Haryono Umar Perbanas Institute, Jakarta, Indonesia. Sidin Usman Universitas Bumi Hijrah, Maluku Utara, Indonesia

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1 International Journal of Civil Engineering and Technology (IJCIET) Volume 9, Issue 7, July 2018, pp , Article ID: IJCIET_09_07_162 Available online at ISSN Print: and ISSN Online: IAEME Publication Scopus Indexed THE INFLUENCE OF INTERNAL CONTROL AND COMPETENCE OF HUMAN RESOURCES ON VILLAGE FUND MANAGEMENT AND THE IMPLICATIONS ON THE QUALITY OF VILLAGE FINANCIAL REPORTS Haryono Umar Perbanas Institute, Jakarta, Indonesia Sidin Usman Universitas Bumi Hijrah, Maluku Utara, Indonesia Rahima Br. Purba Universitas Pembangunan Panca Budi, Medan, Indonesia ABSTRACT The objective of the present research is to analyze internal control and human resource competence s influences on rural fund management which has implications on the quality of village financial statement. The study is descriptive and causal research using sampling method. In this study, there were 40 respondents residing in 10 villages in District of West Gane, Province of North Maluku, Indonesia. Data analysis was performed by using PLS SEM with the aid of SmartPLS computer software version 3.0. The results of this study proved that internal control system and human resource competence have a positive effect on the village funds management. Key words: Internal Control, Human Resources Competence, Village Fund Management, Quality of Village Financial Report. Cite this Article: Haryono Umar, Sidin Usman and Rahima Br. Purba, The Influence of Internal Control and Competence of Human Resources on Village Fund Management and The Implications on The Quality of Village Financial Reports, International Journal of Civil Engineering and Technology, 9(7), 2018, pp INTRODUCTION Law Number 6 Year of 2014 about Village Government defines that the term villages referring to general and traditional villages or called by other names, hereinafter referred to as villages is the unity of a legal community which has the region boundaries authorized to regulate editor@iaeme.com

2 The Influence of Internal Control and Competence of Human Resources on Village Fund Management and The Implications on The Quality of Village Financial Reports and manage government affairs, local communities s interests based on community initiatives, the right of origin, and/ or traditional rights recognized and respected within the governmental system of the Unitary State of the Republic of Indonesia [1]. Village funds have to be managed in transparent, accountable, participative, orderly, and disciplined manners [2]. Given the huge amount of the village fund, some uncertainties arise, particularly related to its position in the village expenditure budget (APBDes). It is estimated that around 32,000 villages do not yet have village technocratic competences, in particular, which are related to the financial statements. Eradication Commission of Corruption (KPK) discovered 14 critical issues pertaining to village funds such as institutional regulation, aspect of management, supervision and human resources [3], [4]. Based on the phenomena, the current study is intended to correlate the aspects of internal control and human resource competence with village fund management and investigates the implications of both aspects on the quality of village financial report. 2. STUDY LITERATURE REVIEW The rise of agency theory is due to a conflict of interest between a principal and an agent. In the theory, it assumes that each individual is motivated by his or her own self-interest so that it leads a conflict of interest between both parties. The principal contracts the agents to manage the company's resources, while the agents are obliged to manage the resources the company owns and they are responsible for the tasks the company has assigned to them [5]. Moreover, the agency theory is based on 3 (three) assumptions, which are (a) assumptions about human nature; (b) assumptions about organization and (c) assumptions about information. In human nature, the assumption explains that humans are characterized as selfish (self-interest) and have bounded rationality and risk aversion. The agency theory applies in various organizations including governmental institutions. Village funds must be managed in an orderly, law-abiding, transparent, accountable, and participatory manner. The village that can run independently of development management not only to manage the entire asset resources owned by the village, but the village will also be able to fix the basic needs of citizens, livelihood needs, and to organize the fight for citizens in a sustainable manner [6]. According to [7] the village funds management should be performed professionally, strictly with control and