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タイトル Relationship Between Corporate Groups and Auditors in Title 著者 , Kazumi Author(s) 掲載誌・巻号・ページ The Annals of the School of Business Administration, Kobe Citation University,40:75-101 刊行日 1996 Issue date 資源タイプ Departmental Bulletin Paper / 紀要論文 Resource Type 版区分 publisher Resource Version 権利 Rights DOI JaLCDOI 10.24546/81003679 URL http://www.lib.kobe-u.ac.jp/handle_kernel/81003679

PDF issue: 2021-10-05 Relationship between Corporate Groups and Auditors in Japan

Kazumi Suzuki*

I . Introduction

It is said that financial statements reflect a combination of recorded facts, accounting conventions and personal judgements. This suggests that the choice of the accounting methods and accounting judgments made by managers have a major effect on the disclosure level, quality and contents of the accounting information in the financial statements. They are expected properly to choose and judge under the conditions in which accounting information is prepared. So, the extent of the discretion which the managers of publicly-held firms can use in choosing accounting methods and in making accounting judgments is limited, because the appropriateness of their choices and judgements is subject to the examination by audit corporations or certified public accountants (hereafter, " auditors"). The relationship between a firm and its auditor has a major effect on the accounting information in the financial statements. This relationship determines whether the auditor, acting on behalf of outside interests, presses the firm to narrow the range of its options, or consents to accept broad discretion by the executives of the client firm. The relationship between a firm and its auditor in Japan may be influenced by the tendency of firms to form corporate groups. Auditing one member firm of a corporate group may lead to auditing the other members too. Thus an audit transaction with a firm can be a foot-in- the-door of the group as a whole. In this paper, we ask why corporate groups are so prominent in Japan, and then, discuss the possibility and the process of an auditor being taken into a corporate group. Thirdly, we look for evidence to support this possibility, and finally, we consider the problems that arise from this arrangement.

" Associate Professor , School of Business Administration, Kobe University. 76 K. Suzuki

II. Why do companies form groups?

A corporate group is an intermediate entity positioned between the market and a firm. Why do companies form such corporate groups? Generally, a transaction is likely to be incorporated into a business organization when a market failure occurs, or if the costs of executing the transaction inside an organization is lower than the costs of the market transaction. But, once a transaction is incorporated into an organization, it is no longer subject to the discipline of the market place. Consequently, its costs may increase, and it may also become uneconomical (Coase [1937]). A corporate group is an intermediate form of business organization between a firm and the market that serves the function of minimizing such inefficiencies of the market as well as a firm. These circumstances give rise to corporate groups (Imai, Itami and Koike [1982] pp.126-12'7; Goto [1978]). How can transaction costs be saved by forming a group? Costs are incurred in all aspects of operations of a firm: in collecting information, in negotiations, and in both concluding and enforcing contracts. Two sets of factors are the primary determinants of these costs. The first set of factors is the characteristics of the goods and services involved, and the circumstances of the transactions. Transaction costs are higher for complex goods and services which have many relevant attributes. Drinking water, for example, is a simple good, a house is more complex. Of course, the costs of trading a house which consist of search expense, commissions, taxes and so on are higher than the costs of trading water. Transaction costs also increase, when a transaction is carried out in a tactical environment which permits complex strategies, and therefore requires the costs of collecting information, confirming the execution of contracts and the division of risk among the transacting parties. The second set of factors concerns the nature of people who conduct the transaction. People make decisions with bounded rationality and limited information. Bargaining for a transaction often includes a search for alternatives, recognition of opportunities, understanding the tactics of the counterparty, and devising one's own tactics. They give rise to personal effort and transaction costs. Relationship between Corporate Groups and Auditors in Japan 77

