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CHAPTER 1

INTRODUCTION

1.1 Background
The beginning of the 21
st
century was shocking by the U.Ss economical
conditions. The year of 2001 set a record for bankruptcies by public
companies, with 257 companies filed for bankruptcy (fox 2003). Starting from
Enron case in 2001, one scandal after another popped up in the business
pages, for instance: the case of Global Crossing (which later filed for
bankruptcy) which involves revenue boosting with fake swaps, followed by
Industrial conglomerate Tyco International and cable television company
Adelphia (which also filed for bankruptcy). The case continues until in June
2002, the telecom giant, WorldCom admitted that it had improperly booked
$3.8 billion in expenses, wrongly boosting cash flow and profit over the
previous 15 months.

The collapse of those companies was mainly due to the bad investments, the
covered up of monetary losses by the executives, lack of transparency on their
annual report, and the lack of independence of their auditors. This event had
negatively affected all the stakeholders of the companies. These accounting
scandals also resulted in a decline of public trust in accounting and reporting
practices.


As a corrective action and to calm down the market, the Sarbanes-Oxley Act
was issued in 2002. The act was named after the creator, Senator Paul
Sarbanes and Representative Michael G. Oxley. The issuance of Sarbanes-
Oxley Act of 2002 (SOX) was intended to eliminate the practices that lead to
manipulation of stock price, to help investors regain their confidence to the
market, and to ensure that the annual financial statements issued by the listed
companies are correct, complete, and has a good internal control supported
them (Keller & Luzzato 2004).

SOX itself consists of 11 titles. However, this thesis will focus on section 404:
management assessment of internal controls. SOX section 404 applies for
both the management and the auditors of the company. SOX section 404
specifically requires auditors of public companies to assess and report on the
effectiveness of internal control over financial reporting. The auditors are also
obliged to issue an opinion on the operating effectiveness of those controls.
On the other side, Section 404 of SOX requires management to publicly
report on the operating effectiveness of the entitys internal control (Arens,
Elder, & Beasley 2006).

Since the issuance of the SOX, all of listed companies in the U.Ss stock
exchanges have to comply with it. Foreign companies that are listed in the
U.Ss stock exchanges are also obliged to comply with the SOX regulation.
Include as one of the listed companies in the New York Stock Exchange is
PT. TEP Headquarter.

PT. TEP Headquarter is a French oil and gas company that is awarded as the
fourth largest publicly traded integrated oil and gas company in the world
1
.
PT. TEP Headquarters worldwide operations are conducted through three
business segments: upstream, downstream and chemicals. PT. TEP
Headquarter operates in more than 130 countries, including Indonesia.

Indonesia itself had not forced its listed companies to follow SOX. However,
Indonesian companies that are listed in the U.S stock exchange (i.e. PT.
Telekomunikasi Indonesia, Tbk. and PT. Indosat, Tbk.) are obliged to follow
SOX regulations. Nevertheless, this thesis will specifically focus on the
implementation of Sarbanes Oxley in PT. TEP Indonesia. The writer chose
PT. TEP Indonesia as this thesis research subject because to conduct its
business in Indonesia, PT. TEP Indonesia, has to follow special rules and
regulations from BP Migas. At the same time, PT. TEP Indonesia also obliged
to comply with SOX regulations as its parent, PT. TEP Headquarter is listed
in the U.S capital market. Therefore, it makes PT. TEP Indonesia an
interesting research subject.


1
Based on Market Capitalization on December 2006
Through this thesis, the writer would like to see the implementation of SOX
section 404 in PT. TEP Indonesia. Hence, the thesis is titled the analysis of
Sarbanes Oxley Act section 404 Implementation in PT. TEP Indonesia.
1.2 Problem identifications:
There are three problems that are going to be discussed in this thesis:
1. What are the changes in Internal Control procedures before and after the
implementation of SOX?
2. What are the problems that the company encountered because of the
adoption of SOX?
3. What are the benefits that the company gets after the implementation of
SOX?

1.3 Aims and benefits:
Aims:
1. To identify the changes in Internal Control procedures before and after the
implementation of SOX.
2. To identify the problems that the company encountered because of the
adoption of SOX.
3. To identify the benefits that the company gets after the implementation of
SOX.


Benefits:
The writer hopes that this thesis would increase an understanding of the
readers on the real case implementation of SOX, especially in the areas of
internal control. Moreover, hopefully, this thesis would give an example of a
good implementation of SOX for other companies that want to be listed in
New York Stock Exchange (NYSE).
1.4 Scope of Work
The analysis and problems discussed in this thesis will only be based on SOX
section 404 regarding management assessment of internal control. Due to time
constraints, the writer will only discuss the implementation of internal control
in the purchasing cycle of the company.

1.5 Research Methodology
The thesis is descriptive in nature where the writer wants to describe the
implementation of SOX in a company. During the research process, the writer
uses several research methods:
a. Literature reviews
Literature reviews are done through collecting relevant information related
to this thesis in research journals, accounting and auditing books, and
internet. Through literature reviews, the writer can obtain secondary
information to be used as theoretical foundation as well as to accommodate
field information. This is useful to develop an understanding of the theory in
relation to the issue.
b. Field research.
Besides gathering data from library, the writer also collects some primary
data by doing field research from the company being analyzed. The field
research is done by interviewing and surveying the employees of the
company in order to collect some information about the operation within the
company.

1.6 Thesis Structure
Chapter 1: Introduction
This chapter covers thesis background, problem identification, aims and
benefits, scope of work, and the thesis structure
Chapter 2: Theoretical framework
This chapter reports on numerous theories relevant to the research object.
Those theories will become the basis for further research analysis.
Chapter 3: Company Profile
The chapter briefly explains PT. TEP Headquarters history and development,
businesses and strategy. In addition, this chapter also provides an overview on
the profile of PT. TEP Indonesia, including its history and development,
vision and mission, and organizational structure.
Chapter 4: Findings and Discussion
This chapter provides the answers for the problems outlined in chapter 1.
Included in this chapter is the discussion on the evaluation of the internal
control assessment process before and after the adoption of SOX, the
problems that the company encountered when it in the implementation
process of SOX, and the benefits of implementation of SOX, especially in PT.
TEP Indonesia.
Chapter 5: Conclusion, recommendations and limitations
This chapter concludes the study, provide some recommendations for the
company and reveal the limitations of the study.

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