Integrity and independence of state auditors

Integrity and independence of state auditors

Agam Fatchurrochman, Nottingham, United Kingdom

The recent scandal at the General Elections Commission (KPU)
involved not only intellectuals, human rights activists, civil
servants and private companies but also auditors of the Supreme
Audit Agency (BPK), which is mandated by the Constitution as the
as the guardian of our national financial integrity.

Deeper investigation by the Corruption Eradication Commission
(KPK) into the case revealed how a deputy chairman of the BPK and
several auditors accepted big sums of money from the KPU in the
course of the BPK audit of expenditure for the 2004 national
elections.

An audit is intended to present an intellectual and moral
statement in the form of an auditor's written testimony on the
auditee's financial integrity. An external audit plays a critical
role in lending credibility to published financial statements as
required by users to make an informed decision on the basis of
the integrity of an auditee.

Auditor independence is one of the basic building blocks of an
audit.

Integrity and objectivity are moral principles that should be
upheld by auditors in performing their duties. The principle of
integrity requires an auditor to be straightforward and honest in
all professional relations, while objectivity regulates that an
auditor should not allow bias, conflict of interest or undue
influence over others to override professional judgments.

International practices have partitioned independence into two
dimensions: independence in fact, and independence in appearance.
Independence in fact relates to the notion that the auditor
possesses an independent mind-set when planning and executing an
audit and that the resulting audit report is unbiased.
Independence in appearance relates to whether the auditor appears
to be independent, particularly in the view of the user
(principal), auditee and the public.

The effectiveness of BPK audits of state institutions and
state-owned enterprises, therefore, depends on several factors.
It is fundamental to public confidence that the BPK operates (in
fact) and is seen to operate (in appearance), in an environment
that supports objective decision-making on key issues having
material effects on financial statements.

Article 23 (e, f, g) of the third amendment of the 1945
Constitution, regulates the institutional relationships between
the House of Representatives, the government and the BPK. The
article stipulates that government institutions are required to
hold an account for the resources entrusted by the House (and
regional legislative councils) in the forms of financial
statements (auditee). The BPK ( the auditor) is assigned by the
Constitution to examine the government institutions' financial
integrity as required by the House. This relationship is a social
contract as stipulated in the Constitution,

These constitutional directives highlight the Governmental
Audit Standard, which regulates that in all audit matters, an
auditor has to act independent, organizationally and
individually, and to be free from individual, external and
organizational threats to independence.

In the BPK-KPU scandal, threats to individual independence
is the key issue and can be defined as the inability of auditors
to act impartially or to be seen as impartial. The audit standard
lists several individual threats that may occur as a result of
working, professional, private or financial relationships, or
even inclinations to give special preference as a result of
shared social and political beliefs and in-group feeling and
solidarity.

The audit standard also underlines threats of familiarity,
which may occur from a close relationship between an auditor with
his/her previous post as a decision maker in an entity with
significant resources.

On the BPK executive board level, the threat to individuals
stems mainly from the manner in which the auditors were recruited
during the New Order government of authoritarian Soeharto, which
simply used the BPK as a rubber stamp for government financial
reports.

However, in the current democratic and reform era where the
legislative influence is quite heavy in most major executive
decisions, the recruitment or selection process for the BPK
executive board is also deeply influenced by social and political
groupings in the House.

We can see now that screening procedures in the House for new
BPK board members resulted in the recruitment of
two representatives from the country's largest political party
into the BPK.

On one side, the experience of senior finance officials or
auditors in state financial practices provide valuable resources
for the BPK, but, on the other hand, these experiences could
become baggage and the source of a conflict of interests for BPK
auditors.

One clear example was when a former finance minister was
selected as the chairman of the BPK a few years ago.
Theoretically his experience would greatly help BPK auditors in
conducting their duties, but the chairman became virtually
dysfunctional because of his alleged involvement in the Golden
Key-Indonesian Development Bank (Bapindo) loan scam causing
conflict of interests and public controversy.

The current BPK-KPU affair also shows that the integrity of
one member of the BPK board in his previous position as chairman
of the House's budgetary committee could impair the BPK's
organizational integrity.

However, at the staff level, threats to individuals mainly
stem from illicit financial relationship between auditors and
auditees, which, in the KPU case, was essentially a bribe given
as transport allowances to auditors.

If the BPK does not address these issues of integrity
seriously, the general public, auditees and users of government
financial reports may have big doubts about the BPK's integrity
and independence. This in turn could damage the effectiveness of
the BPK's work and impair its audit findings and reports. If
there is no public confidence in the BPK's integrity and
independence, there is no point in having a supreme audit
institution at all.

The failure of auditors to realize their social contract,
which underlies their professional existence, may force society
to revoke their professional rights.

In the case of the BPK, the social contract that is already
embedded in the third amendment of the Constitution as the
supreme audit institution might be revisited as well.

The general public, the House, the government and the BPK
should work together to initiate an overall reform of the supreme
audit agency to ensure its integrity and independence at both the
executive board and staff levels.

The writer is an MA Student at Nottingham University's
Business School. He can be reached at lixaf2@nottingham.ac.uk