Bank Lippo controversy

Bank Lippo controversy

The controversy over the two different audited financial
reports for the third quarter of 2002, issued by publicly listed
Bank Lippo, and the absence of quick, firm action to deal with
the case almost two months since its disclosure, has raised an
alarming signal about the effectiveness of bank supervision and
the capability of the capital market watchdog.

The case has also raised great concern over the capability of
the Indonesian Bank Restructuring Agency (IBRA), which has been
controlling almost all of the largest national banks, including
Bank Lippo, after massive bank recapitalization by the government
during the height of the financial crisis in 1998 and 1999.

The dubious financial reporting is yet another strong
indication that integrity and ethics are not yet high on the
agenda of public companies and even such trusted institutions as
Bank Lippo, which is required to have an independent supervisor,
or commissioner, and a director specifically in charge of
compliance with good governance practices.

Bank Lippo's audited financial report for the third quarter of
2002, which was published in the mass media in late November,
puts the bank's total assets at Rp 24 trillion (US$2.6 billion)
and net profit at Rp 98 billion.

However, in another audit report for the same period, which
the bank filed with the Jakarta Stock Market on Dec. 27, showed a
reduction in its assets to Rp 22.8 trillion and a net loss of Rp
1.3 trillion in its bottom line.

The bank explained that the discrepancy was caused by the
reappraisal of Rp 2.4 trillion worth of assets in its books,
foreclosed in 1998, that resulted in a deep cut in their value of
Rp 1.42 trillion. This consequently required the bank to set
aside an additional provision of over Rp 1.3 trillion, thereby
reversing the Rp 90 billion net income mentioned in its previous
report into a net loss of Rp 1.3 trillion.

More devastating yet, is that the bank's capital adequacy
ratio plunged from 24.77 percent to 4.23 percent, far below the
minimum capital standard of 8 percent. Had it not been for the
government blanket guarantee on bank deposits, Bank Lippo would
have suffered a massive run by depositors.

Strong suspicions of subterfuge to destroy the bank
shareholder value arose after Bank Lippo's auditors, Ernst &
Young and Partners, disclaimed any responsibility for the audited
report in late November.

The methods and reliability of the asset reappraisal were also
questionable. Why did the revaluation result in such a steep fall
in the asset value at a time when the price of property, which
accounted for more than 75 percent of the revalued assets, had
been rising to levels two to three times those prevailing when
the assets were foreclosed?

Suspicions of a deliberate attempt to destroy Bank Lippo's
equity book value strengthened further after analysts revealed a
string of dubious transactions in Bank Lippo shares by several
brokers between early November and early January, which further
accelerated the fall in their price from Rp 450 to as low as Rp
210.

Some analysts have pointed their fingers at the Riyadi family
and their Lippo Group, the founding shareholders of Bank Lippo,
who, together with the investing public, still own 40 percent of
the bank. The Lippo Group was deemed the party that would reap
the largest benefit from the depressed share value.

If the late December audited report was accepted, Bank Lippo
would have to make a rights issue to increase its capital
adequacy ratio to the minimum 8 percent. The Bank Lippo
management had indeed planned to ask for shareholders' approval
to launch a rights issue.

Since the government would not likely put up more money to
exercise its rights, the Riyadi family would be able to realize
their ambition to reclaim controlling ownership of Bank Lippo --
at a tiny fraction of the Rp 6.05 trillion the government paid
for 60 percent of the bank in 1998.

Fortunately, IBRA chief Syafruddin Tumenggung, the nominee
shareholder representing the government and a commissioner of
Bank Lippo, has said he would not approve a rights issue.

Nonetheless, extensive damage has been done to the bank.

All these questionable practices could take place because one,
the management and supervisory boards remained dominated by the
Lippo Group, two, Bank Indonesia's supervision had been
deficient, and finally, the stock market watchdog had not done
its job properly.

As it happened, the board of commissioners, which is chaired
by Mochtar Riyadi, the head of the Riyadi family, includes two of
the family's most trusted associates, Roy E. Tirtadji and Markus
Permadi.

The Riyadi family's control of the board has been all the more
complete because the government commissioners -- IBRA chairman
Tumenggung, expert assistant to the finance minister Anggito
Abimayu, and assistant to the chief economic minister Hadia
Herawati -- seemed to have been preoccupied with their primary
jobs.

It is obviously most urgent for Bank Indonesia, IBRA and the
stock market watchdog and management to thoroughly investigate
the questionable asset revaluation, dubious share transactions
and the double-audited reports.

Failure to straighten out the controversy would damage the
public's trust in state-controlled banks and other publicly
listed companies.