Financial Accountability & Management, 30(2), May 2014, 0267-4424

Public Sector Accounting Reform at

Local Government Level in Indonesia
ROSS H. MCLEOD AND HARUN HARUN

Abstract:
This paper describes and analyses the challenges encountered in
attempting to reform public sector accounting in Indonesia, the main objective of
which is to combat corruption and thus help improve governance. Our observations
suggest that this reform has been seriously hindered by a lack of staff with adequate
accounting skills a problem exacerbated by the decision to continue to prepare
old-style cash-based reports alongside the new accrual-based reports. Our key
contribution is to demonstrate the danger of rushing to copy public sector financial
management techniques from quite different country contexts, especially when there
are significant differences of opinion as to the appropriate design of these reforms
among the influential policy-making agencies.

Keywords: public sector, corruption, accrual accounting, New Public Management

INTRODUCTION

In the last three decades public sector accounting reforms have been central to
the adoption of New Public Management (NPM) practices in the public sector
(Lapsley and Pallot, 2000; Christensen, 2007; Christiaens and Rommel, 2008;

The first author is Adjunct Associate Professor in the Indonesia Project, Crawford School
of Public Policy, ANU College of Asia and the Pacific, The Australian National University,
Canberra. The second author is Assistant Professor in the School of Information Systems
and Accounting, Faculty of Business, Government and Law, The University of Canberra,
Australia. A shorter version of this paper was published previously as McLeod, R.H. and H.
Harun (2009), Improving District and Municipal Governance in Indonesia: The Role of Public Sector
Accounting Reform, Policy Brief 3, Australia Indonesia Governance Research Partnership, The
Australian National University: Canberra. Parts of it also appeared in Kuncoro, M., T. Widodo
and R.H. McLeod (2009), Survey of Recent Developments, Bulletin of Indonesian Economic
Studies, pp. 15176. The authors are grateful to the Australia-Indonesia Governance Research
Partnership for financial assistance that facilitated the research reported here. The authors
also benefited from comments by participants in the Indonesia Council Open Conference at
the University of Sydney (1517 July, 2009).
Address for correspondence: Dr. Harun Harun, School of Information Systems and
Accounting, Faculty of Business, Government & Law, The University of Canberra, Canberra,
Australia.
e-mail: Harun.Harun@canberra.edu.au


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Christensen and Parker, 2010; Ball and Craig, 2010; Qian et al., 2011; and
Pollanena and Loiselle-Lappointe, 2012). In New Zealand, the UK and Australia,
for example, accrual accounting was a key feature of the introduction of businessstyle accounting practices in public sector organisations (Guthrie, 1998; Lapsley
and Pallot, 2000; Baker and Rennie, 2006; ter Bogt, 2008; and Christensen and
Parker, 2010). A similar trend has been apparent recently in developing nations
such as Malaysia (Nor-Aziah and Scapens, 2007; and Saleh, 2007), Thailand
(Upping and Oliver, 2010) and Ghana (Rahaman, 2009). Since 2003 Indonesia
has followed a similar path, with the promulgation of new laws on accounting
and auditing in the public sector (Marwata and Alam, 2006; Harun, 2007; and
Harun and Robinson, 2010).
Indonesias enactment of Law No. 17 on State Finance (Undang-undang
Keuangan Negara) in 2003 is seen as the beginning of a process of radical
reform in the field of public sector financial reporting (Harun et al., 2012).
This was followed by the introduction of two complementary laws: Law No. 1
on State Treasury (Undang-undang Perbendaharaan Negara) and Law No. 15 on
Auditing of State Finances (Undang-undang Pemeriksaan Keuangan Negara), both in
2004. The essence of these laws was that much greater attention than hitherto
was to be paid to transparency and accountability in relation to the use of
resources entrusted to the state by the people. The new laws were backed
up by the formulation in 2005 of a new set of standards for public sector
accounting (Standar Akuntansi Pemerintahan, SAP). According to the elucidation
of Law 17/2003, an important objective of adopting the new accounting system
is to support the governments efforts to combat corruption.
The key feature of SAP is the introduction of double-entry accrual accounting
and reporting systems adapted from recommendations of the International
Federation of Accountants, the International Accounting Standards Committee,
the International Monetary Fund, the Indonesian Institute of Accountants,
the Financial Accounting Standards Board (USA) and Indonesias Generally
Accepted Accounting Principles in place of the single-entry accounting system
inherited from the Dutch.1 In reality, however, the traditional cash-based
budgetary or cameral accounting system (Monsen, 2002) inherited from the
colonial era in the form of Laporan Anggaran dan Realisasi Pendapatan dan
Pembelanjaan Negara/Daerah (Report on Budgeted and Realised State/Region
Revenue and Spending) is still used in parallel with the new system for
planning, authorising, recognising and recording all government spending at
central and regional levels. It seems to be widely believed that all governments
and their agencies are obliged to prepare a cash-based budget realisation report
alongside the full set of accrual based reports, but this is debatable. Articles 30
and 31 of Law 17/2003 require budget realisation reports to be prepared, but
make no attempt to define such reports or to stipulate the basis on which they
are prepared.
Government financial reports are subject to audit by the Supreme Audit
Agency (Badan Pemeriksa Keuangan, henceforth BPK); the audited reports

