PRELIMINARY EXPLORATION THE IMPACT OF

EARNINGS MANIPULATION ON BANKRUPTCY:

EVIDENCE FROM INDONESIAN DELISTING COMPANIES

SKRIPSI

Presented in partial fulfillment of the requirements for

The Bachelor’s Degree in Accounting

by
Adya Puspita Adimudra
008201500002

FACULTY OF BUSINESS
ACCOUNTING STUDY PROGRAM
PRESIDENT UNIVERSITY
CIKARANG, BEKASI
2018
 PLAGIARISM CHECK RESULT

PRELIMINARY EXPLORATION THE IMPACT OF

FINANCIAL AND ACCOUNTING FRAUD ON
BANKRUPTCY: EVIDENCE FROM INDONESIAN
DELISTING COMPANIES

i
 DECLARATION OF ORIGINALITY

I hereby declare that the thesis entitled:

PRELIMINARY EXPLORATION THE IMPACT OF FINANCIAL AND

ACCOUNTING FRAUD ON BANKRUPTCY: EVIDENCE FROM
INDONESIAN DELISTING COMPANIES

It is true of my own work or not plagiarism of the work of other. The writer
guarantees that the contribution is original, has not been published previously, is
not under consideration for publication elsewhere and that any necessary
permission to quote or reproduce illustrations from. If in the future proved that
this scientific work is not my own work or plagiarism of the work of others then
the writer willing to accept sanctions in accordance with applicable laws and
regulations.

Cikarang, 10 July 2018

Adya Puspita Adimudra

ii
 PANEL OF EXAMINERS APPROVAL

PRELIMINARY EXPLORATION THE IMPACT OF FINANCIAL AND

ACCOUNTING FRAUD ON BANKRUPTCY: EVIDENCE FROM
INDONESIAN DELISTING COMPANIES

submitted by Adya Puspita Adimudra, Accounting Study Program, Faculty of

Business, has been assessed and proved to pass the oral examination held on 11
June 2018.

Panel of Examiner,
Advisor,

(………………………………..)

Examiner 1 Examiner 2

(……………………………………….) (……………………………………….)

Approved By

Date :………………………………

Stempel

(……………………………….)
Head of Study Program

iii
 ACKNOWLEDGEMENT

First of all I would like to thank God for His grace and blessing, which lead

me to my success in completing this skripsi. In this opportunity, I also would like to

give special thanks to the following parties who helped me went through all the

obstacles I had during the process of making skripsi until it was finished.

• Mrs. Setyarini Santosa as the skripsi adviser who gave me great guidance,

comments and advices to help me finished the skripsi.

• Mr. Ajay Chauhan as the Dean of Faculty of Business, Mrs. Andi Ina Yustina
M.Sc., CMA as the Head of Accounting Study Program, Mrs. Srie as the
Secretary of Study Program, and all President University accounting lecturer
who have taught me during my study.

• My beloved family who always support me through their prayers and keep

reminding me about the deadline so that I could finish this skripsi on time. I

dedicated this skripsi for them.

• My roommate Ni Putu Devi Elvira Lestari a friend to vent that listened to

every problem that I had and supported me with all his great advices.

• My college best friends Nindhita N Sari, Nathania Neysa and Maria Chrystina

P who support me during my university life.

iv
TABLE OF CONTENT

v
LIST OF FIGURES

vi
LIST OF TABLES

vii
 ABSTRACTS
Over the last few years, fraudulent financial and accounting in companies is

increasing. Accounting fraud was consistently listed as a major crime which

comes in many varieties with its own characteristics, threats and strategic

consequences. This study examines the relationship between fraudulent financial

and accounting and bankruptcy in companies that already delist from IDX. This

study uses the analysis of Beneish M-score model and multinomial logistic

regression analysis of the period 2011-2018. The sample is 20 delisting

companies. The data used in this study

Keywords: bankruptcy, regulations No. 23, beneish M-score, financial and

accounting fraud

viii
 INTISARI
Beberapa tahun belakangan, kasus kecurangan financial dan akuntansi di

perusahaan kian bertambah. Kecurangan akuntansi termasuk dalam kejahatan

utama yang memiliki banyak jenis dengan karakteristik, ancaman, dan strategi

penanganan yang berbeda. Penelitian ini bertujuan untuk mengetahui adakah

hubungan antara Kebangkrutan dan Kecurangan (fraud) pada perusahaan tidak

tercatat (delisting) di BEI. Pada penelitian ini, metode yang digunakan adalah

Altman Z-score dan Beneish M-score. Atlman Z-score adalah suatu alat untuk

memprediksi kebangkrutan suatu perusahaan, sedangkan Beneish M-score adalah

alat untuk memprediksi adanya kecurangan dalam laporan keuangan suatu

perusahaan. Penelitian ini adalah penelitian kuantitatif. Populasi untuk penelitian

ini adalah seluruh perusahaan yang sudah delisting dari bursa efek Indonesia,

sedangkan untuk sample menggunakan 18 perusahaan yang sudah delisting yang

memenuhi kriteria tertentu untuk kepentingan penelitian ini. Please write a very

brief abstract in only one paragraph. It should explain in one or two sentence(s)

the background of the research. Besides, clarify the problem or main issue(s)

neatly. Please, provide for the motivation and aim of the research. Then, explain

the method, the data and sample. Explain briefly the result in light with the extant

theories and expectations. End this part with the limitations and suggestions for

further future research.

