Study of The Determinants Existence of External Assurance on
Sustainability Reports in Indonesia
Cana Antyanta Dias and B. Basuki
Faculty of Economics and Business, Universitas Airlangga, Surabaya, Indonesia
Keywords: External Assurance, Firm Size, Industry Affiliation, Profitability, Sustainability of Department,
Sustainability Reports.
Abstract: Due to the growing trend of firms publishing stand-alone sustainability reports, adhering to an
unprecedented demand for disclosure, sustainability reports are now equally as important as financial
reports. Following this occurrence, subjective and partial disclosures with external assurance are required to
assure and maintain credibility of information within sustainability reports. Thus, the purpose of this
research is to obtain empirical evidence related to the determinants that affect the existence of external
assurance on sustainability reports in Indonesia. The sample being tested are 116 companies registered in
the Indonesia Stock Exchange (IDX) during the period 2013–2015, which are issuing stand-alone
sustainability reports. The logistic regression model is employed within hypothesis testing. The result
showed that both Profitability and Industry Affiliation positively and significantly affect the Existence of
External Assurance on Sustainability Reports, meanwhile, Firm Size had positive influence but not
significant. Sustainability Department was also found to be an insignificant determinant to the Existence of
External Assurance on Sustainability Reports.
1 INTRODUCTION
In a modern context, the goal of corporations is to
extend not only to generate profits, but also as a
frontier to incarnate social welfare. To support the
realization of social welfare and cope with ever-
changing social and environmental problems,
corporations should contribute and undertake
sustainable activities, which at the organizational
level, are reflected through the inclusion of
economic, environmental, and social aspects of
companies’ activities as performance indicators to
generate long-term shareholder value (Çalişkan,
2014). Nevertheless, it is difficult to properly assess
the social and environmental performance of
companies because firms lean on financial figures
that are endowed with a limited ability to reflect on
the activities of contemporary business models and
their consequences (Banerjee, 2002; Jones, 2010).
Over the past two decades, companies have paid
more attention to their efforts in recognizing and
measuring environmental issues in financial
reporting, as more stakeholders have voiced further
concerns regarding this issue (Bobe & Dragomir,
2011). Consequently, this has prompted the
inclusion of corporate social responsibility
information in the annual reports from many
corporations. Environmental and social information
could be disclosed as part of a company’s published
annual reports. Furthermore, this information could
be disclosed separately within a stand-alone
sustainability report.
The issuance of stand-alone corporate social
responsibility (CSR) reports has shown a dramatic
growth over the past two decades. KPMG
International surveyed 4,100 companies worldwide
in 2013 and found that 71% of those companies are
engaged in CSR reporting (KPMG International,
2013). However, Cho, et al. (2012) stated that such
practice of voluntary corporate disclosure is subject
to concerns regarding the completeness and
credibility of the information that is being provided.
One way to handle the issue of credibility is by
obtaining third-party assurance (Simnett, et al.,
2009). International evidence has proven the
existence of a growing number of corporations using
third-party assurance for their CSR report. In 2011,
only 45% of the Global 250 corporations published
CSR reports with a third-party assurance and this
had grown to over half by 2013 (KPMG
16
Dias, C. and Basuki, B.
Study of The Determinants Existence of External Assurance on Sustainability Reports in Indonesia.
In Proceedings of the Journal of Contemporary Accounting and Economics Symposium 2018 on Special Session for Indonesian Study (JCAE 2018) - Contemporary Accounting Studies in
Indonesia, pages 16-22
ISBN: 978-989-758-339-1
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved

