Page 1 of 9
Archives of Business Research – Vol. 9, No. 8
Publication Date: August 25, 2021
DOI:10.14738/abr.98.10582. Kurniawanto, H., Suharno, Rahayu, K. P. (2021). Firm Characteristics and Enterprise Risk Management Disclosures: Evidence From
State-Owned Enterprise in Indonesia. Archives of Business Research, 9(8). 136-144.
Services for Science and Education – United Kingdom
Firm Characteristics and Enterprise Risk Management
Disclosures: Evidence From State-Owned Enterprise in Indonesia
Hudi Kurniawanto
Doctor in Accounting, Faculty of Economics,
Universitas Slamet Riyadi, Surakarta, Indonesia
Suharno
Faculty of Economics, Universitas Slamet Riyadi, Surakarta, Indonesia
Krisna Puji Rahayu
Faculty of Economics, Universitas Slamet Riyadi, Surakarta, Indonesia
ABSTRACT
The purpose of this study is to examine the effect of firm characteristics on
enterprise risk management disclosure. The object of research is State-Owned
Enterprises listed on the Indonesia Stock Exchange in 2019-2020, a total sample of
40 annual reports using purposive sampling and multiple regression analysis. The
results of this study prove that firm size and leverage do not affect enterprise risk
management disclosure, while profitability affects enterprise risk management
disclosure. The greater the profitability generated by the company, the wider the
risk disclosure will be made to show stakeholders that State-Owned Enterprises in
Indonesia can use capital efficiently.
Keywords: Firm Size, Leverage, Profitability, Enterprise Risk Management Disclosure,
Indonesia Stock Exchange
INTRODUCTION
The phenomenon of the Garuda Indonesia company financial report case is considered a loss to
shareholders. The management of Garuda Indonesia company in the company's 2018 annual
financial position report based on previous information (2017 financial position report) there
are irregularities, information is obtained that Garuda Indonesia company recorded a profit of
Rp 11 billion in December 2018, but in 2017 Garuda Indonesia company suffered a loss up to
IDR 3 trillion (Merdeka.com dated July 3, 2019). Proven Defect, Garuda Loss Financial
Statement Status. The Financial Services Authority and the Ministry of Finance have imposed
sanctions on Garuda Indonesia company and certified public accountant Kasner Sirumapea and
certified public accountant Tanubrata, Sutanto, Fahmi, Bambang & Partners because it was
proven that there were violations related to the financial report case. annual. The presentation
of this annual financial report is not by the standards of The Financial Services Authority
Regulations and is not by the Statement of Financial Accounting Standards (finance.detik.com
date June 28, 2019).
The increasingly fierce business competition encourages every company to be more
transparent in disclosing information. The information disclosed must be understandable,
Page 2 of 9
137
Kurniawanto, H., Suharno, Rahayu, K. P. (2021). Firm Characteristics and Enterprise Risk Management Disclosures: Evidence From State-Owned
Enterprise in Indonesia. Archives of Business Research, 9(8). 136-144.
URL: http://dx.doi.org/10.14738/abr.98.10582
relevant, reliable, and comparable. The more quality and comprehensive the information
presented in the company's annual report, the more important the report is to investors
(Miihkinen, 2012) and reduces information asymmetry between investors and management
(Lajili & Zeghal, 2005). Disclosure of risk will help investors determine the level of risk they will
face and improve the quality of their investment decisions (Solomon, Solomon, Norton, &
Joseph, 2000).
Empirically, the effect of firm characteristics such as firm size, leverage, and profitability on
enterprise risk management disclosure results varies. Studies (Sinaga, Nazar, & muslih, 2018)
and (Yunifa & Juliarto, 2017) concluded that firm size had a positive effect, while (Hassan, 2009)
and (Sanusi, Motjaba-nia, Roosle, Sari, & Harjitok, 2017) concluded that the results did not
affect. Studies (Marhaeni, T., & Yanto, 2015) and (Kumalasari, Subono, & Anissykurlillah, 2014)
concluded that leverage had a positive effect, while (Amran, Bin, & Hassan, 2009),
(Sulistyaningsih, & Gunawan, 2016), and (Khumairoh, & Agustina, 2017) showed no effect.
