Financial Accountability & Management, 15 (3) & (4), August/November 1999, 0267-4424

ACCOUNTING SYSTEM REFORM IN JAPANESE LOCAL

GOVERNMENTS
Kiyoshi Yamamoto*

INTRODUCTION

New Public Management (NPM), which is rooted in management theory and

new institutional economics, has been a global movement in many countries
since the 1980s (Hood, 1991; Humphrey et al., 1993; and OECD, 1995).
NPM's underlying belief is that private sector management and commercial
business practices are superior to public management and practices. Although
many variations exist, the common set of reform prescriptions is characterized
by a greater focus on results, devolution of authority, strengthened
accountability and control, client or customer orientation, and introduction
of market elements (Hood, 1995a; and Cheung, 1997). Admittedly, many
commentators criticise the concept arguing, for example, that: consumerism
may cause a passive involvement by citizens rather than active participation
(Ranson and Stewart, 1994); the separation of producer and consumer
neglects the character of co-production or interaction between citizens and
government (Barnes and Prior,1995); and that contracting might downgrade
the invisibilities or erode the professional autonomy (Broadbent, Dietrich and
Laughlin, 1996). Despite such criticisms, NPM has nonetheless achieved
widespread acceptance in the public sector.
Accounting plays a central role in NPM; indeed, Power and Laughlin
(1992) describe the change in modes of public management as a shift towards
`accountingization'. The change from cash based accounting or budgetary
accounting to accrual accounting is part of a broader public sector reform
process in the Anglo-Saxon democracies (Robinson, 1998). A notable
example is the New Zealand government which has prepared its annual report
on a full accrual basis since 1992 (Pallot, 1994 and 1996). The aims of the
introduction of accrual accounting are to facilitate more transparency in
agency performance and to improve efficiency and effectiveness. It is argued
that a full accrual accounting system is able to provide more information than
cash based accounting in terms of quantity and quality.
* The author is a Professor in the Department of Management, Okayama University, Japan. He
greatly appreciates the useful suggestions from Professor June Pallot and the helpful comments of
two anonymous referees on earlier drafts. This research was financially supported by the National
Scientific Research Grant from the Ministry of Education.
Address for correspondence: Kiyoshi Yamamoto, Department of Management, Faculty of
Economics, Okayama University, 3-1-1 Tsushima-Naka Okayama,700-0082, Japan.
e-mail: kiyoshi@e.okayama-u.ac.jp
Blackwell Publishers Ltd. 1999, 108 Cowley Road, Oxford OX4 1JF, UK
and 350 Main Street, Malden, MA 02148, USA.

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Among developed nations, Japan is distinctive in that, until recently, central

and local governments operated their finance without new financial
management techniques. Consequently, little has been written about NPM in
Japan. Hood (1995a and 1995b), in his analysis of public sector reforms of
OECD countries in the 1980s characterises Japan as a `low scorer' in terms of
NPM emphasis. He proposes a hypothesis to explain country variations in
terms of motive and opportunity for shifting toward NPM. In his tentative
model, Japan is positioned as a country where motive (such as fiscal stress; a
small public sector) is low but opportunity (in terms of political system) is high.
As fiscal stress has increased in the 1990s, and the outdated nature of
management practices in the government bureaucracy has become more
apparent (Terasawa and Gates, 1998), Japan has begun to adopt a kind of
NPM. Kokubu et al. (1998) outline these changes, focusing in particular on
the role of the financial control system in central government, especially the
functions of the Ministry of Finance and the Board of Audit (BOA). Local
government is mentioned to the extent that they indicate three measures
through which central government controls local governments: the authority
to approve raising local tax and issuing local bonds, determining local
allocation taxes and subsidies, and setting the local finance plans which local
governments are required to follow.
This paper seeks to complement the work of Kokubu et al. at the central
government level by further explaining the way in which central government
has traditionally controlled local government and the development of
financial management in some local governments under new devolution
initiatives. The paper is organized as follows. First, a brief overview of the
political and financial systems in Japanese local governments, and the control
system operated by central government, is provided. The subsequent section
develops a transition model of pressures for accounting change which is seen to
operate differently in the different accounting sub-systems of financial
accounting, management accounting, and auditing. The model is then
applied to the workings of the centralised control system and the reform of
accounting systems in Japanese local governments. It is suggested that
complementarity between pressure and accounting subsystem is a key element
for successful outcome of the reform. Some innovative reforms in Japanese
local government are highlighted by way of example and the paper concludes
with suggestions for further research.

