Definition and Variable Measurement

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D. Definition and Variable Measurement

1. Dependent Variable Dependent variable used in this research is the quality of accountability disclosure. Local Government Accountability Index see appendix 1 is used to measure the level of accountability disclosure. The concept of a disclosure index has been used in a significant body of prior research to investigate the quality of disclosures in annual reports of public sector agencies. Ryan et al 2002, was conducted the initial work in Queensland used an index based on local government needs. The LGA index assigns weights to each of the criteria with a 1 for low importance, 2 for medium importance and 3 for high importance. The criteria and weights were originally developed by Dixon 1991 and externally validated by reference to practitioners in the area and its modification have been validated by an analysis of local government literature, statutory requirements, accounting standard requirements, best practice recommendations from bodies such as Municipal Association of Victoria and the Public Estimates and Account Committee and consultation with practitioners Ryan et al. 2002. Since the LGA index previously used in Australia that has a different standard with Indonesia, revision related to the SAP as a standard in Indonesia is made. Therefore, the total of 22 criteria to measure the quality of financial report disclosure, this study only use 15 criteria. The table of modified LGA index can be seen on appendix 1. 42 Selected Indonesia’s local government financial statements from 2005 to 2007 used as a data in this research. The researcher analyzed all of the report and scored each of criteria in the modified LGA index on a 1-5 scale. 2. Independent Variable Independent variable used in this research is local government financial performance. Financial performance is a measure of how well a firm can use assets from its primary mode of business and generate revenues. This term is also used as a general measure of a firm’s overall financial health over a given period of time, and can be used to compare similar firms across the same industry or to compare industries or sectors in aggregation. www.investodia.com Since the implementation of decentralization, local governments are managing about 40 of all public spending. The absence of systematic monitoring and evaluation and performance measurement systems for local governments leaves many questions on the policy implications of decentralization unanswered. The absence of a comprehensive performance measurement for local governments in Indonesia has lead to a multi-donor commitment for a joint initiative to develop a performance measurement system in close collaboration with the government of Indonesia. Cohen 2006 proposed some ratios to measure local government financial performance. The table as shown below: 43 Table 2 Financial Performance ratios Source: Cohen 2006 Return on Equity is the ratio between the amount of surplus or deficit in the budget report with the total number of reported fund equity on the balance of local governments. This variable describes the ability of local governments to produce the amount of the difference between revenue expenditure of the total equity fund owned by local governments Cohen, 2006. Return on Assets is a financial ratio that describes the proportion between the amount of net surplus or deficit in the budget report with the amount of total assets presented in the balance of local governments. This ratio describes the ability of the company in producing the difference between total revenues with total expenditures made by local governments in a given period Cohen, 2006. Profit Margin is a ratio that describes the number of comparisons between the budget surplus and deficit in a period with the amount of local 44 revenue in a single accounting period. The second number in the calculation of this ratio is taken from the report realization of local government budget Cohen, 2006. Current Ratio is a ratio that describes the ability of local governments to ensure the fulfillment of liabilities by assets owned smoothly. The second number in the calculation of this ratio is calculated by using the data in the government balance sheet. The higher this ratio gives portrayal that local governments have remaining assets are sufficient to ensure the fulfillment of liabilities Cohen, 2006. Debt to Equity ratio is the ratio between the total amounts of government debt to total equity fund. This ratio describes the government ability to guarantee the fulfillment of all amounts payable by the number of equity funds owned by the government on a specific date. The second ratio is determined by using the numbers in the government balance sheet Cohen, 2006. Long Term Liabilities to Total Assets is a ratio that describes the ratio of long-term debt to total assets of local government. This ratio indicates a guarantee of long-term debt provided by local governments with assets owned Cohen, 2006. Assets Turnover is the ratio of the amount of local revenue to total assets owned by the government. This ratio describes the ability of local governments to obtain local revenues by using the total assets owned by the respective local governments, the higher this ratio indicates that the better the ability of 45 governments in seeking owned assets to generate revenue for the region Cohen, 2006. Operating Revenues to Total Revenues is the ratio between the amounts of local revenue to total income received by the relevant local government. Both figures used in calculating this ratio is taken from the government balance sheet Cohen, 2006. Operating Revenues to Operating Expenses is the ratio between the amounts of local revenues by the number of local operating expenditures in a given period. To determine the ratio of these numbers are the numbers used in the budget report. This ratio indicates the government’s ability to obtain local revenues with operating expenditures incurred in a given period Cohen, 2006. 3. Control Variable Control variable used in this study is the description of the size of the entity. As noted by Foster 1986, the variable most consistently reported a significant in studies examining differences across firms in their disclosure policy is firm size. Agency theory states that large companies have greater agency costs than small firms Jensen and Meckling, 1976. Large firms may disclose more information in an effort to reduce these agency costs. Generally, large firms disclose more information than small ones. Unfortunately, it is unclear what size proxies Meek, 1995. Such information and material for the purposes of disclosure of information to external parties, so there should be no major additional cost to perform a more complete disclosure. In contrast, firms with resources that are relatively small may not have ready-to information as large 46 firms, which need no additional costs can be relatively large to make complete discl osure of which is a big company. Measurement of firm’s size using logarithm of total assets Ramassamy, Ong and Yeung, 2005; Amato and Wilder, 1990; Dalton and Penn, 1976 and Shepherd, 1972. Total asset is the description of the size of the entity. As noted by Foster 1986, the variable most consistently reported a significant in studies examining differences across firms in their disclosure policy is firm size. Agency theory states that large companies have greater agency costs than small firms Jensen and Meckling, 1976. Large firms may disclose more information in an effort to reduce these agency costs. Generally, large firms disclose more information than small ones. Unfortunately, it is unclear what size proxies Meek, 1995. According Fitriani 2001 big companies have the ability to recruit skilled employees, as well as the demands of users report that large firms have an incentive to make a broader disclosure than smaller firms. A large company is that many entities highlighted by the general public. Reveal more information is part of the companys efforts to create public accountability. Another explanation is also often asked is because large companies have huge resources, so companies need and are able to finance the provision of information for internal purposes. Such information and material for the purposes of disclosure of information to external parties, so there should be no major additional cost to perform a more complete disclosure. In contrast, firms with resources that are relatively small may not have ready-to information as large firms, which need no additional costs can be relatively large to make complete disclosure of which is a big company. 47 Measurement of firm’s size using logarithm of total assets Ranassamy, Ong and Yeung, 2005; Amato and Wilder, 1990; Dalton and penn, 1976 and Sheperd, 1972.

E. Data Analysis Method