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Page 1 | Proprietary and Copyrighted Information Adoption of the IESBA Code based on the Auditing and Accounting Environment in Japan Toshihiro Yasada.

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Presentation on theme: "Page 1 | Proprietary and Copyrighted Information Adoption of the IESBA Code based on the Auditing and Accounting Environment in Japan Toshihiro Yasada."— Presentation transcript:

1 Page 1 | Proprietary and Copyrighted Information 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

2 Page 2 | Proprietary and Copyrighted Information Table of Contents 1. Japanese Laws and Regulations with Standard Setters 2. Overview of Accounting and Auditing Environment in Japan 3. History 4. The CPA Act, related regulations and JICPA Code of Professional Ethics 5. The CPA Act 6. JICPA Code of Professional Ethics 7. Due Process for the JICPA Code and the Guidance 8. Overview of JICPA Code Compared to IESBA Code 9. The Structure and Layout of “JICPA Code of Professional Ethics ” 10. Difference (More restrictive and additional guidance) 11. Partner Rotation Requirements in Japan 12. Public Interest Entities 13. JICPA Member 14. Our Challenges to Respond to IESBA’s Future Changes

3 Page 3 | Proprietary and Copyrighted Information 1. Japanese Laws and Regulations with Standard Setters The Diet approval or Government Independent Standard SetterJICPA Professional Ethics ※ 1 The CPA Act Code of Professional Ethics and Related Guidance Accounting The Companies Act Financial Instruments and Exchange Act (FIEA) Ordinance on the Disclosure ASBJ - Accounting Standards Guidance Financial Statement Auditing ※ 2 The Companies Act FIEA Ordinance on Audit Certification Business Accounting Council - Auditing Standards Auditing Standards Committee Statements and Related Guidance Internal Control FIEA Ordinance on internal control Business Accounting Council - Internal Control Management Assessment Standards( ※ 3) Internal Control Audit FIEA Ordinance 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.

4 Page 4 | Proprietary and Copyrighted Information 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

5 Page 5 | Proprietary and Copyrighted Information 1948 CPA CPA Act Established JICPA 1949 GAAS Established 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 IAASB IAASB Clarity Project ended IESBA IESBA recent revision 1966 200720082011 2014 2013201020092012195020012002 3. History ※ 1 Internal Control Audit Standards ※ 2 Quarterly Review Standards

6 Page 6 | Proprietary and Copyrighted Information 4. The CPA Act, related regulations and JICPA Code of Professional Ethics - Overall Picture The CPA Act and related regulations JICPA Constitution Members are required to comply with the constitution in accordance with the CPA Act JICPA Code of Professional Ethics Guidance on Independence Guidance on Conflicts of Interest General guidance IESBA Code of Ethics Adoption Qualification CPA Qualification and etc. More stringent rotation requirements and other requirements

7 Page 7 | Proprietary and Copyrighted Information 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 Ethics Guidance 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

8 Page 8 | Proprietary and Copyrighted Information 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

9 Page 9 | Proprietary and Copyrighted Information 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.

10 Page 10 | Proprietary and Copyrighted Information 7. Due Process for the JICPA Code and the Guidance 4 th Step JICPA Annual General Assembly 3 rd Step JICPA Board Meeting 2 nd Step JICPA Ethics Committee ※ including public members 1 st Step JICPA Working Group ※ Before the JICPA Code and / or the Guidance are finalized, JICPA issues its Exposure Draft to seek public comments.

11 Page 11 | Proprietary and Copyrighted Information 8. Overview of JICPA Code Compared to IESBA Code JICPA CodeIESBA 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 PracticePART B ( Section200 ~ 210 ・ 230 ~ 280 ) Professional Accountants in Public Practice Chapter3 Professional Accountants in BusinessPART 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 BusinessPART C ( Section310 ) Potential Conflicts

12 Page 12 | Proprietary and Copyrighted Information 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.

13 Page 13 | Proprietary and Copyrighted Information 10. Difference (More restrictive and additional guidance) JICPA CodeThe 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.

14 Page 14 | Proprietary and Copyrighted Information 11. Partner Rotation Requirements in Japan Time on periodCooling-off period Listed Companies Audit Conducted by the Large Audit Firms (※) ・ LAEP ・ EQCR 55 ・ KAPs other than LAEP and EQCR 72 Other than the aboveAll KAPs72 ( ※ ) 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.

15 Page 15 | Proprietary and Copyrighted Information 11. 2. Partner Rotation Requirements in Japan / Exceptional case LAEP 5 years cooling off KAP 2 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 Off LAEP 5 years cooling off KAP OffKAP 2 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. )

16 Page 16 | Proprietary and Copyrighted Information 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.

17 Page 17 | Proprietary and Copyrighted Information Number of Membership (as of March 31, 2014) 13. JICPA Member ( 1/3 ) Individual Members 26,263 Audit Firms216 Individual Associate members 7,543 TOTAL34,022 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.

18 Page 18 | Proprietary and Copyrighted Information 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 )

19 Page 19 | Proprietary and Copyrighted Information 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 )

20 Page 20 | Proprietary and Copyrighted Information 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.

21 Page 21 | Proprietary and Copyrighted Information 14. Our Challenges to Respond to IESBA’s Future Changes ( 2/3 ) 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.

22 Page 22 | Proprietary and Copyrighted Information 14. Our Challenges to Respond to IESBA’s Future Changes ( 3/3 ) 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.

23 The Ethics Board www.ethicsboard.org


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