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.