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The Effect of Audit Findings and Follow up of Audit Recomendation on

Corruption of Ministries / Institutions in Indonesia

Conference Paper · November 2015

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 The Effect of Audit Findings and Follow up of Audit Recomendation on Corruption of

Ministries / Institutions in Indonesia

Khaliful Azhar1, Dyah Setyaningrum2

1. Department of Accounting, Faculty of Economics and Business Universitas Indonesia

2. Department of Accounting, Faculty of Economics and Business Universitas Indonesia

[email protected], [email protected]

ABSTRACT

The purpose of this research is to analyze the effect of audit findings and its follow-up on the

level of corruption and number of audit findings on the Ministries/Institutions in Indonesia. This

research uses panel data with 24 accused-Ministries/Institutions that were being investigated by

KPK during the period of 2010-2013 as the sample. The results shows that the number of audit

findings affected positively on the level of corruption; and the level of severity of corruption had

a positive impact on the amount of audit findings as well. Moreover, follow-up of the audit

findings proves to have a negative effect toward corruption’s level. It implies that the audit’s

results could be used as an initial detection of corruption act in the Ministries/Institutions; and

also the severity level of corruption could indicate the number of audit findings in those

agencies. Thus, efforts to do emendation should be continuously developed by the

Ministries/Institutions in accordance with auditor’s recommendation in order to decrease the

level of corruption significantly.

Keywords: level of corruption, audit findings, follow-up of audit findings, Ministries/Institutions.

Introduction

Nowadays, corruption cases in Indonesia are still in the apprehensive phase. Although

the Corruption Perception Index (CPI) of Indonesia in 2014 increased 2 points to be 34,

Indonesia has still taken place as the 107th out of 175 countries (www.transparency.org). The

CPI’s score, 34, showed that Indonesia is still not able to flee from the corruption situation that

has been rooted for a long time (Trisasongko, 2015). Number of corruption cases that has been

investigated by the Police Department, the Attorney General, and the Corruption Eradication

Commission (KPK) tend to increase every year. The data of corruption cases that has been

handled by KPK in the investigation phase can be seen in Table 1 below.

Table 1. Data Tabulation of Corruption’s Handling In Institution During 2004-2014 Period

Institutions 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Total
House of Representative
0 0 0 0 7 10 7 2 6 2 2 36
(DPR RI)
Ministries/Institutions
1 5 10 12 13 13 16 23 18 46 26 183
(K/L)
State/Regional Owned
Enterprises 0 4 0 0 2 5 7 3 1 0 0 22
(BUMN/BUMD)
Commission 0 9 4 2 2 0 2 1 0 0 0 20
Provincial Government 1 1 9 2 5 4 0 3 13 4 11 53
Municipality 0 0 4 8 18 5 8 7 10 18 19 97
Total 2 19 27 24 47 37 40 39 48 70 52 405
(Source: acch.kpk.go.id)

Based on the above table, it can be seen that the number of corruption in

Ministries/Institutions (K/L) always dominate the corruption cases that have been handled by

KPK every year. One of the main reasons why there is still a high number of corruptions in the

Ministries is because K/L do not pay serious concern on the follow-up of audit findings which

supposed to be the presumption indicator of corruption or fraud in those K/L. Government’s

auditor can take a role to decrease the level of corruption by monitoring the implementation of

the follow up of audit findings.

 The aims of government audit are to monitor, verify, and assess the government's

accountability. Government audit is the paramount in building good government. As a general

practice of governance in several countries, audit process in public sector can increase

transparency and accountability (Dwiputrianti, 2008); and aid in preventing the corruption act

(Dye and Staphenhurst 1998, Khan 2006). Khan (2006) emphasized that auditor plays a role in

showing the possibility of where the corruption act is being done, for example by detecting

excessive-use or depleted public expenditures (Olken 2007, Schelker and Eichenberger 2010).

The other way around, the corruption’s level that exists in one region or institution can be an

indicator of the number of its audit findings, since corruption cases and deviation are the

indication of its governance quality. In an institution where the corruption’s level is severed,

there is a possibility to trace more irregular or illegal acts that escalates the number of audit

findings (Liu and Lin, 2012). This research focuses on the role of government audit in detecting

the presence of corruption acts in the Ministries/Institutions’ environment.

