The Japanese Institute of
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| The Japanese audit corporations are established in accordance with the Certified Public Accountants Law (CPA Law) of Japan, and their primary mission is to perform auditing. The CPA Law stipulates that an audit corporation is permitted to perform non-audit services to the extent such services are not impediments to audits. Furthermore, all CPAs and audit corporations are required to join the Japanese Institute of Certified Public Accountants (JICPA). JICPA is a regulatory-professional body established in accordance with the CPA Law. CPAs and audit corporations are subject to JICPA oversight over their professional activities. We believe that this system ensures that auditor independence is well maintained in Japan.
In principle, we are for the strengthening of auditor independence. The general comments to the proposed rules are as follows:
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II Discussion of proposed rules
A Conflicts of interest resulting from employment relationships
A1
Is the one-year cooling-off period sufficiently long to achieve an appearance of independence by the accounting firm? If not, what period would be appropriate?
| JICPA comment:
The one-year cooling-off period is sufficient. |
A2
Is the term audit engagement team sufficiently clear? If not, what changes would improve the description to describe the group of accountants who would be covered?
| JICPA comment:
Only the audit engagement partner should be subject to the cooling off rule. |
A3
Is the phrase commencement of the audit sufficiently clear? If not, what changes would improve the description? Is that the appropriate time to mark the commencement of the period? Is there a better mark?
| JICPA comment:
No, the phase commencement of the audit is not sufficiently clear. The cooling off period should begin immediately after the period, during which the audit engagement partner is involved in the audit of the audit client, is over. |
A9
Should the Commission include exceptions subject to certain criteria? If so, what should these criteria be?
| JICPA comment:
The Commission should include exceptions for foreign countries where different mandatory regulations already exist because in these cases the mandatory regulations of foreign countries should be applied rather than the SEC regulations. |
B Services outside the scope of the practice of auditors
B2
Is the meaning of the general principles sufficiently clear?
| JICPA comment:
No, it is not always sufficiently clear in foreign jurisdictions. The Commission should extensively describe the exact meaning of non-audit services. |
3. Appraisal or valuation services, fairness opinion, contribution-in-kind reports
B3-1
Does providing valuation or appraisal services that are unrelated to the financial statements, such as for certain regulatory purposes, impair an accountant's independence?
| JICPA comment:
No, an accountant's independence is not impaired. |
B3-2
Does providing valuation or appraisal services for tax purposes impair an accountant's independence?
| JICPA comment:
No, an accountant's independence is not impaired. |
B3-4
Should we provide an exemption for such services provided to a foreign private issuer by its accountant where local law requires such services (e.g. contribution in-kind reports)?
| JICPA comment:
When foreign countries have applicable regulations, the Commission should provide for exceptions to the auditor independence rule in order to accommodate the statutory requirements of foreign countries. |
B3-5
The Commission staff, when providing interpretations of the application of the auditor independence rules to contribution in-kind reports, has worked with foreign jurisdictions to accommodate the statutory requirements in those jurisdictions. Should the Commission's rules provide that similar practices or arrangements be permitted where contribution in-kind reports are required by foreign statute?
| JICPA comment:
When foreign countries have applicable regulations, the Commission should provide for exceptions to the auditor independence rule in order to accommodate the statutory requirements of foreign countries. |
5. Internal Audit Outsourcing
B5-2
We solicit comment on whether an exception should be provided for small businesses. If so, what criteria should we consider in providing such an exception?
| JICPA comment:
For the internal audit function performed by an accounting firm at the companies that are subject to foreign regulations, exceptions should be provided. That is, an auditor's independence is not impaired when the laws, regulations, and rules applicable in such foreign countries rationally require that an accounting firm abide by certain safeguards under certain conditions for doing internal audit services for the companies in such foreign countries. This exception should apply, regardless of the size of the businesses. In other words, this exception should apply to not only to small businesses, but also large businesses in foreign countries. |
B5-3
Does it impair an auditor's independence if the auditor does not provide to the client outsourcing services related to the internal audit function of the audit client, but rather performs individual audit projects for the client?
