ＩＮＴＥＲＮＡＴＩＯＮＡＬ　ＡＣＣＯＵＮＴＩＮＧ　（２ND EDITION） Ｆｒｅｄｅｒｉｃｋ　Ｄ．Ｓ．Ｃｈｏｉ　New York University　Ｇｅｒｈａｒｄ　Ｇ．Ｍｕｅｌｌｅｒ　University of Washington　　 ３　ＣＯＭＰＡＲＡＴＩＶＥ ＦＩＮＡＮＣＩＡＬ ＡＣＣＯＵＮＴＩＮＧ ＰＲＡＣＴＥＣＥＳ Japan 　Japanese accounting and financial reporting are a potpourri of a great many 　do- mestic and international externalities. On the surface Japanese 　corporate fi- nancial reports seem to have much in common with their British-American counter-parts. Yet as a matter of fact the information 　content of Japanese corporate financial reports differs substantially. For example 　one researcher found that"it must be concluded therefore 　that Anglo-American methods of consolidation failed to reflect adequately 　the nature of corporate gruop associations in Japan."10 A prominent investment analyst Paul H.Aron observes that "despite the growing 　Americanization (or internationalization) of Japanese accounting stand- ards 　Japanese EPS are still significantly understated.... When 　recalculated in conformity with U.S. accounting standards the Japanese EPS are understated by 10Jill.L.Mckinnon 　Application of Anglo-American Principles of Consolidationto Corporate Financial Disclousure in Japan, Abacus June 1984 pp.16-33 　58%.... When a common accounting standard is used Japanese corporations 　still earn less profit per unit of market value than American 　counterparts."11 Japa- nese accounting and financial reporting are simply 　different-substantially dif- ferent from really anything found elsewhere. First and foremost financial 　accounting plays only modest roles in Japa- nese society. Senior managers 　typically come from engineering and the sciences.Only about 5 percent of 　all promotions to directorships go to finance and ac- counting 　specialists. Even large Japanese corporations rarely have ＣＰＡs on 　their staffs. In Japanese industrial organizations sales and marketing are 　moreimportant than accounting and finance. 　Central government holds a tight rein on everything that happens in ac- 　counting in Japan. Many knowledgeable observers feel that Japanese 　accounting activities are primarily a governmental function. Bureaucratic 　control over ac- counting matters is exercised by the Ministry of Justice the Ministry of Fi- nance and the latter's Bureau of Taxation. Accounting standard setting is con- 　trolled by these three governmental bodies. 　Another important factor impacting accounting in Japan is the extensive 　cross-ownership among Japanese companies. Firms hold equity interests in 　each other and generally jointly own other firms. These intercorporate 　investments yield giant industrial conglomerates−especially the nine 　major Japanese tradingcompanies. Banks are often a part of these industrial 　groups. Lifetime employ- ment in a company is still the order of the day. 　Japanese workers and managers are "members" of companies. They do not 　consider themselves employees. Also unusual from a Western 　perspective is the widespread use of bank cred-it and debt capital to 　finance large enterprises. Equity financing is compara- tively minor in Japan. Thus 　corporate managements must primarily answer to banks and 　other financial institutions rather than large numbers of stockholders.The 　controlling bank may well be a member of the conglomerate to which the firm 　belongs. This obviously shifts financial reporting and disclosure responsibili- ties and changes among other things reliance on independent 　auditors serving broad public interests. In many ways 　Japan is a rather traditional society with strong 　cultural and religious roots. Bookkeeping was apparently an elaborate and 　widespread business practice from the beginnings of the Tokugawa 　period(1600-1868). As the Meiji government(1868-1912) took over 　significant German influence entered Jap-anese commercial law and the 　French influenced Japanese bookkeeping. Thus a pervasive European 　influence was added to traditional Japanese practices. More recently 　American and/or international dimensions have entered the Japanese 　ac-counting environment. All of these influences however come to bear 　very grad- ually. Cultural change occurs in almost minute single steps. 　