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2010 Vol.4
Internal Control of National Government Agencies

2010/10/01

Domestic and foreign corporate scandals, such as fraudulent accounting, have led to increased discussions on internal control and to the development of relevant legal frameworks. Foreign nations have built or improved systems in the public sector that reflect the concept and institution of internal control developed in the private sector. As for Japan’s public agencies, frameworks of internal control have not been developed explicitly; however, their necessity has become increasingly recognized in recent years. This is because there is great anticipation for internal control to provide a solution to the current situation where misconducts are repeatedly brought to light not only in private sector entities, but also in public agencies. The Ministry of Internal Affairs and Communications has set up research groups studying the significance of internal control in local governments and independent administrative institutions. However, the internal control of national government agencies has not been discussed systematically.
According to the widely adopted definition in Japan, internal control is the process incorporated into an organization’s operations and performed by all its members in order to reasonably assure that the following four objectives are attained: (1) effectiveness and efficiency of operations, (2) reliability of financial reporting, (3) compliance with applicable laws and regulations, and (4) protection of assets. This broad concept and activity is connected to all administrative aspects of an organization. To examine how national government agencies should operate, this paper particularly focuses on monitoring mechanisms, because the focus on monitoring is considered to be a first step toward more serious discussions for the following reasons. Various types of monitoring already exist within the national government agencies, but the ways in which they are conducted need to be reviewed. Moreover, knowledge and know-how accumulated through monitoring contribute to the proper design of internal control and improvement in its functionalities.
This paper first summarizes the main recent discussions on internal control. Then, from the standpoint of monitoring mechanisms aimed at (1) multiple government agencies and (2) each individual agency, the current state of monitoring within the national government agencies is overviewed and the issues are summarized. Next, concrete examples of two approaches- centralized and decentralized- to monitoring systems in foreign public sectors are discussed. Lastly, this paper examines the direction in which the monitoring mechanisms within the national government agencies should be restructured.

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