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History and Background: Development of CPA Profession

1. Introduction of Independent Audits

The first group of professional accountants in Japan is said to have emerged around 1907, but it was not until 1927, when the Accountants Law was enacted, that a fledgling institute of professional accountants came into existence. However, the formal establishment of the audit profession had to wait until the enactment of the CPA Act in July 1948, following the enactment of the Securities and Exchange Law ("SEL") of that year. The first qualification examination under the CPA Act took place the following year.

The CPA Act was designed primarily to establish professional standards comparable to those in the U.S., and to establish a publicly recognized status for CPAs. Many such measures were introduced under the supervision of the GHQ during the period of occupation by U.S. Forces after World War II. These measures were in response to the growing post-war demand for the democratization of business, better disclosure of corporate information following the dissolution of the zaibatsu (large conglomerates), and the introduction of foreign capital. The JICPA started in 1949 as a voluntary association. In 1953 it was incorporated as an association (shadan hojin) under the Civil Code.

The services provided by CPAs have expanded greatly since July 1951, in conjunction with the requirements of the amended SEL. Among other things, Article 193-2 of the SEL provided that "balance sheets, income statements, and other schedules relating to financial statements, which are filed in accordance with the provisions of this law, shall be examined by an independent CPA who has no special interest or connection therewith." It was under this Article that the examination of corporate financial statements by CPAs began. Until then, the relevant regulations and rules, which were the basis of audits by CPAs, were introduced under the direction of the MOF. These regulations and rules included the Auditing Standards, the Regulations on Auditors Certifying Financial Statements, the Accounting Standards, and the Regulations Concerning the Terminology, Forms, and Method of Preparation of Financial Statements.

Even though audits by CPAs began in 1951, it was not until 1957 that full-scope audits were introduced. It took time for audited firms to fully understand the requirements of the independent audit, and CPAs were not yet sufficient in number to perform full-scope audits. When audits were first conducted under the amended SEL, the number of companies subject to audits was some 450, and the number of CPAs was less than 400. The scope of audits expanded step by step, as follows:

Preliminary audits (1951-1956): Special emphasis was placed on reporting on the appropriateness of accounting procedures and internal controls.

1951 First-time audit for companies that were subject to audit:
Reporting on the design and operating effectiveness of internal controls.
1952 (Jan.) Second-time audit for companies that were to be audited for the second time:
Reporting on compliance with accounting procedures.
1952 (Jul.) Third-time audit for companies that were to be audited for the third time:
Reporting on the appropriateness of internal controls.
1953 (Jan.)

Fourth-time audit:

  • The examination of five important balance sheet items was introduced for companies that had been audited before;
  • Limited-scope audit (reporting on the appropriateness of accounting procedures and internal controls) for companies that were subject to audit for the first time.
1955 (Jan.)

Fifth-time audit

  • Some balance sheet items were added to be subject to audit for companies that had been audited before;
  • Limited-scope audit (reporting on the appropriateness of accounting procedures and internal controls) for companies that were subject to audit for the first time.
1957 (Jan.) Full-scope audits for all companies subject to audit, reporting on the fairness of presentation of financial statements.

2. Major Reform of the CPA Act

In 1965, after the introduction of auditing by independent CPAs, the profession faced its first ordeal. The business community was shocked by the accounting fraud and bankruptcy of Sanyo Tokusyu-ko, which is often compared with the famous 1940 McKesson and Robbins case in the U.S. In response, the Ministry of Finance ("MOF") tightened supervision of the business community, initiating legislative revisions and intensive administrative guidance. Its staff compiled a blacklist of some 100 listed companies and performed focused inspections of registration statements and annual securities reports. It soon became apparent that accounting window-dressing was taking place in one out of two companies. Independent auditors were questioned and, in a number of cases, these auditors were reprimanded or suspended. The SEL was amended in 1971 in order to expand audit requirements, as well as to clarify auditors' responsibility in the event of bankruptcy accompanied by accounting fraud. Under the amended SEL, an independent auditor could be sued for malpractice.

The focused inspection, which was performed after the fact, did not solve the fundamental issues of insufficient independent auditing. Several steps were taken to correct fraudulent accounting and to improve auditing practices. By the end of the 1960s, it was a requirement that any auditor's disclaimer or adverse opinion be disclosed to the public. In most cases, the mere threat of public disclosure was sufficient to convince management to heed the auditor's recommendations. Also, the Auditing Standards and related rules were amended to tighten audit procedures. Observation of physical counts of inventory, confirmation of receivables with customers, and audit of subsidiaries all became mandatory. Further administrative guidance came with an amendment of the CPA Act, designed (i) to strengthen the self-regulatory function of JICPA as a special organization, and (ii) to establish a system for audit corporations, in order to promote uniform and systematic auditing among CPAs.

