Rabu, 26 November 2008


IG Agung Rai, MA, Ak.
Member of Audit Board of the Republic of Indonesia (BPK RI)

It is indeed a great honor for me to be able to participate in the panel discussion on “Exploring the Dark Side and Strengthening the Bright side of Accounting “. As all of us know, our country Indonesia is still in high ranking position for the most corrupted countries in the world. Furthermore, the corruption has penetrated into all sectors and activities in our life. Since we are now combating corruption, I think we need knowledge and experience regarding FA because FA is a good tool to overcome and to disclose the impact of accounting fraud. That is why, this topic is very relevant to the current situation in our beloved country.

Before we proceed, allow me also to express my appreciation to the organizing committee that has arranged this program successfully and chosen such interesting and important topics to be elaborated and discussed.

For this opportunity, we the panelists are asked to explore some topics regarding the dark side of accounting, namely:
1. What is the Forensic Accounting (FA) and Accounting Fraud (FA);
2. The relation between FA with AF;
3. Example of AF in private sector as well as in public sector;
4. How the forensic accountant disclose the AF; and
5. How FA deals with AF.

If you see my curriculum vitae, I have spent almost all my career period as a Government Accountant, especially in auditing the public sector. As such, my presentation will address mainly the FA and AF in the public sector rather than in the private sector.

1. What is Forensic Accounting

Now let us start with the forensic accounting. The Merriam Webster’s Collegiate Dictionary (10th edition) define the word ‘forensic’ as:

1fo-ren-sic adj[L forensic public, fr. forum forum] (1659) 1: belonging to, used in, or suitable to court of judicature or to public discussion and debate 2: ARGUMENTATIVE, RHETORICAL 3: relating or dealing with the application of scientific knowledge to legal problems <~medicine~> <~science~> <~pathologist~> <~experts~>

From the above definition, we could infer that forensic covers the application of various knowledge and science into legal problems. In fact, there are already many examples of the uses of forensic in other disciplines, such forensic anthropologist, forensic chemist, and forensic dentist. Forensic accounting is another example of the use of forensic that relates to accounting discipline.

Regarding the forensic in accounting discipline, D. Larry Crumbley, editor-in-chief of Journal of Forensic Accounting, has written:

Simply put, forensic accounting is legally accurate accounting. That is, accounting that is sustainable in some adversarial legal proceeding, or within some judicial or administrative review.

D. Larry Crumbley used more general terms, i.e. legal proceedings and judicial or administrative review, to describe the use of forensic in accounting discipline. As such, forensic accounting involves three disciplines, i.e., the accountancy, the law, and the audit.

There are other terms that relate or to be perceived to have the same meaning with forensic accounting, i.e., fraud auditing, investigative accounting, litigation support, and valuation analysis. However, there are no clear definitions regarding these terms yet .

In their book1, Bologna and Lindquist explained that some traditional accountants differentiated forensic accounting from fraud auditing. According to traditional group, the forensic auditing relates to the proactive methods and approach to investigate fraud. The purpose of the fraud auditing is to obtain evidence to proof that fraud has happened. Then, the forensic accountant will be called when the evidence already gathered, or when the suspicions become allegations, complaints, or discovery.

The Association of Certified Fraud Examiners (ACFE) identified some differences between traditional audit and fraud examination (forensic accounting):

(Source: ACFE)

In Indonesia, the development of forensic accounting got its momentum when we experienced financial crisis in 1998-1999. During this period, many forensic accountings have been undertaken as part of the loan provisions. This development then accelerated when new elected government created Komisi Pemberantasan Korupsi (Corruption Eradication Commission).

In the public sector, the practice forensic accounting usually carried out by governmental institutions dealing with legal matter, such as the Police, the Attorney General, PPATK, and the Komisi Pemberantasan Korupsi. In addition to these institutions, the BPK also has authority to perform and has performed forensic accounting for several years. This authority stipulated in Law 15/2004 and Law 15/2006. According to these laws, BPK has a mandate to conduct three types of audit: Financial Audit, Performance Audit, and Special Purpose Audit. The forensic accounting comes under the definition of Special Purpose Audit.

Similar to general practices, the practice of forensic accounting in public sector deal with the fraud. The already well-known type of fraud is corruption. There many examples of corruption that will be elaborated further in the following sessions.

2. What is accounting fraud

Our understanding about the nature of accounting is the service activities, which provide quantitative information regarding business or economic activities. The objective of accounting is to provide management with financial-related information that will be used in decision making. The information is provided through a set of financial reports, which are the output of series procedures to record, summarize, and report economic transactions and activities.

We might never imagine that such well-developed process of recording and reporting transactions could be used as a tool to commit fraud.

Simply defined, fraud is a violation of the law, planned deceit, and dishonesty. It consists of various types of white collar crime, including embezzlement, larceny, concealment of information, concealment of liabilities, concealment of facts, engineering of facts, and corruption (Rezaee, 2002) .

In terms of business, frauds related to financial accounting sometimes referred to as occupational fraud and abuse. The ACFE defined this type of fraud as: The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets. The three major types of occupational fraud are: Corruption, Asset
Misappropriation, and Fraudulent Statements (which include financial statement schemes).

There are many theories explaining why people commit fraud. One of them is agency problem that derived from the agency theory. The agency theory, firstly introduced in 1976 by Jensen and Mackling , explained the principal-agent relationship between management and the owners. Referring to this theory, fraud happens because managements – the agent – behave not in the interest of the owners, but for his/her individual interest (opportunistic behaviors).

