al. (2018), Marchini
(2018), and Hwang et al. (2013) showed that transfer pricing has a positive and
significant effect on management. In addition, the findings of Man, Locke, and Wellalage
(2018) shows that agency costs negatively affect earnings management. The limited
number of previous studies examining the effect of transfer pricing and agency costs on
the aggressiveness of financial reporting shows that this research is important to be
carried out by researchers. This is proven by the inconsistency of the findings of the
previous research that has not been found.
The contribution of this study is to fill the void of literature studies that examine the
effect of transfer pricing and agency costs on the aggressiveness of financial reporting.
In addition, this research can be used by various stakeholders in decision making. The
effectiveness of regulations governing transfer pricing can reduce the opportunistic
behavior of managers, as well as the existence of agency costs in order to reduce the
aggressiveness of financial reporting. Based on this description, this study aims to
examine the effect of transfer pricing and agency costs on the aggressiveness of
financial reporting on manufacturing companies listed on the Indonesia Stock Exchange
(IDX) for the 2013-2017 period.
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Literature Review and Hypotheses Development
Agency Theory
The capital market is an alternative for shareholders to invest in companies. That is,
shareholders entrust their resources to be managed by the company. The aim is to
increase shareholder prosperity in the future (Jensen & Meckling, 1976). However, the
company or manager has their own motivation to fulfill their interests which causes a
conflict of interest between shareholders and managers.
Conflicts of interest experience significant developments between shareholders and
managers when the motivation of managers is to get bonuses in fulfilling their interests.
Ali and Hirshleifer (2017) explain that the opportunism of company managers shows
that managers have the motivation to achieve profit targets and hide information that is
less favorable for shareholders or the information conveyed by managers to
shareholders does not indicate the actual condition. As a result of the conflict of
interest, the shareholders try to suppress the manager's opportunistic behavior through
monitoring mechanisms or compensation schemes, so that managers can meet the
interests of shareholders.
The impact of a conflict of interest is the emergence of agency costs. Agency costs are
costs incurred to reduce conflicts of interest. Agency costs incurred by the company
such as, (a) audit fees as a form of costs incurred to oversee the actions of company
management to act in the interests of shareholders, (b) bonding costs as a form of
guarantee that company management does not take profits based on the facilities
obtained, and (c) costs to restore the company's reputation if the company's
management does not manage the company well, giving rise to lawsuits.
Financial reporting aggressiveness Financial accounting standards are designed to
provide opportunities for company management to choose various alternative
accounting methods in the financial reporting process. The aim is to adjust reporting of
transactions and economic events according to the substance of transactions and
industry practices, so as to improve the reliability of accounting information published
by company management. However, the alternative flexibility of this accounting method
is then used by company management to act opportunistically in managing earnings
aggressively, called the aggressiveness of financial reporting.
Frank et al. (2009) explain that the aggressiveness of financial reporting is earnings
management actions taken by company management within or beyond the limits of
applicable accounting principles. The aggressiveness of financial reporting is done
intentionally by managers to meet the interests of managers. The aggressiveness of
financial reporting is an implementation of company management decisions that are not
in accordance with applicable standards (Schipper, 1999). The aggressiveness of
financial reporting is carried out by company management because accounting
standards are based on an accrual basis. That is, recognition of business transactions is
based on the time the transaction occurred not when the cash is received. This allows
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company management to manage the company's revenue, so that it will affect
accounting profit figures.
Transfer Pricing
Transfer pricing is a classic phenomenon that often occurs in the field of taxation
especially those relating to transactions with related parties or have special
relationships. Santosa and Suzan (2017) explained that transfer pricing is the price
contained in each product or service from one division that is transferred to another
division within the same company or between companies that have a special
relationship. Meanwhile, Suandy (2006) explained that transfer pricing is an act of
allocating corporate entity profits in one country to another country's corporate entity
in a group of companies aiming at reducing the corporate tax burden.
