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International Journal of Civil Engineering and Technology (IJCIET). Volume 9 ... The quality of internal auditor's capability by the local government in Indonesia, ..... Pengaruh Kompetensi dan Independensi Auditor terhadap Kualitas Audit.

International Journal of Civil Engineering and Technology (IJCIET) Volume 9, Issue 9, September 2018, pp. 556–568, Article ID: IJCIET_09_09_056 Available online at http://www.iaeme.com/ijciet/issues.asp?JType=IJCIET&VType=9&IType=9 ISSN Print: 0976-6308 and ISSN Online: 0976-6316 ©IAEME Publication

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DETERMINANTS OF JOB QUALITY IMPROVEMENT FOR INTERNAL AUDITORS OF LOCAL GOVERNMENT (EMPIRICAL EVIDENCE FROM INDONESIA) Erlina* Universitas Sumatera Utara, Medan, Indonesia Devi Rosyana Putri Universitas Sumatera Utara, Medan, Indonesia Ana Sopanah Universitas Widyagama, Malang, Indonesia Iskandar Muda Universitas Sumatera Utara, Medan, Indonesia *Correspondence Author: [email protected] ABSTRACT The quality of internal auditor's capability by the local government in Indonesia, especially in Northern Sumatra is still relatively low. This can be proven by the large number of errors and fraud obtained by Financial Inspection Agency (BPK) of the Indonesian Republic. In addition, early this year in 2018, the maturity level of internal auditor institutions in North Sumatra Province was 6% for level 3, 29% for level 2 and 65% for level 1. The Indonesian president expect that sometime in the early 2019 the whole internal auditor would be at least remained in 85% for level 3. This research is conducted to see what factors affect the low capability and quality of auditors. The research was conducted in several districts in North Sumatra. The result showed that their work is inefficient, unprofessional and low commitment. Key words: Internal Auditor Quality, Self Efficacy, Continuing Professional Development, Commitment of Top Management, Fraud, Level Maturity Cite this Article: Erlina, Devi Rosyana Putri, Ana Sopanah and Iskandar Muda, Determinants of Job Quality Improvement for Internal Auditors of Local Government (Empirical Evidence from Indonesia). International Journal of Civil Engineering and Technology, 9(9), 2018, pp. 556-568. http://www.iaeme.com/IJCIET/issues.asp?JType=IJCIET&VType=9&IType=9

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1. INTRODUCTION Supervising the implementation technique must change, it should be more focus and conforming the auditing standards. Everything must be integrated in order to use its resources efficiently and the quality of supervision can be improved. This will provide added value for the Local Government and the Head of the region can achieve his mission. If the macro planning and supervision side is good then the achievement of level 2 can be fullfil in 2018 and level 3 in 2019. For Government Internal Supervisory Aparatus (we called APIP), it is not a mere dream. DeAngelo (1981) defines audit quality as an ability that can be provided by the auditor in (a) finding violations in the client's accounting system and (b) reporting the violation. Some scientists emphasized that the quality of their auditors is in conformity with the methodology or guidelines established by the authorities. For audit authorities, audit quality must be able to respond to the challenges in court (Knechel et al., 2013). As noted by the social scientists, factors that can improve audit quality includes (1) intensive training (Knechel et al., 2013); (2) specialization of audit and error detection, procedural analysis, risk evaluation and internal control deficiencies (Stephens 2011), (3) knowledge and skills in making professional decisions (Knechel 2010; Bobek et al., 2012); and (4) auditor professionalism (Nagy, 2012). Specialization has became more important in the current auditing environment, and the characteristics of the audit team have evolved into one of the most important factors for audit quality. In a dynamic and demanding economic environment, a professional auditor needs to maintain his competency and know the latest developments in order for them to act with adequate skills. Continuous professional development allows an auditor to develop and maintain his ability to keep him competent in a professional environment.

2. LITERATURE REVIEW 2.1. Internal Auditor Quality Audit quality is the attitude of an auditor in performing his duty as reflected in the results of his examination which should be reliable to the applicable standards. The auditing results should increase the weight of accountability and should be able to provide such evidence whether there is any deviation from auditing standards or not. Elfarini (2007) counted that the measurement of the audit quality is centered on the auditor’s performance and compliance with the outlined standards. Bierstaker (2001) defines that audit quality is an ability that can be provided by the auditor in (a) finding any violation in the client's accounting system and (b) reporting the violation. Some experts emphasized that audit quality has been conducted in accordance with the methodology or guidelines. As for audit authorities, audit quality means that the reports can respond to any challenges in court (Knechel et al., 2013). In order to measure the quality of internal audits conducted by the Inspectorate, this study used the audit standard of the Government Internal Supervisory Apparatus (APIP), namely the Regulation of the Minister of Administrative Reform Number PER/05/M.PAN/03/2008 on Audit Standards of the Government Internal Supervisory Apparatus as seen from the standards of implementation and reporting. The standards of implementation describe the nature of auditing activities and provide a framework for carrying out and managing audit by the auditors. Tawaf (1999) study concluded that an audit is considered as qualified if the outcome meets the supervision side. According to Tawaf, the resulting quality and supervision should be done continuously from the beginning to the end of the audit assignment. Meanwhile, according to a research conducted by Malan, the process must be systematic and the evidence can be evaluate objectively on assertion of economic action and occurrence, conformed with

