Contracts, Markets, and Laws in the US and Japan
Edited by Zenichi Shishido
Chapter 20: Reverse engineering SOX versus J-SOX: a lesson in legislative policy
Although both the US and Japan recently introduced similar corporate governance regulations, respectively the Sarbanes–Oxley Act of 2002 (SOX) and the Financial Instruments and Exchange Act of 2006, known as “J-SOX” because of its similarity to SOX, there is an interesting discrepancy between the first-year reports in regard to the discovery of “material weakness” of internal controls by US companies (16.9 percent) and Japanese companies (2.1 percent). What does this discrepancy mean and why does it exist? In order to answer these questions, this chapter attempts to reverse engineer SOX and J-SOX by focusing on how these regulations affect the incentive bargain among the key players complimentarily with the pre-existing laws, practices, markets, and social norms in both jurisdictions. SOX and J-SOX have similar origins, purposes, and substance. They were both enacted after major fraudulent disclosure scandals by legislatures that were forced to react to increasing social criticism. Both the US Congress and the Japanese Diet intended to remedy what was perceived to be defective corporate governance regulations through active intervention in the internal controls of publicly traded companies. Four years after the enactment of SOX, the Japanese Diet transplanted SOX into the corporate governance regulatory system of Japan after making some modifications to its provisions. Although these two regulations were nearly identical upon implementation, each has evolved differently due mainly to the distinctions between the relevant environments in the US and Japan.
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