The effect of political connection and effectiveness of audit committee on audit fee

* Corresponding author, email address: ABSTRACT This study analyzes the effect of political connection and effectiveness of audit committee on audit fee. This study uses the sample of companies listed on the Indonesia Stock Exchange (IDX) in 2015-2017. They were take using a purposive sampling method. The total number of companies is 444 companies. The data were analyzed using SPSS 20 and the hypothesis testing was level of 5%. The F test indicates that the research model is stable and ! " # $& '+ variables that can affect the model by 61.6%. The results of this study show / / !! ! !! ! / effect on ! ; # < ! auditor.


INTRODUCTION
The capital market has developed very rapidly along with the intense business competition in Indonesia. According to the Financial Services Authority of the Republic of Indonesia (OJK), the capital market in Indonesia has become one of the investment destinations for foreign and domestic investors. OJK Regulation number 29/ POJK/ 2016 states that companies whose shares are traded on the Indonesia Stock Exchange (IDX) should report their audited DQQXDO VWDWHPHQWV WR 2-. 7KH ÀQDQFLDO statements issued by the companies are a source of information for decision making for investors, creditors, debtors, management, and the government (Arnold et al., 2012). However, WKLV ÀQDQFLDO VWDWHPHQW³DV D VRXUFH RI information and accountability to shareholders DQG VWDNHKROGHUV³ PXVW JR WKURXJK DQ DXGLW process conducted by an external auditor (Lestari 2015).
7KH ÀQDQFLDO VWDWHPHQWV WKDW WKHH[WHUQDO DXGLWRUV KDYH DGXLWHG FDQ UHGXFH FRQÁLFWV between principals and agents (Jensen and 0HFNOLQJ ,Q RUGHU WR UHGXFH FRQÁLFWV of interest, principals should monitor the procedures to oversee the performance of agents by employing external auditors. However, monitoring procedures can increase agency costs (Jensen and Meckling, 1976). Agency costs are costs incurred by the principal to carry out audit procedures on the company (Francis and Wilson, 1988).
External auditors, in carrying out audit procedures, must measure the risk of the company or client to be audited (Ghosh and Tang, 2015). Risk assessment is an analysis conducted by the auditor about relevant risks associated with the preparation of the FRPSDQ\·V ÀQDQFLDO VWDWHPHQWV $UHQV HW DO 2014). The higher the audit risk assessed by the auditor, the higher the audit effort needed to produce an appropriate audit opinion (Bedard and Johnstone, 2004). Therefore, audit risk can determine how much the cost to be paid by the company which is measured by the amount of effort made by the auditor in conducting audit procedures. Inherent risk is one of the risks assessed by the auditor before conducting the audit process (Arens et al., 2014).
Companies that have political connections are associated with high inherent risk (Gul, 2006). Inherent risk is the risk of material misstatement assertions (Arens et al., 2014). In addition to being associated with inherent risk, companies that have political connections are also associated with a low level of transparency LQ ÀQDQFLDO VWDWHPHQWV UHVXOWLQJ LQ SRRU TXDOLW\ ÀQDQFLDO VWDWHPHQWV DQG ULVNV RI PLVVWDWHPHQW (Chaney et al., 2011;Srinidh et al., 2011;Walker and Reid, 2002;Yu and Yu, 2011). The higher the risk, the higher the efforts taken by the auditor in examining politically connected companies. Auditors are expected to provide appropriate RSLQLRQV RQ ÀQDQFLDO VWDWHPHQWV ZLWK KLJKHU audit fees from connected companies as a return (Ariningrum and Diyanty, 2017;Gul, 2006;Khan et al., 2016;Tee, 2018;Wahab et al., 2011;Wahab et al. ., 2009).
In addition to political connections within the company, there are other factors that can also affect audit fee, such as corporate governance. Corporate governance can be said to be good if it meetsthe standards applied to the Organization for Economic Co-operation and Development (OECD). Corporate governance is related to the supervisory function carried out by the board of commissioners by establishing committees under them, one of which is the Audit Committee.
Results of research conducted by Ghanem et al, (2016) and Collier and Gregory (2006) show that the effectiveness of audit committees has a positive effect on audit fees because the existence of an effective audit committee in a company is considered to provide a more objective supervision system. An effective monitoring system will generate demand IRU EHWWHU DXGLW TXDOLW\ DQG WKLV ZLOO KDYH implications for greater audit fees (Hay et al, 2006). ,QGRQHVLDQ ,QVWLWXWH RI &HUWLÀHG 3XEOLF Accountants (IAPI) has regulated the audit policy based on regulation number 2 of 2016 stating that the amount of member fees may vary depending on the risk of the assignment, the complexity of the services provided, WKH OHYHO RI H[SHUWLVH UHTXLUHG WKH 3XEOLF $FFRXQWLQJ 2IÀFH IHH VWUXFWXUH FRQFHUQHG and other professional considerations. IAPI reported in 2016 that the application of regulatory mechanisms was not optimal to GDWH 7KHUH ZHUH VWLOO PDQ\ FHUWLÀHG SXEOLF accountants who did not disclose how they determined the amount of audit fees to be received. Considering that this regulation has not been implemented effectively in Indonesia, the determining factor of audit fees in Indonesia is still an interesting topic to study. Therefore, the purpose of this study is to provide empirical evidence of factors that affect audit fees, such as the existence of political connection in a company and the effectiveness of the Audit Committee.

