Retained Earnings of Social Welfare Corporations and Their Accounting Irregularities

On July 3, 2012 Japan's Ministry of Finance (MOF) published the results of its investigation on the financial status of special elderly nursing homes and welfare service facilities for the disabled, both of which are operated by social welfare corporations. Social welfare corporations have been demanding an increase in government subsidies to cover a shortage of revenue that has prevented them from expanding social welfare services, and therefore carrying out their mission. However, MOF's current investigation has demonstrated that social welfare corporations as a whole have accumulated a huge amount of retained earnings. In addition, the investigation has shown that those corporations that have retained more earnings are in general less willing to return their surplus to society. MOF goes on to state that it suspects that many such entities are committing irregular accounting practices which deviate from generally-accepted accounting principles. For example, balance sheets submitted by some social welfare corporations to relevant authorities (either prefectural or municipal government) show a total amount of debt mismatching the total amount of credit. That such balance sheets are impossible using accounting software available on the market indicates that these corporations' finances are handled by accountants without any basic knowledge of accounting. Given the circumstances, it is not unreasonable to suspect that the owners of such corporations may have also misappropriated financial resources for personal use.

The social welfare corporation system was created in 1951. Promulgated in 1946, Article 89 of the Japanese constitution stipulates that the government is not allowed to subsidize private welfare service enterprises not under the control of public authorities. This provision reflects the concern of General Headquarters of the Allied Forces at the time that the Japanese government might transfer its obligation to build a system of safety nets to private companies by offering them subsidies. Amidst the economic chaos immediately following WWII, however, the government alone was unable to provide adequate aid facilities for the enormous number of poor and needy citizens. In order to utilize resources in the private sector, the Social Welfare Corporation Act created a system of social welfare corporations which are somehow controlled by public authorities and thus exempted from Article 89 of the constitution.

During the ensuing 60 years, the government has injected subsidies upwards of some ten trillion yen into social welfare corporations. Meanwhile, unemployment remains high and many are in need in the aftermath of the Great East Japan Earthquake, so it may be necessary for the government to continue subsidizing social welfare corporations. However, it is astonishing that the government has never analyzed the financial numbers of social welfare corporations over the last 60 years. In other words, the government has continued and still continues to subsidize social welfare corporations with vast amounts of money without knowing how much they need to achieve the government's policy objectives and, particularly, how much they would need to build a network of social welfare facilities to meet the nation's needs.

This has motivated me to collect and accumulate financial data from about 16,300 social welfare corporations - all of which are operating social welfare facilities in Japan. The results, published on the Canon Institute for Global Studies website in 2011, were surprising. Figures showed accumulated revenue of 7.5 trillion yen among social welfare corporations in 2009, an average profit rate of 5.9% of total revenue, accumulated total assets of 16 trillion yen, and net assets of 13 trillion yen - numbers of which far surpass those of leading companies such as Toyota. After publishing these figures, the governing Democratic Party of Japan (DPJ) instructed the Ministry of Health, Labour and Welfare (MHLW) to analyze the financial data of, among others, special elderly nursing homes, the rates of nursing care awarded to which were then under review. MHLW's investigation found that special elderly nursing homes boast retained earnings of around 2 trillion yen.

MOF's abovementioned investigation was conducted after MHLW's investigation. MOF intended to get the real picture behind slush funds put away by social welfare corporations. It is especially important to note that MOF's investigation revealed that welfare service facilities for the disabled - which were assumed to suffer from a capital shortage - are, in reality, rich. This has been helpful to the government when considering future reforms of the social welfare corporation system. Social welfare corporations enjoy tax benefits. While exempted from corporate tax, they generate an average surplus of 500 billion yen each year. I would like to propose that the government set up a mechanism by which all social welfare corporations jointly contribute one-fifth of this surplus - amounting to 100 billion yen - to support the people affected by the Great East Japan Earthquake. Should social welfare corporations be opposed to this proposal, then alternatively they should accept MOF's proposal legally obligating them to publish their financial statements online so that the public is made aware of these corporations' true financial status. Doing so would in turn stimulate public debate as to how social welfare corporations should be.