Financial irregularities and fiscal autonomy nexus: a threshold effect analysis of local government entities in Ghana

Purpose: This study aims to explore the critical thresholds at which financial irregularities significantly impede local government fiscal autonomy in Ghana. Design/methodology/approach: This study relied on data sourced from the Auditor-General’s reports from 2012 to 2021. Out of the 260 local government entities available at the time of the study, 216 were deemed to have relevant data and were consequently included in the analysis. The dynamic panel threshold regression analysis and Granger causality analysis were used in the investigation. Findings: The empirical analysis reveals a highly significant association between financial irregularities and local government fiscal autonomy. The results indicate that contract and procurement/store irregularities significantly hinder local government fiscal autonomy above total financial irregularities threshold of 6%. Below this threshold, their effects are not statistically significant. Conversely, cash management irregularities adversely affect local government fiscal autonomy irrespective of the level of total financial irregularities. By implication, policymakers must prioritise strengthening control mechanisms to eradicate or minimise cash management irregularities in all areas to bolster local government fiscal autonomy. Overall, the findings indicate a compelling conclusion that the thresholds at which financial irregularities impede local government fiscal autonomy have important implications for policy development and financial management within local government entities. Originality/value: This study provides empirical evidence on the nexus between financial irregularities and local government fiscal autonomy. Using dynamic threshold analysis offers a new perspective to this field of inquiry.