How Effective is the Indonesian External

THEM E : PERFORM ANCE M EASUREM ENTT

 How Effect ive is t he Indonesian Ext ernal Public Sect or Audit ing Report s Before and Aft er t he Audit Reform for

Enhancing t he Performance of Public Administ rat ion?

Septiana Dw iputrianti

 Decent ralizat ion, Account abilit y, And Local Government

Performance In Indonesia

Sujarw oto and Tri Yumarni

 Analysis Of Democratic Public Service Net w ork (Case St udy in Urban Transport at ion Service in M akassar Cit y, South Sulaw esi

Province, Indonesia)

Alw i

HOW EFFECTI VE I S THE I NDONESI AN EXTERNAL PUBLI C SECTOR AUDI TI NG REPORTS BEFORE AND AFTER THE AUDIT REFORM FOR ENHANCI NG THE PERFORMANCE OF PUBLI C ADMI NI STRATI ON?

Septiana Dwiputr ianti *)

Abstract

The research aim s t o enrich the exist ing administrat ion, account abilit y, and auditing of public sect or lit erat ure. This is undert aken t hrough exam ination of the qualit y of inform at ion in t he report s of t he Indonesian St ate Audit Institut ion (BPK) with comparison bet w een preceding and following audit reform. This st udy evaluat es t he fact ors influencing t o t he effect iveness of such audit inform at ion. Tw o main research quest ions; first ly, how is t he qualit y of inform at ion in the audit report s of t he BPK; secondly, w hat are t he key fact ors influencing t he effect iveness and ineffect iveness of inform at ion in the audit report s.

Dat a w ere collect ed through t riangulat ion of observat ions, document ations, quest ionnaires, and int erview s. Key inform ant s in t his st udy w ere (1) auditors, m em bers and m anagers of BPK (2) t he mem bers of Parliam ent and regional Parliam ent , (3) public sect or officials (audit ees) in cent ral and local levels, (4) and ot her respondent s from academics, researchers, pract ices, and non government organization (NGO).

This st udy revealed t hat the execut ive’s hist ory had hist orically neglect ed t he roles and funct ions of BPK. Auditors lacked independence as t he execut ive influenced t he adm inist rat ion and finances of BPK. Auditors also had lack of opport unit y t o increase t heir professionalism . Since t here w as lit tle incent ive for auditors not to accept audit fees from audit ees, t he object ivit y and int egrit y of audit ors w as reduced significant ly.

Since t he t hird am endm ent of 1945 Const it ut ion in 2001, the Indonesian government had reform ed law s and regulat ions relat ed t o public sect or auditing for st rengt hening BPK. In situation where t he Indonesian public adm inist ration needs im m ediat e reform, BPK keeps t rying t o improve it s professionalism and independence t o provide qualified audit report s. BPK has been given m uch at t ention to education, t raining, and the development of other skills and knowledge; implement ed remunerat ion; applied a rewards and sanct ions. This st udy revealed a significant improvement in the am ount and qualit y of in audit resources, including num bers of qualified auditors, represent at ive offices, inform at ion and t echnology, and m odern equipm ent . How ever, m any new auditors lack of experience and lack of diverse educat ional backgrounds in addition to account ing and finance for conduct ing perform ance audit ing.

To enhance t he qualit y of public administ rat ion and account abilit y, t his st udy gives recomm endations for BPK in (1) st rengt hening it s independence, (2) expanding audit or’s professionalism and compet ency in risk managem ent (3) improving t he facilities of the

*) PhD Candidate the Australian National University (ANU), Crawford School of Economics and Government Canberra, Aust ralia ( septiana.dw iputrianti@anu.edu.au ). Senior Lecturer and Head of Postgraduate Program

School of Public Administration, the National Agency for State Administration (STIA LAN) Bandung, W est Java, Indonesian ( septiana_dw i@yahoo.com ) School of Public Administration, the National Agency for State Administration (STIA LAN) Bandung, W est Java, Indonesian ( septiana_dw i@yahoo.com )

Keyw ords: public adm inist rat ion and accountabilit y, t ransparency, public policy, public sect or perform ance audit ing.

Introduction

Since the audit reform t hat w as begun since t he t hird am endment of Indonesian Const itution (2001), t he Indonesian public sect or audit has been strengt hened t o achieve t ransparency and accountabilit y of public adm inist rat ion in cent ral and local level government ’s agencies. This paper aim s t o exam ine t he implem ent at ion of ext ernal of public audit ing t o provide bet t er performance of public administ rat ion, before and aft er t h e audit reform .

The int roduct ion is divided int o t hree part s, t he first part of t his int roduct ion is t o describe t he differences bet w een financial and performance auditing as Indonesian public sect or has expanded it s scope of audit ing from financial t o perform ance auditing. The second part explains the role and funct ion of audit ing in reform ing public administ rat ion (as t he first priorit y in Indonesian governm ent reform) and for good governance. The t hird part describes t he historical developm ent of the Indonesian public sect or auditing.

W hat are the differences bet w een financial and perform ance auditing?

Som e lit eratures explained the difference of financial and performance audit s in different perspect ive. In t erm s of audit result s, Brown and Copeland (1985:3-8) point ed out t hat financial auditing report provides opinions on audit ees’ financial st at ement s, w hile perform ance auditing report provides audit recom m endations for obt aining bet t er organizat ion’s perform ance. In t erm s of audit st andard and period of t ime, Polit t, et .al. (1999: 9-16) argued t hat financial auditing is conduct ed yearly, and based on financial audit st andards and procedures, w hile perform ance audit ing is carried out more occasionally and is based on evaluation of perform ance crit eria and indicators t hat are varies, in t erm s of scope, lengt h, focus, and design, in every public agencies.

