Convergence With IFRS - Case of Indonesia
Convergence With IFRS - Case of Indonesia
Convergence With IFRS - Case of Indonesia
INTERNATIONAL FINANCIAL
REPORTING STANDARDS:
THE CASE OF INDONESIA
ABSTRACT
INTRODUCTION
particular context, one needs both knowledge of and empathy with the
entire local scene. However, in much of the prior literature, the very nature
of the research is such that the purpose is to explain the accounting
environment simply in terms of a few selected variables, without making any
attempt at understanding the totality of the local context.
Gray (1985, 1988) in developing a classification model based on cultural
factors suggests the importance of understanding accounting systems from
an ecological perspective and argues that:
a. accounting is influenced by societal values, which in turn are affected by
ecological influences through geographic, historical, technological, and
urbanization factors;
b. these in turn are influenced by external factors, such as forces of nature,
trade, investment, and conquest; and
c. both ecological factors and societal values influence a society’s
institutional arrangements for legal and political systems, corporate
ownership, capital markets, professional associations, education, and
religion, which affect accounting values and accounting practices.
On this perspective, accounting is likely to be influenced by a much
broader range of factors than what is often assumed in the literature.
Gernon and Wallace (1995) (hereafter, G&W) expand on the above
perspective and provide a taxonomy of accounting ecology that is designed
to reflect the association between accounting and its environment in a
holistic manner. They explain the concept of accounting ecology as follows:
A national accounting ecology is a multidimensional system in which no one factor
occupies a predominant position and in which the perception held by actors on some
unfolding accounting phenomena, as well as the accounting phenomena themselves, are
the objects of study and analysis. Such a synthesis would emphasize the interrelation-
ships of the environmental factors which influence and are influenced by accounting and
would focus on the importance of perceptual as well as non-cultural factors such as
population and land area (G&W, p. 59).
BACKGROUND
1997 (Time, 2 June, 1998, p. 36).3 These events showed how the global
currency and capital markets are prone to panic and capable of causing
economic destruction. According to the Bank of International Settlements,
Asia’s crisis was unique, in that the core problem was not government debt
or bad policies, but a relationship turned sour between banks and formerly
booming private sector companies (Time, 2 June, 1998, p. 35).
As a major player in the economic environment in the region, Indonesia
adopted policies of economic deregulation opening up the economy to
short-term foreign capital. Years of rapid economic growth attracted vast
inflows of foreign capital in the 1990s, leading to over-borrowing and over-
investment in non-productive areas. Further, dubious investments, such as
those involving the speculative property development projects in Jakarta,
were cheerfully funded by local banks, so long as the borrowers had the
right government connections. For example, of the $70 billion in foreign
debt held by Indonesia’s private sector, a significant percentage is thought to
be owed by companies owned or controlled by First Family members and
President Suharto’s cronies (Time, 26 January, 1998, p. 37).4
The regulatory framework in Indonesia was weak. For example, there
were no bankruptcy laws and effective laws regulating the banking system.
The combined effect of over-borrowing, over-investment, and lack of
adequate bank regulation was fatal. In this situation, nobody was quite sure:
a. Who lent what to whom during the boom period?
b. What were the chances those loans would ever be repaid?
c. Would government allow bad banks and companies to go bankrupt in
order to clean up the economic mess?5
Deutsche Bank estimated that non-performing loans amounted to 35% or
more of total bank lending in Indonesia, Malaysia, South Korea, and
Thailand (Economist, 17 October, 1998, pp. 85–86). In Indonesia,
borrowers have stopped making payments on about 70% of domestic bank
loans (Time, 1 November, 1999, p. 19).
The International Monetary Fund (IMF) recommended solutions
designed to rescue Indonesia and other countries in the region from the
crisis. For example, Indonesia was offered a $43 billion rescue package
(Economist, 20 June, 1998, pp. 82–87). These solutions were strongly
centered on fighting chronic corruption, monopolies, and bad procedures
including those related to financial markets and banking structure. The
IMF’s solutions, however, generated mixed results. For example, one of
the requirements was to follow tight monetary policies. Such policies pushed
the interest rates up and high interest rates choked businesses adversely
Convergence with IFRS Indonesia 207
Social Environment
Indonesia is the largest archipelago in the world with nearly 13,700 tropical
islands stretching some 5,120 km from east to west between the Pacific and
the Indian oceans. Indonesia makes up about 5 million square kilometers, of
which 2 million represents land and the rest is sea area between islands.
Indonesia’s population of nearly 210 million people includes at least 300
distinct ethnic groups, most of which speak mutually unintelligible languages
and have unique cultures and customs. The national language ‘Bahasa
Indonesia’, which is spoken by about 90% of the population, provides a
unifying link among these groups. Nearly two-thirds of the country’s
population live in Java where the capital Jakarta is situated (The Straight
Times (Singapore), 22 May, 1999, p. 11). More than 85% of the population
is Moslem, making Indonesia the largest Islamic nation in the world.
Table 1 shows a comparison of some cultural values between Indonesia
and Anglo-Saxon countries.