A corporate group could be expected to form when these transaction costs with the existence of a group are less than the costs of performing these transactions without one, that is, either through the market or through individual firms. Now we need to show how the groups reduce transaction costs in ways that individual firms cannot. Let us consider each aspect of transactions from this point of view. Information becomes a public good if free-riders cannot be excluded from its benefits once it is collected. Those who collect the information end up paying the costs. If a corporate group functions as an information club , it can remove the obstacles arising from public goods through exclusively communicating information within the group (Odagiri[1975]pp.145-146). Once a group has been formed, its members can save the costs of repeating within-group transactions through the market mechanism in the group. The risk of opportunistic behavior by members of the group, and the transaction uncertainties they face are also reduced. Once organized within the group, transactions take a standardized form, and the costs of enforcing them are reduced. On the other hand, firms can avoid the costs and inefficiency of organizational conflicts and bureaucracy by not making these transactions inside the individual firms themselves. In this manner, moving the transaction from the market to the group structure, without taking it into the individual firm, cuts the costs of doing the transaction through the market mechanism in the group. Thus group formation may increase profits for member firms by saving their transaction costs. However, Caves and. Uekusa [1976] point out that such a group profit maximization hypothesis may apply to the pre-World War II financial combines (), not to the recent corporate groups in Japan. The financial combines before the War increased their profits through saving transaction costs and exercising monopoly power. But, according to their analysis of Japanese firms data for 1961-70, profits before interest on assets were negatively related to the group

1. Information club is a party organized on the following three promises. a) Each member firm voluntarily communicates information which it has to other firms within the club. b) Member firms must not communicate wrong information intentionally. c) Member firms must not leak information collected within the group to the outside. 78 K. Suzuki

affiliation. They also found a weak tendency for the group affiliation to reduce the variability of profit and a significant positive relation between the group affiliation and the height of interest payments on borrowed capital. These results suggest that the profits are re- distributed by the groups' main banks in complex ways (Caves and Uekusa [1976] Chapter 4). Similarly, Nakatani[1984], by analyzing Japanese firms data for 1971-82, shows that group formation does not always increase the rates of profit and growth of firms but that the time series variance of these ratios of firms that belong to groups are lower than those of the independent firms. These results lead to the conclusion that the purpose of forming groups is to stabilize, not maximize, profits. A corporate group functions as an insurance pool for its member firms, including the main bank of course, through the sharing of profits and risks over a long period of time. This conclusion is also consistent with the empirical results reported by Caves and Uekusa. In addition, Nakatani finds that the firms that belong to groups pay higher salaries and wages than independent firms. Wages and salaries are tax deductible while the distribution of income is subject to corporate income tax. Corporate groups influence the distribution of income among the suppliers of various factors of production and help to isolate the individual firm from market pressures. Imai[1989] explains group formation on the basis of the process in which a firm adjusts itself to changes in its environment. According to Imai, the fundamentally important activities of managers in a modern firm are creating information, seeking a new context for doing business, and developing the accumulating process of continuous innovation through the interaction of personnel. The choice of market or organization is determined by such interactions. An interaction is, of course, easily conducted within a firm. But, even in the market, an interaction can be conducted through forming continual transaction relations. Which is better, internal organization or the market, depends on the contents of the interaction. Generally an internal organization is oriented in terms of speed of research and development, production, and marketing. But an internal organization, especially an intra-firm organization, has a defect that the information created within the firm is likely to be homogeneous. A market, also, has a defect that it costs a lot of time and human resources to set up the place where the Relationship between Corporate Groups and Auditors in Japan 79

interaction occurs. But, if a firm can get added value from the information related to the transaction with external firms, corporate affiliation or a network in the market may be preferred. That is to say, a connection with external firms is oriented in terms of interaction with external information. (Imai [1989]). If corporate groups are formed to deal with the failure or inefficiency of market, we cannot expect the pure neo-classical model, built on the premise of a profit-maximizing firm, to explain the existence of such groups. Evidence suggests that corporate groups are formed, and we can say that the reasons for the group formation are to increase and stabilize profits over the long term. Moreover, the speed of interaction in the adjustment function and the importance of interaction with external information may play a role.