In t erm s of audit or’s compet encies, Sheldon (1996: 52) point ed out t hat perform ance auditing in public sect or requires for a w ide range of audit ors’ com pet encies, abilit y, and educat ional backgrounds t o design t he perform ance t arget ing in audit ing, while financial auditors require a specific compet encies in financial and account ing backgrounds, and additional knowledge in public administ ration. In t erm s of orient at ion, Kitindi (1992: 8-11) believed t hat financial audit ing is m ore relat ed t o exam ine t he financial report s and w orks t hat have been conduct ed in the past , while perform ance audit ing has broader fut ure, long t erm and st rat egic orient at ion w hich is rel evant t o exam ine not only t he output s and result s of program s t hat have been done, but also the impact and benefit s of program s t o be achieved.

In addition, Lindeberg (2007: 337-350) compared financial, performance audit ing and non-audit evaluative pract ices, he argued that performance auditing has great differences w it h financial audit ing, but great er sim ilarit y w ith program evaluat ion. Therefore, t he recom m endations from the perform ance auditing can be used evaluating and monitoring t he programs and policies t hat are implem ent ing in t he public sect or.

Out side financial and perform ance audit s, t here is specific purposes audit that can

be based on a request from t he President , m em bers of Parliament, or governm ent agencies t hat need imm ediat e at t ent ion for specific audit ing for cert ain purposes. Some examples of t his t ype of auditing are relat ed t o audit ing of forensic, IT, environm ent , and financial report s (such as auditing for expenditure, t ax incom e, non-t ax incom e, subsidy, foreign loan, donors, and foreign aid) for cert ain programs or project s.

Table 1 present s t he summ arizing of comparison bet w een financial and perform ance audit s.

Table 1: Com parison betw een Financial and Perform ance Audits

Financial (Com pliance) Audit

Performance Audit

Object ive/ Examining financial st at ement s Assessing management and Focus

regularit y and com pliance operat ional (input s) for optim al perform ance(out put s, out com es, and impact s)

Result s Audit opinions on compliance and Const ruct ive recom m endat ions for financial st at ement s

im proving perform ance Auditor’s

St rong background in finance, Education background from wide com pet ency

accounting, public adm inistrat ion range of educational backgrounds and law s Tim e Period

Yearly/ fiscal year Carried out vary in lengt h, depending on scope and focus

Audit st andard Based on accounting st andards, Based on perform ance audit and norms

legit im acy, legalit y and st andards which applying norm s of com plet eness

econom y, efficiency and effect iveness (3Es)

Orient at ion Ret rospect ive (t he w ork has done Perspect ive or tow ard the fut ure so far)

Source: Processed from different references:

1. Brown, R.E. and Copeland, R.M ., 1985, ‘Current issues and developm ent s in governm ent al account ing and audit ing: impact on public policy’, Public Budget ing and Finance, 5(2), pp. 3-8.

2. Polit t, C., et .al. 1999. Perform ance or Compliance? Perform ance audit and public managem ent in five count ries, Oxford Universit y Press, New York, pp. 16.

3. Sheldon, D.R., 1996. Achieving Account abilit y in Business and Governm ent , Quorum Books, West port , Conn, pp. 52.

4. Kit indi, E.G., 1992. ‘Perform ance auditing in Tanzanian parast at als’, Int ernat ional Journal of Governm ent Auditing, 19 (2), pp. 8.

5. Gong, T., 2009. ‘Institutional learning and adaptat ion: developing st at e audit capacit y in China’, Public Administ rat ion and Developm ent, 29 (1), pp. 37.

Role and Function of Public Sector Auditing in Public Adm inistration and For Good Governance

In line w it h t he political dem ands for great er account abilit y in providing bet t er services t o t he public and efficiency in managing public resources, public sect or auditing becom e a necessit y for public sect or in recent decade (Pow er 2003b: 191). The m em bers of parliam ent as represent at ive of the public have great er concerned about t he efficiency and effect iveness of t he qualit y of public sect or goods and services. Durrant (2000: 80) highlight ed that public sect or auditing is t he prom inent aspect for encouraging public sect or agencies t o improve t heir effect iveness and efficiency in public administ rat ive.

Efficiency in using public funds and resources reduces t he resources t o provide public goods and services, w hile effect iveness provides a cert ain result (output s, out com es, im pact s and benefits) on the qualit y of goods and services provided by t he governm ent . By preventing t he public money from w ast e, fraud and misappropriat ions expenditures, t he government can allocat e funds for great er num bers and qualit y of public goods and services. As argued by Devas (1989: 271) t hat t he ext ernal auditing can ensure all government ’s incom e is ‘ collect ed, account ed for and properly’ used. M oreover, efficiency can provide low cost s of goods and services t hat influences on t he t ariff set t ing by t he government which is import ant for t he count ry t o be able in compet ing int ernationally (M cIntosh 1997: 123-129). Funnel and Cooper (1998: 283) argued t hat effect ive public sect or audit ing can significant ly im prove t he public sect or performance.

Therefore, an effect ive public sect or audit ing can provide t he value of great er efficiency and effect iveness in public adm inist ration by exam ining the public sect or agencies in prevent ing and reducing w ast e, abuse, fraud and corruption that can improve t o t he perform ance of public administ rat ion, public goods and services for t he benefit of t he public.

