APM Welcome, APM North West Network Conference, Synergies Across Sectors
11.vol 0003www.iiste.org call for paper no 1 pp 26-44
1. Issues in Social and Environmental Accounting
Vol. 3, No. 1 June 2009
Pp. 26-44
Varying the Quality of Business Communica-
tion Caused by Compliance of Different
Accounting Rules
Agus Setyadi
Rusmin Rusmin
Greg Tower
Alistair M. Brown
School of Accounting
Curtin University, Western Australia
Abstract
This study examines the extent of Indonesian companies’ compliance with the Indonesian ac-
counting regulations (IARC) of inventory, fixed assets, and depreciation by analyzing 160 In-
donesian listed companies’ 2006 annual reports. This study also looks at potential factors that
explain the level of this compliance. Analysis reveals a high level of 71.63% inventory compli-
ance, 51.13% fixed assets compliance, and 99.69% depreciation compliance with accounting
rules. T-test and regression analysis show that firm size is a significant predictor of accounting
compliance. Importantly, ownership and governance structures do not influence the level of
compliance. Although Indonesian firms complied with more than 50% of the key accounting
rule provisions, regulatory intervention appears needed to improve compliance. Such regulation
might include sanctions as promulgated by multilateral financial organizations (World Bank
2005).
Keywords: compliance, Indonesia, listed firms, ownership concentration, govern-
ance structures, regulatory intervention and accounting standards
Introduction depreciation. This study also examines
factors that influence listed companies
This study examines the extent of Indo- compliance with these Indonesian ac-
nesian companies’ compliance with the counting standards. These factors in-
Indonesian accounting regulations clude ownership concentration (top one
(IARC) of inventory, fixed assets, and shareholder), corporate governance
Dr Agus Setyadi recently completed his research doctorate at Curtin University on Indonesian Accounting Reporting
Compliance, cutting-edge research that looked at the troublesome plight of reporting compliance in the third world. Dr
Rusmin has published widely in the research avenues of six scholarly text books, 29 fully refereed journal articles and
19 fully refereed international conference papers. He also has successfully obtained two external research grant funds.
Finally, he has received two awards and two scholarships, email: rusmin@cbs.curtin.edu.au. Greg Tower is the re-
search professor in the School of Accounting at Curtin Business School, Curtin University of Technology, Perth, Aus-
tralia, email: greg_tower@cbs.curtin.edu.au. Alistair Brown is a professor of accounting at Curtin University, Austra-
lia, and a visiting professor of accounting (Chutian Scholar) at Zhongnan University of Economics and Law, China.,
email: Alistair.Brown@cbs.curtin.edu.au
2. A. Setyadi, et. al. / Issues in Social and Environmental Accounting 1 (2009) 26-44 27
(independent commissioners), size of study which advances the notion that, in
firm, auditor type, ROA (Return on As- capital markets, agency problems arise
sets), and industry categories. Control where there is a conflict of interest aris-
variables are also used including expert ing from divergent goals between princi-
commissioners, leverage, business com- pal and agent (Jenson and Meckling,
plexity, and independent audit commit- 1976), and difficulties in monitoring
tee. agents’ actions (Eisenhardt, 1989). In
capital markets, stakeholders will reduce
This study is important for a number of the costs that they want to pay for a
reasons. According to the Indonesian company’s shares by predicting the ex-
Capital Market Supervisory Agency tent of managers’ agency costs (Kurth
(Bapepam, 2000; 2003), the regulatory and Lehnert 2006). In theory, a firm will
body in Indonesia, accounting compli- select ownership and corporate govern-
ance is a critical issue in Indonesia’s ance structures that are well organized to
financial markets, particularly as a reduce agency costs (Fauver and Fuerst
means of contributing to the national 2006). This theory advances the notion
economy as an emerging country (World that, in capital markets, agency problems
Bank 2006). Further, compliance im- arise where there is a conflict of interest
proves transparency (Bapepam, 2004; arising from divergent goals between
JSX 2004b), by allowing standards to be principal and agent, and difficulties in
comprehensively relied upon by Indone- monitoring agents’ actions (Eisenhardt,
sian-listed users of annual reports 1989). In capital markets, stakeholders
(Bapepam 2000; 2003). will reduce the costs that they want to
pay for a company’s shares by predict-
Using statistical analysis, this study in- ing the extent of managers’ agency costs
vestigates the degree to which the Indo- (Kurth and Lehnert 2006). In theory, a
nesian-listed firms comply with the In- firm will select ownership and corporate
donesian accounting standards. This governance structures that are well or-
study finds that a high level of 71.63% ganized to reduce agency costs (Fauver
inventory compliance, 51.13% fixed and Fuerst 2006). The main issue re-
assets compliance, and 99.69% deprecia- garding the firm is the information
tion compliance with accounting rules. asymmetry between agents and princi-
pals. In terms of information asymmetry,
This paper proceeds as follows. The next communication between agents and
section discusses past literature and hy- principals might not always be effective
potheses development. This is followed (Brennan 2006). Information asymmetry
by a description of the research method happens when the principals’ ability to
employed. Two further sections present oversee the agents’ performances and
the descriptive statistics and additional jobs are limited. Agency theory, in this
statistical analysis, respectively. Impli- situation, predicts that the agents could
cations and conclusions of the paper are decrease their performance or may even
covered in the final section. shirk their responsibilities due to their
ability to conceal such performance defi-
Literature Review ciencies from the principals (Kunz and
Pfaff 2002).
