A Study on How to Improve the Accountability of National Defense Financial Information for Government Sustainability

Abstract

Accrual-based accounting enables external users to make informed decisions by reporting an accounting entity’s management performance to them. It also helps managers accurately record resource usage and increase efficiency. Despite the Republic of Korea’s expectations for the introduction of accrual-based accounting in national accounting from 2011, aimed at achieving efficient resource management comparable to private companies, the results of the audit by the Board of Audit and Inspection indicate that the settlement of accruals in national accounting is still insufficient. This paper examines whether the financial reports compiled are suitable for competition in decentralized organizations. We present the status of accrual-based accounting in the Ministry of National Defense and analyze the actual cost index to control the efficient use of defense resources and financial information. For our analysis, we compared and analyzed the costs of two divisions and seven brigades in the Ministry of National Defense using cash-based budget spending and the actual cost index based on accrual basis, using data from the defense accounting system in 2015 and 2016. We found that the comparison result between the nominal cost and actual cost index was different. In particular, the actual cost index reflects the degree of control of the decision-maker who manages the resource. Our results show that evaluating the efficiency of resource management units in the Ministry of National Defense using the actual cost index can improve the Ministry’s accountability and achieve the purpose of introducing double-entry bookkeeping.

1. Introduction

Since the implementation of accrual-based accounting, the Ministry of Economy and Finance has annually submitted the financial reports of the central government departments to the National Assembly audited by the Board of Audit and Inspection of Korea (hereafter BAI). Due to the government’s significant efforts over the years, accrual accounting has been relatively reliable in terms of settlement (Shim Jae-young, 2016; Jung Sung-ho, 2017) [1,2].

However, the process of preparation, auditing and submission of financial reports alone does not mean that the fundamental purpose of the adoption of accrual-based accounting has been achieved. The purpose of government accounting is to provide accounting information to assist users in making decisions and to enhance accountability for stewardship of a government (Lee Jong-woon et al., 2018; Funnell and Cooper, 1998) [3,4].

This paper examines whether the financial reports compiled are suitable for competition in decentralized organizations. We present the status of accrual-based accounting in the Ministry of National Defense and analyze the actual cost index to control the efficient use of defense resources and financial information. Enhancing accountability of a trustee can complement the shortcomings of the theory of new public management. Unlike a bureaucracy, new public management seeks to be efficient in its work through decentralization, by which it is more susceptible to corruption not only by chief executives, but also by various responsible personnel who are exercising their powers. So far, however, there have been no adequate means to control the susceptibility. To control a decentralized organization, a virtuous cycle must be established. To have it work, the central office first needs information for an objective evaluation, and the accounting information based on accrual accounting enables the office to analyze not only the budget in running the organization, but also the costs incurred by various resources not involving cash. As a result, accrual accounting has gained attention as a measure to have decentralized organizations under control.

To introduce the principle of competition between organizations under the current national accounting system, the financial information generated by each organization must be comparable, where comparability should be able to evaluate the efforts of each organization to use resources efficiently, instead of measuring only numeric values. By comparing accrual-based accounting information between similar types of organizations, it is possible to induce competition for the operation of an efficient organization. However, it is also necessary to examine whether the information compiled in the financial reports under the current system is suitable for the competition of decentralized organizations. The statement of net cost, which provides information on the operating results, takes the form of deducting revenue from the net cost of financial operations, unlike a comprehensive income statement of a private enterprise. Improved financial reporting, enhanced accountability, cost reduction and cost efficiency are the key to success in reforms in government accounting (Hoque, Z. and Moll, J., 2001) [5]. Therefore, with the current reporting system’s approach to produce the operating results, it is difficult to reduce costs and promote the efficiency of resource management.

The Republic of Korea had high expectations for the introduction of accrual-based accounting in national accounting in 2011, with the aim of improving the management of financial resources within the national organization, comparable to that of private companies. However, despite the government’s efforts, the results of the audit conducted by the Board of Audit and Inspection have revealed significant shortcomings in the settlement of accruals in national accounting. Based on these discussions, this study, for quality accounting information and upgraded accountability of the Ministry of National Defense (hereafter MND), proposes an actual cost index for comparative analysis of the costs incurred by the resource management unit and recommends ways to apply it.

This study differs from prior studies in the following ways. This study broadens the research scope of government accounting. First, the previous studies on government accounting have focused on limited areas, such as the effect of the adoption of and measures to increase the utilization of government accounting, because of its short history. However, more fundamental research on the accuracy of financial information prepared by government agencies and the efficiency of resource management was relatively scant. Therefore, we analyzed whether the current financial information is accurate by analyzing the audit results of government accounting.

Second, the current government accounting system does not differentiate the costs that could be reduced by the efforts of the trustee from those that could not. Accordingly, it is not possible to evaluate how efficiently each agency uses resources. To deal with the problem, this study suggests classifying the expenditure accounts of the ministry’s general ledger into five categories depending on the level of controllability and running a comparative analysis of nine representative military units within the MND. The previous studies on accrual-based government accounting have not analyzed costs in detail. In addition, when expanding a research scope to include other financial information besides expenditure, some research has been performed at an agency level, but no studies have compared accounting information from different agencies or evaluated the cost efficiencies of them. With this study, it would be possible to evaluate accounting entities at an inter-agency level in the government accounting system, and furthermore, it would be able to raise the interest of decision-makers using government accounting information.

The rest of this study is organized as follows. Section 2 examines the theoretical background of accountability and prior research on that, and Section 3 probes the accountability of defense financial information. Section 4 presents an actual cost index and applies it to the cost information of the accounting entities within the MND making an empirical analysis. Finally, Section 5 is a conclusion.

