The Indonesian government is preparing to introduce mandatory legal audits for businesses, signaling a shift toward greater regulatory enforcement and transparency.
This initiative is being spearheaded by the Ministry of Law and Human Rights, which is currently drafting a Presidential Regulation aimed at boosting legal compliance across various business sectors.
The regulation will require companies to conduct legal audits regularly, providing a thorough assessment of their adherence to the laws and regulations governing their industries.
Why Legal Audits Are Becoming Mandatory
The proposed mandatory legal audit is a proactive measure designed to ensure businesses align with legal requirements in their day-to-day operations. The primary goal is to strengthen legal compliance in a way that enhances business accountability.
This increased focus on compliance will not only mitigate legal risks but also provide businesses with a valuable tool for decision-making and public accountability.
Harvardy M. Iqbal, President of the Indonesian Legal Auditors Association, who is actively involved in discussions with various ministries, commented, “Companies will be required to conduct legal audits annually. High compliance levels should also positively impact a business’s valuation, especially in the eyes of investors.”
His statement underscores the broader implications of this regulation for businesses, as compliance could play a significant role in attracting investment and boosting market value.
Who Will Be Affected by the New Rule?
The initial focus of this mandatory legal audit will be on companies that already undergo financial audits, such as those that are publicly traded or involved in raising funds from the public. The following types of businesses will likely be the first to be affected:
– Publicly traded companies
– State-owned enterprises
– Regional-owned enterprises
– Foreign-owned companies
These businesses, by nature, have a higher degree of public accountability and are more exposed to regulatory scrutiny. As a result, the government is placing them at the forefront of this new legal audit initiative to ensure that they set an example of compliance for the broader business community.
The Importance of Legal Compliance
Legal compliance is critical for business continuity and success in Indonesia. Companies that fail to comply with regulations not only risk legal sanctions but also endanger their reputation, operational efficiency, and financial stability.
By conducting annual legal audits, businesses can mitigate the risk of non-compliance, identify potential legal issues before they escalate, and demonstrate transparency to both the public and law enforcement agencies.
In addition to reducing the risk of sanctions, maintaining a high level of legal compliance can increase a company’s attractiveness to investors. Investors are more likely to back businesses that are legally sound, as compliance offers assurance that the business is free from the risk of costly legal disputes or shutdowns.
What a Legal Audit Involves
A legal audit is essentially a comprehensive review of a company’s legal standing, ensuring that its operations are in line with applicable regulations. The audit involves a thorough examination of key documents, such as:
1. Company’s Deeds of Establishment, other incorporation documents and business licenses
2. Tax Identification Numbers, tax returns, and asset ownership documents
3. Employment Documents
4. Contractual cooperation documents with business partners, suppliers, and other stakeholders.
Future Implications of Mandatory Legal Audits
While the regulation is still in the drafting stage, it is expected to become law once the new administration takes office. Businesses that fall under the regulation’s scope will need to start preparing now, ensuring their operations and documentation are up to date.
Failure to comply with the legal audit requirement could result in penalties or, in severe cases, the suspension of business activities.
If your business is in Indonesia, now is the time to prioritize legal compliance. At Seven Stones Indonesia, we understand the complexities of staying compliant with local regulations, and we are here to help. As a trusted local partner, we ensure that our clients strictly adhere to Indonesian laws, providing a strong foundation for business growth and success.
To assist businesses in navigating these new compliance requirements, Seven Stones Indonesia has just launched its Retainer Packages service. These packages are designed to ensure ongoing compliance, offering a wide range of services tailored to meet the unique needs of our clients. Our services include:
- Ongoing corporate secretarial support
- Annual tax reports (both personal and corporate)
- Investment Activity Report (LKPM)
- Annual General Meeting of Shareholders
- Mail handling
Take advantage of our discounted rates available only until December 2024, and ensure your business is fully compliant. Contact us today to learn more about how our retainer packages can benefit your business.
Don’t wait until it’s too late. Start your compliance journey with Seven Stones Indonesia now!
