Internal Control Reporting System

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Overview of the Internal Control Reporting System
The Internal Control Reporting System requires listed companies to exercise internal control over financial reporting via management evaluations and external audits. The legal basis for this is the Financial Instruments and Exchange Law that was enacted in June 2006. Listed companies are obliged to submit an internal control report in the fiscal year style="color:black;font-weight:normal; text-decoration:none!important; background:none!important; text-decoration:none;">iphone photography commencing on or after April 1, 2008.
 * Management evaluation of internal control over style="color:black;font-weight:normal; text-decoration:none!important; background:none!important; text-decoration:none;">proposal software financial reporting (preparation of internal control report)
 * External audit of management evaluation of internal control over financial reporting (internal control audit)

Objectives of Internal Control
Internal control is a process undertaken by each member of an organization in order to achieve four company objectives:
 * 1) Effectiveness and efficiency of business operations
 * 2) Reliability of financial reporting
 * 3) Compliance with the laws and regulations applicable to business activities
 * 4) Safeguarding of assets

Components of the Internal Control Process
The internal control process consists of six basic components:
 * 1) Control environment
 * 2) Risk assessment and response
 * 3) Control activities
 * 4) Information and communication
 * 5) Monitoring
 * 6) Response to IT

Internal Control Report
The management of a listed company prepares a report in consideration of the following:
 * 1) Assessment points for company-level controls
 * 2) Scope of assessment for process-level controls
 * 3) Communication with style="color:black;font-weight:normal; text-decoration:none!important; background:none!important; text-decoration:none;">Chetan Kapur auditors
 * 4) Guidelines for determining material weaknesses
 * 5) Recording and retention of assessment procedures and other matters

In other words, the report must provide details regarding whether the risk of a misstatement arising in financial reporting has been reduced, among other things, by establishing the scope of assessments and analyzing business processes. If a material deficiency exists at the end of a fiscal year, the report must provide details of the deficiency and the reasons why it has not been rectified. It is not necessary to evaluate all style="color:black;font-weight:normal; text-decoration:none!important; background:none!important; text-decoration:none;">global community communications alliance business processes in full detail on a company-wide basis.

Internal Control Audit
Consideration is made to avoid an excessive audit operation burden by examining the operation of the internal audit system in the United States, which is an antecedent. In particular, there is a difference between the countries in the adoption of the direct reporting system (whereby an auditor identifies company risks independently of management assessment activities). While the direct reporting system has been adopted in the United States, only the assertion-based reporting system (a method of checking whether management assessment activities are conducted appropriately) is used in Japan. The internal control audit is carried out by the same person (certified public accountant) who conducts the financial statement audit.
 * 1) Using a top-down/risk-based approach
 * 2) Classification of internal control deficiencies
 * 3) Not adopting direct reporting
 * 4) Integration of internal control audit and financial statement audit
 * 5) Preparation of combined internal control audit report and financial statement audit report
 * 6) Coordination with corporate auditors/audit committee and internal auditors

Financial Services Agency Disclosure Documents
Setting the Standards and Practice Standards for Management Assessment and Audit of Internal Control Over Financial Reporting (Council Opinion)


 * Standards for Management Assessment and Audit of Internal Control Over Financial Reporting (22 pages)
 * Basic internal control framework
 * Assessment of and report on internal control over financial reporting
 * Audit of internal control over financial reporting
 * Practice Standards for Management Assessment and Audit of Internal Control Over Financial Reporting (91 pages)
 * Basic internal control framework
 * Assessment of and report on internal control over financial reporting
 * Audit of internal control over financial reporting

The Standards include definitions of the terms and matters to be included in the internal control report. For companies making preparations to implement an internal control reporting system, the Practice Standards illustrate the process for establishing internal controls over financial reporting. The three items (business process flowchart, business process description, and relationship between risks and controls) style="color:black;font-weight:normal; text-decoration:none!important; background:none!important; text-decoration:none;">Rhino Deck are also illustrated in the Practice Standards.

Legal Basis
The principles of the Internal Control Reporting System are recorded in Article 362 (Article 416) of the Companies Act and Article 24 of the Financial Instruments and Exchange Law, while details of the internal control report to be submitted are provided in the Cabinet Office Ordinance on an Internal System for Ensuring the Adequacy of Financial Calculation Documents and Other Information(Cabinet Office Ordinance No.62 dated August 10, 2007, revised June 6, 2008) (Vertically-written PDF version), although this does not provide specific practice guidelines.

Article 24-4-4-1 of the Financial Instruments and Exchange Law (extract) (amended June 13, 2008)

A company which is required to submit Annual Securities Reports under Article 24(1) shall, if the Securities issued by the company are those listed in Article 24(1)(i) or the company is otherwise required by a Cabinet Order, submit a report to the prime minister together with an Annual Securities Report under Article 24(8) for each business year. This report must contain an evaluation of its system pursuant to the provisions of a Cabinet Office Ordinance as required for ensuring the suitability of finance and accounting statements and other information concerning the company and the Corporate Group to which the company belongs (hereinafter referred to as an “Internal Control Report”).

