Internal auditing in the U.S. and Japan

Contrasts: internal auditing in the U.S. and Japan

Priscilla A. Burnaby

THE UNITED STATES AND JAPAN control many of the world’s largest corporations and a significant portion of the world’s wealth. Recognizing the potential role of internal audit in maximizing economic resources, a team of researchers recently compared aspects of internal auditing practices in the two countries. In many areas, differences in values, culture, and tradition appear to account for significant diversity.

In Japan

The foundation of the Japanese culture rests on personal relationships and mutual dependency, and corporations foster this value in all policies and procedures. The Japanese executive encourages all to give their best efforts; and if they do not, the executive loses face. Leaders make the workplace supportive of the subordinates in exchange for quality work. Subordinates know that the executive will protect them; and when group efforts yield good results, all share in the “glory” and rewards.

Corporate Culture

Contemporary Japanese corporate philosophy emphasizes harmony and cooperation at all levels. Business practices in Japan are largely guided by social values and cultural traditions, exemplifying the notion that management cannot be separated from culture. Japanese culture places social homogeneity and group consensus above individual performance. The Japanese assumption that members of a group work for the good of all encourages and fosters trust. The worker/worker and the worker/employer relationships are entangled in a complex web of mutually exchanged debts and favors. Long-term interests are guided and protected by pasty loyalties.

The Japanese see little usefulness in strict work divisions. Detailed guidelines as to rights and duties would make relationships too inflexible. Encouraging a system of indebtedness among members of the corporation reinforces the importance of the group.

Internal Auditing

Despite vast cultural differences between Japan and Germany, the U.S., and the U.K., the framework for Japanese accounting and auditing was imported from these countries during the 1800s. Even in current times, the Japanese depend heavily on U.S. practices as models.

Internal auditing in not actually recognized as a profession in Japan. The few Japanese companies that do have internal auditing departments give them low status; or they may exist in name only, for the sake of outsiders.

Japanese life is based on loyalty to one’s employer, honesty, and honor. There is little separation of duty, general controls, or signing of contracts. The Japanese believe that only those who distrust each other need detailed contracts. They rarely use lawyers in business arrangements; nor do they resort to the courts to remedy relationships that have gone sour. Many transactions are based on the individual’s word, and many companies are interrelated. Although the Japanese Commercial Code requires public companies to have a Statutory Auditor, who is separated from the internal audit department, the individual is often not an accountant and lacks independence from management.

Stockholders trust management, so little in the way of financial disclosures or reports from internal auditors is required. If an employee is found to be dishonest, the individual has little hope of finding other employment in a Japanese company. (1)

In one of the open-ended questions included in research study, one Japanese respondent observed that “The role of the internal audit department is made light of and its position is not high in the organization.” Another commented: “Internal auditing is put into operation to improve management efficiency and increase an organization’s profit. It does not principally aim at exposure of financial irregularities and errors, because internal auditing in Japanese companies is generally based on the ethical doctrine that human nature is essentially good.”



United States Japan

Financial 3 1

Government 3 0

Service/Distributor 3 1

Insurance 6 1

Manufacturing 4 8

Conglomerate 0 1

Construction 1 0

Oil and Gas 1 0

Transportation 0 1

In the U.S.

U.S. employees are individualistic and seldom, if ever, view the corporation as a substitute for “family.” American workers often seem to feel inhibited by interlocking loyalties and by social and group demands imposed by employers.

Corporate Culture

Corporate cultures are more diverse in the U.S. than in Japan. U.S. corporate culture reflects the philosophy of top management (whereas Japanese corporate culture mirrors the Japanese culture). In some cases, managers may be driven by power and ego, unwilling to give to others responsibility or credit for important jobs. Mutual trust is not a prevalent attitude in the U.S.

To protect themselves in conflicts, U.S. corporations rely on the courts. Legal aspects of contracts are well-defined and of the utmost importance. Suing for breach of contract and other open conflicts are commonplace and accepted courses of action. While the Japanese place great emphasis on human relations, U.S. managers emphasize technology, perhaps believing that good human relations cannot be taught.

Internal Auditing

Internal auditors have been accepted as a necessary evil by U.S. business. Internal control systems stress separation of duties, compliance with company policies, reliable accounting systems, and safeguarding of assets. The status of the U.S. internal auditor was strengthened by the Foreign Corrupt Practices Act of 1977, which mandated that corporations must have a good system of internal controls. Now management is held legally responsible for lack of controls. Since the issuance of this law, internal auditors in the U.S. have become a more integral part of the internal control system.

