Digital transformation and internal control: When and how it works for local government in Japan

This study examines the determinants of digitalisation and internal control in the public sector, with a particular focus on Japanese local governments. Although research on digitalisation and digital transformation (DT) in local governments has expanded in recent years, the adoption of DT and its effects on internal control remain underexplored. In this context, we address the following research question: What factors enhance DT and internal control in local governments? Based on an integrated framework of legitimacy theory and stakeholder theory, this study highlights the role of human errors in information systems and the pressures exerted by key stakeholders on local governments that implement DT for internal control purposes. Using survey data, we find that local governments with experience in human errors and those facing stronger stakeholder pressures, including lawsuits from residents, are more likely to establish internal control systems through DT. The results indicate that local governments develop and adopt internal control systems through DT primarily to defend their legitimacy and respond to the oversight of citizens as key stakeholders. These findings demonstrate that the integrated framework effectively explains the development of DT for internal control, where the goals and expectations often present a paradox.