Manipulating invoices

Manipulating invoices

The submission to the Attorney General's Office of dossiers on
51 companies in Greater Jakarta charged with tax fraud by the tax
directorate general last week, is more evidence of the extensive
use of false or fabricated sales invoices in Indonesia. Tax
Director General Fuad Bawazier charged the companies with
manipulating invoices to get larger value added tax refunds from
the government.

Sales invoices are easily falsified in Indonesia by quoting a
sum not equal to the sale price but a fabricated number settled
upon by the seller and buyer.

Certified public accountants cannot do anything about these
phony invoices, however, because the documents are legal, or at
least bear formal truth. A company which uses manipulated, yet
legitimate, invoices to support its financial statements can
still get a clean bill of health from public accountants. This is
because auditors work according to the accounting principles of
the Indonesian Accountants Association which emphasize legal
truth, or the conformity of transactions and other financial
reports to legal documents. A full audit, although more reliable
because auditors also seek material truth, is very costly and is
therefore only conducted for special purposes, such as when
acquiring a company.

The tax officials uncovered the invoice manipulation not with
a normal audit, but through a tax audit, essentially a full
audit, which looks for both formal and material truth.

Since the main mechanism of the value added tax (VAT) is a
scheme whereby a company is allowed to credit the VAT it pays on
inputs against the VAT it collects from the sales of its products
(output), transaction invoices are the main tool for tax fraud.
There are various ways in which a company can commit tax fraud.
It may submit tax invoices from bogus companies to get larger
refunds or submit false export documents to obtain tax refunds
because exports are exempt from VAT.

The rampant manipulation of invoices is not only devastating
because of the loss of government tax revenues, but also because
of the cost to the economy as a whole. In fact, according to
Government Audit Agency reports, a main source of malfeasance
uncovered by its auditors was government agencies marking up the
cost of goods and services they procure.

The chief of the Government Audit Agency, Soedarjono,
acknowledged in the middle of last month that proving price mark-
ups was difficult due to the virtual absence of information on
market prices. He said the price information system in the
country isn't transparent yet. In Singapore, by contrast, getting
access to comprehensive information on market prices can cost as
little as US$ 10.

Martiono Hadianto, the director general at the finance
ministry in charge of supervising state companies, also recently
admitted in Medan, North Sumatra, that many state plantation
firms had been dictated to by outside suppliers. His remarks
implied that suppliers of goods and services deliberately
inflated their prices in collusion with the directors of state
plantation companies.

Many analysts contend that the tax directorate general's
discoveries are only the tip of the iceberg of invoice
manipulation in the country. Our tax administration system is
only able to detect the most obvious or flagrant manipulations.
Moreover, the need for tax auditors far outstrips the supply.
Hence, companies and businesspeople can easily be asked to
collude in invoice manipulation because the risk of being caught
is very slim.

However, tax revenue losses are not the only damage incurred
by invoice manipulation. Price mark-ups have also been identified
as a main reason behind bad loans and a major cause of the high-
cost economy. It is therefore imperative that the government make
the bidding process for the procurement of goods and services
more transparent. The tax directorate general also needs to
develop a intelligence network of market information to
crosscheck the validity of sales invoices.