Intellectual Capital Disclosures and Audit Components in Non-Discretionary Income

Abstract

This study aims to determine the relationship of Intellectual Capital Disclosures (ICD), audit committee characteristics (size, gender, education, expertise), and audit quality toward the performance of the company measured through Non-Discretionary Net Income (NDNI) and Cash Flow Operation (CFO). This study is conducted on service listed companies in the Indonesia Stock Exchange (Service Industry) from 2010 to 2016 by panel data regression method analyzed using random effect model. The results of this study indicate that components in ICD have no significant impact on firm performance. Some components in the audit committees are found to have significant positive relationship towards financial performance. The empirical results suggest that ICD serve as a tool in aiding firm performance. A corporation should practice ICD extensively to enjoy the impact on the firm performance and value. Most research studies the relationship between intellectual capital disclosures and board diversity toward firm performance individually. The interaction of intellectual capital disclosures and audit committee characteristics is analyzed and studied to see whether audit committee characteristics is a factor that can help and improve the effectiveness of firm performance. Audit quality is also being analyzed and being taken into consideration as a variable. This is the first study to find the relationship towards the firm performance using NDNI and CFO as the dependent variables

Intellectual Capital Disclosures and Corporate Governance in Gaining the Firms’ Non-Discretionary Profits and Market Value in ASEAN-5

“…Accounting-based performance is measured through NDNI and CFO, while market-based performance is measured with Tobin's Q and Market-to-Book Ratio (MBR). NDNI and CFO have direct impact on stakeholders in determining the firm performance and are used for the investor in making decisions whether they will invest or not (Hatane et al, 2019). This research adds another view regarding the benefits of ICD and CG on two firm performance perspectives, on companies engaged in the technology sector in ASEAN-5.…”

“…With the addition of ICD, information disclosure in financial reporting will become comprehensive and potentially reduce bias on firm value (Hatane et al, 2019). Therefore, ICD is vital to lower information asymmetry (Yang, 2018).…”

“…In order to value actual performance, Subramanyam (1996) expressed two forms of non-DA profits: Non-Discretionary Net Income (NDNI) and Cash Flow Operation (CFO). Several studies have used NDNI and CFO to detail a company's real profit (Subramanyam, 1996;Siregar & Utama, 2008;Suprianto & Setiawan, 2018;Hatane et al, 2019).…”

“…IC is the knowledge, information, and practical experience which can be used to generate wealth for firms and thus become the foundation for competitiveness and is acknowledged as an essential asset to business performance (Cabrita et al, 2017). Up until now, there is no official standard that regulates Intellectual Capital Disclosure (ICD) (Schiemann et al, 2015;Guthrie, 2017;Hatane et al, 2019). Consequently, firms tend to have low awareness in disclosing IC.…”

“…Changing business environment needs to create creative and innovative plans to increase competitiveness and sustain in the market places, so that is why companies need to evaluate ICD and its components then develop its performance (Simion & Tobă, 2018). With the systematic ICD, the information can reduce bias towards corporation value and provide information for investors regarding anticipation of uncertainty in the future and help measure corporate value (Hatane et al, 2019).…”