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					Designing Internal Control Systems To Minimize Frauds And Irregularities
BRI’s Expexence Agus Rachmadi, Senior Microfinance Specialist, BRI, Indonesia I. BANK RAKYAT INDONESIA: BRIEF OVER VIEW Bank Rakyat Indonesia, well known as Bank BRI, is a commercial bank. The major shareholder of Bank BRI is the Government of Indonesia. The Government of Indonesia owns seventy percent of Bank BRI's shares; employees through ESOP own ten percent of the shares; and societies own the rest. The business of Bank BRI concerns with loans, saving, trade finances, and any other banking services such as fund transfers, check collections, and safe deposit boxes. Loans are still the major business from which main revenues of Bank BRI come. Such loans include corporate loan, SME's loan and micro finance. Based on the government regulation, the portion of corporate loan allowed is maximum twenty percent. Nowadays, the portion of loans for SME's and microfinance is around eighty eight percent. It means that the portion of corporate loan is getting smaller and in other words, Bank BRI gives more concern to SME's and microfinance. The portion of micro finance itself reaches twenty one percent of Bank BRI's total loans. The main orientation of Bank BRI loans to SME' sand microfinance caused Bank BRI able to struggle from 1997 severe financial crises even though it still needed some fund injection from the government, but such fund injected is less than the funds needed by fellow banks. Such orientation is proper, since the buffer of the existence of Indonesia's economy is SME's and micro enterprise. Based on the figures of the year 2000, the number of SME's in Indonesia is as follows: Small is 39,121,350 (99.85%) enterprises and Medium is 55,437 (0.14%) enterprises. Just for comparison, the number of big enterprises is only 2,005 (0.01 %) enterprises. Based on the employment creation, small enterprises created 61,501,890 (90.03%) jobs; medium enterprises created 6,425,935 (9.41%) jobs; and big enterprises created 386.413 (0.57%) jobs. Bank BRI which just celebrated its 108 years anniversary on December 16th 2003 is the oldest commercial bank in Indonesia. With more than a century experiencing in banking business, Bank BRI able to position itself as one of reputable and respectable institutions nationally as well as internationally, especially in microfinance. Bank BRI has wide network spread to all over the nation. Such network includes many offices located at the very rural areas. Based on the data of the year 2003 the network of Bank BRI includes one head office, 13 regional offices (with 11 regional audit offices), 327 branch offices, 148 sub branch offices, 3,976 BRI Units and 225 service post. Additionally, Bank BRI has established 11 other branches based on Islam banking system, as well. In order to utilize such wide network to win the competition and to increase efficiency, Bank BRI implements centralized online banking system based on the information technology of Sylverlake, called BRINETS. It integrates not only branches and sub branches, but also some of BRI Units operated for microfinance. The rests of BRI Units which .are not integrated by BRINETS yet, are already computerized in their operations.

