Auditing the auditors

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.