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Adoption of the IESBA Code based on the Auditing and Accounting Environment in Japan

Toshihiro Yasada Vice-Chairman, JICPA Ethics Committee Chairman, JICPA Ethics Working Group

IESBA Meeting

New York

April 13-15, 2015


Table of Contents

1. Japanese Laws and Regulations with Standard Setters2. Overview of Accounting and Auditing Environment in Japan3. History4. The CPA Act, related regulations and JICPA Code of Professional Ethics5. The CPA Act6. JICPA Code of Professional Ethics7. Due Process for the JICPA Code and the Guidance8. Overview of JICPA Code Compared to IESBA Code9. The Structure and Layout of “JICPA Code of Professional Ethics ”10. Difference (More restrictive and additional guidance)11. Partner Rotation Requirements in Japan12. Public Interest Entities13. JICPA Member14. Our Challenges to Respond to IESBA’s Future Changes


1. Japanese Laws and Regulations with Standard Setters

The Diet approval or Government Independent Standard Setter JICPA

Professional Ethics 1※

The CPA Act Code of Professional Ethics and Related Guidance

Accounting

The Companies ActFinancial Instruments and Exchange Act (FIEA)Ordinance on the Disclosure

ASBJ - Accounting Standards

Guidance

Financial Statement Auditing 2※

The Companies ActFIEAOrdinance on Audit Certification

Business Accounting Council- Auditing Standards

Auditing Standards Committee Statements and Related Guidance

Internal ControlFIEAOrdinance on internal control

Business Accounting Council- Internal Control Management Assessment Standards( 3)※

Internal Control Audit FIEAOrdinance on internal control

Business Accounting Council- Internal Control Audit Standards( 3)※

Guidance

※1 JICPA has adopted IESBA code but there are some more stringent provisions. See page 13.※2 　 Japan GAAS is fully converged with ISA.※3 Internal Control Management Assessment Standards and Internal Control Audit Standards are set as a single Standard.


• Approx. 3,600 listed companies and approx. 6,000 non listed companies are subject to statutory audit. 　 (The Companies Act and/ or Financial Instruments and Exchange Act (FIEA))

• Japan GAAP is applied for majority of the companies subject to audit.

• US GAAP and IFRS are permitted in accordance with FIEA.

• US GAAP is used mostly by Japanese listed companies which are also SEC registrants (Foreign Private Issuers).

• Japanese companies which voluntarily apply IFRS, are increasing and expected to increase more and more. HITACHI, HONDA, MITSUBISHI CORP. and so on.

• Internal control audit is required for listed companies. 　 Internal control audit in Japan is similar to the US sox. (There are some differences, such as direct reporting vs. indirect reporting.)

2. Overview of Accounting and Auditing Environment in Japan


1948

CPACPA Act

Established JICPA

1949

GAASEstablished the Auditing Standards

Revised Auditing Standards based on IAASB Clarity Project

Fraud Risks Standard

Other ・ IC Audit Standards( 1)※

・ Q Review Standards( 2)※

Professional Ethics

Established the Code of Ethics Adoption

201407 Revised

Event US SOX Financial Crisis

IAASBIAASB Clarity Project ended

IESBAIESBA recent revision

1966 2007 2008 2011 2014201320102009 20121950 2001 2002

3. History

※1 Internal Control Audit Standards 2 Quarterly Review Standards※


4. The CPA Act, related regulations and JICPA Code of Professional Ethics - Overall Picture

The CPA Act and related regulations

JICPA ConstitutionMembers are required to comply with the

constitution in accordance with the CPA Act

JICPA Code of Professional Ethics

Guidance on IndependenceGuidance on Conflicts of InterestGeneral guidance

IESBACode of Ethics

Adoption

CPA Qualification and etc.More stringent rotation requirements and other requirements


4.2. The CPA Act, related regulations and JICPA code of professional ethics (The relationship among laws, regulations, code and guidance)

IESBA Code of Ethics

JICPA Constitution

JICPA Code of EthicsGuidance on

Independence

Interpretative Guidance for the Professional Ethics

Interpretive Guidance for Independence (in

response to the CPA Act)

The Certified Public Accountants Act （ and Financial Instruments and Exchange Act and The Companies Act ）

JICPA Code of Ethics Annotated

Guidance on Conflicts of Interest

Self-regulation Laws and regulations


5. The CPA Act

• Chapter 1 　 General 　 Provisions 　（ Mission, Professional Responsibilities, Services, Qualification, etc. ）

• Chapter 2 　 Certified Public Accountant Examination, etc.