Keywords: audit quality, regulations No. 23, moral hazard theory, agency
problem

ix
 CHAPTER I

INTRODUCTION

I.1. Reasearch background

Financial report is a report contains financial information that reflects the

company’s performance. Information about financial position and performance is

very useful for stakeholders, shareholders, and related parties to make a decision.

Financial report is the result of the accounting processes that is used as a

communication tools between managers and related parties that interested about

financial and accounting information (Gray & Moussalli, 2006). In the last several

years, fraudulent financial and accounting reporting (FFR) have increased. It

attracts considerable attention from the public, investors, auditors, creditors,

researchers, academicians and other stakeholders that have intention to business

activities. For example earnings manipulation reporting done by Enron,

WorldCom, Global Crossing and Tyco that wipes out billion dollars of shareholder

value. The annual cost of financial statement fraud exceeds 1.2 trillion US dollars

worldwide and 377 billion dollars in the US (ACFE, 2014). The practices of

fraudulent financial and accounting can potentially destroy public confidence with

regard to the reliability and accuracy of financial reporting in assessing

companies’ growth and decision making.

Financial reporting is encountered by many cases of fraud committed by

companies that experiencing financial problems. The company tends to wrap-up

the actual conditions and improves their financial statements to make it looks

1
good (Carello & Nagy, 2004; Davis, Soo, & Trompeter, 2009). Perpetrator did an

intentional act to secure unfair gain and harm others. The growth of accounting

fraud in the world increased around 40 per cent since 2001 and continues become

a major concern for companies of all sizes and in every business sector (PWC

Global Economic Crime and Fraud Survey, 2018). It was consistently listed as a

major crime which comes in many varieties with its own characteristics, threats

and strategic consequences. The manipulation in the elements of financial

statement such as overstating the assets, revenue, and profit or understating the

expenses, liabilities and all losses occurs to obtain some kinds of benefits

(Spathis, 2002). According to survey conduct by ACFE in Indonesia, corruption is

the most harmful fraud (77%) followed by overstating or understating assets

(19%) and fraud in financial reporting (4%). Although the percentage of fraud in

financial reporting is low, but resulting a large losses (ACFE, 2016)

Some cases of financial and accounting fraud also occurred in Indonesia.

PT Kimia Farma in 2001 overstated their profits of IDR 32.7 billion, PT Indo

Farma intentionally overstating their inventory of IDR 28.8 billion, PT AGIS Tbk

overstating their income by posted other income without evidence of IDR 17.46

billion and posted wrong accounting principle about their other income of IDR

11.9 billion, PT Great River overstating their receivables and fixed assets

specifically the emissions results bonds that cannot be proven the truth

(Sihombing, 2014). PT Timah (Persero) Tbk allegedly handed a fictitious financial

report in the first half the year 2015, it even occurred at PT Cakra Mineral Tbk,

cases of embezzlement and manipulation accounting overstated

2
assets and overstated on the value of paid-in capital and the biggest case that

detrimental to the state by seizing more than Rp.7 trillion in form of bailout -

Century Bank (Hernawan, 2010).

Bankruptcy is a logical extension of internally misappropriate and

mismanagement of companies’ funds to meet costs of external obligations due to

the temporary lack of liquidity and other difficulties confronted by the company

(Davydenko, 2005). Bankruptcy happens when company cannot step out from

financial distress condition. Corporate bankruptcy prediction is important because

business failures affect related parties and broader economy (Shumway, 2001). It

can damage the economic system in important and subtle ways such as decreasing

the gross national income, increasing unemployment rate, increasing crime rate

and economic downturns in large scale (Jones & Hensher, 2007).

The well-known model in measuring the bankruptcy of the company is

scoring model by Edward I. Altman (Altman Z-score). Altman Z-score can predict

the financial condition whether the company in health condition or near to

bankrupt condition. This model works well on financial statements that are not

manipulated while Beneish M-score is used to determine whether the financial

statement is manipulated (MacCarthy, 2017). Hence, for this analysis to be

success there is the need to use Beneish M-score model to support the

implementation of Altman Z-score model. Therefore, it is imperative to use

Beneish M-score before Altman Z-score model. To do this, the Beneish M-score

was first employed to detect whether the company’s financial statements were

3
manipulated or not, then Altman Z-score used to determine whether company’s

financial condition were near to bankrupt or not.

All transactions of trading securities and capital markets in Indonesia are

regulated by the Indonesia Stock Exchange (IDX) under the supervision of OJK

(Otoritas Jasa Keuangan) – lastly known as BAPEPAM LK (Badan Pengawas

Pasar Modal dan Lembaga Keuangan). The company can sell their stocks through

IDX by registering and requesting for IPO (initial public offering) based on the

order methods regulated by the Law and Regulation Implementation of Capital

Market (Law of Indonesia Republic no 8 year 1995 about Capital Market). The

authority (IDX) can delist the issuer (company) if they failed to comply with the

law. Delisting is a mandatory procedure that the exchange authority (IDX) must

take in order to protect potential losses, both for the shareholders and the company

itself (BEJ, 2004). The reasons of delisting from stock exchange are varies, such

as mismanagement of company’s fund, inability to fulfill their obligations to

stakeholders and shareholder, or the company already reaches their funds target

and no need any additional source of funds. The common condition that delisting

occurs is because shares that listed at Exchange has experienced a decline in

criteria so it does not fulfill the recording requirements (force delisting), the shares

can be issued from the listing on the Indonesia Stock Exchange (IDX). After a

company is expelled from the exchange, then all obligations that were originally

attached will be also deleted, including the obligation to issue financial statements.