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II. BANK BRI MICROFINANCE: THE BRIEF HISTORY Prior to the year 1983, Bank BRI acted as the government agent of development with a special mission to promote agricultural and rural development. Such role has encouraged Bank BRI to maintain its consistent commitment to agricultural and rural development. However, over time, its mission was mixed up with the poverty alleviation programs. Therefore, during this period, Bank BRI microfinance was not operated as a commercial microfinance. Bank BRI microfinance system is well known as BRI Unit system. Such system, established in the early 1970s, had mission to channel subsidized government loans to rice farmers through BIMAS-the credit component of Indonesia's massive effort to reach national rice self-sufficiency. Supporting the success of such government mission, around 3,600 BRI Units were established nationwide at the sub-district level. These Bank BRI's rural outlets functioned primarily as channeling agents for BIMAS and any other subsidized government lending programs. Even tough the goal of rice self-sufficiency was able to be achieved in the year 1985; such program itself experienced a high level of arrears and losses. Beginning in the mid-1970s, saving accounts were introduced through BRI Unit system. However, the annual interest rates of such saving accounts were set by the government at the level of 15% for most deposits. On the other side, the annual interest rates for loans were set at the level of 12%. Such imbalance condition discouraged BRI Units from undertaking saving mobilizations. Furthermore, BRI Units experienced losses severely. By the year 1983 BRI Unit system was forced to make proper decision related to the continuation of its business. The decision was BRI Unit system had to be either closed or converted into a fundamentally different system. After the year 1983, BRI Unit system has been converted to commercial microfinance. The milestone of such conversion was the government deregulation which was well known as June first 1983 package. There were two significant changes of the deregulation which dramatically affected BRI Unit system. The changes were first, termination of BIMAS and other government subsidized loans, which had been the only business of BRI Unit system; and second, state-owned banks would now be permitted to set their own interest rates on both loans and deposits, and for which the government would no longer provide with funding sources. The June 1983 package had provided an enabling environment for the conversion on BRI Unit system to a commercial microfinance system by offering financial services to the poor using market-based approach. However, BRI Unit system introduced its new program of general-purpose individual loan, named KUPEDES (general rural credit), in the early year 1984. Saving instruments for BRI Unit system were also introduced almost simultaneously with the introduction of KUPEDES. The most popular rural saving instrument is SIMPEDES. It provides the much-in-demand combination of security, convenience, liquidity, confidentiality, good service, and real return. After introducing KUPEDES and SIMPEDES, BRI Unit system has transformed itself to full commercial banking operating based on market approach. Therefore, only spent around three years of struggle, BRI Unit system has been profitable and independent of subsidy since 1986. III. BANK BRI MICROFINANCE: WORKING DEFINITION AND PHILOSOPHY As mentioned before, Bank BRI is known globally as one of the most successful practitioner in establishing sustainable microfinance. Along with its more than a century experience in

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promoting microfinance, Bank BRI has undergone bad and good times in doing its business. To give you broader picture of Bank BRI microfinance, it is necessary here to introduce Bank BRI microfinance definition and its business philosophy. Microfinance is generally defined as financial services for the poor. Bank BRI microfinance, well known as BRI Unit system, is banking services offered by Bank BRI through BRI Unit network serving low income urban, suburban and rural societies. Those served by Bank BRI microfinance are both micro-enterprises and fixed income individuals or households. The maximum amount of individual loan offered by Bank BRI microfinance is Rp50 million, equivalent to US$6,OOO. Such loan is available to creditworthy borrowers for all purposes both consumptive and productive purposes. Loan terms are simple and transparent, and typically last 1-5 years with regular installments. Sustainable BRI Unit system can be established since BRI Unit operation is based on philosophy as follows: 1) Banks follow businesses It is obvious that the concept which suggests banks or financial institutions to take the lead in rural development based on massive subsidized rural credit programs is failed in establishing sustainable microfinance. Therefore BRI Unit system is operated based on market driven approach. In other words, BRI Unit system follows where the businesses are and never takes the lead in rural development. BRI Unit system already changed the basis of its business from supply leading approach to demand following approach or banks follow the business approach. 2) Loan is not a panacea Until nowadays there is still wrong belief of societies that loan is a universal remedy for poverty. They believe that loan able to cure all. Banking in Indonesia, however, often been blamed as a main cause of any unsolved poverty. The fact shows us that loan could play an important role in reducing poverty and increase economic development as long as access to capital is the main constraint facing the poor societies or micro-enterprises. In case there are still other problems such as knowledge, production, quality of human resources, access to market, and accounting, other solutions will be in demand. 3) Poor Households or Micro-Enterprises have significant saving potential There is wrong beliefs in societies that the poor has no saving potential at all. The poor, however, needs only loan to help develop its economy. In the contrary, BRI Unit system experiences that loans were not the only banking service needed by low income households or micro-enterprises. Convenient access to a safe is also needed and crucial. Saving is important to enable households or micro-enterprises to build up a financial cushion against family or business difficulties. BRI Unit fund raising has shown us that even poor households or micro-enterprises have significant saving potential. On the other hand, BRI Unit recent experience shows us that poor households and micro-enterprises also need other banking services. They need to send and receive funds quickly, cheaply, and reliably. Therefore, BRI Unit system is requested to implement information technology having capability in payment service. 4) The right tool for the right problem Microfinance as financial services for the poor should be understood properly and thoroughly. Sustainable microfinance is not a poverty alleviation program. Therefore, it is not aimed at those who do not have any capacity at all to generate income due to the lack of

