Public Financial Governance and Socio-Economic Performance: Evidence from Local Government in Indonesia

Increasing the quality of government financial management is an important aspect of governance in order to improve the quality of public services and public welfare. In the era of fiscal decentralization, where local governments are given the authority to manage their own regional finances, transparency and accountability play important roles in regional financial management. The Supreme Audit Agency (Badan Pemeriksa Keuangan or BPK) routinely conducts an audit on local government financial reports and provide an audit opinion on the fairness of the financial information presented in the financial statements of each regional government. It is interesting to examine whether BPK's opinion on Regional Financial Reports (Laporan Keuangan Pemerintah Daerah or LKPD) has a significant relationship with socio-economic performance in each region. This study aims to see links, if any, between the status of BPK's opinion on regional financial statement with socio-economic performance of regions in Indonesia, such as income per capita, poverty level, and inequality. The methodology employed in this study is a panel data regression model using data from all district and city governments in Indonesia from 2015 to 2019. The provisional result of this study is that regions with better opinion status have better socio-economic performance compared to regions with lower audit opinion status. The estimation has considered control variables such as total local government spendings, local government spending on capital, and local government transfers from central government. The estimation results are robust when the area is divided into two categories, Java and outside Java. The findings in this study can contribute both to the existing literature and to relevant government policies in order to improve the quality of local government financial management and, ultimately, welfare of the people.