Exploring The Dark Side of Accounting (Fraud) (1) And Accounting Practice: Between Evil and Angel (2) By Hendrik Manurung ME (1) and Kevin D. Click (PT HM Sampoerna) (2) Note from Brawijaya Accounting Fair (BAF) 2008

Exploring The Dark Side of Accounting (Fraud)

What is Fraud?

Black Law Dictionary said “Fraud is intentional perversion of truth, false representation of a matter of fact, whether by words or conduct.  For the purpose of inducing another, in reliance upon perversion of truth.  To part with some valuable thing belonging to him or to surender a legal right.

Why Fraud is a Costly Business Problem

Fraud losses reduce net income.  If profit margin is 10%, revenues must increase by 10 times losses to recover affect on net income.  Fraud rob income.  To restore income to Rp10.000, need Rp10.000 more Rupiah of revenue to generate Rp1.000 more Rupiah of income.

These Are Inteeresting Time

Number and size of financial statements fraud are increasing.  Number and size of frauds against organization are increasing.  Some recent fraud include several people, as many as 20—30 peoples.  Seems to indicate moral decay).  Many investors have lost confidence in credibility of financial statements and corporate reports.  More interest in fraud than ever before, now a course on many college campuses.

Perspective on Fraud

Bad Fraud

Acquierer overpays.  Earnings management like false revuneu recognition schemes, costs and expenses schemes, understatement liabilities, and many more.  Illegal conduct like liablitiy for past conduct, impoct upon future earnings, and many more.

Good Fraud

Acquierer underpays.  Misconduct that if discovered, reduces costs, and increase earnings.



Why So Many Financial Statement Frauds All of a Sudden?

Good Economy was maskng many problems.  Moral deacy in society.  Executive incentives, to achieve the target.  Wall street expectation, reward for short term behavior.  Nature of accounting rules.  Behavior of CPA Firms like Arthur Andersen in the Enron case,  Greed by investment banks, commercial banks, and investor.  Educator failures, the fraud knowledge not deliver well to the student.

Types of Fraud

Employee fraud, vendor fraud, customer fraud, investment scams, bankrupty frauds, miscellaneous frauds.  The common element is deceit or trickery.

The 21st Century Landscape

Civil and crimina legislation like Sarbanes Oxley Act of 2002.  Professional standards like Committee of Standard Organinzation (COSO), Statement of Auditing Standards (SAS) 99, Public Company Accounting Oversight Board Standards Integrated Audit.  Institute for Internal Auditors (IIA) Standards, ABA Rules for Professional Responsibility.

Expenses Avoided by Fraud

Tax crimes, failure to pay, false statement, evasion.  Fraud against suppliers and customer.  Improper labor practtices.  Environmental, health, and safety violations.  Money Laundering.

Applying COSO Framework

Control Environment

Code of conducts or ethics; ethics hotline; hiring and promotion; audit committee oversight; investigative process; remedition.

Fraud Risk Assessment

Systematic process; level within organization; likelihood and significance.

Control Activities

Linking controls to identified fraud risks.


Information systems and technology; knowledge management; training.


Ongoing monitoring by management; separate “after the fact” evaluations by internal aduit.



Need to teach ethics more.  Need to teach student about fraud and offer a fraud course.  Need to teah student ho to think.  Do analysis not do copy and memorize.


Accounting Practice: Between Evil and Angel

Company Overview

PT HM Sampoerna is the largest tobacco company in Indonesia.  In 2007 net sales is IDR29.8 Trillion, in 2008 (9 moths) growing 17.2%.  Approximately 30,000 employees.  Brand sold: A Mild, Dji Sam Soe, Marlboro.  Listed on Indonesian Stock Market.  Majority owned by Philip Morris International (PMI).  One of largest tobacco companies in the world.  Listed on New York Stock Exchane.

Tone at the Top

Nothing is more important than our commitment to integrity – no financial objective, no marketing target, no effort to outdo the competition.  No desire to please the boss outweighs that core commitment.  Our commitment to integrity must always come first (Louis Camilleri, CEO of PMI).

Company Culture

  • Establish compliance and integrity guidlines on business ethics;
  • integrity is one of the core performance competencies;
  • Promote “whistle blower” with free hotline number to report any suspected non compliances;
  • No tolerance for retaliation;
  • Stringent follow up and reporting of allegatios received;
  • Increase employees awareness on compliance and integrity through training and campaigns.

Resources Qualifications

  • Selective recruitment and placement process to ensure the right talents with high integrity.
  • Continuous training of soft and technical skills. In example GAAP Academy Programs, accounting technical updates. Developing PMI Managers.
  • Develop key employees to be member of professional accounting body (ACA, CIA).

Policies and Procedures

Establish policies and procedures for all aspects of the business process.  Finance policies (50 policies); Accountting Guidelines (1); Capex/Lease/Disposal (10); Travel and Entertainment (2); Cash management (8); Credit controls (6); Equity investent/acquisition (7); other finance policies (8).  Information systems (11 policies).  Compliance (16 policies).  Other (procurement, human resource, CA, operations (17 policies).

Internal Processes

Adequates segregation of duties.  Supervisory review and approval.  Adequate approval authoriztions.  Comprehensive automated IT controls within applications.  Adequate control on user access to systems and applications.

Monthly reconciliation on balance sheet, income statement and cash flow against the underlying financial accounts.  Monthly review and analysis (Sampoerna & PMI). In example mojor balance sheet accounts, income statement (against budget, standards, and previous period), suspense, clearing and inter company account.  Regular independent counts of cash, inventory and fixed assets.  Job rotation of executives (averaging 3 years) to improve capacity and to prevent the abuse of power.

Internal Independent Review

Internal independet review by (1) Corporate Audit Department (repporting to PMI).  The audit based on risk assessment, covered revenue, disbursement, payroll, marketing expenses, procurement. And financial reporting.  (2) Internal Audit and Control Department (Sarbanes Oxley Act section 404), audit 18 major business process, document and test over 300 key controls, external auditor independently review SOX testing results. (3) Appoinment of Independent Audit Committees.  Sampoerna (3 qualified members: senior accounting lecture from state university, senior partner of local accounting firm, and ex managing director of HM Sampoerna).  Meet at least quarterly. PMI: Independent, experienced international business leader.

External Review

External auditors conduct comprehensive review to ensure true and fair reflection of financial statements.  Substantive review of key accounts, systems and controls.

Government & Shareholders

As listed company, sampoerna is required to comply with detailed and tranparent reporting requirement form BAPEPAM.  Published reporting in the company website.  As a subsidiary of a company listed in NYSE, meet the reporting requirements from NYSE SEC.  Government tax audit. Shareholders inquiries.


HM Sampoerna condutcs business using sound internal process and controls across all levels of the organization to ensure full compliance to (1) all applicable laws and regulations; (2) local and international accounting standards and best practices.  This has provided a solid platform to ensure the company’s financial statement are true reflection of business performance and actual financial results.


~ by DanielStephanus on June 16, 2017.

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