Agency theory is used to inform this
3. 28 A. Setyadi, et. al. / Issues in Social and Environmental Accounting 1 (2009) 26-44
The findings of Shleiver and Vishny ownership structures, particularly in the
(1997) and McColgan (2001) suggest form of family ownership (Claessens,
that ownership concentration and inde- Djankov and Lang 1999; Lins 2003).
pendent commissioners are the key de- When ownership is concentrated to a
terminants in terms of agency theory. degree where the single largest share-
The costs of the agency problems, holder has effective control of the firm,
‘agency costs’, can be reduced by vary- the nature of the agency problem shifts
ing the governance and ownership struc- away from the agent-principal conflict.
tures. In this regard, agency problems Principals-managers problems will be
occurring from conflicts of interests be- less likely to be about managements
tween principals and agents could be (agents) versus owners (shareholders)
reduced if the ownership (principals) but more focused on minority sharehold-
was less concentrated and if the monitor- ers versus controlling shareholders
ing between the agent and principal was (Berglof and Claessens 2004). Shleiver
improved by greater independent scru- and Vishny (1997) argue that, as owner-
tiny. This research offers a useful and ship gets beyond a certain point, large
practical application of agency theory in owners gain nearly full control and pre-
ownership structure and corporate gov- fer to use firms to generate private bene-
ernance mechanism context by seeking fits that are not shared by minority
to answer the following overarching re- shareholders. Studies by La Porta, Lopez
search question: Are the concepts of -de-Silanes, Shleiver, and Vishny (1998)
ownership structures and corporate gov- and Shleiver and Vishny (1997) show
ernance significant determinants of ac- the problems associated with high own-
counting regulatory compliance in Indo- ership concentration, and the agency
nesia? conflict between large and small share-
holders. When large shareholders effec-
Ownership concentration (Top one tively control corporations, their policies
shareholder) may result in the expropriation of wealth
from minority shareholders. The con-
Some owners, by virtue of the size of flicts of interest between large and small
their equity positions, effectively have shareholders can be numerous, including
some control over the firms they own controlling shareholders enriching them-
(Villalonga and Amit 2004). In modern selves by transferring profits to other
companies, conflicts of interest between companies they control.
