Journal of Theoretical and Applied Information Technology

10th March 2014. Vol. 61 No.1

© 2005 - 2014 JATIT & LLS. All rights reserved.

ISSN: 1992-8645 www.jatit.org E-ISSN: 1817-3195

ERP PERFORMANCE AS INTERVENING VARIABLE

TO FINANCIAL PERFORMANCE FOR ERP
IMPLEMENTATION, ADHERENCE TO COSO, AND GCG
IMPLEMENTATION
JULISAR
Senior Faculty Member, School of Information System, Bina Nusantara University, Jakarta, Indonesia
E-mail: [email protected]

ABSTRACT

The objective of this study is to make a conceptual framework for testing the correlation hypothesis of ERP
implementation, adherence to COSO, and GCG implementation. Then, the writer will test the effect of ERP
implementation, adherence to COSO, and GCG implementation to ERP implementation and its
implications to financial performance. This conceptual framework will use ERP performance as intervening
variable. This writing is aimed at manufacturing industries in Indonesia which have implemented ERP,
guided by COSO, and applied GCG as well. From the previous studies, there are spaces to do a research
relating to ERP implementation, adherence to COSO, and GCG implementation to ERP implementation
and its implications to financial performance. This research is still a literature study, so that the concept
written here is still a conceptual framework which has to be tested empirically.

Keywords: ERP, COSO, GCG, Financial Performance

1. INTRODUCTION Management System, Wibisono (2011) wrote that

performance of the company is assessed at three
Economic activities in Indonesia are supported main factors: financial performance (70%),
by a variety of business activities in several sectors. operational performance (15%), and administrative
They are (1) the main sector which is industries of performance (15%).
raw material producer consisting of agriculture and From Wibisono (2011) it is clear that financial
mines, (2) the second sector which is processing or performance has considerable factor as one of the
manufacturing industries, and (3) the third sector Performance Management System measurement
which is service industries. (70%). It is because one of the aspects assessed by
Manufacture, based on Letter of the Head of the the public to make an investment (especially for a
Capital Market Supervisory Board No. SE- company that has sold its shares on the Stock
02/PM/2002, December 27th 2002, is an activity Exchange) is to look at the company’s financial
which processes resources into finished products performance. A company which has already sold its
through a manufacturing process. So that, the shares on the Stock Exchange is obliged to publish
company's activities classified in the manufacturing its financial statements, so that investors or potential
industry group have at least three major activities, investors can find out the company's financial
namely (1) activities to obtain or to keep input or performance and prospects of the company in the
raw materials, (2) future. In other words, the financial statements may
processing/manufacturing/assembling the raw be considered by investors or prospective investors
materials into finished materials, and (3) activities to to make an investment.
store or to market their finished products. In terms of To find out a company's financial performance, it
the products, manufacturing activities today include is necessary to do an analysis and interpretation
various types of business. from the financial statements produced by the
Performance Management System is an company. Analysis conducted is based on the
enterprise performance measurement conducted as financial statements that have been issued by the
the study on company’s strategic objectives in company. Analysis here is to look at the state of the
responding to the marketplace needs nationally and company, especially the financial situation based on
internationally. In relation to the Performance existing data on the financial statements. From the

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 Journal of Theoretical and Applied Information Technology
10th March 2014. Vol. 61 No.1
© 2005 - 2014 JATIT & LLS. All rights reserved.

ISSN: 1992-8645 www.jatit.org E-ISSN: 1817-3195

data acquired, then they are processed and analyzed principles of administration issued by Wren et.al
to obtain information from the results of the (2002), in which there are responsibility and control-
analysis. The purpose of the financial performance centered management. In ERP implementation, the
analysis is to take policies, decisions on the primary audience is management because
operations, and financial activities faced by the management plays a fairly important role for
company. successful and unsuccessful ERP implementation.
Letter of the Head of the Capital Market ERP implementation depends on full support of the
Supervisory Board No. SE-02/PM/2002, December management because it controls over the
27th 2002, for Presentation and Disclosure implementation of ERP which includes planning,
Guidelines for Issuers’/Public Companies’ for organizing, leading, and controlling (Vijayakumar,
Manufacturing Industry Financial Statements, states 2009).
that the objective of financial statements is to Financial statements are information generated
provide information that arise of the financial by the operations of the company. From the
position, performance, and changes in financial financial statements, corporate leaders will be able
position of an enterprise that is useful for a large to do the planning, organizing, ordering,
number of users in making economic decisions and coordinating, and supervising. Therefore,
to demonstrate accountability (stewardship) of the information generated according to Hall (2008,
management over the use of resources entrusted to pp14) should follow the five characteristics:
them. The letter states that the Issuer or Public relevance, timeliness, accuracy, completeness, and
Company Management is responsible for the summarization. In addition to the five
preparation and presentation of financial statements. characteristics, to produce the financial statements
Financial statements presented consist of Balance that can be used for planning, controlling, and/or
Sheet, Income Statement, Statement of Changes in decision-making, the company must also implement
Equity, Cash Flow Statement, and Notes to the internal control in the company's operations.
Financial Statements. To implement internal control within the
ERP Software is the backbone of major company applying Information Technology, COSO
companies in this era (Alshawi et al., 2004). Momoh requires at least 2 (two) types of control: general
(2010) wrote that the package offered by ERP control and application control. General control is
provides a seamless integration of all business the control covering all aspects of the competerized
processes in the company, including the integration business process, which are all the company's
of the accounting and financial information, human operations using a computer. Application control is
resources information, supply chain information, the control covering the use of software applications
and customer information. that exercises control over the transaction processing
Stratman (2002) wrote competence of ERP is a as well as in terms of data storage.
portfolio of the managerial, technical, and COSO (2011, i) issued a framework for business
organizational skills and expertise hypothesized as activities and operating environments: (1)
an antecedent to improve business performance after expectation for governance oversight, (2)
the implementation of ERP system and the system globalization of markets and operations, (3) changes
has been running stable. In ERP software, there are in business models, (4) demands and complexities in
3 (three) elements which are (1) a single central laws, rules, regulations, and standards, (5)
database as the system foundation, (2) application expectations for competencies and accountabilities,
modules to process transactions and to perform data (6) use of, and reliance on, evolving technologies,
maintenance in the database, and (3) application and (7) expectations relating to preventing and
modules to generate data thus allowing users to be detecting corruption.
able to see multiple views of the enterprise’s data. To achieve the framework’s objectives, the
In relation to the importance of internal control company should focus on three separate aspects in
whose primary audience is management; internal internal control in accordance with those written in
control viewed as a process; objectives of internal COSO (2011, 3). They are (1) Operations Objectives
control on the effectiveness and efficiency of the – these pertain to effectiveness and efficiency of the
operations, reliability of financial statements, and entity’s operations, including operations and
compliance with laws and regulations forced in any financial performance goals and safeguarding assets
state; focusing on all entities that exist in the against loss; (2) Reporting Objectives – these pertain
company; and who is responsible is the to the reliability of reporting. They include internal
management, this research will use COSO as the and external financial and non-financial reporting;
internal control measurement in accordance with the (3) Compliance Objectives – these pertain to

