Determinants of settlement audit recommendation of ...

Int. J. Public Sector Performance Management, Vol. 4, No. 2, 2018

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Determinants of settlement audit recommendation of the audit board of the Republic of Indonesia Agung Nur Probohudono*, Rudy Hartanto and Rifky Pratama Putra Faculty of Economics and Business, Sebelas Maret University, Jl. Ir. Sutami No. 65a, Surakarta, Indonesia Email: [email protected] Email: [email protected] Email: [email protected] *Corresponding author Abstract: This study aims to determine the factors that affect the settlement of the audit recommendations of the audit board of the Republic Indonesia (Badan Pemeriksa Keuangan /BPK RI). This analysis employed a multiple regression analysis 305 local governments as the sample. The result of research showed that local government type and age affected audit recommendation settlement level of BPK RI. The two variables showed positive effect on follow-up settlement resulting in the audit result of BPK RI. In addition, this study showed that the interaction between education background and local government nature, with local government type interaction affected positively. And then, there is a negative correlation result of interaction between education background and political party monitoring on the settlement of BPK RI audit recommendation. The implication of research is that the settlement of BPK RI audit recommendation is an important matter for the improvement of local government financial accountability. Keywords: settlement audit recommendation; local government; audit opinion, Indonesia. Reference to this paper should be made as follows: Probohudono, A.N., Hartanto, R. and Putra, R.P. (2018) ‘Determinants of settlement audit recommendation of the audit board of the Republic of Indonesia’, Int. J. Public Sector Performance Management, Vol. 4, No. 2, pp.169–189. Biographical notes: Agung Nur Probohudono is a lecturer at the Faculty of Economics and Business of the Sebelas Maret University, Surakarta, Indonesia. He has taught public sector audit, public sector accounting and public sector accounting systems. He is registered as a certified accountant (CA) in Indonesia. Currently, he is the Head of the Center for Public Transparency and Anticorruption Studies Institute for Research and Communities. The focus of his current research is corporate governance, financial reporting and public sector performance. Rudy Hartanto is a graduate of Master of Accounting from the Sebelas Maret University (UNS). Currently, he is a Research Assistant in the Financial Services Authority Indonesia. The focus of his current research is public sector accounting, financial accounting, auditing and sustainable finance.

Copyright © 2018 Inderscience Enterprises Ltd.

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A. N. Probohudono et al. Rifky Pratama Putra is a graduate from the Faculty of Economics and Business of Sebelas Maret University. He is currently involved at the Center for Public Transparency and Anticorruption Studies Institute for Research and Communities as a research fellow. The focus of his research is the prevention of corruption, transparency and good governance of the public sector. This paper is a revised and expanded version of a paper entitled ‘Determinants of settlement audit recommendation of the audit board of the Republic of Indonesia: stakeholders perspective on local government’s financial statement in Indonesia’ presented at Asian Academic Accounting Association, Bandung, 15–18 November 2015.

1

Introduction

Indonesia is a presidential state headed by the president as head of state. Indonesia is an archipelago with a number of islands as much as 17,508. Unitary Republic of Indonesia is divided into provincial regions and these provincial regions shall be divided into regions, counties and cities. Provincial and regency/city until 2015 reached 34 provincial and 486 district or city. As the growing areas of power sharing, the need for strict control of the central government. In the framework of supervision and inspection of the performance of local government, established by The Audit Board of the Republic of Indonesia (Supreme Audit Agency/BPK) to perform the task. BPK is the only institution that has the authority to check the performance in terms of local government finance. This is different to the conditions and circumstances in other countries that allow private public accounting firm to examine the government’s financial statements. In order to support the government’s examination of area scattered on various islands in Indonesia, then formed the Audit Board of the Republic of Indonesia (Supreme Audit Agency/BPK) representatives in every province and district/city. Local government in Indonesia responsible for their financial reports through the financial statement called the local government finance report (LKPD) (Act no. 8 of 2006). LKPD compiled by local governments would henceforth be conducted an examination regarding the fairness of the financial statements. Examination of LKPD conducted by Agency Inspectors of Finance (BPK RI) which are State agencies that run the auditing duties over the management and accountability of the financial state of the Republic of Indonesia (Law no. 15 of 2004). An examination of BPK RI produced a report of the inspection which includes independent auditor’s report that one of them be the opinion of the financial statements of government agencies including local governments. The result of auditing report constituting opinion issued by BPK RI is based on some criteria. One criterion the BPK RI uses in issuing audit opinion (AO) is the implementation of previous year audit recommendation. The implementation of audit recommendation is the one the local government should undertake to improve the financial management accountability next year. The more the local government follows up the audit recommendation of BPK RI, the better is the accountability of financial statement and the better is the AO on such the financial statement. Based on Article 20 of Law no. 15 of 2004, BPK RI monitors the follow-up of audit recommendation and informs the result of follow-up to representative agency in semester

