Human development and the quality of financial reporting among the local governments in Indonesia

We investigate whether a local government’s level of human development is associated with its financial reporting quality. We use audit opinions and accruals management to capture financial reporting quality and manually collected data from our sample of 4,254 financial reports of Indonesian local governments from 2010 to 2018. We find that local governments whose citizens have a higher Human Development Index (HDI) and on each dimension of human development are more likely to receive an unqualified audit opinion on their financial reports. However, we find that local governments with a higher development index are more likely to use accruals management through revenue overestimation or expense underestimation in preparing the statement of operations. Our results suggest that employees of higher quality, as indicated by a higher HDI, have a greater ability to follow accounting rules resulting in a cleaner audit opinion. However, they might opportunistically use their judgments in making accounting estimates. Finally, our study contributes to the literature by providing insight into how human development and its dimensions are associated with the quality of financial reporting, especially in the public sector in developing countries.