Thesis Proposal-Prayoga C

8/11/2019 Thesis Proposal-Prayoga C

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THESIS PROPOSAL

THE EFFECT OF IFRS CONVERGENCE, GOOD

CORPORATE GOVERNANCE AND ACCOUNTING

CONSERVATISM ON INFORMATION ASYMMETRY

Written by:

Name : Prayoga CahayandaStudent ID Number : 92113055

UNIVERSITY OF GUNADARMA

JAKARTA

2014


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CHAPTER I

INTRODUCTION

1.1 Research Background

The financial report is a means of communicating financial information to

parties outside the company. The preparation of financial statements performed by

the manager (agent) who knows the conditions within the company. Manager, as

the one that manage company, know a lot of internal information and know the

future prospects of the company than the company owner (principal). The

information submitted by the manager sometimes does not correspond to the

actual condition of the company because managers tend to report something that

gives the advantage to private interests. Differences between the owners and

management of information called information asymmetry.

Information asymmetry can affects the performance of the company.

Watts (2003) explains that there are differences in information between investors

and managers lead to agency costs that can lower the expected cash flow of the

company. In addition, Jensen and Meckling (1976) also explain that the greater

information asymmetry will increase the chance managers in manipulating

financial statements. Manipulation efforts of financial statements also creates

agency costs that created by the manager himself with the aim of moving the

shareholder wealth through profits from the sale of shares of the company.

Managers will manipulate the information provided to investors in order to

increase the stock price. The increase in the stock price benefit to the manager

because the greater the revenue from the sale of shares acquired. These

circumstances provide a benefit to the manager, but cause losses to investors.

Because investors have to spend some money to buy stocks, but they do not make

a profit from their investment.

To anticipate the asymmetric information on the company, we need a

mechanism that can minimize the impact of information asymmetry in the

company. One mechanism that can be used is the practice of good corporate


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governance. It is a structure, systems, and processes that integrate with each other

to realize the five key principles, namely: transparency, accountability,

responsibility, independency, and fairness. For the implementation of corporate

governance mechanisms, it is needed an optimal and ideal structure such as

independent directors, audit committee, board of directors, and other supporting

committees. In addition to an ideal structure, it is required a system that is used as

the rules and clarity in the description as well as a clear organ function. In a good

system is required a guidance on the implementation of corporate governance,

systems of effective assessment and evaluation, and appreciation of the work that

may improve the performance of the employees (Wulandari 2010). Basically good

corporate governance movement at this point is to seek changes in the approach of

compliance to the conformance with best practices as a form of awareness of the

importance of the management of the company in a professional, ethical, and

responsibility (Kaihatu, 2006).

Corporate governance encompasses the controls and procedures that exist

to ensure that management acts in the interest of shareholders. In addition to

reducing the likelihood that management, acting in its self-interest, takes actions

that deviate from maximizing the value of the firm, corporate governance

mechanisms also affect the information disclosed by the firm to its shareholders.

These mechanisms make it less likely that management, acting in its self-interest,

does not fully disclose relevant information to shareholders or discloses

information that is less than credible (Kanagaretnam et al, 2007).

Budiasih (2011) said that the asymmetry of information is one factor that

can lead to manipulation of the financial statements. In addition to the assessment

and management of work bonuses is also a contributing factor manipulation of

financial statements. The most frequent manipulation is overstated earnings. This

is because earnings can reflect the operational performance of the company and to

the attention of the user in assessing the company's financial statements. In

addition to the company's operational performance also affect the company's stock

price. Right to choose some accounting method is became opportunities for

managers to manipulate financial statements. Therefore, one way that can be done


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to prevent the manipulation of financial statements is to choose conservative

accounting principles.

Watts (2003) as supporting the principle of conservatism found

conservatism is one very important characteristic in reducing agency costs and

improve the quality of financial reporting information that will eventually be able

to increase the value of the company and its stock price. The shareholders hope

that management act on their interests. That requires a monitoring of management

actions taken, such as the examination of financial statements by an independent

auditor and limit the use of decision that can be taken by management. Costs

incurred in respect of the monitoring activities referred to as agency costs.

Muller et al. (2011) find evidence that International Financial Reporting

Standard (IFRS) adoption mitigates information asymmetry differences, an effect

reflected in a larger decrease in bid-ask spreads for firms that had not previously

adopted IFRS values. IFRS adoption has the potential to facilitate cross-border

comparability, increase reporting transparency, decrease information costs, reduce

information asymmetry, and thereby increase the liquidity, competitiveness, and

efficiency of markets (Ball, 2006; Choi and Meek, 2005).

In Indonesia, the convergence was applied since 2008, the Indonesian

Institute of Accountants (IAI) determined that Indonesia did a full adoption of

IFRS on January 1, 2012. This implementation is intended to increase the power

of financial statement information so that financial statements can be more easily

understood and can easily be used both for compilers, auditors, and others as well

as the readers or users and eventually be able to reduce the asymmetry of

information.

Based on the background that has been presented and some empirical

results of previous research, the authors are interested in research on the

mechanism of the effect of good corporate governance and accounting

conservatism on information asymmetry. The reason authors use corporate

governance variables because previous research has stated that full disclosure is

essential in lowering the level of information asymmetry, the authors argue that

corporate governance can be used as a system, structure, and effective processes


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in order to increase public disclosure of information to public so that information

asymmetry will decrease. Accounting conservatism variables are used because

banking companies has adopted IFRS for their financial reporting since 2008.

IFRS uses fair value principles and reduce implementation of conservatism

methods. Author wanted to see the effect of conservatism method that can reduce

the information asymmetry in banking companies. In theory, IFRS adoption,

contrary with conservatism, can also reduce information asymmetry. Author

wanted to see which one have better effect to information asymmetry. Thus, the

title of this research is The Effect of IFRS Convergence, Good Corporate

Governance and Accounting Conservatism on Information Asymmetry.