Studies (Aljifri & Hussainey, 2007), and (Miihkinen, 2012) concluded that profitability had a
positive effect, while (Lajili & Zeghal, 2005), and (Olveira, Rodrigues, & Craight, 2011) find a
negative effect between the two variables.
This research can contribute to the government as a reference in determining policies on risk
management disclosure of state-owned companies listed on the Indonesia Stock Exchange to
increase investor confidence. For company management, this research can provide information
and understanding of corporate risk management disclosures to help improve risk
management disclosure practices in companies and realize good corporate governance.
Based on the description of the background above, the purpose of this study is to examine the
extent to which firm characteristics can affect enterprise risk management disclosure. The main
question of this study is whether the firm characteristics represented by firm size, leverage, and
profitability can affect enterprise risk management disclosure. The purpose of this study,
namely to obtain empirical evidence of the effect of firm characteristics on the enterprise risk
management disclosure.
LITERATUR REVIEW
According (Jensen & Meckling, 1976) discusses the relationship between principals
(shareholders) and agents (managers) related to how to manage the company. The principal is
an entity that delegates authority to agents to manage the company on behalf of the principal
including to make decisions. Agency theory predicts that managers will do the work or will
make decisions that will benefit themselves, even if those decisions are not in the best interests
of shareholders. In addition, managers have more and more accurate company information
than shareholders. The main purpose of risk disclosure is to reduce agency costs incurred
because the interests of managers are different from the interests of shareholders and the
information asymmetry that occurs between managers and shareholders.
Stakeholder theory provides the idea that companies do not only operate for the company
themselves but also to provide benefits to stakeholders. Information is an important element
in decision making, so investors as one of the stakeholders will find ways to get information
Page 3 of 9
138
Archives of Business Research (ABR) Vol. 9, Issue 8, August-2021
Services for Science and Education – United Kingdom
related to the risk that is useful in making decisions (Amran et al., 2009). By making wider
disclosures including risk disclosure, investors will feel more satisfied.
Risk is an uncertain outcome because the probability of uncertainty cannot be determined.
There are six risk categories, namely: financial risk, operating risk, empowerment risk,
information processing, and technology risk, integrity risk, and strategic risk (Linsley & Shrives,
2006). (Miihkinen, 2012) defines risk disclosure as all information about the risk presented by
the company in the annual report. The lack of information about corporate risk in the annual
report can threaten the relevance of the report (Cabedo & Tirado, 2004).
Large companies are considered capable of providing information to both internal and external
parties and have plenty of resources to do so so that large companies do not incur additional
costs to present information to all stakeholders. The larger the company, the more information
will be disclosed. Details will also be disclosed, such as information related to the risks faced by
the company, because large companies are considered capable of providing this information
(Prayoga & Almilia, 2013).
The results of research conducted by (Linsley & Shrives, 2006), (Abraham & Cox, 2007),
(Barakat & Hussainey, 2013), (Ruwita & Harto, 2013) show that firm size is significantly related
to corporate risk disclosure. The size of the company can affect the company's risk disclosure
because the bigger the company, the more stakeholders the company has. Following the
stakeholder theory, as the number of stakeholders increases, the risk disclosure obligation
becomes greater to meet the needs of stakeholders. Based on the description above, the
hypothesis is found:
H1: Firm size is positively associated with enterprise risk management disclosure
According to agency theory, creditors from companies that have a high level of debt risk in the
capital structure can force companies to disclose more information (Amran et al., 2009). This
is because companies with high debt levels are usually more speculative and risky so that wider
disclosure of risk information is needed to reduce information asymmetry between agents and
principals.
