INTRODUCTION THE INFLUENCE OF THE LEVEL OF CORPORATE SOCIAL RESPONSIBILITY DISCLOSURES TO EARNINGS QUALITY.

CHAPTER I
INTRODUCTION

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1.1 Background of Research
Unitted Nations Industrial
Industr
trial Development
D ve
De
v lopm
p en
ent Organization
on defines Corporate
United
Responsibilit
ityy (CSR)
(CS
(C
SR) as

a a management
manag
agem
men
entt concept
conc
co
ncept whereby
whereb
by companies
Social Responsibility
inte
tegrate so
soci
cial
al and env
vir
ironmental concerns in ttheir
heir bus
sin

ines
esss operations
operattio
ions and
integrate
social
environmental
business
interaact
c io
ions
ns withh stakeholders. Based on Act No. 40 of 22007
007 about
00
ab
boutt Corporation,
Corporat
Co
ation,
interactions

Soci
cial
al aand
nd E
nvironmental Responsibility is the commitment of the Company
Com
ompany tto
o
Social
Environmental
part
pa
rtic
i ipat
ate in the sustainable economic development to improve thee qua
ali
lity
y ooff lifee
participate
quality

an
nd en
nvironmental beneficial for the Company itself, the local com
mmuni
nitty and
nd
and
environmental
community
y in general. Implementation of CSR in Indonesia is ma
andatoryy by
y
society
mandatory
gove
vern
rnment on Act No. 40 of 2007 about Corpo
pora
ration, Governmentt R
egulatio

ionn
government
Corporation,
Regulation
Soci
So
c all and
and Environmental Responsibilit
ty ooff
No. 47 of 2012 concerning Social
Responsibility
Corp
Co
rpor
o ation, and the latest is on Decision of the Chairman of Capital Ma
Mark
ket aand
nd
Corporation,
Market

Fina
Fi
nanccia
iall In
Inst
stit
itut
utio
ionn Supervisory
Supe
Su
perv
rvis
isor
oryy Bo
Body
dy ((BAPEPAM-LK)
BAPE
BA
PEPA

PAMM-LK
LK)) No
No.K
KEP-43
431/B
/BL/
L/22012
Financial
Institution
No.KEP-431/BL/2012
conccer
erni
ning
ng tthe
he S
ubmi
ub
mission of Ann
nnual Report
Repoort by Listed C

ompany
om
ny.
concerning
Submission
Annual
Company.
mentation of CSR in Indonesia. One of
Some issues arise aboutt the implem
implementation
n CSR’ss disclosure. It is proved by news on
it is the issue of transparency oon
ch sta
tated that “Ketua Pansus CSR berharap
RiauSatu.com on April 2015 which
stated
Transparan ” The news talked about the
Pemerintah dan Perusahaan Transparan.”
transparency of CSR’s budget and the company’s CSR activities. This issue in
line with Kim et al., (2012) statement that CSR is an issue of growing interest, and

1

2

the reporting of socially responsible activity is becoming more prevalent as
investors, customers, and other stakeholders demand greater transparency about
all aspects of business. When company becomes not transparent in their report, it
will cause information asymmetry
asymm
met
etrry between ccompany
ompa
om
p ny and the users of their report.
Companyy generally has responsibility to fu
fulfill not only their
shareholder
shareholders’
rs’ interest but also sstakeholders’.

t ke
ta
keho
h ld
lder
ers’
s’. Co
C
Corplaw
rplaw (2013) ddefine
rp
efine stakeholders
ef
as any
ny person or group
up which
whi
hich can affect or be affec
cted
ed by