The above table clearly shows the cultural differences between Indonesia
and Anglo-Saxon countries. Indonesia is a large power distance and
collectivist country. IFRSs are strongly influenced, however, by Anglo-Saxon
values, which have been developed in an environment characterized by small
stripped of the seats reserved for it in the parliament and the country had its
first-ever direct presidential election in September 2004. There have been
some attempts at decentralization during the post-Suharto era, for example,
Law No. 22/1999 pertaining to local governments and Law No. 25/1999 on
fiscal decentralization. These are also in line with the 2000 IMF agreement
with the government and Bank of Indonesia, which requires fiscal
decentralization. However politically, Indonesia continues to be a large
power distance society where people tend to accept that power in
institutions and organizations is distributed unequally.
The legal system is based upon Roman-Dutch law. The Criminal Law is codified,
applying equally to all, but application of the Civil Law depends upon membership in
one of three groups: Muslim, European and Alien Orientals (a classification which owes
something to the Dutch colonial influence). The judicial system gives wide powers to the
Shari’a courts over Muslims in civil matters, although Muslims have the right to elect to
be dealt with by the secular courts (p. 283).
Lev (1972) explains the concept of justice within the Indonesian context as
follows:
Justice is not understood as the weighing of distinct interests in like cases, as the
European goddess of justice does; she stands for a formal, ethical view of justice, the
evolution of which depended upon a well-developed concept of private interests. In 1960,
at a time of ideological concern for the expression of specifically Indonesian traditions,
the goddess was replaced as Indonesia’s symbol of justice by a banyan tree inscribed
with the Javanese word pengajoman – shelter, succor – which connotes paternalistic
protection (p. 299).
if it was not contrary to that constitution. This decision was left in the hands
of the President. As a result, even today the President is the de facto source
of legal authority.
Organizational Environment
Professional Environment
Individual Environment
The IAI seems to have a mechanism to seek views from interested groups
regarding proposed accounting standards. However, the extent to which the
business community and other interested users are included in the process
and the degree of transparency in the process are not clear.
In Indonesia, social values have a heavy influence on the individual
environment. Within the political structure, concentration of power with the
ruler is acceptable to the community. Legal traditions also emphasize
harmony and patrimonial protection, rather than application of given rules.
Various organizations within the country provide mechanisms for the ruler
to operate. The role played by various professional groups within society is
also strongly influenced by the ruler. In this environment, individuals are
mindful of these realities, for example, in lobbying for accounting standards.
One needs to be careful because individual judgment may even imply
selfishness, absoluteness, belligerency, and unwillingness to compromise,
traits that are foreign to the Indonesian society. As Lev (1972, p. 282)
explains ‘‘Those who talk about rules as if they were absolute are likely to be
obstructers, inborn trouble makers, anti-social fools, or worse.’’
Further, Indonesia, being a large power distance society, people may not
be concerned about participating in decision-making processes. This may
have implications for the extent to which they respond to exposure drafts
issued by accounting standard setters. On the other hand, the manner in
which such responses are treated at the decision-making level will also be
affected by the cultural value of large power distance. In other words, those
who make important decisions may not feel the need to seriously consider
such responses.
214 HECTOR PERERA AND NABIL BAYDOUN
Accounting Environment
Regulatory Framework
The regulatory framework for accounting and financial reporting has three
levels. They are, Presidential decrees, regulations issued by relevant
government agencies, and accounting standards issued by the IAI.
Convergence with IFRS Indonesia 215
Presidential Decrees
Various Presidential decrees issued from time to time constitute laws that
have an impact on accounting and financial reporting. Until March 1996
when the new Companies Act (Basic Law of Limited Liability Companies
No. 1 of 1995 (Undang Undang Perseroan Terbatas)) came into effect, most
commercial transactions in Indonesia were regulated by the outdated Dutch
Commercial Code9 and the Civil Code10 of 1847. The Commercial Code
provided in broad terms the record-keeping requirements for business
enterprises. For example, it required that any person carrying on a business
activity must keep records sufficient to allow determination of that person’s
rights and obligations (presumably assets and liabilities). However, it did
not specify how this was to be accomplished.
The Companies Act 1995 contains more detailed requirements for
financial reporting. It requires companies to prepare their accounts in
accordance with the Standards of Financial Accounting and to explain the
reasons when these standards are not followed (Article 58). Further, Article
59 requires annual accounts of companies to be audited by a public
accountant. The Act also provides for government backing for IAI
standards (Diga & Yunus, 1997, pp. 287–295).
Although foreign investors opened the door for international accounting
firms, foreign investors, and international accounting firms had to under-
stand the environment in which accounting operates in Indonesia.
Government Agencies
The Capital Market Operations Board (Badam Pelaksana Pasar Modal
(Bapepam)) is the overall regulator for the securities market and is directly
responsible to the Minister of Finance. In conjunction with the privately
operated JSE and SSE, the Bapepam specifies the listing requirements for
companies that intend to raise funds through public issue of securities.11 It
has powers and functions similar to the US Securities and Exchange
Commission (US SEC). Recent reforms in securities regulations indicate a
shift towards a US SEC style regulatory framework. In regard to financial
reporting of public listed companies, the Bapepam supported the accounting
profession’s decision to allow IASs in 1994. The job of supervising foreign
investment falls on the Capital Investment Coordinating Board (Badn
Koordinasi Penanaman Modal (BKPM)) that administers and approves
foreign investment in the majority of economic sectors.
