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Article

Human Competencies: Amplifying Financial Reporting Quality in Indonesian Local Government

by
Mediaty
1,*,
Grace T. Pontoh
1,
Nadhirah Nagu
1,
Rahmawati HS
1,
Anis Anshari Mas’ud
2 and
Rozainun Haji Abdul Aziz
3
1
Faculty of Economics and Business, Hasanuddin University, Makassar 90245, Indonesia
2
Faculty of Economics, Universitas Sulawesi Barat, Majene 91412, Indonesia
3
Accounting Section, UniKL Business School, Kuala Lumpur 50250, Malaysia
*
Author to whom correspondence should be addressed.
J. Risk Financial Manag. 2025, 18(8), 424; https://doi.org/10.3390/jrfm18080424 (registering DOI)
Submission received: 29 May 2025 / Revised: 3 July 2025 / Accepted: 11 July 2025 / Published: 1 August 2025
(This article belongs to the Special Issue Financial and Sustainability Reporting in a Digital Era, 2nd Edition)
Versions Notes

Abstract

This quantitative study examines the determinants of financial reporting quality in Indonesian local governments, focusing on good governance, regional financial accounting systems, internal control systems, organizational commitment, and information technology utilization, with HR competencies as a moderator. Data were collected via surveys from 170 Local Government Work Units (SKPDs) across South Sulawesi Province, Indonesia. Employing Structural Equation Modeling (SEM), the findings indicate that good governance, regional financial accounting systems, internal control systems, organizational commitment, and information technology utilization all positively influence financial reporting quality. Crucially, human resource competencies were found to significantly moderate the relationship between the internal control system and organizational commitment with financial reporting quality. However, this moderating effect was not significant for the relationships involving good governance, regional financial accounting systems, and information technology utilization. These results highlight the essential role of human resource development and systemic enhancements in fostering greater financial accountability and transparency within the public sector. Therefore, policy recommendations should focus not only on enhancing individual competencies but also on synergistically strengthening systems and governance frameworks to achieve transparent and reliable public financial reporting.

1. Introduction

Recent developments in Indonesia’s public sector organizations highlight a remarkable evolution driven by rapid advancements in information and communication technology. This modern era continuously challenges both central and local governments to enhance openness, transparency, and accountability in reporting their activities. The demand for transparency and accountability in government organizations has intensified, leading the central government to delegate authority to local governments through decentralization, as stipulated in Law No. 23 of 2014 concerning regional government. This framework positions local governments as key drivers of national development, empowering them with greater responsibilities and authorities in managing their natural resources and regional finances (Peraturan Pemerintah Republik Indonesia, 2004). Local governments are thus obligated to disseminate financial management data via comprehensive financial reports, which serve as a crucial mechanism for public accountability regarding the stewardship of public funds. The caliber of these financial reports is of utmost importance, as they constitute a fundamental basis for decision-making by diverse stakeholders (Nogueira & Jorge, 2016). Despite notable advancements, as demonstrated by numerous local governments in South Sulawesi consistently attaining an Unqualified Opinion (WTP) from the Supreme Audit Agency of the Republic of Indonesia (BPK RI), certain challenges and inconsistencies persist within the reporting landscape. Notably, some regions, such as Jeneponto and Tana Toraja Regencies, have received a Qualified Opinion (WDP) for five consecutive years, indicating that not all Local Government Financial Statements are fully compliant with established standards or are of high quality (Ode Hasiara, 2017; Salle et al., 2022). This phenomenon signals an ongoing challenge in achieving uniform financial reporting quality across all regional administrations. Previous studies have extensively investigated various elements that impact financial reporting quality, including asset management, regional financial accounting systems, internal control mechanisms, organizational commitment, and the application of information technology. Nevertheless, the divergent outcomes observed across these investigations underscore a significant void in comprehending the intricate interactions among these factors, particularly concerning the influence of human resource competencies.
This research endeavors to bridge these identified inconsistencies by exploring the direct impact of good governance, regional financial accounting systems, internal control systems, organizational commitment, and information technology utilization on financial reporting quality. Concurrently, the study also scrutinizes the moderating role of human resource competencies within these relationships. Existing academic discourse posits that proficient human capital can reinforce the effectiveness of various organizational and systemic determinants on the quality of financial reporting (Lubis et al., 2023; Frederica et al., 2023; Yenni et al., 2024). However, some studies present conflicting views on the extent of this moderating role (Wan Ismail et al., 2024; Salvi et al., 2022). By meticulously analyzing these relationships within the context of Indonesian local governments, this research offers novel insights into the specific mechanisms through which human resource competencies can enhance financial reporting quality. The study contributes to the literature by providing a comprehensive model that bridges theoretical underpinnings, such as agency theory and Stewardship Theory, with empirical evidence from a developing economy. Furthermore, it seeks to identify how controversial aspects, such as varying levels of commitment or inconsistent technology adoption, are influenced by human resource capabilities. The primary objective is to determine how these variables collectively and interactively impact the quality of financial reports, thereby providing actionable recommendations for improving public financial management. The ultimate conclusion sought is a clearer understanding of the optimal combination of governance, systems, and human capital to achieve superior financial reporting quality in the public sector.

2. Literature Review and Hypotheses Development

This section provides a theoretical foundation for the relationships investigated in this study, drawing upon established theories and empirical findings from prior research. It aims to develop a robust conceptual framework that underpins the hypotheses concerning the quality of financial reporting in the public sector.