3. Reorganization of JICPA

Under the amended CPA Act in 1966, the JICPA underwent a drastic change. In order to strengthen its self-regulatory function, its legal form was changed from incorporated association to special judicial entity (tokushu hojin), and all CPAs were required to become members. Membership had formerly been voluntary, so that the JICPA had not been able to oversee all audit practices performed by CPAs, resulting at times in uneven or low quality practice. The JICPA was now patterned after the American Institute of Certified Public Accountants ("AICPA"), with the difference that it was to be closely supervised and guided by MOF.

4. Introduction of Audit Corporations

Another principal feature of the 1966 amendment was that CPAs were permitted to set up audit corporations (kansa hojin). In order to promote the systematic and standardized audit of financial statements, the CPA Act encouraged and facilitated the organization of individual CPAs into corporations. An audit corporation is similar to a partnership in Western countries in that all partners have to bear liabilities of the firm jointly and severally.

The main requirements for an audit corporation were established as follows:

  1. Membership was limited to CPAs;
  2. There must have been at least five members;
  3. All members must have had the right and duty to participate in the practice;
  4. No member was to be under suspension from practice or have contravened provisions of the law;
  5. The corporation must have had an organization, personnel, and facilities sufficient to ensure adequate conduct of the practice.

Before systematic audits by audit corporations were introduced, audits were performed mainly by sole practitioners. It was difficult for a sole practitioner to marshal the resources and expertise to audit large companies. Also, most sole practitioners depended on a relatively small number of clients for their livelihood, which could impair independence. Another problem was excessive continuity by a single auditor on a given client.

The first audit corporation was founded in 1967. A few more soon followed. However, they were still not large enough to perform systematic audits on large clients as contemplated under the CPA Act, so the MOF revised the regulations in order to promote consolidation among small corporations and/or sole practitioners. It took several years for the development of audit corporations of considerable size.

The major advantages of an audit corporation were: (i) a larger business base would justify the establishment of larger professional firms with the requisite organization and competence, and (ii) the audit corporations would assist CPAs in better maintaining their independence and integrity as professionals and improve the public credibility of the profession. The amendment paved the way for Japanese CPAs to render services to international business on an equal footing with CPAs from other countries.

5. Development of Audit Corporations

As Japanese corporate activities expanded globally, so did their methods of financing, including the sale of equity and debt securities overseas. In order to obtain global financing, it was necessary that the company's financial statements be prepared in accordance with Japanese or U.S. GAAP, and be examined in accordance with credible auditing standards.

In 1961, Sony offered, for the first time, a new stock issue for sale in the U.S. and had to hire an American accounting firm to certify its financial statements for filing with the U.S. SEC. Sony's example was soon followed by a number of other Japanese companies offering stocks and bonds in the U.S. and European countries. Suddenly, the clientele of foreign auditing firms broadened to include Japanese companies. Until then, major foreign firms had operated branch offices in Japan to serve only subsidiaries of foreign multinational companies. On the other hand, after 1973, when the first foreign company was listed on the Tokyo Stock Exchange, a number of foreign companies followed, and engaged Japanese CPAs to examine their financial statements. The need for international audit capabilities became imminent.

Japanese audit corporations became aware of the need to enter into associations or affiliation agreements with foreign accounting firms. Major foreign accounting firms (mainly the Big Eight at the time) expanded business in Japan, and started to cooperate with Japanese audit corporations. The first formal affiliation took place in 1975. Thus the audit corporation, introduced by the amendment to the CPA Act, helped facilitate global cooperation and affiliation among auditors, resulting in improvements in Japanese auditing practices.

6. Introduction of Audits under the Commercial Code

Discussions on expanding audit requirements started long before the series of accounting fraud bankruptcies that occurred in the 1960s. Before the introduction of audits under the Commercial Code ("the Code") in 1974, statutory audits were required only under the SEL. Audits under the SEL had serious flaws. For example, auditors often had to audit the financial statements only after the shareholders had approved them. Under this process, it was theoretically impossible to reflect in the financial statements necessary adjustments that were identified during the course of the audit. If the audit had been performed prior to the shareholders' meeting, such adjustments could have been duly reflected and the effectiveness of the audit would have improved significantly. The Ministry with responsibility for the Code (the Ministry of Justice) and the MOF both recognized the importance of expanding the requirements for independent audits under the Code. However, under the Code, companies were subject to audits by company auditors (kansa-yaku), which might overlap with the audits by independent auditors. It was mainly this overlap problem that delayed the introduction of independent audits under the Code.