corporate insiders, for example control-
ling shareholders and managers, and Ownership concentration in Indonesia is
outside investors, requires close analysis dominated by families or the govern-
(Prasad, Green and Murinde 2001) be- ment (Claessens et al. 1999). Claessens,
cause the company’s ownership struc- Djankov, and Lang (2000) found that
ture is deemed a primary determinant of there is evidence of expropriation of mi-
the extent of agency problems between nority shareholders’ wealth by a major-
controlling insiders and outside inves- ity or controlling shareholders. As a
tors. result, McKinsey (2001) advises that
distinct ownership structures, should be
In general, emerging markets, such as examined more explicitly. To formally
Indonesia, have highly concentrated test the impact of ownership concentra-
4. A. Setyadi, et. al. / Issues in Social and Environmental Accounting 1 (2009) 26-44 29
tion, the following hypothesis is exam- whilst commissioners supervise and ad-
ined: vise the directors. Commissioners pro-
H1 : There is a negative relationship be- vide independent oversight of manage-
tween the level of ownership con- ment and hold management accountable
centration and the level of IARC of to shareholders for its actions. A widely
the firms held view is that boards are more effec-
tive in their monitoring of management
Corporate governance (Independent when there is a strong base of independ-
commissioners) ent commissioners on the board of com-
missioners (Federal Register 2003). This
The issue of corporate governance in condition reduces agency costs associ-
modern corporations arises because of ated with the separation of ownership
the separation of ownership and control, and control. In turn, this encourages
and the diffusion of equity among inves- managers to accept agency control
tors (Berle and Means 1932). The imple- mechanisms. An ideal board of commis-
mentation of corporate governance im- sioners would have a low number of
pacts on the structures through which the commissioners who are employees of
objectives of the company are set the firm, past or present (Davidson, Ne-
(World Bank 2006; Cooper and Owen mec, Worrell and Lin 2002). In the con-
2007), the means by which those objec- text of corporate governance mecha-
tives are attained, the monitoring of per- nisms, the board of commissioners is
formance, and the ways it can be im- properly viewed as the solution for prob-
proved (Ho 2003). The importance of lems arising from agent-principal rela-
corporate governance derived from its tions.
contribution to business prosperity
(Sarkar and Sarkar 2000), accountability Weak corporate governance is viewed as
(Yong and Guan 2000), competitive in- one of the factors that contributed to the
vestment (Claessens, Glassner and Asian financial crisis, including the In-
Klingebiel 2002), transparency OECD donesian experience (Choi 2000). In
2002), and stakeholder confidence Indonesia, Bapepam and Jakarta Stock
(Jacobidies and Winter 2005). Exchange (JSX) now require all compa-
nies listed on stock exchange to have at
However, the application of corporate least 30% of the board as independent
governance in Indonesia is seen as a commissioners (JSX 2004a). It is likely
matter of form rather than of substance that the agency conflict between manag-
(Roche 2005). According to the Com- ers and shareholders can be reduced by a
pany Law No.1/1995, the Indonesian greater level of independent commis-
company has a two tier management sioners. A study by Fitzpatrick (2000) in
structure comprising a board of directors Indonesia emphasizes that external or
headed by a president director and a independent commissioners can improve
board of commissioners headed by a corporate governance. Adam and Me-
president commissioner (Company Law hran (2003) suggested that increases in
1995)1. Directors manage and represent the proportion of outside commissioners
the company on a day to day basis, on the board should increase firm per-
1
formance as they are more effective
Directors and commissioners are appointed by share-
holders at a general meeting (Company Law 1995).
monitors of company managers. To test
5. 30 A. Setyadi, et. al. / Issues in Social and Environmental Accounting 1 (2009) 26-44
the degree of corporate governance as ance with mandatory disclosure.
measured by independent commission-
ers, the following hypothesis is exam- Choice of external auditor is a mecha-
ined: nism that helps improve conflicts of in-
H2 : There is a positive relationship be- terest between agent and owner
tween the level of independence of (principal) (Craswell and Taylor 1992).