2.1. Agency Theory and Stewardship Theory

The caliber of financial reports is a significant consideration for external stakeholders. Agency Theory posits a contractual arrangement between managers, serving as agents, and owners, who function as principals. Within governmental organizations, similar agency challenges are present (Eisenhardt, 1989). In this governmental context, as noted by Adams (1994), the public assumes the role of the principal, entrusting mandates to the government (the agent) to execute public duties aimed at enhancing societal well-being. The implication of this theory is that principals, whether directly or through their representatives in the Regional House of Representatives (DPRD), need to monitor the agents, namely the local government. This monitoring function underscores the importance of high-quality accounting information for two main purposes: decision-making by both principals and agents, and evaluating and distributing results in accordance with agreed-upon contracts. This latter role, known as the performance evaluation role, can motivate agents to perform optimally. Public accountability is further delineated as the agent’s duty to report, present, and reveal all activities under their purview to the principal (Tuszkiewicz & Maruszewska, 2021). Within a democratic governmental structure, the interaction between the government and the recipients of its financial data can be perceived as an agency relationship. Agency Theory has seen extensive application in earlier studies exploring the quality of Local Government Financial Statements (LKPD).
Conversely, Stewardship Theory characterizes a scenario where managerial impetus stems not chiefly from personal ambitions but from overarching organizational aims, thereby promoting actions that serve the organization’s optimal interests and align with the principal’s desires. This theoretical framework posits that executives, in their capacity as stewards (Davis et al., 1997), are inclined to conduct themselves in manners that accrue benefit to their principals. It posits that individuals (stewards) will act responsibly and wisely for the organization’s benefit. In public sector organizations, stewards are aware that public service is a key performance measure (Lehrer & Segal, 2020). A good steward serves rather than being served. This study examines good (quality) financial reporting practices in local government, where the local government acts as a steward, entrusted with presenting useful information to the organization and users of government financial information. Quality information is essential for its utility. In this context of quality financial information reporting, management and internal auditors tend to adopt a stewardship perspective. A rational actor, not driven by individual desires, but rather as a steward, aligns his/her motives with the principal’s goals. Stewards (management and internal auditors) believe that by aligning their behavior with the principal’s objectives, their individual goals can also be achieved, for instance, through cost efficiency, performance improvement, or enhanced financial report quality (Lennard, 2007). This behavior benefits the principal (the public) by providing services at minimal cost, and also benefits the steward’s managerial status, potentially leading to renewed trust for future terms, thus increasing the steward’s well-being and providing internal satisfaction for fulfilling the principal’s mandate.

2.2. The Relationship Between Good Governance and Financial Reporting Quality

Good governance is a crucial concept in public administration, pertaining to how an organization or government manages resources, formulates policies, and executes activities in accordance with specific principles. Its implementation is believed to enhance government organizations’ performance, including in financial statement preparation (Garcia-Blandon et al., 2018). Accountability, a core principle of good governance, mandates governments to justify their activities and resource utilization to stakeholders, compelling local governments to prepare justifiable financial reports adhering to accounting standards. This aligns with (Kusumawardani et al., 2021), who also highlight that transparency, another vital principle, emphasizes openness in information dissemination. Prior investigations have established that sound governance positively influences the standard of local government financial reports by cultivating transparency, accountability, and operational effectiveness in financial administration (Setiyawati & Doktoralina, 2019). Concurrently, (Lutfi et al., 2022; Jouali et al., 2024) observations indicate that steadfast adherence to good governance principles results in financial statements that are both more dependable and pertinent. This intrinsic connection between effective governance and financial reporting quality is further underscored by the resulting enhancement in oversight capabilities. Governments practicing good governance encourage stronger internal control systems and structured evaluation mechanisms, enabling early identification of reporting discrepancies. Moreover, transparency, a cornerstone of good governance, motivates all parties involved in financial management to act honestly and responsibly, producing more relevant, reliable, and compliant local financial reports.
Hypothesis 1.
Good governance has a positive and significant effect on financial reporting quality.

2.3. The Relationship Between Regional Financial Accounting Systems and Financial Reporting Quality

An adeptly structured Regional Financial Accounting System (SAKD) is paramount for ensuring the seamless progression of the accounting cycle and, consequently, the integrity of financial reports. Every reporting and accounting entity is obligated to implement its regional government accounting system in adherence to prevailing government accounting standards (SAP). The successful adoption of International Public Sector Accounting Standards (IPSAS) is intricately linked to the subsequent development and implementation of accrual accounting policies (Gomes et al., 2019). Local governments are therefore tasked with establishing SAKD in alignment with SAP, which represents a systematic array of procedures, personnel, tools, and other components vital for executing accounting functions (Dabbicco & Mattei, 2021). SAKD operates as a crucial subsystem that facilitates control through the reporting of local government performance. This system comprehensively covers the processes of recording, classifying, interpreting, summarizing financial transactions, and reporting financial data for the execution of the regional budget (APBD). Furthermore, the Regional Financial Accounting System fundamentally involves identifying, measuring, and reporting the economic and financial transactions of a specific region to provide essential information for economic decision-making (Surjono, 2021; Sonjaya & Muslim, 2023; Yuesti et al., 2022). Thus, SAKD is essentially a coherent set of procedures, spanning from initial data collection to final financial reporting, designed for accountability in APBD execution, regardless of whether it is performed manually or with computer assistance. Fundamentally, SAKD functions as an integrated system; if any constituent element is not adequately executed, attaining the qualitative attributes of LKPD in alignment with SAP becomes challenging. Consequently, a robust SAKD, meticulously structured from the initial stages of data collection through to financial reporting in accordance with relevant accounting standards, will invariably elevate the quality of financial reports. Earlier empirical investigations have consistently demonstrated a positive impact of the Regional Financial Accounting System on financial reporting quality. Conversely, some studies, such as those by (Setiyawati & Doktoralina, 2019; Atmadja et al., 2024), have presented findings indicating no significant influence of SAKD on financial reporting quality, highlighting inconsistencies in the literature.
Hypothesis 2.
Regional Financial Accounting System has a positive and significant effect on Financial Reporting Quality.

2.4. The Relationship Between Internal Control Systems and Financial Reporting Quality

According to the Government Regulation of the Republic of Indonesia No. 60 of 2008, the Government Internal Control System (SPIP) is defined as a comprehensive and ongoing process implemented by an organization’s leadership and personnel. The primary goal of this system is to offer reasonable assurance that organizational objectives will be met, specifically concerning the effectiveness of activities, the reliability of financial reports, the security of state assets, and adherence to all relevant laws and regulations. Internal control is defined as a process, executed by the board of directors, management, and other personnel, structured to provide reasonable assurance concerning the achievement of objectives pertaining to the effectiveness and reliability of financial reporting (Fourie & Ackermann, 2013). A direct correlation exists between organizational objectives and the constituent components required to achieve them. For instance, monitoring involves evaluating the quality and efficacy of the internal control system, encompassing any necessary adjustments and enhancements. It is anticipated that a robust internal control system in local government will yield higher quality financial reports (Muthaher, 2019; Schrank, 2021; Momot et al., 2021; Espinosa-Jaramillo, 2024). This expectation is corroborated by empirical evidence, which consistently indicates a significant positive effect of government internal control systems on financial reporting quality (Kesuma & Ritonga, 2020; Aobdia & Petacchi, 2023; Deng & Wen, 2024). Conversely, (Mutoharoh & Ifada, 2023) some studies have reported an insignificant or negligible effect of internal control systems on financial report quality.
Hypothesis 3.
The Internal Control System has a positive and significant effect on Financial Reporting Quality.