Determinants of settlement audit recommendation

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auditing result overview [Ikhtisar Hasil Pemeriksaan Semester (IHPS), 2014]. IHPS contains data of audit recommendation follow-up monitoring over the auditing of state financial management and accountability undertaken by the officials of central government, local government, BUMN (state-owned enterprise) and other agencies. Generally, the development of local government audit recommendation implementation during 2010–2014 is as follows. Figure 1

Status of audit recommendation implementation 2010–2014 (see online version for colours)

The explanation of table above shows that about 50.47% is the percentage consistent with audit recommendation. The percentage of 50.47% shows that many officials audited by BPK RI do not implement the audit recommendation corresponding to specified period. The implementation of audit recommendation should be an obligation of authorised officials. It is not consistent with the regulation mentioned in the Law no. 15 of 2004 about audit of state financial management and accountability. The law states that according to its authority, the corresponding officials obligatorily follow-up the recommendation of auditing result and everyone not meeting the obligation of following up the recommendation of auditing result should be punished with at least one year and six months imprisonment and/or fine as much as IDR 500,000,000.00. The research on the implementation of recommendation for local government is still very limited. Lin and Liu (2012) found that the auditee’s or other related parties’ attempt is the important factor for the auditor to undertake its duty. In addition, the auditee’s attempt is the important thing in implementing the recommendation of audit as well. Aikins (2012) conducted a research on the effect of local government’s internal audit process in adopting the client audit management from audit recommendation. Aikins (2012) conducted a survey to determine various aspects of a local government internal audit and their relationship to the application of client audit management from audit recommendation. The result of research shows that the application of audit recommendation client management is the function of auditor as a professional profession, due diligence, client relationship, documentation and audit recommendation tacking and follow-up for verifying the implementation approved in action plan. Auditor’s knowledge will help its in conducting high-quality field work by designing and doing it corresponding to the audit testing and by recommending add-value, thereby facilitating acceptance and implementation of audit recommendation (Aikins, 2012). The

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quality of audit felt will be affected significantly by the characteristic of auditor such as industrial skill, responsiveness to client need, professionalism implementation, field work examination and training on professional skepticism (Carcello et al., 1992; Samelson et al., 2006). A research has been conducted by Kristiawan (2014) in Indonesia on the implementation on of audit recommendation. Kristiawan (2014) examined the factors affecting audit recommendation using auditor characteristic, auditee characteristic and also local head characteristic. The characteristics of auditor used were professional competency and education background of auditor. The characteristics of auditee used were local government type and economic entity number. Meanwhile, the characteristics of local head included education background and local government tenure. Setyaningrum et al. (2014) conducted a research by analysing the factors affecting recommendation of BPK RI’s auditing result conducted by local government by including the quality of auditor and legislative supervision as primary variable assumed as affecting the follow-up of auditing result. The appropriate recommendation that is easy to follow up by local government is expected to be provided by auditor with high competency (Kristiawan, 2014). From previous studies it is known that majority using only one test model independent variable on the dependent variable. The variables actually have the effect of variables that exist outside of these variables. The relationship between the independent variables with the dependent variable is likely influenced by other variables. Therefore, this study tries to use the test to test the interaction of the two characteristics of the independent variables [moderated regression analysis (MRA)] in order to determine the effect of interaction between other independent variables (Liana, 2009). MRA is used to answer what if there is interaction between the independent variables with other independent variables.

2

Literature review and hypothesis formulation

2.1 Agency theory in public sector Agency Theory is a theory explaining the relationship between principal and agent. Such the relationship is the root of economic, decision-making, sociological and social theories (Halim and Abdullah, 2006). The relationship is a contact between one or more principals involving other parties (agent) to carry out service and work to the agent (Jensen and Meckling, 1976; Ross, 1973; Mitnick, 2006; Halim and Abdullah, 2006). Agency theory concerns two problems related in the relationship between principle and agency. The problems, according to Eisenhardt (1989), are that agent having duty and obligation of doing work and service corresponding to the principal cannot be verified for his/her behaviour appropriately and that there is risk sharing problem in dealing with the risk. The more developing organisation generates the distance between management (agent) and those entrusting their money (capital supplier) or called principal. Such the distant relationship generates potential conflict between both of them (Umar, 2012). Agency Theory may occur in either private or public sector (Ross, 1973; Moe, 1984; Stiglitz, 1999; Mitnick, 2006).


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In private sector or in companies, agency theory appears when there is an interest affecting the company’s business operation (Band, 1992). Such the conflict occurs between manager and stockholder (agency and performer) and between stockholders and debtholders (performer). The conflict problem between principal and agent is called agency conflict (Chow, 1983; Wats and Zimmerman, 1983). The assumption of behaviour underlying agency conflict is explained below (Band, 1992). a

All individuals, either or principal, attempt to maximise their personal welfare.

b

Every individual is considered as having been able to rationalise and to cope with the effect of the agency problem.

