Auditing system and achievement of financial accountability in local governments: the moderating role of institutional quality

Abstract

Purpose: This study evaluates the impact of auditing systems—measured by internal audit efficiency, external audit effectiveness, and audit findings implementation—on the financial accountability (financial reporting quality and transparency) of Local Government Areas (LGAs) and Local Council Development Areas (LCDAs) in Southwest Nigeria. It also examines the moderating role of institutional quality in this relationship. Methodology: Anchored on Agency Theory, the study adopted a pragmatic mixed-methods research design. Primary data was gathered from selected local governments using structured questionnaires for a quantitative sample of 320 financial professionals, alongside semi-structured interviews with 18 key respondents and a financial expert. Quantitative data was analyzed using Partial Least Squares Structural Equation Modeling (PLS-SEM), while qualitative data was evaluated via NVIVO thematic analysis. Results and Conclusion: Results showed moderate to low baseline perceptions of financial accountability (item means falling below 3.00), alongside significant variation in auditing system effectiveness. Internal audit efficiency, external oversight, and rigorous implementation of recommendations significantly affect financial stewardship. The study concludes that institutional quality acts as a vital moderator to prevent political interference and enforcement failures. Implication of findings: Sub-national policymakers must strictly safeguard the structural and political independence of audit offices, establish legal mandates for the timely implementation and public disclosure of audit findings, and systematically upgrade institutional enforcement frameworks to curb corrupt practices.