2.5. The Relationship Between Organizational Commitment and Financial Reporting Quality

Top management must be committed to quality and communicate this understanding through written policies, with everyone expected to act according to company and customer needs, management commitment as an attachment to doing the best for a specific entity or group. Bracci et al. (2022) describes it as management’s involvement in sustaining behavior to achieve organizational goals. Thus, high job involvement means an individual favors his/her specific work, while high organizational commitment means favoring the organization that employs them. Employees with good commitment are loyal to their organization and strive optimally to achieve its goals. Even the best standards or systems will not function well without top management’s committed support, as managerial factors are key determinants of financial report quality. The normative pillar of institutional theory explains top management’s role in reinforcing rules, standards, and systems to achieve institutional goals (Turner & Wheatley, 2024). This pillar highlights actors’ perceptions and behaviors regarding social obligations, binding expectations, appropriateness of actions, authentication, accreditation, and a sense of shame and honor regulated morally. Top management’s actions serve as an example for their subordinates, normatively supporting financial report quality. Prior research indicates that organizational commitment positively influences financial report quality (Fuada & Amin, 2021; Kong et al., 2018; Muktiadji et al., 2020; Kewo & Kewo, 2024). This implies that a higher level of commitment among personnel may lead to improved performance and better financial report quality. However da Silva Monteiro and Aibar-Guzmán (2010) and Prysmakova and Lallatin (2023) found that organizational commitment did not affect local government financial report quality.
Hypothesis 4.
Organizational commitment has a positive and significant effect on Financial Reporting Quality.

2.6. The Relationship Between Information Technology Utilization and Financial Reporting Quality

The rapid advancement of information technology (IT) and its extensive utilization potential offer opportunities for various parties to quickly and accurately access, manage, and leverage regional financial information. According to (Liu & Zhang, 2024), technology generally offers benefits such as accelerated transaction processing and report preparation. Additionally, it allows for large data storage, minimizes errors, and reduces processing costs. Effective IT utilization is expected to produce reliable and timely financial reports, thereby increasing the reliability and timeliness of financial reporting (Oesch & Walser, 2025). Indonesian Government Regulation No. 59 of 2005 stipulates that the information produced is essential for monitoring development processes and fostering effective good governance. Consequently, local governments are obligated to leverage and advance technology to establish integrated and streamlined information and management systems (Spilnyk et al., 2020; Ashraf et al., 2020; Espinosa-Jaramillo, 2024; Ahmad et al., 2024). Research indicates that the application of IT positively impacts the quality of local government financial reports. Conversely, some studies (Muthaher, 2019) and (Abhishek et al., 2024) have reported no significant effect of IT utilization on financial report quality.
Hypothesis 5.
Information Technology Utilization has a positive and significant effect on Financial Reporting Quality.

2.7. The Moderating Effect of HR Competencies

HR competencies directly influence the standard of financial reports, particularly encompassing the capability to prepare reports in adherence to established standards and a comprehensive understanding of government accounting, covering both regional finance and operational aspects of government (Lapsley & Pallot, 2000). A deficit of proficient human resources in the preparation of government financial reports suggests that such reports may not meet high-quality criteria. Prior investigations, (Dharma et al., 2023) and (Mayowa David et al., 2023), have identified a positive correlation between human resources and the quality of local government financial reports. The present investigation posits that human resource competencies may serve as a moderating factor influencing the relationship between regional financial management, regional asset management, regional financial accounting systems, internal control systems, organizational commitment, and information technology with financial report quality.
Previous scholarly works have incorporated HR competencies as a moderating variable (Al-Adeem, 2023; Renschler et al., 2023). For instance, certain studies have revealed that HR competencies play a moderating role in the impact of accrual-based accounting system implementation, information technology, and internal control systems on financial report quality. Other research has indicated that HR Competencies positively moderate the Regional Financial Accounting System and Internal Control System in relation to Local Government Financial Report Quality. Furthermore, findings suggest that HR competencies positively influence the implementation of the Government Internal Control System, Government Accounting Standards, and the overall quality of Local Government Financial Reports (Hronová & Špaček, 2021; Velte, 2023; Sun, 2023; Fahridzi et al., 2024; Aluchna et al., 2025). However (Turek, 2019; Roni Setiawan et al., 2023) found that HR competencies, as a moderating variable, only enhanced the use of government accounting standards but did not significantly influence the utilization of information technology or the role of internal audit on the Quality of Local Government Financial Statements. These mixed findings underscore the need for further investigation into the specific moderating roles of HR competencies.
Hypothesis 6.
Human Resource Competencies moderate the relationship between Good Governance and Financial Report Quality.
Hypothesis 7.
Human Resource Competencies moderate the relationship between the Regional Financial Accounting System and Financial Reporting Quality.
Hypothesis 8.
Human Resource Competencies moderate the relationship between the Internal Control System and Financial Reporting Quality.
Hypothesis 9.
Human Resource Competencies moderate the relationship between Organizational Commitment and Financial Reporting Quality.
Hypothesis 10.
Human Resource Competencies moderate the relationship between Information Technology Utilization and Financial Reporting Quality.

3. Materials and Methods

This quantitative study employed an explanatory approach with a causal research design to investigate inter-variable relationships and test established hypotheses. The analysis unit was at the organizational level, specifically focusing on Local Government Work Units (SKPDs) located throughout South Sulawesi Province, Indonesia. Data collection was primarily conducted using a survey technique.

