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Garuda Indonesia told by regulator to fix 2018 results

Government pressure thought to have led to state-owned carrier's unusual revenue

The accounting error relates to the carrier's contract with Mahata Aero Teknologi, a local company, under which a Wi-Fi connection service will be made available on all Garuda planes.   © Reuters

JAKARTA -- Indonesia's financial authorities have told Garuda Indonesia, the country's state-owned flagship carrier, to "fix and restate" its 2018 results within 14 days due to accounting errors, and have also frozen the license of the accountant that audited Garuda's results.

The Financial Services Authority, or OJK, said Garuda as a company and its directors would be fined 100 million rupiah each. Additional fines will also be imposed on directors and commissioners who signed off the 2018 results.

The accounting error relates to the carrier's contract with Mahata Aero Teknologi, a local company, for a wifi connection service to be made available on all Garuda planes. Under the deal, the airline stands to receive $240 million from expected future revenue over the next 15 years, without making any investment and sharing revenue with Mahata. Garuda booked the entire amount of the expected revenue in the 2018 accounts. This allowed the airline to eke out a meagre net profit of $809,846 for 2018, its first net profit in two years after ending 2017 with a $216 million net loss.

The accounting fix will likely mean that the carrier's results for last year will end up back in the red.

"We respect the opinion of the regulator and the different interpretations of the financial statements, but we will study the results of the examination further," Garuda said in a statement.

The carrier also added that it believed its auditor -- Tanubrata Sutanto Fahmi Bambang & Partners, a unit of global accounting company BDO, who was told by OJK to "improve quality control policies" -- had carried out its auditing process in accordance with appropriate rules. "There is no interference at all from any party including but not limited to the board of directors and the board of commissioners to direct the results to certain objectives," it said.

The Indonesia Stock Exchange separately issued a statement asking the airline to restate its first-quarter 2019 results as well, and imposed a 250 million rupiah fine on the quarterly result.

Garuda's shares ended Friday's trading down 7.6% from the previous close.

The problem first came to light in April when it was revealed at Garuda's shareholders meeting that two members of the carrier's board of commissioners appointed by CT Corp, a local conglomerate which holds the second largest stake in the air carrier, had declined to sign the 2018 results.

Although the the stated policy of the Indonesian government -- Garuda's largest shareholder -- is to only hold its shares, it is in reality deeply involved in personnel decisions in the company's management ranks. President Joko Widodo's policy of focusing on short-term operational efficiency of state-owned enterprises has resulted in changes in executives at such companies. Previous presidents of Garuda and oil company Pertamina were both replaced about a year after they took up their positions.

According to a government official, the current president of Garuda, Ari Ashkara, was ordered to return the company to profit within a year of taking up his post in September 2018.

The current business environment is by no means favorable for Garuda, which faces fierce challenges from rivals on domestic routes and government pressure to lower ticket prices. Ashkara is aiming to beat discount carrier rivals by enhancing on-board services. His predecessor, Pahala N. Mansury, launched a bold initiative to restructure the company but confrontation with the labour union resulted in his tenure ending after just a year and a half at the helm.

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