IL Possibility that an auditor is taken into a corporate group

One of the firm's transactions is with its auditor. In this section, we examine the relationship between firm and its auditor from the points of view of saving transaction costs, sharing profit and risk for a long time, and speed of interaction in adjustment process and getting information with added value when new accounting issues arise. In selecting an auditor, firms should look for one who is efficient: works fast and accepts low payment. To select a good auditor, firms need to collect information about the quality and quantity of its staff, audit technology, geographic coverage, reputation, fees, and its range of competence. However, auditing is a complex service with many attributes. The different auditors have different costs according to their scale, specialization, clientele, and geographic spread. It is not easy to judge the quality of auditing objectively. For example, audit corporations differ in their fields of specialization and in their ability to handle international businesses. And the client must also spend a considerable amount of effort to prepare itself for the audit'. Moreover auditors

2. For example, salaries of the persons involved in an audit, or the costs of preparingi related materials. In addition, when an auditor in charge of that firm s shifted in the audit corporation, the additional costs of explaining about the firm itself or the contents of the business for the new auditor in charge. 80 K. Suzuki become privy to many secrets of the client. leakage of secrets could inflict serious injury on the client firm. Therefore the reliability of the auditor in keeping confidences becomes important. But it is difficult for client firms to have information about these characteristics of the auditor from the outside. On the other side of the relationship, auditing costs for an auditor differ in internal procedures and controls of the client. In addition, auditors must consider the risk of lawsuits if they fail to detect fraud or other irregularities in their clients' financial statements. From these arguments, we can see that it is costly to gather information about the auditors' staffs and performances, as well as about the clients. When a client and auditor enter into negotiations to determine their contract, this need for information on both sides makes it a costly process. In Japan, five large audit corporations constitute an oligopoly, and it is difficult for other auditors to enter the market. Compared to a competitive market, negotiations in an oligopolistic market are strategic, and therefore more complex and costly. In contracting on audit fees, the amount is not determined through the market mechanism, but through negotiation face to face in the oligopolistic market. Such a negotiation process is complex and therefore costly. Or, in this oligopolistic auditing market, there is a likelihood that a firm contract with the same auditor as the rival firm. In this case, the secrets of the firm can easily leak to its competitors through the auditor. The firm has to bear the costs of investigating the reliability of the auditor or including the articles to make the auditor keep the confidence of its client into the contract in order to prevent leakage. Under these circumstances, both clients as well as auditors can save costs by internalizing the audit function into the client firms. This can be done by substituting an internal audit for an external audit. This eliminates the costs of negotiation and collecting information. However, because the independence of an auditor is required as an essential characteristic of an auditing system, auditing of financial statements cannot be carried out as internal auditing. Taking the auditor into the corporate group, instead of taking him into the individual firm itself, is the next best option. It saves the transaction costs at the group level, if the auditor can be kept within the group for a long time. Relationship between Corporate Groups and Auditors in Japan 81

