Any business should comply with requirements mandated by applicable laws and regulations, which obligations rest greatly on its Board of Directors (BOD) who manages the business and operation process of the company. One of those obligations is the ability to provide a thorough annual report. BOD having the capability to inform the company's performance comprehensively will gain trust and loyalty from its stakeholders. 

In principle, the BOD of every Company is required to provide an annual report, which contains financial statements prepared in accordance with financial accounting standards (standards set by Indonesian Professional Accountants Organization recognized by the Government of the Republic of Indonesia) annually in accordance with Article 66 paragraph (3) of Law Number 40 of 2007 on Limited Liability Companies (Company Law).

Article 100 paragraph (1) of the Company Law states that the BOD is required to prepare an annual report as described in Article 66 and the Company's financial documents.

The obligation to submit the annual report must be done no later than 6 months after the company's financial year ends. It should be noted that the financial statements are part of the annual report (do not confuse between annual reports with financial statements).

The financial statements referred above briefly consist of:

• End year balance sheet  compared to the previous financial year
• Profit and loss (P&L) statement
• Cash flow statement
• Statement of changes in equity
• Notes on the financial statements

According to Article 68 paragraph (1) of the Company Law, if  (i) a company’s business activities are collecting and / or managing public funds; or (ii) the company issues a debt acknowledgment instrument to the public; or (iii) the company has assets or total business circulation with a minimum value of Rp 50,000,000,000 (fifty billion Rupiah), the BOD of the company must submit the company’s financial statements to a public accountant for auditing. Then, the audited balance sheet and P&L statement (as a part of the audited financial statements) must also be submitted to the Minister (in this case the Ministry of Law and Human Rights) in accordance with the applicable laws and regulations. In this regard, the elucidation of Article 68 of the Company Law also states that the obligation to submit such financial statements to a public accountant for auditing arises from the nature of the company concerned. The obligation to submit a financial statements to external supervision is justified on the assumption that public trust must be maintained. Some business need an audited financial report to be able to plan company business development.

With regard to the above, an audit is conducted to assess whether the financial statements prepared are unqualified, adverse or qualified as such that trust from third parties such as banks will be easier to be earned. Auditing is also a part of the company’s efforts to minimize the opportunity to commit fraud, theft, and other criminal acts relating to the company's assets and finances.

Moving on to the ratification of financial statements, Article 67 of the Company Law states that:

1. Annual reports (including financial statements) must be signed by all incumbent members of the BOD and all members of the Board of Commissioners (BOC) and be made available at the company’s office since the date of the summon of the General Meeting of Shareholders (GMS) to be examined by the shareholders of the company. Signing the annual report by BOD and BOC is a form of accountability for the members of the BOD and the BOC in carrying out their duties.

2. If there is/are any member(s) of BOD or BOC who does/do not sign the annual report, the person concerned must state the reasons in writing, or prepare the written reason in a separate letter to be attached to the annual report. The written reason is required to assess the audited annual report which will be taken into account by the GMS before being ratified by the GMS. One (example) of the reasons that can be considered if a member of BOD or BOC does not sign the annual report is if the person concerned has passed away.

3. If there is/are any member(s) of BOD or BOC who does/do not sign the annual report and fail(s) to give their reasons in writing, they are deemed to have approved the contents of the annual report.

If all members of the BOD and BOC of the company do not sign the financial statements, the financial statements may not be approved/ratified by the GMS. In addition, if by the resulting negligence of the members of BOD or BOC, it is evident that the financial statements provided are incorrect or misleading, then all members of the BOD and BOC must be jointly and severally liable to the aggrieved party unless they are able to prove that the situation was not caused by their negligence.

It is worth noting by the BOD and BOC that in practice, the ratification of the annual report (and therefore the financial statements) by the GMS for the year concerned is also followed by a release and discharge (acquit et de charge) of the BOD and BOC’s liability by the GMS for their management and supervisory acts conducted during the financial year concerned as long as such acts are captured in the annual report and financial statements approved by the GMS. This means that the BOD and BOC may no longer be held liable for matters that have been released and discharged. For BOD and BOC, this is one of the importance and the necessities for the ratification of the annual report by the GMS.

