How Tax Compliance, Audit Quality, and Financial Reporting Quality on Corporate Financial Performance in Manufacturing Companies

ABSTRACT


INTRODUCTION
In a dynamic global business environment, manufacturing enterprises have a significant impact on economic growth.Manufacturing enterprises drive economic growth globally.Effective organization, management, and innovation are crucial for their success.SMEs, especially in South Africa, aid in economic growth and job creation.Governments must support the manufacturing sector for sustainability and competitiveness.
Environmental factors significantly influence SMEs' sustainability and growth.A number of variables, including tax compliance, audit quality, and financial reporting quality, affect their financial performance [1], [2], [3].Because these organizations work in a complicated regulatory environment, they have to adhere to strict financial reporting guidelines and tax laws [4].Manufacturing businesses' financial performance is also impacted by the caliber of audits performed on them [5].Furthermore, these businesses' general competitiveness and marketability may be enhanced by their capacity to adhere to tax laws and uphold high standards for financial reporting.Therefore, in order to enhance their financial performance and support economic growth, manufacturing enterprises should place a high priority on tax compliance, audit quality, and financial reporting quality.Understanding the connected linkages among the variables that affect the industrial sector in Indonesia is crucial to the country's economy [6], [7], [8], [9].Manufacturing businesses' stock returns are influenced by various factors, including capital structure, earnings per share, and net profit margin [10].Indonesia's industrial sector is expanding and is a major factor in the economic expansion of the nation.Other significant factors that impact Indonesia's labor force participation rate are inflation, foreign investment, and the effective currency rate.In addition, both short-and long-term factors affecting Indonesia's manufacturing industry sector include inflation, exchange rates, labor availability, and money supply.In order to make the best choices and advance Indonesia's economic development, policymakers and other stakeholders in the manufacturing industry sector must fully comprehend the relationship between these elements.
For corporate enterprises, tax compliance is essential since it affects shareholder confidence and has legal ramifications.Stakeholders are reassured about the veracity of financial statements by high audit quality.Decisions made by investors and opinions held by the market are greatly influenced by the clarity and dependability of financial accounts [11], [12], [13].
Even though tax compliance, audit quality, and financial reporting quality are important, there is a clear knowledge gap in the literature about how these three factors affect a firm's financial performance as a whole, especially when it comes to Indonesian manufacturing firms.Although these characteristics have been the subject of individual studies, there is a dearth of comprehensive research on their interaction and combined effect on financial outcomes [14], [15], [16].
By performing a quantitative analysis that concurrently examines the links between tax compliance, audit quality, financial reporting quality, and firm financial performance, this study aims to close this gap.In order to offer more profound understanding of the intricate processes that influence the financial environment of Indonesian manufacturing companies, an integrated approach is needed.Indonesian manufacturing companies are a major contributor to the economic expansion of the nation.But their profitability has been challenged by the Covid-19 pandemic [7].The management of cash flows, namely the cash flows from operations and investments, has a big effect on stock prices [17].In Indonesia and other ASEAN nations, small and medium-sized businesses (SMEs) are essential to economic development and growth [18].Research has been done on the impact of earnings management and the book-tax discrepancy on the increase of earnings in industrial businesses listed on the Indonesia Stock Exchange [19].Even during the Covid-19 outbreak, Indonesia's industrial sector grew steadily, and this trend is predicted to support the nation's economic growth [8].For Indonesian manufacturing firms to survive and expand, it is essential to comprehend the relationships that exist between company financial performance, audit quality, tax compliance, and financial reporting quality.Evidence-based policies are necessary for policy makers and corporate entities to address these issues and promote a resilient economy.
The demands of financial reporting standards, regulatory regulations, and the necessity of sustainable financial performance provide difficulties for Indonesian manufacturing enterprises.The relationships between business financial performance, tax compliance, audit quality, and financial reporting quality are not well understood.Businesses and governments are unable to make well-informed decisions as a result of this disparity [7], [19], [20], [8].To fully comprehend how these variables interact to affect the financial performance of Indonesian manufacturing enterprises, more research is required.By bridging the knowledge gap, our research will offer insightful information that will help firms and politicians make wellinformed decisions [21].
There are significant research gaps in the synthesis and exploration of the interrelated dynamics among these elements, particularly in the context of Indonesian manufacturing firms.The literature currently in publication offers insightful information about the individual relationships between tax compliance, audit quality, financial reporting quality, and firm financial performance.Studies have indicated that effective corporate governance measures, like board composition, audit committee makeup, and management ownership, have a major and detrimental effect on earnings management in Indonesia's manufacturing sector [33].Furthermore, disclosure of carbon emissions, corporate social responsibility (CSR), and financial performance are positively correlated in Indonesia's industrial sector [34].The quality of sustainability reports produced by Indonesian enterprises is positively impacted by both company financial performance and stakeholder pressure [16].Furthermore, the quality of sustainability report disclosure in manufacturing companies listed on the Indonesia Stock Exchange is influenced by variables like return on assets (ROA), independent commissioners, and audit committees [35].Lastly, in Indonesian industrial enterprises, green accounting has a negative impact on financial performance, but it has a favorable effect through the mediation of CSR [36].