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are passed on to the central and regional legislatures (Dewan Perwakilan

Rakyat/Dewan Perwakilan Rakyat Daerah, DPR/DPRD) and also made available
to the general public. BPK is required to pass on evidence of evident wrongdoing
on the part of government officials to the relevant law enforcement agencies
for follow-up action. Such developments indicate that Indonesia has chosen to
imitate a number of developed nations that have pioneered the adoption of
accrual accounting in the public sector, such as New Zealand, Australia, the UK
and Canada.
Accounting scholars caution, however, that the intended objectives of
public sector accounting reform cannot be achieved automatically, simply
by implementing a private-sector style accounting system (e.g., Siti-Nabiha
and Scapens; 2005; Arnaboldi and Lapsley; 2009; and Christensen, 2007). As
Christensen (2007) notes, the global move to adopt accrual accounting in
the public sector is often advocated by government officials and professional
accountants in the absence of support from empirical studies and without any
strong theoretical basis (see also Carlin, 2005).
Recent studies reveal a number of problems that contribute to slow progress
with implementation of accrual accounting in the public sector, and that limit
the benefits of doing so, including complex and unhelpful relations between
central and local governments in setting reporting rules for the latter (Arnaboldi
and Lapsley, 2009); inappropriate planning and systems (e.g., human resource
management systems) imposed by central governments on local authorities
(Nor-Aziah and Scapens, 2007; and Harun, 2007); and doubts about the
benefit of using accrual accounting information for management purposes (e.g.,
decision making) or combating corruption (Connolly and Handyman, 2006; and
Rahaman, 2009).
Beyond these problems, a number of critical issues have been identified as
contributing to the difficulty of, and lack of enthusiasm for, adopting accrual
accounting in the public sector, such as habitual and technical factors (ter Bogt
and van Helden, 2000), cost issues (Handyman and Connolly, 2011), uncritical
adoption of poorly grounded recipes for its adoption (Hood and Peters, 2004),
and lack of involvement of the public in using government reports (Mimba
et al., 2007). It is worth noting that Australia actually backed away from
its experiment with a full accrual accounting system in the public sector
in 2008 (Barton, 2011): Australias experience should be seen as a critical
input for other countries contemplating switching to accrual accounting. Seen
from this perspective it is important to remind policy makers that improved
governance, accountability and performance of public sector organisations
cannot automatically be achieved simply by issuing new laws and private sectorstyle reporting standards, and producing accrual-based reports. Especially in
developing nations, policy makers need to prioritise their strategies in order
to design effective supporting programs, given that implementation of accrual
accounting in the public sector is expensive and complex (Pilcher and Dean,
2009).

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The rest of this paper is structured as follows. First, we discuss the purpose of
this study and methods used to collect data. Second, we discuss the background
to the Indonesian governments initiatives on public sector accounting reform
since 2003. Third, we present case studies of three local governments attempting
to implement the accrual accounting system. The following section offers
recommendations to policy makers, and the paper concludes by highlighting
its main findings.
PURPOSE AND METHODOLOGY

The purpose of this paper is to understand the background to, and nature
of, public sector accounting reform in Indonesia, and the challenges faced by
local governments in its implementation. We began by examining government
regulations and other sources focusing on public sector accounting in Indonesia.
We reviewed laws, government regulations, and ministerial regulations on local
government financial reporting, all imposed by the central government. We also
drew on media reports, BPK audit reports and various other publicly available
information. In addition, we conducted interviews with central government
policy makers involved in the formulation of public sector accounting regulations,
including senior officials in the Ministry of Finance (MOF) and the Ministry
of Home Affairs (MOHA), and senior auditors in BPK. To gain a practical
appreciation of implementation problems at local government level we collected
information from three local government jurisdictions: the Municipality of
Tangerang (population 2.8 million in 2010) in Banteng Province; the Municipality of Palu (0.3 million) in Central Sulawesi Province; and the District of
Bima (0.4 million) in Nusa Tenggara Barat Province (population data are from
BPS, 2010). From these jurisdictions we interviewed a total of 24 senior officials
and parliamentarians. Interviews lasted from 1 to 2 hours; in several cases
we conducted follow-up interviews to gather additional information. Table 1
presents a profile of our interviewees.
ACCOUNTING REFORM INITIATIVES

Two main features of the accounting reforms are the introduction of doubleentry accrual-based accounting in 2003 and the empowerment of the Supreme
Audit Agency in auditing the reports of public sector agencies.2

Background to Reform
On paper, at least, the reforms introduced since 2003 amounted to a revolution.
Accountability and transparency were anathema to former President Suharto,
who ruled Indonesia for three decades and had no interest in what is now
known as good governance the deployment of the powers of government
for the maximum benefit of the general public. On the contrary: governments
under Suharto had as their main objective the furtherance of the interests of a

