The study focuses on companies that have implemented digital technologies such as enterprise resource planning (ERP), process automation, and digital financial reporting. While these technologies promise efficiency and competitiveness, the research highlights that technology alone does not guarantee financial stability. Governance quality determines whether digital transformation strengthens or undermines a firm’s financial resilience.
Why Digital Financial Risk Is a Growing Issue
Digital transformation has become a strategic priority for manufacturing firms across developing and developed economies. Automation, data integration, and real-time reporting can improve productivity and decision-making. However, these benefits come with significant financial risks.
Manufacturers often face high upfront investment costs, uncertain returns, system integration failures, and new vulnerabilities related to data security and fraud. In Indonesia, particularly in industrial hubs such as Banten Province, medium and large manufacturing firms are under pressure to modernize quickly while managing tight margins and volatile markets.
Previous research has shown that companies adopting digital technologies without strong governance structures are more likely to experience cost overruns, reporting errors, and weak financial discipline. This makes internal governance a central issue not only for corporate managers, but also for policymakers seeking to promote sustainable industrial digitalization.
How the Research Was Conducted
The research used a mixed-methods approach that combines quantitative and qualitative evidence to capture both structural patterns and real managerial experience.
Quantitative data were collected through a survey of 40 manufacturing companies in Banten Province that had been implementing digital transformation initiatives for at least two years. Respondents assessed the effectiveness of internal governance, the extent of digitalization, and levels of financial risk using structured questionnaires.
To deepen the analysis, the researchers conducted in-depth interviews with eight key informants, including chief financial officers, digitalization managers, and risk managers. This combination allowed the study to link statistical relationships with practical insights from decision-makers directly involved in digital projects.
The quantitative data were analyzed using correlation and regression analysis, while interview data were examined through thematic analysis to identify recurring governance practices and risk management mechanisms.
Governance Mechanisms That Reduce Financial Risk
The findings show a clear and consistent pattern: stronger internal governance is associated with lower financial risk during digital transformation.
Key results include:
· Overall internal governance effectiveness had a strong negative relationship with financial risk exposure. Companies with better governance reported fewer financial disruptions linked to digitalization.
· Integration of internal audit and risk management functions significantly reduced the likelihood of financial losses. Firms where auditors and risk managers worked together detected problems earlier and responded faster.
· Managerial supervision played a stabilizing role. Active involvement by top management reduced implementation failures and kept digital projects aligned with financial capacity.
Statistical analysis shows that governance effectiveness had a substantial impact, with internal governance reducing financial risk exposure by more than 40 percent in the regression model. Similar effects were observed for audit–risk integration and managerial oversight.
What Happens Inside Digitally Transforming Firms
Insights from interviews reveal how governance works in practice. Financial executives described internal governance as the “first filter” that screens digital investments before they proceed. Regular board reviews, internal control checks, and cross-functional coordination help prevent cost leakage and system errors.
Audit teams in many firms are no longer limited to post-project evaluations. Instead, they participate from the early stages of digital initiatives, providing real-time monitoring and financial risk assessment. This shift turns auditing into a preventive function rather than a reactive one.
Managerial supervision also emerged as a critical factor. Senior managers monitor budgets, timelines, and risk indicators directly, ensuring that digital innovation does not outpace the organization’s financial readiness. This hands-on oversight increases discipline and accountability across departments.
Implications for Industry and Policy
The study offers several practical implications:
· Manufacturing executives can reduce digital financial risk by strengthening internal controls and encouraging collaboration between audit and risk teams.
· Boards and senior managers play a vital role in aligning digital strategy with financial capacity through active supervision.
· Policymakers and regulators can promote safer digital transformation by encouraging governance standards alongside technology adoption incentives.
· Investors and lenders may view strong internal governance as a signal of lower digital investment risk and greater financial sustainability.
Rather than slowing innovation, the research suggests that governance enables firms to digitalize with confidence, minimizing costly surprises and supporting long-term stability.
Insight from the Authors
Reflecting on the findings, Karnawi Kamar of Universitas Insan Pembangunan Indonesia emphasizes that digital transformation is as much an organizational challenge as a technological one. Drawing on field evidence, the authors argue that internal governance “acts as a strategic safeguard that ensures digital innovation remains within acceptable financial risk limits and supports sustainable performance” across manufacturing firms.
Author Profiles
· Karnawi Kamar, is a lecturer at Universitas Insan Pembangunan Indonesia with expertise in corporate governance, financial risk management, and digital transformation.
· Abdul Khalik, is affiliated with Institut Teknologi dan Bisnis Nobel Indonesia Makassar, specializing in financial management and industrial strategy.
· Tyahya Whisnu Hendratni, is a faculty member at Sekolah Tinggi Ilmu Administrasi Lancang Kuning, focusing on public and corporate governance systems.
· Roni Adi, is a researcher at Institut Teknologi Batam with expertise in technology management and industrial operations.
Source
Article title: The Role of Internal Governance in Managing Financial Risks Associated with Digital Transformation in Manufacturing Firms
Journal: Formosa Journal of Science and Technology
Publication year: 2026
DOI: https://doi.org/10.55927/fjst.v5i1.363
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