• Chapter 3 　 Registration of Certified Public Accountant

• Chapter 4 　 Obligations of Certified Public Accountants

　 The Large Companies, etc. and the partner rotation requirements for the Large Companies

• Chapter 5 　 Responsibilities of Certified Public Accountants

• Chapter 5.2-5.5 　 Audit Firm etc.

　 Partner rotation requirements for audits of listed companies conducted by the Large Audit Firms

• Chapter 6 　 CPAAOB

• Chapter6.2 JICPA

　 Members must comply with the JICPA Constitution.

• Chapter 7 　 Miscellaneous 　 Provisions

• Chapter 8 　 Penal 　 Provisions


6. JICPA Code of Professional Ethics

・ JICPA has adopted IESBA code and some rules are more stringent than those in IESBA code. See page 13.

・ JICPA Constitution Para. 43 / Members are required to comply with JICPA Code of Professional Ethics.

≪JICPA Code of Professional Ethics ≫

　　 Chapter 1 General Application of the Code (Purpose and Fundamental Principles and etc.)

　　 Chapter 2 Professional Accountants in Public Practice

　　 Chapter 3 Professional Accountants in Business

≪A separate set of guidance is provided as follows: ≫

　　 Guidance on Independence / Detailed guidance with more than 90 pages

　　 Guidance on Conflicts of Interest / Detailed guidance provided with case examples

　　 General Guidance / Q & A type of guidance and etc.


7. Due Process for the JICPA Code and the Guidance

4th Step

JICPA Annual General Assembly

3rd StepJICPA Board Meeting

2nd StepJICPA Ethics Committee 　※ including public members

1st StepJICPA Working Group

※Before the JICPA Code and / or the Guidance are finalized, JICPA issues its Exposure Draft to seek public comments.


8. Overview of JICPA Code Compared to IESBA Code

JICPA Code IESBA Code

●JICPA Code of Professional Ethics Chapter1 General Application of the Code

(Purpose, Fundamental Principles and etc.)

PART A （ Section100 ～ 150 ） General Application of the Code (Fundamental Principles and etc.)

Chapter2 　 Professional Accountants in Public Practice

PART B （ Section200 ～ 210 ・ 230 ～ 280 ）　 Professional Accountants in Public Practice

Chapter3 　 Professional Accountants in Business PART C （ Section300 ・ 320 ～ 350 ）　 Professional Accountants in Business

●Guidance on Independence PART B （ Section290 ・ 291 ）　 Independence

●Guidance on Conflicts of Interest Chapter1 　 Professional Accountants in Public Practice

PART B （ Section220 ）　 Conflicts of interest

Chapter2 　 Professional Accountants in Business PART C （ Section310 ）　 Potential Conflicts


9. The Structure and Layout of “JICPA Code of Professional Ethics ”

Requirements

Application and other explanatory material

（基本原則２　公正性の原則）第４条　会員は、職業的専門家としての判断又は業務上の判断を行うに当たり、先入観をもたず、利益相反を回避し、また他の者からの不当な影響に屈せず、常に公正な立場を堅持しなければならない。２　会員が直面する状況又は関係が、先入観や利益相反を生じさせ、会員の職業的専門家としての判断に不当な影響を与える場合、会員は専門業務を提供してはならない。

注解２（第４条）　公正な立場を堅持することは、業務上の判断における客観性の保持を求めるものであり、専門業務の目的の妥当性、専門業務を実施するに当たって裁量すべき事項の選定や判断において先入観のないこと、さらに、これらの判断についての適正性が他の者により検証し得ることを含む。

This is the para. 4 of JICPA Code of Professional Ethics describing “Objectivity” of the fundamental principle.As shown in the example above, the Code distinguishes requirements clearly from guidance. In addition, the guidance is placed close to the requirements (in the rectangle by a dotted line) to provide guidance with a clear linkage to requirements.


10. Difference (More restrictive and additional guidance)

JICPA Code The CPA Act and FIEA

More restrictive provisions than IESBA Code

・ Referral Fees

・ Gifts and Hospitality

・ Confidentiality

・ Partner Rotation for the Large Companies audit ( See next page)

Additional provision to JICPA Code of Professional Ethics

・ Mutual Conference between Members・ Prohibited Conduct against Other Members・ Maintenance of Quality

・ Prohibition of Name Lending

・ Expression of Opinions Regarding Future Events・ Name of an Audit Firm

NOCLAR / FIEA 193-3 requires CPAs and audit firms (correctively “PA”) to report the matter to issuers when PA becomes aware of information concerning an instance of non-compliance or suspected non-compliance with laws and regulations if the matter could significantly affect the financial information. Then, if the issuer has not taken an appropriate action within the required period and the matter could substantially affect the financial information, PA must disclose the matter to the Financial Services Agency.


