Otiaz-LGBコミュのLocal Governments to Enhance External Audit System

The Ministry of Internal Affairs and Communications (MIC) will require all local governments to disclose four types of fiscal benchmarks, and require formulation of fiscal improvement plans and external audits if even one of these benchmarks exceeds certain standards, according to the Nihon Keizai Shimbun. This structure will be included in the proposed local public finance improvement bill (tentative name) to be submitted to the current regular Diet session, according to the report, and will be implemented in the fall of 2009, when fiscal-year 2008 results will be compiled.

The introduction of a system that would require external audits under certain conditions for local governments that currently have not concluded external audit contracts would be a positive trend from the credit perspective, in our view, given that: (1) this has the potential of enlarging the barrier preventing fiscal deterioration for all local governments, and (2) this has the possibility of preventing inappropriate accounting treatment, such as those revealed through the problem of Yubari City's temporary borrowings, for all local governments. However, how much positive effects will be generated will depend on the detailed design of the external audit system, including the range, content, and quality of the audits; we await further discussions.