integrity. Financial management covers the aspect of planning, implementation, administration, reporting, and accountability as follows: Fund management is transparently planned through the village development planning consultation, the results of which are outlined in the Perdes on APBDesa. It is implemented and evaluated openly involving all elements of the village community; All activities must be administratively, technically, and legally accountable; The implementation of financial management is conducted based on the principle of efficient (cost-saving), directive, and controlled manners. In the implementation of the village fund management, the government must adhere to some general principles which govern revenues and expenditures. The principle is that both revenues and expenditures of the village are implemented through the village cash account. Then, the village treasurer can withdraw certain amount of the money from the village treasury to finance the operational needs of the village government. Regent or mayor, through regulation, determines the limits to which the amount of cash can be held in the village treasury (Solly Aryza et al., 2018) editor@iaeme.com

3 Haryono Umar, Sidin Usman and Rahima Br. Purba 3. RESEARCH METHODS The present study used quantitative associative approach by using survey method to measure the influence of internal control and human resource competence on the village fund management and the implication on the quality of village financial statement. As such, it is expected that using associative approach is to investigate the relationship between two or more variables, or the relationship between the independent variable and the dependent variable. Meanwhile, the survey method chose the samples out of the population using questionnaires as a tool for basic data collection [9] Population and Sample Determination Techniques To measure the validity of data in the result analysis in this study, it is necessary to determine the population by using correlational associative approach. For the purpose of this study, the population was chosen from village government apparatus who are assigned in 10 villages in the District of West Gane. The samples of the population were chosen from village administration apparatus, such as chiefs, treasurers, secretaries, and heads of finance division from Villages under the District. The total population of the village chiefs, secretaries, treasurers, and heads of finance division reached 10 personnel for each. Thus, the total population is 40 respondents. The sample is a part or entire population as study objects and their characteristics can represent a member of the population or part of representing population. Sugiyono suggested that the sample is a part of the number and characteristics possessed by the population. According to Arikunto (2008), he suggested that if the number of research subject is less than 100, it is advised to take all the population so that the research is a population-based study. Given the argument, the present study is population research since the number of the sample, which accounts for 40 respondents of governmental apparatus from 10 villages in the District of West Gane, is similar to that of the population. These samples are from 10 villages under Districts of West Gane, comprising Village of Lemo-lemo, Tabamasa, Papaceda, Oha, Balitata, Saketa, Bumi Rahmat, Koititi, and Doro. 4. RESULTS AND DISCUSSIONS West Gane is one of the districts under the administration of Regency of South Halmahera and it is one of the oldest districts in the Republic of Indonesia which has been established since Formerly, West Gane consists of 42 villages and 3 hamlets apart from the main village, after proliferation of administrative regions in South Halmahera Regency in 2007, District of West Gane was then split into four districts namely District of North West Gane, South West Gane and Jouronga Islands. The land area of West Gane stretches to around km 2. The structural administration of government in 10 villages of West Gane District, have been occupied in accordance with the needs of the village. Meanwhile, the need for governmental structure of each village is presented in the table above. The details of village funds disbursement to 10 villages can be observed in the following table editor@iaeme.com

