WEIRD SCIENCE
In Indonesia, many corporate audits remain woefully inaccurate.
By Diarmid O'Sullivan

In 1996, PT Argo Pantes was riding high. The Indonesian textile company was turning a solid profit on over US$200 million in revenues, and cash on hand topped US$137 million. Although the company had funded its growth through some heavy borrowing, debt servicing didn't seem to be a concern. The interest on the company's sizeable cash reserve covered half of Argo Pantes' debt payments.

Then, in early l997, the company's war chest simply vanished. At first, nobody seemed to know what had happened to the US$137 million. "We found out in April 1997 that there'd been an intercompany loan," says one of the company's exasperated foreign lenders. Managers at Argo Pantes, it finally came out, had handed over the money as a deposit on a piece of land bought from an affiliated company. This startling revelation had investors all asking a fairly obvious question: why would managers at the textile company shell out for a large chunk of land when the company's cash reserves were vital for survival?

Allegedly, the company's auditors wondered the same thing. Officials at Hanadi Sudjendro & Rekan - then the local partner of KPMG - say they asked Argo Pantes managers about the deal when they qualified the company's 1997 accounts. The auditors say they warned company management that they couldn't judge how much the land was worth, nor whether Argo Pantes could get the deposit back. To this day, the auditors insist they acted properly and professionally. Two other sources close to the company's banks, however, claim that the auditors had to be nudged into recognizing what happened. "That cash wasn't cash for a long time," says an analyst familiar with the publicly listed textiles firm. "The auditors had to be put under a lot of pressure to put it that way."

Today, the once high-flying Argo Pantes is one of Indonesia's most troubled companies, in desperate need of striking a restructuring deal on the US$300 million it still owes bankers. With business off, and with cash reserves drained, the company can't even repay the interest on its debt. For their part, the company's bankers appear reluctant to give the go-ahead to any restructuring until they find out exactly what happened to the US$137 million that disappeared from the textile manufacturer's balance sheet. Like dozens of other companies in Jakarta, Argo Pantes now faces bankruptcy.

Shell Game

Whether auditors could have prevented the collapse at Argo Pantes remains unclear. Officials at Argo Pantes did not respond to CFO Asia's requests for an interview for this story. Nevertheless, many foreign bankers and analysts in Jakarta believe that local auditors must shoulder some of the blame for the current sad state of many of Indonesia's listed companies. All told, these companies owe a staggering US$80 billion to foreign lenders, and most local businesses are teetering on the brink of insolvency.

Even the president of the Institute of Indonesian Accountants, a local professional society, admits the industry needs to beef up its disciplinary procedures. Noting there is a need for "introspection" in local auditing circles, Zainul Sudjais says the Institute is adopting new procedures that will make it easier to cancel the memberships of lawbreakers. But, Sudjais defends local accountants, noting that auditors are only as good as the information companies give them. "Many people, even in business circles, think that when auditors sign an unqualified opinion, this guarantees that there is no hanky-panky inside the company," he says. According to Sudjais, this view is naive.

Others are harsher in their judgment of Indonesia's auditors. Some accountants say privately that less than 20 percent of the 200 or so listed firms in Jakarta produce reliable financial data. Of course, these critics also admit that scores of corporate managers in Indonesia have gotten exceedingly good at hiding sensitive transactions from auditors. A common practice: one company makes a deposit with a friendly bank on the unwritten understanding that the bank will lend the same amount to another company in the same conglomerate. This is put on the company's books as a cash deposit. But if the borrower defaults, the bank does not give the first company its deposit back. Some of Argo Pantes' foreign bankers suspect something like this may have been behind the company's controversial cash-for-land deal.

Still, Haryanto Sahari, a partner with the local affiliate of Price-waterhouseCoopers, argues that accountants cannot rely solely on the word of corporate clients when preparing audits. "It's a question of common sense," he says. "If you've got a bank making a US$100 million loan to a finance company with a small capital base that's only been in existence for three months, you know something isn't right."

So Vulgar

Foreign bankers now say something hasn't been right with Indonesian audits for years. Not surprisingly, these bankers - who have watched billions in loans go up in smoke - tend to be the fiercest critics of Indonesia's auditors. "All the bank audits were bad," one Singapore-based analyst with a European bank says bluntly. Accountants tend to give a more tempered view, however. "I can't say it was 100 percent bad," notes Istini Siddharta, partner at local KPMG affiliate, Siddharta, Siddharta & Harsono. "Still, I can't close my eyes to the possibility that there were mis-audits."

One of the reasons for all these inaccurate audits is that many Indonesian corporate managers fully expect - and sometimes get - auditors to doctor bad numbers. Siddharta recalls one company director who told her unabashedly that some of his documentation was inaccurate. He then went on to ask her if she could fix the accounts to conceal it. "I told him, 'No thank you, get another auditor,'" she says. "It was so vulgar."

Even honest auditors in Indonesia say they sometimes have trouble keeping up with the workload, which skyrocketed with the boom years of the 1990s. "I would say that the auditors have been overloaded over the past years, because there are only a handful of top-notch firms for all the listed companies," says Eddie Soeparno, head of corporate finance at American Express Bank in Jakarta. Soeparno concedes that some firms would rush to sign off an audit, relying on junior staff to do much of the work. "We addressed this [issue] with our clients, and they said, 'We need to get it done quickly,'" he admits. "Objectively, we should have made more fuss."

Of course, with the Indonesian economy in a coma, and the country suffering from regular outbreaks of bloody riots, making a fuss over audits appears to be low on the government priority list right now. Sophar Toruan, the Finance Ministry official who oversees the accounting industry, admits there is a problem with audits, but claims there is little he can do to clean up the mess. "If a company complains," he offers meekly, "then they can sue the accountants."

But that's about it. Privately, some accountants concede that, unless managers at local companies start to see the value of releasing accurate financial data, the problem will not go away. "The responsible companies are already changing," says one partner at a big five affiliate in Jakarta. "The bad ones are acting as if nothing has happened."

Diarmid O'Sullivan is a contributor to CFO Asia based in Jakarta.