the commissioners and the level of Large auditor firms can act as a mecha-
IARC of the firms nism to minimise agency cost and exert
more of monitoring role by limiting op-
Size of firm portunistic behaviour by agents (Jensen
and Meckling 1976; Watts and Zimmer-
Size of firm has an important effect on a man 1983). DeAngelo (1981) finds that
firm to disclose compulsorily its corpo- companies audited by the major auditor
rate information (Owusu-Ansah 1998). firms have substantial agency costs, and
Relative to a small firm, a large firm has try to reduce agency costs by employing
consideralbly more resources to devote the major auditor firms. Thus, on the
to corporate reporting (Alchian 1969). basis of this position, it is hypothesized
Large firms are also likely to have a va- that:
riety of divisions which require exten- H4: There is a positive relationship be-
sive reporting to satisfy stakeholders tween firms audited by Big 4 audi-
(Dye 1990). Descriptive studies tor and the level of IARC of the
(Wallace, Naser and Mora 1994; In- firms
chausti 1997) indicate a positive associa-
tion between firm size and compliance ROA (Return on Assets)
with corporate reporting requirements. It
is, therefore, hypothesised in the rela- The capital market rewards profitable
tionship between firm size and compli- firms by increasing their share price,
ance with corporate reporting require- which, provides managers with incen-
ments in Indonesia, that: tives to generate greater information in
H3 : There is a positive relationship be- the annual reports. Previous studies
tween the level of firm size and the (Wallace and Naser 1995; Inchausti
level of IARC of the firms 1997) argue that ROA is an important
factor affecting the level at which firms
Auditor type release obligatory data on corporate re-
ports. Other previous studies suggest
This research investigates the relation- that compliance with international ac-
ship between auditor type and regulatory counting standards by profitable firms is
compliance in the Indonesian context. one way to signal superior performance
Previous studies (Wallace and Naser to the market (Dumontier and Raf-
1995) find that level of compliance with fournier 1998). Leuz (2003) forecasted
mandatory disclosure is less for compa- that firms with large profits are more
nies audited by one of the major auditor likely to comply with international ac-
firms in Hong Kong, but Patton and Ze- counting standards that with firms with
lenka (1997) finds that more firms au- smaller profits. It is, therefore, hypothe-
dited by the major auditor firms in the sised on the relationship between ROA
Czech Republic showed higher compli- and compliance requirements in Indone-
6. A. Setyadi, et. al. / Issues in Social and Environmental Accounting 1 (2009) 26-44 31
sia, that: counting standards of inventory, fixed
H5 : There is a positive relationship be- asset, and depreciation of fixed assets
tween firms with larger ROA (IAI 2006). The level of compliance
(Return on Assets) and the level of with each of these Indonesian account-
IARC of the firms ing standards is measured by a self con-
structed compliance index consistent
Industry categories with prior studies (Al-Basteki 1995;
Dumontier and Raffournier 1998; El-
The application of accounting policies Gazzar, Finn and Jacob 1999; Murphy
might differ by industry (Mubarak and 1999; Tower et al. 1999; Street and Bry-
Hassan 2006). ant 2000; Street and Gray 2002; Glaum
and Street 2003; Tarca 2004). These
The characteristics of industries may standards are composed of the following
show up differences in disclosure and number of explicit requirements: inven-
reporting regulatory compliance (Ghose tory - 9 requirements; fixed asset – 16
2006). Many past studies (Ng and Koh requirements and depreciation - 4 re-
1993; Tower, Hancock and Taplin 1999; quirements, a total of 29 items (Setyadi,
Taplin, Tower and Hancock 2002) have Rusmin, Brown and Tower 2007). Con-
classified industry by four categories: sistent with prior studies each required
resources, manufacturers, financial, and item on the checklist is coded one if it is
services industries. However, the indus- disclosed and zero if the item is not dis-
try environment in Indonesia is unique. closed. The IARCinv is computed as the
Rosser (1999) and Craig and Diga actual total number of inventory re-
(1998) note that the real estate industry quired items provided by the Indonesian
is one of dominant sectors in Indonesian -listed companies on their annual reports
economy activities. Financial industries divided by the maximum inventory ap-
are excluded, because they are funda- plicable score. IARCfa is calculated as
mentally different and they have their the actual total number of fixed assets
own rules from Central Bank (Bank In- required items provided by the Indone-
donesia). Four industry categories for sian-listed companies on their annual
industry classification are thus utilized: reports divided by the maximum fixed
resources firms, manufacturers, real es- assets applicable score. IARCdep is com-
tates companies, and services entities puted as the actual total number of de-
industries. It is hypothesized that: preciation required items provided by
H6: There is a relationship between in- the Indonesian-listed companies on their
dustry categories and the level of annual reports divided by the maximum
IARC of the firms depreciation applicable score.
