Public accounting bill must be fair to all

M. Sauri Hasibuan, Managing Partner, FORTECH CONSULTING Jakarta

The current crisis in confidence over corporate financial reports raises questions that go well beyond a company's financial sustainability. The incidence of business failures provides a vivid reminder of how fundamentally corporate activity affects the lives and livelihoods of people and communities worldwide.

As shareholders, institutional investors and policy makers take stock of the social repercussions of the Enron and WorldCom affairs; with the controversial reports issued by Bank Lippo and involving one of the big five accounting firms still fresh in our minds, it is time for the government to address the limit of financial reporting.

The current draft of the proposed public accounting law designed by the Ministry of Finance has stirred debate among those in the accounting profession.

The proposed draft contains tougher measures for local accountants compared with their overseas counterparts.

There is suspicion that the government is trying to meet demands of the International Monetary Fund, which are to liberalize the financial service sector in the widest sense possible.

Highly trained individuals of the IMF naturally see the world through the eyes of the financial community. The decisions of any institution reflect the perspectives and interests of those who make the decisions. Not surprisingly, the policies of the international economic institutions are all too often closely aligned with the commercial and financial interests of those in the advanced industrial countries. These interests include those of financial consultants, public accountants, engineering planners and a host of other professions.

By most assessments, there are two main elements underlying the events that have prompted widespread calls for a higher ethic of corporate responsibility. The first is the failure of accounting systems. The second is the breakdown of corporate governance.

The collapse of businesses in recent months was in part attributable to poor audits of required information. But equally important, they resulted from a fundamental reality of financial reporting: Even sound numbers that comply fully with required standards do not deliver all that shareholders and others need to know in order to assess the true health of a corporation.

As they currently stand, financial reports meet certain narrow technical requirements and provide a glimpse of past performance, such as last year's revenue.

But what about the future? Where is the information on the firm's capacity to innovate, train and enrich its human capital, enhance its reputation, strengthen brands, alliances and partnerships? And what about measures of public trust and the quality of governance? These are basic questions that public accountants have little information with which to provide answers.

Blaming the public accountant for an inability to assess these intangible assets, if reported at all, appears to be unfair and inconsistent. Again, who gave a clean bill of health to those large companies in Indonesia during times of high and stable growth when the country was praised blindly by many as a newly emerging tiger? Foreign accounting firms certainly played a role through their assessments and for that they deserve the authority's scrutiny too.

The Ministry of Finance was blamed for not including the Indonesian Accountants Association when composing the draft. This is pathetic, as there are many experts and practitioners in the association who could have been referred to.

The long-term sustainability of corporations rests on a complex balance of factors. While financial viability is clearly vital, so too are elements such as the ability to adapt in a changing market, to maintain official and public trust, to attract and inspire a workforce and to retain and expand the support of local communities and the client base.

In constructing the draft, the Ministry of Finance may adopt, depending on the local context, the concept of "triple-bottom- line" reporting, such as that offered by the Global Reporting Initiative.

This is basically an assessment of a corporation's performance in relation to profit, people and the planet; it is increasingly welcomed by financial analysts and investors because it helps them make better judgments about the true value and prospects of a company across a broader range of assets.

Moreover, it enables management to anticipate and exploit opportunities to strengthen the firm's market competitiveness and boost company transparency.

The Ministry of Finance can conduct hearings with various stakeholders concerning the possibility of adopting this system as part of required company disclosure. Whether firms like it or not, a company's nonfinancial performance can directly affect its financial health too.

The link between human rights or environment and share value is already well documented. Three of the world's major stock markets -- New York, London and Hong Kong -- have implemented or are proposing changes to disclosure rules that will require information on corporate governance, environment liabilities and human capital issues, from basic working conditions to policies on child labor.

This development signals a growing recognition that nonfinancial information linked to sustainability performance is an essential ingredient in forecasting and securing a company's financial prospects.

The level of public trust in corporations and state-owned enterprises is at an all-time low. The conflict at the aircraft firm PT Dirgantara Indonesia has resulted in disruption and losses to workers and investors. Creating a fair draft for the supervision of the work of public accountants will be a major task for the Ministry of Finance.

Recent corporate failures have taken a severe toll on economies and societies. Not only is there a clear sense that corporations have a responsibility to provide a full and more accurate account of their financial situation, but they must also make more earnest efforts toward sustainability if they are to win public support.