In public sector, agency conflict may occur in planning and implementation stages (Sutaryo and Winarna, 2013). The planning in public sector is the process of planning government budget to be used as the government’s primary means of fulfilling all of its obligations, promises and policies into a real and integrated plan in order to achieve the expected result (Dobell and Ulrich, 2002). The budgeting existing in public sector is a bargaining process occurring between the executive and legislative assemblies (Hagen, et al., 1996). Halim and Abdullah (2006) argued that agency conflict in public sector occurs because there is a difference between executive and legislative functions, in which the executive one includes planning, implementation and reporting on local budget, constituting the manifestation of service to the public, while the legislative one participates actively in implementing legislation, budgeting and supervision. Agency conflict, in addition to occurring between executive and legislative (Sutaryo and Winarna, 2013), also occurs between government as the agent and society as the principal (Arifianti et al., 2013). In the government, there is an interrelationship between principal and agent contacts that can be traced through budgeting process: electorate-legislation, legislation-government, prime minister-bureaucrat and service provider officials (Moe, 1984). The lack of information received by the public as principal can be utilised by the agent to maximise income for both their individual and personal interests (Noreen, 1988; Saam, 2007). In budgeting, the agent tends to make ‘budgetary slack’, in which budgetary slack is made not for public interest, but the personal interest of agent (Nurul, 2010). The lack of information obtained by the public constitutes contractual problems occurring in the development and the application of public policy. It is related to moral hazard and adverse selection (Halim and Abdullah, 2006; Saam, 2007). Gilardi (2001) mentioned that adverse selection may occur when the principal cannot select the agent with suitable skill and preference and moral hazard may occur when the agent cannot be overseen completely by the principal. Moral hazard refers to the principal’s predisposition that cannot promote the agent’s interest complete, while adverse selection is a principal’s incapability of determining some principals who likely promote the agent’s interest and in this case related to the selection of potential agent supported by some classes of principals. Such the condition above results in opportunistic behaviour for the executive in budgeting process. Budgeting process likely relates to the presence of increased budget that in turn will increase the legislative members’ income and to develop a good reputation of politicians in certain areas (Halim and Abdullah, 2006). Tanzy and Davoodi

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(1997) proved that opportunistic behaviour of politicians in the decision making of public investment related to the presence of spending is highly discretionary. Abdullah and Asmara (2006) mentioned that opportunistic behaviour of legislative members occurring currently is as if supported by some regulations and laws enacted: law number 22/1999 and regulation number 110/2000. Both laws have apparently legitimised the legislative members’ action of changing the budget proposed by the executive. Such the change may occur because legislative assembly has had very large authority in selecting and terminating the local head (Abdullah and Asmara, 2006). The executive assembly with authority as budget executor or user will attempt to improve or maximise the budget proportion (Smith and Bertozzi, 1998). On the other hand, the public electing politicians either executive or legislative had an objective to make the budget and resource use run smoothly for those in government. Meanwhile, indeed, there is a story about how public expenditure is used for the politicians (Von Hagen, 2002). Budget use in public policy will be ineffective, inefficient and disturbed because of politician manipulation. In determining resource allocation, politicians employ their power and domination for benefiting themselves (Garamfalvi, 1997). In the attempt of reducing agency conflict between principal and agent, there should be a third party to mitigate the conflict. One attempt that can be taken is to audit the financial statement the principal has made. The audit is conducted on LKPD by BPK RI. The result of auditing from BPK RI constitutes the opinion on the reasonability of financial report, finding, conclusion and recommendation (Law no. 15/2004). Agency conflict occurring generates a problem requiring a concrete solution. BPK RI is the state auditor in charge of and playing an important part in overseeing thereby the duty including in the budget can be implemented well. Overseeing and monitoring are taken by auditing LKPD. Such the auditing will yield AO and recommendation for subsequent improvement. It is the settlement of audit recommendation in the running period that needs to be overseen and monitored to make the audit taken not only limited to opinion expression but also extended to budget management in order to achieve the idealised accountability.

2.2 Local financial auditing Law number 15 of 2004 about the auditing of state financial management and responsibility stated that auditing is: “Process of identifying problem, analysis and evaluating conducted independently, objectively and professionally based on standard auditing to assess truth, precision, credibility and reliability of information on the state financial management and responsibility.”

The auditing made by BPK RI is based on an auditing standard. The auditing standard is developed by considering the existing standard in international audit profession setting. Such the standard auditing is governed by Regulation Number 1 of 2007 about standard auditing of state financial (SPKN). The result of every auditing made by BPK RI will be then organised and presented in the report of auditing result (LHP). Auditing report result of BPK-RI will be delivered to DPR/DPD/DPRD (legislative assembly/local representative council/local legislative assembly) and then followed-up corresponding to


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its authority. The follow-up will be discussed along with the related parties (Law no. 15 of 2004). Thus, the public can obtain an opportunity of finding out the result of auditing, among others, through BPK RI’s publication and website.