The transfer pricing policy is carried out by companies that have special relationships or
related parties. The purpose of transfer pricing is to manage the company's tax burden,
so that corporate tax liabilities can be minimized. Lee, P, and Seo (2013) explained that
there are two approaches in studying transfer pricing policies, namely, (1) the
transaction efficiency hypothesis explains that related party transactions can be an
efficient contracting tool under incomplete information conditions by reducing
transaction costs (Williamson, 1975; Stein, 1997 ; Khana & Palepu, 1997; Shin & Park,
1999), and (2) the conflict of interest hypothesis explains that related party transactions
become dangerous practices arising from moral hazard. The conflict of interest
hypothesis explains that related party transactions are carried out in the interests of
controlling shareholders to take over the wealth of minority shareholders (Jensen &
Meckling, 1976).
Agency Cost
Jensen and Meckling (1976) explained that the delegation of authority from the principal
to the managers causes the agent does not always act in accordance with the principal's
interests. This happens because managers tend to behave opportunistically to fulfill
their interests, resulting in conflicts of interest. This condition results in agency costs.
Agency costs are costs that must be incurred by the principal to reduce conflicts of
interest. Components of agency costs incurred by the company are (1) audit fees as a
form of costs incurred to oversee the actions of company management to act in the
interests of shareholders, (2) bonding costs as a form of guarantee that company
management does not take profits based on the facilities obtained, and (3) costs to
restore the company's reputation if the company's management does not manage the
company well, giving rise to lawsuits.
Hypotheses Development
Agency theory explains the delegation of authority from the principal as the owner of
the company to the agents or managers as the party managing the company influencing
the information asymmetry between the principal and the agent. This happens because
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the agent has the motivation to not act in accordance with the interests of the principal.
This condition is caused by the opportunistic behavior of the managers to fulfill their
interests (Shleifer & Vishny, 1997), so the principle of effort tries to reduce the
managers’ opportunistic behavior through a monitoring mechanism. As a result of a
conflict of interest, the principal is willing to bear agency costs (Jensen & Meckling,
1976). Opportunistic behavior of managers is done through aggressive financial
reporting actions. Frank et al. (2009) states that financial reporting aggressiveness is
earnings management actions taken by company management within or beyond the
limits of applicable accounting principles.
The aggressiveness of financial reporting causes a bias in financial reporting because the
financial statements do not reflect the actual condition of the company. Roychowdhury
(2006) explained that the important reason managers do financial reporting
aggressiveness is to avoid small profits, beat analyst estimates, and maintain company
performance. Research Ding, Zhang, and Zhang (2007) showed that company managers
conducted financial reporting aggressiveness through accrual or non-operating profit
management of related party transactions or related parties.
Aharony et al. (2010) explained that the purpose of the company is to use transactions
with related parties to increase the company's profit during the initial public offering
period. Sales transactions with related parties are mostly used by IPO companies and
parent companies to enable companies to regulate profit figures in such a way that they
can influence the market. In addition, Hwang et al. (2013) stated that most transactions
with related parties are arranged to meet management objectives. Beuselink and Deloof
(2014) stated that members of business groups tend to be involved in the
aggressiveness of financial reporting compared to non-business groups. Research
conducted by Ying and Wang (2013) showed that most companies conduct
aggressiveness in financial reporting followed by excessive tunneling by controlling
shareholders to remove profits imported from IPO companies.
The results of the study of Rasheed et al. (2018) showed that transactions with related
parties have a positive and significant effect on the aggressiveness of financial reporting.
Consistent with Rasheed et al. (2018), the results of Marchini's research (2018), and
Hwang et al. (2013) showed that transactions with related parties have a positive and
significant effect on the aggressiveness of financial reporting. Based on the description,
the hypothesis proposed in this study is as follows.
H1 : Transfer pricing has a positive effect on the aggressiveness of financial reporting.
Jensen and Meckling (1976) explained that the delegation of authority from the principal
to the agent causes the manager does not always act in accordance with the principal's
interests. This happens because managers tend to behave opportunistically to fulfill
their interests, resulting in conflicts of interest. As a result of conflicts of interest and
asymmetry of information is the emergence of agency costs. Agency costs are costs that
must be incurred by the principal to reduce conflicts of interest. Agency costs incurred
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by the company such as, (a) audit fees as a form of costs incurred to oversee the actions
of company management to act in the interests of shareholders, (b) bonding costs as a
form of guarantee that company management does not take profits based on the
facilities obtained, and (c) costs to restore the company's reputation if the company's
management does not manage the company well, giving rise to lawsuits.
