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SIBR-Thammasat Conference on

Interdisciplinary Business & Economics Research

June 2-3, 2016, Bangkok

PROCEEDINGS

Volume 5 (2016)

Issue 2 (June)

ISSN: 2223-5078

Published by:

Society of Interdisciplinary

Business Research

Faculty of Economics Thammasat University

Published by Society of Interdisciplinary Business Research, 2016, Volume 5(2) Papers published in this proceedings have been double-blind peer reviewed

SIBR-THAMMASAT 2016 CONFERENCE

ON INTERDISCIPLINARY

BUSINESS & ECONOMICS RESEARCH

June 2nd-3rd, 2016

Emerald Hotel, Bangkok, Thailand

Learning from Each Other –

Theories and Methodologies Across Disciplines

Conference Proceedings

Volume 5 (2016), Issue 2

ISSN: 2223-5078


Paper ID Title b16-011 Point of Purchase Communication-Role of Information Search, Store Benefit & Shopping

Environment b16-012 Effects of Taxes and Government Laws on Cigarette Industry in India via Benchmark Analysis b16-013 Performance of Enterprises in India b16-014 Prioritizing the plastic recycling processes using Electre method b16-015 A Study on Tourism Marketing in the context of Northeast of India b16-016 The Problematic of the Poverty and the social welfare in the Extractive District of Mining Industry:

Cases Study Sumatra, Jawa, Kalimantan, Sulawesi and Papua b16-017 How Close to You b16-018 Environmental Effect on Wheat Production In District Faisalabad A Time Series Analysis by

ARDL b16-019 Impact of Workers’ Remittances on Poverty in Pakistan: A Time Series Analysis by ARDL b16-020 Ecological Conformity of E-Learning to Teaching and Learning in Ethiopian Higher Education b16-021 An Interaction between Monetary Policy, Commodity Prices and Inflation in Nigeria, 1970-2014 b16-022 Are We Different from Others? Experimental Evidence on Attitudes toward Uncertainty in

Bangladesh b16-023 Credit Cards as Pseudo Money, Are Influential Against Inflation? b16-025 Maritime Silk Road Initiative and China-Sri Lanka Economic Relations b16-026 Moslem Entrepreneur Perception Toward Risk and Risk Abatement Strategy (Case Study Of

Moslem Businessman in Indonesian Paham Qur’an Community) b16-027 Criminal Policy of the Trade Secrets and Financial Transparency in Economic Criminal Law b16-028 CSR Constructive Competition: Trend for Better World b16-029 The Impact of Fiscal Decentralization on Economic Growth: Evidence of Indonesia b16-030 Fiscal Illusions in Local Self-Government Finance: Complementarity of Qualitative and

Quantitative Methods b16-032 National Health Insurance Scheme (NHIS) Effect on the Public Perception of Health Care in

Nigeria b16-033 "Link between Corporate Environmental Disclosure and Firm Performance" - Perception or

Reality? b16-034 Collateral Agency For Aircraft b16-035 Human Resources Management Practices in Nigerian Universities b16-036 Political, Economic, Legal, Social and Cultural Ramifications of the German and European

‘Refugee Crisis’ b16-037 How to Become Smart? An Interdisciplinary View on Frameworks and Prerequisites for "Smart

Cities" and Critical Assessment of State Funding Programs b16-038 The Implementation of Accounting Information Systems: An Evidence from State-owned

Enterprises in West Java, Indonesia b16-040 Consumer Awareness on Organic Agriculture in the Philippines: The Status in Eastern Visayas

Region b16-041 Socio Cultural Diversity and Economic Development: Implications for Southeast Asian Integration b16-042 The Nexus between Exchange Rate Variation and Economic Growth in Nigeria b16-043 Online Purchase Intention: A Study of Automobile Sector in India b16-044 How Does an E-retailer Price Its Products? b16-046 Social Media and New Product Launches in Thailand b16-047 The Patient’s Acceptance of Nasal Irrigation for Colds: A Case Study of Drug Store Patient in

Bangkok Area b16-048 Estimating the Value of Steve Jobs Using an Event Study b16-049 Budgetary Fairness, Organizational Commitment and the Propensity to Create Budgetary Slack in

Government


b16-050 Strategy and Firm Performance: Does Intellectual Capital Disclosure Matters? b16-051 Machiavellianism, Tax Knowledge, and Ethical Perception on Tax Avoidance and Evasion: Survey

on Undergraduate Students in West Java, Indonesia b16-052 Do Institutions Moderate Globalization’s Effect on Growth? b16-053 Contributing Factors Related with the Performance in the CPA Licensure Examinations b16-054 The Impact of Monetary Policy Expectations on Interbank Interest Rates in Malaysia b16-055 Trade Practices of Herders in Darkhan Province, Mongolia: A Documentation b16-056 The Multiplex of Forecasting in Extreme Data: Evidences from ASEAN Stock Exchanges b16-057 Relationship Between Intellectual Capital with Financial Performance and Market Value: Case in

