DUTY OF THE BOARD OF DIRECTORS TO SUBMIT FINANCIAL STATEMENTS
A financial statement constitutes a form of fiduciary duty and accountability of the Board of Directors (Direksi) in the management of a Company (Perseroan). Article 66 paragraph (1) of Law No. 40 of 2007 concerning Limited Liability Companies (“Company Law”) imposes an obligation on the Board of Directors to submit the Annual Report to the General Meeting of Shareholders (GMS/RUPS) after it has been reviewed by the Board of Commissioners, within no later than six (6) months after the end of the Company’s fiscal year.
Furthermore, Article 66 paragraph (2) of the Company Law stipulates that the Annual Report must, at a minimum, contain the financial statement and other reports. The question arises: what if the financial statement is not ratified by the GMS, or if the Board of Directors fails to prepare the financial statement?
What Is a Company’s Financial Statement?
The Company Law does not expressly define “financial statement” (financial report). Pimatua Sirait, in his work Reporting and Financial Statements, interprets a financial statement as the final product of the accounting process, a summary of financial transactions during a given fiscal period.
This is consistent with Article 66 paragraph (2) of the Company Law, which mandates that a financial statement must include at least:
- a balance sheet (statement of financial position) comparing the closing of the current fiscal year with the previous one,
- an income statement (profit and loss statement) of the fiscal year concerned,
- a cash-flow statement,
- a statement of changes in equity, and
- notes to the financial statement (footnotes/disclosures).
Authority of the GMS to Assess Financial Statements
The authority of the General Meeting of Shareholders to evaluate the financial statement is directly linked to its authority to approve the Annual Report and ratify the financial statement. Article 69 paragraphs (1) and (2) of the Company Law provide:
Approval of the Annual Report, including ratification of the financial statement and the supervisory report of the Board of Commissioners, shall be carried out by the GMS.
Resolutions on the ratification of the financial statement and approval of the Annual Report shall be adopted in accordance with this Law and/or the Company’s Articles of Association.
Before such ratification, however, the financial statement must first be reviewed by the Board of Commissioners (vide Article 66 paragraph (1) of the Company Law).
Liability for the Company’s Financial Statement
As a matter of law (de jure), the accuracy of the contents of the financial statement is the personal liability of the members of the Board of Directors and the Board of Commissioners. Article 69 paragraph (3) of the Company Law provides:
“In the event that the financial statement provided proves to be false and/or misleading, the members of the Board of Directors and the members of the Board of Commissioners shall be jointly and severally liable (joint and several liability) to the injured party.”
Accordingly, the GMS is not bound to ratify the financial statement. The GMS may refuse ratification if the statement does not conform to accounting standards and/or fails to reflect the true and fair view of the Company’s condition, whether due to negligence or intentional misconduct (fraud).
The GMS may also order a re-audit (re-examination) if there are indications of material misstatements in the data presented, or even a forensic audit if there is suspicion of deliberate fraud.
Conversely, once the financial statement is ratified by the GMS alongside the Annual Report, the Board of Directors shall be discharged from liability for the management of the Company as reported (acquit et de charge).
Conclusion
The Board of Directors is under a statutory duty to submit the financial statement together with the Annual Report to the GMS. The accuracy of the financial statement is the joint and several liability of the Board of Directors and the Board of Commissioners. Once ratified by the GMS, together with the approval of the Annual Report, the Board of Directors is released from liability for the management of the Company that has been reported (acquit et de charge).
Legal Basis
- Law No. 40 of 2007 concerning Limited Liability Companies (Company Law).
Author:
Nicko Surya Airlangga, S.H.
Masta Pasaribu
Editor:
Muhammad Arief Ramadhan, S.H.