Agency costs incurred by principals aim to suppress opportunistic managerial behavior
in conducting financial reporting aggressiveness. Frank et al. (2009) stated that financial
reporting aggressiveness is earnings management actions taken by managers within or
outside the limits of applicable accounting principles. As a result, principals are willing to
bear agency costs because the aggressiveness of financial reporting actions undertaken
by managers can reduce the level of principal prosperity. Man et al. (2018) shows that
agency costs negatively affect earnings management. Based on this description, this
study proposes the following hypothesis.
H2 : Agency cost negatively affects the aggressiveness of financial reporting.
Research Method
This study uses financial statements of manufacturing companies listed on Indonesia
Stock Exchange (IDX) through the website www.idx.co.id. The sampling technique uses
purposive sampling through criteria, namely, (1) manufacturing companies listed on the
Indonesia Stock Exchange during the 2013-2017 period, (2) publishing financial
statements in rupiah, and (3) not having a negative profit (loss). Thus, this study
obtained 61 companies, so there were 305 sample observations.
This study uses three variables consisting of independent, dependent, and control
variables. The independent variables are transfer pricing and agency costs, the
dependent variable is the aggressiveness of financial reporting, and the control variables
are company size, sales growth, and return on assets. The following are measurements
of these three types of variables.
Transfer Pricing
Santosa and Suzan (2017) explained that transfer pricing is the price contained in each
product or service from one division that is transferred to another division within the
same company or between companies that have a special relationship. Measurement of
transfer pricing uses related party transactions (RPT) (Kiswanto & Purwaningsih, 2014;
Melmusi, 2016; and Nuradila & Wibowo, 2018). The formula used to measure transfer
pricing is as follows.
Related Party Transaction =
Related Party Receivables
………………. (1)
Total Accounts Receivable
http://www.idx.co.id/
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Agency Cost
Agency costs are costs incurred by the principal to the agent to act in accordance with
the interests of the principal. This study uses the ratio of sales to total assets (STA) (Man
et al., 2018; and Chen, Hu, Wang, & Tang, 2013) to measure agency costs. Man et al.
(2018) explained that the low ratio of sales to total assets shows that the company's
sales are bad because of poor managerial performance, so that agency costs get higher.
In other words, the lower this ratio, the higher the agency costs. The formula used to
measure agency costs is as follows.
Agency Cost =
Total Sales
………………. (2)
Total Asset
Financial Reporting Aggressiveness
The aggressiveness of financial reporting is an act of earnings management carried out
by managers within or outside the limits of applicable accounting principles (Frank et al.,
2009). This study uses a modified Jones model to detect the aggressiveness of financial
reporting (Dechow, Sloan, & Sweeney, 1995). Following are the equations used to
calculate the aggressiveness of financial reporting.
...…. (3)
.….. (4)
……. (5)
The control variable uses company size, sales growth, and return on assets. The size of
the company is obtained from the natural logarithm of total assets, sales growth is
obtained from (sales-sales-1) / sales-1. Furthermore, return on assets is obtained from
(profit / total assets).
This study uses a panel data approach to estimate research hypotheses. Panel data is a
combination of cross section data and time series (Winarno, 2015). Before making a
regression estimate, this study will test the assumption of heteroscedasticity. Ghozali
and Ratmono (2017) and Ekananda (2015) explain that white's cross-section
heteroscedasticity can be used to correct parameter values obtained through OLS, so
that it can be used as output in hypothesis testing. Furthermore, this study uses three
panel data estimation methods namely, the common effect test, fixed effect, and
random effect test to test the research hypothesis. In addition, this study also uses a
paired test approach to determine the panel data estimation method that is suitable for
testing the research hypotheses namely, the chow test, the multiplier lagrange test, and
the hausman test.
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Results and Discussion
This study uses descriptive statistics to briefly describe the research variables. The
following are descriptive statistics of research variables.
