The previous presidential administration has prepared a draft of Presidential Regulation ("PR") on Legal Compliance with Legislation Formation and Law Implementation, which mandates the implementation of legal audit ("Bill"). Considering the requirement under Indonesian Law is only on the financial audit, this Bill stipulates that all corporate entities duly established in Indonesia will be subject to legal audit obligation.
To provide you with the general overview of this Bill, we provide in this article, our general overview covering: (i) Scope and Procedures of Legal Audit, (ii) Sanctions, and (iii) Concluding Remarks.
Scope and Procedures of Legal Audit
The Bill mandates the importance of effective implementation of the legal audit by the relevant entities. To ensure such effectiveness, the entities shall be regularly assessed based on their (i) legal substances, structure, culture, also (ii) awareness and compliance with the prevailing law (Article 9 of the Bill).
Unlike the financial audit, which only applies to certain companies duly established in Indonesia (i.e., public companies, bond issuers, public fund managers, State Owned Enterprises, and any entities with a minimum asset of, at least, IDR 50 billion), any form of corporate entities in Indonesia will be subject to the legal audit obligation. For further context, kindly refer to the following points below on such corporate entities mentioned in the Bill:
- Corporate Entities: all corporate entities established in Indonesia, which include limited liability companies (and State-Owned Enterprises), foundations, cooperatives, firms, limited liability partnerships, foreign representative offices, foreign trade representative offices; and
- Public Institutions: all state administration institutions or non-government organizations partially or fully funded by the state or from the regional revenues, including the ministry offices and government institutions.
(Article 11 of the Bill)
Since all Public Institutions will be subject to the legal audit obligation, the Bill differentiates the audit procedures on Corporate Entities and Public Institutions. Corporate entities shall be audited annually by legal auditors certified by the Ministry of Law ("MoL") (Article 12 (1) and Article 1 (8) of the Bill). If a corporate entity does not perform the annual legal audit voluntarily, MoL may appoint a legal auditor to do the audit on the entity. (Article 12 (3) of the Bill).
The Bill further elaborates the guideline for a legal auditor in performing the legal audit for a Corporate Entity in the following procedure:
- Identification on the purpose of assignment;
- planning;
- planning confirmation;
- data and information compiling;
- data and information assessment and analysis;
- report preparation; and
- submission of the legal audit result to the audited Corporate Entity.
(Article 12 (1) of Bill)
Please note when an auditor is appointed by MoL, the auditor will submit the result to MoL before it goes to the audited Corporate Entity.
Since the legal audit result contains the recommendation of the auditor, the audited Corporate Entity will be required to follow up the issues based on the auditor's recommendation (Article 12 (4) and (6) of the Bill). The entity will need to submit the report on the result of follow up actions by the end of the financial year to the following authorities:
- MoL;
- Ministry of Investment and Downstream Industry/ the Indonesian Investment Coordinating Board (Badan Koordinasi Penanaman Modal or "BKPM");
- The relevant ministry responsible for the business activities of the audited Corporate Entity (for instance, a trade company must submit the report to the Ministry of Trade); and
- The local government office in charge of the investment and licensing.
(Article 12 (8) and (9) of the Bill)
Sanctions
Failure to submit the report on the result of follow up actions will be subject to sanctions by MoL (Article 12 (10) of the Bill). However, the Bill remains silent on the types of sanction to be imposed on the relevant Corporate Entities. The ministries involved (MoL, BKPM, etc.) are expected to issue further implementing regulations on the procedures and types of sanctions.
Concluding Remarks
Through this legal audit obligation, companies will need to hire legal auditors to perform the mandated annual audit. Since the Bill does not elaborate on corporate entities that are subjects to the legal audit, this obligation appears to be detrimental to some relatively small companies (medium, small, and micro enterprises) that do not generate substantial revenues every year. On the other hand, some other companies may view this obligation as an opportunity to make themselves known to investors or the public, presenting their companies as "green flag" companies by performing the annual legal audit. Nevertheless, this mandate will require every company to add another expense to its financial book every single year for hiring a legal auditor.
We still have to wait and see how the implementation of this mandatory legal audit will benefit all stakeholders of the relevant businesses including the government. It will be subject to further implementing regulations to be eventually issued by the government after passing the Bill.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