Indonesia b16-058 The Effect of Corporate Strategy on Earnings Management b16-059 Intellectual Capital on Market Value: Evidence from Indonesian Banks b16-060 Lending Behavior of Japanese Megabanks in Indonesian Project Finance Market b16-061 Tourism and Poverty Reduction b16-062 Moderate Effect Of Tax Morality on Perceive Probability of Audit and Sanctions To Tax

Compliance Behavior of SMEs b16-063 The Relationship between Technological Heterogeneity of Resource, Firm Action and Performance:

Empirical Evidence from the Global Tablet Market b16-064 Factors Affecting Turnover Intention Among Academician in the Malaysian Public Educational

Institution b16-065 Analysis of Financial Performance Through Local Government Financial Ratio Analysis Budgets /

Municipal in Indonesia before and after Application of Law Number 28 of 2009 b16-066 Effect of the Bank’s Performance to Profit Growth Using RGEC Approach b16-067 The Impact of Restructuring, Liberalisation and Privatisation on Employment Relations in

Developing Economies: A Case Study of the Nigerian Electricity Distribution Sector b16-068 The Influence of Organizational Climate, Motivation, and Job Satisfaction in Regard to the

Employee Performance b16-069 The Romance of Indonesian Accounting Education: A Modern Colonialism b16-070 Behavioral Finance In Indonesia: Applying The Prospect Theory To Indonesian Investors

Regarding of Financial Iteration b16-071 What Drivies China GDP’s Growth? Advanced vs Emerging Economies b16-072 Bureaucratic Reform to the improvement of public services: Challenges for Indonesia b16-073 Disc Style and Investment Decision Making b16-074 Disposition Effect, Case of Different Gender b16-075 Procurement Business Partnering: An Applied Critical Perspective b16-077 The Role of Education in Sustaining Economic Growth: The Case of Philippines and South Korea b16-078 Microfinance and Remittances: Complements or Substitutes for Poverty Alleviation in Developing

Countries? b16-079 Plant tissue culture : a green entrepreneurship as one of the solutions for plants conservation in a

household scale b16-080 Do Entrepreneurship and Economic Growth Affect Poverty, Income Inequality and Economic

Development? b16-081 The Relation between Financial Education and Investment Decisions in Indonesia b16-082 Integrated Location-Allocation Planning in a Multi-products Multi-period Closed Loop Supply

Chain Network b16-083 Behavioral Finance: An Experimental Study of the Prospect Theory Applicability in Indonesian

Investors with Regard to Gender Propensity b16-084 An Experiment on Fraudulent Reporting: Do Internal control, Framing, and Individual Love of

Money Influence it? b16-085 Joint Distribution of Stock Market returns and Trading Volume b16-086 Causality Relationship between Trade, Political Instability, FDI and Economic Growth: The Case of


Nigeria

b16-087 Improving Supply Chain Performance Through Implementation of Supply Flexibility b16-088 The New Product Development on Innovation Food Product: The Study of Concept Definition on

Thai Functional Food for the Elderly b16-089 Governance in Multilevel-systems - An Interdisciplinary Description and Analysis of the Real

Property Tax in Germany from a Political-economic and Business Point of View b16-090 The Philippine national debt and its impact on the economic growth b16-091 The Relationship of Health-Related Factors to Labor Productivity of the ASEAN-5 b16-092 Green Taxation: Challenge for Emerging Country Case Study from Indonesia b16-093 Harmonization Accounting Education and Culture b16-094 The Effect of Employee Perceived Reputation to Organizational Citizenship Behavior: A Study of

Professional Event Organizer’s (PEO) Employees b16-095 Perceived Environmental Uncertainty, Performance Measurement Systems, and Competitive

Advantage b16-096 Employee Selection Issues in Medium-sized Hotels in Ghana b16-097 The Challenges in Internationalizing Marketing Education in Emerging Markets b16-098 The Challenge of Accounting Education in the Vocational Higher Education in the Era of ASEAN

Economic Community b16-099 The Analysis of Individual Behaviour of Corporate Taxpayers’ Obedience: Tax Compliance Model

(Study of Hotels in Malang and Batu) b16-100 Enriching Entrepreneurial Accounting with Costing Simulation Gameplay b16-101 Human Capital Drivers Analysis (Case Study at PT. Shafira Laras Persada) b16-102 Is Stickiness Cost Occurred in Indonesian Manufacturing Companies b16-103 Urban Food Insecurity and Household Subsistence Level (HSL): The Case of a Low Income

Neighbourhood in South Africa b16-104 Time Series Patterns of Tourist Arrivals to Sri Lanka b16-105 Skepticism, Time Limitation of Audit, Ethics of Professional Accountant and Audit Quality (Case

Study in Jakarta, Indonesia) b16-106 Limited Attention and M&A Announcements b16-108 How Supervisors’ Belief Affects Subordinates’ Performance: A Social Dominance Perspective b16-109 A Novel Health Insurance Scheme for Cancer Care in Bangladesh b16-110 Impact of Worklife Balance on Life Satisfaction of Pakistani Women Entrepreneurs b16-111 Estimation of the social pollution level of the company labour sphere and corporate social policy

effectiveness: methodological approaches b16-112 Analysis of Transformational Leadership Effect towards Organizational Citizenship Behavior

