Disclaimer on govt report

The Supreme Audit Agency, for the fourth consecutive year, placed a disclaimer on the government's financial statement for the 2004 fiscal year, due mainly to inadequate internal controls, noncompliance with financial accounting rules and discrepancies in current accounts.

We expected some problems with the 2004 government financial report, assuming that since it was the first overall balance sheet from the government since the country's independence 60 years ago there would be some shortcomings.

While previous reports covered only the state budget realization (cash flow reports), the 2004 financial statement was a milestone in state financial reporting because it was a consolidated report that captured all of the budgetary and nonbudgetary transactions (cash flow and current accounts), as well as state companies' and local administrations' finances.

The balance sheet, prepared on the basis of the Law on State Finances and audited in compliance with the Law on State Financial Accountability, should theoretically have been a precious tool for gauging the government's financial soundness. The consolidated report was supposed to contain comprehensive and accurate information to help the government improve its fiscal management and policy making.

However, as Supreme Audit Agency chief Anwar Nasution reported to the House of Representatives on Tuesday, his agency could not give any opinion on the 2004 financial report because of basic flaws in the accounting reports. The government's internal control system, he said, was ineffective even though the system works under four layers of internal audits and is supported by ample resources, a large operating budgets and adequate office equipment.

Citing some examples, Anwar said his auditors could not verify Rp 275.8 trillion (US$27.5 billion) in tax receipts and could not find Rp 19.4 trillion in oil and natural gas sales receipts. The auditors also discovered that almost Rp 17 trillion in government balances at various commercial banks were unaccounted for.

An audit is supposed to examine, on the basis of tests, proofs supporting the amounts and expressions in a financial statement. An audit also comprises an evaluation of the accounting principles used, significant estimates made by the government as well as of the presentation of the financial report in its totality. However, the 2004 financial statement seemed so inadequate that it could not be used by the Supreme Audit Agency as an adequate basis for expressing an opinion on the statement.

Needless to say, it is imperative for the government to respond to, clarify and act on the auditor's findings and recommendations. Such catchwords as transparency and accountability, which the government often pronounces as the basic principles of good governance, require stringent public reporting requirements and the enforcement of fiscal discipline in a transparent and accountable manner.

True, it is not easy to prepare a government consolidated balance sheet. The process involves the collection and processing of data and accounts from more than 40,000 working units within the public sector across the country. However, an appropriate, integrated accounting system, which apparently was not in place for the 2004 balance sheet, could enhance transparency in the reporting of the government's financial position.

The findings of the auditors also show that the government has yet to establish an effective risk management system within its overall financial management, which is vital for identifying internal control problems. For example, the plundering of tens of thousands of tons of crude oil from state oil and gas company Pertamina's floating storage unit in East Kalimantan, which occurred over the course of 11 months (October 2004 to August 2005) without being detected by the company, was made possible because Pertamina's internal control system failed to identify oil storage units, offshore or inland, as high-risk areas.

The government should realize that an effective internal control system is a first-line defense against corruption and inefficiency.