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11.vol 0003www.iiste.org call for paper no 1 pp 45-65

  1. 1. Issues in Social and Environmental AccountingVol. 3, No. 1 June 2009Pp. 45-65 Ethical Culture and Financial Reporting: Un-derstanding Financial Reporting Practice within Javanese Perspective* Anis Chariri Faculty of Economics Diponegoro University, IndonesiaAbstractThis study is a case study conducted in an Indonesian insurance company. The aim of the studyis to understand the dynamics of financial reporting in the company. Ontologically, this study isbuilt on a belief that financial reporting practice is a socially constructed reality. As a sociallyconstructed reality, such a practice involves an interaction among social actors, and betweenorganisational actors and the institutional and cultural environment in which the company oper-ates. The main research question of this study is how organisational culture shapes the com-pany on the construction of its financial reporting practice. This study reveals that the companyis committed to quality financial reporting because such reporting can be used to gain legiti-macy and to maintain social harmony. The company conducts itself in this way is because itreflects Javanese culture, a dominant culture in Indonesia. Furthermore, this study concludesthat the way the actors in the company construct financial reporting practice is influenced by itsorganisational culture. The organisational culture of the company, which reflects Javanese cul-ture, is able to shape the behaviour of its actors from the top level to lower levels to conductethical and transparent business practice. Thus, as Hines (1988) claims, this paper concludesthat financial reporting practice is a socially constucted reality.Keywords: ethical culture, Javanese culture, insurance company, legitimacy,conservatism, financial reporting research (for example, Anderson 1979;Introduction Anderson and Epstein 1995; ChenhallStudies of financial reporting, as and Juchau 1977; Lee and TweedieMathews and Perera (1993); Ryan, et al. 1975a; 1975b) and market-based ac-(2002) and Wolk, et al. (2004) note, counting research (for example, Amirhave proceeded in several directions, and Lev 1996; Botosan 1997; Francissuch as a decision-usefulness approach and Schipper 1999; Healy 1985; Healy,(Gilman 1939; Grady 1965; Paton 1922; et al. 1999; Lev and Ohlson 1982; LevPaton and Littleton 1940), behavioural and Zarowin 1999).Anis Chariri, SE., M.Com., Ph.D., Akt. Is Senior Lecturer of Accounting at School of Accounting, Faculty of Econom-ics Diponegoro University, Indonesia, email: anis_chariri@undip.ac.id.
  2. 2. 46 A. Chariri / Issues in Social and Environmental Accounting 1 (2009) 45-65Moreover, studies of financial reporting This study claims that ontologically,have been dominated by the positive financial reporting is a socially con-accounting research paradigm frame- structed reality that can shape, and bework, which addresses particular prob- shaped by powerful actors and institu-lems to be analysed using mathematical tional environments. As a socially con-and statistical techniques, and which is structed reality, organisational actors canaimed at explaining and predicting how construct financial reporting so as toself-interested individuals behave when gain legitimacy and show that their or-facing economic consequences of par- ganisation operates in accordance withticular accounting issues (Holthausen socially acceptable beliefs, values and1990; Watt and Zimmerman 1986). This norms. Hurst (1970) argues that one ofimplies that accounting is seen as repre- the functions of accounting, includingsentation of “itself, variously, as corporate financial reports, is to legiti-‘technical’, ‘neutral’, and ‘value mate the existence of the corporation.free’” (Munro 1998, p. 201). The role of corporate financial reporting is to inform a society that an organisa-However, accounting is no longer seen tion’s actions are accountable, and thatby some as “a neutral device that merely they conform to social values anddocuments and reports ‘the facts’ of eco- norms. Thus, this study aims to seek annomic activity” but as “a set of practices answer to the following specific ques-that affects the type of the world we live tion: “how organisational culture influ-in, the type of social reality we in- ences the company on the constructionhabit” (Miller 1994, p. 1). Financial re- of its financial reporting practice to de-porting practice is influenced not only liver messages that the particular com-by economic variables as claimed by the pany operates in socially accepted be-proponents of positive research, but also liefs, norms and values”.by institutional, political and culturalenvironments. It is recognised that the Javanese Culturecurrent research in accounting and cor-porate governance is alert to the fact that Discussing Javanese culture is not easy,actors’ behaviour is modified by proce- because it is so diverse and complex.dures, rules, incentives and other eco- Such a discussion could refer to lan-nomic factors. Most research to date has guage, way of life, ethics, performingall but ignored the institutional, political arts, texts and more. This study focusesand cultural environment in which finan- on the Javanese culture in terms ofcial reporting practice takes place. Con- world-view, “the Javanese idea of thesequently, calls for studying financial good life” as studied by Magnis-Susenoreporting within its environmental con- (1997). Because of the sheer size of thetexts have emerged in accounting litera- community, the homogeneity of its cul-ture (Adams 1997; Gray 1988; Rezaee ture and their influence on the nation’s2002; Miller 1994; Munro 1998). capital, Javanese culture influences the way of life of most Indonesians, and the Javanese dominate cultural, business,* The author is very grateful to the delegates of the 14th social and political activities in Indone-Euro-Asia Conference and the 3rd InternationalConference on Business and Management Research sia (Mann 1996; Magnis-Suseno 1997).(ICBMR), Bali-Indonesia 27-29 Agustus 2008, wherethe paper has been presented
