Kieso described the pension plan into two, defined benefit and defined contribution. McLeod et al stated that the risk of benefit must be borne by the company because they have agreed to close the underfunded pension plan, while the risk of contribution must be borne by the employees, because they are responsible for investing the pension fund in the investment plan they have chosen. In the US, companies can choose a pension plan that suits them best. Brown and Weisbenner (2013) stated that there was a dramatic shift in employees or companies in the US for choosing the specified contribution rather than choosing a defined benefit scheme in the last few decades, but this phenomenon is different from Indonesia.
The Government of Indonesia regulates the pension program through law No. 11 of 1992, which states that Indonesia recognizes two pension plans, defined benefits and defined contributions, but law number 13 of 2003 article 167 implicitly states that each country needs to follow a defined benefit pension, plans and estimates of pension benefits are governed by the same law. This condition ensures that companies in Indonesia have a choice of two types of pension plans, only determined benefits and cannot choose between defined benefits and defined contributions (having two pension plans).
This two-version plan presents its own audit risk which can lead to higher audit fees, but the same regulation also states that companies can only participate in defined benefits, and the amount exceeded will be given to employees, but not exceeding the company needs to pay for differences, whereas the contribution determined is purely an employee’s contribution. It makes a company that has both pension plans riskier for the auditor because it bears two pension risks and not complementary.
Nasih, Fadhilah, and Harymawan in this research used 487 samples of companies listed on the Indonesia Stock Exchange in the 2014-2016 period. Data is obtained from ORBIS and is collected manually from the Company’s Annual Report and Financial Report which can be downloaded at www.idx.co.id
We find that the choice of pension program is a matter of stating audit cost.
Companies that use both pension plans have higher audit fees because there is a tendency for failure to pay pensions and the need to bear the risk of loss in investment. The pension deficit significantly affects audit cost only in defined benefits, but not in companies that use both pension plans. Auditors in Indonesia tend to see more risk in companies that use both pension plans, than companies that only use defined benefits and pension deficits.
Author: Iman Harymawan, Ph.D.
Details of this research available at: https://www.ijicc.net/index.php/volume-10-2019/151-vol-10-iss-12
Nasih, M., Fadhilah, L., P., and Harymawan, I. (2019). The Effect of Corporate Pension Plan to Audit Pricing. Accepted at the International Journal of Innovation Creativity and Change.