When Clean Audit Opinions Fail to Signal Integrity: Explaining the Governance Paradox of Corruption among Indonesian Local Governments

Abstract

Abstract

Purpose – This study examines why unqualified audit opinions (WTP) do not necessarily indicate the absence of corruption in Indonesian local governments by investigating the institutional factors underlying this governance paradox.

Design/Methodology/Approach – A quantitative approach was employed using balanced panel data from 114 Indonesian local governments during 2019–2022, yielding 342 local government-year observations. Fixed-effects binary logistic regression was applied. Corruption was measured using cases prosecuted by the Corruption Eradication Commission (KPK), while the explanatory variables included Internal Government Supervisory Apparatus (APIP) capability, auditor rotation, accounting human resource capacity, and capital expenditure intensity.

Findings – The results show that stronger APIP capability, more frequent auditor rotation, and higher accounting human resource capacity significantly reduce corruption risk among local governments receiving unqualified audit opinions. Conversely, greater capital expenditure intensity increases the likelihood of corruption. These findings suggest that audit opinions alone are insufficient indicators of governmental integrity without effective internal oversight and institutional capacity.

Theoretical Contribution/Originality – This study extends Audit Expectation Gap Theory by integrating Agency Theory and Institutional Theory to explain how institutional conditions create a governance paradox in which high audit quality does not necessarily translate into substantive accountability.

Policy Implications – Strengthening internal audit capability, auditor independence, accounting competency, and oversight of capital expenditure is essential to improving public sector integrity.

Limitations – Corruption is measured using detected cases only. Future studies should employ alternative corruption proxies and broader governance indicators.

Keywords: Unqualified Audit Opinion, Corruption, Local Government, Public Sector Auditing, Governance Paradox, Indonesia.