Department of Economics, Management, and Industrial Engineering
Doctoral program in Accounting
School year 2020/2021
Curricular Unit of Public Accounting
TOPIC
Determinants of Public Sector Financial Irregularities: The case of Metropolitan,
Municipal and District Assemblies (MMDAs) in Pre and Post Adoption of IPSAS –
Evidence from Ghana
By:
Eric Kwaku Attefah
(101342)
Submitted to:
Professor Maria José Fernandez
1
ABSTRACT
This piece of work aims to investigate the determinants of financial irregularities and internally
generated funds on the total revenues of Metropolitan, Municipal and District Assemblies (MMDAs)
in Ghana. Secondary data in the form of annual auditor general’s reports of financial statements of
the Metropolitan, Municipal and District Assemblies (MMDAs) of Ghana were used. The study
analyzed the collected data using descriptive statistics. Using STATA, this study used 2014 to 2019
auditor general’s reports on MMDAs in Ghana to examine the determinants of financial
irregularities. The pooled OLS was used as the estimation technique with the multiple regression
extension. The ultimate objective of the research was to examine the correlation between the
dependent variable of total revenues and the independent variables of cash, procurement and stores,
contract, statutory tax and deduction, and payroll irregularities respectively as well as internally
generated funds. The findings depict that both independent variables experienced a positive
correlation with the dependent variable. Under regression observation, the model representation is
statistically significant at all confidence levels tested. Moreover, the regression output showed that
the variables are statistically significant with respect to their p-values. The conclusions drawn were
that the model was significant in explaining the performance in relation to the independent variables.
2
TABLE OF CONTENTS
PAGE
1.0 Introduction
4
1.1 Problem Statement
4
1.2 Objectives / Purpose
6
1.3 Research Questions
6
2.0 Literature Review
6
2.1 Public Financial Management in Ghana
9
2.2Financial Controls
11
2.3 Institutional Theory
13
2.4 Hypotheses
14
3.0 Methodology
14
3.1 Research Design
14
3.2 Population and Sample Size
14
3.3 Data Analysis
14
3.4 Model Specification
15
3.5 Estimation Technique
15
4.0 Results of the Study
15
5.0 Conclusion
18
LIST OF TABLES
Table 1. Descriptive Statistics for Regions in Ghana
15
Table 2. Descriptive Statistics for Study Variables
16
Table 3. Ordinary Least Squares (OLS) Regression Results
17
Table 4. Correlation Matrix Results
18
3
1.0 Introduction
In recent years, the lack of clarity, objectivity, and consistency in financial reporting has necessitated
the creation of a standardized framework capable of addressing the insecurity of financial systems
and reporting accounting data to users (Feiveson, 2015). Even though the discipline has gained a lot
of attention in management and financial literature, due to the complex nature of the financial sector
and to deal with the diverse nature of challenges faced by most public institutions, numerous scholars
highly recommend comprehensive research in this discipline (Yapa, 2014). Because of the famous
Enron case in the United States, which was considered one of the biggest financial scandals that
caught the entire company and financial sector off guard in 2001, the idea of financial irregularities
gained a lot of traction among finance and corporate governance scholars (Ofoegbu, 2014).
Efforts been made to ensure transparency and accountability in the management of public funds,
physical assets, and sensitive data. For these purposes, Ghana's government has established a strong
decentralized financial management system to organize all revenue-generating departments and
ensure that those charged with disbursing funds do so in compliance with the law. According to
Edmonds et al. (2017), the level of success of any organization, whether public or private, is largely
determined by how prudently capital, assets, and finances are created, then handled and regulated
according to budget, legislative guidelines, and stakeholders' interests.
According to (ter Bogt & Tillema, 2016), attempts must be made to uphold the laws regulating the
establishment of these public bodies, with a deliberate attempt to properly sanction these laws.
Evaluating the presence of standard systems in every public institution necessitates an independent
assessment and monitoring mechanism to ensure compliance with accounting standards, asset
safeguarding, and maintaining an orderly working environment that encourages performance in
accordance with the organization's mission and vision (Acheampong, 2016).
1.1 Problem Statement
Ghana's public sector is marked by financial irregularities beyond comprehension; according to the
Auditor General's annual report on the procurement and use of public funds, the country has
performed below average in terms of transparency and compliance with ethical standards since
December 2009 (Banyen & Nasamu, 2015). The country requires immediate action to resolve the
threat, as efforts by the government and international partners have failed to produce significant
4
results. The public and stakeholders have expressed their dissatisfaction with the government's
control mechanisms, as well as noncompliance with traditional accounting and reporting standards,
despite the government's attempts to mobilize resources to ensure that training and education are
provided to promote compliance and strict implementation. Despite Section 404 of the SarbanesOxley Act, which orders organizations to strictly adhere to objective reporting and periodic review
of their financial statements by independent evaluators for monitoring purposes, millions of Ghana
cedis go unaccounted for every year (Aziz, Rahman, Alam, & Said, 2015). In the past, successive
governments have been chastised for failing to demonstrate commitment to protecting the
consolidated fund and ensuring that state resources in some forms are used wisely; however, a recent
joint exercise between the government and the IMF to combat irregularities resulted in the
implementation of the mechanized payroll system, which led to the identification and subsequent
prosecution of irregularities. Given that it is mandatory for public employees to be adequately
informed about the laws governing the establishments in which they work, disregarding and failing
to follow the policy recommendations of institutions such as the Auditor General and the
Parliamentary Accounts Committee would not go unpunished, as it implies the cause of grave
concerns and must be addressed. According to the Auditor General's estimate, cash and other
properties not accounted for in 2016 totaled GHc118, 820,175.66, USD$246,744.24 and GHC136,
084.22 as part of funds allocated for various projects but later not reported (Appiah & Abdulai, 2017).
