Accountants' accountability

Instead of joining the bashing of the United States for its full-blown corporate governance shock, we should take the unfolding of accounting and management scandals that have wiped out hundreds of billions of dollars in wealth as an urgent warning to revisit this important gatekeeper of our corporate world and financial markets.

In fact, as accounting professor Wahyudi Prakarsa of the University of Indonesia observed in this paper last week, Indonesia had seen many accounting frauds even though the chicanery had not set off the fierce public attacks on auditors as those in the U.S.

Part of the problem is caused by the lax law enforcement against auditors as public accounting firms are virtually outside the government legal arm, overseen only by the Indonesian Accounting Association. Accounting firms accused of violating major auditing rules are tried by a judiciary board whose panel of judges are also representatives of accounting firms who are appointed by and answer to the association.

One can easily question the independence of this peer oversight process. For example, 10 public accountants who were found guilty of accounting fraud in connection with their audited reports on banks which went bankrupt in 1998 and 1999 were given only very lenient punishment. Three of them were acquitted of all charges, three were ordered only to undergo retraining and four were given a strong warning and barred for sometime from auditing banks.

Moreover, regulations on auditing principles virtually close almost all avenues for liability lawsuits against auditors because their reports always start with a statement that the financial accounts are the responsibility of the management since outside auditors are legally required only to give an opinion, and not judgment, in accordance with Indonesia's generally accepted accounting principles.

Then if independent auditors are supposed only to apply generally accepted accounting principles mechanically without any judgment as to whether the accounts are true or not, shareholders and other stakeholders are left entirely at the mercy of the quality of the management's competence and integrity.

This high vulnerability could expose investors and creditors to great risks, especially because in the country good corporate governance practices and business ethics have yet to be developed. In fact, bad corporate governance has been cited as one of the major causes of our economic crisis.

Most auditors argue that it is impossible for them to detect scams through general audits if the management is determined to act fraudulently. They assert that financial chicanery can be detected only through investigative or forensic audits which require the examination of thousands of transactions and which are therefore greatly time consuming and prohibitively expensive for companies that have to issue quarterly audited reports.

The question then is who is responsible for protecting the investing public from overly greedy management who like to use creative accounting to deceive shareholders, creditors or tax officers?

The investing public in Indonesia is especially vulnerable to financial shenanigans by greedy businesspeople with crooked mentalities because around 70 percent of the companies traded on the Jakarta Stock Exchange are still controlled by the founding families.

A thorough review of the rules determining how companies should draw up their accounts and how these accounts should be independently audited is now most imperative.

Independent auditors now seem to depend too much on the internal audit system and the presumption that the management is honest. Instead of digging deeply into the accounts, they usually do only sample audits to check the internal control system. No wonder, audited reports appear to be designed mainly to avoid liability suits and not to inform the public on the process of calculations that lead into the numbers in the accounts.

The finance ministry may consider adopting the recent order by the U.S. Securities and Exchange Commission that requires the management and chief financial officers at major publicly-traded companies to swear under oath in writing that the numbers in their companies' financial reports are correct. This threat of civil and criminal penalties would go a long way in preventing management fraud.

Given the vital role of auditors in maintaining the integrity of the financial market, the supervision of the accounting profession also needs to be strengthened with an independent oversight committee and an independent judiciary board, unlike the current one which acts simultaneously as the prosecutor and the judge and is run entirely by the accounting community themselves.

Auditing regulations also should be amended to allow auditors to blow the whistle with regards to questionable transactions or accounts without breaching the rules on client confidentiality.

The public does not care whether audited reports result from general, special or forensic audit processes. They want only to be assured that audited financial statements can enlighten them of the overall quality of corporate governance and of the underlying economic performance of the company as well as warn them of any risks or any fraud.