1

THESIS PROPOSAL


THE EFFECT OF IFRS CONVERGENCE, GOOD
CORPORATE GOVERNANCE AND ACCOUNTING
CONSERVATISM ON INFORMATION ASYMMETRY







Written by:
Name : Prayoga Cahayanda
Student 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 manipulating
financial 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 and
accounting 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 information
The 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 other
words 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 provide
financing 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 decision
making.
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 affiliated
companies, 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 making
is 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 circumstances
to 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 auditing
standards, 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
22

liability valuation, than it actually is. In certain situations, some of these criteria
can be conflicting. If so, lower income will first be considered rather than the
higher valuation of assets in determining whether a method or approach is
conservative or not. For example in the use value of running (current value) in the
valuation of assets, one approach, called Distributable income approach, do not
enter in the calculation of real holding gains incomenya. As a result, the inflation
situation, Distributable income approach often produces a higher valuation of
assets and calculation of the lower income compared with that generated from
historical cost approach. Therefore, Distributable income approach which uses the
value of running (current value) can be more conservative than historical cost
approach, although it is generally said to be more conservative historical cost.
Watts (2003) states there are three measures of conservatism, namely:
1) Earnings/stock return relation measures
Stock market price trying to reflect changes in the value of the asset at the
time of the change of both the change in net loss or gain in the value of asset-
stock return still trying to report on time. Basu (1997) stated that the cause of
conservatism events which is bad news or good news reflected in earnings are
not the same (asymmetric recognition time). This is because one of the
definitions of conservatism states that events that are expected to cause harm
to the company and should be immediately recognized, resulting in a faster
bad news is reflected in earnings than good news. Basu (1997) predicts that
stock returns and earnings are likely to reflect a loss in the same period, but
the stock returns reflect gains faster than earnings.
2) Earnings/accrual measures
The size of this second conservatism using accruals, which is the difference
between net income and cash flow. Net income used is net income before
depreciation and amortization, while cash flow used was operational cash
flow. Givoly and Hayn (2000) saw the tendency of the accrual account for
several years. In the event of negative accruals (net income less than the
operating cash flow) that is consistent for several years, then it is an
indication of the application of conservatism. In addition, accrual Givoly
23

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).
24

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 the
Regulation 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,
25

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.
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
27

committee announcement
dates. Independent
Audit 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
Analysis : Multiple Regression
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
Analysis : Multiple Regression
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
28


2.6 Hypothesis
2.6.1 The Effect of IFRS convergence on Information Asymmetry
Muller 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
Analysis : Multiple Regression
! 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
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 of
independent 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
30

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







31

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.







32

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.



33

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
34

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 financial
reports 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 the
study 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.
35

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).
36

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
37

!"#$
!"
= Value of IFRS convergence with dummy variable
!"
!"
= The proportion of independent board
!"
!"
= Audit committee
!"#$%
!"
= Accounting conservatism
!
!"
= Error value
38

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