Basamalah & Jermias Social and Environmental Reporting and Auditing in Indonesia

Gadjah Mada International Journal of Business

January-April 2005, Vol. 7, No. 1, pp. 109127

SOCIAL AND ENVIRONMENTAL

REPORTING AND AUDITING IN INDONESIA
Maintaining Organizational Legitimacy?
Anies S. Basalamah
Johnny Jermias*
The purpose of this study is to examine social and environmental reporting and auditing practices by companies in Indonesia.
Consistent with our prediction, we found that social and environmental reporting and auditing are undertaken by management for
strategic reasons, rather than on the basis of any perceived
responsibilities. The results indicate that reporting and auditing
social and environmental activities increases following threats to
the companys legitimacy and ongoing survival. The results also
support our prediction that social and environmental reports vary
across companies.
This study calls for mandatory reporting and auditing of social
and environmental activities through regulations and reinforcements. This mandatory requirement is particularly needed for
companies with activities that are considered socially and environmentally sensitive. Furthermore, this study reveals that the social
and environmental reporting and auditing are performed by organizations other than accounting profession. We propose that accountants should partake in these activities given the expertise that
they could usefully bring to these areas.
Keywords: disclosures; environmental and social auditing; legitimacy theory

* Corresponding author: Both authors contributed equally to this study. The sequence of names
was determined in random order. We gratefully acknowledge the constructive comments and
suggestions from the anonymous reviewers of this journal.
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Introduction
In recent years, there has been a
substantial growth in social and environmental reporting and auditing, particularly by the business community.
To some extend, this trend has been a
response to stakeholder concerns about
the social, environmental, and economic performance of the companies.
This trend can be demonstrated by the
increased number of guidelines provided by various government organizations, industry bodies, and accounting professions related to social and
environmental disclosures. Most of
the standards, however, are private
and voluntary including governmentbased guidelines and regulations.
Despite its growing popularity,
evidence suggests that information
contained in the social and environmental reporting is rarely used by
stakeholders and management to make
business decisions (CSR Europe and
Accountability 2002). There is a widely
held belief that providing social and
environmental disclosures has an adverse impact on the performance of
companies. Friedman (1962), for example, argues that to maximize profit
and therefore shareholder value, companies should just focus on performing
tasks of generating profit legally and
pay little attention to corporate social
responsibility.
Some scholars have argued that
since social and environmental disclosures are predominantly a voluntary
practice, there is a need for mandatory
regulations to reinforce this practice to
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preserve its existence (e.g., Gray 2002;

Neu et al. 1998; Elkington 1997). Neu
et al., (1998), found that companies
voluntarily disclose social and environment issues in their annual reports
only if these activities are perceived by
management as important to manage
public impressions of the companies
operations to establish or maintain the
companies legitimacy.
A number of reasons for managers to voluntarily disclose social and
environmental information has been
identified in the literature such as to
comply with legal requirements
(Deegan and Blomquist 2001), to gain
competitive advantage by appearing as
socially responsible (Hasnas 1998), to
comply with borrowing requirements
and community expectations (Deegan
and Blomquist 2001), to manage powerful stakeholder groups (Ullman
1985), to legitimize various aspects of
their respective organizations (Patten
1992), and to attract investment fund
(Deegan and Blomquist 2001).
Because social and environmental
reporting and auditing are predominantly a voluntary practice in most
countries, there are no internationally
agreed standards and their development is still in its infancy. It is not
surprising, therefore, that there is still
much debate and lack of consensus on
key issues such as the objective reporting, the qualitative characteristics of
the information, the users of the reports, and the proper presentation formats (Hedberg and Malmborg 2003).
This lack of consensus, however, pro-