Public audit ing t hat holds out a t ransparency, accountabilit y, efficiency, effect iveness, openness, prevent ing of corruption and excess expenditure, can prom ise of good governance (Shim omura 2003: 167). This is also support ed by Curtin and Dekker (2005: 36-37) who emphasized the principles of account abilit y, t ransparency, effect iveness and part icipat ion in public administ ration, w hich is expanding t he role of governm ent in providing government accounting syst em, and public sect or auditing t o provide account abilit y of public sect or agencies w hich lead to good governance. M oreover, Barret (1996:137-146) argued that the audit inst it ut ion is a part of t he governance fram ew ork t hat influences t o the developm ent.

An effect ive auditing pract ice is an essent ial precondition for good governance (Doig 1995:151). Similarly, M ulgan (2003: 24) found t hat Audit ors-General make a significant cont ribution of the public account abilit y t o the public sect or reform in Aust ralia by st anding up for values of t ransparency, probit y and good governance. Innes et .al. (1997: 706) also believed t hat audit report enhances t he credibility of t he financial stat ement s t hat is useful for invest ors and managem ent of public sect or.

Therefore, public sect or audit ing is an im port ant tool for result ing of good government in long t erm s. Audit ing provides assurance of an appropriat e use of resources and prevent s m isuse, fraud, abuse and corruption of public funds and resources w hich can m aint ain and improve public t rust , including t he local and foreign invest ors; and also t ax payers.

Historical Developm ent of Public Sector Auditing in Indonesia

Prior t o the 1945 Indonesian independence, t he public administ rat ion and auditing w as dom inat ed by t he Dut ch administ rat ion and Javanese culture t hat st rongly influenced t he bureaucrat ic culture w it h pat rimonial and patronization pract ices. The President as person of t he sovereign w as pow erful and st rongly influenced all he bureaucracy, including t he BPK. Although the position of BPK in the past w as under the 1945 Const itut ion and M PR, BPK had no independence from t he government or less pow erful t han governm ent . The audit report s of BPK report ed to the parliam ent w hich w as majorit y dom inat ed by Golkar part y, as a ruling part y and single w inner in the elect ion. Hence, during t he New Order Era, t he pract ice of corruption became syst emic under t he pow er of t he President (Soeharto) and his cronies. There w ere no ext ernal audit inst it utions which independent ly exam ined t he public financial m anagement and account abilit y of t he government .

Duplicat ing audit funct ions in public sect or had occurred not only bet w een BPK and int ernal audit inst itutions but also among the internal audit institut ions t hemselves. BPKP, an int ernal audit inst itution had the sam e roles and funct ions as BPK, in conducting post audit, inst ead of examining t he planning and managem ent of t he int ernal public sect or agencies’ financial budget and report s. How ever, BPKP had much higher budget , qualified auditors, represent at ive offices, and ot her audit resources in conduct ed public sect or audit . As a result , BPKP had great er audit scope in regional government s, SOEs and ROEs, w hile BPK only audit ed t he cent ral governm ent . This means, the funct ion and role of BPK t o examining t he public account abilit y of public sect or agencies w ere diminished by reducing resources and audit scope. The duplicat ing of audit functions had burdened st at e finances and audit ees.

Since t he t hird amendment of the 1945 Constit ution (2001), the roles and funct ions of BPK as t he only ext ernal audit institut ion has st at ed clearly. BPK has gradually given great er power t o examine t he public account abilit y of public sector agencies under t he Audit Law (GOI 2004a). Since t hen, BPK has reform ed it s organizat ion and st rengt hened it s roles and functions. Table 2 show s the com parison of the function, law s, and t ypes of Since t he t hird amendment of the 1945 Constit ution (2001), the roles and funct ions of BPK as t he only ext ernal audit institut ion has st at ed clearly. BPK has gradually given great er power t o examine t he public account abilit y of public sector agencies under t he Audit Law (GOI 2004a). Since t hen, BPK has reform ed it s organizat ion and st rengt hened it s roles and functions. Table 2 show s the com parison of the function, law s, and t ypes of

Table 2 Com parison of Internal and External Public Sector Audit before and after Audit Reform (2001)

No Public Sect or

Before Reform

Aft er Reform

1. Ext ernal audit

BPKP, BPK

Only BPK

inst it ut ion(s) - The funct ion of

Auditing all st at e finances of BPK

Lim it ed auditing cent ral

government

cent ral and local government s, SOEs, ROEs

- The funct ion of

Support ing the int ernal BPKP

Audit s cent ral governm ent ,

auditing functions -Report ing t o

SOEs, and ROEs

The President and

Direct t o Parliament and

regional Parliam ent s - Basic law s

Parliam ent

ICW and IAR regulat ions

The t hird amendment of t he

Law on BPK (1965)

1945 Const it ut ion, st at e

Law on BPK (1973)

finances Package law s (2003- 2004) and Law on BPK (2006)

- Audit ing

SAP (1995)

SPKN (2007)

st andards - Types of Audit

Financial and compliance

Financial, perform ance and

specific purpose audit s - Position of BPK

audit s

A high inst it ut ion (a limit ed

A st at e inst itution (st ronger

pow er of St at e inst itution)

posit ion)

2. Int ernal audit

BPKP, Baw asda, IG, M ain inst it ut ion(s)

Baw asda, IG, SPI, M ain

Inspect orat e

Inspect orat e

-The function

Post audit ing

Pre-audit ing for m anagem ent of st at e finances

-Basic law s

Colonial era of the

Law on St at e Finances (2003),

Net herlands, IAR (1933)

Law on Treasury, and Audit Law (GOI 2004b).