International, 2013). There are no formal regulations
to ensure that companies report their non-financial
information separately, so there is no mandate to
include assurance statements within their stand-
alone CSR reports (Simnett, et al., 2009).
Simnett, et al. (2009) identified several findings
in their research, in which they had examined a
sample of 2,113 companies across 31 countries that
produced sustainability reports during the period
2002–2004. They hypothesized that the decision to
assure stand-alone sustainability reports is a function
of company, industry-, and country-related factors.
In contrast to the research by Simnett et al. (2009),
Cho et al. (2014) focused only on firm-related
factors in his research, carried out in the USA due to
the country’s shareholder-oriented characteristics,
which can inhibit the effect of such country-related
factors to drive the demand of sustainability
assurance.
Understanding the need to provide external
assurance for information disclosed within
sustainability reports, this study proposes four
variables, namely profitability, size of the firm,
industry affiliation, and the sustainability of the
department, as determinants of external assurance in
sustainability reports. The research revolves around
the effect of these four proposed determinants
towards external assurance in the reporting of
sustainability.
2 LITERATURE REVIEW
2.1 Theoretical Basis
2.1.1 Legitimacy Theory
Legitimacy is defined as “a generalized perception
or assumption that the action of an entity is
desirable, proper, or appropriate within some
socially constructed system of norms, values,
beliefs, and definitions” (Suchman, 1995, p.574).
Deegan (2002) considered sustainability reporting as
a tool for the communication of the corporation and
society. Sustainability reporting is used by
corporations to justify sustainable activities held by
them and to clarify any incidents that might possibly
have a detrimental effect on their reputations.
Furthermore, Simnett et al. (2009) proposed that
corporations’ decisions to provide assurance on their
reports are driven by their desire to improve the
credibility of the disclosed information, and this is in
line with companies’ objectives to gain legitimacy.
2.1.2 Stakeholder Theory
The stakeholder approach explains the complex
relationships that occur between organizations and
their stakeholders, which are based on the
responsibility and accountability of organizations
(Gray et al. 1996). Liesen et al. (2015) stated that
stakeholders can have contrasting concerns toward
companies’ social and environmental responsibilities
and that sustainability activity can be an effective
method for companies to address these concerns.
They also concluded that sustainability disclosures
and assurance can be one way to reduce stakeholder
pressure and the threat of legitimacy (Liesen et al.,
2015).
2.2 Hypothesis Development
2.2.1 The Influence of Profitability on the
Existence of External Assurance in
Sustainability Reports
Profitability is closely tied with profit, yet it refers to
the relative value of a firm’s ability to generate
return on investment based on employed resources
in comparison to alternative investment. The
relationship between corporate profitability and
social and environmental disclosure is rather
inconclusive. Some argue that profitable firms have
more social constraints and public exposure, so they
must ensure that their profit has not been gained at
the expense of society through the use of
sustainability reports (Gamerschlag et al., 2010). On
the other hand, Neu et al. (1998) argue that
unprofitable firms are more likely to disclose social
information, either to support their poor financial
performance or to guarantee their long-term
competitive advantages caused by current
environmental investments. Branco et al. (2014) and
Kend (2015) found that profitability has
significantly affected the company's demand to
adopt assurance on their sustainability reports. Based
on the preceding explanation, the hypothesis can be
proposed as follows:
H1: Profitability significantly influences the
existence of external assurance on sustainability
reports
2.2.2 The Influence of Firm Size on the
Existence of External Assurance on
Sustainability Reports
Dang and Li (2015) define firm size as a measure of
total assets, sales, and market value of equity within
Study of The Determinants Existence of External Assurance on Sustainability Reports in Indonesia
17