The implementation of IPSAS is justified by presumed deficiencies in accounting information under
national accounting standards, as well as the necessity to narrow and address variations in accounting
policies and procedures. However, the problems that IPSAS was designed to address appear to still
exist, as issues of accounting irregularities are routinely observed (Owusu et al., 2016). The
researcher asks the following inquiry, based on the alleged flaws in these standards: Is IPSAS capable
of improving transparency and accountability in the Ghanaian public sector? The issue is that Ghana's
National Accounting Standards and IPSAS have failed to eliminate misapplication, misappropriation,
and financial irregularities of public funds that it entails (Auditor General´s Report, 2019). This study
aims to examine the extent of persistent financial irregularities in the MMDAs of Ghana before and
after the adoption of IPSAS and make recommendations for future reforms. Financial irregularities,
for this study, have been consistent from 2014 to 2019. The question is to what extent has these
irregularities affected the internally generated funds and the total revenue of the MMDAs in Ghana?
5
1.2 Objectives / Purpose
1. To analyze the impact of financial irregularities on the total revenue of the MMDAs in Ghana
from 2014 to 2019.
2. To examine the effects internally generated funds on the total revenue of MMDAs in Ghana
from 2014 to 2019.
1.3 Research Questions
1. What is the impact of financial irregularities on the revenues of MMDAs in Ghana?
2. To what extent has financial irregularities affected the internally generated funds of MMDAs
in Ghana?
2.0 Literature Review
The rules regulating the use of public resources are clearly stipulated in Ghana's constitutions and
other laws relating to the public sector, and those entrusted with these resources are subject to annual
review by the Auditor General, who performs a comprehensive and impartial evaluation of
government agencies and departments (H. Chang, Chang, Choy, & Choy, 2016). The fundamental
principles for basic financial management and accountability require that, first and foremost, an
organization's assets be used in the organization's best interests and in strict accordance with the
policies and procedures established by the organization (Balabonien & Veerskien, 2015).
According to Edmonds et al. (2017), the level of success of any organization, whether public or
private, is largely determined by how prudently capital, assets, and finances are created, then handled
and regulated according to budget, legislative guidelines, and stakeholders' interests. Efforts have
recently been made to ensure transparency and accountability in the management of public funds,
physical assets, and sensitive data. For these purposes, Ghana's government has established a strong
decentralized financial management system to organize all revenue-generating departments and
ensure that those charged with disbursing funds do so in compliance with the law.
Financial controls are said to be productive when cautious and conscious efforts are placed in place
prior to procuring and appropriating capital, whether long or short term, through laid down
mechanisms recognized by law and approved by authorized bodies, according to leading scholars
such as (Thompson, Ravindran, & Nicosia, 2015). Unfortunately, the control of funds and
6
transparency have become the most significant problems facing MMDAs and, to a large extent, the
Ghanaian public sector (Edmonds et al., 2017). On December 31, 2015, The Auditor General of
Ghana attended an annual general conference attended by Chief Directors, Senior Officials from
various government Ministries, Departments, and Agencies (MMDA's) where it was discussed,
among other things, the concern of total disregard for financial regulations, internal control
machineries, and rampant financial irregularities resulting in unwarranted expenditure. According to
the Auditor General's Report, another troubling figure reflecting cash irregularities was USD$912
million as of December 2016. (Akotia, 2016).
According to the Auditor General's office, a total of USD912 million reflecting the country's total
foreign debt was misappropriated, embezzled, unverified payments, and unaccredited bank deposits,
owing to a weak control environment and inadequate internal audit procedures at different public
boards (Ajao et al., 2013; ter Bogt & Tillema, 2016). Further disclosures have it that, a total of six
public entities and statutory agencies were unable to account for GHc1,975,054,681 in cash, while a
recent study claims that only 26 of the 365 official vehicles allocated to the seat of government were
obtained from the previous officials (Boateng, 2016). This brings the cumulative number of financial
violations discovered by the Auditor General in the financial activities of various public boards and
organizations tasked with protecting state resources to 95.5 percent. The estimated loss includes
US$50,309,512 in cedis exchanged at the current exchange rate of Gh1.5467 per US$1 as of
December 31, 2011. In the year, outstanding debts amounted to 4.8 percent of the anomalies, or GH
99,170,464 (Akotia, 2016).
Government financial management is a matter of a comprehensive economic agenda on the part of
the government to carefully manage the scarce resources and taxes that go into the consolidated fund
at the Central bank to meet budgeted capital projects and other expenditures aimed at providing basic
services to the citizenry without irregularities (Othman, Aris, Mardziyah, Zainan, & Amin, 2015).
