Sarbanes-Oxley: Japan gears up for SOX

While the US has had some spirited debate over the last few weeks about whether Sarbanes-Oxley needs reform, and if so, to what extent, Japan is also gearing up for its own version of Sarbanes-Oxley to go into effect in 2008.  The new Japanese regulations are being dubbed J-SOX.

Just as in the United States, the new law has drawn clear lines between its critics and supporters.  Regulators see a clear need to clean up a landscape that has seen a series of recent accounting scandals.  Investors worry that J-SOX could dampen an economy that has just recently seen modest growth after more than a decade of recession.

A number of scandals hit Japan in 2006.  For example, Livedoor, an Internet service provider based in Tokyo that ran a high-traffic web portal, was accused of fraud.  The allegations of fraud caused panic selling of shares on the Tokyo Stock Exchange  (TSE) in early 2006.  Trading volume was so strong when the story broke, the TSE’s computer system was overloaded and the market was temporarily halted, a first in Japan.  On March 16, 2007, Livedoor’s founder was sentenced to 2.5 years in Jail.

Other accounting scandals that occurred throughout Japan in 2006 included overstated profits by both Nikko Cordial and Misawa Homes Holdings Inc.

J-SOX has made Japanese companies worry about what kind of cost and time will be required to try to comply with the new regulations.  US companies will not be immune from the new rules.  Companies with international subsidiaries in Japan will need to come up to speed too.

Many US-based IT companies are beginning to study and come up to speed on exactly what will be required even though many of the specific details won’t be available until April 2007.

What is clear though is that IT companies will need to document the processes and controls relative to a company’s financial activities.  US subsidiaries may actually be at an advantage to local Japanese companies because their parent companies have already dealt with similar controls mandated in the US.

J-SOX is expected to affect about 3800 companies listed on the TSE.  Like Sarbanes-Oxley, J-SOX specifies strong internal financial controls and requires that company executives certify the accuracy of their financial statements.

In the US, one issue with Sarbanes-Oxley has been the vagueness in the specification of the rules.  In Japan, they’re trying to avoid that problem by making the rules very explicit, but the exact language is still being prepared.  Like the US, many companies are complaining that much more time and resources will be needed by companies in order to comply with new regulations. 

Like in the US, IT and accounting companies are seizing on the new rules as new revenue streams.  For example, Oracle Japan is offering software and consulting services to small and medium-sized companies for helping them comply.  IDC Japan is estimating that the J-SOX compliance market will reach 260.7 billion yen in 2008 with most of than money flowing into IT upgrades.