The Institute of Internal Auditors (IIA), the international organization for internal auditors, was first established in the U.S. in 1941. The IIA sets audit standards, developed a code of ethics, and administers an exam for members to become Certified Internal Auditors. If an internal auditor is also a Certified Public Accountant, the individual is additionally bound by the American Institute of Certified Public Accountants ethics.

Survey Findings

This study surveyed internal auditors in the United States and Japan to determine adherence to IIA Standards, to gain an understanding of the scope of their activities, and to compare usage of computers as an audit tool. A questionnaire was mailed to large corporations in the United States and Japan (in Japanese). The questionnaire was reviewed by the Board of Governors of The IIA’s Greater Boston Chapter and by several corporate executives and corporate auditors with experience in international operations.

The population was selected from The IIA’s membership listing. One hundred participants were selected randomly from U.S. and Japanese members. Twenty-one U.S. questionnaires were returned, for a 21% response rate and 13 of the Japanese questionnaires were returned for a 13.4% response rate. (*)

International Firms

Twenty-nine percent of the U.S. respondents work for international firms. Only 8% of the Japanese respondents work for an international firm; however, a fact which made it possible to learn more about internal audit practices unique to Japan.

Internal Audit Departments

When asked how long the internal audit department has been functioning as a separate department, the U.S. responses ranged from 1 to 70 years (mean of 19) and the Japanese responses ranged from 5 to 47 (mean of 17). It appears that the internal audit function in Japan did not evolve as a separate department until after World War II. The number of internal auditors in the U.S. departments ranged from 1 to 675. For the Japanese firms, number of positions ranged from 1 to 40.

Adherence to IIA Standards

Of the 21 U.S. respondents, 17 (80%) indicated that their departments complied with IIA standards in performing audits. This is not surprising, since the Foreign Corrupt Practices Act has encouraged organizations to maintain a visible and well-organized internal audit department. Only two of the 13 (15%) of the Japanese respondents indicated that they follow IIA standards, which probably reflects The IIA Standards requirement for in-depth audits of compliance with management policies. In Japan, reviews of financial and operating system might be construed as a questioning of the employees’ honor.


To determine the level of independence the internal audit departments are allowed to maintain from management, respondents were asked to whom the internal audit department reports. The data is summarized in Exhibit 2.


United States Japan


(line of authority)

Board of Directors’ Audit Committee 10

Chief Executive Officers 2

Chief Financial Officer 9 4


(directs and reviews work)

Vice President of Finance 9 1

Controller 2

Chief Executive Officer 3

Chief Financial Officer 3

In the U.S., it appears that internal auditors are making progress in attaining independence from management, and many believe that the ideal situation is for them to report to an active audit committee. Internal auditors within Japanese firms appear much less independent. They report to high-level management and do not have an audience with the Board of Directors.

Audit Committees

When asked whether or not their organization had an active Board of Directors’ Audit Committee (Audit Committee), 16 (90%) of the U.S. respondents and two (15%) of the Japanese respondents replied yes. Ten of the U.S. firms’ audit committees meet with internal auditors four or more times a year; two meet three times; three meet two times; and one meets one time. The two Japanese Auditing Committees meet with the auditors twice a year.

Professional Proficiency

To be effective in an internal audit department, the auditor must have a clear understanding of the functions and responsibilities of the department, proper technical education and business background, and continued training. To determine whether or not the internal auditors have clearly defined the functions and responsibilities of their departments, respondents were asked if they have a formal audit charter. Seventeen (85%) of the U.S. internal audit departments have a formal audit charter, while three (23%) of the Japanese internal audit departments have a formal audit charter.

Job Requirements

The formal requirements for employment are outlined in Exhibit 3. In the U.S., many internal auditors are required to have a college degree, accounting certification, and experience in accounting or the area under audit. The Japanese appear to require less, in terms of education, certification, and experience. In Japan, some internal auditing positions require only experience in business.


United States Japan


College Degree 21 6

None Required 7


1-2 years in accounting 7

3-4 years in accounting 2 1

Business experience in area 12 6

None Required 6

Professional Certifications

Certified Internal Auditor (CIA) 5 3

Certified Public Accountant (CPA) 4

Both CIA and CPA 10

None Required 10

Continuing Education

The respondents were asked if they were required to attend continuing education. Seventeen (80%) of the U.S. and seven (54%) of the Japanese respondents stated that they are required to attend continuing education courses.

Scope of Audit Work

To determine the scope of audit work performed, general functions and specific activities were listed. The respondents were asked to rank each function from 1(never) to 5(always). Exhibit 4 shows their mean responses.