Table 1 Descriptive Statistic
Variables Mean Std. Deviation Observations
Transfer Pricing 0.200497 0.295639 305
Agency Cost 1.187859 0.526286 305
Size 23.66719 5.204609 305
Growth 0.090655 0.179618 305
Return on Asset 0.097451 0.101206 305
Financial Reporting Aggressiveness 0.022261 0.077765 305
Table 1 shows that the average transfer pricing value is 0.200497. This value indicates
that the average manufacturing company listed on the Indonesia Stock Exchange in the
2013-2017 period carried out transfer pricing of 20%. Agency costs are 1.187859
indicating that the ratio of sales to assets of manufacturing companies during the 2013-
2017 period is high (more than 100%).
The size of the company is 23,66719 using natural logarithms, so it is known that the
average assets of manufacturing companies during the 2013-2017 period is 23,66719,
sales growth is 0.090655, showing an average growth of 9%, and return on assets is
0.097451 indicating the average availability of total assets to generate a 9% profit.
Furthermore, the aggressiveness of financial reporting is 0.022261 indicating the
average aggressiveness of financial statements in manufacturing companies during the
2013-2017 period was 2%. This value indicates that the aggressiveness of financial
reporting is still relatively low. The standard deviation value indicates the fluctuation of
research variable data with the number of observations for the six variables is 305
observations.
Table 2 shows that the correlation between independent variables is less than 0.80. The
results of this correlation prove that there is no multicollinearity in this research model.
Table 2 Independent Variables Correlation
Transfer
Pricing
Agency
Cost
Size Growth Return
on Asset
Transfer Pricing 1.000000
Agency Cost -0.015094 1.000000
Size 0.107709 -0.026839 1.000000
Growth 0.079287 0.255469 0.081401 1.000000
Return on Asset -0.057347 0.471944 -
0.346711
0.106919 1.000000
Based on Table 3, it is concluded that a suitable method for estimating the effect of
transfer pricing and agency costs on financial reporting aggressiveness is the fixed effect
method (Sig. Cross-Section F, 0.0046 <0.05).
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Tabel 3 Chow Test
Effects Test Statistic d. f. Prob.
Cross-section F 1.649491 (60.239) 0.0046
Cross-section Chi-square 105.680031 60 0.0003
Based on Table 4, it is concluded that a suitable method for estimating the effect of
transfer pricing and agency costs on the aggressiveness of financial reporting is the
random effect method (Sig. Breush-Pagan ie, 0.0000 <0.05).
Table 4 Lagrange Multiplier Test
Test Hypothesis
Cross-section Time Both
Breusch-Pagan 1.346556 110.7699 112.1165
(0.2459) (0.0000) (0.0000)
Based on Table 5, it is concluded that the suitable method for estimating the effect of
transfer pricing and agency costs on the aggressiveness of financial reporting is the fixed
effect method (Sig. Cross-section ie, 0.0003 <0.05).
Table 5 Hausman Test
Test Summary Chi-Sq. Statistic Chi-Sq. d. f. Prob.
Cross-section random 22.976114 5 0.0003
Based on Table 6 of the paired test summary results, it is concluded that a suitable
method for estimating the effect of transfer pricing and agency costs on the
aggressiveness of financial reporting is the fixed effect method.
Table 6 Summary of Panel Data Test Results
No. Metode Pengujian Hasil
1. Chow Test Common Effect vs Fixed Effect (If Prob. > 0.05, so
the suitable method to apply is Common Effect and
vice versa).
Fixed Effect
2. Lagrange
Multiplier
Test
Common Effect vs Random Effect (If Prob. > 0.05, so
the suitable method to apply is Common Effect and
vice versa).
Random
Effect
3. Hausman
Test
Fixed Effect vs Random Effect (If Prob. > 0.05, so the
suitable method to apply is Random Effect and vice
versa).
Fixed Effect
Table 7 shows the estimated results of the effect of transfer pricing and agency costs on
the aggressiveness of financial reporting. The results showed that the effect of transfer
pricing on the aggressiveness of financial reporting has a coefficient value of -0.004167,
t-statistic is 0.039865, and the probability is 0.9168. This finding proves that transfer
pricing has no significant effect on the aggressiveness of financial reporting. The
existence of Minister of Finance Regulation (PMK) No.213 / PMK.03 / 2016 regarding
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additional documents and / or information that must be kept by taxpayers who conduct
transactions with related parties which constitutes an improvement to the Regulation of
the Director General of Tax No.23 / PJ / 2013 which regulates transfer pricing requires
the creation of additional transfer pricing documents for transactions with related
parties. The aim is to increase transparency regarding transfer pricing schemes. This
condition causes management difficulties in managing earnings figures, so that transfer
pricing cannot influence management to behave opportunistically in managing earnings.