POLITICAL AND FINANCIAL SYSTEMS IN JAPANESE LOCAL GOVERNMENTS

Japanese local governments are organised into two tiers: prefectures and
municipalities. Prefectures include forty-seven administrative divisions. Each
of the forty-seven prefectures has a governor and a unicameral assembly, both
elected by direct popular vote every four years. Like the prefectures,
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municipalities are self-governing units administered independently and each

municipality has its own principal organizations: the assembly as the
legislature and the chief executive officer as their executive. It is known as the
`president' or the `chief' system. Also, Japan has a unitary rather than a federal
system of government, even though the Constitution provides the basic
principle of local autonomy.
Local governments largely depend on the central government both
administratively and financially. The national ministries have the authority
to intervene significantly in the affairs of local government. In particular,
central government has substantial power to determine the financial affairs
of local government through the financial distribution system. A fixed
percentage of national taxes are provided as local allocation taxes to local
governments for unrestricted use; in addition, the central government grants
subsidies to local governments for specific purposes. Another intervening
measure is the authority of Ministry of Home Affairs (MOHA) to approve
issuing local bonds and raising local taxes.
Central government, especially MOHA, has controlled the finance of local
governments under the centralised system since the end of World War II. As
many scholars (e.g. Yoshida, 1990; Rothacher, 1993; and Johnson, 1995)
have indicated, these central systems are a significant feature in Japanese local
governments. However, there are few studies about how the control system
worked and why it has persisted in the public sector. A brief description of
the management measures developed by MOHA is therefore provided here.
These measures have enabled relatively small governments to continue
without bankruptcy.
First, non-monetary assets are managed in physical terms outside the
accounting system. They are neither recorded nor measured on balance sheets
in financial terms. Instead, data on quantity and quality, such as volume and
acquired time, are reported in the Survey of Public Assets to the MOHA. By
analysing the data, MOHA can control local governments to ensure the
national minimum level by supervision or allocating funds.
Second, human resources are tightly controlled in terms of both number
and wage. Though local governments have the authority to determine the
number of public servants in their ordinances, the numbers of police and fire
service employees are regulated in proportion to the population in the local
government by national law. MOHA also sets the standard numbers in other
services. Wages are compared with the central government and their level is
measured in the Laspeyres index that is reflected in local allocation taxes to
each local government. A local government whose index is more than 100
has local allocation taxes reduced, given that other conditions are identical.
In addition, MOHA sends its officials to many local governments. Since they
occupy high ranking and important positions such as vice governor, and/or
division chief, this human network serves to diffuse MOHA's policies into
local governments.
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Third, MOHA collects financial information on significant parts of