  3. 3. A. Chariri / Issues in Social and Environmental Accounting 1 (2009) 45-65 47The Javanese have a complex code of expressed through the group. Hence, alletiquette and respect, reflected in the obvious expression of conflict that leadJavanese language. However, the main- to disharmony should be avoided.tenance of inner peace and harmony is apriority in social relationships among the Another way to maintain social harmonyJavanese. Indeed, maintenance of social is the implementation of the principle ofharmony is the core value of Javanese respect. According to this principle, theculture (Magnis-Suseno 1997). The so- Javanese, both in speech and behaviour,cial relationship of the Javanese is char- have to demonstrate “proper respect toacterised by two basic principles reflect- those with whom one comes into socialing their ideas of a good life: conflict contact” (Magnis-Suseno 1997, p. 62).avoidance and respect. Similar to the principle of conflict avoid- ance, the use of language and gestureJavanese culture is characterised by the reflects how the Javanese extend theiravoidance of all form of direct confron- respect to other people in accordancetation. Indeed, conflict avoidance plays a with their social status (such as age andcrucial role in maintaining social har- structural positions). Hence, individualsmony. To avoid conflict, the Javanese should know their positions and duties,are committed to the concept called as and honour and respect those in higher“rukun”, which shows how people positions, while remaining benevolentshould interact in a social relationship. towards, and responsible for those inMulder (1978, p. 39) has described ru- lower positions (Magnis-Suseno 1997).kun as follows: It is also important to note that a social Rukun is soothing over of differ- relationship, there is almost no room for ences, cooperation, mutual ac- individualism in the Javanese society. In ceptance, quietness of heart, and other words, in spite of being individu- harmonious existence. The als, the Javanese prefer collectivism. whole of society should be char- This view is based on a belief that social acterized by the spirit of rukun, harmony can be threatened by individu- but whereas its behavioural ex- alism, diversity and conflict (Mulder pression in relation to the super- 1994). As far as collectivism is con- natural and to superiors is re- cerned, it is common for the Javanese to spectful, polite, obedient, and “develop networks of acquaintance: distant, its expression in the workmates, customers, relatives, friends, community and among one’s neighbors and colleagues” (Yudianti and peers should be Goodfellow 1997, p. 104). ‘akrab’ (intimate) as in a family, cozy, and ‘kangen’ (full of the To exercise collectivism, individuals act feelings of belonging). both in social and in business activities based on the concept of “gotong royong”Rukun is characterised by cooperation, and “musyawarah”. “Gotong royong”mutual acceptance, calm and unity refers to a philosophy that says that peo-(Magnis-Suseno 1997). To achieve ru- ple must help each other; whereaskun, individuals should be a part of the “musyawarah” refers to the fact that allgroup and their individuality should be decisions should be made only after a
  4. 4. 48 A. Chariri / Issues in Social and Environmental Accounting 1 (2009) 45-65consensus or compromise has emerged financial reporting practice in Indonesia,(Magnis-Suseno 1997). The demand for especially in the insurance industry. Fi-collectivism that is supported by nally, the reason Bintang was chosen as“gotong royong” and “musyawarah” is the research setting was that it has acodified in a classical and well-known unique culture influenced by the Java-Javanese proverb: “Sepi ing pamrih, nese views on an ethical social relation-rame ing gawe, mangayu ayuning ship.bawana—be disinterested, work hard,perfect the world” (Antlov 1994, p. 77). Organisational Culture of Bintang: a Circuit of Ethical ConductResearch Approach In regard to how Bintang builds its or- ganisational culture, it can be seen thatThis study is based on the understanding the words transparency, public account-that reality exists as a social product and ability, conservatism and ethical busi-as a result of human interaction, sym- ness become discourses in Bintang.bolic discourse and creativity (Burrel Those who join Bintang will directlyand Morgan 1979; Denzin 1983; Hopper experience and are involved in a conver-and Powell 1985; Morgan 1980; 1988; sation concerning these words. Any timeTomkin and Groves 1983). Furthermore, and any place at which interactionit assumes that humans are incapable of among employees and between employ-total objectivity because they are situ- ees and top management takes place theated in a reality constructed by subjec- words will be mentioned. This can betive experience (Berger and Luckmann interpreted that such words are per-1984). Meanings and the search for the ceived to be taken-for-granted beliefstruth is possible only through social in- and values within this company.teractions (Streubert and Carpenter1999). The inability quantitatively to The core values of the company consistmeasure some phenomena has led to of commitment, positive thinking, credi-intense interest in using other ap- bility, acceptance and carrying out ofproaches to particularly human phenom- responsibility, prudence in all businessena (Nahapiet 1988). Consequently, this decisions, teamwork, understanding andstudy was designed with an interpretive enjoying business ethics, high customermethod of inquiry. services