Role Of The Indonesian Supreme Audit Institution Accounting Essay

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Since the third amendment of the 1945 Constitution (2001), the roles and functions of BPK as the only external audit institution has strengthened to give greater power to examine the public accountability of public sector agencies under the Audit Law (2004). Since then, BPK has reformed its organization. How effective is the new audit legislations in delivering promised outcomes for improving the Indonesian public administration is still a big question.

This paper examines the reforms that have been conducted to improve the transparency of public financial and the accountability of the government in providing public services and furthermore to highlight some of the main features of the analysis, with particular emphasis on those aspects where clear differences have emerged in the practice of audit between the pre- and post-reform periods. The paper then briefly lists a number of recommendations that arise out of the research, before suggesting lines for further research.

The research process included a theoretical conceptual stage and the field research stage. The theoretical conceptual included a literature review that provided a background for study and disclosed the room for improvement in public sector auditing in Indonesia. Moreover, historical analysis of the Indonesia public sector auditing on the crucial time to provide insights into the process of development and change of public sector audits across the time in Indonesia. The field research explored primary and secondary data. In depth interviews conducted with auditors, the members of Parliement (central and local levels), and auditees (public sector employees).

Keywords: public sector auditing, financial transparency, accountability, performance, public sector reform, Indonesia.


This paper examines the role of the Indonesian Supreme Audit Institution (BPK) in financial transparency and performance accountability. Moreover, it addresses comparisons between pre and post audit reform in Indonesia. The research scope is limited to external, rather than internal, public sector auditing, due to concern over the performance and accountability of the Indonesian public sector.

Since 1946 (from the establishment of the Audit Board of the Republic of Indonesia, or BPK), public sector auditing in Indonesia has not significantly evolved in promoting transparency and accountability of government. The BPK was not as functional as it should have been and resulted in an ineffective public sector system and public administration, and lack of public accountability.

Since 1998, Indonesia has achieved a critical transition from a centralised authoritarian government in the New Order Era to a decentralised democratic government during the Reformation Era. As a result of fiscal decentralisation policy in 1999, the allocation for the regional expenditure budget has increased annually. For instance, the budget allocation in 2005, 2006, 2007 and 2008 reached Rp.150.5 trillion, Rp.226.2 trillion, Rp.252.5 trillion and Rp.271.8 trillion respectively. The regional budget expansion requires greater public accountability and standard of governance in managing public finance (Booth 1999:14). Dwiyanto (2003: 108-109) pointed out that decentralisation has worsened the practice of corruption, collusion and nepotism at the regional level, both Executive and Legislative. As a result, corruption skyrocketed and spread not only in the central government, but also in the regional governments and Legislatives. This condition requires BPK to work hard to perform its roles and functions to examine public sector accountability in managing and spending public resources, and to prevent misuse or abuse of public funds and resources.

From 2001, as mandated by the third amendment of 1945 Constitution, BPK was confirmed as the only external audit institution in Indonesia. BPK has worked very hard to provide better performance in auditing and to gain trust from the public. However, some analysts have still identified poor implementation of the Indonesian public sector auditing in performing its roles. As stated by Booth (2005: 216), the bad performance of public sector auditing was an indication of bad governance in Indonesia. Moreover, studies from the Asian Development Bank (ADB 2003; ADB 2004b; ADB 2004c) of Indonesian public sector auditing indicated problems of legal obstacles, absence of public accountability, unsettled audit institutional arrangements, insufficient numbers of qualified auditors and low public awareness of audit functions. Combined, these have influence ineffectiveness of public sector auditing in Indonesia. Therefore, in 2007, BPK was one of the most priorities of public sector institution that had to reform its organisation. This was due to the importance of the audit functions of BPK to improve the accountability and performance of the public sector.

Under the leadership of the President of the Republic of Indonesia, Bambang Yudhoyono, the government attempted to prioritise reducing corruption and creating good governance by reforming bureaucracy and public administration. This is his statement:

Success of development depends on the quality of the administrative order as well as the effectiveness and performance of the bureaucracy. Therefore, to improve the performance of the bureaucracy and to create good governance; gradual and planned bureaucracy reform is carried out by the government. Such reform embraces the balanced improvement of the work system, performance measurement, and implementation of discipline as well as remuneration. On this level, the reform process has started to be carried out by the Ministry of Finance, the Supreme Court, and the Audit Board. (Yudhoyono 2007: 3)

This statement indicates seriousness of President Yudhoyono to improve Indonesian performance in public administration and bureaucracy. The first step in achieving this purpose is by reforming institutions that are closely related to state finance, administration of justice and public sector auditing.

The reform started with a significant change in Indonesian public sector financial management and auditing that influence the reform on institutional, organizational arrangements and policies. The significant audit reforms were covered by the national media such as Republika (3rd October 2004), which stated that the Government of the Republic of Indonesia had made strong efforts since the third amendment of the Constitution in 2001. The legislation and policies from 2003-2007 related to public sector auditing and accounting showed the seriousness of the government's attempts to enhance accountability and transparency of state finances through the improvement of the roles and functions of public sector auditing. As stated by a senior official, in order to rebuild the Indonesian economy, it is been necessary to redevelop the accounting and auditing legal system (Rakyat Merdeka 2nd December 2006).

