Background of Research Background of Re e

1 CHAPTER I INTRODUCTION

1.1 Background of Research

United Nations Industrial Development Organization defines Corporate Social Responsibility CSR as a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with stakeholders. Based on Act No. 40 of 2007 about Corporation, Social and Environmental Responsibility is the commitment of the Company to participate in the sustainable economic development to improve the quality of life and environmental beneficial for the Company itself, the local community and society in general. Implementation of CSR in Indonesia is mandatory by government on Act No. 40 of 2007 about Corporation, Government Regulation No. 47 of 2012 concerning Social and Environmental Responsibility of Corporation, and the latest is on Decision of the Chairman of Capital Market and Financial Institution Supervisory Body BAPEPAM-LK No.KEP-431BL2012 concerning the Submission of Annual Report by Listed Company. Some issues arise about the implementation of CSR in Indonesia. One of it is the issue of transparency on CSR’s disclosure. It is proved by news on RiauSatu.com on April 2015 which stated that “Ketua Pansus CSR berharap Pemerintah dan Perusahaan Transparan.” The news talked about the 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

1.1 Background of Re e

se search Unit t ed ed Nations Industr tr ial De D ve v lopm p en en t Organization on defines Corporate Social R Responsibilit ity y C C S SR as a a manag ag em m en en t t co co nc nc ept whereb by y companies inte tegrate so so ci ci al al and env v ir ir on mental concern s in in t t heir bus s in in es es s s operat t io io ns and intera a ct c io io ns ns with h stak eh olders. Based on Act No. 40 of 2 2 00 00 7 ab bo out t Co Co rporat ation, Soci ci al al a a nd E E nv ironment al Responsib il it y is the c om mitment of of the C C om om pany t t o pa pa rt rtic i ipat at e in the sustainable e conomi c develo pm en t to improve t he e qua a li li ty y o o f f life e an n d d en n v vi ronmenta l beneficial for the C om pany itself, t he l ocal c om mmu ni ni t ty and nd society y in general. Impl emen ta tion of CS R in I ndonesia is ma a ndatory y by y gove vern rn ment on Act No. 40 40 of 2007 about Corpo po ra ra tion , Governme nt t R R e egulatio io n n No. 47 of 2012 concerning So Soci c al l a and Environmental Responsibilit t y y o of Co Co rp rpor o ation, and the latest is on Decision of the Chairman of Capital Ma Mark k et et a a n nd Fi Fina nanc c ia ia l l In In st st it it ut ut io ion n Su Su pe pe rv rv is is or or y y Bo Body dy BA BAPE PE PA PA M- M- LK LK No No .K K EP EP 4 -4 3 31B BL L 2 2012 conc c er er ni ning ng t t he he S Sub ub mi mission of Ann nnual Repo o rt rt by Listed C C om om pa ny ny. Some issues arise about t the implem mentation of CSR in Indonesia. One of it is the issue of transparency o on CSR’s s disclosure. It is proved by news on RiauSatu.com on April 2015 which ch sta tated that “Ketua Pansus CSR berharap Pemerintah dan Perusahaan Transparan ” The news talked about the 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 between company and the users of their report. Company generally has responsibility to fulfill not only their shareholders’ interest but also stakeholders’. Corplaw 2013 define stakeholders as any person or group which can affect or be affected by the actions of a business and it is including employees, customers, suppliers, creditors and even the wider community and competitors. Ekawati 2012 stated that CSR is an activity that shows the company’s concern to their stakeholders and as a form of responsibility to the activities of the company in term of social, economic environmental. All information of CSR is reported and disclosed by company in their annual report as already regulated by government. The information provided is hoped may provide consideration for stakeholders in making decisions. CSR disclosure considered increasingly taking a role in the present due to the shift in the concept of profit which began to lead to the concept of the triple bottom line profit, planet, people initiated by John Elkington and increasingly into the mainstream of business ethics Palguna Putra, 2013. As already said before, implementation of CSR in Indonesia regulated by government, so the disclosure of CSR also mandatory for all listed company. Unfortunately, the regulations did not clearly explain about what are social and 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-431BL2012 only will cause information asymm m et et r ry b etween c c om om pa p ny and the users of their report. Company y generally has responsibility to fu fu lfill not only their shareholder r s’ s’ interest but also s s ta t ke ke ho h ld ld er er s’ s’ . Co C rp rp law 2013 d def ef ine stakeholders as any ny person or or group up w w hi hi ch can affect or be affe c cted ed b b y the e actions of of a business an an d it is in n cl c ud ud in i g em m pl pl oy ees, customers, suppliers, c c re re ditors a a nd nd e e ven th h e e wider comm mun un it it y an n d d comp et itors. Ekawa ti 2012 stated t hat CS S R R is a an n ac ac ti ti vity t t hat sh h ow ow s the c comp any’s conc er n to their s takeholder s an d as a form of o res es po po ns ns ib i ilit t y y to to t t h he a a c ct iv it ie s of the compa ny in te rm of so ci al, economic e nv ir o onme e nt nt al al. All inform m at ion of CSR is re ported and d iscl os ed b y comp an y in