All of Japan is very business oriented. It is not an overstatement to say 　that what is good for business is good for Japan. In terms of accounting in general there is the widespread belief that 　sig-nificant off-balance sheet assets as well as liabilities exist in 　Japan. This isone reason why reported earnings of Japanese corporations are believed to be 11Paul H.Aron 　Japanese Research (DAIWA Securities America Inc) October 23.1989 p.1. 　significantly understated by U.S.standards(see the reference to Paul Aron 　above).Yet this is a controversial point. Relevant research uses mostly 　secondary data and is by and large inconclusive. 　There is furthermore the complication of the concept of corporate 　earnings used in Japan. Following the German thinking that has flown into 　the construc- tion of the Japanese commercial code corporate earnings in 　Japan are basically seen as the source of funds that can be distributed as 　dividends if the stock- holders so desire. British-American thinking 　considers reported earnings as a corporate performance measure. The 　latter has an economic substance orientation whereas the former represents 　essentially cash flow thinking. The applicaton of different concepts of 　what corporate earnings represent clearly yields differentaccounting 　measurement approaches as well as different accounting process outputdata. At the beginning of the 1990s there were approximately eight hundred 　thou-sand kabushiki kaisha (limited liability companies−ＫＫ) in Japan. 　Approximate-ly three thousand of these had thier stock exchanges. Most of 　the publicly traded KK have relatively few shareholders. 　Under the provisions of the commercial code each KK is required to 　elect one or more statutory auditors at a general meeting. Statutory 　auditors do not have to have any particular professional qualification and 　may be reelected for two-year terms. A Kk with a stated capital of 500 　million yen or more or total liabilities of 20 billion yen or more must 　appoint at least two statutory au- ditors. One of these two is to be 　employed on a full-time basis. In addition such a (large) KK is required 　to appoint an accounting auditor who must be an independent CPA. 　The stockholders may dismiss the accounting auditor at any time at a 　gener-al meeting. The accounting auditor may also be dismissed by common 　consent of the statutory auditors in cases of negligence or violation of the rules of per- 　formane of professional duties. If dismissal by the statutory auditors occurs 　reasons for the dismissal must be presented at the first general 　meeting follow-ing the dismissal. During such a meeting the former 　accounting auditor has the right to express his or her opinion regarding the dismissal.12 　The Securities and Exchange Law (SEL) requires that all listed 　companies aswell as unlisted KK that have issued new shares or bonds in the 　amount of $10 million yen or more to the public must file annual and 　semiannual reports with the Ministry of Finance. Audit reports signed by 　independent auditors must ac- company each such filing. 　The Japanese Institute of Certified Public Accountants (JICPA) is 　organizedand operates much along the lines of the American Institute of Certified Public Accountants. In 1990 the JICPA had approximately eleven 　thousand members. Abouttwo thousand of these were junior CPAs. 　Entry to the Japanese CPA profession requires passage of three levels 　of examinations. The first level is preliminary and university and college gradu- 12AICPA 　The Accounting Profession in Japan (New York:AICPA 1988) p.6 　ates are exempt from this examination. The intermediate examination covers 　busi-ness administration and business law topics financial accounting and auditing practice and theory cost accounting bookkeeping and business 　economics. The pass rate for the intermediate examination is normally 　about 10 percent.Those who pass this examination are junior CPAs and 　become members of the JICPA. A junior CPA serves a three-year 　apprenticeship under the supervision of a CPA be-fore sitting for the final 　examination. The latter is a mixture of writtenand o-ral tests aimed manily 　at technical competence. Topics covered include financialanalysis audit case anlysis 　and complex taxation and accounting practice prob-lems. A 　written thesis must also be submitted. The pass rate for the final exam is approximately 20 percent. In all then entry to the Japanese accounting 　pro-fession is very restrictive by international stndards.