4 The Influence of Internal Control and Competence of Human Resources on Village Fund Management and The Implications on The Quality of Village Financial Reports No. Table 1 Village fund and village budget in 2017 in ten villages in West Gane District (Regulation of Head of Local Govt., Regency of South Halmahera, 2017) District Village s name General Allocation Formula allocation Alokasi dana desa Jumlah Village fund ceiling Pagu Dana desa perdesa (1) (2) (3) (4) (5) (6)= (4)+(5) (7) (8)=(6)+(7) 1. Lemo- Lemo 720,442,000.00, ,000.00,- 748,212,000.00,- 245,299,976.00,- 993,511,976.00,- 2. Tabamasa 720,442,000.00, ,000.00,- 743,890,000.00,- 245,299,976.00,- 989,189,976.00,- 3. Papaceda 720,442,000.00, , ,708,000.00,- 245,299,976.00,- 1,000,007,976.00,- 4. Oha 720,442,000.00, ,000.00,- 743,093,000.00,- 245,299,976.00,- 988,392,976.00,- 5. Balitata 720,442,000.00, ,000.00,- 746,232,000.00,- 245,299,976.00,- 991,531,976.00,- 6. Saketa 720,442,000.00, ,000.00,- 776,125,000.00,- 245,299,976.00,- 1,021,424,976.00,- 7. West Bumi Gane Rahmat 720,442,000.00, ,000.00,- 755,206,000.00,- 245,299,976.00,- 1,000,505,976.00,- 8. Cango 720,442,000.00, ,000.00,- 773,810,000.00,- 245,299,976.00,- 1,019,109,976.00,- 9. Koititi 720,442,000.00, ,000.00,- 797,033,000.00,- 245,299,976.00,- 1,042,332,976.00,- 10. Doro 720,442,000.00, ,000.00,- 765,370,000.00,- 245,299,976.00,- 1,010,669,976.00,- Total Gane Barat Description of research variables is indicated by the results obtained from respondents' answers to each indicator of variable measurement on the questionnaires. The operationalized variables in the present study comprise human resource, internal control, village fund management and quality of village financial statement. Each variable was assessed based on the average scores derived from the calculation of respondents s total score divided by the number of the respondents (Furqon, 2009) PLS Test Results The PLS test was performed using outer model evaluation with reflective model and inner model evaluation within 5% level of significance. For data processing, SEM method was employed based on partial least square (PLS) which requires 2 stages to assess fit model from a research model (Ghozali, 2014). The measure of significance of hypothetical acceptability can use comparisons between the values of t-table and t-statistic (Abdillah, 2009). A hypothesis is approved or accepted if the value of t-statistic is higher than that of t-table. Alternatively, it can also compare p-value with α value which is used. In this study, the t-table value of a onetailed hypothesis with a 95% level of confidence (α = 0.05) is Thus, in this case, a hypothesis is accepted when the value of t-statistic is greater than or p-value is less than α (0.05). The method of PLS analysis used SmartPLS software version 3.2.1m Convergent validity test The convergent validity test is used to figure out the correlation between the construct and the indicator. The greater the value of correlation is, the better the relationship between the construct and the indicator will be. Correlation is considered valid with loading factor value ranging above Convergent validity is assessed on the rate of loading factor which is greater than 0.70 (Sholihin and Ratmono, 2013) although the loading rate of 0.50 is still taken into consideration [10]. Initially, the processing results with SmartPLS did not meet the convergent validity since there were still many indicators which had a loading factor value below Subsequently, the model was modified by exluding the indicators which had values of loading factor below Later, the modified model indicated that the values of all loading factors were above Thus, no more constructs for all variables were eliminated from the model. Based on the convergence test results, it indicates that the aspects in village funding management such as transparency, accountability, participation, properness of benefit basis editor@iaeme.com

5 Haryono Umar, Sidin Usman and Rahima Br. Purba have the value of loading factor against their latent variables are , 0.755, 0.783, 0.781, 0.756, 0.779, 0.810, and Thus, it is regarded to be valid. All indicators of human resources competence are regarded to be valid. As such, it can be observed from the results of convergent validity test that those indicators, such as skill and knowledge (ability), each of which has values of loading factor against those of the latent variable of 0.891, 0.915, 0.865, 0.776, and which are considered valid. Likewise, all internal control indicators are declared to be valid. It is because, when observing the convergent validity test results, internal control indicators, such as control environment, risk assessment, control activities, information and communication, each of which has the value of loading factor against those of latent variables of 0.781, 0.784, 0.753, 0.795, 0.761, 0.847, 0.761, and The whole indicators of the the village financial statements quality are valid since, by observing the results of convergent validity test, its indicators, such as understandability, relevance, reliability, and comparability, have the value of loading factor against those of latent variables of 0.839, 0.847, 0.764, 0.816, 0.917, 0.867, 0.881, 0.905, and Discriminant