2. Theoretical Background and Prior Research on Accountability

2.1. Theoretical Background of Accountability

Table 1. Public accounting responsibilities in national accounting law.

	Content
Article 4 of the National Accounting Law (National Accounting Principles)	National accounting shall be carried out in compliance with the following principles: 1. National accounting shall be carried out fairly in accordance with objective data and evidence so that it can be reliable. 2. National accounting shall be carried out simply and clearly and supply adequate information so as to make it possible to easily grasp details and results of financial activities. 3. Deleted <31 December 2018>
Article 5 of the National Accounting Standards	The statement states that the State has adequately fulfilled its public accounting responsibilities. The following information, necessary for evaluation, shall be provided: 1. Information on the financial status of the State and its changes and the results of its financial operations. 2. Information on whether the objectives of the State undertakings have been efficiently and effectively achieved. 3. Information on the budget and other compliance with relevant laws and regulations

Source: National Statute Information Center.

presents legal regulations regarding accounting responsibility. Principles of National Accounting, Article 4 of the National Accounting Law states that “1. National accounting shall be carried out fairly in accordance with objective data and evidence so that it can be reliable, and 2. National accounting shall be carried out simply and clearly and supply adequate information so as to make it possible to easily grasp details and results of financial activities”. In addition, as defined according to the Governmental Accounting Standards Board (GASB, the current major government accounting standards setter), International Public Sector Accounting Standards Board (IPSASB) and the Government Financial Accounting Conceptual Framework in Federal Accounting Standards Advisory Board (FASAB), the purpose of financial reporting is to demonstrate accountability and to provide useful information for decision making (Shim Jae-young, 2016) [1].

Accountability in this context refers to the responsibility of an agent to provide reasonable explanations for the utilization of financial resources belonging to an accounting entity to its principal. The government officials entrusted with accounting duties act as agents on behalf of the people. Therefore, in accordance with national accounting principles and the obligations outlined in the National Accounting Law, they should fulfill their duties impartially, relying on objective data to ensure the reliability of accounting information. Moreover, they should carry out their tasks with clarity and simplicity, providing sufficient information that allows for easy understanding of the details and outcomes of financial activities. However, the presentation format of the financial reports prescribed by the national accounting standards is opposite to that of financial statements for private enterprises. That is, government agencies deduct revenues from costs, whereas private enterprises subtract costs from revenues. Therefore, it can confuse the public as a principal and cannot properly show the results of their financial activities. It is uncommon to employ the format of deducting revenues from costs in government accounting because only a few countries, including South Korea, are using the format. Developed countries in accrual-based accounting, such as the United Kingdom, New Zealand, Australia, the United States and Canada, are deducting costs from revenues (Jung Sung-ho, 2017) [2].

Table 2. Statement of financial operations (unit: billion won).

Program	General Cost	Import	Net Cost
I. Program Net Cost	427,485	(10,103)	417,382
II. Administrative and Operating Expenses	-	-	6985
III. Non-Allocated Costs	-	-	37,817
IV. Non-Distributed Revenue	-	-	36,840
V. Financial Operating Net Cost (I+II+III-IV)	-	-	425,345
VI. Non-Exchange Revenue	-	-	47
VII. Financial Operations Results (V-VI)	-	-	425,298

Source: Statement of Financial Operations (MND in 2018).

shows the statement of financial operations (MND in 2018).

On the other hand, accountability can be construed as control of agents. Shim (2016) [1] argued that accountability extends to the means of imposing control over public organizations because it is based on a principal–agent relationship and that accountability is closely related to control because it is an essential mechanism of control. IPSASB also cites Kohler’s Dictionary for Accountants for the definition of accountability. The dictionary defines accountability as “the obligation to prove desirable management, control, and other performances imposed by laws, customs, and agreements”. Meanwhile, Canada’s Centre for Public Accounting Accountability states that accountability includes several concepts, the main one being that accountability is “the effective and efficient use of public resources to obtain appropriate compensation and to be responsible for outcomes”. All things considered, accountability in government accounting goes beyond simply the meaning of reporting in the form of accounting to the principal. Instead, it should function as a means of enabling an agent to fulfill the desired performances for an accounting entity.

2.2. Prior Research on Accountability

Financial audits are necessary to enhance accountability in public services. The study also emphasized the importance of clarifying the responsibilities of individuals assigned to government accounting matters.

First, as an example of overseas research, Chan (2003) [6] proposed enhancing accountability as a fundamental purpose of government accounting, while Kluvers (2003) [7] studied the nature of accountability for performance in the public sector. Eivani and Emami (2012) [8] studied the relationship between public accountability and financial reporting of governments, and Mulgan (2000) [9] compared public and private sectors in terms of accountability. The passage also mentions Kim (2018) [10], who studied ways to improve accountability in local governments in Korea and Shim (2016) [1] and Jeong (2017) [2], who studied ways to strengthen the accountability of government accounting information in Korea. Finally, Choi (2020) [11] proposed ways to improve the financial operations of municipalities to enhance autonomy and accountability.

Studies were also conducted to improve the accountability of entrusted civil servants. Hong and Kim (2018) [12] studied ways to improve the fiscal accountability of municipal governments. They proposed a two-faceted plan to enhance the fiscal accountability of local governments. That is, for relations with the central government, they proposed the introduction of fiscal rules and ordinances for fiscal soundness; for relations with the locals, they suggested the extension of local participants, laws and regulations for their participation and an external audit system. In addition, Lim (1999) [13] measured a level of local accountability by studying the relationship between a level of local government expenditure and the financial burden on local residents. According to him, fiscal accountability can be divided into accountability of the public sector and that of the local citizen. Public sector accountability means that an entrusted public servant makes appropriate and good use of the taxes borne by the people, and local citizen accountability means that the local people take full responsibilities for the financial burden for the activities of their local government. The study was conducted not on public sector accountability, but rather on local citizens’ accountability based on the difference between the total budget of the municipality and the tax burden of the local population. However, the study is significant by extending the scope of fiscal accountability: fiscal accountability is not only about a report by a trustee to a trustor but also about how properly the trustee uses financial resources.

