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Democracy and financial Democracy

and financial
transparency of local governments transparency

in Sub-Saharan Africa
Redeemer Krah and Gerard Mertens 681
School of Management and Technology, Open University of the Netherlands,
Heerlen, The Netherlands Received 24 August 2019
Revised 24 December 2019
25 February 2020
Accepted 28 February 2020

Abstract
Purpose – The study aims at examining the level of financial transparency of local governments in a sub-
Saharan African country and how financial transparency is affected by democracy in the sub-region.
Design/methodology/approach – The study applied a panel regression model to data collected from
public accounts of 43 local authorities in Ghana from 1995 to 2014. Financial transparency was measured
using a transparency index developed based on the Transparency Index of Transparency International and
the information disclosure requirements of public sector entities under the International Public Sector
Accounting Standards.
Findings – The study finds the low level of financial transparency among the local governments in Ghana,
creating information asymmetry within the agency framework of governance. Further, evidence from the study
suggests a strong positive relationship between democracy and financial transparency in the local government.
Research limitations/implications – Deepening democracy is necessary for promoting the culture of
financial transparency in local governance in sub-Saharan Africa, perhaps in entire Africa.
Practical implications – There is a need for the local governments and governments, in general, to
deepen democracy to ensure proactive disclosure of the financial information to the citizens to improve
participation trust and eventual reduction in corruption. Effective implementation of the Right to Information
Act would also help promote financial and other forms of transparency in the sub-region.
Originality/value – The study contributes to the public sector accounting literature by linking democracy
to financial transparency in the local government. Hitherto, studies concentrate on how entity level variables
impact on the level of financial information flow in the local government without considering the broader
governance infrastructure within which local governments operate.
Keywords Local government, Democracy, Sub-Saharan Africa, Transparency,
Financial disclosure, IPSAS, Freedom of information
Paper type Research paper

1. Introduction
Democracy has become a global icon with increasing subscription and endorsement of
many countries, including the developing ones (Diamond and Morlino, 2004). In a successful
democracy, there is a free flow and access to the public information about government

© Redeemer Krah and Gerard Mertens. Published by Emerald Publishing Limited. This article is
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Vol. 28 No. 4, 2020
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This article is product of a PhD Study partly funded by the Ghana Education Trust Fund Emerald Publishing Limited
2049-372X
(GETFund). DOI 10.1108/MEDAR-08-2019-0539
MEDAR policies and programmes (Hollyer et al., 2011) and its absence leads to a decline in public
28,4 trust for the government (Fairbanks et al., 2007). This implies that openness and
transparency of government to the citizens in all areas, including financial management, are
critical for a successful democracy. In the context of public administration, transparency
refers to the ability of stakeholders to find out what is happening within a public sector
organization (Piotrowski and Van Ryzin, 2007) and it involves availability and accessibility
682 of information to the public to enable assessment of government performance and actions.
Whilst the notion of secrecy is fading out in public administration, transparency is receiving
increasing endorsement everywhere (Schauer, 2014).
Abelson et al. (2004) suggest that citizens are eagerly looking for accessible and credible
information that enhances their ability to contribute constructively to public policy
processes. Within the principal–agent framework, duty is imposed on governments to make
accurate and relevant information about their operations accessible to the citizens to
eliminate the problem of information asymmetry between the government and the citizens.
Failure to do so creates citizens’ mistrust for the government (Abelson et al., 2004). The need
for transparency among citizens is important because it forms the foundation for democratic
governance (Hollyer et al., 2011), correlates positively with accountability (Hood, 2010) and
serves as an effective disinfectant of corruption (Brusca et al., 2018). Thus, there is growing
pressure on the government to demonstrate openness in the deployment of public money
because of increasing cases of financial malpractices and corruption in recent times
(Guillamon et al., 2011; De Vries and Sobis, 2016). The literature demonstrates that low
transparency leads to high corruption (Saxena, 2017; Iyer and R.N, 2017) in the sense that
instances of corruption are exposed easily in publicly available data (Levie, 2019).
Adiputra et al. (2018) observe that the quality of financial reporting has a significant
positive effect on transparency in Indonesian local government. Financial transparency is
achieved through active disclosure of information about the organization’s underlying
economic dealings in a way that is readily understandable by those using the information. In
a democratic government, financial information concerning the monies collected, spent and
invested are publicly disclosed to enable its citizens to make assessment of the government’s
demonstration of financial accountability (Adiputra et al., 2018). The availability and
accessibility of public information at the local level is essential in the overall perception of
transparent government (Armstrong, 2011) because local government is conceived to bring
local people closer to the government through increasing participation in the policymaking
space and evaluation of accountability of the local government (Dowley, 2006; Crawford,
2009). As much, the local government has a greater need to disclose information about its
operations to the local citizens. The disclosure of financial information about local
government is critical for the reason that the local taxes are collected from the local citizens
for the development of the local community (van Wyk, 2007). The absence of information on
how the government spends the public monies is largely construed as corruption and
inefficient management of financial resources (Guillamon et al., 2011; Albalate, 2012; De
Vries and Sobis, 2016; Saxena, 2017).
Transparency is a prerequisite and a key element of democracy (Rosendorff, 2004; Curtin
and Meijer, 2006). Rosendorff and Vreeland (2006) posit that democracies are more
transparent than those that are not democratic regimes. Notwithstanding, democracy is new
to the governance lexicon of Africa, especially in sub-Saharan Africa. Until the emergence of
democracy in Africa, societies were believed to have been socialized on the notion of secrecy
to the extent that the principle of freedom of information are stifled in sub-Saharan Africa, in
particular (Otenyo and Lind, 2004). African governments turned to be much secretive in
their governance practices meanwhile Maret (2011) posits that government secrecy is
antithetical to transparency and an affront to the citizens’ right to information and Democracy
participation in the policy space. and financial
Ghana is the first country to gain political independence in Africa in 1957 and has made
many unsuccessful attempts in the past to adopt a competitive political system fashioned on
transparency
democracy. It was only in 1992 that the country chartered a sustainable democratic path of
governance that allows for political competition, the election of executive and legislature as
well of rule of law based on the Constitution. Ghana has since become an exemplar of
democracy in sub-Saharan Africa (Gyimah-Boadi, 2009; Abdulai and Crawford, 2010). The 683
country has held seven successful national elections over two decades. It is the expectation
that the local government in sub-Saharan Africa, particularly Ghana, becomes more
transparent with democracy. Notwithstanding, the continent has been afflicted with
massive corruption and Warf (2017) confesses that corruption is a highly visible aspect of
Africa countries. For example, Ghana was ranked 78th country in the 2018 corruption
perception index with a score of 41 per cent (Transparency International, 2018). In the face of
rising corruption in Africa, including Ghana, the question that remains unanswered is
whether democracy in Africa is incapable of inducing the much-needed dose of transparency
to disinfect corruption on the continent? Thus, the aim of the study is to determine the level
of financial transparency in the local governments and the effect of democracy on the culture
of financial transparency in local governance in sub-Saharan Africa, with a focus on Ghana.
The objective is achieved through the use of a panel regression analysis of data collected
from 43 Ghanaian local governments. The study contributes to the public sector accounting
and governance literature by providing insight into how democracy affects the flow of
financial information between the local citizens and the local officials within an agency
framework in sub-Saharan Africa.
The remaining part of the paper has been organized into four sections. The next section
reviews the literature and this is followed by the methodology section that discusses the
research methods and procedures used in achieving the result. The next section presents
and discusses the results of the study, whereas the final section provides the conclusion and
recommendations.