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10th March 2014. Vol. 61 No.1
© 2005 - 2014 JATIT & LLS. All rights reserved.

ISSN: 1992-8645 www.jatit.org E-ISSN: 1817-3195

adherence to laws and regulations to which the 2. LITERATURE REVIEW

entity is subject. 2.1 ERP Implementation
Relevant with the compliance objectives issued It needs a paradigm that ERP implementation is
by COSO no. 3, Grant et.al (2008) wrote that a business project compared to the installation of a
governance implementation in the implementation new software technology (Presley, 2006, Parr and
of Information Technology (IT governance) is Shanks, 2000). In the ERP implementation, because
absolutely necessary, because IT governance plays it is a business project, it will require the attention
an important role to produce financial statements. of the stakeholders, such as management,
Moreover, deficiencies in Information Technology information system professionals, line workers,
control can also eliminate important issues relating counsultant, and trading partner (Sambamurthy and
to the financial statements produced through Kirsch, 2002). Based on Muscatello, et.al (2003),
Information Technology. To implement the Enterprise Resource Planning (ERP) systems are
adherence to laws and regulations which are widely implemented as the backbone of many
applicable in a state as required by COSO in terms manufacturing and service firms. They are designed
of the internal control, this study will be guided by to address the problem of information
the Indonesian Good Corporate Governance. fragmentation or “island of information” in
Code of Indonesian Good Corporate Governance business organization.
(2006) via the Minister for Economic Affairs, Rainer (2011:292) wrote that ERP systems take
Decree No. KEP/49/M.EKON/11/2004, has a business process view of the overall organization
approved the establishment of the NCGP (National to integrate the planning, management, and use of
Committee of Governance Policy) consisting of all of an organization’s resources, employing a
Public Sub-Committees and Corporation Sub- common software platform and database. Business
Committees. NCGP provides GCG guidance to all process according to Rainer (2011:7), a business
companies in Indonesia, including companies that process is a collection of related activities that
operate on the basis of sharia, companies whose produce a product or a service of value to the
shares have been listed on the stock exchange, state organization, its business partners, and/or its
enterprises, regional companies, companies that customers. A process has inputs and outputs, and its
raise and manage public funds, and companies activities can be measured.
whose products or services are widely used by the When a company is going to implement ERP, it
public, as well as companies that have a broad is necessary to pay attention to the stages of ERP
impact on environmental sustainability. implementation, because each project in
In the implementation of internal control that has implementing ERP has different phases that will
a relationship with corporate governance and the also provide different benefits for each company. It
implementation of ERP system, using agency is in accordance with Elragal, et.al (2011): “ERP
theory, Morris (2011) described that the system implementation projects have got different
implementation of ERP system can facilitate phases which need to be considered when analyzing
monitoring and audit activities to obtain information the benefits achieved by ERP adopting companies.
that can be used by the principal about agent The concept of business performance can
behavior, according to the second proposition operationalized as financial gains by the
written by Eisenhardt (1989): “when the principal organization, operational improvement for the
has information to verify agent behavior, the agent is organization or intangible gains for the
more likely to behave in the interest of the organization.”
principal.” The argument of the proposition is if Phases in implementing Information
information system can provide information to the Technology, in this case, as they were written by
principal (shareholders) about the behavior of the Kwon and Zmud (1987): “that IT implementation
agent (management), the agent cannot commit fraud follows six-stages or phases as initiation, adoption,
or deceive the principal. adaptation, acceptance, routinization and infusion”.
Hadibroto (2004), chairman of the Association of In addition to considering such things, ERP
Indonesian Accountants, stated three things that implementation should be flexible so that the
need to do in building public trust: first, increase the implementation of ERP can provide significant
effectiveness of corporate governance; second, benefits for the company as well as the competitive
increase shareholder values and protect other advantage (Gupta, 2006).
stakeholder interests; third, go back to the basics of For ERP implementation, successful and
professional ethics and standards. unsuccessful ERP implementation will demonstrate
the performance of ERP. Successful ERP

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 Journal of Theoretical and Applied Information Technology
10th March 2014. Vol. 61 No.1
© 2005 - 2014 JATIT & LLS. All rights reserved.

ISSN: 1992-8645 www.jatit.org E-ISSN: 1817-3195

implementation is expected to provide qualified resources, project management, information