The results of previous research conducted by (Abraham & Cox, 2007), (Hassan, 2009),
(Olveira et al., 2011) found that leverage has a positive effect on risk disclosure. Based on the
description above, the hypothesis is found:
H2: Leverage is positively associated with enterprise risk management disclosure
The level of profitability can be interpreted as a characteristic that describes the company's
ability to generate profits. Companies with high levels of profitability will disclose more
information. This is because high profitability shows that the company can manage the
company well. Companies that produce high levels of profitability are followed by high risks,
thus encouraging companies to disclose increasingly widespread risk information. There is a
positive relationship between the level of profitability and risk disclosure because company
managers in increasing earnings can provide greater information to increase investor
confidence and thereby increase their compensation.
Page 4 of 9
139
Kurniawanto, H., Suharno, Rahayu, K. P. (2021). Firm Characteristics and Enterprise Risk Management Disclosures: Evidence From State-Owned
Enterprise in Indonesia. Archives of Business Research, 9(8). 136-144.
URL: http://dx.doi.org/10.14738/abr.98.10582
The results of research conducted by (Aljifri & Hussainey, 2007), (Miihkinen, 2012) show that
profitability is significantly related to corporate risk disclosure. Profitability has a positive
effect on corporate risk disclosure because the higher the profit generated by the company, the
greater the incentive for managers to provide detailed information as evidence that they can
generate profits for the company. Based on the description above, a hypothesis is proposed:
H3: Profitability is positively associated with enterprise risk management
disclosure
METHODOLOGY
This research is a type of causal research, which aims to test the hypothesis about the effect of
one or several independent variables on the dependent variable. The hypothesis proposed in
this study was tested using quantitative research methods, namely performing regression
testing in the form of descriptive statistics and multiple regression analysis. The data obtained
in this study will be processed using Statistical Product and Service Solutions.
Enterprise Risk Management Disclosure
Enterprise Risk Management Disclosure in this study was measured using a total score index
of disclosure items based on ISO 31000 dimensions which include 5 dimensions, namely
mandates and commitments, framework planning, risk management implementation,
monitoring, and continuous improvement following ISO 31000 component standards.
Calculation of items using a dummy variable, that is, each ERM item that is disclosed is given a
value of 1 and a value of 0 if it is not disclosed. Each item will be summed to obtain the overall
ERM index of each company. Information regarding ERM disclosures is obtained from annual
reports and company websites. The calculation of the Enterprise Risk Management Disclosure
Index is formulated as follows:
ERM Indek = Number of item disclosed (1)
25 disclosure items
Firm Size
Firm size can be seen from the size of the capital used, total assets controlled, or total sales
generated. This study uses the total assets of the company in determining the size of the
company. Since the company's total assets are of high value, this can be simplified by
transforming them into a natural logarithm so that the size of the company can be calculated
by:
Firm size = Total Aset (2)
Leverage
Leverage is used to measure how much the company's assets come from debt or capital.
Leverage is a ratio that states the relationship between debt and total capital or company assets
(Sulistyaningsih, & Gunawan, 2016). The level of leverage in this study was measured using the
debt to asset ratio. The measurement of leverage uses the debt to asset ratio because this ratio
can indicate an increased risk for creditors in terms of the company's inability to pay off the
company's debt. The following formula is used to measure the debt to asset ratio (Utomo &
Chariri, 2014):
Leverage = Total Amount of debt
Total assets (3)
Page 5 of 9
140
Archives of Business Research (ABR) Vol. 9, Issue 8, August-2021
Services for Science and Education – United Kingdom
Profitability
Profitability is a ratio that describes the company's ability to earn a profit. The increase in profit
is the basis for evaluating the company's performance. In this study, profitability is proxied by
Return on Assets (ROA). ROA is the measurement of financial performance that is most often
used in the literature because this ratio measures profitability related to the number of assets
used (Rose, 2016).