2. Literature review
2.1 Theoretical underpin
The argument that democracy promotes transparency is often based on agency theory,
which is a very popular theory across the social sciences. Agency theory explains the role
and behavior of agents in a fiduciary relationship with the principal and makes propositions
towards addressing the likely agency problems (Fama, 1980; Fama and Jensen, 1983). The
central feature of this relationship is the separation of ownership and control (Fama, 1980).
The agency theory predicts the likely existence of agency problems which may undermine
the outcome of the relationship. A problem of a principal–agent relationship is the inherence
self-interest disposition of an overzealous agent to act in his own best interest rather than
the interest of the principal (Schillemans, 2013). In a self-interest seeking mode, an agent is
likely not to provide relevant information to the principal to evade monitoring and
evaluation rights of the principal, and this creates asymmetric information relationship
where the principal fails to obtain the relevant information for proper monitoring of agent’s
behavior (Miller, 2005). To address these problems, the principal establishes a system that
ensures alignment of the agent’s interest and reducing information asymmetric problem.
This theory provides a theoretical lens for the current study in the sense that citizens–public
managers’ relationship can be likened to the principal–agent relationship where the citizens
are the principal and the managers are the agent. The pubic managers have the tendency to
MEDAR pursue their own interest in conflict with the citizens’ interest, thus withholding information
28,4 from the citizens to avoid monitoring. In this sense, the provision of accessible financial
information about the local government is of citizens’ right not a privilege and therefore the
local managers have no discretion in determining the amount and kind of information that
should be provided about the local government to the citizens. Thus, in this study financial
transparency is treated as citizens’ right and not privilege within the agent-principal
684 framework.

