Indonesian Accounting Environment

Accounting System

          A country’s accounting system, which is referred to as a set of accounting rules or practices used in financial reporting (Nobes, 1998), is shaped by various factors including those specific within a particular country. As a result, there have been variations in financial reporting practices around the world. A number of factors that influence countries’ accounting systems have been identified in the literature (see Nobes, 1988). Among those factors, perhaps accounting system orientation, stage of economic development, and culture have contributed most in shaping Indonesian accounting system.

          As a former Dutch colony, the early accounting system in Indonesia after the country gained its independence was substantially affected by the Dutch system that had been applied since colonisation. These influences were reflected in the financial reporting requirements prescribed in the early Indonesian company law (Kusuma, 2005, p.356). However, following certain economic and political reforms that were started in 1967, there had been a shift in the accounting practice orientation from the Dutch system to the U.S. system (Diga and Yunus, 1997, p.285; Liang, 1997, p.363; Kusuma, 2005, p.356). The most important event that marked the shift towards the U.S. accounting system was the publication of the first codified Indonesian Accounting Principles (PAI) in 1973 that was based on the 1965 U.S. GAAP (Saudagaran and Diga, 2000; Kusuma, 2005, p.356). The influence of U.S. accounting system remained present in the subsequent development of the Indonesian accounting systems, even after Indonesia had moved its accounting standard orientation towards international accounting standards.

          The shift to Anglo-American accounting system was also associated with Indonesia’s economic development, particularly in the 1980s. During that time, the Indonesian government was conducting a number of programmes to foster the growth of the capital market sector. Of note, it is thought that the accounting systems used in Anglos-Saxon countries such as the U.S. and the U.K. are mainly developed to cater for economies in which the capital market is the main source of financing (Nobes 1998). Although the country had moved to Anglo-American accounting system, there is a possibility that the Indonesian accounting practices do not completely resemble those in Anglo-Saxon countries due to differences in culture. It has been argued that social and cultural factors are likely to contribute in shaping the accounting system of a particular country (Gray, 1988). Hofstede (1980, p.25) defines culture as “the collective programming of the mind which distinguishes the  member  of  one  human group from another”, and proposes four cultural dimensions, namely individualism versus collectivism, power distance, uncertainty avoidance, and masculinity versus femininity. Within these cultural dimensions, Indonesia is viewed as a country with large power distance, low individualism, medium-weak uncertainty avoidance, and weak masculinity (Hofstede, 1983). Drawing upon Hofstede’s (1980) cultural framework, Gray (1988) proposes four accounting values that influence accounting systems: professionalism versus statutory control; uniformity versus flexibility; conservatism versus optimism; and secrecy versus transparency. The relevance of the Hofstede’s cultural dimensions in explaining accounting values in Indonesia has been confirmed by Sudarwan and Fogarty (1996). Hence, based on the Hofstede-Gray model, Indonesia’s accounting system is likely to be characterised by enforced statutory  control, uniformity, secrecy, and conservatism.

Accounting Regulatory Framework

          The regulation concernin financial reporting in Indonesia are mainly prescribed in the Indonesian Commercial Code and the Limited Company Act. The commercial code, which was based on the Dutch Commercial Code (Diga and Yunus, 1997, p.288), requires companies to keep accounts concerning their assets and liabilities, and to prepare a statement of  balance sheet on a semi-annual basis. However, the code does not provide specific requirements concerning the procedures or standards that should be followed in preparing the accounts and presenting the balance sheet. More detailed financial reporting requirements are provided in the current Limited Company Act, published in 2007. 1The act requires limited liability companies to present financial statements that at least consist of statement of balance sheet, statement of profit and loss, statement of cash flow, and notes to financial statements, and stipulates that the financial statements must  be prepared based on accounting standards set by the authorised accounting professional organisation. The act further specifies certain 1The Limited Company Act was first introduced in 1995. criteria in which  companies  need to have their financial statements audited by public accountants.

          Apart from the Limited Company Act, specific accounting regulations are also promulgated by a number of state and government bodies, including the Bank of Indonesia, the Capital Market Supervisory Agency, and the Tax Authority. The Bank of Indonesia holds the authority to set accounting regulations specific for the banking industry. Similarly, the Capital Market Supervisory Agency specifies financial reporting requirements that should be met by publicly held companies that are listed in the Indonesia Stock Exchange. Meanwhile, the tasks of the Tax Authority are mainly to set specific guidelines for companies in calculating and reporting income taxes based on the Indonesian tax laws.

post by : Rony Sutiyanto