Governance Audit Research Articles

Performance-Based Budgeting and Corporate Innovation: Evidence from a Quasi-Natural Experiment in China

ABSTRACT This paper exploits a quasi-natural experiment to investigate the relationship between performance-based budgeting (PBB) and corporate innovation in China. The findings indicate a significant rise in patent applications and patents granted among firms headquartered in provinces that have adopted PPB. The increase is particularly pronounced for firms in provinces facing higher fiscal pressure and stronger government audits. The positive impact of PBB on corporate innovation is considerable for corporates with state-owned attributes and high financial constraints. The mechanisms of government fiscal transparency, research and development subsidies, and tax incentives are supported. Additional analyses indicate that the current PBB in China shows limitations in covering the governmental fund budget comprehensively. Moreover, in regions with increased government spending on science and technology, the influence of PBB on corporate innovation is significantly more pronounced. Collectively, the evidence implies that PBB can serve as a catalyst for corporate innovation.

Frontier AI developers need an internal audit function.

This article argues that frontier artificial intelligence (AI) developers need an internal audit function. First, it describes the role of internal audit in corporate governance: internal audit evaluates the adequacy and effectiveness of a company's risk management, control, and governance processes. It is organizationally independent from senior management and reports directly to the board of directors, typically its audit committee. In the Institute of Internal Auditors' Three Lines Model, internal audit serves as the third line and is responsible for providing assurance to the board, whereas the combined assurance framework highlights the need to coordinate the activities of internal and external assurance providers. Next, the article provides an overview of key governance challenges in frontier AI development: Dangerous capabilities can arise unpredictably and undetected; it is difficult to prevent a deployed model from causing harm; frontier models can proliferate rapidly; it is inherently difficult to assess frontier AI risks; and frontier AI developers do not seem to follow best practices in risk governance. Finally, the article discusses how an internal audit function could address some of these challenges: Internal audit could identify ineffective risk management practices; it could ensure that the board of directors has a more accurate understanding of the current level of risk and the adequacy of the developer's risk management practices; and it could serve as a contact point for whistleblowers. But frontier AI developers should also be aware of key limitations: Internal audit adds friction; it can be captured by senior management; and the benefits depend on the ability of individuals to identify ineffective practices. In light of rapid progress in AI research and development, frontier AI developers need to strengthen their risk governance. Instead of reinventing the wheel, they should follow existing best practices. Although this might not be sufficient, they should not skip this obvious first step.

Examining the Influence of Religiosity and Emotional Intelligence on the Ethical Conduct and Decision-Making of Auditors

This study explores the impact of religiosity and emotional intelligence on the ethical behavior of auditors. The research aimed to empirically assess how these two variables contribute to ethical conduct in the auditing profession, particularly in government offices. Data were collected from 102 government auditors through a questionnaire and analyzed using the Partial Least Square (PLS) method via WarpPLS software. The results demonstrated that both religiosity and emotional intelligence significantly and positively influence auditors' ethical behavior. These findings suggest that strengthening these qualities among auditors could enhance ethical decision-making and restore public confidence in the auditing profession.

How does audit digitalization stimulate corporate green innovation? The mediating role of R&D investment

PurposeThis paper aims to investigate how digitalization empowers government auditing with technical power to serve national governance better.Design/methodology/approachThis study measures the audit digitalization (AD) index by textual analysis method and matches the provincial AD index with the Chinese listed firm’s data from 2011 to 2019. The two-way fixed effect regression is used to explore the nexus of audit digitalization and corporate green innovation.FindingsThe empirical results demonstrate that government audit digitalization stimulates corporate green innovation, especially for substantive green innovation. Research and development expenditures on personnel and capital are influential mediators and are increased by audit digitalization. The heterogeneity analysis indicates the anti-driving effect for fewer audit informatization expenditures or lower environmental audit coverage, and the incentive effect for state-owned enterprises or firms with corporate social responsibility reports.Originality/valueThe incremental contribution lies in recognizing the progress of government audit digitalization and its role from digital to environmental governance, which extends digital capabilities and digital expertise into the government audit view. Based on textual analysis, a reliable dictionary of audit digitalization is built by machine-learning methods. Then, the authors confirm the effectiveness of audit digitalization, especially when other forms of digitalization fail to promote substantive green innovation. This study also attests to the anti-driving and incentive effect from the external governance perspective. The authors’ findings have implications for digital ecological civilization.