2.3 Finding, recommendation and follow-up of auditing result The result of monitoring on the implementation of auditing recommendation by BPK is presented before the representative council in the form of semester auditing result overview (IHPS, 2014). Generally, the definitions of monitoring, recommendation and follow-up of recommendation are as follows (BPK RI, 2014): a

Monitoring of auditing result recommendation follow-up (TLRHP) Monitoring of TLRHP is a series of activities conducted systematically by BPK RI to determine that the recommendation of auditing result has been implemented by the officials in the specified period.

b

Recommendation The recommendation is a means resulting from the auditing taken by the auditor presented before the authorised body or officials to take measure or correction or financial report that has been audited.

c

The follow-up of auditing result recommendation is an activity and/or decision made by the audited officials and/or other competent parties to implement the result of BPK RI’s auditing.

The result of auditing investigation, according to BPK RI’s Regulation number 2 of 2010 about the monitoring of auditing result follow-up, is classified into four statuses: a

follow-up consistent with recommendation

b

follow-up inconsistent with recommendation

c

not followed-up recommendation

d

followed-up recommendation.

An audit recommendation is stated as having been followed up consistent with the recommendation when BPK RI’s recommendation has been followed-up concretely and completely by the audited officials corresponding to the BPK RI’s recommendation. BPK RI’s recommendation is expected to improve the state/local/corporate financial management and responsibility in corresponding entities. Generally, BPK-RI’s recommendation can be followed-up by means of depositing money/asset to state/local government/company to complete work/product and administrative action in the form of warning, reprimanding and/or sanction imposition to those responsible and/or the executor of activities. Administration measure (action) can be corrective action over the state/local/corporate financial management, completing the evidence of accountability and improvement over a part or entire internal control system (Law no.15 of 2004).

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2.4 Characteristic Characteristics according to KBBI (2014) are the attributes, traits or things owned by an element that is a description of the elements. The following is an explanation of some of the characteristics of variables in this study.

2.4.1 Characteristics of local government Characteristics of local government can be defined as the characteristics possessed by the local government that could include extensive, e.g., size of the organisation (Patrick, 2007; Suhardjanto and Yulianingtyas, 2011; Suhardjanto et al., 2011; Hilmi and Martani, 2012; Puspita and Martani, 2012; Mustikarini and Fitriasari, 2012; Setyaningrum et al., 2014; Kristiawan, 2014), the population or the number of people (Martani and Lestari, 2010; Hilmi and Martani, 2012), the type of local government (Martani and Lester, 2010; Suhardjanto and Yulianingtyas, 2011; Kristiawan, 2014), the number of local set work unit is the local set of local government (Satuan Kinerja Perangkat Daerah/SKPD) (Patrick, 2007; Suhardjanto and Yuliningtyas, 2011; Hilmi and Martani, 2012; Kristiawan, 2014), the age of the local government (Setyaningrum and Syafitri, 2012). This study defines the characteristics of the local government by using a type of local government, the number of local entities and the age of the local government.

2.4.2 Characteristics of auditor BPK RI Auditor examination within the government consisting of internal and external auditors. Examination conducted by BPK RI is an examination conducted by an external auditor, while local governments are internal within the internal watchdog called Inspectorate or inspectorate that is directly responsible for the head region. The results of an internal investigation to the local government inspectorate can be used by the BPK and therefore, the internal audit report on the (local) government must be submitted to the BPK (Syukriy, 2006). Some studies measuring and defining characteristics of auditor BPK as professional skills (Setyaningrum, 2012; Kristiawan, 2014), educational background auditor (Setyaningrum, 2012; Kristiawan, 2014), the experience of internal auditor/inspector (Handayani, 2013), the old audit (Zawitri, 2009; Setyaningrum et al., 2014). BPK auditor characteristics were used in this study is the BPK auditor’s professional proficiency. The auditor’s professional proficiency views of professional education which is owned by the BPK auditor.

2.4.3 Characteristics of the executive and legislative According to Law No. 23 of 2014 on local governments, “The organisers of the regional government of provincial and district/city consists of heads of regions and the regional representatives council (DPRD), assisted by the region”. Head of the region was a leader of an organisation that conducts the legislation. Head of the province called the governor, the heads of districts called Regents and the head area of the city called the mayor. Characteristics of the head area can be defined as the characteristics possessed by the head of the region that could include extensive, such as the term of office of regional heads and educational backgrounds regional head (Kristiawan, 2014).


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Parliament is a representative institution domiciled regional people as an element of the regional administration. Characteristics of Parliament can be defined as the characteristics of the legislators to be the size of dominant in the parliament (Suhardjanto et al., 2011), education level executives (Suhardjanto et al., 2011; Setyaningrum et al., 2014), educational background (Suhardjanto et al., 2011).

2.5 Hypothesis development 2.5.1 Auditor’s professional competency on the follow-up of auditing result of local government financial statement Knowledge on government audit along with formal education and professional training enables the audit team to better understand the internal controlling structure and to do high-quality field work by designing and doing it corresponding to audit testing. The knowledge on audit can give an added-value recommendation that facilitates the added-value in the acceptance and implementation of audit recommendation as well (Aikins, 2012). The difference of knowledge will result in the difference of behaviours in solving the problem between expert and beginner. Such the difference will result in difference in representation, problem-solving representation, information searching and decision quality (Bedard and Chi, 1993). In their study, Booner and Lewis (1990) mentioned that certain type of knowledge is the main determinant of good performance achievement. The difference of professional competency will result in different qualities of audit (Carcello et al., 1992). The auditor with professional competency will result in appropriate recommendation understandable to auditee. The appropriate and easy recommendation will make auditee implement quickly the recommendation given by the auditor. H1

The auditor’s professional competence affects positively the settlement of audit recommendation.