and innovations. The employees of Bintang believe that the core valuesThis study used PT. Asuransi Bintang, of Bintang are built based on the internalTbk (hereafter Bintang)—a publicly environment, which refers to the dailylisted company, which was the recipient behaviours of organisational membersof annual report awards since 1980. The since the establishment of the company.reason for using the company as a re- These core values are then symbolised insearch setting is that Bintang has been the word “MAJU” (meaning “move for-able to show itself as a transparent and ward and become superior”), and theyaccountable company. Annual report cannot be separated from the principle ofawards received by the company since accountability. To understand this fur-the 1980s are evidence that the company ther, it is helpful to note that by describ-is an example of one who practises good ing corporate values, codes of conduct
  5. 5. A. Chariri / Issues in Social and Environmental Accounting 1 (2009) 45-65 49invite and require an accountability of employees of Bintang run the insuranceorganisational members to these values business by obeying all rules and regula-(Willmott 1998). tions and complying with socially im- posed norms for maintaining social har-To realise its business philosophy and mony. This principle has been acceptedmanagement of organisational culture, as a taken-for-granted belief that guidesall individuals should act ethically ac- organisational actors in their daily or-cording to the governing regulations and ganisational life.other informal rules. Consequently, the Positive Thinking High Customer Service Commitment Innovation BASIC PRINCIPLES: Public Accountability Acceptance and Carrying out Prudent in Decision Making Responsibility Teamwork Credibility Business Ethics Figure 1: The circuit of organisational culture of BintangUsing the culture paradigm discussed by ports institutional theory, in thatSchein (2004), the relationship of busi-ness philosophy, core values and conser- ...to survive in the progressivelyvatism can be illustrated as a circuit of more ‘turbulent’ social environ-organisational culture showing an inte- ments, which [are] becoming thegrated-ethical value chain that guides norm, organisations would needorganisational actors in conducting busi- to adopt and act according to theness activities (see Figure 1). Consider- values that would align theming the circuit of organisational culture with the expectations of society.of Bintang, it can be seen that such aculture reflects Javanese culture, the The basic principle of public account-Javanese idea of an ethical social rela- ability is identical with the maintenancetionship. This is consistent with a claim of social harmony. In this regard, em-by Maclagan (1998, p. 145), who sup- ployees of Bintang should be publicly
  6. 6. 50 A. Chariri / Issues in Social and Environmental Accounting 1 (2009) 45-65accountable and act in accordance with In addition, the case of Bintang signifiessocially imposed values and norms. Ac- that organisational culture is not embed-cording to Branscomb (1995), account- ded naturally in an organisation. Instead,ability implies acceptance of responsibil- it is transmitted deliberately into an or-ity, without which there is no basis on ganisation. Organisational culture is notwhich an injured party can initiate a tort a static phenomenon. Schein (1995, pp.action to redress grievances. Further- 225–226) argues that the basic processmore, public accountability can also be of embedding and transmitting a culturalseen as a set of social relations. This is element is a “teaching process” throughbecause accountability is a socially con- the use of a number of mechanisms,structed reality referring to something such asthat is sensible and meaningful. …formal statements of organ-Referring to Willmott’s (1996) work, the izational philosophy, charters,construction of such a sensible and creeds, material used for recruit-meaningful world involves people that ments and selection, and sociali-lead to the practice of accepted account- sation...explicit reward andability. Moreover, Pollit (2003) and status system and promotionRomzek and Dubnick (1998) argue that criteria; stories, legends, myths,public accountability refers to a social and parables about the key peo-relationship in which an actor feels an ple and events...obligation to explain publicly and justifytheir conduct to various significant peo- This means that organisation culture canple. These arguments support a claim shape and be shaped by organisationalthat public accountability used by Bin- actors. Indeed, organisational culture cantang, as a business philosophy, reflects influence any organisational activity andthe core value of Javanese culture, the practice, including financial reportingmaintenance of social harmony. practice. For this, Schein (2004, p.1) argues that:Conservatism, in the language used bythe people of Bintang, means total obe- …culture is both a dynamic phe-dience to any governing regulations and nomenon that surrounds us at allcompliance with socially imposed val- time, being constantly enactedues. This view is consistent with Tann- and created by our interactionssjo (1990, p. 10), who contends that with others and shaped by lead-“...conservative attitude is the attitude of ership behaviour, and a set ofone disposed to preserve well- structures, routines, rules, andestablished existing institutions because norms that guide and constrainthey exist”. By being conservative, Bin- behaviour.tang wants to respect regulators and anysocially acceptable values and avoid a In the case of Bintang, it can be seen thatconflict with regulators and the commu- most personnel in Bintang believe thatnity. Consequently, it can be inferred organisational culture plays an importantthat this concept reflects the principles role in shaping quality financial report-of conflict avoidance and respect. ing practice. For example, even though the President of the Board of Directors