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skills, education and capital. Helping and developing such people's economy is the government's responsibility. It is logical since commercial banks or financial institutions certainly can not afford such programs. The government, to these people, should offer poverty alleviation programs which may include social safety nets, such as food and shelter for free; training programs followed by technical assistance; and subsidized-programmed loans. Sustainable microfinance which aimed at those abovementioned will not help much, but will create other problems. To be sustainable, however, microfinance has to be aimed at those who are economically active. It is true since these people have repayment capacity to pay back the loan received and generally have capability to manage the loan for their economic development as well. Experiences from the field showed us that overhead costs of serving these markets are naturally high. Because of their high repayment capacity, there is still a room for establishing sustainable microfinance. Micro borrowers are trustworthy people and have capability to absorb high interest rates. IV. PERFORMANCE OF BANK BRI MICROFINANCE In nearly two decades, between 1984 and 2003 (December), KUPEDES cumulatively achieved Rp89.401 trillion. Based on the data December 2003, the outstanding loan, KUPEDES, was approximately.Rp14,0971 trillion. Up to the year 2003, the total number of borrowers who have enjoyed the loan cumulatively reached 32,728,335 borrowers. Outstanding borrowers per December 2003 are 3,100,358 borrowers. Let's put another look. Interestingly, during current economic crisis, the loan still increased dramatically. In average, in the last five years, KUPEDES increased close to Rp 1.969 trillion per year. The evidence suggests that the credit coverage and outreach are enormous. The statistics also reveals KUPEDES has played strong roles in rural financial markets in the country. In average, KUPEDES borrowers have continued to pay back more than 97%. The loan portfolio status (Non Performing Loan) has improved significantly from nearly 9% in early 1990s to less than 3% in 2003. The same is true for the long-term lost ratio (L TLR), which shows a downward trend to below 2%. Based on the above data, the performance suggests that KUPEDES has successfully attracted the rural societies. The steady growth, both outstanding and number of clients depicts that the credit is demanded by the rural economy, particularly micro enterprises. Furthermore, the low ratio of loan loss reveals that the loan can generate the borrower's income to pay back the principal and the interest rate plus any other administration costs. As a sustainable microfinance, BRI Unit system, as mentioned before, is free of subsidy. BRI unit system, however, has to raise funds for supporting its lending side. The performance of funds raised is astonishing. The total Deposit which Includes Saving (SIMPEDES & BRIT AMA), Demand Deposit, Time Deposit and others, based on the figures of December 2003, reached Rp27.429 trillion with the number of Depositors reaching 29,869,197 Depositors. Compared to loan outstanding, the figure of funds is much larger. The Loan to Deposit Ratio (LDR), however, only reached 51.39%. This figure shows us that there is still enough room to expand the loan. V. THE NEEDS OF INTERNAL CONTROL SYSTEMS FOR MICROFINANCE: THE RATIONALE An effective internal control system is needed for establishing sustainable BRI Unit microfinance system. Why is such effective internal control important? It is because of the policy to maintain BRI Unit remains small and the potential risks of customer service function. 5.1 The Potential Risks of Small BRI Units

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There are several benefits and risks in maintaining small BRI Units. Such benefits are the organization is simple; bureaucracy is minimal and supporting to fast decision making; and each BRI Unit's employee could be a marketer. The potential risks might be as consequences of small BRI Unit, on the other hand, are related to the facts as follows: 1) All BRI Unit employees must have direct relationship with customers or potential customers. The consequence of this policy is each employee must directly serve customers, and for doing this, each employee is given fairly high authority. There might be misuse of authority in serving the customers. 2) The number of employees for each BRI Unit is minimal. It is, however, supportive for the creation of group thinking-they only think of their group interest, not the interest of their company. Therefore, it is easy for them to be very cohesive in doing something bad to the company. The attitude of such group can be seen from they trust each other very much; they help each other; easy to compromise; and culture of having different opinion is bad. 3) BRI Unit operational system is basically designed as that of Branch Office. Since the minimal standard of employees for each BRI Unit is only four, however, some different functions might be done by the same person. Therefore, some of the segregation of duty for certain function cannot be implemented. This condition might create opportunity for bad employees to take advantage of.