programs, not just the entity's overall financial performance. This
information is called the Statistics of Accounts. Although public services,
other than some public utilities (water, hospital, and transport), are recorded
in cash based accounting, MOHA calculates the program cost of every local
government in a unified form which includes both operating cost and capital
cost. The capital cost is defined as debt redemption (principal repayment +
interest payment) in a similar manner to the former accounting practice in
UK local authorities (CIPFA, 1987). Using these data, the unit cost and
standard unit cost of the program are calculated by demographic group.
MOHA requires local governments whose unit costs are higher than the
standard in the same demographic group to save costs. It also subsidises those
in adverse demographic conditions so as to remedy inequality of services. In
other words, the management practices could be regarded as `enforced
benchmarking' with administrative guidance.
In short, the above measures constitute a sophisticated central management
system which may help to correct disparities between local governments in
terms of quality and cost. Despite the constitutional right of local autonomy,
central government, especially MOHA, is effectively the supervisor of local
governments. The relationship can be viewed as one of supervisor and
subordinates within an organisation and the control system as a large
management accounting system. Furthermore, the Board of Audit (BOA)
has a mandate to audit the local governments when they receive financial
support from central government. BOA reports the audit findings to the Diet
through the Cabinet, not to local governments. Hence, a large part of auditing
is also completed within the central government.
A PROPOSED MODEL OF ACCOUNTING SYSTEM REFORM

One of the best-known existing models of public sector accounting reform is

Lder's (1992 and 1994) contingency model. The model explains the accounting innovation process in terms that contextual variables will influence the
attitudes and behaviour of users and preparers of government financial
information. A combination of favourable contextual conditions and
attitudes/behaviour will facilitate a successful change. The contingency model
has shown remarkable robustness and as a consequence has established itself as
a research paradigm in the public sector accounting (Monsen and Nasi, 1997).
Lder (1994) found the environmental conditions for governmental
accounting innovation in Japan to be generally unfavourable relative to most
of the other eleven jurisdictions in his study. In particular, he found that:

stimuli for governmental accounting innovations were largely missing,

other than moderate fiscal stress in the late 1970s, the early 1980s and again
in the 1990s;
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the political culture is characterized by secrecy, lack of transparency of

political decision processes, and the citizenry's undisputed acceptance of
the decisions of the politically `important people';
political competition, e.g. between the executive and the legislative branches
of government or between the two chambers of parliament or between the
constituency and the government could hardly be observed; if there was
any political competition at all it was between the factions of the governing
Liberal Democratic Party;
the training of senior government accountants is in law or in economics; most of
them therefore have little or no knowledge of private sector accounting and
are not interested in dealing with conceptual issues of governmental
accounting;
there were a considerable number of implementation barriers such as the
degree of codification of public finance and accounting law, the absence of
a Chief Financial Officer responsible for governmental accounting, and the
lack of general accounting knowledge on the part of government
accounting staff.

Given that there have been developments since 1994, it may be timely to
develop a new transition model to analyse public sector accounting change,
and related NPM change, in Japan. The model proposed in this paper (see
Figure 1) also sees accounting reform as contingent: firstly, on external
pressures from the environment and, secondly, on internal pressures from
within the governmental system. Amongst the external pressures in our
model are three key notions in the NPM movement: performance, accountability
and market pressures. (The first two correspond roughly to Lder's
`managerialism' and `accountabilism' drivers.) In contrast to external
pressures, which are influential only, internal pressures are mandated
policies and/or legislation which can target the accounting system directly.
Examples would be the Government Performance and Results Act 1993 in
the USA (Kettl, 1994) or the Public Finance Act 1989 in New Zealand
(McCulloch and Ball, 1991).
Our model focuses on different questions from the Lder model in the hope of
encouraging new insights. The two most significant are as follows. First, instead
of analysing the accounting transformation process as a single phenomenon,
our model recognises that there may be differential effects on the subsystems of
financial accounting, management accounting and auditing. Each subsystem
has the different objectives which the information provider has to meet if they
are to serve the needs of information users. Accordingly, each subsystem may be
influenced by different needs in terms of development and content and changes
in each of the subsystems may take place at different points in time. For
example, the UK's accounting reform in central government was launched at
the establishment of the National Audit Office whose mandates were expanded
to value for money (VFM) audit by the National Audit Act of 1983. The reform
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Figure 1
External and Internal Pressures on Accounting Subsystems

