This article is based on excerpts from a presentation made by Mr. Shirakawa during the 5th ASOSAI Workshop held at Tokyo in July 1994.
1. Three Major Audit Streams
Up to the 1960s, the Japan Board of Audit laid particular stress on three audit subjects, viz. procurement, state subsidy and public works.
(a) Procurement Audit
The Board mainly examined Departmental commodity economy (machines, equipment, etc.) and facilities procurement. The Board pointed out many cases of uneconomical purchases, showed possible savings, and recommended remedial measures. The Ministry of Finance (MOF) Budget Bureau also tightened its examinations of the Ministry/Agency procurement budget. Responding to the Board findings, Ministries/Agencies themselves strengthened training and procurement officer discipline. In particular, the subsequent enactment of the Commodity Management Law established systematic Government procurement and inventory control systems. And thanks to these efforts, the number of improper procurement cases decreased rapidly.
(b) State Subsidy Audit
The Board examined State subsidies granted to local governments (prefectures, cities, towns, and villages), agricultural cooperatives and other bodies, and every year found many cases of excess grant of subsidies and other improprieties particularly in the area of agricultural state subsidy, on which the Board focussed its audit manpower resources. Subsequently the Government strictly applied the penal clauses of the State Subsidy Control Law, thereafter enacted by the Diet, significantly reducing improprieties.
(c) Public works Audit
Amid the rapidly growing national economy in the 1960s, the Government implemented numerous public works projects such as roads, harbours, railways and telecommunication construction throughout the country. The Board examined the public works construction costs, technical performance of construction and other related factors, and found cases of insufficient construction performance that failed to meet specifications, and over-estimated costs. Although improprieties have gradually decreased over the years, the Board continues to point out problematic cases.
2. Developments in Public Works Audit
Public works projects are generally implemented in several steps; i.e. planning, designing, costing, bidding, contracting, construction, supervision, inspection, payment etc. However, while generally covering all these stages in public works implementation, the Board's audit has reoriented its emphasis over the years.
Note 1: Japanese Public Account Law says that:
Starting from the final construction stage, the Board examination has gradually traced back to the earlier public works implementation stage i.e. from examination of completed facilities to construction cost estimates, and then to examination of designing and planning. Examination has been further extended to cover public benefit examination - the final public works projects goal.
3. Expanding Social Welfare Audit
The Japan Board of Audit now has 1,200 staff members compared with the 120, 000,000 Japanese population. This means that Japan has one auditor for every 100,000 people. The Board field audit note 2 covers about 10 per cent of the total accounting units, and about 40 per cent of important accounting units (headquarters of Ministries/Agencies and Government-invested public enterprises etc.).
Note 2: Board audit consists of:
In-office documentary audit , where auditors examine statements of accounts and vouchers submitted by auditee agencies.
Field Audit, where auditors conduct peripatetic audit at auditee agencies and project sites.
Although whether these proportions are appropriate or not depends on people's view on the necessity of Government audit, I personally consider them to be too low. This is especially true in case of audit of government activities which produce high volume transaction data. For example, the Ministry of Health and Welfare (MHW), the Japanese Government's major social welfare department, handles an immense volume of transactions for health and pension insurance, medical care payments etc., in its headquarters and branch offices. In auditing such high volume transactions, the Board picks out particular problematic Government activities from time to time and from year to year. However, the Board management staff and auditors sometimes differ over what the problematic areas are and what the high priority audit subjects are in a specific fiscal year. A typical example is social welfare audit. For instance, Board management considered it undesirable to allocate too much manpower for examination of benefits paid to economically weak people because of the small individual benefit payment amounts and beneficiaries' economically weak positions. However, the Board auditors did not necessarily agree, because they found many cases in which beneficiaries made false claims and illegally received benefits. For example, they found;
Faced with many such illegal cases reported by auditors, Board management realized the necessity of warning the MHW (agency responsible for DLSA payment) and Ministry of Labor (agency responsible for UB payment), and of reporting these illegal cases in the Board's Annual Audit Report to draw the attention of taxpayers. The Board's yearly audit plan thereafter listed social welfare as a major audit topic. The Board then allocated extensive manpower resources for social welfare audit with more social welfare audit findings being reported in the annual Audit Report.