Based on the abovementioned introduction, the purpose of this research are to analyze

(1) whether the audit findings of the preceding period have a positive effect on the level of

corruption and vice versa, (2) whether the follow-up of audit findings has a negative impact on

the corruption, and (3) whether the follow-up of audit findings has a negative effect on the

number of audit findings.

Theoretical Review

The agency theory is used to explain the organizational governance (Cornforth, 2003).

The agency relation constitutes the relation between a principal and an agent, where the agent

conducts the activities on the behalf of and for the benefit of the principal. The agent obtains an

authority from the principal to manage the organization resources in order to achieve the

desired purposes of the principal. On a country level, the government is the agent of the public

while the House of Representatives (DPR) represents the public. The government is given the
authority to collect fund from the public based on the law, and use it to govern the country. In

accordance with the agency theory, thus, the government is responsible to make the

accountability reports and report it to the public.

According to Mardiasmo (2005), public accountability is the government’s responsibility

as the governing authority (agent) to give, present, report, and reveal all of the activities that are

within its responsibility to those that has given them the authority (principal), in this case the

public that are represented by DPR. Mardiasmo (2005) also suggested that there are three

principles that support the formation of public accountability and good public governance. The

first is supervision, which refers to the acts or activities done by parties outside the executive

(public and DPR/DPRD) that involve in overseeing the government performances. The second

is control, which refers to all activities done by the executives to assure that the system and

policy management is applied rightly so that purposes of the organization can be obtained. The

last is examination, which refers to audit activities that are conducted by the parties, which has

the independency and professional capability to ascertain that the government’s performances

must meet the set standard.

Those three principles constitute the function and role of an auditor. Thus, it can be

concluded that the creation of public accountability and good public governance also depend on

the presence of its auditor. Based on the 1945 Constitution of the Republic of Indonesia, the

institution that has taken the role as the government external auditor is the Supreme Audit

Board (BPK). External auditor is defined as the audit that is conducted by an examiner unit that

exists outside the organization being investigated.

Government Auditing Standards (Standar Audit Pemerintahan/SAP) published by BPK in

1995 was used as audit guidelines in auditing the governments’ institution. However, SAP was

considered irrelevant in meeting the current dynamic demands. Besides, in order to meet Article

5 of Law Number 15 Year 2004 regarding Management Audit and State Financial Accountability

and Article 9 paragraph 1 letter e of Law Number 15 Year 2006 regarding Supreme Audit Board,
BPK has to organize an audit standard that covers all of those mandates. Finally in 2007, BPK

published a new auditing standard called State Financial Auditing Standards or in short, SPKN.

In audit process, auditors will report the audit findings and disclose it in an audit findings

report. Mardiasmo (2005) stated that audit findings could be considered as “building blocks” of

audit report which showed the relevant cases and materials which had found during the audit

process. By relevant, it means that the audit findings that have been gained were suitable to the

scope and aims of the audit, whereas materiality refers to in what extent the existing conditions

affected significantly to the organization which was being audited. Moreover, audit findings

should be completed with logical argumentation and enough evidences in order to support the

auditors' conclusion or arguments (Abror, 2014).

The next step after the auditing process is the following-up phase, which is conducted to

confirm that the auditee implements recommendations suggested by the auditors appropriately.

BPK writes down the audit findings in form of audit opinion, audit results of internal control

system, and compliant report towards laws and regulations. The audit opinion is given based on

the fair representation of financial information in the financial reports (BPK, 2011). It is based on

the elucidation of Article 16 paragraph 1 Law Number 15 Year 2004 regarding Management

Audit and State Financial Accountability, which said that opinion is the professional auditor

statements about the fair representation of financial information in the financial reports based on

the following criteria:

1. The relevance with government accounting standards

2. The sufficiency of disclosure

3. The compliant towards laws and regulations

4. The effectiveness of internal control system

Following are the audit opinion that can be given by BPK:

1. Unqualified opinion

2. Qualified opinion
3. Adverse opinion

4. Disclaimer of opinion

In addition to audit opinion, BPK also reports the audit results of internal control system

and the compliance towards laws and regulations. Researches on corruption have been

conducted in a lot of countries. Ata and Arvas (2011) grouped the causes of corruption into

three factors: economic, politics and laws, and socio-cultural. The economic factor including but

not limited to government size, salary, economic growth, income distribution and poverty,

economic competition, economic openness, economic independency, inflation, and regulations.