was followed by the market testing for the identified activity in 1991, which
compares with `make or buy' decisions in the private sector. Now, the move to
resource accounting and budgeting, in which accrual accounting techniques
are applied to preparing financial statements and planning public
expenditures, becomes an integral part of the new fiscal framework.
Second, the Lder model does not provide a discussion of whether or not the
accounting innovation (e.g. full accrual accounting) produces intended
outcomes because its chosen focus is on the likelihood of innovation taking
place, not the purposes of the innovation. This is understandable given the
research objectives at the time, especially the need to create some order in
comparative research. Nonetheless, accounting system reform is not a
fundamental objective in itself but a measure toward public sector reforms;
an accounting system has to be harmonised with a management system which
could be led by the vision of governance (Peters, 1996). We therefore need to
consider not only the change process (accounting system reform) itself but also
the outcome or durable impact on management.
Our model proposes that the three external pressures (market, accountability and performance) make themselves felt in the form of specific demands
on government accounting systems: need for comparison, demand for
transparency, calls for value for money. The demands are not only pressures
for reform, but meeting them is the objective or desired outcome of the
accounting system reform. Additionally, each accounting subsystem is
affected by more than one specific demand and has more than one intended
outcome.
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First, the principal function of financial accounting is to measure and report

financial performance and financial condition of an entity. The need is for
transparency to help ensure accountability. Primary users in the public sector,
such as legislative bodies, investors and creditors, also need reliable and
comparable data for decision making (GASB, 1990); in particular, investors
would like to select the most profitable option whether in the public sector or
private sector. Information disclosed through financial accounting has to be
comparable between sectors or organisations. Thus, financial accounting is
influenced by the demand for transparency and the need for comparison.
Second, management accounting aims at improving performance. The
basic role is `to provide managers with the accounting information they need
to carry out the planning and control functions' (Jones and Pendlebury,
1992). In order to improve performance, it is not enough that the entity
measures its cost and quality; comparative data between the public and
private sectors are required to set a benchmark and compare performance.
Hence, management accounting is affected by the need to ensure value for
money and the need for comparison.
Third, auditing is affected by demands for transparency and demands for
value for money. Government auditing has a wider role and scope than the
private sector auditing, covering not only financial and compliance audits
but also performance audits. The functions extend beyond an attestation of
financial statements. Thus the objectives are both to provide the legislature
with independent information in the interests of transparency and to help
audited bodies improve their performance.
It is suggested here that neither internal pressures nor external pressures
will generate successful outcomes independently. Even though accounting
change itself could be accomplished by internal pressures (fiat), street-level
bureaucrats (Lipsky, 1980) make their own choices and their discretion may
undermine the expected outcome from the innovation. The combination of
internal pressures and strong sustained external pressures is more likely to lead
to the intended outcome. For example, Jessop (1993 and 1995) indicates that
NPM is considered a management model of `welfare to work' or `workfare
state' in which citizens would independently act as customers according to a
market mechanism. The move to accrual accounting would make sense in
NPM only if customers continue to put pressure upon the reporting entity that
adopts accrual accounting.