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Table 1
Profile of Interviewees
Level /Organisation
Central government
Ministry of Finance (MOF)
Ministry of Home Affairs (MOHA)
BPK (Supreme Audit Agency)
Local government
Tangerang Municipality

Palu Municipality

District of Bima

Position

Number

Senior officials
Senior official
Senior auditors

2
1
4

Deputy Mayor
Senior officials in accounting and finance
Local parliamentary members
Deputy Mayor
Senior officials in accounting and finance
Local parliamentary members
Regent (District Head)
Senior officials in accounting and finance
Local parliamentary members

1
3
2
1
6
4
1
5
3
33

Total

narrow elite which is not to deny that the general public enjoyed considerable
improvements in material wellbeing during the three decades he was in power
(McLeod, 2011). It was no accident that during this era there were two state
audit agencies. One of these, BPK, existed by virtue of the Constitution and
was required to report to the parliament as the representative of the people,
but this body was starved of resources, and its reports were not made public.
The second, the Agency for Supervision of Finance and Development (Badan
Pengawasan Keuangan dan Pembangunan), existed for the purpose of keeping the
president himself informed in relation to the financial affairs of key government
bodies and enterprises; this body had considerably more resources at its disposal,
but it reported to neither the parliament nor the general public.
In the words of former BPK Chairman, Anwar Nasution:
The [New Order Suharto] government limited the range of audit targets, the means
or methods of audit, and the content and tone of audit reports. BPKs reports were not
even made public. All the goldmines of the New Order government, like Pertamina
[the state oil and gas company], Bank Indonesia [the central bank] and the state banks
and other state enterprises were off limits to BPK. . . . The New Order government
also controlled BPK through its organisation, personnel and budget. The resources
and infrastructure for raising the quality of work and of human resources of BPK were
also very limited (BPK, 2009: p. 6, authors translation).

Once Suharto had been forced from office in 1998, the opportunity arose for
reform-minded policymakers to move in the direction of accounting reform as a
response to the deliberate suppression of accountability and transparency that
had characterised the Suharto era (Harun and Robinson, 2010). Advocates of

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private sector-style accounting systems, especially in the MOF and BPK, saw the
adoption of private sector accounting techniques within the public sector as an
essential part of attempts to raise the quality of management and thus, the
integrity, efficiency and effectiveness of government. Indonesia chose countries
such as Australia, the UK and New Zealand as models for the new approach,
all of which had been pioneers in public sector adoption of accrual accounting
(Harun et al., 2012).

Introduction of Accrual Accounting

According to SAP, all transactions involving public sector agencies are to be
captured, classified and recorded within a double-entry accrual accounting
system, and then presented in summary form in the financial reports of the
entity in question. The new reporting system requires regional (provincial,
district and municipal) governments to prepare budget realisation reports as
in the old system, together with balance sheets, cash flow and change in
equity statements, and accompanying notes to these financial statements. All
reports must be available to the public (Table 2). Reports are required for each
organisational unit (agency, school, hospital etc.), and they must also be merged
into a consolidated report for each local government (Harun and Kamase, 2012).
Once the reports have been prepared they are submitted to BPK for
examination. Any deficiencies or departures from the accounting standards are
to be reported back to the government in question with a view to having them
corrected, after which the auditor forwards the audited reports to the relevant
legislature and head of government, together with its opinion. This can take
any of four forms: unqualified, qualified, adverse, or disclaimer. An unqualified
opinion is issued if the auditor finds the reports have been prepared in conformity
with the SAP and are free of material misstatements; at the other extreme, an
adverse opinion may result from poor record keeping, poor classification of
transactions, failure to adhere to the approved budget, failure to adhere to the
SAP, or evidence of corruption.3 A qualified opinion is issued if there are minor

Table 2
Comparison of Reporting Systems used in Indonesia
Reporting System
Old (19452004)
New (2005)

Types of Report
Budget realization report
Budget realization report
Balance sheet
Cash-flow statement
Changes in equity statement
Notes to financial statements

Source: Law 17/2003, SAP (2005), Harun and Robinson (2010, p. 240).


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deviations from the SAP, or if narrow areas of the entitys operations have not
been able to be adequately audited for some reason, while a disclaimer opinion
signifies that the auditor has been so greatly constrained in carrying out its
function (usually because there are insufficient records) that it is unable to
form a view as to the veracity of the report or the extent to which it conforms
with the SAP.

