Adoption of the IESBA Code based on the

Adoption of the IESBA Code based on the Auditing and Accounting Environment in Japan Toshihiro Yasada Vice-Chairman, JICPA Ethics Committee Chairman, JICPA Ethics Working Group IESBA Meeting New York April 13 -15, 2015 Page 1 | Proprietary and Copyrighted Information

Table of Contents 1. Japanese Laws and Regulations with Standard Setters 2. Overview of Accounting and Auditing Environment in Japan 3. History 4. The CPA Act, related regulations and JICPA Code of Professional Ethics 5. The CPA Act 6. JICPA Code of Professional Ethics 7. Due Process for the JICPA Code and the Guidance 8. Overview of JICPA Code Compared to IESBA Code 9. The Structure and Layout of “JICPA Code of Professional Ethics ” 10. Difference (More restrictive and additional guidance) 11. Partner Rotation Requirements in Japan 12. Public Interest Entities 13. JICPA Member 14. Our Challenges to Respond to IESBA’s Future Changes Page 2 | Proprietary and Copyrighted Information

1. Japanese Laws and Regulations with Standard Setters The Diet approval or Government Ethics The CPA Act Independent Standard Setter JICPA Code of Professional Ethics and Related Guidance ASBJ - Accounting Standards Guidance Financial Statement Auditing ※ 2 The Companies Act Financial Instruments and Exchange Act (FIEA) Ordinance on the Disclosure The Companies Act FIEA Ordinance on Audit Certification Business Accounting Council - Auditing Standards Internal Control FIEA Ordinance on internal control Business Accounting Council - Internal Control Management Assessment Standards(※ 3) Business Accounting Council - Internal Control Audit Standards(※ 3) Auditing Standards Committee Statements and Related Guidance Professional ※ 1 Accounting Internal Control Audit FIEA Ordinance on internal control Guidance ※ 1 JICPA has adopted IESBA code but there are some more stringent provisions. See page 13. ※ 2　 Japan GAAS is fully converged with ISA. ※ 3 Internal Control Management Assessment Standards and Internal Control Audit Standards are set as a single Standard. Page 3 | Proprietary and Copyrighted Information

2. Overview of Accounting and Auditing Environment in Japan • • • Approx. 3, 600 listed companies and approx. 6, 000 non listed companies are subject to statutory audit. 　 (The Companies Act and/ or Financial Instruments and Exchange Act (FIEA)) Japan GAAP is applied for majority of the companies subject to audit. US GAAP and IFRS are permitted in accordance with FIEA. US GAAP is used mostly by Japanese listed companies which are also SEC registrants (Foreign Private Issuers). Japanese companies which voluntarily apply IFRS, are increasing and expected to increase more and more. HITACHI, HONDA, MITSUBISHI CORP. and so on. Internal control audit is required for listed companies. 　Internal control audit in Japan is similar to the US sox. (There are some differences, such as direct reporting vs. indirect reporting. ) Page 4 | Proprietary and Copyrighted Information

3. History Event Financial Crisis US SOX IESBA recent revision IESBA IAASB Clarity Project ended IAASB 1948 CPA Act 1949 1950 Other 2001 2002 2007 2008 2009 2010 2011 2012 2013 2014 Established JICPA Professional Ethics GAAS 1966 Established the Code of Ethics 201407 Revised Adoption Established the Auditing Standards Revised Auditing Standards based on IAASB Clarity Project Fraud Risks Standard ・IC Audit Standards(※ 1) ・Q Review Standards(※ 2) ※ 1 Internal Control Audit Standards ※ 2 Quarterly Review Standards Page 5 | Proprietary and Copyrighted Information

4. The CPA Act, related regulations and JICPA Code of Professional Ethics - Overall Picture JICPA Constitution Members are required to comply with the constitution in accordance with the CPA Act JICPA Code of Professional Ethics IESBA Code of Ethics Adoption The CPA Act and related regulations CPA Qualification and etc. Qualification More stringent rotation requirements and other requirements Guidance on Independence Guidance on Conflicts of Interest General guidance Page 6 | Proprietary and Copyrighted Information