Mediated by Organizational Commitment: A Study of Hotel in Malang, East Java b16-113 Common Sustainable Development Rules for Creatures, Companies and Countries b16-114 University of Danang's University of Economics Adoption of Foreign Internship Course b16-115 Establishment of Competitive Advantage for Thai SMEs: Qualitative Evidence from a Community-

Based Enterprise in Ubon Ratchathani Province, Thailand b16-116 Relationship between Internal Control over Financial Reporting (ICFR) and Non-Audit Services b16-117 Readiness of the Special Economic Zone (SEZ) in Trat Province, Thailand b16-118 Financial Development and the Lending Channel of Monetary Policy Transmission: Evidence from

Thailand b16-119 The Development Model of Contextual Behavioral Indicators of Employees in Service Industries in

Indonesia b16-120 The Effect of Audit Complexity to Audit Fee b16-121 Strategy Deployment using Balanced Scorecards in a Thai State-Owned Enterprise: A Case Study b16-122 Consumer Views and Concerns of Internet Banking Service Quality in South Africa


b16-123 The Positive Influence of Lean Production and Technology & Innovation on Performances of SMEs

In The Manufacturing Industry b16-124 The Effect of Debt Overhang on Economic Performance: Case of Turkey b16-125 Questioning the Agency Theory: A Fight Toward Account(ant)(ing) Colonization b16-126 The Influence of Intellectual Capital to Market Value With Return on Assets as Intervening

Variable b16-127 The Application of Lean Practices on New Product Development (NPD) Processes b16-128 The Relationship Between Creativity, Entrepreneurial Attitude and Entrepreneurial Intention (Case

Study at Students of State Polytechnics Malang) b16-129 Earnings, Leverage, and Deferred Tax on Tax Penalties and Fines (Case Study in Indonesia) b16-130 An Inverted-U Shape Relationship between Female Labor Supply and the Age of Children: A Case

of Vietnam b16-131 GST in India: Impact on International Trade b16-132 Creating Economic Values Through Multi-Stakeholder Partnership (A Case Study on “Black Soy

Beans Project” of Unilever Indonesia) b16-133 Role of Film-Induced Tourism: A Case Study of Thailand b16-134 The Irony of Profit: Colonization on Accounting for Healthcare b16-135 Thailand’s Electricity Co-operation with Neighbouring Countries b16-136 Cost of Housing Credits-Real Estate Price Nexus b16-137 Efficiency of Islamic Banking Schemes in Indonesia and Relation to Its Growth b16-138 Proposed Marketing Strategy of Start-up Business at Modern Shopping Mall (Case Study of Defstig

Genuine Leather Goods Shop at Paris Van Java Resort and Lifestyle Bandung, Indonesia) b16-139 Developing a Software Application based on Data Mining Technique to The Market Basket

Analysis b16-140 The Impact of Selected Industry-level Determinants on the Export Performance of the Philippine

Electronics and Electrical Industries b16-142 The Demographic Contributions to the Economic Growth in Indonesia: An Empirical Analysis

During Period 1985-2014 b16-143 Earnings Response Coefficient and Technical Analysis Signal around Earnings Announcement

Dates in Indonesian Stock Market b16-144 Shared Financial Interest, Fairness, and Honesty in Budget Reporting: Experimental Study in

Indonesia b16-145 A Comparative Study of the Fertility Rates of Two Developing Countries in Asia: The Philippines

and Thailand b16-146 Consumers’ Evaluation of Glocal Marketing Strategies of Global Firms in Turkey : An Example of

a Glocal Product b16-147 Contingency Audit Tenure and Audit quality b16-148 Does the Fisher Hypothesis Hold in Sweden? An Analysis of Long-Term Interest Rates under the

Regime of Inflation Targeting b16-149 Leverage Ratio Effect on Stock Return in the Companies Sector of Property, Real Estate and

Construction in Indonesia: Panel Data Analysis b16-150 Economic factors affecting agricultural productivity and labor force in Thailand and Philippines b16-151 The Attitude Towards New Rice Direct-seeding Device b16-152 Segmenting Indonesian Performing Art Audiences: Case of Komunitas Salihara b16-153 Exploring the Mediating Influence of Fashion Consciousness between Interpersonal Effects and

Status Consumption among Metropolitan Consumers b16-154 Examining the Existence of Herding Behaviour: Empirical Evidence from the Indonesia Stock

Exchange b16-155 The Optimal Basket Currency Arrangement for Indonesia b16-156 Financial Performance Assessment of PT Indosat Tbk Against Other National Mobile Operators in

Indonesia


b16-157 Domestic and Foreign Banks’ Stability in Indonesia: The Grey Zone Trap and Key Determinants b16-159 CAPEX Efficiency and Service Quality Improvement through Tower Sharing in Indonesia