The politics and laws factor including but not limited to democracy, political competition, public

participation and media autonomy, political instability, accountability, bureaucracy, system of

laws, and also intellectual rights and properties. In addition, the causes of corruption from social

and cultural factor are ethnicity, religion, education, gender, culture, human resources, and

urbanization.

Olken (2007) show that supervision takes an essential role in decreasing the depleting

expenditure, especially supervision that is conducted by the government's auditor. The

foundation in eradication of corruption acts in Indonesia is stipulated in Law Number 31 Year

1999 in conjunction with Law Number 20 Year 2001 regarding Eradication of Corruption Acts.

Based on those laws, KPK (2006) grouped the corruption acts into seven category: the state

financial loss by enriching oneself, other people, or a corporation by misusing the given

authority; bribery; embezzlement; extortion; skullduggery; conflicts of interest in procurement;

and gratification.

Research on government audit and corruption eradication is still rarely conducted. One

of international references on auditor’s role in detecting the potential of corruption is the

research conducted by Liu and Lin (2012) in China. The research investigated whether there

was an indication of corruption from the deviation found in local government and analyzed the

role of the follow-up action of audit findings that was implemented by the local government in
order to reduce the potential level of corruption. Evidence from Liu and Lin (2012) research

showed that number of detected findings found by the auditor related positively to the level of

corruption in that province, which means that the more severe corruption cases in that region,

the greater number of deviation findings found by the audit institution of that local province was.

The improvement efforts after audit process (follow-up) related negatively to the level of

corruption in that province, which indicated that, the greater number of the follow-up efforts, the

fewer corruption cases were.

Masyitoh (2014) conducted similar research on the effect of audit opinion, audit findings,

and follow-up of audit findings toward perception of corruption on municipality in Indonesia. The

results showed that audit opinion affected negatively on the perception of corruption, where the

better audit opinion, the lower perception of corruption in the local government were. Audit

findings on the weakness of accounting control system and reports did not affect the perception

of corruption, but the results of additional examination proved that audit findings related to the

weaknesses of accounting control system and reports have a significant positive influence on

the perception of corruption. The reason being, weaknesses found on the accounting control

system and reports leads to the information in the financial report became doubtful and

unaccountable. Moreover, audit findings of noncompliance with the laws and regulations

affected positively on the perception of corruption. Additional analysis confirmed that both

variables (noncompliant that caused municipal losses and potential losses of the municipality)

had a significant positive impact on the perception of corruption level in the local government. It

showed that corruption existed in the violation of laws and regulations causes the municipality

financial losses, whether it's an evident at the moment or a potential one in the future. Masyitoh

(2014) also found that the follow-up of audit findings affected negatively on the perception of

corruption, where the greater number of auditors’ recommendations that have been followed-up

by the local government showed the lower perception of corruption.

Hypotheses Development

Nicoll (2005) stated that compliance audit on the legal basis supported the anti-

corruption program in several countries, including Indonesia. The existence of violation on the

prevailing rules indicated poor implementation of a government institution (Masyitoh, 2014).

Moreover, BPK also mentioned that noncompliant of the laws and regulations could create

losses or potential losses, revenue shortfalls that lessen the revenue, wasteful conduct,

inefficiency, and ineffectiveness. Ministries/Institutions that did not comply with the prevailing

laws and regulations were likely to have bad quality of governance and high level of deviation,

accordingly the prospect of corruption remained greater. Consequently, audit findings that are

used in this research are one that of the preceding period (t-1) because there is a gap between

the audit process and the publication of the Ministries/Institutions financial statement by BPK.

Therefore, the hypothesis that is going to be examined in this research:

H1: total number of audit findings found in the preceding period has a positive effect on the

corruption.