2.2 Concept of good governance

Governance connotes a complex set of structures and processes through which the goal of
public sector management is achieved (Weiss, 2012). The World Bank conceives governance
as the manner in which power is exercised in the management of a country’s economic and
social resources (Weiss, 2012). Further, the international organizations successfully created
a dichotomy of governance as “good governance” and bad “governance” based on certain
clearly defined indicators (Langbein and Knack, 2010; Weiss, 2012). The absence of good
governance indicators such as democracy, transparency, accountability, responsibility, rule
of law and so on is taken to be bad governance (Yung, 2012; Melville and Mironyuk, 2016).
Sancino et al. (2018) posit that good governance is a broad and value-laden concept that
drives certain dispositions and actions of the government. Good governance is considered as
a tool for improving societal development and reducing corruption (Hooghe and Quintelier,
2014). Whilst there are different principles of good governance in the literature, our study
focuses on the nature of power in society (Sancino et al., 2018), in terms of democracy and
transparency.
Democracy means different things to different people and it can be examined from
economic, social, communitarian and political perspectives (Rahman, 2014). Whilst political
democracy is concern about the governance processes within a country, all other
perspectives of democracies focus on certain outcomes. For this study, democracy is
examined from a political perspective. Thus, democracy is a political system in which
crucial government offices such as the executive and legislature are filled through contested
elections (Przeworski, et al., 2000). To Dahl (1989), democracy is a unique process of coming
up with collective and binding decisions. In a democracy, political competition is encouraged
in an atmosphere where incumbents have some chances of losing the elections, and all
contestants comply with the results of the elections (Rosendorff and Vreeland, 2006).
Democratic regimes pivot around voting equality, enlightened understanding, citizen
participation, free information flow and accountability of the government to the people
(Geiselhart, 2004). Democratic institutions and processes permit voters to exert pressure on
politicians to formulate policies that respond to public needs. Sustained democracy over
time deepens the participation of citizens in governance through the free flow of information.
Transparency, on the other hand, is a nebulous concept (Grimmelikhuijsen, 2010),
however, it generally means openness or allowance of transmission of light to enhance
visibility (Fairbanks et al., 2007). Grimmelikhuijsen and Welch (2012) explain transparency
as the disclosure of information by an organization that enables external actors to monitor
and assess its internal operations and performance. French (2011) expresses a similar view
that an open and transparent government allows information about governmental actions to
be easily accessible and understandable. Transparency is about the availability and
accessibility of relevant information. Thus, a transparent political regime is one that
provides accurate information about itself, its operations, and the country as a whole whilst
permitting information to be made available and accessible (Rosendorff and Vreeland, 2006).
Many citizens are interested in knowing how the government is spending their money
(Abelson et al., 2004) making financial transparency a critical area for governments. Democracy
Generally, financial transparency is about the disclosure of all relevant financial information and financial
in a timely and systematic manner. The level of government’s financial transparency is
gauged by the amount of information available in the financial reports of an organization
transparency
(Guillamon et al., 2011). It involves the disclosure of financial information and the access to
such information by the stakeholders (Araujo and Tejedo-Romero, 2016). Financial
transparency may take the form of mandatory disclosure or voluntary disclosure (Ryan
et al., 2002; Herawaty and Hoque, 2007). Mandatory disclosure refers to the minimum
685
information disclosure required by law or regulations and this leads to passive transparency
(Meijer, 2014). On the other hand, voluntary disclosure is the provision of additional
information in the financial report or enhancing access to such information in the form and
medium that the entity determines appropriate. Voluntary disclosure, according to Meijer
(2014), yields proactive transparency.

2.3 Relationship between democracy and transparency

The relationship between political democracy and transparency have been examined in the
extant literature. In general, transparency is acknowledged as a tenet of democracy (Curtin and
Meijer, 2006; Piotrowski and Van Ryzin, 2007; Fairbanks et al., 2007; Bauhr and Grimes, 2014).
Transparency is seen as an element of democracy and that democratic regimes are more
transparent than those that are not (Curtin and Meijer, 2006). This implies that there is a
positive relationship between democracy and transparency. The close association has led Fung
(2013) to develop the notion of democratic transparency, which conceptualizes information
politically as a resource to transform the behavior of large organizations in socially beneficial
ways. Fung (2013) ascribes four principles to democratic transparency. First, information about
the operations and actions of large organizations, such as the government, that is of interest to
the citizens should be made readily available to the public. Second, the quantum of available
information should commensurate the extent to which operations and activities of the
organization jeopardize citizens’ interests. Third, the information should be organized and
provided in ways that are accessible to targeted user groups. Finally, the social, political,
and economic environment of society should be organized in ways that allow individuals and
groups to take action based on the information disclosed. Accordingly, democracy offers
citizens the sovereign right to know what goes on in government, including financial matters. It
empowers citizens to enforce obligations on public organizations to disclose more information
to reduce or eliminate information asymmetry within the principal–agent framework.

2.4 Political ideology and transparency

Political ideology has been found to have a strong relationship with transparency
(Piotrowski and Van Ryzin, 2007) and this is because governing party’s ideology influences
information disclosure in a political democracy (Sol, 2013). The political party’s
transparency disposition is basic to the extent to which information about government is
made publicly available and perhaps this has led Cuadrado-Ballesteros and Vaquero-Cacho
(2015) to study transparency among political parties in Spain. The result shows that there is
a lack of transparency among political parties, especially in relation to financial information
and therefore the fight against corruption will be difficult to win. Similarly, Bastida et al.
(2019) observe that political integrity, which reflects the absence of agency problems
between the citizens and the public managers, affects the financial situation of the
government. They bemoaned the effect of corruption of mayors of local government on the
cost of municipal borrowing in Spanish local government.
MEDAR This implies that political ideology is capable of influencing the level of transparency of
28,4 the government. Meanwhile, the findings are inconsistent. Cuadrado-Ballesteros et al. (2013)
find that left-wing political parties are associated with higher transparency than the right-
wing political parties on the ground that left-wing governments defend a larger public
sector, thus they are expected to make information readily available and accessible to all the
constituents (Ferejohn,1999). Contrary, Araujo and Tejedo-Romero (2016) provide evidence
686 that supports the view that local governments governed by the right-wing party are more
transparent than those governed by left-wing parties. The current study joins the debate to
provide further evidence on whether the political party influences the culture of financial
transparency.