APPLICATION OF THE MODEL TO PUBLIC SECTOR ACCOUNTING IN JAPAN

In the Japanese government's financial distribution system, described earlier,

there has not been a matching relationship between service costs and citizens'
expenses in local governments. In the standard prefecture, annual
expenditure per resident has been triple the local tax per capita. This
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imbalance has made the public less interested in local finance and
accountability. Furthermore, since the safety and credibility of local bonds
are uniformly guaranteed for by the central government, market pressure in
finance has scarcely influenced management in local governments. There has
not been an incentive for efficiency when local allocation taxes and local bonds
basically compensated for finance shortage. Therefore, neither the market
pressure nor the accountability pressure affected the management of local
government. Also, the central government responded to the pressures on the
auditing subsystem by making it a central government issue and it therefore
had little impact on local government. Instead, management accounting
alone developed as a tool for centralised control of local governments.
External Pressures
The centralised system worked well until the late 1980s. However, the
elaborate control system gradually failed to function properly for several
reasons. Firstly, the system does not cope with the varied needs of citizens. Once
Japan had caught up with the developed countries in the 1980s, the basic needs
for civic life were satisfied. Consequently, the divergent needs of citizens in
different local governments became more apparent. Under such conditions
the present approach, whereby central government plans the future vision and
allocates the funds, does not work. In fact, some innovative local governments
have been in advance of national policies; for example, in regulations on
pollution. Secondly, fiscal stress has grown serious in local governments. The
share of local bonds of total revenues in local finance has expanded every year
since 1990; it accounts for 12.7% in 1998 (7.8% in 1990). The outstanding local
debts at the end of 1998 are approximately $1,400 billion ($580 billion in 1990).
The stress in local finance demands efficiency in the use of public money by local
governments. Thirdly, fiscal scandals and bureaucratic corruption occurred in
many local governments. Not only did officials claim fictional travel and
meeting expenses, but they spent money for inappropriate purposes such as
private entertainment and meeting with central bureaucrats at expensive
restaurants. Possibly the worst case was the Hokkaido Prefecture where corrupt
expenses amounting to $34 million came to the surface in 1995. The local
regulation for disclosure of the government information also assists citizens to
check and detect illegal matters (Yoshimi, 1998). Local government is obliged
by the regulation to disclose information upon request unless it is a matter of
individual privacy. Every prefecture was complying with the new disclosure
regime by the end of 1996. By contrast, in central government it took until
May 1999 for the law on Disclosure of Government Information to be passed.
In terms of our model, these factors lead to three pressures. The first
pressure is the cost saving pressure on local finance. Accumulated local bonds
have decreased local government's discretion in budgeting. An aging
population has also resulted in new service demands on local governments
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such as home and residential care. Fiscal stress stimulates local governments to
plan cost-effective mixtures of resources in pursuit of prioritised goals. In this
case, full cost is a critical information for decision making. These pressures can
be regarded as performance pressures in our model and manifest as demands
for `value for money'. Currently, even MOHA has encouraged local
governments to introduce results-oriented management.
The second pressure is the accountability pressure. The financial condition
of local government as a whole has traditionally not been disclosed. This
makes local finance less transparent to the public because local government
has many public utilities whose finance amounts to about 40% of general
account. Also, a higher interest in activities of local governments on the part
of citizens, as a consequence of political scandal, results in a demand for more
transparency. For example, in Hokkaido, the number of requests for an audit
of the commissioners increased from one in 1993 to fifteen in 1996 (Secretariat
of Audit Commissioners in Hokkaido Prefecture, 1997). Unfortunately, in
some local governments, the audit commissioner's offices themselves had
participated in the corruption which undermined public trust in the audit
system.
The third pressure market pressure leads to a demand for comparative
cost data. The international movement toward marketisation has surged into
Japan. The Japan Rating and Information Centre for Investment first rated
local bonds in March 1999. Although privatisation has been the favoured
measure until now (Kokubu et al., 1998), internal market mechanisms are
also beginning to be introduced to the primary services such as the home care
service. Marketisation of the public service requires the public and private
sectors to be on an equal footing to ensure fair competition between them.
Data on different bases makes comparison impossible. The market pressure
therefore leads to a demand for accrual accounting for local government
services.
Internal Pressures
In addition to these external pressures, two policies proposed by the
Hashimoto Administration in 1997^98 acted as catalysts for change. The first
is the amendment of the Local Autonomy Law whereby mandatory external
auditing was introduced to every prefecture and the large cities from 1998. As
this is in addition to the audit system by inspection commissioners, two
different audit systems now coexist in local government. Previously, the audit
commission system had been the only audit institution in the local government
sector. The commission consisted of four persons appointed by the chief
executive in case of prefectures; two assembly members, and two other
informed persons. While the office is independent of the chief executive, most
of the informed persons had experience in working at the local government in
question. The new external auditing will be done under annual contract with
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the chief executive by a person who is a certified public accountant (CPA) or a

