International Accounting Seminar: Exploring The Dark Side and Strengthening The Bright Side of Accounting

International Accounting Seminar – Brawijaya Accounting Fair 2008

Widya Loka Plenary Hall Brawijaya University, Thursday, 27 November 2008

International Accounting Seminar:

Exploring The Dark Side and Strengthening The Bright Side of Accounting

1.       Keynote Speaker: Indonesia Finance Minister (Represented by Mr. Suwarno, MH., LLM – Head of Tax Office – East Java III)

Accounting is a business language.  

Accounting developed with the increase of the financial transactions in the business.

Accounting has 2 sides like debit and credit, public sector and private sector accounting, and dark and bright side.

Debit and credit are specific term in accounting and the main idea in accounting.

Public sector accounting use to establishing the transparency and the private sector accounting is the information provider to reduce the uncertainty of the future.

Bright side of accounting is developed the economics especially to reduce uncertainty in the private sector business and the dark side of accounting is used for certain crime like fraud scandal in example ENRON Scandal by The Arthur Anderson in 2001.

In the dark side of accounting, the public accountant office role as the tailor of Financial Statements, make the Financial Statements “beautiful”.  So, the ethical and code of conduct obedient as the professional accountant must be increase and supervision from the Indonesia Finance Minister Office.

Indonesia Finance Minister need to against the financial crime and fraud to increase the economic atmosphere.  So, the forensic audit is needed to express the bright side of the accounting.       

Professionalism of the professional, practitioners, and academicians of accounting must be developed.

2.       Exploring The Dark Side of Accounting

Moderator: (Hon) Eko Ganis, SE., M,Com.

Speaker:     1.   Drs. I Gusti Agung Made Rai, MA., Ak. (State Auditor Institutions)

2.       Hendrik  Marpaung, ME., (Indonesia University)

3.       Soekardi Hoesodo, M.Sc., CGFM., CFE., QIA. (Former State Auditor)

Moderator:

The dark side of accounting also called the creative accounting, cosmeticing number, or cooking the book still debatable or the gray area of accounting.

 2.1.  How to Detect and Overcome Impact of Black Accounting

By drs. I Gusti Agung Made Rai, MA., Ak.

Member of State Auditor Institutions and Member of Indonesia Financial Standards Board

Auditor is the detective to detect the accounting fraud, the detector is forensic accounting.

What are the Forensic Accounting (FA) and the Accounting Fraud (AF)?

Forensic Accounting (FA) relating or dealing with the application of scientific knowledge to the legal problems (accurate accounting). Forensic audit are sustainable the adversial legal proceeding, or within some judicial or administrative review.

So, FA are accounting add law add auditing.  FA is the proactive method and approach to investigate fraud.  FA also called as Fraud Auditing, Investigative Accounting, and Litigation Support and Valuation Analysis. 

What is the Accounting Fraud?

AF is the use of one’s occupation for personal enrichment through violation of law, planned deceit, and dishonesty, I.e. corruption, asset miss appropriation, and fraudulent statements.

Fraud behavior is a function of perceived opportunity + rationalization + pressure (greedy).

Relation between Forensic Audit and Accounting Fraud

FA is carried out to investigate Financial Statement related fraud by using some investigative audit techniques, by mining the prove.

Indonesia is rank 126 of the 179 countries for transparency and accountability according to the International Transparency Survey, with 2,0—2,9 transparency index in the 10 scale.

How the Forensic Audit disclose the Accounting Fraud

The audit is not just followed the document but must be follow the flow of the money.  Prove the incidence of the fraud and could be used to litigation.

2.2. Fraud Detections

By Hendrik Marpaung ME

Lecture of Indonesia University

Fraud is the intentional perversion of truth through:

-          False representation,

-          Words or conduct, and

-          False or misleading concealment.

The number and size of Financial Statements fraud are increasing.  Investor have lost their confidence in the credibility of the Financial Statements and the Corporate.

