11.vol 0003www.iiste.org call for paper no 1 pp 26-44
Issues in Social and Environmental AccountingVol. 3, No. 1 June 2009Pp. 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 AustraliaAbstractThis 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 thatexplain 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 accountingrules. T-test and regression analysis show that firm size is a significant predictor of accountingcompliance. Importantly, ownership and governance structures do not influence the level ofcompliance. Although Indonesian firms complied with more than 50% of the key accountingrule provisions, regulatory intervention appears needed to improve compliance. Such regulationmight include sanctions as promulgated by multilateral financial organizations (World Bank2005).Keywords: compliance, Indonesia, listed firms, ownership concentration, govern-ance structures, regulatory intervention and accounting standardsIntroduction depreciation. This study also examines factors that influence listed companiesThis 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 governanceDr Agus Setyadi recently completed his research doctorate at Curtin University on Indonesian Accounting ReportingCompliance, cutting-edge research that looked at the troublesome plight of reporting compliance in the third world. DrRusmin has published widely in the research avenues of six scholarly text books, 29 fully refereed journal articles and19 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: firstname.lastname@example.org. Greg Tower is the re-search professor in the School of Accounting at Curtin Business School, Curtin University of Technology, Perth, Aus-tralia, email: email@example.com. 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
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, infirm, auditor type, ROA (Return on As- capital markets, agency problems arisesets), 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 monitoringtee. agents’ actions (Eisenhardt, 1989). In capital markets, stakeholders will reduceThis study is important for a number of the costs that they want to pay for areasons. 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 willbody in Indonesia, accounting compli- select ownership and corporate govern-ance is a critical issue in Indonesia’s ance structures that are well organized tofinancial markets, particularly as a reduce agency costs (Fauver and Fuerstmeans of contributing to the national 2006). This theory advances the notioneconomy as an emerging country (World that, in capital markets, agency problemsBank 2006). Further, compliance im- arise where there is a conflict of interestproves transparency (Bapepam, 2004; arising from divergent goals betweenJSX 2004b), by allowing standards to be principal and agent, and difficulties incomprehensively 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 costsvestigates the degree to which the Indo- (Kurth and Lehnert 2006). In theory, anesian-listed firms comply with the In- firm will select ownership and corporatedonesian accounting standards. This governance structures that are well or-study finds that a high level of 71.63% ganized to reduce agency costs (Fauverinventory compliance, 51.13% fixed and Fuerst 2006). The main issue re-assets compliance, and 99.69% deprecia- garding the firm is the informationtion 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 andsection discusses past literature and hy- principals might not always be effectivepotheses development. This is followed (Brennan 2006). Information asymmetryby a description of the research method happens when the principals’ ability toemployed. Two further sections present oversee the agents’ performances andthe descriptive statistics and additional jobs are limited. Agency theory, in thisstatistical analysis, respectively. Impli- situation, predicts that the agents couldcations and conclusions of the paper are decrease their performance or may evencovered 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
28 A. Setyadi, et. al. / Issues in Social and Environmental Accounting 1 (2009) 26-44The 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 aterminants 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 shiftsing the governance and ownership struc- away from the agent-principal conflict.tures. In this regard, agency problems Principals-managers problems will beoccurring from conflicts of interests be- less likely to be about managementstween 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 shareholdersing between the agent and principal was (Berglof and Claessens 2004). Shleiverimproved by greater independent scru- and Vishny (1997) argue that, as owner-tiny. This research offers a useful and ship gets beyond a certain point, largepractical 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 minorityto answer the following overarching re- shareholders. Studies by La Porta, Lopezsearch question: Are the concepts of -de-Silanes, Shleiver, and Vishny (1998)ownership structures and corporate gov- and Shleiver and Vishny (1997) showernance significant determinants of ac- the problems associated with