2.5.2 Type of local government on the settlement of audit recommendation in local government Based on Law no. 32/2004 on local government, the local government may consist of municipals and regencies. Viewed from the economic aspect, according to Syukriy (2011), the mean gross domestic product of regency is lower than that of municipal. The size of GDP will have implication to the larger asset owned by the municipal than that owned by regency (Kristiawan, 2014). The larger asset volume shows the areas with more resource. The ownership of more resource in municipal local government will make the implementation of auditor’s recommendation run more quickly (Kristiawan, 2014). Considering the explanation above, the hypothesis of research can be formulated as follows: H2

Type of local government affects positively the settlement of audit recommendation.

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2.5.3 Accounting entity number on the settlement of audit recommendation in local government Permendagri (Interior Ministry’s Regulation) number 13 of 2006 about the guidelines of local financial management mentioned that SKPD or Local Set Work Unit is the local set of local government as budget/product users. SKPD shows the level of performance concentration to be manifested by local government. Patrick (2007) found that in Pennsylvania the local governments with higher functional differentiation level will tend to adopt Governmental Accounting Standard Board (GASB) 34 more than those with lower functional differentiation level. In Indonesian local governments, the function of the functional department is as same as that of SKPD as an accounting entity (Darmastuti and Setyaningrum, 2012). The number of SKPD represented the number of affairs prioritised by local government in building the local area. The more the affairs prioritised by local government, the more complex is the government (Hilmi and Martani, 2011). The number of SKPD in local government will have more and complex problems. Such the complexity will affect the settlement of auditing result follow-up: H3

Number of accounting entity affects negatively the settlement of audit recommendation.

2.5.4 Local government age on the settlement of audit recommendation in local government An organisation’s age can be defined as how long the organisation has gone on since its establishment (Setyaningrum and Syafitri, 2012). In the government, local government age is defined as how long the area has existed (Mandasari, 2009). Legally, the establishment of an area is applied in a law. The organisation that has been long established is considered as having a better ability to disclose financial statement than those newly established (Setyaningrum and Syafitri, 2012). Lesmana (2010) mentioned that the longer a local government has been established, the more experienced it is in running its administration system, including in its financial reporting process. In the presence of better experience in the administrative system, the local government will follow up the recommendation of BPK RI’s financial auditing result. H4

Local government age affects positively the settlement of audit recommendation.

2.5.5 Education background of local head on the settlement of audit recommendation in local government Republic of Indonesia’s Presidential Regulation number 4 of 1959 about conditions of education, competency and experience in government for local head in Article 1 explains the positive conditions of education, experience and age for the local head. Such the formulation is intended to integrate the political acceptability into technical competency for a local head. Related to education, the background of education will affect significantly the need for information among the users of the governmental financial report [Martiningsih (2008) in Fontanella (2010)]. The result of studies in Sweden showed that user did not utilise the information contained in the governmental financial


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statement because of their ignorance about the available accrual accounting information (Paulsson, 2006). The local head of accounting education will attempt to make the financial statement made by local government is consistent with standard accounting government. Such the attempt makes the number of auditing result findings smaller. It will make the settlement of auditing result follow-up easier. H5

Education background of local head affects positively the settlement of audit recommendation.

2.5.6 Local head tenure on the settlement of audit recommendation in local government The longer individual works in a job, the higher is his/her experience. The experience of occupying a post is a specific knowledge of something acquired through working on the same thing for many years (Ashton, 1991). An individual with job experience in a certain field, consciously or unconsciously, will have technical competency and skill in dealing with his/her job. The more an individual’s experience of technical competency and practice in a field, the higher is his/her leadership management ability. A local head with longer tenure will have more experience. The more experience the local head has will make him/her understand better his/her area. H6

Local head tenure affects positively the settlement of audit recommendation.

2.5.7 Number of opposition parties on the settlement of audit recommendation in local government Corresponding to Article 21 of Law no.15 of 2004, DPRD (local legislative assembly) serves to oversee the management of state finance by monitoring the implementation of auditing result follow-up. The strong legislative overseeing supports a tighter overseeing over local financial management. A simple overseeing can be defined as the process of measuring performance and taking action to ensure the output and outcomes as expected and to ensure that everything runs dully corresponding to the specified standard (on the right track) (USAID, 2009). The tighter overseeing conducted by DPRD will make the local government more committed to following up the recommendation of auditing result, that in turn will impact on the decreased number of audit in the next period. H7

Number of opposition parties affects positively the settlement of audit recommendation.