Basamalah & Jermias Social and Environmental Reporting and Auditing in Indonesia

vides great opportunities for research

in this area.
Given that most of the guidelines
and regulations are voluntary, social
and environmental reports tend to be
biased toward managements own interest. To assess the quality of a
companys social and environmental
performance, the reports should be
audited by competent and independent
parties. Watson and MacKay (2003)
propose that the social and environmental audit should check a companys
social and environmental performance
against stated objectives and social and
environmental policies. They further
assert that the aims and objectives of
the audit would be to check regularly
and systematically, among other things,
whether management systems are performing well, compliance with health
and safety legislation, and the impact
of the organizations activities on the
environment and social well being.
The purpose of this study is, therefore, to investigate social and environmental reporting and auditing practices in Indonesia and to examine factors underlying managements motivation to disclose such information.
Indonesia provides an interesting setting for studying this phenomenon given
that there are a number of multi-national companies doing business in
socially and environmentally sensitive
areas such as logging, mining, and oil
and gas. In addition, the government
of Indonesia has recently issued parliamentary decree No. 23 in 1997 concerning the environmental manage-

ment. This decree allows the Ministry

of Environmental to require companies to report their social and environmental activities and to perform environmental and social audits.
As expected, the results indicate
that the social and environmental reporting and auditing are undertaken by
management for strategic reasons,
rather than on the basis of any perceived responsibility. The activities
are performed following threats to the
companies legitimacy and ongoing
survival. In addition, we found that the
formats and contents of social and
environmental reporting and auditing
reports vary across companies. Each
company reports their social and environmental performance according to
the request of management. Similarly,
the items assessed in the audit reports
are based on contracts agreed upon by
management and the auditor. It is
interesting to note that accountants are
not involved in preparation and auditing of the social and environmental
reports. This is surprising given the
expertise that accountants could usefully contribute to these activities.
The remainder of the paper is
organized as follows. The next section
describes the theoretical background
and the related literature. The third
section analyses social and environmental reporting and auditing in Indonesia based on a sample of publicly
available reports. The last section provides the conclusions and discussions
of the main findings.

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Theoretical Background and

Related Literature
It is well documented in the accounting and business literature that
social and environmental reporting and
auditing are motivated by
managements desire to legitimize various aspects of their company. These
activities might be used by management when particular events occur that
are perceived to be detrimental to the
companys reputation and ongoing
survival (e.g., Neu et al. 1998; Patten
1992). Gray et al. (1995) propose that
companies may take certain actions to
establish or to maintain legitimacy
such as by educating society about
changes in the companys actions, by
altering how society perceives a
companys actions without making
changes to those actions, by attempting to divert societys attention away
from the issues of concern to alternative issues, and by seeking to alter
societys expectations of the companys
actions. Their argument is consistent
with the prescription of legitimacy
theory.
Legitimacy theory prescribes that
companies influence, and in turn be
influenced by, the society in which
they operate (Dowling and Pfeffer
1975). Lindblom (1994) defines legitimacy as a condition or status that exists
when there is a fit between a companys
value system and that of the society in
which the company is a part. He further describes that the companys legitimacy is at risk when there is an
actual or potential misfit between the
two value systems.
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Corporate disclosure policies represent ways by which management can

influence societys perceptions about
the companies. Guthrie and Parker
(1990) argue that accounting disclosures serve as tools for constructing,
sustaining, and legitimizing economic
and political arrangements that contribute to the companies private interests. Management will disclose information about social and environmental
performance of the company if they
perceive that the supply of that information is crucial for the survival of the
company (Dowling and Pfeffer 1975).
Management might also decide to collaborate with other parties that are
considered to be legitimate (Fiedler
and Deegan 2002). In a similar vein,
DiMaggio and Powel (1983) assert
that organizations will change their
activities to conform to external expectations and to be legitimate. For
example, because the majority of companies in an industry perform social
and environmental reporting and auditing, there might be an institutional
pressure on a company to also undertakes social and environmental reporting and auditing.
Empirical findings tend to support the predictions of legitimacy theory
(e.g., Wilmshurst and Frost 2000;
Deegan and Gordon 1996; Patten
1992). Using Australian data, Deegan
and Gordon (1996) found that companies social and environmental disclosure was positively related to the increase in threats from activities of
social and environmental interest
groups. Similarly, Patten (1992) found