Regrettably, the considerable growth and change of external public sector auditing in Indonesia has gone largely unnoticed. Research on the issue of audit reporting for accountability and performance and the factors influencing its ineffectiveness on Indonesian public sector auditing has had little attention from academics and professionals. Moreover, there has so far been a lack of detailed studies related to the comparative effectiveness of external public sector auditing in Indonesia before and after the reforms of the early 2000s. There is also lack of research into the reasons behind the continuing failure (impediments) of audit effectiveness in Indonesia comparing the two periods (before and after audit reform in 2001).

Thus, there are two major problems that motivate a study on the topic on external public sector auditing in Indonesia. The first problem is the limited interest by public administration scholars on the research of external public sector auditing reports, in particular, the lack of detailed case studies on the struggles of BPK after the reform in improving public accountability of the Executive. The second problem is that although there have been some reforms and regulations to improve the roles and functions of the external public sector audits, there are still some factors that have significantly impeded the public sector audit effectiveness and these require deeper research. In addition, it is hoped that this study will be able to contribute to the general understanding of external public sector auditing in Indonesia. Particularly, the factors influencing the quality of audit reports for improving the transparency, performance and accountability of the public sector in public administration academic literature.

Research Design and Method

In providing more comprehension of the emerging field of Indonesian external public sector auditing issues, the study utilised an exploratory research design. The research process included a theoretical conceptual stage and the field research stage. The theoretical conceptual stage included a literature review that provided background for study and disclosed the room for improvement in public sector auditing in Indonesia. Moreover, a historical analysis of Indonesia public sector auditing including the crucial time period of Dutch colonisation (before 1945) until the Reformation Era (1998-present) was described in this study. This provides insights into the process of development and change regarding public sector auditing in Indonesia. The field research explored primary and secondary data. The primary data was collected from questionnaires (see Appendix A) to the respondents, observations at BPK, and unstructured in-depth interviews ranging from half an hour to two hours with the informants.

The informants for primary data collection came from different group of respondents and informants, namely: public sector agencies (auditees), BPK auditors and management, Parliament and regional Parliaments Members, General Secretariat of Parliament, and others (such as researcher, auditors from ANAO, ex-auditor of BPK, team leader of ADB, and secondment participants), to provide greater insight into the changing nature of external public sector audits in Indonesia. The secondary data was collected from government documents (regulations, reports, statistical data, audit results and photos), printed media (newspapers, magazines), academic papers presented in local and international conferences, and relevant national/international seminars.

Analysis of the data was mainly qualitative descriptive with an applied triangulation method for verification. For ensuring the validity of data and information, data was collected from multiple resources including in-depth interviews, observations and document analysis (Creswell 2009: 199). As cited by Becker and Bryman (2004: 408), the triangulation method was used to enrich and check the validity and reliability of collected data and information. Solomon and Trotman (2003: 408) strongly believed that the triangulation method plays a valuable role in advancing audit studies. The various responses from questionnaires and information during the interviews, observations in BPK offices, and several secondary data sets were used in this study to check the validity and objectivity of data and information.

Non-probability with specific purposive sampling was the chosen technique, considering the complexity and specific characteristics of informants (Blaikie 2000: 212-213; May 1997: 87; Sproull 1988: 117). In order to provide reliable and valid data and information, key informants were selected through screening criteria related to their competencies or experience with public sector auditing. The study also applied the snowball sampling method whereby the number of respondents was determined based on the needs of information and suggestions from previous informants.

The primary collection of data proceeded through the following stages: (i) consulting with the thesis supervisors on the questionnaires based on the development of concepts and theories related to the quality of public sector auditing, (ii) getting approval from the Secretary General of BPK, audited entities, and Secretary General of Parliament to distribute the questionnaires and to interview the key informants (BPK auditors, auditees and Members of Parliament), (iii) collecting data from questionnaires to get preliminary information, (iv) doing further interviews from 5th November 2006 to 25th March 2007 during the first fieldwork phase, (v) classifying data and information based on the criteria to answer the research questions (vi) analysing data in Canberra from May to July 2007, (vii) collecting more data and information during the second fieldwork phase from 4th - 9th August 2007, (viii) analysing data and writing up the research results, (ix) conducting further interviews and dialogue with key informants on 2nd September to 23rd December 2009 to get more data and information to uncover several sensitive cases and fast developments relating to public sector auditing in Indonesia.

Sixty-one key informants were interviewed. From the questionnaires, there were totaled 140 responded over 180 distributed. Those who came from BPK consisted of (i) BPK Board Members as leaders who decide on strategic reform and policies for BPK, (ii) top and middle managers from different bureaus under the General Secretariat of BPK that manages resources and support for audit roles and functions, (iv) different groups of auditors of state finances (AKN) and representative offices that examine the financial reports and performance of public sector auditees, (iv) trainees (auditors who took part in some trainings), and (v) project managers who manage audit reform projects.

Respondents from the BPK auditors can be divided into five AKNs, namely AKN I (auditors for the Ministry of Defence, the Air Force, the Navy, the Police, and the Ministry of Transportation), AKN II (auditors for the Central Bank of Indonesia and the Ministry of Finance), AKN III (auditors for the Ministry of National Education, the Ministry of Health, and non-departmental agencies), AKN IV (auditors for all the regional governments), and AKN V (auditors for state-owned enterprises and banks). BPK's regional offices of West Java Province in Bandung can be selected as representative of other regional offices in this research as following reasons: (i) the same characteristics as most representatives' offices of BPK in terms of organisational structure, quality of new auditors, and under chief of state finance auditors (AKN) IV for local governments, (ii) the most densely populated province in Indonesia with about 40.918 million people (BPS 2008) and Bandung is the most dense city in West Java with 686,400 households (BPS West Java Province 2007), (iii) the second largest number of audited entities of BPK after East Java Province, and (iv) the reasonable distance between the central government in Jakarta and West Java Province to reduce the risk of difficulties during data collection.