-Account ing

Based on accounting st andard st andard

Not available

The Indonesian External Public Sector Audit ing (before and after the reform )

This sect ion assesses t he crit eria of the audit report s informat ion qualit y and factors influencing t he crit eria of t he Indonesian Supreme Audit Board (BPK). The crit eria consist of t hree part s: (1) the cont ent of, (2) com munication of, and (3) act ing on, information in audit This sect ion assesses t he crit eria of the audit report s informat ion qualit y and factors influencing t he crit eria of t he Indonesian Supreme Audit Board (BPK). The crit eria consist of t hree part s: (1) the cont ent of, (2) com munication of, and (3) act ing on, information in audit

Quality of Indonesian Suprem e Audit Board (BPK) Reports

This sect ion assesses t he qualit y of BPK report s that consist s of t he qualit y of cont ent of inform at ion, t he qualit y of com munication inform at ion in audit report s, and t he qualit y of

act ing on audit informat ion. Relat ed to t he cont ent of the informat ion, there are t hree crit eria, nam ely (1) scope of audit s; (2) access for reliable evidence; (3) object ivit y, and credibilit y of inform ation. Relat ed t o the com m unication of information in audit report s, t here are t hree crit eria, nam ely: underst andable inform ation; precise and informative form at t ing; and tim ely report ing. Relat ed t o acting on inform at ion in audit report s, t here are t hree crit eria, namely: the publication of audit report s; realist ic audit recomm endat ions; and follow ing up audit findings and recom mendations.

The following sect ions describe research findings of each crit eria of t he qualit y of audit report s inform at ion. Law s, regulat ions, and rules as t he heart of both the t heory and t he pract ice of public adm inist rat ion are exam ined, t o underst and t he policies of t he Indonesian ext ernal public sect or audit. M oreover, findings from t he int erview result s enrich t he paper with the em pirical condition of Indonesian public sect or auditing.

Scope of audit

The financial audit scope of BPK has been expanded ext ensively as t he mandat e of t he Const it ution to examine t ransparency and account abilit y of all public sect or bodies. The w orkload of BPK increases in t erm s of t he num ber of agencies and audit scope w hich includes financial, perform ance and special purposes audit s. However, until 2009, BPK still cannot audit t ax revenues and som e SOEs. M oreover, t he lack of compet ency of government agencies t o apply the new governm ent account ing st andard (2005), result ing on lat e submission of t heir financial st at ement s t hat caused BPK to exam ine t heir financial account abilit y. Although BPK has significant improvem ent in increasing num bers of audit ed ent it ies for financial, including compliance audit, t he audit scope of BPK st ill have limit ed role in enhancing account abilit y as it has not focused yet in t he actual out com e and perform ance audit . BPK is st ill cont inuing to develop t he instrument and measurem ent t o examine t he performance of public sect or agencies. For specific purpose audit s as a dem and from t he Parliament s, BPK conduct ed invest igat ive audit for the case of corrupt ion, environment audit, financial audit for the heads of government ’s elect ions, and int ernat ional aid audit s.

Access for Reliability of Audit Evidence

Under t he new law of BPK (2006), auditors have pow er t o access any data and inform at ion for auditing purposes in every govern ment agencies. The sanct ions for audit ees w ho do not provide dat a and inform at ion for audit ors, and audit ors who m isuse t hese dat a and information, have been st ipulat ed. The clear pow er and authorit y of BPK auditors t o Under t he new law of BPK (2006), auditors have pow er t o access any data and inform at ion for auditing purposes in every govern ment agencies. The sanct ions for audit ees w ho do not provide dat a and inform at ion for audit ors, and audit ors who m isuse t hese dat a and information, have been st ipulat ed. The clear pow er and authorit y of BPK auditors t o

Objectivity and Credibility of Audit Reports Information

Based on the st udy, it revealed both positive and negat ive responses and com ment s on t he object ivit y and credibilit y of inform at ion in BPK audit report s. How ever, t he survey point ed largely t o positive percept ions of informat ion in audit report s and opt imism from t he respondent s on the significant reforms design t o provide object ive and credible audit report s. Survey support ed com ment s by a range of key informant s from BPK, audit ees and t he m em bers of Parliam ent . However, crit icisms and negat ive views have showed that t hese claim s w ere over-opt imist ic. Som e negat ive com m ent s during int erview s provided more open and honest st at em ent t hat reduces t he optim ism t o some degree. The key informant s doubt the object ivit y and credibilit y of audit report s due to BPK’s lack of independence. The st udy reveal ed t hat BPK auditors had strong pressure from t he high officials or elect ed people w ho w ere not act ing responsibly t o the public such as at t he local level, t he pressure from t he Regent or M ayor. In addition, t he report s of t he M inist ry of t he Nat ional Arm y had been alt ered. These negat ive and deficiencies view s not ed a more balanced view point and showed that there is st ill room for BPK t o im prove t he object ivit y and credibilit y of it s audit report s.

Understandable Inform ation

The survey result s indicat e various percept ions whet her t he report s of BPK provided

a clear and underst andable information or not . From int erview s, t he st udy revealed t hat inform at ion in audit report s from BPK w as st ill hard to underst and by t he st akeholders, esp ecially when t echnical t erm s on audit ing and finance used w ere not w ell defined. Although audit ors argued that the abilit y t o underst and audit report s depends on the com pet ency of st akeholders, t his st udy found that present ing clearer and simpler inform at ion in the report can avoid misint erpret at ion and help cit izens t o underst and the report s.

