There is currently no single unifying regulation on auditing and compliance in Indonesia.
Foreign investors must be aware that regulations regarding auditing, accounting, and financial reporting are stipulated over several laws and by laws, and that a good understanding of these can ensure their business stays compliant.
Foreign investors should focus on Company Law, which dictates the terms for when audits become obligatory in addition to the accounting standards companies should adhere to when preparing financial statements.
Investors should use the services of registered local advisors to make sure they understand the prevailing regulations.
Auditing and compliance requirements
The Investment Law lays out the basic requirements on how to operate in Indonesia. These are part of key compliance norms:
- Implementing good corporate governance;
- Undertake corporate social responsibility activities;
- Comply with the labor law;
- Submit quarterly investment activities to the Investment Coordinating Board (BKPM); and
- Honor the cultural traditions of communities.
Who is obligated to be audited?
The Company Law mandates that financial statements of a limited liability company must be audited by a public accountant registered in Indonesia if they meet at least one of the following criteria:
- Companies with assets exceeding 50 billion rupiah (US$3.36 million);
- Public companies;
- Companies that issue debt instruments;
- Certain types of state-owned enterprise; or
- The company collects or manages public funds (such as banks and insurance companies).
By law, a company must keep its accounting records and books for at least 10 years from the end of its reporting period.
All registered company’s annual financial statements are to be submitted to a regional tax office once a year. Financial statements consist of the following:
- Balance sheet;
- Cash flows;
- Profit and loss statement; and
- Statement of changes in equity.
Financial statements are required to provide both the current and previous year’s figures and need to be presented on a comparative basis.
Periodic financial statements must be presented in the Indonesian language and a foreign language. The obligation to use foreign languages does not apply to small- and medium-sized enterprises. Periodic financial statements that utilize foreign languages must contain the same information as the periodic financial statements that use the Indonesian language.
If there is a difference in the interpretation of the information presented in foreign languages with those presented in the Indonesian language, the information in the Indonesian language shall be used as a reference.
The accounting books must also use the rupiah as their currency. Companies will need to seek permission from the tax authorities for the use of the US dollar, the only other eligible functional currency. This must be done no later than three months before the start of the accounting year.
Under the Capital Markets Law, foreign companies are allowed to be listed in the country’s bourse.
Their prospectus, however, must first be audited by an auditing firm that is recognized by the country’s Financial Services Authority (OJK), the main regulator of Indonesia’s financial services sector.
The annual financial statement must be submitted to the OJK and announced to the public by no later than the end of the third month from the date of the annual financial statement. The submission of periodic financial statements must be conducted through the electronic reporting system of the OJK.
Public companies must also establish internal audit committees, an internal audit unit, and a company secretary. The audit committee supports the board of commissioners to ensure the effectiveness and integrity of a company’s financial statements and internal controls.
The committee will also review the risk management activities conducted by the board of directors and oversee the implementation of the recommendations of the internal and external auditors.
The auditor must be a registered and independent public accountant as stipulated by the Ministry of Finance (MOF). They must avoid all potential conflicts of interests and adhere to MOF regulations.
The Indonesia Financial Services Authority stipulates the mandatory rotation of the public accountant every three years with a two-year cooling period. This only applies to the public accountant and not the public accountant firm.
The annual deadline for reporting and paying corporate income tax is April 30 – if a company’s fiscal year begins from January 1 – December 31. If a company’s fiscal year differs from the calendar year, then its deadline is four months after the end of its fiscal year.
Penalties for non-compliance
Companies that fail to comply with Indonesia’s audit and tax requirements can expect to receive monthly interest penalties starting from two percent and up to 48 percent. Furthermore, issuing false tax and accounting documents can also result in imprisonment.