3.1. Sampling and Data Collection

The sampling technique used was purposive sampling, selecting SKPDs that are directly involved in the preparation of local government financial reports. The total population of SKPDs in South Sulawesi Province is 1062. From this population, a sample size of 170 SKPDs was determined based on a proportional distribution across each regency/city, ensuring representativeness and equitable distribution. Primary data were collected through observations, questionnaire dissemination, and interviews. Data collection was cross-sectional, conducted within a specific timeframe under normal conditions. The proportional distribution of samples across the Local Governments is detailed in Table 1:

3.2. Ethical Approval

All research procedures involving human participants obtained ethical clearance from the Research and Community Service Institute at Hasanuddin University. The study strictly adhered to ethical standards and principles as outlined in the Declaration of Helsinki. Prior to data collection, each respondent provided written informed consent and received a full briefing on the questionnaire’s purpose. Participants were also explicitly assured of their voluntary involvement and the strict confidentiality of their responses.

3.3. Variables

This study aims to test several variables hypothesized to influence Financial Reporting Quality (FRQ) in the Indonesian local government context. The dependent variable, Financial Reporting Quality (FRQ), is operationalized based on the qualitative framework of Government Accounting Standards (SAP) (Nogueira & Jorge, 2016). The independent variables investigated include Good Governance (GG), measured through principles of transparency and accountability; Regional Financial Accounting System (RFAS), which emphasizes compliance with SAP; Internal Control System (ICS), based on the COSO framework; Organizational Commitment (OC), as a manifestation of employee loyalty; and Information Technology Utilization (ITU) for reporting efficiency (Lutfi et al., 2022; Setiyawati & Doktoralina, 2019; Kesuma & Ritonga, 2020; Fuada & Amin, 2021; Liu & Zhang, 2024). Furthermore, Human Resource Competencies (HRC) is tested as a moderating variable hypothesized to strengthen these relationships; (Dharma et al., 2023) and (Frederica et al., 2023). All variables were measured using a Likert-scale questionnaire developed from these relevant studies. The operational definitions for each variable are summarized in Table 2.

3.4. Research Instrument

The research instrument comprised a structured questionnaire containing 91 items, meticulously designed to measure the specified variables. The questionnaire was administered to respondents directly involved in the preparation of local government financial reports. To ensure response quality, the target respondents were government employees holding positions such as the head of the financial subdivision, treasurer, or accounting staff within each Local Government Work Unit (SKPD). These items were allocated as follows: Good Governance (17 items); Regional Financial Accounting Systems (12 items); Internal Control Systems (22 items); Organizational Commitment (12 items); Information Technology Utilization (5 items); and Human Resource Competencies (23 items). All constructs were measured using a five-point Likert scale, ranging from ‘strongly disagree’ (1) to ‘strongly agree’ (5). Sample measurement items for each key construct are detailed in Appendix A.

3.5. Data Analysis Technique

The collected data underwent analysis using statistical techniques, particularly Structural Equation Modeling (SEM), facilitated by SmartPLS 4 software. Prior to SEM implementation, rigorous validity and reliability assessments were performed. Convergent validity was established where factor loading values surpassed 0.7 and Average Variance Extracted (AVE) values exceeded 0.5. Discriminant validity was evaluated using both cross-loading criteria and the Fornell–Larcker criterion. Specifically, for cross-loading, an indicator’s loading on its assigned construct had to be higher than its loadings on other constructs (Hair et al., 2017). Hypothesis testing was conducted by examining the Estimate for Path Coefficients. Based on the strong theoretical foundation and directional hypotheses (predicting a positive relationship), a one-tailed significance test was employed. A relationship was considered significant if the t-statistic exceeded 1.65 at a 5% significance level (α = 0.05). To test for moderating effects (H6–H10), the interaction term approach was used. An interaction variable was created by multiplying the moderator variable, Human Resource Competencies, by the independent variable. A moderating effect was deemed significant if the path coefficient from the interaction term to the dependent variable was statistically significant (0.05). Furthermore, effect size (f2) was calculated to quantify the influence of exogenous variables on endogenous variables, with values of 0.02, 0.15, and 0.35 signifying small, medium, and large effects, respectively.

4. Results

4.1. Measurement Model

The initial assessment involved evaluating the measurement model through validity and reliability tests to ensure data quality. As presented in Table 2, all indicators for each variable exhibited loading factors greater than 0.7 and AVE values greater than 0.5, confirming that the research model satisfies the convergent validity criteria. This indicates that each indicator reliably measures its respective construct. Table 3 presents the results of the convergent validity and reliability assessment for all constructs.
The reliability assessment indicated that all constructs exhibited high internal consistency, as evidenced by Cronbach’s Alpha, rho_c, and rho_a values consistently above 0.7. Notably, the Human Resource Competencies (HRC) moderating variable showed robust internal consistency, with a Cronbach’s Alpha of 0.977 and Composite Reliability of 0.922. Similarly, Financial Report Quality (Y) demonstrated strong internal reliability, recording the highest values for Cronbach’s Alpha (0.977) and Composite Reliability (0.979) (Hair et al., 2020). All constructs in the model fulfilled the criteria for discriminant validity, as indicated by the square root of each construct’s AVE being greater than its correlations with other constructs. This confirms that each construct distinctly captures different phenomena within the model, as shown in the Fornell–Larcker Criterion Table 4.