Respondents and informants from the Executive as auditees are divided into seven categories. The first category was from central government (departments), namely the Ministry of Health (MOH), the Ministry of National Education (MONE), and the Ministry of Foreign Affairs (MOFA). MOH and MONE are selected because they (i) received large amounts of the government's national policy subsidies to their budgets,(ii) accommodated the increasing demands for accountability in managing funds from international organisations and donors in Indonesia, and (iii) were priority institutions to be audited by BPK on the expenditure side. MOFA was chosen because of Indonesia's recent policy on strengthening international relations, and the Ministry of Home Affairs because of the decentralisation policy. The second category was from central government (non-departments), namely the manager of the State Audit Reform-Sectors Development Project (STAR SDP) from the National Development Planning Board (Bappenas) and the Financial and Development Supervisory Board (BPKP) who provide information related to program reforms of the Indonesian public sector audit. The third category was from the Central Bank of Indonesia as one of the new and important auditees for BPK since audit reform. The fourth category was from state-owned enterprises (SOEs), namely the National Electricity Company (PLN) and the National Oil Company (Pertamina), due to the important issue of electricity and fuel subsidies. The fifth category was from regional-owned enterprises, namely the Water Drinking Regional Enterprise (PDAM) in Bogor and Sukabumi, which provides clean drinking water and sanitation for people in regional areas. The sixth category was from state-owned bank, namely the Mandiri Bank that had the case of non-performance loans (NPL). The seventh category was from auditees from local governments, namely the West Java Provincial Government, Local Secretariat of West Java Province, and Bogor City local government. The eighth category was from Members of Parliament at both the central (DPR) and regional levels (DPRD), as primary stakeholders of BPK. The DPRD Members are from five different commissions and three different factions, namely Golkar Party (PG), National Mandate Party (PAN), and Prosperous Justice Party (PKS). Informants from DPRDs are Members of West Java Province and Kuningan District.

Other respondents and informants included:(i) researchers and academics, (ii) a manager from the Asian Development Bank (as an international organisation that has transferred the largest amount of money to reform Indonesia's public sector external auditing), (iii) B-Trust, a Non Government Organisation, and (iv) auditors from ANAO for getting information related to a secondment program in financial and performance audits and other collaboration with BPK.

The Role of Public Auditing

The following sections describe the role of public auditing in increasing public accountability, improving effectiveness and efficiency in public administration, and achieving good governance based on some academic references.

Increasing Public Accountability

Some scholars have argued that auditing has contributed to promoting the implementation of accountability in the public sector. Brooks and Parisher (1995: 72-83) claimed that public sector auditing is the key element in examining and evaluating government accountability in using public money and providing services to the public. Predengast (2003: 951) believed that the ability of bureaucracies to allocate public goods leads to a high level of inefficiency in the public sector. Public sector auditing can be an essential element in ensuring efficiency, effectiveness and accountability of the government to the public (Barrett 2000: 67).

In addition, Guthrie and English (1997:12) emphasised that the role of the Auditor General is a vital part of the Westminster accountability mechanism to ensure the accountability of the Executive Government (the President, Governors, Regents and Mayors) to public needs and interests. Similarly, Nosworthy (1999: 4) believed that an independent audit institution has the function to examine government agencies in order to hold the Executive to be accountable to the public in using public funds and resources.

According to Bovens (2005: 196-199), accountability is closely related to administrative accountability with a form of diagonal accountability between the public sector audit institution and with both, Parliaments and government agencies as its stakeholders. Audit institutions report their findings on financial accountability and performance of auditees to their stakeholders. Accountability of government agencies to the public and Parliament is called 'horizontal accountability.' Moreover, Day and Klein (1987: 10-12) underlined political accountability as the function of Parliament in reviewing the government agencies to hold them to account for their actions.

Coy and Dixon (2004: 81) also argued that there are three discerning report paradigms, namely stewardship, decision usefulness and public accountability. Stewardship "entails accountability between agent and principal"; decision usefulness considers "the information needs of existing and potential investors, lenders and similar suppliers of capital"; and public accountability "takes a broader perspective that encompasses social, political and wider economic interest".

Gray (1993: 3) also underlined that most government concern over the last three decades has been about how to control public expenditure and how to strengthen public accountability with auditing and evaluation instruments. Auditors have been aware that the understanding of accountability and openness in the public sector allows the public to criticize. The criticism can force the government to change and reform (Funnell 2003: 114). Uhr (1999: 100) underlined that an audit body is an accountability agency that holds auditees to be accountable in managing public funds and providing better public services.

Therefore, there is no doubt that auditing in the public sector has significantly affected assurance of government's accountability in managing and using public funds and other public resources for providing better benefits and services for the public.

