Karya:
- Iqbal Kautsar
- Ahmad Syaifuddin
- Nova Kurniawan
Introduction
Global economies have not escape unscathed from the successive crises that have occurred in recent history.
In 1997-1998, and again in 2008 the world was shaken by an economic recession triggered by the breakdown of the Subprime mortgage market in the United States.
The events in 2008 were preceded by collapse of large finance companies such as New Century Financial Credit in America and the bankruptcy of Sachson Landesbank in Germany in 2007. Also in 2008 finance companies Lehman Brothers, Washington Mutual, Merrill Lynch, Goldman Sachs, Northern Rock, UBS and Mitsubishi UFJ filed for credit protection under the Bankruptcy Act.
There were several conditions that lead to these events such as the accumulation of national debt reaching US$8.98 trillion, while GDP was only US$13 trillion. The corporation tax reduction program at US$1.35 trillion reducing state revenues, the swelling cost of the Iraqui and Afghanistan wars, the failure of the CFTC (Commodity Futures Trading Commission) to appropriately monitor the ICE (Inter Continental Exchange), increasing oil prices to over US$100/barrel, and The Federal Reserve maintaining low interest rates[1].
These events resulted indirectly in drying up liquidity in global banking and capital markets accompanied by the withdrawal of funds (especially from emerging markets) either in the form of stock portfolios, bonds or in loans in foreign currencies. This caused funding in foreign currency to be very difficult to obtain and very expensive[2].
In Indonesia, the impact of the global economic crisis in 2008 caused the uncertainty of exchange rates between the US$ and the Rupiah, increasing the price of imported goods that fulfil many elements of our lives, making the consumer purchasing power weaker, credit facilities difficult, loss of financial confidence, complicated trade transactions and the bankruptcy of companies that has no fundamental foundation thereby allowing the flow on effect of rising, unemployment. The Indonesia Jakarta Composite Index also declined along with falling prices of shares of companies such as Medco, Bumi Resources and Antam[3].
Many parties had a negative impact from the global crisis in 2008. These included large-scale enterprises that played in the global market to with forex, stocks, bonds, and off-shore loans, public sector external debt, importers or businesses that import content of raw materials.
Although the economic crisis originated from problems in the financial sector, the effect also affected the private sector. The JCI represents the financial sector. When crisis hit in 2008, the JCI saw economic conditions decline, though not absolutely because it was also influenced by several other factors. With the decline in the index a negative sentiment occurred in the stock index that reduced funds in the private sector.
The impact on the private sector was inflation and a shortage of funds due to the tightening the flow of funds out of the sector resulting in the decline in the level of productivity. If a company did not have a strong economic foundation, the company was in trouble. This led to financial distress and even bankruptcy.
Crisis conditions that had negative effects for companys would lead to moral hazard.
Information is very important for all parties. In the context of the company, information is presented in financial statements that become references for decision makers, especially the major users of financial statements - creditors and investors.
The negative impact of these problems impacting on the company will make the information in the financial statements look worse. Users of financial statements also will respond to it. This leads to anxiety and a negative response by stakeholders that the company will acquire a negative outlook. It will lead to a moral hazard, especially for accountants preparing and presenting financial statements.
Although the accounting profession has a code of ethics, some cases in Indonesia resulted in an abuse of authority by accountants in presenting financial statements.
Every company should have in place controls to prevent these situations occurring. But if we see the facts, many cases tell us that the manipulation is done by the company. It is driven by opportunity, pressure and rationalization.
An accountant can do the manipulation if there are opportunities to do so. This means there is a gap in the enterprise control system that allows an accountant to do this.
The practice of manipulation can also occur if there is pressure from management or other parties that inflate the financial statements to make the financial situation look better or hide the bad side of the company's true financial condition. Agency theory describes different interest between management and the investors as principals. Differences in interests are able to trigger and pressure accountants to manipulate data.
The last factor is rationalization of manipulation. Here manipulation is seen with a rational point of view that includes the benefits and disadvantages of such actions. An accountant can rationally manipulate when the benefit obtained is greater than the risk of loss that will be suffered .
Three factors encourage manipulation. This paper was written to analyze the manipulation actions undertaken by an accountant using game theory approach by considering the various factors above. This approach will consider the concept of manipulation and how the company can face the negative impact of the crisis.
Financial Distress and the Economic Crisis
In many cases, accounting manipulation is closely related with financial distress and economic crisis. Research provided by Han and Wang (1998) proved that oil companies wanting profit during the economic crisis utilized the accrual method of accounting to manipulate earnings. In the banking sector, Rahman (1998) says that accounting plays an important role in causing the economic crisis by manipulating its role in the disclosure of non-performing loans. Gonzalo and Garvey (2005) more generally state that ethics is very important as the economic crisis that occurred was caused by financial scandals and accounting manipulation.
