* Based on the address delivered at the inaugural Session of the ASOSAI Workshop held at Tokyo during April 1988
The Board of Audit of Japan has one hundred and eight years of history since its establishment in 1880.
While we have to give high regard to the tradition and experience of audit fostered during this long period of time, it is almost needless to say that timely and appropriate response to the dramatic change of socio economic conditions in the society is also required for us. We can observe a number of what we call "New Trends in Government Audit" especially in recent audit activities in Japan.
The first trend which I would like to refer to is, the increasing emphasis on 3E audit, that is, audit from the viewpoints of economy, efficiency and effectiveness.
The compliance audit, which focuses on checking the conformity with budgetary provisions and accounting laws and regulations, is the fundamental aspect of the Government Audit. This type of audit, which is sometimes criticized in Japan as inflexible for being too much reliant on laws and regulations whatever their causes are. Even though we accept this type of criticism in some cases, basically we cannot neglect this aspect of Government Audit.
On the other hand, it is also true that we are required to expand the boundary of our audit beyond this type of audit, that is, the audit from the viewpoints of whether Government projects could have achieved certain level of performance with lower cost or whether they could have achieved higher level of performance with the same level of cost. The former is referred to as economy audit and the latter as efficiency audit.
Picking out some examples of findings of this type of audit in our annual Audit Report for fiscal 1986, we reported some cases of uneconomical purchase of imported medical equipment caused by ignorance of appreciation of Japanese yen against the U.S. dollar. The background of this audit finding is that despite the rising value of Japanese yen against the U.S. dollar caused by the growing trade surplus of Japan, the added value of Japanese yen was not reflected in price estimation of equipment.
For another example, we reported some cases of uneconomical cost estimation of certain public works which we found were due to the failure of reflecting newly developed economical construction method, machine and materials in design and cost estimation. One of the focal points of the audit in Japan is cost estimation and attention is paid to whether or not economic cost estimation is made by taking more advanced and more cost-saving construction technologies into account.
Besides economy and efficiency, another focus of attention is "effectiveness," that is, whether the project has attained the intended goals and expected effectiveness. For example, we have pointed out certain house construction projects which were completed well in terms of economy as well as legal and budgetary compliance but had such problems in terms of effectiveness as significant number of vacancies even long after the completion of construction. It seems to me that unlike the private sector, the public sector is not so deeply attentive to cost-benefit or cost-savings since profit yardstick cannot be applicable there. Furthermore, post-evaluation or close review in terms of effectiveness of the project tends to be neglected to some extent or other. Consequently, the audit of economy, efficiency and effectiveness has come to be focal point in recent years in the Board of Audit of Japan. Findings reported in this type of audit make up nearly 60% in monetary terms of our Audit Report for fiscal 1986 for example.
Second is the improvement of the quality of what I call the "macro audit." Basic pattern of our audit is to point out individual irregular or improper matter by, for example, checking accounting records on individual transactions, and visiting construction sites. In Japan, this type of audit, which focuses mainly on regularity and legal compliance of individual transactions, is susceptible to criticism for being too much reliant on laws and regulations and consequently inflexible. However, the importance of this type of audit, which I call "micro audit," cannot be ignored a3 the starting point of the Government Audit despite its limited scope of audit viewpoints.
However, taking look at another aspect of the Audit in Japan, on the other hand, the Board is entitled to demand actions where there are decided tendency for certain types of misconduct, or present opinions where there are problems in administration or administrative systems even though we cannot criticize individual cases decisively as improper under the present system.
The Board also reports matters on which the auditees have taken action based on the audit findings of the Board before publication of Audit Report and this is what we call "corrections and improvements."
The "action demands," "opinion presentations" and "corrections and improvements" are what I call "macro audits".
The Board is expected to conduct these two types of audit, that is, "micro audit" and "macro audit" with appropriate balance. Taking examples of audit findings of "macro audit" which appeared in the Annual Audit Report for fiscal 1986, the Board reported improper exemptions of insurance premium in National Pension Fund System. Another example is unauthorized disposal or subletting of residences obtained through purchase or loans from the public corporation. In Japan, the Government is providing residences for people through loans and selling with long-term instalments and low interest. To accomplish the Government policy of providing residences for those who are really in need, the unauthorized subletting, or diverting residences obtained to non-residential purpose before full liquidation of instalments or loans is strictly prohibited. The result of our audit appeared in the Audit Report as "action demand" and "correction and improvement".
The cases pointed out by these types of "macro audit" amounts to more than 80% of the total in monetary terms in the Report.
Thirdly, we can point out inclination towards audit on "software" in comparison with audit on "hardware" such as audit of public works and building constructions on which the Board of Audit of Japan has had long period of experience. Now, let me define the term "hardware" as tangible assets constructed by Government Project such as building and civil constructions and remaining outputs of Government Administration as "software". History of "hardware" audit in Japan seems to be conspicuous among Supreme Audit Institutions in the world and we believe the Board has reached considerably high level of audit in this field. On the other hand, audit on software especially such as social security has not been given higher priority, and it seems to me this is because the social security was intended for those who are economically disadvantaged or weak. However, waste should be called waste even in the administration for relieving the weak and should not be ignored. This is especially true in view of the fact that the growing population of the aged is now the serious problem in Japan socially and economically. Serious financial trouble is feared to arise if the population of the aged grows at the current rate because this will certainly lead to increased Government spending for social security such as medical insurance payment and pension for the aged. The role of the Government Audit on social security is going to be paid serious attention under this circumstance.
Taking this situation into account, the Board restructured part of the organization three years ago to cope with the growing demand for audit of social security such as pensions.