Mean * Responses

United Japan


Review the reliability and integrity 3.7 4.1

of financial information

Review reliability and integrity 3.9 4.0

of operating information

Review compliance with policies,

procedures, laws, and regulations 4.6 3.4

Review of the internal controls for

safeguarding and existence of the assets 4.5 4.1

Review the economy and efficiency

with which resources are used 4.1 3.4

* scale – 1 (never) to 5 (always)

Exhibit 5 indicates the number of respondents engaged in particular internal audit activities. Some differences may be explained by culture. For example, the reason that more Japanese internal auditors review bad debt/loan loss may be that bad debts are unusual in Japan because of the dishonor associated with nonpayment. Fewer Japanese internal auditors are involved with corporate ethics, fraud investigations, and personnel functions. Again, this may be due to the perceived cultural environment of honesty.



United States Japan

Acquisition/divestiture 61% 85%

Bad debt/loan loss 57 92

Billing/collecting 100 100

Construction projects 48 39

Corporate ethics 71 54

EDP general controls 86 69

Microcomputer security 76 31

Employee benefits 86 46

Financial budgeting 67 92

Fixed assets capital expenditures 95 92

Fraud investigations 95 39

Government regulations 54 91

Inventory control/plans 76 92

Management Information Systems 81 23

Manufacturing/production control 38 77

Marketing/sales promotion 62 62

Organizational control 100 54

Personnel functions 91 69

Purchasing function 100 77

Quality Control 57 54

Receipts/disbursements 100 92

Research & development 54 29

Transfer pricing 33 39

Treasury function 81 100

Shipping and receiving 76 54

Contract administration 76 77

Also, the Japanese auditors seem to do less work in the areas of microcomputer security, EDP general control, management information systems, and organizational control. Japanese workers do many of the functions performed by computers in the U.S., so that there are fewer computer systems to safeguard.

Computer Systems

To determine the level of involvement of internal auditors in computer systems modification, the participants were asked to rank the degree to which they audit certain data processing functions. Exhibit 6 summarizes the responses.


United States Japan

Systems documentation 3.1 2.3

User documentation 3.3 2.4

Systems modification 3.0 1.6

Program coding 2.0 1.6

Pre/post tests 2.7 1.8

Program-change control 2.8 1.4

* Scale – 1(never) to 5(always)

It is disappointing to see that, in both countries, internal auditors appear to be doing only a marginal job of reviewing their organizations’ computer system changes. Highly automated systems require strong internal controls to assure accuracy of information, and internal auditors’ regular reviews of these systems would help to assure continued safeguarding of the system.

Computers as an Audit Tool

Few Japanese internal auditors appear to be taking advantage of computers as audit tools (Exhibit 7). The reason for this may again be that management would consider it dishonorable to have their work reviewed. When asked if the internal audit department uses microcomputers as an audit tool, 18 (86%) of the U.S. respondents said yes, while only two (15%) of the Japanese answered affirmatively.


United States Japan

Prepare workpapers 3.9 4

Use commercial software 4.2 1

Design own audit software 2.6 3

Access mainframe computer 3.4 1

* Scale – 1(never) to 5(always)

The Future

When asked what direction and responsibilities the internal auditing profession will take in the future, comments from U.S. respondents suggested several recurring themes, especially increased professionalism and pride in the profession. Some individuals felt that the internal auditor’s role will expand into management consulting. Many felt that more fraud and operational investigations would be initiated and that more computer audit skills would be required for working with complex systems.

Many Japanese respondents stated that the status of internal auditing will not improve in their country unless laws are passed. One respondent felt that as more corruption cases come to light, laws will be passed to require more involvement of internal auditors. Others replied that as their businesses become more complex, diversified, and modern, the role of the internal auditor will naturally evolve. Several mentioned the need for audit and computer training.


U.S. and Japanese internal auditors are striving to find their roles in the infrastructure of complex environments. Although U.S. internal auditors have more independence and acceptance within their organizations, their position is still evolving. The Japanese corporate culture is so deeply rooted in the mores of personal integrity and group cooperation that overall change in attitude toward the internal auditing function will be slow to evolve. If the Japanese

(1) Albrecht, W. S., Marsh, H. L., Jr., Bentzel, F. H., Jr., “Auditing an International Subsidiary,” Internal Auditor, October 1988, pp. 23-27. (*) When responses do not toal 21 for the U.S. and 13 for Japan, the difference is the result of nonresponses.

COPYRIGHT 1992 Institute of Internal Auditors, Inc.

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