4
 This study about manipulation (Beneish M-score) and bankruptcy (Altman

Z-score) in delist companies has never been done in previous studies especially in

Indonesia. This study will explore the correlation of the bankruptcy (Altman Z-

Score) and fraudulent (Beneish M-Score) model in the Indonesian companies,

with specific reference to Indonesian delisting companies.

I.2. Research problem

Problem formulation

Deloitte (2008) revealed the companies that committed bankruptcy would

engage in fraudulent activities or manipulate the financial statements. In 2001,

Enron case shock the public followed by the case of WorldCom, and Tyco in 2002.

All of the companies were involved in manipulate their financial statements to

attract the investors and to secure unfair gain (Awolowo, 2016). The case study of

Enron Corp by MacCarthy (2017) provide an information that in 1996 and 1997

Enron’s financial condition remain in distress zone. The company moves out from

financially distress to gray area with high TATAI (total accruals to total assets

index) which confirm that the company manipulated their financial statements

after 1997 to attract investors. In 2008, PT Katarina Utama Tbk (RINA)

improving their financial statement before does the IPO in 2009. The company

overstated their assets and equity, and add fake project for IDR29.6 billion. A few

years after IPO, RINA known does not have capability to going concern

(Prameswari, Yunita, & Azhari, 2018). This implies that before do the IPO and

prior to the collapse of the company in 2011, there was pressure on the

management team to manipulate earnings in order to show a better picture for

5
their shareholders (Purnajaya, 2014). In addition, when the financial condition

near to bankrupt the managers are motivated to manipulate financial statement to

publish a better financial picture. This creates a linkage between a company that

verge to bankruptcy and a fraudulent financial and accounting; hence, there is the

need to use these two models, Altman Z-score and Beneish M-score models

simultaneously for this study.

Research questions

Given above the backgorund, this study seeks to answer the research

question which is ”Is there any relationship of earnings manipulation on

bankruptcy?”

1. 3 Research objectives

The research objective is to examine whether or not the earnings

manipulation M-Score (Beneish, 1999) have influence toward bankruptcy

indicators Z-score (Altman, 2000) in delisting companies.

1. 4 Research scope and limitation

This study examines the correlation of Beneish M-Score in predicting

earnings manipulation and Altman Z-Score modeling in predicting bankruptcy of

Indonesian companies and whether that is the reason for the companies has been

delisting from Indonesia Stock Exchange (IDX). This study is quantitative method

that use secondary data from online and offline sources. This study is not free

from limitation. There are some limitations in this study. First, the availability of

the annual report of delisting companies is fewer than the listing companies in

6
Indonesia Stock Exchange (IDX), so the number of sample in this study is limited

to 18 companies from all sectors (manufacturing, service and retail). Second, this

study only collect data from companies’ financial report and annual report and it

exclude the non-financial related information. All financial data of the companies

was collected from online and offline sources. The financial data collected only

for 3 years of accounting period respectively.

1.5. Research benefits

1.5.1 Theoretical use

This study expected to provide new references regarding the relationship

between corporate bankruptcy and fraudulent financial and accounting reporting

(FFR) in Indonesian delisting companies.

1.5.2 Practical use

1.5.2.1 Investors

Provide references for investors to pay attention in every detail of the

company that becomes the target of investment, especially information related of

company’s financial condition and the quality of their financial report.

1.5.2.2 Academicians

The result of the study will enhance the academicians; knowledge in

knowing the relationship of bankruptcy on fraudulent financial and accounting in

Indonesian companies that has been delisted from IDX

1.5.2.3 Regulators

7
 The result of the study will enhance the regulators to make regulations with

respect to the prevention of a verge to bankrupt company that has a tendency to

commit fraud

1.5.2.4 Future researchers

This study could be used as a reference or basis for future research and

improve the knowledge to the related topic.

8
 CHAPTER II

LITERATURE REVIEW

2.1 Review of the extant literature

2.1.1 Theoretical Framework : Altman Z-score Model

Bankruptcy is a failure and insolvency to realize the rate of return on

invested capital and allowance for risk consideration lower than prevailing rates of

similar investments (Altman and Hotchkiss, 2006). There are two conditions that

describe insolvency: technical and bankruptcy sense. Technical insolvency is a

signal that the company lacks of liquidity and cannot meet its current obligations.

Insolvency in a bankruptcy sense is advance situation than technical insolvency

and usually indicates a chronically permanent condition. Altman (1968) can

correctly predict financial failure in 95% of companies 1 year prior to their

rd
demise, 72% in 2 years prior to insolvency and decreases to 52% in the 3 year

(Altman, Hatzell & Peck, 1995). Prameswari, Yunita, & Azhari (2018) indicate

that the model is more accurate in predict the bankruptcy compare with other

models (Ohlson, Zmijewski, and Springate). Grice and Ingram (2001) indicated

that the model’s accuracy is significantly lower in recent periods than reported in

Altman’s study. Wijaya (2016) in his study about prediction of bankruptcy in food

and beverages companies in Indonesia, the accuracy of Z-score is the smallest

(23.1%) compare with Zmijewski (92.3%) and Springate (84.6%). Most criticisms

against the model are its only relies on accounting data; inadequate recognition of

9
cash-flow as a relevant component; failed-based oriented rather than the ability to

sustain (going concern) (Wilkinson, 2009).

