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FACTORS INFLUENCING THE WEAKNESSES OF INTERNAL CONTROL OF LOCAL GOVERNMENTS IN INDONESIA
Corresponding Author(s) : Ain Hajawiyah
Humanities & Social Sciences Reviews,
Vol. 8 No. 1 (2020): January
Abstract
Purpose of the study: This paper aims to examine the factors influencing local government internal control weakness, includes leverage, locally generated revenue, capital expenditure, complexity, previous year's internal control weaknesses findings
Methodology: The population of this research is the audit report of the Audit Board of the Republic of Indonesia (BPK) in the Regency/City of West Indonesia with a total of 263 financial statements. The purposive sampling method is used, resulting in 186 financial statements as samples. Hypotheses are tested using multiple linear regression using SPSS V.21.
Main Findings: The results of the study show that locally generated income, capital expenditure, and previous year’s internal control weaknesses findings positively affect the weaknesses of local government control. Meanwhile, leverage and regional complexity do not affect the weaknesses of local government internal controls. Lack of supervision among revenues and expenditures causes a decrease in local government internal control system quality.
Applications of this study: This study can be useful for local governments to minimize the internal control weakness in the organization.
Novelty/Originality of this study: Leverage and previous year’s finding on internal control weaknesses variables are included in this study because there have been only a few studies that use those variables. This research uses a different proxy than the previous ones with the aim of getting more accurate results.
Keywords
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- Afiah, N. N., & Azwari, P. C. (2015). The Effect of The Implementation of Government Internal Control System (GICS) on The Quality of Financial Reporting of The Local Government and Its Impact on The Principles of Good Governance. Social and Behavioural Sciences, 211(1), 811–818. https://doi.org/10.1016/j.sbspro.2015.11.172 DOI: https://doi.org/10.1016/j.sbspro.2015.11.172
- Ashbaugh-skaife, H., Collins, D. W., Jr, W. R. K., & Lafond, R. (2009). The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity. Journal of Accounting Research, 47(1), 1–43. https://doi.org/10.1111/j.1475-679X.2008.00315.x DOI: https://doi.org/10.1111/j.1475-679X.2008.00315.x
- Audit Board of the Republic of Indonesia. Audit Findings Semester 1 Year 2007.http://www.bpk.go.id. Accessed in January 2018.
- Badara, M. S., & Saidin, S. Z. (2013). Impact of the Effective Internal Control System on the Internal Audit Effectiveness at Local Government Level. Journal of Social and Development Sciences, 4(1), 16–23. DOI: https://doi.org/10.22610/jsds.v4i1.731
- Beneish, M. D., Billings, M. B., & Hodder, L. D. (2008). Internal Control Weaknesses and Information Uncertainty. The Accounting Review, 83(3), 665–703. https://doi.org/10.2308/accr.2008.83.3.665 DOI: https://doi.org/10.2308/accr.2008.83.3.665
- Costello, A. M., & Wittenbreg-Moerman, R. (2011). The Impact of Financial Reporting Quality on Debt Contracting: Evidence from Internal Control Weakness Reports. Journal of Accounting Research, 49(1), 97–132. https://doi.org/10.1111/j.1475-679X.2010.00388.x DOI: https://doi.org/10.1111/j.1475-679X.2010.00388.x
- Donaldson, L., & Davis, J. H. (1991). Stewardship Theory or Agency Theory: CEO Governance and Shareholder Returns. Australian Journal of Management, 16, 49–64. https://doi.org/10.1177/031289629101600103 DOI: https://doi.org/10.1177/031289629101600103
- Fatimah, D., Sari, R. N., & Rasuli, M. (2014). Pengaruh Sistem Pengendalian Intern, Kepatuhan Terhadap Peraturan Perundang-undangan, Opini Audit Tahun Sebelumnya dan Umur Pemerintah Daerah terhadap Penerimaan Opini Wajar Tanpa pengeculian pada Laporan Keungan Pemerintah Daerah di Seluruh Indonesia. Jurnal Akuntansi, 3(1), 1–15.
- Gao, X., Jia, Y., & Li, S. (2018). Does Mandatory Disclosure of Internal Control Weaknesses Affect Corporate Financing Decisions ? Journal of Accounting, Auditing & Finance, 1–26. https://doi.org/10.1177/0148558X18772244 DOI: https://doi.org/10.1177/0148558X18772244
- Huefner, R. J. (2011). Fraud Risks in Local Government: An Analysis of Audit Findings. Journal of Forensic & Investigative Accounting, 3(3), 111–125.