1.2 Statement of the Problem

The financial statements are information resources that issued by

management for stakeholders to assess the company value. However, such

information can be misleading if there is different information between managers

(agents) and owners (principal) or commonly called information asymmetry. The

greater information asymmetry will increase the chance managers in manipulatingfinancial statements. Manipulation efforts of financial statements created by the

manager himself with the aim of moving the shareholder wealth through profits

from the sale of shares of the company. Managers will manipulate the information

provided to investors in order to increase the stock price. The increase in the stock

price benefit to the manager because the greater the revenue from the sale of

shares acquired. These circumstances provide a benefit to the manager, but cause

losses to investors. Because investors have to spend some money to buy stocks,but they do not make a profit from their investment. In an effort to reduce the

manipulation it will appear the agency cost incurred by the company.

Good corporate governance mechanisms can monitor and ensure that

management or agent actions follow the interests of the owner or principal.

Conservative financial statements and IFRS convergence can reduce the

possibility of manipulation of financial statements and can reduce agency costs

arising from information asymmetry. If these factors is proven can reduce agency


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cost, it can minimize information asymmetry. Four specific questions arising from

this are:

1.

What effort can be undertaken by banks to reduce information asymmetry?

2.

Does IFRS Convergence affect information asymmetry?

3. Does good corporate governance affect information asymmetry?

4.

Does the accounting conservatism affect information asymmetry?

1.3 Limitations of Research

This research analyzes the effect of IFRS convergence, corporate

governance and accounting conservatism on information asymmetry. The sample

used in this study is listed bank in Indonesia Stock Exchange (IDX). The sample

selected with purposive judgment sampling, such as: (1) the conventional banks of

government and private of foreign exchange, (2) The banks who have completed

annual report for the period 2009 to 2013, (3) Bank has data which needed in this

research.

Dependent variable in this research is information asymmetry. While the

independent variables used are IFRS convergence, good corporate governance andaccounting conservatism.

1.4 Research Objectives

This research seeks to examine empirically and determine:

IFRS Convergence affect information asymmetry

Independent board affect information asymmetry

The existence of an audit committee affect information asymmetry

Accounting conservatism affect information asymmetry

1.5 Research Contributions and Benefits

This research is expected to contribute in: 1) providing the understanding

the relationship of IFRS convergence, corporate governance and accounting

conservatism on information asymmetry in banking companies which can be used

by investors and potential investors as one consideration in making investment

decisions, 2) reinforcing previous studies regarding the effect of IFRS


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convergence, corporate governance and accounting conservatism on information

asymmetry.

The results of this research can provide benefits to: 1) The results of this

study are expected to provide input in decision making for stakeholders in

banking company, especially regarding the effect of IFRS convergence, corporate

governance and accounting conservatism on information asymmetry, 2) This

study can be used as an exercise and application of disciplinary knowledge

acquired in the lecture bench, as well as to increase knowledge about the effect of

IFRS convergence, good corporate governance and accounting conservatism on

information asymmetry and its effect on the performance of the bank


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CHAPTER II

LITERATUR REVIEW AND HYPOTHESIS

2.1 Agency theory

Agency theory describes the company as a meeting point between the

owners of the company (principal) with the management (agent). Jensen and

Meckling (1976) states that an agency relationship is a contract that occurs

between the manager (agent) and the employer (principal). Authority and

responsibility as well as the principal agent arranged in an employment contract

by mutual consent. And both have different interests. Alijoyo and Zaini (2004)

stated the basic assumptions that led to agency theory are:

a. Agency Problem

Given the agent and the principal have a position, functions, interests and

different backgrounds and opposite to each other, and need each other, then

the differences and contradictions in practice unavoidable. It was there when

the difference in interest between the agent and the principal. It was called the

Agency Problem, in addition to the thing that makes the agency problem is

asymmetry of information

b. The existence of the Agency Problem

Agency problem between agent and principal gave rise to the Agency

Conflict. Agency Conflict is the conflict that arises due to the desire of the

management (agent) to act in accordance with their interests to sacrifice the

interests of shareholders (principals) to obtain returns and long-term value of

company, while the Agency's own Conflict arise in some problems, such as:

Moral Hazard Management choose profitable investment placement fot

itself not for company.

Earning Retention Management companies tend to maintain the level of

income at a stable point, while capital owners prefer higher distribution

through some positive internal investment opportunities.

Management of risk aversion are more likely to take a safe position for

itself in taking investment policy.


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Time Horizon Management tend to pay attention to cash flow only from

years of their service.

Eisenhardt (1989) states that the of agency theory use of three assumptions

human nature: (1) human being, in general, self-serving (self-interest), (2) humans

have limited thinking about the future perception (bounded rationality), and (3)

humans always avoid risk (risk averse).

Agent is motivated to maximize the fulfillment of economic and

psychological needs, among others, in terms of obtaining an investment, loan, or

contract compensation. Conflict of interest is increasing mainly because the

principal cannot monitor the daily activities of the CEO to ensure that the CEO

works in accordance with the wishes of shareholders. Principal does not have

enough information about the agent's performance. Agents have more information

about the company as a whole. This has resulted in an imbalance of information

held by the principal and the agent (Nasution and Doddy, 2007).

Imbalance of information is called the asymmetry of information. The

assumption that individuals act to maximize his own, resulting in agent utilizes its

information asymmetry to hide some information that was not known to the

principal. Asymmetry of information and potential conflicts of interest between

principal and agent encourages agents to provide information that is not true to the

principal, especially if the information relates to the measurement of agent

performance (Richardson, 1998).

2.2 Asymmetry of informationThe financial statements were made with the purpose to be used by various

parties, including the company's own internal parties such as managers,

employees, trade unions and others. The parties most concerned with the actual

financial statements are the external users (shareholders, creditors, government,

and community). The internal users (the management) know the events that

occurred at the company, while external parties who are not in the company


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directly, do not know this information so that the degree of reliance on

management accounting information is not for the external users.

