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
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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