The impact of audit on IT governance: A study of the financial services sector in Ghana

AbstractIn recent years, IT governance has been a subject of discussion among academics and practitioners. The concern has been on the need to implement governance mechanisms and ensure the right balance of these mechanisms. However, the audit of IT governance mechanisms has received very little attention. This paper aims to analyse the overall impact of IT governance audits on the maturity and coherence of governance mechanisms. Guided by the configurational theory, the researchers argue that when governance mechanisms operate coherently and are regularly audited, there will be improvement in IT governance and the performance of financial institutions. In this study, seven financial services companies in Ghana were reviewed, and their IT governance maturity was assessed after seven months of auditing with a COBIT 5‐driven IT audit framework. Two surveys were conducted, one before and one after the auditing. The findings of the study confirm the claim that regular auditing improves IT governance maturity and coherence. Several governance mechanisms within the case organizations improved to one higher level of maturity on the Capability Maturity Model. This improvement was after seven months of auditing. Regular auditing also improved IT roles and responsibilities, empowered IT personnel and improved the IT budgetary control and architecture of the entities. This study has implications for practice. It emphasizes the importance of independent regular IT auditing and the need to ensure coherence among IT governance mechanisms if effective IT governance is to be achieved in financial institutions.

Do Big 4 Firms Provide Higher Audit Quality in Government Audits? Evidence from Canadian Provincial Consolidated Financial Statements

SUMMARY Audit quality is influenced by both the demand for and the supply of audits. A major challenge in audit quality research involves isolating supply effects. The audits of Canadian provincial governmental entities present an appealing setting, where there is low variation in the demand for audit quality. Our analysis, employing various audit quality metrics, reveals that Big 4 firms underperform both government auditors and non-Big 4 firms in our setting. We find robust evidence that less government audit knowledge is a key channel through which Big 4 auditors underperform. Additionally, the weaker performance of Big 4 firms may be due to lower effort. Insights from interviews with government audit executives and audit committee members provide evidence supporting the quantitative results. Our results are robust to propensity score matching and to tests that address alternative explanations. Our findings have important implications for governments, audit committees, and auditors in the government sector. JEL Codes: M41; M42.

Corporate environmental, social, and governance information disclosure and audit governance in the context of green development

The purpose of this paper is to investigate the relationship between Environmental, Social, and Governance (ESG) disclosure and audit governance. The objective is to assess the impact of auditor team independence, auditor professional quality, and transparency of audit procedures on the quality of information disclosure, and to elucidate the role of these factors in advancing sustainable development. Research methodologies include the optimization of information disclosure text analysis using natural language processing (NLP) and text generation techniques, complemented by empirical analysis. Key findings indicate that the maximum error between NLP and manual annotation in the proportion of positive emotions in information disclosure is 0.03, and 0.06 in audit governance. The Rouge index score surpasses the 0.5 threshold, while the Perplexity value varies across three experiments, though remaining generally low. Deep learning model results reveal that auditor team independence, professional quality, and procedural transparency significantly enhance the quality of information disclosure. These findings offer crucial insights for enterprises, regulators, and investors, affirming the rationality and stability of the model, and providing valuable input for future green development strategies and decision-making processes.

Towards Better Financial Governance: The Urgency of Model Risk Management in Indonesia Viewed Through Maqashid Shariah

This study assesses the adequacy of Model Risk Management (MRM) frameworks within Indonesian Islamic banking by utilizing Maqashid Shariah principles as a tool to align these frameworks more closely with global standards, specifically focusing on safeguarding life (Hifzh Al-Nafs) and property (Hifzh Al-Mal). Through a comparative literature review, this research examines the structure and effectiveness of MRM practices in Indonesia, referencing regulations such as POJK 65/2016 and SEOJK 25-SEOJK.03-2023, against those in developed financial markets such as the USA, UK, Europe, Japan, and UAE, with an emphasis on governance, lifecycle management, and internal audit processes. The findings suggest that Indonesia’s current MRM frameworks are somewhat rudimentary when contrasted with international norms. Key areas identified for enhancement include expanding the scope, enhancing governance structures, refining model lifecycle management, and strengthening internal audits and oversight mechanisms. By employing Maqashid Shariah principles as an analytical tool, this paper proposes enhancements to MRM frameworks that can significantly improve the stability and compliance of Islamic banks in Indonesia, promoting greater global competitiveness and adherence to Shariah principles. This approach not only integrates traditional MRM approaches with Islamic ethical standards but also provides a tailored framework for regulatory enhancements that support a stable, compliant, and ethical Islamic banking environment.