THEORETICAL FRAMEWORK AND HY-POTHESIS
According to Li et al. (2008), the existence of political connection within a company can LQÁXHQFH WKH FRPSDQ\·V SHUIRUPDQFH WKURXJK policies that favor the company and ease in obtaining government projects. In order to JHW SURÀW WKH FRPSDQ\ FDQ OREE\ WR PDNH SROLFLHV WKDW DUH SURÀWDEOH IRU WKHP ZKHUH WKHVH DFWLYLWLHV UHTXLUH IXQGV RU UHVRXUFHV the company has (Fisman, 2001;Johnson and Mitton, 2003). The company should provide resources in the form of donation to related parties in order to create policies. This should EHQHÀW WKH FRPSDQ\ WR SRVH ULVNV DVVRFLDWHG with the exploitation and manipulation of company resources, because the donation itself is not always through the approval of minority shareholders, thus triggering agency problems (Ramsay et al., 2001). Therefore, the existence of political connections in companies is often associated with a low level of transparency in ÀQDQFLDO VWDWHPHQWV WKDW UHVXOWV LQ SRRU TXDOLW\ ÀQDQFLDO VWDWHPHQWV DQG ULVNV RI PLVVWDWHPHQWV LQ ÀQDQFLDO VWDWHPHQWV &KDQH\ HW DO Srinidh et al., 2011;Walker and Reid , 2002;Yu and Yu, 2011).
Companies that have a higher risk are more likely to have material misstatements LQ WKH ÀQDQFLDO VWDWHPHQWV *XO 7KH higher the auditor's assessment of risks in the company including inherent risk, the higher WKH DXGLW HIIRUW UHTXLUHG E\ WKH DXGLWRU WR audit the company. In addition, greater efforts cause auditors to feel that they need to charge large amounts of audit fees to the company (Gul, 2006). Therefore, politically connected companies are believed to pay greater audit fees than companies that are not politically connected (Ariningrum and Diyanty, 2017;Gul, 2006;Khan et al., 2016;Tee, 2018;Wahab et al., 2011;Wahab et al., 2009).

H1: Political connection within the company has a positive effect on audit fees
Indonesia implements a two-tier system in corporate governance. The highest organ of the company that has a supervisory function is the board of commissioners. To help carry out the supervisory function, the board of commissioners forms an audit committee. With regard to audit fees, there are two arguments that illustrate the effect of the effectiveness of the audit committee on audit fees.
7KH ÀUVW DUJXPHQW LV RQ WKH VXSSO\ seen through the auditor's perspective. An effective audit committee can improve the TXDOLW\ RI FRUSRUDWH JRYHUQDQFH 7KH DXGLWRU believes that inherent risk can be lower if the audit committee in the company is effective in carrying out its duties. This ultimately reduces the audit fees charged to the company (Wahab et al, 2011). The second argument is on the demand. As described by Hey et al. (2006), audit fees paid by companies are determined by companies as users. The effectiveness of the supervisory function is carried out by the Board of Commissioners and assisted by the Audit &RPPLWWHH 7KH FRPSDQ\ UHTXHVWV KLJKHU TXDOLW\ DXGLW VHUYLFHV DQG PRUH WKRURXJK audit procedures. This can have implication for the high amount of audit fees charged by the auditor. H2: The effectiveness of the audit committee has a positive effect on audit fees.