According to (Kromidha & Córdoba-Pachón, 2017), every public worker requires statutory guidance
to carry out their functions and must be properly briefed on the sanctions for breaking the laws
pertaining to their office, for example (Babatunde & Dandago, 2014) argue that any public employee
needs legislative guidelines to carry out their duties and should be adequately briefed on the
consequences of breaking the laws that apply to their role, such as when funds intended for a specific
project are instead used to finance a conference or a foreign trip that was not budgeted for and had
7
no supporting documentation to show authorization for such expenditure. As stated in the code of
ethics for all public employees, integrity and ethical principles are fundamental criteria for holding a
public office. The law requires those performing duties on behalf of the state to do so in the best
interests of the state and to spend any resources entrusted to them in accordance with regulatory and
approval procedures (Oppong, Arora, Sachs, & Seidu, 2016). According to the literature,
transparency advocates often criticize public-sector control structures, claiming that the problems are
not caused by a lack of control mechanisms, but rather by a lack of discipline and a general attitude
toward government property among Ghanaians. People are generally more concerned with private
investments than public capital, which is unfortunate.
There is ample evidence suggesting the joint effort between the Auditor-General and the Bank of
Ghana to ensure all Receipts and Payments are properly accounted for in compliance with Article
187(2) (5) of the 1992 (Aveh, Awunyo-Vitor, & Afriyie, 2016). The Auditor-General is mandated by
the Constitution of the Republic of Ghana to audit the public accounts of Ghana, as well as all public
offices, including the courts, central and local government administration, universities and public
institutions of similar nature, and any public corporation or other body or organization formed by an
Act of Parliament, and to report to Parliament (Akotia, 2016).
In general, the Ghanaian Audit Service and other law enforcement agencies apply section 404 of the
Sarbanes Oxley Act of 2002 (Sarbanes, 2002) while dealing with such apparent limitations associated
with any control mechanism. Evidently, Section 41(1)(b) of the Financial Administration Act, 2003
(Act 654) (FAA) and Regulation 191 of the Financial Administration Regulations, 2004, (LI 1802)
(FAR) require the Controller and Accountant-General to provide financial statements of the
government to the Auditor-General and the Minister of Finance (MoF), as well as details of
transactions it carried out on the MoF's orders (Ayee, 2003). Several scholars, including Babatunde
and Dandago (2014), have argued that control systems are effective when an organization makes a
deliberate effort to reduce and control wrongful payments while still sticking to conventional
budgeting systems. If the above scenario is accurate, it appears that the public sector deserves credit
for significantly reducing payments of GHC 360.24 million budgeted in the Goods & Services
category in 2016. Despite this positive effort, there were Ghc431.30 million in debts, showing
massive discrepancies and unaccounted for payments (William Jr, Glover, & Prawitt, 2016).
8
It is common knowledge that the government spends close to 70% of the public sector budget on
procurement at the end of each accounting year, indicating that greater structural changes and control
mechanisms within the public sector are needed to protect the state's interests in this regard (William
Jr et al., 2016). Major stakeholders have expressed concerns about public sector reforms, especially
regarding employee attitudes, state resource management to avoid waste, and theft to instill a
collective commitment toward revenue generation and preventing revenue leakage (Owusu, Owusu,
Weir, & Weir, 2016). Other authorities have raised the question of public sector workers' wages being
determined by an hourly assessment rather than a fixed monthly salary (Aveh et al., 2016).
Over-under budgeting, according to a well-known expert and leading author in the Finance and
Auditing literature, is also a sign of management inefficiency. Given that the principle of internal
control did not set a cap on the amount of money spent in the public sector per year, Kaiser and
Streatfeild (2016) agree that a fair ratio should be set by law to benchmark spending of public
resources, including in emergency situations, and that due process should not be skipped. The Public
Accounts Committee of Parliament is a sign of openness, which they often demonstrate through a
public interview with invited state agencies, in which they frequently provide detailed accounts of
their operations relating to accounting periods, and in which they frequently raise red flags on certain
acts of irregularity (Owusu et al., 2016). There is enough evidence to show that the institutions are in
place with a legal structure in place; however, regulation is quickly becoming an impossible task,
given the magnitude of irregularities that have plagued Ghana's public service in the past and recent
years, especially with the basic elements of controls to ensure discipline and a positive culture
(Wynne & Mear, 2016).
2.1 Public Financial Management in Ghana
When it comes to public financial management matters, the Auditor-General is the first port of call.
At the end of each accounting year, all statutory agencies, public boards, corporations, and MDAs
are subjected to strict review under the provisions of the Financial Regulation Act of 2004
(Legislative Instrument 1802), which is closely aligned with the Financial Regulation Act (FAR) of
2003 and other international accounting principles (Oppong et al., 2016).
Several interventions have been made to protect the public purse from further leakage; the aim is to
promote a sound financial management system free of irregularities that are causing inflation and
9
inefficiency throughout the sector. The implementation of the "Ghana Integrated Financial
Management System (GIFMIS)" in 2009, a project initiated and launched by the Government of
Ghana, through the Controller and Accountant General, Ministry of Finance (MoFeP), with support
from the World Bank, the European Commission, DFID, and the British Government as part of the
Public Sector Reform Initiative, is a classic example of a strong financial control initiative. (PFMRA)
(Akotia, 2016). By default, the Controller and Accountant-General (CAGD) is the department in
charge of overseeing the implementation of any kind of financial reform, but under the oversight of
the Auditor-General and the Ministry of Finance and Economic Planning.