To detect fraud, we can use the software, IDEA: Data Analysis Software.

IDEA is the anti fraud application, and detecting fraud through:

1.       Use the pivot table to perform substantive audit procedure. i.e. gross profit by location, line business, moth, etc.

2.       Data function and gap detection to find missing information.

3.       Days of the week to identify inappropriate or inconsistent access to the systems.

4.       Digital analysis using Benford’s Law.

5.       Purchases and payments: supplier validity and account analysis.

2.3. Fraud Auditor Profession

By Soekardi Hoesodo, M.Sc., CGFM., CFE., QIA.

Former State Audiotor

Chairman of Lembaga Pengembangan Fraud Auditing Indonesia (LPFAindonesia.or.id)

Chairman of Yayasan Pendidikan Internal Auditing Indonesia (YPIAindonesia.or,id)

Audit scope:

1.       Objectives, goals achievement.

2.       Risk, prevent accomplishing an objectives.

3.       Control, managing the risk.

Note:

Bank Indonesia has so many auditors, there are 300 auditors for auditing the banks in Indonesia and 80 auditor in Internal Control Department for auditing the local Bank Indonesia.

But so many fraud happen in the bank industry, event the former BI Governor and Top Management involved in the fraudulent practice.

Risk based audit

Financial statements fraud studies by COSO (1999) stated:

1.       Financial Statements fraud not isolated to a single fiscal period.

2.       Most sample fraud companies were audited by a big eight/four Public Auditing Firm.

3.       Business Fraud Survey (IIA, 1999), the organization not going effective after audited by the external auditor.

Note:

Management fraud did by a small group people but robe big amount money and the employee fraud did it by the big group people but robe only a small amount of money.

Modern Audit (COSO System)

Financial report audit and risk management report audit.

Audit is the different kind knowledge than accounting, audit is an independent knowledge to detect the fraud and abuse of the rules.

SAS 99 about fraud declare at 1997, before declared fraud is called as error and irregularities.

How to reduce Fraud and Corruption:

1.       Create people full of honesty,

2.       Create culture of honesty, and

3.       Soft control (high professionalism, ethics, and morale).

4.       Strengthening The Bright Side of Accounting

Moderator: Nurcholis SE, M.Bus., Ak.

Speakers: 1. Dr. A. P. Pohan, SH., LLM. (Notary from Jakarta)

2.  M. Yusuf Wibisana, SE., M.Sc. (Brawijaya University and Chairman of the Indonesia Financial Accounting Standard Board)

3.  Mr. Kevin D. Click (Chief Financial Officer of PT. H.M. Sampoerna tbk.)

4.1.      SAK In The Notary Point of View

Dr. A. P. Pohan, SH., LLM.

Notary from Jakarta

Corporation Law Setting Board

Corporation Law has close relationship with the Indonesia Financial Accounting Standard (SAK)

Example:

Chapter 68:1—2, Financial Statements of a Company (PT) must be audited by the Public Accountant Firm.

Chapter 36:1, Cross holding not allowed because the conflict of interest.

Toward the understanding among accountants and lawyers.

4.2.      SAK, Its Structure and Challenges

M. Yusuf Wibisana, SE., M.Sc.

Lecture of Brawijaya University

Chairman of the Indonesia Financial Accounting Standard Board

Indonesia Standard Setting:

Securities Exchanges Commission (Bappepam) and Indonesia Accountants Institute (IAI)

Set up the Indonesia Financial Accounting Standards Board, a private body who responsible for setting the accounting standards of Indonesia.

There are 2 (two) accounting standards in Indonesia.

1.       SAK (Indonesia Financial Accounting Standards), announce to the international business as the official accounting standards in Indonesia.

2.       SAN (National Accounting Standards), i.e. Syari’ah Accounting Standards for business in Indonesia only and for specific business.

Note:

Syari’ah Accounting Standards set by Indonesia Accountants Institute (IAI) and MUI.