| JICPA comment:
We believe that an auditor's independence is not impaired as long as the audit client's personnel make the final decision regarding internal audits. |
B5-4
Are there safeguards that can be established by the auditor that would allow the audit client to outsource the internal audit function to the auditor without impairing its independence?
| JICPA comment:
There might be cases where the internal audit function of the audit client is performed by an accounting firm that audits the audit client as long as the internal audit function is not wholly delegated to the accounting firm. |
B5-5
Would it impair the auditor's independence if the auditor performs only operational audits that are unrelated to the internal controls, financial systems, or financial statements?
| JICPA comment:
No, it will not impair an auditor's independence. |
B5-6
Is additional guidance necessary to distinguish the services that would be prohibited under this proposed rule from those services that would be permitted as operational audits?
| JICPA comment:
Yes, additional guidance is necessary. |
6. Management Functions.
B6-2
Do services related to assessing or recommending improvements to internal accounting controls and risk management controls result in the auditor auditing his or her own work? Would such services impair an auditor's independence when the auditor is required to issue an attestation report on the effectiveness of the control systems that he or she has assessed or evaluated for effectiveness?
| JICPA comment:
No, we believe that such services will not impair an auditor's independence. |
C. Partner Rotation
C1
Should the Commission adopt rules requiring that issuers engage forensic auditors periodically to evaluate the work of the financial statement auditors? If so, how often should the forensic auditors be engaged? What should be the scope of the forensic auditors' work? Would doing so obviate the need to require partner rotation for the audit firm? Alternatively, could the company obtain the necessary expertise by engaging other outside consultants? If so, what type of consultants should it engage?
| JICPA comment:
Forensic auditors are not necessary, and we believe that the rules requiring forensic audits should not be adopted. |
C2
Would the establishment of rules requiring companies to engage forensic auditors periodically provide an opportunity to other firms to enter the market to provide these services?
| JICPA comment:
Forensic auditors are not necessary, and we believe that the rules requiring forensic audits should not be adopted. |
C3
Should the Commission establish requirements for firms conducting forensic audits? If so, what should those requirements be?
| JICPA comment:
Forensic auditors are not necessary, and we believe that the rules requiring forensic audits should not be adopted. |
C4
Should issuers be given a choice between engaging forensic auditors periodically and having the audit partners on their engagement team be subject to the rotation requirements? Why or why not?
| JICPA comment:
Forensic auditors are not necessary, and we believe that the rules requiring forensic audits should not be adopted. |
C5
What are the costs and benefits of engaging forensic auditors to evaluate the work of the financial statement audit firm?
| JICPA comment:
It is sufficient that the partners who influence the basis of auditors' opinions periodically rotate. Therefore, forensic auditors are not necessary. |
C6
This proposed rule would apply to the audits of the financial statements of "issuers." Should the Commission consider applying this rule to a broader population such as audits of the financial statements of "audit clients" as defined in 2-01(f)(6) of Regulation S-X? Why or why not?
| JICPA comment:
No, the proposed rule should not apply to a broader population. |
C7
For organizations other than investment companies, the rotation requirements would apply to significant subsidiaries of issuers. Should a different approach be considered? Is so, what approach would be appropriate?
| JICPA comment:
The same approach should apply to significant subsidiaries of issuers for organizations other than investment companies. |
C8
Should the rotation requirements apply to all partners on the audit engagement team? If not, which partners should be subject to the requirements?
| JICPA comment:
No, the rotation requirements should not apply to all partners on the audit engagement team. The engagement partner and the independent review partner only should be subject to the auditor rotation requirements. |
C10
Is the exclusion of certain "national office partner" personnel from the rotation requirements appropriate?
| JICPA comment:
Yes, it is appropriate. |
C11
Is the guidance on national office partners who are exempted from the rotation requirements sufficiently clear?