Corruption is an exploitation of public facility for the sake of personal interest. The

exploitation is always compared to a legal standard. According to Sevensson (2005), there are

several types of corruption: selling government asset illegally, kickbacks in governmental

procurement, bribery, and embezzlement. The level of corruption in an institution is an

exploitation act in conducting activities within the institution and the government auditors should

have the qualification to detect the exploitation or fraud in the financial statement and misused

of government’s asset. The findings of that exploitation also confirm how the public resources

exploited by related government and departments. Findings of the exploitation and misused

found which are reported by the audit institution can be used as a measurement or a good

indicator to identify the corruption done by the government, only if the audit institution works

independently, exceptionally technical and impartial. Thus, the second hypothesis that is going

to be analyzed in this research:

H2: level of corruption has a positive effect to the number of audit findings.

Dwiputrianti (2008) suggested that the existence of follow-up reports of audit findings

and the recommendation in the investigation report indicated that the quality of the report and

the whole audit process would become more effective if the recommendation is applied by the

auditee. By conducting the auditor recommendations, thus the Ministries/Institutions have

shown an effort to correct the fault in the accountability of state administration. If the agencies

did not applied the recommendation, then the audit process would be useless and the

exploitation in the wrong practice or audit findings would be repeated continuously in the

succeeding periods (Liu and Lin, 2012).

Liu and Lin (2012) suggested that improvement after the audit process (audit

rectification) is more important than detection of audit findings itself, because the efforts to

conduct the rectification after audit process can enhance the effectiveness of audit process and

also anticipate the similar findings found in the future so that the number of findings is expected

to be diminished after the audit rectification process. Without any follow-up, the audit findings

will be impractical to create accountability in the audit process. Moreover, audit findings can be

used as a guideline in conducting further investigation of the findings that indicate corruption

acts. It is in accordance with Article 8 of Law Number 15 Year 2006 regarding the Supreme

Audit Board which stated that audit findings report will be used as an initial evidence for the

authorized party to conduct investigation, including the police department, the attorney general,

and corruption eradication commission (KPK). Based on the abovementioned explanation, there

are hypotheses that are going to be analyzed in this research:

H3: follow-up of audit findings conducted by the Ministries/Institutions in the preceding period

affects negatively towards corruption.

H4: follow-up of audit findings conducted by the Ministries/Institutions in the preceding period

affects negatively towards number of audit findings.

Research Method

Data used in this research are primary data with Ministries/Institutions that existed in the

corruption cases reports which were followed-up by KPK in the investigation phase within the

period of 2010-2013 as the sample (pooled data). Regression model that are developed to

examine the defined hypotheses in this research, is divided into two models.

CORRUPTit = α0 + α1 AUIRRi.t-1 + α2 AURECi.t-1 + α3 AUOPIi.t-1 + α4 WAGESit + α5 CHARCit+ Є. .

. (3.1)

Where:

CORRUPTit = Level of corruption

AUIRRi i.t-1 = Total number of audit findings in the preceding period

AURECi.t-1 = Followed-up of audit findings in the preceding period

AUOPIi.t-1 = Audit opinion in the preceding period

WAGESit = Level of personnel expenditure

CHARCit = Characteristic of Inspector General

Model 1 is used to examine Hypothesis 1 (represented by coefficient α1 with expected value

α1>0) and Hypothesis 3 (represented by coefficient α2 with expected value α2<0) can be seen in

the equation 3.1 above.

AUIRRit = β0 + β1 C_CORRUPTit + β2 AURECi.t-1 + β3 AUOPIi.t-1 + β4 SIZEit + β5 CHARCit+ Є. . .

(3.2)

Where:

AUIRRit = Total number of audit findings

C_CORRUPTit = Level of corruption

AURECi.t-1 = Followed-up of audit findings in the preceding period

AUOPI i.t-1 = Audit opinion in the preceding period

SIZEit = Government size

CHARCit = Characteristic of Inspector General

Model 2 is used to examine Hypothesis 2 (represented by coefficient β1 with expected

value β1>0 and Hypothesis 4 (represented by coefficient β2 with expected value β2<0). In

addition, this research also used Two Stage Least Square (2SLS) method to examine

simultaneous equation. The simultaneous equation is a set of equations where the dependent

variable in one or more equations is also the independent variable in other equation, so that in

an equation system, one variable can have two roles, both dependent variable and independent

variable. Because the level of corruption in this research is an endogen variable, a variable that

is assumed to influence and is influenced by other variable, thus the variable of the level of

corruption that is used in model 2 uses cap, which is estimation score of the corruption’s level

that is gained by calculating result of regression by entering parameter score and corruption

variable data in model 1.

