Public Sector Auditing from the Dutch Colonial period to the Old Order (1945- 1965)

3.1 Public Sector Auditing from the Dutch Colonial period to the Old Order (1945- 1965)

Prior to the independence of Indonesia, the colonial bureaucracy and the Dutch administration dominated public administration and auditing in Indonesia. Javanese culture was also strongly influenced by the bureaucracy culture with patrimonial practices and power concentrated in the sovereignty. Prior to Indonesian independence in 1945, audit functions were conducted by the Algemene Rekenkamer (the Dutch‘s Audit Institution). Forms of administration were governed based on the formative period of Dutch colonialism, exemplified by the administrative institutions in Yogjakarta and prevailing until the end of the 18 th century. According to Hoadley (2006: 9), ―Javanese politics were dominated by diadic ties forged between sovereign and vassal (gusti-kawula) resulting in a highly centralised, if brittle, state with little delegation of authority or intermediate organisations ‖. Boediono (2005: 322) noted that independence in Indonesia had to start Prior to the independence of Indonesia, the colonial bureaucracy and the Dutch administration dominated public administration and auditing in Indonesia. Javanese culture was also strongly influenced by the bureaucracy culture with patrimonial practices and power concentrated in the sovereignty. Prior to Indonesian independence in 1945, audit functions were conducted by the Algemene Rekenkamer (the Dutch‘s Audit Institution). Forms of administration were governed based on the formative period of Dutch colonialism, exemplified by the administrative institutions in Yogjakarta and prevailing until the end of the 18 th century. According to Hoadley (2006: 9), ―Javanese politics were dominated by diadic ties forged between sovereign and vassal (gusti-kawula) resulting in a highly centralised, if brittle, state with little delegation of authority or intermediate organisations ‖. Boediono (2005: 322) noted that independence in Indonesia had to start

In addition, public sector auditing was carried out by ARK (Algemene Rekenkamer), which was the official name of the SAI during the Dutch occupation period in Indonesia. On-site auditing was formally conducted by BPK due to the absence of adequate available documents, data and information for auditing. Although on-site auditing necessities required large travel costs, this was still applied instead of desk audits (with no visits to the auditee).

Since Independence Day on 17 th August 1945, the founders of the Republic of Indonesia realised the importance of auditingfor examining state finances. The first Head of Supreme Audit was the first President of the Republic Indonesia, Soekarno. The Board Members of BPK were Ministers. BPK began officially performing its constitutional

assignment on 1 15 January 1947 in Magelang . To perform its duty, BPK used Indische Comptabiliteitswet or ICW (laws for financial accountability for the East Indies) and

st

Instructie en verdere bepalingen voor de AlgemeeneRekenkamer or IAR (instructions and further provisions for the office of the state audit) as the basic regulations used bythe Algemene Rekenkamer (Auditor Magazine 2003:20-21). This meant that since BPK was formally formed in 1947, the head and Board Members of BPKwere under the power of the Executive and were still using the East Indies laws.

The Parliamentary system under the original 1945 Constitution (before the amendment), applied unikameral, which meant t he People‘s Consultative Assembly (MPR)

15 This is based on information from a Board Member IV of BPK in the press conference on 5 th January 2007 in 15 This is based on information from a Board Member IV of BPK in the press conference on 5 th January 2007 in

The formation of state institutions in Indonesia was adopted from the Netherlands. For instance, the position of MPR had a similar function to that of the King or Queen in Netherlands. The position of BPK (Algemere Rekenkamer) under the original 1945 Constitution was similar to the institution referred to in the constitution of the Netherlands as one of the ‗highinstitutions of state‘ (in Dutch ‗hoge colleges van staat’) along with the Supreme Court (MA or Hogeraad/Landraad), Parliament (DPR or Volksraad), Supreme Advisory Council (DPA or Raad van Nederlandshe Indie), and the President (equal with General Governor ) (Asshiddiqie 2005: 204). Consequently, BPK gave its reports to MPR. Asshiddiqie (2005: 7) noted that under the 1945 Constitution, there was a lack of a checks and balances mechanism between the Executive, Legislative and Judicative. Figure 3.1 presents the position of BPK under the 1945 Constitution and the People's Assembly (MPR), which was adopted from the colonial (Netherlands) structures and practices.