Telecommunication Industry; Optimization Model Using Comparison of Genetic Algorithm and Linear Integer Method

b16-160 The Impact of Financial Education Toward Indonesia University Student’ Financial Literacy and Financial Inclusion

b16-161 Financial Performance Analysis of PT Agung Podomoro Land Tbk in Relation to Property Industry Crisis in Indonesia

b16-162 Assessing The Financial Performance of Coal Company in Indonesia - A Case Study of PT Adaro Energy Tbk Compared to Its Competitors

b16-163 Financial Advisers and Trust in China b16-164 Relationship between Value Creation and Strategic Partnership at Tourist Destinations in West Java b16-165 Exploring the Effect of Exchange Rate Volatility on the Indonesia's coffee exports of Taiwan

Agriculture Product: a Case of Robusta and Arabica Coffee in Indonesia b16-166 Developing Leadership Systems Inside University Using Jim Collins Method [Good to Great]:

Human Resource Development to Face ASEAN Economic Community in Indonesia b16-167 Organizational and Occupational Commitment of Retail Pharmacists in Japan b16-168 Factors Affecting the Working Hours of Child Laborers in Dagupan City, Philippines b16-169 Analysis Merger of PetroChina Company Limited and Sinopec Limited Using Valuation Method

and Discounted Cash flow b16-170 Taking Ownership of the Future: Developing Practical Money Skills Among the Youth in

Emerging Economies b16-171 Leadership Styles and Its Influence on Employee Engagement as Perceived by Filipinos Working

under Local and Foreign Superiors b16-172 Knowledge Management of Local Wisdom in New Product Development Process b16-173 The Influence of Service Quality towards Customer Loyalty of Coffee Shops. Case Study: Coffice

Bandung b16-174 Reducing Business Risk from Product Pricing Strategy based on Location Assessment for Culinary

Start up Business Case Study of Bakso Bakar Kacamata Hitam b16-175 The Impact of Intra-industry Diversification on the Performance: An Evidence Beyond High Tech

Industry b16-176 Analysis of the factors affect Customer Preferences Towards Live Music Performance in Indonesia b16-178 The Effect of Internal Audit Function Effectiveness and Implementation of Government Accounting

Standard on Financial Reporting Quality b16-179 Adoption of Halal Logistics System: Case Study of Catering Production in Santosa Hospital

Bandung Central b16-180 Protection, Technological Transfer and Alliance against Terrorist Conflict b16-181 Spying Solution in the Framework of Terrorist Conflicts b16-182 Develop Posdaya to Develop People Economy b16-184 The patient Satisfaction Measured by the service quality: Investigation on Mutiara Bunda Women

and Children Hospital Salatiga, Indonesia b16-185 Factor Analysis of Customer Online Repurchase Intention Towards Indonesian E-Ccommerce

Marketplace C2C : Case of PT Bukalapak.com b16-187 The Impact of Chinese FDI on Lao Economy: Evidence from CGE Modelling b16-188 When is Earnings Management Really Good News? Indonesian Evidence b16-189 The Relationships Management Signaling on Underpricing and the Influence on Initial Stock

Trading Volume During Stabilization Period b16-190 The Effects of Minimum Wage on Wage Distribution of the Poor: Evidences of Indonesia b16-191 Characteristics of Successful Managers: A Study of Thai Employees b16-192 Business Cycles Synchronization: A Precondition Study Optimum Currency Area in ASEAN+3


b16-193 When Laws and Regulations Control Teaching Inquiry and Ability to Properly Diagnosis Learning

Needs of Adult Learners b16-194 How People Develop Existing Goods to become New Product: The Case of Entrepreneurial Student b16-195 The Important of Green Product Development for Company Development: A Conceptual

Framework b16-196 Customer Involvement in SME New Product Development b16-197 Assessing CSR Program: The Importance Role of PR Support (Case: Indonesia) b16-198 Market Timing Strategy: Quantum Leap in Share Prices, the Philippines Experience b16-199 Accounting Standard and Accounting Quality b16-200 Frequency of Using Online Trading Channel b16-201 Optimal Hedging Ratio of SET Index & SET Index Futures b16-202 Effect of Shocks on the Real Exchange Rate of ASEAN-5 plus 3 Countries b16-203 Measuring Consumer Personal Values To Create Product Positioning b16-204 Auditee Satisfaction Case on Inspectorate General of Ministry of Finance in Indonesia b16-205 The Mediating Role of Job Satisfaction between Work-life Balance and Organizational

Commitment of Graveyard Shift Employees in the BPO Industry b16-206 The Determinants of Bank as a Financial Intermediary (Case Study: 19 Big Banks in Indonesia

Period 2008-2015)

1

THE EFFECT OF INTERNAL AUDIT FUNCTION EFFECTIVENESS AND IMPLEMENTATION OF GOVERNMENT ACCOUNTING STANDARD

ON FINANCIAL REPORTING QUALITY

Rindu Rika Gamayuni* Department of Economics and Business, Lampung University

E-mail address: [email protected]

Faricha Department of Economics and Business, Lampung University


Dewi Sukmasari Department of Economics and Business, Lampung University


Presented at the: SIBR 2016 Conference on Interdisciplinary Business and Economics Research, 2nd-3rd June 2016, Bangkok.

