The Implication of Political Governance in Preventing Fraud of Indonesian SOEs

Abstract

Objective - This study examines one of the political governance pillars, namely the Party's cadre management system, on fraud in Indonesian SOEs. In the context of Indonesia, SOEs' executives are not officially the cadre of the Party, but some of them have a political connection to the ruling Party. We use BOC's Duality and BOCs political connection as proxies of the Party's cadre management system due to their potential affiliation to the ruling Party. Methodology/Technique - This study used 86 observations of SOEs listed on the Indonesia Stock Exchange during 2015-2019. Using panel data estimation, this study surprisingly finds that BOC's Duality has a negative effect on fraudulent financial statements. Findings – The political connection positively affects the fraudulent financial statement. These findings suggest that independent boards with dual positions are incentivized to maintain their reputation, thereby decreasing fraudulent financial statements. Novelty - However, independent boards with political connections cannot overcome their conflicts of interest, so they cannot properly carry out their supervisory functions. These findings become the main contribution of this study that explains the implication of political governance in preventing fraud in Indonesian SOEs. Type of Paper: Empirical JEL Classification: M41; M48 Keywords: BOC's Duality; fraudulent financial statement; political connection; corporate governance. Reference to this paper should be made as follows: Geraldina, I. (2022). The Implication of Political Governance in Preventing Fraud of Indonesian SOEs, J. Mgt. Mkt. Review, 7(3), 91 – 97. https://doi.org/10.35609/jmmr.2022.7.3(1)