high own-counting regulatory compliance in Indo- ership concentration, and the agencynesia? conflict between large and small share- holders. When large shareholders effec-Ownership concentration (Top one tively control corporations, their policiesshareholder) 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 smalltheir equity positions, effectively have shareholders can be numerous, includingsome control over the firms they own controlling shareholders enriching them-(Villalonga and Amit 2004). In modern selves by transferring profits to othercompanies, conflicts of interest between companies they control.corporate insiders, for example control-ling shareholders and managers, and Ownership concentration in Indonesia isoutside 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 thatture 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 ators. result, McKinsey (2001) advises that distinct ownership structures, should beIn general, emerging markets, such as examined more explicitly. To formallyIndonesia, have highly concentrated test the impact of ownership concentra-
A. Setyadi, et. al. / Issues in Social and Environmental Accounting 1 (2009) 26-44 29tion, 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 managementCorporate governance (Independent when there is a strong base of independ-commissioners) ent commissioners on the board of com- missioners (Federal Register 2003). ThisThe issue of corporate governance in condition reduces agency costs associ-modern corporations arises because of ated with the separation of ownershipthe separation of ownership and control, and control. In turn, this encouragesand the diffusion of equity among inves- managers to accept agency controltors (Berle and Means 1932). The imple- mechanisms. An ideal board of commis-mentation of corporate governance im- sioners would have a low number ofpacts on the structures through which the commissioners who are employees ofobjectives 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 isformance, 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 thevestment (Claessens, Glassner and Asian financial crisis, including the In-Klingebiel 2002), transparency OECD donesian experience (Choi 2000). In2002), 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 atHowever, the application of corporate least 30% of the board as independentgovernance in Indonesia is seen as a commissioners (JSX 2004a). It is likelymatter 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 apany Law No.1/1995, the Indonesian greater level of independent commis-company has a two tier management sioners. A study by Fitzpatrick (2000) instructure comprising a board of directors Indonesia emphasizes that external orheaded by a president director and a independent commissioners can improveboard of commissioners headed by a corporate governance. Adam and Me-president commissioner (Company Law hran (2003) suggested that increases in1995)1. Directors manage and represent the proportion of outside commissionersthe 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
30 A. Setyadi, et. al. / Issues in Social and Environmental Accounting 1 (2009) 26-44the 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 thatfirm to disclose compulsorily its corpo- companies audited by the major auditorrate information (Owusu-Ansah 1998). firms have substantial agency costs, andRelative to a small firm, a large firm has try to reduce agency costs by employingconsideralbly more resources to devote the major auditor firms. Thus, on theto corporate reporting (Alchian 1969). basis of this position, it is hypothesizedLarge 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- firmschausti 1997) indicate a positive associa-tion between firm size and compliance ROA (Return on Assets)with corporate reporting requirements. Itis, therefore, hypothesised in the rela- The capital market rewards profitabletionship 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 inH3 : 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 firmsAuditor type release obligatory data on corporate re- ports. Other previous studies suggestThis research investigates the relation- that compliance with international ac-ship between auditor type and regulatory counting standards by profitable firms iscompliance in the Indonesian context. one way to signal superior performancePrevious studies (Wallace and Naser to the market (Dumontier and Raf-1995) find that level of compliance with fournier 1998). Leuz (2003) forecastedmandatory disclosure is less for compa- that firms with large profits are morenies 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 withlenka (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 ROACzech Republic showed higher compli- and compliance requirements in Indone-