Business dictionaries defines economic crisis as a situation where the economy of a country experiences a sudden decline in financial stability. Accounting dictionaries define the economic crisis as a situation where a state of financial bankruptcy exists. In general, there is still no universally accepted definition despite the presence of macroeconomic indicators such as exchange rates, exports, GDP, inflation, income per capita and economic growth. The economic crisis can also be associated with banking issues such as interest rates and non-performing loans. The most significant impact felt by the real sector experiencing financial distress was caused by the depreciation of exchange rates and high inflation.
Like economic crisis, financial distress has no standard definition. But in general financial distress can be defined as a condition in which companies experience difficulties in meeting short-term and long-term liabilities. Financial distress becomes one of the determining factors as to whether a company should be liquidated or not (Kahl, 2002). There are several important factors that can be considered when assessing financial distress. Platt and Platt (2002) believe that EBIT, net income and cash flow are things that must be considered carefully.
Financial distress has the potential to cause an economic crisis. Tripriyo (2000) in his research proved that 79.65% of companies in Indonesia experienced financial distress in 1997 and the resulting crisis in 1998. Webb and Cohen (2007) argue that financial distress has great potential in causing an economic crisis. This was later proven in 2008 when financial distress arose in the housing finance sector and caused a major problem in the United States.
Accounting Manipulation
APB (1970) defines accounting as an activity that serves to provide quantitative information - primarily financial - of the economic entity that is useful in making decisions. One of the most important forms of information provided by accounting is the financial statement. Therefore, the main concern in the development of accounting is often focused on financial statements.
Financial reporting is different from the financial statements. Financial reporting covers a wider area for the institutions involved and the applicable laws in the preparation of financial statements. Suwardjono (2005) defines financial reporting as the structure and accounting processes that describe how the financial information is provided and how it is reported to achieve economic and social aims.
Financial statements must follow the operational guidelines called GAAP (Generally Accepted Accounting Principles). As a framework of guidelines, GAAP provides guidance on how to treat items that must be reported with respect to their definition, measurement/assessment, recognition, presentation and disclosure. As the operational guideline, GAAPs will be a major criterion in determining whether financial statements are presented fairly or not.
In reality, many problems arise relating to fair presentation. For example, there were 22 big U.S. companies listed by Forbes magazine (2002) that performed financial manipulation during the period 2000 – 2002. Amat et al. (2003) presents facts concerning 39 Spanish companies, which are listed on the exchange floor, doing creative accounting or manipulation of financial statements from 1999-2001.
AICPA (2002) defines accounting manipulation as the manipulation, falsification, or alteration of accounting records or supporting documentation of financial statements; mistakenly or deliberately neglecting the financial statements, events, transactions, or other important information; intentional misapplication of accounting principles relating with the number, classification, manner of presentation, or disclosure.
Manipulation activities are closely linked to ethical issues. Research by Growthorpe and Amat (2005) concluded that the activity of manipulation is a reprehensible activity. This activity was detrimental to users of financial statement because it created a biased view of economic reality. Some of the techniques mentioned by Stolowy and Breton (2003) are often used in accounting manipulations. These include earnings management, income smoothing, big bath accounting, creative accounting, and window dressing.
Ethics and Financial Statements
The concept of ethics becomes an important factor. In some literature, the concept of ethics has a variety of definitions and understanding. Velasquez (2006) chose one definition of ethics being the principle of conduct governing an individual or a group.
In a business context, ethics have a variety of principles. Velasquez (2006) mentions a variety of principles that must be considered, such as the cost and benefit, rights and duties, justice and fairness and ethics of care. The complexity arises because it is difficult to integrate these four factors for each principle to get a fair proportion in practice.
As a profession which is related to the business, the accountant becomes an integral part of the discussion of ethics. Accountants are often confronted with ethical dilemmas caused by external pressure or internal sources and this eventually leads to the actions of accounting manipulation. In the context of ethics, accounting manipulation is considered unethical.
McPhail and Walters (2009) mention several perspectives in examining ethics, such as utilitarianism, deontological and teleological. Utilitarian perspective is choosing an ethical action based on the costs and benefits resulting to the public. Deontological is a perspective that examines the general principles and ethics based on moral principles of action. While theological is reviewing ethical viewpoints based on the consequences of those actions.
From the standpoint of utilitarianism, accounting manipulation is unethical because it is an act that gives huge losses to users of financial statements (Growthorpe and Amat, 2005). From the deontological perspective, manipulation of accounting would clearly violate general principles and morals because accounting manipulation means to lie (Sugiri, 2005). From the standpoint of theological, accounting manipulation may give rise to bad consequences because of the potential crisis which may ensue (Gonzalo and Garvey, 2005)
Game Theory
There are ethical dilemmas related to the particular interests within and outside a company in the accounting manipulation activities. Conflict of interest can be addressed using game theory perspective.