Costly information about auditors can be shared among the member firms of the group. If all members of the group hire the same auditor, more and more information about the auditor is accumulated and shared within the group. Consequently, it becomes cheaper for all member firms to hire the same auditor. There are also substantial arguments, on the other side, for corporate groups to distribute the audit work of their member firms among different auditors. For large corporate groups, there is enough audit work to give several of the member firms to each of the large audit corporations. By doing so, corporate groups can encourage price competition among these large auditors which might otherwise act oligopolistically. So auditors might be taken into corporate groups when the amount of saving contract costs exceeds the decreasing amount of audit fees caused by price competition among auditors. How are the contract costs saved ? Caves and Uekusa ([19761 p.78) suggest that groups that form around main banks redistribute profits in complex ways. For example, the main bank may raise the interest rate to profitable member firms and lower the interest rate to unprofitable firms. It is necessary for the main bank or the core company in a group to monitor the performance of other members in its group for this purpose. Then it can use a single auditor for the whole group as a part of its performance monitoring mechanism. A great deal of information about the member firms circulates within the group through cross-shareholding, sale transactions, credit, and personnel exchanges. If a single auditor audits all the firms in a group, it is much cheaper than if each firm is audited by a different auditor. A change of auditor is costly for both the client and the auditor. They both lose information about each other. They must also gather information about the new relationships. Therefore, unless there is an important benefit that exceeds these costs, an auditor, once hired, is likely to stay on the job. The first year of audit of a new client requires a great deal of work to gather new information. The audit fees rarely cover the costs of the first year's audit. However, as the auditor begins to accumulate information on the client, the costs of the audit decline in later years if the client does not insist on sharing in these cost savings. The 82 K. Suzuki auditor can then begin to make a profit. However, if the client desires to renegotiate the fees each year, the auditor must propose more fees in the first year and has to accept a decrease in fees in response to the decline of auditing costs in later years. But this process imposes renegotiation costs, arising from estimating auditing costs, on both client and auditor every year. Additionally, fixed audit fees are useful for both in managing profits over the long term. So keeping fixed fees is advantageous for both. These cost savings make it more likely that auditors will be taken into the corporate groups. The corporate grouping goal of sharing profit and risk for the long term makes it more likely that the auditors will be taken into corporate groups for the long term, too. For example, when one firm does well and another does poorly in a corporate group, the audit fees from the former may be increased and the fees from the latter may be decreased. This helps reduce the variability of profits of each member of the corporate group as well as the auditor over the long term. Auditors bear the risk of the compensation for damage when they do not detect fraud in the financial statements. If the parties who are likely to bring compensation claims against the auditors: the large shareholders and creditors in the same group: also become the clients of the auditors, they may not bring up such claims. This reduces the risk of the auditors. In this setting, the economic demand for auditing disappears. Then, we can suggest the likelihood that price competition in auditing fees would occur. Because, if the member firms in a group did not need audit services, they could encourage price competition among large audit corporations in the oligopolistic market. But the large audit corporations can control audit fees through a price cartel among themselves, too. In fact, the Japanese Institute of Certified Public Accountants has a standardized fees rule, that allows the operation of a price cartel. This rule prevents price competition. Furthermore, we can explain the relationship between firms and auditors from the point of view of an adjustment function, such as the determination of the accounting methods to be adopted and the accounting judgements required when new accounting matters occur with the internationalization or the diversification of the operations of firms. Relationship between Corporate Groups and Auditors in Japan 83

It is desirable that accounting matters are adjusted in a firm in terms of speed of adjustment. But there is a likelihood that the firms are prevented from forming generally accepted accounting practices because there is only bounded special knowledge in a firm and they can make only decisions of a homogeneous nature on the adjustments within a firm. Conversely, when firms talk over these matters with auditors or accounting consultants with whom they have never made auditing contracts, the firms bear the costs of time and human resources to explain their situations or the contents of their transactions and their industries. So we can consider the likelihood that firms prepare a structure which can timely take measures for new accounting requirements through taking the contracted auditor, who already knows the situation of the client, into the group to which the client itself belongs. From the reasons given above, it is possible to hypothesize that the auditing contracts of firms belonging to a corporate group use the same auditor to save costs, to share risk, and to quickly respond to new accounting situations. This sounds like a free lunch. But such cost reduction may cause a decline in the reliability of financial statements auditing through the loss of the independence of the auditor. This is a question to be considered later.

N. Relations between corporate groups and auditors

There are two kinds of corporate groups in Japan; that is the " Six Large Corporate Groups (financial series)" and the " Vertical Series Corporate Groups (capital series)". The former are descended from the giant family trusts (ZAIBATSU), and are formed around each main bank. The latter are composed of subcontract companies or sales companies around a core giant firm. In this section, we are going to analyze the relationship between the corporate groups of each type and their auditors.

