Independence of Board Members and Auditors

6.1.3 Independence of Board Members and Auditors

This section evaluates the independence of the Board Members of BPK 84 and auditors pre and post audit reform. The legal basis and data and information from

documents, comments and statements from key informants are provided as supporting evidence.

Independence of the Board Members Pre and Post Audit Reform

Pre Audit Reform

In the past, there was no legal basis to establish the independence of the Board Members and auditors of BPK. BPK had no independence in the election, appointment and dismissal of its Board Members, including the Chairman and Vice Chairman. Parliament only proposed three candidates for Board Membership, while the government proposed

84 The Board Members of BPK are different from normal auditors. The Board Members of BPK act as leaders 84 The Board Members of BPK are different from normal auditors. The Board Members of BPK act as leaders

The President had the final decision over who were to be chosen as Chairman, Vice Chairman and also ordinary Board Members. This practice prevented the leaders of BPK from being independent from the President and thus the government and the Executive. The Chairmen of BPK had no power to manage their own organisational structure (Kompas

11 th August 2005). A conflict of interest was highly visible as the President appointed the Chairman and the Vice Chairman positions and as a result the appointees were deeply

indebted to the President. A key informant from Public Relations Division of BPK (Interview B5), affirmed this, describing the close relationships between former BPK leaders and the President as follows:

In the past, the Chairman of BPK was proposed by the Members of Parliament, but he was appointed by the President, as a result, anyone who was the Chairman of BPK in the past had a close relationship with the President, for instance, Sri Sultan Hamengkubowono (1964-1966), Dadang Suprayogi (1966-1973), Umar Wirahadikusumah (1973-1983), M. Jusuf (1983-1993) and JB Sumarlin (1993-1998). All these Chairmen of BPK had a close relationship with President Soeharto during the New Order. Satrio Budihardjo Joedono was the Chairman of BPK from 1998- 2004 and had a close relationship with President BJ Habibie at that time.

This situation became a serious factor causing the ineffectiveness of BPK in examining the transparency and accountability of public sector. Seno (2004b:4-7) also agreed that the Chairmen and the Vice Chairmen of BPK were influenced by the Executive.

The Board Members of BPK in the past were former high officials from government offices, such as from the Central Bank of Indonesia, the National Army and the Ministry of Finance. However, even though they worked for BPK, they still had working The Board Members of BPK in the past were former high officials from government offices, such as from the Central Bank of Indonesia, the National Army and the Ministry of Finance. However, even though they worked for BPK, they still had working

Moreover, BPK ‗s independence was also reduced by its roles and functions not being supported by the public and Parliament nor by internal legal regulations or a code of ethics. The New Order Era government conditioned BPK like thisin order to prevent the audit institution from working properly and impeding the power of government. As a result, the government managed public resources for its political purposes without control from other institutions, including the Parliament and BPK. This meant that public resources were managed unprofessionally, with unsatisfactory public services and without concern for public need and accountability.

Post Audit Reform

To strengthen the independence of BPK since audit reform, Article 23F, Paragraphs

1 and 2 of the third amendment of the 1945 Constitution (2001) and Articles 16 and 17 of the Law on BPK (2006) stipulated the appointment and dismissal of BPK Board Members, including the Chairman and Vice Chairman. Since the new appointment system was implemented, leaders of BPK have significantly more autonomy and independence. The Board Members of BPK are in a public professional position that is appointed by Parliament to strengthen BPK ‘s independence.

The appointment process of the Board Members of BPK is depicted in Figure 6.3 (below). DPR proposes all candidates for BPK Board Membership to be considered by DPD (processes 1 and 2). After that, all candidates are announced to the public (process 3). Parliament (DPR) then makes the final decision on appointment and selection after

Figure 6.3 Appointment Process for Members, Chairman and Vice Chairman of BPK

Head of Supreme

DPD

Court of Justice

(Senate)

1 5 Consideration

Swearing-in selected Members, Chairman and Vice Chairman of BPK

Appointed Members of

Appointed

Parliament

Chairman and Vice

BPK

Chairman of BPK

Input

Attended 3 and

Candidates of

Public

Affirmed

BPKMembers President as the

Announced

Head of State

Source: Adapted from the amended 1945 Constitution (2001) and Article 14 of the Law Number 15 of 2006 on BPK (GOI 2006b).

