The Effect of Audit Committe on Internet Financial Reporting: Study

from Financial Industry in Indonesia

Yuli W. Astuti

, Eka A. Shidarta

, Kholilah

and Sheila F. Putri

Faculty of Economics, Universitas Negeri Malang, Malang -Indonesia

Keywords: Learning Strategies, Problem-Based, Pedagogic Competencies

Abstract: The purpose of this study was to determine the effect of the audit committee on the internet financial

reporting (IFR). Audit committees are measured by the number of members, educational background,

professional background, and number of audit committee meetings. The measurement of financial report

quality uses the full disclosure of companies reporting. This study uses data of financial institutions listed on

the IDX in 2017. The total population of companies that meet the criteria is 95 companies with the number

of observations is 110 companies. Data were analyzed using multiple regression analysis. The results

showed that the number of members, educational background, and the number of audit committee meetings

did not affect the IFR. It only frequencies of audit committee meeting affect the IFR. The selection of the

audit committee is based on the professional background of the audit committee which has an impact on the

selection of public accountant firm (KAP).

1 INTRODUCTION

Finacial and Non-financial reporting are needed by

stakeholders as information that management is not

only concerned with profit (Alhazaimeh,

Palaniappan, & Almsafir, 2014). The development

of the internet in such a way is an alternative for

management to make paperless and internet-based

reporting (IFR). In the era of industrial revolution

4.0, information became a very valuable item, a

company must address this with complete,

comprehensive and easily accessible financial and

non-financial reporting using internet.

The importance of IFR is not directly

proportional to the high number of studies in this

field. Some research on IFR discusses the influence

of corporate governance mechanisms on IFR level

(Puspitaningrum & Atmini, 2012), the important of

both physical and financial infrastructure in the IFR

implementation (Ojah & Mokoaleli-mokoteli, 2012),

and the perception of prepares and users of IFR

(Noor & Ali, 2015). One of the factors that influence

IFR is the audit committee as a proxy for good

corporate governance (GCG). The audit committee

is an independent party that bridges stakeholders'

interests in managing the company's management.

The supervision process carried out by the audit

committee will improve the company's GCG.

According to Coase (1937) the company is a nexus

of contract from various parties.

GCG will produce quality financial reporting

(Laurentiu, Lazar, & Maria, 2014; Puspitaningrum

& Atmini, 2012). Therefore, the audit committee is

an important factor in implementing GCG

(Chrisdianto, 2013; and Agustia, 2013;

Puspitaningrum & Atmini, 2012). The function of

the audit committee is to analyze accounting

policies, assess internal controls, assess external

reporting systems, and examine company

compliance with applicable regulations

(Mutmainnah & Wardhani, 2013). This task is

reinforced by the issuance of regulations on

guidelines and implementation of the audit

committee by the Indonesian Indonesian Financial

Services Authority (IFSA). The importance of the

audit committee function underlies a full disclosure

regarding expertise, number of members, and the

number of audit committee meetings to support the

company's financial statements.

The different between this research with

Puspitaningrum & Atmini (2012) is the

completeness measurement of audit committee

(educational background, professional literacy, and

Astuti, Y., Shidarta, E., Kholilah, . and Putri, S.

The Effect of Audit Committe on Internet Financial Reporting: Study from Financial Industr y in Indonesia.

DOI: 10.5220/0009507912651269

In Proceedings of the 1st Unimed International Conference on Economics Education and Social Science (UNICEES 2018), pages 1265-1269

ISBN: 978-989-758-432-9

1265

numbers of audit committee. Previous research only

used the number of meetings and finance experience

as a proxy of audit committee.This research is

important to do because of the increasing need for

IFR in the era of industrial revolution 4.0 and the

limiltless research in IFR.

The next section of this article is presented in the

following order, literature review, research

methodology, discussion, and conclusion. Literature

review is basic review for developing hyposthesis.

The methodology was written to choose the right

analysis tool to answer the research objectives.

Discussion is the part that describes the results of

statistical tests and the discussion. The article was

closed by drawing conclusions and implications of

the research.

2 THEORICAL FRAMEWORK

Financial statements are prepared based on the

accounting policies chosen by management. The

background of the audit committee's knowledge of

accounting will increase the understanding on the

selection of accounting policies of the audit

committee (Mutmainnah & Wardhani, 2013). In

addition, the accounting education background is

used to analyze financial statements prepared by

management for presenting quality financial

statements. Nuresa & Hadiprajitno (2013) states that

the supervision process carried out by companies

will increase if the audit committee has sufficient

understanding of financial reporting.

The professional background needed by audit

committee members is not just a background in

accounting and finance (Puspitaningrum & Atmini,

2012; Wang, 2015). Background in the field of

supervision and other business fields is also needed

so the oversight mechanism carried out by the audit

committee is more comprehensive. The results of

research conducted by Wang (2015) show that the

professional background of audit committee

members influences the quality of financial

statements. This findings differ with Puspitaningrum

& Atmini (2012). The other research stated there is

no relationship between the professional backgruond

of audit committees and IFR. Therefore, this study

measured the variable of professional background of

the audit committee in other business decision

making support.

