JRSSEM 2022, Vol. 02, No. 3, 249 – 259

E-ISSN: 2807 - 6311, P-ISSN: 2807 - 6494

DOI : 10.36418/jrssem.v2i03.262 https://jrssem.publikasiindonesia.id/index.php/jrssem/index

THE EFFECT OF BOARD OF DIRECTORS NARCISM, THE

BOARD OF DIRECTORS' BONUS SCHEME, AND THE

CEO'S DUALITY ON FINANCIAL REPORTING QUALITY

Suryadi

Agustin Fadjarenie

1,2,3

Mercu Buana University, Indonesia

e-mail: suryadi.1012[email protected]

, agustin.fadjarenie@mercubuana.ac.id

*Correspondence: suryadi.1012[email protected]m

Submitted: October, 5

2022 Revised: October, 14

2022 Accepted: October, 19

2022

Abstract: This study aims to explain the effect of Board of Directors Narcissism on Financial

Reporting Quality; the effect of the Board of Directors Bonus Scheme on the Quality of Financial

Reporting; and The Effect of CEO Duality on Financial Reporting Quality. This research method is

quantitative causal type which is asymmetric. The research locations are all state-owned companies

listed on the Indonesia Stock Exchange for the 2017-2020 period. The technique of collecting data

is through surveys on secondary data on the IDX official website (www.idx.co.id). The data analysis

technique is linear regression of panel data with the help of Eviews 9.0 software. The results showed

that the Narcissism of the Board of Directors had a negative and significant effect on the Quality

of Financial Reporting; The Board of Directors Bonus Scheme has a positive and insignificant effect

on the Quality of Financial Reporting; and CEO Duality has a negative and insignificant effect on

the Quality of Financial Reporting. The results of this study as input for the company are that the

Narcissism of the Board of Directors, and Dualism of the CEO are not good for the company, so

they must be prevented or minimized.

Keywords: Board of Directors Narcissism, Board of Directors Bonus Scheme, CEO Duality, Quality

of Financial Reporting

Suryadi

, Agustin Fadjarenie

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INTRODUCTION

The importance of financial reporting

quality cannot be overstated. According to

financial literature, the quality of the

company's financial information (financial

reporting quality) released in the

company's financial statements has a large

influence on investment decisions.

Companies' financial information is used by

the capital market to make investment

decisions (Atuilik & Salia, 2016). The

Government Accounting Standards

Committee (2005: KK-10) defines

qualitative financial reporting

characteristics as normative measures that

must be embodied in accounting

information in order to achieve its

objectives.

Soemarso (2004) identifies two

indicators of financial reporting quality: the

reporting process and financial reporting

quality. Financial reporting is said to be of

high quality if it meets the qualitative

characteristics of information, which

include fundamental qualitative

characteristics such as relevance and

faithful representation, as well as

enhancing qualitative characteristics such

as comparability, verifiability (verifiability),

timeliness (timeline), and understanding

(understandability) (Gautama et al., 2017).

Based on this description, it appears

that the variables of CEO narcissism, CEO

bonuses, and CEO duality are related to

financial reporting quality. CEO narcissism,

CEO bonuses, and CEO duality are assumed

to affect financial quality independence,

despite the fact that this aspect of

independence is important in influencing

financial reporting quality and audit quality

(Haeridistia & Fadjarenie, 2019). CEO

narcissism, CEO bonuses, and CEO duality

are thought to influence a variety of other

factors, including investment decisions,

funding decisions, and dividend policy

(Triani & Tarmidi, 2019).

It is interesting to investigate SOEs,

specifically the quality of SOE financial

reporting. Because, despite the fact that

these SOEs are highly regulated, there have

been numerous high-profile cases

involving the financial reporting quality of

SOEs. There are several issues concerning

the reporting quality of SOEs. Consider the

case of PT Garuda Indonesia (Persero) Tbk,

which was accused of financial engineering

in 2019. This case began with the Supreme

Audit Agency's (BPK) findings that there

had been financial reporting manipulation

(financial engineering within the company,

BPK discovered the recognition of the

company's receivables in financial

reporting, demonstrating that the audit

process of Garuda Indonesia's financial

reporting does not fully follow the

applicable accounting standards)

(Hariyanto, Suganda, and Soft, 2020). Ari

Askhara's financial reporting has been

"polished," so that the news "Certificate of

CT's Story Rejects Garuda's Financial

Reporting Polesan Ari Askara" appears

(Idris, 2020).