Return on Assets (ROA) is expressed by the formula:
ROA = Net Income
Total Assets (4)
The population in this study includes all state-owned companies listed on the Indonesia Stock
Exchange 2019 - 2020, which includes a total of 20 companies. Samples were obtained by the
purposive sampling technique. The final sample used in this study is 40 annual reports of state- owned companies listed on the Indonesia Stock Exchange 2019 - 2020.
The data collection method in this study uses secondary data taken from the annual reports of
state-owned companies listed on the Indonesia Stock Exchange in 2019-2020. The secondary
data collected was obtained from the website www.IDX.co.id and the sites of each sample
company.
The multiple regression equation for hypothesis testing in this study is:
ERMD = α0 + β1SIZE + β2LEV + β3PROFIT + ε (5)
Where:
ERMD : Enterprise Risk Management Disclosure,
SIZE : Firm Size,
LEV : Leverage,
PROFIT : Profitability
α0 : Constant,
β1... β3 : regression coefficient, and
ε : error term.
FINDINGS
Description of Data
Overall, there are 40 observation data on the annual report of SOE companies in Indonesia for
2019-2020. Table 1 below describes the descriptive statistics of the research variables.
Information on the descriptive statistics includes minimum, maximum, mean, and standard
deviation values.
Page 6 of 9
141
Kurniawanto, H., Suharno, Rahayu, K. P. (2021). Firm Characteristics and Enterprise Risk Management Disclosures: Evidence From State-Owned
Enterprise in Indonesia. Archives of Business Research, 9(8). 136-144.
URL: http://dx.doi.org/10.14738/abr.98.10582
Table 1 Descriptive Statistic
Variable Min Max Mean Std. Deviation
Firm Size (milyard) 5.5710 891.3370 116.21797 192.8888
Leverage 0,4060 0,8904 0,7341 0,1545566
Profitability -0,4563 0,1473 0,0085 0,0855546
ERM Diclosure 0,7600 0,8800 0,8040 0,0502711
Valid N (listwise) 40
Source: Secondary data are processed
Table 1 shows the average level of enterprise risk management disclosure in state-owned
companies in Indonesia of 80.40% with a maximum value of 88.00% and a minimum of 76.00%.
These results indicate that the awareness of SOEs companies in Indonesia is quite high
regarding the importance of disclosing company risk as one of the keys to creating value and
competitive advantage for companies. Descriptive statistics from independent variables: The
average number of firm sizes is Rp. 5,571,000,000,000, - the average leverage is 73.41%. and
the average profitability of 0.85%.
Multiple Regression Analysis.
The results of multiple regression after testing the classical assumptions can be seen as follows.
Table 2 shows that the value of R Square (R2) is 28.60% and Adjusted R Square (Adjusted R2)
is 22.60%. Based on the Adjusted (R2) value, it can be concluded that as much as 22.60% of
ERM disclosures can be explained by independent variables, the remaining 77.40% is explained
by other factors outside the model.
The table shows the calculated F value of 4.805 with a probability of 0.006 (p-value < 0.050).
Because the F value is greater than 4,000 and the probability is less than 0.050, this regression
model shows the Goodness of Fit Model so that the regression model can be used to predict the
enterprise risk management disclosure and can show that the independent variables jointly
affect enterprise risk management disclosure.
Table 2 Result of Multiple Regressions
Variables Coefficient t p-value
(Constant) 1,151 7,878 0,000
Firm Size -0,009 -1,896 0,066
Leverage -0,079 -1,601 0,118
Profitability 0,192 2,200 0,034**
R-Square 0,286
Adjusted R-Square 0,226
F 4,805
Sig 0,006
Notes: Significance at: *0,10, **0,05, and ***0,01 levels.
Page 7 of 9
142
Archives of Business Research (ABR) Vol. 9, Issue 8, August-2021
Services for Science and Education – United Kingdom
The variable that has a significant effect on the level of corporate risk disclosure is profitability
at a significance level of 0.05 while the firm size and leverage variables have no effect on
enterprise risk management disclosure.
