SUPREME AUDIT BOARD SETTING VISION, LACKING CAPACITY

UNCLAS SECTION 01 OF 02 JAKARTA 002864

SIPDIS

STATE FOR EAP/MTS, EEB/IFD/OIA, INL BOULDIN
MCC FOR AMBASSADOR DANILOVICH AND MORFORD
DEPT PASS USTR
SINGAPORE FOR BAKER
TREASURY FOR IA - BAUKOL
USAID FOR ANE/AA WARD

SENSITIVE
SIPDIS

AIDAC

E.O. 12958: N/A
TAGS: PGOV KMCA KCOR ECON KJUS ID
SUBJECT: SUPREME AUDIT BOARD SETTING VISION, LACKING CAPACITY

REF: JAKARTA 2722

JAKARTA 00002864 001.2 OF 002



1. (SBU) SUMMARY: The Indonesian Supreme Audit Board (BPK) presented
its semiannual audit report to Parliament on October 10, documenting
1,543 cases that caused $854 million in losses to the state. The
BPK performs key government oversight functions, yet lacks the
resources, capacity, and cooperation with other government agencies
to enact its strategic plan. A 2005 law requires all government
bodies to provide financial reporting to the BPK. BPK Chairman Dr.
Anwar Nasution continues to engage in political battles to increase
government accountability. With only 600 auditors, the BPK's
capacity to implement its own responsibilities is far from
comprehensive. End Summary.

BPK Reports $854 Million in Losses to State
--------------


2. (U) On October 10, the BPK reported to Parliament 1,543 cases of
government malfeasance that caused Rp 7.69 trillion ($854 million;
Rp 9,000/USD) in losses to the state. High-profile cases involved
wrongdoing at state-owned investment company PT Bahana Pembina Usaha
Indonesia (BPUI),state-owned airline Merpati, and local
governments. Nasution presented the semiannual audit report to
Parliament and noted the government's reluctance to follow-up on BPK
findings. Since 2004, the BPK has documented 5,717 cases that
caused a loss of state assets. Only 860 of these cases - 15% - have
had full asset recovery. Compared to 2005 findings, the BPK has
reported comparatively fewer cases for 2006. The BPK documented
thousands of cases in 2005 reports, amounting to Rp 48 trillion
($5.33 billion) in losses to the state.

Wide Mandate, Limited Resources
--------------


3. (SBU) Covering 467 local-level governments, 82 government
institutions, all state-owned enterprises, and other special audits,
the BPK is stretched with only 600 auditors and 3,000 total staff.
We met with BPK Director General for Strategic Planning Daeng Nazier
on October 1. (See bio notes in paragraph 10.) BPK's core
responsibility is conducting financial audits of local government
and government institutions. It also does performance audits (i.e.
Health Ministry handling of avian influenza) and special purpose
audits (i.e. Lapindo mud flow, Aceh reconstruction, disaster
management).


4. (U) The BPK evaluates institutions based on adherence to
government accounting standards, effective internal control, and
adequate disclosure. Four possible results are: unqualified
positive with no exceptions (highest),qualified positive with
exceptions, adverse, and disclaimer - unable to make judgment. If
the BPK gives an adverse rating, the institution reviewed has 60
days to implement the findings and recommendations. If problems
continue, the BPK reports the case formally to the Attorney
General's Office. Fraud cases are sent to the police and on a
case-by-case basis to the Corruption Eradication Commission (KPK).
Law enforcement can file penal, civil, or administrative cases based
on BPK findings.


5. (U) In 2006, the BPK evaluated 82 government institutions, such
as the State Logistics Agency (BULOG),Parliament, and the Judicial
Commission. The BPK reported that six institutions earned an
unqualified positive rating (highest score),39 earned qualified
positive ratings, 37 received a disclaimer (unable to make a
judgment),and no institution received an adverse rating. For 2006
audits, 362 of the 467 local governments submitted financial reports
to the BPK. Three local governments (Surabaya, Pontianak, Sambas)
earned an unqualified positive rating, 284 earned a qualified
positive rating, and 56 received a disclaimer judgment. The BPK
gave 19 adverse (negative) ratings, including both East and West
Kalimantan Province.

Limitations of BPK
--------------

JAKARTA 00002864 002.2 OF 002




6. (U) The BPK is severely limited by its personnel - only 3,000
staff - and lack of reach into the provinces. The BPK has only
established 23 of the proposed 33 provincial level offices. Daeng
acknowledged that the 600 BPK auditors are not sufficient to cover
its expansive mandate. A long-discussed merger of the BPK with the
state audit authority, the BPKP, has not materialized and has met
with strong resistance from the BPKP.

BPK's Perspective on Governance Problems
--------------


7. (U) Daeng said that there is a trend across local governments of
inefficient budget formulation, implementation, and monitoring.
Both Aceh and Jakarta province had Rp 2 trillion ($222 million)
remaining in their budgets in 2006. Many have offered reasons for
the slow spending, including the lack of experience of newly elected
officials. Daeng suggested that poor or non-existent budget
planning processes is one cause. Local government officials are
also concerned about corruption charges if they approve large
procurement contracts. Procurement processes have traditionally
been discretionary and a source of graft. Standardized guidelines
and training for procurement officials in Indonesia do not yet
exist.


8. (SBU) BPK Chairman Dr. Anwar Nasution, a Harvard-trained
macroeconomist, has led several political battles to assert the role
of the BPK. President Yudhoyono decided in favor of the BPK in a
controversy with the Supreme Court over the BPK's authority to audit
revenues from court fees (see reftel). However, Daeng was not
optimistic on Supreme Court cooperation in upcoming BPK
investigations. Nasution has also picked a fight with the Director
General of Tax at the Ministry of Finance. Nasution wants BPK
authority to audit the Directorate General of Tax, particularly tax
collection methods. The powerful Directorate General of Tax is
responsible for collecting 70% of government revenue. Nasution's
willingness to push for the BPK's stronger role in auditing is
encouraging. However, the bureaucratic forces resisting the BPK are
still immense.

Comment: Good Vision, Lacking Capacity
--------------


9. (SBU) The BPK has a strong mandate, institutional vision, and
leadership. It has improved its own transparency according to US
GAO recommendations in 2005, including posting reports online.
However, a lack of personnel and financial resources severely limit
the reach and effectiveness of BPK's auditing. BPK's ability to
follow-up on documented malfeasance, such as the 19 adverse opinions
it rendered for 2006 audits, remains to be seen. The BPK can take a
strong role in combating corruption within the government. However,
it will need increased funding and political support to achieve its
mission of government accountability.

Daeng Nazier Bio Notes
--------------


10. (U) Daeng Nazier is Director General for Strategic Planning,
which includes planning, evaluation, research and development, and
education and training at the BPK. Daeng joined the BPK in August
2007 after two years at the Ministry of Home Affairs as the Director
General for Local Government (2005-2007). Daeng worked for the
Ministry of Finance for 30 years, rising to Director General level
(1975-2005).


11. (U) For more information on the BPK, see www.bpk.go.id. The
English website is limited, but does include an audit report on Aceh
reconstruction.

HEFFERN