Jakarta’s $500 billion question

In July 2010, the management of the Indonesian Stock Exchange (IDX) punished PT Bakrie Brothers and two of its subsidiaries by fining them each Rp 500 million (US$52,000) for what it simply called “erroneous entries”, worth $780 million in their 2010 first quarter financial statements. In fact, the IDX management only became aware of the huge discrepancies as the result of a tip-off from a whistle-blower in early June.

But the manner in which the IDX management and the stock exchange watchdog (Bapepam) resolved the issue still left big questions as to how publicly listed companies, such as these, had been so careless with their accounts that they were blind to the hundreds of millions of dollars in discrepancies.

The IDX management now has to clarify fresh allegations, already reported the world over in the past few days, which say that two Indonesian companies — PT Bumi Resources, which is controlled by the Bakrie family, and PT Berau Coal Energy — misappropriated more than $500 million in development funds.

 London-listed Bumi Plc., the parent company of Bumi and Berau with ownership of 29.2 percent and 85 percent respectively, shocked the market with its revelation on Monday that it had commissioned an independent investigation to probe allegations of irregularities related to almost $500 million in development funds in Bumi and Berau.

The allegations must be more than just simply wild rumors. The directors of Bumi Plc. would not have ordered such investigations or hired a high-caliber law firm to conduct the forensic audit if they were not aware of strong evidence pointing to corporate fraud, especially given the devastating impact the revelation would have on Bumi Plc. prices, which had fallen by more than 70 percent over the past one year.

Bumi Plc. was set up in early 2011 after Rothschild bought stakes in coal mining firms affiliated with the Bakrie family.

In April 2011, when Bumi Plc.’s share price was at £14, up from its listing price of £10, co-founder Nathaniel Rothschild and Indonesia’s politically influential Bakrie family were seen as having hit on a winning formula that brought an emerging market asset to London.

The multi-billion dollar deal provided the Bakrie family with prestige and access to global capital.

Now, fast forward a year and a half and after myriad disputes the “wonderful” news has turned into a nightmare. Earlier this week the share price fell 39 percent to hit a low of 119p, before recovering to 147.6p.

There are several big questions that if not answered satisfactorily, could damage the credibility and reputation of the public companies, the IDX as well as Bapepam.

IDX has become one of the best performers in Asia this year with its share index having reached a historical high. This can be attributed to the stronger fundamentals of the economy as well as the confidence and trust the investing public has in the stock market’s operations.

However, questionable and unreliable financial statements could damage this trust because financial reports, the accountability to the investing public and shareholders, greatly influence the formation of share prices on the stock market.

It is therefore most urgent and imperative for Bapepam, as the watchdog responsible for enforcing the laws and regulations on the stock market, to probe into the roots of the lingering corporate concerns at PT Bumi Resources and PT Berau Coal.

Certainly the investigations and the findings should be credible, otherwise investor confidence and trust in the stock market would be severely damaged and the latest wave of upbeat reports on Indonesia’s economy could turn sour. Jakarta Post