Analysis of the Implementation of the Fourth Line of Defense in Improving the Qualityof Financial Reports

Abstract

Three lines of defense are a unit in the organization that is covered by organizational governance. So good governance is a reflection of the three lines of defense. the Three Lines of Defense was felt to be insufficient. This has prompted the emergence of the Four Lines of Defense concept which is considered to be able to guarantee a more effective risk management
and internal control process. To achieve organizational goals reflected in financial reports, there are 4 pillars of defense (four lines of defense) that the company must carry out. The 3 pillars of defense (control, risk management, and internal audit) will be reflected in good corporate governance, while the fourth pillar of defense is the external auditor. This study aims to analyze the relationship between the 4 pillars of defense in improving the quality of financial reports. Good corporate governance will enhance the quality of financial reports if there is a strong role
from external auditors. This study’s population is the mining companies listed on the Indonesia Stock Exchange. The sample of this study is financial statements from 2018-2020 within 66 companies listed on the
Indonesia Stock Exchange. The data used in this study were secondary, for the sample uses a purposive sampling method. The hypothesis testing uses SPSS Version 23 for Windows. The results of this study indicate: (1) Good Corporate Governance has a positive effect on the quality of financial statements. In this study, the indicators of Good Corporate Governance are institutional ownership, managerial ownership, and independent commissioners. This means that the larger the percentage of institutional ownership, managerial ownership, and independent commissioners reduce the quality of financial statements (improve profit management). (2) Audit quality influences the relationship between good corporate governance and the quality of financial reports. Companies are required to benefit stakeholders, because stakeholders have the right to obtain information about the company as a basis for decision-making. Therefore, the company is obliged to report quality financial statements, to produce the content of quality financial statements, it is necessary to have a third party to validate the financial statements so that they are by the circumstances in the company, namely independent auditors (public accounting firms).