  7. 7. A. Chariri / Issues in Social and Environmental Accounting 1 (2009) 45-65 51and Director of Financial Services do that:not directly say that there is a relation-ship between culture and quality finan- …Bintang got an annual reportcial reports, they claim that only those award. I think that it was reason-who understand Bintang are able to as- able. We have an ethical culturesess such a relationship. The President and our culture greatly influ-of the Board of Directors said that ences the quality of our financial reports. I do not really know whether the financial report is a reflection of Bintang has a unique culture that influ- organisational culture. For ex- ences employees not only in the Divi- ample, we could see that some sion of Accounting, but also in other insurance companies provided a divisions to behave ethically when car- high figure in revenues. But we ring out their jobs. A statement by one did not know how the company of the accounting staff explained how got the revenues. Bintang al- such a culture shapes behaviour of indi- ways implements business eth- viduals. He (Mr A) pointed out that: ics. But do other companies con- sider ethical aspects in their I think numbers or data con- business? I do not think so, be- tained in financial statements cause we can see how business reflect the moral values or a cul- in Indonesia is... a legal activity ture of our company, especially is okay, illegal ones are up to in the Accounting Division. I you. We are committed to ethi- did not really know what was cal business. Only the “market going on in other divisions. But, players” and those who are con- I believe they [other divisions] cerned with Bintang are able to have implemented the same val- assess whether our financial re- ues. port is a reflection of our organ- isational culture. This ethical culture has been institution- alised by both the founders and theA similar view was held by the Director Board of Directors, who continuouslyof Financial Services, who stated that: remind individuals in Bintang of the im- portance of being conservative in con- …Financial reports also reflect ducting business. Another employee in our culture, although it is not the Accounting Division (Mr D) re- easy for users to directly under- marked that: stand the relationship between organisational culture and the I believe that the reason why we reports. got annual report awards was that we had honest leaders. TheyA convincing argument of the existence never manipulate accountingsuch a relationship can be seen from a data. That is our cul-statement by new employee (Mr C), who ture...conservative.previously worked at a famous auditfirm in Indonesia (Deloitte). He insisted
  8. 8. 52 A. Chariri / Issues in Social and Environmental Accounting 1 (2009) 45-65This statement is consistent with a view process and process is greatlyexpressed by the Director of Administra- influenced by the corporate cul-tion Services, who is also a minority ture. We always attach a volun-shareholder and a son of a founder. He tary explanation of any itemssaid that: that we consider important for users to know. This is part of The quality of financial reports our commitment to transparent is mainly determined by ethical reporting. We always try to dis- conduct of those who prepare close any information as trans- the reports. If you are used to parently as possible. running a business ethically, you will automatically provide the His subordinates also supported the correct information about the statement. For example Mr B said that company’s activities. “Bintang has produced transparent fi- nancial reports. It is very transparentSimilarly, Mr E, who is responsible for indeed. This happens because of our cul-preparing the financial reports stated that ture” there is no a surprise in the an- An example of the influence of organisa- nual report awards. With or tional culture on financial reporting without the annual report awards practice can also be seen from the state- we are always committed to ment by the Director of Financial Ser- quality financial reporting prac- vices: tice. Our financial reports are just like that We made a significant change in the current annual report [2002].The head of the Internal Audit Unit has We changed the way we calcu-an interesting view concerning the rela- lated the unearned premium ac-tionship between organisational culture count. There is a regulation de-and financial reporting practice. He jus- termining how to calculate thistified his statements as follows: account, but we are used to cal- culating the account more con- We have no crucial changes in servatively. It is more prudent if financial reports. The insurance we talk about the insurance industry has standardised finan- business. The point is that we cial statements. We always obey include commission as a deduc- regulations. But it should be tion of unearned premium. I ap- noted that regulations are only a ply a conservative approach for guide. We have no choice ex- maintaining the company’s sol- cept to comply with the regula- vency. tions. You should know that the format of financial statements is Financial reporting practice in Bintang the same as another insurance shows that there is a strong relationship company. What makes it differ- between organisational culture and qual- ent is the output of financial re- ity financial reporting. This implies that porting practice. Output needs a company with an ethical culture will
