EVALUATING FINANCIAL STABILITY AND GOVERNANCE IN FINANCIAL REPORTING: EVIDENCE FROM CONSUMER GOODS INDUSTRY

Abstract

This research adopts the financial statement risk assessment framework to conduct a quantitative evaluation of the probability of financial misrepresentation within the pharmaceutical sector—an industry noted for its stringent regulatory environment and intricate financial arrangements. In response to the persistent challenges of maintaining transparency and precision in financial disclosures, this study explores critical risk determinants: financial stability, external pressures, personal financial incentives, financial targets, industry-specific characteristics, deficiencies in oversight, and rationalisation. Employing a quantitative methodology, the investigation focuses on pharmaceutical manufacturing firms listed on the Indonesia Stock Exchange (IDX) during the period 2019–2022. A purposive sampling technique yielded a final sample comprising 11 firms. Data analysis was executed through multiple linear regression using SPSS version 25, with the t-test applied to assess the statistical relevance of each risk factor's effect on financial statement anomalies, measured via earnings management proxies. The empirical analysis reveals that financial stability, personal financial incentives, and ineffective oversight exert a significant influence on the reliability of financial reports. In contrast, no meaningful statistical association was observed for external pressures, financial performance targets, industry attributes, or rationalisation. These outcomes furnish empirical evidence concerning the integrity of financial disclosures and emphasise the necessity for strengthened governance systems aimed at fostering greater transparency and accountability. This study advances the discourse on operational risk in financial reporting and offers practical implications for regulatory authorities, auditors, and governance professionals.