Compulsory reporting

Compulsory reporting

Most media gave little play to Minister of Finance Bambang
Subianto's announcement on Monday of the obligation for companies
to file with the government annual reports as part of the
national drive against corruption, collusion and nepotism. It was
somewhat understandable -- the explanation about the ruling for
companies to submit audited annual financial reports to the
government was buried near the bottom of Bambang's nine-page
report, under the vague subheading "public services".

It may have reaped next to no fanfare, but the regulation
should play a pivotal role in enhancing transparency and
accountability of businesses, a situation which will ultimately
lead to the development of good corporate governance. Building up
a reliable database on the private sector will help the
government devise appropriate macroeconomic and sectoral policies
and intensify tax collection efforts. People also will be better
able to scrutinize the credibility of companies, notably those
which raise funds from the public, because the filed reports will
be made public on the website of the Ministry of Trade and
Industry.

Previously, only publicly listed companies and businesses
raising funds from the public and issuing debt instruments were
required to submit annual financial reports to the government.
Now all foreign companies, including their agents and
representative offices in the country, and firms with minimum
assets of Rp 50 billion are subject to the compulsory reporting.
Beginning next year, the ruling also will apply to companies with
minimum assets of Rp 25 billion.

The ruling stipulates that financial reports contain the
balance sheet, income and profit statement, cash flows, assets
and liabilities, equity capital, list of shareholders and company
profile. Reports must be submitted to the Company Registry Office
at the Ministry of Trade and Industry in three hard copies and
two diskettes. An on-line system is being prepared at the
Company Registry Office to facilitate the filing of reports.

Penalties for companies failing to meet the obligation are a
jail term of up to two months for directors and a fine of Rp 1
million (US$147). Public accountancy firms which neglect to
submit copies of financial reports they audit are liable to have
their business license revoked.

Lack of company information has long been a major barrier to
investors, domestic and foreign, intending to set up business in
the country. This dearth of company data and the absence of a
credit information agency also rendered it time-consuming and
unusually costly for banks to assess credit risks -- and for the
tax office to conduct reliable tax assessment and broaden the tax
base.

No less damaging was the fact that government policies were
often detached from market realities; input for the policy-making
process were not only incomplete but also inaccurate. Bambang
said many companies often made three financial reports, of which
only the one intended for shareholders reflected the true
condition. The others were mostly models for cooking the books:
the one stating low profits was for the tax office and the other,
showing high profits, was for banks to obtain a high credit
standing. Under the new ruling, only financial reports filed with
the Company Registry Office will be legally binding.

As with many other regulations which suffer from lax
enforcement, the government needs to work harder to enforce
compulsory reporting, which actually is part of the
implementation of Law No.3/1982 regarding compulsory registration
of companies.

The ruling came into force this year, starting with 1998
financial reports, after almost six years of preparation. But the
response has thus far been quite tepid. At the end of June, the
deadline for the submission of the 1998 report, only about 880,
or less than 30 percent, of the 3,000 companies covered by the
ruling filed reports with the Company Registry Office. More
disappointing was that only 134 of the roughly 300 publicly
traded companies met the obligation.

It is not an issue of the penalties being too light to force
conformity, but that the government needs to show concerted
determination in enforcement. Jailing a firm's director or
revoking the license of an accountant could well be the shock
therapy to jolt companies into following the rules.