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established standards and then communicate it to the user. From the above definition it can be concluded that a competent auditor is an auditor who is able to find a violation and is willing to disclose the violation. According to Indonesia’s National Government Internal Auditor (we called BPKP), a qualified auditor should be able to find and report a fraud that occurred in an agency or government (both central and local). The probability of finding the fraud depends on the technical capability of the auditor and possible errors on the report, depends on the independency and the competency of the auditor to reveal the fraud he found. To improve the quality of the audit it is necessary to know the factors that influence it. According to Erlina and Muda (2018) the quality of an auditor can be known by how far he run the procedures listed in the program. From this definition it can be concluded that audit quality concerns an auditor's compliance in fulfilling procedural matters to ensure reliable financial statements

2.2. Self Efficacy An auditor does not work independently in carrying out his work. It is important to understand that how the interaction between people, tasks, and the environment with the auditor will affect its performance. Bandura (1977) argued that individual behavior is the result from the interaction between environment and personal factors. Although self-efficacy is a person's subjective view of his ability, it is greatly influenced by his actions, motivations, persistence, and principal behavior (Bandura 1991). Gist and Mitchell (1992) suggest that self-efficacy is an important motivational construction. It affects individual choices, goals, emotional reactions, effort, ability to overcome problems, and perseverance. Self-efficacy relates to performance. Self-efficacy has a positive impact on performance because high selfefficacy allows people to make effective behavioral arrangements through a series of cognitive, motivational, and affective decision processes (Bandura, 1997).

2.3. Continuing Professional Development Continuing professional development (CPD) is an activity to improve knowledge, skills and experience which related to professional activities, following the completion of individual formal training. It is as important as the development of personal qualities that are required to carry out professionalism and technical duties during a professional’s life. Technical and nontechnical skills must to be developed. Continuing the development should be a never ending proses, it has to be systematic and the process is to maintain and develop professional competence, creativity and innovation. And the result has value for the individual and his institution. Development toolbox included any learning activity, technical skills, problemsolving or professional performance standards. The prime goal is to provide top quality professional services. Continuing professional development helps your skills and knowledge stays up to date. Undertaking high quality CPD is important in today’s technological world as the pace of change can make previous learning out-of-date. Previous studies have shown that continuing professional development can determined audit procedures, and professionalization in client disputes. Maintenance of professional competence requires continuous awareness and understanding, professional and business developments. One strategy for advancing better performance is to utilize modern technology. Technological advancements allow auditors to conduct electronic reviews of client work at their offices or from remote locations (Brazel et al., 2004). The audit software reduces the time required for paperwork. Dodgson (1993) found that the value of knowledge can increase exponentially as the network reused and quickly integrated into business practices. Such applications include support and expert systems, expert knowledge and point-to-point knowledge. Staff members can access industry best practices, studies, surveys, statistics, and expert knowledge on specific issues (Silvi, 2002).

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Auditors can advance their development through continuous learning. It may enhance their knowledge, open the minds, increase their sensitivity to fraud detection, set career goals, and promote peer learning. The auditor's learning and their professional service affect the quality of the audit. The learning effected the audit quality (Low 2004). When auditing from time to time, auditors collect client-specific knowledge so that their beliefs about clients are updated and more precise.Vera-Muño et al. (2006) emphasizes that sharing of audit information among team members is crucial. Because the auditor gets more specialized knowledge that will ultimately improve his performance (Beck and Wu 2006). The auditor's experience shared with fellow auditors provides an experience to increase the knowledge (Libby and Luft 1993). Learning is important to maintain competency. Similarly, knowledge has benefit that can be stimulated and it may gather new information (Davenport and Prusak (1998). Due to audit risk, Nelson (2009) suggests

that auditing requires skills, such as, industrial specialization. Auditor knowledge and expertise have an effect on audit quality. The auditor gathers knowledge and experience from the customer to make professional judgments. In terms of industry and client characteristics, auditors with strong knowledge are able to detect fraud and more likely to allocate resources for recruitment, training, technology, and audit techniques to improve the quality of audit services (Green 2008). If the audit authority does not provide sufficient information about a particular industry, the industry will be underrepresented, because the auditor cannot gather audit experience for the industry, leads nowhere but to low audit quality.