The Expanded Role of BPK

Paralleling the introduction of accrual accounting to the public sector the central
government has also strengthened the role and institutional capacity of the BPK.
As mentioned earlier, Suharto era (196698) governments totally controlled
accounting information and the auditing of public sector financial reports, little
of which was made available to the public. Thus a key feature of Indonesias
post-Suharto public sector accounting reforms has been the ongoing attempt to
boost the capacity and the independence of BPK (Nasution 2008). In recognition
of this, BPK received support from the Peoples Consultative Assembly (Majelis
Permusyawaratan Rakyat) in the form of a constitutional amendment in 2002 (TAP
MPR No.VI/MPR/2002), which emphasised BPKs position as the sole external
auditor of state finances, and the need to consolidate the independence and
professionalism of this institution. A more concrete indication is that the total
number of BPK staff increased by 54% from 2004 through 2008 (BPK, 2009).
According to Law 15/2004, BPKs role is not only to audit the financial statements
of government agencies. It is also obliged to report evidence of illegal behaviour
(i.e. corruption) to one or more of the enforcement agencies (police, attorney
generals office, corruption eradication commission) for further action.
The BPK has wide-ranging authority to examine any and all documents
connected with state finances and to investigate systems of internal control; it
is explicitly authorised to carry out an investigative examination if there is any
indication of losses to governments and/or criminality (Article 13). Government
officials are personally liable for deficiencies of cash or physical assets for which
they have responsibility (Article 22). Finally, there are provisions for heavy
penalties for those who obstruct the audit process in any way (Chapter VI). To
the extent corrupt activity can be proven, perpetrators can be imprisoned, fired,
fined, demoted or otherwise sanctioned.
Figure 1 provides a schematic overview of the new arrangements. Audit
reports issued by BPK can be used as a basis for evaluating the performance
of elected parties and officials. Potential users include parliamentary members,
the media, non-government organisations and, ultimately, the public who now
have the realistic option of replacing elected officials through general elections.
At the same time, evidence of corrupt behaviour passed on to the various law
enforcement agencies can be used as the basis for prosecution of the officials in
question. It was beyond the scope of our study to attempt any evaluation of the
extent to which public sector accounting reforms has influenced the quality of
governance at local government level, however.

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Figure 1
Public Sector Accounting Reform
Transactions
(all receipts & payments)

Double-entry data capture

(including classification of transactions)

Data processing & financial reporting

Auditing
(verifying information in financial reports)

Follow-up
(holding individuals accountable)

DPR/DPRD

Enforcement agencies

Public, media &

NGOs

Action against corrupt officials

Election process

Head of Government/Executive

Better governance: improved efficiency/reduced corruption

IMPLEMENTATION PROBLEMS AND THEIR CONSEQUENCES

In this section we discuss problems of implementing the new accounting system

at local government level, based on case studies of three jurisdictions.

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Responsibility without Autonomy in Human Resource Management

The experience of the three local governments studied here indicates that a
major problem encountered when adopting accrual accounting arises from a
serious defect in the way decentralisation has been implemented. Commencing
in 2001, a wide range of government functions was devolved (decentralised) to
lower levels of government from the centre mainly to local governments
under a number of regional autonomy laws (Laws 22 and 25/1999, Laws
32 and 33/2004). In large part this was a response to the extraordinarily
centralised system of government that had evolved during the Suharto era,
and was intended to avoid the possibility that any future president could
achieve a position of similar political dominance. According to Law 22/1999, for
example, the rationale for decentralisation was to bring government closer to
the people, based on the premise that locally elected leaders and parliamentary
representatives would be more responsive to citizens within these much smaller,
lower level jurisdictions than would those at the national level. Taken at face
value, this rationale implies that the functions now devolved to lower levels
should no longer be of concern to the central government, except to the extent
that regional government policies might conflict with those of the central
government.
In reality, however, the transfer of functions has been much more limited than
a reading of the regional autonomy legislation might suggest, not least because
these transfers imply a considerable loss of power for central government
ministries. Seen in this light, in our view it is no surprise that many ministries
have devoted considerable energy to clawing back lost territory or simply
asserting that the devolution of authority does not apply to them. One such is the
Ministry of State Administrative Reform (Menteri Pendayagunaan Aparatur Negara
dan Reformsi Birokrasi, MENPAN), which in the past controlled human resource
management throughout government at all levels, and which thus far has refused
to relinquish its control over this function at the provincial and local government
level (McLeod and Harun, 2009). This turns out to be of crucial importance in
the current context. As a consequence, the supply of accountancy skills in local
governments is extremely limited relative to the enormous demand for them
that has been generated by public sector accounting reform (Detikfinance, 2008;
and Harun and Robinson, 2010). This circumstance differs significantly from the
private sector, where the sudden emergence of a need for particular skills would
result in immediate efforts to recruit individuals with those skills. In turn, the
firms in question would be under no illusion that this would be possible except
to the extent they offered competitive remuneration. But this is not the way
human resources are managed in the public sector in Indonesia (McLeod, 2005,
pp. 7781).
Under long-established MENPAN rules, recruits into the bureaucracy may
enter only at the level of new graduates (from high school, technical college,
university, etc), and then slowly make their way to higher levels primarily on the


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basis of seniority which precludes an adequate response to sudden new human

resource requirements other than by outsourcing work to outside consultants.4
In any case, salary scales are utterly unrealistic in relation to those in the
private sector (other than for low level positions), so even if there were freedom
to recruit individuals to fill high-level positions this would be almost impossible
(McLeod, 2011, pp. 459). These practices present an enormous obstacle to local
governments wanting to hire qualified and experienced accountants. As a senior
official in the Palu Municipality lamented:
It is almost impossible for us to hire the staff we need. We have no authority to hire
people, and our system prevents the recruitment of people with the qualifications
and experience we need. These things are determined by the central government.
Salaries are also uncompetitive in comparison with the salaries of our friends in Astra
[a leading national private sector company]. So, what can we do?

