U92750 [B/E] BOM
ITEM 15. CONTROL AND PROCEDURES
BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 25026 Name: PT TELKOM
Date: 23-JUN-2006 10:35:39.88 Operator: BOM99999T
Phone: 65-6536-6288 Site: BOWNE OF SINGAPORE
U92750.SUB, DocName: 20-F, Doc: 1, Page: 185
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OWNE INTEGRATED TYPESETTING SYSTEM CRC: 25026ame: PT TELKOMDate: 23-JUN-2006 10:35:39.88Operator: BOM99999TPhone: 65-6536-6288Site: BOWNE OF SINGAPORE 92750.SUB, DocName: 20-F, Doc: 1, Page: 185
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Equity Price Risk
The Company’s long-term investments consist primarily of minority investments in the equity of private Indonesian companies. With respect to the Indonesian companies in which the Company has investments, the financial performance of such companies may be affected by the fluctuation of macro economic and social conditions such as the level of economic activity, Rupiah exchange rates against other currencies, inflation and interest rates.
Not applicable.
PART II
There are no defaults, dividend arrearages or delinquencies to which this Item applies. But see Item 5. “Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Indebtedness” for information on covenant defaults for which waivers have been obtained.
Not applicable.
Disclosure Controls and Procedures
TELKOM has a disclosure committee comprised of 14 senior members from various departments and chaired by the Director of Finance.
The disclosure committee’s role is to support TELKOM’s management in designing and evaluating TELKOM’s disclosure controls and procedures and participating in the disclosure process. TELKOM formally established its disclosure committee on February 18, 2005. Since its formal establishment, the disclosure committee has established internal work procedures relating to the preparation of various disclosure materials for quarterly and annual reporting, including TELKOM’s annual report on Form 20-F. The establishment of the disclosure committee formalized the previous disclosure process where designated senior employees from various departments were responsible for assisting with the necessary disclosures, while the department heads were responsible for reviewing of such disclosure materials.
TELKOM’s principal executive officer and principal financial officer carried out an evaluation of the effectiveness of TELKOM’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, 2005. TELKOM’s principal executive officer and principal financial officer concluded, based on their evaluation, as of December 31, 2005, that the design and operation of TELKOM’s disclosure controls and procedures were not effective to ensure that information required to be disclosed in the reports TELKOM files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required, and is
accumulated and communicated to TELKOM’s management, including TELKOM’s President Director and Director of Finance, to allow timely decisions regarding required disclosure.
Internal Controls over Financial Reporting
In connection with the audit of our financial statements, reportable conditions (as defined under standards established by the American Institute of Certified Public Accountants) relating to TELKOM’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) were identified and communicated by PwC in their report dated January 9, 2004 and delivered to
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BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 49850 Name: PT TELKOM
Date: 23-JUN-2006 10:35:39.88 Operator: BOM99999T
Phone: 65-6536-6288 Site: BOWNE OF SINGAPORE
U92750.SUB, DocName: 20-F, Doc: 1, Page: 186
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OWNE INTEGRATED TYPESETTING SYSTEM CRC: 49850ame: PT TELKOMDate: 23-JUN-2006 10:35:39.88Operator: BOM99999TPhone: 65-6536-6288Site: BOWNE OF SINGAPORE 92750.SUB, DocName: 20-F, Doc: 1, Page: 186
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TELKOM on January 12, 2004, and discussed by PwC with the Board of Directors on January 14, 2004 and with the Board of Commissioners and the Audit Committee on January 16, 2004, in connection with its audit of the consolidated financial statements as of and for the year ended December 31, 2002. Reportable conditions were also identified and communicated by KPMG to TELKOM and its Audit Committee on June 29, 2004, July 2005 and May 2006 in connection with its audit of the consolidated financial statements as of and for the years ended December 31, 2003, 2004 and 2005, respectively. Both PwC and KPMG identified the same material weaknesses based on their respective audits of TELKOM. Both PwC and KPMG informed TELKOM that they were unable to determine when such material weaknesses first arose, as such material weaknesses appeared to exist prior to the commencement of their respective audit periods. Both PwC and KPMG informed the Audit Committee that they had identified “reportable conditions” each of which constituted a “material weakness” (as each such term is defined under standards established by the American Institute of Certified Public Accountants) in TELKOM’s internal control over financial reporting with respect to: (1) inadequate personnel resources with sufficient knowledge and experience in the application of Indonesian GAAP and US GAAP accounting principles because TELKOM did not have sufficient personnel in its accounting department with expertise in applying Indonesian GAAP to complicated accounting issues or in identifying and applying differences in accounting treatments under Indonesian GAAP and U.S. GAAP; (2) deficiencies in the organizational structure of the accounting department, including the oversight function for accounting and financial reporting because there was inadequate management, supervision and review for the accounting functions;
(3) inadequate internal processes for the assessment of critical, significant and judgmental accounting areas; accordingly, when a set of facts gave rise to critical or significant accounting issues or raised significant issues of judgment, such issues were not always properly identified, or, even if properly identified, the appropriate experts were not always consulted and issues of judgment were not always elevated to the
appropriate level of management or the Audit Committee; and (4) insufficient written policies and procedures for the accounting and financial reporting function, insufficient knowledge of and compliance with, existing policies and procedures among relevant personnel and insufficient emphasis by the internal audit function on the foregoing; in particular, accounting and financial reporting personnel did not have objective written policies and procedures to follow when addressing significant accounting and financial reporting issues and so such issues were not always dealt with in a consistent manner, and the internal audit function did not focus on identifying or identify this issue as well as the other reportable conditions identified herein.