ABSTRACT

Based on The Indonesian Supreme Audit Agency (BPK RI) in 2014, only 23% Government Financial Statements have unqualified opinion, and there is an increase in the number and value in some cases of the Internal Control System weaknesses and noncompliance with laws and regulations from 2008 to 2013, which indicated the low quality of financial reporting in Indonesia. Therefore, we need an effective internal audit function and good implementation of governmental accounting standard in order to create qualified financial reporting, transparent and accountable. The purpose of this study is to empirically study: (1) The effect of the internal audit function effectiveness on financial reporting quality; (2) The effect of implementation of government Accounting Standard on financial reporting quality.

This research uses survey method with description verification approach and type of causal research, conducted on Local Government Inspectorate at Bandar Lampung City, Indonesia, while the unit of observation is internal auditor (inspector). The primary type of data is questionnaire research instruments’ result, which was analized using multiple regressions. This study analysis finds that the implementation of government accounting standard significantly affect the financial reporting quality, but the internal audit function effectiveness did not significantly affect the financial reporting quality. Keywords: Internal Audit function Effectiveness, Government Accounting Standards, Financial

Reporting Quality.

mailto:[email protected]�



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I. INTRODUCTION

Anwar Nasution (2009) stated that only a small number of local governments succeeded in preparing its financial statements. Based on The Indonesian Supreme Audit Agency (BPK RI) in 2014, only 23% Government Financial Statements in Indonesia have unqualified opinion. The Indonesian Supreme Audit Agency disclosed factors that influence the quality of financial reporting at Local Government are (1) the presentation of financial statements in conformity with the Indonesian Government Accounting Standard (SAP) and follow up on The Indonesian Supreme Audit Agency findings and commitment to monitor implementation of Internal Control System (SPI); (2) Internal control which improves the quality of financial statements, (3) Following-up the financial audit result or recommendations by the The Indonesian Supreme Audit Agency, to improve the internal control system.

According to data from The Indonesian Supreme Audit Agency (2014), there is an increase in the number and value in some cases of the Internal Control System weaknesses and noncompliance with laws and regulations from 2008 to 2013. A number of weaknesses of the Internal Control System and the findings of non-compliance with the regulations of local government is possible associated with the weakness of internal oversight mechanism. Previous studies state that the internal audit function may improve the quality of financial reporting (Schneider and Wilner, 1990; Goodwin and Seow, 2002; Prawit, et al., 2008; Gramling, et al., 2011). Doyle, et al. (2007) suggest that conceptually, the internal control system is the foundation for the creation of quality financial reporting. The purpose of this internal control system can be achieved with the existence of the internal audit function, as guarantor attainment of the objectives of internal control (Sawyer, 2003; Mihret and Yismau, 2007; INTOSAI, 2010). Effective internal audit function can reach the goal of internal audit, which is to increase the efficiency and effectiveness of internal controls within an organization (Cangemy and Singleton, 2003; Cohen and Sayag, 2010; Eden and Moriah, 1996).

Preparation of financial statements is a form of transparency as a requirement for accountability in supporting the government’s transparency of public resources management activities. Institute of Internal Auditors (IIA) (2012) states that the high quality of the internal audit function will improve the quality of financial reporting, and can detect aberrant decision. This statement is supported by Schneider and Wilner (1990) in his research that internal audit can detect irregularities in financial reporting. Similarly, Goodwin and Seow (2002), showed that the existence of the internal audit function affects the quality of financial reporting. Adequate accounting standards implementation will increase reliability and objectivity of information presented and consistency in financial reporting. Ridwan (2007), Pamungkas (2005) proved that government accounting standard implementation also affect financial reporting quality.

Based on the phenomenon and previous studies, the identified problems in this research are: (1) How much is the influence of the effectiveness of the internal audit function on the financial reporting quality, (2) How much is the influence of implementation of governmental accounting standards on the financial reporting quality.

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2. LITERATURE REVIEW

2.1 Effectiveness of Internal Audit Function Cohen and Sayag (2010) stated that the internal audit function will be effective if it can

achieve the desired objectives. The purpose of internal audit is to improve the efficiency and effectiveness of the organization (Eden and Moriah, 1996). Cangemy and Singleton (2003) stated that an effective internal audit function is to achieve its objectives. Previous literature states that the effectiveness of the internal audit is an internal audit capability to plan, implement and communicate the findings objectively (Spraakman, 1997; Dittenhofer, 2001). Implementation of audit recommendations is crucial for the effectiveness of the internal audit (Van Gansberghe, 2005). Van Gansberghe’s findings was also corroborated by Sawyer (2003) whom stated that the internal auditor's work is not completed until the damage has been repaired and corrected. Moeller (2005: 269) and the Institute of Internal Auditors (IIA) (2012) both are saying that effective internal audit function has the following six dimensions: (1) planning, (2) Communication and approval, (3) Management resources, (4) Policies and procedures, (5) Coordination, (6) Reporting to the board and senior management. Furthermore, the Indonesian Governmental Internal Control Apparatus code of ethics (2008) adds two dimensions for an effective internal audit function, namely (1) Quality Control and Development Program; (2) Public Complaints Follow Up. 2.2 Implementation of Governmental Accounting Standards

Establishing accounting standards is an important factor, so there will be accounting standards that are acceptable to the interested parties and beneficial to the development of the government accounting. Indonesia is one of the countries that uses the accrual basis accounting in the financial statements based on IPSAS and the Indonesian Governmental Accounting Standards (SAP) (2010). General purpose of financial statements is intended to meet the common needs of most users report. To achieve this objective, this standard sets the entire consideration in the context of the presentation of financial statements, guidelines for the structure and the contents of financial statements.