Tangerang Municipality employed eleven well qualified accountants, but Palu

Municipality employed only two recent accounting graduates. Likewise in the
District of Bima there were only three accountants who understood the SAP.
In the face of the greatly increased demand for qualified and experienced
accountants, the Bima and Palu governments could do little more than either
outsource their accounting tasks or have the work undertaken by individuals
lacking the necessary skills with the predictable consequences of inefficient
accounting processes and poor quality accounting reports or, at best, delivery of
these reports well beyond the stipulated deadlines (BPK, 2008). One interviewee
in Bima stated that:
Often we need to pay outside consultants to prepare our reports. It is difficult to hire
qualified staff here. It is a long process and recruitment also requires approval from
the central government.

Similarly, an accounting staff in Bima stated:

Since we do not have sufficient qualified staff, we just prepare the reports as best we
can, and so our reports do not comply fully with the rules.

The lack of accounting skills is seen as a main factor contributing to poor

implementation of the accounting reforms. Soepomo Prodjoharjono, a senior advisor to BPK, points out that if the government seriously intended to implement
the reporting system this would have required some 38,000 accountants in 2008
at the local government level alone, and that this requirement could not have
been fulfilled in even a decade (Prodjoharjono, 2008). Similarly, the Agency
for Supervision of Finance and Development provided an even higher estimate
46,000 of the number of additional qualified accountants needed by
local governments to implement the SAP (Detikfinance, 2008). By contrast, in
2008 there were, for example, only 22 qualified accountants working for the
Jakarta Capital City provincial government, which meant it lacked some 5,000
accountants. Interviewees at the MOF, MOHA and BPK also made similar

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observations about the lack of qualified and experienced accountants across all
government organisations.
Seen from this perspective it is unsurprising that many local governments
have devoted substantial budgetary resources to hiring outside consultants to
design new accounting systems for them and to prepare their financial reports,
as interviewees in Bima and Palu reported. These same interviewees noted the
irony of the fact that the so-called mark-up practices that accounting reform
is intended to help eliminate have become a common feature of procurement of
accounting consultancy services in at least some local governments. They also
pointed out that budgetary resources are often wasted through the purchase of
computers, nominally intended to be used in the accounting process, because of
the lack of staff competent to operate them. In short, our case studies show that
the lack of accounting expertise which should have been obvious to reformminded policy makers at the outset has turned out to be a key obstacle in
the implementation of accrual accounting by local governments. Similar findings
emerged from studies of local governments in the UK (Handyman and Connolly,
2011) and of the Dutch government (ter Bogt and van Helden, 2000).
It makes no sense to devolve many of the tasks of government to the local
level and to require local governments to be accountable for their performance
if they are not also given sufficient autonomy to be able to manage their
affairs as they see fit, including the freedom to recruit people with the necessary
skills and to pay competitive salaries. Local governments are well aware of
the dysfunctionality of current human resource management practices dictated
by MENPAN, but for the most part the ministry seems to have been able to
convince them that they do not have the authority to introduce their own
systems of personnel management. That said, some local governments (including
Tangerang Municipality, as we observed) seem to have been able to negotiate
special arrangements under which they have been allowed more flexibility in
these matters than most of their peers. This has allowed them to recruit at least
some individuals with specialised accounting skills and experience albeit
from elsewhere in the bureaucracy rather than from the private sector and
thus to prepare far superior sets of financial accounts. It is to be hoped that
other local governments will follow in these footsteps, but it would be a far
more satisfactory outcome if there could be a general devolution of authority in
relation to personnel management to all local governments, rather than just a
select few.

Conflicting and Changing Directives from the Centre

The second major problem faced by local governments has been the lack of
consistency in relation to requirements from the centre. According to our
interviewees in the MOF and the three local governments, this inconsistency has
two dimensions: conflicting requirements of different ministries specifically,
the MOF and the MOHA and requirements that change frequently over

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time. All local governments are required to prepare their reports based on the
SAP, and BPK is required to evaluate these reports relative to this standard.
But they are also required to follow MOHA Regulation No. 13/2006 (Peraturan
Menteri Dalam Negeri), later modified by Regulation No. 59/2007, which specifies a
different chart of accounts (i.e., system of classification of transactions) that has
to be followed. The local government officials we interviewed were frustrated by
having to prepare and reconcile one set of financial statements conforming to
the MOHA regulations and another set, based on SAP, for submission to BPK
and the MOF:
We are disappointed with rapid changes of the rules. In 2004 we were required to
adopt the SAP. Then suddenly MOHA issued new reporting regulations in 2006,
only to replace them in 2007. We have limited people and funds to implement these
reporting requirements.

