Research Project on the Design for the Optimum Disclosure System Volume 3: The Status quo and Problems with the Internal Control Report System

The Internal Control Report System (herein after System) was introduced in Japan in the fiscal years beginning on or after April 1, 2008, and listed companies have therefore experienced three years of compliance reporting based on the new internal control reporting requirements. In this paper, we assess the implementation of the internal control requirements, wherein we show that the Japanese word used to match the English word "material weakness" causes an unnecessary burden. Thus far, considerable efforts have been made to improve the effectiveness and efficiency of the System. The Business Accounting Council is currently working on a review of the System in order to make mid-course corrections to the reporting and auditing components of an internal control over financial reporting. In December 2010, the BAC issued an exposure draft of the revised Standards and Practice Standards for Management Assessment and Audit concerning Internal Control over Financial Reporting, which proposed to give the listed companies, especially smaller companies, considerable flexibility in determining how to implement the internal control requirements. The exposure draft also proposes to change the aforementioned Japanese word that is used to match the English word "material weakness." With the age of IFRS near at hand, the revised standards are expected to enhance the effectiveness and efficiency of the System.