Imrpoving Effectiveness and Efficiency in Public Administration

In line with the political demands for greater accountability in providing better services to the public and efficiency in managing public resources, public sector auditing became a necessity for the public sector in recent decades (Power 2003: 191). Members of Parliament as representative of the public have greater concern about the efficiency and effectiveness of the quality of public sector goods and services. Durrant (2000: 80) highlighted that public sector auditing is a prominent aspect for encouraging public sector agencies to improve their effectiveness and efficiency in public administration.

Efficiency in using public funds and resources reduces the resources needed to provide public goods and services, while effectiveness provides a certain result (outputs, outcomes, impacts and benefits) on the quality of goods and services provided by the government. By preventing the waste of public money, fraud and misappropriation expenditure, the government can allocate funds for a greater number and quality of public goods and services. As argued by Devas (1989: 271), external auditing can ensure all government's income is "collected, accounted for and properly" used. Moreover, efficiency can provide lower costs of goods and services that influences tariff setting by the government, which is important for a country to be able to compete internationally (McIntosh 1997: 123-129). Funnel and Cooper (1998: 283) argued that effective public sector auditing can significantly improve public sector performance.

One of the big problems in managing public sector funds and resources is the possibility of misuse, fraud and corruption. Bertsk (2000: 61) argued that the role of auditing for uncovering and investigating fraud and corruption has been recognised in many countries. Oiken (2007: 200-248) provided evidence of a substantive reduction in missing expenditure in over 600 Indonesian village road projects, from 27.7 percent to 19.2 percent, after being audited by the external audit agency from a baseline 4 percent to 100 percent. Raman and Wilson (1994:517-38) added that auditing can contribute specifically to controlling and ensuring compliance with laws and regulations that prevent threats to society, including the practices of money laundering, fraud and corruption.

Therefore, effective public sector auditing can provide greater efficiency and effectiveness in public administration by examining the public sector agencies in preventing and reducing waste, abuse, fraud and corruption. This can improve the performance of public administration and public goods and services for the benefit of the public.

Achieving Good Governance

Public auditing that holds for a transparency, accountability, efficiency, effectiveness, openness, preventing of corruption and excess expenditure, can promise good governance (Shimomura 2003: 167). This is also supported by Curtin and Dekker (2005: 36-37) who emphasised the principles of accountability, transparency, effectiveness and participation in public administration. They agreed that providing government accounting system and public sector auditing can provide accountability of public sector agencies which lead to good governance. Moreover, Barret (1996:137-146) argued that the audit institution is a part of the governance framework that influences the economic and social development.

An effective auditing practice is an essential precondition for good governance (Doig 1995:151). Similarly, Mulgan (2003: 24) found that the Auditor-General makes a significant contribution to the public accountability and public sector reform in Australia by standing up for values of transparency, probity and good governance. Innes (1997: 706) believed that audit reports enhance the credibility of the financial statements that are useful for investors in, and management of, the public sector.

Therefore, public sector auditing is an important tool for resulting in good governance in the long term. Auditing provides assurance of an appropriate use of resources and prevents misuse, fraud, abuse and corruption of public funds and resources. It can maintain and improve public trust, including that of local and foreign investors and also tax payers.

Audit Reform under the Reformation Era (1999-Present)

Due to the bureaucratic culture present during the New Order Era, reform of the bureaucracy, seen as a prerequisite of good governance, has provided a big challenge as power was dispersed horizontally and vertically, which has had implications for the dispersion of corruption (Lele 2009: 84). Indonesian people's demand for 'good governance' as necessary for the country's development (Bakti 2000: 3) has forced the Constitution to be amended.

Audit reform started in 2001 when the third amendment of the 1945 Constitution (Seno 2002: 4-6) declared BPK's status and function to be the only state external audit institution and required improvements in its independence and professionalism. The amended Constitution builds up a 'checks and balances' system that had been lost for nearly 55 years (1946-2001). In addition, the chairman of BPK is no longer appointed by the President to conduct its audit function without interference from the Executive. The function of BPK in examining the management and accountability of government and in assisting the legislative to conduct its role has been strengthened. The third amendment of the 1945 Constitution (2001) provides one special Chapter (VIIIA) on BPK, consisting of Articles 23E, 23F and 23G. These articles strengthen the position, roles and functions of BPK as an audit institution coherently and clearly. All BPK Members are high officials of the state, but not government officials; they are not subject to criminal proceedings in conducting their duties and must have the prior consent of the Head of State.

Figure 1: Position of BPK under the Third Amendment of the 1945 Constitution (2001)

Source: 'The Audit Board of the Republic of Indonesia (BPK RI): enhancing transparency and accountability in state finance with independency, integrity and professionalism', Jakarta, p. 14 (BPK RI January 2007).

Figure 1 (above) presents the position of BPK under the third Amendment of the1945 Constitution (2001) as parallel with MPR, DPR, the President, Supreme Court, Constitutional Court (MK), the Senate (DPD) and the Judicial Commission (KY). The People's Consultative Assembly (MPR) has been curtailed. The power of the Executive has been transferred to the Legislative both at the central and regional level, as the standard practice of democracies. Moreover, after the amendment of the 1945 Constitution, power between MPR and DPR was separated. The amended has provided a clear fundamental ruling directive to reform state governance with strong commitment and strategies.

