23 Sep 2024
Draft Presidential Regulation Envisages Mandatory Annual Legal Audits for Businesses and Other Entities

A draft presidential regulation (“Draft”) introduced in July will, if eventually promulgated in its present form, require every Indonesian business entity (badan usaha), legal entity (badan hukum), and public entity (badan publik) to undergo an annual legal audit to assess the legality of the entity and its actions, including its levels of legal compliance and good corporate governance.

Detailed information has yet to be provided on the scope of the envisaged legal audit requirement, audit procedures, how detailed an audit should be, or the consequences of an adverse audit opinion. These and other matters are expected to be addressed in implementing regulations. However, it is clear that what is envisaged has the potential to be burdensome for many businesses in terms of both time and money.

What do we know so far?

As regards the private sector, what we know based on the Draft may be summarized as follows:

A business or legal entity is required to have a legal audit conducted every year. If it fails to appoint a legal auditor of its own accord to do so, then a legal auditor may be appointed by the Minister.

Just as in the case of a financial audit, the findings of a legal audit should be set out in an opinion issued by the legal auditor, who must be certified by the Minister of Law and Human Rights (“Minister”).

The Draft describes the general processes involved in a legal audit, encompassing:

1. Identification of audit’s purpose and parameters;
2. Planning and confirmation of audit;
3. Collecting information;
4. Assessment and review of information; and
5. Writing-up and submitting the audit report.

Other requirements under the Draft are as follows:

The Draft further provides that a failure by a business or legal entity to comply with its legal-audit obligations will be subject to sanctions. As to what these might be, the Draft rather vaguely states that they shall be “in accordance with the laws and regulations in effect.”

ABNR Commentary

The Draft forms part of a broader (long-running) effort to improve legal compliance in Indonesia by both private and public organizations. It introduces an entirely new, and potentially costly, bureaucratic requirement for businesses, on top of their existing reporting obligations to the Ministry of Law and Human Rights, the Investment Coordinating Board / Badan Koordinasi Penanaman Modal (BKPM), and other agencies, as the case may be. However, insufficient information is available to date to vouchsafe just how burdensome / costly the new legal-audit requirement is likely to be. We will have to wait for the regulation to be promulgated and its implementing regulations issued before this becomes clear. In the meantime, we will keep you updated as regards any changes or additions to the Draft.

By partners Mr. Emir Nurmansyah (enurmansyah@abnrlaw.com), Ms. Chandrawati Dewi (cdewi@abnrlaw.com), and Mr. Maher Sasongko (msasongko@abnrlaw.com) and senior associate Ms. Yohanna Fifinella (yfifinella@abnrlaw.com).

This ABNR News and its contents are intended solely to provide a general overview, for informational purposes, of selected recent developments in Indonesian law. They do not constitute legal advice and should not be relied upon as such. Accordingly, ABNR accepts no liability of any kind in respect of any statement, opinion, view, error, or omission that may be contained in this legal update. In all circumstances, you are strongly advised to consult a licensed Indonesian legal practitioner before taking any action that could adversely affect your rights and obligations under Indonesian law.

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