lawyer or a person who has rich experience of public sector auditing. In
practice it is almost certain that CPAs will become the dominant external
auditors a point which is important in accounting reform because such
external auditors are likely to be members of the Public Sector Accounting
Committee of the Japanese Institute of Certified Public Accountants. That
committee issued an exposure draft of the Accounting Principles for Public
Sector Accounting in 1997, recommending that governments adopt accrual
accounting. While the exposure draft has not yet become a standard, many
guide books for external auditing now refer to the Principles.
The second policy is the liberalisation of capital markets. The policy intends
to make the Japanese capital market global, fair and free by the 21st century.
Because it is a comprehensive and drastic change in a short period, it is referred
to as `the Japanese Big Bang'. The Big Bang will inevitably affect the public
financial market which is currently controlled under the Fiscal Investment
and Loan Program (FILP) which currently finances a significant portion of
local bonds. The FILP is a mandatory fund drawn from the Postal Savings
and Postal Life Insurance Services, and the Welfare Insurance Service under
FILP Law. These services were candidates for privatisation in discussions of
financial market reform. Although privatisation was finally abandoned, the
Fundamental Law for Reforming Central Government enacted in 1998 gives
these services a mandate to manage the whole of their funds freely after 2001.
Local bonds might lose their safe and reliable creditors once the Postal Savings
and Welfare Insurance Services are free to invest their funds elsewhere in the
market. If the regulation on issuing local bonds is also removed by the
Decentralisation Strengthening Bill which was submitted to the diet in May
1999, the present advantage which local governments enjoy, in that any local
government regardless of financial state can finance at the same or lower rate
than the private sector, will disappear. Local governments might be required
to disclose their financial statements in the same business style as private
companies.
Impact on Accounting
The above external and internal pressures will influence the accounting
systems of local governments. In relation to the external pressures indicated
in the model, the market pressure of need for comparative data may affect
financial accounting and management accounting in the form of measuring
the program cost on an accrual basis identical to the private sector. However,
its impact might be restricted to financial accounting because comparative
data like the MOHA's benchmarking could be acquired without adopting
accrual accounting in daily transactions. Accordingly this pressure might
largely be concentrated on financial accounting. The accountability pressure
of demand for transparency could impact on both financial accounting and
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Figure 2
Interrelation Between Pressures and Accounting

auditing. Since the Japanese average citizen has little interest in financial
reports, however, it is likely that the demand will be entirely directed to
auditing reform. The performance pressure of calling for VFM should
influence management accounting and auditing (especially performance
auditing). However, Japanese practices are limited to financial auditing in
the private and public sectors except BOA's audit. Therefore, the pressure is
aimed primarily at management accounting.
With respect to the internal pressures, the Decentralisation Strengthening
Bill, new external auditing and the Big Bang policy directly act on reforms of
management accounting, auditing and financial accounting respectively,
since these pressures can be forced on local governments. It is suggested here
that each subsystem of accounting will be most likely to transform when the
interrelated internal and external pressures simultaneously act on it, i.e.
market pressure and capital market reform policy act together on financial
accounting, performance pressure and decentralisation or management
reform policy on management accounting, and accountability pressure and
audit system reform policy act simultaneously on auditing (see Figure 2).
While the change itself will be initiated by an internal policy, the outcome of
change will depend also on primary players exerting external pressure. For
example, financial accounting will be effective in providing useful information
only if investors are influential in the capital market. To the extent that there is
a different mixture of internal and external pressures in each local
government, their accounting systems would be transformed in different ways
because an accounting system consists of three subsystems and the subsystems
will face different pressures at different points in time. By way of illustration,
the public sector reforms in some local governments in Japan are considered
below.
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Mie Prefecture
Mie Prefecture in central Japan is the most advanced in public sector reform.
The reform has been implemented under the strong leadership of Governor
Kitagawa. The basic philosophy at the beginning was lacking in two
principles of NPM: devolution of authority and the introduction of market
elements. However, the revised latest philosophy for the reform fully adopts
NPM (see Figure 3).
In contrast to the centralised system, Mr. Kitagawa established a clear
strategy and obtained the support of the bureaucrats for change. Mie prefecture
first introduced a comprehensive evaluation system, in which all projects are
evaluated in terms of cost and outcome, in 1996. Here cost is measured by
adding the budget for the project to personnel cost, which is calculated as the
required time multiplied by the standard wage rate. Furthermore, information
disclosure has been significantly extended with the evaluation being fully
disclosed to the public. In 1998, accrual accounting for preparing the balance
sheet of the government was introduced. Although several trials at preparing a
balance sheet had been undertaken previously, this was the first formal balance
sheet. At this stage, however, accrual accounting is not yet integrated into the
project evaluation system as the cost of projects is measured on a cash basis and
does not recognise depreciation as an expense.
The reforms in Mie Prefecture can be analysed in terms of the model. Two
external pressures appeared. First, in 1995 and 1996, fiscal scandals
amounting to around $10 million were detected as in Hokkaido. The
corruption led to accountability pressures whereby the residents demanded