Tabel 2. Definition of Variables

Level of Corruption (CORRUPT) : Number of followed-up reports in the investigation

phase by KPK

Audit Findings (AUIRR) : Total findings on the weakness of internal control

system + findings on noncompliance with the laws

and regulations

Follow-up of Audit Findings (AUREC) : Total number of BPK's recommendations that is

followed-up in accordance with the recommendations

/ total number of recommendations.

Audit Opinion (AUOPI) : 1 = unqualified opinion,

0 = other than unqualified opinion.

Government Size (SIZE) : Total asset of Ministries/Institutions.

Level of Personnel Expenditure (WAGES) : Total expenses for personnel expenditure in

Ministries/Institutions.

Characteristic of Inspector General (CHARC) : 1 = educational backgrounds in Economics

(Accounting, Financial, Management),

0 = educational background other than from

Economics.

Research Findings

Results of statistic descriptive obtained by stata program can be seen in the table 3

below:

Table 3. Descriptive Analysis Calculation Results

Total Standard
Variables Mean Minimum Maximum
Data Deviation

CORRUPT 96 3.844 9.318 0 45

AUIRR 96 28.615 16.891 5 86

AUREC 96 0.719 0.310 0.004 1

Proportion 1 = unqualified opinion 0 = other than unqualified opinion

AUOPI 96 51% 49%

1 = educational backgrounds in 0 = educational background other

Proportion Economics than from Economics

CHARC 96 37.5% 62.5%

2,261,256.54 3,866,103.71 6,350,528.09 20,540,487,51

WAGES 96 Million Million Million Million

47,237,636.5 119,908,441.36 51,970,247.31 729,777,310.35

SIZE 96 2 Million Million Million Million

Notes: This table shows statistic descriptive for the whole variables that were used. CORRUPT indicates
the level of corruption, AUIRR signifies the number of audit findings, AUREC signifies the number of
followed-up audit findings, AUOPI signifies the inspector general characteristic, WAGES indicates the
level of personnel expenditure, and SIZE signifies the government size of the K/L.

Based on descriptive analysis results in table 3, it was distinguised that total sample that

was successfully observed were 96 observation data. According to table 3, in average, level of

corruption in the sample of Ministries/Institutions was 3.844 or 4 cases (rounding off) per

institution. The Attorney General had the highest level of corruption with total 45 cases. In

average, audit findings in the sample of Ministries/Institutions was 28.615 or 29 findings per

institution. The institution with the most audit findings was Ministry of Religion with 86 audit

findings in 2012.

The effect of total number of audit findings on the level of corruption

Model 1 examined the effect of number of audit findings (Auirr) on the level of corruption

and also assessed the influence of followed-up audit om the level of corruption. Summary of

examination results of model 1 is presented in table 4.

Table 4. Results of Multiple Regression Equations Model 1

Independent Variables Test Prediction Coefficient T-Stat Prob.

C 2.379 4.47 0.000***

Auirrt-1 H1 + 0.711 1.45 0.076*

Aurec t-1 H3 - -0.145 -1.46 0.074*

Auopi t-1 - -0.234 -1.37 0.0875*

Wages - -0.095 -2.85 0.002***

Charc - -0.318 -1.76 0.041**

R-squared 0.3025

Prob (F-Stat) 0.0000

N 96
 Notes: This table shows regression result for Model 1. Dependent variable CORRUPT refers
to the level of corruption which measured by the number of cases handled by KPK in the
Investigation Phase. Independent Variable AUIRRt-1 denotes the number of audit findings by
BPK in the preceding period. AURECT-1 refers to number of followed-up investigation results
by BPK in the preceding period. Control Variable AUOPIt-1 signifies the audit opinion in the
preceding period which measured by dummy scores of audit opinion. Wages refers to level
of personnel expenditure which measured by the total personnel expense, and CHARC
indicates the characteristic of Inspector General which also measured by dummy scores. *,
**, and *** indicate significance at the 10%, 5%, and 1% level.

The effect of the level of corruption on the number of audit findings

Model 2 examined the effect of the level of corruption (C_Corrupt) on the number of

audit findings. The corruption’s level applied in this model uses the cap score, which was the

estimated scores of the level of corruption. The cap score was obtained by calculating the result

of regression by entering parameter score and corruption variable data in model 1. Summary of

examination result of Model 2 is presented in Table 5.

