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Jakarta Post

Spate of accounting fraud may cost public faith in stock market

  • Vincent Lingga

    The Jakarta Post

Jakarta   /   Tue, January 21, 2020   /   09:37 am
Spate of accounting fraud may cost public faith in stock market Some brokers monitor the Composite Stock Price Index (IHSG) trading in Jakarta. (JP/Nurhayati)

Regulatory agencies slapped only light sanctions and small fines on public accounting firm (KAP) Tanubrata, Sutanto and its foreign partner BDO International in June 2019 for violating standard accounting principles concerning publicly listed airline Garuda Indonesia.

The accounting misconduct forced a massive material correction of Garuda’s 2018 bottom line, from a net profit of US$870,000 as booked in the previously “cooked report” to a loss of $175 million.

Likewise, KAP Satrio, Bing Eny and its foreign partner Deloitte also got only light penalties for their violations of standard accounting principles with regard to their audit of multi-finance corporation PT Sunprima Nusantara Pembiayaan (SNP), which misled investors and lenders into total losses of Rp 1.8 trillion ($124 million) in bank loans and medium-term notes in mid-2018.

The sanctions and fines imposed on several other KAPs, including KAP Purwanto, Sungkoro & Surja and its foreign affiliate Ernst and Young Global Ltd. (EY) as well as KAP Aryanto, Amir Abadi Jusuf, Mawar and affiliate RSM International, were similarly negligible compared to the huge amount of earnings and assets they allegedly overstated in their audited reports.

It has now become increasingly evident from the preliminary investigation that international accounting firm PricewaterhouseCoopers (PwC) was also implicated through the questionable, unqualified opinions it gave to state-owned life insurance company Jiwasraya and social and life insurance company Asabri for military and police personnel, which have lately been embroiled in allegedly huge financial scandals.

The audit controversy erupted only after it was revealed recently that the value of Jiwasraya and Asabri investments in stocks and mutual funds crashed by a range of 65 to 90 percent, causing potential losses of over $2 billion, while the economy and the Indonesian stock market (IDX) remained stable.

Investigative audits by the Supreme Audit Agency (BPK) and the Development Finance Comptroller (BPKP) revealed that the two insurance companies had, over the past two years, violated virtually all basic prudential rules on investments as stipulated in the 2011 insurance law, yet their financial reports still received largely clean bills of health from their auditors.

The stamp of an apparently reputable accounting company, such as Deloitte, BDO International, EY or PwC, all of which are among the world’s top 10 auditors, on financial reports does not guarantee the investing public reliable guidance on a company’s performance.

The lenient sanctions certainly are not a strong deterrent to prevent accounting malpractice or fraud. Audited financial reports are key to the integrity of the financial services industry and the first prerequisite for good corporate governance.

Worse, the Finance Ministry’s Center for the Development of Financial Professions and the Financial Services Authority rarely discovered accounting fraud and financial-reporting misconduct by themselves, including such issues as how companies booked their revenue, whether they properly valued their assets and obligations and whether they properly disclosed information to investors.

The “cooked” Garuda financial report by KAP Tanubrata and BDO International, which was signed by the board of directors and commissioners, came to light only after two of the commissioners who represented minority private shareholders blew the whistle about what they saw as grossly misstated profits.

The fact that such massive-scale window dressing could have taken place at a publicly traded company, which is subject to very stringent disclosure requirements, raised great concern among the investing public about the credibility and reliability of the financial reports of other public companies.

Still more discouraging is that not a single public accounting firm has been sued on charges of auditing malpractice or fraud, even though the 2011 insurance law allows criminal charges against auditors and public accounting firms for violating standard accounting principles or manipulating financial data and threatens violators with a maximum imprisonment of five years and a maximum fine of Rp 300 million.

The limited-liability company law also requires corporate boards of directors and commissioners to issue joint statements on audited financial reports stating their responsibility for the correctness of the reports’ contents.

Independent auditors tend to defend themselves by citing the accounting principle that states that auditor opinions on the financial accounts are the responsibility of the management since outside (independent) auditors are legally required only to give an opinion, and not judgment, in accordance with Indonesia’s generally accepted accounting principles.

If independent auditors are supposed only to apply generally accepted accounting principles mechanically without any judgment as to whether the accounts are true or not, shareholders and other stakeholders are left entirely at the mercy of the quality of the management’s competence and integrity.

Most auditors argue it is impossible for them to detect scams through general audits if the management is determined to act fraudulently. Independent auditors now seem to depend excessively on the internal audit system and the presumption that the management is honest.

The question, then, is who is responsible for protecting the investing public, notably retail investors, from overly greedy management who like to use “creative” accounting to deceive shareholders, creditors or tax officers?

The latest flurry of financial fraud now makes it imperative to amend auditing regulations to allow auditors to blow the whistle on questionable transactions or accounts without breaching the rules on client confidentiality, even at the risk of losing a client, yet with a great boost to their integrity and credibility. Aggressive or sometimes “creative” accounting is often overlooked by auditors preoccupied with the desire to preserve lucrative auditing and consulting contracts.

The public doesn’t care whether audited reports result from a general or an investigative audit process. They want only to be assured that audited company statements reflect the overall quality of corporate governance and forewarn them of any risks or fraud.