by thee actions of a business
affected
an it is including
and
in
ncl
c ud
udin
i g employees,
em
mpl
ployees, customers, suppliers, creditors
cre
reditors and
and even
even the
th
he wider
comm
mun
unit
ity an
nd competitors. Ekawati (2012) stated that CS
SR is aan
n ac
acti
tivity tthat
hat
community
and
CSR
activity
sh
how
ows the company’s
company’s concern to their stakeholders and as a form of
o res
espo
pons
nsib
i ilitty
shows
responsibility
to the
the activities
activities of the company in term of social, economic environmental.
enviroonmeent
ntal
al. All
inform
mation of CSR is reported and disclosed by company in their annual
annnual reportt ass
information
aal
ready regulated by government. The information provided is hoped m
ay pr
provid
de
already
may
provide
consid
deration forr st
stak
akeholders
h
iin
n makingg ddecisions.
eciisions. CS
CSR
R disclosuree conside
ere
redd
consideration
stakeholders
considered
in
increasingly
pres
esen
entt due to the shift in the concept off pprofit
rofi
ro
fit
taking a role in the present
wh
whic
ichh be
bega
gann to lead to the concept of the triple bottom line (profit,
(pr
p of
ofit
it,, planet,
plaanet
pl
et, people)
peop
pe
ople)
which
began
in
init
itia
iate
t d by Johnn El
Elki
kinggto
tonn and in
incr
crea
easi
singly
y iinto
nto the
nt
the ma
m
instream ooff bu
business
initiated
Elkington
increasingly
mainstream
ethics (P
(Pal
algu
guna
na P
utra, 2013).
(Palguna
Putra,
As already said before, iimplementation
mplementaation of CSR in Indonesia regulated by
government, so the disclosure off CSR also
also mandatory for all listed company.
Unfortunately, the regulations did nnot
o clearly explain about what are social and
ot
environmental responsibility’s items that should be disclosed by a company. Even,
the latest regulation in Decision of the Chairman of Capital Market and Financial
Institution Supervisory Body (BAPEPAM-LK) No.KEP-431/BL/2012 only

3

requiring companies to disclose its CSR activities that cover policies, types of
program and cost incurred in four aspects such as environmental; employment
practices, health, and work safety; social and community development; and
product responsibility, still, the
he items
items are not
ot too
too specifics. Thus, the activity and
the disclosure of CSR
SR in Indonesia is still based on comp
company’s
mpan
a y’s decision (voluntary
disclosures)
disclosures).
). V
Voluntary
oluntary disclosu
disclosures
ure
r s al
alsoo m
mean
ean th
ea
that company dis
disclose
iscl
c ose beyond what
is mandatory.
man
nda
datory.
Co
Comp
mpany should
shhou
ould balance in fulfilling the iinterest
nterest off shareholders’
nt
sha
hare
r holder
ers’ and
Company
also sstakeholders’.
take
ta
kehhold
der
ers’. It is a good choice for a company to shif
iftt their
theiir concept
conc
co
ncept fr
from
shift
pr
rof
ofit concept
conce
cept to triple bottom line concept. But there is one thing
ng tha
at sh
shou
ould bbee
profit
that
should
re
real
aliize bby
y company that Act No. 40 of 2007 chapter 74 clause 2 m
entiion
oned
ed that
realize
mentioned
CSR is
is the obligation of the company which are budgeted and calculated
ca
ass
eex
pensses of the company. When expense increase it will affect compa
any’s pprofit.
rofitt.
expenses
company’s
Meanw
while, Milto
on Friedman
Friiedman (1970)
Fr
(19
1970) in hiss shareholders
sharehold
derrs th
theory said th
that the ssole
olee
ol
Meanwhile,
Milton
rresponsibility
esponsibility of business is to increase
increeas
asee profits. Corplaw (2013) also addin
ng th
tha
at
adding
that
ba
base
sedd on tthe
he ppremise
remise that managements are hired as the age
g nt off th
thee sh
shar
areh
ehol
oldders
based
agent
shareholders
to run
run the company
compa
pany
ny for
for their
the
heir
ir benefit,
benef
efit
it, and
and therefore
theref
efor
o e they
they are
are legally and
and morally
morally
obligate
t d to sserve
erve their interest. T
er
h s is contradicting
hi
coontradicting with the
the stakeholder
stak
st
akeh
eholder theory
obligated
This
which state that the company is not the onl
ly entity operates for his own benefit,
only
and to gain support from stakeholders
stakehholders companies
co
ompanies must provide benefits to its
stakeholders. Stakeholder theory suggests
sugggest
sts the purpose of the firm is to serve
bbroader
d societal
i t l iinterests
t
t beyond
b
d economic
i value
l
ti
ffor shareholders
h h ld
creation
alone. So company should handle this problem and must ensure that the
fulfillment of the interest not running unilaterally.