- Ittonen, K. (2016). Investor reactions to disclosures of material internal control weaknesses. Managerial Auditing Journal, 25(3), 259–268. https://doi.org/10.1108/02686901011026350 DOI: https://doi.org/10.1108/02686901011026350
- Keane, M. J., Elder, R. J., & Albring, S. M. (2013). The effect of the type and number of internal control weaknesses and their remediation on audit fees. Review of Accounting and Finance, 11(4), 377–399. https://doi.org/10.1108/14757701211279178 DOI: https://doi.org/10.1108/14757701211279178
- Kim, J., Song, B. Y., & Zhang, L. (2011). Internal Control Weakness and Bank Loan Contracting: Evidence from SOX Section 404 Disclosures. The Accounting Review, 86(4), 1157–1188. https://doi.org/10.2308/accr-10036 DOI: https://doi.org/10.2308/accr-10036
- KPMG. (2012). International Survey of Corporate Responsibility Reporting. Forensic: Fraud Survey. Swiss.
- Kristanto, S. B. (2009). Pengaruh Ukuran Pemerintahan, Original Local Govenrment Revenue (PAD), dan Capital expenditure sebagai Prediktor Kelemahan Pengendalian InternalPemerintah Daerah. Akuntansi Ukrida, 9(1), 1–17.
- Kusumawardani, M. (2012). Pengaruh size, Kemakmuran, Ukuran Legislatif, Leverage Terhadap Kinerja Keuangan Pemerintah Daerah di Indonesia. Accounting Analysis Journal, 1(1), 28–35.
- Kwanbo, M. L. (2010). Internal Control System and the issues of independence and confidentiality in local governments Auditing: An examination. https://doi.org/10.2139/ssrn.1366664 DOI: https://doi.org/10.2139/ssrn.1366664
- Mascha, M. F., Miller, C. L., Mascha, M. F., & Miller, C. L. (2010). The effects of task complexity and skill on over / under-estimation of internal control. Managerial Auditing Journal, 25(8), 734–755. https://doi.org/10.1108/02686901011069533 DOI: https://doi.org/10.1108/02686901011069533
- Mihaela, D., & Iulian, S. (2012). Internal Control and the Impact on Corporate Governance, in Romanian Listed Companies. Journal of Eastern Europe Research in Business & Economics, 2012, 1–10. https://doi.org/10.5171/2012.676810 DOI: https://doi.org/10.5171/2012.676810
- Mulyani, P., & Suryawati, R. F. (2011). Analisis Peran dan Fungsi Sistem Pengendalian InternalPemerintah (SPIP/PP No.60 Tahun 2008) Dalam Meminimalisasi Tingkat Salah Saji Pencatatan Akuntansi Keuangan Pemerintah Daerah. Jurnal Organisasi dan Manajemen, 7(2), 1–15.
- Petrovits, C., Shakespeare, C., & Shih, A. (2010). The Causes and Consequences of Internal Control Problems in Nonprofit Organizations. Accounting Review, 86(1), 325–357. https://doi.org/10.2308/accr.00000012 DOI: https://doi.org/10.2308/accr.00000012
- Pinnuck, M., & Potter, B. N. (2009). The quality and conservatism of the accounting earnings of local governments. Journal of Accounting and Public Policy, 28(6), 525–540. https://doi.org/10.1016/j.jaccpubpol.2009.08.002 DOI: https://doi.org/10.1016/j.jaccpubpol.2009.08.002
- Putri, N. K., & Mahmud, A. (2015). Pengaruh Pertumbuhan Ekonomi, PAD, Ukuran dan Kompleksitas terhadap Kelemahan Pengendalian InternalPemerintah Daerah. Accounting Analysis Journal, 4(2), 1–8.
- Saputro, E. A. (2015). Analisis Faktor-Faktor yang Berpengaruh Terhadap Kelemahan Pengendalian InternalPemerintah Daerah. Accounting Analysis Journal, 4(3), 1–9.
