JAPAN Law and Practice Contributed by: Hiroshi Mitoma, Tomohiko Iwasaki, Kosuke Hamaguchi and Akira Komatsu, Nagashima Ohno & Tsunematsu
6. Audit, Risk and Internal Controls 6.1 External Auditors The following categories of joint stock companies must appoint an accounting auditor: • a large-sized company ( daigaisha ); • a company with an audit and supervisory commit - tee; and • a company with nominating and other committees. An accounting auditor must be appointed from among external auditing firms or licensed accountants. For publicly traded companies, the accounting auditor usually provides audit certification on the financial statements filed under the FIEA. In order to ensure independence of an accounting auditor, the Companies Act bars interested firms or persons with ties to the company from serving as an accounting auditor. Also, with the aim of shielding an accounting auditor from undue influence from the management, the board of statutory auditors (or their equivalent), rather than the board of directors, has the right to approve the appointment, removal and com - pensation of the accounting auditor. With respect to an accounting audit for a listed com - pany, a statutory registration system is in place where the Japanese Institute of Certified Public Accountants assesses the appropriateness of an external auditing firm, etc that engages in an accounting audit. 6.2 Risk Management and Internal Controls In relation to geopolitical risk, compliance with trade controls, investment controls and economic sanctions has been enforced under the Foreign Exchange and Foreign Trade Act. In 2022, the Economic Security Promotion Act was enacted, introducing four new regulatory frameworks: • ensuring stable supply of critical materials; • ensuring stable provision of essential infrastructure services; • supporting the development of advanced critical technologies; and • establishing a non-disclosure system for patent applications.
Government authorities are expected to address geo - political risks primarily through these statutory frame - works. Companies are required to comply with these laws and regulations related to economic and national security, and the board of directors is expected to oversee such compliance including the internal sanc - tions based on their fiduciary duties. 7. Environmental, Social and Governance 7.1 ESG Requirements The Corporate Governance Code suggests that a listed company: • take appropriate measures to address sustain - ability issues, including social and environmental matters; • develop a basic policy for the company’s sustain - ability initiatives from the perspective of increasing corporate value over the mid- to long-term; and • appropriately disclose its initiatives regarding sus - tainability in its management strategies and provide information on investments in human capital and intellectual properties. In addition, under the FIEA, publicly traded com - panies (in this context, listed companies and other companies that are required to file annual securities reports under the FIEA) are required to disclose their notion and efforts on sustainability in annual securi - ties reports. 7.2 ESG Developments While there have been notable anti-ESG policy move - ments in the global political landscape, particularly under the Trump administration in the United States, Japan views ESG as a long-term social issue rather than a partisan matter. Accordingly, Japan continues its commitment to addressing ESG issues, and there has been no significant shift away from the promotion of ESG initiatives.
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