Policies in Accountancy and Auditing for Transparency and Accountability

In the Reformation Era, the Indonesian government has reformed laws on state finance and auditing (2003-2004). These laws reform the accounting system from using a single entry accounting system to a double entry system, and from cash-based accounting into a modified accruals-based accounting system that helps BPK in examining the financial and non-financial performance of public sector agencies. This is also noted by McCrae and Aiken (2000: 285), who said that public sector accounting in other developed countries has adopted an accruals-based accounting system from the private sector to focus on performance in government financial reports. Financial reports from public sector agencies are required to be based on the new government accounting standards (GOI 2005) where all public resources are recorded in integrated government reports that help the internal and external auditors to monitor the financial and liquidity conditions of both central and regional governments.

The Law on State Finances (GOI 2003) forces the government to apply the new government accounting system (SAP) to improve the transparency and accountability of public sector agencies in managing state finances. Articles 30 and 31 of this law stipulate the requirement for BPK to audit Executive agencies' financial statements including balance sheets, budget realisation, cash flow statements, and notes to financial statements, and to submit the audit results to Parliament no later than six months after the end of the budget year. This regulation was effectively implemented in 2006 and BPK audits began adhering to the new system in 2007.

During the New Order Era, economic policies were influenced by developmentalism and crony capitalism. This resulted in significant government debt increases and economic growth and development becoming concentrated in a few groups or individuals (Bakti 2000b: 40). There was a lack of fairness and transparency relating to the use of public finances and resources. After the audit reform, all foreign aid projects or loan programs had to be audited by BPK. An economist and middle official of Bandung City local government argued that the requirement of Parliament's approval in obtaining foreign aid received a lot of interference from legislators. Moreover, he thought that the Indonesian government is unable to be flexible in determining fiscal policies, which slows down the government's capacity to improve economic conditions. This statement is an example of an auditee who disagrees with the new regulations related to reporting state/local government loans as an indication of lack of transparency, accountability and competency at government level.

Besides the Law on State Finance (2003), Article 56, Paragraph 3 of the Law on State Treasury (GOI 2004) stipulates that government is required to submit financial statements to BPK within three months of the end of the financial year. BPK also has additional work in regulating state losses. These include the mechanism of officials to pay state losses based on audit findings and also the sanctions, and the responsibility of employers or the heads of units to report any state losses to the heads of departments or regional governments and BPK (BPK RI 2007a: 6). This law puts pressure on the BPK to follow technical procedures to implement the law. The Head of the Law Bureau stated:

BPK is arranging the procedure of compensation for state losses for the treasurer and in consultation with government, in this case, the Ministry of Finance, Ministry of Law and Human Rights and the Ministry of Internal Affairs (for regional treasurer). We hope in two months it will be done.

Moreover, according to a key informant from the Law Bureau of BPK during the second fieldwork study, in early 2007, BPK completed the regulations of compensation for the procedure for any kind of state loss. This indicates that BPK has a lot of work to complete the operational regulations for criminal activities leading to state or regional losses.

Law of Audit (2004) and Law on BPK (2006)

The Indonesian government did not change its Audit Law from the Netherlands/colonial era until the Audit Law was legalised on the 19th July 2004 to replace the IARStaadsblad 1933 Number 320. The Audit Law (GOI 2004) regulates the following: (i) definition of auditing and auditors, (ii) scope of auditing and auditing standards, (iii) freedom and independence of audit work, (iv) access to information for auditors, (v) authority to evaluate internal controls,(vi) audit results and follow up, (vii) imposition of compensation for state losses, and (viii) administration of criminal penalties for any person who does not comply with the responsibility to follow up the BPK's audit findings. Detailed explanations of the content and implementation of the Audit Law are provided in the following Chapters.

After two years discussion, on 30th October 2006, the Law on BPK replaced the former Law on BPK (GOI 1973) to provide a legal basis for public sector auditing that harmonised with the third amendment of the 1945 Constitution in 2001 and state finances law package of 2003-2004 (GOI 2006). There are four important changes from the former Law on BPK, namely: (1) restating the mandate, function, position and responsibility, (2) enlarging the number of Board Members, (3) establishing regional offices in all provinces, and (4) confirming the only external audit institution in the Republic of Indonesia. This law was initiated by DPR instead of BPK itself. To reform Indonesian public sector auditing and the organisation of BPK, the Law on BPK was based on international best practice for public sector auditing. On 8th January 2007, BPK celebrated its 60th anniversary (1947-2007). This means that since the establishment of BPK, this was the first time that BPK is under the Law on BPK, which provides the legitimate power and authority to be a free and independent audit institution to achieve effective public sector auditing.

Regulation on State Finances Audit Standards and Code of Conducts (2007)

Paragraph 6, Article 6 of the Law on BPK (GOI 2006) requires BPK to regulate further for implementing its duties auditing state finance management and accountability. BPK provided new audit standards. The process of providing this new audit standards should be carried out precisely (due process) and based on benchmarks from international best practice as required by Article 5 of the Audit Law (GOI 2004).

The consultant team of BPK came from the economics faculty of the University of Indonesia and SAIs from the United States (GAO), Netherlands (ARK) and New Zealand (ANZ). Feedback was getting from public hearings, which come from professionals; researchers; academics; government officials; and the public. The new audit standards of BPK, namely Standard Pemeriksaan Keuangan Negara (SPKN), were launched in January 2007.

Table 1 (below) presents the differences between SAP and SPKN (BPK RI 2007g).