| JICPA comment:
Yes, it is clear. |
C12
Is the distinction between a member of the engagement team and a national office partner who consults regularly (or even continually) on client matters sufficiently clear?
| JICPA comment:
Yes, it is clear. |
C13
Should certain partners performing non-audit services for the client in connection with the audit engagement be excluded from the rotation requirements?
| JICPA comment:
Yes, they should be excluded from the rotation requirements. |
C14
Should additional personnel (such as senior managers) be included within the mandatory rotation requirements?
| JICPA comment:
No, additional personnel should not be included within the mandatory rotation requirements. |
C15
Is it appropriate to provide transitional relief where the proposed rules are more restrictive that the provisions of the Sarbanes-Oxley Act?
| JICPA comment:
Yes, the transitional relief should be provided for such occasions. |
C16
Are there situations in foreign jurisdictions that extended partner rotation could be modified with additional safeguards or limitations that would recognize the jurisdictional requirements as well as logistical limitations that may exist?
| JICPA comment:
Yes, in Japan engagement partners rotate every seven years for audit engagements of listed companies, and no particular issues are identified in this matter. For the audit of Japanese companies that are SEC registrants, auditing personnel have to possess enough knowledge of US GAAP and SEC rules. Immediate introduction of the shorter rotation requirement would cause a shortage of knowledgeable accountants. If the Commission set the five-year auditor rotation instead of the seven-year auditor rotation, it should explain why it adopted this rule. |
C17
Should the rotation requirements be different for small firms? What changes would be appropriate and why? If so, how should small firms be defined?
| JICPA comment:
Exceptions to the rotation requirements should be provided for small firms. |
C18
Would the proposed rules impose a cost on smaller firms that is disproportionate to the benefits that would be achieved?
| JICPA comment:
Yes, the proposed rules will require smaller firms to incur a cost that is disproportionate to the benefits that would be achieved. |
C19
Is the five-year "time out" period necessary or appropriate? Would some shorter time period be sufficient, such as two, three or four years? Should there be different "time out" periods based on a partner's role in the audit process?
| JICPA comment:
The two-year "time out" period is deemed appropriate. . |
C20
If a partner rotates off an engagement after fewer than five years, should the "time out" period also be reduced? Why or why not? If so, how much should the reduction in the time out period be?
| JICPA comment:
A partner should not rotate off an engagement in fewer than five years. |
C22
The proposed rules would not require all partners on the audit engagement team to rotate at the same time. Should it? Why or why not?
| JICPA comment:
No, the proposed rules should not require such broad partner rotation. |
D. Audit Committee Administration of the Engagement
D1
Should the Commission create other exceptions (beyond the de minimis exception) that would allow an audit committee to adopt a policy that contracts that are recurring (e.g., due diligence engagements in connection with a series of insignificant acquisitions) and less than a stated dollar amount (such as $25,000) or less than a stated percentage of annual revenues (such as 1% or 5%) could be entered into by management and would be reviewed by the audit committee at its next periodic meeting?
| JICPA comment:
The Commission should create exceptions regarding review of the audit committee or its equivalent, such as corporate auditors in Japan, for recurring or immaterial transactions with accounting firms. Such exceptions should allow the audit committee or its equivalent to review and approve such transactions at the next periodic meeting of the audit committee or its equivalent. |
D6
Our proposed rules do not contain exemptions for foreign filers. Are there legal or regulatory impediments, which may make it difficult for certain foreign filers to comply? If so, what safeguards can these foreign filers employ to ensure that they comply with the proposed rules?
| JICPA comment:
The Commission should exempt certain foreign filers from complying with the proposed rules as long as these foreign filers abide by the foreign rules that are applicable to them. |
D12
This proposed rule would apply to "issuers." Should the Commission consider applying this rule to a broader population such as "audit clients" as defined in 2-01(f)(6) of Regulation S-X? Why or why not?