Independent variables
Research methods
Consistent with Claessens et al., (2000),
Dependent variables top one shareholder ownership is meas-
ured by the proportion of shares owned
This study examines factors that influ- by the top one shareholder to the total
ence Indonesian listed companies com- number of shares issued.
pliance (IARC) with the Indonesian ac-
7. 32 A. Setyadi, et. al. / Issues in Social and Environmental Accounting 1 (2009) 26-44
To accommodate, Indonesia’s two-tiered sioners to the total number of commis-
board structure, this study the ratio of sioners on the Board of Commissioners.
the number of independent commission- Jensen and Meckling (1976) argue that
ers to the total number of commissioners there is a strong link between leverage
on the board of commissioners is used as and disclosure; in this study, leverage is
a proxy for corporate governance. measured as a debt ratio defined as total
debt to total assets. Haniffa and Cooke
Size of firm is measured by the log of a (2002) and Auch (2004) argue that busi-
firm’s total assets in rupiah. Prior re- ness complexity plays a role in the ex-
search recognizes the relationship be- tent of compliance with accounting stan-
tween corporate reporting and firm size. dards; this is measured as a presence of a
Ahmed and Courtis (1999) state that subsidiary of a listed firm where 1 is a
firm size an essential factor in corporate firm which has at least one subsidiary;
reporting. and 0 is a firm which does not have any
subsidiaries. Lastly, independent audit
In order to keep auditors’ reputation, committee is measured as ratio of the
audit firms ask clients to disclose all im- number of independent audit committee
portant information in their report to the total number of committee on the
(Chalmers and Godfrey 2004). Consis- Audit Committee (Klein 2002; Zhang,
tent with Barako, Hancock and Izan Zhou and Zhou 2007).
(2006), this study measures auditor type
by the presence of Big 4 auditors versus Statistical analysis and sample selec-
non Big 4 auditors in publicly listed tion
firms where 1 if Big 4, and 0 if other-
wise. This is consistent with previous This study uses multiple regression with
research three metric dependent variables
(Indonesian Accounting Regulatory
Singhvi and Desai (1971) and Haniffa Compliance - IARC: IARCinv, IARCfa
and Cooke (2002) argue that the Board and IARCdep) and five independent
of Directors (in Indonesia’s case) are variables (top one shareholder, inde-
encouraged to disclose information in pendent commissioners, and firm size as
detail to maintain positions and compen- metric; and industry categories and audi-
sation. In this study, ROA is measured tor type as a non-metric categorical),
as net profit divided by total assets. This with four control variables (business
is consistent with prior studies (Ali, Ah- complexity, and independent audit com-
med and Henry 2004; Barako et al. mittee as non-metric categorical; and
2006). leverage as a metric). The main statisti-
cal method utilized to test hypotheses is
Finally, four industry categories are Ordinary Least Square (OLS) regres-
measured as classification of industries sion:
into resources, manufacturers, real es-
tate, and services. This study examines a random sample of
160 annual reports of non-financial
Four control variables are also analysed. listed companies on the JSX for the pe-
Expert commissioners are measured as a riod of 1 January to 31 December 2006.
ratio of the number of expert commis- The sample is 56.74% (or 160 annual
8. A. Setyadi, et. al. / Issues in Social and Environmental Accounting 1 (2009) 26-44 33
reports) and derived from the population and a maximum of 100.00% compli-
of 282 non-financial firms listed on JSX. ance. The mean of depreciation compli-
Financial listed firms are excluded from ance is 99.69% (standard deviation of
this compliance study because they have 2.786%), with a minimum of 75.00%
their own rules from the Central Bank compliance and a maximum of 100.00%
(Bank Indonesia). Different regulation compliance. There is only one company
applies to financial firms such as banks, (PT Jakarta Setiabudi Internasional
insurance and investment companies, the Tbk.) that totally complied with the ac-
unique nature of transactions and the counting standards requirements.
assets portfolio of such entities (Karim The mean of ownership concentration
and Ahmed 2005). Annual reports are (top one shareholder) is 46.11% with a
chosen as source of data because they lowest concentration of 6.64% and a
are easily accessed McQueen 2001), highest ownership concentration of
useful (Yeoh 2005), communicated 92.88%. The mean level of independent
widely (Anderson 1998; Beattie, McIn- commissioners is 40.91% ranging from
nes and Fearnley 2004), and financially 20.00% to 80.00%. The mean indicates
focused. that, on average Indonesian firms-listed
have total assets of
IDR4,286,884.75million (standard de-
Descriptive Statistics viation: IDR10,961,151.33million). The
mean indicates that, on average Indone-
Table 1 provides descriptive statistics sian firms-listed have ROA of 3.60%
for all of the observations. It shows the (standard deviation: 10.32%). On aver-
mean of inventory compliance is 71.63% age Indonesian firms-listed has leverage
(standard deviation of 15.64%), with a of 52.28% (standard deviation: 31.88%).
minimum of 22.22% compliance and a The mean of independent audit commit-
maximum of 100.00% compliance. The tee is 30.99% ranging from 0% to
mean of fixed assets compliance is 66.67% and the mean of Expert commis-
51.13% (standard deviation of 22.47%), sioners is 51.72% ranging from 0% to
with a minimum of 31.25% compliance 100.00% (see Table 1).