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The dependent variable of the study is audit IHH ZKLFK LV GHÀQHG DV WKH DPRXQW RI FRVWV WKDW HDFK FRPSDQ\ PXVW LQFXU WR ÀQDQFH WKH VHUYLFHV of an external auditor who has conducted DQ DXGLW RI WKH ÀQDQFLDO VWDWHPHQWV RI WKH company concerned. Audit fee is measured by the natural logarithm of audit fees contained in WKH ÀQDQFLDO VWDWHPHQWV The independent variables in this study are political connection and effectiveness of the DXGLW FRPPLWWHH 3ROLWLFDO FRQQHFWLRQ LV GHÀQHG as a condition in which one of the company's leaders, such as the board of directors, the board of commissioners, or the majority shareholder (having a minimum share of 10%) is a member of the legislature, ministers, political party leaders or people related to the government. Political connection (POL) in this study is measured by a dummy variable, by giving a value of 1 for companies that have political connection and a value of 0 for companies that do not have political connection. The second independent variable is the HIIHFWLYHQHVV RI WKH DXGLW FRPPLWWHH GHÀQHG DV D FRPPLWWHH WKDW PHHWV WKH UHTXLUHPHQWV WR protect the interests of shareholders to ensure WKDW WKH ÀQDQFLDO UHSRUWLQJ LQWHUQDO FRQWURO and risk management are reliable, through efforts to carry out diligent supervision. The effectiveness of the audit committee is measured by the composite index (EFFAC5) FRQÀUPHG ZLWK ÀYH FKDUDFWHULVWLFV 7KH ÀYH combined characteristics are: Independent Audit Committee (IAC), Audit Committee Expertise (ACEXP), Audit Committee Diligence (ACD), Size of Audit Committee (SAC) and Audit Committee Chair with Accounting Expertise (ACCHX). A score system is used where the dichotomous score of "1" or "0" is for each characteristic of an effective audit committee (Ali et al., 2018). After obtaining the value of the effectiveness score, the researcher ranked it by the score of the effectiveness of the audit committee in the company divided by the value of perfect score.

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The control variables in this study are SXEOLF DFFRXQWLQJ ÀUPV UHWXUQ RQ DVVHWV 52$ DQG FRPSDQ\ VL]H 3XEOLF DFFRXQWLQJ ÀUP LV measured by dummy variable. Code 1 is given to companies that use big 4 public accounting services and code 0 is given to companies that use non big 4 public accounting services. ROA is measured using operating income after tax divided by total assets. Company size is measured using the natural logarithm of total assets. 7KH DQDO\VLV WHFKQLTXHV XVHG LQFOXGH descriptive statistical analysis, classical assumption test, and hypothesis test (Ghozali, 2011). Descriptive statistical analysis contains information about the characteristics of research data in the form of minimum values, maximum values, mean values, and standard deviations. Hypothesis test is done using multiple linear regression analysis. The following is regression HTXDWLRQ PRGHO LQ WKLV VWXG\  Ali et al. (2018).The score of the effectiveness of audit committee for each company is divided by perfect score. The average value obtained is 0.8059. The result shows that the average sample company has a good score in the effectiveness of audit committee. The average value in the study conducted by Ali et al. (2018) is 4, with the ratio of 0.8 obtained from a score of 4 on the ÀYH FKDUDFWHULVWLFV RI WKH HIIHFWLYHQHVV RI WKH audit committee.

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The hypotheses in this study were tested using multiple linear regression analysis. Before doing the multiple linear regression analysis, the researchers conduct classical assumption test consisting of data normality test, heteroscedasticity test, and the multicolinearity test. The classical assumption test was FRQGXFWHG WR ÀQG RXW ZKHWKHU WKH UHVHDUFK data are normally distributed, and free from heterokedasticity and multicolinearity. This research model is feasible to do multiple linear regression analysis because it has passed the classical assumption test.
In Table 3, it shows that the value of adjusted R2 is 0.384, which means that variations in the variables of political connection and the effectiveness of the audit committee are able to explain the dependent variable of audit fees by ZKLOH WKH UHPDLQLQJ LV LQÁXHQFHG by other factors outside the research model that are not selected as dependent variables. )XUWKHUPRUH WKH ) WHVW VKRZV D VLJQLÀFDQFH value of 0.000, indicating that the independent YDULDEOHV DQG FRQWURO YDULDEOHV VLJQLÀFDQWO\ affect the dependent variable.