Precise and Inform ative Formatting

Audit report s from BPK w ere t oo t hick, t oo long, t oo complicat ed and lack of int erest ing present at ion for st akeholders. This condit ion affect ed difficulties in reading, absorbing and underst anding inform at ion in audit report s. Since 2007, BPK has provided a new sum mary audit report format and continued producing innovat ions with an elegant lay out , pict ures, fancy pie chart s, and short w rit t en st ories. M oreover, BPK att em pt s t o obt ain Audit report s from BPK w ere t oo t hick, t oo long, t oo complicat ed and lack of int erest ing present at ion for st akeholders. This condit ion affect ed difficulties in reading, absorbing and underst anding inform at ion in audit report s. Since 2007, BPK has provided a new sum mary audit report format and continued producing innovat ions with an elegant lay out , pict ures, fancy pie chart s, and short w rit t en st ories. M oreover, BPK att em pt s t o obt ain

Timely Reporting

Timely audit reporting has been st ipulat ed by t he Audit Law (2004) and included in audit st andards. The survey result s indicat ed m ore posit ive responses from auditors and

audit ees’ groups, in cont rast with t he mem bers of Parliam ent who w ere doubt ful about t im eliness of audit report s. Negat ive view s w ere also reveal ed w hich suggest ed BPK did not successfully fulfill the requirem ent s of t he st akeholders, in part icular m embers of t he Legislat ive instit ut ions, t o provide up-to-dat e and t im ely audit report s.

Publication of Audit Reports

BPK audit report s are now published t o provide t he public with inform at ion on the perform ance of government and how governm ent funds are spent . M oreover, audit findings

of BPK have raised curiousness of t he public that increased t he number of art icles in print ed m edia, radio and t elevision. Table 3 present s t he numbers of art icles of BPK’s findings/ result s in 2006.

Table 3: Numbers of News Articles of BPK’s Findings/ Results in 2006

No M onth

Numbers of New s

3 M arch

9 Sept em ber

10 Oct ober

12 Decem ber

Source: Adapt ed and processed from Clippings of BPK, the Public Relations Division of BPK, Jakart a,

M oreover, a public aw areness program has been conduct ed to raise public underst anding of BPK’s roles and functions in prom oting participat ion in effect ive public sect or auditing. The survey of t his research found that the respondent s agreed t hat BPK audit report s have been published. How ever, som e respondent s including polit icians and audit ed found unhappy w it h the publication BPK audit findings. Audi t ees covered-up their cases and t ried to st op BPK from publishing their cases. They argu ed t hat inform ation in BPK report s could provide a bad impact on organizat ions, for exam ple, inform at ion on non- perform ing loans (NPL) and irregularit ies in national banks t hat m ade cust omers dist rust ful about deposit ing their money and encouraged t hem to move t o other foreign banks.

Realistic Audit Recom m endations and Follow ing up Findings and Recom mendations

A realist ic and const ruct ive audit recomm endat ion to improve t he public adm inist rat ion and perform ance of public sect or agencies is essent ial for effect ive audit report s. The research found that the audit ed found difficult y and lack of responsiveness t o follow-up t he recom mendat ions in BPK report s. On t he other hand, the auditors could not provide realist ic recom m endations that can be done in short or m edium t erms by audit ed. As a result , the BPK recom m endat ions from year t o year do not change.

Although the m andat e for public sect or agencies t o follow up BPK audit report s has been provided in t he audit regulat ions, t he evidence show s t hat the rat e of follow up of BPK findings and report s are st ill very low . This study revealed t hat t he m em bers of Parliament found it difficult t o encourage t he public sect or agencies t o follow up BPK report s. The public sect or agencies aw are of t he import ance t o follow up BPK audit findings. However, audit ed found hard to follow up and to m eet all t he dat a, informat ion and recomm endations request ed by BPK audit ors in the short t erm.

Aft er audit reform (2002-2006), dat a indicat e a serious problem of t he government in following up BPK report s. Nat ional daily new spapers (Sam 2006, Sunspot 2006 and Sara Pem baharuan

16 M ay 2006) revealed t hat t he level of follow -up of BPK’s audit report s w as very low. From 2003 to 2005, 16,433 cases of t he m isuse of st at e finances w ith a value of Rp.132.49 t rillion, US$146.69 million, €98.91 thousand and ¥361.48 m illion, w ere found by BPK. How ever, only 6,920 cases, or about 42 per cent of t he t ot al, w ere followed up, while t he rest , valued at Rp.34.22 t rillion (25.8 per cent of t he t ot al value in Rupiah) and US$ 61.11 m illion, w ere not addressed by governm ent .

In addition, significant findings of BPK include inefficiencies and loss of st at e finances up to a value of Rp.253.75 billion in various government procurem ent project s, plus Rp.1.5 t rillion in quest ionable debt reduct ions and bad loans involving a number of dissolved banks, w hich were not followed up (Hudiono 17 M ay 2006). M oreover, in sem est er 1 of

2006 t he follow -up on BPK audit report s w as only 36.15 per cent 1 .

Table 4: Follow -up of Cases and Values (in billion rupiahs) of State Losses in 2005-2006 Group of Entities

State Losses

Followed-Up

No Follow ed-up

Cases Values Cent ral Governm ent

89 2,104 1,263 Government SOEs

23 4,762 Tot al Year 2005

2,724 11,230 Cent ral Governm ent

3 0.3 1,527 1,868 Government SOEs

5 56.2 21 1,265 Tot al Sem. I 2006

26l

1,695 19,046 Source: Adapt ed from :

Kompas , 6 January 2007. ‘Tat a Pemerint ahan: BPK segera t erbit kan st andar pem eriksaan’ (Stat e administ rat ion: BPK w ill launch audit ing st andards soon)’ , Jakart a.

