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Social Sciences & Humanities: Chaerul Djusman Djakman, Sylvia Veronica Siregar and Siti Nurwahyuningsih Harahap
Social Sciences & Humanities: Chaerul Djusman Djakman, Sylvia Veronica Siregar and Siti Nurwahyuningsih Harahap
Social Sciences & Humanities: Chaerul Djusman Djakman, Sylvia Veronica Siregar and Siti Nurwahyuningsih Harahap
ABSTRACT
The purpose of this study is to examine corporate governance (CG) disclosure, particularly
audit committee and internal audit disclosure, of listed firms in Indonesia. To the best of the
researcher’s knowledge, no previous studies have specifically examined the compliance
level of listed firms in Indonesia with prevailing CG regulations, specifically related to audit
committee and internal audit disclosures. We compared annual reports of 443 listed firms
between 2012 and 2013 based on the regulations that govern disclosures set by the
Indonesian Capital Market Authority. It was found that the level of disclosure 2012 and
2013 on CG, particularly with regards to audit committees and internal audits, was relatively
low. Specifically, the level of disclosure was only 39.5% and 43.9% in 2012 and 2013
respectively. The old regulation lacked detailed requirements, meaning that the level of
disclosure varied greatly across firms. The revised regulations announced in 2012 were
stricter and more detailed, meaning annual reports for 2013 were expected to have richer
information on the firms’ CG practices. However, the level of disclosure in 2013 increased
by only 4.4%. This result shows that the revised regulations did not automatically increase
the level of disclosure possibly due to the fact that enforcement was not yet in place. The
findings of this paper have implications for capital market regulators in particular the need
to enforce the regulations with the ultimate objective of ensuring full compliance with
mandatory disclosures.
1993; Botosan, 1997; Sengupta, 1998). firms (Yu, 2010). In Indonesia, for example,
Managers have an information advantage over the Capital Market and Financial Institutions
outsiders, about the firm’s past and future Supervisory Agency/Badan Pengawas
economic performances (Sengupta, 1998). Pasar Modal and Lembaga Keuangan
This information asymmetry creates agency (Bapepam-LK)1 (now the Financial Services
problems. Based on the agency theory, Authority/Otoritas Jasa Keuangan (OJK))
companies disclose information to mitigate released several regulations pertaining to
agency conflicts between shareholders and corporate governance. One example is
managers. Even though companies may Regulation No. X.K.6 on the Annual
voluntarily disclose information to outsiders, Reporting of Issuers or Public Companies.
there are mandatory disclosures required by Under this regulation, the annual report must
regulatory bodies. contain a brief description of the
Companies release information to the implementation of corporate governance in
market through a number of sources, the current period. Another regulation is
including annual reports, quarterly reports, Regulation No. IX.1.5 on Formation and
press releases, and websites. Although there Work Performance Guidelines of the Audit
are other means of releasing information, the Committee. Audit committees have
annual report is considered to be the major oversight responsibility over the financial
source of information for users (Botosan, reporting process, the audit process of
1997). Knutson (1992, p. 7), for example, external and internal auditors, and
states that, “at the top of every analyst’s list compliance with prevailing laws and
(of financial reports used by analysts) is the regulations. Regulation No. IX.I.7 also
annual report to shareholders. It is the major relates to corporate governance, regulating
reporting document and every other internal audit units within the corporations’
financial report is in some respect subsidiary organisational structures. In performing its
or supplementary to it.” The annual report roles, the internal audit unit works closely
should contain useful information that will with the audit committee.
allow readers to make the right decisions, as
well as make efficient use of scarce
resources (Akhtaruddin, 2005).
Corporate governance (CG) is considered 1Since 31 December 2012, the role of
Bapepam-LK, which is structurally under the
one of the important factors when making
supervision of the Ministry of Finance, has
investment decisions, and has generated much been transferred to the Financial Services
public interest. Concerns related to public Authorities/Otoritas Jasa Keuangan (OJK).
interest have motivated stock exchanges and The OJK was established by the Indonesian
Government to perform regulatory and
regulators in many countries to introduce supervisory duties regarding financial service
regulations that require governance-related activities in banking, capital markets, and non-
disclosures by listed banking financial industry sectors.