Another theory is called asymmetric information. This theory is based upon the asymmetric access to information between the principals - the owners, and the agents - managements. These differences generate two types of agent’s behaviors, i.e., hidden action and hidden information. By hiddening some actions and/or information, managements could commit fraudulent activities for their benefit.

Donald R Cressey identified three common causes that can trigger fraud. He depicted these causes in a triangle, which then is known as “the fraud triangle”.

First, there is pressure to engage in fraud, such as economical needs.

Second, there is opportunity that allows individual to commit fraud or to conceal dishonest acts.

Third, the ability to justify an act and to exploit legal loopholes to cover up/conceal fraud.

Moreover, ACFE has identified types of fraud and presented in a chart that is called “fraud tree”

(Source: ACFE)

3. Relation between Forensic Accounting and Accounting Fraud

Referring to above explanations, we could see that forensic accounting is carried out to investigate financial statement-related fraud, by using some investigative audit techniques. Several traditional audit techniques can be used to perform investigative audit, such as physical examination, documentation review, reperformance, and inquiries.

With the increase in importance and demand, the forensic accounting/ investigative audit has emerged to be a profession. Being a certified fraud investigator, which is called Certified Fraud Examiner (CFE), give the accountants/auditors credentials that highly valued by business society. However, to be a good fraud auditors/forensic accountants need additional skills and knowledge.

Howard D Davia advised five rules that should be followed when performing forensic accountant/forensic audit:
1. Avoid becoming prematurely entangled in developing endless facts and circumstances of a case of fraud, to the exclusion of identifying a perpetrator or perpetrators, and proving their involvement.
2. Fraud auditors must constantly strive to prove a perpetrator’s intent to commit fraud.
3. Be creative, think like a perpetrator, do not predictable.
4. Fraud auditing detection procedures must take into account that much fraud involves conspiracy
5. Proactive fraud detection strategy must consider that fraud may appear in the accounting records as distinct entries or hosted entries, and in some instances may not appear in the records at all.

4. Frauds in Indonesia

Before we proceed further, let’s see where our country is in global corruption index. One of the indicators of corruption index widely used is Corruption Perception Index (CPI). This index is developed by Transparency International, a non-governmental organization concerned with the fighting against corruption in the world.

(Source: www.transparency.org)

Prof. Dr. Soemitro once estimated that the fraud in procurement process in our country could involve as much as 30% of procurement budget. However, some procurement fraud cases bring into the court indicated that the amount of money money involved could be much larger.

One of the largest fraud incidence is the distribution BI’s Liquidity Supports (BLBI) during and after financial crisis of 1997. This fraud involved as large money as Rp 650 triliun and spread over 10 years. The natures of BI’s Liquidity Support which are involving large amount of money but lacking strong controls is good conditions for fraud to happen.

There are many other examples how fraud has penetrated deeply into sectors and segments in government, such as: 1. laws; 2. defence; 3. Banking system; 4. Local governments; 5. State-owned enterprises; and 6. Parlement.

5. How the forensic accountant disclose the accounting fraud

Every perpetrator always tries to find ways to commit fraud successfully. The scheme he/she used usually follows the cycle of accountancy. This cycle can be divided into three phases, i.e., the input, the process, and the output phase.

(Source: Ilya Avianti, Transaction Fraud in Financial Statements as a Modus of Corruption, in The Audit Forum, August 2008)

In the input phase, where transaction documents are prepared and captured, the fraud scheme involve such activities as forging documents, engineering fictitious documents, creating corroborating documents, and omitting illegal transactions.

The fraud in the process phase usually committed by exploiting the weaknesses in the internal control systems, issuing internal policies to justify committed or planned fraud, changing or manipulating financial records, and misapplication of accounting principles.

In the output phase, when the financial reports are produced, the fraud usually committed by disclosing inadequately and by exploiting the loopholes in the Financial Accounting Standards.

For the governmental sector, the incidence of fraud also follows the same process. It happens in all phases of budgeting cycle. The government budgeting cycle is depicted in the following graph.

Some examples of fraud in government sector are: (1) reallocating between expenditures account, (2) not recording revenue transactions, (3) recording fake transactions, (4) overvaluing assets, and (5) inadequate disclosure.

(Source: I Gusti Agung Rai, Audit Kinerja pada Sektor Publik: Konsep, Praktik, dan Studi Kasus, Penerbit Salemba Empat, 2008)

The fundamental principle that has proven to be effective in conducting forensic accounting, that is follow the money. One example of the application of this principle is in the Bank Bali Case.

(Source: Kompas, 7 Nopember 1999)

6. How forensic accountant deals with fraud accounting

As mentioned in the beginning session, the objective of the forensic accounting is to proof whether the incidence of fraud happened or not. As such at the end of the audit, the forensic accountant/investigative auditors should be able to provide adequate, sufficient, and reliable evidence to answer the audit objective. If the auditors concluded that there is a incidence of fraud, the evidence obtained during the audit could be used for litigation.

In general, the process of identifying and then proofing the incidence of fraud is as follow (ACFE):

(Source: ACFE)

Article 14 of Law 15/2004, stated that should during the audit BPK found the indication of fraud, the BPK should report in appropriate time such incidences to the legal institutions authorized by law to deal with such incidences.


To conclude my presentation, please allow me once again to express my sincere appreciation to Himpunan Mahasiswa Jurusan Akuntansi Fakultas Ekonomi Brawijaya, The OC, and last but least, distinguished colleague panelists and dear audiences in this seminar.

Jakarta, November 26, 2008

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