Business Accounting Council

Business Accounting Council

Business Accounting Council

１. General Background of Discussions

(1) Necessity for enhancement of internal control

The securities market cannot fulfill its function unless corporate information is disclosed in a

fair manner to the investors. However, improper practices have been observed recently

concerning disclosure under the Securities and Exchange Law, and in particular that in the

Annual Report.

These cases may indicate that companies’ internal controls to ensure the reliability of corporate

disclosure are not functioning effectively. Considering these circumstances, in order to ensure

the reliability of corporate disclosure, it is necessary to seriously consider a measure to enhance

the internal controls of listed companies. The enhancement of internal controls will bring

various benefits to each listed company through the improvement of adequacy and efficiency of

business operation etc. It will also bring numerous benefits to all the market participants,

including the listed companies themselves, through the improvement of the reliability of

disclosure overall as well as the regional and global confidence of securities market.

In this regard, the importance of companies' internal controls has also been recognized in the

United States since a series of misconducts such as the Enron case. Consequently, under the

Public Company Accounting Reform and Investor Protection Act of 2002 (Sarbanes-Oxley Act

of 2002), the management of the Securities and Exchange Commission (SEC) registrant are

obliged to prepare the Internal Control Report, which shall contain an assessment of the

effectiveness of the internal controls over financial reporting. In addition, each registrant is

assumed to have an audit by certified public accountants.

2

Comparable systems have been introduced in other countries, such as the United Kingdom,

France, South Korea etc.

In Japan, certification by the company representative on the fair disclosure of Annual Report has

been