Study Notes on Regional Financial Accounting and Local Governance in Indonesia

Introduction to Regional Financial Accounting and Local Governance

Regional financial accounting is specifically employed by local governments to facilitate the management and administration of regional finances. This management serves as a critical mechanism for governing and organizing the household affairs of the local government. Within the broader scope of public sector accounting, regional financial accounting has garnered significant attention from various stakeholders since the reform era. According to the 1945 Constitution of the Republic of Indonesia, local governments are authorized to regulate and manage their own governmental affairs based on the principles of autonomy and co-administration (tugas pembantuan). The provision of broad autonomy is strategically intended to accelerate the realization of public welfare by enhancing services, empowerment, and community participation.

Through this expanded autonomy, regions are expected to improve their competitiveness while adhering to principles of democracy, equity, justice, specificity, and regional potential within the framework of the Unitary State of the Republic of Indonesia (NKRI). In increasing efficiency and effectiveness, local governments must consider relationships between different levels of government and between regions, as well as the diversity of local potential. The aspect of authority must respect the uniqueness of regions, while financial relationships, public services, and the utilization of natural and other resources must be conducted fairly and harmoniously. Furthermore, local governments are expected to navigate global competition by leveraging developments in science and technology. To fulfill these roles, regions are granted the broadest possible authority alongside the rights and obligations required to implement regional autonomy within the national governance system.

Legislative Evolution and Rationales for Change

The transition from Law Number $22$ of $1999$ to Law Number $32$ of $2004$ regarding Local Government was driven by amendments to the $1945$ Constitution and various People's Consultative Assembly (MPR) decrees. These include MPR-RI Decree Number $IV/MPR/2000$ regarding Policy Recommendations in the Implementation of Regional Autonomy, MPR-RI Decree Number $VI/MPR/2002$ regarding Recommendations on Implementation Reports of MPR Decisions, and MPR-RI Decision Number $5/MPR/2003$ regarding suggestions on implementation reports by the President, DPR, BPK, and MA.

Political legislation also influenced these shifts, including Law Number $12$ of $2003$ regarding General Elections, Law Number $22$ of $2003$ regarding the Composition and Position of MPR, DPR, DPD, and DPRD, and Law Number $23$ of $2003$ regarding Presidential Elections. From a financial perspective, the framework is supported by Law Number $17$ of $2003$ concerning State Finance, Law Number $1$ of $2004$ concerning State Treasury, and Law Number $15$ of $2004$ concerning the Audit of State Financial Management and Accountability.

Principles of Regional Autonomy and Governance Harmonization

Regional autonomy is built on the principle of the broadest possible autonomy, meaning regions have the authority to manage all government affairs except those specifically reserved for the Central Government. This empowers regions to create local policies aimed at public service, community empowerment, and welfare. This is paired with "real and responsible autonomy." Real autonomy implies that government affairs are handled based on existing tasks, authorities, and obligations that have the potential to grow according to regional specifics; thus, the content of autonomy varies between regions. Responsible autonomy means the implementation must align with the goal of empowering the region and improving people's welfare as part of national objectives.

Local governments must ensure harmonious relationships with other regions through cooperation to prevent disparities and maintain the integrity of the Unitary State of the Republic of Indonesia. The Central Government is obligated to provide guidance through research, development, planning, and supervision, as well as establishing work standards, guidance, training, and evaluation. Additionally, the Central Government provides facilities, assistance, and encouragement to Ensure that autonomy is implemented efficiently and effectively.

Formation of Regions and Special Zones

The formation of new regions is primarily intended to improve public services and accelerate welfare while serving as a venue for local political education. Formation must account for economic capability, regional potential, area size, population, and socio-political, socio-cultural, and security considerations. The government may also establish special zones within autonomous regions for national interests or specific functions. Examples include cultural heritage sites, national parks, strategic industrial developments, high-tech developments (such as nuclear energy or missile launches), communication infrastructure, mining, telecommunications, transportation, free trade zones/ports, military bases, strategic mineral conservation, national resource research labs, social laboratories, and specific correctional institutions. The Central Government is required to involve local governments in the formation of these special zones.

