“A series of accounting irregularities at large companies have deepened public distrust of both accounting and auditing firms.”

This is the opening sentence of a recent editorial in the Japan Times Online, entitled “Auditing Accountability,” that continues, “It is hoped that a bill to revise the Certified Public Accountant Law, now on the Diet floor, will remind CPAs and auditing corporations of the weight of their social responsibility, and help them regain the public's trust.”

Under the bill as described in the editorial, the maximum duration in which a chief CPA of a large auditing firm could continue to audit a listed company would be shortened from the current seven years to five years, and CPAs who have quit auditing firms would be prohibited from landing jobs at companies they audited, or their affiliates. Additionally, if companies fail to rectify irregularities that CPAs have detected, the latter would be legally required to report the failure to administrative authorities.

The editorial also indicates that the bill would allow authorities to issue a order to improve management and operations, as well as impose administrative fines on CPAs and auditing firms involved in irregularities. The fine for irregularities deemed deliberate would be one-and-a-half times the auditing fee, and the fine for failure through carelessness to detect irregularities would be the same amount as the fee.

Doesn’t this all sound rather familiar? Accounting irregularities involving large companies followed by legislative proposals aimed at the CPA auditor. It should come as no surprise that many of the provisions mimic the Sarbanes-Oxley provisions.

The ability of the administrative authorities to issue a order to improve management and operations of the auditor, and impose administrative fines on the auditor as an alterative to issuing a reprimand to the firm, an order to suspend operation, or an order to dissolve the firm, would give the regulatory authorities in Japan a wide range of choices to be used against auditing firms, probably a reaction to the demise of Andersen.

The consideration of such legislation is an indication that the Sarbanes-Oxley pendulum isn’t swinging back. Rather, with minor adjustment in implementation, the momentum might even be getting stronger. And because of a desire for greater convergence with international accounting standards, I expect that a similar desire for a convergence in the rules that govern auditors is adding to that momentum.

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