their natural value. In general, large companies face
a greater political risk than small firms. Large
companies experience more pressure from the public
to carry out social responsibility. Therefore, large
companies will be more inclined to assure their
sustainability reports, to increase public confidence
and reduce the possibility of detrimental claims from
society regarding the company. In addition, large
companies have excess resources to undertake
sustainability assurance that is still voluntary. For
example, research conducted by Simnett et al.
(2009) and Branco et al. (2014) have determined
firm size as a firm-level variable that was proven to
have a significant influence on the company’s
demand of sustainability assurance. Based on the
preceding explanation, the hypothesis can be
proposed as follows:
H2: Firm size significantly influences the
existence of external assurance on sustainability
reports
2.2.3 The Influence of Industry Affiliation
on the Existence of External Assurance
on Sustainability Reports
This study defines industry affiliation as a
classification of firms in accordance to their
respective business operations, belonging to a
specific industry. Many previous studies have shown
a relationship between industry classifications and a
firm decision to assure their sustainability reports.
Simnett et al. (2009) and Cho et al. (2014) in their
research have found similar evidence that utilities,
mining, and finance industries are more likely to
have their sustainability reports assured. However,
Cho et al. (2014) grouped several “more sensitive”
industries into a separate classification, namely an
environmentally sensitive industry (ESI) variable.
Based on the preceding explanation, then the
hypothesis can be proposed as follows:
H3: Industry affiliation significantly influences
the existence of external assurance on sustainability
reports
2.2.4 The Influence of the Existence of the
Sustainability Department on the
Existence of External Assurance on
Sustainability Reports
A sustainability department is one which focuses
primarily on ensuring a firm has the ability to
achieve a profitability objective, while also ensuring
that society outreach is not neglected. It represents a
more effective integration of sustainability matters,
which can be the driver for an advanced
sustainability reporting system and continuous
improvement on the level of credibility of this
environmental and social information (Kend, 2015;
Gillet & Martinez, 2011). Ruhnke and Gabriel
(2013) have evidenced a strong and positive
correlation between the existence of a sustainability
department with the decision to assure sustainability
reports. Hence, it is predicted that those companies
that release stand-alone sustainability reports and
have voluntary assurance statements accompanying
those reports, will be more likely to have separate
sustainability departments, as a reflection of their
strong commitments regarding social and
environmental issues. Based on the preceding
explanation, the hypothesis can be proposed as
follows:
H4: A sustainability department significantly
influences the existence of external assurance on
sustainability reports
3 RESEARCH METHODOLOGY
3.1 Conceptual Framework
The following conceptual framework is used in this
study to describe the relationship between
independent variables of profitability, firm size,
industry affiliation, and the sustainability of a
department and external assurance on sustainable
reports.
Figure 1: Conceptual framework.
3.2 Operational Definition and
Measurement of Variables
3.2.1 Existence of External Assurance on
Sustainability Reports
JCAE Symposium 2018 – Journal of Contemporary Accounting and Economics Symposium 2018 on Special Session for Indonesian Study
18

The existence of external assurance on sustainability
reports is measured by using a dummy variable, in
which it takes the value of 1 in the case of the
presence of an assurance statement in a company’s
stand-alone sustainability report and the value of 0
when such statement does not exist.
3.2.2 Profitability
This research will use the ROA ratio as the
benchmark for a firm’s profitability, as it has been
used extensively in much previous research (Folk
and Per ego, 2010; Haida et al., 2013; Ruhnke &
Gabriel, 2013) as the proxy for profitability. Prior
research (Ruhnke & Gabriel, 2013; Cho et al., 2014)
used earnings before interest and tax to account for
the return, which is the numerator in the ROA
computation, because earnings before interest and
tax (EBIT) is perceived to be as an effective proxy
for the actual return resulting from the investment in
company.
ROA =


 
(1)
3.2.3 Firm Size
Firm size in this research is obtained using a firm’s
total assets. Therefore, a natural log of the firm’s
total assets is computed to yield a firm size figure.
Firm size = Ln (Assets)
3.2.4 Industry Affiliation
This dummy variable will give the value of 1 if a
company is a member of an industry that is
classified as having significant social and
environmental impact and the value of 0 for
companies not included in that classification. This
research classifies ESI (Environmentally Sensitive
Industries) that consists of mining and extraction,
paper, chemicals, petroleum, metals, utilities
(Batten, 2002), finance (Simnett et al., 2009), and
technology and telecommunication (Zorio et al.,
2013), as industries with a considerable impact on
society and the environment. All industry
classifications will be based on the GICS (Global
Industry Classification Standard) code.
3.2.5 Sustainability Department.
Following what has been applied in research by
Ruhnke and Gabriel (2013), sustainability
department in this research, can be referred to as
sustainability department, CSR committee, and
environmental and social department. Thus, if a
company has one of these three functions, then it’s
sustainability department variable would be scored
as 1.
3.3 Research Model
In line with the preceding explanation, thus, the
model of analysis for this research is as follows:


 




 

 








 



 



  (2)
Where, for company i:


(0, 1) = Dependent variable (Existence
of external assurance on
sustainability reports)
π
i
= Probability value of Existence
of external assurance on
sustainability reports.


= Constant


= Coefficient


= Profitability, as measured by
the ROA ratio.


