Subsidiaries of Japanese firms are at risk as Japan introduces its own Sarbanes-Oxley Act

Subsidiaries and affiliates of Japanese firms could be exposed to risks associated with new Japanese internal controls and financial reporting laws, which came into force on April 1.

Japan's Financial Instruments and Exchange law, or J-SOX, as it is informally known, is modelled on the US' Sarbanes-Oxley Act.

Failure to comply could lead to fines and imprisonment.

J-SOX aims to improve the transparency and accountability in business processes for all Japanese listed companies.

“Failure to comply may have significant penalties for senior management in Japan, including fines and imprisonment, warned Marsh.

Approximately 3,800 Japanese listed companies, including their significant subsidiaries and affiliates, fall under the J-SOX requirements.

The law requires companies to review how risk is managed across the entire group, and focus on the risks that could create material misstatements in financial reporting.

Abigail Simpson, a senior consultant in Marsh’s risk consulting practice, commented: ‘The requirement for all listed companies to review how well risk is managed, both at company level and at process level, in the context of financial statements is a new concept for many Japanese organisations. As a result, this requirement has proved challenging and has been fuelled by the limited number of accountants, auditors and consultants to assist with the implementation of the regulations.’