Japan

In Japan, general financial reporting requirements, such as the frequency, form, and content of financial statements, are outlined in the Companies Act 2005, which replaces portions of the Commercial Code 1993, and in the Financial Instruments and Exchange Act (FIEA) 2007. The Companies Act regulates the preparation of financial statements of all companies (i.e., stock, general partnership, limited partnership, and limited liability), whereas the FIEA is specific to listed companies and unlisted publicly accountable companies.

In 2001, the Accounting Standards Board of Japan (ASBJ) was formed under the auspices of the Financial Accounting Standards Foundation. The ASBJ is responsible for the development and deliberation of private-sector accounting standards in Japan. All standards set by the ASBJ are subject to the endorsement of the Financial Services Agency (FSA).

The IASB and ASBJ have been working together to achieve convergence of IFRS and Japanese Generally Accepted Accounting Principles (Japanese GAAP) since 2005. Voluntary adoption of IFRS for consolidated financial statements by companies that meet certain criteria has been permitted since March 2010. On 30 June 2015, Japan inaugurated a set of accounting standards known as Japan’s Modified International Standards. The four frameworks are:

• IFRS: virtually all listed companies and unlisted companies preparing consolidated financial statements for listing purposes are permitted to use IFRS as designated by the Commissioner of the FSA.
• Japanese GAAP as issued by the ASBJ: historically, most listed companies have used Japanese GAAP.
• Japan’s Modified International Standards (JMIS): accounting standards comprising IFRS and the ASBJ modification. JMIS was developed based on IFRS with deletions and modifications determined by the ASBJ. Concurrent with the issuance of JMIS on 30 June 2015, the ASBJ published modifications relating to amortization of goodwill and recycling of other comprehensive income. However, there are no adopters of JMIS as of this report.
• US GAAP: with the permission of the Commissioner of the FSA.

The Japanese government policy has continuously encouraged stakeholders to promote the voluntary adoption of IFRS since 2014. As of July 2023, 268 companies (over 45% of the Tokyo Stock Exchange market capitalization) have adopted or plan to adopt IFRS.

Companies subject to statutory audits in Japan are identified in the FIEA and the Companies Act. The FIEA determines the scope of statutory audit for investor protection purposes, including all listed companies and other certain companies with shareholders over the specified threshold. In addition, the Companies Act outlines that companies that meet the following criteria must also undergo audits: (i) companies with a capital stock of 500 million yen or more or total liabilities of 20 billion yen or more as of the latest fiscal year-end; (ii) companies that adopt a “Company with Nominating Committee, etc.” or a “Company with Audit and Supervisory Committee” corporate governance system; and (iii) companies which appoint external auditors on a voluntary basis. Statutory audits are also required for other specific types of entities in accordance with relevant laws or regulations, for example, incorporated private educational institutions that have received subsidies from the government, certain non-listed large financial institutions, incorporated administrative agencies, local governments, agricultural corporations, social welfare entities, and medical corporations.

All audits must be carried out in accordance with the Japanese GAAS (auditing standards generally accepted in Japan). Japanese GAAS consists of the standards issued by the Business Accounting Council (BAC)—an entity that operates under the supervision of the FSA—and Statements on Auditing Standards (SAS) and Statements on Quality Management Standards (SQMS) issued by the Japanese Institute of Certified Public Accountants (JICPA). SAS and SQMS are developed by JICPA at the request of the BAC to provide detailed requirements to implement the auditing standards issued by the BAC. JICPA’s SAS and SQMS are comparable to ISA and ISQM 1 and 2 issued by IAASB.

There is one professional designation—Certified Public Accountant (CPA)—in Japan, which is protected and regulated by the Certified Public Accountants Act 2007 (CPA Act). The law sets the regulatory framework for the profession by stipulating the scope of services to be provided by CPAs, the establishment of the national CPA examination, requirements for the CPA qualification, establishment of audit corporations, duties and responsibilities of CPAs, the role and organization of the Japanese Institute of Certified Public Accountants (JICPA), roles of the regulatory authorities, and the disciplinary and criminal sanctions applicable to CPAs. The CPA Act grants the Financial Services Agency (FSA) the authority to oversee CPAs, along with JICPA’s and national standard-setting bodies’ activities.

