The Effect of Institutional Pressure on the Level of BPK Auditor Reliance: A Study of Government Audit Institutions in Indonesia

Supreme Audit Agency (BPK) and Government Internal Supervisory Apparatus (APIP), as government audit institutions, have an essential role in realizing the accountability of state financial management. Both are expected to establish good coordination because it can benefit both the audit institution and the government organization being audited. This study examines the effect of institutional pressure, namely coercive pressure, normative pressure and mimetic pressure, on the level of BPK auditor reliability. In addition, this study also aims to examine the impact of BPK auditor reliability on audit quality. The research was conducted at government audit institutions considering that reliability is a form of coordination in conducting government financial report audits. The survey method was carried out to collect data from 264 audit team leaders tasked with examining the government’s 2020 financial reports. SEM PLS analysis was used with the help of the WarpPLS Version 8 software. Unlike previous studies, this study found that mimetic pressure does not affect the level of auditor reliability. BPK is the only external government audit institution so no other audit institutions can be used as a benchmark in auditing government financial reports. The study also concluded that BPK auditors’ reliance on APIP could improve audit quality. This research provides input for the government regarding strategies to improve coordination and cooperation between BPK as the government’s external auditor and APIP as the government’s internal auditor.

1. Rahayu S., Yudi S., Rahayu. Internal auditors role indicators and their support of good governance. Cogent Business & Management. 2020;7(1):1751020. DOI: 10.1080/23311975.2020.1751020

2. Khelil I. The working relationship between internal and external auditors and the moral courage of internal auditors: Tunisian evidence. Arab Gulf Journal of Scientific Research. 2023;41(4):462–477. DOI: 10.1108/AGJSR‑07–2022–0121

3. Endaya K. A. Coordination and cooperation between internal and external auditors. Research Journal of Finance and Accounting. 2014;5(9):76–80. URL: https://www.researchgate.net/publication/328095958_Coordination_and_Cooperation_between_Internal_and_External_Auditors

4. Ho S., Hutchinson M. Internal audit department characteristics/activities and audit fees: Some evidence from Hong Kong firms. Journal of International Accounting, Auditing and Taxation. 2010;19(2):121–136. DOI: 10.1016/j.intaccaudtax.2010.07.004

5. Fowzia R. Co-operation between internal and external auditors: A comparative study on nationalized and foreign banks in Bangladesh. World Journal of Management. 2010;2(2):22–35.

6. Sari R. P., Hastuti S., Tannar O. Audit quality based on Internal Audit Capability Model (IACM) and gender as mediating variabel in the public sector. Journal of Economics, Business, and Government Challenges. 2019;2(1):22–38. DOI: 10.33005/ebgc.v2i1.61

7. Al-Shaheen H., Bai H. The reliance of external audit on internal audit: In Chinese audit corporations. Master’s thesis. Kristianstad: Kristianstad University; 2020. 65 p. URL: https://www.diva-portal.org/smash/get/diva2:1468987/FULLTEXT01.pdf

8. Krishnamoorthy G., Maletta M. The contingent effects of board independence and audit committee effectiveness on internal audit reliance: A pre-SOX perspective. International Journal of Accounting and Finance. 2016;6(1):62–85. DOI: 10.1504/IJAF.2016.076558

9. Azad A. N. The extent of external auditors’ reliance on internal audit function: Case of the UAE. International Journal of Economics, Commerce and Management. 2017;5(4):451–464. URL: https://ijecm.co.uk/wp-content/uploads/2017/04/5428.pdf

10. Mălăescu I., Sutton S. G. The reliance of external auditors on internal audit’s use of continuous audit. Journal of Information Systems. 2015;29(1):95–114. DOI: 10.2308/isys‑50899

11. Munro L., Stewart J. External auditors’ reliance on internal auditing: Further evidence. Managerial Auditing Journal. 2011;26(6):464–481. DOI: 10.1108/02686901111142530

12. Saidin S. Z. Does reliance on internal auditors’ work reduced the external audit cost and external audit work? Procedia — Social and Behavioral Sciences. 2014;164:641–646. DOI: 10.1016/j.sbspro.2014.11.158