The implementation of Enterprise Resource Planning (ERP), which was also deployed to streamline
public financial management at a central control unit and managed by the Controller and AccountantGeneral (CAGD), is an example of the numerous financial control modalities instituted with the aim
of rescuing and mounting a permanent closure to the iniquities surrounding the public financial
system. The ERP is jointly controlled for monitoring and oversight by three public agencies that are
proponents of change and accountability (Haruna & Kannae, 2016). Following the endorsement and
constant review of Public Financial Management laws (PFM) and regulations in recent years, the
World Bank's country director praised Ghana for a well-built legislative structure to improve public
financial management in an address. Wynne and Mear (Wynne & Mear, 2016). When properly
implemented, these and other control measures will prevent the country from incurring unjustified
public debts and gross irregularities in the public sector.
The obligations of each arm of government, namely the Executive, Legislature, and Judiciary,
towards the implementation of all laws relating to the use of public resources are enshrined in the
1992 Constitution of Ghana in plain terms (Edmonds et al., 2017). Any person acting in the interest
of the state is required to follow these laws. Other constitutional frameworks, such as the Financial
Administration Act of 2003 (FAA) and the Audit Service Act (2000), also emphasize this. The
Financial Administration Regulation is a complement to these (FAR). The basic budget and
accountability frameworks are laid out in the legislative and regulatory system (Aziz et al., 2015).
With the establishment of all these legislative provisions and frameworks, it is virtually impossible
for persons employed in the public sector to violate the control systems intentionally or erroneously
without being subjected to the full force of these rules. The aim of this study was to see if the control
elements are successful in the public sector, as well as to see if government employees are aware of
10
the controls and follow the regulations. According to (Rahman et al., 2015), many device failures are
caused by a failure to recognize the system's usage and potential.
2.2 Financial Controls
Financial regulation, according to Balabonien and Veerskien (2015), is a carefully orchestrated
attempt by management to spend and stay within a specific budget over an accounting period. In this
regard, instead of using a beyond budgeting model that allows spending officers to incur those costs
at their discretion in the interest of the organization effectively, judiciously, and within the legal
frameworks, management should use a static or conventional budget structure. Financial control,
according to Gitman, Joehnk, and Billingsley (2015), refers to procedures designed to ensure
financial appropriations follow established accounting practices, such as ensuring receipts and
payments are properly recorded and approved based on management policy on budgetary allocations
in accordance with regulatory instruments, resulting in financial statements free of errors and
omissions. Domingues et al., (2017). In theory, a well-functioning financial management system
should encourage consistency in allocating funds to projects and investments in the order of priority,
while keeping in mind the normal procedures for having the transaction authorized. According to one
school of thinking, the primary goals of financial management are strict adherence to precision and
transparency (Sarbanes, 2002).
A comprehensive policy package to improve the public sector's system of controls was introduced in
a document titled "Public Financial Management and Private Sector Competitive Support Program
Phase" (PFMPSCSP). For the sake of transparency, the policy was set to include simple controls such
as a basic clear letter of authority from all Chief Executives of MDAs who are by statute the spending
officers to append signatures approving payments and originators of such payments (Akotia, 2016).
Financial monitoring is thought to include not only the safeguarding of properties and the quality of
books, but also the process of surveillance using rigorous technology (William Jr et al., 2016). The
(PFMPSCSP) fiscal control and monetary policy to be implemented under the IMF-World Bank
sponsored project will aim to strengthen and widen the domestic revenue generating base to prevent
the local currency from depreciating against other major currencies, with the goal of raising sufficient
funds for pressing capital projects with a long-term horizon (Appiah & Abdulai, 2017).
11
A robust monitory regulation, according to leading authors such as (Lindgren & Jansson, 2013),
would boost the Government of Ghana's credit rating on the capital markets, both domestically and
internationally, allowing it to access external funding in the form of grants, aids, and loans. Major
economic growth initiatives, such as diversification into non-traditional export commodities, are
expected to boost Ghana's competitiveness and market access in Europe. Only when funds are used
wisely and professionally administered can benefits such as job growth and poverty alleviation be
realized (Tricker & Tricker, 2015). During implementation, a major emphasis would be on
commitment to controls and oversight of spending appropriations to improve the authorization
processes and procedures, with approval vested in agencies rather than individuals holding roles. In
a speech given during his visit to Ghana on March 8, 2012, former President of the United States of
America, Barack Obama, stressed the importance of openness and accountable governance. He
advised the entire citizenry that it was more important to reinforce institutions than it was to cultivate
powerful personalities (Pitt, 2014). This assertion was met with a practical response from the
government in the form of programs and reforms (Aziz et al., 2015). According to renowned
management scholars Gitman and Zutter (2012), an institution's financial control system plays a
critical role in the governance and management of risks that are critical to the achievement of its
organizational goals. A sound financial management structure also helps to protect stakeholders'
investments and the institution's properties from fraud, waste, and unaccountable appropriations.