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Throughout our experience practicing and handling various legal matters, we have come across frequently asked questions raised on this subject. You will find brief summary on these questions below. Should you have further inquiries, please do not hesitate to contact us.

Frequently Asked Questions:

1. What are the consequences if the Board of Directors fail to prepare an annual report (including the financial statements)? 
   
   Article 100 paragraph (1) Law No. 40 of 2007 on Limited Liability Company (“Company Law”) requires the Board of Directors (BOD) to prepare an annual report. The failure of the BOD to do so means that the BOD has failed to comply with its duties and consequently, according to Article 97 of the Company Law, the BOD may be held jointly and severally liable should the company suffer losses due to the BOD’s failure in performing its duties and obligations, including the preparation of annual report as mandated by the Company Law.

2. What are the consequences if the annual report is not ratified due to errors in preparing the financial statements?
   
   BOD and BOC shall be jointly and severally liable for any losses suffered by the company resulting from this and no release and discharge provided to BOD and BOC until a revision is made and the financial statement is approved by the General Meeting of Shareholders (GMS).

3. What are the consequences if the Board of Directors is proven to have violated his/her fiduciary duties?
   
   The relevant BOD member is personally liable for the Company's losses (if any) resulting from the breach.

4. What are the consequences if the financial statements prepared by the BOD do not comply with financial accounting standards set out by Indonesian Professional Accountants Organizations recognized by the Republic of Indonesia?
   
   This means that the BOD does not comply with the requirements set out in the Company Law and therefore each member of the BOD is personally liable for the Company's losses (if any) resulting from this non-compliance.

5. Is every member of BOD required to approve the company’s financial statements? If there are members of BOD who do not approve, what is/are the step(s) to take?
   
   The obligation to sign the annual report by all BOD members is set out in Article 67 paragraph (1) of the Company Law. In case there are any BOD members who does not sign the annual report, she/he may do so but must convey the reason in writing. If there are any of the BOD members who do not sign the annual report and do not give his/her reasons in writing, the person concerned is deemed to have agreed to the contents of the annual report.

6. If the financial statements are not signed by several members of BOD because the person disagrees with the financial statements, would such financial statements still be required to be approved by the GMS?
   
   In case there are members of the BOD or BOC who do not sign the annual report concerned, they must state the reason in writing, and such reasons will be considered by the GMS in approving (or not) the financial statement. It is reasonable to expect that the GMS will demand the annual report/financial statement be revised by the BOD and BOC before the GMS is willing to approve it.

7. What is the reasonable ground for the BOD for not signing the financial statements?
   
   Aside from business/commercial reasons, at the very least, the BOD must consider that all aspects relating to the financial statement comply with the Company Law, among other things:

• If the financial report is made in accordance with the Indonesian accounting standard;

• If the financial report is audited by a public accountant especially for companies falling under requirement of Article 68 (1) of the Company Law; or

• If the company’s mandatory reserve complies with the 20% requirement as set out under Article 70 (1) of the Company Law, etc;
  failing which, it is reasonable for the BOD to refuse signing the financial statement.

8. What are the consequences if the annual report (including financial statements) is not prepared following 6 months after the company's financial year ends?
   
   For the BOD, the most obvious consequence is for the BOD to be held personally liable for any losses suffered by the company for not having a proper annual report/financial statement and that there will be no release and discharge (acquit et de charge) given to the BOD.

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The above is a summary prepared by Solis Advisors – Attorneys and Consultants (“Solis”), an Indonesian based Law Firm. It is only intended to inform generally on the topics covered and should not in any way be treated as legal advice or relied upon when making investment or business decisions. If you have any questions/comments on the matter set out above, or other subject(s) you wish to inquire, please contact your usual Solis contact or email us at consult@solis.consulting.