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November 23, 2009

Audit demand muted as Indonesia suffers auditor shortage

Indonesia’s audit market has not
experienced the rise in demand experts predicted following
mandatory audit reform. There are also capacity concerns plaguing
the nation’s accounting profession.

Mandatory audit for all limited liability
companies with a turnover or assets exceeding IDR50 billion ($5.39
million) was introduced to Indonesia’s Corporate Law in 2008. It
was expected to lead to a boom in business for small to mid-tier
audit practices.

However, compliance appears to be an ongoing
issue under the new law and accounting firms that expected a sudden
increase in audit work have been disappointed.

Indonesia firm growth rates

The agency responsible for enforcing mandatory
audit requirements is the Ministry of Justice. One reason for the
lack of compliance is the absence of enforcement action against
small companies that do not comply.

“The law is not effective yet but
theoretically the market should be growing,” Indonesian Institute
of Accountants president Ahmadi Hadibroto commented. “The impact is
on small and medium accounting firms who expect more business, but
if clients can avoid audit they will avoid it. Banks here do not
put audit as a requirement for small business loans.”

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The IDR50 billion threshold was set at a
higher level than the government’s original suggestion of IDR25
billion in assets after the accounting profession pointed out that
the lower threshold would create too great a demand for audit
services.

This would have been a problem due to the low
number of qualified accountants in Indonesia.

The law has been worded to allow the threshold
for mandatory audit to be reduced to assets worth IDR25 billion in
the future, once the government feels the appropriate time has
arrived.

Developing human resources to cope with future
audit demand is one of the main challenges facing Indonesian firms.
At present, there are about 3,000 qualified CPAs in Indonesia
serving a country of 228 million people.

Part of the reason for this shortage is the
risks involved, including personal liability risk.

“If we can solve all these problems, then we
believe that interest in this profession will grow,” Hadibroto, a
KPMG tax partner, said.

“Accountancy laws and regulations become a
disincentive. The business community is not obliged to prepare
decent financial reports. Audit is a negotiation between auditor
and client. Bright young people will not want to be part of
this.”

Less than 50 newly-qualified CPAs join the
profession each year as most accounting students prefer to work as
internal accountants in the corporate sector. Those joining
accounting firms can work in audit without CPA qualifications.

The main auditor shortage is at senior level
and already affects larger practices.

“It is difficult to get audit partners. Now
about 60 percent of accredited auditors are aged over 50 years,”
Hadibroto said. “It’s a problem for Big Four and mid-tier firms.
What worries accounting firms is the supply of auditors and whether
we can cope.

“The main challenges involve human resources
and replacing licensed auditors. Business is growing but accounting
firms are not sure how long partners will stay.”

David Hayes

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