ERP performance. It is relevant to the research technology, business process, training, project
done by Elragal, et.al (2011), that ERP support and communications, and software
implementation should contribute a good ERP selection and support. Issues related to the
performance in order to give benefits in terms of implementation are alignments. There are some
qualified financial performance. Nevertheless, to alignments in relation to the implementation, which
get qualified ERP performance, it is not only are strategic alignment, system and process
determined by ERP implementation but also alignment, and knowledge alignment (Chen, 2001).
influenced by other factors, such as those written by Gupta (2000) finds that the keys to successful
Grabski (2007), it needs complementary controls to ERP implementation are relating to securing top
control the implementation of ERP. management commitment, forming cross-functional
For companies that implement ERP, ERP is an task forces to link project management with
operational activity for the company, in which business units, carrying out an assessment exercise
according Wibisono (2011), contributing 15%; and of hardware requirements, making deployment a
according to Ke et.al (2008): “ERP (Enterprise step-by-step introduction rather than all at once,
Resource Planning) systems, a type III information starting early planning on user training and support,
system (IS) innovation, have strategic relevance streamlining decision making to move
because their integration into core business implementation quickly, and being patient, as ERP
processes or strategies can directly impact firms’ implementation takes time.
performance.” However, as Poston (2001) said, When the company is going to conduct ERP
ERP implementations are often performed along implementation, it needs to consider the
with business process reengineering. Some firms correspondence between business model and
wanting to reengineering use ERP as the vehicle to competitive capabilities, as Beheshti (2006) said:
accomplish the business process. While this study “Such systems must be designed with their impact
focuses on the effect of ERP on firm’s on the company’s business model and competitive
performance, the separate effect to reengineering capabilities in mind, and their implementation
business process cannot be disentangled. An requires the alignment of IT and corporate
ineffective and unsuccessful process reengineering strategies, and often also entails major changes to
project could also contribute to lost performance organizational structure and culture (Presley, 2006).
gains including negative financial returns. ERP systems are also dynamic and continuously
To see the explanation given by Grabski et evolving (Bititci et.al, 2000).”
al (2007), figure 2.1 is a model made for successful Besides the correspondence between business
ERP implementation. model and competitive capabilities, Muscatello
(2008) states things need to consider are strategic
Project Management initiatives, executive commitment, human
resources, project management, information
technology, business process, training, project
Change
support and communication, and software selection
Management
and support. In business process activities the firm
will focus on identifying and improving the
Alignment of the
efficiency of critical operations, on restructuring
Succesful ERP
Business & New
Information System
Implementation important non-value adding operations, and on
eliminating inefficient processes. Reengineering
should be undertaken to insure that the strategic
Internal Audit
Activities
objectives mentioned earlier are feasible. The
reengineering effort should create a uniform
response from all aspects of the business.
Consultant and
In line with the business process specified by
Planning Activities
Al-Mashari (2002) which is to adopt ERP,
companies need business focusing on technology
Figure 2.1 Model of Control Factors for Successful ERP and business process to implement ERP. In addition
Implementation. Source: Grabski et.al (2007) to focusing on technology and business process,
when companies will make ERP implementation,
Critical Success Factors to implement ERP, they also need to pay attention to the control at the
according to Muscatello (2008), are strategic time of application and organizational changes,
initiatives, executive commitment, human

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 Journal of Theoretical and Applied Information Technology
10th March 2014. Vol. 61 No.1
© 2005 - 2014 JATIT & LLS. All rights reserved.

ISSN: 1992-8645 www.jatit.org E-ISSN: 1817-3195

because without control, ERP implementation will mathematics, economics, and medics. In the context
be difficult and risky, as examples in Davenport of ERP implementation and to obtain ERP
(2000), Grabski, et.al (2007). performance, control is necessary in conducting
In connection with the need of internal control ERP implementation. It is because ERP
implementation, companies must also have a implementation is significantly different with
complementary relationship among the factors tradisional implementation system (Grabski, 2007).
associated with operations, such as flexible Control in ERP implementation is something
manufacturing systems, marketing strategies, important, as stated by Kirsch, L.J; Sambamurthy,
control systems, information systems, relationships V; Ko, D-G; Purvis, R.L. (2002). Hence for ERP is
with customers and suppliers. All of those factors a project, in this study control theory will be used to
are called complementary factors required, so that obtain the ERP performance. To make a project
they fit in each other to form a coherent operational needs control, so that the project made will be in
system and to maximize profitability. Then to precise purposes and objectives which have been
obtain successful ERP implementation, companies defined.
must understand the risks, so that the companies Diffusion of Innovations consists of 2 (two)
must conduct a control associated with these risks words: diffusion and innovations. Diffusion is the
(Grabski et.al, 2007). The risks mentioned are risks process of an innovation communicated through
due to the absence of correspondence between channels among members within a social system;
organizational strategy, organizational structure and while innovations are ideas, practices, or objects
process, as well as the selection of ERP displayed by an individual or adoptions of other
applications. units (Rogers, 2003). Bradford, et.al (2003) uses the
Ho, et.al (2004) argues for ERP implementation Diffusion of Innovations Theory to carry out the
with the model in figure 2.2: “that system development and testing of a model that can
implementation is a challenging management issue support successful ERP implementation.
and is no less important than system research and Information System Success Theory issued by
development and a successful implementation will DeLone and McLean (1992) consists of 6 (six)
benefit from the application of all three dimensions, dependent variables to obtain success information
and not a single one.” system. The 6 (six) dependent variables are system
quality, information quality, use, user satisfaction,
ERP system
individual impact, and organizational impact. To
determine whether the system made reaches goals
- System specification
- Solution for integrating or objectives (success), there should be
legacy systems
Integration Process
measurements to measure whether the system has
- Suggested management
mechanism reached the target created to provide value to
- IT-enabled process
Performance Information System Management and Information
integration
Reengineering Process - Change management System Investment (DeLone et.al, 1992, Figure
approach 2.3). This is to provide a positive impact to the
- Change management
- MIS role
- Top management support
company.
- Trainning of staff

Figure 2.2 Adaptation Framework of ERP

Source: Ho et.al (2004)
In the ERP performance model made by Ho et
al. (2004), there is no compelementary control as
outlined by Grabski (2007). Therefore in this study,
complementary control will be conducted; Good
Corporate Governance using Agency Theory, and
adherence to COSO using Control Theory. Control Figure 2.3 D & M Success Model
theory or cybernetic theory explains about self- Source: DeLone, et.al (1992)
regulating systems, both mechanistic and
humanistic (Cannon, 1929). Wiener (1948) stated The central theme of Structural Theory is that
that control theory is generally attributed with every individual is a member of a social structure,
establishing as a distinct body of thought. Control and that structure supports sustainable performance
theory is widely used in several scientific studies in every time (Giddens, 1976, 1979, 1984). In the
the area of management, engineering, applied theory issued by Giddens, there are 2 (two) topics,
which are about (1) human behavior that creates

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 Journal of Theoretical and Applied Information Technology
10th March 2014. Vol. 61 No.1
© 2005 - 2014 JATIT & LLS. All rights reserved.