In response to the matters identified by TELKOM’s external auditors, under the supervision of the Audit Committee, in January 2004 TELKOM’s senior management directed that TELKOM dedicate resources and take steps to strengthen control processes and procedures in order to prevent a recurrence of the circumstances that resulted in the need to restate TELKOM’s consolidated financial statements which include among others: (i) an assessment of the organizational structure of the finance department, including to determine additional resources which need to be dedicated to it; (ii) the enhancement of all finance-related policies and procedures covering accounting and financial
reporting; (iii) the improvement of standard documentations requirements for the assessment of critical, significant and judgmental accounting areas; (iv) the improvement of understanding of relevant Indonesian GAAP and U.S. GAAP accounting principles and financial reporting responsibilities across all business units through intensive and continuing education and training and proactive consultations with advisors on technical matters as they relate to TELKOM’s financial reporting; and (v) modification of the mandate of TELKOM’s internal audit function to place greater emphasis on the adequacy of, and compliance with, procedures relating to internal control over financial reporting.
Since 2004, TELKOM has taken a number of steps specifically aimed at addressing the senior management’s directions on the foregoing.
Such steps include:
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(1) TELKOM carried out a recruitment exercise for accountancy graduates and provided regular training programs on accounting and financial reporting issues with emphasis on Indonesian and U.S. GAAP. Since May 2004, TELKOM has provided additional information, resources
BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 36321 Name: PT TELKOM
Date: 23-JUN-2006 10:35:39.88 Operator: BOM99999T
Phone: 65-6536-6288 Site: BOWNE OF SINGAPORE
U92750.SUB, DocName: 20-F, Doc: 1, Page: 187
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and databases to its accounting staff by subscribing to various printed or on-line accounting publications.
(2) TELKOM over hauled its organization structure in respect of internal control over financial reporting to achieve the separation of each financial reporting function and also to bring qualified, knowledgeable employees to implement TELKOM’s improved financial reporting policies and procedures. In connection with the improvement of the oversight function, TELKOM’s senior management directed the addition of a new oversight function to its accounting organization structure to improve the assessment of critical, significant and judgmental accounting issues by establishing a new unit dedicated to the on-going review and monitoring of TELKOM’s internal control over financial reporting. As part of such efforts, TELKOM established its “Finance Center” on January 6, 2006. The Finance Center is a unit which directly reports to Finance Director and acts as a centralized decision making and execution body in relation to TELKOM’s financial reporting for all the business units. The unit is also responsible for supporting all the business units of TELKOM in all relevant financial areas, including its accounting function. Since the establishment of the Finance Center, the Accounting Department, which also directly reports to Finance Director and is a unit independent from Finance Center, focuses on reviewing financial statements produced by all the business units of TELKOM to ensure that the financial statements are prepared in accordance with generally accepted accounting principles.
(3) On April 13, 2006, TELKOM formally approved and issued revised accounting and financial reporting policies and related supplements, which take effect retroactively from January 1, 2006. Following the issuance of the revised accounting and financial reporting policies and the supplements, TELKOM is updating its accounting manuals and work procedures as operating guidelines for implementation of the new policies. Such revised accounting manuals and work procedures are expected to be finalized in the third quarter of 2006.
(4) To improve its internal control over financial reporting at the entity level and to incorporate the best corporate governance practices, TELKOM restructured its corporate organization and separated the Risk Management unit and Legal Compliance unit, each reporting directly to the CEO. Each of these units is responsible for ensuring TELKOM’s compliance with various internal and external rules and regulations in respect of financial reporting and minimizing TELKOM’s regulatory and business risks which may arise in conducting its accounting and financial reporting functions.
(5) Since 2004, in preparation for the compliance with Section 404 of Sarbanes-Oxley Act of 2002, TELKOM, in conjunction with Ernst & Young, has designed an internal control framework and protocol for all of its business processes. Since then, TELKOM has gradually adopted and implemented such new internal control system in its daily operations. Since December 2004, TELKOM has
conducted walkthroughs and test-runs with respect to the implementation of the new internal controls, has made adjustments and also taken remedial steps where appropriate to evaluate and monitor the implementation of the Directors’ Decree on Internal Control. TELKOM plans to implement these regular tests and remedy problems identified through such tests on a regular basis. In addition, TELKOM, also in conjunction with Ernst & Young, reviewed the implementation of its information technology-related general controls. Such review was completed on July 15, 2005.
(6) Since December 2004, TELKOM has modified the mandate of its internal audit function to place greater emphasis on the adequacy of, and compliance with, procedures relating to internal control over financial reporting. Since April 2005, with the assistance of Ernst &
Young, TELKOM has also been assessing the roles and functions of its Internal Audit Unit to ensure compliance with the Sarbanes-Oxley Act of 2002.
BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 40441 Name: PT TELKOM
Date: 23-JUN-2006 10:35:39.88 Operator: BOM99999T
Phone: 65-6536-6288 Site: BOWNE OF SINGAPORE
U92750.SUB, DocName: 20-F, Doc: 1, Page: 188
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OWNE INTEGRATED TYPESETTING SYSTEM CRC: 40441ame: PT TELKOMDate: 23-JUN-2006 10:35:39.88Operator: BOM99999TPhone: 65-6536-6288Site: BOWNE OF SINGAPORE 92750.SUB, DocName: 20-F, Doc: 1, Page: 188
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