4

Both CSR and profit (earnings) information are represented in annual
report and financial statements of the company. Investor, creditor and
stakeholders use this information as based information for their decision-making
process. Therefore, the quality
quallit
ityy of the company’s
com
mpa
pany’s annual report and financial
statement plays an iimportant
mportant role in the communication
n pprocess
rocess for the transfer of
information fr
from the companyy too us
user
users
rs of aannual
nnnual report and ffinancial
i ancial statement
in
becaus
se it will affectt ttheir
heeir
i ddecision-making
ecision-making proce
cess
ss.
because
process.
All information
All
info
in
f rmat
atio
ion in annual report or financ
ncial stat
atem
emen
ents sho
oul
u d be
financial
statements
should
presen
ente
tedd tran
nsparently to the users. Yeh et al., (2014) sstated
t ted th
ta
that
at m
anag
gers
presented
transparently
managers
us
sua
ually have
haave better or timelier information than investors. Thus, ma
ana
nage
gers
rs have
hav
ve
usually
managers
in
ince
centiv
ves to withhold private information for their self-interest an
nd too practice
prac
pr
a tice
incentives
and
diversi
ion of resources because of conflicts of interest principles and aagents.
gents. Th
hiss
diversion
This
wi
w
ll lead
leead to information asymmetry between company and the users of an
annua
al
will
annual
reportt or
or financia
al st
stat
atement. W
h n asymme
he
metr
try is high,
hig
i h, stakeholders
sta
takeholders ddo
o not have
hav
avee
financial
statement.
When
asymmetry
ssu
fficient resources or access to re
rele
levant information to monitor mana
nage
ger’
r’s
sufficient
relevant
manager’s
ac
acti
tions.
s It
It leads
le
to creation of opportunities for earnings
earning
gs manage
geme
ment practices
pra
ract
ctic
ices
actions.
management
(R
(Ric
icha
hardson 19988 in
in Sanjaya
Sanj
Sa
njay
ayaa and Yo
Youn
ung.
g. 22012).
012)).
(Richardson
Young.
Information asymmetry is
is a condition
con
ondition describing that managers have
access to information on the com
mpany’s pros
spects which are not owned by outside
company’s
prospects
parties (Sanjaya and Young, 2012
12). Lan
ng and Lundholm (1996) in Yeh et al.,
2012).
Lang
(2014), find that companies are more
re llikely
ikely to make voluntary disclosures when
information asymmetry between the company and investors is severe. Yeh et al.,
(2014) adding that increased voluntary disclosure can effectively reduce
information asymmetries among management and stakeholders. Sanjaya and

5

Young (2012) also stated that the increasing on presentation of voluntary
disclosure, information asymmetry can be reduced so that earnings management
can be prevented. When the practices of earnings management prevented it will
affect to the increasing of earn
nin
inggs quality.
earnings
Ball and Shivakumar
Shivakumar (2005) in Yeh et al., (2014)
(2201
014) stated thar earnings
quality refers
refe
ferrs to the level of ffaithful
aith
thfu
ful representation
repr
re
preesen
entaation of the features
feaatu
tures of a firm’s
fundam
amental ea
arningss processes
pro
roccesses that are relevant tto
o sp
specificc decisionn making by
fundamental
earnings
in
nvestors,, creditors,
cre
redi
dittors, m
anagers, and all other parties
partie
iess contracting
contraact
ctin
ingg with a firm.
investors,
managers,
Qual
lit
ityy of earni
nings is important because investors rely on ear
arni
n ngss in
info
form
rmatio
on to
Quality
earnings
earnings
information
ev
val
alua
u te inf
nformation risks related to a firm (Francis et al. 2004; N
g 20
011 in
in Yeh
Y h aatt
Ye
evaluate
information
Ng
2011
al. 22014).
al.,
0144). Higher quality of earnings indicating that information that
at usee by
by users
of ann
nual report and financial statements are relevant and reliable as
as the bas
sed
annual
based
in
inform
mation in decision-making process.
information
Manyy researches
res
esea
earc
rche
hess al
alre
r ad
adyy test aabout
bout
ut tthe
he iinfluence
nflu
nf
luen
ence
ce of disclosuree tto
o
already
ea
earnings
management or disclosure to earnings quality, and they have the
he same
sam
ame
re
resu
sult
ltss which
whhic
ichh is disclosure
dis
iscl
clos
osur
uree ne
nega
g tively iinfluence
nflu
nf
luen
ence
ce eearnings
arni
ar
ning
ngss m
anage
geme
ment
nt and
results
negatively
management
po
posi
siti
tive
vely
ly influence
influ
luen
ence
ce earnings
ear
arni
ning
ngss qu
qquality
alitty (Z
(Zhou an
andd Lo
Lobo
bo, 20
2001
01;; Yehh et aal.,
l., 2014;
l.
positively
Lobo,
2001;
Sanjaya and Young, 2012; Blanco
Blancco et al., 2014). Many researchers also research
about the link between CSR and earnings
earniings quality or CSR and earnings
management, and the results is m
ix (Kim
m et al., 2012; Ekawati, 2012; Isyanto,
mix
2014; Hong and Andersen, 2011; Chih
Chi
h h et al., 2008; Arief, 2014; Palguna Putra,
2013).
Based on those arguments, writer attracted to test the influence of level of
CSR disclosure to earnings quality. This research will use discretionary accrual of