IPSAS (2010) revealed that a government's financial statements will include the components: (1) statement of financial position; (2) statement of financial performance; (3) statement of change in net assets / equity; (4) cash flow statement; (5) accounting policies and notes to financial statement.

2.3 Financial Reporting Quality

Good quality financial reporting is financial reporting which generates useful information for users, i.e. information that meets the quality financial information characteristics (Belkaoui, 2000; Jonas and Blanchet, 2000; McDaniel et al., 2002 ). Financial Reporting Quality Dimensions according to Beest, et al. (2009) consist of: (1) Relevant (4 indicators), (2) Faithful Representation or Reliability (5 indicators), (3) Understandability (5 indicators), (4) Comparability (6 indicators), (5) Timelines (1 indicator). Indonesian Governmental Accounting Standards (2010) which is adapted from the International Public Sector Accounting Standards (IPSAS) (2010), states that the purpose of governmental financial reporting is to present information that is useful to users in assessing accountability and to make a good decision making of economic, social, and politics. The dimension of financial reporting quality by the

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Indonesian Governmental Accounting Standards (SAP) (2010) are as follows: (1) Relevant, (2) Reliable, (3) Comparable, (4) Understandable. 2.4 HYPOTHESIS DEVELOPMENT 2.4.1 The Influence of Internal Audit Function Effectiveness on the Financial Reporting

Quality Internal audit will be effective when it has conducted an audit of internal control and

financial statements to achieve the reliability of financial reporting and provide quality assurance and integrity of financial reporting (Arens and Loebbecke, 1997, p. 788; Hermanson et al., 2008). Sawyer (2003) explains that the internal audit is an assessment conducted by internal auditor on the operation and control varying within the organization, among others, to determine whether the financial and operating information is accurate and reliable, and whether the risks faced by the company have been identified and minimized. In internal auditing, internal auditors are responsible for evaluating whether the financial statements are fairly presented (qualified financial reporting) (Arens and Loebbecke, 1997, p. 786). Goodwin and Seow (2002) investigated the influence of corporate governance mechanisms (the existence of an internal audit function, the strength of the audit committee, and the strength of the company code of conduct) on the quality of financial reporting. Research results found that three factors affect the quality of financial reporting. Based on the auditor's perception, among the three factors, the internal audit function is the most influential factor on the quality of financial reporting. Schneider and Wilner (1990) supported that internal audit would prevent irregularities in financial reporting. Based on theory and previous studies, the proposed hypothesis: Hypothesis 1: The internal audit function effectiveness affects the financial reporting quality. 2.4.2 The Influence of Governmental Accounting Standards Implementation on the

Financial Reporting Quality Governmental Accounting Standards (SAP) is a standard to be followed in the financial

report of central government agencies and local governments. Users of financial statements will use SAP to understand the information presented in the financial statements. Government Accounting Standards regulate the presentation of general purpose financial statements in order to improve the comparability of the financial statements of both the budget, between periods, and between entities. General purpose financial statements are intended to meet the common needs of most users report. Solikin (2010) have proven that the implementation of governmental accounting standard affects good governance. Further research Ridwan (2007) proved that there was significant effect of governmental financial accounting implementation to the Local Government performance. Pamungkas (2005) revealed that there were significant effects of governmental financial accounting implementation to the financial reporting quality. Hypothesis 2: Implementation of government accounting standards affects the financial reporting quality.

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Based on the framework that has been described, the relationship between research concepts can be described as follows:

Figure 2.1 Framework

3. RESEARCH METHODE

Variables in this study have some dimensions and indicators to operationalized:

Table 3.1 Dimensions and Indicators of Variable

VARIABLE DIMENSIONS INDICATORS Internal audit function effectiveness (X1)

1. Planning internal audit assignments

1.1 Consider activities that have the greatest risk 1.2 Consideration from the leader 1.3 Identify, analyze, evaluate and document sufficient

information to achieve the objectives of the assignment. 1.4 Plan audit activities, resources required, vision,

mission, goals, strategies, programs and activities of auditors every five years.

1.5 Arrange the plan based on the principles of harmony, alignment, avoiding overlapping and repetitive examination and considering the efficiency and effectiveness of resource use.