13. Usman R., Rohman A., Ratmono D. The relationship of internal auditor’s characteristics with external auditors’ reliance and its impact on audit efficiency: Empirical evidence from Indonesian government institutions. Cogent Business & Management. 2023;10(1):2191781. DOI: 10.1080/23311975.2023.2191781

14. Cohen J. R., Krishnamoorthy G., Wright A. M. Form versus substance: The implications for auditing practice and research of alternative perspectives on corporate governance. Auditing: A Journal of Practice & Theory. 2008;27(2):181–198. DOI: 10.2308/aud.2008.27.2.181

15. Pizzini M., Lin S., Ziegenfuss D. E. The impact of internal audit function quality and contribution on audit delay. Auditing: A Journal of Practice & Theory. 2015;34(1):25–58. DOI: 10.2308/ajpt‑50848

16. Bedard J. C., Graham L. Detection and severity classifications of Sarbanes-Oxley Section 404 Internal Control Deficiencies. The Accounting Review. 2011;86(3):825–855. DOI: 10.2308/accr.00000036

17. Morrill C., Morrill J. Internal auditors and the external audit: A transaction cost perspective. Managerial Auditing Journal. 2003;18(6/7):490–504. DOI: 10.1108/02686900310482632

18. Zenger T., Gubler T. Agency problems. In: Augier M., Teece D. J., eds. The Palgrave encyclopedia of strategic management. London: Palgrave Macmillan; 2018:25–27. DOI: 10.1057/978–1–137–00772–8_531

19. Hay D., Cordery C. The value of public sector audit: Literature and history. Journal of Accounting Literature. 2018;40:1–15. DOI: 10.1016/j.acclit.2017.11.001

20. Jensen M. C., Meckling W. H. Theory of the firm: Managerial behavior, agency cost and ownership structure. Journal of Financial Economics. 1976;3(4):305–360. DOI: 10.1016/0304–405X(76)90026-X

21. Streim H. Agency problems in the legal political system and supreme auditing institutions. European Journal of Law and Economics. 1994;1:177–191. DOI: 10.1007/BF01552469

22. Argento D., Umans T., Håkansson P., Johansson A. Reliance on the internal auditors’ work: Experiences of Swedish external auditors. Journal of Management Control. 2018;29(3–4):295–325. DOI: 10.1007/s00187–018–00272–7

23. DiMaggio P.J., Powell W. W. The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological Review. 1983;48(2):147–160. DOI: 10.2307/2095101

24. Tolbert P. S. Institutional environments and resource dependence: Sources of administrative structure in institutions of higher education. Administrative Science Quarterly. 1985;30(1):1–13. DOI: 10.2307/2392808

25. Oliver C. Strategic responses to institutional proses. The Academy of Management Review. 1991;16(1):145–179. DOI: 10.2307/258610

26. Gudono. Teori Organisasi. 4th ed. Yogyakarta: Penerbit Andi; 2017. 324 p.

27. Lawrence T., Suddaby R., Leca B. Institutional work: Refocusing institutional studies of organization. Journal of Management Inquiry. 2011;20(1):52–58. DOI: 10.1177/1056492610387222

28. Scott W. R. Institutions and organizations. Thousand Oaks, CA: Sage Publications, Inc; 1995. 178 p. (Foundations for Organizational Science Series).

29. Hirsch P. M. Sociology without social structure: Neoinstitutional theory meets brave new world. American Journal of Sociology. 1997;102(6):1702–1723. DOI: 10.1086/231132

30. Mahoney J., Thelen K. Explaining institutional change: Ambiguity, agency, and power. New York, NY: Cambridge University Press; 2009. 236 p. DOI: 10.1017/CBO9780511806414

31. Marquis C., Glynn M. A., Davis G. F. Community isomorphism and corporate social action. Academy of Management Review. 2007;32(3):925–945. DOI: 10.5465/amr.2007.25275683

32. Chiang C. Insights into current practices in auditing environmental matters. Managerial Auditing Journal. 2010;25(9):912–933. 10.1108/02686901011080062

