Internal governance and fraud prevention system: The potentiality of the spiritual quotient

Abstract

Cases of financial fraud by local governments in Indonesia are on the rise, causing significant losses to the state. The weak internal control system and the apparatus’s low integrity are some well-known culprits, thus confirming the fraud diamond theory of Wolfe and Hermanson (2004). As a religious country, the potentiality of spirituality seeks to increase governmental internal control systems and regional management information systems that are still underrepresented in previous studies despite Nguyen and Crossan (2022) arguments that the infusion of virtue ethics into fraud management systems can greatly benefit from it. This article provides an empirical investigation as to whether implementing the government’s internal control system and regional management information systems might prevent fraud in Indonesian local governments, with the spiritual quotient (SQ) as the moderating factor in these relationships. This study employs a quantitative approach by collecting response data from the financial division apparatus in Indonesia. The sample was determined by the purposive sampling method and sent to the head of budget planning and treasury in Indonesia, resulting in 221 return questionnaires. The partial least squares structural equation modeling is used to analyze the direct and moderating relationships. This study reports that the implementation of the government’s internal control system and regional management information system has successfully prevented fraud in the financial reporting of local governments. The spiritual quotient strengthens the implementation of the government’s internal control system in avoiding fraud. However, the same does not occur with the regional management information system. The article concludes with discussions and implications.