2.5 Population size and transparency

The literature demonstrated that the population of the local government is associated with
transparency in local government. Guillamon et al. (2011) found a positive and significant
relationship between the population of local government and financial transparency.
Enikolopov and Zhuravskaya (2007) conclude that smaller local governments were associated
with less transparency resulting in increased corruption. The positive influence of the
population size of a local government on transparency was confirmed by many studies
(Esteller-Moré and Polo Otero, 2012; Styles and Tennyson, 2007; Araujo and Tejedo-Romero,
2016). These studies explained that large local governments may have much pressure from the
citizens because of sizeable resources made available to them. Thus, this study expects that the
size of the local government will have a positive influence on financial transparency.

2.6 Local government in Ghana

Ghana is a sub-Saharan African country and the first to gain independence from colonial
rule in Africa in 1957. Ghana is a unitary constitutional democracy but has suffered from
military interventions several times between 1966 and 1992 to cut short the life of three
democratically elected governments. It was in 1992 that the 1992 Constitutions of the 4th
Republic was ushered into the country’s political system. This paved way for a new
democratic government system in which ballot boxes have become a norm of choosing
persons into the office of President and Parliament. And ever since the system has been
jealously guarded, protected and sustained. The country has seized every opportunity to
promote the tenets of democracy and invested heavily in deepening democracy at the local
levels to ensure participation of the local people in decision-making process (Ahwoi, 2010;
Adusei-Asante, 2012). Unfortunately, corruption is high in the face of democracy and the
country’s fight against corruption seems not to achieve the desired result over the years
(Transparency International, 2018). Meanwhile, democracy is expected to promote
transparency, which will eventually disinfect corruption in the country.
At the time of the study, the country has 10 administrative regions within which the local
governments operate. The regional distribution of the local government is shown in Table I.
In Ghana, the local government is categorized in accordance with the Local Government Act
1993 as Metropolitan Assembly, Municipal Assembly and District Assembly (MMDAs)
based on the citizen’s population and the economic viability of the area. In the
categorization, a local government with at least 75,000 people with commensurate economic
viability is designated as District Assembly, Municipal Assemblies have at least 95,000
people with tested economic viability whilst Metropolitan Assemblies have at least 250,000
people with required economic viability. The number of MMDAs rose from 110 in 1993 to
216 in 2012 because of the creation of new ones in accordance with the Local Government
Act 1993. Therefore, on the onset of the 4th Republic of Ghana in 1992, which is the cradle of
 Number of
Democracy
Regions Metropolitan Assembly Municipal Assembly District Assembly and financial
transparency
Ashanti 1 8 21
Brong-Ahafo 0 8 19
Central 1 7 12
Eastern 0 10 16
Greater Accra 2 9 5 687
Northern 1 2 23
Upper East 0 3 10
Upper West 0 1 10
Volta 0 5 20
Western 1 3 18
Total 6 56 154
Table I.
Regional distribution
Source: National Association of Local Authorities in Ghana retrieved from http://countrystudies.us/ghana/ of local governments
104.htm in Ghana

sustained democratic governance, there were only 110 MMDAs existing. The study focuses
on these 110 MMDAs as target population because they have existed over the span of the
Fourth Republic and therefore met the selection criterion.

3. Methodology
Panel regression is considered most appropriate for the study because of the cross-sectional
and time-series attributes of the data set (Gujarati,2013) and de Jager (2008) encourages
accounting researchers to explore the benefits of panel regression. The data was collected
from 43 local governments over a 20-year period (1995-2014), a period for which data was
available. Panel regression was chosen because it combines time series of cross-section
observations which gives more informative data with more variability, less collinearity
among variables and a high degree of freedom (Baltagi, 1995). In addition, Panel data has
the advantage of enabling the researcher to model the heterogeneity across groups which is
common in panel data (Gujarati, 2013; Hsiao, 2014). The data was analyzed using STATA
13. The panel regression model specification is:
FinTit ¼ b 0 þ b 1 Demoit þ b 2 Polideoit þ b 3 Sizeit þ « it
where
FinTit = financial transparency of enity “i” in time “t”;
Demoit = the duration of democracy of entity “i” in time “t”;
Polideoit = the political ideology of the government in power that influences
entity “i” in time “t”;
Sizeit = the size of the local government “i” in terms of population and
economic viability in time “t”;
b0 = the constant;
b 1 ; b 2 and b 3 = the intercepts of the independent variables, respectively; and
« it = the error term.

