Asian firms facing audit crunch

Asian firms facing audit crunch

Tom Wright, Dow Jones, Jakarta

Tighter regulations over accounting practices post-Enron are making it increasingly difficult for Asian companies listed in the U.S. to find American-registered accountants to review their books.

After the scandal over now-disgraced Enron Corp. forced auditors to draw a clearer line between accounting and advisory work, the Big Four accounting firms are increasingly refusing to take on jobs that might smack of conflict of interest. In many Asian countries, the only SEC-approved auditors are the Big Four: Deloitte Touche Tohmatsu, KPMG LLP, Ernst & Young LLP and PricewaterhouseCoopers.

With all four busy advising governments on privatization work, that doesn't leave enough auditors to go around, particularly for state-owned companies that are being privatized. And that's making it tough for some Asian companies that are listed in the U.S. and need to hire auditors approved by the U.S. Securities & Exchange Commission.

One company now caught in that trap is NYSE-listed Telekomunikasi Indonesia, that country's largest telecom company. Telkom, which is majority-owned by the government, could have its shares delisted by the SEC because it recently hired a nonapproved auditor to handle its 2002 accounts. Telkom says it is having a hard time finding a suitable auditor and may miss a July 15 SEC deadline to resubmit the accounts; if it does, it could face de-listing from the New York Stock Exchange.

At least three of the Big Four accounting firms have recently been advising the Indonesian government in some capacity, auditors say. The government has hired the big firms to advise on its plans to sell shares in Telkom to the public; it also used them during last year's sale of a majority stake in Indonesia Satellite Corp. to a Singapore government-linked company. Thus, working directly for Telkom might constitute a conflict.

Other international accounting firms have affiliates in Jakarta, but only the four major firms are registered with the American Institute of Certified Public Accountants - a benchmark for gaining SEC approval.

Deloitte audited Telkom's accounts until 2001, but left the company last year after a row with the government over the audit of another state-owned enterprise. The remaining three big foreign firms turned down Telkom's offer to audit due to conflict of interests, which ranged from past advisory work to carrying out executive searches for the company.

Analysts say they don't believe Telkom's financial report for 2002 was misleading. The company posted a net profit in 2002 of Rp 8.345 trillion (about US$1 billion), almost double the previous year due to a boost in subscribers at its cellphone unit.

Bacelius Ruru, head of Telkom's board of commissioners, said this week the company hopes to hire KPMG. But it remains unclear whether conflict of interest issues can be resolved, said Herwidayatmo, the head of Indonesia's capital market regulator, Bapepam. KPMG declined to comment.

Telkom's problems illustrate how a dearth of foreign auditors could complicate efforts by other Asian companies to raise capital in the U.S.

In the U.S. and Europe, smaller firms can take on auditing work where the Big Four may have conflicts of interest, said James Kallman, the managing partner with Moores Rowland International's Indonesian affiliate.

In Asian countries, the local partners of these second-tier firms often lack SEC approval to audit U.S.-listed companies. That happened to Mr. Kallman's firm, PT Eddy Pianto, which audited Telkom's 2002 results while it was a partner of Grant Thornton LLP. The firm became affiliated to Moores Rowland earlier this year.

Foreign auditors working in Southeast Asian countries such as Indonesia, Thailand, and the Philippines are most likely to face conflicts of interest because of the large amount of advisory work they do for the governments, says Andy Xie, regional economist for Morgan Stanley.

Auditors in Thailand, for example, say they have advised on privatizations, which might rule them out from auditing state- owned companies such as energy concern PTT or Thai Airways when they come up for sale to investors.

Unlike Telkom, however, the main casualties so far of growing caution among auditors have been privately held Asian companies that analysts say lack financial transparency.

The Big Four are more frequently dropping Asian clients due to the Sarbanes-Oxley Act legislation passed last year in the U.S. that tightened accounting-industry regulations after the Enron scandal.