J-SOX: The Good, The Bad, and the
(Not So) Ugly
The Financial Instruments and Exchange Law is Japan's version of the Sarbanes-Oxley Act, or SOX, hence its informal name of J-SOX. Scheduled to go into effect for Japan's 3,800 listed companies and their foreign subsidiaries in April 2008, J-SOX is being adopted by many firms right now. SOX was adopted following the Enron scandals that rocked the US business world, and J-SOX is being instituted in the wake of corporate misconduct as exemplified by Livedoor and Seibu Railway.

SOX has elicited a chorus of complaints from US businesses who argue it puts them at a disadvantage in world capital markets and has driven listings of public companies overseas. Japan's regulators have sought to avoid the missteps of SOX by implementing a less onerous regime based on broad principles that leaves much of the actual procedures up to company managers.

This has led to the usual debate and trade-offs between the "rules regime" of the US and the "principles environment" of most other places. Putting specific rules in place leads to an outcry about their inapplicability to specific firms and their high expense, but people know what they're supposed to be doing. Providing just general principles will elicit fewer complaints from Japanese companies, but also a lot of confusion about just what they should do to comply.

Among the worries Japanese managers have is finding the personnel to do the work. Japan has only about 17,000 CPAs, a small fraction of the number in the US, and importing Japanese-speaking accountants from abroad does not seem a realistic possibility. Audit automation will thus be critical to the process.

Not surprisingly, many Japanese business people don't even know what J-SOX is. In an online survey taken in April, some 46% of respondents had never heard seen or heard of the "SOX Law." One problem the authorities face in gaining broader recognition is that, like many new words and acronyms written in katakana or romaji, J-SOX means little to the ordinary Japanese.

Will J-SOX do much good? My view is colored by my experience as an accountant, but my prejudice is that rules that heighten the awareness of internal controls and their importance to both the audit and work processes are to be welcomed. Although initially met with complaint and resentment, they can be the catalyst for introducing operating improvements that benefit the long-term health of the firm.

In the Harvard Business Review (April 2006), two Deloitte executives contributed the article The Unexpected Benefits of Sarbanes-Oxley. The authors noted that the introduction of SOX, along with its drawbacks of higher expense, has had significant benefits, including standardizing work processes, reducing complexity, and minimizing the human error caused by manual processes.

Of course, it may be impossible to have spent the kind of money spent on SOX without experiencing some ancillary benefits, and there may have been far more efficient ways of bringing about these improvements. Moreover, there's no guarantee that any similarly benign effects will be seen in Japan.

Nevertheless, smart managers will look past the immediate costs and hassle of J-SOX and see it as an opportunity to review and overhaul their work processes and introduce new technology that both safeguards shareholder assets and improves company operations.