“The moderating role of audit quality and firm size in the effect of corporate governance on related party transactions: Evidence from Indonesia”

This study aims to analyze the essential corporate governance determinants of related party transactions (RPTs) in Indonesia. Based on a hand-collected sample of three business groups of small, medium, and large-cap publicly listed firms on the Indonesia Stock Exchange (IDX) for 2013–2019, panel regression results find that foreign shareholders and firm size have a significant effect, at –2.402 and 0.248, respectively. The moderating model of audit quality shows that domestic shareholders, foreign shareholders, and firm size are significantly negatively associated, with –5.627 and –5.958 at 5%, respectively. Similar results show that foreign shareholders and independent commissioners significantly negatively affect related party transactions at –2.864 and –1.845, moderating the firm size at 10% and 5%, respectively. The moderation of regression results also indicates that audit quality and firm size tend to strengthen negative effects on the association between related party transactions and corporate governance. The moderation interaction confirms that audit quality will determine that domestic and foreign shareholders tend to increase the number of affiliate transactions. The interaction of complete information quality will force domestic and foreign shareholders to increase the role of affiliate transactions in creating firm value. The larger size of the firm, which is owned by foreign shareholders, will increase the intensity of cross- border related party transactions through the combined effects in the context of internationalization with a tendency of expropriation and transfer pricing practices, which can reduce government tax incomes. RPTs) to and RPTs a to the


INTRODUCTION
National business entities in emerging markets create domestic, regional, and even multinational business groups that carry out related party transactions (hereafter as RPTs) based on business developments and economic globalization. However, related party transactions tend to be abusive rather than positive if they are not controlled by corporate governance with the support of stakeholders. RPTs have been identified as direct indicators of wealth exploitation (Saleh, 2021;El-Helaly, 2018). The OECD's latest summit emphasized that Asian nations should adopt a comprehensive strategy to monitor and regulate abusive RPTs as a threat to corporate governance in the region. Among the accounting scandals involving corporations such as Enron, WorldCom, Adelphia, and Tyco in the United States, related party transactions emerged as the primary source of concern (Tambunan et al., 2017). These cases demonstrate how insiders exploit RPTs to further expropriate minority shareholders' interests. RPTs are not legally In general, the key instrument used by MNCs and business groups is to manipulate transfer pricing between business entities within the business group (transfer mispricing). Furthermore, Liu et al. (2017) and Klassen et al. (2017) found that the motivation for "transfer pricing manipulation" is to avoid taxes through the transfer of business group profits across business entities and cross-border by increasing the intensity of RPT. Recently, OECD countries and emerging market countries have been increasingly interested in developing related party transaction practices that are increasingly intensive and tend to be manipulated (Cristea & Nguyen, 2016). There is the problem of related party transactions in Indonesia, where business groups (or conglomerates) and MNCs take advantage of the flexibility of deviant affiliate transactions to take over minority shares and avoid taxes legally (Tambunan et al., 2017). RPTs have long been perceived as a way for majority shareholders to expropriate minority shareholders through a variety of means, including related party asset sales, receivables, loans, and even trading affiliations (Bansal & Thenmozhi, 2020; Richardson et al., 2013).
Due to the growing practice of manipulating global transfer prices, including in Indonesia, the latest regulation regarding transfer pricing has been issued, namely No. 213/PMK.03/2016 or better known as PMK-213, as a new provision for transfer pricing documents. The new regulation regulates the master document/local document report per country for Taxpayers who conduct transactions with parties with a special relationship. Previously, The Financial Services Authority (OJK) had issued regulations based on the Decree of the Chairman of Bapepam-LK No. 412/BL/2009 as last amended by Regulation of the Financial Services Authority of the Republic of Indonesia No. 42/POJK.04/2020 concerning Affiliated Transactions and Conflicts of Interest in Certain Transactions. However, violations of affiliate transactions still occur on the Indonesia Stock Exchange (IDX), including the loss of potential tax as a source of state revenue. This decision is in line with the OECD recommendation on affiliate transactions, also known as BEPS Action 13. In general, the stipulation of RPT regulations aims to enhance the implementation of corporate governance in business groups and reduce potential tax losses due to affiliate transactions that business groups often misuse on the IDX.