ISSN: 1992-8645 www.jatit.org E-ISSN: 1817-3195

and forms the social structure (agency) and (2) the components of internal control in the form of lines;
degree to which a social structure is formed, and the forms of organizational structure including
forcedly formed, and the behavior of an individual, entities, divisions, subsidiaries, operating units or
which is said by Giddens the duality of structure functions of which are business process, such as
and action. Number (2) is the most incisively sales, purchasing, production and marketing.
criticized of Giddens. He strongly criticized the Considering those things, internal control
idea of a relationship is always attached to dualism implementation is absolutely necessary, is
as a basic sociological analysis in many theories. presented in three dimensions in a cube.
According to Giddens, social analysis should Research has been carried out for successful
emphasize on aspect of duality (circumstances or implementation of information system project
special natures as an individual or characteristics (Cafasso, 1984; Ives et.al, 1984, Jiang and Klein,
that distinguish her/him from other people, such as 1999; Jiang et al 1996; McFarlan, 1981), but the
character or personality), not on dualism (a notion research conducted still has risks of failure in the
in this life that there are reciprocal conflicts or two- implementation. Therefore, to support successful
faced states). It means that the relationship between ERP implementation, one must understand the
actors (agents) and structure cannot be denied. risks, so that by knowing the risks it will be
However, the issue is how the actors (agents) and conducted control over them.
the structure can be interconnected to social
behavior? Are actors (agents) and the structure
associated by putting forward differences (tension
or conflict) or duality (reciprocal)? Social sciences,
according to Giddens, have been dominated by Vis
a Vis dualism. Actors and structure should be
reciprocal or rely on each other. This is the duality
meant to lie on the structure which demands the
actors as a means (medium and resources) and
becomes social practice guidelines in various Figure 2.4 The COSO Framework
places. Source: COSO (2011)
To Giddens, actors (agents) are concrete people A process consists of ongoing tasks and
who are in continuous activities; while structure is activities. It is a means to an end, not an end in
rules and resources formed of (and form to) social itself (COSO, 2011, 1). Business process, which are
practices looping. Duality of actors (agents) and conducted within or across operating units or
structure is the result and, at the same time, a means functional areas, are managed through the
of social practices. By this sense, structuration fundamental management activities of planning,
theory is formed. Structuration theory presupposes executing, and checking. Internal control is
an ongoing process and allows looping to form integrated with these processes. Internal control is
social behavior. most effective when it is embedded in the entity’s
There are 3 (three) main things that commonly infrastructure and its ongoing activities (COSO,
occur in structure as explained in Gidden’s 2011, 2).
structuration theory. They are (1) designation The implementation of internal control is in
structure or signification, relating to symbolic accordance with the development of Management
schemata, meaning, addressing, and discourse; (2) Theory issued by Henry Fayol (1841-1925) which
domination structure which involves the mastery of is included in the Stream of Management for
political and economic context; (3) justification or Classic Organizational Theory (1900-1940), who
legitimation structure relating to normative rules in argued about Administrative Theory which consists
legal system. of planning, organizing, command, coordination,
and control. The administrative theory was then
2.2 Adherence to COSO developed by Wren et.al (2002) to be 10 (ten)
principles. They are in table 2.2.
COSO (2011) issued a framework that shows
the relationship between the goals (objectives), the
components of internal control, and the structural
form of the organization. In Figure 2.4, there are 3
(three) objective categories of internal control
implementation in the form of a column; 5 (five)

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10th March 2014. Vol. 61 No.1
© 2005 - 2014 JATIT & LLS. All rights reserved.

ISSN: 1992-8645 www.jatit.org E-ISSN: 1817-3195

Table 2.2 Administrative Principles centralization, specialization) is configured in the
software. In Figure 2.6, Noovre (2006) describes
Fayol’s Administrative Theory Developed to be how to do an assessment to internal control.
10 Principles by Wren
1. Unity of Command C hoose the ri ght cont rol framework
COSO, CoCo, S AC. ..
2. Hierarchical transmission of orders
(“chain-of-command”)
3. Separation of Powers – authority, Doc ument cont rol s against the se lec te d mod el
Appr oach, Deployment, As s es sm ent of appr oach ef fici ency
subordination, responsibility and
control
De vel op a qua nt it at ive sc orin g process
4. Centralization S ix categories
5. Order
6. Discipline
Assemble a gro up of exami ne rs
7. Planning Individuals with appr opriate s kills and knowledge
8. Organization Chart
9. Meetings and reports Score th e i nt erna l c ont rol app l ic ati on
10. Accounting Scor ing agai ns t a model
Source: Wren, et.al (2002)
Figure 2.6 Quantitative assessment of Internal Control
From Fayol’s Management Theory which was Source: Noorvee (2006)
developed to be 10 (ten) principles by Wren, this
study will use those ten Wren’s administrative Relating to financial statements, which function
principles. One part of the principles is Separation for planning, control, and/or decision-making
of Power – authority, subordination, responsibility, should avoid the risks of both long-term (strategic),
and control which is an elaboration of internal medium term (tactical), and short-term
control. (operational) planning, the implementation of
internal control can avoid risk management. This
risk management is known as Enterprise Risk
Management (ERM). This is in line with Drew et.al
Classic Organizational Theory (1900–1940)
(2006) that provides the understanding of
Enterprise Risk Management (ERM), which refers
Fayol's
AdministrativeTheory byHenry Fayol (1841–1925) Adminsitrative to the existence of a comprehensive approach to
Theory
risk management within a company. Risk
management has received attention from COSO
Coordination
Planning Organizing Command
and Control
See Table 2.2.
that develops an internal control framework.

Figure 2.5 Digram of the Classic Organizational Theory 2.3 GCG Implementation
(data processed) Corporate Governance is a term used in
formulating governance for the company. Basically,
For internal control implementation in the corporate governance is rules, principles, or
company, there are some internal controls can be practices that set the direction of the company.
implemented by the company after conforming NCGP (2006) provides a definition of Good
them to the company's needs. In relation to internal Corporate Governance through an opening speech
control, Morris (2011) stated internal control is by Dr. Boediono (Coordinating Minister for
considered an “internal issues” and public Economic Affairs of the Republic of Indonesia) is
companies were not required to disclose one of the pillars of the market economy system. It
information about internal control procedures. is closely associated with the trust of the company
Carton (2010) argued in relation to the ERP and applying it and the business climate in one country.
internal control, which is one of these essential Corporate governance is sometimes viewed as a
dichotomies in the planning and management of business culture fostering economic growth by
routine activities is the trade-off between control building up confidence of investors (The HIH
and flexibility. With the ERP systems, the Royal Commision Report, 2003). Risks that occur
interdependence between control and other directly or indirectly may be associated with the
structuring attributes (such as formalization, performance of the company, because these risks

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© 2005 - 2014 JATIT & LLS. All rights reserved.