their a nn n u ual report t a s s al a read y regulated by governm ent. The informatio n provided is hoped m may pr provid d e consid d e er ation fo r r st st ak ak h eholders i i n n making g d d e ec i isions. CS CS R R disclosu re e conside e re re d d in in creasingly taking a role in the pres es en en t t due to the shift in the concept of f p p ro ro fi fit wh whic ic h h be be ga ga n n to lead to the concept of the triple bottom line pr p of of it it , , pl pl a anet et , pe pe op op le in in it itia iate t d by John n El Elki king g to to n n and in incr cr ea easi singly y i i nt nt o th th e e ma m instream o o f f bu bu siness ethics P P al al gu gu na na P Putra, 2013. As already said before, i implementa ation of CSR in Indonesia regulated by government, so the disclosure of f CSR a a l lso mandatory for all listed company. Unfortunately, the regulations did n n ot o c learly explain about what are social and 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 items are not too specifics. Thus, the activity and the disclosure of CSR in Indonesia is still based on company’s decision voluntary disclosures. Voluntary disclosures also mean that company disclose beyond what is mandatory. Company should balance in fulfilling the interest of shareholders’ and also stakeholders’. It is a good choice for a company to shift their concept from profit concept to triple bottom line concept. But there is one thing that should be realize by company that Act No. 40 of 2007 chapter 74 clause 2 mentioned that CSR is the obligation of the company which are budgeted and calculated as expenses of the company. When expense increase it will affect company’s profit. Meanwhile, Milton Friedman 1970 in his shareholders theory said that the sole responsibility of business is to increase profits. Corplaw 2013 also adding that based on the premise that managements are hired as the agent of the shareholders to run the company for their benefit, and therefore they are legally and morally obligated to serve their interest. This is contradicting with the stakeholder theory which state that the company is not the only entity operates for his own benefit, and to gain support from stakeholders companies must provide benefits to its stakeholders. Stakeholder theory suggests the purpose of the firm is to serve broader societal interests beyond economic value creation for shareholders alone. So company should handle this problem and must ensure that the fulfillment of the interest not running unilaterally. product responsibility, still, the he i i t tems are n ot ot t t oo specifics. Thus, the activity and the disclosure of CSR SR i n Indonesia is still based on comp mpan a y’s decision voluntary disclosures . . V Voluntary disclosu u re r s s al al so o m m ea ea n th th at company dis iscl c ose beyond what is man n da datory. Co Co mp mp any sh h ou ould balance in fulfilling the i i nt nt erest of f s sha ha re r holder ers’ and also s sta take ke h hold d er er s’ . It is a good choi ce for a company to sh if ift t thei i r r co co nc nc ept fr from pr r of of it conce ce pt to triple bot to m line c on cept. But th er e is one t hi ng ng tha a t t sh shou ou ld b b e e re re al ali ize b by c om pany that Act No . 40 of 2007 cha pter 74 clause 2 m menti i on on ed ed that CSR i is the obligat ion of the com pa ny whi ch are b ud geted and ca calculated a s s ex e pens s es of the company. Wh en expense i ncreas e it will affect com pa any’s p profi t t. Mean w wh il e, Mil to o n n Fr Fr i iedman 19 19 70 in his s s s h harehold d er r s s th th eo ry said th th at the s s ol ol e e r responsibility of business is to incre eas ase e profits. Corplaw 2013 also addin n g g th th a at ba base se d d on on t t he he p p remise that managements are hired as the age g nt of f th th e e sh shar ar eh ehol old ders to to r r un un the compa pa ny ny f f o or the he ir ir benef efit it , an and d theref ef or o e th th ey ey a a re legally a a nd nd m morally obligate t d d to to s s er erve their interest. T T hi h s is c o ontradicting with th th e e st st ak ak eh eholder theory which state that the company is not the onl ly entity operates for his own benefit, and to gain support from stakeh holders co ompanies must provide benefits to its stakeholders. Stakeholder theory sug ggest sts the purpose of the firm is to serve b d i t l i t t b d i l ti f h h ld 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 of the company’s annual report and financial statement plays an important role in the communication process for the transfer of information from the company to users of annual report and financial statement because it will affect their decision-making process. All information in annual report or financial statements should be presented transparently to the users. Yeh et al., 2014 stated that managers usually have better or timelier information than investors. Thus, managers have incentives to withhold private information for their self-interest and to practice diversion of resources because of conflicts of interest principles and agents. This will lead to information asymmetry between company and the users of annual report or financial statement. When asymmetry is high, stakeholders do not have sufficient resources or access to relevant information to monitor manager’s actions. It leads to creation of opportunities for earnings management practices Richardson 1998 in Sanjaya and Young. 