Figure 3
Philosophy of Reform in Mie

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transparency of the government activities. Second, as the repayment of local

bonds became larger year by year, performance pressures to demonstrate
Value for Money might have been expected to grow. However, this VFM
pressure was not strong since the debt redemption divided by general revenue
was smaller than other prefectures and the fiscal condition was rather sound.
Further, the market pressure did not appear at the time of the innovations,
because local bonds are still regulated by the central government.
On the other hand, the management system reform policy created
considerable internal pressure. The policy originated with the governor's
intention to not only transfer private management into the government but
also to enhance decentralisation. It is noteworthy that Mr. Kitagawa himself
participated as a representative member in enacting the Decentralisation
Promotion Law of 1995. This law states that the Council for Decentralisation
Promotion shall recommend decentralising policies within five years to the
Cabinet, which is obliged to respect the recommendations. The Decentralisation Strengthening Bill mentioned earlier follows the Decentralisation
Promotion Law. The other internal pressures have not yet come fully into play
since the external auditing was not launched until 1999 and the liberalisation
policy for issuing local bonds is still under discussion.
In short, the major pressures are the accountability pressure and management system reform policy. Under the mandatory management reform policy
the project evaluation system was introduced and the decentralisation policy
and accounting reform developed. Thus the transition itself was accomplished
and the reform has been progressed by the governor's endeavor. However, if
we consider the outcome of the reform in terms of the model, we note that
management accounting has been affected by internal pressure alone. The
related external pressure, performance pressure (see Figure 2) is lacking. We
postulate that this partial influence upon management accounting will be
fragile in its ability to accomplish value for money, because a successful
outcome requires a combination of the internal pressure and the sustained
external pressure. In practice, information users of the evaluation results seem
to be occupied largely with the members of Citizen's Ombudsman. Their
interests have not yet translated into performance pressure on the government
for efficiency and effectiveness.
Other Local Governments
Miyagi Prefecture in northern Japan launched its reforms in 1997. As in Mie
Prefecture, the Governor (Mr. Asano) has progressed a comprehensive reform
through strong leadership. The basic philosophy is reinvention as a mission
and outcome oriented government that will focus on efficiency and serve for
the residents. In order to realise the philosophy, five major reforms are now
being implemented. These reforms are aimed in three directions: residents,
related parties, and the government itself.
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The first reform is directed toward citizens as customers. It covers setting of