2.1.2 Theoretical Framework : Beneish M-score

Beneish (1999) formulated several analytical ratios and variable to identify

the occurrence of the tendency of a firm to engage in earnings manipulation that

determined from eight independent variables. Many previous studies applied

Beneish M-score model to popular corporate issues to identify financial report

manipulation – Enron and WorldCom case. MacCarthy (2017) state that in the

Enron case the Beneish M-score was successfully spots the main point of the case

which is the company manipulate their financial statement to hide their debt. The

manipulation in financial report do when the company prior to the bankruptcy. It

means that the model has the ability to reveal Fraudulent Financial Reporting and

more responsive in identifying the financial health of a company by using

financial and accounting data (Impink, 2010; Mahama, 2015). Contrary (Cynthia,

2005) and (Ugochukwu and Azubuike, 2013) argued that Beneish model did not

have the ability to consistently discover the FFR problems and only predicting the

existing risks of material misstatement.

2.1.3 Agency Theory

Some cases that already mentioned in the introduction in line with Agency

Theory, where there is motivation from management as an agent to display a good

performance to their shareholders. Managers tend to report that the company

reports at the end of the period, is at least as much as the forecasted previously by

10
management or financial analysts (Jennifer Ho, Liu, & Ouyang, 2012). As the

principal, shareholders want to invest their capital in high return company. They

can take their capital elsewhere for a better return. In other side, the managers

(agent) always seek to meet the targets provided by the principal to achieve

maximum incentives. The one who do very well can move up (Fama, 1980;

Jensen & Meckling, 1976). That condition leads the managers to provide good

information that actually does not describe the real situation (Zogning, 2017).

2.1.4 Fraud Triangle Theory

In his doctoral study on fraud, Donald R. Cressey (1953) sparks and

formulated the theory of fraud, known as Fraud Triangle Theory. Cressey (1953)

stated that there are three important keys of fraud likelihood: motivation

(pressure), opportunity, and rationalization

Picture 1: Triangle Fraud Theory

Motivation or the “need” is the conditions related to immorality,

emergencies, increased needs, reversals in the business environment, and a high

11
standard of living of the perpetrator that creates a stressful need to violate trust
(Machado & Gartner, 2017). This situation will only have the effect of creating the
desire for specific results related with the solution to the problem, and which can
be produce by the criminal violation of financial trust. Opportunity is about the
chance of the perpetrator. The logic is that the individual will commit fraud as
soon as they holds a position of trust, knows the weaknesses in the internal
controls, and obtains sufficient knowledge regarding how to successfully commit
the crime. Rationalization means accepting this behavior for various reasons
(Cressey, 1953; Singleton & Singleton, 2010).

2.2 Hypothesis development

2.2.1 Earnings Manipulation and Bankruptcy

If a firm is in financial distress, the company’s managers can expect to

have their bonuses cut, be replaced and suffer loss of reputation (Agrawal &

Chatterjee, 2015). Lan (2007) finds that for China’s private sector firms, if the

firm is in financial distress, managers face the threat of cut in their bonus,

loss of reputation or even the loss of their jobs. Hence, the incentive to use

earnings management is strong for such firms (Mahdi, Mahdi, & Mohammad,

2015). A study by Mehta & Bhavani (2017) found that Z-scores, which

measure the probability of bankruptcy, are sufficient to detect FFR. They

compared Z-scores with other individual variables that were expected to

return negative figures, as firms with poorer financial conditions (and,

therefore, smaller Z-scores) are more likely to engage in fraudulent financial

12
 reporting. Chen, Chien, & Huang (2010) find that distressed firms in China

employ income inflating earnings management techniques to avoid a delisting

threat and special monitoring by the government.

From the discussion, the researcher proposes the first hypothesis as follows:

H0: Beneish M-score model has no significant effect on bankruptcy

predictions

H1: Beneish M-score model has a significant effect on bankruptcy predictions

2.3 Research framework

Earnings Bankruptcy
Manipulation
Dependent Variable
Independent Variable

13
 CHAPTER III

RESEARCH METHOD

3.1 Primary data collecting and processing

This study is causal study that focused on examining whether or not one

variable (independent variable) has relationship on the other variable (dependent

variable). The logical and statistical explanation of the reason is important to

provide rational conclusion to discover the causal relationship (Sekaran and

Bougie, 2013). As explained, this study intended to examine the relationship

between independent variable (company bankruptcy) and dependent variable

(financial and accounting fraud). The dependent variable (company bankruptcy)

measured using modified Altman Z-score (1995) and the independent variable

(financial and accounting fraud) measured using 8 variables Beneish M-score. The

type of data used in this study is secondary data, which is collected from online

and offline sources, the information about delisting companies were collected

from IDX and SahamOK.com. The audited annual reports, aggregate number of

shares, and regular market closing price were downloaded from various website.

The required data as follows: aggregate number of shares, regular market closing

price, net income, companies’ IDX delisting date, total revenue, and audited

annual reports data. Moreover, this study is a quantitative study because the data

used in this study were secondary data and measured using statistical tools. In

addition, this study is cross-sectional study because the data collected over 3 years

respectively.