  9. 9. A. Chariri / Issues in Social and Environmental Accounting 1 (2009) 45-65 53more likely be committed to quality fi- because it reflects Javanese culture. Tonancial reporting practice than compa- maintain social harmony, individualsnies with unethical cultures. This is con- should be members of a group andsistent with claims of such relationships should work within the framework ofin the accounting literature (Adams and gotong royong and musyawarah. TheseKuasirikun 2000; Geriesh 2003; Lewis Javanese values can also be seen in Bin-and Unerman 1999). tang.Studies of fraudulent financial reporting The organisational reality of Bintangpractice also demonstrated that financial indicates that success is a collectivereporting fraud is shaped by a set of ethi- achievement under the guidance of itscal values reflected by dishonest man- management. In line with the conceptagement, personality anomalies, lies and gotong royong (cooperation), the estab-crookedness (Loebbecke, et al. (1989), lishment of executive committees inand a poor organisational culture Bintang can be seen as an example of(Merchant 1987). A poor organisational cooperation. Even though such commit-culture, according to Merchant (1987), is tees are not mainly found in the Ac-a culture typified by a lack of moral counting Division, several employees inprinciples, guidance and leadership; as the Accounting Division are also mem-well as no internal rules, policies and bers of the committees. Consequently,procedures. Adams (2002) remarks that the committees play (consciously or un-culture reflects moral values, which one consciously) roles in constructing finan-would expect in turn to influence at least cial reporting practice. For example thethe issues on which companies perceive Director of Financial Services said that:as worthy of annual reports. ...the committees are actuallyThe story of Bintang provides a real and intended to build better control.interesting portrait of a relationship be- However, since the establish-tween an organisational culture and fi- ment of committees has beennancial reporting practice. Different part of a trend in implementingfrom financial reporting practices of the practice of good corporateother companies, the financial reporting governance, we decided to makepractice in Bintang reflects a local cul- some executive committees. Onture—Javanese culture—that shapes not these committees we decide eve-only individual behaviour but also its rything together. (emphasisorganisational culture. added.) Similarly, the Director of AdministrationFinancial Reporting Practice: a Re- Services pointed out that:flection of Javanese Values ...we...establish and utilise com-The financial reporting practice of Bin- mittees for the purpose of show-tang is constructed as a rhetorical story ing that we make a collectiveto gain legitimacy and maintain social decision. Directors do not makeharmony. The reason that the company their own decisions. We try toconducts such practices in this way is
  10. 10. 54 A. Chariri / Issues in Social and Environmental Accounting 1 (2009) 45-65 develop collectivism. (emphasis for improving an internal control system, added.) an audit report draft, and accounting policies and disclosures in the 2002 an-This view is also consistent with that of nual report.the manager, who is responsible for un-derwriting policies. He said: A long discussion concerned an account- ing treatment and necessary disclosure The executive committee is in- in regard to changes in the calculation of tended to ensure that crucial de- the estimated unearned premium. The cisions are not determined by a external auditor believed that changes in single person. The use of a team the calculation of the unearned premium in the decision-making process should be classified as a change in esti- will lead to a better decision. As mation, rather than a change in an ac- far as I know the committees counting method. have run well and togetherness in teamwork is part of our cul- According to the Director of Financial ture. (emphasis added.) Services, a change in the calculation that made the estimated unearned premiumIn addition, in the 2001 annual report of was Rp. 12 billion lower than that of theBintang, the Chairman of the Board of previous calculation, which was in-Commissioners expressed his feelings in tended to fulfil the requirement of De-regard to the importance of helping each cree of the Minister of Finance No. 481/other (gotong royong). He said (p. 15): KMK017/19991, and was not intended to increase the company profit. Such a Finally, we also extend our deep change is not against the law. Indeed, appreciation to shareholders, all the President of the Board of Directors employees of PT. Asuransi Bin- argued that such a change is allowed by tang, Tbk agents and business the authoritative body and said: partners, and all financial au- thorities that have contributed to I personally discussed this issue the success of PT. Asuransi Bin- [changes in the calculation of tang, Tbk and we hope that this the estimated unearned pre- cooperation can be further ex- mium] with the regulator [the tended in the forthcoming years. Department of Finance] and also wrote a letter to the regulator. ItMoreover, an example of musyawarah is not a problem. We still use 40can be seen from a discussion held by per cent in the calculation. Thethe Audit Committee of Bintang regard- difference is only in the basis ofing changes in the calculation of the esti- calculation. Previously we cal-mated unearned premium. On 24 March culated 40 per cent of the net2003 the Audit Committee and the premium and now we calculateBoard of Directors held a meeting with 40 per cent of the net premiuman external auditor to discuss the final 1 This decree is replaced by the Decree Number 424/draft of the annual report. In this meet- KMK.06/2003, which requests insurance companies toing they discussed issues concerning achieve the level of solvency at 75 per cent, 100 percompliance with regulations, a proposal cent, 120 per cent by the end of 2002, 2003 and 2004 respectively.