Ghana as a country can develop and improving the current system to the level of stringent financial
regulation needed in the future to ensure the effectiveness and efficiency of operations. People's
dependability, faith, and trust must be used to show the nature of internal control and compliance
with laws and regulations, among other things. Internal control includes effective financial controls,
as well as the management of accurate accounting records. They assist with ensuring that the
organization is not unnecessarily subjected to the avoidable danger of records being taken into the
possession of unauthorized individuals or lost documents. In this regard, the PRAAD, which is an
independent entity required by statute to take care of state-owned valuable records, must strengthen
its control and security mechanisms to help combat weakening internal control systems. Gitman et
al., (2015).
Other authorities believe that to make the entire process complete and robust, financial information
detailing special government contracts with other countries and partner institutions, but in the form
12
of computerized and electronic systems sealed and protected by security codes, should be included
in document security within the public sector (Ajao et al., 2013). With time, Ghana will be able to
erase statements such as (causing financial loss to the state and willfully misappropriating public
resources), which were specific legal charges brought against top government officials in 2005 who
oversaw various institutions where Ghana lost scarce resources due to negligence (Speklé &
Verbeeten, 2014). However, are the various activities of the institutions meeting their objectives? Are
state-owned properties, such as Official Bungalows, as well as vehicles and logistics, being used
effectively? To address these questions, the government auditor must properly carry out the duties
entrusted to him by the 1992 Ghanaian Constitution and the Public Administrative Act of 2003 in
assessing performance and identifying flaws in the public sector's control structures (William Jr et
al., 2016). If Ghana is to catch up to Rwanda and Tanzania in terms of economic recovery and set a
regional standard, revenue leakages and prudent use of state facilities such as cars, power, and salary
packages for public sector employees must be linked to performance and required qualifications
(William Jr et al., 2016). According to experts, appointees to such sensitive control and special
installations should have adequate knowledge of internal controls and be willing to support the reform
strategy to obtain the best results from the reforms.
2.3 Institutional Theory
John Meyer and associates Brian Rowan and Richard Scolt produced institutional arguments in 1977
and 1983, respectively, and Lynne Zucker in 1977. Meyer and Rowan (Meyer & Rowan, 1977).
According to the idea, structural forces, as well as technology needs and resource dependencies,
shaped formal organizational frameworks (Palthe, 2014). The core premise is that organizational
structures and procedures are either reflections or responses to the wider environment's laws, ideas,
and customs. Standardized things, administrations, procedures, techniques, and programs serve as
useful myths, and many organizations adopt them ritualistically, yet institutionalized rules can clash
with efficiency. Meyer and Rowan (Meyer & Rowan, 1977). Institutional theory has been used in
previous research to understand why some countries have embraced IPSAS (Adhikari & Mellemvik,
2010; Christiaens, Vanhee, Manes-Rossi, Aversano, & van Cauwenberge, 2015; Nagalinagm,
Mangala, & Kumudinie, 2015; Stan & Sven, 2000). Similarly, the Ghana government has
implemented accrual accounting and reporting to meet external expectations and portray a sense of
logic and productivity to achieve credibility, but the framework will not be used to improve internal
performance and, as a result, financial reporting quality. The purpose of this study was to see if the
13
introduction of IPSAS in the public sector has resulted in a significant increase in the quality of
financial reporting among semi-autonomous government agencies.
2.4 Hypotheses
H1. There is a positive relationship between financial irregularities and revenues of MMDAs in
Ghana.
H2. The impact of internally generated funds is high on the revenues of MMDAs in Ghana?
3.0 Methodology
3.1 Research Design
The design lays out the researcher's method for collecting and analyzing data related to finding
answers and solutions to the research issue, as well as hypothesis testing. The aim of the research
design was to demonstrate the study's validity and reliability. The aim of the research design was to
organize the data collection, review, and establish a consistent relationship with the research
questions so that rational conclusions could be drawn (Block, Miller, & Wagner, 2014). The rationale
for the data sources and procedures used is also included in the study design. A well-structured
research design ensures that relevant knowledge about the research issue is used, and that the research
goals are met (Block et al., 2014). This piece of work adopted trend analysis and descriptive study to
look at the specifics of financial irregularities in terms of Cash, Procurement, Payroll, Contract and
Statutory Tax and Deduction respectively in MMDAs in Ghana.
3.2 Population and Sample Size
Due to the growing existence of irregularities associated with managing public funds, the public
sector of Ghana, specifically Two Hundred and Sixty (260) Metropolitan, Municipal and District
Assemblies (MMDAs) annual Auditor General´s Reports were sampled for the study. A sample of
six (6) year’s annual statements comprising two (2) years pre-adoption and four (4) years postadoption of IPSAS in Ghana from 2014 to 2019.
3.3 Data Analysis
The study adopted STATA to analyze the data. Cash Irregularities, Procurement Irregularities,
Payroll Irregularities, Contract Irregularities and Statutory Tax and Deduction Irregularities
respectively as well as Internally Generated Funds (IGF) enshrined in the annual Auditor General´s
14
Reports of MMDAs in Ghana were used as independent variables while Total Revenues as dependent
variables for the analysis. Regression was used to determine the effects of independent variables on
the dependent variables.
