Auditing the auditors

Auditors have a crucial role in enhancing the integrity of the disclosure process, one of the pillars of good corporate governance. But the integrity, honesty and objectivity of Indonesian public accountants appears to be suspect.

When the International Monetary Fund (IMF), which has been pouring billions of dollars into Indonesia to bail out the country's economy, wants a fair assessment of the financial condition of an entity in the country, the multilateral agency always turns to international auditors.

Consequently, domestic banks involved in the government's restructuring program were audited by international accountancy firms, as were such strategic state companies as Pertamina oil and gas, the state electricity company, national flag carrier Garuda as well as the State Logistics Agency. This obviously came at a much higher cost than using local accountancy firms.

The IMF likewise apparently doubts the independence of the investigation into the Bank Bali scandal. Earlier this week the fund urged an international accountancy firm be assigned to audit the results of the investigation by the Indonesian Bank Restructuring Agency into what is now notoriously known as the Rp 546 billion scam.

But is the competency and integrity of domestic accountancy firms so low they are not qualified or cannot be trusted to conduct a reliable due diligence? The answer is no, if the Bank Bali scandal is any guide. International accountancy firm KPMG, one of the seven largest auditing firms in the world, failed to detect the cession agreement between Bank Bali president Rudy Ramli and Djoko Chandra and Setya Novanto of PT Era Giat Prima which triggered the scandal.

KPMG, one of the firms recommended by the IMF to audit Indonesian banks for the restructuring program, audited Bank Bali at least three times between mid-1998 and June 1999 at the order of three different clients. But KPMG failed to uncover the cession deal, which was concluded on Jan. 11, 1999, simply because the transaction was said to have not been recorded in the bank's book.

Notwithstanding the fact that the integrity of small accountancy firms could be compromised by the often cozy relationship between accountancy firms and their corporate clients, the image problem of Indonesian auditors may lie in the gap between public expectations and the standards and principles the accounting industry applies.

Indonesian accountancy firms, for example, insist their task is simply to give an opinion on the fairness of information in the financial statements they audit, based on generally accepted accounting principles. This implies auditors do not examine every document related to the financial statements. If a company cooks its books or records, an auditor could unknowingly be misled.

If accountants merely apply accepted accounting principles without judging and assessing the internal management system and likely business risks ahead, and if they cannot sniff out chicanery, what then is the use of assigning professional independent accountants? After all, a company's financial statement is not meant only for the directors and shareholders, but for the general public as well.

The many cases of business failures or frauds occurring not long after a company's financial statements were given a clean bill of health by public accountants, and the fact that almost all companies involve a large number of shareholders, employees, creditors, customers and other stakeholders, whether they are publicly listed or not, makes it imperative for the accountancy industry to improve or broaden the principles and standards it applies to auditing.

The general public does not know the difference between what professional accountants call general, special and forensic audits and the different charges they impose. They simply want to be protected from fraud by companies, be warned of an imminent business collapse and be well informed of whether particular companies practice good governance. It is obviously impossible to expect foolproof auditing, which is prohibitively expensive and, sometimes, beyond the purview of public accountants. But it is not too much to expect audited financial reports to provide a reliable basis for calculating risks.