Towards more faith in our accountants

Y.R. Agandhi, School of Economics, University of Tarumanagara, Jakarta

Accountants in Indonesia are among those still grappling with the effects of the greatest bankruptcy case in the United States, involving the energy firm, Enron, and also one of the largest accounting companies, Arthur Andersen.

Public accountants provide assurance services, defined by some experts as independent professional services, which improve the quality of information for decision makers. One type of assurance service is an audit of historical financial statements. Audit services form the highest level of assurance given by public accountants. In other words, assurance services deal with public trust where public interest must be protected.

There are three types of professional governance, namely self- regulated, direct and mixed approaches.

In the self-regulated model, the accountancy profession is given the authority to regulate members and create a code and standards, including the enforcement of discipline. The direct model places authority in the government to regulate the profession starting from certification, examination, licensing, sanctioning and law enforcement.

The third model is a mix of both. Indonesia applies the mixed model but leans to a self-regulated model. Licensing and sanctioning is done by the Ministry of Finance. Apparently, law infrastructures and professional maturity are enough to support current conditions.

Law No. 34/1954 is the only legislation ruling the profession. Despite the fact that many banks -- which were checked by public accountants -- have gone bankrupt, we have never heard of lawsuits against members of the profession. We lack experience in resolving client-auditor disputes.

The Indonesian Institute of Accountants has created its own code and standards but the bankruptcy of many banks suggests a considerable degree of tolerance of deviation from such internal codes.

Transparency and neutrality are still a problem in the profession. Transparency needs to involve not only accountants and the government but also public participation in terms of publicly available regulations, public awareness and public protection in acquiring financial information.

Long-term relationships between the auditor and its client, poor legal infrastructure and enforcement are major obstacles faced by the accountancy profession and society. One solution is to review, amend or even overhaul the law regarding the profession.

Meanwhile, regulations must be drawn up to overcome current conditions and to bridge expected future conditions. One such needed rule is on a mandatory rotation of auditors every five years, especially when dealing with publicly listed companies and financial companies pooling public funds.

In some countries a mandatory auditor rotation is on the top of the list of necessary measures taken to break up long-term relationships between auditors and their clients. South Korea, India, Italy and Austria, have reportedly imposed audit rotation for banks and publicly listed companies.

Singapore has just imposed auditor rotation for bank-related companies. Hong Kong is considering the need. Expressions of resistance refer to costs and the trouble of new auditors in understanding the client's business practices.

Another solution is joint audits, already applied in the pension industry. A pension fund's financial statements have to be audited by an accounting firm and investment assets of the pension funds have also to be audited by another accounting firm.

"Enrongate" created losses of around US$68 billion and pension funds of millions of people. Bankruptcies of banks in Indonesia have cost the government at least Rp 650 trillion -- which may have been contributed in part by public accountants.