6

earnings management as the proxy of earnings quality and also will use
companies in mining sector that listed in Indonesia stock exchange year 20122014 as the sample of research.
1.2 Research Question
Based on background that explained above, thus
thus,
s, the research question
can be for
rmulated ass fol
ollo
low:
w
formulated
follow:
Does
es the level
el of
of corporate
corporatte so
ciiall responsib
ibil
ilit
ityy disclosures
disclosure
ress influence
i fluencee earnings
in
social
responsibility
qquality?
ualitty?
1.3
3 Objective
Obje
Ob
j ctiv
ive of Research
The objective of this research is to give empirical evidencee the influence
inf
nflu
luence
of leve
el of corporate social responsibility disclosure to earningss quality oon
n
level
IIn
doneesian mining companies that listed on IDX year 2012-2014
Indonesian
1.4 Contribution
on of
of Research
Th research is expected to give contri
This
ribbution as follow:
contribution
11.. As academic
aca
cade
demi
micc pu
purp
pos
ose,
e, tthis
hiss research
hi
r seear
re
arch
ch iiss to test
tes
estt the
the influence
infl
in
flue
uenc
ncee of level
lev
eveel of
purpose,
corp
co
rpor
orat
atee so
oci
cial
al responsib
ibility disclo
osure on earnings
eaarn
rningss quality
qua
uali
lity
ty in
in Indonesia
In
corporate
social
responsibility
disclosure
especially in mining secto
or.
sector.
2. As managerial purposes, tthis
his researc
ch is expected to help users of financial
research
statements to more thoroughly
thoroughl
h y understand
undderstand the performance of the company
as a basis for making decision
ns and also is expected to provide input to the
decisions
regulator, in here government, as a basis for the creation of a new policy
relating to CSR and earnings management practices in Indonesia.

7

1.5 Systematic of Writing
Research was prepared by systematic as the following:
CHAPTER I: INTRODUCTION
Chapter I contain an int
ntrroduction in the preparation ooff the research, which consist
introduction
of background,
d, formulation of
of the problem, research ob
oobjectives,
jectives, research
contributi
tion, and systematics
syst
stem
mat
atic
i s off w
riti
ri
ting
ng.
contribution,
writing.
CH
HAPTER
R
CHAPTER

II:
II:

THEO
ORE
RET
TICAL
THEORETICAL

BACKGR
GROU
OUND
BACKGROUND

AND
AND

HYPOT
OTHESIS
HYPOTHESIS

DEVE
VELO
LOPM
PMEN
NT
DEVELOPMENT
Ch
hapter II contains literature review outlines the theoretical bas
asis and
and pprevious
reviouus
Chapter
basis
re
rese
seaarch
h to be used as a reference for data analysis study in thi
is stu
tudy
dy. This
research
this
study.
chapterr also includes a conceptual framework for hypothesis develop
pment thatt iss
development
bbe
ing proposed in this research.
being
CHAP
PTER III: R
ESE
ES
EARCH METHODOLOGY
METH
ME
T ODOL
LOG
OGY
CHAPTER
RESEARCH
Ch
Chapter
III includes an operationa
al definition of each variable an
nd ho
how
operational
and
me
meas
asur
urem
ement,
t, data
data
t co
coll
llec
ecti
tion
on m
ethods,, po
popu
pula
lati
tion
on and
nd sampl
ple us
used
ed iin
n this
measurement,
collection
methods,
population
sample
re
ese
sear
arch
ch,, as well
wel
elll as the
the sampling
sam
mpl
pling techniques
tecchniqu
te
quees criteria
cri
rite
teri
r a used,
used
us
ed, and
and da
data
ta m
ethod
research,
method
analysis.
CHAPTER IV: DATA ANALYS
SIS AND D
ISCUSSION
ANALYSIS
DISCUSSION
Chapter IV contains the results of processing
proocessing and data analysis, whether the
results is able to meet and prove the proposed hypothesis or not. Further
discussion on the result of statistical analysis will be included as well.
CHAPTER V: CONCLUSION

8

Chapter V contains the final conclusion to answer research questions. Disclosing
the limitations of the study as well as suggestions given for further research will
be included also.