Auditing Standard Violations

PT Eastman Christensen with KPMG Siddharta Siddharta &

Harsono

Compiled to Fulfill The Assignment of AuditingSeptember 26th, 2013

by :

Fella Distiara ( 8335116619 )Ruth Citra Permata ( 8335118330 )

State University of JakartaFaculty of Economics

Departement of AccountingUndergraduate Program

NewsFamous CPA firm (KAP) in Jakarta, KPMG Siddharta Siddharta & Harsono (KPMG-SSH) and Soni Harsono defendants in the U.S. Courts. KPMG-SSH names would have been familiar to the executives of the companies in Jakarta. KAP is also one of the few major accounting firm mainstay Bank Restructuring Agency (IBRA)’s in the restructuring of many financial institutions in Indonesia. However, news of the KPMG-SSH issued by the Securities Exchange Commission (SEC) on September 17, 2001 and not something that can be said for the firm's performance. Because the SEC announced that KPMG-SSH and his senior partner, Sony B. Harsono, alleged to have committed bribery of officials of the tax office in Jakarta.

The CaseThe U.S. has a law called the Foreign Corrupt Practices Act (FCPA), a law which prohibits corrupt practices conducted in a foreign realm. The law allows the U.S. government's legal action against foreign nationals suspected of involvement in corruption with the U.S. side, either corporate or individual.

In March 1999, Sonny Harsono, a partner of KPMG Siddharta Siddharta & Harsono ("KPMG-SSH"), allegedly authorized KPMG-SSH personnel to bribe an Indonesian tax official on behalf of PT Eastman Christensen ("PTEC"), an Indonesian company beneficially owned by Baker Hughes Incorporated ("Baker Hughes") that domisiled in Texas, AS. PTEC itself is a party in a lawsuit the SEC and the U.S. Justice Department, asked KPMG-SSH to bribe officials of the tax office in South Jakarta (PTEC domiciled in South Jakarta). The order was intended that the amount of tax liability for PTEC kept to the minimum. KPMG-SSH allegedly agreed to make the illicit payment for the purpose of influencing an Indonesian tax official to reduce a tax assessment for PTEC from $3.2 million to $270,000.

Alleged bribery involving Harsono initiated by a very significant amount. According to the lawsuit, KPMG-SSH has agreed to make illegal payments. Previously, Harsono require direct instruction from Baker Hughes (and not of PT EC) to the KPMG-SSH to pay the tax office officials. On the basis of the instructions, KPMG-SSH's office is willing to do illicit.

Long story short, bribery transaction between the employees who has been given a mandate by unscrupulous officials Harsono with the tax office took place. Then to bury it Harsono bribery ordered employees to issue a bill (invoice) on behalf of KPMG.

To conceal the allegedly improper payment, Harsono allegedly authorized KPMG-SSH to generate an invoice that included $75,000 for payment to the Indonesian tax official and $68,000 for KMPG-SSH's fees for services rendered and applicable taxes. Although made as if the cost of the services KPMG-SSH, it actually represents a fictitious bill of funds bribe of U.S. $ 75 thousand to be given to the tax office officials. While the rest is the cost of debt service and taxes KAP real.

After receiving the invoice, PTEC allegedly paid KPMG-SSH $143,000 and improperly recorded the transaction as payment for professional services rendered. On March 23, 1999, PTEC received a tax assessment of approximately $270,000 from the Indonesian government, almost $3 million lower than the original assessment. If the accusations are true, then the difference between the amount of tax is the amount embezzled losses suffered by the state.

Final judgement

Department Legal consequences of the peace itself is that the defendants, both KPMG-SSH and Harsono, banned for a foul, giving help and advice that may violate the anti-bribery provisions in the FCPA. Simultaneously, they are also prohibited from violating provisions of the accounting and internal reporting company under the Securities Exchange Act of 1934.

After Baker Hughes's General Counsel and FCPA Advisor discovered the subject payment, Baker Hughes: (a) attempted to stop the payment to KPMG-SSH; (b) voluntarily and promptly disclosed the alleged misconduct to the S.E.C. and D.O.J.; and (c) instructed KPMG-SSH not to make the payment to the Indonesian tax official and to return the entire amount paid to KPMG-SSH.

Of two different laws, there are three articles that allegedly violated by KPMG-SSH and Harsono. For FCPA, KPMG-SSH and Harsono charged with violate Section 104A (a) (1), (2) and (3). As for the Securities Exchange Act Capital Markets Law U.S. -, Section 30A (a) (1), (2), (3) and Section 13 (b) (2) (B).