4. 2. The CPA Act, related regulations and JICPA code of professional ethics (The relationship among laws, regulations, code and guidance) The Certified Public Accountants Act（and Financial Instruments and Exchange Act and The Companies Act） IESBA Code of Ethics JICPA Constitution JICPA Code of Ethics Annotated Guidance on Independence Guidance on Conflicts of Interest Interpretive Guidance for Independence (in response to the CPA Act) Interpretative Guidance for the Professional Ethics Self-regulation Laws and regulations Page 7 | Proprietary and Copyrighted Information

5. The CPA Act • Chapter 1 　General　Provisions　（ Mission, Professional Responsibilities, Services, Qualification, etc. ） • Chapter 2 　Certified Public Accountant Examination, etc. • Chapter 3 　Registration of Certified Public Accountant • Chapter 4 　Obligations of Certified Public Accountants 　The Large Companies, etc. and the partner rotation requirements for the Large Companies • Chapter 5 　Responsibilities of Certified Public Accountants • Chapter 5. 2 -5. 5 　Audit Firm etc. 　 Partner rotation requirements for audits of listed companies conducted by the Large Audit Firms • Chapter 6 　CPAAOB • Chapter 6. 2 JICPA 　 Members must comply with the JICPA Constitution. • Chapter 7　Miscellaneous　Provisions • Chapter 8　 Penal　Provisions Page 8 | Proprietary and Copyrighted Information

6. JICPA Code of Professional Ethics ・ JICPA has adopted IESBA code and some rules are more stringent than those in IESBA code. See page 13. ・ JICPA Constitution Para. 43 / Members are required to comply with JICPA Code of Professional Ethics. ≪JICPA Code of Professional Ethics ≫ 　　Chapter 1 General Application of the Code (Purpose and Fundamental Principles and etc. ) 　　Chapter 2 Professional Accountants in Public Practice 　　Chapter 3 Professional Accountants in Business ≪A separate set of guidance is provided as follows: ≫ 　　Guidance on Independence / Detailed guidance with more than 90 pages 　　Guidance on Conflicts of Interest / Detailed guidance provided with case examples 　　General Guidance / Q & A type of guidance and etc. Page 9 | Proprietary and Copyrighted Information

7. Due Process for the JICPA Code and the Guidance 1 st Step JICPA Working Group 2 nd Step JICPA Ethics Committee　※including public members 3 rd Step JICPA Board Meeting 4 th Step JICPA Annual General Assembly ※Before the JICPA Code and / or the Guidance are finalized, JICPA issues its Exposure Draft to seek public comments. Page 10 | Proprietary and Copyrighted Information

8. Overview of JICPA Code Compared to IESBA Code JICPA Code IESBA Code ●JICPA Code of Professional Ethics Chapter 1 General Application of the Code (Purpose, Fundamental Principles and etc. ) PART A （Section 100～ 150） General Application of the Code (Fundamental Principles and etc. ) Chapter 2　Professional Accountants in Public Practice PART B （Section 200～ 210・ 230～ 280） 　Professional Accountants in Public Practice Chapter 3　Professional Accountants in Business PART C （Section 300・ 320～ 350） 　Professional Accountants in Business ●Guidance on Independence PART B （Section 290・ 291） 　Independence ●Guidance on Conflicts of Interest Chapter 1　Professional Accountants in Public Practice PART B （Section 220） 　Conflicts of interest Chapter 2　Professional Accountants in Business PART C（Section 310） 　Potential Conflicts Page 11 | Proprietary and Copyrighted Information

10. Difference (More restrictive and additional guidance) JICPA Code The CPA Act and FIEA More restrictive provisions than IESBA Code ・Referral Fees ・Gifts and Hospitality ・Confidentiality ・Partner Rotation for the Large Companies audit ( See next page) Additional provision to JICPA Code of Professional Ethics ・ Mutual Conference between Members ・Prohibited Conduct against Other Members ・Maintenance of Quality ・Prohibition of Name Lending ・Expression of Opinions Regarding Future Events ・Name of an Audit Firm NOCLAR / FIEA 193 -3 requires CPAs and audit firms (correctively “PA”) to report the matter to issuers when PA becomes aware of information concerning an instance of non-compliance or suspected noncompliance with laws and regulations if the matter could significantly affect the financial information. Then, if the issuer has not taken an appropriate action within the required period and the matter could substantially affect the financial information, PA must disclose the matter to the Financial Services Agency. Page 13 | Proprietary and Copyrighted Information

