JICPA Code of Ethics

1. Ethics Committee

The JICPA Ethics Committee was established in July 2004 in order to promote stronger independence of auditors, as required by the amended CPA Act. The Ethics Committee consists of JICPA members and those outside of profession and is supported with full time staff.
The JICPA Code of Ethics ("JICPA Code") has passed through two major revisions up to the present date. The first one was the total revision in 2000 which was aimed at harmonization with the "Code of Ethics for Professional Accountants" (revised in January 1998) of the International Federation of Accountants (IFAC); the second was the partial revisions in December 2003 and July 2004 following the enactment of the revised CPA Law which further tightened independence requirements for auditors. The revised CPA Law was enacted in May 2003 to maintain and improve the reliability of the CPA auditing system after a series of domestic and international scandals in accounting and auditing.

2. Comprehensive Amendment of the JICPA Code of Ethics in 2006

1. Purpose of the revision and its background

In recent years, a flood of international and domestic accounting and auditing scandals has raised the urgent need to ensure the reliability of disclosed information, especially of financial information, in capital markets. Measures have been taken to improve disclosure systems and the public expects a more rigorous Code of Ethics for CPAs.
The JICPA Code of Ethics ("JICPA Code") has passed through two major revisions up to the present date. The first one was the total revision in 2000 which was aimed at harmonization with the "Code of Ethics for Professional Accountants" of the IFAC (revised in January 1998); the second was the partial revisions in December 2003 and July 2004, following the enactment of the revised CPA Act which further tightened independence requirements for auditors. The revised CPA Act was enacted in May 2003 to improve the reliability of the CPA auditing system after a series of domestic and international scandals in accounting and auditing.

a. Toward the global convergence of Code of Ethics for professional accountants

The IFAC Code of Ethics for Professional Accountants ("IFAC Code") has been revised several times since 1998. Section 8 "Independence" (Paragraph 290 of the current version) of the IFAC Code had been established as the international standard on which national standards should be based. Subsequently, IFAC Statements of Membership Obligations ("SMO") 4 "IFAC Code of Ethics for Professional Accountants," effective on or after December 31, 2004, changed the authority of the IFAC Code. SMO 4 and the revised IFAC Code strengthened the status of the IFAC Code with the provision that "no member body or firm is allowed to apply less stringent standards than those stated in this Code, except as allowed where laws or regulations in a jurisdiction prohibit the member body or firm from complying with certain parts of this Code."

b. Establishment and enhancement of a comprehensive Code of Ethics

Five-year rotation rule

"Reform of the partner rotation rule," which was referred to in the press release; "Measures for ensuring appropriate disclosure and stricter auditing system" issued by the CPAAOB on October 21, 2005; and the JICPA Chairman and President's Statement "Toward the restoration of confidence in audits by CPAs" released on October 25, 2005, have been incorporated in the Notes regarding the Code of Ethics issued on February 16, 2006. The Notes stipulate that lead audit engagement partners of audit firms over a certain size are required to rotate after serving for no more than five years with a five year cooling-off period. This rule took effect for audit engagements for periods beginning on or after April 1, 2006.

Elimination of predecessor's influence during cooling-off period

JICPA captured the attention of its members on March 17, 2006 by issuing the Interpretive Guidance for the Professional Ethics, a document which covers the need to eliminate predecessor's direct and/or indirect pressures during the cooling-off period after the lead audit engagement partners' rotation.

Enhancement of the self-regulatory function of JICPA

JICPA announced the establishment and enhancement of a comprehensive Code of Ethics in the Chairman and President's Statement "Restoring Confidence in Certified Public Accountants' Audits - Enhancement of the self-regulatory function of JICPA -"on April 6, 2006.
Taking into consideration the circumstances described above, the JICPA Ethics Committee decided to revise the JICPA Code to make it equivalent with international standards and to strengthen independence requirements for auditors.

2. Fundamental policies for the revision

The JICPA Ethics Committee has deliberated the revision of the JICPA Code under the following fundamental policies, taking into account consistency with relevant national laws and regulations, as well as the IFAC Code.

a. Ensuring the international level of standards

JICPA has incorporated the philosophy of the IFAC Code in its Code, unless otherwise prohibited in national legislation.

b. Maintaining the former level of JICPA Code of Ethics

The provisions of the former JICPA Code, which are more rigorous than that of IFAC Code or are not stipulated in IFAC Code, are maintained in the revised JICPA Code.

c. Clarity

The revised JICPA Code is written in the simplest and clearest terms possible.

d. Transparency and availability

Professional ethics require that one conducts oneself in a disciplined manner as a professional. In addition, the JICPA Code is also required to be publicly available, as it constitutes the bedrock of self-regulation. JICPA intends to release an exposure draft and invite comments from the public and its members in case of future revision.

