The author was born in 1956. He graduated from the Yokohama National University with a bachelor’s degree in economics. He also graduated from the University of Rochester in the U.S. with an MBA degree.
| Since the late 1980s, reforms of public finance systems have been made based on the ‘New Public management Theory (NPM) which emphasizes the introduction of market principles in the government sector. This article takes a look at the future role to be played by the Board of Audit, Japan, in making the government realize effective implementation of NPM-based reforms. |
Since the late 1980s, reforms of administrative and public finance systems based on the New Public Management (NPM) theory have been made, largely in Anglo-Saxon countries such as the United Kingdom and New Zealand. Since then, these reforms have gradually expanded to Nordic countries, including Sweden and Finland, and continental countries, including the Netherlands and France. The basic principle of this NPM theory requires that market principles should be introduced in the government sector and that administrative management should shift from an input control and process-oriented approach to an output (outcome) control and customer-oriented approach. NPM theory has been translated into action as follows: 1) The government’s role is modified through the privatization of state-run enterprises and/or the introduction of Public Private Partnerships (PPP); 2) The "Performance-based Management" approach is practiced through the establishment of independent agencies and/or performance measurements; 3) Public accounting and budget systems are reformed through the introduction of corporate accounting methods such as accrual basis accounting.
In Japan too, reforms based on NPM theory have gradually been made through the introduction of policy evaluation and independent administrative institutions. It is quite likely that NPM theory will be widely adopted to improve the efficiency of administrative activities and the soundness of public finance. In advanced Western countries that have implemented NPM-based reforms, a framework to enable the market principle and the output (outcome) control approach to function effectively has been established. In these countries, the Supreme Audit Institutions (SAIs) are playing important roles. I would now like to study future roles to be placed by the Board of Audit of Japan in terms of helping to realize the effective implementation of NPM -based reforms.
1. "Performance-based Management" and the role of SAIs In advanced Western countries, the financial conditions of the central governments have worsened due to the slowdown in economic growth rates, etc. since the late 1980s. As a result, these central governments were required to improve administrative efficiency and regain their fiscal health. At the same time, it was widely understood that administrative approaches focusing on input controls for budgets, personnel, etc. have limitations. Since fiscal conditions worsened and citizens’ demands for administrative services increased and diversified, it was increasingly important for central governments to allocate limited financial resources to each policy reasonably and efficiently.
To respond to these tasks, some advanced Western countries granted discretionary power for budgeting and staffing to the chief operating officer of each Ministry or independent agency. At the same time, these advanced countries introduced so-called "Performance-based Management," an administrative approach that aims at improving results and performance. In the "Performance-based Management" approach, goals are established, and performance measurements are conducted in light of such goals. In countries where the "Performance-based Management" approach has been adopted, Parliament controls the cabinet. Therefore, a performance plan in which goals and quantitative performance targets for each policy or for each independent agency "are established must be submitted to Parliament for approval in advance. After the performance plan is implemented, a performance report containing actual performance results is prepared and submitted to Parliament.
Performance measurements are self-evaluations made by Ministries, etc., and any budget and other proposals that reflect evaluation results, are examined by Parliament. In order for Parliament to ensure that "Performance—based Management" functions effectively, it is essential to improve the quality of evaluations and the reliability of evaluation results. To secure the reliability of evaluation results, a third party, on behalf of Parliament, must verify the following: 1) the targets of each policy are clearly established; 2) the performance indicators that can properly evaluate the effects of each policy are selected; 3) administrative tools that can attain the targets of each policy most efficiently and effectively have been adopted; 4) the target values of performance indicators are set at appropriate levels; and 5) the actual values of performance indicators are accurate and not biased.
To perform the above items, the third party must meet the following conditions:
1. be independent from the cabinet that implements policies; 2) be large enough in the size of the organization to respond to all policies of all Ministries; and 3) have knowledge gained through experience in administrative practices. In advanced Western countries that have implemented administrative reforms using NPM theory, SAls are performing the role of the third party mentioned above.