ISSN: 1992-8645 www.jatit.org E-ISSN: 1817-3195

affect corporate policies and regulations. Paper economic bonding cost. This is to reduce the
written by Poletti-Hughes suggested that corporate possibility of the Principal disadvantaged by the
governance practices for the company and the Agent or otherwise.
country in which these two things provide value for Within these conditions, the two sides, the
the company. Risks can be managed by giving Principal and Agent, have different motivations and
better attention to the implementation of internal agents do not always act as expected by the the
control and corporate governance structure Principal (Shapiro, 2005). Jensen (1983) divides
(governance structure) to provide value for the agency theory into two major parts (1) the positivist
company. (Bhimani, 2009). agency theory and (2) the principal-agency theory.
Associated with the implementation of internal Both of the theories use the same unit of analysis,
control, a study conducted by Uhlaner (2007) for which is the contract between the Principal and the
private firms, that the implementation of corporate Agent. The difference is the positivist agency
governance should be implemented in all theory focuses on the relationship between owners
companies, especially companies that are included and managers generally in public organizations;
in public company. It is as has been outlined by while the principal-agency theory can be used more
NCGP which provides GCG guidance to all widely in the relationship of Principal and Agent,
companies in Indonesia, including companies that such as the relationship between employers and
operate on the basis of sharia, companies whose employees, sellers and buyers. Einsenhardt (1989)
shares has been listed on the stock exchange, state adds that both theories are complementary, and
enterprises, regional companies, companies that assumptions used in the two theories are same in
raise and manage public funds, and companies the uncertainty of the results, the possibility of risks
whose products or services are widely used by the and information. In the application, agency theory
community, as well as companies that have a broad has been widely used by researchers in various
impact on environmental sustainability. Figure 2.7 disciplines, such as accounting, marketing, political
is a picture given by Uhlaner (2007) for corporate science, and organizational behavior.
governance in private firms. Contract based on agency theory, according to
Shapiro (2005), includes two things: (1) the agency
Ownership
Composition problem arising from the difference of interest
(Family vs. non-family,
external owners (VC, private
equity, individual), overlap with
between the principal and the agent in the condition
management, number , etc.)
Attitude and behaviors of asymmetric information, (2) the risk problem,
(Quality of) Governance which reflects different behavior between each
Functions Firm performance
Board of Directors Monitoring / accountability Organization party to the risks that must be borne.
Enterprising function Effectiveness
Composition
Attitude and behaviors Service function Financial performance The problem magnitude lies on the ability of the
Ownership structuring Strategic change
function principal in monitoring the agent’s activities. The
Other governance
problem arises because of the adverse selection and
mechanism
Financial reporting
moral hazard which result in the difference of
Executive remuneration
interest between the two sides that leads to the
difference between expected performance and
Figure 2.7 Framework for the Special Issue on actual performance. To the principal primary goal
Governance in the Privately-held Firm is to maximize profits through cooperation
Source: Uhlaner (2007) undertaken, whereas to the agent the main concern
is to maximize compensation obtained. In this case
Agency theory is a theory that examines the the agent cooperates with the compensation she/he
relationship between Principal and Agent (Jensen earns, so it may arise, of which is called shirk costs,
and Meckling, 1976). It describes the relationship costs that arise because the agent does not work as
of cooperation based on managerial behavior, expected.
agency costs, and capital structure. In this case, Relating to the implementation of Good
Jensen and Meckling stated that the relationship Corporate Governance in the company, agency
between the Principal and the Agent is based on theory describes the relationship between the
contract in which the Principal binds the Agent to principal (top management) and the agent
conduct activities on behalf of the Principal and (functional area manager). In this case, sometimes
giving authorities to do the work and make certain the desire of top management is in contradiction
decisions. Eisenhardt (1989) states, similar to Jesen with the state of the functional area, so it needs to
and Meckling in relation to the Principal and Agent, be bridged with GCG implementation. Thus,
the Principal will issue a supervision fee while the inequality between the different interests can be
Agent must pay the royalty fee which is an

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overcome. In line with the principle, Kamus (2008, operational performance. Therefore, in ERP
a, pp19) wrote that the basis for determining the implementation it needs to measure the
measurement of performance is the principal’s performance of ERP. Things measured are
relationship with the agent (principal-agent information availability, information quality,
concept). According to the concept, owners of the standardization, inventory management, on-time
company or the shareholders are the principal (Top delivery.
Management positions: Chief Executive Officer, Financial performance is the overall picture of
Chief Finance Officer, Chief Operating Officer), financial activities in the company that gives
those who have real wealth of the company. information about the value of the company. For a
Without the principal, company is none. The agent public company, financial performance generated
or agency is a party designated by the principal to will provide information about share price. The
run the company. higher share price is the higher of the shareholders'
In this study, for the principal categories wealth; the higher shareholder value, the higher
(Top Management), will be added Chief value of the company. Only in deviant conditions,
Information Officer; for the agent categories are the two are not aligned (Djohanputro, 2008, a,
Finance Manager, Accounting Manager, Human pp20-21).
Resource Manager, Marketing Manager,
Production and Operations Manager, and Internal
Auditor. However, in this study categorized as the 2.5 Financial Performance
agent are Finance Manager, Accounting Manager Financial Performance determines specific
and Internal Auditor. measurements that could measure the success of a
company in generating profits (Sucipto, 2003).
2.4 ERP Performance Financial performance is calculated by using
In connection with Performance Management financial ratios. The ratios are the results of a
System, Wibisono (2011) assessed the performance comparison between numbers of one financial
of the company from three main factors: Financial figure and other financial figures. The figures
performance (70%), Operational (15%) and contain in the financial statements consisting of
Administrative (15%). Resulting financial balance sheet, profit / loss, cash flows, and changes
performance may provide an overview of the state in equity positions. There are several categories of
of the company as a whole and is a very important the ratio that can be used as a measurement of
study for the sake of maintaining the sustainability financial performance: profitability, liquidity,
of the company. Kamus Besar Bahasa Indonesia solvency, turn-over, efficiency, and effectiveness
(KBBI) (2010-2011) defines performance as a noun (Djohanputro, 2008, a, pp23-34).
(n = noun) which has meaning: (1) something
achieved, (2) demonstrated achievement, (3) ability 2.5.1 Profitability ratio
to work (tt equipment). This ratio shows company’s ability in
Performance Assessment according to Mulyadi generating profits. Profitability ratio consists of
(1997, pp 419) is a periodical determination of Gross Profit Margin which shows the company’s
operational effectiveness of an organization, part of ability; Operating Profit Margin which shows the
the organization and its employees by objectives, company’s ability in generating operations profit
standards, and criteria set previously. In ERP from sales; Net Profit Margin which shows the
implementation, one needs to know the resulting percentage of net profit value, which is profit to be
performance by implementing the ERP. To this, the shareholders’ rights, compared to net sales
Elragal, et.al (2011) said: “The concept of business acquired by the company; Return on Equity which
performance can be generalized as financial gains shows the amount of profits from the company and
by the orgnizaiton, operational improvements for becomes the shareholders’ rights as compensation
the organization of intangible gains for the depositing a number of equity; the higher of the
organization.” ratio, the higher of the shareholders’ wealth; Return
Some researchers suggested that the on Assets which shows how much the operating
implementation of ERP should provide a significant profit generated from the total asset under
impact on operational performance (Cottelleer & management. The higher of the ratio is the better of
Bendoly, 2006; Cottelleer, 2006; Gattiker & the ability of management to generate additional
Goodhue, 2004, 2005). Relating to the advice wealth to enjoy by the investors. Investors are
given, Madapusi (2012) wrote the ERP System shareholders, bondholders, and creditors.
Implementations result in improvements in