Individuals seeking the CPA designation must meet the following requirements: (i) pass the CPA examination conducted by the Certified Public Accountants and Auditing Oversight Board (CPAAOB)—an agency that is part of the FSA, (ii) have a minimum of three years practical experience, (iii) participate in a three-year professional accountancy education program offered by the Japan Foundation for Accounting Education and Learning, and (iv) pass final assessments offered by JICPA.

The FSA and the CPAAOB oversee distinct aspects of the audit profession. The FSA is responsible for (i) overseeing all of JICPA’s activities; (ii) supporting the standard-setting processes of the Accounting Standards Board of Japan (ASBJ) and the Business Accounting Council (BAC); and (iii) registering audit firms while the CPAAOB has the following responsibilities: (i) conduct and oversee the quality assurance reviews; (ii) implement the CPA examinations; and (iii) deliberate disciplinary actions against CPAs and audit firms and make necessary recommendations to the FSA.

Under the oversight of these bodies, JICPA is authorized to carry out the following regulatory activities: (i) uphold the professional ethics of members by developing the code of ethics for accountancy profession and promoting compliance with the code; (ii) design and implement measures to improve the quality of services provided by members through organizing seminars and research projects; (iii) research on the theories and the practices of auditing, accounting, and other related fields of professional services in order to promote the implementation of auditing and accounting standards, and to establish auditing and accounting systems; (iv) design and implement quality assurance reviews; (v) support members by providing necessary assistance through consulting with the members and providing materials; (vi) conducting investigative and disciplinary proceedings; (vii) design and implement measures for the education and training of CPAs; and (viii) perform administrative works for the registration of members.

Lastly, JICPA maintains certain independence requirements for CPAs providing services to regulated companies. Specifically, CPAs are not allowed to conduct audits on companies in which the individual was employed within the past year (two years for a government office). Audit corporations are also not allowed to provide audit services to a company within which the corporation has substantial interests, such as investments. Audit firms are restricted from providing extensive consulting services beyond auditing itself. Finally, in respect of an audit of a public interest entity, an individual may not act as the engagement partner, the individual appointed as responsible for the engagement quality control review, or any other key audit partner role for more than seven years.

In Japan, the Certified Public Accountants and Auditing Oversight Board (CPAAOB) serves as an independent audit oversight function of the Financial Services Agency (FSA). Both agencies oversee the regulatory activities of the Japanese Institute of Certified Public Accountants (JICPA). CPAAOB’s authorities are outlined in the Regulation section and the CPAAOB is a member of the International Forum of Independent Audit Regulators.

The Japanese Institute of Certified Public Accountants (JICPA)

JICPA was established under the Certified Public Accountants Act in 1966, and the Act has subsequently been amended to enhance JICPA’s authority in the accountancy profession. Today it is the sole organization representing the profession in Japan, and any individual who wishes to use the designation of and publicly practice as a Certified Public Accountant (CPA) must be a member.

Under the oversight of the Financial Services Agency (FSA) and the Certified Public Accountants and Auditing Oversight Board (CPAAOB)—an agency that is part of the FSA—JICPA is authorized to carry out the following regulatory activities: (i) uphold the professional ethics of members by developing the code of ethics for accountancy profession and promoting compliance with the code; (ii) design and implement measures to improve the quality of services provided by members through organizing seminars and research projects; (iii) research on the theories and the practices of auditing, accounting, and other related fields of professional services in order to promote the implementation of auditing and accounting standards, and to establish auditing and accounting systems; (iv) design and implement quality control reviews; (v) support members by providing necessary assistance through consulting with the members and providing materials; (vi) conducting investigative and disciplinary proceedings; (vii) design and implement measures for the education and training of CPAs; and (viii) perform administrative works for the registration of members.

In addition to membership in IFAC, JICPA is a member of CAPA (Confederation of Asian and Pacific Accountants), GAA (Global Accounting Alliance), and AFA (ASEAN Federation of Accountants). JICPA also works closely with the ASBJ (Accounting Standards Board of Japan) and the Business Accounting Council (BAC) in setting standards for the jurisdiction.