3.4 Model specification
The empirical model of financial irregularities and IGF is specified in a panel data framework as
follows:
REVENUEi t = ȹ + ΩCASH i t + ΨPROCUREMENT AND STORESit + ϢCONTRACTi t
+ βSTATUTORY TAX AND DEDUCTIONit + µPAYROLLit + αIGFit + εit … … … … … … … … … … .1
Where i, t, ȹ and ε
represent the individual variable, time (year), intercept of the regression and
disturbance term, respectively. The notations Ω, Ψ, Ϣ, β, µ, and α are coefficients of their respective
variables. All other notations/variables are as already defined.
3.5 Estimation Technique
The study used the pooled Ordinary Least Square (OLS) regression as the empirical estimation
technique. Standard errors were employed to deal with any possible heteroscedasticity and serial
correlation (autocorrelation). All analyses in this study were done using STATA 16.0.
4.0 Results of the Study
Table 1: Descriptive Statistics for Regions in Ghana
Source: Annual Auditor General’s Report for MMDAs from 2014 to 2019
15
The descriptive statistics for regions in Table 1 reveals the utilization of Annual Auditor General´s
Report encompassing all the ten (10) regions of Ghana for a six-year period spanning from 2014 to
2019. In 2019, four regions were split into new regions: Brong Ahafo (Bono Region, Ahafo Region
and Bono East Region), Northern (North East Region, Northern Region and Savannah Region), Volta
(Oti Region and Volta Region) as well as Western (Western Region and Western North Region)
making a total of sixteen (16) regions. However, for the sake of uniformity in regions for the purpose
of this study, all the new regions´ figures were added to their respective original regions’ figures to
maintain ten (10) regions in respect of 2019.
Table 2: Descriptive Statistics for Study Variables
Source: Annual Auditor General’s Report for MMDAs from 2014 to 2019
The descriptive statistics in Table 2 shows that Cash irregularities has a mean value of 2663136 while
Procurement and Stores, Contracts, Statutory tax Deduction, Payroll, Revenue and IGF have average
values of 58675.91, 119134.7, 31318.04, 32254.74, 1.33e+08 and 2.69e+07, respectively. The results
further show a standard deviation of 9157752 with a minimum of 11808 and a maximum of 6.78e+07
for Cash Irregularities, a standard deviation of 95794.68 with a minimum of 0 and a maximum of
583934.7 for Procurement and Stores Irregularities, a standard deviation of 430750.4 with a minimum
of 0 and a maximum of 2822472 for Contract Irregularities, a standard deviation of 68734.95 with a
minimum of 0 and a maximum of 440288 for Statutory Tax and Deduction Irregularities, a standard
deviation of 37257.8 with a minimum of 0 and a maximum of 154814.3 for Payroll Irregularities, a
standard deviation of 6.87e+07 with a minimum of 3.67e+07 and a maximum of 3.63e+08 for
Revenue, and a standard deviation of 3.20e+07 with a minimum of 2465447 and a maximum of
1.56e+08 for Internally Generated Funds (IGF), all corresponding to 60 observations.
16
Table 3: Ordinary Least Squares (OLS) Regression Results
Source: Annual Auditor General’s Report for MMDAs from 2014 to 2019
The results show that payroll, statutory tax and deduction, procurement and stores, cash and internally
generated funds have positive significant effects on revenues of MMDAs in Ghana (Table 3).
Specifically, a unit increase in all the independent variables apart from contracts affect revenue
performance by positive level of significance. This outcome is not surprising since MMDAs with
higher irregularities are more capable of affecting revenue performance. Similarly, a unit increase in
internally generated funds is found to positively affect revenue performance at a significant level.
The p-value, Prob>F = 0.0000, for the F-test is significant because it captures the data of the
probability greater than F being less than 0.1, 0.05, and 0.01 which is 90%, 95%, and 99%
respectively. The F-test has shown that this regression model has explanatory power, and it is a good
regression model. This can be explained by looking at the p-value for this regression. As the p-value
for F is 0.0000, it means that as this value is less than 0.1, 0.05, and 0.01, the variable is statistically
significant. Overall, the model representation is statistically significant at all these levels because the
99% is the strongest and being 99% confident in something is stronger than 90% or 95% confident
level. It is a 99% confident that the null hypothesis can be rejected, and the null hypothesis is that the
R-squared is equal to zero. The regression output shows that the variables are statistically significant
because their p-values equal 0.0000. The p-value of the overall regression is highly significant
(p>0.00), which indicates the higher fitness of the results. Also, the R2 of 0.8514 indicates that, the
17
variables in the model jointly explain about 85% of the variations which is particularly good.
Moreover, because of the use of robust standard errors, the estimates are robust to any serial
correlation and heteroscedasticity.
Table 4: Correlation Marix Results
Source: Annual Auditor General’s Report for MMDAs from 2014 to 2019
This section presents results of correlation matrix as well as determinants of financial irregularities
in the MMDAs of Ghana. The correlations among independent variables are generally low which
may indicate the absence of multicollinearity (Table 4). Nonetheless, STATA normally omits
variables that are highly correlated.