A. Setyadi, et. al. / Issues in Social and Environmental Accounting 1 (2009) 26-44 31sia, that: counting standards of inventory, fixedH5 : 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 consistentIndustry categories with prior studies (Al-Basteki 1995; Dumontier and Raffournier 1998; El-The application of accounting policies Gazzar, Finn and Jacob 1999; Murphymight 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). TheseThe characteristics of industries may standards are composed of the followingshow up differences in disclosure and number of explicit requirements: inven-reporting regulatory compliance (Ghose tory - 9 requirements; fixed asset – 162006). 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 requiredresources, manufacturers, financial, and item on the checklist is coded one if it isservices 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 theRosser (1999) and Craig and Diga actual total number of inventory re-(1998) note that the real estate industry quired items provided by the Indonesianis one of dominant sectors in Indonesian -listed companies on their annual reportseconomy activities. Financial industries divided by the maximum inventory ap-are excluded, because they are funda- plicable score. IARCfa is calculated asmentally different and they have their the actual total number of fixed assetsown rules from Central Bank (Bank In- required items provided by the Indone-donesia). Four industry categories for sian-listed companies on their annualindustry classification are thus utilized: reports divided by the maximum fixedresources 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 byH6: 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 variablesResearch methods Consistent with Claessens et al., (2000),Dependent variables top one shareholder ownership is meas- ured by the proportion of shares ownedThis study examines factors that influ- by the top one shareholder to the totalence Indonesian listed companies com- number of shares issued.pliance (IARC) with the Indonesian ac-
32 A. Setyadi, et. al. / Issues in Social and Environmental Accounting 1 (2009) 26-44To 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 thaters to the total number of commissioners there is a strong link between leverageon the board of commissioners is used as and disclosure; in this study, leverage isa proxy for corporate governance. measured as a debt ratio defined as total debt to total assets. Haniffa and CookeSize 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 aAhmed and Courtis (1999) state that subsidiary of a listed firm where 1 is afirm 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 auditIn order to keep auditors’ reputation, committee is measured as ratio of theaudit firms ask clients to disclose all im- number of independent audit committeeportant 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 typeby the presence of Big 4 auditors versus Statistical analysis and sample selec-non Big 4 auditors in publicly listed tionfirms where 1 if Big 4, and 0 if other-wise. This is consistent with previous This study uses multiple regression withresearch three metric dependent variables (Indonesian Accounting RegulatorySinghvi and Desai (1971) and Haniffa Compliance - IARC: IARCinv, IARCfaand Cooke (2002) argue that the Board and IARCdep) and five independentof Directors (in Indonesia’s case) are variables (top one shareholder, inde-encouraged to disclose information in pendent commissioners, and firm size asdetail 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 (businessis consistent with prior studies (Ali, Ah- complexity, and independent audit com-med and Henry 2004; Barako et al. mittee as non-metric categorical; and2006). leverage as a metric). The main statisti- cal method utilized to test hypotheses isFinally, 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-financialFour 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
A. Setyadi, et. al. / Issues in Social and Environmental Accounting 1 (2009) 26-44 33reports) 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 ofthis 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 companyapplies to financial firms such as banks, (PT Jakarta Setiabudi Internasionalinsurance 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 concentrationand Ahmed 2005). Annual reports are (top one shareholder) is 46.11% with achosen as source of data because they lowest concentration of 6.64% and aare easily accessed McQueen 2001), highest ownership concentration ofuseful (Yeoh 2005), communicated 92.88%. The mean level of independentwidely (Anderson 1998; Beattie, McIn- commissioners is 40.91% ranging fromnes and Fearnley 2004), and financially 20.00% to 80.00%. The mean indicatesfocused. 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% tomean 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% towith a minimum of 31.25% compliance 100.00% (see Table 1). Table 1 Descriptive statisticsNo. Minimum Maximum Mean Median Std. Deviation1 IARCinv 22.22 100.00 71.63 77.78 15.642 IARCfa 31.25 100.00 51.13 37.50 22.473 IARCdep 75.00 100.00 99.69 100.00 2.794 TopOne 6.64 92.88 46.11 48.67 20.625 IndCom 20.00 80.00 40.91 40.00 10.566 Size -Log 8.85 18.23 13.76 13.89 1.797 Size (Assets)2 7000.00 82333378.00 4286884.75 1075000.00 10961151.338 ROA -78.01 37.22 3.60 3.30 10.329 Leverage 0.10 221.43 52.28 51.24 31.8810 IndAC 0.00 66.67 30.99 33.33 15.2311 ExpCom 0.00 100.00 51.72 31.98 50.002 Size (Assets): Total assets (in million rupiah).