11. Partner Rotation Requirements in Japan Listed Companies Audit Conducted by the Large Audit Firms （※） Other than the above Time on period Cooling-off period ・LAEP ・EQCR 5 5 ・ KAPs other than LAEP and EQCR 7 2 All KAPs 7 2 (※) Audit firms which audit 100 or more listed companies (the Large Audit Firms) must follow a five year time-on and five year time off rotation rule for the lead engagement partner and the engagement quality control review partner, in auditing listed companies. More than 150 small or medium firms which are not the Large Audit Firms above, audit listed companies. Page 14 | Proprietary and Copyrighted Information

11. 2. Partner Rotation Requirements in Japan / Exceptional case Normal course of partner rotation LAEP LAEP 5 years cooling off KAP KAP 2 years cooling off 　Exceptional case / when a LAEP or a KAP takes “off” for years less than 5 years or 2 years LAEP Off LAEP 5 years cooling off KAP Off KAP If there is an exceptional case above, the CPA Act stipulates that the interim “off” period which is less than the required cooling off period (5 years for LAEP or 2 years for KAP) shall be a deemed “on” period. (By deeming that an audit or audits have been provided even during the periods for which the services have actually not been provided (the above “off” periods), 2 year or 1 year off period in the above case is included in 5 or 7 year count. ) Page 15 | Proprietary and Copyrighted Information

12. Public Interest Entities 　 　　　　　 JICPA Code PIE The Large Company based on The CPA Act - Listed Companies Banks, Long-term Credit Banks Insurance Companies Other financial institutions and certain other companies specified in the provision Additional Entities - Certain Large regional financial institutions and etc. Page 16 | Proprietary and Copyrighted Information

13. JICPA Member（1/3） Number of Membership (as of March 31, 2014) Individual Members　 Audit Firms Individual Associate members TOTAL By gender ：Male 28, 803, Female 4, 559 26, 263 216 7, 543 34, 022 ※JICPA set up JICPA’s committee on professional accountants in business in August, 2012 and approx. 1, 000 members as at December 31, 2014 participate in this committee. This does not cover all PAIB, and, thus, we do not know how many professional accountants work in business. In addition, there a lot of accountants working in business who are qualified to become a CPA but not registered. Page 17 | Proprietary and Copyrighted Information

13. JICPA Member（2/3） • Mandatory Registration – A person who is qualified to become a certified public accountant shall register on the certified public accountants roster in order to become a certified public accountant. – A certified public accountant or an audit firm shall automatically become a member of the Institute. – A person who has passed the certified public accountant examination who has interned for two years or more as prescribed in Article 15(1) and has completed the professional accountancy education program as prescribed in Article 16(1) and received the confirmation from the Prime Minister under the provisions of paragraph (7) of the same Article is qualified to become a certified public accountant. Page 18 | Proprietary and Copyrighted Information

13. JICPA Member　（3/3） • Continuing Professional Education（CPE）Requirements – 20 credits during a year at minimum – 120 credits during three consecutive years at minimum – Professional ethics courses are included in the required credits. Page 19 | Proprietary and Copyrighted Information

14. Our Challenges to Respond to IESBA’s Future Changes（1/3） • Historically, non audit practices have been much smaller in size than audit practices in Japan compared to the US and other major European countries. Recently, non audit practices have continued to grow and will grow faster than in the past. The provisions of JICPA code related to non audit services are the same as IESBA code and rather more restrictive but we pay attention to EU regulatory developments. Page 20 | Proprietary and Copyrighted Information

14. Our Challenges to Respond to IESBA’s Future Changes（2/3） • Historically, the number of PAIB has been very limited and most of JICPA members have been professional accountants in public practice who work with the firms or as a sole proprietorship. 　In particular, there has been a very small number of senior PAIB working for the listed companies as CFO, executive officers and other management functions. However, the number of PAIB is increasing. Thus, we pay attention to the future revisions of IESBA code. Page 21 | Proprietary and Copyrighted Information

14. Our Challenges to Respond to IESBA’s Future Changes（3/3） • More than 150 of small or medium audit firms audit listed companies. • Considering the trend in our profession in Japan, it is our important challenge to raise awareness and enhance understandings of our code and activities among investors and other stakeholders in Japan and to make our profession more attractive. Page 22 | Proprietary and Copyrighted Information

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