1740 Pertanika J. Soc. Sci. & Hum. 25 (4): 1739 - 1752 (2017)
Corporate Governance Disclosure in Indonesia
Pertanika J. Soc. Sci. & Hum. 25 (4): 1739 - 1752 (2017) 1741
Chaerul Djusman Djakman, Sylvia Veronica Siregar and Siti Nurwahyuningsih Harahap
1742 Pertanika J. Soc. Sci. & Hum. 25 (4): 1739 - 1752 (2017)
Corporate Governance Disclosure in Indonesia
Pertanika J. Soc. Sci. & Hum. 25 (4): 1739 - 1752 (2017) 1743
Chaerul Djusman Djakman, Sylvia Veronica Siregar and Siti Nurwahyuningsih Harahap
2. Regulation No. IX.I.7 regarding the with accessible annual reports. A summary
Formation of Internal Audits and of the sample selection process is provided
Guidelines on Internal Audit Charters, in Table 1.
issued for the first time in 2008 and
revised in 2012. Table 1
Sample selection
3. Regulation No. IX.1.5 regarding the
Formation and Work Performance Total public firms in 2013 468
Guidelines of the Audit Committee, Annual reports not available (20)
Firms newly listed in 2013 (5)
issued for the first time in 2004 and
Final Sample 443
revised in 2012.
Most of the checklist items (37 items) are Analysis based on checklist items, as
newly required under the revised regulations provided in Table 2, reveals that the 2012
published in 2012. The remaining checklist disclosure level of CG, audit committees,
items (11 items) are contained in the and internal audits is relatively low, 39.5%
previous versions of the regulations. Based of the required disclosure. Further analysis
on the types of disclosure, checklist items on the types of disclosure shows that the
can be classified into three main categories, level of internal audit disclosure, 31%, is
as follows: the lowest. The low level of internal audit
1. CG disclosures in general (3 items). disclosure may be explained by the fact
2. Audit committee disclosures (23 items). that the practice of internal audits is new
3. Internal audit disclosures (22 items). to most public firms. The requirement for
the formation of internal audits was
RESULTS AND DISCUSSION enacted only in 2008 after the release of
Regulation No. IX.I.7. Meanwhile, the
Up to 30 September 2013, there were 468
requirement for the formation of audit
firms listed on the Indonesian Stock
committees was enacted earlier, in 2004,
Exchange (IDX). Among these, five
after the release of Regulation No. IX.I.5.
companies were newly listed in 2013 and
Since the internal audit requirement is
therefore, did not yet issued annual
relatively new for most listed firms, the
reports. Twenty firms were excluded from
level of its disclosure is consequently still
the sample, as their annual reports are not
low. This finding of a relatively low level
available either on their websites or that of
of mandatory disclosures is consistent
the IDX. Following this exclusion, the
with previous studies (such as Akhtarudin,
final sample consisted of 443 public firms
2005; Devalle & Rizzato, 2012).
1744 Pertanika J. Soc. Sci. & Hum. 25 (4): 1739 - 1752 (2017)
Corporate Governance Disclosure in Indonesia
Detailed analysis based on the year of in the last column of Table 2 as well as in
regulation enactment shows that the level of Figure 1. The results show that on
disclosure for items under the 2012 revised average, there are increases in the level of
versions of regulations is lower than disclosure, even though it is only a slight
disclosure for items that were earlier increase of 4.4% (from 39.5% in 2012 to
required. This indicates that corporations 43.9% in 2013). Owing to the enactment
need time to implement the new regulations. of the 2012 revised regulations, which
Even though the new regulations had not yet require more detailed disclosure, we
been enforced in 2012, some new disclosure expected the level of compliance to have
items were reported in firms’ annual reports, increased, resulting in a higher percentage.
indicating certain voluntary disclosure The results show, however, that in 2013,
practices by some of the listed firms. when the revised regulations had already
To further examine the compliance come into effect, the overall disclosure
level of listed firms, we examine the 2013 level, as well as disclosure on audit
annual reports. The results are presented committees and internal audits, is still low.
