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Banking & Finance

Japan seeks greater transparency, details in audit reports

Improprieties spur push for more auditor opinions, expected in fiscal 2019

TOKYO -- Japan looks to combat a rise in corporate accounting improprieties with reforms that likely will require audit reports to offer more financial details on companies and reveal accountant opinions and assessment processes.

Current audit reports simply give a company's financial statement one of four ratings, based on how much of the key information is stated appropriately. But the Financial Services Agency begins drafting a new rule this fall, and the audit processes and accountant opinions are expected to become part of the reports around the fiscal year ending in March 2020.

"This will increase tension in the relationship between the auditing and the audited companies, and could help nip improprieties in the bud," said Yasumasa Tahara, who leads the FSA's corporate disclosure division.

Leaving it to the company

Improprieties that came to light in April about an overseas copier sales affiliate of Fujifilm Holdings forced the Japanese parent to revise earnings for fiscal 2011 through fiscal 2015. Yet Japan's current standard does not require auditors to report details, and so Fujifilm's reports covering revised earnings and fiscal 2016 simply include an unqualified opinion affirming that all key information is correct.

New standards expected in the FSA's audit reform would require the report to lay out the assessment process and auditor's reasoning in evaluating Fujifilm's various businesses, including the multifunction equipment leasing operation where the accounting issue occurred.

The FSA's revisions likely will focus on areas such as impairment losses -- which reflect reduced earnings potential of assets -- pension benefit obligations and deferred tax assets linked to advance tax payment for expected future earnings. All of these involve complex accounting steps, and the work of sorting out details often is left to the company's discretion.

"There are more and more cases in which the company and accountant have different views," said Sayaka Sumida, a standing member of the board at the Japanese Institute of Certified Public Accountants.

A company's earnings depend on interpretations of details, underscoring the risks of improprieties. Observers increasingly demand greater visibility of auditing processes at large.

Fifty-eight cases of accounting improprieties by listed companies were found last year, the most since tracking of comparable data began in 2008, according to Tokyo Shoko Research. Roughly 40% were simply errors, and another 40% or so were seen as book-padding.

Bashful auditors

Both the auditing and audited companies have reservations about the reform. A senior official of a large manufacturer expressed concern that publicizing in-progress accounting could mislead investors. Auditing companies seem to balk at the role of revealing the inner workings of clients, as auditors long have operated in a culture of doing their work behind the scenes.

Deliberations on similar changes to audit reports began in Europe and America following the 2008 financial crisis. The U.K. and European Union have introduced changes, while the U.S. is scheduled to follow suit starting in 2019.

British company Rolls-Royce Holdings often is cited as a model case. Its mainstay airplane business operates under long-term contracts but development costs can spike and sway earnings. International accounting firm KPMG reports on the company using a dozen or so criteria, including whether profit derived from long-term contracts is booked appropriately each year, with year-on-year comparisons.

When audit reports reveal more, "even individuals will be able to obtain more cues about investing," said Fumio Matsumoto of Dalton Capital Japan.

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