2. Communication and approval 2.1 Communication about audit plan 2.2 Communication about resources

3. Management of resources 3.1 Manage and utilize its resources economically, efficiently and effectively

4. Policies and procedures of internal audit

4.1 The contents of the policy and procedures of internal audit

4.2 Review of policies and procedures continuously to be effective.

5. Coordination

5.1 Coordination of monitoring plans and monitoring results, both with other internal auditors and external auditors.

6. The internal audit reports to the CEO

6.1 The contents of the report: the outcome of the activities, problems, and obstacles.

6.2 The report submitted periodically to the direct higher up

The internal audit function effectiveness

(X1) Financial Reporting

Quality (Y)

Implementation of Government Accounting

Standard (X2)

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7. Development Program and Quality Control

7.1 Developing programs and controlling audit quality covering all aspects of audit activities in the Internal Supervisory Government Apparatus (APIP)

8. Following-Up the Public Complaints

8.1 Handling complaints with clear mechanisms and procedures, transparent and accountable, based on the rule

Governmental Accounting Standard Implementation (X2)

1. The purpose of Financial Statements

1.1 Availability of information about the adequacy of current year receipts to finance all expenditure

1.2 Availability of information regarding the suitability of obtaining economic resources and allocation with a defined budget

1.3 The availability of information on the economic resources used in the reporting entity's activities and the results that have been achieved

1.4 Availability of information on how the reporting entity fund its operations and meet its cash needs

1.5 The availability of information on the financial position and condition reporting entity associated with sources of revenues, both short term and long term, including those derived from taxation and loans.

1.6 Availability of information regarding changes in the reporting entity's financial position, whether an increase or decrease, as a result of activities undertaken during the reporting period

2.Accounting and financial reporting principles

2.1 Basis of Accounting 2.2 Historical Value 2.3 Realization 2.4 Substance over form 2.5 Timeliness 2.6 Consistency 2.7 Full Disclosure 2.8 Fair presentation

3. Financial Reports element

3.1 Budget Realization Report 3.2 Balance Sheet 3.3 Statement of Cash Flows 3.4 Notes to Financial Statements

Financial Reporting Quality (Y)

1. Relevant

1.1 Having feedback 1.2 Having predicted value 1.3 On Time 1.4 Detailed Information

2. Reliable 2.1 Honest presentation 2.2 Can be verified / tested 2.3 Information is neutral

3. Comparability

3.1 Consistency in accounting policies application 3.2 Comparability between time to time 3.3 Comparability between entities

4. Understandability

4.1 Utilization 4.2 The form and terms can be understood

The instrument used in this study is in the form of a questionnaire. The respondents are

local government inspectorate, such as team leader, team members, technical controllers (regional assistant inspectors), and quality control (inspectors).

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Measurement techniques used is Likert Scale. Population in this research is the local government Inspectorate at Bandar Lampung City. In selecting sample, simple random sampling is used to obtain 30 samples. Multiple linear regression (multiple linear regression) is used to analyze the model in this study. The model is as follows:

FRQ = a + b1 IAFE + b2 GASI + e

FRQ : Financial Reporting Quality IAFE : Internal Audit Function Effectiveness GASI : Governmental Accounting Standards Implementation e : error

4. RESULTS AND DISCUSSION

4.1 Descriptive Analysis 4.1.1 Internal Audit Function Effectiveness

Table 4.1 Average Score of Internal Audit Function Effectiveness

No. Dimension Mean Score Criteria

1 Plan 4.29 Good 2 Communication and approval 4.47 Good 3 Management of resources 4.07 Good 4 Policies and procedures 3.53 Moderate 5 Coordination 3.73 Moderate 6 Report to leaders 4.27 Good 7 Program development and quality control 4.23 Good 8 Follow-up public complaints 4.43 Good

Grand Mean 4.13 Good

Results of grand mean score about the effectiveness of the internal audit function is 4.13 (in the interval 4-5), meaning that the internal audit function is effective. The dimensions of policies and procedures, and coordination, was quite effective, but there are still some weaknesses.

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4.1.2 Governmental Accounting Standards Implementation

Table 4.2 Average Score of Governmental Accounting Standards Implementation

No. Dimension Mean Score Criteria

1 Purpose of financial statements 4.79 Good 2 Accounting principles and financial reporting 4.73 Good 3 Financial statement items 4.63 Good

Grand Mean 4.71 Good

Results of grand mean score about the implementation of governmental accounting standards amounted to 4.71 (at intervals of 4-5), meaning that governmental accounting standards has been implemented well. 4.1.3 Financial Reporting Quality

Table 4.3

Average Score of Financial Reporting Quality

No. Dimension Mean Score Criteria 1 Relevance 4.8 Good 2 Reliability 4.7 Good 3 Comparability 4.7 Good 4 Understandability 4.7 Good

Grand Mean 4.7 Good Results of grand mean score about the financial reporting quality at the interval 4.7,

meaning that financial reporting have been qualified. 4.2 Hypothesis Testing Result

Before multiple regretion analyzed, this research has passed the test of classical assumptions (normality, multicollinearity, heteroscedasticity, and autocorrelation).

Table 4.4 The Model’s Goodness of Fit

Model R R Square Adjusted R Square Std. Error of the Estimate 1 , 7 18 a , 515 , 479 , 028 648 a. Predictors: (Constant), GASI, IAFE b. Dependent Variable: FRQ

Adjusted R2 value of 0.515, which means 51.5% of dependent variable (quality of financial

reporting) can be explained by the independent variables (effectiveness of the internal audit

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function and the implementation of governmental accounting standards), it means that this model is fit or good enough to predict the quality of financial reporting. While the remaining 48.5% is explained by other variables not included in this regression model.