Table 4 summ arizes t he cases and value of t he st at e losses in audit findings of BPK in 2005 and sem est er I of 2006 which indicat es a very low rat e (only 10.8% cases in 2005 and 1.51% cases in 2006) of follow -up on BPK findings. Although few in number, the follow -up of st at e losses cont ribut ed about Rp.2,597 billion in 2005 and Rp.199.5 billion in 2006 t o st at e t reasury.

Table 5: Follow up of BPK Audit Recom mendations (Central and Local Governm ents and SOEs) in 2008

Inst it ut ions Tot al St at us Com plet ed Recom m endations Recomm endat ions Finished

No Follow up Cent ral

Under Process

3,602 cases Governm ent

Rp. 52 t rillion

Rp. 108.31

Rp. 62.91 t rillion

t rillion

1 This information was presented by at the Tortama IV of BPK in the auditorium of BPK, Jakarta, on 6 December 2006.

Local 76,733 cases

33,746 cases Governm ent

Rp.100.3 t rillion Rp. 182.75

Rp. 132.04 t rillion

t rillion

SOEs 2,954 cases

Rp. 51.92 t rillion Rp. 10.02 t rillion

t rillion

Source: Processed from w ebsit e BPK RI (ww w.bpk.go.id accessed on 13 M arch 2009).

In addit ion, Table 5 shows a quit e significant num bers of cases w ith huge values of m oney w ere not follow ed by audit ees. It seem s t hat the recomm endat ions w ere run very slowly. For inst ance, for Stat e Ow ned Ent erprises (SOEs), from about 2954 cases, t here w ere st ill 662 cases have not been complet ed. Almost 25% of BPK report s w ere follow ed up by cent ral and local governm ent s and more t han 50% by SOES and has cont ribut ed m ore t han Rp. 216 t rillion for stat e t reasury. The dat a from Table 5 also indicat es significant BPK findings on the inefficiency of st at e expenditures in public sect or t hat w ere ret urned t o st at e t reasury. The highest inefficiency w as in local government , cent ral governm ent and SOEs respect ively. BPK only has the responsibilit y t o monit or t he follow -up of audit report s.

Factors Influencing the Quality of BPK Audit Reports

This paper exam ines t hree key factors influencing t he cont ent and communication of inform at ion in BPK report s, nam ely: t he independence and autonomy; the professionalism and int egrit y; and t he audit resources. To support t he analysis, t his st udy examines t h e fact ors pre and post audit reform, including the legal basis, the survey, com ment s and st at em ent s from personal int erview s, publication of the m edia, and conferences/ sem inars.

Independence and Autonomy of an Audit Institut ion

Before t he audit reform , BPK had no independence as mandat ed by t he sacred (sakt i) 1945 Const itution. The president w as pow erful in influencing all t he bureaucracy, Before t he audit reform , BPK had no independence as mandat ed by t he sacred (sakt i) 1945 Const itution. The president w as pow erful in influencing all t he bureaucracy,

In t erm s of budget ing, the approval of BPK budget ing is not from t he governm ent , but from t he parliam ent based on t he needs of BPK. Figure 1 illust rat es t he process of get t ing t he budget resources and audit ing account abilit y of BPK’s budget . Three m ain st at e inst it ut ions are involved in this process, nam ely: Parliam ent, the Government (t he M inist ry of Finance) and BPK. To m aint ain independence in budget ing, (1) BPK’s plan budget is separat ed from the st at e budget plan. BPK proposes it s budget plan t o get approval from t he Parliam ent aft er a discussion about the need for st at e audit act ivities; (2) aft er t he BPK budget is approved, Parliament informs t he audit need of BPK to the M inistry of Finance to

be insert ed in annual st at e budget plan; (3) for exam ining t he account abilit y of BPK to t he public, Parliam ent appoint s an independent public account ant office (KAP) of three audit ors proposed by BPK; (4) t he audit result s of KAP on the BPK account abilit y are published t o the public.

Figure 1: BPK Budgeting Resources and Process

Appoint ed (5)

An Independent

Audi t ed and

Public Audit Office

Published (6)

Budget Pr oposal (1)

Budget of

Par liament

BPK

Appr oved Budget (2)

Infor med (3) Annual St at e

Minist er of

Finance

Budget Plan

Inser t ed (4)

S ource: Adapt ed/ Processed from Article 35 of the Law Num ber 15 of 2006 (GOI 2006b).

Figure 2: Appointment Process for M embers, Chairm an and Vice Chairman of BPK

Head of

DPD

Supreme Cour t

(Senat e)

of Just ice

1 5 Considerat ion

Sw ear ing-in select ed Member s, Chai rman and Vi ce Chair man of BPK

Parliament Appoint ed Member s of

Appoint e

Chair man and Vi ce

BPK

Chair man of BPK

Input

At t ended

Candidat es

3 Publ ic

of BPK Pr esident as t he Member s

Announced Head of St at e

Source: Adapt ed from t he am ended 1945 Const itution (2001) and Art icle 14 of the Law Num ber 15 of 2006 on BPK (GOI 2006b).

