Market Talks Friday, 06 05 2011 More in Market Talks Bapepam-LK Amends Regulation on Audit Committees

The Indonesia Capital Market and Financial Institution Supervisory Agency (Bapepam-LK) will amend Regulation No. IX.I.5 on the Establishments and Guidelines for the Work Implementation of Audit Committees. The amended regulation will include new rules such as the acceptable number of audit committee members, the requirements to be an audit committee member, and the working period for the audit committee of a publicly-listed company.

Nurhaida, Head of Bapepam-LK, said that Regulation Number IX.I.5 will be adjusted according to the developments in the business world and complexity of business activities. The amendment also aims to prevent conflicts of interest and enhance the independence of audit committees.

The initiative is based on the Indonesia Institute of Audit Committee’s (IKAI) recommendations, which include requiring audit committee members to be independent commission members, with at least one audit committee member being a financial expert and the other members, abreast with financial knowledge.

Nurhaida reiterated the vital role of audit committees in ensuring that publicly-listed companies implement good corporate governance. “Such governance is essential in building trust. Investors and stakeholders will better trust publicly-listed companies with good corporate governance,” Nurhaida explained.

Two Issues

Kanaka Puradireja, Chair of the Honorary Board of IKAI, said that there are two issues that IKAI must currently focus on. The first issue concerns the number of audit committee members. “The number is usually three to five. Having too many members will make it more difficult to reach a decision, which will reduce the team’s effectiveness,” Kenaka.

The second issue concerns the working period of audit committees. Kanaka revealed that the working period of audit committee members is currently not regulated. The ideal working period, according to Kanaka, based on his experience, is about three years as the period when members will begin to fully understand the activities of companies.

“In England, it can reach nine years and can even be extended, as long as the reasons are strong,” Kanaka said.

The primary function of an audit committee is to ensure the integrity of financial statements of publicly-listed companies. To be able to perform this function well, audit committee members must be familiar with the accounting and monitoring processes.

“Audit committee members must be familiar with the audit processes of both internal and external institutions. They must also understand risk management. One of the risks to watch out for is mistakes in financial statements,” Kanaka said.

Management Intervention

Kanaya continued that as the submission date nears, for companies with poor track record and control, there is always the possibility of company executives interfering with the preparation of financial statements. This is usually missed by audit committees.

According to Hotbonar Sinaga, President Director of PT Jamsostek, institutional investors sees the importance of the presence of audit committees, as they are the only relatively independent unit in a publicly-listed company.

Hotbonar says audit committees are the safeguards of the interest of investors in a publicly-listed company. “Investors can even trust audit committees more than the board of directors,” Hotbonar added.

Hotbonar insists on the importance of selecting audit committee members based on their competence and professionalism, instead of formality. “It is important that audit committee members have an accounting or management background,” Hotbonar said.