34 A. Setyadi, et. al. / Issues in Social and Environmental Accounting 1 (2009) 26-44Table 2 provides descriptive statistics tion as an asset), FA2 (Recorded at itsfor individual accounting standards, cost), FA8 (The gross carrying amount),from INV1 (Lower of cost and net realiz- FA9 (Accumulated depreciation at theable value) to DEP4 (Consistent from beginning and end of the period), DEP1period 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) complianceshows 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 FA11of 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 standardsNo. Variable Title % Compliance1 INV1 Lower of cost and net realizable value 0.942 INV3 Cost of formulas 0.913 INV6 Total carrying amount 0.914 INV7 Appropriate classification to the entity 0.915 INV5 Accounting policy 0.906 INV2 The cost of inventories 0.547 INV8 Fair value less costs to sell 0.438 INV4 Recognition as an expense 0.299 INV9 The amount of inventories recognized as an expense during the 0.23 period10 FA1 Fixed assets that qualifies for recognition as an asset 1.0011 FA2 Recorded at its cost 1.0012 FA8 The gross carrying amount 1.0013 FA9 Accumulated depreciation at the beginning and end of the period 1.0014 FA3 Amount of accumulated depreciation 0.9915 FA7 Measurement of gross carrying amount 0.9916 FA4 Revaluation of fixed assets 0.3317 FA5 Explain the effect of revaluation 0.3118 FA6 Difference between revaluation value and book value must be 0.24 recorded on equity account19 FA10 Effective date of the revaluation 0.2420 FA15 Each re-valued class of fixed asset 0.2021 FA12 The revaluation methods used for fixed assets 0.1922 FA16 The amount of revaluation reserve 0.1923 FA13 Significant assumptions for items’ fair values 0.1824 FA14 Items’ fair values were determined 0.1825 FA11 Independent valuer was involved 0.1426 DEP1 Allocation on a systematic basis 1.0027 DEP3 The depreciation method used 1.0028 DEP4 The useful lives 1.0029 DEP2 Consistent from period to period 0.99
A. Setyadi, et. al. / Issues in Social and Environmental Accounting 1 (2009) 26-44 35Table 3 shows the frequency of auditor Univariate t-tests and ANOVA statisticaltype indicating that the Big 4 firms audit analysis reveal that the different means49% (or 78) of listed companies in Indo- of compliance between auditor type andnesia. It also illustrates that 84% (or business complexity are not statistically134) of the company has at least one significant for IARCinv, IARCfa, andsubsidiary. Table 4 also highlights the IARCdep. However, there are clear in-four industry categories of listed compa- dustry differences; the results indicatenies 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) onlyhas 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 50.23 100.00Big 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 0.15Business com-plexity:Company has 26 16 73.61 51.20 100.00no subsidiaryCompany has 134 84 71.26 51.12 99.63subsidiary Total 160 100 71.63 51.13 99.69 0.46 0.50 0.000 0.99 0.39 0.53Four industry IARCinv IARCfa IARCdepcategories: ANOVA ANOVA ANOVA1. Resources 29 18 70.09 45.04 99.142. Manufactur- 43 27 73.90 61.77 99.42 ers3. Real estate 28 17 72.84 47.32 100.004. 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 0.46Legend: * denotes statistically highly significant at p<0.01Further 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 andcorrelation coefficients. The upper half auditor type (p<0.01) and give the high-
A. Setyadi, et. al. / Issues in Social and Environmental Accounting 1 (2009) 26-44 37est correlation coefficients, 0.418 and Multiple regressions0.438 respectively. Since the variablesare to be used in regression analysis and Table 5 communicates the results ofas 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. TheSchindler 2003; Ghozali 2005), it is sug- table provides p-values and coefficientsgested 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 0.93Notes: 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%
38 A. Setyadi, et. al. / Issues in Social and Environmental Accounting 1 (2009) 26-44ness complexity, industry categories, top Implications and Conclusionone shareholder, independent commis-sioners, ROA, leverage, independent This study provides an analysis of theaudit committee, and expert commission- extent to which Indonesian-listed firmsers are not found to be significant pre- comply with Indonesian accountingdictors of the extent of inventory compli- standards. Compliance index is a selfance 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 derived0.29) are greater than the 0.05 (p>0.05) from Indonesian accounting standardssignificance 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 thatshareholder, independent commission- firm’s size is significant for inventoryers, ROA, leverage, independent audit compliance and fixed assets compliancecommittee, 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, support0.42, 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, thefirm size is significant with its p-value of0.01 (p<0.05). Therefore, hypothesis 3 (H3: results support hypothesis 3 (H3: size ofsize of firm) is accepted. firm).The table also illustrates that for deprecia- These findings highlight the importancetion compliance, there is no significant pre- of the enforcement issue for firms listeddictors of the extent of depreciation compli- on Jakarta Stock Exchange to complyance since their p-values are greater than the with the regulator’s rules. The goal is to0.05 (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 costsnificant different) post hoc test, multiple comparisons of associated with agency costs. Analysisfour industry categories for inventory compliance, fixedassets compliance, and depreciation compliance. The reveals a high level of 71.63% inventoryresults 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 0.01respectively (p<0.05), for fixed assets compliance. In ance with accounting rules. Althoughaddition, three ANOVAs show that the only fixed assetscompliance is significant with its p-value of 0.00. the statistical analysis was run with and without possible4 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 theand 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 thetance measure highlight possible concerns. Therefore, same statistical result as the full regression model.
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