The central government appears to have imposed these new rules and
regulations without bothering to consult with the lower levels of government
directly affected by them, and with little concern for the budgetary and human
resource implications. It hardly needs to be said that implementing radical
accounting reform with very limited human resources becomes a much more
difficult task if the rules keep changing, and if parallel sets of different rules
need to be followed simultaneously.
According to interviewees in the MOF and BPK, these two organisations,
working closely together, attempted from the outset to minimise the burden
of accounting reform on reporting entities, mindful of the problems that were
bound to arise if Indonesia tried to move to a highly sophisticated accounting
system within a very short time span. MOHA insisted, however, that it had authority over local government affairs including over the accounting function
and imposed a chart of accounts that was much more highly disaggregated than
that which the MOF required of central government departments and agencies,
even though local government operations are generally much smaller in scale
and less complex.
According to our interviewees in Bima and Palu, using two different charts of
accounts was very likely to generate errors, and it was hard to understand why
the simpler system regarded as satisfactory at the highest level of government
could not also be used at lower levels. Likewise, it is hard to understand how
MOHA can actually make use of the flood of highly disaggregated data it
demands from hundreds of local governments and their subsidiary entities.
Detailed reporting to the centre (other than for auditing purposes, which is not
the MOHAs responsibility) only makes sense if the centre intends to involve
itself deeply in the management of reporting units. This was surely not envisaged
by the proponents of the far reaching decentralisation of government functions
that began in 2001, who intended rather to modify incentives such that local
governments primary concern would be to serve their constituents well not
to do the bidding of the central government.5

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Not only has MOHA imposed unnecessarily detailed financial reporting

requirements on local governments that are inconsistent with the requirements
of MOF (as their main source of funds) and BPK, but at the same time it has
obliged each local government to develop its own accounting system (Regulation
No. 13/2006). Bearing in mind that one of the objectives of accounting reform
is to improve efficiency and effectiveness of government at all levels, this seems
absurd. All local governments for the most part undertake the same kind of
service delivery to their constituents. It follows that an accounting system
well designed for one should be just as suitable for all the others, provided
there is enough flexibility to cope with local idiosyncrasies in service provision.
The MOHA requirement results in enormous wastage due to failure to take
advantage of economies of scale. Specifically, there are something of the order
of 500 provincial and local governments, for which it would be possible to develop
just three computerised systems one each for provincial, municipal and
district governments (KPPOD, 2009). These could be developed at the centre,
with input from local government representatives, and without the need for
endless replication of this work across hundreds of lower-level jurisdictions.

Consequences
Two of the immediate consequences of the lack of qualified accountants and the
conflicting rules faced by local governments are a low level of compliance with
SAP and underuse of accrual based-reports for decision making.
Many local governments fail to produce their reports when required. BPK
(2008: 4) reported that of 469 local governments, only 59% submitted their
financial reports for 2007 on time; of the remainder, 34% had submitted their
reports by mid August 2008, but 7% had still failed to do so. Months later
three governments had still failed to submit their reports (BPK, 2009). In
addition, there is a failure to produce reports of a satisfactory standard. Only
a tiny proportion of local government reports have obtained an unqualified
opinion from BPK and, although the majority obtained a qualified opinion, the
proportion that did so declined significantly through 2009, with corresponding
increases in the proportion obtaining adverse or disclaimer opinions (Table 3).
Although there was some improvement in 2010, there were still only 32 local
governments of about 500 in total (i.e., 6%) that obtained an unqualified opinion
for their reports (JPPN, 2010). Among the three local governments studied, the
financial statements of only Tangerang Municipality obtained an unqualified
opinion from the BPK in the period since adoption of SAP in 2005 to 2009, when
this study was undertaken. By contrast, the reports of Bima District and Palu
Municipality obtained only qualified opinions from 2006 to 2009.
It remains an open question as to what should be done when local governments
continuously fail to submit their reports, or to do so on time, or fail to meet the
required standard. BPK (2008, pp. 23) provides a number of reasons also
observed in our case studies why central and regional government reports

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Table 3
Local Government Financial Reports by BPK Opinion (%)

2004
2005
2006
2007
2008
2009
2010

Unqualified

Qualified

Disclaimer

Adverse

Total

7.3
4.7
0.6
0.9
2.7
3.0
9.0

86.8
85.1
70.8
60.6
74.1
66.0
76.0

2.4
6.9
23.3
25.9
16.0
10.0
3.0

3.5
3.3
5.2
12.6
7.2
21.0
12.0

100.0
100.0
100.0
100.0
100.0
100.0
100.0

Sources: BPK (2009, 2011), Nasution (2009); BPK (2012).

fail to comply with SAP, including lack of coordination within governments;

lack of skilled staff; and rapid changes in regulations, leading to different
interpretations. As a consequence of these problems, from 2005 to 2010 most
local governments were only able to produce consolidated reports for themselves,
whereas Law 17 and SAP require all of their subordinate entities such as schools,
hospitals and other agencies also to produce accrual-based reports.

Underuse of Accrual-Based Accounting Information

The reality is that almost no members of the general public read the financial
reports of their governments. Most do not have the expertise to be able to make
much sense of such reports, and any potential benefit to the individual who
takes the trouble to read and analyse them is likely to be greatly outweighed
by the opportunity cost of the time and effort required. Rather, most citizens
form their opinions on government performance directly, based on the quality
of service delivery, judging from their own experience. For example, they look
at the availability and quality of education and health services; the degree of
security of property and person; the cleanliness and tidiness of public spaces;
their perceived exposure to extortive action on the part of public sector officials;
the quality of service offered in public sector offices and instrumentalities; the
frequency of flooding in urban areas; and so on.6 As a senior official in the
planning division in Palu Municipality put it:
What matters to people in this region is the outcome of the governments projects.
They do not need government financial statements.