Therefore, basically, the position of BPK under the 1945 Constitution was more firmly under the MPR, within the state structure. As stated by Board Member IV of

BPK 16 the establishment of BPK is stipulated in the Constitution as a ‗social contract‘ with the people of the Republic of Indonesia:

The establishment of BPK started from the Independence Day in this country. BPK was founded based on the Constitution. In the theory of the state formation, the establishment of this state started from the same hopes, the same desires and the same

16 The speech and presentation of a Member IV of BPK at Sosialisasi of BPK on 6 th December 2006 in the 16 The speech and presentation of a Member IV of BPK at Sosialisasi of BPK on 6 th December 2006 in the

Figure 3.1 BPK under 1945 Constitution and People’s Assembly (MPR)

Source: The presentation of a Board Member of BPK in Sosialisasi of BPK, on 6 th December 2006 in the auditorium of BPK, Jakarta.

This statement indicates that the purpose of BPK‘s establishment should not be separated from the Indonesian people s‘ desires, which is stated in the 1945 Constitution, Paragraph 5,

Article 23 (GOI 2006c: 57) as follows:

In order to audit the accountability of the state finances, an Audit Body shall be established, the regulations shall be prescribed by statute. The results of the audit shall be made known to Parliament.

However, the term ‗an Audit Body‘ with the authority to conduct external auditing in this paragraph was not clear. Since the power of the President in the 1945 Constitution was

strong, BPK had no independence from the influence and power of the Executive. An audit body in this statement could be interpreted to mean that the roles and functions of BPK were the same as those of other central and local government internal audit institutions, namely the Financial and Development Supervisory Board (BPKP), General Inspectorates (for the Ministry level), Primary Inspectorates (for the non-ministerial institution -at central

Internal Control Units (SPI) in the public sector. As a result of this proliferation of auditing bodies, the cost of auditing was high; public sector audits were poorly structured with overlapping functions, and were ineffective. Moreover, the auditees took too much time and energy to serve all the auditors from the different supervisory institutions

From the 1950s until 1958, Indonesia applied a Parliamentary system, based on the Constitution of the Federal Republic of Indonesia and the Provisional Constitution of the new Republic of Indonesia. BPK operated under the title of Finance Control Council

(Dewan Pengawas Keuangan) 17 . The office of the Board was located in Bogor , where it was known as the seat of Algemene Rekenkamer, the Court of Audit of the former

Netherlands East Indies‘ Government (BPK RI 200320-21). The 1945 Constitution was re-imposed by Presidential Decree on the 5 th July1959 (BPK RI 2003:20- 21). From 1959 until 1965, Indonesia applied ‗Guided Democracy‘

(demokrasi terpimpin), whichcentralised power in three aspects: political elite over society, the Jakarta centre over the provinces, and the charisma of President Soekarno as the leader of central government level (Lev 2000: 12-13). Moreover, the army simultaneously had dual functions (dwifungsi) in defense and security (military affairs) and also in society and politics (civilian affairs) (Hoadley 2006: 112-113). The dual functions allowed domination of bureaucratic and Executive positions (in both central and regional governments) by retired military personnel. This affected the lack of autonomy of the bureaucracy, including BPK. Although the first Law on BPK was enacted in 1965, the law did not fully comply with the terms of the 1945 Constitution, since the President dominated the Board. Over the years, BPK lacked authority and resources, which affected the quality of public sector

17 Bogor is located 60 km south of Jakarta, the capital city of Indonesia.

administration and services. Boediono (2005: 322) noted the low quality and performance of the Indonesian public sector and that it needed serious attention. The influence of politics and the government on the BPK led to declining performance and capacity of public sector agencies to achieve the Constitution‘s message to be accountable in using public finances.