standards for public services. The second reform is to establish a partnership
with municipalities, private companies and NPOs (Non-Profit Organisations). Devolution to municipalities and promotion of contracting out are
an integral part of the reform. The third to fifth reforms, on the other hand,
are targeted at internal management of the government, i.e. development of
program and project evaluation systems, personnel, organisation and
operation, budgetary systems reforms. The last reform includes the
introduction of accrual accounting. In 1998, as an experiment, the operating
cost of a social welfare service for handicapped people was compared on an
accrual basis between the public and private sectors. Although the higher cost
found in the public sector did not immediately lead to contracting out, the
pressure of a contestable market is expected to make public managers reduce
costs. Thus the reform is also oriented to NPM. However, given that the
external pressure for performance is weak (as in Mie Prefecture), it is
uncertain that management accounting reform will achieve the intended
performance outcomes.
Other local governments have also implemented public sector reforms.
Although most governments do not fully adopt the principles of NPM, two
thirds of prefectures have introduced or plan to introduce the evaluation
system (House of Representatives Bureau of Inquiry, 1998). It is noteworthy
that the project evaluation system has been diffused quickly throughout the
country since it was first introduced by Mie in 1996. This might be understood
in terms of Asian culture: `consumers are ready to switch brands once the
standards of their reference group change' (Schutte,1998). In similar vein,
accrual accounting itself could be introduced and diffused to most Japanese
local governments in the long term. Once this occurs, research should examine
whether or not the intended outcomes of accounting system reform are
achieved in practice.

CONCLUSIONS

This paper has proposed a framework for analysing the relationship between
NPM pressures of market, accountability and performance, on the one hand,
and accounting system reform on the other. The latter is viewed, not as a
unitary phenomenon, but as distinct subsystems of management accounting,
financial accounting and auditing which face different combinations of
pressures at different points in time. The external pressures are seen to
translate into specific demands comparative data, transparency and value
for money which are both the stimuli for and the desired outcomes of, reform
in the accounting sub-systems. The framework was applied to an initial
analysis of Japanese local government and its prospects for reform.
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The paper has suggested that the centralised financial system has persisted
because performance pressures have been resolved by the centralised
management accounting system and the market and accountability
pressures have been less developed. However, recent fiscal stress and
corruption in many local governments have resulted in performance
pressures in the form of calls to demonstrate value for money and
accountability pressures in the form of demand for transparency. In addition
to these external pressures, three internal pressures have appeared in the
form of proposed reform policies in capital markets, management systems
(decentralisation) and external audit. Since neither capital market reform
nor external audit has been implemented in local government so far, it is only
the project evaluation system as a kind of management accounting which has
been quickly introduced in many local governments, of which Mie
Prefecture is a prime example. In terms of our model, we can understand
that the diffusion has been promoted by the governor's reform policy for
results-oriented management (internal pressure) reinforced by external
pressure in the form of demand for VFM.
The model proposes that the intended outcome of the reform will be
brought about by a combination of the mandatory internal pressure and
sustained external pressure on the entity. Accounting subsystem reform can
be nominally accomplished by an internal policy or mandate but, in the
absence of a strong interest in performance on the part of Japanese citizens,
the external pressure of VFM is not intense. Accordingly, external auditing
would work for enhancing transparency, but the outcome of management
accounting reform depends on the extent to which the public maintains its
interest in performance.
Our preliminary framework highlights several possible areas for future
research. First, we should continue to observe the whole process of accounting
system reform in Japanese local government and its outcome in terms of
improving performance and strengthening accountability. Second, the
framework could be used in the context of other countries, possibly on a
comparative basis. Such studies could be used to check the robustness of the
model and refine it further. In particular, the relationships among its
components, and the extent of harmonisation between them, should be
investigated in more detail. For example, harmonisation among the
subsystems of financial accounting, management accounting and auditing in
NPM reform, and the extent to which this contributes to a successful transition
and achievement of intended objectives, could be explored on a cross-national
basis. Finally, instead of discussing `NPM' and `accounting' in broad and
general terms, specific relationships between NPM concepts such as market
competition, accountability and performance, on the one hand, and the
specific different sub-systems of accounting, on the other, could be investigated in more detail.
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YAMAMOTO
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