Furthermore, the audit of medical spending, which had not been performed was conducted last year after certain period of preparation including invitation of medical expert from Ministry of Health and Welfare as a technical adviser. As a result, the Board reported a number of cases of excessive payment for the medical services for the aged in the Scheme of Government medical insurance and subsidy.
Regarding the Social Welfare, besides these cases, the Board reported for example improper exemption of insurance premium in the National Pension Fund System, which I mentioned earlier, and inadequate screening and examination system vis-a-vis the eligibility of the beneficiaries of Social Aid Scheme for low-income people in Japan.
Amount of public fund pointed out in the audit of Ministry of Health and Welfare in the Audit Report for fiscal 1986 amounts to as high as 12% of total amount compared with only 1% in 1980.
Fourthly, we can point out the development and introduction of new audit techniques. The fact that the audit on "software" such as payment for pension and social insurance was well behind the audit on hardware seems to be closely related to slow-paced development of audit methodologies and techniques in the former type of audit.
Since the spending of public fund in pensions and social insurance system is the accumulation of small payment to individuals insured, the audit methods in this field are obliged to be quite different from that for hardware which consumes considerable amount of money for one project. Thus the audit method of hardware can hardly be applied to the software audit. The Board introduced large scale computer system in 1984 with back ground of such audit environment. Advancing computer technologies among auditee agencies also prompted the Board to introduce the Computer to cope with the situation.
The utilization of computer is apparently effective in auditing Government works which involves immense but fixed type of transactions such as pension, social insurance, and tax collection. For example, we pointed out a number of cases of irregualr receipt of insurance benefits in the Sailors Unemployment Insurance System by matching list of the beneficiaries in the system and list of the insured of Corporate Workers' Pension system by computer. Those who were pointed out as irregular recipients of unemployment insurance benefit were enlisted as corporate employees in the Corporate Workers' Pension System. Board learned that this showed they were receiving unemployment insurance benefit despite they were hired as corporate workers after they lost job of sailors. This was reported in the Audit Report for fiscal 1983.
Taking another example, the Board picked out duplication of beneficiaries of Workers' Compensation System and Corporate Workers' Pension System by utilizing computers almost in the same way. All these examples seem to be telling that audit by computers is taking root in Japan.
Changing the topic to audit criteria, with expansion of audit viewpoints from the traditional regularity and compliance to the economy, efficieny and effectiveness, exact measures of judgment such as laws, regulations, budget provisions, and prescribed design criteria begin to narrow their scope of applicability. This certainly gives rise to demand for new audit criteria such as cost-benefit analysis.
In this context, the Board established ten-member Study Group on Audit Problems comprising outside scholars and experts and started to develop new audit technique and method in 1986. This Group has just finished introductory and general studies and is about to start discussions on specific subjects such as audit of project for road construction and project for development of farmlands for example. This year, the Group plans to conduct research of methodologies of cost-benefit analysis such as analysis of possible travel benefits and time-saving benefits in case of road construction. Travel benefit means benefit derived from cost-saving, such as saved cost for fuels, and time-saving benefits means benefit from the time saved by using newly constructed roads. It also plans to further investigate applicability of the product of the study into actual field audit.
Fifth, the recent development of the Public Relations activities intended to further promote the understanding of the general public vis-a-vis the Board of Audit. The Board has not necessarily been active in Public Relations activities so far, and I think there has been certain philosophical background behind this attitude.
For instance, the idea that the Audit Report should be self-explanatory like judgment in the law court and no comment should be made on it, or say, the audit work is conservative by nature and should be carried out in seclusion from public opinion, or the purpose of Government Audit, which is pointing out defective sides or shortcomings of auditees, does not go well with the purpose of Public Relations, and et cetera.
While it is obvious that there is certain limitation in the roles of Public Relations with regard to audit activities, judging from the nature of the Government Audit itself, it is also true that every effort should be made to make our audit work understood by general public because the audit is not conducted for the sake of audit itself but for the Nation and the people. Furthermore, the Public relations is not intended to win the favour of the general public nor is it alien to Government Audit simply because the purpose of the Government Audit is criticism. In this context, in the past few years the Board has been actively involved in Public Relations activities for mass media and leaders of various spheres of the society such as business circle. This year we have published for the first time a booklet for Public Relations containing brief outlook and various aspects of the activities of the Board. Unfortunately we have no English version yet.
Next is the relation with internal audit institutions. Since the Board finds it difficult to secure the complete appropriateness of Government accounting because of the limited audit manpowers, cooperation with the internal auditors within Ministries and Public Corporations are needed.
The Board has been advocating this type of cooperation, but frankly speaking, insufficient in terms of taking actual measures. Under these circumstances, the Board held the meeting with senior auditors of Government-invested public corporations for the first time and offered explanation on the Audit Report. The Board wants to hold similar meeting with directors of Accounting Divisions of each Ministry and Agency, and further promote the exchange of information and opinions with internal auditors.
Also, the Board has the idea of keeping closer cooperation with certified public accountants, internal auditors of local Governments, scholars and officers in charge of administrative inspection. For the moment, we have tentative plan of setting up discussion forum.
The last point is the utilization of our Audit Report.
While the Government is responsible for making effective use of our Audit report by reflecting audit findings on administration as a matter of course, the Board is also quite attentive to the utilization of Audit Report by auditees.
We have come to have close cooperation with the Budget Bureau of Ministry of Finance and audit findings have come to be reflected more often in the course of budget making especially in the past few years. As a matter of fact, I was in charge of budget-making in the Ministry of Finance for fifteen years. Anyway, we sincerely anticipate the further utilization of our Audit Report in public finance and administration in general.
Now, I would like to say in conclusion that the audit environment and history are different from country to country, and experiences of the Board of Audit of Japan are not necessarily applicable to other countries. However, it would be my great pleasure if our experiences could be of any help to audit work in other countries.