KEY DETERMINANTS OF GOVERNMENT AUDITOR’S BEHAVIOUR TO ADOPT BIG DATA ANALYTICS IN AUDIT PRACTICE

<p><strong>Background</strong>: Despite the increasing adoption of big data and Big Data Analytics (BDA) in the business world, the accounting and audit profession is considered slow in taking advantage of these innovative developments. Government auditors play an important role indirectly in improving good governance. The use of BDA in government audits has been carried out in Indonesia since 2020. However, because its use is not mandatory, not all government auditors use the application.</p><p><strong>Objective</strong>: This research investigates the key determinants that drive government auditors' behaviour to adopt BDA technology in audit practice, especially in the Indonesian context, with a focus on the Indonesian Supreme Audit Agency (SAA).</p><p><strong>Research Method: </strong>This study was conducted through a questionnaire survey involving 126 government auditors in Indonesia. Meanwhile, research data was analyzed using the Structural Equation Modelling - Partial Least Square method (SEM-PLS).</p><p><strong>Research Results</strong>: Research findings show that performance expectancy and effort expectancy have a direct influence on auditors' intentions to use BDA techniques at SAA. Meanwhile, the auditor's intention to use BDA techniques has a significant effect on Actual Use.</p><p><strong>Originality/Novelty of Research: </strong>This research addresses the gap about<strong> </strong>factors that encourage auditors' behaviour to adopt BDA technology in audit practice, especially in public sector context.</p><p> </p>

The Influence of Good Corporate Governance Mechanism and Audit Quality on the Level of Accounting Conservatism

The objective of this study is to determine whether Managerial Ownership, an Independent Board of Commissioners, a Board of Directors, an Audit Committee, and Audit Quality influence Accounting Conservatism in Manufacturing companies listed on the Indonesia Stock Exchange (IDX) between 2019 and 2022. The sampling technique was purposive sampling of 37 companies that satisfied the criteria. The technique employs panel data regression analysis with the Eviews 12 software. The outcomes of the study show that partial managerial ownership and the board of directors have an impact on accounting conservatism. Meanwhile, the independent board of commissioners, audit committee, and audit quality all demonstrate that they have little impact on accounting conservatism. Simultaneously, the research findings reveal that managerial ownership, an independent board of commissioners, a board of directors, an audit committee, and audit quality all have an impact on accounting conservatism.

Methodologies and best practices for audit and compliance in governmental financial management

This review paper explores the methodologies and best practices in audit and compliance in governmental financial management. It provides a comprehensive overview of the regulatory framework and standards governing public sector audits, discusses the types of audits commonly conducted, and outlines the typical audit processes. The paper identifies significant challenges faced in governmental auditing, such as limited resources, the complexity of operations, and resistance to change. It highlights the critical role of risk management and technology in addressing these challenges. Furthermore, it emphasizes the importance of ongoing training and capacity building for auditors and compliance officers. The paper concludes by considering emerging trends in the field, such as the integration of artificial intelligence and the emphasis on sustainability. It offers recommendations for further research to enhance the efficacy of governmental audit and compliance practices. Keywords: Governmental Financial Management, Audit Processes, Compliance, Risk Management, Public Sector Accountability.

Enhancing fraud prevention and internal control: the key role of internal audit in public sector governance

Enhancing fraud prevention and internal control: the key role of internal audit in public sector governance

Constructing a Triangular Linkage Model of Government Audit, Social Audit, and Internal Audit to Promote High-Quality Development of Audit Services

Constructing a Triangular Linkage Model of Government Audit, Social Audit, and Internal Audit to Promote High-Quality Development of Audit Services

Independence of Government Auditors: Anteceden and Consequences in Improving Audit Quality

Independence of Government Auditors: Anteceden and Consequences in Improving Audit Quality

Research on the Impact of Tax Administration Digitalization Reform on the Quality of Government Audit: Empirical Evidence from the Golden Tax III Project

Research on the Impact of Tax Administration Digitalization Reform on the Quality of Government Audit: Empirical Evidence from the Golden Tax III Project

Auditing leading officials: Unintended consequences of government audit reform on corporate green innovation

