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.