Lippo anticlimax

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.