14
The data population for this study is all companies that delisted from IDX

(Indonesia Stock Exchange). The purposive sampling method used to reach the

targeted sample that already set by the researcher. The criteria detailed below:

a. Companies that delist from IDX during 2011-2018 period

b. Delist companies which publish their audited annual report

c. Delist companies that publish complete audited annual report for 4

years before delisting year

Table 3.1

Sample Selection

Delisting companies from 2011-2018 32

Companies availability data of financial statements -12

Total sample 20

3.2 Variables and Measurement

3.2.1 Independent Variable (Beneish M-score)

Beneish M-score is a common-used model to detect earnings

manipulation. It can be categorized as financial forensic tool to detect

areas of possible manipulation on the company’s financial statement. The

score determined by eight independent variables that were taken from the

company’s financial statements. The model is:

M-score = -4.84 + 0.92*DSRI + 0.528 GMI + 0.404*AQI + 0.892*SGI

+ 0.115*DEPI-0.172*SGAI + 4.679*TATA – 0.327*LEVI

15
Where:
DSRI : Days Sales in Receivable Index

GMI : Gross Margin Index

AQI : Assets Quality Index

DEPI: Depreciation Index

SGAI : Sales, General and Administrative Expenses Index

LVGI : Leverage Index

TATAI: Total Accruals to Total Assets Index

Table 3.2

The explanation about the 8 variables in M-score

No Ratios Formula

1 DSRI (Days Sales in (Net Receivables t / Sales t) / (Net

Receivables Index) receivables t-1 / Sales t-1)

2 GMI (Gross Margin Index) [(Sales t-1 - COGS t-1)/ Sales t-1] /
[(Sales t - COGS t)/ Sales t]

3 AQI (Asset Quality Index) 1-[(CA t + PPE t) / TA t] / 1-[(CA t-1

+ PPE t-1) / TA t-1]

4 SGI (Sales Growth Index) Sales t / Sales t-1

5 DEPI (Depreciation Index) [ Depreciation t-1 / (PPE t-1 +

Depreciation t-1)] / [ Depreciation t /

(PPE t + Depreciation t)]

6 SGAI (Sales and General (SGA Expenses t / Sales t) / (SGA

Administrative Expenses) expenses t-1 / Sales t-1)

16
 7 TATA (Total Accruals to (Net Income t - Operating Cash Flow)
Total Assets) / Total Assets t

8 LVGI (Leverage Index) [(Current Liab t + Long term Debt t)/

TA] + [(Current Liab t-1 + Long term

Debt t-1)/ TA]

If the M-score obtained greater than -2.22 it means that the company’s

financial statements may have been manipulated.

In this study, the researcher divide the Beneish M-score into two

categorize which is company that predicted conduct the manipulation

(code 1) and the company that predicted did not conduct manipulation

(code 0).

Table 3.3

Independent Variable

Variable Scale Classification Code

X1 Categorical Manipulated 1
(M-score)

No Manipulated 0

3.2.2 Dependent Variable (Altman Z-score)

Altman Z-score is a model that is used to predict the bankruptcy

rate of a company by calculating the value of several ratios then included

in a discriminant equation. This model is a multivariate discriminant

17
analysis (MDA). Altman (1968) develop the first generation of Z-score by

combined five financial ratios between bankrupt and non-bankrupt

company. The formula is:

Where

X1 = (Current Assets – Current Liabilities) / Total Assets

X2 = Retained Earnings / Total Assets

X3 = Earnings before Income Tax / Total Assets

X4 = Market Value of Equity / Total Liabilities

X5 = Sales / Total Assets

The cut off of the Z-score is

< 1.81 : bankrupt

1.81 < Z < 2.99 : gray area

> 2.99 : safe area

The first model of Altman Z-score only applicable for go public

companies and not applicable for companies that not go public, in year

2000 Altman made an adjustments to the Z-score model by replaced the

X4 variable which was originally a comparison of market value of equity

with the total liabilities with book value of equity with total liabilities and

eliminate X5 variable. Altman also modified the coefficient of each

variables that can used by all companies whether private company or listed

company (Altman, 2000).

18
The modified formula is:

Z = 6.56 X1 + 3.26X2 + 6.72X3 + 1.05X4

Where

X1 = (Current Assets – Current Liabilities) / Total Assets

X2 = Retained Earnings / Total Assets

X3 = Earnings before Income Tax / Total Assets

X4 = Book Value of Equity / Total Liabilities

X5 = Sales / Total Assets

The cut off of the Z-score is

< 1.10 : bankrupt

1.10 < Z < 2.60 : gray area

> 2.60 : safe area

This study use Multinomial Logistic Regression. Refer to the Hosmer and

Lemeshow trichotomous logistic regression in Field (2009) for the

regression model with three categorical nominal scale (code 1,2,3)

dependent variable are used in the category of Y.