LITERATURE REVIEW
Two distinct viewpoints can help explain why firms are committed to related party transactions. The first views related party transactions as an efficient approach to contracting in the absence of complete information (Downs et al., 2016).
According to this view, related party transactions are critical in a market economy because they help businesses meet basic requirements, reduce transaction costs, and facilitate the implementation of fundamental property rights and contracts (Bona-Sánchez et al., 2017). Thus, given the presence of a slow-developing external market that creates high transaction costs, related party transactions are expected to increase efficiency, promote better business relations, long-term profits, and reduce uncertainty in the economic environment, resulting in corporate business risks. Wong et al. (2015) discovered that related party sales have a favorable effect on firm value when applied to a sample of Chinese publicly traded businesses. This growth in value, however, was significantly reduced as a result of the parent director's dominant role, significant government ownership, or tax evasion incentives frequently associated with management lease extraction operations.
The globalization of business groups adds to the agency problem, as management requires a commensurate increase in discretionary power. This development needs proper corporate governance frameworks for business groupings to ensure management and shareholder interests are aligned (Rasheed et al., 2019;Saleh, 2021). Despite the importance of corporate governance factors in developing multinational corporations, relatively few literature sources have explored various governance factors that can affect RPTs in emerging markets. Globalization of MNCs requires more excellent information processing (big data) and knowledge of international markets, and emphasizes the role of internationalized ownership structures (Becker & Runkel, 2013;Santosa, 2020a). On domestic side, as indicated by Suk et al. (2019), family-based ownership concentration can be identified through stock pyramids and cross-ownership. Additionally, the function of the relationship-based business as a reflection of Indonesia cultural orientation toward families and group membership is completely apparent.

Santosa et al. (2020) and Bena and Ortiz-Molina
(2013) stated that the ownership structure tends to be concentrated in emerging markets with controlling shareholders consisting of families or the state. Firm value with concentrated shares provides an opportunity to maximize majority shareholder wealth through related party transactions (Kang et al., 2014). Based on this, related party transactions can be used as an efficient market internalization tool. Still, on the other hand, it can also be negative as a tool that allows the expropriation of majority shareholders to minority shareholders through earning management (Tambunan et al., 2017;Merle et al., 2019). The opposite understanding sees RPTs as a vehicle for transferring resources from a firm to affiliated parties. In this sense, business associations' owner-managers have significant incentives to divert resources from member firms, and they exploit investment and financing decisions to use it (Wong et al., 2015;Bona-Sánchez et al., 2017). Controlling stockholders can expropriate minority shareholders in a variety of ways in organizations with poor corporate governance. One of these is through transactions involving affiliated parties. Bad governance is correlated with poor financial reporting, including earnings manipulation, restatements, and fraud (Hasnan et al., 2016). Saleh (2021) and Tambunan et al. (2017) argue that there are two RPTs hypotheses: the propping up and the internal capital market. For propping, it is intended to support the performance of business groups by transferring funds from stronger companies to companies that need capital in one business group. This practice is generally related to IPO activities or rights issues of affiliated firms in the next period and reports lower income than the last period, so it needs to be propped (El-Helaly, 2018; Chee Yoong et al., 2015), in propping abnormal sales to affiliates. Furthermore, the internal capital market hypothesis implies using affiliate transactions as a substitute for arm-length markets. Juliarto et al. (2013) found the effect of managerial ownership on tunneling behavior in several ASEAN countries, which supports the hypothesis regarding a positive relationship between managerial ownership and the expansion of tunneling as an effort to tax avoidance. Firms in the business group that require internal capital are characterized by increased capital expenditure and working capital with low lending and guarantee rates to affiliates and high lending rates from affiliates Moreover, Cheung et al. (2006) in the Hong Kong capital market found an interesting thing, such as the effect of affiliate transactions on the expropriation of minority shareholders. They further stated that they found specific evidence that the business group traded transactions at a discounted valuation before the takeover. This result shows that investors cannot estimate expropriation and revalue the firm only when a takeover occurs. Wang  The implementation of corporate governance is one of the best alternatives to increase information transparency of business group issuers to reduce the increasing prevalence of RPTs manipulation in business groups in Indonesia. This study addresses the relationship between essential corporate governance variables such as domestic and foreign shareholders, independent directors and commissioners, and audit quality and firm size moderating. The paper explores the moderating role of audit quality and firm size in the RPTs panel model related to corporate governance in affiliated corporations to increase symmetric information in Indonesian business groups.

HYPOTHESES DEVELOPMENT
The empirical results of several previous studies summarized the association between RPTs and corporate governance in general. To begin, corporate governance quality is adversely linked with the amount of RPTs, establishing a consistent negative relationship across a variety of RPT intensities and types. Additionally, at various levels of RPTs, the propping up and internal capital market hypotheses are somewhat validated. Finally, corporate governance moderates the relationship between these conditions and RPTs (Yeh et al., 2012).
There is also a negative correlation between corporate governance and RPTs, which is not focused on board structure and RPTs. Still, it is possible to analyze corporate governance and RPTs research from a broader perspective, in which a firm is divided into sub-items or integrated into a composite index, and RPTs can be analyzed. Itemization into related asset sales, related borrowing, and related lending and guarantees ( So, the quality of disclosure of better RPT information is generally audited by big-four accounting firms because the opinions submitted to the public are more accurate and reliable (Yoon & Jin, 2021). Therefore, related party transactions in Indonesia can be used by shareholders in a business group for propping up, tunneling or expropriation if corporate governance is not appropriately implemented. Therefore, the direction of the relationship between RPTs and corporate governance is still a theoretical and empirical question, so the hypotheses of this study are as follows: H1: There is an association between corporate governance and RPTs in a business group.
H2: Audit quality moderates the effect between corporate governance and RPTs in business groups.
H3: Firm size moderates the effect between corporate governance and RPTs in business groups.