The case of revealing state losses in a

number of SOEs is inextricably linked to the

issue of poor reporting quality. Corruption

occurred in PT Asuransi Jiwsraya (Persero),

resulting in a loss of Rp 16.8 trillion. There

251 | The Effect of Board of Directors Narcism, The Board of Directors' Bonus Scheme, and The

Ceo's Duality on Financial Reporting Quality

was poor financial reporting, with the

strategy of buying low-quality stocks and

mutual funds, resulting in tens of trillions of

dollars in losses. In the case of Jiwasraya,

there are indications of engineering in the

formation of share prices (Idris, 2020). PT

Asabri (Persero) caused the state even more

losses, totaling Rp. 22.78 trillion. The loss to

the state is the result of share

mismanagement. Given that the large state

losses were only discovered after the losses

had been running for a long time, this

demonstrates that the two SOEs' financial

reporting is of poor quality (Sari, 2021).

The delay in submitting financial

reporting is an example of financial quality.

This occurred, among other things, in 2019.

Financial reporting should be submitted to

the Ministry of BUMN no later than

February 15, according to the Joint

Regulation of the Ministers of Finance

Number 23/PMK.01/2007 and the

Regulation of the Ministers of SOEs

Number PER-04/MBU/2007. Meanwhile,

two major SOEs in the energy sector, PT

Pertamina (Persero) and PT PLN, do not

appear to have collected financial reports

(Persero). Previously, Pertamina (Persero)

submitted a financial report submission

delay from the expected schedule because

they were still auditing subsidies (CNN,

2019).

Because the performance of SOEs in

2020 was adversely impacted by the Covid-

19 pandemic, it is interesting to look at the

quality of SOE financial reporting. As a

result, on average, SOE companies

produced consolidated financial reports.

From a profit of Rp. 124 trillion in 2019 to

Rp. 28 trillion in 2020, all SOEs' profits

decreased by 77%. The majority of profits

(90.7%) from the 104 state-owned

businesses were made by just five SOEs: BRI

(26.4%), Bank Mandiri (22.2%), Pertamina

(19.1%), Telkom (17.8%), and BNI (5.2%)

(Pranoto, 2021).

Internal control, which is influenced by

the board of directors, management, and

other personnel, is another issue related to

the quality of financial reporting in state-

owned enterprises. BUMN firms adhere to

the Statement of Audit Standards No. 62

(PSA 62), particularly in terms of internal

control. PSA 62 is a problem for SOEs that

go public because listed companies must

also follow capital market rules and Law No.

199 concerning SOEs. Some listed SOEs are

conservative while still complying with PSA

62; some even issued three reports in

addition to Bapepam PSA 29 rules,

resulting in four independent auditor

reports. The Indonesian Institute of

Accountants (IAI KAP) has published an

exposure draft of PSA 75 as an amendment

to PSA 62, but its status is still pending

(BPKP.go.id, 2021).

There have been a number of previous

studies that are relevant to the theme of

financial reporting. The author traces 23

previous research journals, both domestic

and international, with a publication period

of 2017-2020, as shown in table 2.1. The

following are known based on 23 previous

studies, as summarized in table 2.1: First,

three independent variables influence the

same dependent variable (Firm

Performance, with Financial Performance

Proxy). The three variables that both affect

the same dependent variable are (1) CEO

Narcissism (X1) variable affects Firm

Performance (with Financial Performance

Proxy) (Uppal, 2020); (2) CEO Bonus/

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Compensation (X2) variable affects Firm

Performance (with Financial Performance

Proxy) (Teti et al., 2017); (3) CEO Duality (X3)

variable affects Firm Performance (with

Financial Performance Proxy) (Mubeen et

al., 2020).

Second, with the dependent variable

"Quality of Financial Reporting," the

independent variable is not one of the three

independent variables (CEO Narcissism,

CEO Bonus/Compensation, and CEO

Duality), indicating a research gap that this

study can fill. This study combines three

independent variables that were previously

studied separately. As a result, the study will

introduce three independent variables

(CEO Narcissism (X1), CEO Bonus/CEO

Compensation (X2), and CEO Duality (X3) to

see if they affect Financial Reporting

Quality.