Table 7 Estimation of the Effect of Transfer Pricing and Agency Costs on Financial
Reporting Aggressiveness
Independent Variables and
Control
Fixed Effect
Coefficient t-Statistic Prob.
Transfer Pricing -0.004167 -0.039865 0.9168
Agency Costs -0.049055 -4.210845 0.0000
Size -0.011340 -2.012239 0.0453
Growth 0.045502 2.181788 0.0301
Return On Asset 0.515738 6.880017 0.0000
Constant 0.295361 2.018044 0.0447
F-Statistic 3.543303
Prob (F-Statistic) 0.000000
R
2
0.490747
Adjusted R
2
0.352247
Note: This model free of heteroscedasticity problems with white cross-section standard errors
and covariance (d.f corrected)
The results showed that the effect of agency costs on the aggressiveness of financial
reporting had a coefficient value of -0.049055, t-statistic was -4.210845, and probability
was 0.0000. This finding proves that agency costs have a negative and significant effect
on the aggressiveness of financial reporting. Agency costs are costs incurred by the
principal to the agent to act in accordance with the interests of the principal. The aim is
to reduce conflicts of interest between principals and agents. Agency costs incurred by
the company, namely, (1) audit fees to control opportunistic managerial actions, (2)
bonding costs to ensure that agents will not make decisions that are detrimental to the
principal, and (3) residual loss as a result of manager decisions that should be able to
optimize shareholder profits. This condition affects managers to reduce opportunistic
behavior in managing company profits.
Average data shows that agency costs measured through comparison of sales with
assets prove this ratio is high (more than 100%), the aggressiveness of financial
reporting measured through discretionary accruals has a low average value of 2%. This
data proves that when sales are high, agency costs are low. Low agency costs with low
discretionary accruals prove that agency costs can directly mitigate the aggressiveness
of financial reporting. This condition occurs because company managers tend to start
switching to real earnings management compared to accrual earnings management that
is easily detected by auditors (Roychowdhury, 2006). Return on assets and growth
shows a positive and significant effect on the aggressiveness of financial reporting
proving that managers use these two ratios as opportunities to conduct financial
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reporting aggressiveness. That is, the higher this ratio gives the potential for managers
to behave opportunistically in conducting financial reporting aggressiveness.
Conclusion
The purpose of this study is to estimate the effect of transfer pricing and agency costs
on the aggressiveness of financial reporting. The research sample uses manufacturing
companies listed on the Indonesia Stock Exchange (IDX) for the period of 2013-2017.
The results showed that transfer pricing had no significant effect on the aggressiveness
of financial reporting. Meanwhile, agency costs have a negative and significant effect on
the aggressiveness of financial reporting. The contribution of this research is through the
Minister of Finance Regulation (PMK) No.213 / PMK.03 / 2016 regarding additional
documents and / or information that must be kept by taxpayers who carry out
transactions with related parties which is a refinement of Tax Director General
Regulation No. 23 / PJ / 2013 can reduce the behavior of managers in managing earnings
through transfer pricing schemes. Furthermore, conflicts of interest between principals
and managers cause principals to incur agency costs to control opportunistic managers'
actions. As a result, the prosperity of shareholders is reduced because of the company's
financial burden.
This study has several limitations, namely (1) the research sample uses manufacturing
companies listed on the Indonesia Stock Exchange (IDX) for the period 2013-2017, so it
cannot be generalized to companies outside the sample, and (2) measurement of
transfer pricing using only related party transactions (RPT). Meanwhile, the
measurement of financial reporting aggressiveness only uses the modified Jones model.
Therefore, further research is expected to (1) use companies other than manufacturing
such as mining to see the consistency of research results, and (2) measurement of
transfer pricing and financial reporting aggressiveness using proxies other than related
party transactions and modified Jones models.
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