• In 2022, the Sustainability Standard Board of Japan (SSBJ) was established to set national sustainability standards. The SSBJ intends to develop high-quality and internationally consistent and comparable standards for national sustainability disclosure reporting. In February 2023, the SSBJ published its development plan, under which the SSBJ will develop the national standards based on the ISSB standards and publish the draft standards by March 2024 and finalize by March 2025.
• JICPA revised the Practical Guideline for Assurance Engagements 3000 and 3402 and, in June 2021, issued the Practical Guideline for Assurance Engagements 3410 based on the ISEA 3420. In addition, in July 2022, JICPA issued the Research Paper No.4- PGAE (Practical Guideline on Assurance Engagements) 3000 "Research Paper on ‘Guidance on Sustainability and Other Extended External Reporting (EER) Assurance Engagements in Japan (Draft)'" The guidelines were compiled with reference to the EER Guidance, are based on ISAE 3000, and reflect current practice in Japan.
• The Japan CPA Act was revised in 2022 for the first time in 15 years since 2007 and went into effect in April 2023. The major revision was regarding the registration system for listed company audit firms set by law, which JICPA had operated through self-regulation.

The Japanese Institute of Certified Public Accountants (JICPA), Financial Services Agency (FSA), and Certified Public Accountants and Auditing Oversight Board (CPAAOB) work together to design and implement the quality review system for all statutory audits in Japan. JICPA has conducted reviews since April 1999. The 2003 amendments to the Certified Public Accountants Act legally established the CPAAOB to conduct quality assurance reviews of audit firms along with overseeing the JICPA’s review process.

JICPA has a Quality Control Committee and a Quality Control Review Team. The Quality Control Committee consists of both JICPA members and other non-JICPA member experts. They are responsible for developing quality control and management review standards and procedures, instructing review teams, approving quality control review reports, and deciding on issuing recommendation for improvement reports. The Quality Control Review Team reviews whether a firm’s audit quality control has been designed in accordance with the JICPA standards, which are based on ISQM 1 as issued by the IAASB, and whether procedures have been adequately implemented. The Self-Regulatory Monitoring Conference oversees the effectiveness of the overall review system.

The CPAAOB examines the reports submitted by the JICPA and carries out on-site inspections of the audit firms. If the results of inspections show that the quality control review was not conducted properly, or CPAs/audit firms did not conform to laws, regulations and standards related to quality control of audits, etc., the CPAAOB will recommend that the Commissioner of the FSA take administrative actions and other measures as necessary.

JICPA reports that its quality assurance review system meets all SMO 1 requirements and notes that it regularly revises the review program to ensure it continues addressing all SMO 1 components.

Current Status: Adopted

The Certified Public Accountants Act outlines the requirements to become a CPA in Japan. These include passing a CPA examination that is administered by the Certified Public Accountants and Auditing Oversight Board (CPAAOB), completing a professional accountancy education provided by the Japan Foundation for Accounting Education and Learning (JFAEL), completing practical experience, and passing a final assessment offered by the Japanese Institute of Certified Public Accountants (JICPA).

JICPA indicates these initial professional development requirements are generally in line with the latest IES requirements in effect, although noting that it shares responsibility of this area among different stakeholders and implementation of the requirements may vary.

In addition, JICPA also requires members to fulfill continuing professional development (CPD) requirements. Members must fulfill 120 CPD credits in each rolling three-year period and at least 20 CPD credits in each year. The institute indicates that its CPD is also overall in line with the IES.

Current Status: Adopted

Japanese GAAS (auditing standards generally accepted in Japan) consists of the standards issued by the Business Accounting Council (BAC)—an entity operating under the auspices of the Financial Services Agency (FSA)—and the standards issued by the Japanese Institute of Certified Public Accountants (JICPA).

The standards issued by the BAC and SAS and SQMS issued by JICPA, taken together, comprise Japanese GAAS. All audits must adhere to the Japanese GAAS. Companies subject to statutory audits in Japan are identified in the Financial Instruments and Exchange Act and the Companies Act. Statutory audits are also required for other specific types of entities in accordance with relevant laws or regulations.

BAC’s standards consist of the Auditing Standards, the Standard to Address Risks of Fraud in an Audit (applicable to publicly traded companies only), and the Standard on Quality Control for Audits. The BAC’s standards are supplemented by Statement on Auditing Standards (SAS) and Statement on Quality Management Standards (SQMS) issued by JICPA.

Since first issuing SQMS and SAS, JICPA regularly revises its standards to stay converged with the standards and revisions as issued by the IAASB.

Current Status: Adopted

Ethical requirements in Japan are defined in the Certified Public Accountants Act in addition to the Code of Ethics issued by the Japanese Institute of Certified Public Accountants (JICPA).

