Accounting in Japan

What factors do you consider to be primarily responsible for the Japanese accounting system being significantly different from other national systems and what influences do you consider the Japanese system will have on international accounting in the future?

INTRODUCTION

Japan as an accounting jurisdiction is characterized by the dominance of the state (Haller and Raffournier, 2003). The accounting rules have been set out in the past fifty years as statute law with an implicit objective that accounting should contribute to the growth of the national economy (Haller and Raffournier, 2003). Until recently, the accounting profession had played a minor role in shaping accounting practices, and he accounting profession and auditing practice was created by law after World War II as a discipline needed to reactivate the securities market in Japan (Haller and Raffournier, 2003). Going back in time would show that industrialization of Japan began in 1868 after the Meiji Restoration (Nobes and Parker, 2004). In 1890 and 1899, the first Commercial Code was established based on a Franco-German model and oriented towards creditors and tax collection (Nobes and Parker, 2004). A deeper look at Japan's accounting and financial reporting reflects a mixture of a number of domestic and international influences (Choi et al., 1992), with the first half of the twentieth century having the accounting thinking drawing influences from France and Germany (Lawrence, 1996), and the second half from the United States, that emphasizes on shareholder information (US) (Choi et al., 1999). Because Japanese accounting system bents more to tax influences, it is classified as the uniform accounting approach (Choi et al., 1992). In addition, following the Hofstede and Gray's framework would put Japan under the conservatism or masculinity cultural classification (Choi et al., 1992). However, it is widely known that Japan's accounting system differs significantly from other national systems; therefore this paper is to discuss the factors for the differences and to consider whether the Japanese system will have any influence on international accounting in the future.

LEGAL SYSTEM AND STANDARD SETTING

In terms of legal and institutional basis of accounting, the national government has the most significant influence on accounting in Japan (Arai and Shiratori, 1991 cited from Nobes and Parker, 2004). There are three main sources of regulation, all imposed by the government and administered by two separate ministries (Lawrence, 1996). The Ministry of Justice (MoJ) is responsible for the Commercial Code; the Ministry of Finance (MoF) is responsible fro the Securities and Exchange Law, the tax law and regulations and the Business Accounting Deliberation Council, which is the body that publishes financial accounting standards (Lawrence, 1996). The legal framework is better illustrated below.

Adopted from Lawrence (1996)

The Commercial Code was enacted in 1899 and it deals with limited liability companies (Kabushiki Kaisha), such as incorporation procedures, issuance of shares, and duties and responsibilities of directors and statutory auditors (Haller and Raffournier, 2003). The code sets the legal framework of accounting in Japan and is in the centre of the triangular legal system, and given its generality, coupled with an implicit and persistent belief in Japan that accounting should eventually contribute to the development of the national economy as a whole (Haller and Raffournier, 2003).

ACCOUNTING PROFESSION

The Japanese accounting profession is divided into two groups that provide services to third parties. One is the licensed tax practitioner (Zeirishi) and the other is the certified public accountant (Konin Kaikeishi) (Haller and Raffournier, 2003). Tax practitioners are individuals who have passed the required examinations or obtained through some other way (i.e. working as a tax agent of the Japanese Tax Administration for a certain number of years), and who are registered with the appropriate regional Certified Public Tax Accountants Associations (Haller and Raffournier, 2003). They principally provide tax compliance and consulting services, which also includes bookkeeping and preparation of accounts (Haller and Raffournier, 2003). The certified public accountant is a registered member of the Japanese Institute of Certified Public Accountants (JICPA) (Nobes and Parker, 2004). In order to be a certified public accountant, one must pass three levels of examination (Nobes and Parker, 2004). University and college graduates are exempted from the preliminary CPA examination. The intermediate examination includes economics, bookkeeping, financial accounting, cost accounting, the Commercial Code, business administration and auditing theory (Nobes and Parker, 2004). Those that pass are referred to as 'junior CPAs' and they must undergo three years of apprenticeship before sitting the final test of technical competence, and submit a thesis and the passing rate is known to be low (Nobes and Parker, 2004).

FINANCIAL REPORTING IN JAPAN

Business accounting in Japan mentions seven qualitative characteristics such as truthfulness of reporting, understandability, consistency of application and conservatism in general terms (Haller and Raffournier, 2003). The income statement is generally governed by the accrual basis of accounting, the realization principle and the matching of revenue with expenses (Haller and Raffournier, 2003). Financial reporting under the Securities and Exchange Law requires an annual securities report (Yukashoken Hokokusyo) from all publicly held Japanese companies. The report is filed with the MoF, and submitted to all stock exchanges the securities are listed and available to the public (Haller and Raffournier, 2003). In addition, the Commercial Code also requires a statutory report from all companies (Choi et al., 1999).

The statutory report