3. Major changes

a. Chapter 1 - General

The former JICPA Code defined minimum requirements with which a professional accountant should comply with. Throughout the revised JICPA Code, JICPA incorporates a conceptual framework approach ("Framework Approach"), providing examples of relationships and circumstances which threaten professional accountants' compliance with the fundamental principles. A conceptual framework requires a professional accountant to identify, evaluate and address those threats and assists in applying appropriate safeguards to eliminate or reduce the threats to an acceptable level.

The former JICPA Code was divided into three chapters: Chapter 1 - General Provisions (Article 1-2), Chapter 2 - Rules Applicable to All Members (Article 3-13.2), and Chapter 3 - Rules Applicable to Members Engaged in Audits (Article 14-18). The revised JICPA Code is reorganized into Chapter 1 - General Provisions, Chapter 2 - Rules Applicable to Accounting Firms and Members in an Accounting Firm, which retains contents of former Chapter 2 and 3 and combined into one Chapter, and Chapter 3 - Rules Applicable to Members in Business. Members who work for business entities, public sector organizations, and educational institutions are subject to this Chapter 3, although they were not covered by the former JICPA Code.

Definition of terms is set in the revised JICPA Code in order to clarify the extent and nature of the Code. Examples of terms are as follows:

  • Accounting firm (including controlling and/or controlled by entities)
  • Members in public practice (including members who work for a consulting company which affiliated with the accounting firm)
  • Related entity (including parent entities, subsidiary entities and affiliated entities of the client, and entities with a material financial interest in the client)
  • Assurance team (including persons who provide direct supervision, management or other oversight of the assurance engagement partner)

Contents of the former Notes regarding the Code of Ethics which should be maintained are integrated into JICPA Code.

b. Chapter 2 - Rules Applicable to Accounting Firms and Members in an Accounting Firm

The following sections which are stipulated in IFAC Code are added to the revised JICPA Code:

  • Consideration of Integrity of Clients (Article 4)
  • Conflicts of Interest (Article 8)
  • Second Opinions (Article 9)
  • Objectivity of Professional Services (Article 15)

The scope of the following sections, which are applied to members who conduct audit engagements only under the former JICPA Code, is expanded to encompass members who provide a broad range of professional services;

  • Changes in a Professional Appointment (Article 16 of the former JICPA Code)
  • Notifying the Existing Accountant (Article 17 of the former JICPA Code)
  • Contingent fee (Article 18 of the former JICPA Code)
  • Gifts and Hospitality (Article 11-2-(3) of the former the Notes regarding the Code of Ethics Article 14 - Independence)

Article 19 "Name of an Audit Corporation" is retained in the revised JICPA Code and an additional guideline is planned to be issued in order to serve as a reference to members.

c. Article 16 - Independence Requirements for Members in an Accounting Firm who Perform Assurance Engagements

The revised JICPA Code stipulates independence requirements when performing assurance engagements in general and is not limited to audits of financial statements.

The revised JICPA Code deals with the relationship of members' controlling entities, network firm and clients.
Application Guidance for the Conceptual Framework of Independence was released separately from JICPA Code in order to indicate how a framework approach should be applied to certain relationships and circumstances which threaten professional accountants' independence.

d. Measures for Dissemination and Effective Implementation of This Revision

As this revision includes significant changes to the entire JICPA Code, the revised JICPA Code should be disseminated and fully understood by every member through an education program such as Continuing Professional Education.

JICPA will improve the Code and release an Interpretive Guidance to make it an example of effectively-functioning self-regulation.

e. Structure of JICPA Code, Other Pronouncements and Relevant Laws and Regulations

The following diagram indicates the structure of the JICPA Code, and other pronouncements and relevant laws and regulations which are closely interrelated:

e. Structure of JICPA Code, Other Pronouncements and Relevant Laws and Regulations

3. Revision in response to the Amended CPA Act

In order to conform to the amended CPA Act of 2007 (which came into effect on April 1, 2008) the JICPA Code has been revised. The five-year rotation rule, which JICPA introduced as a self-regulatory measure in 2006, has been legislated under the amended CPA Act.

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