4.2. Structural Model

A primary outcome of the analysis was the model’s substantial explanatory power, with the R-Square for Financial Report Quality indicating that a significant majority (88.6%) of its variation is accounted for by the included independent variables. This underscores the model’s considerable predictive capability and overall robustness for the dataset analyzed, as Table 5 shows:
The effect size (f2) analysis, shown in Table 4, reveals that most exogenous variables have a large effect on Financial Report Quality, with f2 values significantly above 0.35, except for Regional Financial Accounting Systems, which shows a small effect. Hypothesis testing was conducted by examining path coefficients and t-values. A path coefficient close to 1 indicates a strong positive relationship, while a value near 0 suggests a weak relationship. Significance was determined by a t-value greater than 1.65 at a 5% error level. Based on the R-Square analysis, the structural model demonstrates strong explanatory power, with an R-Square value of 0.886 for Financial Report Quality. This indicates that the model can explain 88.6% of the variation in the dependent variable, suggesting a high predictive capability. Overall, this high R-Square value signifies that the model possesses strong explanatory power and is well-suited for the analyzed data. Furthermore, the analysis of effect size reveals that most exogenous variables exert a large influence on Financial Report Quality. Subsequently, hypothesis testing was conducted. At this stage, the test involved examining the path coefficient values and the t-values. A path coefficient approaching 1 indicates a positive relationship, while a value closer to 0 signifies a weak relationship within the model structure. The t-value, furthermore, indicates the significance of a relationship between variables at a specific error level. In this study, the researchers utilized a 5% error significance level, meaning the t-value must be greater than 1.65 (Hair et al., 2020). The following Table 6 outlines the results of the hypothesis testing:
The structural model analysis provided substantial insights into the drivers of Financial Report Quality. A key finding was the model’s strong explanatory power, evidenced by an R-Square value of 0.886 for Financial Report Quality. This signifies that 88.6% of the variation in the dependent variable can be accounted for by the independent variables included in the model, indicating a high predictive capability. The testing of direct effect hypotheses consistently revealed positive and significant relationships. Good Governance (H1; t = 6.838), Regional Financial Accounting System (H2; t = 1.708), Internal Control System (H3; t = 5.572), Organizational Commitment (H4; t = 4.673), and Information Technology Utilization (H5; t = 7.087) all proved to be significant predictors of Financial Reporting Quality, thus H1 through H5 are accepted. These findings confirm the fundamental importance of a sound governance framework, robust accounting systems, internal controls, dedicated personnel, and technological integration for transparent financial reporting; however, the analysis of the moderating role of Human Resource Competencies (HRC) revealed more nuanced results. This study tested whether HRC strengthens the relationship between the independent variables and Financial Reporting Quality. The results indicate that the moderating effect was significant for only two of the five hypothesized relationships. Specifically, HRC was found to significantly moderate (strengthen) the relationship between the Internal Control System (ICS) and Financial Reporting Quality (H8; t = 2.000, p = 0.023). Similarly, HRC also significantly strengthened the influence of Organizational Commitment (OC) on Financial Reporting Quality (H9; t = 2.290, p = 0.011). Thus, hypotheses H8 and H9 are accepted. Conversely, HRC was not found to moderate the relationship between Good Governance (GG) and Financial Reporting Quality (H6; t = 1.388, p = 0.083). Likewise, no significant moderating effect was found for the relationship between the Regional Financial Accounting System (RFAS) (H7; t = 0.399, p = 0.345) or Information Technology Utilization (ITU) (H10; t = 1.205, p = 0.114) with Financial Reporting Quality. Therefore, hypotheses H6, H7, and H10 are rejected. These findings suggest that while human resource competency is critical, its role as an enhancer of systemic and governance effectiveness is not uniform across all factors, highlighting a complex interplay within the Indonesian local government context.

