Stringent bank audits must go on: Expert

JAKARTA (JP): Bank Indonesia should not surrender to pressures to review contracts with accounting firms which audit banks using international standard practices, analysts said.

They said internationally accepted auditing was needed to attract foreign investors into the banking industry.

Umar Juoro of the Center for Information and Development Studies (CIDES), said foreign investors would only come if banks were audited using internationally accepted practices.

"Whether you like it or not, we need the foreign money to rehabilitate the ailing banking sector," Umar told The Jakarta Post.

Pande Raja Silalahi of the Centre for Strategic and International Studies (CSIS) said: "If we want to restore international confidence in the banking sector we need to audit local banks using international standards."

Recovery of the banking sector was a key to lifting the country out of the economic crisis, he said.

State Bank BNI's former director Sutan Remy Sjahdeni said the crisis had caused people to lose confidence in the banking sector, although some banks had been managed prudently and would pass the test of international auditors.

"If we audit banks using local standards, people will remain doubtful about the banks," he said.

If several banks passed international audit, then overseas confidence would return and the banks could resume their international businesses, including letters of credit arrangements, he said.

Letters of credit issued by local banks have been rejected by overseas banks in the wake of falling international confidence.

Pande added: "If an audit came up with only 20 healthy banks, we'd have to accept it. If we needed to 'amputate' some of the banks, we'd have to do it right away."

Umar said banks passing an audit could kick-start financing for the real sector. "With improved confidence in the banking sector, interest rates could be lowered," he said.

The central bank agreed with the IMF in April to use several international auditors to examine local banks. The results would be used to decide how to restructure the ailing industry.

Several parties, including top government officials, have suggested the immediate closure of banks that have no hope of meeting the new 4 percent capital adequacy ratio requirement by the end of this year.

Six banks under the management of the Indonesian Bank Restructuring Agency (IBRA) have been audited.

The results of four have been made public: Bank Danamon, Bank Umum Nasional, Bank Tiara and Bank PDFCI. IBRA has postponed announcing the results for Bank BDNI and Bank Modern.

The agency said last week that the assets of the four banks were much smaller than reported by their managements and that the banks needed large amounts of cash to fulfill the capital adequacy ratio requirement. Bank Danamon needs Rp 28.3 trillion (US$1.9 billion), Bank Umum Nasional Rp 10.47 trillion, Bank PDFCI Rp 3.2 trillion and Bank Tiara Rp 2.89 trillion.

Several bankers have been pressing Bank Indonesia to review the use of international standards in the auditing process.

"Using international standards isn't relevant to efforts to revive the ailing banking sector, especially amid the current economic crisis," said a banker who declined to be named.

Local banks could not fulfill the conditions demanded by international auditors because the banks had been practicing under Indonesian accounting standards, he said.

He said employing international standards would result in many banks being categorized as unhealthy.

Former BI director I Nyoman Moena said international auditors should not force their standards on local banks, arguing that it would only confuse the banks because they had been operating under Indonesian accounting standards.

"BI should review the auditing procedures," he said.

International auditors are expected to complete auditing 32 banks under the supervision of IBRA and 15 non-IBRA banks by the end of this month. The remainder is expected to be completed in October. (rei)