IV.1. Relations between the Six Large Corporate Groups and their auditors

The so-called Six Large Corporate Groups, formed and developed after World War II, are descended from the giant family trusts called 84 K. Suzuki

ZAIBATSU. They consist of Sakura Bank — Group, Bank—Mitsubishi Group, Sumitomo Bank—, Fuji Bank — , Dai-Ichi Kangyo Bank —Dai-Ichi Kangyo Bank Group and Sanwa Bank —. Firstly, let us examine if there is a connection between the Six Large Corporate Groups and their auditors. Table 1 presents the data on the number of firms in each group who are audited by each of the big five audit corporations. All other auditors are grouped together in the sixth category. We shall exclude this "Others" category from analysis because none of the auditors included in this class has more clients than any of big five has. The big five audit corporations are Tohmatsu, Asahi, Chuo, Showa-Ota and Century.

Table 1: Relations between the Six Large Corporate Groups and auditors (the numbers of companies)

Mitsui Mitsubishi Sumitomo Fuyo Dai-Ichi Sanwa Total Kangyo

Tohmatsu 20 20 13 11 10 3 77 Asahi 14 18 47 23 10 17 129 Chuo 15 32 10 15 10 14 96 Showa-Ota 25 20 10 26 19 11 111 Century 10 12 12 6 14 5 59 Others 39 29 17 38 24 13 160 Total 123 131 109 119 87 63 632

Note: 1. Refer to Appendix A. 2. Although Sakura Bank which is the main bank in the Mitsui Group is audited by both Tohmatsu and Showa-Ota, it is considered to be audited by only Showa-Ota, because Mitsui Bank was audited by only Showa-Ota before it combined with Taiyo Kobe Bank to become Sakura Bank.

Our null hypothesis is that each individual firm belonging to the Six Large Corporate Groups independently chooses its auditor, disregarding which group it belongs to. A chi-square test on this contingency table yields a figure of 68.8 which rejects the null hypothesis at a 0.5 percent level of significance. Apparently, the choice of auditor is not independent of the group the firm belongs to. What is the nature of this dependence? A characteristic of the Six Relationship between Corporate Groups and Auditors in Japan 85

Large Corporate Groups is that the main bank is simultaneously a large shareholder, a large creditor and also an institutional investor. And the main bank plays an important role in redistributing profits and sharing risks within the group. For this purpose, the main bank needs to monitor the member firms in its group. A main bank can utilize the audit by certified public accountants (CPAs) as a part of its monitoring system of the member firms. It is efficient for the main bank to rely on an auditor it knows well. Therefore the main bank may make the member firms in its group elect the same auditor that the bank itself uses. Each main bank contracts with the auditor as the following; Sakura - Showa-Ota, Mitsubishi - Tohmatsu, Sumitomo - Asahi, Fuji - Showa-Ota, Dai-Ichi Kangyo - Century and Sanwa Chuo. Table 2 shows the percentages of member firms in each group that use each auditor.

Table 2: Relations between the Six Large Corporate Groups and auditors (the percentages)

Mitsui Mitsubishi Sumitomo Fuyo Dai-Ichi Sanwa Kangyo

Tohmatsu 16.4 14.6 12.0 9.3 11.6 4.8 Asahi 11.5 13.8 42.6' 19.5 11.6 27.4' Chuo 12.3 24.6' 9.3 12.7 11.6 21.0 Showa-Ota 19.7 15.4 9.3 21.2d 22.1' 17.7 Century 8.2 9.2 11.1 5.1 15.1 8.1 Others 31.9 22.4 15.7 32.2 28.0 21.0 Total 100 100 100 100 100 100

Notes:1. Figures mean percentages of firms which contract with that auditor in the group. 2. A core bank is excluded from firms in the calculation of percentages. 3. Bold types mean the percentage in which firms contract with the same auditor as that of their own main bank. 4. Significance levels. a: 0.001 b: 0.01 c: 0.05 d:0.1