Table 4.5

Hyphothesis Testing Result Unstandardized Coefficients t Sig. Result

B Std. Error

(Constant) 1,397 , 623 2,243 ,033 IAFE , 080 , 107 0.748 , 461 Ha Rejected GASI , 635 , 146 4, 366 , 000 Ha Accepted

a. Dependent Variable: FRQ Regression equation: FRQ = 1,397 + 0,080 IAFE + 0,635 GASI + e

Hypothesis 1 is rejected at significance value 5%, it means IAFE has no significant effect on the FRQ. Hypothesis 2 is accepted at significance value 5%, means that GASI has positive and significant effect on the FRQ. Regression coefficient of 0.635 for Governmental Accounting Standar Implementation (GASI) means that each increase of 1% Governmental Accounting Standar Implementation (GASI) will increase financial reporting quality (FRQ) by 63.5%. 4.3 Discussion 4.3.1 The Influence of Internal Audit Function Effectiveness on the Financial Reporting

Quality The first hypothesis testing results show that there is no significant effect of the Internal

audit function effectiveness (IAFE) to the financial reporting quality (FRQ). Results of grand mean score about the effectiveness of the internal audit function is 4.13 (to be in the interval 4-5) means that the internal audit function is effective, but it still has some weaknesses in terms of policies, procedures, and coordination. GASI has a score of 4.70 means that the financial reporting has good quality, as proven by obtaining an unqualified opinion for four consecutive years (2010-2013) at the local government. Results of this study are not consistent with Goodwin and Seow (2002), Schneider and Wilner (1990), Prawitt, et al. (2009), and Gramling, et al. (2011) which all found that Internal audit function effectiveness have effect on the financial reporting quality.

In the Bandar Lampung city inspectorate, the internal audit function has been effective, as the theory stated that an effective internal audit function consists of planning, communication and approval, resource management, policies and procedures, coordination, reporting to the leader, program development and quality control, and public complaints follow up (Moeller, 2005; Internal Audit Professional Standards, 2004; Standard of internal government audit regulatory authorities, 2008). Financial reporting has been categorized as good quality, proven from the results of descriptive analysis on the dimensions of relevant, reliable, comparable, and understandable. This is consistent with theory stated by Arrens and Loebbecke (1997: 788), which revealed that an effective internal audit function will result in quality financial reporting.

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Arrens and Loebbecke (1997: 788) also stated that the internal auditor is responsible for evaluating whether the financial statements are presented fairly.

Results of this study demonstrate that the effectiveness of the internal audit function have positive effect on the financial reporting quality, but the effect is not significant, due to the limited number of samples taken, and because there are still some weaknesses in the policies, procedures, and coordination of the internal audit function.

4.3.2 The Influence of the Governmental Accounting Standards Implementation on the

Financial Reporting Quality The second hypothesis testing results indicate that there is significant effect of

governmental accounting standards implementation on the quality of financial reporting by 60.35%. This means that 60.35% financial reporting quality can be explained by the implementation of government accounting standards. Results of the grand mean score of respondents on the implementation of government accounting standards amounted to 4.72 (in the interval 4-5) means that government accounting standards had been implemented properly. Results of this study prove that there are significant effect from implementation of government accounting standards on the quality of financial reporting, aligning with the results of research conducted by Solikin (2010), Pamungkas (2005), Nugraheni and Subawaeh (2008) which proves that governmental accounting standard implementation influences the financial reporting quality. The results also supported by Mardiasmo (2006), which stated the accounting standards required comparable financial statements, and the common perception and understanding between presenters and the user. Financial statement information as a product of the implementation of government financial accounting standards can affect the quality of the financial reports of local government, as expressed in Government Regulation No.71 / 2010 that in order to meet the objectives of financial statement, information needs to fulfill qualitative characteristic of financial statements, such as relevant, reliable, comparable and understandable.

V. CONCLUSIONS AND IMPLICATION

5.1 Conclusions

Based on the formulation of the problem, formulation of hypotheses and the results of the research, the authors’ conclusions are as follows: 1. The effectiveness of the internal audit function does not affect the quality of financial

reporting. This is caused by the limited number of samples studied, and there are still some weaknesses in the policies, procedures, and coordination of the internal audit function in the local government.

2. Implementation of governmental accounting standards has a significant positive effect on of the financial reporting quality. Governmental Accounting Standards have been implemented well at local government (Bandar Lampung city) so that financial reporting is qualified (relevant, reliable, comparable, understandable).

5.2 Implication In the results of this study, the implementation of governmental accounting standards is a

more dominant factor of the quality of financial reporting, it provides advice to the local government of Bandar Lampung to implement the Governmental Accounting Standards ranging

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from accounting functions: analyze the transaction up to the financial reporting within a transparent and accountable local government organizations. To achieve this objective requires qualified human resources with educational background and skills appropriate in the field, added with high ethics and moral.

The next research should expand the sample in order to have more generally acceptable results. The local government should improve the policies, procedures, and coordination of the internal audit function in order to achieve qualified financial reporting.

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