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2.5.2 Liquidity Ratio Galbraith (1974) wrote that Organizational

This ratio indicates company's ability to Information Processing Theory explains the reasons
meet the payment obligations to third parties in a in every execution in the company giving uncertain
timely manner. The higher availability of short- results. This is because the system is a set of objects
term assets is the better of company's ability to or elements in iteraction to achieve a specific goal.
meet its obligations. Liquidity ratio consists of (1) An example is a system will change or process
Current Ratio, which indicates the availability of energy, information, or material into a product or
current assets to tackle current liabilities of the output that can be used by the system itself or
company. Current assets are all wealth that is easy outside the system (environment) or both.
to become cash in a short time, less than one year. Therefore, within a system, the results given may
Current liabilities are all liabilities of the company be different from one part and other parts.
maturing less than one year; (2) Quick Ratio or From research conducted by Hunton et.al
Acid Test Ratio, which shows company's ability to (2003) in 63 companies by a comparison between
meet short-term obligations, or its current the companies that implement ERP and do not
liabilities, with the assets of the company that is implement ERP, it is found that there are
ready to pay; (3) Ratio of Operating Cash Flow to differences in financial performance for companies
Current Liabilities, which demonstrates company's that implement ERP and do not implement ERP.
ability to generate cash from normal business Companies that implement ERP have better
operations to meet its current liabilities. financial performance than companies that do not
implement ERP.
2.5.3 Turnover Ratio Challenges faced by the company are the
This ratio shows management's ability in using company should be able to implement internal
its managed wealth to produce income. Turn over control specifically for ERP implementation of
ratio consists of Asset Turn-over, Fixed Asset which should also measure the performance of
Turn-over, Net Working Capital Turn-over, ERP. Yet, in the implementation of ERP and to get
Account Receivable Turn-over, Inventory Turn- qualified ERP performance, the company also
over, Account Payable Turn-over, Operating Cycle, dealing with laws and rules as expressed by Garber
Cash Convertion Cycle. (2010), Hare (2011).

2.5.4 Solvency Ratio 3. DISCUSSION

This ratio shows companies' ability in fulfilling
obligations in the form of payments of long-term Based on the literature review, then model of this
interest and principal loan. Solvency ratio consists study is as following.
of (1) Leverage Ratio or Gearing Ratio, consisting
of the ratio of long-term loan, the ratio of long-term
loan to equity, the ratio of long-term loan to total ERP Implementation
assets; (2) Interest Coverage Ratio; (3) Fixed
Charge Coverage Ratio; (4) Cash Fixed Charge
Coverage Ratio.
Modern companies, which their operational
activities use Information Technology called
Adherence to COSO ERP Performance Financial Performance
Enterprise System or better known as Enterprise
Resource Planning, requires internal control to
protect the confidentiality, integrity, and
availability of all information produced by the
company. The information produced can be used by
top management for planning, organizing, comand, GCG Implementation

coordination, and control. Activities of planning,

organizing, command, coordination, and control
impact the company in supporting the company's Figure 3.1 Model of the Study
activities and performance of the company (Sutton
(2006; Mathrani, 2009; Davenport, 2000; Hedman
& Borell, 2002; Markus & Tanis, 2000; Stoel,
2011; the ISO / IEC, 2005; ITGI, 2005).