One of the obstacles that will arise between the agent and the principal is

the presence of information asymmetry. Asymmetry of information is a condition

in which the agent has more information about the company and future prospects

compared to principal. This condition provides the opportunity for agents to use

the information learned to manipulate financial reporting in an effort to maximize

their own welfare. This information asymmetry lead to moral hazard in the form

of business management to perform earnings management Rahmawati, et al.

(2006).

Scott (2009) classifies into two types of information asymmetry:

1. Adverse selection

That is the type of information asymmetry in which the parties to a

transaction of business, or any potential transaction has more information

than others. Adverse selection occurs because some people like managers and

insiders (insiders) know the other more current conditions and future

prospects than outside investors. There are various ways to do managers and

other insiders can exploit the information they have and will be detrimental to

parties outside the company. For example, managers can act unethically

(biasing) in managing the information issued to investors in order to increase

the value of the stock options they hold. They are able to release information

early in the allowing investors to select qualified insiders benefit while

harming ordinary investors. Such actions will reduce the ability of ordinary

investors to take a good investment decisions. In other words, adverse

selection is the type of information asymmetry in which one or more parties

in a business transaction that has the advantage compared to the other

information. However, many experts recommend accounting and financial

reporting as a mechanism to control adverse selection by changing the outside

inside information into information in a timely and credible (Scott, 2009)

2. Moral hazard


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That is the action taken by the manager is not fully known shareholders.

Managers or other internal parties can perform actions that violate the

contract between management and shareholders or unethical actions, beyond

the knowledge of the shareholders. Moral hazard may occur due to the

separation of ownership with control, characteristic of a large company.

Effectively, It is impossible for shareholders and creditors to observe directly

the level and quality managers for their efforts. Then, managers may be

tempted to neglect the business, blamed their performance to factors outside

their control. Obviously, if this is the case, there are serious implications for

both the investor and the economic efficiency of the operation. So we can

conclude that the problem of adverse selection is a problem on the

communication from the company to outside investors, while the moral

hazard problem is asymmetry problems arising from the inability of the

owners/shareholders to observe the performance of managers in running the

company, where the shareholders have limitations in observing performance

managers in running their interests as a shareholder (Scott, 2009).

Information asymmetry problems can be overcome by doing management

requires full disclosure of the financial condition of the financial statements or to

implement good corporate governance system in the company. If the information

asymmetry problem is not fully resolved, rationally the stock market will be

undervalued or overvalued on the availability of corporate information.

Godfrey et al (2010) revealed, in an effort to reduce the agency problems it

will appear the agency cost incurred by the company. Generally, this agency cost

is a form to reduce the property owner's to reduce self-interest that occur and

reduce the information asymmetry. Jensen and Meckling (1976) split agency costs

into 3 types of costs:

1. Monitoring costs

Represents costs incurred to monitor the work of the agent/management.

Examples of oversight costs incurred by owners/shareholders are the auditor

service fees, the cost in providing compensation to management and etc.

2.

Bonding costs


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The existence of monitoring costs cause managers to make a mechanism

to ensure that managers will act in accordance with the wishes of

shareholders, or guarantee they would compensate shareholders if they act in

a manner contrary to the interests of shareholders. The cost to make and

follow this mechanism is called bonding costs, because these costs represent

costs to bind the interests of managers to the interests of shareholders.

Bonding costs generated by the manager. For example, managers voluntarily

provide quarter financial statements in order to benefit the shareholders in

knowing the state of the company.

3. Residual loss

When the manager will stop the spending for bonding costs, where the

marginal cost of bonding is equal to the marginal cost of monitoring the

expenditure incurred. Although there monitroing and bonding activities,

interests of managers will remain in line with the interests of shareholders.

Managers may make some decisions that do not meet the interests of

shareholders as a whole. As a result, the emergence of deadweigh loss, also

known as the residual loss, which is the impact of the actions taken by

managers who are often different actions that will maximize shareholder

value, although there have been monitoring and bonding costs.

2.2.1 Bid ask spread

According to Subali and Diana (2002) Bid-ask spread is the difference

between the highest buying price (bid) which caused investors willing to buy a

particular stock by the selling price (ask) that causes the lowest investors are

willing to sell their shares. Bid-ask spread which is a function of transaction costs

affect trade and lead investor expects to hold more long/short assets that have

higher transaction costs/lower.

If an investor wants to buy or sell a stock or other securities in the capital

market, he usually conduct transactions through broker/dealers who have

specialized in a security. Broker/dealers here who are ready to sell at the ask price

for the investor if the investor wants to buy a security. If the investor already has a


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security and want to sell, the broker/dealers that will buy securities at the bid

price. The difference between the bid and the ask price is the spread. So the bid-

ask spread represents the difference between the highest purchase price to the

broker/dealer is willing to buy a stock and the price which the broker/dealer is

willing to sell the stock.

The use of bid-ask spread as a proxy of information asymmetry by

Komalasari (2001) due to the mechanism of capital market, capital market also

face the problem of agency. Market participants interact with each other in the

capital markets in order to realize its goal of buying or selling securities, so that

their activities are influenced by information received either directly (public

statements) or indirectly (insider trading). Dealers or market-makers have limited

the power of thought to the perception of the future and face a potential loss when

dealing with informed traders. This has caused the adverse selection that

encourages dealers to cover losses from informed traders increase the spread of

the liquid merchants. So it can be said that the asymmetry of information that

occurs between dealers and informed traders is reflected in the determined spread

(Komalasari, 2001).

Research by Rahmawati et al (2006) on the bid-ask spread is stated that

there is a component of the spread that contributed to the losses suffered by the

dealer when trading with informed traders are as follows:

1) The order processing costs, consists of the cost of thecharged by securities

traders (effects) of readiness to reconcile purchase orders and sales, and

compensation for time spent by a securities dealer in order to complete the

transaction.

2)

The inventory holding cost, the cost of which is born by securities traders to

bring the inventory stock to be traded in accordance with the request.

3) Adverse selection component, represents a reward given to securities traders

to take a risk when dealing with investors who have superior information.