Table 1 Descriptive statistics
No. Minimum Maximum Mean Median Std. Deviation
1 IARCinv 22.22 100.00 71.63 77.78 15.64
2 IARCfa 31.25 100.00 51.13 37.50 22.47
3 IARCdep 75.00 100.00 99.69 100.00 2.79
4 TopOne 6.64 92.88 46.11 48.67 20.62
5 IndCom 20.00 80.00 40.91 40.00 10.56
6 Size -Log 8.85 18.23 13.76 13.89 1.79
7 Size (Assets)2
7000.00 82333378.00 4286884.75 1075000.00 10961151.33
8 ROA -78.01 37.22 3.60 3.30 10.32
9 Leverage 0.10 221.43 52.28 51.24 31.88
10 IndAC 0.00 66.67 30.99 33.33 15.23
11 ExpCom 0.00 100.00 51.72 31.98
50.00
2
Size (Assets): Total assets (in million rupiah).
9. 34 A. Setyadi, et. al. / Issues in Social and Environmental Accounting 1 (2009) 26-44
Table 2 provides descriptive statistics tion as an asset), FA2 (Recorded at its
for individual accounting standards, cost), FA8 (The gross carrying amount),
from INV1 (Lower of cost and net realiz- FA9 (Accumulated depreciation at the
able value) to DEP4 (Consistent from beginning and end of the period), DEP1
period to period) (29 compliance items: (Allocation on a systematic basis),
inventory – 9 items, fixed assets – 16 DEP3 (The depreciation method used)
items, and depreciation – 4 items). It and DEP4 (The useful lives) compliance
shows the level of compliance of compa- with score of 100% respectively. How-
nies with each individual accounting ever, it shows the lowest level of com-
standard. It also shows the highest level pliance of companies with FA11
of compliance of companies with FA1 (Independent valuer was involved) com-
(Fixed assets that qualifies for recogni- pliance with score of 14%.
Table 2 Descriptive statistics for individual accounting standards
No. Variable Title % Compliance
1 INV1 Lower of cost and net realizable value 0.94
2 INV3 Cost of formulas 0.91
3 INV6 Total carrying amount 0.91
4 INV7 Appropriate classification to the entity 0.91
5 INV5 Accounting policy 0.90
6 INV2 The cost of inventories 0.54
7 INV8 Fair value less costs to sell 0.43
8 INV4 Recognition as an expense 0.29
9 INV9 The amount of inventories recognized as an expense during the
0.23
period
10 FA1 Fixed assets that qualifies for recognition as an asset 1.00
11 FA2 Recorded at its cost 1.00
12 FA8 The gross carrying amount 1.00
13 FA9 Accumulated depreciation at the beginning and end of the period 1.00
14 FA3 Amount of accumulated depreciation 0.99
15 FA7 Measurement of gross carrying amount 0.99
16 FA4 Revaluation of fixed assets 0.33
17 FA5 Explain the effect of revaluation 0.31
18 FA6 Difference between revaluation value and book value must be
0.24
recorded on equity account
19 FA10 Effective date of the revaluation 0.24
20 FA15 Each re-valued class of fixed asset 0.20
21 FA12 The revaluation methods used for fixed assets 0.19
22 FA16 The amount of revaluation reserve 0.19
23 FA13 Significant assumptions for items’ fair values 0.18
24 FA14 Items’ fair values were determined 0.18
25 FA11 Independent valuer was involved 0.14
26 DEP1 Allocation on a systematic basis 1.00
27 DEP3 The depreciation method used 1.00
28 DEP4 The useful lives 1.00
29 DEP2 Consistent from period to period 0.99
10. A. Setyadi, et. al. / Issues in Social and Environmental Accounting 1 (2009) 26-44 35
Table 3 shows the frequency of auditor Univariate t-tests and ANOVA statistical
type indicating that the Big 4 firms audit analysis reveal that the different means
49% (or 78) of listed companies in Indo- of compliance between auditor type and
nesia. It also illustrates that 84% (or business complexity are not statistically
134) of the company has at least one significant for IARCinv, IARCfa, and
subsidiary. Table 4 also highlights the IARCdep. However, there are clear in-
four industry categories of listed compa- dustry differences; the results indicate
nies in Indonesia have a wide range. Re- that four industry categories are signifi-
sources has 18% (or 29), manufacturers cant with p-value of 0.00 (p<0.01) only
has 27% (or 43), real estates has 17% for IARCfa.