Table : Differences between Former (SAP 1995) and New (SPKN 2007) Audit Standards


SAP 1995

SPKN 2007

Legal basis

Law 5/1973

Law 15/2004 and Law 15/2006

Number of paragraphs

27 (20 main paragraphs and seven additional paragraphs)

46 (33 main paragraphs and 13 additional paragraphs)

Development concept

Not clearly regulated

A part of the professional standard of SPKN, formed a SPKN committee.


BPK and other state internal audit institutions and public accountants based on contracts

BPK, public accountants and other parties that work for and on behalf of BPK

Requirement of staff capacities in conducting state audits

Individuals had to be registered accountants

Has expertise in the field of finance, collectively has certification, responsible person, should have a valid professional certificate.

Uncover internal audit weaknesses

General (narrative)

Findings (condition, criteria, causes, effects)

Responses to recommendations

Not available

Shall be conducted


Not regulated

Regulated separately

Title of state finances audit report

Auditor independence report

Report of audit result on the financial statements.

Source: Adapted from information from the Jakarta BPK office and was made available in the interview during the second field study on 9th August 2007.

Table 1 suggests that SPKN regulates important issues including responses to recommendations, auditor requirements, internal audit weaknesses, users, and non-compliance. Starting on 7th March 2007, BPK auditors, public accountants on behalf of BPK and other internal auditorsbegan using SPKN as guidelines for planning, implementing, evaluating and reviewing audit reports.

In addition, on 22nd August 2007, BPK introduced a Code of Ethic to regulate the integrity and professionalism of leaders of BPK Board Members and auditors in performing their duties and using their authority. As believed by Dalglish and Miller (2010: 16), integrity is one of the most significant abilities for a leader in emerging changes of globalisation. However, as long as BPK employees are public servants, they have to obey regulations from BKN (State Personnel Board). Hoadley (2006: 127) found that leaders and civil servants in Indonesia do everything according to the golden rule of 'as long as the boss is satisfied' (asal Bapak senang) and rewards and performance were not based on merit system. The seniority and paternalistic system still strongly drives public administrators and auditors and if they do not satisfy their boss, it might be difficult for them to keep a good performance record.

Table Legal Changes since Audit Reform (2001) in Indonesia


Legal Changes

Before Audit Reform (1946-2000)

After Audit Reform (2001-present)



Government auditing was stipulated in only one paragraph of the 1945 Constitution

BPK roles, functions and position are stipulated coherently and clearly in one chapter, three articles and seven paragraphs in the third amendment of the 1945 Constitution.


Laws about BPK

Laws about BPK from 1946-1973 did not view BPK as an independent audit institution

The new Law on BPK (2006) is based on international best practice and stipulates roles and functions of BPK to be an independent audit institution


Government Audit Standards

Some important items were not stipulated in former BPK audit standards (SAP 1995)

In 2007, BPK's SPKN is developed from international best practice with guidelines for three types of public sector auditing (financial, performance and specific purposes audits)


Code of Conduct

A Code of Conduct was not available, only auditors' declaration without legal enforcement

Code of Ethical Conduct and an Honorary Board of Code of Ethics were established in 2007 to maintain the performance and professionalism of BPK Board Members and auditors.

Source: Adapted from different legal sources related to government auditing before and after the audit reform of 2001

Therefore, since audit reform, the authority and power of BPK has become stronger with the amendment of regulations. Table 2 (above) summarises the legal changes related to public sector auditing in Indonesia before (1946-2000) and after (2001-present) the 2001 audit reform. This table shows that before audit reform, the legal basis of government auditing was ambiguous, which resulted in ineffective government auditing functions. After audit reform, some significant changes in the roles and functions of BPK and its standards occurred. The legal changes were developed based on international best practice to provide effective public sector auditing implementation and to maintain the integrity and professionalism of BPK Board Members and auditors.

Reforming Audit Institutions in Indonesia

Before the audit reform, the roles and functions of internal and external audit institutions lacked clarity and often overlapped. The duplication and unclear functions among audit institutions caused ineffectiveness, with high costs of auditing activities and increased pressure on auditees being reviewed. As a result, although Indonesia had experience with public sector auditing for more than five decades (1945-2001), the audit system still suffered from a lack of accountability and quality in examining public sector institutions. The following sections describe the audit institutions related to BPK functions before and after audit reform.

Limited and Duplicated BPK Functions Pre Audit Reform (2001)

During the New Order Era, before audit reform, Presidential Decree Number 31 in 1983 mandated the government to establish an internal audit institution, namely the Financial and Development Supervisory Board (BPKP), which sat under the Coordinating Minister for Development Supervision and Administrative Reforms. BPKP was considered the right arm of the President and had responsibility for both internal inspections and external auditing. Nonetheless, this caused a duplication of audit functions between BPK and BPKP to conduct post audit function (BPK RI 2005a; BPKP 2004; BPKP 2005). However, BPK and BPK had huge differences in budgets and resources.

Table 3 shows that BPKP had a much greater auditing resources. The amount of budget and representative offices of BPK were much higher compared with BPK. As a result, BPKP had stronger power to conduct auditing with larger number of auditees in regional governments, while BPK could only audit a limited number of public sector agencies at the central and local levels. Moreover, BPKP had better quality and numbers of auditors. Thus, BPKP had more than double the number of auditors with much better qualifications to audit SOEs compared with BPK. In addition, BPKP also had a greater number of computers as a modern technology to support audit tasks compared to BPK. This resulted in reducing the BPK's power and operational capability and impeded its achievement of goals and purposes in auditing public sector agencies.