This component is closely related to the flow of information in the capital

market. In connection with the bid-ask spread, accountants focus is on the


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adverse selection component as it relates to the provision of information to

the capital markets.

2. 3 Good Corporate Governance

Corporate governance is a concept that can be used in improving

economic efficiency, which includes a series of relationships between the

company's management, board of directors, shareholders and other corporate

stakeholders. Corporate governance also provides a structure that facilitates the

determination of the goals of a company, and as a means to determine the

performance monitoring techniques. Watts (2003), states that one of the ways

used to monitor and limit the contract issue is the management of opportunistic

behavior of corporate governance. In connection with the issue of agency,

corporate governance is a concept that is based on agency theory, is expected to

serve as a tool to provide confidence to investors that they would receive a return

on the funds they have invested. In other words, corporate governance is directed

to reduce the information asymmetry between principal and agent (Ujiyantho and

Bambang, 2007).Until now, there are some the definition of an assortment of good

corporate governance. But generally they have the same purpose and

understanding. Forum for Corporate Governance in Indonesia or FCGI (2003) in

his first publication using the definition of the Cadbury Committee, namely:

a set of rules that govern the relationship between shareholders,

management (manager) company, creditors, government, employees and the

internal and external stakeholders other related rights and obligations, or in otherwords a system that regulates and controls the company.

Besides FCGI also explained that the purpose of corporate governance is

to create added value for all interested parties (stakeholders).

In the book by Brigham and Erhardt (2005), corporate governance is defined as a

set of rules and procedures that ensure the manager to apply the principles of

value-based management. These principles in practice is known by the term rates

are Transparency, Accountability, Responsibility, and Fairness Independency.


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National Committee on Corporate Governance (2004) developed the principles

that govern the implementation of good corporate governance in the banking

sector, namely:

1.

Openness

a. The Bank shall disclose information in a timely, adequate, clear, accurate and

easily comparable and accessible to stakeholders in accordance with their

rights.

b. Information that must be disclosed include, but are not limited to matters

related to the vision, mission, business objectives and corporate strategy,

financial condition, composition and compensation management, controlling

shareholders, cross shareholding, executive officers, risk management,

surveillance systems and internal control, compliance status, system and

implementation of good corporate governance and events that may affect the

condition of the bank.

c.

Transparency principle adopted by the bank does not reduce the obligation to

comply with bank secrecy in accordance with the legislation in force, the

secret office and personal rights.

d. Bank policy must be in writing and communicated to interested parties

(stakeholders) and the right to obtain information about the policy.

2.

Accountability

a. The Bank shall establish clear responsibilities of each organ that is aligned

with the organization's vision, mission, business objectives and strategy of the

company.b. The Bank must ensure that all organs of the bank organization has

competence in accordance with its responsibilities and understand their role

in the implementation of GCG.Banks should ensure the presence of a check

and balance system in the management of the bank.

c. Banks should have a measure of performance of all levels of the bank based

on the agreed measures are consistent with the value of the company


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(corporate values), business objectives and strategy of the bank and has a

reward and punishment system.

3. Responsibilities

a. To maintain the continuity of its business, the bank must adhere to the

principle of prudence (prudential banking practices) and ensure the

implementation of applicable regulations.

b. Bank should act as a good corporate citizen (good company) including

concern for the environment and social responsibilities.

4.

Independence

a. Banks should avoid undue dominance by any stakeholder and is not affected

by the unilateral interests and free of conflicts of interest (conflict of interest).

b.

Bank in decision making should be objective and free from any pressure from

any party.

5.

Fairness

a.

Banks must always consider the interests of all stakeholders based on the

principle of equality and fairness (equal treatment).

b. Banks should provide the opportunity for all stakeholders to provide input

and express opinions in the interest of banks as well as having access to

information in accordance with the principle of openness.

The Bassel Committee on Banking Supervision established that the

Federal Reserve banks is a critical component of the economy. They providefinancing commercial enterprises, basic financial services to a broad segment of

and access to the payment system (Brigham and Erhardt, 2005). The importance

of the national economy banks underlined by the fact that the banking industry is

universally a regulator that has access to government safety net. It is one of the

facts about the importance of corporate governance of banking. The Bassel

Committee on Banking Supervision-Federal Reserve has highlighted the fact that


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the strategies and techniques that are based on the principles of the OECD

(Brigham and Erhardt, 2005), which is the basis for corporate governance include:

(a)

The company's values, codes of conduct and other appropriate behavior

standards and systems used to ensure their compliance

(b) The establishment of mechanisms for interaction and cooperation between

the board of directors, senior management, and the auditors

(c) A strong internal control system, including the functions of internal and

external audit, risk management functions independent of business lines,

and other checks and balances.

The implementation of effective corporate governance in the Bank, state-

owned enterprises and public company, provide significant contribution in

improving the economic conditions, as well as crisis and avoid similar failures in

the future. One characteristic of a well-managed company (good corporate

governance) is to convey information faster, accurate, and complete (Arifin,

2003).

Shleifer and Vishny (1997) stated that corporate governance is a concept

that is based on agency theory, is expected to serve as a tool to provide confidence

to investors that they would receive a return on the funds they have invested.

Corporate governance is concerned with how the investors are confident that the

manager will benefit them, confident that the manager will not steal/embezzle or

invest in projects that do not benefit relating to funding/capital has invested by

investors, and relates to how the investors control managers. In other words,

corporate governance is expected to function to suppress or lower the cost of

agency.

2.3.1 The Board of Commissioners (BOC)

Board of Commissioners in the NCG (2006) is defined as the organ in

charge of the company and collectively responsible for overseeing and providing

advice to the Board of Directors as well as ensuring that the company implement

GCG. Nevertheless, the Board shall not participate in making operational


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decisions. The position of each member of the Board of Commissioners including

the Chairman are equivalent. Chief Commissioner task is to coordinate the

activities of the Board of Commissioners. In order for the implementation of the

duties of the Board of Commissioners can run effectively, it needs to be met the

following principles:

1.