During the course of the discussions in the 1970s, there was another series of accounting fraud bankruptcies, including the FujiSash and the Nihon Netsugaku failures. It was necessary to regain public trust in audits. The MOF again conducted a focused inspection to confirm whether adequate audit procedures were being performed, and facilitated systematic audits by audit corporations. The JICPA conducted research on auditing practices, and set up the Audit Practice and Review Committee to encourage systematic audits and to strengthen and standardize audit procedures. In 1979, the JICPA also started to develop Audit Manuals that stipulated standard audit procedures for CPAs to refer to.

In 1974, after a number of years of discussion and consultation, the Code was amended to require companies with a capital stock of \1,000 million or more to be subject to audit by accounting auditors. In 1981, in order to expand audit requirements, further amendments to the Code were effected. The criteria for the requirement for an audit were expanded to include companies with a capital stock of \500 million or more or with total liabilities of \20 billion or more. Furthermore, other expansions of the types of companies required to undergo audit under other laws and regulations were undertaken.

7. Problems Emerging after the Bubble Economy Crash

From the early postwar period, banks played a major role in funding the growth of industry, and operated in an environment protected by bureaucratic regulations that permitted them to enjoy record growth and large margins. In turn, they were closely monitored and subject to administrative guidance by the MOF.

Up until the middle of the 1970s, there was keen demand from industry for funds for growth. However, after the period of rapid economic growth ended, companies started accumulating surplus funds and seeking financial investment opportunities. Since banks had mostly accomplished their original objectives to fuel economic growth, they had to find new borrowers to expand their business; and they lent money for client investments. The trend to new types of lending was also spurred on by deregulation in financial markets and innovation in financial instruments. Many industrial companies invested their surplus funds, including funds borrowed from banks, into Money Trust Funds comprised mostly of marketable securities. They believed that the boom in the stock market would last forever. Industrial companies enjoyed unrecognized stock price appreciation on their investments, as did the financial institutions with equity stakes in companies.

Investments in real estate also increased. Throughout the period of the bubble economy, most Japanese financial institutions made loans indiscriminately, as long as the debtor provided real estate as collateral, in the widespread belief that in the long run real estate collateral would appreciate and the loans be recoverable. These assumptions held until the bubble burst in 1990.

After the bubble economy crash, the sharp drop in land and stock prices created enormous problems, both to those who had invested directly and to those who had financed the investments. Unrealized losses mounted to alarming levels. Several scandals emerged involving financial institutions. Many securities companies, for example, were discovered to have compensated favored customers for trading losses. In the 1990s, real estate companies and construction companies went bankrupt because of the country's tight monetary policy. Bad debts became a major issue for financial institutions. Several financial institutions, including banks and housing loan companies whose audits had been conducted mainly by audit corporations, collapsed within less than a year after being given an unqualified opinion. The public questioned the standards of disclosure of banks and especially the adequacy of provisions for non-performing loans. Public criticism of audits for not providing advance warning of such failures also intensified. At that time, auditors' reports did not include an emphasis paragraph as to 'the ability to continue as a going concern' when a company's ability to survive was in doubt.

In the late 1990s, the MOF changed its approach to the supervision of banks from one that depended on "administrative guidance" that was somewhat ambiguous and left room for manipulation to a more transparent approach based on written rules and regulations. Under the new approach, banks are to perform their own self assessment of loans and loss allowances (which had been set by to direct supervision), and these self assessments are to be subject to expanded audit procedures by the independent auditors. Credit unions and credit associations were to be audited and subject to the same discipline for loss allowances.

After the bubble burst, several important amendments to disclosure rules were also effected to improve the quality of disclosure in the depressed economic conditions. Information on the market value of marketable securities was to be disclosed, and real property that had incurred unrealized losses could be written down to reflect current market values.