Before assuming their position, selected Members of BPK read an oath in accordance with their respective religions under the guidance of the Head of the Supreme Court of Justice (process 7). The President attends this ceremony. After the ‗swearingin‘, elected Members may meet in a special session to select among themselves who is to become Chairman, the Vice Chairman and ordinary Members of the Board (processes 8 and 9). The process of electing Board Members has extended the impersonal and neutral position of BPK in relation to the Executive and the Legislature.

In 2004 and 2009, BPK conducted an election process for its Members by applying ‗fit and proper test‘. A key informant (Interview B7, a manager from BPK argued that the

BPK Chairman, Professor Anwar Nasution 85 , was different from the previous Chairman pre reform. Mr. Anwar had a strong commitment to reform BPK as an independent audit

institution to better enable it examine the management and accountability of public sector toward providing a clean and good government; free from corruption, collusionand nepotism (KKN). In addition, he was brave enough to criticise weaknesses regarding transparency and accountability of Indonesia‘s public sector (Masirom and Widyatmoko 2007). This was not the case under the former Chairmen of BPK before reform.

The requirement of Board Members to maintain their independence, to perform their duties, and to exercise their authority is stipulated by Article 3 of the Law on BPK (2006). Board Members are required to observe their professional oath and pledge, act neutrally and impartially, avoid any conflict of interest, and avoid situations that may affect the objectivity of an audit. Besides, the Members are prohibited from holding a concurrent position in other state institutions, other agencies managing state finances, or domestic or foreign private companies. They cannot participate as Members of any political party or demonstrate attitudes and behavior that may cause their independence to be questioned.

Independence of Auditors Pre and Post Audit Reform

Pre Audit Reform

Before audit reform, since the BPK leaders were appointed by the President, the personnel of BPK were also influenced by the government (that was the Ministry of Empowerment Apparatus (MENPAN). The Chairman of BPK stated to media (Eksekutif January 2007: 18) that all BPK personnel were public servants. This means that the rules

85 He has a PhD in Economics from Tufts University and was the former Dean of the Economic Faculty, 85 He has a PhD in Economics from Tufts University and was the former Dean of the Economic Faculty,

A BPK official (15/03/2007) expressed his disappointment and dissatisfaction withthe inflexibility of the audit institution in developing the quality and quantity of its auditors. He argued that BPK auditors and staff had little incentive to perform. Even if they performed better than their peers, promotion was based on seniority rather than performance, and auditors had little opportunity to increase their productivity by undertaking additional training and education. This practice was the same as the salary system employed for the Indonesian civil service.With few incentives such as promotions; BPK auditors augmented their earnings from auditees. As a result, BPK auditor morale was low and continued to significantly reduce their independence in auditing. BPK audits were never effectively implemented in the Indonesian public sector.

Post Audit Reform

The Law on BPK regulates how BPK auditors can maintain their independence. In this law, it is clearly stated that auditors shall not (i) have an immediate family relationship or a relationship by marriage with anyone who has the responsibility towards the audit itself, (ii) have any financial interest either directly or indirectly in the auditee, (iii) have worked or provided services to the auditees within the last two years, (iv) have a private relationship with the auditees, or (v) be involved either directly or indirectly in the activities of the auditees, such as providing assistance, consultation services, a development system, or preparing and reviewing the auditees‘ financial statements. These regulations have

guided auditors to be independent from personal, external and organisational disruptions guided auditors to be independent from personal, external and organisational disruptions

Moreover, audit standards (BPK RI 2007g: 17) have stipulated the responsibility of auditors to maintain independence in mental attitude (independence in fact) and independence in appearance. Being independent constitutes being impartial and intellectually honest as well as thinking in a way that is free from conflict of interest. Taking an independent stance means avoiding relationships that can affect the behavior and objective appearance of auditors in performing an audit. A continuous assessment of the relationship between auditors and audited entities is needed to maintain objectivity and independence. This means that auditors must avoid situations thatcould cause third parties who know relevant facts and conditions to conclude that the auditors concerned are unable to maintain their independence, thus causing them to be unable to provide an objective and impartial evaluation of all matters related to the implementation and reporting of audit results.

