Independence Requirements for CPAs

In accordance with Article 24 of the CPA Act, a CPA shall not render audit services in any of the following cases:

(a)

For a company or other entity in which the CPA or his or her spouse is, or was, within the past year an officer or staff member corresponding thereto or a responsible official in charge of affairs concerning financial matters;

(b)

For a company or other entity for which the CPA is, or was an employee within the past year; and

(c)

For a company or other entity in which the CPA has substantial interests.

"Substantial interests" referred to in item (c) above include the following business, financial or other relationships between a CPA or his or her spouse and a company or other organization (audit client):

i)

The CPA or his or her spouse is or was a director and/or an officer or a person responsible for finance of the audit client during the audit-related period;

ii)

The CPA or his or her spouse is or was an employee of the audit client during the past year;

iii)

The CPA's spouse is or was a government official that had a close relationship with the audit client during the past two years;

iv)

The CPA or his or her spouse owns stock of the audit client and/or debt or credit;

v)

The CPA or his or her spouse has special economic interests such as office rent or borrowings with no or unreasonably low rent or interest;

vi)

The CPA or his or her spouse provides tax services for the audit client;

vii)

The CPA or his or her spouse has or had a special economic interest described above provided by any director of the audit client, or provides tax services for any director of the audit client within the past year or during the audit-related period;

viii)

The CPA or his or her spouse is or was a director of an affiliated company of the audit client within the past year or during the audit-related period; and

ix)

The CPA or his or her spouse is an employee of the parent company or subsidiary of the audit client.

A CPA who was once a national or local government official shall not conduct, during his or her tenure of office or during the two years following his or her termination, an audit practice with respect to the financial affairs of those business enterprises closely related to the duties of the office held during the two years preceding his retirement.

In addition, in accordance with Article 34-11 of the CPA Act, an audit corporation shall not provide audit services to a company or other entity falling under any of the following categories:

(a)

A company or other entity whose stock the audit corporation owns or in which the audit corporation is investing;

(b)

A company or other entity with which any member of the audit corporation has the relationship described in Article 24 (1) (i);

(c)

When a partner is involved in audit services provided by the audit corporation concerning the financial documents of a company or an entity, if he or she has become an officer for or taken an equivalent position with the company or the entity or any entities within the consolidated companies during the accounting period pertaining to said financial documents or the following accounting period, then such company or entity or entities within the consolidated companies; or

(d)

A company or other entity in which the audit corporation has other substantial interests.

"Substantial interests" in item (d) above include the following business, financial, and other such interests between the audit corporation or its partners and the company or other entity (audit client):

i)

An audit corporation is either a debtor or creditor of the audit client in any amount;

ii)

An audit corporation has special economic interests such as office rent or borrowings with no or unreasonably low rent or interest;

iii)

An audit corporation is provided special economic interests described above from a director of the audit client;

iv)

Any partner of an audit corporation is an employee of the audit client;

v)

Any partner of an audit corporation is a director, a company auditor and/or an employee of the parent company and/or its subsidiaries of the audit client;

vi)

Any partner of an audit corporation provides tax services for the audit client;

vii)

A partner of an audit corporation being engaged in the audit service of a company or his/her spouse has any of the relationships described in Article 24 (1) (ii) or (iii), or Article 7 (1) (i) through (viii) of the Cabinet Order of the CPA Act; and

viii)

The majority of partners of an audit corporation or their spouses have any of the relationships described in Article 24 (1) (ii) or (iii), or Article 7 (1) (i) through (viii) of the Cabinet Order of the CPA Act.

Further, any partner of an audit corporation who has a relationship described in Article 24 (1) or (3) with an audit client shall not be engaged in an audit of the financial statements of such audit client conducted by the audit corporation.

Audit corporations are permitted to provide financial advisory and consulting services for audit clients as long as such services do not impede the audit service (Article 34-5 of the CPA Act), but they are prohibited from providing tax services. Individual CPAs, however, are permitted to provide tax services excluding the ones for audit clients (Articles 3 and 52 of the Certified Tax Accountants Law).

In the amended CPA Act, enforced from April 2004, an individual CPA and engagement partner of audit corporations who performs audit services to a client shall not be in the management of such a client as a director or any other important position until at least one year elapses after the end of the accounting period during which this partner was involved in auditing the client (Articles 28-2 and 34-14-2). This requirement has been expanded by the amended CPA Act of 2007 to cover certain consolidated companies.

As mentioned previously, the scope of audit corporation services is limited to audits and audit-related services such as compilation of financial statements, research, and advice and consultation on financial matters, so long as such services do not impede the conduct of the audit (Article 34-5). This requirement effectively prevents audit corporations from providing extensive consulting services to their audit clients.

The amended CPA Act, effective from April 2004, restricts audit corporations from providing certain non-audit services to audit clients. Prohibition of the following non-audit services, which was partially amended by the revised CPA Act of 2007, is provided in Cabinet Office Ordinance:

(a)

Services related to bookkeeping, preparing financial documents, and accounting books and records;

(b)

Design and management of financial or accounting information systems;

(c)

Services related to verification or appraisal of properties contribution-in-kind or any property equivalent;

(d)

Actuarial services;

(e)

Internal audit outsourcing services; and

(f)

Other services that are equivalent to the above listed services that may involve management decisions or lead to self-audit of the financial documents the auditor examines.

These non-audit services are prohibited to any clients that are required to be audited in accordance with the Financial Instruments and Exchange Act (FIEA) and certain large companies that are required audits by the Companies Act (Article 34-11-2). Individual CPAs are required to follow the similar rule (Article 24-2)

The JICPA Application Guidance for Conceptual Framework of Independence provides that each individual CPA and engagement partner of audit corporations must rotate for particular audit engagements of listed companies and certain large companies at least every seven years with cooling-off periods of two years. Partner rotation is required for the FIEA audits and certain large company audits pursuant to the Companies Act (Articles 24-3 and 34-11-3).

JICPA established a self-regulatory rotation rule for audit corporations auditing 100 or more listed companies 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 had made this rule effective in April 2006, prior to its incorporation into the CPA Act amended in 2007.

Similar independence requirements are provided in these Acts as follows:
All provisions required in Article 24 (for individual CPAs) and Article 34-11 (for audit corporations) of the CPA Act are applicable to CPAs performing audits required by the FIEA. In addition, independence rules are stricter in the FIEA than in the CPA Act, and auditors are required to comply with these more rigorous rules for the FIEA audits. For instance, under the FIEA, the independent rules apply to assistants in engagement teams. The coverage of related persons described as "CPA and his or her spouse" is expanded to "CPA, his or her spouse and relatives within the second degree of kinship (parents, siblings, grandparents and grandchildren in addition to spouse and children).". Economic relationships with the client "company" are expanded to the client "company and any of its affiliates included in the consolidated financial statements" (Article 2 of the Cabinet Office Ordinance relating to the Audit of Financial Statements).
All CPA Act provisions are applicable to CPAs performing Companies Act audits (Article 337 of the Companies Act).