3.1 Measurement of variables

The core variables of interest to the study are financial transparency as dependent variables
and democracy, political ideology and population size as the independent variables.
MEDAR 3.2 Financial transparency
28,4 This is the dependent variable of study obtained from the financial reports of 43 local
governments from 1995 to 2014 using content analysis to develop a disclosure index.
Content analysis is a process by which the investigator seeks to examine the content of
written or published communication by a systematic, objective and quantitative analysis
(Gibson and Guthrie, 1995). According to Gibson and Guthrie (1995) content analysis
688 involves systematic classification and description of communication content (often limited
to documentary evidence such as annual reports, published articles and online database) in
line with certain predetermined categories, including the development of disclosure index. A
disclosure index has been extensively used by scholars in measuring the level of disclosure
in annual reports (see, for example, Ryan et al., 2002; Hooks et al., 2002; Cheung et al., 2010).
A disclosure index, according to Guthrie and Abeysekera (2006), is a research instrument
comprising a series of pre-selected items that, when scored, provide a measure that indicates
a level of disclosure for the purpose for which it has been constructed. In developing a
disclosure index, Cheung et al. (2010) recommend that consideration is given to previous
literature when identifying the items that make up the index. Therefore, the study considers
the financial transparency index developed by Transparency International (TI) Spain in
2008 (see, for example, Guillamon et al., 2011; da Cruz et al., 2016) together with the reporting
requirements of International Public Sector Accounting Standards (IPSASs) in crafting the
index for the study.
TI- Spain developed a survey instrument that measures the transparency of local
governments of which financial transparency was an aspect of the instrument. The TI-Spain
index considers three broad indicators of financial transparency: accounting and budget,
revenue and expenditure and municipal debt. The accounting and finance indicator has 11
items covering publications of vital financial information about the municipal. The
indicators for transparency on revenue and expenditure were made up of 5 items relating to
basic financial ratios of the municipal in relation to revenue and expenditure. Transparency
on debt is measured by four items focusing on the analysis and disclosure of the debt status
of the municipal.
In respect of the IPSAS, it provides the minimum disclosure requirements of all public
sector entities, including the local governments. IPSAS 1 paragraphs 16 and 17 deal with
financial information that should be reported in the general-purpose financial statement of
public sector entity, which is largely consistent with the TI-Spain index. The key areas that
disclosure was required are the source and application of revenues, the financial condition,
the cash requirements cost and sustainability of public services and budget information of
the entity.
Based on the methodology of these prior indexes, a 20-items financial transparency index
was developed for the current study taking into account the local context adaptability.
Similar to the TI-Spain’s index, our index focuses on five broad areas of transparency of the
local government: budget information, financial performance, financial condition, financing
and general information. The budget information disclosure is measured by four items
relating to the provision of information on the budget in the financial report. Financial
performance is measured with five items centered on the publication of information relating
to revenues and expenditure. The financial condition assesses the disclosure on cash and
other resources, including the payables using three-items. Transparency in terms of
financing of the local government considers three items on the source of funding of the
entity, clearly providing information on the internally generated revenues,
intergovernmental transfers and debt. The general information transparency is assessed
based on five-items covering timeliness, auditors’ reports, notes on accounting policies and
level of disaggregation of revenues and expenditure. To enhance the validity of the index, Democracy
the views of three independent accountants in the local government sector were sort on the and financial
appropriateness of the items. These experts confirmed all the items but few as an
appropriate measure of financial transparency in the local government. Where there were
transparency
dissenting views, the items were modified accordingly to reflect the general view of the
experts.
In relation to the scoring, each item was scored 0, 1 or 2. The value “0” was awarded to an
item when it was not disclosed at all in the financial report, “1” is awarded when the item is 689
not explicitly disclosed and “2” when the item is explicitly disclosed. The scores were
reviewed by three independent financial experts to ensure the reliability of the
interpretations associated with content analysis (Yongvanich and Guthrie, 2005). Where the
result of the independent reviewers varies from the assessment made for a given item, a
reconciliatory procedure is carried out together with the independent reviewers to reach a
consensus on the appropriate scores. Note that the experts used in the scoring are the same
as those who had validated the index in the developing stage.
The next stage is the computation of the financial transparency index. The index has
been expressed in percentage for each of the local governments involved in the study.
Further, the mean financial transparency index was computed to represent the transparency
of the local governments in Ghana for a given year. The formula used is given as:

RFDi
FTi ¼ x 100
EDSi

where
FTi
P = financial transparency index of a given local government;
FDi = aggregate financial disclosure score obtained by a given local government for a
given year; and
EDSi = expected disclosure score (which is the sum of the maximum score for each of
the 20-items) for each local government.

3.3 Democracy
There is no agreement on how to measure democracy as the definitions of democracy are far
from consensus (Kekic, 2007; Horowitz, 2006; Giannone, 2010). Consistent with Rosendorff
and Vreeland (2006), the study used a minimalist definition of democracy which focuses
primarily on the role of elections in a political system. In this context, democracy refers to a
practice of a political regime in which elections are used to select key officers into political
office. This is a fundamental feature of democracy and its continuity may define the success
of democracy. A democracy index developed by the Economist Intelligent Unit (EIU) is
largely acknowledged as the most comprehensive measure of democracy of states (Unit and
Britain, 2011), however, such index could not address the needs of this study for two
reasons. First, the EIU index started only in 2006 and therefore does not fit the time span of
the current study hence inappropriate for use. Second, the index uses several variables
including transparency to construct the index and its use to measure a casual effect of
democracy on transparency will create collinearity problems. The most appropriate way to
measure democracy is the duration of the democratic period as Rosendorff and Vreeland
(2006) argue that it offers an opportunity to explore interesting possibilities. In other words,
the study wants to avoid measures of the regime that define democracies as transparent as
MEDAR this creates multicollinearity problems. Thus, in this study democracy is measured by the
28,4 duration it has covered. In 1995, for example, Ghana’s democracy was three years old
therefore democracy was coded as “3” and democracy in 2014 was coded “22”. The
assumption is that democratic virtues improve with time as more investment is required to
sustain it.

