Policies in Accountancy and Auditing for Transparency and Accountability

3.3.1 Policies in Accountancy and Auditing for Transparency and Accountability

In the Reformation Era, the Indonesian government has reformed laws on state finance and auditing (2003-2004). These laws reform the accounting system from using a single entry accounting system to a double entry system, and from cash-based accounting

into a modified accruals-based accounting system 19 that helps BPK in examining the financial and non-financial performance of public sector agencies. This is also noted by McCrae and Aiken (2000: 285), who said that public sector accounting in other developed countries has adopted an accruals-based accounting system from the private sector to focus on performance in government financial reports. Financial reports from public sector agencies are required to be based on the new government accounting standards (GOI 2005) where all public resources are recorded in integrated government reports that help the internal and external auditors to monitor the financial and liquidity conditions of both central and regional governments.

The Law on State Finances (GOI 2003b) 20 forces the government to apply the new government accounting system (SAP) to improve the transparency and accountability of

public sector agencies in managing state finances. Articles 30 and 31 of this law stipulate the requirement for BPK to audit Executive agencies‘ financial statements includingbalance sheets, budget realisation, cash flow statements, and notes to financial statements, and to submit the audit results to Parliament no later than six months after the end of the budget year. This regulation was effectively implemented in 2006and BPK audits began adhering to the new system in 2007.

19 According to Pallot (2003: 135-136), accruals-based accounting system ensure cost responsibility, encourage ongoing monitoring of assets and enable systemic costing and charging for services.

20 This was approved to replace t he Netherlands‘ regulation of state finances during the colonial era, namely the

During the New Order Era, economic policies were influenced by developmentalism and crony capitalism. This resulted in significant government debt increases and economic growth and development becoming concentrated in a few groups or individuals (Bakti 2000b: 40). There was a lack of fairness and transparency relating to the use of public finances and resources. After the audit reform, all foreign aid projects or loan programs had to be audited by BPK.An economist and middle official of Bandung City local government (Interview A17) argued that the requirement of Parliament‘s approval in obtaining foreign aid received a lot of interference from legislators. Moreover, he thought that the Indonesian government is unable to be flexible in determining fiscal policies, which slows down the government‘s capacity to improve economic conditions. This statement is an example of an auditee who disagrees with the new regulations related to reporting state/local government loans as an indication of lack of transparency, accountability and competency at government level.

Besides the Law on State Finance (2003), Article 56, Paragraph 3 of the Law on State Treasury (GOI 2004c) stipulates that government is required to submit financial statements to BPK within three months of the end of the financial year. BPK also has additional work in regulating state losses. These include the mechanism of officials to pay state losses based on audit findings and also the sanctions, and the responsibility of employers or the heads of units to report any state losses to the heads of departments or regional governments and BPK (BPK RI 2007a: 6). This law puts pressure on the BPK to follow technical procedures to implement the law. The Head of the Law Bureau stated:

BPK is arranging the procedure of compensation for state losses for the treasurer and in consultation with government, in this case, the Ministry of Finance, Ministry of

Law and Human Rights and the Ministry of Internal Affairs (for regional treasurer). We hope in two months it will be done 21 .

Moreover, according to a key informant from the Law Bureau of BPK during the second fieldwork study 22 , in early 2007, BPK completed the regulations of compensation for the

procedure for any kind of state loss. This indicates that BPK has a lot of work to complete the operational regulations for criminal activities leading to state or regional losses.

Law of Audit (2004) and Law on BPK (2006)

The Indonesian government did not change its Audit Law from the Netherlands/colonial erauntil the Audit Law was legalised on the 19 th July 2004 to replace

the IARStaadsblad 1933 Number 320. The Audit Law (GOI 2004b) regulates the following: (i) definition of auditing and auditors, (ii) scope of auditing and auditing standards, (iii) freedom and independence of audit work, (iv) access to information for auditors, (v) authority to evaluate internal controls,(vi) audit results and followup, (vii) imposition of compensation for state losses, and (viii) administration of criminal penalties for any person who does not comply with the responsibility to follow up the BPK‘s audit findings. Detailed explanations of the content and implementation of the Audit Law are provided in the following Chapters.