  11. 11. A. Chariri / Issues in Social and Environmental Accounting 1 (2009) 45-65 55 after a deduction of a net com- cussion, the external auditor disclosed mission. the changes in the notes to the 2002 fi- nancial statement (note 2h) as follows:Furthermore, in the meeting, one of au-dit committee members asked a question In 2001, the estimated unearnedof the external auditor regarding the premium is computed based onchanges. She said: the aggregate percentage method at the rate of 40 per cent What do you think about this of the net premium. Effective change? Is this an estimation from 2002, the company adopts change or a change in an ac- the aggregate percentage counting method? If this change method of 40 per cent of the net is concerned with an accounting premium after a deduction of a change, there should be disclo- net commission. The change in sure of why the auditor agrees the computation still meets the with the change. Restatement on Decree of the Ministry of Fi- the 2001 financial statements nance No. 481/KMK.017/1999 should also be done for the dated 7 October 1999 and the change. Letter of the Insurance Director, the Directorate General of Fi-In reply to the question the external nance Institutions, Numberauditor argued that: S4212/LK/2000 dated 23 Au- gust 2000. If the 2002 estimated This is an estimation change unearned premium is computed because there are only two cal- based on the aggregate percent- culation methods of the esti- age method of the net premium mated unearned premium: the without a deduction of net com- aggregate method and the daily mission, the unearned premium basis method. The change is will increase by Rp only concerned with the basis of 12,403,893,000. The change in calculation. We have internally the estimated unearned premi- discussed this change with other ums computation was made in auditors. I believe that the order for the company to still change is more related to an es- comply with the ratio of invest- timation change, rather than a ment to technical reserve and change in accounting method. claim payable as required by the Decree of the Ministry of Fi-After discussing this change, a compro- nance.mise was finally made and the Chairmanof the Audit Committee suggested that This example shows how musyawarahthe auditor should clearly express such a guides individuals in Bintang to make achange in the 2002 annual report that it collective decision. The importance ofis legally allowed and still complies with musyawarah is also supported by theregulations, especially the decree of the Director of Financial Services, who ar-Minister of Finance No. 481/ gued that:KMK.017/1999. As a result of the dis-
  12. 12. 56 A. Chariri / Issues in Social and Environmental Accounting 1 (2009) 45-65 ...before a final draft of financial vatism is applied not only in financial statements is signed, the exter- reporting practice, but also in all aspects nal auditor reviews the draft and of organisational life. This argument is sometimes we have a conflict based on the fact that for Bintang, con- with the auditor, for example, servatism is more than just choosing a about the use of a certain termi- procedure. Rather, it conveys an ideol- nology of information being ogy, values and beliefs. Consequently, disclosed in annual reports. We Bintang views conservatism in the same usually overcome this conflict way as is commonly used in politics. by making a compromise. (emphasis added.) In politics, conservatism might be seen as a philosophy or ideology supportingThe above narratives illustrated how the importance of traditional values orgotong royong and musyawarah influ- established social order. Thus to quoteence financial reporting practice in Bin- Tannsjo (1990, p. 4):tang. Clearly, maintaining social har-mony is the ultimate purpose of publish- …the conservative attitude...ising quality annual reports. This supports characterized by two centralthe view expressed by Maclagan (1998, tenets...(1) that whatever existsp. 141) that “...organizations are seen as as a well established fact oughtadapting to a set of norms in the social to continue to exist and (2) thatenvironment, and gaining legitimacy”. the reason why it ought to con- tinue to exist is that it is wellConservatism: a Lesson From Bintang established.In accounting literature, conservatism is It should be noted that for proponents ofconcerned with procedures adopted by conservatism, tradition does not merelyan accountant when facing uncertainties. mean customs or habits, but consists ofIt is unquestionable that conservatism standards and institutions that are per-holds an extremely important place in ceived to be a guide to promote a well-the ethos of accounting (Wolk, et al. ordered life (Jost, et al. 2003; Kirk2004). Conservatism guides accountants 2001). Therefore, the orientation of ato make decisions based on logic and conservative attitude is to maintain orderevidence that will lead to the fairest and stability and to adhere to pre-presentation of financial statements. Ac- existing social norms.cording to conservatism, when account-ants are facing uncertainty as to which In light of conservatism, orientation toaccounting procedures or methods to values plays an important role in shapingapply, they tend to choose the proce- the behaviour of employees. In this re-dures that will be least likely to overstate gard, a conservative attitude derives val-assets or income. ues from traditions and judges the world around the individuals to be organisedHowever, within Bintang’s context, the by the standards they trust (Jost, et al.word conservatism has a broader mean- 2003). In addition, they do not simplying than that generally accepted in ac- preserve traditional or established val-counting literature. In Bintang, conser- ues, but ensure that a society is socially