690 3.4 Political ideology

Political ideology in Ghana could be classified conveniently as left-wing and right-wing
(Piotrowski and Van Ryzin, 2007). The left wing party is a social democrat that promotes
social interventions and inclusion whilst right-wing party has capitalist ideology with a
focus on the market forces to develop society. The political ideology of the central
government is reflected at the local government level as the President is Constitutionally
empowered to appoint the Chief Executives of the local government. Our study proxied the
political ideology of the local government in a given year as follows: code of “1” is assigned
when the government in power is left-wing and “2” when the government in power is right-
wing. The data on the regimes of the political parties were obtained from the Electoral
Commission Database, which is publicly available on the website. The Electoral
Commission is the state institution solely responsible for conducting national and district
level elections.

3.5 Size of local government

The population of local government has been used in the literature to represent the size of
the local government (Piotrowski and Van Ryzin, 2007; Araujo and Tejedo-Romero, 2016). In
Ghana, Local Government Act 1993 (Act 462) categorized the local governments by
population size as Metropolitan Assemblies (250,000 people and above), Municipal
Assemblies (95,000 people and above) and District (75,000 people and above). Thus, the data
for size is proxied as follows: “3” Metropolitan Assembly, “2” for Municipal Assembly and
“1” District Assembly. The status of the local government is explicitly contained in the name
of that local government so this helps in easy coding. For example, the Accra Metropolitan
Assembly suggests that it is a Metropolitan Assembly hence will be scored 3 points. The
categorization of the local government as Metropolitan, Municipal and District Assembly
encapsulates wider measures of population and economic viability and therefore the
inclusion of any economic specific data such as urban status and literacy rate are found to
cause multicollinearity problem. In addition, the information on local government
characteristics such as the age of the local government will not be informative as all the local
governments involved in the study were assumed to be in existence from the time of the 4th
Republic.

4. Results and discussions

This section provides empirical results of the study by using descriptive and multivariate
analyses.

4.1 Descriptive statistics

Table II summarizes the descriptive statistics for the dependent and independent variables.
The results show that financial transparency has a mean of 30.49 and a standard deviation
of 8.14. The mean score of 30.49 per cent implies that financial transparency is low in the
Ghanaian local governments. However, the agency theory suggests that lack of information
flow between the principal (in this case the local citizens) and the agents (the local officials)
will create a problem of asymmetry in the agency relationship which spurs citizens mistrust Democracy
for the government (Schillemans, 2013). Financial transparency in governance reduces or and financial
eliminates the asymmetric challenges in the relationship. The standard deviation of 8.14 and
the range of 17.5 and 55.00 indicate a wide variation in financial transparency among the
transparency
local governments, perhaps because of size and other differences among the local
governments across the country.
An assumption of linear regression model is that the independent variables should not
correlate significantly as this reduces the explanation power of the variables (Stock and 691
Watson, 2015). The violation of this assumption creates the problem of multicollinearity.
The study checked for multicollinearity first by observing the correlation matrix and second
by performing variable inflation factor (VIF) test, which is a widely used measure (Gujarati,
2013). Table III shows that there is a weak correlation between the independent variables
suggesting that the multicollinearity problem is unlikely. This was confirmed by the VIF
result of 1.19. A VIF greater than 10 indicates the possible existence of a multicollinearity
problem (Gujarati, 2013). The correlation results show that there is a strong positive
association between financial transparency and democracy (r = 0.6478) and size (r = 0.6805).
It also shows a negative correlation between financial transparency and right-wing political
orientation. This implies that where there is a strong democratic culture financial
transparency is high.
In panel regression, decision must be made between fixed effect (FE) and random effect
as to the most appropriate model to achieve consistent and efficient results. The FE model
assumes that each of the local governments selected is different, therefore the error term and
the constant (which captures individual characteristics) are not correlated. If the error terms
are correlated, then FE is not suitable because inferences may not be correct and one needs
to model that relationship using random-effect. Hausman test was therefore carried out to
aid the decision and the result is shown in Table IV.
Hausman test hypothesizes that the difference in the coefficient is not systematic. The
test result (Chi-square =9.55, Prob > 0.0228) fails to accept the null hypothesis and conclude
that FE model is an optimal methodology to use in this study (Katchova, 2013). Thus, FE
model was applied in this study.

Variable Obs Mean SD Min Max

FinT 860 30.49128 8.144053 17.5 55.0

Democracy 860 12.48140 5.777672 3.0 22.0
Size 860 1.51977 0.658661 1.0 3.0 Table II.
Pol-ideo 860 1.40000 0.490183 1.0 2.0 Descriptive statistics

Variables FinT Democracy Size Pol-ideo

FinT 1.0000
Democracy 0.6478 1.0000
Size 0.6805 0.4401 1.0000 Table III.
Pol-ideo 0.0843 0.0026 0.1579 1.0000 Correlation matrix
MEDAR 4.2 Panel regression results
28,4 The regression result is shown in Table V. A cluster-robust estimates of the standard errors
were used in the analysis to address any possible issue of heteroscedasticity. Under the FE
model, there is a positive significant relationship between financial transparency and
democracy at a significance level of 0.01 (coefficient =0.76028, p-value = 0.000). When the
AR1 option is applied to the FE model the same conclusion was reached, however, the
692 coefficient and the standard error reduced marginally. The size of the local government was
also found to influence financial transparency significantly in a positive manner
(coefficient = 3.03338, p-value = 0.000). The result under autoregression (AR) option
confirms that size is a significant explanatory variable of financial transparency in the local
government. However, it resulted in lower coefficient and standard error. The political
ideology of the government is found to influence financial transparency at 0.05 level of
significance under the FE model (coefficient = 0.78006, p value 0.045). This indicates that a
right-wing government is less transparent than the left-wing party. However, political
ideology is found to be insignificant under the AR option of the fixed model
(coefficient =0.2196804, p-value = 0.373).
Thus democracy, size of local government and the political ideology together explained
57.20 per cent of the change in financial transparency at the local government. FE with AR
option however reports lower R-square of 53.23 per cent. The aim of the AR option is to
transform the model to remove the nuisance parameters and leave behind the parameters of
interest in an estimable form (Gujarati, 2013; Stock and Watson, 2015). To check the
robustness of the estimated relationship between financial transparency, democracy, size
and political ideology, two other estimation techniques were used: least square dummy
variable (LSDV) FE model and the population average estimator. Whilst LSDV shows a