19
 Table 3.4

Dependent Variable

Variable Scale Classification Code

Y Categorical Bankrupt 3
(Z-score)

Gray Area 2

Free from bankrupt 1

3. 3 Research Model

Logistic regression used to find regression equation with categorical dependent

variable (binomial, multinomial or ordinal). This regression model does not need

the normality and classical assumption test. Logistic regression model also ignores

heteroscedacity test (Ghozali, 2016). It means that the dependent variable does not

need homoscedacity for each independent variable. Multinomial logistic

regression is the logistic regression used when the dependent variable has a scale

that is multinomial (more than two categories). The common form of logistic

regression is:
Logit (Y) = ln(1− ) = α0 + β1 X1 + … + βm Xm+ ε

Where:
Logit (Y) = ln(1− ) = log natural of comparison between company that

categorized as bankrupt (code 3), in the gray area (code 2), and free from bankrupt

(code 1)

20
α0 = Constanta

β1 = Coefficient

X1 = financial and accounting fraud (Beneish M-score)

ε = error

This study consist of one dependent variable that consist of three categories

(bankrupt, gray area, and free from bankrupt) and one independent variable that

consist of two categories (manipulation and no manipulation) thus two equations

are formed.

The first equation for probability between “free from bankrupt” with “bankrupt”

categories is:

) = α0 + β1 X1 + ε
Logit (Ya) = ln(

Where:

) = log natural of comparison between company that

Logit (Ya) = ln(

1−

categorized as bankrupt (code 3) and in the gray area (code 2)

α0 = Constanta

β1 = Coefficient

X1 = financial and accounting fraud (Beneish M-score)

ε = error

The second equation for probability between “gray area” with “bankrupt”

categories is:

21
 Logit (Yb) = ln( ) = α0 + β1 X1 + ε

Where:
Logit (Yb) = ln(1− ) = log natural of comparison between company that

categorized as bankrupt (code 3) and in the gray area (code 2)

α0 = Constanta

β1 = Coefficient

X1 = financial and accounting fraud (Beneish M-score)

ε = error

3.4 Statistical Analysis

Statistical analysis used in this study is SPSS (statistical package for social

sciences) application version 20.

3.4.1. Descriptive Analysis

Descriptive analysis show the basic analysis and summary of the data,

such as mean, sum, standard deviations, variance, maximum, minimum,

range, skewness, kurtosis, and percentiles. The mean is used to estimate

the magnitude of the population from the sample. Standard deviation is

used to assess the average of sample. Descriptive analysis was done for all

the variables of this study, which were bankruptcy and financial and

accounting fraud.

3.4.2 Multinomial Logistic Regression

3.4.2.1 Overall Fit Model Test (Model Fitting)

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 The first step in logistic regression is overall fit model test (model

fitting). Some statistical tests were conducted to assess this test. The

assessment of fit models in logistic regression uses statistics based on the

likelihood function. Likelihood L of the model is probability that the

hypothesized model describe the input. The logistic regression model can

be classified as good model if there is a decreasing in -2logL on final

section in the Model fitting table (Peng, 2014). The -2log Likelihood

model in logistic regression is similar to the definition of “Sum of square

error” in the regression analysis model. -2log likelihood statistics test are

used to determine when independent variable are added to the regression

model it will significantly improve the model fit. The overall fit model test

(model fitting) uses the value of -2log likelihood where if the value of final

row is lower than intercept row, it can be concluded that the regression

model is better (Ghozali, 2016).

Hypothesis for assessing the models is:

H0: The hypothesized model is fit with the data

Ha: The hypothesized model is not fit with the data

3.4.2.2 Pseudo R-square (Cox & Snell, Nagelkerke, and McFadden Test)

Analyzing data with a multinomial logistic regression there is no an

equivalent statistic to R-squared. The estimates from a logistic regression

are found by the maximum likelihood estimation rather than the least

squared estimation. However, to evaluate the goodness-of-fit of the

logistic models, several pseudo (because never achieve 0 or 1) R-squares

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have been developed. This pseudo R-square cannot be interpreted as one

would interpret an OLS R-squared, and different pseudo R-square can

show different values (Menard, 2002). There are three popular pseudo R-

squares.

3.4.2.2.1 McFadden’s R-square

Where L0 is the value of the likelihood function for a model with

no predictors (i.e. with intercept only), and LM is the likelihood function

for the model being estimated. The ratio of the McFadden R-square

indicates the level of improvement over the intercept model offered by the

full model. Since a likelihood falls between 0.0 and 1.0, the log of a

likelihood is less than or equal to zero. If a model has a very low

likelihood, then the log of the likelihood will have a larger magnitude than

the log of a more likely model. Thus, a small ratio of log likelihoods

indicates that the full model is a far better fit than the intercept model

(McFadden, 1973). When comparing two models on the same data,

McFadden’s would be higher for the model with the greater likelihood.

3.4.2.2.2 Cox and Snell’s R-square

Where L0 is the value of the likelihood functions for a model with

no predictors (i.e. with intercept only), LM is the likelihood function for

the model being estimated, and n is the sample size. The Cox and Snell R-

square indicates the level of improvement of the full model over the

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intercept. It has maximum value that is less than 1 when the full model

predicts the outcome perfectly and has a likelihood of 1 (Cox & Snell,

1989).

3.4.2.2.2 Nagelkerke’s R-square

Where L0 is the value of the likelihood functions for a model with

no predictors (i.e. with intercept only), LM is the likelihood function for

the model being estimated, and n is the sample size. The Nagelkerke’s R-

square adjusts the R-square of Cox and Snell so that the range of possible

2/n
value extends to 1.0 by driving by its maximum possible value (1-L0) . If

the full model perfectly predicts the outcome and has a likelihood of 1.0

then the Nagelkerke R-square is 1.0.

