The Effect of Budget, Audit and Government Performance: Empirical Evidence from Indonesian Regional Governments

Abstract

The development of public sector accounting was now propelled by stakeholder demands on bureaucratic performance, accountability and transparency, to pay close attention to tax revenues and expenditures with due regard to financial governance through positive auditing results. The Indonesian government enacted a new rule of Government Accounting Standard No. 71 of 2010 which fundamentally changed the form of government accounting books. The impact of these changes on budgeting, auditing and government performance in the early days of their implementation is crucial as a basis for reference for later reforms. This study aims to examine empirically the effect of audit opinion on the performance of Indonesian local governments by considering the mediating effect of revenue and expenditure realisation based on legitimacy and public choice theories. Data from 32 provinces in Indonesia during the 2010-2014 period with a total number of 150 observations (province-years) was analysed by least square regression. The research found that, in line with legitimacy theory, the previous year’s audit opinion had a significant and positive effect both directly and indirectly through the realisation of regional expenditure as a mediating variable on the performance of local governments. However, regarding public choice theory, the results must be carefully interpreted as the mediating effect of the realisation of expenditure on how audit opinions affect the performance of the provincial government depending on the measurements used. The result may be used by the government, provincial government, local parliament and the Audit Board of Indonesia in policy setting, supervision and inspection in improving the performance of the provincial government. Audit opinion, in relation to the realisation of government expenditure and its function, indirectly boosts the performance of local government in developing countries.