Ministerial decree a warning for proffessional accountants<\/p>\n
Winahyo Soekanto, Lawyer, Consumer Care Foundation, Jakarta,
\nwinahyo@yahoo.com<\/p>\n
What happens when accountants and their clients get too
\n\"intimate\"? The birth of illegitimate dealings and financial
\nscams such as those affecting U.S. corporations Enron, Xerox,
\nGlobal Crossing, WorldCom and Arthur Andersen.<\/p>\n
Amid signs that the problem of accounting malpractice might
\nalso be present in Indonesia (one needs only to remember the
\nrecent case of questionable audit of one of Indonesia's major
\npharmaceutical companies), the government has issued a new
\ndecree. Hopefully, the Minister of Finance Decree No.
\n423\/KMK.06\/2002 will end any such illicit love affairs between
\naccounting firms and their clients, as it restricts the duration
\nand extent of audit services.<\/p>\n
The decree, for instance, limits to five years the audit
\nservices rendered by one public accounting firm to one client.
\nFurther, a public accountant can only undertake audit services
\nfor the same client for three years.<\/p>\n
Indeed, in many of the recently-revealed scams, violations
\nbegan when clients' excessive wish for leeway met with the
\naggressive flexibility offered by the accountants. Accounting
\nfirms have been known to offer financial engineering, making the
\nmaximum use of any legal loopholes and thus leading to
\nintentional misrepresentation.<\/p>\n
Accounting manipulation is one of the corporate frauds living
\na dormant existence in many companies, and springs to life in
\nwhat observers now cynically refer to as \"creative accounting\".
\nThis is what happened to U.S. telecommunication giant WorldCom --
\nlater dubbed as the largest corporate fraud in U.S. history.<\/p>\n
WorldCom -- which is also the world's largest internet traffic
\ncarrier and operates in 65 countries -- has admitted to
\ndiscovering an accounting error, in that it had recorded overhead
\ncosts, such as network maintenance costs, as capital expenditure.
\nThe result was a deceiving portrayal of increased revenues and
\nprofit.<\/p>\n
The world stock markets trembled by the fraud. The reputation
\nof U.S. corporations took another one of a series of dips
\nfollowing the collapse of Enron last year. The price of its
\nshares, which in 1999 reached US$64 per share, dropped to US$.09.
\nThe U.S. government responded to the scandal by opening a
\ncriminal investigation into the case, and by launching a bill
\nthat would reform company accounting, but the world's trust in
\nthe system and standards of accounting in the U.S. and elsewhere
\nstill took a free fall.<\/p>\n
Indonesia, too, is facing the same predicament because
\ninvestors, shareholders and financial agencies are losing the
\nbenchmark for proper business practices. Consumers and other
\nstakeholders have to accept goods and services from producers
\nwhose claims of production costs cannot be verified.<\/p>\n
Indeed, the Indonesian public is already familiar with a
\ncontroversial accounting practice often referred to as \"window
\ndressing\", in which financial statements are fabricated so they
\nlook better. This can be done through a series of tactics such as
\nomitting expenditures, covering up other financial obligations,
\npostponing certain accounting procedures, and recording
\ntransactions that have yet to take place. No less popular are the
\npractices of establishing double accounts, and massaging or
\nmaking up balance sheets for the purpose of evading tax; in
\nshort, manipulating the book.<\/p>\n
In Indonesia, the partnership of the legal system and the
\naccounting system has often been the magic wand that magically
\nchanged loss into profit and that turned inadequacies into a
\nstatus that enabled companies win bank loans and undertake plans
\nfor public offering.<\/p>\n
Our accountants, too, have at their disposal the opportunities
\nto hold insider trading when they serve their clients both as an
\nexternal auditor and a financial advisor. Ultimately, with the
\nslightest nudge at the elbow at the right time, by a corrupt
\nsomeone-in-power and a corrupt banker, anything can be
\nfinancially engineered with the accountants shielding themselves
\nbehind the statement \"to the best of our knowledge.\"<\/p>\n
Accountants are, as are lawyers, often pushed to find
\nloopholes, especially in legal \"grey areas.\" Installing an
\nair-conditioning system in an office building is a capital
\nexpenditure, whereas repairing an air-conditioning system is a
\ndirect cost -- the two are not the same, but they represent an
\nexample of that grey area.<\/p>\n
Alternatively, whereas lawyers strive to hold on to their jobs
\nin courtrooms, accountants do it behind closed doors, attempting
\nto make the books look good before the investors or the banks.<\/p>\n
The professions of public accountants and lawyers grew almost
\nhand-in-hand since 1967, with the entry of the first foreign
\ninvestment, through the years of the oil boom, the property boom
\nand the banking boom in the late 1980s, and up to the start of
\nthe collapse of the Indonesian banking system in late 1997.<\/p>\n
During the booms of the 1980s and 1990s, accountants and legal
\ncounsels were equally powerful, as they grew together with the
\nbusiness conglomerates. They were standing beside those big
\nbusiness people enjoying success or facing troubles -- so
\nnaturally, they were familiar with some aspects of dirty business
\ndealings such as mark-ups, back-to-back arrangements,
\nestablishing dummy companies, nominees arrangement, paper
\ncompanies, rescue-upon-rescue, empty shares, indemnity
\nagreements, and the BLBI (Bank Indonesia liquidity support).<\/p>\n
Though accountants may not keep as high a profile as lawyers
\ndo, accounting firms are no less glamorous than the most famous
\nlaw firms. The six largest accounting firms in Jakarta hire on
\naverage hundreds of professional auditors, whereas even the big-
\nten law firms in Indonesia never hire more than dozens of
\nlawyers. Several years before the onset of the 1997 economic
\ncrisis, one of the top accounting firms held its anniversary bash
\nat the Jakarta Convention Hall. Thousands of guests attended the
\nparty with the promise of hundreds of door prizes -- courtesy of
\nthe firm's various clients. The grand door prize was an
\nautomobile presented by Indonesia's leading automotive company.<\/p>\n
Has the glamour of the accounting profession faded along with
\nthe collapse of the Indonesian economy? Certainly not. Did the
\naccountants have a role in the economic meltdown? They did, for
\nsure, because theirs were the financial reports that contained
\nimportant considerations for the decision-making processes by
\ncreditors and investors during the booms and the collapse.<\/p>\n
Will the new regulation be enough? This is questionable,
\nbecause the decree actually shows glaring loopholes -- a new
\naccounting branch can easily be set up after five years in order
\nto skirt around the stipulations and maintain major clients. In
\nthat new firm, the same accountants can go on serving the same
\nclients.<\/p>\n
This is not to say that the majority of public accountants are
\nnot concerned about the possibility of losing clients because of
\nthe new decree. The government has insisted the decree is meant
\nto protect the public from accounting malpractice -- a precaution
\nagainst violations of the professional code of conducts, and to
\nhelp ensure good corporate governance.<\/p>\n
Despite the loopholes, the decree is a welcome development in
\nthe quest for reform in Indonesia's public accounting profession.
\nHopefully, the next to come will be a law on public accountants.<\/p>",
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