However, the MOF continued to have considerable influence over banking accounting, and it exercised that influence. In order to assist banks to satisfy the requirements set by the BIS (Bank for International Settlements), the MOF manipulated certain accounting rules. Formerly, banks had been required to recognize marketable securities on the balance sheet at the lower of cost or market value, but in the prevailing environment of extensive and significant unrealized losses, the MOF allowed banks to recognize these securities at cost, so the banks did not have to recognize the losses in their financial statements. The MOF also allowed banks to write real property up when the market value was above cost, so as to recognize an accounting gain. These treatments were contrary to global accounting standards, which emphasize recognizing marketable securities at their market values, but the MOF insisted that these treatments were intended to protect the general public by protecting the banking system. Internationally, questions about the integrity of Japanese accounting became intensified. It was felt that these questionable accounting procedures would delay the resolution of the non-performing loan problem. Under the close supervision of MOF, the JICPA was in a difficult position.

Even so, to restore and enhance public trust in the audit, the JICPA took the following steps:

  • Established the Special Audit Committee on Financial Institutions in 1996 to discuss matters concerning audit procedures specific to banks;
  • Started research on 'going concern' disclosures and issued a report in 1997;
  • Reorganized institutions supervising audit practice and set up the Task Force on Emerging Issues, in order to respond to fundamental issues as they emerge, in 1997;
  • Established the Task Force to discuss issues in the construction industry in 1998.

The JICPA also responded to recommendations proposed by the CPA Investigation and Examination Board, and implemented the following measures:

  • The CPE Program was introduced in 1998;
  • The Quality Control Review was introduced in 1998;
  • The Code of Ethics was amended to further enhance professional ethics in 2000.

The process of setting accounting and auditing standards, previously driven by the MOF, is gradually changing. Even though the basic standards are to be set by the Business Accounting Council ("BAC"), an advisory body to MOF, the role of the JICPA in setting standards has become more important because of continued international pressure and forces encouraging deregulation in Japan. The JICPA is now authorized to decide on the details of auditing standards. In 1992, the JICPA established the Auditing Standards Committee. Since then the Committee has issued Standards to guide audit practice. The Financial Accounting Standards Foundation ("FASF") was established in 2001, and the Accounting Standards Board of Japan ("ASBJ") was organized under the auspices of the FASF as an independent and private-sector entity to develop accounting standards in Japan.

8. Amendment of the CPA Act in 2003

The amendment of the CPA Act, the biggest change since the 1970s, was discussed for several years after the crash of the bubble economy in the early 1990s and was strongly influenced by the U.S. Sarbanes-Oxley Act of 2002.

The following features are included in the amendment:

1. Auditor Independence Rules

a. Non-audit services

The prior CPA Act allowed CPAs to provide their audit clients such services as preparation of financial statements, researching or planning financial matters, and providing consultation on financial matters to the extent that it did not impede the performance of the audit.

The amended CPA Act, put into effect in April 2004, prohibits an audit corporation from providing certain non-audit services to any audit client, in addition to tax services which had been prohibited by the prior act.
Non-audit services prohibited in the amendment include the following:

  • Services related to book keeping, financial documents, and accounting books,
  • Design of financial or accounting information systems,
  • Services related to appraisal of contribution-in-kind reports,
  • Actuarial services,
  • Internal audit outsourcing services,
  • Securities brokerage services,
  • Investment advisory services,
  • Other services that are equivalent to the above listed services and that involve management decisions or lead to the self-audit.

It is prohibited to provide these non-audit services to any clients that are required to be audited in accordance with the SEL and certain large companies that are audited in accordance with the Code.

b. Audit partner rotation

Prior to the amendment, engagement partner rotation was required under the JICPA's Auditing Standards Committee Statement as a seven-years term with a two-years time-out period. Under the amended CPA Act, all engagement partners are legally required to rotate after serving for no more than seven years with time-out periods that are prescribed in a cabinet order (two years). The amended partner rotation rules apply to statutory audit engagements that are required under the SEL and the Code for the certain large companies. In this respect, the audit engagements to which the partner rotation rule is applied are the same as those for which the rules as to the prohibition of certain non-audit services apply.

c. Cooling off

The prior CPA Act had no prohibitions as to audit clients hiring a retired partner of the audit corporation.

Under the amended CPA Act, an engagement partner who performs audit services to a client is prohibited from joining the management of the audit client as a director or other important position until at least one year after the end of the accounting period during which the partner was involved in auditing this client.

2. Strengthening Auditor Oversight

Prior to the amendment, the Financial Services Agency ("FSA") oversaw auditors and the JICPA to protect the public interest. The FSA's CPA Investigation and Examination Board oversaw the CPA examination and disciplinary actions against CPAs.

The amended CPA Act directed that the Certified Public Accountants and Auditing Oversight Board ("CPAAOB") be established within the FSA by reorganization of the former CPA Investigation and Examination Board in order to enhance the monitoring and oversight of CPAs and the JICPA quality control review. The CPAAOB consists of ten members who are nominated by the Prime Minister with consent by the Diet. At least the chairperson and one member of the board serve full-time.

