Why J-Sox is Not Sarbanes-Oxley

But the origins and intent of J-SOX are different from what happened in the United States. Instead of being propelled by political backlash from burned individual investors, Japan's new regulatory initiative is being driven by FSA bureaucrats who want to crack down on pro- North Korean interests and criminal groups who have been engaging in fraud and manipulating stocks.

Since the March 2004 accounting season, companies listed on the Tokyo Stock Exchange and other Japanese securities exchanges have been voluntarily submitting "confirmation" letters to vouch for the accuracy of their filings. But the Japanese market has been gripped by a string of massive accounting frauds committed by Livedoor and the Murakami Fund, both of which are alleged to have backing from Koreans living in Japan who are sympathetic to North Korea.

The yakuza, or organized crime syndicates, are also happily on the romp on the TSE's Mothers and the Osaka Securities Exchange's Hercules sections for small-cap and start-up ventures. "Substantial portions" of the 120 Mothers-listed companies and even a larger percentage of those on the Hercules are yakuza-linked, one insider tells Directorship.

So the FSA has decided to require companies to observe the new guideline closely, instead of asking them to comply voluntarily, says Hajime Onuki, deputy chief accountant of the FSA's Corporate Accounting and Disclosure Division. The guideline is meant to help publicly traded companies achieve four goals: effectiveness and efficiency of corporate operations; reliability of treasury documents; compliance with laws and regulations; and safekeeping and maintenance of assets.

J-SOX is very different from America's Sarbanes-Oxley law in part because Japan's economy rests on a structure of keiretsu, or large industrial groups, rather than stand-alone corporations. The new guideline is expected to prompt groups such as Hitachi, which has hundreds of small units, to consolidate subsidiaries into bigger units.

And the new guideline is softer in some ways than U.S.- SOX. It will require businesses to publicly disclose governance- related errors and defects that would be deemed to change group pretax income by more than 5 percent. That is much looser than SOX's requirement that any "material" error be disclosed.

Another difference is that Japan won't require auditors to report back to any government entity and will also allow them to work with documents given them by businesses rather than having to generate as much paperwork as the U.S. law requires.