  13. 13. A. Chariri / Issues in Social and Environmental Accounting 1 (2009) 45-65 57ordered according to its values (Muller independence and to improve2001; Stone 1994). the prosperity of our society.To keep tradition alive, for example, in This statement implies that the improve-an organisational context, conservatives ment of social wealth is more importantpass it down from generation to genera- than profit maximisation. Thus, conduct-tion, from superiors to subordinates, ing ethical business is the only way towho embody the conservative attitude of achieve such an objective. In so doing,the organisation. In other words, to Bintang always obeys all regulations andmaintain a conservative attitude a leader operates in accordance with socially ac-must be able to institutionalise the atti- ceptable values. This has been acceptedtude in an organisation’s life. The fol- as a tradition of Bintang in dealing withlowing section describes how conserva- insurance business and external pres-tism is embedded in financial reporting sures.practice in Bintang. Conservative attitude in Bintang is alsoConservatism in Bintang: a Reflection confirmed by Mr A in the Accountingof Javanese Culture Division, who said:The concept of conservatism applied in From its establishment BintangBintang is similar to that used in politics. always complies with all regula-Thus, for Bintang to be conservative, its tions promulgated by authorisedstaff must be able to conduct ethical bodies. This is why Bintang isbusiness and obey regulations and any well known as a conservativesocially acceptable norms and values for company. This is part of ourthe purpose of maintaining stability and culture...order in Indonesian society. Bintang hasemployed conservatism since the estab- This statement is supported by Mr G, thelishment of the company. The reason for manager who is responsible for under-this is that Bintang was established not writing policies. He maintained that Bin-simply to raise profits, but to improve tang is committed to obeying regula-the welfare of Indonesian society. This tions. He said that “Bintang is very con-can be seen from a statement by the servative in implementing regulations.charismatic founder, Mr Soedarpo Sas- Bintang has continuously kept obeyingtrosatomo in the 2004 Management An- any regulations”.nual Meeting of Bintang. He said: Such statements indicate that in Bintang, Bintang not only raises money, as discussed before, the conservative but also utilises our independ- attitude has been accepted as a taken-for ence so that we can fight in our -granted belief that guides its employees own country. We have a holy in conducting business. A statement by spirit. The founders then have Mr B, a senior internal auditor, illus- institutionalised the holy spirit trates this view: in Bintang, to enable its organ- isational members to utilise our As far as I know, Bintang is conservative in conducting busi-
  14. 14. 58 A. Chariri / Issues in Social and Environmental Accounting 1 (2009) 45-65 ness. With or without formal ing to environmental rules we tend to conduct our- changes...Thus, being conserva- selves ethically...I think since tive does not mean we neglect the establishment of Bintang, we the changes in the business envi- have run the business conserva- ronment. We also adopt new tively. The founders of this com- concepts introduced by profes- pany always remind us about the sional accounting bodies, as importance of being honest, long as the concepts are consis- ethical and fair in doing busi- tent with our culture. ness. I am proud of working here. Even though Bintang is a Another claim showing the commitment small company, it always runs of Bintang to be conservative can be an ethical business. seen from a statement by the Director of Administration Services. He said:In addition, being conservative does notmean static. Instead, such an attitude has In line with the flexibility ofdriven Bintang to be responsive to exter- Bintang to respond to environ-nal pressures. An active response to new mental changes, I think Bintangregulations is an example of Bintang’s employs a conservative ap-flexibility, even though the Indonesian proach. This is a positive policybusiness environment has been sur- because currently we have tightrounded by unethical business and cor- regulations. However, theserupt government. In this regard, it is tight regulations are not a majorinteresting to note what employees of problem for Bintang, as the con-Bintang said about conservatism and servative approach has led Bin-external pressures. For example, Mr H tang to keep obeying the regula-believed that: tions. It is true that the tight regulations have made insurance Although Bintang is conserva- business more difficult. But for tive, this company is very flexi- Bintang, because of the conser- ble in responding to changes in vative approach, to implement the business environ- the tight regulations is not as ment...Management always difficult as for other insurance complies with regulations. If a companies. Indeed, many insur- new regulation is issued, Bin- ance companies collapsed be- tang usually establishes a team cause of the regulations. Thus, I to discuss whether the regulation believe that conservatism is only affects the head office or good for supporting the imple- influences both the head office mentation of regula- and branch offices. Thus, we tions...However, as Bintang is can anticipate the consequences used to obeying the rules and of any regulations. never conducts unethical busi- ness activities, sometimes theThis statement is supported by Mr B, conservative approach makes itwho contended that: difficult for Bintang to compete We are very flexible in respond- with other insurance companies.