(or 28), and services has 38% (or 60).
Table 3 Frequency and comparison of compliance means
N Percent of IARCinv IARCfa IARCdep IARCinv IARCfa IARCdep
compa- mean mean mean T-test T-test T-test
nies
F Sig. (p- F Sig. (p- F Sig. (p-
value) value) value)
Audited by:
Non Big 4 82 51 71.69 50.23 100.00
Big 4 78 49 71.58 52.08 99.36
Total 160 100 71.63 51.13 99.69 0.00 0.96 0.271 0.60 2.13 0.15
Business com-
plexity:
Company has 26 16 73.61 51.20 100.00
no subsidiary
Company has 134 84 71.26 51.12 99.63
subsidiary
Total 160 100 71.63 51.13 99.69 0.46 0.50 0.000 0.99 0.39 0.53
Four industry IARCinv IARCfa IARCdep
categories: ANOVA ANOVA ANOVA
1. Resources 29 18 70.09 45.04 99.14
2. Manufactur- 43 27 73.90 61.77 99.42
ers
3. Real estate 28 17 72.84 47.32 100.00
4. Services 60 38 69.96 48.23 100.00
Total 160 100 71.63 51.13 99.69 0.64 0.59 4.854 0.00* 0.88 0.46
Legend: * denotes statistically highly significant at p<0.01
Further Statistical Analysis is Pearson pair-wise coefficients and the
lower half is Spearman correlation coef-
Correlations3 ficients. Both Pearson and Spearman
correlations show a statistically signifi-
Table 4 reports Pearson and Spearman cant correlation between size of firm and
correlation coefficients. The upper half auditor type (p<0.01) and give the high-
12. A. Setyadi, et. al. / Issues in Social and Environmental Accounting 1 (2009) 26-44 37
est correlation coefficients, 0.418 and Multiple regressions
0.438 respectively. Since the variables
are to be used in regression analysis and Table 5 communicates the results of
as these correlation values are below the multiple regressions4 analysis of inven-
critical limits of 0.80 (Hair, Anderson, tory compliance, fixed assets compli-
Tatham and Black 1995; Cooper and ance, and depreciation compliance. The
Schindler 2003; Ghozali 2005), it is sug- table provides p-values and coefficients
gested that a multicollinearity problem of all independent variables in the re-
between independent variables is not a gression model. It illustrates that for in-
serious concern. ventory compliance: auditor type, busi-
Table 5
Results of multiple regressions analysis of IARCinv, IARCfa and IARCdep5
Multiple Regression
Findings
Model
IARCinv IARCfa IARCdep
n 160 Annual Re- 160 Annual Reports 160 Annual Reports
ports
F Value 1.08 1.35 0.45
Significance 0.38 0.21 0.92
Adjusted R Squared 0.01 0.02 -0.04
Variables Β P-Value Β P-Value Β P-Value
Constant or intercept 3.09 0.00 -0.22 0.83 37.57 0.00
Auditor type -1.11 0.27 -1.38 0.17 -0.72 0.47
Business complexity -1.26 0.21 -0.77 0.45 -0.40 0.69
Industry categories 0.49 0.63 0.17 0.87 1.12 0.27
Top One shareholder 0.10 0.92 1.65 0.10 -0.28 0.78
Independent commis-
-0.67 0.50 0.16 0.87 -0.23 0.82
sioners
Firm’s Size (Log)1 2.16 0.03** 2.66 0.01** -0.19 0.85
Return on Assets 1.59 0.12 1.09 0.28 -0.41 0.68
Leverage 0.60 0.55 0.81 0.42 -0.05 0.96
Independent audit com-
-0.24 0.81 0.76 0.45 -0.40 0.69
mittee
Expert commissioners 1.07 0.29 0.62 0.54 0.09 0.93
Notes: 1 Firm’s Size is transformed into log form to avoid skewness.
