The Effect of Local Own-Source Revenue, Local Government Size, Capital Expenditure, and Social Assistance Expenditure on Internal Control Weaknesses: The Mediating Role of Economic Growth

Ardianta Rabu, September 09, 2026
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FORMOSA NEWS

Economic Growth in Banten Risks Weakening Financial Control in Local Governments Without Stronger Supervision

Rapid economic growth in regional governance does not always guarantee better financial oversight. A study published in 2026 by researchers from Universitas Sultan Ageng Tirtayasa (Untirta)—Andini Ismayanti, Agus Ismaya Hasanudin, and Tri Lestari—reveals that accelerating economic activity and expanding public spending in Banten Province, Indonesia, can actually increase weaknesses in the Government Internal Control System (Sistem Pengendalian Intern Pemerintah or SPIP). These findings offer crucial insights for local governments, public sector auditors, and policymakers striving to prevent financial mismanagement and ensure transparent public administration.

The background of this research lies in persistent audit findings by the Audit Board of the Republic of Indonesia (BPK). BPK audit reports frequently highlight thousands of internal control weaknesses, compliance failures, and improper asset management across regional municipalities. Increases in Local Own-Source Revenue (Pendapatan Asli Daerah or PAD) and expanding public budgets are commonly celebrated as success indicators for regional development. However, this study examines the secondary effects of fiscal expansion, analyzing how economic growth acts as an intervening mechanism that can inadvertently heighten operational risks and governance vulnerabilities.

To examine these financial dynamics, the researchers employed a quantitative design using secondary data spanning 2014 through 2023. The dataset incorporated official BPK regional audit reports and local government financial statements across all regencies and cities in Banten Province. Utilizing EViews 12 statistical software alongside mediation analysis (Sobel Test), the study evaluated the relationships among Local Own-Source Revenue, local government size (total assets), capital expenditure, and social assistance spending on internal control weaknesses, with economic growth acting as a mediating variable.

Based on statistical modeling and empirical evidence, the main findings of the study reveal several key insights:

  • Local Own-Source Revenue (PAD): Higher local revenue exerts an indirect positive effect on internal control weaknesses through economic growth. Expanding local revenue stimulates regional economic activity, which increases transaction volumes and administrative complexity, creating supervisory gaps if oversight capacity remains static.
  • Local Government Size (Total Assets): Government size, measured by total assets, directly increases internal control weaknesses. Larger asset holdings introduce greater management complexity, leading to challenges such as unrecorded assets and inventory discrepancies.
  • Capital Expenditure: Capital expenditure does not directly trigger control weaknesses. Instead, capital spending indirectly influences control weaknesses by driving economic growth, which expands the scale and volume of public infrastructure development.
  • Social Assistance Expenditure: Social assistance spending shows a significant positive effect on internal control weaknesses, both directly and indirectly through economic growth. While social aid boosts household consumption, weak distribution procedures increase the risk of moral hazard and administrative error.
  • Economic Growth: Economic growth itself has a direct positive effect on internal control weaknesses. Rapid economic expansion places heightened pressure on administrative structures and budgetary execution, exposing institutional vulnerabilities.

The practical implications of these findings are directly relevant to public administration, economic planning, and regulatory policy. For local governments, the study demonstrates that economic expansion and fiscal growth must be matched by equal investments in internal audit capacity, digital asset tracking, and strict governance protocols. Regional leaders must prioritize the institutional strengthening of Government Internal Inspectorates (Aparat Pengawasan Intern Pemerintah or APIP) to manage the operational risks associated with larger budgets. For policymakers, the research underlines the necessity of balancing growth targets with robust accountability mechanisms to safeguard public funds.

The authors summarized their core conclusion regarding governance and regional development:

"An increase in a region's economic activity that is not accompanied by an increase in the capacity of the internal control and supervision system will actually enlarge the risk of weaknesses in local government financial management."

Author Profiles

  1. Andini Ismayanti, S.E. – Primary researcher from the Master of Accounting Program at Universitas Sultan Ageng Tirtayasa (Untirta), specializing in public sector accounting and regional financial control systems.
  2. Dr. Agus Ismaya Hasanudin, S.E., M.Si. – Senior lecturer and researcher at Universitas Sultan Ageng Tirtayasa (Untirta), specializing in financial management and accounting.
  3. Dr. Tri Lestari, S.E., M.Si. – Senior lecturer and researcher at Universitas Sultan Ageng Tirtayasa (Untirta), focusing on public sector governance and governmental accounting.

Research Source

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