The research on improving accountability has centered on the need to create conditions, such as systems and regulations for accountability. In addition, research has been conducted with an emphasis on the reporting itself, meaning that a person in charge of the trusteeship is responsible for the reporting to a trustor. This shows a lack of research on accountability in the sense of the effective and efficient use of the resources when considering the key characteristics of accountability as defined by the Canadian Centre for Public Accountability: “accountability is associated with the effective and efficient use of public resources, and the responsibility for appropriate compensation and outcomes”.

3. The Status Quo Accountability of the MND

To understand the current level of accountability of the MND, it is necessary to look at audit reports by the BAI on the ministry’s financial statements and the status of the financial operation of the ministry. In this study, the audit report from the Board of Audit and Inspection was collected by analyzing the audit results of the Ministry of National Defense, which were obtained from the central agency’s website of the Board of Audit and Inspection. The study also extracted information on the financial operations of the Ministry of National Defense from the Defense Integrated Financial Information System, a closed accounting system operated by the Ministry of National Defense.

3.1. The Audit Findings of the BAI

The BAI annually audits all government departments, including the MND. The auditor general inspects the assets, liabilities and net assets of each department and its financial operations, checks changes in each item over the years and demands to correct abnormal accounting treatments departing from the accounting standards.

Table 3. Key status of audit findings by BAI.

	Total	Misclassification of Account	Miscalculation	Omitted Transaction	Others
Total	42	15	4	14	9
Year 2015	12	1	3	6	2
Year 2016	8	3	1	1	3
Year 2017	9	5	0	3	1
Year 2018	8	5	0	1	2
Year 2019	5	1	0	3	1

shows the audit findings by the BAI from 2015 to 2019 by type.

A total of 42 errors were identified during the sample period, ranging from at least 5 to a maximum of 12 each year. There are 15 cases of account misclassification errors, 4 cases of miscalculation of amounts, 14 cases of omitted transactions and 9 other cases.

The misclassification of accounts was identified as the most frequent error type during the period. To be specific, the errors occurred by treating capital expenditure related to the acquisition of assets, such as buildings under construction, as expenses or classifying supplies from the Defense Acquisition Program Administration as a miscellaneous gain rather than as assets transferred within the government.

The miscalculation is due to the recognition of a transaction with incorrect monetary values and has the lowest number of cases. The details include the misapplication of the value of war reserve items (general tangible asset) transferred by the Defense Acquisition Program Administration and transferred to the MND and over-stated allowance for pension benefits, but as Table 1 shows, it is not a type of error that often occurs.

Omitted transactions are accounting errors that have emerged following the implementation of accrual-based accounting. During this period, they occurred most frequently in conjunction with account misclassification. Upon closer examination, these omissions occurred when balances were not transferred from temporary accounts to permanent accounts. In cash basis accounting, even if assets, such as buildings, were omitted, it was challenging to detect such errors without comparing an asset ledger with supporting documents for earmarked expenditure on assets in the ledger. However, accrual-based accounting has made it possible to identify these omissions without the need for such laborious procedures.

Other matters are new problems that have arisen since the adoption of accrual-basis accounting, which accounts for nine cases during the period. For instance, the maintenance expenses corresponding to the capital expenditure were accounted for as an increase in the assets but not depreciated, or the criteria for allowances for doubtful accounts were not applied, even though they had to be set to reflect the passage of time and default rates from experience.

The audit findings indicate that the same problems have not been improved. During the period, the number of misclassification error increased from one in 2015 to five in 2017 and 2018, and omitted transactions have also been reported each year since 2015, increasing in some year and decreasing in others.

3.2. Current State of Financial Operations by the MND

The asset size of the MND is 220.9066 trillion won as of at the end of 2019, and the results of its financial operations (expense minus revenue) were 42.5298 trillion won in 2019. These figures are 62% of Samsung Electronics’ assets during the period (352.5644 trillion won) and 12% of Samsung Electronics’ cost of sales (147.2395 trillion won). However, the audit period and the audit team for the ministry are not proportional to the size. As a result, the audit heavily depends on auditor’s professional judgment rather than on systematic ways. It cannot be guaranteed that the audit findings from the first half of the sample period have been properly taken measures only because the same items were not detected in the second half. Therefore, we examined the accounting information in detail over the sample period to shed light on whether the audit findings have enhanced the accountability of the ministry.

Table 4. Prior period adjustments for the sample period from 2015 to 2019.

	Gain on Prior Period Adjustments	Loss on Prior Period Adjustments	Total (%)	Financial Operations Results
Year 2015	885	542	1427 (0.41)	350,496
Year 2016	2604	188	2792 (0.71)	394,273
Year 2017	6353	5564	11,917 (2.87)	415,741
Year 2018	3483	5487	8970 (2.31)	388,893
Year 2019	1584	1556	3140 (0.74)	425,298

(Unit: Billion Won, %).

shows the corrections of accounting errors during the sample period from 2015 to 2019.