Firm size (ρ-value = 0.066 and coefficient = -0.009) indicates that firm size has no effect on
enterprise risk management disclosure. These results are consistent with research conducted
by (Hassan, 2009) and (Sanusi et al., 2017) who found that there was no effect of firm size on
the disclosure of firm risk. This is because companies, both large and small, in carrying out their
operational activities are faced with different social situations, regulations and business
environments in carrying out risk disclosure practices.
Leverage (ρ-value = 0.118 and coefficient = -0.079) indicates that leverage has no effect on
corporate risk disclosure. These results are consistent with the research conducted by (Amran
et al., 2009) who found that there was no effect of leverage on the company's risk disclosure. It
is suspected that creditors and investors in general in Indonesia pay less attention to financial
analysis factors so that although the disclosures in the annual report have been made by the
company, the disclosure is not responded well. Leverage, which is one indicator of the
company's performance measurement and financial information, is less able to influence risk
disclosure in the company's annual report.
Profitability (ρ-value = 0.034 and coefficient = 0.192) indicates that profitability has a
significant positive effect on corporate risk disclosure. These results are consistent with the
results of research conducted by (Aljifri & Hussainey, 2007) and (Miihkinen, 2012) which
shows that the level of profitability affects the disclosure of company risk. The greater the
profitability generated by the company, the wider the risk disclosure will be made to show
stakeholders that SOEs companies in Indonesia are able to use capital efficiently.
CONCLUSION
From the research results obtained, it can be concluded that firm size and leverage do not affect
enterprise risk management disclosure in Indonesia. The firm size does not affect the
enterprise risk management disclosure. This is because companies, both large and small, in
carrying out their operational activities are faced with different social situations, regulations,
and business environments in carrying out risk disclosure practices.
Leverage does not affect the enterprise risk management disclosure. This shows that leverage,
which is one indicator of the company's performance measurement and financial information,
is less able to influence risk disclosure in the company's annual report.
Profitability affects the enterprise risk management disclosure. The greater the profitability
generated by the company, the wider the risk disclosure will be made to show stakeholders that
State-Owned enterprises in Indonesia can use capital efficiently.
Page 8 of 9
143
Kurniawanto, H., Suharno, Rahayu, K. P. (2021). Firm Characteristics and Enterprise Risk Management Disclosures: Evidence From State-Owned
Enterprise in Indonesia. Archives of Business Research, 9(8). 136-144.
URL: http://dx.doi.org/10.14738/abr.98.10582
References
Abraham, S., & Cox, P. (2007). Analysing the determinants of narrative risk information in UK FTSE 100 annual
reports. British Accounting Review, 39(3), 227–248. https://doi.org/10.1016/j.bar.2007.06.002
Aljifri, K., & Hussainey, K. (2007). The determinants of forward-looking information in annual reports of UAE
companies. Managerial Auditing Journal, 22(9), 881–894. https://doi.org/10.1108/02686900710829390
Amran, A., Bin, A. M. R., & Hassan, B. C. H. M. (2009). Risk reporting: An exploratory study on risk management
disclosure in Malaysian annual reports. Managerial Auditing Journal, 24(1), 39–57.
https://doi.org/10.1108/02686900910919893
Barakat, A., & Hussainey, K. (2013). Bank governance, regulation, supervision, and risk reporting: Evidence from
operational risk disclosures in European banks. International Review of Financial Analysis, 30, 254–273.
https://doi.org/10.1016/j.irfa.2013.07.002
Cabedo, J. D., & Tirado, J. M. (2004). The disclosure of risk in financial statements. Accounting Forum, 28(2), 181–
200. https://doi.org/10.1016/j.accfor.2003.10.002
Hassan, M. K. (2009). UAE corporations-specific characteristics and level of risk disclosure. Managerial Auditing
Journal, 24(7), 668–687. https://doi.org/10.1108/02686900910975378
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs, and ownership
structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1017/CBO9780511817410.023
Khumairoh, & Agustina, L. (2017). The Roles of The Board of Commissioner in Moderating Factors Affeting The
Disclosure Of Enterprise Risk Management. Accounting Analysis Journal, 6(3), 445–457.
https://doi.org/10.15294/aaj.v6i3.18908
Kumalasari, Subono, & Anissykurlillah, I. (2014). Factors Influencing the Area of Risk Management Disclosure.
