Ministerial decree a warning for proffessional accountants

Winahyo Soekanto, Lawyer, Consumer Care Foundation, Jakarta, winahyo@yahoo.com

What happens when accountants and their clients get too "intimate"? The birth of illegitimate dealings and financial scams such as those affecting U.S. corporations Enron, Xerox, Global Crossing, WorldCom and Arthur Andersen.

Amid signs that the problem of accounting malpractice might also be present in Indonesia (one needs only to remember the recent case of questionable audit of one of Indonesia's major pharmaceutical companies), the government has issued a new decree. Hopefully, the Minister of Finance Decree No. 423/KMK.06/2002 will end any such illicit love affairs between accounting firms and their clients, as it restricts the duration and extent of audit services.

The decree, for instance, limits to five years the audit services rendered by one public accounting firm to one client. Further, a public accountant can only undertake audit services for the same client for three years.

Indeed, in many of the recently-revealed scams, violations began when clients' excessive wish for leeway met with the aggressive flexibility offered by the accountants. Accounting firms have been known to offer financial engineering, making the maximum use of any legal loopholes and thus leading to intentional misrepresentation.

Accounting manipulation is one of the corporate frauds living a dormant existence in many companies, and springs to life in what observers now cynically refer to as "creative accounting". This is what happened to U.S. telecommunication giant WorldCom -- later dubbed as the largest corporate fraud in U.S. history.

WorldCom -- which is also the world's largest internet traffic carrier and operates in 65 countries -- has admitted to discovering an accounting error, in that it had recorded overhead costs, such as network maintenance costs, as capital expenditure. The result was a deceiving portrayal of increased revenues and profit.

The world stock markets trembled by the fraud. The reputation of U.S. corporations took another one of a series of dips following the collapse of Enron last year. The price of its shares, which in 1999 reached US$64 per share, dropped to US$.09. The U.S. government responded to the scandal by opening a criminal investigation into the case, and by launching a bill that would reform company accounting, but the world's trust in the system and standards of accounting in the U.S. and elsewhere still took a free fall.

Indonesia, too, is facing the same predicament because investors, shareholders and financial agencies are losing the benchmark for proper business practices. Consumers and other stakeholders have to accept goods and services from producers whose claims of production costs cannot be verified.

Indeed, the Indonesian public is already familiar with a controversial accounting practice often referred to as "window dressing", in which financial statements are fabricated so they look better. This can be done through a series of tactics such as omitting expenditures, covering up other financial obligations, postponing certain accounting procedures, and recording transactions that have yet to take place. No less popular are the practices of establishing double accounts, and massaging or making up balance sheets for the purpose of evading tax; in short, manipulating the book.

In Indonesia, the partnership of the legal system and the accounting system has often been the magic wand that magically changed loss into profit and that turned inadequacies into a status that enabled companies win bank loans and undertake plans for public offering.

Our accountants, too, have at their disposal the opportunities to hold insider trading when they serve their clients both as an external auditor and a financial advisor. Ultimately, with the slightest nudge at the elbow at the right time, by a corrupt someone-in-power and a corrupt banker, anything can be financially engineered with the accountants shielding themselves behind the statement "to the best of our knowledge."

Accountants are, as are lawyers, often pushed to find loopholes, especially in legal "grey areas." Installing an air-conditioning system in an office building is a capital expenditure, whereas repairing an air-conditioning system is a direct cost -- the two are not the same, but they represent an example of that grey area.

Alternatively, whereas lawyers strive to hold on to their jobs in courtrooms, accountants do it behind closed doors, attempting to make the books look good before the investors or the banks.

The professions of public accountants and lawyers grew almost hand-in-hand since 1967, with the entry of the first foreign investment, through the years of the oil boom, the property boom and the banking boom in the late 1980s, and up to the start of the collapse of the Indonesian banking system in late 1997.

During the booms of the 1980s and 1990s, accountants and legal counsels were equally powerful, as they grew together with the business conglomerates. They were standing beside those big business people enjoying success or facing troubles -- so naturally, they were familiar with some aspects of dirty business dealings such as mark-ups, back-to-back arrangements, establishing dummy companies, nominees arrangement, paper companies, rescue-upon-rescue, empty shares, indemnity agreements, and the BLBI (Bank Indonesia liquidity support).

Though accountants may not keep as high a profile as lawyers do, accounting firms are no less glamorous than the most famous law firms. The six largest accounting firms in Jakarta hire on average hundreds of professional auditors, whereas even the big- ten law firms in Indonesia never hire more than dozens of lawyers. Several years before the onset of the 1997 economic crisis, one of the top accounting firms held its anniversary bash at the Jakarta Convention Hall. Thousands of guests attended the party with the promise of hundreds of door prizes -- courtesy of the firm's various clients. The grand door prize was an automobile presented by Indonesia's leading automotive company.

Has the glamour of the accounting profession faded along with the collapse of the Indonesian economy? Certainly not. Did the accountants have a role in the economic meltdown? They did, for sure, because theirs were the financial reports that contained important considerations for the decision-making processes by creditors and investors during the booms and the collapse.

Will the new regulation be enough? This is questionable, because the decree actually shows glaring loopholes -- a new accounting branch can easily be set up after five years in order to skirt around the stipulations and maintain major clients. In that new firm, the same accountants can go on serving the same clients.

This is not to say that the majority of public accountants are not concerned about the possibility of losing clients because of the new decree. The government has insisted the decree is meant to protect the public from accounting malpractice -- a precaution against violations of the professional code of conducts, and to help ensure good corporate governance.

Despite the loopholes, the decree is a welcome development in the quest for reform in Indonesia's public accounting profession. Hopefully, the next to come will be a law on public accountants.