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3.1 Correlation between ERP Implementation, including companies that operate on the basis of
Adherence to COSO, and GCG sharia, companies whose shares have been listed on
Implementation the stock exchange, state enterprises, regional
ERP (Enterprise Resource Planning) is a companies, companies that raise and manage public
software that integrates planning, management, and funds, and companies whose products or services
the use all available resources within the company. are widely used by the public, as well as companies
It contains a series of applications that automate that have a broad impact on environmental
routine works of the company in back-end sustainability must implement GCG (Good
categories (such as finance, inventory management, Corporate Governance).
scheduling, and other back-end activities) that help
the company handle the jobs in functional areas 3.2 Effects of ERP Implementation, Adherence
(Turban, 2010; 379). to COSO, and GCG Implementation on ERP
The main objective of ERP implementation is to Performance
conduct the integration in all functional areas exist
in the company and to allow information to flow 3.2.1 ERP implementation – ERP performance
seamlessly in all functional areas (Rainer, 2011). In ERP implementation, it needs to know
Nevertheless, in practices there are companies the operations performance produced by the ERP
succed and fail in ERP implementation and there is implementation. Elragal, et.al (2011) stated: “The
a notion that if a company has implemented ERP, concept of business performance can be generalized
there is no problem in the company. as financial gains by the organization, operational
Structuration theory (Giddens, 1976) suggests improvements for the organization of intangible
that each individual is a member of a social gains for the organization.” Some researchers
structure and the structure supports sustainable suggested the implementation of ERP should
performance at all times. Therefore, successful and provide a significant impact on operational
unsuccessful ERP implementation depends on the performance (Cottelleer & Bendoly, 2006;
individual in the structure. Hence it needs control in Cottelleer, 2006; Gattiker & Goodhue, 2004, 2005).
accordance with Complementary Control To obtain a qualified ERP performance that affects
Procedures (Grabski et.al, 2007), that is adherence the financial (operations) performance, during the
to complementary control procedures. This is for implementation process, it needs attention from
conducting internal control (internal control) in management and performance measurement to be
ERP implementation. In addition to adherence to achieved should be set (Nicolau, 2004b).
complementary control procedures, successful ERP
implementation must consider the determinant 3.2.2 Adherence to COSO – ERP performance
factors of successful ERP implementation. Those For companies in the modern era which the
are strategic initiative, commitmen executive, operation activities use information technology, the
human resources, project management, information implementation of internal control is something
technology, business process, training, project very important. With a good internal control, it will
support and communications, and software produce a good performance management system.
selection and support (Muscatello, 2008). For companies applying information technology,
In line with the Structuration Theory (Giddens, they will utilize COSO as a standard
1976) and Complementary Control Procedures implementation of internal control which has
(Grabski et.al, 2007), COSO (2011) requires the management as primary audience, internal control
existence of internal control which is defined: seen as a process, and internal control objectives
“Internal control is a process, effected by an which are effective and efficient operations,
entity’s board of directors, management, and other reliability of financial statements, adherence to laws
personnel, designed to provide reasonable and regulations, focus to all corporate entities,
assurance regarding the achievement of objectives responsibility of the management
in the following categories: (1) effectiveness and
efficiency of operations (2) reliability of reporting; 3.2.3 GCG Implementation – ERP Performance
and (3) compliance with applicable laws and Code of Indonesian Good Corporate
regulations.” Governance (2006) via the Minister for Economic
To implement the objectives outlined by COSO, Affairs, Decree No. KEP/49/M.EKON/11/2004,
then every company must implement laws and has approved the establishment of the NCGP
regulations prevailing. In this case NCGP (2006) (National Committee of Governance Policy)
issued a policy that every company in Indonesia, consisting of Public Sub-Committees and

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ISSN: 1992-8645 www.jatit.org E-ISSN: 1817-3195

Corporation Sub-Committees. NCGP provides human resources) that exist in the company to a
GCG guidance to all companies in Indonesia, systematic system and managerial approach.
including companies that operate on the basis of Besides, the implementation of ERP is also the core
sharia, companies whose shares have been listed on strategy to Information Technology-based
the stock exchange, state enterprises, regional companies, providing value for the company, and is
companies, companies that raise and manage public a key role in competitive advantage. One of the
funds, and companies whose products or services reasons for implementing ERP is to improve
are widely used by the public, as well as companies company performance and deliver value to the
that have a broad impact on environmental company in terms of information flow, integration
sustainability. in all management functions, accuracy in the
Financial statements produced by the company completion of reports and procurement of
applying Information Technology, in this case is information (Su, et.al, 2013).
the ERP, then ERP performance is important. The Research conducted by Hunton, et.al (2003)
ERP therefore should show good performance. found that companies that implement ERP give the
Thus, it may give information needed by the same results in financial performance, while
company through the financial statements produced companies that do not implement ERP show poor
that will be used to measure financial performance. financial performance. Results of the research
Financial statements produced by functional conducted by Poston, et.al (2000, 2001) gave mixed
area (accounting and finance), which would result results as well as the controversy that there was no
in financial statements that would ultimately show difference in financial performance between
company's performance in this regard is financial companies that implement ERP and companies that
performance, should have a high level of accuracy, do not implement ERP. Companies that implement
which can be reliable and of a good quality (Morris, ERP did not show better results than before
2011). Due to financial statements, Top implementing ERP, while companies that do not
Management (Chief Financial Officer, Chief implement ERP gave increased performance.
Information Officer, Chief Executive Officer, and
others) will perform the functions of Administrative 3.4 Implications of Adherence to COSO to
Theory in the Classic Organizational Theory Financial Pperformance
Stream of Management as proposed by Henry Financial statements produced by the company
Fayol (1841 - 1925) which are planning, can be used to calculate financial performance.
organizing, command, coordination, and control. Financial performance is calculated by using
Nevertheless, in its implementation in financial ratios. Financial ratios are the result of a
functional area, the Functional Area Manager could comparison between numbers of one financial
commit cheating, fraud to Top Management or figure and other financial figures. The figures
otherwise, as Classic Organizational Theory issued contain in the financial statements consisting of
by Henry Fayol, one of the functions of top balance sheet, profit / loss, cash flows, and changes
management is command, so there are possibilities, in equity positions. Relating to financial statements,
Top Management gives orders to the Functional which function for planning, control, and/or
Area Manager to commit fraud by manipulating decision-making should avoid the risks of both
existing operations in the functional area. This can long-term (strategic), medium term (tactical), and
lead to performance in the functional area (ERP short-term (operational) planning, the
performance) does not reflect real situation which implementation of internal control can avoid risk
will have implications to financial statements. At management.
the same time, financial statements will be used to COSO is a private-sector initiative begun in
measure financial performance. If financial 1985 to address fundamental causes if financial
performance does not reflect real situation, Top scandals. Reliability of financial reporting is one of
Management will be wrong in performing one of the three objectives of the internal control process
the managerial functions such as planning, in the COSO framework (Altamuro, et.al, 2010). In
organizing, command, coordination, and control. connection to COSO and financial performance
derived from financial statements written by
3.3. Implications of ERP Implementation to Altamuro (2010), that financial statements are the
Financial Performance responsibility of management, prepared and
ERP (Enterprise Resource Planning) is a system enforced with adequate internal control structure,
integrating all functional areas (research and and constructed with procedures for the preparation
development, production, marketing, finance and of financial statements and should be subject to and

