The impact of public sector accounting reform on corruption: Causal evidence from subnational Indonesia

Abstract

It is widely believed that the adoption of quality public sector accounting practices can assist in reducing corruption. In theory, accounting reform, especially the shift from cash-to accrual-based methods, leads to the production of much improved financial information, which ultimately can be used by citizens to hold government more accountable and limit corruption. Empirical evidence from crosscountry analyses appears to support the theoretical predictions. We investigate the impact of accounting practices on corruption among districts in Indonesia. We use external financial audits to measure the adoption of reforms and the number of corruption case court convictions as our proxy for corruption. We estimate Poisson regression models using instrumental variable techniques to identify the causal effects of adopting accrual-based accounting procedures on corruption. We show that the employment of improved accounting methods is strongly associated with declining corruption. However, after accommodating the endogeneity of accounting practices, we determine that reform adoption has no effect on corruption. K E Y W O R D S corruption, Indonesia, public sector accounting reform 1 | INTRODUCTION It is widely believed that the adoption of high-quality public sector accounting practices can assist in reducing corruption (Jeppesen, 2019). In theory, accounting reform, especially the shift from cash-to accrual-based procedures, leads to the production of much improved financial information, which ultimately can be used by citizens to hold government accountable and limit corruption (Changwony & Paterson, 2019). More specifically, accrual-based accounting and reporting systems can correct the information asymmetries that exist between politicians and citizens, thereby improving transparency and enabling voters to monitor elected officials more rigorously. It is this improved transparency and enhanced monitoring that can help constrain public sector corruption, it is argued (Banker & Patton, 1987; Stanley et al., 2008). Empirical examination of the relationship between accounting practices and corruption is not particularly far advanced. The literature offers only a few examples, all of which investigate the association between improved accounting methods, operationalized via a variety of different proxies, and perceived corruption in cross

Public Sector Strategies in Curbing Corruption: A Review of the Literature

“…In the same research field, the focus is often aimed at evaluating the degree to which public administration reforms contribute to corruption reduction (Andrei et al, 2009;Neshkova & Kostadinova, 2012;Segal & Lehrer, 2012). Other works take into consideration more specific reform processes, such as the adoption of quality public sector accounting (Lewis & Hendrawan, 2020) or auditing practices (Gustavson and Sundström, 2018) that can assist in reducing corruption. Similarly, Christensen and Fan (2018) report on the introduction of an anticorruption campaign in China characterized by strict reporting rules between local and central governments.…”

The Impact of Computerized Accounting Information Systems Risks on the Quality of Accounting Information

“…It includes all the necessary control methods and procedures for documenting information systems, describing them with their physical and logical components, documenting end-user procedures, in addition to documenting all cases of continuous development and updating of the system (Lewis and Hendrawan, 2020). The control procedures are divided into documenting and developing the system into:…”

When street‐level implementation meets systemic corruption

“…Furthermore, street-level implementation plays a key role in equity, equality, and justice for the public at large (Brodkin, 2003), which may be significantly challenged by well-known, multiple, negative effects of corruption, including exacerbating the difference between rich and poor (Gupta et al, 2002;Uslaner, 2008), creating obstacles to governmental reforms (Hellman et al, 2003;Khator et al, 1992;Lewis & Hendrawan, 2020), and causing considerable human welfare losses in the long run (Kaufmann et al, 2005).…”

“…In line with the motivation of this special issue, our study focuses on street‐level implementation as embedded in systemic corruption, which is a well‐documented feature of the developing world (Doig et al., 2007; Fernando & Bandara, 2020; Khan, 2006; Mungiu‐Pippidi, 2006). Furthermore, street‐level implementation plays a key role in equity, equality, and justice for the public at large (Brodkin, 2003), which may be significantly challenged by well‐known, multiple, negative effects of corruption, including exacerbating the difference between rich and poor (Gupta et al., 2002; Uslaner, 2008), creating obstacles to governmental reforms (Hellman et al., 2003; Khator et al., 1992; Lewis & Hendrawan, 2020), and causing considerable human welfare losses in the long run (Kaufmann et al., 2005).…”