JICPA has an Ethics Committee that issues the JICPA Code of Ethics, which is in conformity with that of the 2022 International Code of Ethics for Professional Accountants. JICPA Ethics Committee works to adopt the latest version of the IESBA Code as soon as possible after its release.

JICPA states that due to national legislation and the JICPA’s own Code of Ethics, some ethical requirements are more stringent than what is in the IESBA Code of Ethics.

Current Status: Adopted

The Ministry of Finance (MoF) of Japan is responsible for the development of public sector accounting standards for the central government, while the Ministry of Internal Affairs and Communication (MIC) is responsible for accounting standards for local governments. Both standards are accrual-based and unique to Japan (not aligned with IPSAS).

Current Status: Partially Adopted

The Certified Public Accountants Act grants legal authority to the Japanese Institute of Certified Public Accountants (JICPA) to conduct investigative and disciplinary proceedings (I&D).

JICPA has established the Audit Practice Review and Investigatory Committee to conduct reviews of submitted information and complaints. When needed, it also investigates further details and decides whether to recommend sanctions; and the Disciplinary Committee to examine the evidence and judge on sanctions. Individuals can then appeal to the institute’s Review Board for Appropriate Procedures if not satisfied with the decision of the Disciplinary Committee. JICPA has also established the Self-Regulatory Monitoring Conference in order to ensure the objectivity and transparency of JICPA's monitoring activities concerning audit practices. The Conference reviews the activities of JICPA’s committees involved in I&D procedures and makes recommendations as to whether cases should be published. JICPA reports that its I&D system aligns with the SMO 6 requirements.

The Financial Services Agency is authorized to take enforcement actions based on the results of investigations and/or the recommendations by JICPA as necessary.

Current Status: Adopted

In 2001, the Accounting Standards Board of Japan (ASBJ) was formed under the auspices of the Financial Accounting Standards Foundation (FASF). The ASBJ is responsible for the development and deliberation of private sector accounting standards in Japan. All standards set by the ASBJ are subject to the endorsement of the Financial Services Agency (FSA).

The IASB and the ASBJ have been working together to achieve convergence of IFRS and Japanese Generally Accepted Accounting Principles (Japanese GAAP) since 2005. Voluntary adoption of IFRS for consolidated financial statements by companies that meet certain criteria has been permitted since March 2010. On 30 June 2015, Japan inaugurated a new set of accounting standards known as Japan’s Modified International Standards, bringing to four the number of different accounting frameworks that listed companies in Japan may use. The four frameworks are:

• IFRS: all listed companies and unlisted companies preparing consolidated financial statements for listing purposes are permitted to use IFRS as designated by the Commissioner of the FSA. All voluntary adopters use full IFRS without modification or deletions and any selected types of public interest entities (for instance, financial institutions) are not required to adopt IFRS.
• Japanese GAAP as issued by the ASBJ: historically, most listed companies have used Japanese GAAP.
• Japan’s Modified International Standards (JMIS): accounting standards comprising IFRS and the ASBJ modification. JMIS was developed based on IFRS with deletions and modifications determined by the ASBJ. Concurrent with issuance of JMIS on 30 June 2015, the ASBJ published modifications relating to amortization of goodwill and recycling of other comprehensive income.
• US GAAP: with the permission of the Commissioner of the FSA.

Current Status: Partially Adopted

Relevant Organizations

• Accounting Standards Board of Japan (ASBJ)
• Business Accounting Council (BAC)
• Certified Public Accountants and Auditing Oversight Board (CPAAOB)
• Financial Services Agency (FSA)
• Japan Foundation for Accounting Education and Learning (JFAEL)
• Japanese Institute of Certified Public Accountants (JICPA)

Relevant Legislation

• Certified Public Accountants Act (CPA Act)
• Commercial Code
• Companies Act
• Financial Instruments and Exchange Act

Relevant Publications

• IFIAR, FSA Member Profile, 2023.
• IFRS Foundation, “IFRS Application Around the World, Jurisdictional Profile: Japan,” 28 July 2022.
• JICPA, “Accounting Standards.”
• JICPA, “Auditing System.”
• JICPA, “Code of Ethics.”
• JICPA, “Continuing Professional Development.”
• JICPA, “Disciplinary Actions and Sanctions on CPAs.”
• JICPA, “Quality Control Review System.”
• JICPA, SMO Action Plan, 2023.