Exploring Corporate Governance Around the World

By Allison Garrett, Senior Vice President for Academic Affairs at Oklahoma Christian University

Wednesday, January 17, 2007

Ensuring Confidence in Japan's Capital Markets

Taizo Nishimuro, the CEO of the Tokyo Stock Exchange, spoke at the World Congress of Accountants back in November. The text of his speech is here. He spoke on recent efforts of the TSE and the Japanese Institute of CPAs to ensure trustworthy financial reporting and on the convergence of international accounting standards.

FYI, the TSE is the world's second largest market based on capitalization, which exceeded USD 4.5 trillion at the time of the speech. Almost 24% of all stock traded on the TSE is traded by foreign investors, and 50% of all brokerage orders come from foreign investors. Japanese investors hold around 12.85 (USD) trillion in financial assets, but Japanese investors are far less likely than U.S. investors to hold stock. One of the goals of the TSE is to shift investors in Japan into the capital market. The TSE is still working to fix some of the systems glitches experienced last fall when trading had to be suspended for several hours.

Nishimuro also noted that Japan has experienced several high-profile financial frauds in the last year. In one instance, the outside auditors were involved. Consequently, the Japanese Institute of CPAs has stengthened its ethics code and taken additional steps to enhance the quality of outside audits. Beginning in 2008, listed companies must file an "Internal Control Report" which sounds a great deal like the SOX 404 review that U.S. companies have been conducting.

The speech also includes a description of the uniquely Japanese "consolidated earnings digests." The TSE requires standardized reports and these reports convey information to the market as soon as the main information that will be contained in the issuer's securities filings is known. On the average, this gives investors important information about 2 months sooner than the filing date for the reports. The TSE is also working with companies on XBRL reporting.

Nishimuro also noted concern that Japaneses accounting standards will become "merely a local phenomenon" and explained that the TSE is working with others on international accounting standards.

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