Heightened Expectation on the Compliance Framework of Businesses
Mandatory Legal Audit – The Upcoming Presidential Regulation
“Ensuring full compliance to the laws and regulations in Indonesia” is one of the key undertakings of businesses when entering into Indonesia. Save for licensed entities (for example, in financial sectors), there has been no further implementing procedures and mechanics of such undertaking.
In July 2024, a Draft of Presidential Regulation on Legal Compliance in the Formation of Legislation and Law Implementation (the “RPP Draft”) was released. One of the key highlights of the RPP Draft is the imposition of mandatory legal audit for business entities, other legal entities, and public institutions (the “Mandatory Legal Audit”).
The Mechanics of the Mandatory Legal Audit
The RPP Draft imposes the Mandatory Legal Audit to be carried out by business entities, other legal entities, and public institutions on annual basis by way of appointing legal auditor who is certified by the Minister of Law and Human Rights (“MOLHR”).
The Mandatory Legal Audit involves the following stages:
- Identification of the objectives of the legal audit.
- Planning of the legal audit.
- Confirmation of the planning of the legal audit.
- Collection of data and information.
- Assessment and analysis of the data and information.
- Drafting of the report of the legal audit.
- Submission of the legal audit report.
The audit report resulting from the Mandatory Legal Audit must be assessed by the business entities/legal entities to be observed and as a basis for any remediation actions (where relevant) to be carried out. The audit report along with all remediation actions will then be reported to MOLHR at the end of the financial year.
Sanctions for non-compliance found during the Mandatory Legal Audit are subjected to the relevant laws and regulations.
The Power of MOLHR
In the case where business entities or legal entities fail to perform the annual legal audit or in case of any complaints, MOLHR will appoint a legal auditor to perform the Mandatory Legal Audit. The audit report will then be reported to MOLHR.
Impact to Businesses
The Mandatory Legal Audit may appear to be a straightforward process, but practically, it could be challenging especially for non-licensed businesses (e.g., businesses that are not heavily regulated) knowing the known gaps of the provisions under the laws and the implementing regulations.
In some sectors where the implementing regulations are yet to be passed, the threshold of being ‘compliant’ involves certain degree of subjective view as an interpretation of the law is needed.
Furthermore, the Mandatory Legal Audit also effectively expects businesses to familiarize themselves with a typical audit process and how to collaborate with auditors – in principle, this means ideally there must be a pre-determined assessment compliance implemented within the business along with the risk appetite of the business.
Essentially, a robust governance framework must be in place to support the execution of the Mandatory Legal Audit.
A robust governance framework is typically expected in highly regulated sectors such as banking, insurance, financial technology, financing, natural resources. However, by imposing the Mandatory Legal Audit, the Indonesian Government appears to expect all businesses regardless of the business sector, to be equipped with a robust governance framework.
Although there is yet a clear timeline of the finalization of the RPP Draft, with the Mandatory Legal Audit in the horizons, as a pro-active measure business entities should consider building a governance framework and engage third party legal auditor to assess (on preliminary/red flag basis) if there are any non-compliance issues within the business.
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