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