Corruption hides truth in audit reports<\/p>\n
The value of banks' assets reported by public accountants is
\nfar lower than those disclosed by international auditors assigned
\nby the government to revalue the assets in a due diligence.
\nEconomist Kwik Kian Gie discusses the reasons behind the
\ndisparity.<\/p>\n
JAKARTA (JP): Corporate financial reports that have been
\naudited by public accountants, particularly ones submitted by
\ninternational networks such as Arthur Anderson, Arthur Young,
\nPrice Waterhouse and KPMG, usually reflect the real conditions of
\nthe audited companies.<\/p>\n
Such reports are generally used by banks to assess the
\ncredibility of audited companies and by investors to decide
\nwhether or not they will cooperate with them. If such reports do
\nnot reflect the truth, bad luck will follow for the banks and
\ninvestors. Can audit reports by public accountants be trusted?<\/p>\n
Something very strange has happened in the country: the
\nIndonesian Bank Restructuring Agency (IBRA) distrusted the audit
\nreports of major international public accountants and assigned
\ntwo giant finance companies -- Lehman Brothers and J.P. Morgan --
\nto reaudit Indonesian banks. The two firms use a different method
\nof auditing called due diligence, which can be interpreted as an
\nassessment of serious scrutiny.<\/p>\n
As is widely known, most Indonesian banks cannot repay their
\nhuge debts to Bank Indonesia, the central bank. The government,
\ntherefore, confiscated the banks' assets, including assets put up
\nas collateral by bank borrowers who failed to repay their debts.
\nAssigned by the government to restructure the banking industry,
\nIBRA appointed the two finance companies to carry out the due
\ndiligence.<\/p>\n
The due diligence produced extremely different results, some
\nof which indicate that the real value of certain banks is only
\nabout 20 percent of the value recognized by public accountants.
\nWho is right, Lehman Brothers and J.P. Morgan, or the public
\naccountants?<\/p>\n
The two companies determined the value of the assets on their
\nreal prices, crosschecked at market places or at factories. The
\npublic accountants, who work in accordance with the Indonesian
\nAccounting Standard, set the asset values based on financial
\nreports prepared by the audited companies. A public accountant,
\nfor example, will believe an audited company's report that it
\nprocured a building at Rp 100 billion (US$11.5 million) as long
\nas the report is supported by basic documentation or receipts,
\neven if its real price is only Rp 50 billion. Company executives
\nkeep the other Rp 50 billion.<\/p>\n
Are public accountants operating in Indonesia not required to
\ncarry out serious auditing in the due diligence manner of Lehman
\nBrothers and J.P. Morgan? No, because the scope and
\nsophistication of their auditing jobs are determined by their fee
\namounts.<\/p>\n
How about responsibility for their reports? Public accountants
\noperating in the country are protected by representation letters
\nwhich declare that the truth of the documents accompanying the
\nreports is the responsibility of the audited companies.<\/p>\n
If that is the case, can financial reports in Indonesia be
\ntrusted? Not at all. But facts show that creditor banks, the
\nCapital Market Supervisory Agency (Bapepam) and the Jakarta Stock
\nExchange regard public accountants' audit reports as true and
\nappropriate. That is one of the causes resulting in the current
\nfinancial disaster facing the banking industry and the capital
\nmarket.<\/p>\n
Investors in the capital market, for example, lost a lot of
\nmoney because when they valued stocks they relied on audited
\nfinancial reports, the figures of which turned out to have been
\nmarked up significantly. As a consequence, the Jakarta Stock
\nExchange lost its good reputation. Many of its stocks are traded
\nat prices far lower than costs for the production of share
\ncertificates.<\/p>\n
In other countries public accountants also rely on documents
\nproduced by audited companies to determine asset values. But no
\none there would produce a Rp 100 billion receipt if they sold a
\nbuilding for Rp 50 billion. Otherwise they would have to pay
\nincome tax on the false profit. So, formal truth -- based on
\ndocuments -- is the same as material truth in those countries. In
\nIndonesia, income tax on false profits can be evaded through
\nbribery. Formal truth, therefore, is extremely different from
\nmaterial truth.<\/p>\n
Now that a new government will be established soon after the
\nJune 7 general election, it will have to take necessary measures
\nrelating to public accountants' methods and the standardization
\nof Indonesian accounting. Will the new government continue to
\nallow public accountants to relay \"the truth\" merely by the
\nverification of documents or will it suggest they adopt
\nprinciples used by J.P. Morgan and Lehman Brothers in their due
\ndiligence?<\/p>\n
As long as collusive and corrupt practices prevail among tax
\nofficials and taxpayers, the Indonesian Accounting Standard will
\ncontinue to reveal false formal truths. It will be up to the new
\ngovernment to revise these standards.<\/p>",
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