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4) The location of BRI Units faraway from that of branch office. BRl Unit, generally, located around one mile to 100 miles from branch office location. Some of those need more than 24 hours to reach by boat or by car. The Consequence of far location might be branch office's leader or other employees responsible in the development of BRI Units cannot visit BRl Unit at any time. The consequence might create frauds and irregularities. 5.2 The potential risks of customer service function There are several consequences of serving the customers. Such consequences might relate to: 1) Conflict of interests Employees want additional income, on the other hand, they have to achieve their performance target. Therefore, they sometime are very expansive and not prudent in growing BRI Unit's business. Customers need banking service quickly and for such service they often do short cut. 2) Negative attitude Employees might not accept their level of income fitted to personal level and position whole heartedly. On the other hand, they receive performance targets which might be responded as a burden which have to be achieved by all means. They sometime try to get any additional income while achieving such targets. Customers often use all means to convince employees giving irregular banking service. Customers often believe that in order to get special treatment, money can do everything. 3) Mismanagement Mismanagement might cause frauds and irregularities. The attitudes of management which might create frauds and irregularities are: a) Management based on power. b) Misinterpretation of efficiency. c) Top down performance target. d) Threatening management-often use punishment threat to motivate employees. e) Unequal treatment to the employees. f) Negative thinking to the employees who are creative, innovative, energetic, and having courage to deliver opinions.

4) Not align among system and procedures, organization and human resource management. Such condition might relate to: a) The number of employees is not the same as requested by systems and procedures. b) The establishment of policy or systems and procedures is not fit to the organization. c) The systems and procedures do not accommodate built in control principle. d) The violation of employees’ job description to the separation of duty and dual control principles. Based on these above rationales, it is crucial for Bank BRI to create an effective BRI Unit internal control system. VI. ORGANIZATIONAL STRUCTURE OF BANK BRI MICROFINANCE AND INTERNAL CONTROL

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In order to fulfill the need of BRI Unit internal control system, there are several relevant things done by Bank BRI such as: 1) Established organizations in the head office, regional offices and branch offices responsible in the development of BRI Unit system 2) Established BRI Unit control systems and procedures. 3) Implemented proper BRI Unit policy and business strategy related to product development, human resources management, operation, logistis, and any other supportive technology and equipment. 4) Implemented prudential banking principles, good corporate governance, and new corporate culture.

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The picture below depicts the structure of microfinance development at Bank BRI. There are several working units which are responsible in the development of Bank BRI Microfinance. Those working units are located in the head office, regional offices and branch offices. Board of Commissioners

Board of Directors

Micro Business Division Divisions

Internal Audit Division

Regional Officers for Business Micro Business Division, located in the head office, is responsible for the existence of written Development

Regional Officers for Audit Service

micro finance systems and procedures. Together with other divisions, this division is also responsible for the plan of broadening BRI Unit networking and for the nationwide microfinance business plan and supporting equipment or logistic plan. The Division has to assure that microfinance operation is provided by an effective internal control system. The Division will, periodically, make sure that Regional Offices for Business Development and Branch Offices, in developing microfinance, are compliant with the system and procedures.
The picture below is the microfinance development structure in the regional office. There are two kinds of regional offices which are responsible for developing sustainable microfinance. These offices are Regional Office for Business Development and Regional Office for Audit Service.

