Budget Transparency and Internal Control Systems in Enhancing Financial Reporting Quality

Abstract

Purpose: This study examines the effects of budget transparency and internal control systems on financial reporting quality in local government, with public accountability as a mediating variable.Research Methodology: A quantitative explanatory approach using Partial Least Squares Structural Equation Modeling (PLS-SEM) was applied. Data were collected through questionnaires from 150 structural officials across 28 Regional Apparatus Organizations (Organisasi Perangkat Daerah [OPD]) in Merauke Regency, Indonesia, selected using proportional stratified random sampling.Results: Budget transparency (β = 0.298, p = 0.001) and internal control systems (β = 0.341, p < 0.001) significantly improve public accountability, with internal control systems as the strongest predictor. Public accountability significantly enhances financial reporting quality (β = 0.521, p < 0.001). Mediation analysis confirms that public accountability significantly mediates the relationship between budget transparency (β = 0.155, p = 0.021) and internal control systems (β = 0.178, p = 0.011) with financial reporting quality.Conclusions: Strengthening budget transparency, internal controls, and public accountability can improve local government financial reporting quality.Limitations: The study focuses only on structural officials in Merauke Regency, South Papua, limiting broader generalization.Contributions: This study highlights public accountability as an institutional mechanism linking governance practices and financial reporting quality, provides evidence from Eastern Indonesia, and offers practical insights for public sector governance reform by emphasizing the importance of internal control systems.