Q116   I  Have internal controls become compulsory?

A116   Yes. Under the New Company Law, it has become compulsory for directors to oversee the setting up of internal control systems, and for  these controls to be agreed at board of directors' meetings before being included in company policy. There was no clear requirement in the old Commercial Law that companies establish internal controls or compliance systems. In reality, though, there were legal precedents that indicated their development was an obligation of directors. The intent was included in the Commercial Law, and it can be argued that this has now simply been clarified. The obligation to have internal controls has not just been clarified in the New Company Law, but the Financial Services Agency (FSA)  has drawn  up the Evaluation and Audit-

ing Standards for Internal Control, based on the Financial Instruments and Exchange Control Law, which will require listed companies to introduce controls commencing in 2008. The Financial Instruments and Exchange Control Law is the Japanese version of the U.S. Sarbanes-Oxley Act, established in 2002 in response to a number of major scandals, including that involving Enron.