Audit Committee Key to Preventing Corporate Bankruptcy, Study Finds in Indonesian Listed Firms
A 2026 study by Rakhmat Irwansyah, Yohannes Indrayono, and Arief Tri Hardiyanto from Pakuan University reveals that audit committees play a decisive role in reducing financial distress among companies at risk of bankruptcy. Analyzing 251 firms listed on the Indonesia Stock Exchange (IDX) between 2020 and 2025, the research shows that while institutional ownership has no significant impact, effective audit committees significantly improve financial stability—an insight that carries major implications for corporate governance and investor confidence.
Growing Risk of Corporate Financial Distress
The findings arrive at a time of global economic uncertainty. According to international projections, economic growth remains modest, while geopolitical tensions and market volatility continue to pressure businesses. In Indonesia, fluctuations in the Composite Stock Price Index (JCI) and rising operational costs have increased financial strain on companies, especially in sectors like energy, transportation, and manufacturing.
Financial distress—defined as a company’s inability to meet its financial obligations—is widely recognized as an early stage before bankruptcy. Companies flagged with “special notation” on the IDX often exhibit warning signs such as negative equity, declining profits, and liquidity problems. These conditions make them ideal subjects for examining how corporate governance mechanisms influence financial survival.
Simple Method, Strong Evidence
The research uses a quantitative causal approach to assess how two governance factors—institutional ownership and audit committees—affect financial distress.
Key elements of the methodology include:
- Sample: 251 Indonesian listed companies with financial difficulties (2020–2025)
- Data Source: Financial reports published on the Indonesia Stock Exchange
- Analysis Tool: EViews version 10 using path analysis and t-tests
- Measurement Model: Financial distress evaluated using the Altman Z-Score
This approach allows the researchers to identify direct relationships between governance structures and financial health without relying on complex technical assumptions.
Key Findings: Audit Committees Make the Difference
The study delivers clear and actionable results:
1. Institutional Ownership Has No Significant Effect
- Statistical results show no meaningful relationship between institutional ownership and financial distress
- Probability value: 0.9442 (> 0.05), indicating insignificance
- Average institutional ownership (54.61%) is not strong enough to influence management decisions
This suggests that institutional investors, such as banks and pension funds, may not actively monitor companies in distress or may adopt short-term investment strategies.
2. Audit Committees Significantly Reduce Financial Distress
- Strong statistical relationship between audit committees and improved financial condition
- Probability value: 0.0007 (< 0.05), indicating significance
- Companies with effective audit committees show lower risk of financial collapse
Audit committees help ensure accurate financial reporting, strengthen internal controls, and detect risks early.
3. Governance Quality Matters More Than Ownership Structure
The study highlights that ownership alone does not guarantee oversight. Instead, active internal governance—especially through audit committees—has a more direct and measurable impact on financial stability.
Why Institutional Ownership Falls Short
The researchers explain that institutional ownership does not always translate into effective monitoring. In many distressed companies:
- Institutional investors hold shares but remain passive
- Strategic control remains with company management
- Monitoring is limited, especially under financial pressure
“Rakhmat Irwansyah and colleagues from Pakuan University emphasize that ownership structure alone cannot be relied upon to predict financial distress,” the study notes, highlighting the need for stronger internal governance mechanisms.
Real-World Impact for Business and Policy
The findings offer practical insights for multiple stakeholders:
For Companies
- Strengthening audit committee independence and expertise can prevent financial crises
- Regular monitoring improves transparency and accountability
For Investors
- Evaluating audit committee effectiveness may be more reliable than ownership structure
- Governance quality becomes a key indicator of long-term investment safety
For Regulators
- Policies should emphasize audit committee standards and performance
- Enforcement of governance rules can reduce systemic financial risk
For Academics and Analysts
- The study adds empirical evidence that internal governance mechanisms outperform ownership-based controls in distressed environments
Strengthening Corporate Governance
The study recommends that companies:
- Increase the competence and independence of audit committee members
- Improve access to financial data and internal audits
- Hold more frequent and structured audit meetings
These steps can transform audit committees into an early warning system that detects financial risks before they escalate.
Author Profiles
- Rakhmat Irwansyah, M.M. – Lecturer and researcher at Pakuan University, specializing in financial management and corporate governance
- Yohannes Indrayono, M.M. – Academic at Pakuan University with expertise in capital markets and investment analysis
- Arief Tri Hardiyanto, M.M. – Researcher in corporate finance and financial risk management at Pakuan University
All authors are affiliated with Pakuan University, Indonesia, and focus on financial distress, governance systems, and corporate sustainability.
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