Good morning, and thank you very much Hal and Ohta-san for all of your efforts to make this symposium possible again this year. It is my pleasure to join this prestigious Harvard Law School Seminar, the fifth symposium on building the financial system of the 21st century.

Although my task this morning is to talk about recent accounting reforms and auditor independence, I rather feel like talking about why Bank of Japan all of a sudden had to decide to purchase the excess shares major banks hold. But I guess I have to leave it to the tomorrow's session.

In Japan, for the past several years, we do have some accomplishments on the accounting reform, such as privatization of accounting standard setter and decision to finally introduce an accounting for impairment of fixed assets and so on. But issue we are now facing is much bigger and profound in its nature. Since we met last December in Gotemba, the U.S. policymakers have taken significant steps in this regard in order for restoring confidence in the economy, such as certification of financial statements by CEOs and CFOs, and a passage of Sarbanes-Oxley Act. Indeed as a politician, I would like to praise prompt resolutions and efforts made by both executive and legislative branches of the U.S. government. However, in Japan, I was puzzled by finding a good number of Japanese policymakers at first perceived that the developments in the U.S. corporate governance and accounting policy has not much to do with Japan, since "the U.S. model in the 90's" had not simply proved itself to be a success. They sometimes go so far as to say that thus the U.S. model cannot be a model to be learned for Japan.
I try to argue against those who have such opinions. Maybe, Japan cannot laugh about a falldown of a top runner, because Japan falls behind two or three rounds regarding accounting and auditing matters. If the top runner quickly gets up again and back to the track, we will end up with finding ourselves to be behind three rounds again.

History tells us when the economy massively fluctuates, such as the collapse of economic bubble, it always reveals many corporate frauds and accounting riggings. It is not only limited to Enron and Worldcom cases after the collapse of IT bubble, but also in Japan we still have serious doubts in financial statements after asset price bubble of a decade ago. As Fed Chairman Greenspan points out, during the economic boom, "infectious greed" covers the management, shareholders, and market participants. However, we cannot blame "greed" itself, since "profit-making", which is an engine of capitalism, is a subtle way of expressing "greed". Rather, we have to learn lessons from recent experiences in the U.S. as to how to strengthen legal and administrative base in order to ensure "a better quality of capitalism". The Sarbanes-Oxley Act contains a lot of clues to it.

The Act reforms corporate governance focusing on behavior of corporate management. For example, under this law, CEOs and CFOs must personally vouch for the truth and fairness of their company's disclosures. I think this has historical ground of development of modern corporations of 150 years. Current corporate shareholding is predominantly for "investment", not for "corporate control" as it had been 100 year ago, due mainly to so-called "institutional investor phenomenon" starting in the 70's. Fund managers of institutional investors, such as pension funds, choose to sell rather than "resolve indigenous problems" of corporations. Thus corporate management gets de facto control over corporations, and they cannot be easily replaced by shareholders or by other constituencies. Inadequacies in corporate governance in such a manner tend to be overlooked in today's corporate governance structure. It is apparent that this is the global phenomenon. Not only failed banks' non-performing assets disclosure in Japan, but also recently revealed corporate wrongdoings by major Japanese companies indicate lax corporate governance, which is also prevailing in Japan.

Since the U.S. policymakers recognized the importance of investor protection and global capital flow by ensuring better corporate governance, prompt legislation was made possible. But from the viewpoint of EU and Japan, the Act also raised some jurisdictional problems, since the Act requires all listed companies, whether U.S. or non-U.S., to have "fully independent audit committees". The Act shall also be applied to Japanese CPAs and audit firms that provide audit services for Japanese companies listed in the U.S. stock market as well as to Japanese audit firms that provide audit services to subsidiaries and affiliated companies, operating in Japan, of issuers listed in the U.S. market. The Japanese regulator seems to perceive that these are unnecessary duplication of regulation, and thus cooperation between the U.S. regulator and foreign regulators is necessary and instrumental in order to restore confidence of investors. Here, you can taste a little bit of a flavor how Japanese accounting industry must always care for the attitude of domestic regulator, and often not for the real interests of investors. This perception might be showing a regretting lack of understanding as a regulator on the essential mechanism of capital market, because a mere cooperation of regulators cannot restore the confidence of investors, but policy measures geared to ensure investor's maximum interest shall ultimately restore the confidence in the global market. Therefore the issue must be solved by way of "reciprocal improvements" of regulations where major countries together pursue international minimum level of regulations in the direction taken by the Sarbanes-Oxley Act.
In order to enhance corporate responsibility in Japan, "Committee on Corporate Accounting" and "Committee on Commercial Law" of the LDP, both of which I reside as a chairman, recently released points of issues to be solved, which include following homework for us.
First, we obviously have to strengthen corporate governance in Japan. Tougher responsibility and penalty of CEOs and CFOs is inevitable. I this regard, we must note that from next April, corporations will have an option to establish "an auditing committee" instead of conventional internal auditors. A legal protection of whistleblower deserves consideration. We also have to strengthen independence of auditing and make it function by injecting outside financial experts.

Secondly, we must strengthen both independence and responsibility of audit firms and accountants. We have same issues as in the U.S., such as a weak regulation on audit and clarification of non-audit services that should not be provided by audit firms. We may need an organization such as Public Company Accounting Oversight Board, which officially oversight audit firms instead of peer reviews. Moreover, Japan has to at least double the number of accountants in the immediate future. Thus, both we, the LDP and the FSA are planning a thorough revision of Certified Public Accountant Law in the next ordinary session next year, while we still have different views with each other. It is obvious that both responsibility and independence of accountants must be strengthened so that accountants can devote themselves to the interests of investors, not to that of client corporations or that of regulators.

To solve these problems, together with many other issues, and moreover, in order to have better working capital market in Japan, I firmly believe that we must establish an independent and strong "Japanese SEC" with quasi-judicial function, which would separate capital market regulator from banking regulator which has continuously damaged banks' investor's interests during the last decade. Current capital market regulating functions are all scattered in the various bureaus in the FSA besides the Securities Exchange Surveillance Commission, and there is "no single regulator" responsible for protecting investors. Indeed, SEC Chairman Mr. Pitt must be always having hard time finding his appropriate Japanese counterpart. Depending on issues, he has to contact with Commissioner of the FSA, Chairman of the Securities Exchange Surveillance Commission, Director of Kanto Regional Bureau of Finance, and sometimes even Prime Minister of Japan! Therefore, recently Japan Business Federation, Keidanren, also released their proposal that claims needs for an establishment of independent and integrated "Japanese SEC".

To name but a few, we are confronting a lot of issues in both countries. At this crucial moment of economic uncertainties worldwide, we, in this room, are fortunate to have a good opportunity to have extensive discussion on these issues, hoping to come up with constructive proposals and mutual understanding that could eventually restore the confidence in the global economy.

Thank you.