The rapid advancement of digital technologies and artificial intelligence (AI) is transforming public sector financial reporting by enabling greater efficiency, accuracy, transparency, and accountability. This paper examines the impact of digitalization and AI on public sector financial reporting in Malaysia, with particular emphasis on the opportunities and challenges associated with their adoption. Using a conceptual and literature-based approach, the study synthesizes existing research and Malaysian policy initiatives to identify the key implications of emerging technologies for public financial management. The analysis indicates that digitalization and AI provide significant opportunities through enhanced process automation, improved transparency and accountability, stronger fraud detection and risk management, data-driven decision-making, and long-term cost efficiency. However, their effective implementation is constrained by several challenges, including shortages of skilled personnel, fragmented legacy systems and data silos, cybersecurity and privacy risks, regulatory and ethical gaps, and high implementation costs, particularly among smaller public agencies. The paper therefore proposes targeted upskilling and reskilling programmes, a unified data governance framework, strengthened cybersecurity infrastructure, clear ethical guidelines for AI adoption, and greater utilisation of scalable cloud-based solutions. The study contributes to the emerging literature by highlighting the need for a balanced digital transformation strategy that integrates technological innovation with institutional readiness, governance, and human capabilities. Addressing these issues is essential for Malaysia to realise the full potential of digitalization and AI in achieving more efficient, transparent, accountable, and sustainable public sector financial reporting.
Adnan, M. F., Bahrudin, A. N., & Hashim, S. (2024). Factors Influencing the Adoption of Artificial Intelligence (AI) Based Accounting System in Malaysian Organization: A Conceptual Paper. Accounting and Finance Research, 13(2), 80. https://doi.org/10.5430/afr.v13n2p80
Agostino, D., Lourenço, R., Jorge, S., Bracci, E., & Cruz, I. (2025). Data science and public sector accounting: Reviewing impacts on reporting, auditing, and accountability practices. Public Money and Management, 46(6), 690–699. https://doi.org/10.1080/09540962.2025.2529266
Alhosani, K., & Alhashmi, S. M. (2024). Opportunities, challenges, and benefits of AI innovation in government services: a review. Discover Artificial Intelligence, 4(1). https://doi.org/10.1007/s44163-024-00111-w
Baladari, V. (2020). Adaptive Cybersecurity Strategies: Mitigating Cyber Threats and Protecting Data Privacy. Journal of Scientific and Engineering Research, 7(8), 279–288.
Benbunan-Fich, R., Desouza, K. C., & Andersen, K. N. (2020). IT-enabled innovation in the public sector: introduction to the special issue. European Journal of Information Systems, 29(4), 323–328. https://doi.org/10.1080/0960085X.2020.1814989
Campion, A., Gasco-Hernandez, M., Mikhaylov, S., & Steve, M. (2022). Overcoming the Challenges of Collaboratively Adopting. Social Science Computer Review, 1–33.
Caroline Geetha, Mat Salleh Ayub, & Elijah Vivin Vincent Chandran. (2024). the Influence of Adopting Artificial Intelligence (Ai) on Malaysia’s Economic Environment. Malaysian Journal of Business and Economics (MJBE), 11(1), 102–115. https://doi.org/10.51200/mjbe.v11i1.5294
Collina, M. (2026). Integrated Cloud and Artificial Intelligence Solutions for Smart Governance Fraud Detection and Digital Service Delivery. 9(3), 1000–1007. https://doi.org/10.15680/IJCTECE.2026.0903013
Elsamad, S. A. (n.d.). Inside the Mind of Corruption?: Towards Detecting Bribery Tendency with Deep Learning on EEG.
Gunasilan, U. (2024). Digital Transformation Technologies Reshaping. Accountancy Business and the Public Interest, 07, 106–113.
Lee, C. S., & Tajudeen, F. P. (2020). Usage and impact of artificial intelligence on accounting: Evidence from Malaysian organisations. Asian Journal of Business and Accounting, 13(1), 213–239. https://doi.org/10.22452/ajba.vol13no1.8
Leocádio, D., Malheiro, L., & Reis, J. (2024). Artificial Intelligence in Auditing: A Conceptual Framework for Auditing Practices. Administrative Sciences, 14(10). https://doi.org/10.3390/admsci14100238
Magdaleena Kowalczyk. (2024). Robotic Process Automation in accounting for public sector entities from the perception of clerks – evolution or revolution?? 48(3), 197–214.
