Reforming Audit Institutions in Indonesia

3.3.2 Reforming Audit Institutions in Indonesia

Before the audit reform, the roles and functions of internal and external audit institutions lacked clarity and often overlapped. The duplication and unclear functions among audit institutions caused ineffectiveness, with high costs of auditing activities and increased pressureon auditees being reviewed. As a result, although Indonesia had experience with public sector auditing for more than five decades (1945-2001), the audit system still suffered from a lack of accountability and quality in examining public sector institutions. The following sections describe the audit institutions related to BPK functions before and after audit reform.

Limited and Duplicated BPK Functions Pre Audit Reform (2001)

During the New Order Era, before audit reform, Presidential Decree Number 31 in 1983 mandated the government to establish an internal audit institution, namely the Financial and Development Supervisory Board (BPKP), which sat under the Coordinating Minister for Development Supervision and Administrative Reforms. BPKP was considered the right arm of the President and had responsibility for both internal inspections and external auditing. Nonetheless, this caused a duplication of audit functions between BPK and BPKP to conduct post audit function (BPK RI 2005a; BPKP 2004; BPKP 2005). However, BPK and BPK had huge differences in budgets and resources.

Table 3.3 shows that BPKP had a much greater auditing resources. The amount of budget and representative offices of BPK were much higher compared with BPK. As a Table 3.3 shows that BPKP had a much greater auditing resources. The amount of budget and representative offices of BPK were much higher compared with BPK. As a

Table 3-3 Resources of BPK and BPKP (2004)

No Resources

- Staff administration

2. Level of education -Senior high school and diploma

-S1 (Bachelor Degree))

-S2 and S3 (Master and Doctorate

Degrees) 3. Representative offices

5. Four-wheel vehicles

Rp.421 billion Source: Adapted from Nasution, A., 2006. ‘The role of BPK in promoting transparency and accountability of the state finance’, The Audit Forum, IX(2), pp. 6-11.

6. Budget

Rp.273 billion

The issue of duplicated functions of BPK and the internal audit institutions was argued by the BPK Chairman (Kontan 10 th March 2007) as follows:

The function of the internal controller is to build the effectiveness and efficiency of the state financial management accountability system. It will avoid duplication and conflict of authority, thus it will create work harmonisation. The government should organise these internal control institutions.

This statement suggested that the functions and roles of internal audit institutions are crucial for effective public financial management and performance of public sector This statement suggested that the functions and roles of internal audit institutions are crucial for effective public financial management and performance of public sector

After audit reform, the Presidential Decree on BPKP Number 103 of 2001(GOI 2001) replaced the Presidential Decree on BPKP in 1983. The law stipulated the roles and functions of BPKP as professional government internal auditor in the area of financial and development supervision. Moreover, Article 114, Paragraph 4 of Presidential Decree Number 9 of 2004 (GOI 2004a) stated that BPKP does not have the responsibility to conduct audit functions for regional government agencies. Since then, BPKP has only helped government agencies in managing and reporting state finances based on the new government accounting standards. In addition, BPKP provides manuals of accountability for public sector agencies through government internal auditors or APIP (Aparat Pengawasan Internal Pemerintah) .The manualsinclude guidance on operational audit planning, monitoring and evaluation of follow-up activities; technical sampling (random sampling) during the process of audits; and government loss indemnity and strategies against national corruption.

Since the 1999 decentralisation policy, regional Inspectorates have the full authority to audit and control regional governments in managing public resources. However, most of regional Inspectorates still lack the necessary number of qualified internal auditors. As a result, BPKP also helps regional government in managing public finances.

Therefore, since audit reform, the Indonesian government and legislative restructured the function of audit public sector institutions to obtain effective and well functioning audits for the accountability framework. The Constitution and existing laws confirm that BPK is the only external audit institution and the Central and Regional Inspectorates are internal audit institutions.

Table 3-4 Indonesian External and Internal Audit Institutions and their Report to Main Stakeholder(s)

External Auditing

Internal Auditing

Regional Level Audit

Central Level

Regional Level

Central Level

Regional Inspectorates Institutions

Governor(s)/Regent(s)/ Stakeholders

Report to Main National

Regional

Minister/head of

Parliament or

Mayor(s) DPR(s)

Parliament(s) or

institution(s)

DPRD(s)

Table 3.4 (above) presents the structure of Indonesia‘s external and internal government audit institutions in terms of their functions and reporting. Internal audit institutions report to the head of Ministry/institution/local government, while BPK reports to the Parliament. Therefore, internal audit institutions are a part of the Executive, while BPK is a state audit institution that is independent from the influence of the Executive and other parties. This indicates the clear and separate roles and functions of external and internal audit institutions in Indonesia. BPK audits all public agencies and reports to DPR (Parliament) and DPRDs (regional Parliaments). Internal auditing in central government is conducted by general Inspectorates that report to the Minister or head of public sector agencies at the central level. The regional inspectorate conducts internal auditing for regional government and reports to the head of the regional government (governor, Regent, or Mayor). For state-owned enterprises/regional-owned enterprises, there is an internal controller unit (SPI). All of these internal audit institutions have the function of controlling and auditing the internal management of public sector agencies.

Organisational Change of BPK

Since BPK has a new mandate and greater authority to conduct all external auditing of public sector agencies, the Audit Board has committed to achieve its strategic purposes.

BPK has the vision ―To become a state finances audit institution, which is independent, professional and plays an active role in improving the accountability and transparency of state finances ‖, and the mission ―To audit state finance management and accountability in order to improve the accountability and transparency of state finances and to play an active role in achieving good, clean and transparent governance ‖. The mission is broken down into four strategic goals: (1) to establish BPK as an independent and professional state finance audit institution, (2) to meet the needs and expectations of stakeholders, (3) to establish BPK as the central regulator in the field of auditing state finance management and accountability in accordance with its legal and legislative mandates, and (4) to encourage the achievement of good governance of state finance management and accountability (BPK RI 2006a: 3-4). The strategic objectives indicate a new commitment and value of BPK to provide better performance for its stakeholders.

To achieve its purposes, BPK has reformed its organisation to improve operational capabilities both internally and externally, including rightsizing organisation, improving staff competency, providing better information technology and so forth. Although the priority of BPK in the short and middle terms is still very much concerned with financial audits, it is also eager to help the functions of Parliament by conducting specific purpose auditing and to conduct performance auditing for examining public sector agencies‘

efficiency, effectiveness and economy.