Wed, 19 Mar 2003

Lippo anticlimax

The great controversy over the past 10 weeks regarding the two different audited financial reports of publicly listed Bank Lippo for the third quarter of 2002 ended in an anticlimax on Monday afternoon, after the capital market watchdog announced that the bank's management did not intentionally disseminate misleading information.

The conclusion seemed absurd, especially after the Capital Market Supervisory Agency (Bapepam) had found during its investigation that another version of an audited report existed for the same period, which was submitted by independent auditors to the bank's management on Jan. 6.

We realize that corporate fraud is hard to detect and is even harder to prosecute, and that cases of financial misstatements often turn on arcane accounting issues that do not lend themselves to black-and-white interpretations.

However, simply concluding -- after only a few weeks of investigation -- that no criminal prosecution would be initiated against the bank's management with regard to the strikingly different financial reports, is completely a mockery of capital market rules and the principles of good governance.

Herwidayatmo, chairman of the Capital Market Supervisory Agency, damaged the integrity and degraded the competence of his office when he stated that Bank Lippo management, or board of directors, had only committed a misdemeanor by erroneously including the word "audited" on the financial report it publicized in late November 2002.

Issuing an audited financial report in late November noting a Rp 98 billion net income, then publicizing another audited report for the same period in late December showing net losses of Rp 1.3 trillion, as Bank Lippo did, is nothing but an act of disinformation.

Punishing the directors with an administrative fine of only Rp 2.5 billion (US$280,000), as the agency did, is certainly not effective in deterring other company directors from committing similar crimes in the future.

Disseminating misleading information on a publicly traded company, let alone a bank with fiduciary responsibility, is truly a crime, because financial reporting has a major effect on the way the economic game is played, and is also the cornerstone on which market discipline rests.

Bank Lippo's independent auditors, the Prasetio, Sarwoko & Sandjaja accounting firm that is affiliated with Ernst & Young, claim that they had clearly stated at a meeting with Bank Lippo management held immediately after completing their audit on Nov. 22, that they could not yet give a final opinion, pending completion of the reappraisal of several assets by independent appraisal companies. The auditors submitted their final report only on Jan. 6.

Yet, the management went ahead and publicized the report on Nov. 28 as an audited version, then filed another audited report to the Jakarta Stock Exchange in late December.

As reported earlier, the reappraisal of Rp 2.4 trillion worth of foreclosed assets in Bank Lippo's books resulted in a deep cut in their value to Rp 1.42 trillion, thereby slashing its capital adequacy ratio (CAR) from the 24.77 percent in its November report, to 4.23 percent, far below the minimum capital standard of 8 percent.

Herwidayatmo's statement that the agency only recognized the report submitted on Jan. 6 to Bank Lippo management by their independent auditors, also raised a lot of pertinent questions about the status of the bank, its auditing procedures and the motive behind all these financial misstatements.

It is curious that the agency has so hastily decided to stop criminal investigations into the alleged dissemination of misleading information, while the finance ministry has yet to complete its investigation into the methods used in reappraising Bank Lippo's assets, which resulted in such a deep value cut.

The handling of the Bank Lippo case would have been more credible if the decision on the alleged dissemination of misleading information was taken after the investigations -- into the reappraisal methods and into possibly dubious transactions in Bank Lippo shares since early November -- had been completed.

After all, the allegations that the Riady family -- the founding shareholders of Bank Lippo -- had tried to reacquire majority ownership of the bank arose because of various connected issues: the controversy over the different reports, the questionable asset reappraisal, the flurry of dubious transactions to push down share prices, the bank's decision to hastily dispose of its foreclosed assets, and its plan to make a rights issue to raise more capital.