INDONESIA - SUPREME AUDIT BOARD LOSING ITS WAY

UNCLAS SECTION 01 OF 04 JAKARTA 006018

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR EAP/MTS AND EB/IFD/ODF
TREASURY FOR IA-ANNA JEWELL
DEPARTMENT PASS AID
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO
DEPARTMENT PASS GAO--WILLIAMS-BRIDGERS

E.O. 12598: N/A
TAGS: ECON EFIN EAID KCOR PGOV ID
SUBJECT: INDONESIA - SUPREME AUDIT BOARD LOSING ITS WAY

REF: 05 JAKARTA 6277

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1. (SBU) Summary. The Supreme Audit Agency (BPK),one of
Indonesia's key anti-corruption institutions, appears losing
its way because of weak leadership, internal power struggles
and a lack of reform. The BPK's first "Advisory Board on
Tsunami-Related Audit" conference April 24-25 in Jakarta

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came off as poorly prepared, and supreme auditors from
Europe, Asia and the Middle East recommended BPK improve
audit planning goals and procedures. The conference showed
that the BPK was not prepared to audit one of the best
functioning agencies in government -- the Agency for
Rehabilitation and Reconstruction of Aceh and Nias (BRR) --
which confirmed our views of the BPK's overall lack of
direction. BPK Chairman Dr. Anwar Nasution has proven a
poor and often absent manager, and done little to make the
BPK more effective and independent. Nasution, who lacks
formal audit training, has struggled with a political board
and has little control over budget and staff. The Ministry
of Finance has begun drafting a new regulation to clarify
the roles of Indonesia's four overlapping audit
institutions. Developing more credible audit and inspector
general functions will comprise an important component in
Indonesia's corruption prevention efforts and overall
governance reform. End Summary.

Advisory Board Meeting a Dud
--------------


2. (SBU) The BPK hosted auditors from the International
Organization of Supreme Audit Institutions (INTOSAI) at an
April 24-25 "First Meeting of the BPK Advisory Board on
Tsunami-Related Audit". The event left many attendees

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disappointed, especially compared to the BPK's well-attended
April 2005 tsunami audit conference (ref). President Susilo
Bambang Yudhoyono (SBY) opened last year's conference, which
featured a major presentation by U.S. Comptroller General
David Walker. This year's event proved much smaller and
lacked focus. At some of the sessions, INTOSAI advisors and
the BPK spent significant amounts of time simply trying to
understand each other. BPK officials appeared not to
understand basic audit procedures, objectives for tsunami
audits, and how to set audit parameters with the auditee.
BPK's lack of preparation perplexed and frustrated INTOSAI
attendees from the supreme audit offices of Australia,
Denmark, Netherlands, Norway, Japan, Sweden, Saudi Arabia,
Korea and the UK. "The BPK missed a great opportunity
here," one observer noted. An international journalist
attending commented at the end, "Can someone tell me what
these two days were about?"


3. (SBU) This year's BPK presentations repeated facts
related to tsunami damage and had little discussion of audit
strategies and procedures. At one point the BPK asked how
it could audit the two-thirds of Aceh reconstruction funds
flowing through international funds and non-governmental
organization (NGO) channels. Given that this activity does
not form part of BPK's already huge and largely unfulfilled
mandate - bilateral and NGO donors have their own audit
guidelines - the remark sounded out of place and told much
about the agency's failure to dig into its core task of
auditing Government of Indonesia (GOI) tsunami
reconstruction spending. The head of the Agency for
Rehabilitation and Reconstruction of Aceh and Nias (BRR),
Kuntoro Mangkusubroto, made an excellent presentation on
reconstruction challenges including rebuilding human
resources--replacing a school is easier than replacing a
teacher, he noted. Kuntoro acknowledged tension between the
need for accountability and proceeding quickly and flexibly
with reconstruction.

Audit Plan Over-Ambitious, Lacks Focus
--------------


4. (SBU) The BPK's presented an "Audit Action Plan for 2006"
at the conference that many participants found hastily
drafted, rudimentary and unrealistic. The BPK did not give
INTOSAI Steering Committee members a copy in advance and

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senior advisors to BPK Chairman Nasution did not participate
in the drafting. Neither did the BPK give the Asian
Development Bank (ADB),which has a multi-million dollar
program to assist Indonesia's auditors, a copy of the plan
in advance nor an opportunity to comment on it. The plan
focuses on three areas:

--Auditing the financial statements of BRR;
--Performance audit of the rehabilitation and reconstruction
process and specific sectors;
--Audit of specific Areas: internal controls, computer
systems, procurement.


5. (SBU) According to the plan, BPK will audit five tsunami-
related sectors in 2006 including infrastructure, housing
and land, education, health, economy and business. When
INTOSAI Steering Committee members asked whether BPK would
start or finish the audits in 2006, BPK had no answer. The
2007 plan includes each of these sectors but adds the
religious and social sectors. The BPK had not consulted
with BRR on the parameters of the audit plan, and dismissed
suggestions that it should have.


6. (SBU) INTOSAI attendees noted that the plan would prove
ambitious even for an institution with experience in
performance auditing, and that each sector audit could take
12-15 months. They asked Nasution to comment on areas he
considered high risk; he responded that infrastructure has
the highest risk, with housing currently the most visible
sector. He said the public has high expectations and
claimed the BPK would "audit everything." INTOSAI
recommended that BPK seek to perform smaller, more
manageable audits in areas judged high risks to the economy.
INTOSAI also suggested that BPK adopt an approach to
undertake a combination of sector-based and cross-sectoral
audits. They suggested that BPK needed to communicate with
bodies under audit to initiate beneficial change. BRR
representatives said they have ramped up their own internal
audit office with donor technical assistance.