How does a major government audit reform targeting leading officials in China affect corporate green innovation (GI)? Existing studies inadequately examine the relationship between the end-of-tenure audit of natural resource assets (EANRA) and corporate GI performance. Employing a difference-in-difference-in-differences approach and utilizing data from Chinese industrial enterprises spanning 2008 to 2020, we identify that EANRA significantly hinders corporate GI, particularly for large enterprises, those operating in less competitive industries, and those located in the eastern and central regions. This effect is more pronounced in cities with newly appointed and outgoing leading officials, short-tenure mayors, and stricter environmental regulation intensity. The crowding-out effect occurs as EANRA inhibits corporate GI by reducing innovation inputs and imposing cost constraints. However, the EANRA effect can be mitigated by internal controls and media coverage. Our findings highlight the unintended consequences of government audit reform for GI in developing countries like China.

Can government environmental auditing and fiscal transparency promote the green development of heavy-polluting firms?

Corporate green development (GD) is critical for realizing China’s double carbon targets, and government environmental auditing is an essential path for supervising the GD behavior of enterprises. However, the effect of government environmental auditing on corporate GD has not been thoroughly investigated, particularly through the path of improving fiscal transparency. This study takes Chinese A-share listed companies in heavily polluting industries from 2011 to 2022 as the sample and uses statistical models to empirically test the effects. The results indicate that government environmental auditing can significantly facilitate corporate GD by improving fiscal transparency. Government auditing functions to checking and preventing environmental pollution issues can promote enterprises’ GD. The function of preventing pollution issues has the most substantial promotion effect. The analysis of regional heterogeneity indicates that government environmental auditing in the western region has the strongest effect. The conclusion of this study provides theoretical support and guidance for strengthening government environmental auditing, improving government fiscal transparency, and promoting the GD of enterprises.

Technique of Government Digital Auditing

The actions that must be taken to consider government digital auditing, given that we all function in the conditions of the “World Wide Web” (www). The use of www reality is essential for the functioning of government digital auditing. It enables the search for ways to solve the challenges of the rational use of budgetary resources and to optimise budgetary relations in a government. This article is about the benefits, challenges and technique of government digital auditing that intended to safeguard public interest and preserve government assets. The goal of this article is to provide a clear and concise representation of the main blocks of the technique for Government Digital Auditing. This technique is based on Author’s insights and practical experience as a government auditor, Chief of accountants, Professor of Accounting and Auditing.

The Influence of Corporate Governance, Profitability, and Capital Intensity on Tax Avoidance in Manufacturing Companies Listed on the Idx in the Time Frame 2021-2023

Tax avoidance is a significant issue that can affect state revenues and fiscal fairness. Companies often use legal loopholes to reduce their tax liability, which while legal, is contrary to the primary purpose of tax laws. This study aims to find out and analyze corporate governance, profitability, and capital intensity affect tax avoidance in manufacturing companies in Indonesia. This study uses a quantitative approach with secondary data from the financial statements of manufacturing companies listed on the IDX. The independent variables in this study are corporate governance (audit quality and audit committee), profitability, and capital intensity, while the dependent variable is tax avoidance. Data analysis was carried out by normality, multicollinearity, heteroscedasticity, autocorrelation, and hypothesis test using the t-test and the F test. However, simultaneously, audit quality, audit committee, profitability, and capital intensity affect tax avoidance. The study implies that an increase in the number of audit committees and investment in fixed assets can reduce tax avoidance. These findings can be a reference for policymakers and corporate management in improving corporate governance to minimize tax avoidance practices.

PENGARUH LOKUS KENDALI, KOMITMEN ORGANISASI DAN KINERJA TERHADAP PENERIMAAN DISFUNGSIONAL AUDIT

This research aims to determine the influence of the variables locus of control, organizational commitment, and performance on the acceptance of dysfunctional audits. Researchers used convenience sampling to determine respondents for the sample. The sample collected was 41 government auditors who worked at the BPKP Office of South Sumatra Province. The analysis in this research includes respondent characteristics, descriptive statistics and SEM-PLS analysis. The test results show that there is a significant influence between locus of control on organizational commitment, organizational commitment on performance, and organizational commitment on the acceptance of dysfunctional audits. The research results also show that there is no significant influence between locus of control on acceptance of dysfunctional audits, locus of control on performance, and performance on acceptance of dysfunctional audits.