Ministerial decree a warning for proffessional accountants
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.