Basamalah & Jermias Social and Environmental Reporting and Auditing in Indonesia

an increase in the North American oil

companies social and environmental
disclosures following the Exxon Valdez
oil spill that was considered a threat to
the legitimacy of oil companies.
While legitimacy is considered to
be a resource on which a company is
dependent for survival (Dowling and
Pfeffer 1975), it is also a resource that
the company can manipulate for its
own interest (Woodward et al. 2001).
For example, a company might manipulate information provided to its
stakeholders, particularly important
stakeholders such as governments,
creditors or social and environmental
interest groups, to gain their support
and approval or to distract their opposition and disapproval (Ullman 1985).
This is because managers have an
incentive to disclose information about
their various social and environmental
management programs and initiatives
to the important stakeholders to indicate that they are conforming to the
stakeholders expectations. In such
case, the information is disclosed for
strategic reasons, rather than on the
basis of perceived responsibility.
It is therefore paramount that the
social and environmental disclosures
should be audited by independent parties to ensure that the disclosures are
objective and free from managements
bias. At a broad level, social and
environmental audits can be defined as
a process that enables an organization
to assess its social and environmental
programs and activities in relation to
societys requirements and expectations (Elkington 1997). Social and

environmental audits might be undertaken for accountability purposes to

try to explain the various social and
environmental impacts of a companys
activities. It might also be undertaken
based on specific issues faced by the
company such as the implications that
might follow from opening or closing
a particular plant.
Social and environmental reports
can be used as a managerial device
aimed to take away various pressure
regarding social and environmental
issues from the company (Watson and
MacKay 2003). For example, PT
Freeport Indonesia (PTFI) was criticized internationally for causing continuous sufferings of the habitat around
the mining areas in West Papua. It is
alleged that the company has destroyed
the natural environment, social environment, culture, and other inhabitants (AMP-Demmak 2003). As part of
the response, a social audit was performed by Labat-Anderson Incorporated (1997) while an environmental
audit was conducted by Montgomery
Watson Indonesia (1999) with the assistance of the American and Indonesian World Wildlife Fund.
Similarly, PT Inti Indorayon
Utama (PTIIU) has been protested by
North Sumatrans residents and various non-governmental organizations
for their activities in Porsea (North
Sumatra). The protesters claim that
the companys activities have damaged the environment and social well
being of people in Porsea. The company has also responded to these protests by undertaking environmental
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reporting and auditing performed by

Labat-Anderson Incorporated (1996)
in coordination with several non-government organizations interested in
social and environmental issues, Ministry of Environment, and the Environmental Supervisory Board
(BAPEDAL). The results of the social
and environmental audits are provided
separately (not part of the companies
annual reports).
From an economic perspective,
managers may want to disclose information if the information will increase
the companys value (Verecchia 1983).
When information asymmetry between
managers and investors exists (i.e.,
managers have access to information
that investors do not), investors and
creditors may assume the worst about
the company and undervalue the
companys stock or require a higher
interest rate on loans in a condition of
non-disclosure (Grossman 1981).
Gibbins et al., (1990), argue that companies have an incentive to reduce
information asymmetry when they rely
on the capital markets to reduce perceived costs.
In contrast, managers may decide
not to disclose information to protect
proprietary information in order to
exploit its potential economic benefits
(Dye 1985). Cormier and Magnan
(1997) argue that proprietary information may be used by third parties (e.g.,
employees, customers, suppliers, and
competitors) to enhance their positions against the disclosing firm in
contract negotiations or competitive
situations. From a management per114

spective, nondisclosure of proprietary

information can result in lower third
party costs. As proprietary information, social and environmental disclosures may represent significant costs
to the firm when the information is
publicly available (Cormier and
Magnan 1997). By disclosing certain
social and environmental costs such as
social and environmental liabilities or
commitments, companies might face a
potential threat to their reputation.
This disclosure might also affect their
reported profit negatively.
The economic-based argument
seems to be consistent with the practice of both PTFI and PTIIU. Their
social and environmental reports and
audits were not undertaken regularly
and were not part of the companies
annual reports. The companies unwillingness to disclose their social and
environmental activities in their annual reports might indicate that management perceived the social and environmental information as risky and
therefore might affect the companys
value negatively (Cormier and Magnan
1997).
The preceding discussions indicate that social and environmental reporting and auditing tend to be voluntary and therefore lack of uniformity.
Companies will choose to perform
these activities to satisfy their important stakeholders such as government
and social and environmental interest
groups, and to establish or maintain
the companies legitimacy. In addition, companies operate in different
industries might face different issues,

