Internal Control Weakness and Corruption: Empirical Evidence from Indonesian Local Governments

Abstract

Purpose: Corruption still becomes a serious problem in Indonesia in the decentralization era. This paper aims at providing a comprehensive empirical examination regarding the effect of internal control system weaknesses on corruption in Indonesian local governments (LGs). Theoretical framework: By drawing the concept from the fraud theories and agency theory, the study explores the internal control weaknesses as corruption determinants in LGs. Design/methodology/approach: We use secondary data from the related regulating bodies in Indonesia during 2010-2018 fiscal period from 508 LGs with total of 4530 observations, analyzed with panel data regression. Findings: Our findings suggest that the corruption in Indonesian LGs has not experienced significant decrease during the observation period. The internal control system implementation also still has significant weaknesses that has not improved from 2010-2018. Our analysis demonstrates that internal control weakness positively affects corruption. Further analysis also reveals that all internal control weakness element also has positive effect on corruption, both the weaknesses in the budget, revenue, and expenditure administration, the weaknesses in accounting and financial reporting, and the structure weaknesses. Research, Practical & Social implications: Based on the research findings, our study emphasizes that the internal control system implementation in Indonesian LGs needs urgent improvement to support the prevention of corruption in local level. The policymakers are required to take strategic efforts for internal control system reform in the LGs to reduce the likelihood of corruption by irresponsible local authorities. Originality/value: The study fills the limitation in Indonesian corruption literature by providing one of the earliest empirical investigation that comprehensive covers the whole Indonesian regions.