Variable FE RE

Democracy 0.76028 (0.02457) 0.74618 (0.02419)

Size 3.03338 (0.35581) 3.31517 (0.34393)
Pol-ideo 0.78006 (0.21316) 0.71982 (0.21299)
Table IV. Cons 17.48391 (0.55831) 17.14740 (0.84778)
FE and RE model Hausman test Chi2 = 9.55; p-value = 0.0228

Estimators
Variables FE (within) FE (AR option) LSDV Pooled average

Democracy 0.76028*** (0.06312) 0.73791*** (0.05056) 0.76028*** (0.06473) 0.74762*** (0.06128)

Size 3.03338*** (0.84711) 1.94745*** (0.39106) 3.03338*** (0.86868) 3.28630*** (0.79296)
Pol-ideo 0.78006** (0.36898) 0.21968 (0.24644) 0.78006** (0.37838) 0.72599 (0.36034)
Cons 17.48391 (1.31839) 18.68468 (0.25577) 17.48391 (1.35197) 17.18187 (1.42276)
R-square 0.5720 0.5323 0.8831 
Model (p-value) 0.0000 0.0000 0.0000 0.0000
F stat 115.24 117.20 109.59 
Wald Chi2    53.57
Table V. Notes: Significance are denoted as follows: 1% ***; 5% ** and 10% *. Standard errors are shown in
Regression results brackets below the respective coefficients
very high R-square, the Wald Chi2 under the pooled average estimator was 53.57, very close Democracy
to the FE model with AR option. In line with the earlier result, the significance and the signs and financial
of the coefficient were the same under the FE within and AR models. Therefore, the
relationship between the variables under investigation is consistent and efficient.
transparency
Further, a sensitivity analysis was carried out to see the explanatory power of each
independent and controlled variable included in the step-wise model and the result is shown
in Table VI.
Table VI shows that democracy alone explained over 40 per cent of the variation in 693
financial transparency. An addition of the size of local government in Model 2 improves the
explanatory power to 53.61 per cent and further inclusion of political ideology variable
slightly dropped the R-square to 53.23 per cent indicating that the political ideology offers a
weak explanation of financial transparency in Ghana. In all scenarios, the explanation
power of the model is found to be robust and consistent.
Democracy is found to significantly improve financial transparency and this is
consistent with earlier studies that conclude that democracy promotes transparency (Curtin
and Meijer, 2006; Fairbanks et al., 2007; Bauhr and Grimes, 2014). This implies that as
democracy grows in Ghana, the financial transparency disposition of the local governments’
increases. Therefore, transparency can be improved in the local governments by deepening
the culture of democracy in the country. In extension, when the transparency of the local
governments becomes high corruption and other malpractices in financial management will
be easily exposed, thereby reducing them. Despite the belief that transparency is rhetoric in
Africa because of socialization on the notion of secrecy (Otenyo and Lind, 2004), the results
of the study show that the introduction of democracy has the potential to promote
transparent governance in the local government in the specific and public sector in general.
Further, political ideology is found to affect transparency in the local government.
Specifically, the right-wing orientation of a government makes it less transparent probably
because of capitalist policies that encourage market forces in national development. This
result corroborates the prior conclusions of Piotrowski and Van Ryzin (2007) and Cuadrado-
Ballesteros et al. (2013) but counter the result of Araujo and Tejedo-Romero (2016) which
suggest that local governments governed by right-wing parties are more transparent than
those governed by left-wing parties. Even though the debate continues as to which
ideological orientation promotes transparency, there is a consensus that the orientation of
government significantly affects the level of disclosure to the public (Sol, 2013). In this
regard, the convergence of political ideology on making local government more transparent
should be the concern of civil society organizations and major political parties in the

Variable Model 1 Model 2 Model 3

Democracy 0.79537*** (0.05262) 0.73815*** (0.05074) 0.73791*** (0.05056)