33. Chiang C., Northcott D. Financial auditors and environmental matters: Drivers of change to current practices. Journal of Accounting & Organizational Change. 2012;8(3):340–363. DOI: 10.1108/18325911211258335

34. Utami H. A case study of internal auditing practice in a state-owned enterprise in Indonesia. PhD theses. Wollongong: University of Wollongong; 2016. 351 p. URL: https://ro.uow.edu.au/cgi/viewcontent.cgi?article=5852&context=theses

35. Zsidisin G. A., Melnyk S. A., Ragatz G. L. An institutional theory perspective of business continuity planning for purchasing and supply management. International Journal of Production Research. 2005;43(16):3401–3420. DOI: 10.1080/00207540500095613

36. O’Keefe T.B., King R. D., Gaver K. M. Audit fees, industry specialization, and compliance with GAAS reporting standards. Auditing: A Journal of Practice & Theory. 1994;13(2):41–55.

37. Haveman H. A. Follow the leader: Mimetic isomorphism and entry into new markets. Administrative Science Quarterly. 1993;38(4):593–627. DOI: 10.2307/2393338

38. Mu E., Carroll J. Development of a fraud risk decision model for prioritizing fraud risk cases in manufacturing firms. International Journal of Production Economics. 2016;173:30–42. DOI: 10.1016/j.ijpe.2015.11.014

39. de Freitas C. A.S., de Aquino Guimarães T. Isomorphism, institutionalization and legitimacy: Operational auditing at the court of auditors. Brazilian Administration Review. 2007;4(1):35–50. DOI: 10.1590/S 1807–76922007000100004

40. Oussii A. A., Boulila Taktak N. The impact of internal audit function characteristics on internal control quality. Managerial Auditing Journal. 2018;33(5):450–469. DOI: 10.1108/MAJ‑06–2017–1579

41. Abbott L. J., Parker S., Peters G. F. Internal audit assistance and external audit timeliness. Auditing: A Journal of Practice & Theory. 2012;31(4):3–20. DOI: 10.2308/ajpt‑10296

42. Kim Y., Zhang P. Understanding data sharing behaviors of STEM researchers: The roles of attitudes, norms, and data repositories. Library & Information Science Research. 2015;37(3):189–200. DOI: 10.1016/j.lisr.2015.04.006

43. Teo H. H., Wei K. K., Benbasat I. Predicting intention to adopt interorganizational linkages: An institutional perspective. MIS Quarterly. 2003;27(1):19–49. DOI: 10.2307/30036518

44. Sholihin M., Ratmono D. Analisis SEM-PLS dengan WarpPLS 7.0 — untuk Hubungan Nonlinier dalam Penelitian Sosial dan Bisnis. Yogyakarta: Penerbit Andi; 2021. 308 p.

45. Ghozali I., Latan H. Partial least square: Konsep, teknik dan aplikasi SmartPLS 2.0 M3. Semarang: Badan Penerbit Universitas Diponegoro; 2012:115–126.

46. Hair J. F., Ringle C. M., Sarstedt M. Partial least squares structural equation modeling: Rigorous applications, better results and higher acceptance. Long Range Planning. 2013;46(1–2):1–12. DOI: 10.1016/j.lrp.2013.01.001

47. Kock N. Advanced mediating effects tests, multi-group analyses, and measurement model assessments in PLS-based SEM. International Journal of e-Collaboration. 2014;10(1):1–13. DOI: 10.4018/ijec.2014010101

48. Utary A. R., Ikbal M. Audit Sektor Publik. Yogyakarta: Interpana; 2014.

49. McDermott R., Fowler J. H., Smirnov O. On the evolutionary origin of prospect theory preferences. The Journal of Politics. 2008;70(2):335–350. DOI: 10.1017/S 0022381608080341

50. Heinrich C. J., Fournier E. Dimensions of publicness and performance in substance abuse treatment organizations. Journal of Policy Analysis and Management. 2004;23(1):49–70. DOI: 10.1002/pam.10178

51. Gittell J. H. Organizing work to support relational co-ordination. The International Journal of Human Resource Management. 2000;11(3):517–539. DOI: 10.1080/095851900339747