In recent years, psychologists and

business scholars have begun to regard

narcissism as a personality trait rather than

a disorder. The significance of narcissism as

a research construct stems from its

relationship to individuals' categorization

of themselves, others, and the

environment, as well as the interpretation

of the phenomena they perceive and how

their perception and processing of

information can influence the decisions

they make (Al-Shammari et al., 2019)

According to (Al-Shammari et al.,

2019)research on 134 CEOs of Fortune 500

companies from 2008 to 2013, there is a

link between CEO narcissism and corporate

social responsibility (CSR). The positive

effect of CEO narcissism on CSR is also

supported by research conducted by

(Uppal, 2020)on 373 CEOs in the Indian

automotive industry, which found that CEO

narcissism has a curvilinear effect on

company performance. This means that

while CEO narcissism can be beneficial to

company performance, it can also be

detrimental outside of the company's

performance environment. The research of

also shows that CEO narcissism has a

positive effect on CSR.

In contrast to previous research, the

purpose of this study is to investigate the

impact of CEO narcissism on financial

reporting. According to (Al-Shammari et al.,

2019), CEO narcissism can influence the

decisions they make, as evidenced by the

research of (Chen et al., 2021), and (Al-

Shammari et al., 2019), which proves CEO

narcissism can affect CSR. According to

(Uppal, 2020) research, CEO narcissism has

an impact on company performance. Based

on these findings, the authors intend to

investigate the impact of CEO narcissism on

financial reporting quality.

Previous research has shown that the

CEO Bonus has an impact on other aspects

of the company. (McNichols & Stubben,

2008)discovered that CEO bonuses have an

effect on earnings management. The

research of (Cho et al., 2019)demonstrates

that CEO bonuses have an impact on

shareholder returns. Both studies show that

CEO bonuses can have an impact on other

aspects of a company. As a result, the

authors of this study wanted to investigate

the impact of CEO bonuses on the quality

of financial reporting. Because, as

suggested by (Gan et al., 2020), the

relationship between CEO compensation

and performance can be biased in favor of

the CEO at the expense of shareholders if

the compensation committee is influenced

by insiders, the CEO Bonus is assumed to

253 | The Effect of Board of Directors Narcism, The Board of Directors' Bonus Scheme, and The

Ceo's Duality on Financial Reporting Quality

affect the Quality of Financial Reporting.

Previous research has shown that CEO

Duality can have an impact on other

aspects of the business. According to

(Uppal, 2020) research on 373 CEOs in

India's automotive industry, CEO duality

has an impact on company performance.

(Broye et al., 2017)demonstrate the effect

of CEO Duality on Compensation. (Mubeen

et al., 2020)found that CEO Duality has an

impact on company performance. Based on

these two studies, the author wishes to

investigate the impact of CEO Duality on

other aspects of the business, specifically

the Quality of Corporate Reporting. The

authors believe that CEO duality will have

an impact on the quality of corporate

reporting because CEO duality is the

practice of combining CEO and Board

positions into a single role. This practice

reduces the CEO's monitoring capacity

while increasing the CEO's discretion, which

can have both positive and negative

consequences for the company. On the one

hand, there will be greater managerial

wisdom that comes with the duality of the

CEO because it provides firmer and more

decisive corporate leadership. As a result, it

is understandable that CEO Duality may

have an impact on Financial Reporting

Quality.

MATERIALS AND METHODS

This study is intended to be applied

research rather than basic research . To

differentiate it from an experimental study,

this type of research is a survey study

(Cooper et al., 2006).

This is a quantitative research method

(Creswell & Creswell, 2017). The type of

quantitative research used in this study is

causal studies, or research based on the

concept of cause. More specifically, the

causal study in this study is asymmetrical

(asymmetrical relationship), which means it

has only one effect, namely the influence of

the independent variable on the dependent

variable (Cooper et al., 2006). This study

investigates the effect of four variables,

including three independent variables,

namely board narcissism (X1), director

bonus scheme (X2), and CEO duality (X3),

and one dependent variable, namely

financial reporting quality (X3) (Y).

The operational definition of variable measurement is as follows:

Vari-

abel

Definition

Measurement

Ratio

Narci

ssism

of the

Board

Direct

ors

(X1)

Narcissists seek

excellence, have

very high self-

confidence, are

often considered

arrogant, and

pursue recognition

and affirmation (Ahn

CEO narcissism uses a four-item

index developed by (Chatterjee

& Hambrick, 2007). These

include: 1) advantages

photo of the CEO in the annual

report of the company; (2) THE

CEO stands out in the company's

press release; (3) relative cash

Ratio

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et al., 2020).

CEO compensation; and (4) the

CEO's relative non-cash

compensation. These items

represent one or more common

aspects of the narcissistic

personality (see Chatterjee &

Hambrick, 2007):

superiority/arrogance,

exploitative/entitlement, self-

absorption/self-admiration, and

leadership/authority.

