The Financial Services Agency's audit subcommittee agreed in broad terms on 2 October to send a draft revision of Japan's auditing standards out for public comment, according to the published minutes of its 57th meeting. The draft would lengthen the going-concern look-ahead and add a going-concern section to more audit reports. Members used the session to argue about what the draft leaves to others.
See also: Earlier Tokyo Brief coverage.
What the draft changes
Auditors would have to assess management's going-concern evaluation over at least one year after the approval date of the published financial statements. The secretariat said current practice is a reasonable period of at least one year from the closing date.
The audit report change is wider. The existing requirement to report a material uncertainty stays unchanged. What is new is a going-concern section in the audit report where no material uncertainty is identified. Where management made significant judgments in concluding that no material uncertainty exists, auditors would explain how they examined its assessment. The revised standard would apply from fiscal years ending March 2028, and the Japanese Institute of Certified Public Accountants is asked to produce practice guidance quickly.
On fraud, the draft leaves the standard text alone. The secretariat said Japan's fraud risk response standards already contain the core of the revised international standard on fraud (ISA 240), so practical changes would come through practice guidance.
Where members pushed back
The sharpest objection was about accounting rules, not auditing rules. One absent member, writing in, said Japan is effectively the only major jurisdiction without an accounting standard that makes management assess going concern and disclose the result in the notes. The member said the Accounting Standards Board of Japan's project description focuses on moving existing JICPA guidance. The member urged that the board be pressed to develop a standard consistent with international rules, and, if the board did not or could not act, that the council consider drafting one.
The chair said the audit standard should not dictate accounting standards, and that the secretariat had been asked to keep that content short. Another member warned that, without a note requirement, auditors might end up pointing to the business-risk section of the securities report, which sits uneasily with the long-held dual-responsibility principle. A further member also asked the FSA to push for a standard matching IFRS and US rules.
On fraud, one member asked the FSA to show what it had verified about actual fraud cases before concluding no change was needed. Another noted that the 2013 fraud risk response standards apply only to listed companies and asked for consideration of large unlisted ones. The secretariat said it would take note but could not decide on the spot. A third member urged follow-up checks for unintended effects, such as auditors avoiding riskier clients.
Several members asked that healthy companies not be told they face extra work. One member worried that disclosures could turn into boilerplate.
Next steps
The chair said the draft was broadly agreed, and members left drafting changes to him. The secretariat said the text would be shared with members by email or similar means and promptly put to public comment, with a comment period of about a month. The FSA's planning and markets bureau chief said the agency aims to bring it to the council's plenary quickly afterwards. No date is set for the next subcommittee meeting.