| JICPA comment:
No, the Commission should not apply this rule to a broader population because such act will significantly increase costs for non- listed companies. |
F. Definitions
2. Accounting Role
F2-1
Is this proposed definition sufficiently clear? If not, what changes would make the definition clearer and more operational?
| JICPA comment:
Yes, it is clear. |
3. Financial Reporting Oversight Role
F3-1
Is this proposed definition sufficiently clear? If not, what changes would make the definition clearer and more operational?
| JICPA comment:
Yes, it is clear. |
4. Audit Committee
F4-1
Some registrants may not have designated boards of directors or audit committees (e.g. benefit plans required to file Form 11-K). Does the definition of audit committee sufficiently describe who should serve in this capacity where such situations exist? If not, what additional guidance would be appropriate?
| JICPA comment:
It will be necessary for the SEC to address the issues related to companies in countries where audit committees are not required. |
H. Expanded Disclosure
2. Audit Committee Actions
H2-3
Would expansion of the proxy disclosure of professional fees paid to the independent auditor from three categories to four provide more useful information to investors?
| JICPA comment:
No, we believe that the previous three categories are sufficient. |
H2-7
For a registrant not subject to the proxy disclosure rules, such as foreign private issuers, should we require that the same disclosures be placed in annual reports?
| JICPA comment:
No, foreign private issuers should not be required to abide by the same proxy disclosure rules. |
I. Transition Period
I1
Would a period of time beyond the adoption date of the final rules be necessary or appropriate for compliance with the final rules by smaller companies or companies with whose securities currently are not listed or quoted? If so, which rules should we consider a delayed effective date?
| JICPA comment:
It is deemed appropriate to set the date later than the adoption date of the final rules for compliance with the final rules by smaller companies or companies with whose securities currently are not listed or quoted. The application of the rule to the non-public companies should be exempted until the non-public companies are listed on a stock exchange. |
I3
Are there special considerations that we should take into account in providing a transition period for foreign private issuers?
| JICPA comment:
Yes, regulatory rules of foreign countries should be taken into account. |
D．Request for comments
D2
Are there any other costs or benefits that we have not identified? For example, would the additional duties on audit committees increase the cost of maintaining those committees? Would the amount of compensation demanded by audit committee members increase? Would there be a shortage of potential audit committee members that would lead to higher costs related to finding and retaining such members? Would the cost of officer/director liability insurance increase? Please describe any such costs and provide relevant data.
| JICPA comment:
Japanese companies are required to have corporate auditors instead of an audit committee under the Commercial Code of Japan. The Japanese corporate auditor system should be recognized as the equivalent of audit committees. If Japanese companies that are SEC registrants are required to have an audit committee, then they would be forced to change corporate governance systems, and this change would result in a significant cost increase. |
D5
Will the prohibition of certain non-audit services impose greater costs on companies? If so, what will those costs be and how significant will those costs be?
| JICPA comment:
Yes, the prohibition of certain non-audit services imposes greater costs on companies. Particularly, small listed companies will find it difficult to employ a sufficient number of professional staff members. So they will be required to request other firms to provide non-audit services to them instead of the accounting firms that presently audit them and provide such non-audit services. This kind of arrangement will certainly increase costs to the issuers. |
D6
How much cost will issuers incur from not being able to retain their preferred providers of non-audit service, when that preferred provider happens to also be their auditor?
| JICPA comment:
The issuers certainly will have to spend more money. Particularly, small listed companies will find it difficult to employ a sufficient number of professional staff members, and they will be hurt if accounting firms that audit them are prevented from providing non-audit services. |
D8
Are there any economies of scope that will be lost due to implementation of the auditor independence rules?
| JICPA comment:
Yes, there may be cases where significant economies of scope are lost as a result of the stringent auditor independent rules. |
D9
Are there any economies of scale that will be lost due to implementation of the auditor independence rules?
| JICPA comment:
Yes, there may be cases where significant economies of scale are lost as a result of the stringent auditor independent rules. |