Tax Compliance and Financial
Performance A crucial component of financial management that goes beyond legal requirements is tax compliance.It has been demonstrated that efficient tax compliance has a positive effect on businesses' financial success, particularly in the manufacturing industry.In addition to lowering legal risks, tax compliance affects financial judgment and produces better financial outcomes.Businesses with strong tax compliance and efficient tax planning are more likely to have long-term financial stability and consistent profitability.Companies can lower their risk of fines and penalties while coordinating their tax strategy with business goals by proactively managing their tax obligations [22], [23], [24].

Audit
Quality and Financial Performance Ensuring the correctness and dependability of financial accounts, boosting stakeholder confidence, and lessening the information asymmetry between investors and managers are all made possible by high-quality audits.
Since companies with thorough and independent audits have greater levels of financial accountability and governance, empirical data points to a favorable relationship between audit quality and financial performance [25].Superior audits strengthen the trustworthiness of financial data, improving the company's capacity to draw in money and cultivating favorable opinions from investors [26] Firms with robust audit protocols are probably going to have higher market value and long-term financial stability [27].

Financial Statement Quality and Financial Performance
Transparency, corporate governance, and moral financial management all depend on highquality financial reporting [28].In addition to meeting legal requirements, transparent financial reporting increases investment, reduces capital costs, and fosters positive relationships with stakeholders [29].Improved corporate governance and stakeholder trust are the main drivers of sustainable financial performance in companies that produce highquality financial reporting [30].Management can make better decisions about resource allocation and strategy planning when they have access to timely and accurate financial information [31].As a result, there is a positive correlation between financial reporting quality and financial performance since successful businesses have transparent reporting practices [32].

Research Design and Sample
The relationship between tax compliance, audit quality, financial reporting quality, and corporate financial success in Indonesian manufacturing enterprises is examined in this study using a quantitative research design.Data was collected from a sample of 175 manufacturing enterprises using a cross-sectional approach.In order to guarantee a picture of the financial dynamics of the sector, this study is limited in time.
The sample was made up of manufacturing firms that were chosen using a systematic sampling technique and listed on significant stock exchanges.By using this method, a representative sample that accounts for variations in business size, geography, and market capitalization is guaranteed.Given the intricacy of the variables being studied and using partial least squares (PLS) analysis in conjunction with structural equation modeling (SEM), a sample size of 175 was deemed adequate for a strong statistical analysis.Information was gathered from a number of sources, such as tax records, audited financial statements, and other pertinent financial data.The extraction of financial performance metrics included earnings per share (EPS), return on equity (ROE), and return on assets (ROA).Furthermore, information from regulatory filings, auditor reports, and other publicly accessible sources will be gathered about tax compliance, audit quality, and financial statement quality.The duration of this study is four weeks, beginning on September 1 and concluding on October 5, 2023.

Data Analysis
To evaluate intricate interactions between variables, structural equation modeling (SEM) with partial least squares (PLS) analysis was employed [37].SEM-PLS was selected because it can effectively handle smaller sample numbers and is appropriate for managing latent variables [38].There are multiple steps in the analysis.First, the validity and reliability of each construct are evaluated in order to validate and improve the measurement model.Next, an evaluation is conducted of the structural linkages among financial reporting quality, tax compliance, audit quality, and business financial performance.In order to evaluate the importance of the correlations and strengthen the robustness of the parameter estimations, a bootstrap resampling technique is carried out in the end.