The number of audit committee members is

depend on the size and complexity of the company.

In Indonesia the number of audit committees is

regulated in IFSA Regulation No.55/POJK.04/2015.

It regulated the minimum members of audit comittee

from independent commissioners and outside parties

of public companies. The number of audit

committee members influences the quality of

financial statements (Mutmainnah and Wardani,

2013). The influence of the number of audit

committee members on the quality of financial

reports has implications for the need for other

companies disclosures. In contrast to Mutmainnah

and Wardhani (2013), Nuresa dan Hadiprajitno

(2013) states that the number of audit committees

does not affect the quality of financial reporting. The

more the number of audit committees, the harder the

agreement can be made.

The oversight process carried out by the audit

committee is discussed regularly at audit committee

meetings. There is no minimum meetings number

that must be held by the audit committee, but the

number of meetings will affect predictability,

persistency, and conservatism of financial

statements (Mutmainnah and Wardhani; 2013). The

intensity of the meetings number will provide early

detection of possible fraud committed by

management (Nuresa & Hadiprajitno, 2013). In line

with the two researchers above, Puspitaningrum &

Atmini (2012) stated that the frequency of meetings

held by the audit committee would increase the

intensity of supervision and control by the audit

committee. Further supervision will affect the full

disclosure of IFR.

Large companies have better complexity and

management information systems than smaller

companies. Total Asset is wealth owned by the

company so that it can be used as a measure of the

company. The more assets company has, the more

funds it has to use IFR (Ojah & Mokoaleli-mokoteli,

2012; Puspitaningrum & Atmini, 2012).

3 RESEARCH METHOD

This research was conducted at financial industry

listed on the Indonesian stock exchange (IDX).

Financial industry need high transparency both

financial and non-financial reporting. In addition,

Garc (2018) also states that there are differences in

earnings quality and accounting conservatism

between management in the banking sector. This

difference will affect the full disclosure made by the

company.

Purposive sampling method used in this research.

The criteria of financial industry selected are; 1) the

companies are banks, securities, insurance, and other

investment companies; 2) End of December 31 fiscal

year, 3) completeness of IFR data including aspects

of audit committee profiles, and 4) IFR Period 2017.

Number of listed financial industries is 110

UNICEES 2018 - Unimed International Conference on Economics Education and Social Science

1266

companies, we eliminate 8 data due to incomplete

data financial statements, and 7 data due to

incomplete audit committee data, so the data we

took was 95 companies.

Variable

The dependent variable of this study is the

internet finacial reporting proxied by the internet

disclosure index (IDI). This index consists of 50

items to measure the content (40 items) and the

presentation (10 items) of companies’ website. In

more detail, 40 items of website content consist of

accounting and financial information (15 items),

corporate governance information (9 items),

corporate social responsibility (CSR) and Human

Resources Information (8 items), contact detail to

Investor Relation (IR) and related information (8

items), while 10 items of website presentation

consist of material processable formats (3 items) and

technological advantages and user support (7 items).

Maximum IDI score is 50.

The independent variable used in this study is the

accounting education background (EDU) as

measured by the sum of the accounting committee

members' accounting background, the score given is

0 for educational backgrounds for non accounting

fields and 1 for accounting education background,

then overall number added up. The professional

experience of the audit committee (PROFLIT) is

measured by the sum of the overall experience of the

audit committee members. The number of audit

committee members is measured by the number of

audit committee members. The number of meetings

is measured by the number of meetings held for one

year by the audit committee. This study also uses

total assets measured by natural logahritme of total

assets (SIZE) as control variabel.

Method of Data Analysis

This research used multiple regression analysis. The

research model is formulated in the research

equation below:

IDI= EDU + PROFLIT + NUMBAC + MEET + SIZE

IDI is the level of IFR, EDU is educatioan

background, PROFLIT is Proffesional Literacy,

NUMBAC is number of audit committee, MEET is

audit committee meeting frequencies, SIZE is

companies total asset. The classic assumptions in

this study include normality tested using

Kolmogorov-Smirnov Test, multicollinearity tested

using Tolerance Value and Variance Inflation

Factor, and heteroskedasticity tested using Glejser

Test. Autocorrelation test is not needed in this

research as the data used are cross sectional data.

4 ANALYSIS

The result of descriptive statistics tests of IFR is

illustrated in Table 1.

Table 1. Test of IFR

The level of voluntary disclosure disclosed by

financial industry in the form of IFR is high,

approximately 38,5%. It indicated that financial

industry has a complete information website about

the accounting and financial information, corporate

governance information, corporate social

responsibility and Human Resources Information,

and related information. Some companies

undisclosed the contact detail to investor relation

information, material processable formats and

technological advantages and user support. Table 2

shows the result of descriptive statistics test of

independent and control variables.

Table 2: Test of Dependent Variable

Variable

Min.

Max.