Similarly, three senior officials in the accounting division of Bima District

suggested that the public was more concerned about corruption than looking
at local governments financial reports, while two local parliamentary members
argued that the public tend to rely heavily on mass media in evaluating the
local government performance. They can also rely potentially, at least on

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their elected representatives to monitor performance of their governments,

and indeed it is a responsibility of parliaments to read and analyse those
governments financial reports. But again the reality is that few members
of parliament in the three local governments we investigated have the skills
needed for this task. Moreover, given that most members of the public are in
fact not very interested in such arcane matters, members of local parliament
have little reason to devote their time to this aspect of their work. As one local
parliamentary member in Bima put it:
We never understand the content of the reports. We are more familiar with the old
type of [cash based] reports.

Two local parliamentary members in Palu expressed similar thoughts.

POLICY RECOMMENDATIONS: SETTING PRIORITIES

Indonesia has an unenviable reputation as one of the most corrupt countries

(Transparency International, 2010; and Suryadarma, 2012), and corruption is
a major concern of private sector firms and the general public. This was one
factor influencing Indonesias decision to adopt accrual accounting, although this
consideration was much less important in developed nations such as Australia
or New Zealand where the emphasis in public sector accounting reform was
much more on the potential role of information generated in the accounting
process as a management tool.
Given the high priority of fighting corruption in present-day Indonesia
(McLeod, 2005; and KPPOD, 2009) we argue that the usefulness of having
accrual-based balance sheets and income statements depends little on having
accurate valuations of all government entities individual assets and liabilities
(which is much more important if accounting data are to be used for
management purposes, such as financial decision-making). Rather, it depends
on having accurate lists of these especially the assets. It is often the case that
corruption and irregularities take the form of diverting funds away from the
purchase of assets intended to be used to deliver services to the public (Harun
et al., 2012, p. 274). Alternatively, as our interviewees in BPK observed, it may
take the form of the transfer of assets (such as motor vehicles, housing and land)
to the ownership, or at least control, of particular individuals, without proper
compensation to the government. If the reporting system shows the purchase
or sale of such assets, this will show up in the balance sheet, but if there is no
balance sheet it will be very difficult for anybody reading the budget statement
to check whether any resources have been misappropriated. What is crucial,
therefore, is that any assets that potentially could be misappropriated be listed
in the balance sheet; putting accurate values on all of them is less important.
After an initial balance sheet has been created, every subsequent purchase or
disposal of any kind of asset will necessarily be recorded in both the cash flow
statement and the balance sheet, thus providing a useful body of evidence that
can be checked by the auditor.

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Indonesias accounting reforms have been radical, and it can be argued in

retrospect perhaps more for the benefit of other countries contemplating
similar reforms that it would have been more realistic to prioritise them
rather than trying to achieve full-fledged accrual accounting perfection at a
stroke: that is, to have focused at first on transforming the accounting system
so as to make it much more systematic and accurate, and its reports more
easily verifiable, in order to further the aim of cutting back on public sector
corruption. This is not to deny that there is enormous scope for improvement
in the management of government operations and policies using sophisticated
accounting data, but simply to emphasise that one of the most severe problems
faced by Indonesia today is the high level of corruption. If officials responsible
for implementing the accounting process must spend a great deal of their time
trying to estimate the value of all assets already owned by government bodies
including things as diverse as roads and railways, dams and drainage systems,
parks and garbage dumps they will have correspondingly less time to deal
with this more urgent priority.
Setting of priorities is of course one of the important functions of management
in any field. In the present context, one of the unhappy realities is the fact that
accounting was given so little attention during the three decades under Suharto
that the bureaucracy emerged from this period with desperately few qualified
accountants relative to the enormity of the task of properly recording and
reporting the financial aspects of public sector activity. The lack of accounting
skills throughout government in Indonesia is perhaps the greatest obstacle
to public sector accounting reform, and this is not something that should
have escaped the attention of those who introduced these reforms. Requiring
all government bodies suddenly to start producing financial reports based on
sophisticated accrual accounting techniques seems akin to expecting a baby to
perform ballet before it has even learned to walk.
Our case studies strongly suggest that the design of public sector accounting
reform has placed too much emphasis on the nature and content of reports
to be produced by government entities relative to issues of implementation.
The reforms implicitly call for tens of thousands of unnecessarily sophisticated
reports to be produced and audited each semester, whereas the number of
qualified accountants available to all levels of the bureaucracy combined seems
to be of the order of hundreds, or possibly even less. If the objectives of reform
are to be achieved, then, there would appear to be only three conceivable
means of doing so. First, large numbers of current civil servants could be given
crash courses in the basic essentials of accountancy. Second, large parts of the
accounting function could be outsourced to private sector firms specialising in
accounting. Third, large numbers of qualified and experienced accountants could
be recruited from outside the civil service and placed in appropriately high-level
positions.
The first approach is not out of the question, provided it is implemented
sensibly. A crash course lasting for a few weeks is no substitute for a bachelors