These management - auditor differences and subsequent experience clearly show that we need to eliminate preconceived notions in planning and executing audit. These experiences also showed that bottom-up proposals were better than top-down directives for audit planning. The Board of Audit today generally formulates its annual audit plans vising bottom-up proposals.
However, apart from the demonstrated merit of bottom-up approach, the experience of the Board also demonstrated the merit of top-down directives. A typical example was the audit of medical expense proposed by the late Mr. Tsuji, ex-President of the Board of Audit. Mr. Tsuji insisted that:
"Compared with its distinguished service in "hardware (tangible asset) audit" such as public works audit) the Board has largely slighted "software (intangible asset) audit" such as social welfare service audit. A typical
example is medical expense audit. With the growing aged population in Japan, medical expenses paid by Government through various public health insurance systems has been growing rapidly in the past decade. However, despite its big budget scale, the Board auditors have not focused on this area. Further, there have been mass media reports and widespread rumours that many hospitals made false medical reimbursement claims. The Board should examine the validity of medical reimbursement claims and payments."
However, Board auditors balked at the President's proposal because they lacked medical knowledge and were therefore not confident of examining medical bills submitted from hospitals to the Ministry of Health and Welfare (MHW)note 3 Responding to the auditors' misgivings, Mr.Tsuji invited a medical doctor from the MHW as a "Technical Advisor". At the same time, he also established a new audit division exclusively for examination of medical expenses. With the technical support provided by the advisor, the new division's auditors started examining medical reimbursements, and pointed out cases of many irregular medical reimbursements.
Note 3: Japan has MHW - run health insurance systems and MHW
subsidized municipality-run health insurance systems. The MHW and municipalities delegate medical reimbursement payment to public medical reimbursement payment bodies that pay medical bills submitted by hospitals.
1. 3-E Audit today
Today, Government auditing is generally divided into "regularity audit" and 3-E audit. The Japan Board of Audit defines the viewpoints of these two types audit as:
In auditing Government accounts and other activities, individual Board auditors examine them from all these viewpoints. Specifically, in performing 3-E audit, individual auditors comprehensively evaluate specific Government projects from the elements of economy, efficiency and effectiveness.
2. New Audit Concepts
While Japan Board of Audit has conducted its 3-E audit generally from Economy, Efficiency and Effectiveness viewpoints, Board 3-E audit findings have often included elements not categorized as any of these three elements, as shown in the following examples;
(Example 1)
State-run Workers' Accident Compensation Insurance insures workers against sickness and injury, and pays workers' medical costs to hospitals based on prescribed payment standards. However, the Board found that medical payment amounts for the same diseases differed from district to district because Government regional bureaus supplemented the prescribed standards, and consequently, applied standards which differed from district to district. The Board demanded that the regional bureaus apply uniform standards nationwide.
(Example 2)
Ministry of Education (MOE) subsidizes prefectural governments for Rural Area Allowance (RAA) which such governments pay to primary/junior high school teachers working in depopulating under-developed areas. Based on prefectural government claims, MOE determines each area's "under-development level" and pays different RAAs to individual areas. However, the Board found that MOE applied the wrong under-development levels in many cases because it overlooked wrong claims caused by prefectures' failure to identify changing economic status in individual areas. Consequently, there were many cases in which teachers working in unqualified districts received RAAs while those in qualified districts could not receive RAAs. The Board demanded that the MOE re-examine Prefectural governments' claims and instruct such governments to periodically re-examine "under-development levels" of all the individual areas.
(Example 3)
Based on national universities' claims, the Ministry of Education (MOE) exempts national university students' from tuition fee payment if their academic performance exceeds a prescribed level and their economic status (parents' annual income etc.) is below a prescribed level. However, the Board found that while students in some universities were exempted from tuition fee payment, students in other universities with the same economic status could not get exemption. The Board found that this resulted from the MOE failing to strictly define the scope of "income" etc. in its tuition fee exemption application form. Consequently, annual income calculation method etc. differed from university to university. The Board demanded that MOE establish a detailed uniform standard application form and strictly examine submitted applications.
All of these cases, in which particular people received favourable treatment and others did not, suggest possible introduction of a new audit concept "equality". Although this does not necessarily question how much taxpayers' money Government could save, it evidently questions the fairness of Government's financial activities. This may also lead us to another new concept "rationality"." Although these are yet to be suitable illustrated in relation to the 3-E audit viewpoints, I think we might actively introduce these as our new audit concepts as we did in introducing the 3-Es.