(Ahn et al., 2020).

Board

Direct

ors

Bonu

Sche

(X2)

COMP_PCT =

EQUITY_TOT, equity-

based compensation

ratio

(limited number of

options and shares)

for total

compensation; or

OPTION_TOT, the

ratio of the option

given to the total

compensation in

one

year; or

RESTRICTED_TOT,

the ratio of restricted

shares granted to

total compensation

(Gan et al., 2020).

(Indriaswari & Nita, 2018)

Ratio

Dualit

CEO

(X3)

CEO duality is the

practice of

consolidating ceo

positions and Board

seats into a single

role (Wang et al.,

2018: 172)

The measurement of CEO Duality

(

CEOduality)

uses dummy, the

value of one if the CEO is the

chairman of the board, and zero

if it is the other way around (Gan

et al., 2020).

Nominal

255 | The Effect of Board of Directors Narcism, The Board of Directors' Bonus Scheme, and The

Ceo's Duality on Financial Reporting Quality

Quali

ty of

Finan

cial

Repor

ting

(Y)

∆∆Ri,t is the annual

change in the

receivables of the

company i in year t;

∆ Slaesi,t is the

annual change in the

company's revenue i

in year t. All variables

are divided by the

total assets of the

previous year

(McNichols &

Stubben, 2008)

(Gautama et al.,

2017).

Where:

∆∆Ri,t is the annual change in

the receivables of the company i

in year t; ∆ Slaesi,t is the annual

change in the company's

revenue i in year t. All variables

are divided by the total assets of

the previous year (McNichols &

Stubben, 2008)(Gautama et al.,

2017).

The general public (Sekaran & Bougie,

2016). This study includes all state-owned

enterprises listed on the Indonesia Stock

Exchange (IDX). All state-owned companies

listed on the Indonesia Stock Exchange

(IDX) with complete data according to the

research variables and the 2017-2020

period comprise the affordable population

(Sekaran & Bougie, 2016). The sample

consists of all state-owned companies that

are listed on the Indonesia Stock Exchange

(IDX) and are part of the affordable

population. The sampling technique used

was purposeful sampling. (Cooper et al.,

2006)distinguishes two types of purposive

sampling techniques: judgment sampling

and quota sampling. This study employs

judgment sampling, in which the researcher

selects the sample based on criteria

determined by the researcher's

consideration, state-owned companies

that, in addition to being listed on the IDX,

have gone public at least one year before

2018 and are still listed on the IDX at least

until 2020; and has complete data for four

research variables from 2017 to 2020. The

data in this study is collected on a yearly

basis (yearly).

The data in this study is secondary data

(Kuncoro, 2011; (Sugiyono, 2013). As a

result, the library research method was

used to collect secondary data on all

variables via the IDX official website

(www.idx.co.id), the Financial Services

Authority (www.ojk.go.id), and the websites

of each of the sampled companies.

The data analysis method in this

research is descriptive method and multiple

linear regression. The multiple linear

regression equation model in this study

uses panel data (Widarjono, 2015) as

follows:

= α + β

+ β

2it

+ β

3it

+ ε

Where:

= Quality of Financial

Reporting

= Directors Narcissism

= Directors Bonus Scheme

= CEO Duality

1,2,3

= Slope regression

Suryadi

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| 256

coefficient

t= Period t

i= 1st Entity

a= Constant

e= Variable outside this

research model

The t-test was used for the partial

model and the F-test for the simultaneous

model in this study. If the p-value is less

than 0.10, the effect of the independent

variable on the dependent variable is

significant; otherwise, the effect is not

significant.

Data analysis in this study is aided by

the advanced Eviews 9.0 software. Based on

sensitivity analysis using Chow, Hausman,

and the Lagrange Multiplier, one of three

alternative models (common effect, fixed

effect, or random effect) terpilih model

etimasi yang terpilih adalah common effect

model. Because of this, the primary

assumptions used are heteroskedastisitas

and multikolinearitas

RESULTS AND DISCUSSION

The regression results of this study indicate

that

1. Influence of the Board of Directors (X1)

on the Quality of Financial Statements

(Y)

The influence of the Board of

Directors' narcissism (X1) on Financial

Reporting Quality (Y) has a coefficient of

influence of -318.478 and a t value of -

1.811029, with a p-value of 0.0741.