Table 5. Results of Multiple Regression Equations Model 2

Independent Variables Test Prediction Coefficient T-Stat Prob.

C 2.220 12.38 0.000***

C_Corrupt H2 + 0.106 20.88 0.000***

Aurec t-1 H4 - -0.055 -1.25 0.1075

Auopi t-1 - -0.227 -11.33 0.000***

Size - -0.093 -6.48 0.000***

Charc - 0.417 16.68 0.000***

R-squared 0.8900

Prob (F-Stat) 0.0000

N 96

Notes: This table shows regression result for Model 2. Dependent Variable AUIRR refers to
number of audit findings by BPK, Independent Variable C_Corrupt signifies the cap score
from Corrupt variable in model 1, AURECt-1 denotes the number of followed-up on
investigation results done by BPK in the preceding period. Control Variabel AUOPIt-1 refers to
audit opinion in the preceding period which measured by dummy score of audit opinion, SIZE
indicates thegovernance measurement in K/L which measured by the total assets, and
CHARC signifies the characteristic of General Inspectorate which also measured by dummy.
*, **, and *** indicate significance at the 10%, 5%, and 1% level.
Discussion

The examination result of Hypothesis 1 in Model 1 that can be seen in table 4 showed

that the number of audit findings was equivalent to the level of corruption, which means that the

audit findings are supposed to be the resources or main reference in seeking the indication of

corruption acts in the Ministries/Institutions in Indonesia. Audit findings created by the

government’s auditors, which consisted of findings on the weaknesses of internal control system

and findings on noncompliance with the laws and regulations, affected the level of corruption as

the audit findings showed that there was flaws in supervision function that caused the potential

of deviation. This will leads to material loss whether it's an evident at the moment or a potential

one in the future. Moreover, the results of additional analysis, which is shown in table 6,

indicated that the greater number of the findings on the weaknesses of internal control system,

the higher the level of corruption would be. It was because internal control exercised the

supervision function of the organization. Therefore, the greater number of findings on the

weaknesses of internal control system signified that the supervision function was not yet

effectively implemented, which caused the higher number of potential fraud and corruption. It

was also proved by a great number of corruption cases related to goods and services’

procurement and in budget misuses which was revealed by KPK, such as the procurement of

Hambalang sport complex facilities case in the Ministry of Youth and Sports and the

procurement of medical devices case in the Ministry of Health, which supposed to be detected

earlier if the internal control system was running properly.

The level of corruption has a significant effect on the number of audit findings that was

presented in table 5 to examine Hypothesis 2; this is because corruption act is a deviation act in

managing government activities. In an institution where there the corruption level is severe,

there is a possibility of a greater number of irregular or illegal activities that can be traced so that

it will increase the number of audit findings. In addition, the results of this research also

supported the previous researches conducted by Glaeser and Saks, 2006; Zhao and Tao, 2009;
Wu and Rui, 2010; and Liu and Lin, 2012. In Indonesia, the findings on the presumption of

corruption acts in an institution will drive the Finance and Development Supervisory Agency

(BPKP) as the government's internal auditor and the Supreme Audit Board (BPK) as the

government's independent auditor to do the initial investigation or investigative to the said

institution. They will seek the weaknesses of the supervision and control function, which has

caused the corruption to grow, and determine the amount of state's financial losses from the

corruption acts. Thus, resulting in the increasing number of audit findings.

The examination results of Model 1 in the table 4 showed the significant influence of the

audit follow-up variable towards the level of corruption in the Ministries/Institutions. This is

because by implementing the recommendations given by the auditor, the Ministries/Institutions

have shown an effort to amend the weaknesses and develop the internal control system, so that

the expected level of corruption is decreasing. Whereas in table 5, audit follow-up did not affect

the number of audit findings. It happened because of several reasons, such as there was a

different perspectives related to implementation of the follow-up, the follow-up that has been

applied needed more than one period of time, the supervision's futility in implementing the

follow-up, no commitment in continues improvement, and there's a possibility of error in

recommendations given by the auditor related to the follow-up that's supposed to be conducted

in order to avoid the same occurrence of the audit findings.