= Firm size, as measured by Ln
(assets)


(0, 1) = Industry affiliation (whether
included in a category of
either industry, with or
without significant social and
environmental impact)


(0, 1) = The existence of sustainability
department in a firm
4 RESULTS AND DISCUSSION
4.1 Hypothesis Testing Result
Table 1: Logistic regression result.
Variable
B
Wald
Sig.
Exp (B)
Profitability
7.821
8.512
0.004
2492.111
Firm Size
-0.024
0.014
0.905
0.976
Industry
Affiliation
3.373
11.958
0.001
29.177
Study of The Determinants Existence of External Assurance on Sustainability Reports in Indonesia
19

Sustainability
Department
0.869
2.701
0.100
2.386
Accordingly, the regression equation that can be
created based on the table above is:


 




   


 

 




  (3)
4.1.1 The Influence of Profitability on the
Existence of External Assurance on
Sustainability Reports
The result shows that the coefficient value for
Profitability is positive with a significance level of
0.004 (p < 0.05). Therefore, there is a significant and
positive relationship that exists between profitability
and the existence of external assurance on
sustainability reports. This result is consistent with
research by Ruhnke and Gabriel (2013) and Branco
et al. (2014). According to Ruhnke and Gabriel
(2013), firms with a higher profitability have higher
financial capacity and face less pressure from equity
investors. This provides an incentive for companies
to improve their credibility in terms of sustainability
reporting, so that they can report and demonstrate
their high sustainability performance.
4.1.2 The Influence of Firm Size on the
Existence of External Assurance on
Sustainability Reports
The result of the hypothesis testing demonstrates
that the coefficient value for firm size is negative
with a significance level of 0.905 (p > 0.05).
Therefore, firm size has an insignificant negative
effect on the existence of external assurance on
sustainability reports. The results in this study are
consistent with research conducted by Cho et al.
(2014), as they concluded that the economic and
legal environments of specific countries become
contributing factors of sustainability assurance
decisions.
4.1.3 The Influence of Industry Affiliation
on the Existence of External Assurance
on Sustainability Reports
The result shows that the coefficient value for
Industry Affiliation is positive with a significance
level of 0.001 (p < 0.05). Therefore, industry
affiliation significantly and positively affects the
existence of external assurance on sustainability
reports. This result is in line with research conducted
by Cho et al. (2014) and Branco et al. (2014).
4.1.4 The Influence of a Sustainability
Department on the Existence of
External Assurance on Sustainability
Reports
The result of hypothesis testing shows that the
coefficient value for a sustainability department is
positive with a significance level of 0.100 (p > 0.05).
Therefore, there is an insignificant and positive
relationship that exists between a sustainability
department and the existence of external assurance
on sustainability reports. Prior research has produced
conflicting results regarding the influence of
sustainability department on sustainability
assurance. Research by Ruhnke and Gabriel (2013)
is contrary to this research, as well as research
conducted by Kend (2015). There is an allegation
that this sustainability department just acts as a
symbol to signal the company’s attention toward
sustainability. Moreover, the rare existence of
sustainability departments in Indonesia does not
guarantee a company's performance in the context of
sustainability, including the decision about whether
to assure its sustainability report, as such decisions
can be made immediately by senior managers.
5 CONCLUSIONS
Based on the above discussion, the following
conclusions can be made: First, profitability, as the
first determinant in hypothesis testing, indicates a
positive and significant effect on the existence of
external assurance on sustainability reports. It
implies that firms in which business operates
profitably or have higher financial capacity are more
likely to provide external assurance through
sustainable reports to ensure that profit does not
come at the expense of social welfare. Moreover,
firm size, the second determinant, is proven to have
a negative and insignificant effect on the existence
of external assurance on sustainability reports. It
asserts that engagement towards external assurance
of a sustainable report is not contingent to its size.
Furthermore, variables of industry affiliation had
positive and significant effects on the existence of
external assurance on sustainability reports. It
emphasizes that industry affiliation plays a
significant and important role in driving managerial
JCAE Symposium 2018 – Journal of Contemporary Accounting and Economics Symposium 2018 on Special Session for Indonesian Study
20

decisions to provide sustainable reports. Lastly,
results suggested that the sustainability department
had a positive but not significant effect on the
existence of external assurance on sustainability
reports. A sustainability department drives a firm’s
policy to meet its profit objectives, develop social
outreach, and encourage firms to engage in external
assurance of sustainability reporting.
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