Hypothesis 1 is accepted because the p-

value of the board of directors' narcissism

variable is 0.0741 and less than 0.10,

indicating that the board of directors'

narcissism has a significant effect on the

quality of financial reporting. The

coefficient value of -318.478 indicates that

the direction of influence is negative,

indicating that the board of directors'

narcissism has a significant negative impact

on the quality of financial reporting.

The findings revealed that the Board of

Directors' Narcissism had a negative and

significant impact on the Quality of

Financial Reporting. These findings

demonstrate that the more narcissistic the

board of directors, the lower the quality of

financial reporting. These findings also

support the notion that the narcissistic

Board of Directors is highly motivated to

ensure that the company they manage

always looks good, with the goal of

improving their personal image as a result

of the company's success. Because of the

board of directors' high narcissism,

companies tend to engage in unfavorable

practices such as earnings management,

which has a negative impact on the level of

financial statement quality.

These findings support the work of

(Salehi et al., 2020), who found that CEO

narcissism is linked to corporate risk taking.

CEOs with high levels of narcissism have an

unfavorable impact on company decision

making, posing risks to the company.

2. The Impact of the Bonus Scheme (X2)

on Financial Reporting Quality (Y)

The coefficient of influence for the

Board of Directors Bonus Scheme on

Financial Reporting Quality is 0.270436, the

t value is 0.253385, and the p-value is

0.8007. The p-value of the Board of

Directors Bonus Scheme variable is 0.8007,

257 | The Effect of Board of Directors Narcism, The Board of Directors' Bonus Scheme, and The

Ceo's Duality on Financial Reporting Quality

which is greater than 0.10, indicating that

the Board of Directors bonus scheme has

no significant effect on financial reporting

quality, and thus hypothesis 2 is rejected.

The coefficient value 0.270438, on the other

hand, explains that the direction of

influence is positive, implying that the

board of directors bonus scheme has no

significant positive effect on financial

reporting quality.

According to the findings, the Board of

Directors Bonus Scheme had a positive but

not statistically significant effect on the

Quality of Financial Reporting. These

findings demonstrate that, while the bonus

scheme for the board of directors may

make the board of directors happy or

unhappy, it does not necessarily have an

impact on the practice of preparing high-

quality financial reporting. The high

influence of other factors on financial

reporting quality is thought to have

contributed

The findings of this study contradict

those of (Tahir et al., 2019), who

investigated the effect of CEO bonuses on

earnings management and found negative

results, as well as (Cho et al., 2019), who

investigated the effect of CEO bonuses on

shareholder return and found negative

results, and (Armstrong et al., 2017), who

investigated the effect of CEO incentives on

earnings per share and found negative

results.

3. The Impact of CEO Duality (X3) on

Financial Reporting Quality (Y)

The coefficient of influence for CEO

Duality on Financial Reporting Quality (Y) is

-95.00431, the t value is -0.154568, and the

p-value is 0.8776. The p-value for the CEO

duality variable is 0.8776, which is greater

than 0.10, indicating that CEO duality has

no significant effect on financial reporting

quality, and thus hypothesis 3 is rejected.

The coefficient value -95,00431 indicates

that the direction of influence is negative,

implying that CEO duality has no significant

negative effect on financial reporting

quality.

The findings revealed that CEO

Duality had a negative and insignificant

effect on Financial Reporting Quality. These

findings explain why, when CEO duality

occurs in a company, the CEO has very high

authority over company policies and has an

impact on policy arbitrariness, including

financial statement preparation.

Nonetheless, this authority is not very

strong in the process of preparing financial

reporting because other factors have a

greater influence on the quality of financial

reporting.

The findings of this study contradict

(Mubeen et al., 2020), who examined the

effect of CEO Duality on Firm Performance

and found significant positive results,

(Broye et al., 2017), who examined the

effect of CEO Duality on Compensation and

found positive relationship findings, and

(Teti et al., 2017), who discovered the effect

of CEO Duality on M & A Performance

CONCLUSIONS)

Narcissism of the Board of Directors

(X1) has a negative and significant effect on

the Quality of Financial Reporting (Y). It

means that the first hypothesis is proven.

The Board of Directors Bonus Scheme (X2)

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has a positive and insignificant effect on the

Quality of Financial Reporting (Y). It means

that the second hypothesis is not proven.

CEO duality (X3) has a negative and

insignificant effect on the Quality of

Financial Reporting (Y). It means that the

third hypothesis is not proven.

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Ceo's Duality on Financial Reporting Quality

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