The composition of the Board of Commissioners should enable effective

decision making, precise and quick, and can act independently.

2. Members of the Board of Commissioners must be professional, ie integrity

and have the ability to be able to function properly, including ensuring that

the Directors have regard to the interests of all stakeholders.

3. Supervisory and advisory functions of the Board of Commissioners includes

preventive measures, repairs, up to the layoffs.

Composition, Appointment and Dismissal of Members of the Board of

Commissioners:

1. The number of members of the Board of Commissioners must be tailored to

the complexity of the company with regard to its effectiveness in decisionmaking.

2. BOC may consist of a Commissioner who does not come from affiliated

parties known as Independent Commissioner and Commissioner affiliated.

The meaning is affiliated parties business relationship and kinship with

controlling shareholders, members of the Board of Directors and Board of

Commissioners, as well as the company itself. Former member of the Board

of Directors and the Board of Commissioners and employees of affiliatedcompanies, for a certain period of time are included in the category of

affiliated.

3. Number of Independent Commissioner should ensure that oversight

mechanisms operate effectively and in accordance with laws and regulations.

One of the Independent Commissioner shall have accounting or financial

background.


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4. Members of the Board of Commissioners are appointed and dismissed by

Rapat Umum Pemegang Saham (RUPS) through a transparent process. For a

company whose shares are listed on the stock exchanges, and state-owned

enterprises or areas, companies that raise and manage public funds,

companies whose products or services are widely used by the general public,

as well as companies that have a broad impact on environment, the

assessment process candidates for Board Commissioner conducted before the

RUPS held by the Nomination and Remuneration Committee. Independent

Electoral Commissioner must consider the opinion of the minority

shareholders can be channeled by the Nomination and Remuneration

Committee.

5. Dismissal of members of the Board of Commissioners conducted by RUPS

based on reasonable grounds and after the members of the Board of

Commissioners were given an opportunity to defend himself.

BOC Supervisory Function:

1.

BOC shall not participate in making operational decisions. Decision makingis performed in its oversight function, so the decision operations remain the

responsibility of the Board of Directors. Authority vested in the Board of

Commissioners is still being done in its function as watchdog and adviser.

2. If necessary, in the interests of the company, the Board may impose sanctions

on members of the Board of Directors in the form of suspension with the

provisions must be followed up with the implementation of the RUPS.

3.

In the event of a vacancy in the Board of Directors or in certain circumstancesto temporarily carry out the functions of the Board of Commissioners to the

Board of Directors.

4. In order to carry out its functions, the Board of Commissioners either jointly

or individually and are entitled to have access and obtain information about

the company and complete in a timely manner.


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5. The Board of Commissioners shall have rules and guidelines (charters) so

that performance of its duties can be directed and effective and can be used as

a means of assessment of their performance.

6.

Board of Commissioners in its oversight function, to submit accountability

reports supervision of the management by the Board of Directors, in order to

obtain the release and discharge of responsibility (acquit et decharge) of the

AGM.

7. In performing its duties, the Board may establish committees. The proposal of

the committee submitted to the Board for approval. For a company whose

shares are listed on the stock exchanges, state enterprises, regional

companies, companies that collect and manage public funds, companies

whose products or services are widely used by the general public, as well as

companies that have a broad impact on environment, at least should be

established an Audit Committee, while another committee was formed

according to the needs.

2.3.2 The Audit Committee

In FCGI (2003) stated that the Audit Committee has a separate task in

helping the Board of Commissioners to fulfill its responsibilities in providing

overall supervision. For example, the Audit Committee has the authority to

implement and validate the investigation of issues within the scope of his

responsibilities. The number of Audit Committee members must be tailored to the

complexity of the company with regard to effectiveness in decision making. For a

company whose shares are listed on the stock exchanges, state enterprises,

regional companies, companies that collect and manage public funds, companies

whose products or services are widely used by the general public, as well as

companies that have a broad impact on environment, the Audit Committee is

chaired by an Independent Commissioner and members may consist of the

Commissioner and or professionals from outside the company. One of the

members have diverse backgrounds and abilities or accounting and finance. The

audit committee in accordance with Kep. 29/PM/2004, defined as a committee


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established by the board of commissioners to undertake the task of supervising the

management of the company. The audit committee is a new component in a

company that has a very vital role as an enterprise control system. In addition the

audit committee can also serve as a liaison between the shareholders and the

board of commissioners with management in terms of the company's internal

control. As in Kep. 29/PM/2004 who wrote duties of the audit committee are:

1. Reviewing the financial information that will be issued by the company, such

as financial statements financial statements, projections and other financial

information,

2. Reviewing the companies' compliance with laws and regulations in the field

of capital markets and other laws relating to the activities of the company,

3. Reviewing the implementation of the inspection by the internal auditors,

4.

Report to the commissioners of the various risks faced by the company and

implementation of risk management by the directors,

5.

To review and report to the board of commissioners on complaints relating to

the issuer,

6.

Maintain confidentiality of documents, data and company secrets.

Audit Committee according to the KNKG (2006) has a duty to assist the

Board of Commissioners in ensuring that:

i. Financial statements are presented fairly in accordance with generally

accepted accounting principles,

ii.

Company's internal control structure is implemented,

iii.

Internal and external audit conducted in accordance with applicable auditingstandards, and

iv.

Follow-up findings of the audit carried out by the management.