Regional Offices for Business Development

Regional Offices for Audit Service

Departments

Micro Business Department

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Branch Offices From the above picture, we can see that Regional Office for Audit Service is responsible for auditing the operation of Regional Office for Business Development and Branch Offices in developing sustainable microfinance. This Office directly audits Regional Office for Business Development, Branch Offices and by sampling audits BRl Units. This office has to make sure that the internal control of the microfinance development in those working units is effective. Micro Business Department, located in the Regional Office for Business Development, helps Regional Office for Business Development develop microfinance and promote effective internal control implementation in each BRl Unit. This Department, periodically, by sampling, assures that the business development of each BRl Unit is on the right track with the regional business development plan. The Department also assures that each BRl Unit implements internal control effectively. The picture on the next page shows us the organizational structure of branch office, particularly related to the structure of BRl Unit development. There are two or three positions, which depend on the number of the BRI Units help Branch Leader develops microfinance under supervision of branch office. Those positions are Micro Business Manager (MBM), Micro Business Assistance Manager (MBAM) and Micro Business Compliance Supervisor (MBCS) named Penilik. The existence of MBM is only in the certain branch offices which have at least two MBAM. The ratio of MBAM to the number of BRI Units is 120. This means that up to 20 BRI Units, here must be one MBAM. MBM and MBAM help Branch Leader in developing sustainable microfinance. They have to implement internal control effectively in operating microfinance. They supervise BRI Unit Leaders in the operation of microfinance and encourage BRI Unit Leaders to implement internal control effectively as well. MBCS, on the other hand, helps Branch Leader to make sure that the implementation of internal control in each BRI Unit is effective. They inspect each BRI Unit monthly to prevent any mistakes, malpractices and misuses of authority. This inspection function is needed for preventive action in the operation of each BRI Unit's business.

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The picture also depicts that for the function of effective internal control, BRI Unit must be operated by minimal four people. With this minimal number of people, the segregation of duty can be implemented effectively. This minimal number of people, however, will be able to promote effective implementation of the internal control in each BRI Unit.

Branch Leader

Micro Business Manager/Micro Business Assistance Managers

Managers/Assistance Managers

Micro Business Compliance Supervisors

Supervisors

BRI Units

BRI Units

Clerks

Teller

Deskman

Credit Man

The minimal structure of each BRl Unit consists of BRl Unit Leader, Teller, Deskman, and Credit Man. Additional people might be needed based on the development of its business size. Maximal structure of each BRl Unit consists of eleven people. In case the business size of certain BRl Unit needs more than eleven people, so such BRl Unit must be split up into two. Meaning that we have to open another unit in potential location and not too far from the old unit's location, and transfer some of old BRl Unit's business to this new one. This splitup policy is also to promote effective implementation of internal control in each BRI Unit. VII. BANK BRI MICROFINANCE: INTERNAL CONTROL SYSTEMS In short we can say that the existence of BRI Unit internal control is to cope with broad network of BRI Unit; far distance of BRI Unit location; small organization of BRI Unit; potential risks of customer service function; large amount of assets and liabilities of each BRI Unit and nationwide; and great number of clients and customers of each BRI Unit and nationwide. The objectives of BRI Unit internal control are related to control operation, protect assets and liabilities by minimizing frauds and irregularities, protect the existing network, maintain the employees, control implementation of budget and business strategies, and maintain steady growth.

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Based on the structure depicted on chapter six, to function Bank BRI microfinance internal control there are ten positions which are responsible to. These positions are BRI Unit Leader, MBCS, MBAM, MBM, Branch Leader, Micro Business Department Manager of Regional Office, Regional Office for Business Development Manager, and Regional Office for Audit Service Manager, Micro Business Division Manager in the Head office, and Micro and Retail Business Managing Director. It is important here to discuss more detail the lines of control to BRI Units, sound internal control for BRI Units, and supportive condition to improve the implementation of effective internal control. 7.1 The Lines of Control It can be restated here that to function BRI Unit Internal Control System effectively there must be several lines of control. These lines of control are: 1) Line Management Control Line management control is the control by any positions responsible for developing the business of microfinance. Such control is done by:
 

BRI Unit Leader: He/she controls his/her units on site daily. MBM/MBAM: He/she controls all BRI Units under his/her development three to four times monthly and off site daily. Branch Manager: He/she controls BRI Units under his/her Branch's development on site once a year and off site monthly. Micro Business Department Manager/Regional Office for Business Development Manager: He/she controls BRI Units by sampling on site yearly and off site monthly. Micro Business Division Manager/Micro and Retail Business Managing Director: He or she controls BRI Units case by case basis on site and off site monthly.