11. Partner Rotation Requirements in Japan

Time on period Cooling-off period

Listed Companies Audit Conducted by the Large Audit Firms （※）

・ LAEP

・ EQCR5 5

・ KAPs other than LAEP and EQCR

7 2

Other than the above All KAPs 7 2

( ) Audit firms which audit 100 or more listed companies (the Large Audit Firms) must follow a five year ※time-on and five year time off rotation rule for the lead engagement partner and the engagement quality control review partner, in auditing listed companies.

More than 150 small or medium firms which are not the Large Audit Firms above, audit listed companies.


11. 2. Partner Rotation Requirements in Japan/ Exceptional case

LAEP LAEP LAEP LAEP LAEP5 years

cooling off

KAP KAP KAP KAP KAP KAP KAP2 years

cooling off

Normal course of partner rotation

　 Exceptional case / when a LAEP or a KAP takes “off” for years less than 5 years or 2 years

LAEP LAEP Off Off LAEP5 years

cooling off

KAP KAP KAP Off KAP KAP KAP2 years

cooling off

If there is an exceptional case above, the CPA Act stipulates that the interim “off” period which is less than the required cooling off period (5 years for LAEP or 2 years for KAP) shall be a deemed “on” period.(By deeming that an audit or audits have been provided even during the periods for which the services have actually not been provided (the above “off” periods), 2 year or 1 year off period in the above case is included in 5 or 7 year count. )


　　　　　JICPA Code PIE

12. Public Interest Entities 　

The Large Company based on The CPA Act

- Listed Companies- Banks, Long-term Credit Banks- Insurance Companies- Other financial institutions and certain

other companies specified in the provision

Additional Entities

- Certain Large regional financial institutions and etc.


Number of Membership (as of March 31, 2014)

13. JICPA Member （ 1/3 ）

Individual Members　 26,263

Audit Firms 216

Individual Associate members7,543

TOTAL 34,022

By gender ： Male 28,803, Female 4,559

※JICPA set up JICPA’s committee on professional accountants in business in August, 2012 and approx. 1,000 members as at December 31, 2014 participate in this committee. This does not cover all PAIB, and, thus, we do not know how many professional accountants work in business . In addition, there are a lot of accountants working in business who are qualified to become a CPA but not registered.


• Mandatory Registration – A person who is qualified to become a certified public accountant shall register on the

certified public accountants roster in order to become a certified public accountant.

– A certified public accountant or an audit firm shall automatically become a member of the Institute.

– A person who has passed the certified public accountant examination who has interned for two years or more as prescribed in Article 15(1) and has completed the professional accountancy education program as prescribed in Article 16(1) and received the confirmation from the Prime Minister under the provisions of paragraph (7) of the same Article is qualified to become a certified public accountant.

13. JICPA Member （ 2/3 ）


• Continuing Professional Education （ CPE ） Requirements– 20 credits during a year at minimum

– 120 credits during three consecutive years at minimum

– Professional ethics courses are included in the required credits.

13. JICPA Member 　（ 3/3 ）


14. Our Challenges to Respond to IESBA’s Future Changes （ 1/3 ）

• Historically, non audit practices have been much smaller in size than audit practices in Japan compared to the US and other major European countries. Recently, non audit practices have continued to grow and will grow faster than in the past. The provisions of JICPA code related to non audit services are the same as IESBA code and rather more restrictive but we pay attention to EU regulatory developments.



• Historically, the number of PAIB has been very limited and most of JICPA members have been professional accountants in public practice who work with the firms or as a sole proprietorship. 　 In particular, there has been a very small number of senior PAIB working for the listed companies as CFO, executive officers and other management functions. However, the number of PAIB is increasing. Thus, we pay attention to the future revisions of IESBA code.



• More than 150 of small or medium audit firms audit listed companies.

• Considering the trend in our profession in Japan, it is our important challenge to raise awareness and enhance understandings of our code and activities among investors and other stakeholders in Japan and to make our profession more attractive.

The Ethics Boardwww.ethicsboard.org

http://www.ethicsboard.org/

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Documents

overview of jicpa code

ic audit standards

iesba code

japanese companies

cpa cpa act established

japanese listed companies

accounting environment

auditing environment