Gain or loss on prior period adjustments refers to a correction of an error in the year in which it is discovered and adjusted in the financial statements. During the sample period, it was 142.7 billion won in 2015, which is 0.41% of the total financial operating results. This figure was 1.1917 trillion won in 2017, accounting for 2.87% of the total financial operation results. The same item made up 2.31% of the financial results in 2018. Considering that the ratio of accounting errors to expenses of the budget of the Korean government is about 2%, these errors indicate that the MND makes more accounting errors than other governmental departments. What is noteworthy, however, is that prior period adjustments are not recorded when an accounting entity decides not to correct the errors found. Therefore, it is necessary to check whether there are any inappropriate accounting treatments during the sample period to make sure that the ministry has taken necessary measures for the errors. Verification for every transaction is not efficient or possible. However, it is possible for certain accounts. Such accounts can be considered proper or improper transactions based solely on their accounting information at the time when transactions in question take place and thereafter.

Under Article 14 of the Law on Contracts to which the State is a party, the contractual performance shall be paid after inspection by the government. In this case, if payment after inspection advances to the recognition of buildings or items in a contract, then the recognition results in a temporary account of advance payment. If it is the case for buildings under construction, a temporary account of a building under construction is recorded in accordance with construction progress. Such temporary accounts cannot last for more than 1 month after the completion of the contract under the current law.

Table 5. Advance payment and buildings under construction.

	Advance Payment	Buildings under Construction	Total (Ratio)	Asset
Year 2015	114.4	189.02	200.46 (1.13%)	177,311.0
Year 2016	121.7	257.05	269.22 (1.36%)	197,521.0
Year 2017	159.7	271.02	286.99 (1.40%)	204,952.2
Year 2018	196.7	330.29	349.96 (1.65%)	212,378.3
Year 2019	120.4	257.52	269.56 (1.22%)	220,906.6

(Unit: Billion Won, %).

shows the advance payments incurred as a result of the MND’s financial operations from 2015 to 2019 and the buildings under construction during the same period. Some of the audit findings in 2015 and 2016 continue to occur in the other years when those particular items were not included in the audit findings.

Advance payments and buildings under construction, which accounted for 1.13% of total assets in 2015, gradually increased to 1.65% in 2018 and fell slightly to 1.22% in 2019. The audit findings in 2015 show that the advance payments and buildings under construction should have been closed and been recorded as the corresponding permanent accounts. The same type or error has occurred since 2015.

Why, then, is the accountability of the ministry so poor? The MND has a resource management unit that is an internal reporting entity to provide useful accounting information to internal information users under its umbrella. The number of resource management units was 248 in 2019. In other words, comparing the financial statements prepared by the MND to those by a private enterprise, we can say that they are consolidated financial statements integrating 248 subsidiaries. Each resource management unit employs several accounting, military, facilities and information professionals to generate financial information. In other words, the accountability of the ministry depends on each resource management unit’s accountability. Thus, it is necessary to come up with measures to improve the unit’s accountability. Efforts must be made to ensure accurate accounting for transactions that occur at each unit, and to do so, it must prove that it has carried out unit operations more efficiently than other competing units. Companies have the incentive to use the available resources efficiently to minimize costs, maximize profits and account for them exactly without omissions. Since the unit is also a state institution, accomplishing given missions can be applied instead of maximizing profits, but the cost should be minimized. However, it is difficult to measure the efficiency of an organization’s operations based on accrual-basis accounting in that it includes a few uncontrollable costs by the resource management unit.

4. Measures to Strengthen Accountability

4.1. Actual Cost Measurement Indicators

To measure the efforts for cost saving in each resource management unit, costs need to be reclassified. For example, if every cost is assessed on the same terms regardless of its controllability, the incentive to reduce costs will diminish. For instance, fuel and utility fees vary with the level of usage (effort). On the other hand, contributions to employee pension plans are determined by uncontrollable factors. Therefore, it is necessary to give higher weight to items controllable by management and lower weight to items uncontrollable by management to produce new cost metrics that reflect an organization’s efforts of cost saving. This is hereinafter referred to as the actual cost index.

Table 6. Cost classification by controllability.

Index		Content
Controllable	4	If it is a cost that can operate on its own and is highly controllable as a highly volatile budgetary cost, then in theory it is an enforceable cost of zero.
	3	It can operate on its own and requires mandatory enforcement by the external environment at a low volatility budget but minimizes the cost.
	2	Budgetary costs or costs that cannot be operated on their own. They cannot be controlled in the short term but can be controlled by long-term planning. Costs spent on events arising under conditions of uncertainty and uncertainty.
	1	Non-budgetary costs or acquisition costs that may change depending on the procurement unit price and are least controllable.
Out of control	0	Non-budgetary expenses and uncontrollable expenses.

shows proposed cost classification criteria based on a level of controllability. In this study, we first divided the controllable and uncontrollable costs into four categories according to a level of controllability by management.

• Controllable cost

Controllable cost is divided into four categories according to a level of controllability.

Table 7. Examples of Control Level 4 cost items.

Accounts	Items
Supplies, printing and advertising expenses	office supplies, promotional goods, expendable items, medical supplies, machinery and (spare) parts, sample fees
Operating expenses	event cost, general operating expenses, ad hoc operating expenses
Education and training fees	internal education fee, domestic education fee, foreign education fee
Outsourced service fees	research and service expenses, management service expenses, consignment business expenses, other service expenses
Repair/maintenance costs	building/construction repair/maintenance costs, equipment/vehicle/carrier repair maintenance costs, repair/maintenance fee for all supplies, repair/maintenance costs for other tangible assets

shows exemplary Cost Control Level 4 cost items (the most controllable cost items). These items are unrestricted for use and highly volatile budget items. In theory, no use of any of these items is possible.

The cost items belong to the accounts of supplies, and printing and advertising can vary much with the efforts of the resource management unit to save the costs. In addition, the unit can control expenses for training and education for various purposes with discretion. Repair and maintenance costs appear to be uncontrollable by the unit in that long-lived tangible assets cannot avoid repair or maintenance. However, they can change significantly depending on how well the management unit manages the long-lived assets.

