Fictitious bank reports

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.