In t erms of leadership, t he new appoint ment process for t he Board m embers, including BPK Chairman and Vice Chairm an, has result ed in independence of BPK leaders from t he governm ent . The appoint m ent process of BPK members can be depict ed in Figure

2. DPR proposes all candidat es for BPK members t o be considered by DPD (processes 1 and 2). Aft er t hat , all of t he candidat es for BPK m embership are announced t o t he public (process 3). Parliam ent (DPR) m akes t he final decision on the appoint m ent and select ion of m em bers of BPK aft er t he considerat ion by DPD and input from t he public (processes 4, 5 and 6).

In t erms of human resources, BPK has m ore flexibilit y in recruit ing, developing, t erminat ing, rew arding and punishing Board of members, auditors, and st aff based on the BPK dem and required, without being subject ed t o the st rict rule of M ENPAN and BPK. Besides positive responses on the improving of BPK independence, t his st udy reveals t hat BPK has not been successful in becoming an independent audit inst itution. This st udy recorded evidence w hich implies deficiencies of BPK auditors in achieving subst antial independence, especially due t o t he f act t hat t hey are st ill accepting m oney from audit ees, are st ill bribable, and st ill open t o the possibilit y of negot iations bet w een auditors and audit ees. These pract ices significant ly reduce t he independence of audit ors.

Since 2004, a member of SAI has been involved as ext ernal review er and an inspect orat e unit as int ernal cont roller has assessed t he independence and performance of BPK. The roles of peer review and int ernal inspect or have significantly influenced the effort Since 2004, a member of SAI has been involved as ext ernal review er and an inspect orat e unit as int ernal cont roller has assessed t he independence and performance of BPK. The roles of peer review and int ernal inspect or have significantly influenced the effort

Integrity and Professionalism of BPK M em bers and Auditors

Before audit reform , BPK lacked of int egrit y and professionalism, the t raining and educat ion w as not effect ivel y improving t he skills and compet ence of auditors. M oreover,

BPK had not m any audit ors with a background in accounting and had no the Code of Ethics for it s auditors. M oreover, BPK had no clear audit m anual, guidelines and t echnical guidance.

Since t he reform , t he requirem ent of BPK t o maint ain it s int egrit y and t o ensure t h e securit y and immunit y of audit ors and m embers of BPK are st ipulat ed clearly under t he Law

on BPK (GOI 2006b). BPK also has had the Code of Et hics (BPK RI 2007c). Besides, BPK has im plem ent ed a remunerat ion syst em t o provide fairer rew ard for auditors w ho are more professional and have bet t er perform ance; and also t o m aint ain audit ors’ professionalism in providing credible and object ive report s. This st udy found that BPK has st rongly att em pt ed t o improve t he audit ors’ compet ence and professionalism by sending it s audit ors for t raining and education bot h inside and out side the count ry. All audit ors are com pulsorily required t o develop t heir compet ence by com plet ing at least 20 hours of t he 80 hours educat ion w ithin a one to t wo years period.

Besides posit ive responses on t he im provement of int egrit y and professionalism of BPK, t his st udy also revealed t hat the compet encies and knowledge of auditors w as st ill not as st akeholders’ expect ed. For new auditors, lack of experience in auditing public sect or’s agencies result ed in their lack of abilit y t o det ect fraud and corruption. BPK audit ors also st ill lack of knowledge and experi ence beyond accounting and finance t o exam ine t he perform ance of public sect or agencies and provide realist ic audit recom mendat ions.

Auditing Resources of BPK

Before t he audit reform , BPK had very limit ed resources, including budget , auditors, represent at ive offices, t rainings and other audit resources. Besides, t he resources of BPK w ere cont rolled under influence of t he government and the bureaucracy. As a result , the qualit y of findings, opinions and recom mendations in BPK report s w as deficient .

Table 6: Annual Budget Allocat ions for BPK before (1993-2000) and after Audit Reform (2001-2009)

Year Amount in Rupiahs (billion) Descript ion 1993/ 1994

42.39 Before audit reform 1996/ 1997

329.36 Aft er audit reform 2006

Source: Adapt ed from

1. BEPEKA St atist ics 1995/ 1996 (BPK RI 1996).

2. BEPEKA St atist ics 1996/ 1997 (BPK RI 1997).

3. BPK RI St at ist ics 2001 (BPK RI 2002).

4. BPK RI St atist ics 2002 (BPK RI 2003).

5. BPK RI St at ist ics 2003 (BPK RI 2004) .

6. BPK RI St at ist ics 2004 (BPK RI 2005b).

7. BPK RI St at ist ics 2005 (BPK RI 2006b).

8. BPK RI St at ist ics 2006 (BPK RI 2007b).

9. Websit e of BPK (w ww .bpk.go.id, accessed on 17 August 2009).

Table 6 show s t hat t he budget allocat ion of BPK before audit reform w as m uch smaller t han aft er t he audit reform (2001). The parliam ent and governm ent have increased t he budget of BPK more t han five t imes higher from Rp. 329.36 billion to Rp. 1.725.48 billion in 2009, aft er t hey found a significant im provem ent in BPK performance in auditing public finance t hat saved st at e expenditure and increase the st at e revenue.

BPK has put in place an impressive increase in the quant it y of resources. Since 2004, t he allocation of budget has improved significant ly; num bers of new auditors and st aff have increased by more t han 1500 personnel. Figure 3 show s t he t ot al number of BPK personnel in the period of 1998/ 99-2008 which indicat es increases in t he num ber of em ployees continuously every year. According to the head of hum an resources of BPK (6/ 12/ 2006), in 2007, BPK recruit ed m ore t han 1700 auditors t o fulfill it s audit m andat e especially for t he new em ployees for t he represent at ive offices. Compared t o the number of em ployees before t he audit reform , t he number of em ployees in 2008 has increased by about 2600 personnel.