Pseudo r-squares are useful tools in evaluating multiple models

predicting the same outcome on the same input (data), but they cannot be

interpreted independently or compared with different datasets. In other

words, a pseudo R-squared statistic has little meaning without context and

only has meaning when compared to another pseudo R-squared of the

same type on the same data in predicting the same outcome (Tjur, 2009).

The higher pseudo R-squared indicates that the ability of independent

variables to explain the variation of the dependent variable is better than

the small value of pseudo R-square (Ghozali, 2016; Menard, 2002).

3.4.2.3 Parameter Estimates

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 This table calculates the true and false estimation values by looking

several values in the table for each category of dependent variable. In the

column section there are two predictive values of the dependent value

“free from bankrupt” with code 1 and “gray area” with code 2. While in

the row shows the actual observation value of the dependent variable “free

from bankrupt” with code 1 and “gray area” with code 2

3.4.2.4 Classification Table

The classification table is the table that shows the predicted values

which tally correct and incorrect estimation. The columns are the predicted

values of the dependent variable while the rows are the observed values of

the dependent. The model is perfect when the overall percentage correct is

100%. Although classification hit rates (percent of correct) as overall

effect size measures are preferred over pseudo R-square measure, it has

some severe limitations for this purpose. Classification tables should not

be used exclusively as goodness-of-fit measures because it ignores actual

predicted probabilities and instead use dichotomized predictions based on

a cutoff.

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 CHAPTER IV

RESULT ANALYSIS, DISCUSSION AND IMPLICATION

4.1 Data Description

The data population is companies that delisted from IDX (Indonesia Stock

Exchange). Sampling method used is nonprobability sampling, which is

judgmental purposive sampling. From total of 32 companies, 12 companies were

eliminated because did not consistently issue complete audited annual report

during 2011-2018 period. Therefore, the total sample was 20 companies.

4.1.1. Descriptive Analysis

Descriptive analysis show the basic analysis and summary of the

data, such as mean, sum, standard deviations, variance, maximum,

minimum, range, skewness, kurtosis, and percentiles. In this data, the

researcher only need information about number of the data, minimum,

maximum, mean, and standard deviations.

Table 4.1 Descriptive Analysis

Table 4.1 above provides the data of the minimum, maximum,

mean and standard deviation value of each variable (dependent and

independent). For Altman Z-score (Zscorebiner) variable, the values

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respectively are 60; 1.00; 3.00; 1.9833; and 0.94764. For Beneish M-score

(Mscorebiner) variable, the values respectively are 60; 0.00; 1.00; 0.4167;

and 0.49717.

4.1.2. Overall Fit Model Test (Model Fitting)

Table 4.2 Overall Fit Model Test

This table indicates the parameters of the model for which the model

fit is calculated. “Intercept Only” describes a model that does not control

for any independent variables and simply fits an intercept to predict the

outcome variable. ”Final” describes a model that includes the specified

independent variable. By including the independent variable the “Final”

model should improve upon the “Intercept only”. The -2log Likelihood

describe that all predictors’ regression coefficients in the model are

simultaneously zero and in tests of nested models. If the -2log Likelihood

of null model is greater than the fitted “final” model it means that the

model is better (Hosmer & Lemeshow, 2000). From the Table 4.2

significant value of this model is 0.001 < 0.05 it means that the model is

fit with the data (accept the H0: the hypothesized model is fit with the

data).

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4.1.3. Pseudo R-square (Cox & Snell, Nagelkerke, and McFadden Test)

Table 4.3 Pseudo R-square

(Cox & Snell, Nagelkerke, and McFadden Test)

This test indicates the affecting value of independent variable to

dependent variable. The R-square value in this test consists of three R-

square (Cox and Snell, Nagelkerke, and McFadden). The values of R-

square based on the model respectively are 0.208, 0.243, and 0.120. The

bigger the R-square value the better the ability to affecting dependent

variable (Ghozali, 2016; Menard, 2002). From that explanation, this study

use Nagelkerke’s R-square value that has the biggest value than Cox &

Snell and McFadden. The value of Nagelkerke R-square 0.243 means that

independent variable (M-score) can explain the dependent variable (Z-

score) by 24.3% and 76.7% explained from other variable beside Beneish

M-score (manipulation).

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4.1.6. Parameter Estimates (Coefficients of the model)

Table 4.4 Parameter Estimates

The B (the only coefficient) column is the estimated multinomial

logistic regression coefficients for the models. An important feature of the

multinomial logistic regression is that it estimates k-1 models, where k is

the number of levels of the outcome variable. SPSS is treating the

bankrupt as the reference category and therefore estimated a model for

“free from bankrupt” relative to “bankrupt” and a model for “gray area”

relative to “bankrupt”.

In the “free from bankrupt” to “bankrupt” section the intercept B

value is 1.447. It means for “manipulation” (the variable “no

manipulation” evaluated at zero), the logistic regression for preferring

“free from bankrupt” to “bankrupt” is 1.447. In the “gray area” to

“bankrupt” section the intercept B value is 0.000. It means for

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“manipulation” (the variable “no manipulation” evaluated at zero), the

logistic regression for preferring “gray area” to “bankrupt” is 0.000.

The (Mscorebiner=0.00), which is a dummy variable representing

the comparison between “no manipulation” and “manipulation” to

classification in Beneish M-score. The sign is negative. It indicates that if

the company is “manipulation” compared to “no manipulation” the

company more likely to be “free from bankrupt” than “bankrupt”. It is

more likely that the company is free from bankrupt condition if the

company actually conducts manipulation in the financial and accounting

reporting.

