The Audit Industry and the Trend of Disclosure Systems
March 1, 2017
Mr. Hiroyuki Sakai
Managing Partner, KPMG AZUSA LLC
The objective of “accounting audits” conducted by independent certified public accountants (CPAs) is to provide assurance that the financial statements prepared by companies are fair and reliable and to contribute to the sound development of capital markets.
Accounting audits started in Japan with the enactment of the CPA Act about 70 years ago. Ever since, Japanese corporate activities expanded globally, so did auditing firms. Currently, there are four major firms in Japan, including AZSA LLC to which I belong. They conduct audits for majority of companies that account for an overwhelming 93% of sales of listed companies in this country. The four firms each affiliates to one of the global BIG Four firms of PricewaterhouseCoopers (PwC), Deloitte & Touche (DT), Ernst and Young (EY) and KPMG. AZSA LLC affiliates to KPMG which is smallest in size, yet it has member firms in over 150 countries worldwide, 200,000 employees and income worth 3 trillion yen.
The Japanese Stewardship Code and the Corporate Governance Code were formulated to stimulate sustainable business growth and to enhance long-term corporate value through “constructive” dialogue between companies and institutional investors. While some feel the two Codes have facilitated dialogue, many foreign institutional investors remain uncertain about the sustainable enhancement of corporate values.
To ensure “constructive” dialogue and substantive communication between companies and foreign institutional investors, we must give a more flexible schedule and procedures for the general shareholders’ meetings. Currently, majority of meetings are held during the same period, which gives foreign investors a limited time to review agenda items. Research results conducted by the Ministry of Economy, Trade and Industry show that foreign investors spend only 1-3 days to review the agenda.
We must also work to simplify, streamline and reduce redundancy among the three disclosure systems of the Companies Act, the financial report and the earnings summary. It would be more effective and efficient to disseminate an integrated set of information for diverse stakeholders, which also save time and energy for report writers.
Before I close my speech, let me touch upon the recent initiatives to reinforce governance of auditing firms. While accounting audits constitute a critical infrastructure of capital markets, corporate scandals relating to financial reporting have undermined public confidence in audits. Thus, deliberations unfold on formulating a governance code for auditing firms. Auditing firms must recognize its crucial role as a social infrastructure, strive to reinforce governance and improve audit quality, so that we can contribute to the growth of capital markets and achieve a fair and just society.