Table Resources of BPK and BPKP (2004)









- Staff administration



- Auditors




Level of education

-Senior high school and diploma



-S1 (Bachelor Degree))



-S2 and S3 (Master and Doctorate Degrees)




Representative offices








Four-wheel vehicles





Rp.273 billion

Rp.421 billion

Source: Adapted from Nasution, A., 2006. 'The role of BPK in promoting transparency and accountability of the state finance', The Audit Forum, IX(2), pp. 6-11.

The issue of duplicated functions of BPK and the internal audit institutions was argued by the BPK Chairman (Kontan 10th March 2007) as follows:

The function of the internal controller is to build the effectiveness and efficiency of the state financial management accountability system. It will avoid duplication and conflict of authority, thus it will create work harmonisation. The government should organise these internal control institutions.

This statement suggested that the functions and roles of internal audit institutions are crucial for effective public financial management and performance of public sector organisations. Effective internal auditing can help external auditors to better examine the financial accountability and performance of public sector agencies.

After audit reform, the Presidential Decree on BPKP Number 103 of 2001(GOI 2001) replaced the Presidential Decree on BPKP in 1983. The law stipulated the roles and functions of BPKP as professional government internal auditor in the area of financial and development supervision. Moreover, Article 114, Paragraph 4 of Presidential Decree Number 9 of 2004 (GOI 2004) stated that BPKP does not have the responsibility to conduct audit functions for regional government agencies. Since then, BPKP has only helped government agencies in managing and reporting state finances based on the new government accounting standards. In addition, BPKP provides manuals of accountability for public sector agencies through government internal auditors or APIP (Aparat Pengawasan Internal Pemerintah).The manuals include guidance on operational audit planning, monitoring and evaluation of follow-up activities; technical sampling (random sampling) during the process of audits; and government loss indemnity and strategies against national corruption.

Since the 1999 decentralisation policy, regional Inspectorates have the full authority to audit and control regional governments in managing public resources. However, most of regional Inspectorates still lack the necessary number of qualified internal auditors. As a result, BPKP also helps regional government in managing public finances.

Therefore, since audit reform, the Indonesian government and legislative restructured the function of audit public sector institutions to obtain effective and well functioning audits for the accountability framework. The Constitution and existing laws confirm that BPK is the only external audit institution and the Central and Regional Inspectorates are internal audit institutions.

Table Indonesian External and Internal Audit Institutions and their Report to Main Stakeholder(s)

External Auditing

Internal Auditing

Central Level

Regional Level

Central Level

Audit Institutions



General Inspectorates

Report to Main Stakeholders

National Parliament or DPR(s)

Regional Parliament(s) or DPRD(s)

Minister/head of institution(s)

Table 4 (above) presents the structure of Indonesia's external and internal government audit institutions in terms of their functions and reporting. Internal audit institutions report to the head of Ministry/institution/local government, while BPK reports to the Parliament. Therefore, internal audit institutions are a part of the Executive, while BPK is a state audit institution that is independent from the influence of the Executive and other parties. This indicates the clear and separate roles and functions of external and internal audit institutions in Indonesia. BPK audits all public agencies and reports to DPR (Parliament) and DPRDs (regional Parliaments). Internal auditing in central government is conducted by general Inspectorates that report to the Minister or head of public sector agencies at the central level. The regional inspectorate conducts internal auditing for regional government and reports to the head of the regional government (governor, Regent, or Mayor). For state-owned enterprises/regional-owned enterprises, there is an internal controller unit (SPI). All of these internal audit institutions have the function of controlling and auditing the internal management of public sector agencies.

Organisational Change of BPK

Since BPK has a new mandate and greater authority to conduct all external auditing of public sector agencies, the Audit Board has committed to achieve its strategic purposes. BPK has the vision "To become a state finances audit institution, which is independent, professional and plays an active role in improving the accountability and transparency of state finances", and the mission "To audit state finance management and accountability in order to improve the accountability and transparency of state finances and to play an active role in achieving good, clean and transparent governance". The mission is broken down into four strategic goals: (1) to establish BPK as an independent and professional state finance audit institution, (2) to meet the needs and expectations of stakeholders, (3) to establish BPK as the central regulator in the field of auditing state finance management and accountability in accordance with its legal and legislative mandates, and (4) to encourage the achievement of good governance of state finance management and accountability (BPK RI 2006a: 3-4). The strategic objectives indicate a new commitment and value of BPK to provide better performance for its stakeholders.

To achieve its purposes, BPK has reformed its organisation to improve operational capabilities both internally and externally, including rightsizing organisation, improving staff competency, providing better information technology and so forth. Although the priority of BPK in the short and middle terms is still very much concerned with financial audits, it is also eager to help the functions of Parliament by conducting specific purpose auditing and to conduct performance auditing for examining public sector agencies' efficiency, effectiveness and economy.

Conclusion and Recommendations

Based on this comprehensive study of the role of Indonesian Supreme Audit Institution (BPK) in financial and performance accountability, conclusion and some recommendations are suggested to make BPK a more excellent and reputable audit institution. Although some effort has been made and some reforms have been achieved, BPK still needs to improve its weaknesses and to be aware of threats from the external environment.


