Enabling CPAs to Continue Contributing to the Creation of a Sustainable World
On July 6, 2018, Japan’s CPA system marked its 70th anniversary. CPAs originally started out as auditing professionals, but in the process of addressing the public’s expectations, we have come to take on many roles beyond simply auditing listed companies. From now on, if CPAs are to continue fulfilling their mission as auditing and accounting professionals who contribute to the sound development of the society and the economy, we will need to adapt to changes in the economy and social structures, as well as changing public expectations.
Now, at the beginning of 2019, I would like to take this opportunity to provide an overview of the JICPA’s measures and initiative to adapt to these changes and prepare members for the future.
Chairman and President
Call for enhanced transparency in the capital markets
Among recent changes in social structures, one major trend has been the demand throughout society for enhanced transparency in organizations and business operations. Within the capital markets especially, increasingly globalized, diversified corporations are seeking to achieve sustainable growth by taking action to improve their information disclosure. In line with this trend, a framework for information disclosure is currently being developed in Japan: the Corporate Governance Code—with which corporations must comply—required corporations to ensure appropriate information disclosure and transparency, and then fair disclosure rules were introduced. Subsequent developments have included proposals for fuller provision of financial information, along with the descriptive information necessary to understand it properly, and proposals to provide governance-related information as a means of facilitating constructive dialogue.
In light of these trends and increasing interest in ESG investment (i.e., investment that takes account of environmental, social, and governance factors), an increasing number of corporations are endeavoring to enhance their transparency by producing annual reports and integrated reports that go beyond disclosure of financial information alone to respond to the demand for more disclosure of information relating to their medium- to long-term prospects.
The purpose of such efforts to enhance transparency is not simply to make a greater volume of information available. It is crucial to use the dialogue and feedback from stakeholders facilitated by fuller provision of information to bring about better business practices.
I believe that this need for dialogue also applies to the work of CPAs.
Efforts to enhance transparency in auditing
In the auditing sphere too, 2018 was a year in which the debate about enhancing transparency progressed significantly. Largely in response to long-standing criticisms that auditing has been a “black box,” the Audit Firm Governance Code had been published in March 2017, enhancing transparency at audit firms. Then, in July 2018, Japan’s auditing standards were revised to require Key Audit Matters (KAMs) to be included in audit reports.
The introduction of KAMs is expected to enhance the transparency of audits performed and enhance the value of information included in audit reports. Favorable effects are also expected in terms of enhancing auditors’ engagement with executives and audit and supervisory board members of corporations, promoting dialogue between corporations and users of financial statements in financial reporting, and in other areas. Even among industry peers, items included in KAMs may be completely different from one corporation to another because factors such as business scale, corporate culture, and business circumstances vary. It is therefore crucial that auditors understand the particular characteristics of a corporation and study them thoroughly before recording KAMs. The JICPA, for its part, is revising its practical guidelines and striving to raise awareness of KAMs among its members through training and other means so that auditors can meet the public’s expectations right from the early adoption stage starting in the fiscal year ending March 31, 2020.
Furthermore, I believe it is important to take the discussions of the Consultation Group on Improving Provision of Information relating to Financial Auditing established by Financial Services Agency seriously and consider how we can enhance the transparency of auditing practice even further.
In another move related to transparency at audit firms, the JICPA released a research report relating to Audit Quality Indicators (AQIs), which quantify audit firms’ initiatives to enhance audit quality in November. Although AQIs are indirect indicators, they do offer quantitative information related to audit quality, so I expect that proper use of AQIs by audit firms will go some way toward facilitating understanding of their progress with initiatives to enhance audit quality. I also expect this information will be used for reference when corporate auditors and others select or assess auditors.
The JICPA’s efforts to enhance transparency
The JICPA too is endeavoring to improve its capacity to communicate information. We are managing our operations transparently and are proactively informing the public about the results we achieve, thereby aiming to fulfill our duty of accountability to society even better and make further improvements based on the feedback we receive.
We launched our efforts to that end by publishing the annual report in 2018 in Japanese in addition to a report in English. In these reports, we explain all aspects of the JICPA’s organization and activities to the public as a means of promoting understanding. We intend to publish annual reports continuously in the years to come, further expanding and enhancing their content. In another initiative, we offered members of the public regular access to information released by the JICPA by sending out information regarding topics featured on our website via email newsletters. We also held regular press conferences and revamped our website to make it more user-friendly.
In our initiatives as a self-regulatory body too, the JICPA is striving to enhance transparency; we release a report summarizing the activities of each organization responsible for self-regulatory activities and deliberate on the form these organizations should take, considering how they could best be structured to fulfill their duty of accountability to society even better.
Looking ahead to the future of the CPA profession
Two and a half years have already passed since I became Chairman and President of the JICPA in July 2016, and just over six months remain of my term in office. From the time I assumed office I sought to support CPAs working in a diverse range of roles and in various situations. To that end, I announced three cornerstones on which the JICPA’s subsequent activities would be based: (1) building confidence in CPA audits, (2) becoming an agent for enhancing resilient and robust accounting infrastructure, and (3) professional competence and attracting future generations. I intend to properly resolve any pending issues that can be resolved during my own term in office, and for those issues that need to be passed on to my successor, I will summarize the key points for consideration and potential courses of action before handing over.
At the JICPA we have always thought constantly about how we should fulfill our legally mandated responsibilities as a self-regulatory body for CPAs. It is only natural that we should do so, and we should continue to think diligently about our responsibilities in future. As I perform my duties as Chairman and President I feel strongly that, both as individual professionals and as a self-regulatory body for such professionals, we must also involve ourselves in tackling a variety of social issues.
Currently, Japan faces issues such as decreasing birthrate and aging population. These issues are expected to cause decrease in tax revenues and increase in cost of social security, and these issues have also amplified succession issues for small and medium-size enterprises. I believe there is an increasing need for CPAs to assist organizations such as social welfare corporations through audit or succession planning to help the regional economies achieve transparency and further revitalization.
These days, many corporations and organizations are seeking to realize a sustainable world by pursuing initiatives in line with the sustainable development goals (SDGs), which target innovative solutions to issues at the worldwide level. In this regard, JICPA has also made the challenging goal of improving the accounting literacy of the Japanese populace as a whole a target of our efforts and have initiated some activities, as knowledge of accounting (accounting literacy) can prove useful in a diverse range of situations or at various life stages.
For CPAs to continue contributing further to achieving the sustainable world, we believe that we should engage in tackling not only issues within the accounting and auditing spheres, but also issues that affect society as a whole. Accordingly, we are deliberating on how we can best contribute to society, having set up a committee to assess our challenges and suggest initiatives as it contributes to sustainability of our society.
I would like to close by reemphasizing that it is my sincere wish to dedicate myself fully until the very end of my term in office and work diligently to enable Japan’s CPA system and the profession to develop and flourish further.
Past Messages from Chairman and President