Division of Governmental Affairs

According to Law Number $32$ of $2004$ Article $20$ , Paragraph $3$ , the central government utilizes the principles of decentralization, co-administration (tugas pembantuan), and deconcentration, while local governments use autonomy and co-administration. Certain affairs remain the absolute authority of the Central Government, including:

International Politics: Appointing diplomats, foreign policy, international treaties, and foreign trade policy.
Defense: Establishing armed forces, declaring war/peace, declaring states of emergency, and developing national defense systems.
Security: Establishing the national police and national security policies.
Monetary Policy: Printing money, determining currency value, and controlling money circulation.
Justice (Yustisi): Establishing judicial institutions, appointing judges/prosecutors, pardons (grasi), amnesties, and forming laws.
Religion: Establishing national religious holidays and recognizing religions.

Regional affairs are divided into "Obligatory Affairs" (Urusan Wajib) and "Optional Affairs" (Urusan Pilihan). Obligatory affairs relate to basic services such as basic education, health, minimal living needs, and basic environmental infrastructure. Optional affairs are linked to the unique potential and characteristics of the region.

Rights and Obligations of Autonomous Regions

Under Law Number $32$ of $2004$ Articles $21$ , $22$ , and $23$ , regions have the right to: manage their own government affairs, elect local leaders, manage regional state apparatus and wealth, collect regional taxes and retributions, receive profit-sharing from natural and other resources, and obtain other legitimate sources of income.

Conversely, regional obligations include: protecting the community, maintaining national unity and NKRI integrity, improving quality of life, developing democracy, realizing justice and equity, improving basic education, providing health and public facilities, developing social security systems, regional spatial planning, developing productive resources, preserving the environment, managing population administration, and preserving socio-cultural values. These rights and obligations are realized through the local government work plan and detailed in the regional budget (APBD) covering revenue, expenditure, and financing. Management must be efficient, effective, transparent, accountable, orderly, fair, and compliant with laws.

Local Government Structure and Regional Apparatus

Local governance is carried out by the Local Government (Executive) and the Regional People's Representative Council (DPRD - Legislative). Regional heads and deputies are elected directly and democratically through the Regional General Election Commission (KPUD). The relationship between the executive and DPRD is based on a partnership where both are equal and parallel. The regional head is assisted by the regional apparatus, which consists of:

Secretariat: Staff elements that assist in policy formulation and coordination.
Technical Agencies: Supporting elements that handle specific policy implementation.
Regional Departments (Dinas): Executive elements of regional affairs.

Financial Management and Accounting Standards

Regional financial management is a subsystem of the national financial management system and is governed by Law Number $33$ of $2004$ regarding Fiscal Balance, PP Number $58$ of $2005$ , and Permendagri Number $13$ of $2006$ . Other primary references include Law Number $17$ of $2003$ , Law Number $1$ of $2004$ , Law Number $15$ of $2004$ , Law Number $25$ of $2004$ (National Development Planning System), and PP Number $71$ of $2010$ regarding Government Accounting Standards (SAP). Good governance pillars—transparency, accountability, and participation—are the foundation of these regulations.

Government Accounting Standards (SAP) transitioned from a cash-towards-accrual basis (PP Number $24$ of $2005$ ) to a full accrual basis (PP Number $71$ of $2010$ ). Article $36$ of Law Number $17$ of $2003$ mandated the implementation of accrual-based accounting within $5$ years. Key provisions of PP Number $71$ of $2010$ (Articles $4$ through $8$ ) include:

Implementation of Accrual SAP, expressed in PSAP and supported by a Conceptual Framework.
Changes to PSAP are regulated by Ministry of Finance regulations after considering BPK input.
The Central Government’s accounting system (SIAP) is regulated by the Ministry of Finance, while local systems are regulated by Governor/Regent/Mayor regulations based on general guidelines.
Implementation can be gradual, moving from cash-towards-accrual to full accrual.

Planning, Budgeting, and the APBD

The Budget (APBD) is the annual financial plan established by local regulations. Planning must involve community participation. Each Regional Apparatus Work Unit (SKPD) prepares a Work Plan and Budget (RKA-SKPD) that aligns budgets with benefits and outcomes. Budgetary discipline principles include:

Revenue plans must be measured rationally.
Expenditures are capped by the budget and must be backed by certain revenue.
All transactions must pass through the Regional General Cash Account.
Planning involves clear goals, indicators, and rational unit prices.