What's Wrong with BPK?
--------------


7. (SBU) Nasution, a Harvard-trained economist and former
Senior Deputy Governor of Bank Indonesia, noted that he
feels out of place heading the BPK without any experience as
an auditor. He has provided lackluster leadership in recent
months, spending a great deal of time at conferences and
lecturing overseas, and not in Jakarta. At one point during
the tsunami audit conference, Nasution made an apology of
sorts: "Indonesia is in a difficult transition from an
authoritarian regime to democracy...Previously, audit
reports were only discussed internally with the government:
we were not independent. Please don't have high
expectations of us. We are in the process of learning and
building capacity. We need your help to broaden our vision
and our ability." (Comment: While on one level true, the
BPK has received generous donor assistance and training over
the past year, which seems to have made little impact on
performance.)


8. (SBU) BPK's board is approved by Parliament, and with two
of seven members party politicians, has proven a major
obstacle to rapid reform. One commentator said he knows no
other supreme audit institutions that have a politically-
appointed board. The board has undermined Nasution both
privately and publicly on several occasions. BPK's internal
management and public statements often display "mixed and
confusing signals," the commentator noted. One advisor
noted that the BPK's structure is at odds with its
operational needs. Nasution also does not have control of
his organization's budget, in the hands of Secretary General
Dharma Bhakti. With no real control over budget or staff,
and a political board that does not support him, Nasution
has little power.


9. (SBU) In addition to leadership weaknesses, the BPK has
other internal challenges. Advisors have noted that the

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BPK's audit reports, poorly structured, do not present a
user-friendly executive summary, and do not highlight the
areas of greatest concern for the government, the auditee or
the public. The BPK's information technology and internal
communications systems seem inadequate. It has not yet
adopted international audit standards in many areas and
lacks capacity to perform performance and investigative
audits. Perhaps most important, the BPK does not have a
system for prioritizing audits based on risk, nor does it
employ consistent follow-up on audit recommendations.

Too Many Auditors, Not Enough Direction
--------------


10. (SBU) Indonesia has four sets of audit institutions that
frequently overlap and conflict with each other:

--BPK (15 regional offices, 3000 staff).
--Inspectors General (IGs) in most ministries and
Agencies.
--The internal GOI Comptroller of Finance and Development or
BPKP (28 offices, 6000 staff).
--Provincial and local auditors or BAWASDAS (over 400
offices at provincial and district levels, of varying
capacity).

Decentralization and the transition to democracy has
benefited these organizations, but has resulted in a lack of
clarity, overlapping mandates and authorities, and
uncoordinated audit work. The BPK's authority and budget
have grown, but it still lacks capacity to conduct
meaningful performance and investigative audits. BAWASDAs,
gaining authority, lack trained staff. Ministry Inspector
General (IG) offices appear inadequately staffed, under-
funded, and largely dependent on the commitment of their
ministers. The Minister of Finance has cited USAID's
activities to develop IG capacity at her Ministry as an
exemplary example of donor support helping "change
mindsets." Few Ministry IG offices perform meaningful audit
or oversight work. One advisor suggested Indonesia needs a
national "IG Act" to define and regularize the roles,
functions, and authorities of the IGs.


11. (SBU) Two advisors to Indonesia's audit institutions
have noted that the BPKP forms part of the problem. Under
former President Soeharto, the BPKP ensure that Soeharto
received his share of revenues and kept local officials in
line, sometimes through intimidation. Although the BPKP has
a great deal of audit expertise, it has lost most of its
mandate to coordinate and perform internal GOI audits. It,
nonetheless, retains its staff of 6000 and its budget, and
the other three audit institutions mistrust and resent it.
Advisors and consultants have offered several suggestions
for reorganizing Indonesia's audit agencies:

--Dissolving the BPKP and moving its auditors and budget to
other audit institutions;
--Giving BPKP a coordination function over IGs and
BAWASDAs;
--Merging the BPKP with the BPK.


12. (SBU) The Ministry of Finance (MOF) has begun
considering a new government regulation to rationalize audit
and internal control functions of the government. One
Embassy contact said BPKP head Arie Soelandro is working
hard behind the scenes to keep as much power as possible.
He seeks to control all non-BPK audit functions and have all
BAWASDAs and IGs report through BPKP. However, the contact
noted, "That would be like putting Dracula in charge of the
blood bank."

Comment
--------------


13. (SBU) Although donors have focused most of their anti-
corruption assistance on the Anti-Corruption Commission
(KPK) and other law enforcement organizations, well-
functioning Inspectors General and effective auditing remain

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crucial to Indonesia's drive to reduce corruption. Like
many other GOI agencies, the BPK struggles to shake off its
Soeharto-era legacy of direct political control and largely
meaningless audit activity. Unfortunately for the BPK,
Nasution does not seem the right man for the job--his
commitment to the hard work of reform pales in comparison to
some of SBY's more energetic ministers, particularly Finance
Minister Sri Mulyani Indrawati. We have experienced
Nasution's failure to exert control over his agency
firsthand: he failed to stop a campaign by senior staff to
oust two highly qualified USAID advisors only a few weeks
after they completed a tactical implementation plan for
improving BPK performance. While the BPK drifts,
fortunately most of the money for Aceh reconstruction moves
through donors and NGOs with audit controls in place. On-
budget funds move through BRR, which has much stronger
leadership, standards and guidelines for project management
and procurement, and robust donor support.
PASCOE