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obedient to laws and regulations. Financial implementation with financial performance using
statements should provide an assessment of the ERP performance as intervening variable. This
effectiveness of internal control structure, and the model is expected to be able to describe the
company must obey the laws and regulations
relationship between the variables exist.
prevailing in any state to ensure guarantee on the
financial statements at the end of the period. The This research should be conducted in
financial statements which have been prepared manufacturing industries regarding that ERP
should be audited by independent public implemention was initially carried out in
accountant. The statements include validation with manufacturing industries. Manufacturing industries
the assertion from management including in the implement COSO, that is, as a form of internal
management report. In addition, annual financial control compliance. Moreover, intenal control is a
statements must be audited by independent public
basis of the preparation to financial statements.
accountant.
Financial statements issued, then, will be used for
3.5 Implications of GCG Implementation to measuring financial performance. One condition
Financial Performance required by COSO is that a company implementing
Abdo, et.al (2007) wrote that good corporate COSO should obey the law and regulations in the
governance can be a tool to attract investors’ country. In relation to the company, obedience to
attention to invest their money in the company. law and regulations prevailing is in accordance to
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Table 2.1 Results of Previous Studies for ERP (Enterprise Resource Planning)
Implementation

Theory Researchers Results

Control Theory Kirsch et. al (2002) The researchers conducted a study to test the
(Canon, 1929) relationship between control and information
system development project from the point of view
of IS professional (IS project leader) with the client,
in this case is superior in the company in
hierarchical arrangement. Information system
project, in this case is ERP implementation, is a
project (Presley, 2006; Parr and Shanks, 2000).
Results showed:
1. It needs control in the implementation of a
project, so empirical research is necessary to
prove the usability of the use of self-and-clean
control modes.
2. Behavior of the client (superior) who has little
knowledge about the development of
information system development (ISD), then
key factors are needed to exercise control over
the development process system by using type
of control mode.
Type of control mode applied in the implementation
of ERP has not been done in the research.
Therefore, this study will conduct the type of
control mode that will be implemented.
Diffusion of Bradford et. al (2003) The researchers conducted the study to test
Innovations Theory successful ERP implementation system.
(Rogers, 2003), The results showed that the degree of consensus in
Information Systems organizational objectives and competitive pressure
Success Theory have a significant effect on the performance of
(DeLone et.al, 1992) ERP. On the other hand, the complexity of the
system, training, competitive pressure, and top
management support have a significant connection
to the the satisfaction on the level of functional
managers to use the new system.
In strategic level, it provides a significant support
for the performance of ERP implementation; the
issues of implementation have connection to user
satisfaction. As a fact, user satisfaction correlates
with the support of top management and affects the
performance produced. The study is in line with the
research conducted by DeLone et.al (2003).
However, how much the influence is, as far as the
journal study has been done, there is no research
has been conducted relating to it. Therefore, this
study will conduct some empirical tests about the
correlation magnitude between top management
support with user satisfaction in the context of ERP
implementation.
Structuration Theory Indeje et.al. (2010) The researchers conducted the study to identify
(Giddens, 1976). factors within the organization that affect efforts in
the implementation of Integrated Financial
Management Information System (IFMIS).

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Theory Researchers Results

Based on the premise that structure and culture in
the organization will give effect to the
implementation efforts on a project, the result of the
research is organizational culture impact the
financial information system development and
implementation.
Empirical tests have not been done on Indeje, et.al’s
research (2010); it is still a concept. Therefore, in
this study, it will be conducted empirical tests.
Structuration Theory Jack, et.al (2008) The researchers conducted this study on a case
(Giddens, 1976) study in the European Union and the Egyptian
government towards the implementation of ERP
and within limited context of the role of
management accountants. Results showed:
(1) ERP Implementation in developing countries
such as Egypt is a neglected area of research in
the accounting. Thus implementing ERP in
developing countries will face its own
difficulties.
(2) ERP system, as one of developing technology,
is mostly used in Anglo-American countries.
This suggests that ERP system is not an easy
thing to be applied in developing countries.
(3) ERP system that has been introduced since the
1990s to replace the in-house-developed legacy
systems, gives another problem in terms of
integration. Although the intervention to the
European Union in its decision to adopt ERP in
IMC (Industrial Modernisation Center) is
limited in all departments of IMC following
their branches makes the IMC adopt ERP,
unlike prior research, this intervention failed.
(4) In the case of IMC, ERP system does not bring
changes to accounting system usability. In
contrast, it is used to manage performance-
based budgeting and stability.
Research was conducted in the European Union and
Egyptian Government, while ERP implementation
has been up to other countries and ERP has been
used in almost all industries. Therefore, in this
study, the research will be done in manufacturing
industries that have implemented GCG issued by
NCGP to the State of Indonesia and that involves
COSO as internal control.

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Table 2.3Results of the Previous Research for Adherence to COSO (Committee of Sponsoring Organization of the
Treadway Commission)

Theory Researchers Results

Control Theory (Canon, Ma et.al (2011) The researchers conducted a study to analyze
1929), performance audit of the government by referring to
COSO, 2011 COSO framework.
The result is that the ability of the audit and
management give a significant improvement to the
effectiveness of the audit process. Then the process
of economic development in the region also gives a
significant role in improving audit work.
Therefore, it is very important to every institution,
business supervision agencies to provide guidance
and prevention before problems occur. Area in
development of the economy and its construction
has to be something important to implement internal
audit control audit.
Agency Theory Morris (2011) The researcher conducted the study to review the
(Jensen dan Meckling, ERP system to the effectiveness of internal control
1976) and its implications to financial statements.
Results of the research conducted in the period
1994-2003 by referring to SOX Section 404, by
means of regression analysis, showed that
companies implementing ERP and internal control
have a low impact on internal control weaknesses
compared to companies implementing ERP but do
not have control tools in it.

Table 2.4 Results of the Previous Research for ERP (Enterprise Resource Planning) Performance

Theory Researchers Results

General System Theory as the Madapusi, et.al The researchers conducted the study to
root of Organizational (2012) examine the effect of ERP implementation on
Information Processing Theory operational performance within the company.
(OIPT) (Galbraith, 1974) The results showed that the performance of
each module of ERP implementation affects
operational performance. In addition, the
resulting performance is different in every
module of ERP implementation in overall
operational performance measurement.
Research to be carried out is how far the
performance of ERP influences ERP
implementation which has implications to
financial performance.

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