Corporate Governance Theoretical Framework

14 concerned with managing the relationship among various corporate stakeholders. Corporate governance is a concept to increase company performance through supervising or monitoring management performance and guarantee management accountability to stakeholder based on rule’s framework. The main objective of corporate governance is to achieve a company management transparency for the users of financial statement Yonnedi and Sari 2009. If the company could implement this concept so the economics growth could keep on going well together with company management transparency that is also going well and give benefit for many sides. In formulating corporate governance, there are many countries, including Indonesia, that refer to OECD Organization for Economic Co-operation and Development. OECD reveals a corporate governance structure and its relation of accountability among the involved parties consisting of shareholders, board members, commissioners, and managers. It designed to encourage the creation of a competitive performance and to reach the main objectives of the company. Corporate governance has been strongly influenced by corporate ownership structure. Meanwhile, there are many other factors affecting corporate governance such as legal system, cultural and religious tradition, political stability and economic event. The global financial 15 crisis and credit crunch, which have engulfed financial markets and economics around the world, have further catapulted corporate governance onto center stage Solomon 2010. Generally, Indonesia’s corporations are family businesses, which mean that family members hold key managerial positions, and control the corporation Sang-Woo Nam and Il Chong Nam 2004. This situation emerges the agency problem between the management the controlling family and minority shareholders. The agency problem does not appear commonly between the management and owners. The existence of large shareholders may by itself not be a matter of concern, or may even be a blessing but the beneficial effect of large shareholders should be expected only when management is separated from ownership or when proper corporate governance mechanisms are in place so that outside shareholders can effectively check misbehavior by controlling owners. Due to those reasons, Indonesia needs more attention in relations to the corporate governance problem arising from the separation of control from ownership. Good corporate governance GCG is an important pillar of market economy as it relates to the investors’ confidence both in the companies as well as in the overall business environment. Implementation of GCG encourages fair competition and conducive business climate leading to sustainable economic growth and stability Indonesia Codes of Good Corporate Governance, 2006. 16 In addition, good corporate governance is needed to prevent the expropriation of shareholders by managers and to ensure the efficient management of a company that has multiple owners. It is also needed to attract the capital needed to pursue large and worthwhile projects Sang-Woo Nam and Il Chong Nam 2004.

4. Audit

Generally audit is a systematic process of 1 objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and 2 communicating the results to interested users www.accountingconcern.com. An auditors job is to ensure the integrity of financial data. When performing an audit, an auditor will request access to the business financial records. This includes the ledgers, lists of receipts and expenditures, bank balances, records of physical assets owned or leased and many other records. The auditor will also interview personnel and review the business accounting system and its internal controls. In essence, the auditor will review any activity that affects the business finances www.fasb.org. Audits exist because they add value through easing the cost of information asymmetry, not just because they are required by law. For example, a privately-held company that does not issue securities on a 17 public exchange might engage a firm to audit its financial statements in order to obtain more desirable loan terms from a financial institution. Without the audit, the lending party would not have assurance as to whether or not the companys financial position is accurate. In turn, the lender could price protect raise their price against this information asymmetry. An auditor working for a private business may review a clients banking and other financial statements, to verify that they have been correctly prepared and appropriately reported as required by the law. Auditors must keep themselves educated of any changes in law that will affect how their clients must report financial information. It is