The amendment also mandated the performance of quality control reviews and grants the legal authority for the JICPA to conduct quality control reviews.

3. Reform of CPA Examination

The amended CPA Act contains reforms of the CPA examination system that became effective as of January 2006. The new CPA examination was simplified to a single-step examination from the former three-step examination.

In order to obtain their certification as CPAs, All candidates who have passed the CPA examination are also required to have two years practical experience, which can be taken either before or after sitting for the examination, three year professional accountancy education program, and a final assessment provided by the JICPA.

4. Introduction of Limited Liabilities of Partners

Prior to the amendment, every partner of an audit corporation was jointly and severally liable for liabilities without limitation. Under the amended CPA Act, a new category of 'designated partner' was created to alleviate the legal burdens of partners who are not designated as engagement partners. Only the partners who perform audits (the "designated partners") are jointly and severally liable for misconduct and negligence, and other partners who are not involved in the audits in question are liable at a maximum, to the extent of their interest in the audit corporation with regard to the liabilities claimed by audit clients.

This designated partner system is different from a limited liability partnership. Non-engagement partners are still liable for third-party claims. In this respect, non-engagement partners are jointly and severally liable, without limitation, for third party claims together with the engagement partner(s).

9. JICPA Commitment to Restore Public Confidence in CPA Audits

Corporate scandals relating to financial reporting involving listed companies have come out one after another since 2004; these scandals have undermined public confidence in the disclosure system in Japan. The growing public distrust in CPA audits hit a peak when the Kanebo scandal was revealed in 2005. Kanebo had a long history as a household goods and cosmetics conglomerate and was delisted from the Tokyo Stock Exchange after admitting to accountancy fraud over a four-year period. In association with this accountancy fraud, four CPAs were arrested for allegedly aiding and abetting Kanebo executives in the falsification of financial reports.

Before the Kanebo scandal was disclosed to the public, the JICPA has already taken several steps to enhance auditing practices. Some of these measures included:

An increase in full time quality control reviewers from 10 to 20 to reinforce the effectiveness of JICPA quality control reviews to maintain and improve the quality of auditing practices at individual audit firms. An information technology expert was also hired to assist in these reviews;
Creation of the Disciplinary Committee and the Appeals Committee and improved transparency in disciplinary processes by making these committees independent from the Executive Board and assigning members from outside the accountancy profession; and
Establishment of audit hotlines to collect information on audits from CPAs and relevant people in companies.

Subsequent to the indictment of Kanebo's former auditors, the Chairman and President of the JICPA released a statement on October 25, 2005, entitled "Toward the restoration of confidence in audits by CPAs." In this statement, the JICPA indicated it was determined to take the following actions in response to the public scrutiny towards CPAs:

Request for the immediate implementation of audit partner rotation by the Big 4 audit corporations and revision of the rotation rule of lead audit partners in certain large audit corporations as a five-year engagement with five-year cooling-off period;
Make mandatory requirements in the taking of certain subjects such as the Code of Ethics and audit quality control out of the total Continuing Professional Education ("CPE") credits (40 hours annually);
Conduct urgent quality control reviews for the Big 4 and provide full cooperation to the monitoring of the CPAAOB; and
Address issues related to the Quality Control Standards of audit firms issued by the BAC.

The Chairman and President urged all members who perform audits to realize what the public expects of CPAs and to perform their audits fairly and strictly as independent auditors.

Further to these measures, the JICPA also announced its plan to set up a registration system of listed company audit firms and the establishment of a comprehensive Code of Ethics on April 6, 2006.

One month after the above announcement, the FSA announced that it had decided to take administrative action against the audit corporation which Kanebo's former auditors belonged to. The audit corporation was to suspend part of its business for two months between July and August 2006, and ordered the revocation of certification, or one-year suspension, of CPAs who were partners in connection with the alleged misconduct connected with Kanebo.

The Chairman and President reaffirmed this statement by stating that the JICPA would make every effort to strengthen self-regulatory function through various measures including a registration system of listed company audit firms and establishment and enhancement of a comprehensive Code of Ethics.

At a special assembly on December 11, 2006, the JICPA approved the amended JICPA Code of Ethics and resolved to introduce the registration system of listed company audit firms. The registration system of listed company audit firms has been in place since April 2007. JICPA set the deadline as July 15 for the registration of audit firms that audit listed companies (as of April 1, 2007). After deliberations by the Quality Control Committee and the JICPA Quality Control Oversight Board, 196 firms were allowed to register at the time of the deadline. No non-registered audit firms were identified. The final register has been released for public viewing.

