DISCLOSURE: DISINFECTANT OR CERTIFICATION?
KEYWORDS: DISCLOSURE, ACCOUNTING, SECURITIES LAWS

"Sunlight is said to be the best of disinfectants;
electric light the most efficient policeman."
n    Justice Louis Brandeis, 1913

This is said to be the famous quote from the United States Supreme Court Justice which was used to justify the securities laws of the 1930s and the disclosure requirements they introduced. Since Japanese securities laws after the war were also mostly based on US securities laws one should not be surprised that Japan is now using the increasingly stringent disclosure requirements in the USA to justify similar moves in Japan. The timing of the interest in improving disclosure was with the enormous scandal with Seibu Railways, which had gotten away with lying about meeting stock market listing requirements for an astounding 40 years. Thus, just as was happening in the USA, Japan started introducing requirements that financial documents be “certified.” Starting with the companies with business years ending March, 2005 companies listed on the Tokyo Stock Exchange will be required to have their presidents or other representatives certify as to the accuracy of  their annual financial statements. However, these are only stock exchange regulations meaning that violators will only be delisted, other legal penalties are unclear. In November, 2004 the Financial Services Agency demanded that all 4500 companies audited for publicly trading purposes to check the accuracy of their financial statements filed under the securities laws and report if they found mistakes. The agency warned if the companies did not respond it would likely investigate them. The agency even set up a hot line and email address for people to secretly report problems. If the problems are not too serious the agency plans to grant amnesty while warning them to improve for the future. In December 2004 the agency received a report of another company, Nippon Shinpan, also manipulating its record of shareholding to misrepresent its situation financially. The investors sued the company for this in court, so one wonders why the agency did not know. Nevertheless, in December financial authorities and members of the ruling Liberal Democratic Party announced plans to impose penalties on firms that make false financial statements. The Financial Services Agency hopes to file a bill seeking such penalties in the Securities Exchange Law during 2005. The amendment is likely to include increased disclosure of relationships of directors and auditors. Greater clarity on the auditors will include their firms and how long they have had a relationship with the company, etc.  Listed companies with parent companies will be required to provide earnings information on those parents even if they are not listed on any stock exchange. The information is likely to include the balance sheet and income statement of the parent company. Information on major shareholders and executives will also be required.

There is some movement to permit foreign companies listed on Japanese stock exchanges to file their financial statements in English.

The Financial Services Agency was also planning on making changes making it easier for individual investors to file suit for losses incurred when corporations have disclosure failures. This would involve an amendment to the Securities Exchange Law. Under existing law the burdens for proving liability are difficult including proof that the failure to disclose was clearly related to the loss and proper disclosure would have prevented the losses. Moreover, such cases are only available in cases of new share issuances, not for existing shares. The new revisions would make it easier for investors to prove their losses and the timing of the purchase would be irrelevant.


The Financial Services Agency has also announced plans to penalize those making false statements in securities registration statements when they issue securities such as shares or bonds. The fine would be 2% of the proceeds from a share issue and 1% of the proceeds from a bond issue.

For financial statements beginning with business years ending March, 2005 publicly traded companies will have to disclose in their securities filings risk factors to their business, such as dependence on a few customers, dangers from regulatory changes, and if they are very dependent on certain products.

The Financial Services Agency plans to soon come out with guidelines for audited quarterly earnings reports that companies making securities filings for purposes of listing on stock exchanges must file. This is likely to included balance sheet and income statement.

The Financial Services Agency also launched a study group in 2004 on whether they should permit Japanese companies to use the “International” Accounting Standards, which is really the European accounting standards.

An advisory body to the Ministry of Justice has made a recommendation that Japanese corporations being acquired in a merger/acquisition must give explanations to their shareholders. This would include an explanation of the calculation of the valuation of the shares of the companies in the exchange, particularly where it involves more than just a share exchange, as well as an explanation on why management recommends the exchange. The information would be made available to all shareholders and could be put on websites.

Copyright 2005. All rights reserved Attorney Roderick H. Seeman

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