According to Gardner (2003), game theory is science that studies games and takes games seriously enough to solve them. While Hutton (1996) defines game theory as an intellectual framework for examining what leads various parties to make a decision and what they should do given their possession of inadequate information and different objectives. In brief, Davis (1997) explained that game theory is a theory of decision making.
Solution of the game theory refers to the increase in legal sanctions. But this is disputed by Tsebelis (1989) who states that increased legal sanctions do not affect individual behavior, but instead lower the probability of officials to enforce the law. As well, the raising of incentives to obey the law (a measure of welfare) can reduce the number of law enforcement agencies, but not to the level of a crime.
One of the games that can be used in reviewing the accounting manipulation activities is the inspection game, an analysis tool which studies the interactive relationship between two or more rational agents (Pradiptyo, 2007). The core of the game is to see the relationship or interaction between the enforcer and the offender. Pradiptyo, Sasmitasiwi and Sahadewo (2011) says that this theory is a universal theory and can be applied in a variety of disciplines
Performance and Ethical Dilemmas on Financial Crisis
As a cornerstone to explaining the performance and ethical dilemmas of a financial crisis, we assume that the current crisis threatened the company's deteriorating performance. This means that the company's financial indicators such as net income and stock price declines and financial ratios deteriorate. In such circumstances, firms are assumed to be in a dilemma between ethics and performance. Firstly, the company doing the manipulation of financial reporting indicates that performance is still considered good, while in ethics it is considered bad. Secondly, by contrast, companies that do not perform manipulation of financial reporting may have good ethical but be considered as having poor performance.
In this paper, we assume that during a financial crisis, the company will manipulate its financial reporting in order to make its performance to be considered as good, although unethical. In this manipulation, there are two parties involved, they are management and accountants. Management gives pressure to accountants to manipulate financial reporting to the public. Accountants, who compile financial reports, are the executor of manipulating the company's financial reporting.
Discussion
Game Theory in Ethical Dilemma and Performance
Inspection game is one of the games that is used to conduct the analysis using Game Theory Approach. Tsebelis (1989) and Pradiptyo (2007) used it to explain the relationship of escalation of the punishment with the behavior of law enforcement officials and public. There are three propositions which explain the implications of implementing these strategies. In this paper, we try to use game theory approaches in the field of accounting-related behavioral ethics. We analyze the strategies undertaken by management and accountants in the company's efforts to face financial crisis.
During financial crisis, we assume that the company has experience with performance and ethical dilemmas. Parties who experience these dilemmas are the management and accountants. It is assumed that Management will give accountants pressure to manipulate company financial reports in order to maintain performance that can be considered good rate during crisis. On the other hand, ethics would be worse because of manipulation. In table 1, we describe the interaction between the accountant and management. We use an assumption that both parties will maximize the pay-off, the offender will choose the most profitable strategy. In addition, the running game is sequential, that is done in stages and the perpetrator will use strategy that is influenced by the strategy undertaken by his co-star.
Table 1. Interaction between management and accountant when financial crisis happened
Accountant | |||
Manipulate | Doesn’t Manipulate | ||
Press | UK - DI -- (a1) | DK + DI -- (b1) | |
| Management | BI - CG -- (a2) | BG - CP -- (b2) | |
Doesn’t Press | UK + UI -- (c1) | UI - DK -- (d1) | |
-CG -- (c2) | -CP -- (d2) | ||
which;
UK = Performance Utility that acquired by management, such increasing the company's performance rate, raising management reputation, guaranteeing security of management positions, raising salary and bonus management.
UI = integrity Utility that acquired by management associated with implementation of ethical appreciation and moral management
DK = Performance disutility of management associated to threat of corporate performance, reduction of management reputation, threat of positions, cut of salaries and bonus management.
DI = Integrity disutility of management, related to the disobedience of ethics and moral management
BI = Incentive benefits that gained by accountant because of manipulation, related to the direct incentives (raising salary, security of position, close to the management) and indirect incentives.
BG = The benefits obtained by the integrity of accountants that do not manipulate financial reporting, related to ethics, morality, independence and professionalism of accountants
CP = Position cost of accountant for his actions doesn’t manipulate financial reporting, such dismissal or reduction in the company's position, salary reduction, shunned by management / supervisor, etc.