Prior to Indonesian independence in 1945, public administration and auditing was dominated by the Dutch administration and Javanese culture, which strongly influenced the bureaucratic culture with patrimonial and patronisation practices. The President was a state leader who elected by the representative of Indonesian people and was powerful and strongly influenced to the bureaucracy and government, including the BPK. Although the past position of BPK was under the 1945 Constitution and MPR, BPK had no independence from the government or was less powerful than the government. The audit reports from BPK were reported to Parliament which was majority dominated by the Golkar party, as the ruling party and single winner in the election. Hence, during the New Order Era, corruption became systemic under the power of the President (Soeharto) and his cronies. There were no external audit institutions independently examining public financial management and government accountability.

The duplication of audit functions in the public sector occurred not only between BPK and internal audit institutions, but also among the internal audit institutions themselves. BPKP, an internal audit institution, had the same roles and functions as BPK in conducting post audits, instead of examining the planning and management of the internal public sector agencies' financial budgets and reports. However, BPKP had a much higher budget, and more qualified auditors, representative offices, and other audit resources from which to conduct public sector audits. As a result, BPKP had a greater auditing scope in regional governments, SOEs and ROEs, while BPK only audited central government. This meant the function and role of BPK to examine the public accountability of public sector agencies was diminished by the reduction in resources and audit scope. The duplication of audit functions burdened both state finances and auditees.

Since the third amendment of the 1945 Constitution (2001), the roles and functions of BPK as the only external audit institution are stated clearly. BPK has gradually been given greater power to examine the public accountability of public sector agencies under the Audit Law (GOI 2004). Since then, BPK has reformed its organisation and strengthened its roles and functions. Table 5 compares the functions; laws and types of auditing, position, and standards before and after audit reform. The table illustrates the Reformation of the system and regulations of public sector auditing in Indonesia.

Table Comparison of Internal and External Public Sector Auditing before and after Audit Reform (2001)


Public Sector Auditing

Before Reform

After Reform


External audit institution(s)


Only BPK

- The function of BPK

Limited auditing of central government

Auditing all state finances of central and local governments, SOEs and ROEs

- The function of BPKP

Auditised central government, SOEs, and ROEs

Supporting internal auditing functions

-Reporting to

The President and Parliament

Direct to Parliament and regional Parliaments

- Basic laws

ICW and IAR regulations

Law on BPK (1965)

Law on BPK (1973)

The third amendment of the 1945 Constitution, State Finances Package Laws (2003-2004) and Law on BPK (2006)

- Auditing standards

SAP (1995)

SPKN (2007)

- Types of Audit

Financial and compliance audits

Financial, performance and specific purpose audits

- Position of BPK

A high institution (a limited power of state institution)

A state institution (stronger position)


Internal audit institution(s)

Bawasda, IG, SPI, Main Inspectorate

BPKP, Bawasda, IG, Main Inspectorate

-The function

Post auditing

Pre-auditing for management of state finances

-Basic laws

Colonial era of the Netherlands, IAR (1933)

Law on State Finances (2003), Law on Treasury, and Audit Law (GOI 2004).

-Accounting standards

Not available

Based on Government Accounting standards(2005)

How effective are the new audit legislations in delivering promised outcomes for improving the Indonesian public administration remains a big question. This study examines the quality of, and the factors influencing, BPK reports to improve public accountability of government and public administration. Some Indonesian scholars have written academic publications on aspects of public sector auditing such as Bastian (2007) from Gajah Mada University, Harun (2007) from Tadulako University, Pujiono and Jati (2007) from Surabaya University and Udayana University, respectively. However, all the authors come from the accounting department of their universities and analysed Indonesian public sector auditing from accounting problems, policies and practices perspective. Harun (2007) and Bastian (2007) gave a little mention about Indonesia's public sector audit laws and institutions, but none gave an overall systemic account of the quality of audit reporting and the reasons for its effectiveness or ineffectiveness. This thesis intends to help remedy this research gap and to provide a reliable overview and analysis of BPK's current performance.

The recommendations are divided into three aspects namely: (1) legal basis, (2) institutional, and (3) audit resources.

Legal Basis Aspect

To strengthen the role and functions of the ethics board of BPK.

To implement audit law and audit standards effectively with law enforcement and sanctions for any BPK Members and auditors Member who do not comply with regulations, such as accepting bribes or other gratification from auditees.

To keep proposing judicial reviews of the tax and State Owned Enterprises (SOEs) Laws that impede BPK from auditing national tax revenues and SOEs.

Institutional Aspect

To communicate effectively between BPK, Parliament and government about the importance of accessing data and information for auditing tax revenues, Supreme Court revenues, and SOEs, as mandated by the Constitution.

To protect auditors who uncover sensitive cases (such as fraud, corruption and other irregularities) from external pressures, to maintain their audit independence and the quality of audit reports. .

To build networking with public sector auditors' professional association, public policy and public administration groups to develop auditor expertise in measuring organisational performance.

Audit Resources Aspect

To create stronger commitment and integrity of BPK Members in providing objective and credible information in audit reports through training and education resources that focus on psychomotor and cognitive targets, such as revitalisation, integrity and anti-corruption ethics training programs.

To improve the quality of audit resources in all new BPK representative offices, mainly for IT that allows auditors to (i) access data and information relating to the activities of the audit office and public sector regulations and documents, (ii) to share information between auditors and other interest groups, (iii) to get faster and cheaper communication with other SAIs, and (iv) to help auditors detect fraud and to conduct audits of disasters.