Table 8. Control Level 3 representative items.

Accounts	Items
Utilities and fuel costs	electricity, water supplies, cleaning service charges, fuel costs
Taxes	taxes
Clothing and food costs	clothing cost, food cost

shows the second most controllable cost items. They are unrestricted for use and less volatile budget items. They are inevitable but can be minimized depending on a level of cost-saving efforts.

For instance, the fuel costs for carriers, vehicles, ships or airplanes, postage, utility fees and cleaning service charges are necessary, but the management unit can keep them as low as possible depending on its cost-saving efforts.

Table 9. Examples of Control Level 2 items.

Accounts	Items
Salary expenses	flat salary, bonuses, allowances for temporary employees, other remuneration, pension benefits
Fringe benefits	civil service pension, military pension employment insurance, industrial accident insurance, health insurance
Other fringe benefits	special meals, night shift, gifts, disaster relief
Compensation cost	relocation compensation fees, other compensation fees

shows the third most controllable cost items (Control Level 2 items). They are restricted for use and subject to a long-term plan. That is, they are not controllable in a short-term.

The various salaries paid by each resource management unit are under weak control because they are from the annual budget. However, the necessities for military missions are under review and updated on a yearly basis in accordance with each military unit’s yearly and mid-term plans. Thus, it is possible for each unit to have the optimal number of personnel to complete the missions, when the amount of costs reduced by each resource management unit along with achievements of the missions are compared. Food expenses for overtime work and night shifts, gifts and disaster relief seem to be minimizable by the resource management unit.

Accordingly, this study categorizes them as either level 4 or level 3. Yet, since other fringe benefits rely on a pre-determined quota, such as fringe benefits, they are deemed proportional to the number of employees. The compensation cost is an expense paid in accordance with various laws if a state official has caused damage or loss to others in the lawful performance of his or her duties. The cost may be reduced in the long term by the administration authority’s reasonable policy judgment.

Table 10. Examples of Control Level 1 items.

	Items
Price differences	difference between office supply cost and purchase price, difference between expendable good cost and purchase price, difference between ammunition cost and purchase price, difference between medical supply cost and purchase price, difference between fuel cost and purchase price, difference between clothing cost and purchase price, difference between food cost and purchase price, difference between fuel cost and purchase price, difference between repair maintenance cost and purchase price
Error correction	loss on prior period error corrections, electricity bill overpayment return

shows the fourth most controllable, Control Level 1, cost items. They are in fact the most uncontrollable costs, excluding the uncontrollable costs. They are non-budgetary costs and vary with a procurement unit price at the time of purchase.

The price difference between the (standard) cost and purchase price is a cost item that can only be identified in the accounting for the MND. Its munitions are divided into registered equipment that is managed after being listed item by item and the items managed in groups by the military classification system, including non-registered equipment, apparatuses, fixtures, vehicles and carriers. The items managed in groups are further divided into the durable items, including equipment, apparatuses, fixtures, vehicles and carriers, and the expendable items other than the durable items. Except for the registered items and the durable items, non-registered items and the expendable items are recorded at the standard unit price at acquisition. Any differences between the standard price and the acquisition cost are recognized as the price difference. The reason for using the standard unit price is as follows. Although the quantity of the K-2 rifle used by the MND is difficult to accurately indicate in this document, it is inefficient to manage hundreds of thousands of K-2 rifles at an individual acquisition cost. Therefore, the MND is managing them in a group, and for this purpose, it sets a standard unit price. Therefore, the standard unit price changes year by year and is used for the current 1 year based on the actual acquisition unit price incurred during the immediately preceding fiscal year. Since the current year’s standard unit price is the prior year’s actual acquisition unit price, the price difference occurs when a price in a contract changes year by year. The standard unit price is supposed to change once a year by rule. However, if it is determined that a changed standard unit price has been unreasonably estimated, it may be adjusted during the fiscal year with the approval of the Defense Acquisition Program Administration. Therefore, the price difference can be reduced in part by negotiating with a contractual party at the time of contract or by a thorough cost analysis. However, as described earlier for the uncontrollable cost items, the differences due to the revaluation of inventories were classified as an uncontrollable expense as they are solely out-of-control changes in the standard unit price.

2.

Out-of-control costs

An out-of-control cost is a non-budgetary cost that cannot be determined by the operator of the resource management unit to determine the usage.

Table 11. Out-of-Control costs—examples.

Nine Minutes	Anti-Neck
Valuation Loss, Disposal Loss, Impairment Loss, Disposal Loss	revaluation loss on property, plant and equipment, loss on disposal of short-term investment securities, loss on disposal of long-term investment securities, loss on disposal of general tangible asset, loss on disposal of general tangible asset, other asset impairment loss, asset disposal loss
Depreciation	building depreciation expense, structure depreciation costs, machine depreciation expense
Bad Debt and Appropriations (Transfer)	compensation for large damages, the transfer of allowance liabilities, transfer of contingent liability
Inventory Valuation Differences	unregistered equipment inventory evaluation difference

classifies items that are out of control among the items managed by the resource management unit.

According to the “Guidelines for Accounting for Financial Assets and Financial Liabilities”, if the recoverable cost of the asset is below the book value due to the physical damage of the asset or an abrupt decline in market value and the difference between the recoverable cost and the book value is material, in accordance with Article 32 (3) of the Rules on National Accounting Standards, the difference shall be adjusted to the recoverable cost by writing down the book value of the asset. The difference shall be recognized as an impairment loss on that asset. In addition, if the estimated amount of uncollectable Korean government bonds at a reporting date is greater than the corresponding allowance for doubtful accounts, the difference shall be recognized as bad debt expense uncontrollable by the resource management unit. The MND applies a different percentage, based on experience, to the overdue sovereign bonds and recognized bad debt expense. The loss on valuation, impairment loss and bad debt expense are of expenses not controllable by the resource management unit and incurred regardless of the unit’s cost-saving efforts. Among the uncontrollable cost items, a peculiar item is the revaluation of unregistered equipment. The equipment is subject to revaluation whenever its standard unit cost changes. Any change of it is recorded as a depreciation expense.