The test results through multinomial logistic regression in the table

show that in the “free from bankrupt” section Beneish M-score has a

significant effect to the model. A significant value of 0.001 indicated that

the Beneish M-score can distinguish between “free from bankrupt”

category and “bankrupt” category. The Odd Ratio value (exp(b)) 0.107

explain that the higher the M-score, the company’s tendency to be “free

from bankrupt” is 0.107 times greater than “bankrupt”. In addition, in the

“gray area” section, M-score (Beneish M-score) has a significant effect to

the model. A significant value of 0.034 indicates that the M-score can

distinguish between “gray area” category and “bankrupt” category. The

Odd Ratio value (exp(b)) 0.136 explain that the higher the M-score, the

company’s tendency to be “gray area” is 0.136 times greater than

“bankrupt”.

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 4.1.7. Classification Table

Table 4.5 Classification Table

Based on the results of the classification table, the multinomial

logistic regression model has the ability to predict from the raw data with

the right of 65%, while the remaining 35% is wrong. It can conclude that

this multinomial logistic regression model has a percent of correct by 65%

in predict the effect of Beneish M-score (manipulation) to bankruptcy.

4.2. Result and Discussion

The results of multinomial logistic regression analysis show that the

multinomial logistic regression model can predict correctly by 65% the effect of

Beneish M-score to Altman Z-score. The percent correct value in classification

table for each categories (“free from bankrupt”, “gray area”, “bankrupt”)

respectively are 84.6%, 0%, and 84.6%. The value of the likelihood ratio test and

pseudo R-square test shows that the contribution of independent variable (Beneish

M-score) has a significant effect on α (0.05). So that the dependent variable can

classify the category “free from bankrupt” with “bankrupt” and “gray area” with

32
“bankrupt”. Based on the parameter estimates table, the multinomial logistic

regression model is:

Logit (Ya) = ln( ) = 1.447 – 2.235 X1 + ε

Beneish M-score affect the probability of company in category “free from

bankrupt” with “bankrupt” by coefficient value is 1.447, significant value 0.009

(less than 0.05), and Odd Ratio (Exp(B)) value 0.107. It means that the

manipulation did not affect the bankruptcy prediction in gray area.

Logit (Ya) = ln( ) = 0.000 – 1.992 X1 + ε

Beneish M-score did not affect the probability of company in category “gray area”

with “bankrupt” by coefficient value is 0, significant value 1.000 (more than 0.05),

and Odd Ratio (Exp(B)) value 0.136. It means that the manipulation did not affect

the bankruptcy prediction in gray area.

In the table 4.5 Parameter Estimates, The sign of coefficient of Beneish M-

score is negative. It indicates that if the company is “manipulation” compared to

“no manipulation” the company more likely to be “free from bankrupt” than

“bankrupt”. There is a tendency that the company is free from bankrupt condition

if the company conducts manipulation in the financial and accounting reporting.

The results show that hypothesis 1 of this study is accepted. It means that

manipulation has a significant effect on companies’ bankruptcy. This result is

same with research done by MacCarthy (2017) and Mehta & Bhavani (2017) that

do a case study about companies that conduct manipulation in their financial

reporting that stated both of Enron and Toshiba do earnings manipulation in their

financial reporting to move out from financially distress condition.

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 CHAPTER V

CONCLUSION AND RECOMMENDATION

5.1 Conclusion

Based on the results of this study, the multinomial logistic regression model

can predict the effect of Beneish M-score (manipulation) on Altman Z-sccore

(bankruptcy) by 65% and other factors outside manipulation affect Alman Z-score

by 35%. The R-square value using Nagelkerke’s R-square indicate that the ability

of Beneish M-score (manipulation) affect Altman Z-score (bankruptcy) of 24.3%.

Even though the percentage is quite small, but Beneish M-score significantly

affect the Altman Z-score. The odd ratio (exp(b)) in the table 4.5 Parameter

Estimates also explain that the higher the Beneish M-score, the tendency of

companies to be free from bankrupt is 0.107 times greater than going bankrupt. It

can be concluded that the company will tend to do manipulation to make better

financial statement and to survive from financial distress condition that can lead to

bankruptcy.

5.2 Limitations and Recommendations

This study uses probability model to predict the relationship of one variable to

other variable which is multinomial logistic regression. This study is the first

study on the manipulation and bankruptcy in Indonesian delisting companies, this

study have several limitations. First, the total sample used in this study is

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relatively small and only focused on delisting companies. Second, this study only

used financial and accounting model and did not include other information related

to the variables. Third, this study is lack of references about the topic. The

conclusion of this study just extends the critical thinking and theories about the

topics. Fourth, the study only examines the annual report of the companies 3 years

before the delisting date.

In response to the limitations, the researcher suggests some recommendations

for future research. First, do case study for listed companies to get the better

conclusion and more sample. Second, find other factors besides manipulation that

can affects bankruptcy. Third, explore more references that examine the

relationship of manipulation on bankruptcy. Fourth, extend the period of annual

report more than 3 years before delisting date to provide more informative results.

5.3 Implications

The results of this study can be an implication to the regulator (OJK) to help

them assessing the companies that do manipulation in order to attract investors

and give protection for investors to minimize the side-effects. The investor can

use this study as a tool to help them make a decision before do the investment.

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