2.4 Accounting Conservatism

Warsidi (2005) explains that conservatism is defined as an effort to choose

accounting methods generally acceptable that resulted in: (1) slower revenue

recognition, (2) the cost of faster recognition, (3) lower asset valuation, higher


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divide into two, namely operating accruals accruals which is the number that

appears in the financial statements as a result of the company's operations and

non-operating accruals accruals which is the number that appears outside the

operational results. There is considerable subjectivity involved early in the

decision whereby capitalized costs for both fixed assets and intangible assets

that can be recognized built themselves (such as capitalized software

development costs) and then decisions related to the allocation of costs that

can be depreciated over the asset can be determined. Non-current assets

depends on the write down of the asset when it was decided already scaled

value (impaired), and the determination of some permanent impairement that

involve abnormal managerial. On the liability side, there is a variety of

accounts such as long-term debt, postretirement benefits and tax deferral is

also a manifestation of the estimation and subjective assumptions (such as

pension accounting estimates, the expected return on assets, growth is

expected over employee wage growth, and other-other). Givoly and Hayn

(2000) states that if the accrual is negative, then the profit is classed

conservative, due to lower earnings from cash flow earned by the company in

a given period. Conservatism with accrual measure calculated with the

following formula as used by Givoly and Hayn (2000) :

CONACCit = (NI + Dep) it-CFOit

Where:

CONACCit = level of conservatism for firm i in year t

NIit = Income before extraordinary items of firm i in year t

Depit = depreciation of firm i in year t

CFOit = cash flow from operations for firm i in year t

Where the size of the accrual accounting conservatism derived from net

income before extraordinary items at time t on a firm i plus depreciation and

amortization further reduced net cash flow from operating activities

(operational cash flow) of firm i at time t. The results of the above calculation

CONACC multiplied by -1, so that greater conservatism shown by the larger

value of CONACC (accrual accounting conservatism with size).


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3) Net asset measures.

The third measure is used to determine the level of conservatism in the

financial statements is the value of assets and liabilities overstatement

understatement. One measurement is a proxy measurement models used by

Beaver and Ryan (2000) is by using the market to book ratio that reflects the

market value relative to the book value of the company. The ratio is worth

more than 1, indicating the application of conservative accounting value of

the company because the company posted lower than market value.

Conservatisms influence on accounting practice has been long and

significant (Watts, 2003). Although there is a trend in moving from conservative

accounting to fair value accounting, conservatism still cannot be eliminated. The

survival of conservatism suggests that it has its own benefits. If regulators and

standard-setters ignore its benefits and try to eliminate conservatism without fully

understanding these benefits, the resultant standards are likely to damage the

role of accounting as an information source (Khan and Watts, 2009).

2.5 International Financial Reporting Standard (IFRS)

According Suhardjanto and Aulia (2009), there are two nature of the

disclosures, it is disclosure based on the terms (required / regulated / mandatory

disclousure) and voluntary disclosure. Mandatory disclosure shall be the

minimum disclosures required by the applicable accounting standards.

Regulations regarding mandatory disclosure in Indonesia has been governed by

Bapepam-LK Regulation through. VIII.G.7 on Financial Statements as well as theRegulation by Chairman of Bapepam-LK. XK6 Kep-134/BL/2006 dated

December 7, 2006 on the obligation to submit annual reports for public

companies.

Utami, et al. (2012) revealed that in the convergence of IFRS, there are

two kinds of adoption strategies, namely big bang strategy and gradual strategy.

Big bang strategy fully adopt IFRS as well, without going through certain stages.

This strategy is used by the developed country. While in the gradual strategy,


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adoption of IFRS done gradually. This strategy is used by developing countries

such as Indonesia.

1.

There are 3 stages in the IFRS convergence in Indonesia,

namely:

Adoption Phase (2008-2011), covering the entire activity which adopted IFRS

to GAAP, preparation of the necessary infrastructure, and evaluation of the

applicable GAAP.

2. Final Preparation Phase (2011), in this stage of completion of the preparation

of the necessary infrastructure. Furthermore, the gradual implementation of

several IAS IFRS-based.

3. Implementation Phase (2012), dealing with the application of SFAS IFRS

activity gradually. Then the evaluation of the impact of the application of

SFAS comprehensively.

2.5.1. SFAS No. 50 and SFAS No. 55 (Revised 2006)

Financial Accounting Standards Board (DSAK), formerly called the

Financial Accounting Standards Committee (KSAK) endorsed a revision of SFAS

No. 50 (1998), namely the SFAS 50 (revised 2006) on Financial Instruments:

Presentation and disclosure and SFAS No. 55 (revised 2006) on the recognition

and measurement of financial instruments at December 16, 2006. Both SFAS is

on the plan enacted on January 1, 2008. However, because banks in Indonesia is

not yet ready to declare under SFAS No. 50 (revised 2006), the delayed

enforcement until January 1, 2010.

The problems that arise from the application of SFAS No. 50 (revised

2006) as a replacement of SFAS No. 50 (1998) in Indonesian banking industry

(Diana, 2010).

1. Allowance for Credit Losses problem (Loan-Loss Provisioning) or the

Allowance for Impairment Losses (CPKN).

2. This new standard can reduce sources of bank interest income because:

a) Fees and commissions income credit has now become a deduction of

the value of loans in order to calculate the effective interest income.


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26

b) Interest securities eg Bank Indonesia Certificates (SBI) are not allowed

in the operating income rate. SBI reclassification has resulted in many

banks place their funds out of credit with the trait of debt ratio to fund

(LDR) - which are relatively small.

c) Loans classified as an asset on the bank's Loan and Receivables which

the valuation is by amortized cost, this has the consequence that the value

of the credit (in this case the bank's assets) will be affected by the

projected cash flow from the asset, so that the loan bears interest at below

market interest will discounted becomes smaller than at cost (loans

disbursed).

3. The application of SFAS 50 and SFAS 55 requires systems and long

preparations for the financial statements because it must incorporate all in one

package. In terms of investment, at least every bank should be issued and the

amount of U.S. $ 1 million for the purchase of information systems and

technology for financial reporting application based on SFAS No. 50 & 55

(revised 2006).