Furthermore, auditors need to take into consideration two kinds of disruption to independence, namely, personal, and external or organisational (BPK RI 2007g: 40). If one or more of the aforementioned disruptions to independence affect the ability of individual auditors in performing their auditing tasks, the auditors concerned must reject the audit assignment. In the event that the auditors, due to certain reasons, are unable to reject the audit assignment, the aforementioned disruptions must be indicated in the audit scope section of the audit report. The following paragraphs explain in detail these two types of disruption.

Paragraph 24 of audit standards (BPK RI 2007g: 45) ‗external disruption‘ section, states the requirement for auditors to be free from political pressure. How BPK auditors Paragraph 24 of audit standards (BPK RI 2007g: 45) ‗external disruption‘ section, states the requirement for auditors to be free from political pressure. How BPK auditors

other parties‘ intimidation or pressure; leaking information obtained from audited parties; and being affected by any particular prejudice, interpretation, or interest, including the

personal interest of the auditors or of other parties regarding the audit findings.

To avoid personal disruptions, according to the audit standards of BPK (SPKN 2007), Paragraph 19 (BPK RI 2007g: 25-27), audit organisations must have an internal quality control system to help them determine whether their auditors‘ independence is

exposed to personal disruptions. This includes prejudice against individuals, groups, organisations or program objectives that may result in impartial implementation of the audit. It also includes having past responsibilities in decision making or management of an

entity affecting the implementation of the entity‘s activities or programs currently underway or being audited.

However, this study revealed criticisms about the lack of independence of BPK auditors from Members of Parliament and auditees, as follows:

 “Auditors of BPK are not fully independent, because I still hear of the negotiation system with the auditees ” (Interview C5, a Member of Parliament Commission I, PAN fraction).

 “A few of the BPK auditors are still weak in terms of independence” (Interview C9, a Member of Kuniangan Regional Parliament).  “Auditors were not independent or objective, I hope this is the last and will not

happen in the future ” (Interview A13, an auditee from the Ministry of Foreign Affair).

 “BPK auditors could not be independent, because they are always willing to

accept the money that we give, but they only want to receive in cash and not transfer to their account ” (Interview A19, an auditee from Ministry of Public Works).

These criticisms raised serious issues about the lack of BPK auditors‘ independence. The practice of negotiation and receiving money from auditees resulted in reducing the These criticisms raised serious issues about the lack of BPK auditors‘ independence. The practice of negotiation and receiving money from auditees resulted in reducing the

a Member of Parliament (Interview C5) supported by a key informant (Interview A19, an auditee from the Ministry of Public Works) admitted that auditees are able to obtain information about BPK auditors to find out about their characters and behavior, so that the negotiation process can run smoothly.

To provide further information about bribery practices for BPK auditors from auditees, an informant who worked for more than 5-years in the finance section of a regional government explained her experience (Interview F4, an ex-auditor of BPK) as follows:

As long as I was dealing with BPK auditors, they all could be bribed. We tried to spend a lot of money to serve them during auditing. They asked for us to pay their hotel and food bill; entertainment, like karaoke and cinema; shopping; and gifts on the day they returned to their hometown. I think this practice still occurs in all regional government agencies.

This excerpt provides evidence of how BPK auditors do not act independently in audits, because they can be bribed or have accepted bribes. This statement supports statements that already stated before from auditees of central and local government who had similar experiences when BPK auditors visited and audited their offices.

On the other side, BPK auditors defend themselves by expressing the difficulties they face in avoiding influence and pressure from auditees, as follows:

 “The Law on BPK could not protect us if we experienced pressure from the

auditee; for instance, after the audit, the auditees refused to sign the audit findings and said , ‘Change this audit report or you will die’. We need protection, don’t leave us to take on all the risk ourselves, BPK has to take further action”

(Interview B21, an auditor from AKN IV).  “I audited a plane. After I took some photographs and obtained evidence, I found

irregularities to do with this plane. Yet, the auditee said, ‘you can choose to uncover these findings or you can choose to get off this plane safely ” (Interview B13, an auditor of AKN I).