validity test Correlation is said to be valid if the correlation value of cross loading indicator is greater than that of other latent variable. The test results of discriminant validity indicate the values of loading correlation of village fund management (VFM) against that of latent variables are 0.766, 0.809, 0.755, 0.783, 0.781, 0.756, 0.779, 0.810, and These values are greater than that of cross correlation latent variables; thus, it is obvious that all indicators of village fund management (VFM) are claimed to be valid. All indicators of human resource competencies are valid since it is found that discriminant validity test indicates the values of correlation of human resources competence loading to those of latent variable which are greater than correlation value of cross loading of other latent variable (= 0.891), ranging from 0.915, 0.865, 0.776, to Meanwhile, the correlation of loading internal control (IC) to latent variables on the discriminant validity test indicate the values of 0.781, 0.784, 0.753, 0.795, 0.761, 0.847, 0.761, and which are greater than that of cross loading of other latent variables. The discriminant validity test shows that loading correlation values of village financial statements quality (VFSQ) to latent variables are 0.839, 0.847, 0.764, 0.816, 0.917, 0.867, 0.881, 0.905, and It is obvious that these values are greater than that of correlation of cross loading latent variable. Thus, it can be stated that all indicators of village financial statement quality (VFSQ) are valid. Dirrect Effect Indirrect Effect Influence of variable Table 2 Result for Inner Model (data processing PLS) Original Sample (O) Sample Mean (M) Standard Deviation (STDEV) T Statistic ( O/STDEV ) P Values HRC VFM IC VFM HRC VFSQ VFM VFSQ IC VFSQ HRC VFM VFSQ IC VFM VFSQ Human Resources Competence Has A Positive And Significant Impact On The Village Fund Management Based on the result of the first hypothesis test, the influence of the human resources competence variable on the village fund management shows the value of path coefficient of with the editor@iaeme.com

6 The Influence of Internal Control and Competence of Human Resources on Village Fund Management and The Implications on The Quality of Village Financial Reports t-value of 1.370, which is less than t-table (1.960). In addition, the value of p-values is which is greater than the significant level (0.05). These results indicate that H1 which predicts human resource competence has a positive and insignificant effect on village fund management is rejected. On the other hand, Hypothesis H0 which says that human resource competence influences the village fund management is accepted. Given the results, it implies that the human resources competence of village government officials from 10 villages in the the District of West Gane should be properly taken much attention by an elected chief of village who assigns his staff in village administration so that they can perform well their duties and responsibilities for excellent village fund management Human Resources Competence Has a Positive and Significant Effect on Quality of Village Financial Report According to the results of the first hypothesis test regarding the influence of the human resource competence variable on the village financial report quality, it shows that the value of path coefficient is with the t-value of It means that the value is greater than t table (1.960) while the p value is which indicates that it is less than the significant level (0.05). These results reveal that H1 which predicts that human resource competence has a positive and significant influence on quality of village financial report is in accordance with the first hypothesis where H0 is human competence influences the quality of village financial report. Therefore, H1 should be accepted while H0 should be rejected. These results imply that human resource competence has a positive and significant impact on the quality of village funds financial reports. As such, the results should be noted by the village government officials in 10 villages that human resource competence is one of the requirements when recruiting government staff candidates at the village level Internal Control has Positive and Significant Impact on Quality of Village Financial Report The test results of the first hypothesis regarding the influence of internal control variable on quality of village financial report shows the value of path coefficient of with t value of Obviously, it is seen that the value is less than that of t table (1.960). In addition, the p value of means that it is greater than that of significant level (0.05). These results indicate that the statement of H1, i.e. internal control has a positive and insignificant effect on quality of village financial report