Overview of Japanese financial reporting and auditing circumstance

Globalization of the Auditing Regime is the key word for extensive changes in financial reporting and auditing circumstance in Japan during the past about 15 years. It is to say that the globalization of business and capital markets has completely transformed the auditing regime, including auditing standards in Japan.
The amendment of the Certified Public Accountants Act ("CPA Act") in 2003, a big change since the 1970s, was strongly influenced by the U.S.
Sarbanes-Oxley Act of 2002. Some of the major amendments included strengthening of the auditor independence rules and auditor oversight, reform of the Certified Public Accountants (CPA) examination, and limited liabilities of partners for audited entities. Nevertheless, corporate scandals involving listed companies relating to financial reporting have emerged in succession since 2004. As a means to prevent such fraudulent accounting, the CPA Act was revised again in 2007. In this most recent amendment, the focus was placed on further strengthening of oversight on auditors, revision of auditor liability, enhancement of quality control, governance, disclosure of audit firms, and the reinforcement of the independence of auditors.
Moreover, the Securities and Exchange Law (SEL) and other related laws, which regulate capital markets, were amended and reorganized into the Financial Instruments and Exchange Act (FIEA) in 2006. Under the FIEA, the following measures related to financial reporting became effective in the fiscal year beginning April 1, 2008:
- Management's assessment of internal control over financial reporting and a CPA audit of the assessment;
- Introduction of quarterly financial reporting and CPA reviews.
The Japanese Institute of Certified Public Accountants (JICPA) has executed various measures as a self-regulating body in response to an upheaval in the audit environment, with the aims of restoring the public confidence in audits and improving the audit quality. Those measures include strengthening the quality control review conducted by the JICPA, introducing the registration system of listed company audit firms, and revising the JICPA Code of Ethics ("JICPA Code").
With respect to auditing standards, convergence has been accelerated on a global basis with the International Standards on Auditing (ISA) developed by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC). In order to respond to the clarity project of the IAASB, JICPA completed redrafting and rewriting the Auditing Standards Committee Statements under the clarity convention in 2012.

The Japanese Institute of Certified Public Accountants, July 2013. Corporate Disclosure in Japan Auditing (Fifth Edition), 7.

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