2.6 Previous Research Study

There are several research have been done related to the influence of

corporate governance mechanisms and accounting conservatism on information

asymmetry. The researchers are shown in table below:

Table 2.1 Overview of Previous Research Study

No. Author Research Method Result

1 Evi

Gantyowati

and Dhinar

Adi

Nugroho

Population sample : 86 Companies

Analysis : Multiple Regression

Dependent var. : Information

asymmetry using Trading Volume

Activity

Independet var.: The proportion of

independent board, and audit

Independent

Commissioner has

an influence on the

decrease in

information

asymmetry around

earnings


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committee announcement

dates. IndependentAudit Committee

has no effect and

does not have a

correlation to the

decline in

information

asymmetry around

earnings

announcement

dates.

2 Sri Haniati

and

Fitriany

Population sample : 93 Non-

financial Companies


Dependent var. :Information

asymmetry using bid ask spreads

Independent var.: Accounting

conservatism using the earnings

return relation measure,

earnings/accruals measures and net

assets measure

Conservatism

affect significantly

and negatively to

information

asymmetry

3 Soviana

Wulandari

Population sample : 88 Companies


Dependent var. : Information

asymmetry using bid ask spreads

Independet var.: Corporate

governance mechanism, and

dividend policy

Institutional

ownership and

board of directors

size have influence

on asymmetric

information that

proxied by bid-ask

spread, (2) board of


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2.6 Hypothesis

2.6.1 The Effect of IFRS convergence on Information AsymmetryMuller et al. (2011), showed that the convergence of IFRS in Europe have

positive influence on Information Asymmetry. This prove that applying IFRS on

the company's value will decrease the Information Asymmetry. The decline of this

information asymmetry can be determined by measuring the value of the bid-ask

spread. Bid-ask spread is the difference between the price offered by the dealer

with the lowest price. Spread is the difference between the factors that cause the

highest purchase price the investor is willing to buy certain stocks with the lowest

independent

commissioner,audit committee,

transparency

disclosure, and

dividend payout

policy have not

influence on

asymmetric

information that

proxied by bid-ask

spread

4 Anita Dwi

Lestari

! Population sample : 30 Companies


! Dependent var. : Information

asymmetry using spreads

! Independet var.: Corporate

governance mechanism, and

earnings management

Good corporate

governance and

earnings

management have

influence

negatively to

asymmetric

information


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29

selling price caused investors are willing to sell their shares. Bid-ask spreads can

also be interpreted as the difference between the highest purchase price to the

stock trader is willing to buy a stock with the lowest selling price that the trader is

willing to sell the stock. The decline in value of the bid-ask spread is a reflection

of the declining value of Information Asymmetry itself.

H1: The existence of IFRS convergence will influence information

asymmetries

2.6.2 The Effect of BOC Independent on Information Asymmetry

Independent directors is a central mechanism in the company's internal

controls to supervise the managers (Fama, 1980). Ajinkya, et al (2005),

Karamanou and Vafeas (2005), and Klein (1998) states that the Board of

Commissioners to monitor management more effectively, will increase the quality

and frequency of published information management. Increased voluntary

disclosure will reduce information asymmetry. Due to the growing size of the

information gap between the external and internal sources. This is in contrast to

the findings of Eng and Mak (2003) which states the more the number ofindependent members on the commissioner, reducing the expression of voluntary

corporate lawyer.

H2: The existence of independent board members will influence information

asymmetries

2.6.3 The Effect of Independent Audit Committee of the asymmetry of

information

Klien (2001), DeFond and Jiambalvo (1991), McMulen (1996); Beasly

and Salterio (2001); McMullen and Raghunandan (1996) supports the existence of

an audit committee can improve the quality of financial reporting. This indicates

investors have seen more value in companies that have an independent audit

committee. While the research conducted by Beasley (1996), Menon and

Williams (1994), showed no difference between companies that have independent


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audit committees are not. Which signifies distrust of investors in the ability of

audit committees in improving the quality of financial statements.

H3: The existence of audit committee will influence information asymmetries

2.6.4 The Effect of accounting conservatism on information asymmetry

Information asymmetry between managers and investors appear allowing

managers use their private information to investors to transfer wealth themselves

by way of exaggerating (overstatement) financial performance in the financial

statements in the company 's stock price also go up as long as they manage the

company (Lafond and Wattts, 2006). Associated with the tendency of managers to

manipulate financial statements, Lafond and Watts (2008) stated conservatism is

one of the corporate governance mechanisms that can reduce the ability of

managers to manipulate and overstatement of financial statements, particularly

regarding financial performance in order to improve cash flow and the value of

the company.

Conservatism reduces future manipulation of information asymmetry and

financial statement presentation of earnings by limiting unverified and make sure

all the losses have been included in the financial statements. In addition

conservatism also verifying the net assets in the balance sheet contained to

prevent asset management exaggerate. Conservatism can be measured in many

ways: earnings/stock return relation measure (example: Model Basu, 1997),

earnings/accruals measures (eg Givoly models Hyan, 2000), the net asset measure

(example: Model Beaver and Ryan, 2000).

H4: Accounting conservatism will influence information asymmetries


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2.7 Research Framework

The research framework of this research can be seen in figure below.

In figure above, we can see the object of this research are banking

companies. In banks, there are shareholders and management. Those two parties

have different interest. This conflict interest between shareholders and

management can create different information that called information asymmetry.

Information asymmetry can creates agency cost that can inflict financial loss to

shareholders. Good Corporate Governance, that proxied by independent board and

audit committee, and IFRS convergence and accounting conservatism can reduce

agency cost that appeared in the bank.


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CHAPTER III

RESEARCH METHODS

3.1 Research Objects

This study was designed to see the effect of good corporate governance

and accounting conservatism on information asymmetry in banking companies

that listed on Indonesia Stock Exchange (IDX) and have been audited. The

population in this research is all banking companies listed on IDX period 2009-

2013. Reasons using banking companies as companies that studied is because

banking is an industry that has properties different from other industries such as

manufacturing, trade, and so on. Banking is an industry that is loaded with a

variety of regulations, it is because the banks are financial intermediary that

connects between the parties that the excess funds to those who need funds.

Because of these functions, the risk faced by banks is very large, the inability to

keep the image and quality will greatly affect the liquidity of banks (Rahmawati,

et al., 2006).