Basamalah & Jermias Social and Environmental Reporting and Auditing in Indonesia

and therefore might provide different

reports. For comparability and consistency, however, social and environmental issues can be categorized into
(1) physical and chemical impacts; (2)
biological impacts; and (3) social, economical and cultural impacts (see for
example Government Decree No. 27,
1999 regarding Analyses of Environmental Impact). Thus, it is possible
that regardless of the variety of issues
faced by different companies in different industries, comparable reports
among companies might be produced.1
Given that there is no uniform
standard for reporting and auditing
social and environmental disclosures
coupled with the fact that management
can control the issues to be reported/
audited, we expect that there will be a
significant variation in the contents
and formats of social and environmental audits in Indonesia.

Social and Environmental

Reporting and Auditing in
Indonesia
Constitution No. 4 enacted in 1997
(amended by Constitution No. 23 of
1997) gives the Minister of Environment of the Republic of Indonesia an
authority to order companies to undertake mandatory social and environmental reporting and auditing of their
operations. Following this constitution, The Ministry of Environment

issued decree No. 42 in 1994 which

provides a guideline concerning the
social and environmental reporting and
auditing in Indonesia. In practice, however, most social and environmental
reporting and auditing are voluntary
and there is no uniform standard for
these activities. Besides the Ministry
of Environments guidelines, most
companies also use the ISO 14001
audit checklist or the partial audit standard developed by Hagler Bailly Indonesia (for pesticide industry) and
Texaco (for oil and gas industry) as a
reference.
For mandatory social and environmental audits, Minister of Environment in 2001 issued decree No. 30
as a guideline, and order environmental auditors to use the Indonesian National Standard 19-14010-1997 and
Indonesian National Standard 1914012-1997 issued by National Standardization Board (Badan Standardisasi
Nasional or BSN) which are, surprisingly, almost a direct translation of the
ISO 14010 and 14012 guidelines. Despite the Ministry of Environmental
guidelines, social and environmental
items to be audited remain unclear.

The case of PT Freeport

Indonesia (PTFI) and PT Inti
Indorayon Utama (PTIIU)2
We use purposive sampling technique (Jaccard 1983) to select the re-

In financial accounting and auditing, comparable and consistent financial statements and audit
reports are generated by different companies in different industries.
2
The reports and appendices are available publicly through the Ministry of Environment or
upon request from the authors.
1

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ports to be reviewed in this study. We

could not use random sampling technique due to the difficulty of determining the sampling frame (i.e., the list of
companies that report and audit their
social and environmental activities are
not publicly available).
We review three reports for the
purpose of this study: The 1999 external environmental audit report of P.T.
Freeport Indonesia; The 1996 environmental, safety, and health audit of
Pulp and Mill, Rayon Plant, and Forestry Operation of P.T. Inti Indorayon
Utama; and The 1997 final social audit
report of P.T. Freeport Indonesia.
The reason for selecting these reports
is that they are the only social and
environmental reports publicly available.3 The reports are publicly available because the two companies were
ordered by the Ministry of Environmental to undertake environmental
audits due to complaints from local
people and non-government environmental interest groups. For the social
audit of PTFI, although it is a voluntary audit, the company makes this
report publicly available and copies of
this report can be obtained from the
company.
Format and content of the reports
A general impression of the socalled social and environmental reporting and auditing released by the
companies is that they are of very
different standards (see Appendix 1),

despite the fact that they have used the

Ministry of Environment guidelines in
some ways. Although the reporting
and auditing of the environmental audits are mandatory, the audit scopes,
which serve as the terms of reference,
are determined by management. The
following sections take a more specific
look at the reports included in this
study.
Environmental reporting and
auditing of PTFI
PTFI called its environmental report as 1999 External Environmental
Audit (Excluding Social, Cultural and
Economic Impact) PT Freeport Indonesia Operations Irian Jaya, Indonesia
(Montgomery Watson Indonesia 1999).
The report begins with an executive
summary consists of an overview, introduction, legislative framework and
the companys environmental programs, significant issues and audit
findings, and comments and recommendations. The main body consists
of eight chapters. The first chapter
provides information about the
companys operating activities, audit
scope based on the guidelines found in
ISO 14010, 14011, and 14012, audit
planning and process performed including a review of the companys
environmental management, environmental resources and practices owned
by the company, and the structure and
content of the environmental report. It
is interesting to note that this chapter