The line management control is aimed to encourage effective implementation of BRI Unit internal control system while developing and growing its business. 2) Supervision Control This control is done by MBCS with the ratio of 1:4. It means that each MBCS is responsible in supervising four BRl Units or four CREDITMAN in case there are more than one CREDITMAN in certain BRI Units. He/she inspects each BRl Unit under his/her supervision for four days monthly. He/she reports his/her inspections to Branch Leader. The type of his/her inspection is individual and team. The purpose of team inspection is to avoid weak supervision of MBCS or collusion of MBCS with BRl Unit Managers or other BRl Unit Employees under the MBCS' supervision. Team inspection is case by case basis and it is done only by branch with more than two MBCS. Team inspection will not be done to the BRI Units which are under supervision of MBCS who is the member of the team inspection. In other words, there must be cross inspection among MBCS. Such team inspection is lead by MBAM. MBCS supervision working paper includes cash management, loan operation, saving/fund operation, other banking services, computer operation, field visit, registers and others.

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3) Audit Control On site audit control is done by Regional Office for Audit Service yearly. The audit is aimed to assure that the BRI Unit internal control is implemented effectively and any potential risk is mitigated optimally. The audit includes cash management, loan operation, saving/fund operation, other banking services, computer operation, maintenance of registers, and others. The Bank BRI audit system is now moving from compliance audit to audit as a strategic business partner. 7.2 Sound Internal Control Sound BRI Unit internal control system should include separation of function, delegation of authority, proper procedures, and accepted by employees. 1) Separation of Functions Separation of functions or often stated as segregation of duties means that to do a certain process, there are several stages done by different persons. Cash transactions, for example, consist of recording, custody, and authorization. Non cash transactions, on the other hand, consist of maker, checker, and signer. Maker and checker can not be the same person, but checker and signer can be the same person. Loan processing, as another example, consists of registration, investigation, and authorization. Loan registration, which consists of receiving and recording of loan applications, is done by Deskman. Loan investigation, which consists of loan and collateral appraisal and analyses, is done by CREDITMAN. Loan authorization or approval is done by BRI Unit Leader or BMAM or MBM or Branch Manager depends on the size of the loan disbursed. Loan disbursement, on the other hand, consists of document making and recording, document checking and approval, and disbursement payment. Document making and recording of loan disbursement is done by Deskman. Document checking and approval is done by BRI Unit Leader. Disbursement payment at last is done by Teller. 2) Delegation of Authority In order to encourage effective implementation of BRI Unit internal control, there must be delegation of authority~ For effective internal control, the authority, however, cannot be centralized in the one hand. The delegation of authority is important to minimize misuse of authority. Such delegation of authority is related to credit limit, cash payment, reward and punishment, compensation, etc. Credit limit, for example, is delegated as follows: For BRI Unit Leader is up to Rp l0 million, for MBAM is up to Rp 15 million, and for MBM/Branch Leader is up to Rp 50 million. Delegation of authority must be developed properly to be able to encourage simple, fast, and minimal risk operation. Delegation of authority must be balance with effort to avoid frauds and irregularities. 3) Proper Written Procedures As a basis of proper operation and to implement standardized microfinance operation, it is needed to establish written systems and procedures. Microfinance systems and procedures have to include separation of function and delegation of authority. 4) Accepted by Employees Employees have to be able to interpret and implement standardized systems and procedures properly. Therefore, employee training and development to improve employee's