The sample used in this study is a banking company that has a certain

criteria. The sampling method used was purposive sampling. Purposive sampling

is a technique to determine the sample with a certain consideration. Sampling

conducted using following criteria:

1. Banking companies that have gone public and listed on the Stock Exchange

during the period 2009 to 2013,

2. Financial statement data available for the consecutive reporting years from

2009 to 2013 are stated in rupiah (IDR),

3. The sample companies publish financial statements auditors using the fiscal

year ended December 31,

4.

Complete data is available on the publication period ended 31 December

2009 to 2013.


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The types of company shown in table below:

Table 3.1

Types of Banks

Criteria Total

Badan Usaha Milik Negara (BUMN)

Private Commercial Banks

2

17

Total Banks Researched 19

Source: Secondary Data Processed, 2014

Based on purposive sampling has been carried out, there are 19 companies

samples which have passed specific criteria so the number of observations during

the period of 2009-2013 in this research are 95 observations. The result of data

collection can be seen in table 3.2 as follows

Table 3.2

List of Banks

No. Bank researched

1. Bank Negara Indonesia

2. Bank Mandiri

3. Bank Bumi Artha

4. Bank Central Asia

5. Bank Bukopin

6. Bank CIMB Niaga

7. Bank Danamon

8. Bank Ekonomi Raharja

9. Bank ICB Bumi Putera

10. Bank International Indonesia

11. Bank Mega

12. Bank OCB NISP

13. Bank of India Indonesia

14. Bank Rakyat Indonesia

Agroniaga

15. Bank Windu Kentjana

International

16. Bank Himpunan Saudara

17. Bank Pan Indonesia


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18. Bank Tabungan Pensiunan

Nasional

19. Bank Victoria International

Source: Secondary Data Processed (2014)

3.2 Data and Variable

3.2.1 Data Used

The data used in this study is secondary data. It is data that obtained

indirectly through an intermediary media. The data of this research is financialreports issued by the banking company and published by the Indonesia Stock

Exchange (IDX). The data used in the form of financial statements during 2009 to

2013 and the stock price data during the observation period as well as annual

reports issued by the sample companies.

3.2.2 Variables Used

Variable is basically anything that can be given value. The variables in thestudy were classified into independent and dependent variables. These variables

are described in more detail as follows

a. Dependent Variable

In this study the information asymmetry is the dependent variable.

Information asymmetry arises when the manager is better informed on the

company's internal and prospects for the future than the shareholders and

other stakeholders. This research measures the information asymmetry by

using the relative bid-ask spread. Healy et al. (1999) stated that the

information asymmetry seen from the difference between the ask price and

the bid price of the company's stock or the difference selling and buying price

of company's stock for one year. Bid ask spread is calculated as the average

over 12 months (January-December) (Siregar, 2006), which calculated as

follows:

SPREAD = (aski,t bidi,t) / {(aski,t + bidi,t) /2} x 100.


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Where:

ask price = price of the highest ask the company's stock

bid price = price of the lowest bid the company's stock

b. Independent Variables

IFRS convergence in this research use dummy variable. Dummy variable is a

variable that is used to quantify the qualitative variables (Sekaran, 2006). it is

a categorical variables that thought to have an influence on the variables that

are continuous. Dummy variable has only two values, namely 1 and 0, and

given the symbol D. D = 1, for the circumstances in which a convergence of

IFRS is required in 2012. D = 0, for the circumstances in which a

convergence of IFRS has not begun required.

Independent board is a board member who is not affiliated with management,

other board members and controlling shareholders, as well as free from the

business relationship or other relationship that can affect its ability to act

independently or to act solely in the interest of the company (National

Committee on Governance, 2004). The proportion of independent board is

measured using indicators of the percentage of board members from outside

the company of the entire size of the board members of the company.

Audit committee is measured using percentage between the number of audit

committee members are independent of the total number of audit committee.

Based on the BEJ Circular, SE-008/BEJ/12-2001, audit committee consists of

minimum three members, one of whom is an independent commissioner who

also serves as chairman of the audit committee, while the other member is an

independent external party.

Accounting conservatism measured using Accrual Base used according to

research by Givoly and Hyan (2000). Givoly and Hyan measure conservatism

by subtracting the income before extraordinary items and operating cash

flows are added to the depreciation expense. The results of the calculation

CONACC multiplied by -1, so that greater conservatism shown by the larger

value of CONACC (accrual accounting conservatism with size).


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CONACCit = (NI+Dep)it CFOit

Where:

CONACCit = level of conservatism for firm i in year t

NIit = Income before extraordinary items of firm i in year t

Depit = depreciation of firm i in year t

CFOit = cash flow from operations for firm i in year t

3.3 Data Collection Method

Data collected by the method of documentation. In this method, the

necessary data is collected and recorded, whereas the literature obtained from

previous studies and is supported by other literature. The data obtained through

the information asymmetry stock price data obtained from yahoo finance site, data

relating to conservatism and IFRS convergence is obtained through a survey of

literature on the financial statements published by the Stock Exchange during the

period of the study, the data obtained through the annual corporate governance

report published by the Stock Exchange during the period of the study. Data is

collected period 2009-2013.

3.4 Processing Techniques and Data Analysis

In this research, the author conducted test using SPSS 15.0 software to

obtain accurate results. Descriptive statistical analysis is used to determine the

value of the average, minimum, maximum and standard deviation of the variables

studied. Additionally, performed classical assumption (normality,

multicollinearity, and heterocedastisity). Hypothesis test performed to test of

influence good corporate governance and accounting conservatism on information

asymmetry (H1, H2, H3, and H4). Hypothesis test conducted by using multiple

linear regressions because the data that used is linear and has more than one

independent variable. The regression model as follows:

!"#$%&!" ! !! !!!"#$!" ! !!!"!" ! !!!"!"!!!!"#$%!" ! !!"

Where :

!"#$%&!" = Information asymmetry


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