5.0 Conclusion
This study was set out to investigate the effects of financial irregularities and internally generated
funds on the total revenues of Metropolitan, Municipal and District Assemblies (MMDAs) in Ghana
using cross-sectional data from the auditor general’s annual reports. While financial irregularities
have persisted in the reports before and after adoption and implementation of International Public
Sector Accounting Standards (IPSAS), little is known about the drivers of these irregularities.
However, for these MMDAs to continue to prepare and present transparent and accountable financial
reports credible enough devoid of any financial irregularities, the determinants of these irregularities
should be known. Using STATA, this study used 2014 to 2019 auditor generals reports on MMDAs
in Ghana to examine the determinants of financial irregularities. The pooled OLS was used as the
estimation technique with the multiple regression extension. The ultimate objective of the research
was to examine the correlation between the dependent variable of total revenues and the independent
variables of cash, procurement and stores, contract, statutory tax and deduction, and payroll
18
irregularities respectively as well as internally generated funds. The findings depict that both
independent variables experienced a positive correlation with the dependent variable. Under
regression observation, the model representation is statistically significant at all confidence levels
tested. Moreover, the regression output showed that the variables are statistically significant with
respect to their p-values. The conclusions drawn were that the model was significant in explaining
the performance in relation to the independent variables.
19
References
Acheampong, F. (2016). Examination of accounting procedures and practices adopted by Ghana
Water Company Limited.
Adhikari, P., & Mellemvik, F. (2010). The adoption of IPSASs in South Asia: A comparative study
of seven countries. In M. Tsamenyi & S. Uddin (Eds.) (Vol. 10, pp. 169–199). Emerald Group
Publishing Limited.
Ajao, O., Evans, O., & Samuel, D. (2013). Public sector accounting and developing economies: A
comparative review and analysis of Ghana and Nigeria. Unique Journal of Business
Management Research, 1(3), 034- 041.
Akotia, P. (2016). Audit and Accountability in the Government of Ghana: A Records Management
Perspective. Integrity in Government through Records Management: Essays in Honour of
Anne Thurston, 127-137.
Appiah, D., & Abdulai, A.-G. (2017). Competitive clientelism and the politics of core public sector
reform in Ghana.
Auditor General`s Report on the Accounts of Metropolitan, Municipal and District Assemblies
(MMDAs) 2019.
Aveh, F. K., Awunyo-Vitor, D., & Afriyie, R. O. (2016). Independence, objectivity, and integrity
compliance by public sector internal auditors in Ghana: evidence from Ashanti Region.
International Journal of Critical Accounting, 8(5-6), 444-462.
Ayee, J. R. (2003). Local government, decentralization, and state capacity in Ghana. Critical
Perspectives on Politics and Socio-Economic Development in Ghana. Leiden: Brill, 45-81.
Aziz, M. A. A., Rahman, H. A., Alam, M. M., & Said, J. (2015). Enhancement of the Accountability
of Public Sectors through Integrity System, Internal Control System and Leadership Practices:
A Review Study. Procedia Economics and Finance, 28, 163-169. doi:
https://doi.org/10.1016/S2212-5671(15)01096-5
Babatunde, S. A., & Dandago, K. I. (2014). Internal Control System Deficiency and Capital Project
Mismanagement in the Nigerian Public Sector. Procedia - Social and Behavioral Sciences,
164, 208-221. doi: https://doi.org/10.1016/j.sbspro.2014.11.069
Balabonienė, I., & Večerskienė, G. (2015). The Aspects of Performance Measurement in Public
Sector Organization. Procedia - Social and Behavioral Sciences, 213, 314-320. doi:
https://doi.org/10.1016/j.sbspro.2015.11.544
Banyen, K. T., & Nasamu, M. A. (2015). Challenges in Managing Government Payroll Systems in
Ghana: The Way Forward.
Block, J. H., Miller, D., & Wagner, D. (2014). Bayesian methods in family business research. Journal
of Family Business Strategy, 5(1), 97-104. doi: https://doi.org/10.1016/j.jfbs.2013.12.003
20
Boateng, E. A. (2016). Managing State-Owned Enterprises: The Special Projects of Ghana.
Chang, H., Chang, H., Choy, H. H., & Choy, H. H. (2016). The effect of the Sarbanes–Oxley Act on
firm productivity. Journal of Centrum Cathedra, 9(2), 120-142.
Christiaens, J., Vanhee, C., Manes Rossi, F., Aversano, N., & Van Cauwenberge, P. (2015). The
effect of IPSAS on reforming governmental financial reporting: An international comparison.
International Review of Administrative Sciences, 81(1), 158– 177.
Domingues, A. R., Lozano, R., Ceulemans, K., & Ramos, T. B. (2017). Sustainability reporting in
public sector organisations: Exploring the relation between the reporting process and
organisational change management for sustainability. Journal of Environmental
Management, 192, 292-301. doi:
http://doi.org/10.1016/j.jenvman.2017.01.074
Edmonds, C. T., Edmonds, J. E., Vermeer, B. Y., & Vermeer, T. E. (2017). Does timeliness of
financial information matter in the governmental sector? Journal of Accounting and Public
Policy, 36(2), 163-176. doi: http://doi.org/10.1016/j.jaccpubpol.2017.02.002
Feiveson, L. (2015). General revenue sharing and public sector unions. Journal of Public Economics,
125, 28-45. doi: https://doi.org/10.1016/j.jpubeco.2015.03.004
Gitman, L. J., Joehnk, M. D., & Billingsley, R. (2015). PFIN 4: Cengage Learning.