2. Reform of public accounting system/budget system and the role of the SAIs In advanced Western countries, the sustainability of the government sector has come into question due to the maturation of the economic structure and the progress of the aging society since the late 1980s. As a result, central governments have been required to explain the assets and liabilities that are held by the government sector, taxes/social insurance premiums that are to be borne by the citizens in the future, and other related matters. Since the performance measurement system was introduced to evaluate the outcomes/performances of each policy or each independent agency from the standpoints of 3Es (economy, efficiency, and effectiveness), it is necessary to grasp costs by policy or by the administrative work of each independent agency to make evaluations from the standpoints of economy and efficiency. After the financial conditions of the government sector were disclosed and performance measurements from the standpoints of 3Es were implemented, the central governments were increasingly required to establish a framework under which such financial and performance information is reflected in budgets.
To respond to these tasks, some advanced Western countries have reformed their public accounting systems and the budget systems as follows. They have introduced some elements of corporate accounting methods, such as accrual basis accounting, into the public accounting system, and have introduced accrual-based and output-based budgeting. Under this new public accounting system/budget system, a budget proposal containing budget amounts, etc. for each policy is prepared and submitted to Parliament for approval, as Parliament controls the cabinet. After policies are implemented, financial statements such as balance sheets and administrative cost statements are prepared and submitted to Parliament.
The financial statements prepared on an accrual basis contain the subjective judgments of each Ministry, and budget and other proposals which reflect the financial data of these financial statements are examined by Parliament. However, the public accounting system containing some elements of corporate accounting may function effectively only if the quality of accrual basis accounting improves and the reliability of financial statements is secured. To secure the reliability of financial statements, a third party, on behalf of Parliament must verify the following: 1) the financial statements are prepared by each Ministry in accordance with governmental accounting standards and related laws and regulations; and 2) these financial statements properly indicate the financial conditions and administrative costs of each Ministry.
To perform the above items, the third party must meet the following conditions:
1) be independent from the cabinet that prepares financial statements; 2) have the statutory authority to demand modification/improvement of inappropriate governmental accounting standards or related laws and regulations; and 3) have knowledge gained through experience in administrative practices. In advanced Western countries that have implemented administrative reforms using the NPM theory, SAIs are performing the role of the third party mentioned above.
In Japan, the basic principles of NPM theory are adopted in administrative management. As for "Performance-based Management," a policy evaluation system was introduced to all Ministries in January 2001, and independent administrative institutions were established as independent agencies in April 2001. As for the reform of the public accounting system, corporate accounting principles are applied to independent administrative institutions and government corporations, such as public corporations. At the central government level, however, only balance sheets consolidating the general account and special accounts(on a trial basis) have been prepared since FY 1998 Under these conditions, the writer would like to examine the roles of the Board of Audit of Japan hereunder with reference to the trends in advanced Western countries.
1. Performance-based Management
(1) Extensive implementation and improvement of performance measurements made by the government as a whole
The policy evaluation system in Japan requires that every Ministry adopt three evaluation methods, which are project evaluation, performance measurement and program evaluation. Since some of these evaluation methods were introduced for the first time in Japan, it seems to take a long time for policy evaluations to take root and demonstrate the expected effects. This is because it may take time to refine evaluation methods to the level that they are really effective as it is rather difficult to identify the effects of policies, or to establish a causal link between the outputs (administrative activities) and their effects.
Therefore, it is recommended that the Board of Audit of Japan: 1) audit the implementation of policy evaluations made by all Ministries and the conditions of the use of evaluation results; and 2) ask for improvements if there are inappropriate practices based on audit results, and introduce good practices. Thus, the Board of Audit of Japan can contribute to the extensive implementation and improvement of policy evaluations by all Ministries.
(2) Improvement of the reliability of performance reports, etc. made by all Ministries
Under the Government Policy Evaluation Act, the Ministry of Public Management, Home Affairs and Posts and Telecommunications (MPHP) is authorized to undertake evaluation activities to ensure that policy evaluations will be objectively and strictly made by all Ministries under the policy evaluation system. In December 2002 and April 2003, MPHP announced the review reports on policy evaluations in all Ministries in 2001. However, the MPHP conducted "examinations of objectivity and strictness in the formality of policy evaluations made by administrative organizations." In other words, the Ministry’s examinations are only superficial.