5. Discussion

This study provides compelling evidence regarding the multifaceted determinants of financial reporting quality in Indonesian local governments, underscoring the critical role of HR competencies as a moderating variable. The analysis of the structural model offers substantial insights into the key drivers of Financial Report Quality. A primary finding highlighted the model’s robust explanatory power for Financial Report Quality, indicating that a significant portion of the variation in the dependent variable is accounted for by the independent variables, showcasing its high predictive capability and overall strength. Furthermore, the assessment of influence revealed that most exogenous variables, specifically Good Governance, Internal Control Systems, Organizational Commitment, and Information Technology Utilization, substantially impact Financial Report Quality, reinforcing their vital roles in elevating reporting standards within public administration (Setiyawati & Doktoralina, 2019).
The investigation into the direct relationships between the independent variables and Financial Report Quality consistently showed strong positive influences. Good Governance (X1) demonstrated a notable positive impact on Financial Report Quality (Y), emphasizing its crucial role in ensuring better financial report quality. This finding is also in line with the findings of (Kusumawardani et al., 2021; Lutfi et al., 2022) that state sound governance positively influences the standard of local government financial reports. In the context of public financial management, good governance encompasses principles such as transparency, accountability, participation, responsiveness, and compliance with laws, all of which create a conducive environment for high-quality financial reporting practices. High-quality financial reports reflect the reliability of presented information, adherence to accounting standards, and adequate disclosure (Dabbicco & Mattei, 2021). Good governance supports this quality through effective oversight and internal control mechanisms (Sonjaya & Muslim, 2023). For instance, transparency encourages organizations to present clear and accessible financial information to stakeholders, while accountability ensures that those responsible for financial management are answerable for their actions.
Previous studies, such as (Jouali et al., 2024) and the International Federation of Accountants (IFAC), support these findings, indicating that good governance significantly contributes to increased accuracy and reliability in public financial reporting. Likewise, the Regional Financial Accounting System (X2) also exhibited a positive and significant effect on Financial Report Quality (Y). This highlights how a robust and well-implemented accounting system is essential for accurate, reliable, and transparent financial reporting. SAKD aims to ensure that financial information produced adheres to government accounting standards (SAP) and is reliable for various stakeholders. Research by (Gomes et al., 2019) confirms that adequate accounting systems and technology-based approaches improve financial reporting quality through enhanced transparency and efficiency in data management.
The analysis further underscored the pivotal roles of internal controls, organizational commitment, and information technology in driving financial reporting quality. The Internal Control System (X3) was found to have a significant positive impact on Financial Report Quality (Y), highlighting its effectiveness in ensuring accuracy and preventing irregularities in financial processes. Internal control, as a foundational framework, provides reasonable assurance for achieving organizational objectives, encompassing reliable financial reporting and compliance with regulations. Its essential components—control environment, risk assessment, control activities, information and communication, and monitoring—function cohesively to ensure effective and efficient financial management (Deng & Wen, 2024). A strong control environment, reflecting an organization’s culture and management’s stance on control, establishes the basis for all other control elements. This finding is also in line with the findings of (Momot et al., 2021; Espinosa-Jaramillo, 2024), who found that a robust internal control system in local government will yield higher quality financial reports.
This expectation is corroborated by empirical evidence, which consistently indicates a significant positive effect of government internal control systems on financial reporting quality (Aobdia & Petacchi, 2023). Further research results found that underscore that effective control environments, risk assessments, and control activities are crucial for accurate and reliable financial reporting. Likewise, Organizational Commitment (X4) showed a significant positive influence on Financial Report Quality (Y), indicating that dedicated and aligned personnel are crucial for superior reporting outcomes. Organizational commitment serves as a strategic foundation for implementing policies and practices that support good financial management, covering consistent attitudes and actions from management and staff to ensure high-standard financial reports that comply with regulations. Effective leadership and a strong organizational culture supporting accountability, as highlighted by (Bracci et al., 2022), is management’s involvement in sustaining behavior to achieve organizational goals that contribute significantly to reliable financial reporting.
This finding is also in accordance with the findings of (Turner & Wheatley, 2024) indicates that organizational commitment positively influences financial report quality. This implies that higher commitment facilitates even the most difficult tasks, leading to better financial report quality. The utilization of Information Technology (X5) also proved to be a significant positive determinant of Financial Report Quality (Y), underscoring the benefits of technological integration for efficiency and transparency in financial operations and reporting. IT facilitates process automation, improving efficiency and accuracy in reporting. Liu and Zhang (2024) confirm that organizations using IT tend to have more accurate and relevant financial reports. IT also enhances transparency by providing wider access to financial data, strengthening public accountability, as shown by (Oesch & Walser, 2025). This finding is in line with research by (Spilnyk et al., 2020; Ahmad et al., 2024), which finds that the application of information technology positively impacts the quality of local government financial reports. Technology generally offers benefits such as accelerated transaction processing and report preparation. Additionally, it allows for large data storage, minimizes errors, and reduces processing costs.
The findings of this study significantly enrich the theoretical understanding of financial reporting quality within the public sector, particularly through the lens of Agency Theory and Stewardship Theory. From an Agency perspective (Tuszkiewicz & Maruszewska, 2021), the effective implementation of Good Governance, robust Regional Financial Accounting Systems, and strong Internal Control Systems represents critical organizational knowledge and capabilities that directly enhance the transparency and reliability of financial reports. This improved information flow reduces the asymmetry between the public (principals) and the government (agents), enabling more effective oversight and accountability, thereby mitigating potential agency problems (Adams, 1994).
Crucially, this study’s primary contribution lies in examining the moderating role of HR Competencies, which revealed more nuanced results than initially hypothesized. The findings indicate that HRC significantly strengthens the positive influence of the Internal Control System (H8) and Organizational Commitment (H9) on financial reporting quality. This can be interpreted to mean that an internal control system, which relies heavily on human execution, judgment, and monitoring, becomes far more effective when operated by competent staff. Similarly, the high commitment of employees is more effectively translated into high-quality reports when those employees possess the requisite knowledge and skills (competence) to do so. This aligns with the notion that even the best systems and intentions require proficient human capital to achieve optimal outcomes, a point supported by the broader literature on the importance of human factors in accounting (Al-Adeem, 2023; Renschler et al., 2023). On the other hand, a surprising finding was the non-significant moderating role of HRC on the relationships involving Good Governance (H6), RFAS (H7), and IT Utilization (H10). This suggests a more complex dynamic. Regarding Good Governance, it is possible that when governance principles are strongly institutionalized, the framework itself is robust enough to ensure report quality, thereby diminishing the marginal impact of individual competence. For RFAS and IT Utilization, the increasing standardization and automation of these systems may mean that their effectiveness is more dependent on the quality of the system itself rather than the advanced expertise of the user. This finding does not diminish the importance of competence but suggests its amplifying effect is most pronounced in areas requiring significant human judgment and proactive behavior like ICS and OC.
The supported moderating effects on ICS and OC align well with Stewardship Theory, suggesting that capable and committed stewards (employees) are better able to act in the principal’s best interest. The non-significant findings, however, highlight a key aspect of Agency Theory: strong, well-designed systems (governance, accounting, IT) can serve as powerful control mechanisms to reduce agency problems, sometimes to a degree where the agent’s individual competence has less of a moderating impact. From a practical standpoint, these results offer clear guidance for policymakers in Indonesia. The findings advocate for a dual-pronged strategy: first, continue investing in systemic frameworks (strengthening governance, ensuring robust accounting systems, leveraging IT), and second, focus human capital development on areas where it can make the most impact—namely, enhancing competencies related to internal control processes and fostering a culture of strong organizational commitment. Finally, this study has limitations that open avenues for future research. The data were cross-sectional and based on perceptions from a single province. Future studies could employ a longitudinal design, expand the geographical scope, or incorporate objective data like audit findings from the Supreme Audit Agency (BPK) to validate financial reporting quality. Exploring other potential moderators, such as leadership style, could also provide deeper insights.

6. Conclusions

This study comprehensively examined the determinants of financial reporting quality in the Indonesian local government context. The findings confirm that good governance, regional financial accounting systems, internal control systems, organizational commitment, and information technology utilization are all significant positive predictors of financial reporting quality. This underscores the necessity of a multifaceted approach that addresses both systemic and human-centric factors to enhance public sector accountability.
The study’s primary contribution lies in its nuanced findings regarding the moderating role of HR Competencies (HRC). HRC was found to significantly strengthen the positive impact of the internal control system and organizational commitment on financial reporting quality. However, this moderating effect was not observed for good governance, regional financial accounting systems, or IT utilization. This indicates that while HR Competencies is a critical catalyst, its impact is most pronounced in areas requiring human judgment, diligence, and proactive behavior, whereas its influence is diminished in processes that are already highly structured by robust systems or regulations.

6.1. Theoretical Implications

Theoretically, these findings enrich both Agency Theory and Stewardship Theory. From an Agency Theory perspective, the strong direct effects of good governance and internal controls serve as vital mechanisms to reduce information asymmetry between the government (agent) and the public (principal), thus mitigating agency problems. Concurrently, the results support Stewardship Theory by demonstrating that committed and capable personnel (stewards) are crucial for achieving organizational goals. The significant moderating effect of HR Competencies on commitment suggests that for stewards to be effective, their positive intentions must be supported by proficient capabilities.

6.2. Practical Implications

From a practical standpoint, these results offer clear guidance for policymakers and public sector managers in Indonesia. The findings advocate for a dual-pronged strategy to improve financial reporting quality. First, continuous investment in systemic and structural elements—such as strengthening governance frameworks, ensuring robust and compliant accounting systems, and leveraging modern information technology—is essential. Second, and just as critically, human capital development must be targeted and strategic. Training should focus not only on technical accounting standards but also on enhancing competencies related to the execution and monitoring of internal controls. Furthermore, leadership should foster a strong organizational culture that values commitment and accountability.