2.4. Top Management Commitment Improving the quality of an internal auditor, the main requirement for success is to improved the government’s structures. Active involvement of the head of internal audit, senior management, audit staff, accounting officers and senior operational managemet must be well secured. But valued evaluation of the risk management, controlled the processess (Van Gansberghe, 2005). Understanding the importance of commitment through employee performance study, Eisenstat (1993) conducted a study among 3,044 white-collar employees of the Western Australian Public Service. He studied the correlation of employee’s attitudes towards functional flexibility. It was hypothesized that employees would favor functional flexibility if they have lower levels of perceived job characteristics, perceived reward equity, organizational commitment and affective well being as well as a higher degree of educational attainment.Nutt (1995) points out that subtle changes taking place in the attitudes of employees towards working, their employers, and their lives are requiring companies to change their management techniques according to motivate their employees and instill them with commitment. Employees want to work for companies they can be proud of, which exhibit values and viewpoints similar to their own, and are concerned about long-term goals. Top management are involved in the design of information systems. They influenced the environmental variables to receive attention in the organization (Sandelands, 1994). They are also required to provide accurate and timely feedback. Top management commitment is necessary to improve the internal auditor’s performance. If there is no strong push from the top management, it is difficult to improve their performance. Besides, without commitment, fraud findings and mistakes reported to top management are meaningless if they do not respond and follow up on the findings.

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2.5. Conceptual Framework and Development of Hypothesis Based on the previous description, the framework of this study is as follows:

Figure 1 Research Framework

Hypothesis in this study is “Self Efficacy, continuing professional development, and commitment of top management affect internal auditor quality”.

3. METHOD This study was a quantitative approach. This type of research can be said as descriptive and causal research. Causal research is research that aims to see the effect of several variables on other variables. The causal design is useful for analyzing how a variable influences other variables, and is also useful in experimental research where the independent variables are controlled in a controlled manner by the researcher to see the impact on the dependent variable directly (Lutfie et al., 2016; Lubis et al.,

2016; Gusnardi et al. 2017; Achmad et al., 2017; Badaruddin et al., 2017; Syahyunan et al., 2017; Muda, 2017 & Erwin et al., 2018). The hypothesis build on previous studies (Erlina, 2017; Erlina, 2018). The population used in this study was the internal auditors in the Local Governments of Deli Serdang and Dairi Regency, Tebing Tinggi and the city of Medan, Indonesia. This study used the census method where the entire population was the sample. This study used primary data which were collected through questionnaires and interviews. The variables of this study were self-efficacy, continuing professional development, commitment of top management, and internal audit quality. Audit quality is an ability that can be given by the auditor in find, report and perform violation. Self efficacy is a person's belief in which he can perform a task at a certain level. Continuing Professional Development is a learning process, to encourage one’s personal growth, improve auditing skills, revolutionize work procedures, and improve the quality of audit reports. Commitment of top management is direct participation by the highest level executives in a specific aspect of an organization. The analyses used for answering hypothesis testing were descriptive statistics and Structural Equation Model (SEM) analysis. Measurement model (outer model) is often also called outer relation or measurement mode, defining how each indicator block relates to its latent variable (Ghozali, 2008, Dalimunthe et al., 2016; Lubis et al., 2016; Handoko et al., 2107; Hasan et al., 2107; Erlina et al., 2107; Situmorang et al., 2018; Muda et al., 2017). Evaluation of the measurement model or outer model is done to assess the validity and reliability of the model. Construct validity shows how well the results obtained from the use of a measurement in accordance with the theories used to define a construct while the reliability test shows the accuracy, consistency and accuracy of a measuring instrument in measuring. Test the validity of the outer model with reflective indicators there are two factors that will be observed, namely the value of the loading factor (convergent validity) and the value of cross loading (Situmorang et al., 2017; Tarmizi et al., 2017; Marhayanie et al., 2017; Muda et al., 2018;