10. Amendment of the CPA Act in 2007

Following these accounting and auditing scandals, the subcommittee on CPAs in the Financial System Council under the FSA began deliberations on a wide variety of issues including reinforcement of audit corporations' governance and further enhancement of auditor's independence. Based on the subcommittee conclusion, a further amendment of the CPA Act was proposed to the National Diet and enacted on June 20, 2007.
The revision of the Act includes measures (a) to enhance the quality control, governance, and disclosure of audit corporations, (b) to reinforce the independence of auditors, and (c) to strengthen oversight of auditors and revise auditor's liability. Major amendments are as follows:

1. Enhancing the quality control, governance, and disclosure of audit corporations

a. Establishment of an appropriate operational control system of audit corporations

The previous CPA Act required audit corporations to maintain sufficient operational control systems to perform audit engagements fairly and properly. In addition to the requirements, the amendment specifies the following obligations of audit corporations in the establishment of operational control systems.

  • To ensure appropriate management of audit corporations;
  • To establish and implement appropriate quality control policies.

b. Enlargement of qualification for partners of audit corporations

The amendment relaxes qualification for partners of audit corporations to include non-CPAs under the following conditions:

  • Non-CPA partners shall register with the JICPA;
  • The percentage of non-CPA partners amongst partners in audit corporations shall be limited to a certain level (this is up to 25% as specified by the Cabinet Office Ordinance).

c. Disclosures by audit corporations and certain CPAs

Audit corporations are required to disclose documents explaining their operations and financial information to the public. Individual CPAs who audit listed companies and certain large companies are also required to disclose their operations to the public.

2. Reinforcing the independence of auditors

a. Review measures to enhance independence

The amendment provides the statutory principles covering the duties of CPAs that CPAs and audit corporations shall act in an independent manner in the performance of their work.

b. Expansion of the scope of restrictions on employment with audit clients

Under the previous CPA Act, engagement partners were prohibited to join the management ranks of audit clients as a director or other important position during a certain period. The amendment expands the scope of the restriction on employment to prohibit the engagement partner from joining the management of the parent company, consolidated subsidiaries, or sister companies of the audit client.

c. Strengthening the rotation rule

The JICPA established a self-regulatory rotation rule for large audit corporations that audit 100 or more listed companies in Japan to follow a five-year rotation rule with a five-year cooling-off period for the lead engagement partners and engagement quality control review partners. JICPA made this rule effective in April 2006. The amendment has made it a legal requirement.

d. Report to the FSA about fraudulent conduct by management

Along with the amendment of the CPA Act, the Financial Instruments and Exchange Act ("FIEA") was also amended to require auditors to report to the board of company auditors or the audit committee when auditors discover a fraudulent conduct that materially affects the fair presentation of financial statements. Auditors would be required to report to the FSA if the client fails to take necessary action or if the auditor believes preventative action is needed.

3. Strengthening of oversight on auditors and revision of auditor liability

a. Enhancement of disciplinary actions

Disciplinary actions against audit corporations were previously limited to censure, suspension orders, and dissolution orders. The amendment added an order to improve the operational management system of audit corporations. It will be within the remit of the FSA to order an audit corporation to improve its quality control and management, and to forbid any partners who are found to be responsible for seriously inappropriate conduct from further execution of audit, quality control, and management of the audit corporation. Furthermore, the FSA may impose a monetary sanction upon an audit failure: the amount may be equal to the audit fee when a partner of an audit corporation is found to have been negligent, or equal to the audit fee plus 50 percent when an audit corporation partner's conduct is found to be willful (i.e. 1.5 times the audit fee). The monetary sanctions are administrative actions and would not be considered a criminal penalty.

b. Introduction of limited liability company (LLC) structure

The previous CPA Act only allowed general partnership as a legal form of audit corporations. The amendment allows an audit corporation to be formed as an LLC if certain conditions such as minimum capitalization and mandatory deposit requirements, are satisfied.

c. Introduction of oversight on foreign audit firms

Foreign audit firms that audit companies listed in Japanese capital markets were not subject to supervision of Japanese authority under the previous CPA Act. The amendment requires audit firms that provide audit attestation to foreign issuers whose securities are publicly traded in Japanese capital markets, to notify the FSA of their identities and be subject to the oversight of Japanese authorities.

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