3
Although interviews with managers and auditors might provide new insights into the reasons
for conducting social and environmental activities by the companies, this study relies solely on
analyzing publicly available documents due to time and budget constraints.

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Basamalah & Jermias Social and Environmental Reporting and Auditing in Indonesia

also mentions about the names and

expertise of each audit team member
and external observers from the World
Wildlife Fund (both from U.S. and
Indonesia) and from Ministry of Mining and Energy.
The second and third chapters
explain the companys environmental
conditions and audit findings. It should
be noted that the audit findings consist
only of positive findings and therefore
without any recommendations. Chapter four describes about international
environmental management standards
and a comparison with practices and
programs of the company. Again, the
conclusion is that the companys practices and programs are satisfactory
with a recommendation that the company should maintain and update its
existing practices and programs to keep
up with the companys plan to change
its mining operations in the future.
Chapters five, six, and seven describe how PTFI has satisfied the requirements of various Indonesian environmental rules and regulations and
the progress made by the company
regarding environmental issues identified in the previous year report. The
final chapter summarizes the major
issues and recommendations for future
actions.
Environmental reporting and
auditing of PTIIU
PTIIU called its environmental
report as Final Audit Findings: Environmental, Safety, and Health Audit
of Pulp Mill, Rayon Plant, and Forestry Operations (Labat-Anderson In-

corporated 1996). This report consists

of an executive summary, four chapters and appendices.
The executive summary describes
the reasons for environmental audit
contract, the sequence of activities
from the signed of the audit contract
until the completion of the field work.
This section also includes the members of the audit team (without mentioning their expertise), the term of
reference (and changes made in it after
discussions with non-government environmental interest groups, Ministry
of Environment, and Environmental
Supervisory Board) used to guide the
audit work, an explanation of how the
company perceives environmental reporting and auditing as important, and
how the company attempts to improve
their environmental management programs.
The first chapter, an introduction,
summarizes the companys operating
activities, audit scope, and sequence
of activities beginning with a visit by
the team to the plants in Porsea, and
the name and affiliation of the audit
team members, without any indication
of their qualification. Chapter two and
three explain, in more detail, the
companys ongoing operations and its
environmental management and monitoring activities. These chapters also
contain comparisons between the
companys environmental programs
and those of the North-American companies.
Chapter four explains the social
impacts of the companys activities.
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This chapter also contains a letter from

a non-government institution (Yayasan
Bina Usaha Lingkungan) thanking the
auditor for using the institution as a
sub-contractor for conducting the audit. The appendices describe the stakeholders that received the reports, comparisons between the current audit findings and those of the previous year,
social and environmental issues faced
by the company, and follow-up actions
related to audit findings and recommendations.
Social reporting and auditing of
PTFI
PTFI called its social report as
Final Social Audit Report PT Freeport
Indonesia (Labat-Anderson Incorporated 1997). This report consists of an
executive summary, three chapters,
and appendices. The executive summary explains the social and political
conditions surrounding the areas in
which the company operates. This
section also describes constraints and
social conflicts that have emerged in
the mining sites that have slowed down
the community development program
and efforts made to overcome these
problems. The final part of this section
described the progress made by the
company in improving social condition such as the creation of Community Affair Department headed by a
local people.
The first chapter describes the
companys background, audit objectives, audit team, audit scope, and
audit approaches and processes. This
section also mentions that the social
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audit is performed under the supervision of Environmental Supervisory