Table 2
Disclosure level
The level of overall disclosure in 2013 is audit committee regulations having been
60.4% (an increase of 2.2% compared to enacted in earlier years, hence, most listed
2012); the audit committee disclosure level firms already have audit committees in
is 50.5% (an increase of 5.3%); and the level accordance with prevailing regulations,
of internal audit disclosure is 34.7% (an whereas the lower level of internal audit
increase of 3.7%). The increase in audit disclosure might be related to this being
committee disclosure is the highest the most recently enacted among the three
compared to levels of overall and internal regulations.
audit disclosure. This could be due to
Pertanika J. Soc. Sci. & Hum. 25 (4): 1739 - 1752 (2017) 1745
Chaerul Djusman Djakman, Sylvia Veronica Siregar and Siti Nurwahyuningsih Harahap
Disclosure Level
70.00%
58.20% 60.40%
60.00%
50.50%
50.00% 45.20% 43.90%
40.00% 34.70% 39.50%
31.00%
30.00%
20.00%
10.00%
0.00%
Overall CG Audit Committee Internal Audit Total Disclosure
2012 2013
1746 Pertanika J. Soc. Sci. & Hum. 25 (4): 1739 - 1752 (2017)
Corporate Governance Disclosure in Indonesia
Table 4
Overall CG disclosure
Even though it was not a requirement at the annual reports on corporate websites
end of 2012, some firms (54.2% in 2012) should be a common practice.
had uploaded their annual report to their The requirement to upload annual
websites. Listed firms are typically large reports to company websites was introduced
firms that have websites in order to in 2013. The percentage of listed firms that
communicate with various stakeholders, uploaded their annual reports to their
including investors that require financial websites in 2013 increased to 57.6%, an
information. Presenting annual reports on increase of 3.4% compared with 2012. This
corporate websites does not incur additional increase is relatively low and points to the
costs for these large firms; therefore, it is fact that many firms are still not uploading
expected that the voluntary presentation of their annual reports on their websites.
Table 5
Audit committee disclosure
Pertanika J. Soc. Sci. & Hum. 25 (4): 1739 - 1752 (2017) 1747
Chaerul Djusman Djakman, Sylvia Veronica Siregar and Siti Nurwahyuningsih Harahap
Table 5 (continue)
Analysis of the audit committee disclosure was a twofold increase in 2013 (15.9%),
level details, as presented in Table 5, the compliance level is still low. Based on
shows a high level of disclosure (more the compliance level in 2012, most firms
than 90%) for information pertaining: did not disclose the audit committee
names and number of audit committee charter on their websites because there
members; information demonstrating that was no requirement for it. However, after
the chair of the audit committee is also an the regulation was enacted in 2013, only
independent member of the board of 15.9% of listed firms complied with the
commissioners; and information that audit requirement to upload their audit
committee members are external parties. committee charter to their websites. This
However, only a small number of firms low level of compliance should encourage
(7.9%) disclose their audit committee an increase in OJK enforcement.
charter on their corporate website. According to Regulation No. IX.1.5
The audit committee disclosure items released in 2004, public firms are required
show an increase in 2013 compared with to have an audit committee and an audit
2012. Nevertheless, this increase is also committee charter. Considering that this
relatively small. Consistent with the findings regulation has active in force for almost
on instances of uploading annual reports to 10 years, all public firms should have met
websites, only 7.9% of listed firms had this requirement. The results in Table 5,
uploaded their audit committee charter to however, show that only 35.4% of firms in
their websites in 2012. Even though there 2012 and 42.7% of firms in 2013 had
1748 Pertanika J. Soc. Sci. & Hum. 25 (4): 1739 - 1752 (2017)
Corporate Governance Disclosure in Indonesia
an audit committee charter and only about brief description of the audit committee’s
one third of them (15.9%/42.7%) uploaded activities in the current year, as outlined in
their charter to websites. The whistleblower the audit committee charter. In 2012, the
system is another item that has a very low level of compliance is only 29.3%, which
level of disclosure as it involves significant increased to 53% in 2013. This item is
cost and complex arrangements. Therefore, mandatory in the revised regulation. The
it is expected that only a small number of results show that for certain items,
firms can afford it. mandatory requirements may increase the
One of the items that has the highest level of disclosure.