* Highly significant at the level of 1%; ** Significant at the level of 5%;
*** Moderately significant at the level of 10%
13. 38 A. Setyadi, et. al. / Issues in Social and Environmental Accounting 1 (2009) 26-44
ness complexity, industry categories, top Implications and Conclusion
one shareholder, independent commis-
sioners, ROA, leverage, independent This study provides an analysis of the
audit committee, and expert commission- extent to which Indonesian-listed firms
ers are not found to be significant pre- comply with Indonesian accounting
dictors of the extent of inventory compli- standards. Compliance index is a self
ance since their p-values (0.27, 0.21, constructed based on a 29 item of Indo-
0.63, 0.92, 0.51, 0.12, 0.55, 0.81, and nesian accounting standards and derived
0.29) are greater than the 0.05 (p>0.05) from Indonesian accounting standards
significance level. However, firm size is on inventory, fixed assets, and deprecia-
significant with its p-value of 0.03 tion (Setyadi et al. 2007). Using 160 non
(p<0.05). Therefore, hypothesis 3 (H3: -financial Indonesian-listed companies’
size of firm) is accepted. 2006 annual reports, this study observes
the extent of compliance with the Indo-
The table illustrates that for fixed assets nesian accounting standards.
compliance: auditor type, business com-
plexity, industry categories, top one Multiple regressions analysis finds that
shareholder, independent commission- firm’s size is significant for inventory
ers, ROA, leverage, independent audit compliance and fixed assets compliance
committee, and expert commissioners are with p-values of 0.03 and 0.01 (p<0.05).
not found to be significant predictors of the However, firm’s size is not significant,
extent of inventory compliance since their p- for depreciation compliance. The re-
values (0.17, 0.45, 0.87, 0.10, 0.87, 0.28, sults, for inventory compliance, support
0.42, 0.45, and 0.54) are greater than the hypothesis 3 (H3: size of firm). Simi-
0.05 (p>0.05) significance level. However,
larly, for fixed assets compliance, the
firm size is significant with its p-value of
0.01 (p<0.05). Therefore, hypothesis 3 (H3: results support hypothesis 3 (H3: size of
size of firm) is accepted. firm).
The table also illustrates that for deprecia- These findings highlight the importance
tion compliance, there is no significant pre- of the enforcement issue for firms listed
dictors of the extent of depreciation compli- on Jakarta Stock Exchange to comply
ance since their p-values are greater than the with the regulator’s rules. The goal is to
0.05 (p>0.05) significance level. enhance firms’ exposure to stakeholders.
The benefits derived from compliance
with the Indonesian accounting stan-
3
This study further analysed Tukey HSD (honesty sig- dards could include a reduction in costs
nificant different) post hoc test, multiple comparisons of associated with agency costs. Analysis
four industry categories for inventory compliance, fixed
assets compliance, and depreciation compliance. The
reveals a high level of 71.63% inventory
results illustrates that manufacturers have fundamentally compliance, 51.13% fixed assets compli-
higher compliance than resources, real estate, and ser- ance, and 99.69% depreciation compli-
vices firms with its p-values of 0.01, 0.03, and 0.01
respectively (p<0.05), for fixed assets compliance. In ance with accounting rules. Although
addition, three ANOVAs show that the only fixed assets
compliance is significant with its p-value of 0.00. the statistical analysis was run with and without possible
4
This study further analysed possible outliers by using Mahalanobis-linked outliers. The results were funda-
Cook’s distance, and VIF (Variance Inflation Factor) mentally similar to the original analysis, therefore the
and Tolerance the summary scores showed no problem. full data set is used in all statistical presentations.
However, further analysis using the Mahalanobis dis- 5
Backward regressions have been done and give the
tance measure highlight possible concerns. Therefore, same statistical result as the full regression model.
14. A. Setyadi, et. al. / Issues in Social and Environmental Accounting 1 (2009) 26-44 39
Indonesian firms may have complied Alchian, A. (1969), “Information costs,
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