CG = Integrity costs incurred by accountant because of manipulation, an infraction of morality, ethics and accountant code ethics.
c1 > a1, b1 > d1 and a2 > b2, d2 > c2
In this inspection game model, the game accordingly is a one shot game. Nash Equilibrium can be obtained by calculating the probability which is owned by each player. In the Tsebelis model (1989), probability formulation is;
p* = (d2 – c2 )/(a2 – b2 – c2 + d2)
q* = (b1 – d1 )/(b1 – d1 – a1 + c1)
Which, p* = Probability of pressure action by management
q* = Probability of manipulation by accountant
Later, we will obtain an expected utility that will be able to explain the situation in a real condition.
From this model, we can conclude several propositions related to efforts of management to suppress accountants in financial reporting and accounting attempts to manipulate as a consequence of management pressure. The first proposition:
a) Management will suppress the accountant if the performance utility will be higher than integrity disutility when face of crisis [EC (UK + UI)],
b) There will be a manipulation by the accountant if the incentives benefits that are gained from management is higher than the cost of integrity and cost of position [EC (CP + CG)],
c) Management will give pressure proportional to the incentive benefits of manipulation, but in contrary to management integrity disutility [p * = CG / (BG - CP)],
d) The probability of accountants doing manipulation will have a positive relationship with the performance utility that is obtained by management and inversely proportional to the cost of the accountant integrity [q * = UK / (UI - DK)].
The second proposition, escalation of integrity utility will reduce management efforts of manipulation suppressing, and escalate accountant integrity providing benefits greater than the declination of accountants incentive to do manipulation [the probability of manipulation decrease, if ΔUK ≤ ΔUI - ΔDK)]. The second proposition will be valid if at the time of financial crisis, integrity (honesty), which is owned by management is valued higher than the achievement of its performance, although this condition may not prevent manipulation attempted by accountants. For accountants, this will be true when they face the pressure of management, accountants taking primacy of integrity and professionalism that they have, although it still does not change the consequences of their position.
Through the first and second propositions, we can conclude that the financial crisis encourages management to maintain good performance of the company through pressure to accountant to manipulate financial reports. In this case, the accountant as a compiler of financial statements will come under pressure from management to manipulate financial reports in order to make the company's performance look good. Accountants are faced with a dilemma situation because they must hold fast to ethics and morals, on the other hand they have to 'save' their company.
Therefore, raising respect for ethics and morals (which are denoted in integrity) needs to be done, both by management and accountants, to decrease the probability of management suppression and accountant manipulation. Benefits of ethics and morals should be increased beyond expectations of the management performance benefits and accountant incentive when doing manipulation to 'save' the company's financial report. It is necessary to create environmental conditions for companies, both internal and external (especially stockholder), which upholds the ethics benefits and moral, not solely based on the size of the company's performance but based on financial reporting. Thus, management would not be requesting accountants to manipulate and accountants will not implement the company's financial report manipulation.
However, it is not easy to encourage management and accountants not to manipulate the financial statements during a financial crisis with the underlying physical aspect only based on performance of financial reporting. However, it is worth considering the statement of Sugiri, (2005) that information in financial reporting must have a high quality, which represents the transactions and the underlying economic events and it is the result of a rational business decisions. Quality of financial reporting is crucial in order to allocation of resources will not do in wrong direction.
Conclusion
The financial crisis could push a company to manipulate its financial reports. This condition is the dilemma of a company, whether performance or ethics are prioritized. Several studies in the United States found that companies tend to prioritize the performance during the financial crisis. Aspects of ethics and integrity are considered but will not save the financial reporting in poor financial condition. Therefore, manipulation of financial statements was deliberately done by the company.
In this manipulator company, the management put pressure on the accountant to manipulate the preparation of financial reports. This can happen when the performance management scored higher than the utility obtained by the integrity of management. On the other hand, the accountant will choose to receive pressure management to manipulate when it considered the benefits of incentive manipulation to be higher than the cost of integrity and the cost of position in the company. In addition, the probability of management to give pressure for manipulation is also influenced positively by the benefits obtained by the incentive manipulation accountant, but contrary to the integrity of management. The probability of accountants to manipulate the financial statements is influenced positively by the management performance utility over the manipulation pressure, but in contrast to the cost of the integrity of accountants.
Efforts should be made in order to make management and accountants not manipulate the financial statements and to increase the appreciation of the benefits of ethics, morals and integrity to them. Ethics and integrity of this award must come from internal and external environment. Ethics and integrity, though intangible, have an important role in overcoming the crisis. Efforts that are ethical, will direct the company's present financial reporting information correctly. Correct information has implications for the appropriate and efficient allocation of resources. Thus, the company through its resource allocation will have more power to anticipate and cope with the threat of a crisis that befall them.
References
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[1] see Kompas and Depkominfo in 2008
[2] see Tanya Jawab Memahami Krisis Keuangan Global Bagaimana Pemerintah Mengatasinya. Depkominfo 2008
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