International Journal of Government Auditing – October 2004
China
Audits Promote Reform of National Budget System
For the past 9 years, the National Audit Office of China (CNAO) has carried out annual audits of the implementation of the national budget. The audits have addressed how (1) the Ministry of Finance (MOF) organizes national budget implementation, (2) various departments of the State Council (Cabinet) carry out their budget plans, and (3) various provincial governments manage the national subsidies allocated to them by the national government.
The audits have focused on the reform of China’s fiscal budget management system because of ongoing conflicts between the budget management and market economy systems resulting from the influence of the former planned economy. The objective of the Chinese fiscal system reform is to establish a socialist public finance system that gives full consideration to China’s current conditions. The CNAO audits have made significant contributions to achieving this goal.
For example, the audits have addressed the issue of “out-of-account” funds. For historic reasons, the fees that Chinese governmental departments charged for administrative services they provided were not included in general budgets but rather were used by the governmental departments themselves. The CNAO recommended that all these funds be incorporated into the national budget and that if, as a result, any governmental department needed to increase its budget, it should apply for and be allocated the funds from general budgets. This recommendation has been implemented and, since 2003, the MOF has incorporated into its overall budget the administrative fees generated by the Ministry of National Resources, the Ministry of Commerce, and 22 other departments. The MOF is to report periodically to the National People’s Congress (NPC) on revenues and expenditures of out-of-account funds and be monitored by NPC members.
The specification of budget plans provides a second example of the CNAO’s contributions to the reform of the Chinese fiscal system. During the audit of the MOF, CNAO found that some expenditures of the national budget approved by the NPC had not been specified to spending departments and programs and that extra expenditures often occurred as a result of additional budgets during the implementation process. This led to weak management of budget implementation and the lack of transparency in fund allocations, which in turn hindered the best use of fiscal funds. In 1999, the NPC and the State Council supported the CNAO proposal on the specification of budget plans.
Since 2000, a department-based budgetary system, according to which each governmental department or agency has its own separate budget plan, has been adopted in China. Starting from 2001, CNAO’s national budget audits were prioritized based on promoting the establishment of the department-based budgetary system. However, during the audit of national budget implementation in 2003, CNAO found that the MOF and other departments had not specified funds totaling 38.115 billion RMB yuan to respective departments or programs in their annual budgetary plans, with unspecified funds accounting for 5.6 percent of total allocations. This finding suggested that the problem had not been thoroughly resolved.
To improve this situation, the CNAO proposed that the budgetary funds allocated at the beginning of the year be increased and that contingent reserves be enlarged. In accepting this proposal, the Standing Committee of the NPC required that the State Council report to the NPC any difficulties in allocating budgetary funds at the beginning of the year, along with the agencies and amounts involved. The State Council, in turn, asked the MOF to send case reports on any allocation unavailable at the beginning of the year as well as final accounts for its review. This reform had a significant influence on the balance of power among the NPC, the State Council, and the MOF in regard to budget allocations. It will further standardize the management of budgetary expenditures at the national level.
These two examples demonstrate that the objectives of CNAO’s audits of national budget implementation not only disclose specific problems but also improve the Chinese budgetary management system by evaluating existing management weakness. By doing so, limited fiscal funds can then be placed in the most needed areas to ensure better overall controls and a more stable and smooth development of the national economy.
CNAO’s 2003 Annual Report Submitted to the National People’s Congress
On June 23, 2004, Mr. Li Jinhua, Auditor General of China, presented the Report on Auditing of Central Budgetary Implementation and Other Fiscal Revenues and Expenditures in 2003 to the NPC, China’s Parliament.
NPC Standing Committee members spoke highly of this year’s audit report and affirmed the work of the CNAO. They also expressed their appreciation that the CNAO fulfills its responsibilities by overcoming difficulties and obstacles, practices administration in accordance with the law, and discloses even the toughest issues. The members demanded that all audit findings be investigated and dealt with, that relevant departments learn from the findings and make continuous progress by carrying out corrections and reform, and that new structural measures be introduced to prevent and solve potential problems. The Standing Committee members have also required that CNAO audits be strengthened to broaden and deepen audit disclosures and that performance audit be actively promoted to increase effectiveness in the use of public funds.
In its review report on the CNAO annual audit report, the Financial and Economic Committee of the NPC recommended that the State Council (China’s Cabinet) urge the relevant departments and localities to take effective measures to address the root causes of the problems reported. In particular, for those major violations of laws—especially repeat violations—and irregularities, those in charge should be held accountable. Results of these corrective actions are to be reported to the NPC by the end of 2004. The review report also approved the CNAO recommendations for strengthening central budgetary management, saying that they were “suitable, feasible, and should be implemented.”
For additional information, contact: International Department, National Audit Office of China, fax: ++86-10-6833 09558; e-mail: cnao@audit.gov.cn.