Figure 2: Num bers of BPK Em ployees Period 1998/ 99-2008

Sources: Adapt ed from:

1. BPK RI, BPK RI Dalam Angka (BPK St at ist ics) 2003 (BPK RI 2004).

2. BPK RI, BPK RI Dalam Angka (BPK St at ist ics) 2004 (BPK RI 2005b).

3. BPK RI, BPK RI Dalam Angka (BPK St at ist ics) 2005 (BPK RI 2006b).

4. BPK RI, BPK RI Dalam Angka (BPK St at ist ics) 2006, (BPK RI 2007b).

5. BPK w ebsit e (w w w.bpk.go.id Accessed on 17 July 2009). M oreover, since BPK has been employing the im plem ent at ion of rew ard and

punishment for it s personnel in separat e funct ional and structural posit ions, HRB has a special sect ion for evaluat ing and developing compet it ion bet w een st aff and audit ors and for managing functional positions (BPK RI 2007f). Table 7 show s numbers of BPK em ployees punishment for it s personnel in separat e funct ional and structural posit ions, HRB has a special sect ion for evaluat ing and developing compet it ion bet w een st aff and audit ors and for managing functional positions (BPK RI 2007f). Table 7 show s numbers of BPK em ployees

Table 7: Numbers of Employees Received Rew ard and Punishm ent (2004-08)

Year 2004

Tot al Rew ards*

29 18 28 4 10 89 Punishm ent

Source: w ebsit e of BPK (ww w .bpk.go.id. Accessed on 27 July 2009) Not e: * Sat ya Lencana Wira Karya Aw ard

In addit ion, Table 8 present s dat a of t he recruit m ent of new personnel of BPK in 2007 and 2008, which indicat es t hat t he priorit y w as m ainly for auditors w it h a background in professional account ancy, in addit ion to other educat ional backgrounds, such as: financial and hum an resources m anagem ent , development st udies, law , civil engineering and public relat ions.

Table 8: Recruitment of New BPK Personnel for Financial Year 2007-08

2 This aw ard is f rom t he Governm ent for BPK employees w ho perf orm w ell achievement s and dedicat ion.

No Facult y

Depart m ent

Recruit m ent

1 Econom ics

Financial M anagem ent

Hum an Resources M anagement

Developm ent Studies

2 Law

Law Science

3 Engineering

Civil Engineering

Indust rial Engineering

M ining Engineering

Informat ics Engineering/

Comput er Science

5 Social and

Com munications

Political Science

Int ernat ional Relations

7 Forest ry

Forest ry

8 Psychology

Psychology

9 Lit erat ure

Indonesian Lit erat ure

English Lit erat ure

French, Germ an, Dut ch and Russian

1 (for each

lit erat ure) Tot al

Lit eratures

469 Source: BPK Announcem ent Number: 01/ S.Peng/ X-X.3/ 12/ 2007 on Recruit m ent of Candidat e Public Officials for Bachelor Degree at BPK, t he financial year 2007/ 2008 (BPK RI 2007d).

Recruit ment as

of Year 2007/ 2008

In addition, the number of Board has increased from seven t o nine, as t here ar e com pulsory of 80 hours t raining for auditors. The number and qualit y of BPK’s t raining and educat ion have improved. Table 9 show s the program s in educat ion and t raining cent re w hich w ere held from 2004 t o 2006 for audit ors and m anagers. Dat a indicat ed expanding educat ion and t raining held by t he cent re ext ensively, in line w ith the increasing numbers of auditors as w ell as levels of m anagers as a result of opening new offices. M oreover, BPK also increased t he num bers of personnel pursuing their form al education through post graduat e degrees and overseas short courses (non-degrees).

Table 9: Numbers of Participants in BPK Training and Education (2004-06) Education/ Training

Training of M anagers

26 47 60 Training of Auditors

1472 Training of Technical St aff:

1642 Overseas Short Courses (Non-Degree):

28 49 10 Formal education for Post -Graduat e Degrees: 28

Source: BPK RI, BPK RI Dalam Angka (BPK St at ist ics) 2006, pp. 46 and 49 (BPK RI 2007b)

The modern equipm ent and IT has been added; and regional offices have opened in every province. Figure 4 illust rat es Indonesia’s geographical spread and the BPK locat ion of represent at ive offices t hroughout Indonesia, 33 provinces from W est t o East and from Nort h to South.

Figure 4: Representative Offices of BPK RI in 33 Provinces (after the audit reform , in 2008)

These fact s indicat e that since t he reform , BPK has gradually increased it s resources as t o conduct it s audit roles and funct ions more effect ively.

Conclusion

Since the audit reform , BPK has had clear m andat e from t he Constitut ion and the Law on St at e Finances (2003), t he Law on St at e Treasury (GOI 2004b), the Law on Audit (GOI 2004a), and the Law on BPK (GOI 2006b). It s scope of auditing now (1) includes all the st at e finances (both cent ral and local government s, SOEs, ROEs, the Cent ral Bank of Indonesia, public services agencies, and other agencies using t he st at e’s money; (2) has a higher and broader scope of audit, which covers t hree t ypes of audit s (financial, perform ance and specific purposes audit s). M oreover, BPK has been confirm ed as the only ext ernal audit inst it ut ion for all public sect or agencies in Indonesia, w hile BPKP is t he int ernal auditor. As a result , the numbers of audit ees has increased mult iple tim es.