4.2. Empirical Analysis

In this study, the actual cost index proposed as a means of enhancing accountability is applied to a resource management unit, and its performance is compared year by year. In addition, the performances of two or more resource management units are compared based on the index. The comparison between periods is analyzed by applying the index to the empirical data for the years from 2015 to 2016 and the comparison between units is performed by analyzing two divisions and seven brigades of similar sizes and with similar missions within the MND.

Table 12. Comparison of actual cost index between periods of Division A.

		Year 2015	Year 2016	Gap
Nominal Costs		321,713	335,065	13,352
Actual cost		189,445	154,226	−35,219
Control Level	0	132,268	180,839	48,571
	1	32,046	1197	30,849
	2	92,944	101,081	8137
	3	5684	5834	150
	4	58,771	46,114	−12,657

(Unit: Million Won).

compares the costs incurred within a resource management unit from Division A in accordance with the current government accounting standards and the accounting standards of the Ministry of National Defense over the period of 2015 and 2016, and the figures are converted to reflect the actual index and the control levels.

The nominal costs incurred in 2016 in the Army Division A were KRW 335,065 million, an increase of KRW 13,352 million from the nominal cost of KRW 321,713 million in 2015. However, the actual cost index reflecting the control level was 154,226 million won in 2016, a decrease of 35,219 million won from 189,445 million won in 2015. To be specific, in the year of 2016, the uncontrollable cost increased by 48,571 million won, from 132,268 million won in 2015 to 180,839 million won in 2016, and the difference was attributable to an increase by 293,000 million won in inventory values, such as supplies costs, ammunition costs and clothing costs, and to depreciation expenses of 113,000 million won. These costs are an uncontrollable cost item and excluded when calculating the actual cost. The costs classified as Control Level 1 were KRW 1197 million in 2016, a decrease of KRW 30,849 million from KRW 32,046 million in 2015. The decrease of KRW 310,000 million in 2016 compared to 2015 is due to prior period adjustments for error corrections. The costs classified as Control Level 2 were KRW 101,081 million in 2016, an increase of KRW 8137 million from KRW 92,944 million in 2015. The increase is explained by the increase in labor costs by KRW 53,000 million in 2016 compared to 2015 and the increase in clothing costs by KRW 28,000 million. The costs classified as Control Level 3 increased by KRW 5834 million in 2016 compared to KRW 5684 million in 2015, driven mainly by the increase in electricity costs of KRW 0.2 billion due to the correction of accounting errors. Finally, the costs classified as Control Level 4 of decreased by KRW 46,114 million in 2016 compared to KRW 58,771 million in 2015. The main reasons for the decrease were the reduction of 25,937 million won in expendable munitions, the increase in the cost of medical supplies by 4951 million won, the increase in food expenses by 6009 million won and the increase in the costs of maintenance and repair by 2893 million won.

Table 13. Comparison of actual cost index between Divisions A and B.

		Division A	Division B	Gap
Nominal Costs		354,897	335,065	19,832
Actual Cost Index		118,845	121,392	−2547
Control Level	0	204,121	180,839	23,282
	1	1189	1197	−8
	2	100,881	101,081	−201
	3	4361	5834	−1472
	4	44,345	46,114	−1769

(Unit: Million won).

compares the costs incurred in Divisions A and B in accordance with the current government accounting standards and the accounting standards of the MND over the period of 2015 and 2016, and the figures were converted to reflect the actual index and the control levels.

The nominal costs of Divisions A and B in the Army were KRW 354,897 million and KRW 335,065 million, respectively. Division A recorded 19,832 million KRW more than the Division B. However, when the control levels are considered, Division A spent 118,845 million won and Division B expensed 121,392 million won. In more detail, the uncontrollable expenses incurred were 204,121 million won by Division A, 23,382 million won more than Division B’s 180,839 million won, and Division A incurred 3200 million won more in depreciation expenses than Division B and 17,000 million won more in revaluation losses on tangible assets. The depreciation expenses and the revaluation losses were excluded from the actual cost calculation as they are irrelevant to the resource management unit’s cost-saving efforts.

The costs classified as “Control Level 1” for Divisions A and B are similar, with only an 8 million won difference between them. Looking at the details, the cost difference between the standard unit prices of and the purchase prices of the expendable supplies was minus 5 million won for Division A, but 2 million won for Division B, with a decrease in 7 million won incurred by Division A. The difference between the purchase prices and the standard unit prices of the fixture/furniture/vehicle and delivery equipment was minus 4 million won for Division A, but minus 2 million won for Division B, with a decrease in 2 million won incurred by Division A.

The cost classified as “Control Level 2” for Division A was 200 million won less than Division B’s 100,881 million won. The following items cause the difference: Division A recorded 65,320 million won, while Division B generated 64,661 million won for fixed-level salaries and bonuses, 659 million won higher for Division A. In night shift expenses, Division A generated 333 million won, which was 24 million won higher than Division B’s 308 million won. However, in the clothing costs, Division A generated 4288 million won, which was 988 million won less than Division B’s 5277 million won. For the “Control Level 2” cost, Division A eventually incurred 200 million won less than Division B.

