EXPLORING THE DETERMINANTS OF FRAUD PREVENTION IN VILLAGE FUND MANAGEMENT: EVIDENCE FROM REGENCIES AND CITIES IN NORTH SUMATRA PROVINCE, INDONESIA

Abstract

This study examines the determinants of fraud prevention in village fund management across regencies and cities in North Sumatra Province, Indonesia. Fraud in local public finance management continues to threaten the effectiveness, accountability, and sustainability of rural development. Grounded in agency theory and the fraud triangle framework, this research analyzes how institutional integrity, internal control systems, accountability mechanisms, and community participation contribute to reducing the likelihood of fraudulent practices. Using data collected through surveys from village officials and community representatives, the study employs Partial Least Squares Structural Equation Modeling (PLS-SEM) with SmartPLS to test the measurement and structural models. The outer model results confirm that all indicators exhibit strong convergent and discriminant validity, with loading factors exceeding 0.70, Average Variance Extracted (AVE) values above 0.50, and reliability coefficients greater than 0.70. The inner model analysis reveals that institutional integrity and internal control systems have a significant and positive effect on fraud prevention, while accountability and community participation serve as complementary mechanisms that enhance transparency and social control. The findings underscore that fraud prevention in village fund management requires not only formal control mechanisms but also cultural and participatory approaches that strengthen ethical behavior and local governance. This study contributes to the growing body of literature on public sector accountability and rural financial governance by providing empirical evidence from Indonesia, where village funds constitute a major component of decentralization policy. The findings offer practical insights for policymakers in improving the design of internal controls, ethics-based training, and community-based monitoring systems to foster a culture of integrity in public resource management.