2.5.8 The settlement of audit recommendation in local government on AO The BPK RI’s auditing guidelines state that LKPDs that have been audited and received AO will be recommended to be followed-up concerning the recommendation of the audit so that the problem will not be exception again in the audited fiscal year. The auditor should study the effect of previous audit’s result and the follow-up over the LKPDs audited, particularly related to the probability of repeated audit findings and the auditor’s belief in original or estimated account balance in the audited balance (BPK RI, 2011).

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The recommendation of previous year audit, not followed-up next year will be taken into account by the auditor to determine the reasonability of financial statement reflected on AO. It is confirmed by the general description of auditing included in each LKPDs audited by BPK RI. General description of auditing in point five in the research method section in auditing planning subsection concerning the consideration of auditing result mentions that auditing should take auditing result and follow-up of previous auditing result into account. H8

3

The settlement of audit recommendation in local government affects the AO next year.

Method

3.1 Research design This research employed secondary data obtained from other parties in the form of data obtained from Financial Auditing Board (BPK RI), a local government website or from relevant sources that can be used to support this study. The population of research employed local government financial statement audited in 2012 for Percentage audit recommendation settlement and 2013 for AO. The sampling technique used in this research was purposive sampling. The sample of research was taken using the following criteria: a

The local government of regencies/municipals throughout Indonesia publishing LKPDs in 2012 and 2013 that have been audited by BPK RI.

b

Local government financial statement including entire data and information needed in variable measurement and data analysis for hypothesis testing in the research.

3.2 Operational definition of variable Table 1 No. a

b

Operational definition of variable Variable

Note

Percentage audit recommendation settlement

Audit opinion

PRA =

∑ rmk − ( ∑ btl + ∑ bstl + ∑ tdtl) × 100% ∑ rmk

PRA

percentage audit recommendation settlement

btl

not followed-up

bstl

followed-up incompletely/inconsistent with recommendation

tdtl

cannot be followed-up

rmk

recommendation

‘5’ for unqualified opinion, code ‘4’, for qualified, code ‘3’ for qualified with explanatory paragraph, code ‘2’ for adverse opinion and ‘1’ for disclaimer.

Determinants of settlement audit recommendation Table 1 No.

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Operational definition of variable (continued) Variable

Note

c

Professional competency of BPK’s auditor

Every auditor team head with one or more professional certification is given 1 (one) point, while the one with no professional certification is given 0 (zero) point.

d

Type of local government

e

Accounting entity

f

Local government age

g

Education background of regent

Code ‘1’ for the local head with economic/accounting education and ‘0’ for the one with no economic/accounting education.

h

Tenure of regent

Code ‘1’ for the local heads with more than one period tenure/incumbent and ‘0’ for those with less than one period tenure.

i

Percentage legislative overseeing

Code ‘1’ for local government with municipal-type and code ‘0’ for the one with regency type.

SIZE =

∑SKPD Regency/municipal

UP = years of regency/municipal establishment

PLO =

∑ PO × 100% ∑ TA

note: PPL

Percentage legislative overseeing

PO

Local head opposition party affiliated with local legislative assembly (DPRD)

TA

Total number of DPRD members

3.3 Research method of analysing data The method of analysing data used in this research was a multiple regression analysis. The multiple analysis method was used because the independent variable was combination of metric and nominal (non-metric) ones (Ghozali, 2011). PRA = β 0 + β1 PC + β 2 TLG + β3

SIZE + β 4

ALG + β5 EDU + β 6 TR + β 7 PLO + ε

PRA = β 0 + β1 EDU * TLG + β 2 EDU *SIZE + β3 EDU * ALG + β 4 EDU * PLO +β5 TR * TLG + β 6 TR *SIZE + β 7 TR * ALG + β8 TR * PLO + ε OA = β 0 + β1 PRA + ε

notes: PRA

percentage of audit recommendation settlement

PC

professional competency of BPK RI’s auditor.

TLG

type of local government

SIZE

number of accounting entity (Satuan Kerja Perangkat Daerah/SKPD) size of local government

ALG

age of local government age

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EDU

education background regent

TR

tenure of regent

PLO

percentage legislative overseeing of DPRD

OA

opinion audit next year

β0

constant

β1 – β6

coefficient of regression

ε

error term.

4

Data analysis and discussion

4.1 Population and sample The population of research was all the local governments (regencies/municipals) in Indonesia. The sample of research was taken using purposive sampling method. The detail of sample to be tested in this research is illustrated below. Table 2

Sample and research observation

No.

Sample criteria

Model 1 and Model 2

1

Local government financial statements (LKPDs) of regency and municipal in Indonesia in 2012 that have been audited by BPK RI

497

2

Local government not submitted LKPD and no data completeness of LKPD

(5)

3

Regency and municipal government not presenting data information required in the research Local governments used in the sample of research

Table 3

(187) 305

Sample and research observation

No.