Board (Bapedal) and uses Ministry of
Environmental decree No. 42 issued
in 1994 as a guideline. Part of the audit
work was outsourced to several institutions with an explanation that individuals from these institutions have
expertise in sociology, anthropology,
environmental observers, economic,
agriculture and social development,
doctor, community health, communication, educators and psychologist,
management consultant, and people
with long history of working and writing about West Papua. This team also
includes three people from Papua that
are affiliated with the local university
(Labat-Anderson 1997).
The second chapter describes the
audit findings, both negative and positive without any recommendations,
and the companys important stakeholders which include PTFI, government, and local people. Chapter three
discusses the findings reported in chapter two in more detail and provides
recommendations. The report also
mentions that some of the problems
are very difficult and complicated and
the company has not been able to solve
them. There are three appendices attached to this report. Appendix A
contains a list of individuals and organizations contacted during the activities. Appendix B explains the guideline used to develop the questionnaires
employs by the team. Appendix C
contains the interim report published
in May, 1996.

Basamalah & Jermias Social and Environmental Reporting and Auditing in Indonesia

Reasons for Undertaking Social

and Environmental Reporting
and Auditing
A general finding from the review of the three reports mentioned
earlier is that the companies in this
study were particularly interested in
maintaining their legitimacy after some
threats to their reputation and ongoing
survival from local communities, environmental interest groups, and government agencies (both local and national). Both companies in our studies
seem to have difficulties to convince
their stakeholders that their operations
are environmentally and socially acceptable. Because of the social and
environmental problems related to their
operations, both companies were ordered by the Ministry of Environment
to undertake environmental reporting
and auditing. In general, the ministry
orders a company to report and audit
their social and environmental activities only if there are evidences, among
other things, that the company has
jeopardized the social and environment of the surrounding areas in which
it operates.4 As indicated earlier, the
social audit of PTFI is a voluntary
audit conducted by Labat-Anderson
Incorporated (1997).
PTFI, for example, acknowledged
that there is a huge perception gap
between the company, government,
and local people. The company al-

leged that due to lack of expertise and

human resources, Indonesian government cannot fulfill its obligation to
provide satisfactory business environment for the company. Other issues
such as Land rights, historical mistrust, and differences in leadership
styles and values between local communities and those of the government
and the company have caused various
conflicts between the company and the
local people. In 2001 PTFI was sued
by Indonesian Forum for Environment
(Wahana Lingkungan Hidup) for the
pollution caused the companys operation in West Papua and the misleading
information released by the company.
Both the Southern Jakarta District Court
and the Higher Court (Pengadilan
Tinggi) ruled that the company violates the Constitution No. 23 of 1997
and ordered the company to fix its
tailing system(s).The courts also mentioned that PTFI intentionally disguised
certain information but published false
and
inaccurate
information
(dte.gn.apc.org 2001). The company,
however, appealed to the Supreme
Court and the case is still unsettled.
Similarly, PTIIU has been protested by local communities and various non-government organizations for
several years. In a most recent protest,
thousands of residents including activists from various non-government organizations, clergymen, and ulemas
staged a protest against the reopening

Constitution No. 23 of 1997 states that the Minister of Environment may order a company
to undertake mandatory environmental audit when the company shows disobedience to the rules
mentioned in this Constitution.
4

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of a suspended pulp plant in Toba

Samosir regency, North Sumatra
(Jakarta Post 2003). These protesters
claimed that the companys operations
have damaged the environment and
the social value of people in Porsea, in
particular and in North Sumatra, in
general.
Both companies seem to face serious threats to their reputation and even
ongoing survival. By reporting and
auditing their social and environmental program and activities, they could
gain a possibility to form a dialogue
with their protesters and stakeholders.
It is interesting to note that both companies collaborate with other parties
that are considered to be legitimate in
preparing their social and environmental reports (i.e., Ministry of Environment, Environmental Supervisory
Board and Yayasan Bina Usaha
Lingkungan for PTIIU; and World
Wildlife Fund, Ministry of Mining
and Energy of Indonesia, Several Indonesian Universities, and Science Institution of Indonesia for PTFI).

