Tokyo Report: 2.1 Pct of Firms Report Poor Internal Controls

Tokyo, Aug. 10 (Jiji Press)--New corporate governance rules have
unearthed problems in internal financial controls at 2.1 pct of the listed
Japanese companies that have released assessment reports, according to a
Jiji Press survey.
The relatively low figure should not be taken at face value because
companies that strictly assessed their internal financial control systems in
line with the rules may be disadvantaged, experts say.
The new rules, which require listed companies to review their
internal controls, were introduced to prevent accounting fraud and enhance
the credibility of corporate financial reports. Starting with book closings
for fiscal 2008, which ended in March, listed firms disclose the findings of
their own assessments.
The rules are modeled after those of the United States. Problems
highly likely to lead to improper accounting procedures, such as falsified
information in financial statements, are reported as "serious defects" in
internal controls.
By the end of July, 2,708 listed companies released reports on
their assessments. Among them, 58 reported defects that could result in
errors in their financial statements.
Meanwhile 2,641 companies, or 97.5 pct of the total, found their
internal controls to be "effective." The remaining nine firms said they have
failed to complete their assessments for such reasons as manpower shortages.
Companies listed on the Jasdaq Securities Exchange accounted for
the largest portion of the 58 firms reporting serious defects.
Among the 58 was Nishimatsu Construction Co. <1820>, whose former
president was charged for violating the political funds control law, and
Daikin Industries Ltd. <6367>, which was discovered to have engaged in false
bookkeeping.
According to Pronexus Inc. <7893>, which provides client companies
with support services for investor relations activities, in the first year
of the reporting system in the United States, serious defects in internal
controls were reported by 16.3 percent of companies.
The share is low in Japan as the Japanese system is more flexible
and was introduced after a long period of preparations, a Pronexus official
said.
But the low figure means companies that have revealed defects in
their internal controls stand out and may become the subject of damaging
rumors, and companies may be reluctant to assess themselves objectively.
Yoshihiro Machida, a professor at the graduate school of Aoyama
Gakuin University in Tokyo, says that companies reported defects because
they "thoroughly" reviewed their internal systems. "The reporting system
should not disadvantage such companies," he added.
The new rules are designed to allow companies to discover problems
they need to resolve, the Pronexus official said. The reporting system is
"wrong if it makes companies feel ashamed of having defects and reluctant to
disclose them."
To prevent companies from hiding problems in their internal
controls, more studies of the new rules, including whether expressions like
"serious defects" are appropriate, should be conducted, experts say.