Mean

Std.Dev

EDU

.00

4.00

1.3684

1.07241

PROFLIT

2.00

19.00

8.3158

3.13275

NUMBAC

3.00

6.00

3.3579

.77068

MEET

.00

34.00

8.7789

6.40508

SIZE

18.56

34.66

29.6773

2.47985

Approximately 1/3 of total audit committee

members have finance and/or accounting

educational background. Moreover, most of audit

committee members have professional literacy not

only in accounting and/or financial background but

also other business decission making support.

Although the rule requires only one of audit

committee members has finance and/or accounting

educational background. Based on FSA regulation

the minimum numbers of audit committe is 3 and the

financial industry submissive the rule. There is a

large variation in the audit committee meeting

frequencies, from once a year up to 34 times a year.

In general, audit committee conducted 8 meetings in

the year 2017.

Results of classic assumption test

The result of Kolmogorov-Smirnov Test is 0.619

with significance level of more than 5%, it can be

Min.

Max.

Mean

IFI

2.8

The Effect of Audit Committe on Internet Financial Reporting: Study from Financial Industry in Indonesia

1267

summarized that the data come from normally

distributed population. The results of

multicollinearity test utilising Tolerance Value and

Variance Inflation Factor is EDU (0,982 and 1,018),

PROFLIT(0,975 and 1,025), NUMBAC (0,947 and

1,056), and MEET (0,868 and 1,151). Test results

demonstrating that there is no indication of

multicollinearity. Further, the values of Glejser

statistics have significance level of more than 5%,

indicating that there is no heteroskedasticity

problem.

Results of hypothesis tests

The results of hypothesis tests are exhibited below:

Table 3: Hipotesis tests

Variabel

Coefficient

regression

Sig.

Konstanta

22.995

EDU

.122

.602

PROFLIT

.112

.165

NUMBAC

.571

.086

MEET

.090

.032

SIZE

.397

.000

Adjusted R

Square

.257

Based on Table 3, it can be seen that only audit

committee meeting frequencies variable that is

statistically significant at the level of 5%. It also can

be concluded that audit committee meeting

frequencies affect the level of IFR positively based

on the possitive coefficient of this variable.

Therefore, the proposed hypothesis proxied by size

is supported. This study succeeds in finding

evidence that audit committee meeting frequencies

affect the level of IFR positively. However, this

study could not find any evidence that audit

committe educational background, professional

literacy, and number of audit committee influence

the level of IFR.

5 RESULTS

The result could not find evidence that audit

committe affect the IFR. This result consistent with

Pusitaningrum & Atmini (2012) but inconsistent

with Mutmainnah and Wardhana (2013). IFR not

only presented the financial information. So, the

audit committe basic knowledge affect the financial

reporting quality but not to other disclosure. This

study could not find any evidence that proffesional

literacy affect the IFR. This result consistent with

Puspitaningrum & Atmini (2012) but inconsistent

with Wang (2015). Wang (2015) stated that

professional background increased the quality of

financial reporting. Financial reporting just a part of

IFR. IFR is more complex and comprehensive than

the financial reporting. The professional literacy

affect the financial reporting quality (Wang, 2015),

but not the other disclosure needed in IFR. This

study also could not find any evidence that number

of audit committee affect the IFR. The number of

audit committee regulated by FSA. The company

submissive the rule using the minimum number

address by the rule. This evidence consistent with

Nuresa & Hadiprajitno (2013) but inconsistenr with

Mutmainnah and Wardhani. The more the number of

audit committees, the harder the agreement can be

made. This study succeed find the evidence about

effect of the frequencies of audit committee meeting

to the IFR. This result consistent with the prior study

(Mutmainnah & Wardhani, 2013; Nuresa &

Hadiprajitno, 2013; Puspitaningrum & Atmini,

2012). The frequency of meetings held by the audit

committee would increase the intensity of

supervision and control by the audit committee, it

affect the full disclosure of IFR (Puspitaningrum &

Atmini, 2012). The intensity of the meetings number

will provide early detection of possible fraud

committed by management (Nuresa & Hadiprajitno,

2013), so it will increase the full dislosure of IFR.

The size possitevely affect the IFR. It consistent

with Puspitanigrum & Atmini (2012) and Ojah et. al

(2013). In general this study only found the

eviendence of meeting frequencies to the IFR. This

can be caused by the selection procedures. In

Indonesia (Puspitaningrum, 2013). Furthermore it

seems that board of commissioners are established

just as a formality, to obey the rules. The members

do not have sufficient competencies in accounting or

other decision making support. Beside that it is a

common phenomenon in Indonesia that government

officers or ex-government officers are selected as

board of commissioner members as they can help

the companies to get an access to the governmental

institutions more easily (Puspitangrum & Atmini,

2012).

6 CONCLUSIONS

The results of this study successfully found the

effect of the meetings frequencies on IFR, while the

other variable did not. However, the adjusted R

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1268

square result for this study is only 25.7% so there are

still many variables outside this study that influence

IFR. The next research can examine the effect of

other variables such as the managerial and

blockhoder ownership on the IFR. Beside that,

longer period of testing can be used to to see the

development of IFR in financial industry.

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