Challenges to set and implement the SAK:

1.       Limited knowledge on the standards especially for the complex standards.

2.       Applicability and acceptance on the standards have not reached a desired level.

3.       Economic consequences arising from implementation of certain standards may compromise quality of standards.

4.       Marching toward single set of high quality standards, International Financial Report Standards (IAS).

Practices problem issues:

1.       Going concern issues in the crisis period (1997—2004) and in the recovery period (2005—now).

2.       Earning management to bubble the performance.   

3.       Declined of the securities value and the securities market in the global market now a ady.

4.       Bank and their bankruptcy problem because of subprime mortgage in the USA.

Engineering Accounting

Accounting has two sides in the balance sheet, left for the assets and right for the liabilities and equities.  But accountant and auditor make it there is no left in the left and there is no right in the right of the balance sheets.

Audit trend in last 5 years

The auditors focus of audit objective in the fraud increasing.

Fraud is the audit risk for the auditor, so fraud assessment is a must before doing audit.

Fraud might be happen but not affected the auditor opinion if not materials but reported in the internal control memorandum or management letter.  But if the fraud materials the auditor must be reported and affect the auditor opinion, than follow up with the detail audit if the client (company) want it.

Event fraud in a small amount and not material and nor affected the auditor opinion, the auditor must raise the issue and reported to the client in the management letter.

4.3.      Road to Fair and Transparent Financial Statements

Mr. Kevin D. Click

Chief Financial Officer of PT. H.M. Sampoerna tbk.

Tone of the Top (Philip Morris International)

“Nothing is more important than our commitment to integrity – no financial objective, no marketing target, no effort to outdo the competition, no desire to please the boss outweight that core commitment.  Our commitment to integrity must always come first.”

Company Culture

1.       Established compliance and integrity on business ethics.

2.       Integrity in the one core performance competencies.

3.       Promote “whistle blower” with free hotline number to report any suspected non-compliances.

4.       No tolerance for retaliation.

5.       Stringent follow up and reporting of allegations received.

6.       Increase employee awareness on compliance and integrity through training and campaigns.

Resources Qualification

1.       Selective recruitment and placement process to ensure the right talents with high integrity.

2.       Continuous training soft and technical skills.

3.       Develop key employees to be a member of professional accounting body.

  

Policies and Procedures

1.       Finance policies.

2.       Information Systems.

3.       Compliance

4.       Other (procurement, HP, CA, Operations)

Internal Process

1.       Adequate segregation of duties.

2.       Supervisory review and approval.

3.       Adequate approval authorizations.

4.       Comprehensive automated IT controls within applications.

5.       Adequate control on user access to systems and applications.

6.       Monthly reconciliation of balance sheet, income statement and cash flow against the underlying financials account.

7.       Monthly review and analysis.

8.       Regular independent counts of cash, inventory, and fixed assets.

9.       Job rotation of executive (averaging 3 years).

Internal Review

1.       Internal independent review.

2.       Internal audit and control department.

3.       Appointment of Independent audit committees

External Review

External auditors conduct comprehensive review to ensure true and fair reflection of financial statements covering

Government and Shareholders

1.       As a listed company, PT. H.M. Sampoerna tbk is required to comply with detailed and transparent.

2.       As a subsidiary of a company listed in NYSE.

3.       Government tax audits.

4.       Shareholders inquiries.

PT. H.M. Sampoerna tbk conduct business using sound internal process and controls across all levels of the organization to ensure full compliance to:

1.       All applicable laws and regulations,

2.       Local and international accounting standards and best practices.

This has provided a solid platform to ensure the company’s Financial Statements are true reflection of business performance and actual financial results.

Investor confidence to the PT. H.M. Sampoerna tbk in the long term performance:

1.       Integrity not cooking the book,

2.       Just meet the budget as the budget as well,

3.       Transparency and compliance more than number.