The process begins with the submission of general policy (KUA) aligned with the work plan, followed by RKA-SKPD preparation and DPRD discussion. The approved APBD is detailed by organizational unit, function, program, activity, and expenditure type.

Execution, Administration, and Accountability

The Regional Head holds the power for financial management, delegating to the Regional Financial Management Unit (SKPKD) as the manager and Treasurer (PPKD), and to SKPDs as budget users. This separation ensures checks and balances. The SKPKD functions as the Regional General Treasurer, while administrative verification and SPM (Payment Request) issuance are handled by individual SKPDs to prevent centralization.

Accountability requires the submission of financial reports: Budget Realization Report (LRA), Balance Sheet (Neraca), Cash Flow Statement (LAK), and Notes to Financial Statements (CaLK). These must be audited by the BPK before being reported to the DPRD and the public.

Revenue, Expenditure, and Financing (Post-Reform)

Under Law Number $32$ of $2004$ , the APBD structure includes:

Regional Original Income (PAD): Region taxes, retributions, separated regional wealth management, and other legitimate PAD.
Balance Funds (Dana Perimbangan): Revenue Sharing (Bagi Hasil) from taxes (PBB, BPHTB, PPh $21$ , $25$ , $29$ ) and natural resources (forestry, mining, fisheries, oil, gas, geothermal); General Allocation Fund (DAU) based on a percentage of net domestic revenue and regional equity criteria; and Special Allocation Fund (DAK) for national priorities or regional specificities.
Other Legitimate Income: Grants (hibah) in money, goods, or services; and Emergency Funds (Dana Darurat) for urgent events like financial crises or disasters that cannot be handled by the APBD alone.

Expenditures are prioritized to improve quality of life (education, health, social security) based on standard spending analysis and performance benchmarks. Financing includes:

Receipts: Loans (from central gov, other regions, banks) and regional bonds with DPRD approval.
Payments: Formation of reserve funds (Dana Cadangan) and capital equity participation (Penyertaan Modal) in BUMN/BUMD or private entities.
Surplus/Deficit Management: Surpluses pay debt or fund investments. Deficits are covered by previous year surpluses (SiLPA), reserve transfers, or loans. Local governments must report surplus/deficit positions every semester to the Ministry of Home Affairs and Ministry of Finance.

Shifts in Financial Management Systems

Management in the Reform era (post- $1999/2004$ ) differs significantly from the Pra-reform era (UU Number $5/1974$ ). Historically, regional management followed PP Number $5$ and $6$ of $1975$ and Mendagri Decision Number $900-099$ of $1980$ . Key shifts include:

Accountability: From vertical (to higher government) to horizontal (to the people via DPRD).
Budgeting: From traditional line-item budgets to performance budgets.
Auditing: From simple financial audits to financial and performance (value for money/ $3E$ : Economics, Efficiency, Effectiveness) audits.
Accounting Method: From single entry/cash basis to double entry and accrual systems.
Structure: Shift from "Regional Level I/II" terminology to "Province, Regency, and City."
Governance: Absolute separation between Regional Head (Executive) and DPRD (Legislative).

Regional-Owned Enterprises (BUMD) and Asset Management

Regions may own BUMDs, established via local regulation. Assets used for public interest cannot be sold, pledged, or pawned. However, regional property can be removed from inventory for sale, grant, or destruction if it meets criteria for wear, age, or economic value, provided the process is transparent. Procurement must prioritize domestic products and efficiency.

APBD Approval and Evaluation Process

The Draft APBD must be approved by the DPRD no later than $1$ month before the fiscal year starts (January $1$ to December $31$ ).

Provincial Level: Drafts sent to the Minister of Home Affairs (Mendagri) within $3$ days of approval for evaluation. Mendagri evaluates within $15$ days. If the draft violates public interest or higher laws, the Governor and DPRD have $7$ days to revise it. Failure to comply allows Mendagri to cancel the draft and apply the previous year's budget ceiling.
Regency/City Level: Drafts evaluated by the Governor within $15$ days. Revisions must be made within $7$ days. If not followed, the Governor cancels the draft and applies the previous year's ceiling.
Deadlines: If DPRD and the Head cannot agree on a draft $1$ month before the year starts, the Head uses the previous year's budget figures with authorization from Mendagri (Provincial) or the Governor (Regency/City).