Accounting Analysis Journal, 3(1), 18–25.
Lajili, & Zeghal. (2005). A Content Analysis of Risk Management Disclosures in Canadian Annual Reports.
Canadian Journal of Administrative Sciences, 22(2), 1215–142.
https://doi.org/http://dx.doi.org/10.1108/17506200710779521
Linsley, P. M., & Shrives, P. J. (2006). Risk reporting: A study of risk disclosures in the annual reports of UK
companies. British Accounting Review, 38(4), 387–404. https://doi.org/10.1016/j.bar.2006.05.002
Marhaeni, T., & Yanto, H. (2015). Determinants of Enterprise Risk Management (ERM) Disclosures in
Manufacturing Companies. Accounting Analysis Journal, 4(4), 1–22.
Miihkinen, A. (2012). What Drives Quality of Firm Risk Disclosure?. The Impact of a National Disclosure Standard
and Reporting Incentives under IFRS. International Journal of Accounting, 47(4), 437–468.
https://doi.org/10.1016/j.intacc.2012.10.005
Olveira, J., Rodrigues, L. L., & Craight, R. (2011). Risk-related disclosures by non finance companies: Portuguese
practices and disclosur characteristics. Managerial Auditing Journal, 26(9), 817–839.
https://doi.org/10.1108/02686901111171466
Prayoga, E. B., & Almilia, L. S. (2013). Effect of Ownership Structure and Company Size on Risk Management
Disclosure. Journal of Accounting and Finance, 4(1). https://doi.org/10.36448/jak.v4i1.237
Rose, C. (2016). Firm performance and comply or explain disclosure in corporate governance. European
Management Journal, 34(3), 202–222. https://doi.org/10.1016/j.emj.2016.03.003
Ruwita, C., & Harto, P. (2013). Analysis of the Effect of Company Characteristics and Corporate Governance on
Corporate Risk Disclosure. Diponegoro Journal of Accounting, 2(2), 1–13.
Sanusi, Z., Motjaba-nia, S., Roosle, N. A., Sari, R. N., & Harjitok, A. (2017). Effects of Corporate Governance
Structures on Enterprise Risk Management Practices in Malaysia. International Journal of Economics and
Financial Issues, 7(1), 6–13.
Sinaga, Nazar, & muslih, M. (2018). The Influence of the Size of the Board of Commissioners, the Risk
Management Committee (RMC), and Company Size on the Implementation of Enterprise Risk Management
Page 9 of 9
144
Archives of Business Research (ABR) Vol. 9, Issue 8, August-2021
Services for Science and Education – United Kingdom
(Study on Banking Companies Listed on the Indonesia Stock Exchange (IDX) in 2014-2016. E-Proceeding of
Management, 5(2), 2410–2417.
Solomon, J. F., Solomon, A., Norton, S. D., & Joseph, N. L. (2000). A conceptual framework for corporate risk
disclosure emerging from the agenda for corporate governance reform. British Accounting Review.
https://doi.org/10.1006/bare.2000.0145
Sulistyaningsih, & Gunawan, B. (2016). Analysis of Factors Affecting Risk Management Disclosure. Indonesian
Accounting and Finance Research, 1(1), 1–11.
Utomo, Y., & Chariri, A. (2014). Determinan pengungkapan risiko pada perusahaan nonkeuangan di indonesia.
Diponegoro Journal of Accounting, 3(3), 1–14.
Yunifa, L., & Juliarto, A. (2017). Analysis of the Effect of Company Characteristics on the Level of Risk Disclosure
in Manufacturing Companies. Diponegoro Journal of Accounting, 6(3), 538–549.