Conclusions and Discussions

This study investigates the practice and motivation for social and environmental reporting and auditing in
Indonesia. The reports seem to be
associated with significant threats faced
by the company that might jeopardize
their reputation and even their ongoing
survival. Based on reviews of three
reports by PT Freeport Indonesia and
PT Inti Indorayon Utama, we also
found that the format and contents of
120

the reports vary significantly between

the two companies. It is interesting to
note that in all three reports, the audit
scopes are determined by management
of the companies. It is not surprising,
therefore, that the tone of the reports
and the findings tend to be positive and
bias in favor of the company.
The findings are consistent with
the prediction of the legitimacy theory.
Fiedler and Deegan (2002), for example, propose that whenever managers consider that the supply of the
particular information is crucial to
organizational survival, they will exerts every effort to ensure that the
information is available to the intended
parties. They further assert that managers will also try to collaborate with
other parties who are considered to be
legitimate. In a similar vein, Guthrie
and Parker (1990) argue that accounting disclosures are social, political,
and economic tools. They serve as a
means for constructing, sustaining,
and legitimizing economic and political arrangements, institutions, and
ideological themes which contribute to
the companys private interests.
Woodward et al. (2001) propose
that because managers tend to manipulate social and environmental disclosures for their own interest, it is crucial that the disclosures should be
audited by independent parties and
should be made mandatory, particularly for companies with activities that
are considered socially and environmentally sensitive. Without mandatory requirement, management will

Basamalah & Jermias Social and Environmental Reporting and Auditing in Indonesia

only disclose social and environmental

issues if they perceive that the benefits
of disclosing such information outweigh the cost of producing and disclosing that information. The findings
are also consistent with our prediction
that the reports will be different between companies due to the lack of
uniform standards for social and environmental reporting and auditing internationally, and particularly in Indonesia.
Furthermore, this study found that
both the preparers and the auditors of
the reports are controlled by the company and both the preparers and the
auditors are from institutions other
than accounting professions. It should
be noted, however, that according to
the Ministry of Environment Decree
No. 12 issued in 1994, environmental
auditor should have expertise in the
process, procedures, and audit techniques, besides the technical knowledge in environmental field. Furthermore, the decree also requires that
environmental auditors should have a
good communication skill, be able to
develop audit plan and time schedule,
be able to analyze data and audit findings, and be able to write audit reports.
A closer look at the format and content
of the social and environmental reports presented in Appendix 1 reveals
that they are very similar to those of

financial (and particularly operational)

audit reports prepared by accountants
(a sample of operational audit report is
presented in the fourth column of Appendix 1). Wilmshurst and Frost (2000)
assert that accountants might contribute positively to environmental and
social reporting and auditing because
of their expertise in areas such as
designing and implementing environment management system, conducting
life cycle analyses, performing activity-based and cost benefit analyses,
identifying important social and environmental issues and their impact on
the companys operations, reporting
the social and environmental activities
of the company, and maintaining a
good relationship with experts in social and environmental areas. We believe, therefore, that given the long
historical practices of financial and
operational audit reports with well
established standards and procedures
coupled with the expertise that accounting professional has regarding
reporting and auditing business related
issues, it would be beneficial to involve accounting professional in preparing and auditing social and environmental aspects of a companys activities.5
The findings of this study, however, should be interpreted in light of
two limitations. First, the reports re-

5
It should be noted that financial audits can only be performed by certified public accountants.
Other types of audits such as management, operational, and social and environmental audits, can
be performed by experts other than certified public accountants. We believe, however, that with
the reporting and auditing expertise that accounting professional has, professional accountants,
together with other experts from related disciplines, will significantly improve the quality of social
and environmental reports.

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Gadjah Mada International Journal of Business, January-April 2005, Vol. 7, No. 1

viewed in this study are not randomly

selected and therefore caution should
be taken in making inferences from the
results of this study. Future research
might extend this study by including
more companies from different industries. Second, this study relies exclu-

sively on publicly available information. Future studies might incorporate

other approaches such as interviews
with managers and auditors to gain
more insights into the motivation to
report and audit social and environmental activities.