Therefore, it is recommended that the Board of Audit of Japan: 1) in the project evaluations, verify economy calculation as a precondition for approval of projects and verify the cost-benefit ratio computed beforehand in comparison with actual figures at the time of audit; and 2) in the performance measurements, verify that target values of performance indicators are set at appropriate levels and actual figures of performance indicators are correct and not biased. The Board of Audit of Japan may then contribute to an improvement in the reliability of performance reports made by Ministries by conducting audits of the details of policy evaluations made by Ministries.
2. Reform of the public accounting system
(1) Extensive implementation and improvement of accrual basis accounting
In Japan, at the level of independent administrative institutions and government corporations, such as public corporations, financial statements have been made in accordance with accounting standards based on corporate accounting methods. At the central government level, however, the Study Group on the Method to Explain Fiscal Conditions (the Ministry of Finance) only suggested the preparation of accrual-based financial statements of all Ministries based on corporate accounting standards in June 2003. If corporate accounting methods are introduced in the public accounting system, government accounting standards will be essential because there are differences between administrative .and corporate activities. To ensure that accrual basis accounting takes root, it is important to establish a board to examine the government accounting standards to be applied to the central government, public corporations, and independent administrative institutions.
Therefore, if a government accounting standards advisory board is established, it is recommended that the Board of Audit of Japan participate in the board as a member, and express its views on the principles and procedures of accounting treatment as an organization to verify the financial statements of all Ministries. This is because government accounting standards will be the criteria for determining whether financial statements are properly made or not. Thus, the Board of Audit of Japan may contribute to ensuring that accrual basis accounting is adopted by all Ministries.
(2) Improvement of the reliability of financial statements, etc.
In Japan, the financial statements of independent administrative institutions and government corporations, such as public corporations, are audited by the Internal Auditors of each institution or corporation. In the case of independent administrative institutions whose capital is above 10 billion yen, besides the Internal Auditors audits, their financial statements are also audited by external auditors who make the audit contracts with the heads of institutions.
Financial statements will be made in accordance with related laws and regulations, government accounting standards, etc. However, if these laws and regulations do not properly reflect institutional changes or actual conditions, those financial statements that are prepared in accordance with these laws and regulations will not always properly indicate the financial conditions or costs of government corporations or independent administrative institutions. Since Internal Auditors or external auditors are not given the authority to ask for the amendment to government accounting standards and regulations and therefore they must admit these laws and regulations as given conditions, they enter their opinions in financial statements.
If related laws and regulations do not reflect actual conditions, the Board of Audit of Japan may contribute to the improvement of the reliability of financial statements: 1) by clarifying the matters to be noted in correctly understanding the financial statements of government corporations or independent administrative institutions; 2) by asking for amendments, if any financial statements do not properly reflect financial conditions, etc. of government corporations or independent administrative institutions; or 3) by asking for amendments, when any laws or regulations do not reflect actual conditions.
From the viewpoint of government mechanisms, the basic principles of NPM theory admit that the cabinet is given extensive discretionary power in implementing policies and Parliament controls the cabinet based on the effects of policies. Before policies are implemented, budget proposals reflecting performance plans are submitted to Parliament, and after policies are implemented, performance reports and financial statements are submitted to Parliament. After having understood the effects of policies implemented by the cabinet with reference to such performance reports and financial statements, parliament examines budget proposals for a new fiscal year in which policies are to be reviewed. To ensure that parliament’s control over the cabinet is effective, therefore, it is essential to maintain the reliability of performance reports and financial statements. In advanced Western countries that have introduced NPM theory, it is the SAI -independent from the cabinet- that makes an effort to maintain and improve the reliability of performance reports and financial statements.
In Japan, "Performance-based Management" is implemented as policy evaluations are conducted by all Ministries. The public accounting system has been partially reformed as corporate accounting principles are applied to independent administrative institutions. To ensure that administrative methods utilizing NPM theory will be effective, it is essential to improve the reliability of performance reports and financial statements because Ministries’ subjective views tend to be included therein. Therefore, the Board of Audit of Japan, which is independent from the cabinet, is expected to play the important role of improving the reliability of performance reports and financial statements.
(Note: the opinions expressed in this paper are personal to the writer, and do not necessarily represent those of the Board of Audit of Japan)