increase in the level of disclosure is a
Table 6
Internal audit disclosure
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Chaerul Djusman Djakman, Sylvia Veronica Siregar and Siti Nurwahyuningsih Harahap
Table 6 (continue)
In general, the level of disclosure of each after the release of the revised regulations
component of audit committee and internal in 2012, which contained more detailed
audit disclosure shows a relative increase requirements.
(see Table 5 and Table 6). Audit committee Details of internal audit disclosure items
disclosure shows an increase of 5.3%, from in 2012 and 2013, as presented in Table 6,
45.2% in 2012 to 50.5% in 2013, whereas indicate that the level of disclosure is not
internal audit disclosure shows an increase high for all items, which are below 62%.
of 3.7%, from 31% to 34.7% in 2012 and The highest disclosures are for the: internal
2013 respectively. The increase, however, is audit charter (50% in 2012 and 50.8% in
still small. It was initially expected that 2013); name of the internal auditor (55% in
following the introduction of the 2012 2012 and 61.8% in 2013); and the internal
regulations, the level of compliance would audit head who is responsible to the CEO
increase significantly in 2013. (56% in 2012 and 58.5% in 2013). This
The level of internal audit disclosure as evidence is quite similar to evidence arising
presented in Table 6 is also relatively low for from overall disclosure and audit committee
all disclosure items (lower than 57%). The disclosure. The item with the highest
highest disclosure levels are for: internal audit increase is duties and responsibilities of the
charter (50%); internal auditor name (56%); internal audit unit as outlined in the internal
and the reporting line of the internal audit to audit charter, which was 33% in 2012, and
the CEO (55%). This relatively low disclosure increased to 46.2% in 2013.
level might be caused by internal audit
regulations that do not require much CONCLUSION
information regarding internal audit activity. It This study had analysed the corporate
was expected that the level of internal audit governance (CG) practices of public firms
disclosure would increase in Indonesia, particularly audit committee
1750 Pertanika J. Soc. Sci. & Hum. 25 (4): 1739 - 1752 (2017)
Corporate Governance Disclosure in Indonesia
and internal audit practices, and how these OJK, particularly the mandatory
practices meet the prevailing regulations of disclosure requirements. The annual report
the Indonesian Capital Market Authority is one of the main information sources for
(OJK). Analysis was conducted based on investors when making investment
secondary data obtained from annual decisions. Therefore, it should contain full
reports, to measure the current practices of disclosure of CG practices.
audit committees and internal audits. This study has several limitations. Only
Based on the content analysis of annual CG disclosure in annual reports was
reports, we found that the level of CG examined and not disclosures made by
disclosure (particularly disclosure related to companies through other mediums, such as
audit committees and internal audits) in through website. In order to get a more
2012 and 2013 was relatively low: only comprehensive picture, in-depth interviews
39.5% in 2012 and 43.9% in 2013. The should be conducted to gather additional
previous version of regulations lacked information on why firms disclose or do not
detailed requirements, resulting in the level disclose certain items. This study also did
of disclosure varying greatly across firms. In not examine the impact of disclosures on
2012, the OJK published revised versions of investors, creditors, and other stakeholders.
these regulations, which contained more
detailed requirements. Thus, it was expected ACKNOWLEDGEMENT
the 2013 annual reports would contain more The authors gratefully acknowledge the
detailed and higher levels of disclosure on financial support from the DIKTI
firms’ CG practice. However, results showed (Directorate General of Higher Education,
that the increase in the level of disclosure in Ministry of Research, Technology and
2013 was only 4.4% indicating that the Higher Education of the Republic of
detailed requirements in the revised Indonesia) research grant.
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