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skills and knowledge is crucial. Bank BRI has six training centers located in six different provinces and another one is in the head office, Jakarta as the central office of training and development nationwide. External training is also provided based on the needs of skills and knowledge to improve. Bank BRI has already implemented competency based training to improve employees’ competence. To support skills, knowledge, and competencies improvement, Bank BRI has implemented systemized performance management. Through performance management, employee is developed individually. Performance management will generate training needs assessment for each individual employee as a feedback for training centers in developing relevant competency based training. 7.3 Supportive Condition to Internal Control Supportive condition to sound internal control is also encouraged. Such supportive condition is established by: 1) Implementing Performance Evaluation Performance of BRI Unit is evaluated as a basis of the BRI Unit Leader's performance evaluation. The evaluation is based on the Balance Score Card Concept. There are four perspectives evaluated here, these are financial, customers, internal business processes and employee growth. The evaluation of internal business process perspective will help Bank BRI improve the effectiveness of its internal control. BRI Unit Leader is evaluated by Branch Leader. Branch Leader is evaluated by Regional Office for Business Development Manager, and Regional Office for Business Development Manager is evaluated by Micro and Retail Business Managing Director. Performance evaluation results will be followed by rewards, warning, field visit or discussion of strategy to improve performance. 2) Creating Supportive Working Life Supportive working life is created by encouraging interactive communication among employees, among management, and among management and employees. Participative leadership which gives employees opportunities to participate in the decision making process is exercised. Through participative leadership, employees’ sense of belonging to the decision agreed upon will improve. Therefore, employee control will help management to implement internal control effectively. 3) Implementing Balanced Rewards and Punishment Balanced rewards and punishment will help management improve internal control effectively. Rewards will encourage employees to improve their performance and internal control. Severe punishment, on the other hand, will minimize employees in the violation of systems and procedures or in other words will improve their internal control of daily operation. 4) Implementing Good Corporate Governance Good Corporate Governance (GCG) principle which consists of Transparency, Accountability, Responsibility, Independence, and fairness is implemented. The implementation of GCG will help management in creating effective control culture. This culture will encourage anyone to improve the effectiveness of internal control.

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5) Implementing New Corporate Culture Bank BRI New Corporate Culture consists of five principles, integrity, professionalism, customer satisfaction, role model, and employee recognition. The implementation of this culture will help improve the effectiveness of internal control.

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6) Implementing Prudential Banking Principle Bank BRI also implements prudential banking principle. The implementation of this principle will impose the existence of control culture. Finally, the control culture will help management and employees improve internal control in the daily operation. VIII. BUSINESS DEVELOPMENT AND CONTROL: THE ART OF BALANCING

Strict or tight Internal Control might be able to minimize frauds and irregularities, but on the other hand, it might create unsupportive culture to business development. There is tradeoff between control and customer service. If control is improved, on the other hand the service time or might be service quality will reduce. If service quality is improved, so some of the strictness of internal control might be sacrificed. Therefore, we have to identify the point in which the internal control is effective for the development of the business. Internal control for microfinance must support the principles of microfinance. Such principles are simple, sustainable, and accessible. Simple means that microfinance system and procedures must be easy to implement either by the customers or employees. Too tight internal control might create very difficult requirement to the customers to fulfill. It might also burden the employees to develop the business. Besides, it might also create inefficiency related to the number of employees needed, the forms needed, and any supporting logistic requested. Finally, it might reduce the sustainability of microfinance business. Accessible means that microfinance is easy to access by customers. In order to be accessible, microfinance service might be closed to the customers technologically or physically. Since the distance of BRl Unit location from the branch is generally faraway, the internal control must not give opportunity to anyone to violate the systems and procedures. Such internal control, by the way, has to still give a room for employees to develop business successfully. Based on the above discussion, we can say that there must be balance between internal control and business development. Effective internal control must be able to reduce frauds and irregularities, but it still has enough room for sustainable business development.

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IX. BANK BRI INTERNAL CONTROL: FUTURE CHALLENGE It seems BRl people in the field feel that Bank BRl internal control is too strict. Bank BRl Internal Audit is felt even stricter. It, however, burdens BRl Unit to reach more informal customers. For future microfinance development, it is needed for Bank BRl Internal Control and Audit to give more room to BRl Unit to reach more informal customers. Bank BRl has to be able to establish internal control and audit which balance business development and the effort to minimize frauds and irregularities. Bank BRl is challenged to grow control culture. The effectiveness of its performance management will determine whether anyone encouraged implement effective internal control or not. Therefore, effective implementation of balance score cards as Bank BRl new performance evaluation to support effective internal control is another challenge faced by Bank BRl.

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