Gitman, L. J., & Zutter, C. J. (2012). Principles of managerial finance: Prentice Hall.
Haruna, P. F., & Kannae, L. A. (2016). Implementing Good Governance Reform in Ghana: Issues
and Experiences with Local Governance1. Public Administration in Africa: Performance and
Challenges, 135.
Kaiser, P. J., & Streatfeild, J. (2016). A Practical Approach to Public Sector Reform: Following the
Dollar in Reforming Road Maintenance. Development Policy Review, 34(5), 745-757.
Kromidha, E., & Cordoba-Pachon, J.-R. (2017). Discursive Institutionalism for reconciling change
and stability in digital innovation public sector projects for development. Government
Information Quarterly, 34(1), 16-25. doi: https://doi.org/10.1016/j.giq.2016.11.004
Lindgren, I., & Jansson, G. (2013). Electronic services in the public sector: A conceptual framework.
Government
Information
Quarterly,
30(2),
163-172.
doi:
https://doi.org/10.1016/j.giq.2012.10.005
Meyer, J. W., & Rowan, B. (1977). Institutionalized Organizations: Formal Structure as Myth and
Ceremony Author (s): John W. Meyer and Brian Rowan Source: American Journal of
Sociology, Vol. 83, No. 2 (Sep. 1977), pp. 340-363 Published by: The University of Chicago
Press St. American Journal of Sociology, 83(2), 340–363.
21
Nagalinagm, N., Mangala, F., & Kumudinie, D. (2015). The Development of Public Sector
Accounting a nd Financial Reporting in Sri Lanka. International Journal on Governmental
Financial Management, Vol. XV, N.
Ofoegbu, G. N. (2014). New Public Management and Accrual Accounting Basis for Transparency
and Accountability in the Nigerian Public Sector. Journal of Business and Management,
16(7), 104 113.
Oppong, S., Arora, R., Sachs, P., & Seidu, M. (2016). Appraisal of corporate governance in a lower
middle-income country: The case of Ghana. Accounting, 2(1), 37-44.
Othman, R., Aris, N. A., Mardziyah, A., Zainan, N., & Amin, N. M. (2015). Fraud Detection and
Prevention Methods in the Malaysian Public Sector: Accountants’ and Internal Auditors’
Perceptions.
Procedia
Economics
and
Finance,
28,
59-67.
doi:
https://doi.org/10.1016/S2212-5671(15)01082-5
Owusu, A., Owusu, A., Weir, C., & Weir, C. (2016). The governance-performance relationship:
evidence from Ghana. Journal of Applied Accounting Research, 17(3), 285-310.
Palthe, J. (2014). Regulative, Normative, and Cognitive Elements of Organizations: Implications for
Managing Change. Management and Organizational Studies, 1(2), 59–66.
Pitt, S.-A. (2014). International standards for the professional practice of internal auditing.
Rahman, I. K. A., Rahman, N. A. A., Azhar, Z., Omar, N., & Said, J. (2015). Management
Accounting Best Practices Award for Improving Corruption in Public Sector Agencies.
Procedia Economics and Finance, 31, 503-509. doi: https://doi.org/10.1016/S22125671(15)01192-2
Sarbanes, P. (2002). Sarbanes-oxley act of 2002. Paper presented at the Public Company Accounting
Reform and Investor Protection Act. Washington DC: US Congress.
Spekle, R. F., & Verbeeten, F. H. M. (2014). The use of performance measurement systems in the
public sector: Effects on performance. Management Accounting Research, 25(2), 131-146.
doi: https://doi.org/10.1016/j.mar.2013.07.004
Stan, B., & Sven, M. (2000). An institutional perspective on performance measurement and
management in the “new public sector.” Management Accounting Research, 2000, 11,
ter Bogt, H., & Tillema, S. (2016). Accounting for trust and control: Public sector partnerships in the
arts.
Critical
Perspectives
on
Accounting,
37,
5-23.
doi:
http://doi.org/10.1016/j.cpa.2015.10.002
Thompson, N., Ravindran, R., & Nicosia, S. (2015). Government data does not mean data
governance: Lessons learned from a public sector application audit. Government Information
Quarterly, 32(3), 316-322. doi: https://doi.org/10.1016/j.giq.2015.05.001
22
Tricker, R. B., & Tricker, R. I. (2015). Corporate governance: Principles, policies, and practices:
Oxford University Press, USA.
William Jr, M., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A systematic
approach: McGraw-Hill Education.
Wynne, A., & Mear, F. (2016). Government Financial Reporting-Good Practices from sub-Saharan
Africa.
Yapa, P. W. S. (2014). In whose interest? An examination of public sector governance in Brunei
Darussalam.
Critical
Perspectives
on
Accounting,
25(8),
803-818.
doi:
https://doi.org/10.1016/j.cpa.2014.03.003
23