Audit

Audit

Question 1

Under the Corporate Law, Japanese joint stock corporations are permitted to choose between the traditional corporate governance system based on a board of statutory auditors (the "statutory auditor system") and a corporate governance system based on committees (the "committee system"). The vast majority of Japanese companies employ the statutory auditor system. For Japanese companies with the statutory auditor system, including us, the Corporate Law of Japan has no independence requirement with respect to directors. The statutory auditors, who are separate from the company's management, monitor performance of directors and oversee accounting firms and have separate staff to assist them in completing their tasks. Pursuant to the Corporate Law(Myers & Myers Skinner 2007), Japanese companies with a board of statutory auditors, including us, are required to have at least 50% of the statutory auditors to be "outside statutory auditors" as defined in the Corporate Law and who must meet independence requirements under the Corporate Law. Statutory auditors must not have served as a director, accounting officer (kaikei-sanyo), executive officer, manager or any other employee of the company or any of its subsidiaries. Currently, we have two outside Statutory Auditors. As discussed above, we employ the statutory auditor system. Under this system, our Board of Statutory Auditors is a legally separate and independent body from our Board of Directors. The function of our Board of Statutory Auditors is similar to that of independent directors, including those who are members of the audit committee, of a U.S. company(Francis Wilson 1988). In particular, their function is to monitor the performance of our Directors, and review and express on opinion on the method of auditing by our independent public accounting firm and on such accounting firm?s audit reports, for the protection of our shareholders. Japanese companies with a board of statutory auditors, including us, are required to have at least three statutory auditors. Currently, we have four Statutory Auditors. The term of each Statutory Auditor is four years. In contrast, the term of each of our Directors is one year.  Since July 31, 2005, when the requirements of Rule 10A-3 under the U.S. Securities Exchange Act of 1934 relating to listed company audit committees become applicable to foreign private issuers, we have relied on an exemption under that rule available to foreign private issuers with boards of auditors (or similar bodies), or statutory auditors meeting certain criteria. We make disclosure regarding such reliance in Item 16.D. to our annual report on Form 20-F. Directors are elected at a meeting of shareholders. The Board of Directors does not have the power to fill vacancies in the board.  The predominance of these corporate groups helps explain why the traditional Japanese audit model is different to that in western economies. In western economies, the goal of corporate governance is to ensure that management focuses on maximizing stockholder value, and external auditors are expected to support this process by providing independent verification of the financial statements. In Japan, auditors traditionally cooperate with management to help it achieve its goals, which are often more about serving the ...