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degree in accountancy requiring five years of university study. If this approach

is adopted, therefore, it will be important to design simple, standardised
accounting systems and software at the central level to be applied at all levels
of government, users of which would require relatively little training since
they would only be required to undertake straightforward electronic data entry
tasks.
The second approach also has some merit, in the sense that, if policy-making
inertia in relation to personnel recruitment, redeployment and promotion
precludes the internal reforms that would enable the bureaucracy to prepare its
own accounting reports, at least those reports would be prepared to adequate
standards if this work were farmed out to reputable accounting firms. Indeed,
this was the approach initially followed in Australia, when it faced the same
problem of a lack of accountants with sufficient experience to be able to
implement accrual accounting. However, the evidence so far suggests that this
has not always been the case. Individual accountants with no great reputation
to protect have often been given this work on a one-off basis, resulting in poor
quality reports that do not meet the standards required by the auditor. In
addition, there has been little continuity, such that the learning process needs
to be repeated in each successive accounting period.
The third approach seems capable, in principle, of allowing Indonesia to
make more rapid progress with public sector accounting reform, but in the
absence of very strong support from the highest level of government it is
unlikely to be implemented. For the time being any movement in this direction
remains stymied because it requires not only that the existing, long-established
recruitment and promotion practices be overturned, but also the implementation
of huge increases in salaries to match those available in the private sector. Over
the last few years there have been some highly circumscribed attempts (pilot
projects) to undertake reform of these aspects of personnel management, but
there remains a reluctance to extend these to the bureaucracy as a whole (Harun,
2007). One possibility would be to conduct a different kind of pilot project,
where the focus would be on a specific profession accountancy rather than
a specific part of the bureaucracy. This would involve recognising accountancy
positions as functional ones (i.e., to be filled only by qualified accountants)
and remunerating these positions at levels similar to private sector pay scales.7
Failing this, it would be highly desirable for MENPAN to at least relinquish its
control over human resource management policy at sub-national government
level more generally than it has done hitherto.
CONCLUSION

The collapse of the Suharto regime in 1998 provided an opportunity for

Indonesias Ministry of Finance and Supreme Audit Agency to promote the
adoption of private sector-style accounting and auditing in the public sector.
Our observations of the experience of three local governments in moving to

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implement the new accounting system suggests that these reforms have been
seriously hindered by the lack of staff with the required accounting skills
and that this problem has been made worse by the insistence on continuing to
prepare old-style cash-based reports alongside the new accrual-based reports,
and by MOHAs insistence on imposing its own, much more complex, chart of
accounts for reporting to itself. As a consequence, the level of compliance of local
government reports with the SAP has been low, and little use has been made of
accrual-based reports for decision making and other management purposes, or
for holding governments to account for their financial performance.
The key contribution of this study is therefore a further exemplification of
the dangers inherent in rushing to copy public sector financial management
techniques from quite different country contexts, especially when there are
significant differences of opinion as to the appropriate design of these reforms
and even the need for them among the influential policy-making agencies.
In particular, the study illustrates the crucial importance of ensuring that the
conditions necessary to support the implementation of reforms such as this are
met in advance of their introduction or of prioritising less ambitious reforms
to begin with if they are not. Public sector accounting reform is certainly highly
desirable in Indonesia, but it is naive to imagine that much can be achieved in
the absence of complementary reform of existing human resource management
practices, and if the widely divergent approaches of MOF and BPK, on the one
hand, and MOHA, on the other, cannot be resolved satisfactorily.
NOTES
1 Prior to the reforms, the entire financial information and accountability reports were . . . based
on the single-entry recording method and administered in fragmented cash-based bookkeeping
systems (Manao, 2008, p. 1).
2 Indonesian public sector accounting covers three areas: the central government; regional
governments; and non-profit organisations owned by the government, such as schools and
hospitals. State owned-companies use the private sectors Statement of Financial Accounting
Standards to prepare and present their financial statements (Harun, 2007, p. 366).
3 Even if an unqualified opinion is issued, it is possible for the auditor to also issue a Letter
of Improvement (Surat Perbaikan) to mention minor issues, areas of potential risk, etc. This
document is used to prepare the future audit program of the entity in question.
4 To make matters worse, transferring staff between departments, not to mention between
different levels of government, is extremely difficult.
5 For an extended critique of the MOHA position see Telaah Kritis Permendagri No. 13/2006, dan
Implementasinya di Daerah [A Critical Analysis of Home Affairs Ministry Regulation 13/2006 and
its Implementation in the Regions], Tribun Timur, 23 March, 2007).
6 Thus the statement in Law 17/2003 that one of its objectives is to inform taxpayers and users
of public sector services regarding the effectiveness and efficiency of public sector agencies
operations is unrealistic.
7 This practice is already followed in relation to certain other professions, such as doctors.

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