Against violations of anti-bribery provisions set forth in the FCPA, the SEC or Department of Justice may file a lawsuit with a fine of up to U.S. $ 10 thousand. The suit not only be addressed on companies violating, but also to the directors, officers, employees, or agents of the company concerned. In fact, it also includes its shareholders.

Analysis

In this case, we know that KPMG and Sony B. Harsono has proven bribing tax officials in Indonesia amounted to U.S. $ 75 thousand. To get around this expenditure, issued false invoices for professional fees to be paid by KPMG’s client, PT Easman Christensen, a subsidiary of Baker Hughes Inc. which is listed on the New York Stock Exchange.

The order was intended that the amount of tax liability for PTEC kept to the minimum. Although it made as if the cost of the services KPMG-SSH, it actually represents a fictitious bill of funds bribe of U.S. $ 75 thousand to be given to the tax office officials. While the rest is the cost of KAP service and the real taxes debt.

In this case, KPMG-SSH and Harsono had violated:1. Section 13(b)(2)(a) of the Exchange Act by making and keeping books, records and accountants, which,

in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the issuer, or gift, or the authorization of the payment of any money or the giving of anything of value to: (1) Any foreign official; (2) any foreign political party or official thereof or any candidate for foreign political office; or (3) any person, while knowing that ll or a portion of such money or thing of value will be given, directly or indirectly, to any foreign official, to any foreign political party or official thereof, or to any candidate for foreign political office; whether such payment or gifts prohibited by Section 30A(a) of the Exchange Act, excepted by Section 30A(b) of the Exchange Act, or is subject to the affirmative defense under Section 30A(c) of the Exchange Act.

2. Section 13(b)(2)(B) of the Exchange Act by devising and maintaining a system of internal accounting control sufficient to provide reasonable assurance that: (1) transactions are executed in accordance with management’s general or specific authorization; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statement and to maintain accountability for assets. (3) access to assets is permitted only in accordance with management’s general or specific authorization; and (4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

KPMG-Siddharta & Harsono also violated several provisions of the Generally Accepted Auditing Standards. In this case, those violated standards is :

1. General Standard number 2 : The auditor must maintain independence in mental attitude in all matters relating to the audit.Accountants who have attempted bribe on behalf of clients as in the case above can be considered as a dishonesty and unfairness in performing their duties . in this case, we can see that the accountant has neglected his integrity and his independence as a public accountant.

2. Standard of Fieldwork number 2 : The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit proceduresIn this case KPMG - Siddharta Siddharta & Harsono didn’t objective in doing their audit, they was biased to defend the interests of its client , PT Easman Christensen, in order to obtain relief from the payment of taxes , and then propose to PT Easman Christensen for bribing Indonesian tax officials . The result is that the tax liability should have been $ 3.2 million reduced to only $ 270 thousand. KPMG did

assess the risk of material statement of the financial statement, so they can track whether there is any fraud or not. But actually the KPMG itself did fraud for their own benefit.

3. General Standard number 3 : The auditor must exercise due professional care in the performance of the audit and the preparation of the report.In this case , KPMG does not consider the adverse effects that must be borne by the state for the benefit of their clients and continuity of their services to be used by its client , PT Easman Christensen . Their Professional skills are not used for positive action , but it leads to negative actions , namely outsmart and bribing tax officials , so it is obviously not considered to be a very unprofessional.In this case , KPMG - Siddharta Siddharta & Harsono clearly violates the principles of professional , because :

a. Suggesting things should not be done to their clients , namely bribery to get their tax payment relief .

b. Conspired with a third party ( the tax man ) for the benefit of clients and the organization , resulting in a tax loss to the state of the sector .

c. Actions taken by KPMG - Siddharta Siddharta & Harsono relate to conflict of interest .

An auditor in a issuing a report should consider about making an informative report to be always in accordance with auditing standards applicable in Indonesia, " informative disclosures in the financial statements should be deemed adequate , unless otherwise stated in the auditor's report . " Audit report should be informative , so that the wearer can make decisions carefully and also right . But in this case , KPMG - Siddharta Siddharta & Harsono makes statements PTEC tax liabilities to a minimum. With such manipulation , of course users can not know the report is clear and certain about the state of spending and tax difficult decisions carefully and precisely .

This Tax bribery case should not happen , if every auditor has knowledge , understanding and applying ethics depthly in the implementation of his professional work . Professional work has to be done in a professional manner as well , with a fully grounded in particular moral and ethical standards .