Fictitious bank reports

Tax Director General Fuad Bawazier's disclosure on Tuesday that several banks had filed fictitious financial reports was not a complete surprise. The findings of the tax auditors only serve to confirm pervasive rumors that many banks and companies, notably those which have not gone public, often cook up their financial accounts to suit their purposes.

The rumors say companies often make three different financial reports -- all audited -- one for their shareholders, one for bank creditors and one for tax officials. In the case of banks, the three separate accounts are meant for their shareholders, tax officials and the central bank, the guardian of the banking system.

Obviously, the financial reports addressed to creditor banks, or to Bank Indonesia in the case of the banks' reports, contain the rosy version of the fiction. The one meant for tax auditors features the gloomy side so as to reduce the taxable profit and the third one for the shareholders contains the true story. That was precisely the scenario disclosed by Fuad.

As Fuad recounted, a bank mistakenly submitted the version of its financial reports that had been "cooked up" for Bank Indonesia (central bank) to the tax auditors. The bank's directors were forced to admit they had different versions of their financial reports upon learning that the bank's tax obligations assessed by the tax officials were much higher than those the management had estimated.

In April last year, Standard & Poor's international credit rating agency also expressed doubts about the quality of the financial accounts of a number of banks in Indonesia. The rating agency said it doubted the validity of the earnings reported by banks, the manner in which the banks defined their problem loans and the level of provisions for the possible bad loans they claimed on their reports.

Fuad's disclosure, we think, poses a serious challenge to the central bank to properly enforce all the prudential regulations it has issued over the past two years. Just as recently as January, the central bank issued several rulings, one of which requires banks to hire only external auditors who have been registered at the central bank. Another regulation obliges external auditors not only to examine the financial statements of banks but also to assess the structure of their internal audit systems in a bid to strengthen the objectivity and independence of internal auditors. We reckon all these rulings were designed to ensure that the banks' audited reports represent their actual financial positions.

But Fuad's disclosure shows that despite these rulings several banks seemed still able to make different versions of financial reports. We wonder whether it would not be possible, accounting wise, for the central bank to require banks to file the same financial reports with the different rightful recipients, such as the shareholders, the tax offices and the central bank itself. If that is not possible because the formats should be different, why haven't banks been obliged to file a copy of the same financial reports they attach to their annual income tax returns together with their reports to the central bank. Such a procedure would make it easier for central bank officials to crosscheck and verify the financial statements. Tax auditors in turn should have access to the version of the financial reports filed with the central bank to enable them to verify the financial statements.

Because what was uncovered by the tax auditors was not difference in format but difference in substance, at least one of the different reports must be false, or full of lies and fabricated figures. That, we think, is very dangerous in view of the fiduciary responsibility of banks.

Besides acting immediately to investigate the findings of the tax officials and to deal firmly with the auditors responsible for the fictitious reports, the central bank should also develop a mechanism to enable itself and tax auditors to crosscheck banks' financial accounts.