Nomura Research Institute, Ltd. (NRI: Tokyo, Akihisa Fujinuma, President, CEO & COO) has undertaken a survey of Japanese companies regarding the implications of a Japanese version of the Sarbanes-Oxley Act. The Japanese version of the law (J-SOX) is expected to be introduced in the near future.*¹ The NRI survey shows that nearly 90% of companies are aware that the Japanese government is considering introducing J-SOX, and more than 60% of companies have begun preparing to comply with the law in some way or another.

At the present time companies are primarily taking a passive approach. NRI's analysis shows that many issues must be faced by companies if they intend to both meet the letter and spirit of the law "accuracy in financial reporting", as well as leverage compliance activities to improve corporate value through the implementation of an ERM (enterprise risk management) framework.

Respondents to the NRI survey consisted of major companies listed on the First or Second Sections of the Tokyo Stock Exchange, or the Mothers or JASDAQ markets. The survey was carried out in December 2005 and replies were obtained from 380 companies.*² A total of 86.1% of respondents were aware that the government is considering introducing J-SOX (Figure 1) and 61.2% of respondents replied that they had looked over the exposure draft issued in July 2005 by the Financial Services Agency (Figure 2). Furthermore, the survey showed that at the present time 63.4% of companies have already taken some action (consulting with external experts, launching of projects, appointing project leaders, etc.), a very high proportion (Figure 3). However, looking at the types of actions being made, these are mostly preparatory stage efforts such as "consulting with external experts" (61.9%), "launching of projects" (31.0%), or "appointing project leaders" (34.7%), etc. Only 23.0% of companies said that they "have actually started taking concrete actions" to meet the requirements (Figure 4).
Broken down by industry and with respect to both J-SOX awareness and the status of specific actions taken, the high level of engagement in the financial industry stood out. It was also apparent that the service industry and trading industry (and the like) lag slightly behind other industries (Figures 5 and 6).

Furthermore, 80.5% of respondents claimed that the costs of meeting the J-SOX requirements were expected to be "very large" or "large", enough to infer that companies have a strong sense of the burden (Figure 7). Concerning their attitude toward the act, 16.1% of respondents replied that they wanted to "ensure a high level of compliance even if it entails significant cost" while the majority of companies replied that they would "ensure a level of compliance equal to that of other companies" (47.1%) or would "Ensure the minimum necessary level of compliance with a minimum expenditure" (36.8%). It cannot be denied that there is a quite passive aspect to these replies (Figure 8). The survey also revealed that many of the respondents (61.3%) consider "documentation of controls" to be a particularly difficult aspect of the requirements to be met (Figure 9).

By comparison, in the United States, where companies are advanced in their implementation of the internal control requirements, there is an awareness that implementing risk management mechanisms such as "risk assessments" "embedding controls in daily activities", "thorough employee training" etc., are more important for meeting the requirements of the Sarbanes-Oxley Act. Furthermore, faced with significant perennial risk management system operating costs, companies in the United States have come to recognize the importance of "risk assessments" and "assignment of risks" in keeping down these recurring operational costs.

The above shows that although awareness of J-SOX is currently high among Japanese companies, most efforts to meet the requirements have been passive. NRI's analysis indicates that Japanese companies need to shift to a mid/long-term strategy of implementing full-scale company-wide ERM structures. And we believe that ex-ante "risk assessments" and "assignment of risks" are extremely important for reducing operating costs.

NRI will continue to conduct surveys and analyze the efforts taken by companies related to internal control, and NRI will offer consulting services and solutions that support these efforts and lead to improvements in corporate value.

[For general inquiries, please contact:]
Takeshi Nomura
Corporate Communications Department
Nomura Research Institute, Ltd.
Tel: +81-3-6270-8100
E-mail: kouhou@nri.co.jp

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Figure 1: Aware that introduction of J-SOX was being deliberated

Figure 2: Awareness of the Financial Services Agency Exposure Draft

Figure 3: Current Status of Efforts to Meet the J-SOX Requirements

Figure 4: Types of actions taken to Meet J-SOX Requirements (multiple answers)

Figure 5: Knowledge and Understanding of J-SOX by Industry

Figure 6: Status of Efforts to Meet the J-SOX Requirements by Industry

Figure 7: Costs of Meeting the J-SOX Requirements

Figure 8: Approach to Efforts to Meet the Requirements of the Sarbanes-Oxley Act

Figure 9: Particularly Difficult Challenges in Meeting the J-SOX Requirements (multiple answers)

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