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Basamalah & Jermias Social and Environmental Reporting and Auditing in Indonesia

Appendix 1
Format and Content of the Social and Environmental Reporting and
Auditing Reviewed in this Study (with a Comparison of an Operational
Reporting and Auditing)
PT. IIU
Executive Summary

PT. Freeport (a)

Executive Summary

Introduction

Overview

Observations of
Team

Introduction

October 1995 Audit

Findings
Introduction
Background
Scope
Sequence of
Activities

Legislative
Framework and
PTFI Environmental Programs
Significant Issues
and Audit Findings
Comments and
Recommendations

Chapter 1 IntroducLABAT Final Audit

tion
Team
Background
Forest Activities
Audit Objectives
and Scope of Work
Introduction
Corporate Policy,
Management
Systems, and
Practices
Environmental
Issues
Safety and Health
September 1995
Forestry Audit
Pulp Mill and Rayon
Plant
General Permit
Compliance
Environmental
Management
Wastewater
Cooling Water

Audit Team and

Qualifications
Organization of
Audit Report
Chapter 2 Environmental Setting
Location and
Demographic
Setting

PT. Freeport (b)

Executive Summary

PT. XYZ
Audit Team

Overview of the isExecutive Summary

sues and problems.
Discussions of the Chapter one Introduction
problems
Chapter 1: Introduction
Company
ground

back-

Audit objectives
Audit team
Audit scope
Approaches

Background
Audit Objective
Audit Scope
Chapter two X Profile
Organization and
Manage-ment
Operational Activity
of X, Administration
and Financial
Activities

Chapter 2: Stakeholders, Issues, Progress

Chapter three
and Constraints
Management and
Stakeholders
Procedures
Issues faced by PT
Organization and
Freeport Indonesia
Manage-ment
Progress toward last
years audit recom- System and Procedures
mendations

Physical Characteristics

Chapter 3: Discussions Chapter four Effectiveness and Efficiency

of the problems
1) Community and so- The Achievement of
cial development Y

Biological and
Ecological Conditions

2) Institutional development

Biodiversity
Characteristics
Lorentz National
Park

program

Y Programs
Realization of Y

Y Funding
3) Social and culture
Chapter five Concluperception
sions
4) Government roles
Organization and
5) Land rights
Management

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Gadjah Mada International Journal of Business, January-April 2005, Vol. 7, No. 1

Continued from Appendix 1

PT. IIU
Stormwater
Discharges
Air Emissions

PT. Freeport (a)

Chapter 3 Waste and
Overburden
Management

PT. Freeport (b)

PT. XYZ

6) Job opportunities
and training

System and Procedures

7) Education

Effectiveness and
Efficiency

Solid Water

Introduction

8) Community health

Occupational Safety
and Health

Tailings Management Plan (Including Acid Rock

Drainage)

9) Internal communi- Appendices

cations

Pollution Prevention
Community Relations
and Community
Development
Attachments A-F

Overburden
Management Plan
(Including Acid
Rock Drainage)
Solid and Hazardous Waste Management
Liquid Waste
Management
Chapter 4 Mine
Closure/Reclamation
Plan
Introduction
Current PTFI
Practices
Financial Assurance
Mechanism
Conclusions
Chapter 5 Legislative
Setting and Compliance
General Approach
Framework for
Environmental
Management
Chapter 6 PTFI
Environmental
Management
Systems
Introduction

126

10) Public relations

11) Communication
with stakeholders
12) Companys problems
Appendices

Basamalah & Jermias Social and Environmental Reporting and Auditing in Indonesia

Continued from Appendix 1

PT. IIU

PT. Freeport (a)

PT. Freeport (b)

PT. XYZ

Environmental
Policy
Environmental
Objectives and
Targets
Environmental
Organization and
Personnel
Environmental
Management
Manual
Environmental
Management
Reviews and Audits
Conformance and
Compliance
Chapter 7 Environmental Monitoring
Water Quality
(Surface and
Ground Water)
Biological Monitoring
Ambient Air
Quality
Flora and Fauna
Biodiversity
Other Monitoring
(Including Glacier)
Chapter 8 Conclusions and Recommendations
Chapter 9 References
Appendix

127