The “Control Level 3” cost was 4361 million won for Division A, which was 1472 million won less than Division B’s 5834 million won. Looking at the main factors for the difference, the fuel cost was 108 million won for Division A, which was 58 million won more than Division B’s 50 million won, but for the electricity fees, Division A generated 2597 million KRW, which was 603 million won less than Division B’s 3200 Million KRW, and Division A generated 1530 million KRW in water bills, resulting in 1019 million KRW less than Division B’s 2549 million KRW. Division A finally incurred a “Control Level 3” cost of 1472 million won less than Division B.

The “Control Level 4” cost was 44,345 million won for Division A, which was 1769 million won less than the 46,114 million won of Division B. To be specific, Division A generated 12,776 million won in food expenses, which was 2516 million won less than Division B’s 15,293 million won. On the other hand, in fees for business agency services, Division A incurred 439 million yuan, which was 154 million won more than the 285 million won of Division B, and in the expendable goods fee, Division A incurred 2472 million won, which was 794 million won more than the 1678 million won of Division B.

By calculating the actual cost index and analyzing the costs incurred by resource management units, not only can the efficiency of the overall operation of resource management be diagnosed, but also the efficiency of costs within a group can be improved by aggregating costs by types of a similar controllability level. For example, in the above “Control Level 2” cost, Division A’s fixed salaries and bonuses were 659 million won higher than Division B’s fixed salaries and bonuses, and in the clothing cost that was expected to be proportional to the labor costs, Division A was expected to be higher than Division B, but the actual cost incurred for Division A was 988 million won less than Division B’s cost. In this case, the head of Division B can recognize that the clothing cost is being used inefficiently and can analyze it in depth.

Table 14. Comparison of seven brigades’ nominal costs and actual cost indices.

Category	Brigade A	Brigade B	Brigade C	Brigade D	Brigade E	Brigade F	Brigade G
Nominal Costs	188,592	79,083	65,002	167,200	245,203	58,635	48,982
Ratio	22%	9%	8%	20%	29%	7%	6%
Ranking	2	4	5	3	1	6	7
Actual Cost Index	53,449	26,014	21,255	49,893	36,250	18,904	16,139
Ratio	24%	12%	10%	22%	16%	9%	7%
Ranking	1	4	5	2	3	6	7

(Unit: Million Won).

compares the nominal costs and actual cost indices of the seven brigades with the same mission, showing the proportion of the nominal costs incurred by each brigade to the total nominal cost of the seven brigades and the proportion of the actual cost index of each brigade to the actual cost index of the group. The nominal expenses of Brigade E account for 29% of the total nominal cost, but its actual cost index takes up 16% of the total actual cost index, which is 13% lower than 29%. Although the other brigades, except for Brigade E, have actual cost indices lower than the nominal costs, it is because the actual cost index of Brigade E is lower than its nominal cost. Of the seven brigades, Brigade E has excellent cost-saving efforts, making it the most accountable of the entire group of brigades in terms of the efficient use of resources.

Nominal cost makes it difficult for the resource management unit to distinguish controllable cost from uncontrollable cost. With that challenge, the commander, including the brigadier general, who is the decision maker of the resource management unit, will have a lower incentive to use the resource efficiently. On the other hand, as shown in the case of Brigade E, the actual cost index can work to motivate the commander to efficiently manage resources. As a result, the motivation for efficient resource operation will be higher and the efficiency of resource operation will be higher.

5. Policy Proposal

Since 2011, accrual-basis accounting and double-entry bookkeeping have been implemented for national accounting in Korea. The objective was to enhance transparency and efficiency in national fiscal management by adopting a system aligned with international standards for national accounting. However, unlike the financial statements of major industrialized countries and private enterprises, the new government financial statements in Korea provide excessive information, making it challenging for the public to comprehend the format. Consequently, the financial reports of the Korean government have not been useful for decision-making processes. In terms of accountability, the lack of trust from the public as the principal diminishes the incentives for government officials entrusted with responsibilities to accurately report accounting information and effectively manage resources.

In the case of the MND, which is one of the central offices, since the introduction of national accounting, due to the inaccuracies in accounting information, there have been audit findings from the auditor general every year, such as classification errors, miscalculations and omitted transactions. In addition, according to the results of the MND’s financial operations, the same kinds of errors from the previous years have been identified every year, resulting in profits (losses) from prior period adjustments—error corrections, and temporary accounts, such as assets under construction, advance payments and accounts payable that should be closed in the current year remain for years. However, despite this situation, not enough research has been performed to improve accountability. Therefore, in this study, a new indicator that can enhance the accountability of the resource management unit is proposed for accounting information of the MND.

Currently, costs in national accounting include costs of various natures, making it difficult for a trustor to evaluate whether a trustee used the resources efficiently. To deal with this difficulty, an index was proposed to calculate a new actual cost index by dividing cost items into five categories according to a level of controllability. In addition, an empirical analysis was conducted for the empirical data for the years of 2015 and 2016 by applying the index to accounting information of two divisions and seven brigades in the MND.

The costs subject to accounting information from the MND are divided into the costs that can be directly controllable by the decision maker at the resource management unit and the costs that cannot be controllable. Controllable costs are further divided into four types that vary depending on a level of controllability: unrestricted and volatile budget items; unrestricted and less volatile budget items; restricted and underfunded budget items; items unfunded or subject to changes in procurement costs. The “actual cost index” was proposed. The index is a cost indicator that can evaluate the degree of efficient use of resources according to the four types of costs with different weights.