6.3. Limitations and Future Research

This study has several limitations that open avenues for future research. The data were cross-sectional and relied on perceptions from employees within a single province in Indonesia, which may limit the generalizability of the findings. Future research could benefit from a longitudinal design to observe changes over time or expand the geographical scope to include other provinces. Additionally, exploring other potential moderating variables, such as organizational culture or leadership style, could offer deeper insights into the complex dynamics of public sector financial reporting.

Author Contributions

Conceptualization, M., G.T.P., and N.N.; methodology, M., G.T.P., N.N., R.H., and A.A.M.; software, A.A.M.; validation, M., G.T.P., N.N., R.H., and R.H.A.A.; formal analysis, R.H. and A.A.M.; investigation, M. and G.T.P.; resources, N.N.; data curation, M. and G.T.P. and R.H.; writing—original draft preparation, M.; writing—review and editing, M., N.N., and R.H.A.A.; visualization, G.T.P. and R.H.A.A.; supervision, R.H. and R.H.A.A.; project administration, M. and A.A.M.; funding acquisition, M. All authors have read and agreed to the published version of the manuscript.

Funding

This research was financially supported by internal funds from Hasanuddin University under the Thematic Research Group (TRG) Batch 2 grant scheme (Number: 00773/UN4.22/PT.01.03/2025) for the Fiscal Year 2025, Universitas Hasanuddin, Indonesia.

Institutional Review Board Statement

This research was conducted in accordance with the Declaration of Helsinki and approved by the Ethics Committee of Hasanuddin University, decision Rector of Hasanuddin University (Number 01180/UN4.1/KEP/2025, approved in January 2025).

Informed Consent Statement

Informed consent was obtained from all subjects involved in the study.

Data Availability Statement

Restrictions apply to the availability of these data. Data were obtained from the Audit Board of Indonesia (BPK RI) and are available from the corresponding author.

Acknowledgments

We would like to express our gratitude to Hasanuddin University for its financial support, which has made this joint research and publication program possible.

Conflicts of Interest

No potential conflict of interest was reported by the author(s).

Appendix A

Table A1. Operationalization and measurement.
Table A1. Operationalization and measurement.
FactorMeasurement Items
Financial Reporting Quality (FRQ)1. The information in the financial report is useful for evaluating past events and predicting future outcomes.
2. The financial report is issued in a timely manner according to the accounting period, making the information relevant.
3. The financial report presents information honestly and is free from material error and bias.
4. The information presented is verifiable, meaning it would be substantiated by different independent parties.
5. The financial report can be compared with reports from previous periods to identify financial trends.
6. The information in the financial report is presented in a clear and concise manner.
Good Governance (GG)1. The financial reporting process in our work unit is conducted with clear accountability.
2. Financial information is easily accessible to relevant stakeholders.
3. Our work unit involves relevant stakeholders in the financial planning and evaluation process.
4. The financial management in our work unit complies with all applicable regulations and laws.
5. Our work unit responds quickly to every issue related to regional finances.
6. An effective internal oversight mechanism is in place for financial management.
Regional Financial Accounting System (RFAS)1. The financial recording system complies with generally accepted accounting standards.
2. Economic transactions are identified and classified correctly before journaling and posting.
3. Financial reports are generated according to established and standard procedures.
4. The financial reports produced are relevant and reflect the actual financial condition.
Internal Control System (ICS)1. Control Environment: The leadership sets a positive example by adhering to established rules and policies.
2. Risk Assessment: Risk assessment is conducted routinely to identify potential problems in financial management.
3. Control Activities: The separation of duties is implemented effectively to prevent misuse of authority.
4. Information and Communication: Findings and recommendations from auditors are always followed up on effectively.
5. Monitoring: Routine supervision is conducted to maintain the quality of financial reports and prevent deviations.
Organizational Commitment1. The leadership and employees in this unit are committed to increasing transparency in financial management.
2. The employees in this unit have high motivation to achieve the established performance targets.
3. Employees are willing to strive optimally to achieve the organization’s goals.
4. Employees feel a sense of loyalty to the organization where they work.
Information Technology Utilization (ITU)1. All transaction recording is performed using a computerized system.
2. Using the computerized system makes the recording and reporting process easier and faster.
3. The computer network is utilized to connect work units for data and information transfer.
4. The accounting process, from transaction to final report, is computerized.
Human Resource Competencies (HRC)1. Knowledge and Responsibility: The roles and responsibilities of all staff in the finance/accounting subdivision are clearly defined.
2. Education: The educational background of the staff is appropriate for their financial management duties.
3. Training: Staff have received adequate training to support their capabilities in the accounting field.
4. Experience: The staff possess the necessary skills and abilities to prepare the financial reports accurately.