- Schneider, A., & Church, B. K. (2008). The effect of auditors ’ internal control opinions on loan decisions. Journal of Accounting and Public Policy, 27(1), 1–18. https://doi.org/10.1016/j.jaccpubpol.2007.11.004 DOI: https://doi.org/10.1016/j.jaccpubpol.2007.11.004
- Susiarini, D. R., & Kiswanto. (2016). Faktor-Faktor yang Mempengaruhi Weaknesses of internal control of local governments Daerah di Jawa Tengah. Accounting Analysis Journal, 5(1). https://doi.org/https://doi.org/10.15294/aaj.v5i1.9762
- Tempo.Co. (2017). Semester 1, BPK Temukan 14.997 Masalah Senilai Rp 27,39 Triliun. Diambil dari www.tempo.com
- Yamin, R., & Sutaryo. (2014). Faktor Penentu Jumlah Temuan Kelemahan Sistem Pengendalian InternalPada Pemerintah Daerah di Indonesia. Jurnal Akuntansi dan Keuangan Indonesia, 15(4), 1–24.
References
Afiah, N. N., & Azwari, P. C. (2015). The Effect of The Implementation of Government Internal Control System (GICS) on The Quality of Financial Reporting of The Local Government and Its Impact on The Principles of Good Governance. Social and Behavioural Sciences, 211(1), 811–818. https://doi.org/10.1016/j.sbspro.2015.11.172 DOI: https://doi.org/10.1016/j.sbspro.2015.11.172
Ashbaugh-skaife, H., Collins, D. W., Jr, W. R. K., & Lafond, R. (2009). The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity. Journal of Accounting Research, 47(1), 1–43. https://doi.org/10.1111/j.1475-679X.2008.00315.x DOI: https://doi.org/10.1111/j.1475-679X.2008.00315.x
Audit Board of the Republic of Indonesia. Audit Findings Semester 1 Year 2007.http://www.bpk.go.id. Accessed in January 2018.
Badara, M. S., & Saidin, S. Z. (2013). Impact of the Effective Internal Control System on the Internal Audit Effectiveness at Local Government Level. Journal of Social and Development Sciences, 4(1), 16–23. DOI: https://doi.org/10.22610/jsds.v4i1.731
Beneish, M. D., Billings, M. B., & Hodder, L. D. (2008). Internal Control Weaknesses and Information Uncertainty. The Accounting Review, 83(3), 665–703. https://doi.org/10.2308/accr.2008.83.3.665 DOI: https://doi.org/10.2308/accr.2008.83.3.665
Costello, A. M., & Wittenbreg-Moerman, R. (2011). The Impact of Financial Reporting Quality on Debt Contracting: Evidence from Internal Control Weakness Reports. Journal of Accounting Research, 49(1), 97–132. https://doi.org/10.1111/j.1475-679X.2010.00388.x DOI: https://doi.org/10.1111/j.1475-679X.2010.00388.x
Donaldson, L., & Davis, J. H. (1991). Stewardship Theory or Agency Theory: CEO Governance and Shareholder Returns. Australian Journal of Management, 16, 49–64. https://doi.org/10.1177/031289629101600103 DOI: https://doi.org/10.1177/031289629101600103
Fatimah, D., Sari, R. N., & Rasuli, M. (2014). Pengaruh Sistem Pengendalian Intern, Kepatuhan Terhadap Peraturan Perundang-undangan, Opini Audit Tahun Sebelumnya dan Umur Pemerintah Daerah terhadap Penerimaan Opini Wajar Tanpa pengeculian pada Laporan Keungan Pemerintah Daerah di Seluruh Indonesia. Jurnal Akuntansi, 3(1), 1–15.
Gao, X., Jia, Y., & Li, S. (2018). Does Mandatory Disclosure of Internal Control Weaknesses Affect Corporate Financing Decisions ? Journal of Accounting, Auditing & Finance, 1–26. https://doi.org/10.1177/0148558X18772244 DOI: https://doi.org/10.1177/0148558X18772244
Huefner, R. J. (2011). Fraud Risks in Local Government: An Analysis of Audit Findings. Journal of Forensic & Investigative Accounting, 3(3), 111–125.
Ittonen, K. (2016). Investor reactions to disclosures of material internal control weaknesses. Managerial Auditing Journal, 25(3), 259–268. https://doi.org/10.1108/02686901011026350 DOI: https://doi.org/10.1108/02686901011026350
Keane, M. J., Elder, R. J., & Albring, S. M. (2013). The effect of the type and number of internal control weaknesses and their remediation on audit fees. Review of Accounting and Finance, 11(4), 377–399. https://doi.org/10.1108/14757701211279178 DOI: https://doi.org/10.1108/14757701211279178
Kim, J., Song, B. Y., & Zhang, L. (2011). Internal Control Weakness and Bank Loan Contracting: Evidence from SOX Section 404 Disclosures. The Accounting Review, 86(4), 1157–1188. https://doi.org/10.2308/accr-10036 DOI: https://doi.org/10.2308/accr-10036
KPMG. (2012). International Survey of Corporate Responsibility Reporting. Forensic: Fraud Survey. Swiss.