Marzouki, A., Chouikh, A., Mellouli, S., & Haddad, R. (2023). Barriers and actions for the adoption and use of Artificial Intelligence in the public sector. ACM International Conference Proceeding Series, 94–100. https://doi.org/10.1145/3614321.3614334
Mellouli, S., Janssen, M., & Ojo, A. (2024). Introduction to the Issue on Artificial Intelligence in the Public Sector: Risks and Benefits of AI for Governments. Digital Government: Research and Practice, 5(1), 1–6. https://doi.org/10.1145/3636550
Mohammad Belayet Hossain, Mahadi Hasan Miraz, & Abba Ya’u. (2024). From Legality To Responsibility: Charting the Course for Ai Regulation in Malaysia. In Iium Law Journal (Vol. 32, Issue 1).
Mohd Nasir Saari, Mustafa Man, Mohd Adza Arshad, M. K. Y. & W. A. W. A. B. (2025). Transforming Cost Management in Malaysian Public Construction Through Data - Driven Rate Standardisation with J - Selaras. Intelligent Systems and Applications, September.
Nabilah, F. (2024). Future of Malaysia ’ s AI governance (Issue November).
Ogu, O. A., Nkemjika, A. K., & Chinedu, O. D. (n.d.). Optimizing Public Services Delivery Through Artificial.
Oktari, V. (2026). Leveraging Cloud Computing and Artificial Intelligence Capability to Strengthen Good Governance in Public Organizations: The Mediating Role of Innovation Strategy. Jurnal Riset Ekonomi Manajemen (REKOMEN), 9(1), 109–125. https://doi.org/10.31002/rekomen.v9i1.3592
Pamisetty, V., Pandiri, L., Singireddy, S., & Narasareddy, V. (2025). Leveraging AI , Machine Learning , And Big Data For Enhancing Tax Compliance , Fraud Detection , And Predictive Analytics In Government Financial Management. Asian Review of Accounting, 5, 1770–1784.
Rajput, A., & Katamba, I. (2024). International Journal of Research Publication and Reviews Leveraging Artificial Intelligence and Big Data in Public Accounting?: Redefining Audit Practices and Financial Reporting. 5(11), 5516–5531.
Shawang, S. H., Indiran, L., Fu, C., & Fahim, N. A. (2024). The Influence of Big Data Management Towards Big Data Decision-Making Capability in The Malaysian Public Sector. 40.
Sun, T. Q., & Medaglia, R. (2019). Mapping the challenges of Artificial Intelligence in the public sector: Evidence from public healthcare. Government Information Quarterly, 36(2), 368–383. https://doi.org/10.1016/j.giq.2018.09.008
Unit, E. P. (2021). Malaysia digital economy blueprint. Economic Planning Unit, Prime Minister Department, Putrajaya.
Wan Ahmad Tirmizi Wan Sulaiman, Iskandar Hasan Tan Abdullah, Nik Sarina Nik Md Salleh, & Sakinah Mat Zin, W. N. A. T. I. (2025). Developing Talent and Enhancing Performance in the Public Sector: Strengthening Government Workforce Capacity for Malaysia’s National Development. International Journal of Research and Innovation in Social Science (IJRISS), 10(19), 3265–3273. https://doi.org/10.47772/IJRISS
Wan Mohamad Noor, W. N. B., Abd Razak, S. N. A., Mat Jusoh, Y. H., & Hasan, S. J. (2024). Navigating the Digital Landscape: Unraveling Technological, Organizational, and Environmental Factors Affecting Digital Auditing Readiness in the Malaysian Public Sector. Journal of Emerging Technologies in Accounting, 21(1), 111–127. https://doi.org/10.2308/JETA-2022-072
Weekly, E. (2021). Malaysia Digital Economy Blueprint?: Boosting cloud capabilities in Malaysia.
Wibisana, P. A., Wijoyo, S., Nadia, F. N. D., Amiati, M., & Putri, S. A. (2026). Cloud-powered knowledge management: a systematic literature review of public sector innovation through cloud computing. Cogent Business and Management, 13(1). https://doi.org/10.1080/23311975.2026.2616543
Zgarni, A. (2026). Artificial Intelligence and the Enhancement of Audit Quality: An Empirical Investigation. International Journal of Scientific Research and Modern Technology, 5(1), 103. https://doi.org/10.38124/ijsrmt.v5i1.1154
Kamaruddin, N. I., Sahibudin, N. A. M., Zakee, M. A. M. M., Jusoh, Y. H. M., Bahari, R., & Rahman, S. A. (2026). The Impact of Digitalization and Artificial Intelligence on Public Sector Financial Reporting: Opportunities, Challenges, and Future Directions. International Journal of Academic Research in Business and Social Sciences, 16(10), 351–362.
Copyright: © 2026 The Author(s)
Published by Knowledge Words Publications (www.kwpublications.com)
This article is published under the Creative Commons Attribution (CC BY 4.0) license. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this license may be seen at: http://creativecommons.org/licences/by/4.0/legalcode