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Table 1. Sample Distribution in Level II Local Governments.
Table 1. Sample Distribution in Level II Local Governments.
Local GovernmentNumber of Work UnitsSample
Kab Bantaeng406
Kab Barru376
Kab Bone6612
Kab Bulukumba467
Kab Enrekang427
Kab Gowa437
Kab Jeneponto447
Kab Kepulauan Selayar366
Kab Luwu579
Kab Luwu Timur406
Kab Luwu Utara437
Kab Maros478
Kab Pangkajene dan Kepulauan437
Kab Pinrang447
Kab Sidenreng Rappang406
Kab Sinjai427
Kab Soppeng345
Kab Takalar437
Kab Tana Toraja467
Kab Toraja Utara528
Kab Wajo417
Kota Makassar538
Kota Palopo508
Kota Pare-Pare335
Kab Bantaeng406
Total1.062170
Source: Processed by researchers, 2025.
Table 2. Description of variables.
Table 2. Description of variables.
ConstructDescription
Financial Reporting Quality (FRQ)Relevance, Reliability, Comparability, and Understandability
Good Governance (GG)Operationalized as the exercise of governmental authority based on political and institutional processes that uphold transparency, accountability, and active public participation.
Regional Financial Accounting System (RFAS)Four core stages of the accounting cycle related to the implementation of the Regional Budget (APBD). It includes the following:
  • Identification of financial transactions that occur within a specific period.
  • Measurement of the monetary value of those transactions.
  • Recording of transactions systematically, typically using the double-entry method.
  • Reporting of financial information in a concise and structured manner.
Internal Control System (ICS)Five interrelated components adapted from the COSO framework. These components are as follows:
  • Control Environment, which reflects the overall attitude and policies of top management regarding the importance of control.
  • Risk Assessment, the process of identifying internal and external risks that could impede organizational objectives.
  • Control Activities, consisting of policies and procedures designed to ensure management directives are carried out.
  • Information and Communication, which ensures a flow of relevant and reliable information to support all control components.
  • Monitoring, the process of continuously evaluating the effectiveness of the internal control system, both through routine supervision and separate evaluations.
Organizational CommitmentThree primary dimensions that reflect an employee’s loyalty and involvement with the organization:
  • Affective Commitment, which is the employee’s emotional attachment and desire to remain part of the organization.
  • Continuance Commitment, which is based on a rational consideration of the losses that would be incurred by leaving the organization.
  • Normative Commitment, which arises from a sense of moral responsibility and obligation to stay with the organization.
Information Technology Utilization (ITU)Operationalized as the scope of activities that include the design, implementation, development, and management of computer-based information systems, particularly hardware and software applications
Human Resource Competencies (HRC)The capabilities of employees to perform their financial duties, measured through four key dimensions: 1. Knowledge and Responsibility (clarity of roles and duties), 2. Education (suitability of educational background), 3. Training (participation in relevant technical training), and 4. Experience (possession of skills and abilities to perform tasks accurately)
Table 3. Convergent validity and reliability.
Table 3. Convergent validity and reliability.
ConstructConvergent ValidityReliability
Loading FactorAVECronbach’s AlphaRho_CRho_A
Good Governance (GG)0.7160.5820.9550.9590.963
Regional Financial Accounting Systems (RFAS)0.7720.5830.9350.9440.943
Internal Control Systems (ICS)0.7890.5410.9590.9630.963
Organizational Commitment (OC)0.7160.5030.9100.9230.928
Information Technology Utilization (ITU)0.7610.6290.8530.8940.862
Human Resource Competencies (HRC)0.8020.7460.9770.9790.978
Source: Processed by researchers, 2025.
Table 4. Fornell–Larcker Criterion.
Table 4. Fornell–Larcker Criterion.
ConstructFornell–Larcker
X1X2X3X4X5YZ
Good Governance (X1)0.763
Regional Financial Accounting Systems (X2)−0.1130.764
Internal Control Systems (X3) −0.126−0.0660.736
Organizational Commitment (X4)−0.080−0.077−0.0720.709
Information Technology Utilization (X5)−0.142−0.079−0.070−0.0830.793
Financial Reporting Quality (Y)0.3180.3760.3620.2750.3220.864
Human Resource Competencies (Z)−0.0900.968−0.073−0.093−0.0910.3490.793
Source: Processed by researchers, 2025.
Table 5. R-Square and effect size measurement.
Table 5. R-Square and effect size measurement.
ConstructR2Effect Size (F2)
R-SquareR-Square AdjustedFinancial Report Quality
Good Governance (GG) 1.658
Regional Financial Accounting Systems (RFAS) 0.024
Internal Control System (ICS) 1.300
OrganizationalCommitmen (OC) 0.658
Information Technology Utilization (ITU) 1.854
Financial Report Quality (FRQ)0.886 0.878
Source: Processed by researchers, 2025.
Table 6. Structural model.
Table 6. Structural model.
Hypothesis Testing ResultsHypothesisStd.BT-Statisticsp ValuesResult
Direct Effect
H1GG > FRQ0.0776.8380.000Supported
H2RFAS > FRQ0.1591.7080.044Supported
H3ICS > FRQ0.0945.5720.000Supported
H4OC > FRQ0.0824.6730.000Supported
H5ITU > FRQ0.0727.0870.000Supported
Moderating Effect
H6HRC * GG > FRQ 0.0851.3880.083Not Supported
H7HRC * RFAS > FRQ 0.0970.3990.345Not Supported
H8HRC * ICS > FRQ 0.0282.0000.023Supported
H9HRC * OC > FRQ 0.0732.2900.011Supported
H10HRC * ITU > FRQ 0.0791.2050.114Not Supported
Source: Processed by researchers, 2025. Note: * denotes significance at the p < 0.05 level. Significant at <0.05 level, GG (X1) = Good Governance; RFAS (X2) = Regional Financial Acounting System; ICS (X3) = Internal Control System; OC (X4) = Organizational Commitment; ITU (X5) = Information Technology Utilization; FRQ (Y) = Financial Report Quality; HRC (Z) = Human Resource Competencies.
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MDPI and ACS Style

Mediaty; Pontoh, G.T.; Nagu, N.; HS, R.; Mas’ud, A.A.; Aziz, R.H.A. Human Competencies: Amplifying Financial Reporting Quality in Indonesian Local Government. J. Risk Financial Manag. 2025, 18, 424. https://doi.org/10.3390/jrfm18080424

AMA Style

Mediaty, Pontoh GT, Nagu N, HS R, Mas’ud AA, Aziz RHA. Human Competencies: Amplifying Financial Reporting Quality in Indonesian Local Government. Journal of Risk and Financial Management. 2025; 18(8):424. https://doi.org/10.3390/jrfm18080424

Chicago/Turabian Style

Mediaty, Grace T. Pontoh, Nadhirah Nagu, Rahmawati HS, Anis Anshari Mas’ud, and Rozainun Haji Abdul Aziz. 2025. "Human Competencies: Amplifying Financial Reporting Quality in Indonesian Local Government" Journal of Risk and Financial Management 18, no. 8: 424. https://doi.org/10.3390/jrfm18080424

APA Style

Mediaty, Pontoh, G. T., Nagu, N., HS, R., Mas’ud, A. A., & Aziz, R. H. A. (2025). Human Competencies: Amplifying Financial Reporting Quality in Indonesian Local Government. Journal of Risk and Financial Management, 18(8), 424. https://doi.org/10.3390/jrfm18080424

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