Kristanto, S. B. (2009). Pengaruh Ukuran Pemerintahan, Original Local Govenrment Revenue (PAD), dan Capital expenditure sebagai Prediktor Kelemahan Pengendalian InternalPemerintah Daerah. Akuntansi Ukrida, 9(1), 1–17.
Kusumawardani, M. (2012). Pengaruh size, Kemakmuran, Ukuran Legislatif, Leverage Terhadap Kinerja Keuangan Pemerintah Daerah di Indonesia. Accounting Analysis Journal, 1(1), 28–35.
Kwanbo, M. L. (2010). Internal Control System and the issues of independence and confidentiality in local governments Auditing: An examination. https://doi.org/10.2139/ssrn.1366664 DOI: https://doi.org/10.2139/ssrn.1366664
Mascha, M. F., Miller, C. L., Mascha, M. F., & Miller, C. L. (2010). The effects of task complexity and skill on over / under-estimation of internal control. Managerial Auditing Journal, 25(8), 734–755. https://doi.org/10.1108/02686901011069533 DOI: https://doi.org/10.1108/02686901011069533
Mihaela, D., & Iulian, S. (2012). Internal Control and the Impact on Corporate Governance, in Romanian Listed Companies. Journal of Eastern Europe Research in Business & Economics, 2012, 1–10. https://doi.org/10.5171/2012.676810 DOI: https://doi.org/10.5171/2012.676810
Mulyani, P., & Suryawati, R. F. (2011). Analisis Peran dan Fungsi Sistem Pengendalian InternalPemerintah (SPIP/PP No.60 Tahun 2008) Dalam Meminimalisasi Tingkat Salah Saji Pencatatan Akuntansi Keuangan Pemerintah Daerah. Jurnal Organisasi dan Manajemen, 7(2), 1–15.
Petrovits, C., Shakespeare, C., & Shih, A. (2010). The Causes and Consequences of Internal Control Problems in Nonprofit Organizations. Accounting Review, 86(1), 325–357. https://doi.org/10.2308/accr.00000012 DOI: https://doi.org/10.2308/accr.00000012
Pinnuck, M., & Potter, B. N. (2009). The quality and conservatism of the accounting earnings of local governments. Journal of Accounting and Public Policy, 28(6), 525–540. https://doi.org/10.1016/j.jaccpubpol.2009.08.002 DOI: https://doi.org/10.1016/j.jaccpubpol.2009.08.002
Putri, N. K., & Mahmud, A. (2015). Pengaruh Pertumbuhan Ekonomi, PAD, Ukuran dan Kompleksitas terhadap Kelemahan Pengendalian InternalPemerintah Daerah. Accounting Analysis Journal, 4(2), 1–8.
Saputro, E. A. (2015). Analisis Faktor-Faktor yang Berpengaruh Terhadap Kelemahan Pengendalian InternalPemerintah Daerah. Accounting Analysis Journal, 4(3), 1–9.
Schneider, A., & Church, B. K. (2008). The effect of auditors ’ internal control opinions on loan decisions. Journal of Accounting and Public Policy, 27(1), 1–18. https://doi.org/10.1016/j.jaccpubpol.2007.11.004 DOI: https://doi.org/10.1016/j.jaccpubpol.2007.11.004
Susiarini, D. R., & Kiswanto. (2016). Faktor-Faktor yang Mempengaruhi Weaknesses of internal control of local governments Daerah di Jawa Tengah. Accounting Analysis Journal, 5(1). https://doi.org/https://doi.org/10.15294/aaj.v5i1.9762
Tempo.Co. (2017). Semester 1, BPK Temukan 14.997 Masalah Senilai Rp 27,39 Triliun. Diambil dari www.tempo.com
Yamin, R., & Sutaryo. (2014). Faktor Penentu Jumlah Temuan Kelemahan Sistem Pengendalian InternalPada Pemerintah Daerah di Indonesia. Jurnal Akuntansi dan Keuangan Indonesia, 15(4), 1–24.