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The results of research conducted using this PRGHO DUH FRQVLVWHQW ZLWK WKH ÀUVW K\SRWKHVLV which states that political connection has a VLJQLÀFDQW SRVLWLYH HIIHFW RQ DXGLW IHH 7KH OHYHO RI VLJQLÀFDQFH LV 7KXV WKH ÀUVW hypothesis (H1) is accepted. It can be concluded that the existence of political connection in a company can increase the inherent risk of a company (Gul, 2006). Politically connected companies can help government-related affairs (Faccio, 2006), and the connected companies FDQ OREE\ SROLFLHV WKDW EHQHÀW WKHLU FRPSDQLHV Companies that have political connections will cover the process of political contributions which will result in low transparency in the ÀQDQFLDO VWDWHPHQWV /RZ WUDQVSDUHQF\ FDQ UHVXOW LQ SRRU TXDOLW\ RI ÀQDQFLDO VWDWHPHQWV DQG ULVN RI PDWHULDO PLVVWDWHPHQW LQ ÀQDQFLDO statements (Chaney et al., 2011;Srinidh et al., 2011;Walker and Reid, 2002;Yu and Yu, 2011). The higher the risk, the higher the efforts taken by the auditor in examining politically connected companies. Auditors are expected WR SURYLGH DSSURSULDWH RSLQLRQV RQ ÀQDQFLDO statements, and as a return they will get higher audit fees from connected companies (Ariningrum and Diyanty, 2017;Gul, 2006;Khan et al., 2016;Tee, 2018;Wahab et al., 2011;Wahab et al. ., 2009 The result of this study is also in line with the perspective of the Audit Pricing Theory which states that the auditor determines the audit fees to be charged because they must consider the risks that the company has. This FDQ EH UHÁHFWHG LQ WKH QXPEHU RI HIIRUWV PDGH by auditors to carry out audit procedures. Politically connected companies have a high inherent risk (Gul, 2006). It is also in line with the theory and empirical results that politically connected companies pay higher audit fees than unconnected companies.

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The results of this study show that the effectiveness of the audit committee has a positive effect on audit fee, with the VLJQLÀFDQFH OHYHO RI )RU WKDW reason, the second hypothesis (H2) in this study is accepted. It can be explained that, in practice, audit fees are seen not only from WKH DXÀWRU·V SHUVSHFWLYH DV DQ DXGLW VHUYLFH provider, but also from the client's perspective that plays a role in determining the audit fees WR EH SDLG +H\ HW DO &OLHQW UHTXHVWV determine the audit fees paid because the client ZDQWV DQ DXGLW FRQGXFWHG E\ D KLJKHU TXDOLW\ auditor, thus causing the audit fees charged to be higher.
Companies that have effective audit committees will encourage the companies to JHW EHWWHU DXGLW TXDOLW\ 7KH FRPSDQLHV GR this to maintain their reputation and protect themselves from legal responsibilities that might occur in the future due to the low level of supervision that the companiesdo (Carcello, Hermanson, Neal, & Riley, 2002). Demand for EHWWHU DXGLW TXDOLW\ DQG ZLGHU DXGLW FRYHUDJH will make the company pay a higher audit.
The results of this study support the argument ofdemand-side theory which states that the higher the level of the effectiveness of supervision conducted by the Audit Committee to assist the Board of Commissioners in overseeing management, the higher the GHPDQG IRU EHWWHU DXGLW TXDOLW\ 7KH GHPDQG IRU KLJK DXGLW TXDOLW\ ZLOO LQ WXUQ DIIHFW KLJKHU audit fees charged by auditors (Carcello, Hermanson, Neal, & Riley, 2002).

CONCLUSION, IMPLICATION, SUGGE-STION, AND LIMITATIONS
This study aims to analyze the effect of political connections and the effectiveness of the auditcommittee on audit fees. Based on the ÀUVW K\SRWKHVLV WHVWLQJ LW SURYLGHV HYLGHQFH that the existence of political connection in WKH FRPSDQ\ VLJQLÀFDQWO\ DIIHFWV DXGLW IHHV Politically connected companies are considered to have a higher risk than other companies that do not have political connections. &RQVHTXHQWO\ DXGLWRUV ZLOO LQFUHDVH WKH DXGLW HIIRUW UHTXLUHGWKXV UHVXOWLQJ LQ WKH KLJK audit fees charged (Ariningrum and Diyanty, 2017;Gul, 2006;Khan et al., 2016;Tee, 2018;Wahab et al., 2011;Wahab et al., 2009). Based on the second hypothesis testing, it isfound that the effectiveness of the audit committee KDV D VLJQLÀFDQW HIIHFW RQ DXGLW IHHV 7KLV result supports the argument of demand-side theorywhich states that an effective audit committee will conduct oversight. The audit committee will ask the auditor to conduct good TXDOLW\ DXGLWV ZKLFK ZLOO KDYH LPSOLFDWLRQV for the high audit fees charged (Carcello, Hermanson, Neal, & Riley, 2002).
The limitations in this research include: 1) there is only a small number of companies that disclose audit fees in their annual reports; 2) in Indonesia, there are still no reliable sources that show someone's poliitical relationship, so the researchers only use online media as LQIRUPDWLRQ WR ÀQG RXW VRPHRQH·V SROLWLFDO relationship.
This study recommends that, for further study, the researchers should add variables that have an effec on audit fees. In addition, this VWXG\ DOVR VXJJHVWV WKDW IXUWKHU UHVHDUFK ÀQG more accurate sources for one's relationship with politics.