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This article was first published in the September 2016 China edition of Accounting and Business magazine.

The International Forum of Independent Audit Regulators (IFIAR) has announced that it will open a permanent secretariat in Japan in 2017 as part of the organisation’s efforts to enhance its capabilities and improve the quality of auditing around the world. The decision has been welcomed in Japan, where the proposal had the direct support of the office of Prime Minister Shinzo Abe, government officials confirmed.

Discussions among members of the forum, which presently number independent regulators from 51 states, had been ongoing for some time, but it was not until 2013 that a decision was taken to carry out a full examination of the feasibility of the proposal for a permanent secretariat, IFIAR officials said. The membership expressed support for the plan in April 2015. The following April, at IFIAR’s 2016 plenary meeting in London, members voted in a secret ballot in favour of the permanent secretariat and confirmed that it would be established in the Japanese capital.

‘Since its inception in 2006, IFIAR has rapidly matured,’ says Janine van Diggelen, IFIAR chair and head of international auditing and accounting, policies and standard setting at the Netherlands Authority for the Financial Markets.

‘Audits are also becoming increasingly crossborder in nature, with an audit engagement of consolidated financial statements often involving audit firms from multiple jurisdictions,’ she adds.

Inevitably, audit oversight regulators are gradually coordinating with each other in response to the modern-day crossborder realities of auditing. ‘Given IFIAR’s position as the leading international organisation on auditing matters and the expected geographical expansion of this organisation, IFIAR needs a governance structure and a permanent secretariat to react effectively and efficiently to global issues relating to audit oversight,’ van Diggelen says.

Sophisticated business environment

The organisation confirmed that a number of other cities were considered to host the permanent secretariat – it declined to identify the other candidates – but Tokyo won out for several good reasons.

‘Tokyo is a city which provides excellent livability,’ van Diggelen says. ‘It has solid infrastructure and a sophisticated business environment, with political and economic stability.

‘Moreover, Tokyo can serve as a gateway to many non-IFIAR member jurisdictions,’ she adds. ‘At present, most IFIAR members are from Europe. By locating a permanent secretariat in Tokyo, IFIAR can more easily geographically expand to the African and Asia-Oceania regions as well.’

The Japanese government and financial regulators have supported the proposal from the outset, with finance minister Taro Aso saying in late April that Tokyo acting as host ‘is extremely important for Japan to enhance its global presence and the position of the Tokyo market as an international financial centre’.

Kiyotaka Sasaki, who assumed the position of secretary general of the Japanese Securities and Exchange Surveillance Commission in July 2015, concurs with that assessment, telling Accounting and Business that the decision to set up an IFIAR secretariat in Tokyo is ‘very important’.

‘Look at the Toshiba situation,’ Sasaki continues. ‘A case like that [makes it] very important for us to continue and encourage our engagement with IFIAR.’

In December, Japanese regulators imposed a record 7.37 billion yen (US$60m) fine on a company that had previously been considered a pillar of Japan Inc. An internal panel of accountants and lawyers determined that Toshiba had overstated its operating profits over a number of years, with the accounting irregularities totalling 152 billion yen (US$1.2bn) and involving senior management.

The scandal has been a body blow to the company, which booked an operating loss of 719.1 billion yen (US$6.6bn) for the financial year to 31 March 2016. The crisis also forced it to cut 3,000 jobs and sell its medical equipment business to Canon and its white goods division to Chinese appliance giant Midea Group.

Having improved audit quality through enhanced IFIAR activities in Japan may help to prevent deliberate manipulation of corporate finances in the future, Sasaki suggests. And he believes that Tokyo is the ideal location as IFIAR looks to raise its profile further afield.

‘There were probably three major factors in Tokyo being selected: the high-quality infrastructure, the security of the business community here and a highly educated work force and our hospitality – all of which are going to help to attract excellent international staff,’ he says.

Thirty of the organisation’s 51 members are presently from Europe but with Asia’s economies booming there is an added urgency to ensure that auditing standards are up to scratch, Sasaki adds. And with countries such as China, India and other emerging states providing the impetus for rapid economic growth in the region, Japan is perfectly positioned to ensure that IFIAR’s reach grows.

Enhanced outreach

‘We must also not forget that Japan is still the third largest capital market in the world,’ Sasaki says. ‘And IFIAR’s principle is to ensure high-quality audits for all the stakeholders, from investors through audit companies and financial institutions. The organisation can take advantage of enhancing its outreach to ensure quality and Japan can help to provide that platform.’

Attracting IFIAR to Tokyo is also in line with the Abe administration’s ambitions to make the city into a more important global financial centre, in part by ensuring more effective corporate governance, Sasaki continues.

‘Having the permanent secretariat in Tokyo will also enable Japan to make a more substantial contribution to IFIAR, which will be beneficial to global economic activity,’ Sasaki says, adding that it will also permit Japan to play a bigger role in setting standards in auditing and the broader financial sector. 

A permanent secretariat will have a number of benefits for members, van Diggelen believes. With IFIAR’s positions of chair and vice chair changing every two years, a permanent secretariat would enable the organisation ‘to execute ambitious work plans, regardless of the resources available with the officers’ organisations for secretariat staff’, she says.

‘A permanent secretariat also provides for a highly specialised and professional staff dedicated on a full-time, long-term basis solely to advancing the mission and interests of IFIAR,’ she adds. ‘In addition, it provides stability and continuity, as well as more effective outreach and interaction by IFIAR with its members and outside stakeholders.

‘Finally, it provides a solid institutional basis for the organisation with respect to the day-to-day administrative matters that are necessary to maintain IFIAR as an effective and efficient organisation over the longer term.’

The process of establishing the permanent secretariat has moved on to determining the most appropriate site for its headquarters. As Tokyo’s main financial and business district, Marunouchi-Otemachi is considered an ideal location, the organisation confirms. It is also the Japanese hub for numerous multinational corporations, law firms and audit companies, while the regional offices of international organisations, such as the World Bank and the International Monetary Fund, are also nearby. An added bonus is that it is close to the Kasumigaseki district, the location of all of Japan’s ministries, and Tokyo Station, which offers rapid and easy transportation links.

IFIAR anticipates that the secretariat will initially be comprised of five full-time staff, including an executive director and a locally hired administrative assistant.

Julian Ryall, journalist