c. Model Fit
A structural equation model's model fit can be evaluated using a variety of fit indices.The chi-square test, which assesses the discrepancy between the observed and expected covariance matrices, is one often used fit index.A significant chi-square value denotes an imperfect fit, yet large samples frequently exhibit this [39].The normalized chi-square, which contrasts the chi-square value with the degrees of freedom, is an additional fit index.A satisfactory match is indicated by a value near 1; in large samples, slightly higher values are acceptable [40] .The model's fit is also evaluated using the goodness-of-fit index (GFI) and adjusted goodness-of-fit index (AGFI), where values near 1 denote a better fit [41].The model's relative fit is measured by the Tucker-Lewis index (TLI) and the comparative fit index (CFI), where values near 1 denote a good fit [42] .The model's fit to the observed data is evaluated using the root mean square error of approximation (RMSEA) and standardized root mean square residual (SRMR), where lower values denote a better match [43].
A lack of a perfect fit, which frequently happens in big samples, was shown by the chisquare test's significant result (χ² = 1500, df = 800, p < 0.001) in this study's model fit assessment.A considerable chi-square may arise due to the huge sample size; thus, more fit indices must to be taken into account.A satisfactory fit is indicated by the normed chisquare (χ²/df) of 1.88, which is near to 1.In large samples, values somewhat greater than 1 are acceptable.A satisfactory fit is indicated by the Goodness-of-Fit Index (GFI) of 0.92, although additional indices should be taken into account for a thorough evaluation.Following adjustment for degrees of freedom, an overall rather good fit is indicated by the Adjusted Goodness-of-Fit Index (AGFI) of 0.89.
A solid fit between the model and the data is indicated by the Comparative Fit Index (CFI) of 0.95, and the model's adequacy is supported by the Tucker-Lewis Index (TLI) of 0.

Discussion
Higher levels of tax compliance are linked to better firm financial success, according to the positive and substantial path coefficient, which is consistent with [44].This implies that manufacturing businesses typically have better financial outcomes when they carefully handle their tax responsibilities [45].The robust positive correlation found between financial performance and audit quality highlights the critical role that excellent audits play in enhancing financial accountability and transparency, both of which eventually help manufacturing companies' bottom lines [46].The significance of transparent financial reporting methods in accordance with [47] is highlighted by the favorable association between financial performance and the quality of financial reporting.Prioritizing these kinds of procedures increases the likelihood of long-term financial stability for manufacturing firms [48].
In order to sustain the financial success of Indonesian manufacturing enterprises, tax compliance, audit quality, and financial reporting quality are critical components.
Prioritizing these procedures increases the likelihood of manufacturing organizations experiencing sustainable financial health, enabling them to continue their financial performance [7], [16].It was also discovered that the management of intellectual capital (IC) improved the financial performance of Indonesia's telecom sector [49].Also, it has been discovered that financial performance in Indonesia's manufacturing sector is positively correlated with disclosure of carbon emissions and participation in corporate social responsibility (CSR) programs [50].Sustainable financial performance is ultimately the result of these practices' increasing cost savings, improved reputation, and higher client loyalty [34]

Limitations
Even if this study offers insightful information, it's vital to be aware of its limitations: a. Data Availability: The granularity and specificity of the data used in this study may be limited as they are derived from publically available sources.Access to more comprehensive and confidential data sets could be beneficial for future studies.b.Time Horizon: The study's crosssectional methodology restricts the capacity to deduce cause-andeffect correlations.Studies with a longer time span may offer a more complex understanding of dynamic interactions.c.Industry Specification: The Indonesian manufacturing sector is the subject of this study.It is important to use caution when making generalizations to other industries or the global context and to take industry-specific subtleties into account.d.External influences: Although not specifically taken into account, external influences like shifts in the world events, regulatory landscape, or economic conditions could have an impact on THIS study's conclusions.

Future Research Opportunities
Investigation of Mediating elements: Subsequent studies should look at possible mediating elements that could provide an explanation for how financial performance is impacted by tax compliance, audit quality, and financial reporting quality.

CONCLUSION
To sum up, this research offers a thorough analysis of the connections among tax compliance, audit quality, financial reporting quality, and business financial success in the ever-changing Indonesian manufacturing sector.The results, which were obtained from a strong sample and examined using SEM-PLS, attest to the significance of these variables in determining the financial performance of businesses in this industry.The favorable association that has been discovered emphasizes how crucial it is to invest in high-quality audits and transparent financial reporting in addition to following tax laws.Policymakers seeking to improve auditing standards, regulatory organizations trying to improve the regulatory framework, and stakeholders making investment and management decisions can all benefit from these insights.Given the manufacturing sector's ongoing significance to Indonesia's economic growth, the insights gleaned from this study provide a useful framework for promoting resilient and sustainable financial practices in the sector.Subsequent investigations may expand upon these results, investigate new angles, and aid in the continuous advancement of our comprehension of the dynamics of corporate finance.

Table 1 .
Measurement Model Test