Surabaya- Political ties inside Indonesia’s largest state-owned enterprises increase the risk of earnings manipulation, but strong audit quality can significantly reduce that risk. This conclusion comes from a 2026 study by Tytys Dwi Saputri, Eni Wuryani, and Pujiono of the Faculty of Economics and Business, Universitas Negeri Surabaya. Published in the East Asian Journal of Multidisciplinary Research, the study examines how political connections and audit quality interact to shape financial reporting practices in major Indonesian state-owned enterprises (SOEs).
The researchers analyzed SOEs listed on the Indonesia Stock Exchange and included in the IDXBUMN20 index during the 2022–2024 period. These firms represent the most strategic and systemically important state-owned companies in Indonesia. The findings matter because SOEs manage public assets, receive government backing, and are expected to uphold high standards of transparency and accountability—especially during periods of political transition and economic recovery.
Why Political Connections Matter in SOEs
Indonesian state-owned enterprises operate under a dual mandate. They are expected to perform as competitive business entities while also fulfilling political, social, and developmental objectives set by the government. This structure places SOEs in a governance environment that differs sharply from private companies.
Political influence often enters SOEs through the appointment of directors and commissioners with backgrounds as government officials, members of parliament, or political party affiliates. These connections can provide advantages, such as easier access to government projects, regulatory support, and financial guarantees. At the same time, they can weaken internal oversight and reduce pressure on managers to strictly follow market discipline.
Past financial scandals involving SOEs, including high-profile cases such as Garuda Indonesia and Jiwasraya, have heightened public concern over earnings manipulation and the credibility of financial statements. Against this backdrop, understanding how political connections affect financial reporting—and how these effects can be controlled—has become a pressing policy issue.
How the Study Was Conducted
The research by Saputri, Wuryani, and Pujiono uses a quantitative approach based on panel data from 18 Indonesian SOEs included in the IDXBUMN20 index between 2022 and 2024. The data were drawn from publicly available annual reports and audited financial statements.
In simple terms, the study focuses on three main elements:
- Political connections, measured by the proportion of board members who have current or past affiliations with political institutions.
- Earnings management, captured through patterns in accounting adjustments that indicate whether managers are manipulating reported profits.
- Audit quality, assessed by whether a company is audited by a high-reputation international audit firm, commonly known as the Big Four.
The researchers then examined how these factors interact, paying special attention to whether audit quality can weaken the influence of political connections on earnings manipulation.
Key Findings at a Glance
The results reveal a clear and consistent pattern across Indonesia’s largest state-owned enterprises:
- SOEs with stronger political connections are more likely to engage in earnings management.
- Political influence increases pressure on managers to present favorable financial results, especially to maintain legitimacy and justify government support.
- High-quality audits significantly weaken the link between political connections and earnings manipulation.
- Companies audited by reputable international audit firms face tighter monitoring and reduced managerial discretion.
In other words, while political ties raise the likelihood of profit manipulation, strong external audits act as an effective counterbalance.
What the Findings Mean in Practice
The study highlights audit quality as a critical governance mechanism in politically sensitive organizations. In SOEs, internal controls and boards may be compromised by political considerations. External auditors, particularly those with strong reputations and global standards, become an essential line of defense.
According to the authors, high-quality auditors are more likely to resist pressure from politically connected management. They face higher reputational and legal risks if financial misstatements are allowed to pass unchecked. As a result, they tend to enforce stricter compliance with accounting standards.
As noted by the research team from Universitas Negeri Surabaya, politically connected SOEs often operate under “soft budget constraints,” where managers expect government support during financial trouble. Strong audits reduce the room for opportunistic behavior by increasing transparency and accountability.
Implications for Policy, Business, and the Public
The findings carry several important implications:
For policymakers, especially the Ministry of State-Owned Enterprises, the study supports stricter rules on auditor selection. Prioritizing independent and reputable audit firms for strategic SOEs can strengthen financial discipline and protect public resources.
For SOE management, the research underscores the importance of professional governance practices. Political connections may be unavoidable in state-owned companies, but their negative effects can be mitigated through credible external oversight.
For investors and the public, audit quality emerges as a key signal of financial reliability. When SOEs are audited by high-reputation firms, stakeholders can place greater trust in the reported financial performance.
More broadly, the study contributes to global discussions on corporate governance in emerging economies, where political influence and business operations often intersect. It shows that even in highly politicized environments, strong institutions can limit financial misconduct.
Author Insights
Reflecting on the findings, the authors emphasize that audit quality functions as an external safeguard. In their analysis, strong audits do not eliminate political influence, but they significantly reduce its harmful impact on financial reporting. This reinforces the idea that transparency and accountability are achievable, even within complex political systems.
Author Profiles
Tytys Dwi Saputri at the Faculty of Economics and Business, Universitas Negeri Surabaya.
Eni Wuryani Universitas Negeri Surabaya
Pujiono Universitas Negeri Surabaya
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