There are other institutions that are responsible for regulating specific
sectors. For example, the Bank of Indonesia, in addition to administering
the country’s monetary policy, undertakes the task of prescribing financial
216 HECTOR PERERA AND NABIL BAYDOUN
Accounting Standards
The government has refrained from imposing uniform accounting stan-
dards. Instead companies are allowed to select their own accounting
policies, subject to the reporting rules specified in legislation, administrative
pronouncements, and accounting standards. The primary responsibility for
developing detailed financial reporting standards rests with the IAI, which
consults with government agencies, for example, the Bank of Indonesia, and
other private sector bodies, for example, stock exchange.
Indonesian accounting standards draw heavily upon US sources (Ikatan
Akuntan Indonesia, 1989). The first set of accounting standards, Indonesian
Accounting Principles (Prinsip Akuntansi Indonesia) formulated by the
IAI in 1973 was directly adopted from Accounting Research Study 7
entitled ‘‘Inventory of Generally Accepted Accounting Principles for
Business Enterprises’’ published by the AICPA in 1965. These standards
were the reference for auditors when testifying on the compliance by
Indonesian firms with Indonesian accounting principles. The IAI carried out
a major revision to these principles and issued a revised set in 1984. The
accounting principles issued in 1984 were also based on the US accounting
pronouncements. In addition, the IAI issues statements of accounting
standards on specific topics of relevance to accounting practitioners.
However, accounting as a supporting service for a modern business sector
has not kept pace with the process of economic transition in Indonesia
(Schwarz, 1994, p. 65). Consequently, a great deal of business activity in the
private and state sectors remains clouded by ambiguity and uncertainty. The
economic crisis in the late 1990s highlighted the problem of a lack of
adequate measurement and disclosure practices by Indonesian firms.
Although the institutional framework related to accounting in Indonesia
follows the pattern that exists in the US and accounting standards draw
heavily upon US sources, enforcement of accounting rules remains a major
problem. Recent experience has raised concerns about the adequacy of
enforcement mechanisms. For example, as mentioned earlier, there have
been incidents involving massive loans made by financial institutions to
politically well-connected individuals which have been inappropriately
disclosed and improperly valued in the financial statements, undermining
Convergence with IFRS Indonesia 217
The position of most skilled groups in any society depends on the extent
to which their professional services are appreciated and demanded and their
values generally accepted by other institutional subsystems. In the case of
Indonesia, social values tend to support a mixture of traditional and
charismatic authority. As a result, professionals are likely to be weak and
the procedures followed by professionals tend to lose meaning and impact
(Lev, 1972, p. 260). In Indonesia, professionals seem to have lost their
prominence to politics and become dependent on political influence. Politics
is a game played not more or less according to rules of professional conduct,
but according to rules of influence, money, family, social status, and military
power.
The current status of the Indonesian accounting profession represents a
case of split personality in that it is Dutch in its qualification structure but
its training and philosophy are American (e.g., Briston, 1990; Yunus, 1990).
In most developing countries, both the legal and accounting systems were
imported from the same place.13 In the case of Indonesia, however, this was
true only for the colonial era. As mentioned earlier, during the subsequent
period, particularly since the 1960s, many aspects of Indonesian accounting
have been influenced heavily by the US or Anglo-Saxon accounting
standards and practices. Siddik and Jensen (1980, p. 76) state that:
Although the trend of accounting principles and standards in Indonesia are heavily
influenced by U.S. practice, their application is still Dutch. The most notable Dutch
influence is the application of replacement cost theory in the valuation of assets y .
Another distinctive Dutch influence still extant is a decimal numbering classification for
general ledger account y . The Indonesian Tax Ordinance is based on regulations
prepared by the Dutch in the 1930s.
CONCLUDING REMARKS
NOTES
1. For a review of this literature, see Meek and Saudagaran (1990).
2. Accounting infrastructure includes producers and users of information,
information intermediaries, laws and regulations that govern the production,
transmission, and usage of information, and regulatory bodies. (Lee, 1987, p. 79).
3. By mid-December more than $1billion a day was flowing out of South Korea.
As a result, foreign exchange reserves had fallen to less than $10 billion. Default was
about 10 days away (Time, 12 January, 1998, p. 24).
4. See also, Time, 24 May, 1999, pp. 36–48 for further details.
5. For example, in Indonesia, 90% of domestic companies were considered
technically bankrupt (Time, 2 March, 1998, p. 37) and at least half of the 222 banks
(deregulation in 1998 resulted in a proliferation of banks) were also considered
technically bankrupt (Time, 26 January, 1998, p. 37).
6. For example, in 1998, the number of unemployed in Indonesia was reaching 20
million (Time, 2 March, 1998, p. 37).
222 HECTOR PERERA AND NABIL BAYDOUN
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