Improving accountability

Improving accountability

The cloud thrown over the Indonesian banking industry by the US$436
million loan scandal at the state-owned Development Bank of Indonesia
(Bapindo) may have a silver lining after all; Thursday, the central bank
(Bank Indonesia) signed two cooperation agreements aimed at improving
the accountability and internal auditing of banks.

The first agreement with the Indonesian Accountants Association calls
for higher standards of accounting and financial reporting at banks and
companies traded on the stock exchanges. The second, developed by the
Indonesian chapter of the Institute of Internal Auditors, will develop
standards for the conduct of internal auditors at banks.

It seems obvious that the two cooperation programs were prompted, at
least in part, by the bitter lessons taught by the Bapindo scandal. The
fraud, which occurred between 1989 and 1993, remained undetected by the
government auditors from the finance ministry and supervisors from the
central bank until last year.

The inability of Bapindo's internal auditors to discover the fraud
for almost a year after it occurred, let alone during the four years
that it was taking place, provides clear evidence that bank auditing is
a problem that has to be given a high priority by banking regulators.

It is a pity, however, that it took three major scandals to prompt
the central bank to act.

The most recent, in August of 1990, was Bank Duta. Bank Duta, which
was controlled by three foundations which were chaired by President
Soeharto, reported total losses of almost US$420 million in a foreign
exchange scandal the previous year. Ironically, the private bank got a
clean financial bill of health from a public accountant and an approval
to list shares on the Jakarta stock exchange in June of that same year,
just a short time before the scandal broke. Again, the central bank was
too late to uncover gross violations of almost all prudential rulings at
Bank Summa in 1992. The private bank was closed later that year with
total debts of nearly $800 million.

The cooperation programs are designed to improve the quality and the
reliability of the financial information reported by banks and public
companies. Hopefully, they will also provide clearer working standards
for accountants to enhance their role in ensuring the soundness of
listed companies and to improve the accountability of management at
banks and public firms.

One may argue that accounting standards or principles are only a tool
for accountants and auditors to determine whether a financial report is
fair and not misleading. Even high standards would not be enough to
prevent fraud if accountants applied the principles mechanically. But we
think good standards are still helpful because they are the necessary
first step in the multi-stage process to assure quality accounting and
auditing. Clear standards of accounting and financial reporting would
minimize the chances for management to massage their reports or to
falsify documents. They also impose broad financial disclosures.

However, clear standards of accounting and financial reporting will
not be enough. They should be applied by accountants who possess not
only technical competence but also a high sense of integrity and ethics.
The system of accountability can only improve if the internal auditors
at banks also possess a high degree of independence and integrity. That
is what is expected from the cooperation agreement with the Institute of
Internal Auditors; the development high standards for those conducting
internal audits. Hence, the objectives of the two cooperation agreements
actually are inter-related.

The ultimate goal is to protect the depositors and investors by
establishing greater transparency and creating an effective mechanism to
prevent fraud or, at least, detect it at the earliest opportunity.