Size 2.06460*** (0.36662) 1.94745*** (0.39106)
Pol-ideo 0.21968 (0.24644)
Cons 20.70646 0.19718 18.17523 (0.20773) 18.68468 (0.25577)
R-square 0.4097 0.5361 0.5323
F-statistics 228.4300 171.9600 171.9800
P-value 0.0000 0.0000 0.0000
Table VI.
Notes: Significance are denoted as follows: 1% ***; 5% ** and 10% *. Standard errors are shown in Step-wise estimation
brackets below the respective coefficients models
MEDAR country. The expectation is that the campaign for high transparency is politically
28,4 indifferent.
The study reveals that the size of the local government has a significant positive
relationship with the level of financial transparency of local governments, supporting the
position of the earlier studies (Guillamon et al., 2011; Enikolopov and Zhuravskaya, 2007;
Styles and Tennyson, 2007; Esteller-Moré, and Polo Otero, 2012; Araujo and Tejedo-Romero,
694 2016). The size of the local government is found to have a positive impact on transparency
probably for two reasons. First, large local government has more pressure from the large
constituents to provide information on the resources mobilized from them. In Ghana, for
example, the Metropolitan and Municipal Assemblies are located urban areas of the country
and therefore are able to collect a lot of monies from commercial activites and other
operations. The smaller assemblies, the district assemblies are unable to raise such monies
because there are mostly located in deprived parts of the country. Second, large local
governments (metropolitan assemblies and municipal assemblies) are more likely to have a
cosmopolitan character with higher literacy level and the enlightened citizens may demand
more information from the local authority, propelling them to be more transparent. In the
District Assembly, the literacy of citizens is low and perhaps less pressure on them to
disclose financial information to the citizens.

5. Conclusion and recommendations

The study examines whether democracy affects the level of financial transparency in local
governments in sub-Saharan Africa, specifically Ghana. The evidence from the panel
regression analysis shows that financial transparency is generally low among the local
governments thereby creating information asymmetric problem, an agency problem, in the
governance of the local government. Meanwhile, democracy is found to improve financial
transparency in local governments in Ghana. In other words, sustained democracy is likely
to erode the presumed notion of secrecy of African societies (Otenyo and Lind, 2004).
Further, the size of the local government was found to have a significant positive
relationship with financial transparency. Large local governments turned to be more
transparent than the smaller ones, suggesting that the government makes policies towards
the rapid development of rural local governments to promote transparency. Further,
political ideology was found to impact transparency significantly at 5 per cent level of
significance. Right-wing political orientation is associated with less financial transparency
in the local government, probably because of the market inclination such as new public
management policies. The overall implication of the study is that a well functioning
democracy is inherently transparent, and this may serve as a disinfectant of corruption.
Probably, African countries are unable to deal with corruption because of weak democracy
with the resulting low transparency (Brusca et al., 2018).
As a practical implication, we recommend that the fight against corruption in Africa
should begin with the enhancement of democracy that supports the free flow of financial
information to the citizens, as this increases the chances of the citizens finding out corrupt
acts within the government. Governments should direct efforts toward creating sustainable
democracy so that financial transparency could become the norm in the local governments
and the public sector at large. A way of achieving financial transparency in government is to
promote open government through e-governance policies that require all local governments
and other public sector entities to publish their financial information on their websites and
social media platforms. Currently, the practice is for entities to submit their financial
information to the limited number of public institutions such as the Minister of Finance, the
Controller and Accountant General, the Auditor General and Minister of Local Government
and Rural Development. Another way is for central government to promote the adoption Democracy
and implementation of the IPSASs in the local governments and across the entire public and financial
sector to enhance the quality of financial information disclosure to the citizens.
We also recommend that passage and operationalization of Freedom of Information Law
transparency
(FOL) are necessary to promote the culture of financial transparency in Ghana and sub-
Sharan Africa. FOI law is known to reduce corruption and increasing the chances to detect
corrupt actions through increasing information flow between the public officers and their
principals in an agency relationship (Peisakhin and Pinto, 2010; Worthy, 2013; Cordis and
695
Warren, 2014). As an exemplar, Ghana has recently enacted the FOL (titled Right to
Information Act 2019, Act 989) but its operationalization is yet to take effect.
Furthermore, we recommend that local governments and other public institutions should
be well resourced and strengthened to enable them to meet the information disclosure
obligation imposed on them as our result shows that large local governments are more
transparent. The question of how much efforts are being made by local governments in sub-
Saharan Africa to become transparent begs for research. The study, therefore, recommends
a study into the strategies that governments are putting in place to advance open and
transparent governance in Africa.
Our study focused on how democracy can improve financial information between the
local citizens and the local officials within the agency framework. Corruption may produce
immunity to transparency as its disinfectant and therefore future accounting researches are
encouraged to focus on how auditing and auditors step up the fight against corruption
within the public sector. Interestingly, corruption is not only found inside the government,
but in other non-parastatals and therefore research on corruption and transparency should
be directed to these unassuming segments of the public sector.
We noted some limitations of the study. Firstly, formulation and application of disclosure
index require the use of judgement which brings forth to some subjectivity in the estimation,
however, this is minimized by the involvement of independent experts during the
formulation and the application stages of the index (Yongvanich and Guthrie, 2005).
Secondly, in an attempt to measure democracy, the study used the duration of democracy in
Ghana as a proxy with the assumption that democracy improves with repeated elections.
However, a democracy index that captures comprehensive democratic data might have been
most appropriate but such data is either unavailable or has equated transparency to
democracy that is likely to cause collinearity issues. The study went around this problem by
using the duration of the democracy measured in years as a proxy. A similar measure of
democracy was used by Rosendorff and Vreeland (2006), arguing that the use of the
minimalist approach to defining democracy provides interesting possibilities.

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Corresponding author
Redeemer Krah can be contacted at: [email protected]

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