Global Issues on Corporate Governance From the Japanese Perspective

1
Global Issues on Corporate Governance? From the
Japanese Perspective ?

• WCOA 2006 Istanbul
• (14 November 2006)
• Naohiko Matsuo
• Financial Services Agency,Japan

2
Structural Problems of Financial Reporting
Supply Chain(1)

• Global Issues, Discussions and Initiatives
• (1) Objective
• ? Addressing weakness and ensuring
  confidence in market foundations in the
• wake of large corporate failures
  since 2001
• (2) Global Issues
• ? Corporate Governance
• ? Auditor Independence and Auditing
  Oversight
• ? Accounting and Auditing Standards
• ? Disclosure
• ? Securities Analysts
• ? Rating Agencies

3
Structural Problems of Financial Reporting
Supply Chain(2)

• (3) Global Discussions
• ? G7 Finance Ministers and Central Bank
  Governors
• ? FSF(Financial Stability Forum)
• ? IOSCO(International Organization of
  Securities Commissions)
• Principles for Auditor
  Oversight(October 2002)
• Principles for Auditor
  Independence(October 2002)
• Principles for Ongoing
  Disclosure and Material Development Reporting by
• Listed Entitles(October 2002)
• Principles regarding the
  Activities of Credit Rating Agencies(September
  2003)
• Principles for Addressing
  Sell-Side Securities Analyst Conflicts of
  Interest
• (September 2003)
• ? OECD
• new OECD Principles of
  Corporate Governance(April 2004)
• ? Others

4
Structural Problems of Financial Reporting
Supply Chain(3)

• (4) Initiatives
• ? U.S.Sarbanes-Oxley Act of 2002
• ? JapanComprehensive Program for Promoting
  Securities Markets Reforms
• (announced in August
  2002)
• Enhancement of corporate
  governance system
• (amendments of the
  Commercial Code in 2001 and 2002)
• Comprehensive amendment
  of the CPAs Law in 2003
• ? EUCommunication reinforcing statutory
  audit in the EU(May 2003)
• Corporate Governance Action Plan(May
  2003)
• ? IFACReport of the Task Force on
  Rebuilding Public Confidence in
• Financial Reporting(July
  2003)
• ? Others

5
Recent Incidents of Fraudulent Financial
Reporting or False Disclosure Documents in Japan

• ? Railway company(October 2004)
• False disclosure of major shareholders
• ? Cosmetic company(April 2005)
• Fraudulent financial reporting
• ? Internet company(January 2006)
• Fraudulent financial reporting

All delisted from the Tokyo Stock Exchange
6

• Further Measures to Prevent Fraudulent Financial
  Reporting or False Disclosure Documents

• Further strengthening corporate governance
• Further strengthening auditor independence
• and auditor oversight

(1) Further strengthening internal control
(2) Further strengthening enforcement
7

• Further Enhancement of
  Corporate Governance in Japan (1)

• Further strengthening internal control
• (1) Need to develop internal control system
  
• under the new Corporate Law in Japan
• ?Effective May 2006
• ?Duty of large corporations and
  corporations with audit committee
• system to determine the internal
  control system and include it
• in annual business reports
• ?Items to be included in the internal
  control system
• System on information keeping
  and control
• System on risk management
• System for ensuring efficient
  management
• System for compliance with laws
  and articles of incorporation
• System for ensuring proper
  business within a corporate group

8

• Further enhancement of
  Corporate Governance in Japan (2)

• (2) Further strengthening internal control over
• financial reporting under the newly enacted
• Financial Instruments and Exchange Law
  (FIEL)
• ? Introduction of mandatory annual management
  assessment (internal
• control report) and auditors audit of
  the management assessment
• ? Introduction of mandatory certification of
  annual reports (including
• quarterly reports and semi-annual
  reports) by management
• ? Applied to business year starting on and
  after, April 2008
• ? Measures to avoid excessive costs
• use of top-down type risk approach
• two categories of deficiencies of
  internal control
• - material weakness and deficiencies
• no direct-reporting
• same auditor for audits of internal
  control report and financial statement
• preparation of audit reports of
  internal control and financial statements
  together
• corporation between external auditors
  and internal auditors of corporations

9

• Further Enhancement of
  Corporate Governance in Japan (3)

• 2. Further strengthening enforcement
• (1) Increase in maximum criminal penalty
  against unfair trading
• and violations of disclosure documents
  under FIEL
• 5 years imprisonment, etc.
• 10 years imprisonment,
  etc.
• (2) Strengthening functions and
  organizational structure of the
• Securities and Exchange Surveillance
  Commission (SESC)
• ? New authority on the inspection on
  disclosure documents
• since July 2005
• ? Increase from 2 divisions to 5
  divisions in the Executive Bureau