The Improvement in Financial Reporting Quality during Periods of Decentralization: Evidence from Indonesia
Faiz Zamzami*, Eko Suwardi, Fuad Rakhman, Suyanto

a. Student of Doctoral Program in the Faculty of Economics and Business, Universitas Gadjah Mada, Yogyakarta, Indonesia and Public Sector Accounting Department, Vocational College, Universitas Gadjah Mada, Yogyakarta, Indonesia-
b. Accounting Department, Faculty of Economics and Business, Universitas Gadjah Mada, Yogyakarta, Indonesia

Abstract

Purpose
Financial reporting quality is one of the critical issues worldwide, including in the public sector. The quality of financial reporting among local governments in Indonesia has improved tremendously during decentralization. The number of local governments receiving clean opinions on their financial reports increased from only 28 in 2010 to 252 in 2015 and 452 in 2019. This study investigates the factors contributing to the improving quality of financial reporting among local governments, especially in the decentralization process and public sector reforms over a decade among local governments in Indonesia.

Design/Methodology/Approach
This study uses logistic regression analysis to investigate the factors improving financial reporting quality, with a sample of 1,880 local government years from 2015 to 2019. We obtain financial data from the financial reports prepared by the local governments, audit findings and audit follow-up data from the audit reports issued by the Supreme Audit Board of Indonesia, and data on government political support gathered from the country^s Public Election Commission.

Findings
This study finds that the improvement in financial reporting quality is positively associated with the unity of the government, the follow-up on audit recommendations, regional independence ratios, capital expenditures, and the use of information technology, and is negatively associated with the number of audit findings.

Originality
Sound financial reporting practices must support the decentralization and democratization process in the context of local governments. This study provides evidence of how the quality of financial reporting has evolved throughout the democratization process among local governments in Indonesia, which started with the direct election of local government heads in 2005, and what factors contributed to improving the quality. We address the role of the unity of government concerning the increase in the quality of financial reports, which we believe is the novelty of this research.

Keywords: financial reporting quality, audit opinion, local government, unified government, Indonesia

Topic: Public sector accounting