 “If an auditee refuses to be audited, what can we do after that? We need basic

rules on audit standards and audit management guidelines as soon as possible as rules on audit standards and audit management guidelines as soon as possible as

The auditor from AKN IV had difficulties in facing auditees from regional government who had no responsibility to be transparent and accountable in managing public finances and resources. Besides, these auditees threatened to kill and harm BPK auditors if they revealed the real situation in the audit reports. BPK auditors felt that the risk to be borne was very high and that BPK did not support them fully. A similar experience was had by the auditor from AKN I (Interview B17) who audited the Ministry of Defense and was threatened with not getting off the plane safely if s/he reported the findings as they were. Another experience was from an auditor from AKN V (Interview B24) who has to audit SOEs, but the SOEs rejected the BPK auditorsbecause they had already been audited by KAP. This refusal indicates that BPK auditors were not appreciated as the only external auditors examining the transparency and accountability of the public sector. These experiences prove that although BPK has legally embedded independence, there are still extensive opportunities to improve its independence, such as providing a new draft of the

Audit Management Guidelines (PMP) that was issued on 19 th February 2008. Besides, BPK provided audit guidelines of 100 financial audits on 19 th May 2008, 200 performance audits

on 5 th June 2008and 300 special purposes audits on 27 February 2009 that can help auditors during auditing.

th

Since audit reform, BPK has the authority to organise its human resources. According to BPK ‘s human resource division (Interview B8), BPK has the authorisation to independently manage its own employees in any aspect related to audit quality, such as to establish the Code of Ethics; recruiting, deploying, developing, and organising its own personnel; and determining the qualifications, positions and provision of BPK auditors. Although BPK personnel are civil servants or PNS(Pegawai Negeri Sipil), since audit Since audit reform, BPK has the authority to organise its human resources. According to BPK ‘s human resource division (Interview B8), BPK has the authorisation to independently manage its own employees in any aspect related to audit quality, such as to establish the Code of Ethics; recruiting, deploying, developing, and organising its own personnel; and determining the qualifications, positions and provision of BPK auditors. Although BPK personnel are civil servants or PNS(Pegawai Negeri Sipil), since audit

Since audit reform, the majorInspectorate (ITAMA) of BPK has made some efforts to review the performance of personnel and audit reports. According to a middle officer and an official of the ITAMA unit (Interview B4), they realised that their unit has a significant role in examining and supervising the performance of BPK auditors and staff. Since audit reform, the unit has worked hard to provide the operational and procedural standards for evaluating the work performance of its personnel. The internal controller or Inspectorateunit of BPK keeps improving its capacity to evaluate and monitor the integrity and independence of auditors to fulfill the mandate of the Constitution by strengthening the roles and functions of BPK internal controlling system. The Code of Ethics employs with reward and punishment to BPK auditors. Moreover, the public services unit (Interview B7) collected data and information about BPK from stakeholders (Members of Parliament, auditees and public) in 2007.An officer from the unit argued that BPK still has a lot of work to do to meet stakeholder expectations and the mandate of the Constitution.

For assuring the independence and quality of BPK audits as mandated by the Law on Audit (2004) and the Law on BPK (2006), BPK has been assessed by external peer reviewers from other countries. The peer review is appointed by BPK after obtaining Parliamentary approval. Following the passing of the laws, BPK was reviewed by the Auditor General of New Zealand in 2004. In 2009, the Netherlands Court of Audit reviewed BPK and assessed the follow up of the previous peer review recommendations. The results and recommendations from the Netherlands Court of Audit were published For assuring the independence and quality of BPK audits as mandated by the Law on Audit (2004) and the Law on BPK (2006), BPK has been assessed by external peer reviewers from other countries. The peer review is appointed by BPK after obtaining Parliamentary approval. Following the passing of the laws, BPK was reviewed by the Auditor General of New Zealand in 2004. In 2009, the Netherlands Court of Audit reviewed BPK and assessed the follow up of the previous peer review recommendations. The results and recommendations from the Netherlands Court of Audit were published