Sample criteria

Model 3

1

Local government financial statements (LKPDs) of regency and municipal in Indonesia in 2013 that have been audited by BPK RI

497

2

Local government not submitted LKPD and no data completeness of LKPD

(5)

3

Regency and municipal government not presenting data information required in the research Local governments used in the sample of research

(187) 305

4.2 Descriptive analysis Considering the table 4 under, it can be found that the mean settlement level of audit recommendation is 56.15%. It indicates that the follow-up settlement of auditing result is still low in every area. The lower settlement of audit recommendation indicates the lower


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commitment of local government to following up the settlement of audit recommendation. Table 4

Descriptive statistic result Audit recommendation settlement BPK RI

Variable

N

Minimum

Maximum

Mean

PRA

305

0.00

100

0.5615

PC

305

0.00

1.00

0.1180

TLG

305

0.00

1.00

0.1934

SIZE

305

16.00

219.00

51.4557

ALG

305

4.00

1,262.00

163.2689

EDU

305

0.00

1.00

0.4426

TR

305

0.00

1.00

0.1082

PLO

305

0.05

1.00

0.7003

OA

305

1.00

5.00

3.2557

Notes: PRA = Percentage of audit recommendation settlement, PC = Professional competency of BPK RI’s auditor; TLG = Type of local government; SIZE = SKPD size of local government; ALG = Age of local government age; EDU = Education background regent; TR = Tenure of regent; PLO = Percentage legislative overseeing of DPRD; OA = Opinion audit next year.

Total SKPDs proxied with SIZE in the table above had mean score of 51. The sample of research, viewed from SKPD number, the minimum number of SKPDs the local government has is 16. Total local government age in descriptive statistics in the table above shows that the mean age of local government is 163 years. Meanwhile, the minimal age of local government is four years. Opposition party (PLO) like descriptive statistic result above shows the mean value of 70%. It represents that the opposition party of the local head (regent) affiliated with DPRD still dominates substantially. Meanwhile, the opposition party supporting the regent in DPRD reaches 100%. The percentage 100% occurs when the regent has local head nominating him/her self as independent nominee or the regent winning the Local Head Election without any supporting parties.

4.3 Discussion This study examined the recommendations produced by the BPK as government auditors. The study consisted of three test models. The first model to examine factors affecting TLRHP BPK RI. The second model uses the interaction between the test characteristics and the characteristics of local government executives against TLRHP. The third model tested whether TLRHP BPK AO affects the next year. The result of research on the effect of BPK RI auditor’s competency, local government size, local head education background, local head tenure and percentage overseeing of opposition in DPRD shows that there is no effect on recommendation settlement of BPK RI audit. Such the result affects inversely the study conducted by Kristiawan (2014) that has proved that BPK RI auditor’s competency, local government size, local head education background and local head tenure affect positively the

184


settlement of BPK RI audit recommendation. The result of research on percentage overseeing of political parties is also different from Setyaningrum et al. (2014). Table 5

Result of regression analysis test

Model

1

Sig. prediction

Standardized coefficients Beta

T

Sig.

PC

+

0.015

0.250

0.803

TLG

+

0.130

2.233

0.026**

SIZE

-

0.047

0.804

0.422

ALG

+

0.170

2.917

0.004*

EDU

+

–0.049

–0.831

0.407

TR

+

0.031

0.525

0.600

PLO

+

–0.031

–0.533

0.595

Notes: Definition variable: *sig 0.01; **sig 0.05 and ***sig 0.1; PC = Professional competency of BPK RI’s auditor; TLG = Type of local government; SIZE = SKPD size of local government; ALG = Age of local government age; EDU = Education background regent; TR = Tenure of regent; PLO = Percentage legislative overseeing of DPRD.

Local government type and age in this current research show the result affecting positively the settlement of BPK RI audit recommendation. The result of research on local government type is in line with Kristiawan (2014). Meanwhile, the local government age shows the result consistent with Setyaningrum et al. (2014). Table 6

Result of regression analysis test

Model

Sig. prediction

2

Standardized coefficients Beta

T

Sig.

EDU*TLG

+

0.145

2.277

0.024**

EDU*SIZE

+

0.101

1.010

0.313

EDU*ALG

+

0.086

1.340

0.181

EDU*PLO

+

–0.194

–1.890

0.060***

TR*TLG

+

0.146

2.261

0.025**

TR*SIZE

+

–0.139

–1.110

0.268

TR*ALG

+

0.071

1.143

0.254

TR*PLO

+

0.060

0.481

0.631

Notes: Definition variable: *sig 0.01; **sig 0.05 and ***sig 0.1; PC = Professional competency of BPK RI’s auditor; TLG = Type of local government, SIZE = SKPD size of local government; ALG = Age of local government age; EDU = Education background regent; TR = Tenure of regent; PLO = Percentage legislative overseeing of DPRD; EDU * TLG = Interaction EDU and TLG; EDU * SIZE = Interaction EDU and SIZE; EDU * ALG = Interaction EDU and ALG; EDU * PLO= Interaction EDU and PLO; TR * SIZE = Interaction TR and SIZE; TR * TLG = Interaction TR and TLG; TR * ALG = Interaction TR and ALG; TR * PLO = Interaction TR and PLO.