is not in line with the first hypothesis where H0 states internal control influences quality of village financial report. Therefore, H1 should be rejected whereas H0 is to be accepted. Given such results, to measure the quality of financial statements, the government in 10 villages of West Gane District has to seek staff whose financial accounting competence. Shortly, it also requires changes in morality and ethics of village management and staff that are responsible for managing village funds to consistently adhere to the local and central regulations in preparing village fund management planning. These regulations cannot be taken apart from moral and ethics of village government for accountability of village fund management. Ultimately, they are able to produce high quality of village financial report. 5. CONCLUSIONS Prior to the analysis, sequential procedures preceded, such as validity test through convergent validity, discriminant validity and average variance extracted (AVE) test and reliability test through composite reliability and Cronbach's alpha method. Based on the analysis results, it reveals that all constructs and instruments used in this research are valid and reliable. Furthermore, referring to the result of hypothesis test, it can be concluded that the editor@iaeme.com

7 Haryono Umar, Sidin Usman and Rahima Br. Purba implementation of Internal Control (IC), Human Resource Competence (HRC), and Village Fund Management (VFM) have direct or indirect effect on the quality of Village Financial Report (VFRQ) in 10 villages with the following details: Human resource competence positively affects the village fund management (VFM) implementation in 10 villages of District of West Gane. The higher village government staff have competence, the better village financial management at the village government level will become. Internal controls have positive and significant impact on the village fund management. Well performed internal control system will result in better the village fund management in 10 villages of West Gane District. Human resource competence positively and significantly affects the quality of village financial report of 10 villages in West Gane District. The quality of village financial report produced by the village government tend to be improved provided that the village government officials acquire higher competences. Internal controls positively affect KLKDes (VFRQ) through increased effect of internal control implementation on improving the quality of village financial statements. The village fund management has a positive effect on the quality of village financial statements. The better the village financial management, the better the quality of village financial statements are. REFERENCES [1] P. Nugrahaningsih and J. Winarna, Pendampingan Pengelolaan Dana Desa Dengan Pengembangan BUMDes Berbasis Sistem Informasi Akuntansi, Pros. SNAMK (Seminar Nas. Akunt. Manaj. dan Keuangan), pp , [2] Mendagri, Peraturan Menteri Dalam Negeri Republik Indonesia Nomor 113 tahun 2014 Tentang Pengelolaan Keuangan Desa. 2014, pp [3] H. Umar, Government Financial Management Strategy for Preventing Corruption in Indonesia, South East Asian J. Manag., vol. 5, no. 2, pp , [4] H. Umar, Pengawasan Untuk Pemberantasan Korupsi, J. Akunt. Audit [5] M. W. H. Michael C. Jensen, Theory of the Firm : Managerial Behavior, Agency Cost and Ownership Structure, J. financ. econ., vol. 3, pp , [6] R. Br Purba, Capacity Apparatus Improvement in Managing Economics and Finance towards Independent Village, IOSR J. Econ. Financ. Ver. I, vol. 8, no. 1, pp , [7] A. Galih and A. Muis, Pengelolaan Keuangan Desa Pasca UU No. 6 Tahun 2014 Tentang Desa : Potensi Permasalahan dan Solusi Village Financial Management after Implementation of Law No. 6 / 2014 : Potential Problems and Solutions, vol. 13, no. 6, [8] S. Aryza, M. Irwanto, Z. Lubis, A. P. U. Siahaan, R. Rahim, and M. Furqan, A Novelty Design Of Minimization Of Electrical Losses In A Vector Controlled Induction Machine Drive, IOP Conf. Ser. Mater. Sci. Eng., vol. 300, no. 1, p , [9] G. G. Gable and G. G. Gable, Integrating Case Study and Survey Research Methods: An Example in Information Systems, Case Stud., vol. 3, no. 2, pp , [10] J. F. Hair, W. C. Black, B. J. Babin, and R. E. Anderson, Multivariate Data Analysis, Vectors. p. 816, [11] P.Babu Rao and V.Balakrishnan, CSR in a Public Sector Undertaking in India A Case Study, International Journal of Management (IJM), Volume 1, Issue 2, 2010, pp , ISSN Print: , ISSN Online: [12] Novita Sari, Imam Ghozali, Tarmizi Achmad, the Effect of Internal Audit and Internal Control System on Public Accountability: The Emperical Study in Indonesia State Universities. International Journal of Civil Engineering and Technology, 8(9), 2017, pp editor@iaeme.com