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Muda & Hasibuan, 2018; Muda and Hutapea, 2018 & Muda, and Windari, 2018). Convergent validity measures the correlation between statement items and constructs in research. Individual reflective size is said to be high if it correlates more than 0.70 with the construct that you want to measure. For the initial research phase, the development of the measurement factor factor loading values above 0.50 is considered sufficient (Ghozali and Latan, 2015). If the construct correlation with the measurement item is greater than the size of the other construct, then it shows that the latent construct predicts the size of their block better than the size of the other block. Another method for assessing discriminant validity is comparing the value of the square root of average variance extracted (AVE) of each correlation between constructs and other constructs in the model. If the square root value of AVE for each construct is greater than the correlation value between the constructs and the other constructs in the model, then it is said to have good discriminant validity. The construct reliability test in PLS can use two methods, namely cronbach's alpha and composite reliability (Ghozali and Latan, 2015, Sirojuzilam et al., 2016; Azlina et al., 2017; Sadalia et al., 2017; Dalimunthe et al., 2017 and Muda et al., 2018). Composite Reliability is a reliability test that measures the real value of a variable while cronbach's alpha measures the lower bound of the reliability of a variable. In this study the reliability value seen came from Composite Reability, while Cronbach's Alpha was not used because Composite Reliability was better in estimating the internal consistency of a construct (Hutagalung et al., 2017; Muda, 2017; Erlina and Muda, 2018; Eriadi et al., 2018; Sari et al., 2018; Muda, & Nurlina, 2018 and Muda & Naibaho, 2018). The latent variable has high reliability if the composite reliability value is above 0.70.

4. RESULT AND DISCUSSION 4.1. Result After processing data, the researchers performed advanced analysis by using Structural Equation Model (SEM). The data were analyzed using the approach Partial Least Square (PLS). The outer model test began by estimating or predicting the parameter (Muda and Dharsuky, 2015 & 2016; Lubis et al., 2016; Tarmizi et al., 2016; Sirojuzilam et al., 2016 & 2017; Muda and Hutapea, 2018 & Pohan et al., 2018). The especially by calculating PLS algorithms with the following result:

Figure 2 The PLS Output Noted: Kinerja Internal Auditor=Internal Auditor Quality

Outer model test (the convergent validity test, the discriminant validity test and reliability test) faund that I can be concluded that all indicators used to measure each variable were valid and reliable (Dalimunthe et al., 2016; Muda and Dharsuky, 2016; Muda et al., 2017; Yahya et al., 2107; Sadalia et al., 2018; Erlina and Muda, 2018 and Muda et al., 2018). The result in

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this research in assessing the value of path coefficient can be seen in figure 1 and table 1. This study found that continuing professional development and self efficacy have affect internal auditor quality significantly but commitment of Top Management don’t have affect to internal auditor quality. Table 1 The value of t-Statistic Exogenous Commitment of Top Management Continuing Professional Development Self Efficacy

Path Analysis 0.059 0.438 0.480

t- Statistics 1.093 4.301 5.823

p Values 0.275 0.000 0.000

Endogenous Variabel: Internal Auditor Quaity

4.2. Discussion 4.2.1. Effect of Self Efficacy on Internal Audit Quality Based on the hypothesis test that has been done, we can conclude that self efficacy have a positive effect in affecting the auditor’s quality. The result of this study support the result of the previous research. Confidence is an individual's belief in his ability to mobilize motivation, cognitive resources and actions needed to deal with the situation at hand. (Bandura, 1986 in Farida, 2006). Self Efficacy is an individual's belief in his ability to mobilize motivation, cognitive resources and actions in situations faced by a person. Lee, 2013 argues that self-efficacy has a significant impact on the performance of management and auditors. Kuang's research (2009) shows that there is a significant and positive relationship between self efficacy and the performance of internal auditors. If auditors have a high self efficacy, he will be able to develop a strong personality, reduce stress and not easily affected so he can perform his task well. The results support the institutional theory. Its core idea is the establishment of an organization by the institutional environment pressure and it causes the occurrence of institutionalization. Donaldson (1995), states that idea in institutional environments that make up the language and symbols to explain the existence of the organization accepted (taken for granted) as norms in the concept of the organization. Donaldson (1995), sees three isomorphic institutional formations. The first is coersif isomorphis which shows that an organization take some form of another organization because of the pressure from the state and other organizations or the wider society. The second is mimesis isomorphis, which is the immitation of an organization by another organization. The third is normative isomorphis, namely the existence of professional demands. Another concept on institutional theory according to Donaldson (1995) is loose-coupling in the theory of institutional with open systems. Confidence is related to the individual's beliefs about his ability. Self efficacy can specifically demonstrate the auditor's confidence in its ability to complete a given task. Individuals with a high level of self efficacy will feel confident about their performance capabilities. The most important factor in self-efficacy is past experience. If at any time an auditor can complete a task and succeed in his performance, then he will tend to build a high confidence in his ability to complete the task successfully. Self efficacy can be weak if repeatedly fails to perform a task well. Auditors need to have an understanding in emotional intelligence, in order to regulate the emotions that arise in the implementation of its performance. While auditors who have high self efficacy will be able to develop a strong personality, reduce stress and not easily affected so that he can perform his performance well. Lee's research (2013) demonstrates that self-efficacy has a significant impact on management performance and auditor performance.