After two years discussion, on 30 th October 2006, the Law on BPK replaced the former Law on BPK (GOI 1973)to provide a legal basis for public sector auditing that

harmonised with the third amendment of the 1945 Constitution in 2001 and state finances law package of 2003-2004 (GOI 2006a). There are four important changes from the former Law on BPK, namely: (1) restating the mandate, function, position and responsibility, (2)

21 This is based on an interview on 19 th February 2007 at BPK office, Jakarta.

enlarging the number of Board Members, (3) establishing regional offices in all provinces, and (4) confirming the only external audit institution in the Republic of Indonesia. This law

was initiated by DPR instead of BPK itself 23 . To reform Indonesian public sector auditing and the organisation of BPK, the Law on BPK was based on international best practice for

public sector auditing. On 8 th January 2007, BPK celebrated its 60 th anniversary (1947- 2007). This means that since the establishment of BPK, this was the first time that BPK is under the Law on BPK, which provides the legitimate power and authority to be a free and independent audit institution to achieve effective public sector auditing.

Regulation on State Finances Audit Standards and Code of Conducts (2007)

Paragraph 6, Article 6 of the Law on BPK (GOI 2006b) requires BPK to regulate further for implementing its duties auditing state finance management and accountability. BPK provided new audit standards. The process of providing this new audit standards should be carried out precisely (due process) and based on benchmarks from international best practice as required by Article 5 of the Audit Law (GOI 2004b).

The consultant team of BPK came from the economics faculty of the University of Indonesia and SAIs from the United States (GAO), Netherlands (ARK) and New Zealand

(ANZ) 24 . Feedback was getting from public hearings, which come from professionals; researchers; academics; government officials; and the public. The new audit standards of

BPK, namely Standard Pemeriksaan Keuangan Negara (SPKN), were launched in January 2007. Table 3.1 (below) presents the differences between SAP and SPKN (BPK RI 2007g).

23 This is based on presentation of the Tortama IV of BPK on 6 th December 2006 in the auditorium of BPK, Jakarta.

24 This is based on information and documents from the Organisation Bureau of BPK collected on 9 th August

Table 3-1Differences between Former (SAP 1995) and New (SPKN 2007) Audit Standards Description

SAP 1995

SPKN 2007

Legal basis

Law 15/2004 and Law 15/2006 Number of paragraphs

Law 5/1973

27 (20 main paragraphs and

46 (33 main paragraphs and 13

additional paragraphs) Development concept

seven additional paragraphs)

Not clearly regulated

A part of the professional standard of SPKN, formed a SPKN committee.

Users

BPK and other state internal

BPK, public accountants and other

audit institutions and public

parties that work for and on behalf of

accountants based on contracts BPK

Requirement of staff Individuals had to be registered Has expertise in the field of finance, capacities in conducting

collectively has certification, state audits

accountants

responsible person, should have a valid professional certificate.

Uncover internal audit

Findings (condition, criteria, causes, weaknesses

General (narrative)

effects)

Responses to

Shall be conducted recommendations

Not available

Regulated separately Title of state finances audit Auditor independence report

Non-compliance

Not regulated

Report of audit result on the financial report

statements.

Source: Adapted from information from the Jakarta BPK office and was made available in the interview during the second field study on 9 th August 2007.

Table 3.1 suggests that SPKN regulates important issues including responses to recommendations, auditor requirements, internal audit weaknesses, users, and non-

compliance. Starting on 7 th March 2007, BPK auditors, public accountants on behalf of BPKand other internal auditors 25 began using SPKNas guidelines for planning,

implementing, evaluating and reviewing audit reports. In addition, on 22 nd August 2007, BPK introduced a Code of Ethic to regulate the

integrity and professionalism of leaders of BPK Board Members and auditors in performing their duties and using their authority. As believed by Dalglish and Miller (2010: 16), integrity is one of the most significant abilities for a leader in emerging changes of

25 This includes auditors from various institutions, experts who perform audits, or supervisory bodies that act as internal auditors of institutions, such asthe internal audit unit in the Central Bank of Indonesia and other state- 25 This includes auditors from various institutions, experts who perform audits, or supervisory bodies that act as internal auditors of institutions, such asthe internal audit unit in the Central Bank of Indonesia and other state-

civil servants in Indonesia do everything according to the golden rule of ‗as long as the boss is satisfied ‘ (asal Bapak senang) and rewards and performance were not based on merit system. The seniority and paternalistic system still strongly drives public administrators and

auditors and if they do not satisfy their boss, it might be difficult for them to keep a good performancerecord.

Table 3-2 Legal Changes since Audit Reform (2001) in Indonesia No.

After Audit Reform (2001-present) Changes

Legal

Before Audit Reform

(1946-2000)