One of the fundamental principles of democracy is not to manage finances without the consent of the people. The principle of managing national finances based on this is called ‘fiscal democracy.’ Fiscal democracy in the United Kingdom began with the Magna Carta in 1215 and took institutional form about 650 years later in 1866 with the establishment of the National Audit Office. The core elements of fiscal democracy introduced at that time?‘tax legality,’ ‘expenditure legality,’ ‘unified budget,’ and ‘independent audit reporting to the parliament’?are also found as the foundation of today’s fiscal system in Korea.
Dr. Yoo Jin-oh, who drafted the original Constitution of the Republic of Korea, aimed to include principles such as “tax items and rates shall be determined by law,” “the total revenue and total expenditure of the state shall be organized in a budget,” “the budget prepared by the executive branch must be approved by the National Assembly,” and “the settlement of accounts audited by the audit committee shall be submitted to the National Assembly” in the Constitution. This reflects the basic philosophy that fiscal management in a democratic country should not only be efficient but also ensure accountability.
To enhance the efficiency and transparency of fiscal operations, the Korean government fully adopted the accrual basis and double-entry bookkeeping accounting system starting from the 2011 fiscal year. While the previous cash basis accounting focused only on “when, where, and how much government expenditure was made,” accrual basis accounting distinguishes whether the expenditure is a cost for current consumption or an asset contributing to the future. This information plays a crucial role in evaluating the efficiency of fiscal management and supporting future policy decisions. Additionally, the government has transparently disclosed the results of fiscal operations, including accrual basis accounting information, annually to the National Assembly and the public through the national settlement of accounts report. This forms the basis of accountability by clearly revealing where and how the people’s taxes have been spent.
Korea’s fiscal management is also well organized legally. The ‘National Finance Act’ stipulates that the government’s settlement report must be prepared according to the National Accounting Act, which specifies that the national settlement report should include the cash basis ‘revenue and expenditure settlement’ and the accrual basis ‘national financial statements.’ Furthermore, Article 99 of the Constitution guarantees the independence and role of the Board of Audit and Inspection by stating, “The Board of Audit and Inspection shall audit the revenue and expenditure settlement annually and report the results to the President and the National Assembly for the following year.” However, there is room for improvement as the Board of Audit and Inspection does not clearly express opinions including qualitative evaluations of fiscal information during this process.
Currently, the Board of Audit and Inspection’s accounting audit remains at the level of verifying calculation errors and compliance with accounting standards in the settlement report. This is likely because it still maintains the framework of ‘settlement audit’ stipulated in the 1948 original Constitution. However, since the introduction of the accrual basis and double-entry bookkeeping accounting system, the government’s fiscal information has changed significantly in quantity and quality. In line with this, audits should evolve from simple ‘inspection’ to independent ‘audits’ that evaluate the quality and reliability of fiscal information. Many advanced countries’ supreme audit institutions already express audit opinions rather than just conducting accounting audits. The UK’s National Audit Office, the US Government Accountability Office, Australia’s Australian National Audit Office, and Canada’s Office of the Auditor General enhance the reliability of government fiscal information through independent audit opinions. This plays a key role in enabling the public and the National Assembly to trust fiscal information.
The ultimate goal of fiscal democracy is to gain the trust of the people. For this, qualitative evaluation of accounting information produced during the settlement process is essential. The role of the Board of Audit and Inspection needs to expand beyond detecting calculation errors to guaranteeing the reliability of information to the public. For Korea’s settlement process to take the first step toward fiscal management innovation, efforts by the Board of Audit and Inspection to provide trusted fiscal information to the public and the National Assembly through independent audits are necessary. It is time for Korea to further develop fiscal democracy by learning from the examples of countries around the world.
Park Sung-jin, Associate Professor, Department of Global Public Administration, Yonsei University / IPSASB Member
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