The accounting regulatory compliance of Indonesian firms' annual reports

Abstract

This study examines accounting compliance using an agency theory framework through an analysis of 220 non-financial Indonesian listed companies’ 2006 annual reports. The level of regulatory compliance is measured using a 29 item index derived from the specific requirements of the Indonesian accounting standards (PSAK) on inventory, fixed assets, and depreciation. The key dependent variable is the aggregate compliance (IARCagg) with further sub-analysis conducted on measurement and disclosure rules and each individual standard.The findings reveal that only 60.61% of accounting regulation rules are followed by Indonesian companies. Measurement rules demonstrate higher compliance than disclosure. Depreciation rules have very high compliance with inventory and fixed assets much lower. Consistently, historical cost topics are far better addressed than fair market value themes.Regression analysis demonstrates that size of firm and return on assets are statistically significant predictors of IARC. Bigger and more profitable companies have far higher compliance with accounting rules. This is consistent with prior accounting compliance studies (Nichols and Street, 2007). Of special interest are the findings that corporate governance and ownership structure do not appear to explain accounting regulatory compliance in an Indonesian context.Given the almost 40% non-compliance rate there is a clear need for the Indonesian regulatory bodies to better enforce companies’ compliance with the rules. Improved enforcement of compliance with accounting standards could decrease agency costs and increase stakeholders’ confidence in Indonesian companies.