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PP RUEHCHI RUEHDT RUEHHM
DE RUEHJA #6018/01 1320849
ZNR UUUUU ZZH
P 120849Z MAY 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 4115
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 9782
RUEHBJ/AMEMBASSY BEIJING 3425
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RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHINGTON DC 0017
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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 
 
JAKARTA 00006018  001.2 OF 004 
 
 
¶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 
 
SIPDIS 
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 
 
SIPDIS 
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 
 
JAKARTA 00006018  002.2 OF 004 
 
 
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 
 
JAKARTA 00006018  003.2 OF 004 
 
 
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 
 
JAKARTA 00006018  004.2 OF 004 
 
 
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