2012. Information asymmetry is a condition describing that managers have access to information on the company’s prospects which are not owned by outside parties Sanjaya and Young, 2012. Lang and Lundholm 1996 in Yeh et al., 2014, find that companies are more likely 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 process. Therefore, the qual l it it y y of the com mpa pa ny’s annual report and financial statement plays an i i m mportant role in the communication n p p rocess for the transfer of information fr from the company y to o us us er r s s of of a a nn n ual report and f f in i ancial statement becaus s e e it will affect t t the e ir i d d ecision-making proce ce ss ss . Al All l in info f rmat at io io n in annual re port or fi na nc nc ial stat at em emen en ts sho oul u d be presen ente ted d tran n s sp aren tl y to the users . Yeh et al., 2014 s s ta t ted th th at at m manag gers us s ua ua lly ha a v ve better or tim el ier inform at ion than inv estors. Thus, ma a na nage gers rs hav v e e in ince centiv v e es t o withhold priva te infor ma tion for their self-intere st a n nd to o pr prac a tice diversi io n of resources b ec ause of conf li ct s of inter es t pr in ciples and a a gents. Th hi s s wi w ll le ea d to information asy mmetry between c om pany and the use r s of an annua al report t o o r financ ia a l l st st at atement. W W he h n asymme me tr try is hig i h h, s s ta ta keholder s d do not h h av ave e su s fficient resources or access to re re le le vant information to monitor mana nage ger’ r’ s ac ac ti ti ons. s I I t t le le ads to creation of opportunities for earning g s manage ge me ment p pra ra ct ctic ices R Ric ic ha ha rdson 1998 8 i i n n Sa Sa nj njay ay a a and Yo Yo un un g. g. 2 2012 . . Information asymmetry i is a con ondition describing that managers have access to information on the com mpany’s pros spects which are not owned by outside parties Sanjaya and Young, 2012 12. Lan n g g and Lundholm 1996 in Yeh et al., 2014, find that companies are more re l l i ikely to make voluntary disclosures when 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 earnings quality. Ball and Shivakumar 2005 in Yeh et al., 2014 stated thar earnings quality refers to the level of faithful representation of the features of a firm’s fundamental earnings processes that are relevant to specific decision making by investors, creditors, managers, and all other parties contracting with a firm. Quality of earnings is important because investors rely on earnings information to evaluate information risks related to a firm Francis et al. 2004; Ng 2011 in Yeh at al., 2014. Higher quality of earnings indicating that information that use by users of annual report and financial statements are relevant and reliable as the based information in decision-making process. Many researches already test about the influence of disclosure to earnings management or disclosure to earnings quality, and they have the same results which is disclosure negatively influence earnings management and positively influence earnings quality Zhou and Lobo, 2001; Yeh et al., 2014; Sanjaya and Young, 2012; Blanco et al., 2014. Many researchers also research about the link between CSR and earnings quality or CSR and earnings management, and the results is mix Kim et al., 2012; Ekawati, 2012; Isyanto, 2014; Hong and Andersen, 2011; Chih 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 affect to the increasing of earn n in in g gs quality. Ball and S S h hivakumar 2005 in Yeh et al., 2 2 01 01 4 stated thar earnings quality refe fe r rs to the level of f fa aith th fu fu l re re pr pr e esen en ta a t t ion of the fea a tu tu res of a firm’s fundam amental ea a rnings s p p ro ro c cesses that are relevant t to o sp sp ecific c decision n making by in n vestors, , c cre re di dit tors, m ma nagers, and al l other pa rt ie ie s s contra act ctin in g g with a a firm. Qual l it it y y of of earni ni ng s is i mp ortant becau se investors rel y on e ar ar ni n ng s s in in fo form rmatio o n n to ev v al al ua u te inf nf or mation risks r elated to a fi rm Franci s et al. 2004; N N g g 20 11 11 i in n Ye Y h a at al al ., . 2 2014 4 . Higher quality of ear nings in dicating that informatio n th at at use e b b y y users of ann n u ua l report and f inancial sta teme nt s ar e relevant a nd reliable a as the bas s ed ed in in form m at ion in decision-maki ng process. Ma ny y r res es ea ea rc rc he he s s al al re r ad ady y test a a b bout ut t t he he i i nf nf lu lu en en ce ce of disclosure e t to o ea earnings management or disclosure to to earnings quality, and they have the he s sam am e re re su sult lt s s wh hic ic h h is is d d is is cl cl os os ur ur e e ne ne ga g tively i i nf nf lu lu en en ce ce e e ar ar ni ni ng ng s s m manage ge me ment nt a nd po po si siti tive ve ly ly influ lu en ence ce ear ar ni ni ng ng s s qu q alit t y y Z Z ho u an an d d Lo Lo bo bo , 20 2001 01 ; ; Yeh h et et a al. l., 2014; Sanjaya and Young, 2012; Blanc c o o et al., 2014. Many researchers also research about the link between CSR and earni ings quality or CSR and earnings management, and the results is m mix Kim m et al., 2012; Ekawati, 2012; Isyanto, 2014; Hong and Andersen, 2011; C C hi h h h et al., 2008; Arief, 2014; Palguna Putra, 6 earnings management as the proxy of earnings quality and also will use companies in mining sector that listed in Indonesia stock exchange year 2012- 2014 as the sample of research.

1.2 Research Question