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4.2.2. The Effect of Professional Development on Internal Auditor Quality In the framework of continuing professional development, the level of formal education of each individual will also improve his ability and selling value. The auditor can not meet auditing standards without proper formal education and experience in the field. In addition, the level of education and work experience of an auditor must be an additional value. Auditors with a high academic degree are assumed to work better with their skills, expertise, knowledge and intellectual potential.The goal setting theory is a theory of cognitive motivation originally developed from Locke's (1968) idea of human action in specific work situations. Locke's basic idea refers to what Aristotle says "final causality", namely that it is caused by purpose (Locke, 1996). One of the important propositions underlying this theory is the consciousness of human intentions as goals, and human behavior or action is governed by those goals. The term goals in this theory refers to a statement of desire, object or action one wants to achieve (Latham and Locke,1991; Lee et al.,1989). Cheng (2009), Hirshleifer believes that educational attainment ensures the quality of someone’s workforce. While Stiglitz considers the role of additional education as a bridge to reduce the difference between actual productivity and productivity predictions. In connection to that, Meinhardt, etc. in Cheng (2009) suggests that educational outcomes from auditors can help improve the quality of governmental audits. After completing the education, most of the professionals enter their career as assistants in accounting firms. They continue to learn and gain expertise through direct practice. In general, the average length of experience for partners, managers, seniors in charge, auditors, and assistants, is about 10 years, 5-10 years, 2-5 years, and 0-2 years in a row (Arens and Loebbecke in Cheng, 2009). Direct practice produce experiences that will shape more individual capability. According to Libby and Federick in Cheng (2009), most experienced auditors are more likely to detect reasonable errors and fewer unreasonable errors, compared to inexperienced auditors. In addition, auditors who have more experience will make fewer mistakes in their financial statements. In the discovery of Libby and Federick in Cheng (2009) Work experience can add and accumulate the basic knowledge of auditors in making mistakes on financial statements and audit techniques. Some knowledge can guarantee a company of having a good audit quality. Experience is an important element in improving the quality of auditors and human capital primarily because the auditors sell services. Therefore, there is a relation between experience and the auditor’s quality. CPD or Continuing Professional Development is a combination of approaches and techniques that will help manage, develop and educate an individual. CPD’s focus is on the result. CPD can also be define as an awareness to renew and develop competence in the workplace of a professional (Charterd Institute of Professional Development, 2000). Cheng et.al (2009) argues that an appropriate and efficient way to improve the competence and professionalism of an auditor is through Continuing Professional Development (CPD). CPD can increase the knowledge, ability and quality of a professional. As explained before that each individual is a company’s largest asset. The company is not only looking for a superior and competent personnel, but it must also maintain it. The Education and Training Center for all Indonesia Supreme Audit Institution auditors has a vision of making the place as a role model in the development of professional auditors for public sector. The Education and Training Center for all Indonesia Supreme Audit Institution auditors provides various types of education and training, required by each auditor according to the level they have. Each day the agency has a training schedule. Each month Indonesia Supreme Audit Institution from each region sends its auditors to follow the program that has been provided so that the development of auditors in the area can be maintained and monitored. While in local government, there is no pusdiklat for local government inspectorate. So that continuing professional development is gained from experience so far and discussion with their fellow auditors.

As explained above that on the basis of goal-setting theory, self-efficacy is a key driver of self-regulatory mechanisms that serve to regulate human motivation and action (Bandura,

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1986). Bandura (2000) mentioned that self efficacy is the confidence that one can successfully execute for certain positive outcomes. Self efficacy is defined as "a person self perception of competence to enact a behavior or to handle a given type of situation. In other words, self efficacy indicates that individuals can behave appropriately and accordingly to produce a certain effect (Margaret, 1991). In accounting research, Mohd Iskandar and Mohd Sanusi (2011) showed that auditors with high self efficacy levels performed better than auditors with low self efficacy. This is confirmed by Usmany (2013) and Nadiroh (2013). There are relations between self efficacy and auditor performance. Auditors who have high self efficacy are able to manage their activities better and tend to expect maximum results. The results of this study provide confidence. Auditors are able to complete more tasks within a certain period of time and are able to provide constructive suggestions on how an audit job should be done effectively. He is also able to increase his confidence and produce better quality jobs.

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