Population and sampling
The selection of business groups is carried out through purposive sampling according to the typology criteria in the population of business

Research variables and measurement scale
RPT is the dependent variable in this study, and the independent variables are domestic shareholder, foreign shareholder, independent director, and independent commissioner. Public auditor quality and firm size are used as moderating variables. More details can be seen in Table 1.

Empirical model
The specification model in estimating the parameters in this study is based on several previous studies on the association and correlation of RPT, where RPT (related party transaction), intercept, 16 , αα 

Descriptive statistics
Based on the descriptive results, the following sample characteristics displayed in this study include average (mean), median, maximum value, minimum, and standard deviation for the dependent and independent variables, respectively. Table 2 shows that related party transactions are quite high, with an average RPT of 28.386. The summary statistics of the data is shown in Table 2. Overall, the results of the descriptive analysis show relatively good data. There is no extreme data used for this study to provide comprehensive data.

Unit root test
In this study, the analysis begins with a unit root test to check the stationarity of the data before estimating the model using panel regression analysis. The stationary test is run to the original data, but not all of the data are stationary at the level. INC is not stationary at the level but at the first difference with α = 5. Table 4 shows the detailed unit root test result for each variable.
The LLC test is predicated on the assumption that the existence of unit roots is consistent across cross-sections. The IPS and Fisher tests make no such assumption. As a result, the subsequent tests assume that the unit root varies across cross-sections. Table 4 presents the LLC test result at the 5% significance level, and all the variables are stationary.

DISCUSSION
The study results are grouped into three models, which show that the independent variables presented in Model 1 include elements of the application of corporate governance principles. They are represented by proxies of the ownership structure, which includes a domestic shareholder (DSH) and a foreign shareholder (FSH) as proxies of own- ership, proxies of the principle of independence that are seen through independent management through independent directors (IND), and independent supervision through independent commissioners (INC). The proxies of the principle of transparency are represented through audit quality and control variables through firm size.
The results of Model 1 in Table 5  In other words, the tendency of foreign shareholders to expropriate is still very possible because the average ownership is below 25%.
Firm size in Model 1, Model 2, and Model 3 in Table 5 presents consistent results, significantly positively affecting affiliate transactions. Firm size is a determining factor in the increase in affiliated transactions, which allows us to understand if this is due to an increase in foreign shareholder ownership. The interaction of foreign share ownership and size will be a determinant in encourag- Firm size is very decisive in affiliate transactions because the larger the firm, the better the ability to cope with financial pressure (Hasnan et al., 2016). The findings of this study are also in line with Ying and Wang (2013) and Santosa (2020a), who state that firm size is an essential variable in the everyday activities of affiliate transactions.
The estimation results of Model 2 in Table 5 answer the second hypothesis. Audit quality moderates the association between corporate governance and RPTs in business groups. The estimation results before audit quality moderation show that domestic shareholders and foreign shareholders significantly negatively affect affiliate transactions. This finding shows that the absence of audit quality affects the arrangement of incomplete information so that affiliate transactions are reduced to avoid inefficient contract mechanisms (Ryngaert & Thomas, 2012). However, moderating audit quality produces the opposite result, namely: domestic shareholders and foreign shareholders increase affiliate transactions because they have incomplete information to maintain efficient contracts. These results indicate that practical corporate governance arrangements for business groups will ensure alignment between the interests of management and shareholders, both domestic and foreign (Maigoshi et al., 2018).
The estimation results of Model 3 in Table 5

CONCLUSION
This study contributes to the existing literature on the relationship between auditor quality and firm size in terms of corporate governance in business groups in Indonesia. It also examines the moderating effect of audit quality and firm size on the independent variables through panel data analysis. The discussion results show interesting findings, especially those related to the moderating role of audit quality and firm size, which strengthens the association of corporate governance in related party transactions.
The results and discussion of the first-panel data model show that the elements of corporate governance in the form of foreign ownership variables and a control variable in the form of firm size are determinants that positively affect related party transactions. The discussion results show that the average foreign ownership is 18.3 percent, and the larger size of the firm in which foreign shareholders invest will lead to an increase in cross-border RPTs in the context of internationalization with a tendency of expropriation and transfer pricing practices that can harm government income.
They moderate the role of audit quality and firm size in the interaction of related party transactions with corporate governance variables. Moderation interaction confirms that audit quality will force domestic shareholders and foreign shareholders to tend to increase affiliate transactions. The interaction of complete information quality will make domestic and foreign shareholders increase the role of affiliate transactions in creating firm value. Furthermore, the moderating role of firm size shows the role of independent commissioners in increasing affiliate transactions and increasing firm size. However, at the same time, the balance of the monitoring function of independent commissioners is maintained through the interaction of audit quality.

LIMITATIONS AND AVENUE FOR FUTURE RESEARCH
Three limitations apply to this study: the independent variables, the study period, and the small business group under study. Additional research may include many other factors, primarily control variables such as fundamental ratios and investment, as well as macroeconomic variables such as inflation, interest rates, and currency exchange rates.