CASE 8.3
KANSAYAKU
Synopsis
This case focuses on Japan’s accounting profession and independent audit function. As this
case documents, the accounting profession and independent audit function within the U.S. and Japan
are very similar in many respects but very dissimilar in others. Similar to the United States, Japan’s
accounting profession has historically been dominated by a small number of large accounting firms.
In fact, each of Japan’s four largest accounting firms is affiliated with one of the Big Four
Similar to the United States, Japanese auditors have faced mounting criticism in recent years as
a result of a series of high profile accounting and auditing failures. Much of this criticism stemmed
from revelations that several of the large “mega banks” that have dominated Japan’s post–World War
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Kansayaku—Key Facts
1. Similar to the United States, the public accounting profession and independent audit function in
Japan are dominated by a small number of large accounting firms.
2. On a per capita basis, Japan has significantly fewer CPAs than any other industrialized
4. The criticism of Japan’s independent audit function focused on allegations that the close
5. Allegedly, independent auditors in Japan routinely subordinated their professional judgment to
the wishes and demands of client executives.
7. The first major test of this new regulatory framework was posed by an accounting and auditing
scandal involving Kanebo, Ltd., a large cosmetics and apparel company.
9. Kanebo’s independent auditors not only ignored the material misrepresentations in Kanebo’s
10. Despite the fact that Kanebo’s top executives and the company’s independent auditors either
11. Among the most significant results of the Kanebo scandal was the two-month suspension
imposed on the company’s independent audit firm, ChuoAoyama.
12. The unprecedented suspension of ChuoAoyama signalled that Japan’s regulatory authorities
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Instructional Objectives
1. To demonstrate how cultural norms and values can impact a nation’s financial reporting system,
accounting profession, and independent audit function.
Suggestions for Use
This case provides students with an opportunity to compare and contrast the accounting
profession and independent audit function of two of the world’s major economic powers, namely,
Japan and the United States. No doubt, by the time you assign this case there will be more “news
items” regarding the Japanese accounting profession. To initiate discussion of the case, you might
Suggested Solutions to Case Questions
1. Consider assigning individual student groups specific issues or topics to investigate and report
on in class. For example, you might have one group research recent developments regarding the
2. In any economy, the parties that are the principal source of capital for business organizations
will obviously be among the principal stakeholders in that economy’s financial reporting process.
Not surprisingly, individual audit firms, rule-making authorities, and professional organizations will
likely feel some pressure or need to cater (or kowtow) to the information needs of those principal
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primarily by the reluctance of audit firms to encourage those institutions to provide adequate loss
reserves for their huge loan portfolios. Likewise, audit firms were not inclined to issue unfavorable
3. Advantages of high barriers to entry to a given profession:
a. As a general rule, only highly qualified individuals will enter the profession.
Disadvantages of high barriers to entry to a given profession:
a. There may not be a sufficient number of professionals to meet the public’s demand
4. Advantages of an oligopolistic market structure for audit services:
a. The major accounting firms should have sufficient economic resources [manpower,
etc.] to audit the largest companies in the economy.
Disadvantages of an oligopolistic market structure for audit services:
a. The small number of major accounting firms means that companies, particularly large
companies, that want to change auditors will have few replacement auditors to choose
from.
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5. Listed next are examples of measures that have been taken in the U.S. and other countries to
strengthen the independence of auditors:
a. Rotation of audit engagement partners after a given period of time
b. Restrictions on the types of consulting services audit firms are allowed to provide to
their clients
c. Public disclosure of audit and non-audit fees
d. Prohibiting auditors from having direct financial interests in clients
Next are examples of other measures that have been suggested by various parties to further
strengthen the independence of auditors:
a. Establishing a government agency [patterned after the IRS] that would audit the
financial statements of public companies