Additional Analysis

BPK grouped the audit findings into two categories, which were the weaknesses of

internal control system (TKSPI) and the noncompliance with the laws and regulations

(TKTKPU). This research conducted additional analysis to Model 1 by regressing both groups of

audit findings in order to examine the effects on the level of corruption, which can be seen in the

table 6.
 Table 6. Results of Additional Regression

Independent Variables Prediction Coefficient T-Stat Prob.

C 2.339 3.77 0.000***

TKSPI + 0.429 2.25 0.0135**

TKTKPU + -0.959 -0.36 0.361

Aurec - -0.185 -1.98 0.0255**

Auopi - -0.219 -1.24 0.109

Wages - -0.084 -2.70 0.004***

Charc - -0.351 -2.01 0.0235**

R-squared 0.3134

Prob (F-Stat) 0.0000

N 96

Notes: this table shows additional regression for an additional analysis. Dependent
Variable Corrupt depicts the level of corruption; Independent Variable TKSPIt-1 depicts the
number of audit findings of the weaknesses of internal control system of the preceding
period; TKTKPUt-1 depicts the audit findings of the noncompliance with the laws and
regulations in the preceding period. AURECt-1 refers to the number of follow-up of audit
findings by BPK in the preceding period. Control Variable AUOPIt-1 indicates the audit
opinion in the preceding period measured by dummy score of audit opinion, WAGES is
the level of personnel expenditure measured by the total expenses for personnel
expenditure, and CHARC refers to the caracteristic of Inspector General which also
measured by dummy score. *, **, and *** indicate significance at the 10%, 5%, and 1%
level.

Conclusion

It could be concluded that the number of audit findings have a positive effect on the level

of corruption, where the greater number of audit findings that reported by BPK as the

government auditor, the higher level of corruption in that Ministries/Institutions would be. The

additional analysis also showed that the findings of the weaknesses of internal control system

have a positive effect on the level of corruption, which means that the worse the internal control

system, the higher of potential fraud or corruption acts would be. Moreover, the level of

corruption in Ministries/Institutions has a positive influence to the number of audit findings,

where the more severe level of corruption happened, the greater number or audit findings could

be seen in those Ministries/Institutions. It indicates that in an institution where the corruption

level is severed, there is a possibility that there number of irregular or illegal acts that can be

traced will be increasing. Thus, resulting in the increasing number of audit findings.

The follow-up of audit findings have negative effect on the level of corruption where the

better amendment of follow-up was conducted, the lower the level of corruption would become.

This is because by applying the recommendation given by the auditor, the Ministries/Institutions

has showed an effort in developing their internal control system so that the existence of fraud or

corruption could be effectively detected. Whereas, the follow-up of audit findings did not have

any effect to the number of audit findings. It happened because of several reasons, such as

there was a different perspectives related to implementation of the follow-up, the follow-up that

has been applied needed more than one period of time, the supervision's futility in implementing

the follow-up, no commitment in continues improvement, and there's a possibility of error in

recommendations given by the auditor related to the follow-up that's supposed to be conducted

in order to avoid the same occurrence of the audit findings.

Implication, Limitation, and Suggestion

The suggestion that can be given by researchers is to continue providing support to the

central government in enforcing the Ministries/Institutions to follow-up the audit findings

recommended by BPK. Moreover, this research can also help to encourage the utilization of

BPK’s audit findings by the central government and the law enforcer as a tool to supervise the

Ministries/Institutions, since the examination results of this research showed that the greater

number of audit findings obtained have a significant effect to the level of corruption. The

Ministries/Institutions should pay more attention on the number of audit findings, especially

findings on the weaknesses of internal control system because number of audit findings

reported by BPK has been proved to have a significant influence on the level of corruption. In
addition, employee's welfare should be improved because their level of income is proven

affecting the level of corruption. So that by strengthening the internal control system, the

improvement of employee's welfare, and selecting the inspector general accurately based on

the educational background, it is expected to reduce the level of corruption in the

Ministries/Institutions. For BPK as the government auditor, we suggest them to heighten the

supervision in the following-up of the audit findings by the Ministries/Institutions. It is expected

that the auditor’s role in giving rectification recommendation and supervision of the audit

findings can increase the level of corruption the Ministries/Institutions.

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