The result of regression test on Model 2 constitutes the examination of the interaction between local government characteristics, executive characteristic and political party


185

monitoring on the settlement of BPK RI audit recommendation. The result shows that only interaction between educational background and local government tenure with local government type affect positively. In addition, there is a negative correlation result of interaction between educational background and political party monitoring on the settlement of BPK RI audit recommendation. Meanwhile, the remaining interaction variable shows no effect on the settlement of BPK RI audit recommendation. Table 7 Model

3

PRA

Result of regression analysis test Sig. prediction

Standardized coefficients

T

Sig.

+

0.539

13,207

0.000*

Notes: Definition variable: *sig 0.01; **sig 0.05 and ***sig 0.1; PRA = Percentage of audit recommendation settlement.

The result of Model 3 constitutes the follow-up research studying whether or not the settlement of BPK RI audit recommendation affects the result of AO given by BPK RI for subsequent years. The result of the analysis shows the positive effect on the settlement of BPK RI audit recommendation. It is in lien with BPK RI’s statement and auditing guidelines on AO expression, in which AO is expressed based on the settlement of BPK RI audit recommendation in the previous year.

5

Concluding remarks

In the section of this discussion will explain the critical study of the test results in Model 1 up to model3. The discussion will be focused on the research results, compliance with the theory and the results of previous studies. The following is a summary of the test results in Model 1 to Model 3. The result of research using Model 1 related to the settlement of BPK RI audit recommendation shows that only local government type and local government age affect significantly. Meanwhile, the result of BPK RI auditor’s professional competence, SKPD size, local head education program, local head tenure and percentage legislative overseeing of DPRD variables does not affect the settlement of BPK RI audit recommendation. The interaction testing used in this research shows that only the interaction between educational background and local government tenure on local government type shows a positive effect on the settlement of BPK RI audit recommendation. Meanwhile, the interaction between local head characteristics including educational background and government tenure with SKPD and local government age does not affect the settlement of BPK RI audit recommendation. Meanwhile, advanced test on next year AO shows a positive effect. This study has a limitation in which there is a classification of BPK RI audit recommendation settlement per year that may result in test result less representing the actual condition. Another limitation is that this research unsurely represents the auditor competency owned because there is still another factor that can measure the auditor professional competency such as auditor age (Cheng et al., 2013). The professional competency variable with audit chief competency as the measurement is used because of author’s limitation in obtaining data of auditor unpublished widely by BPK RI.

186 Table 8 No.

A. N. Probohudono et al. Conclusions Variable

Hypothesis (H1)

Result

Conclusion

Model 1

1

PC

(+)

(+) Sig.

Proven

2

TLG

(+)

(+) Sig.

Proven

3

SIZE

(-)

(+) Not sig.

Not proven

4

ALG

(+)

(+) Sig.

Proven

5

EDU

(+)

(-) Not Sig.

Not proven

6

TR

(+)

(+)Not sig.

Not proven

7

PLO

(+)

(-)Not sig.

Not proven

Model 2

8

EDU_TLG

(+)

(+) Sig.

Proven

9

EDU_SIZE

(+)

(+) Not sig.

Not proven

10

EDU_ALG

(+)

(+)Not sig.

Not proven

11

EDU_PLO

(+)

(-) Sig.

Proven

12.

TR_TLG

(+)

(+) Sig.

Proven

13

TR_SIZE

(+)

(-)Not sig.

Not proven

14.

TR_ALG

(+)

(+)Not sig.

Not proven

15

TR_PLO

(+)

(+)Not sig.

Not proven

16

PLA

(+)/(-)

(+) Sig.

Proven

Model 3

Notes: Definition Variable: PC= Professional Competency of BPK RI’s auditor; TLG = Type of Local Government, SIZE = SKPD size of Local Government, ALG= Age of Local Government age; EDU= Education Background Regent; TR = Tenure of Regent; PLO = Percentage Legislative Overseeing of DPRD; EDU*TLG= Interaction EDU and TLG; EDU*SIZE = Interaction EDU and SIZE; EDU*ALG= Interaction EDU and ALG; EDU*PLO= Interaction EDU and PLO; TR*SIZE= Interaction TR and SIZE; TR*TLG= Interaction TR and TLG; TR*ALG= Interaction TR and ALG; TR*PLO= Interaction TR and PLO. PRA = Percentage of audit recommendation settlement.

Further research is expected to use more appropriate measurement in measuring the auditor’s professional competence that can reflect on the BPK RI auditor’s professional competence comprehensively. In addition, further research can ad local inspectorate characteristic variable as internal auditor of local government in charge of giving input and improving the local government’s finance. The implication of the research is that the settlement of BPK RI audit recommendation is an important matter for the improvement of local government financial accountability. The settlement level of BPK RI audit recommendation requires good cooperation between stakeholders such as local government, BPK RI auditor, legislative and executives to make the settlement run smoothly. In addition, further research can use the perspective of the community (public) constituting the par of stakeholders in the term of state financial management.


187

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