Developments in the U.S. economy have an extremely important impact on the entire global economy. Moreover, such developments are of critical concern to the Japanese economy as Japan endeavors to escape its deflationary cycle and to achieve recovery. From this perspective, we highly appreciate the prompt response of the United States to the problem of distrust in corporate accounting practices, and its speedy implementation of comprehensive measures aimed at re-establishing confidence in the capital markets.
We wish to state that Japanese corporations have already achieved very high standards of corporate governance and disclosure when measured internationally, as a result of a series of revisions in Japan's Commercial Code and Securities and Exchange Law undertaken in recent years. Continued efforts are being made to further upgrade these standards. Regarding the recently enacted Sarbanes-Oxley Act of 2002, we find that it contains various provisions that are inconsistent with current Japanese laws, rendering it impossible for Japanese corporations to comply with this legislation. Furthermore, fund-procurement activities of Japanese corporations in the United States will be hampered by these inconsistencies. Therefore, Japanese corporations should be exempted from the provisions of the Sarbanes-Oxley Act in areas where the legal provisions of the two countries are overlapping.
We are particularly concerned with Section 301, which contains amendments to Section 10A of the Securities Exchange Act. Specifically, the application of sub-section (m) [Rules Relating to Audit Committees], paragraph (3) [Independence] to Japanese corporations will prove highly problematic.
The Commercial Code of Japan contains the following provisions concerning the audit of large corporations. (See Attachment 1-1 and 2.) Large corporations are required by law to appoint a Board of Auditors ("Audit Committee" instead, under the new corporate governance that will be allowed by the newly enacted Commercial Code) and external accounting auditors. The independence of the Board of Auditors and external accounting auditors from the corporation and from its executive directors is ensured under the provisions of the law.
Therefore, the "audit committee" prescribed under Section 301 is inconsistent with and overlapping the requirements of the Commercial Code of Japan. As Japanese corporations must comply with the provisions of the Commercial Code of Japan, Japanese corporations should be exempted from the pertinent provisions of Section 301. At the very least, the same procedures should be followed as in the case of the proposed New York Stock Exchange's rules on listing. That is, having exempted Japanese corporations, it should thereafter suffice to make a disclosure of the substantial differences between corporate governance systems in Japan and the United States.
To avoid the problem of overlapping laws, on various occasions, the SEC has respected home-country laws and exempted foreign corporations from certain U.S. regulations or has applied special regulations. (See Attachment 1-3.) The same pattern is observed in the New York Stock Exchange and NASDAQ, where foreign corporations are exempted from certain listing standards. The example of this positive tradition should be respected in the application of the Sarbanes-Oxley Act of 2002.
We wish to state that Japanese corporations are making every possible effort to comply with the requirements of the Sarbanes-Oxley Act of 2002. However, the details of how this legislation will be enforced remain unclear. Therefore, it is conceivable that new problems will be identified as practical issues of implementation are further clarified. In such cases, we intend to submit additional requests for problem resolution. (See Attachment 2.)
The Commercial Code of Japan contains the following provisions concerning the auditing systems of large corporations. An external accounting auditor must scrutinize if the accounting practices of the corporation are correct and appropriate (Audit Special Exceptions Law, Article 2). Auditors of the corporations must form a board of auditors (Audit Special Exceptions Law, Article 18-2, Sec. 1). Then, the board of auditors as a body and auditors individually must audit the directors' execution of their duties (Article 274-1 of the Commercial Code) in cooperation with the external accounting auditor (Audit Special Exceptions Law, Article 8). The function of the Audit Committee system, to be introduced on an optional basis on April 1, 2003, is to audit the directors' and executive officers' execution of their duties (Audit Special Exceptions Law, Article 21-8).
|Section 102||System of registration of accounting firms to the newly established Oversight Board|
|Section 106||Treatment of foreign public accounting firms|
|Section 201||Prohibition of certain non-auditing services to a company by the accounting firm that audits the company|
|Section 202||Pre-approval by audit committees of auditing/non-auditing services|
|Section 203||Audit partner rotation duties|
|Section 204||Duty of auditors to report to audit committees|
|Section 206||Prohibition of auditing by a registered public accounting firm when the CEO, CFO, or other person serving in equivalent position at the company in question has been employed by that registered public accounting firm during the 1-year period preceding the date of the initiation of the audit (establishment of a cooling-off period)|
|Section 303||Prohibition of improper influence on accounting firms|
|Section 304||Forfeiture of bonuses and profits by CEO, CFO, etc.|
|Section 307||Professional responsibilities of attorneys|
|Section 401||Rules concerning disclosures of off-balance sheet transactions and pro-forma figures|
|Section 404||Reporting of management assessments of internal controls|
|Section 406||Disclosure of code of ethics for senior financial officers|
|Section 407||Disclosure of whether or not at least one financial expert is in the audit committee|
|Section 408||Enhancement of SEC's review of periodic disclosures by issuers|
|Section 409||Real-time disclosure of major changes in financial situation|