  15. 15. A. Chariri / Issues in Social and Environmental Accounting 1 (2009) 45-65 59 We know that we might be able rame ing gawe, mangayu ayuning to conduct business like other bawana” —be disinterested, work hard, companies, such as illegally re- perfect the world (Antlov 1994, p. 77). ducing the customer’s premi- ums, which result in getting cos- Obedience to regulations shows that tumers. But we do not want to Bintang wants to avoid unnecessary con- do that... flicts and respect those who issue the regulations. To quote Jost, et al. (2003,Such quotations showed that “the or- p.340), “conservative ideologies—likeganization and the management of work virtually all other belief systems—areinvolve moral matters and ethical dilem- adopted in part because they satisfymas from top to bottom from beginning some psychological needs”. Moreover,to end” (Watson 1998, p. 253). The rea- the case of Bintang shows that:son that organisational members of Bin-tang conduct ethical business can be ...accounting is intimately impli-related to a view by Blanchard and Peale cated in the construction of fa-(1988, p. 7) who wrote that: cilitation of the contexts in which it operates. It cannot be …ethical behaviour is related to extracted from its environment self-esteem...that people who like an individual organism from feel good about themselves have its habitat...Accounting as a so- what it takes to withstand out- cial institution is shaped by cul- side pressures and to do what is ture to present and explain cer- right rather than do what is tain phenomena concerning eco- merely expedient, popular, or nomic transactions. As a social lucrative... that a strong code of institution, accounting is inte- morality in any business is the grated into customs, values, first step toward its suc- norms, beliefs accepted in a so- cess...that ethical managers are ciety. Thus accounting cannot winning managers. be isolated and analysed as prac- tice that is free from culture.What has been practised in Bintang also The existence of accounting isillustrates that the company has tried to determined by culture, customs,judge the business environment to be norms, and institutionswell ordered by the values that Bintang (Hopwood, et al. 1994, p. 228;trusts, as Jost, et al. (2003) describe. original emphasis).This implies that Bintang obeys regula-tions to ensure that there is social order Based on such reasons, the case of Bin-and stability of society according to its tang also signifies that its organisationalvalues. This view is actually a reflection actors have constructed the company asof Javanese culture. Indeed, for Bintang, a part of a wider social community.maintenance of social harmony is the Thus, “individuals in both an organisa-most important thing in conducting busi- tion and a society should behave so at toness, including financial reporting prac- achieve forms of self-actualisation thattice. To achieve this Bintang has imple- leads to social harmony” (Legge 1998,mented the philosophy “sepi ing pamrih, p. 159).
  16. 16. 60 A. Chariri / Issues in Social and Environmental Accounting 1 (2009) 45-65The Financial reporting practice of Bin- To sum up, regardless of how beliefs,tang shows that quality financial report- values and norms are institutionalised ining is determined by an ethical culture. Bintang to shape individuals’ behaviour,For Bintang, it is not economic factors and to socially construct financial re-that drive quality financial reporting; porting practice, this study concludedrather it is a reality that is socially con- that the financial reporting practice ofstructed by actors in the organisation. Bintang is a socially dynamic process. It is a socially constructed reality involving an interplay betweenConclusion and Limitation individual, social values and organisations. Indeed, in the case ofThe case of Bintang shows that organ- Bintang, it can be seen that financialisational culture plays an important role reporting practice reflects the Javanesein shaping the behviour of organisational ideas on an ethical social relationship.members. The organisational culture of Financial reporting practice in BintangBintang is built on the bases of public shows that accounting is a social sci-accountability, conservatism and trans- ence. It is value laden.parency, and is able to shape the behav-iour of its actors from the top to lower Despite its rich and thick description oflevels to conduct ethical and transparent the case chosen for this study, it isbusiness practice. Through the adoption worthwhile noting a number of limita-of Javanese culture, organisational mem- tions. First, the findings of this study arebers of Bintang have behaved ethically constrained by a single company with aso as to maintain social harmony both focus on the insurance industry, and areamong organisational members, and be- also constrained by a relatively shorttween organisational members and its data collection period (six months), dur-institutional environment. ing which there were no new regulations or pressure during data collection thatThe case of Bintang also shows that might influence the company. Possibly,quality financial reporting practice is a more complete and comprehensivestrongly influenced by the organisational analysis of institutional, political, andculture of the company. It is true that cultural change is needed.regulations affect financial reportingpractice. However, compliance with Second, even though this study was un-regulations is determined by organisa- dertaken by prolonged engagement intional culture. Thus a company with an the organisational setting, and by using aethical culture will more likely be com- triangulation approach in collecting datamitted to compliance with regulation and interpreting research findings, thisand to quality financial reporting prac- study may have suffered from a subjec-tice. Taken-for-granted beliefs have tive bias, especially in interpreting datashaped the behaviour of Bintang organ- or facts. Meanings, symbols, and factsisational members and have driven the gathered and discussed in this studycompany to commit to ethical culture. were translated by the researcher with-This ethical culture has also shaped its out endorsement by an impartial thirdfinancial reporting practice. party. Thus, it is possible that meanings, symbols, and facts are misinterpreted
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