Next, the proposed actual cost index was applied to resource management units within the MND and compared with nominal costs. As a comparison between periods, in the case of Division A, the nominal cost increased in the current year compared to the previous year, but the nominal cost included much “Control Level 0” costs, or uncontrollable costs, such as valuation differences in expendable goods, ammunition costs and clothing costs and depreciation costs, so when these costs were excluded from the calculation of the actual cost index, the actual cost index decreased compared to the previous year’s index. Based on nominal costs, the cost in 2016 was 13,352 million won higher than that in 2015. However, based on the actual cost index, the cost in 2016 was 35,219 million won lower than that in 2015. A comparison between the resource management units compared the nominal and actual cost indices of Divisions A and B. Division A had a higher nominal cost than Division B. However, for the “Control Level 4” cost items and the “Control Level 3” cost items with a high level of controllability, Division A incurred lower costs than Division B, while for the cost item with an uncontrollable “Control Level 0”, Division A incurred a higher cost than Division B. In the actual cost index, Division A was lower than Division B. Based on nominal cost, the cost of Division A was 19,832 million won higher than that of Division B. However, based on the actual cost index, the actual cost index of Division A was 2547 million won lower than that of Division B.

Finally, the nominal cost and actual cost indices of the seven brigades performing the same mission were compared. Here, the proportion of the nominal cost of each brigade to the total nominal cost and the proportion of the total actual cost index of each brigade to the total actual cost index of entire brigades were calculated to confirm the relative cost-saving efforts of each brigade through the changes in ratios. As a result, it was confirmed that one out of seven brigades managed their resources efficiently by significantly reducing the proportion of the actual cost index compared to the proportion of nominal costs. In the test, the nominal cost of the E Brigade accounts for 29% of the total nominal cost, but the actual cost index accounts for only 16% of the total actual cost index, which is 13% lower than 29%. This is because, except for with the E Brigade, the actual cost index is lower than the nominal cost. However, the actual cost index of the E Brigade is lower than its nominal cost. Among the seven brigades, Brigade E is the most efficient in terms of resource utilization due to its cost-cutting efforts.

By presenting a new model in the field of national accounting that divides the costs incurred in national accounting according to the degree of control, this study expands the scope of prior research (Kim Kyung-ho, 2018; Sim Jae-young, 2016; Jung Sung-ho, 2017) [1,2,10]. It is similar in that it evaluates government entities subject to audits by the auditor general to improve accountability, such as Choi (2020) [11], but in Choi’s study, the evaluation criteria were things other than financial figures, such as the number of financial accounting officials, the number of years of service and whether an independent audit committee was in place.

This study differs in that it proposes a way to improve accountability using cost information calculated by the cost based on accrual-basis accounting. Earlier, Chan (2003) [6] stated that accounting information based on accrual-basis accounting should play a role in boosting the performance incentives of the executive branch. From this point of view, this study presents a concrete way to implement the role through the actual cost indicator. Brown (1993) [14] calculated the positions occupied by each administrative agency, and this study is significant in that it calculated the actual cost from the nominal cost of the brigades with similar missions and similar roles and calculated it as a position.

In addition, the previous studies were mainly aimed at strengthening the accountability of the entire country. Yet, this study was the first to study the central authorities that make up the national accounting on the improvement of accountability. This is the uniqueness of this study that sets it apart from other studies. From a practical point of view, the actual cost indicators presented in this study will make the resource management unit, which is an internal accounting entity of the MND, conscious of the comparative evaluation with similar units and pay attention to cost management, thereby improving the accuracy of accounting information and at the same time, improving accountability by making efficient use of resources competitively.

Nevertheless, the limitations of this study are as follows: first, in order to calculate the actual cost index, we have classified the costs into a total of five groups, including out-of-control costs, but if we analyze the group more closely, we will be able to calculate the index to reflect a more precise degree of control. Second, there is a rather uniform weight of 0, 1, 2, 3 and 4 for each group. For example, budget costs for unrestricted and volatile budget items were assigned to the “Control Level 4” group, weighted to the nominal cost by four times, and the budget cost for restricted and underfunded budget items was classified into the “Control Level 2” group and weighted twice as much as the nominal cost, in which case whether it is reasonable for the weight of the “Control Level 4” group to have twice the weight of the “Control Level 2” group is something that needs further studies. Third, in the case of costs that are conducive to the long-term performance and value of the MND, it will be necessary to ensure that management has considerable leeway by excluding such costs from the performance evaluation. The out-of-control costs expressed in this study may be modified as the costs excluded from evaluation and classified as excluded costs to be assessed along with the existing non-controllable cost items.

6. Conclusions

The transparent implementation of the defense capability improvement costs, which constitutes 32% of the Korean defense budget, is a significant concern for the public during the execution of the government budget [15]. The implementation of accrual-basis accounting and double-entry bookkeeping in national accounting was intended to enhance transparency and efficiency in national fiscal management by implementing a system comparable with international standards. However, the financial reports of the Korean government contain excessive information that is difficult for the public to comprehend, resulting in the reports being unsuitable for a decision-making process. Moreover, the study highlighted the issue of accountability, as the lack of trust from the public leads to a loss of incentives for government officials to accurately report accounting information and manage resources efficiently.

To address this issue, this study proposed a new actual cost index to improve the accountability of resource management units. The index divides costs into five categories based on their controllability, which enables a trustor to evaluate whether a trustee used resources efficiently. An empirical analysis conducted on the accounting information of two divisions and seven brigades in the MND demonstrated that the proposed actual cost index accurately evaluates the efficient use of resources. The study also revealed that Division A and Brigade E were the most efficient in terms of resource utilization due to their cost-cutting efforts.

However, the study has certain limitations that must be acknowledged. The proposed actual cost index may not be applicable to other organizations or industries, and further research is required to determine its broader applicability. Moreover, the empirical analysis conducted in this study is limited to data from 2015 and 2016, and the findings may not be applicable to other time periods. Despite these limitations, the study’s contributions to enhancing accountability in national accounting and the identification of the most efficient resource management units are significant.