Form No. 1
 * 1) Matters relating to the basic framework of internal control over financial reporting
 * 2) * Confirmation that the representative and chief financial officer are responsible for the development and operation of internal control over financial reporting
 * 3) * Names of the standards complied with when developing and operating internal control over financial reporting
 * 4) * Confirmation that not all financial reporting misstatements can be prevented or detected by conducting internal control over financial reporting
 * 5) Matters relating to the assessment scope, the base date, and assessment procedures
 * 6) * The base date when the assessment of internal control over financial reporting was conducted
 * 7) * Confirmation that the generally accepted standards for assessment of internal control over financial reporting were complied with when completing the assessment of internal control over financial reporting
 * 8) * Overview of the procedures for assessment of internal control over financial reporting
 * 9) * Scope of assessment of internal control over financial reporting
 * 10) ** The scope of the assessment of internal control over financial reporting and the procedures and methods of determining the assessment scope must be briefly outlined. If sufficient assessment procedures could not be carried out for part of the scope of internal control over financial reporting due to unavoidable circumstances, the scope and reasons must be stated.
 * 11) Matters relating to the assessment result
 * 12) * The result of the assessment of internal control over financial reporting must be stated in accordance with the classifications listed below:
 * 13) ** Confirmation that internal control over financial reporting is effective.
 * 14) ** Confirmation that internal control over financial reporting is effective, although some of the assessment procedures could not be carried out, including the assessment procedures that could not be carried out and the reasons why they were not carried out.
 * 15) ** Confirmation that internal control over financial reporting is ineffective since there is a material deficiency, including details of the material deficiency and the reasons why it was not rectified by the end of the fiscal year.
 * 16) ** Confirmation that the result of the assessment of internal control over financial reporting cannot be expressed because important assessment procedures could not be carried out, including the assessment procedures that could not be carried out and the reasons why they were not carried out.
 * 17) Additional notes
 * 18) * Subsequent events that have a significant impact on the effectiveness of internal control over financial reporting.
 * 19) * If any measure is implemented after the end of the fiscal year to correct material deficiencies, the details thereof.
 * 20) Special notes
 * 21) * If there is any matter that should be specifically noted on the assessment of internal control over financial reporting, this fact and the details thereof must be stated.

History

 * Dec. 2001: Enron scandal (Enron filed for bankruptcy)
 * Mar. 2004: Certification by a company representative regarding the fair disclosure of an annual securities report was put in place as a voluntary system from the fiscal year ended on or after March 31, 2004
 * Jan. 2005: At a general meeting, the Business Accounting Council made a decision to commence discussions on the development of an assessment standard by management and the auditing thereof by certified public accountants regarding the effectiveness of internal control over financial reporting.
 * Jul. 2005: The Internal Control Committee of the Business Accounting Council issued an introductory draft of the Standards for Management Assessment and Audit of Internal Controls Over Financial Reporting.
 * Nov. 2005: Tokyo Stock Exchange system failure (transactions in the morning session were brought to a halt)
 * Dec. 2005: The Internal Control Committee of the Business Accounting Council published the “Draft Standards for Management Assessment and Audit of Internal Control Over Financial Reporting”.
 * Jan. 2006: Livedoor scandal (officers were arrested)
 * Jun. 2006: The Financial Instruments and Exchange Law was enacted.
 * Nov. 2006: The Internal Control Committee of the Business Accounting Council issued an introductory draft of the Practice Standards.
 * Feb. 2007: The Business Accounting Council issued “Setting the Standards and Practice Standards for Management Assessment and Audit of Internal Control Over Financial Reporting (Council Opinion)”.
 * Mar. 2007: The Business Accounting Council issued the “Opinion on Establishing Quarterly Review Standards”.
 * Oct. 2007: The Planning and Coordination Bureau of the FSA issued the “Q&As on Internal Control Reporting System” (Q1 through Q20).
 * Jun. 2008: The Planning and Coordination Bureau of the FSA made some additions to the “Q&As on Internal Control Reporting System” (Q20 through Q67).
 * Mar. 2009: Book closing activities for the fiscal year starting on or after April 1, 2008 will commence.

Relationship with BPM
For management to conduct an independent internal control of the company, the following conditions must be met:
 * Business processes must be defined and made clear; and
 * Management must be able to control businesses so they operate in accordance with business processes; and
 * The results of business operations must be monitored.

These activities reflect business process management (BPM), and they are essential in order for management to fulfill its obligations, such as preparing a report on the status of the company’s implementation of internal control in accordance with this reporting system.

Listed companies and companies preparing for listing are required to establish an internal control system by introducing the concept of the BPM system in order to achieve BPM using IT in accordance with this system.

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