The probability that a certain auditor is elected by the firm is theoretically one divided by the total number of existing auditors in Japan. But, because there are small audit corporations and personal 86 K. Suzuki

auditors which do not have the scale sufficient to audit large companies, the number of auditors which can audit large companies is narrowed down. But we are unable to discover how many audit corporations have the capacity to audit large companies. So we classify the auditors whom clients can select among the six; Tohmatsu, Asahi, Chuo, Showa-Ota, Century and " Others" in which other auditors are collected. But, of course, there are many auditors who have the scale sufficient to audit large companies in the " Others" category. It may depend on the capacity of the audit corporation how many clients each audit corporation can audit, but it is difficult to find a figure which represents the capacity of an auditor. For example, the number of the clients does not always indicate the capacity of the auditor, because one large client needs a larger capacity than some small clients in total. An audit corporation may allocate more CPAs to a large client than to some small clients in total'. Similarly the number of CPAs employed does not always indicate the capacity, because one veteran CPA can provide more capacity than some inexperienced CPAs can together. Accordingly, we have to build up the following hypothesis simply. That is, if we assume that firms which are members of a corporate group elect their auditors independently, disregarding which auditor is elected by their main bank, the probability that a certain auditor is elected by a firm would be expected to be less than one-sixth. In other words, if we assume that there is a tendency that the auditor elected by a firm which is the member of a corporate group is the same as the auditor elected by the main bank in that group, the probability that the auditor of the main bank is elected by other member firms belonging to that group would be more than one-sixth. We conduct a one-sided test with the null hypothesis that the percentage that the auditor of main bank is elected by other member

3 . If we assume that the number of the clients indicates the capacity of the auditor, the probability that a certain auditor is elected by a firm would be expected to be less than the ratio of the number of the clients of each auditor to the total number of the firms belonging to the Six Large Corporate Groups; Tohmatsu 77/632, Asahi 129/632, Chuo 96/632, Showa-Ota 111/632, Century 59/632; under the condition that firms independently elect auditors. The results of the one-sided tests under this null hypothesis are the following. Significant at 0.001; Sumitomo-Asahi. at 0.005; Mitsubishi-Chuo. at 0.05 ; Dai-Ich Kangyo-Century. at 0.1 ; Mitsui-Tohmatsu, and Sanwa-Asahi. Relationship between Corporate Groups and Auditors in Japan 87 firms in the group is one-sixth. The result of the test is presented in Table 2. The null hypothesis is rejected for Sumitomo —Asahi at the 0.1 percent level and for Fuyo — Showa-Ota at the 10 percent level respectively. But we can not find particular connections through the main bank in the other groups, though we can find specific relations in Mitsubishi Group, Dai-Ichi Kangyo Bank Group and Sanwa Group not through the main banks. Accordingly, it is difficult to explain the relationship between the Six Large Corporate Groups and auditors only from the point of view that the main banks utilize their auditors as a part of a monitoring facility.

IV.2. Relations between the Vertical Series Corporate Groups and auditors

Vertical Series Corporate Groups are another type of groups that consist of subcontractors or sales companies around a core giant company. Such groups differ from the Six Large Corporate Groups in that they are related not only through capital but also through funds, personnel exchanges, support of techniques and commodity transactions. This relation is closer than that of the Six Large Corporate Groups. Arguments applicable to the Six Large Groups are also applicable to the Vertical Series Corporate Groups if we replace the main bank by the core firm in the arguments. The core firm has a similar, though not the same, need for monitoring the member firms in the group, and therefore, one might expect its member firms to use its own auditor. If a firm which is the member of a Vertical Series Corporate Group elects an auditor independently, disregarding which auditor is elected by the core firm, the probability that a certain auditor would be elected is expected to be less than one-sixth, as we have seen in Section IV.1. In other words, if we assume that there is a tendency that the auditor of the firms which are the members of a certain group is the same as the auditor of the core firm in that group, the probability that the auditor of the core firm is elected by other member firms in that group would be expected to be more than one-sixth. So we conduct a one-sided test of our null hypothesis that the member firms elect their auditors independently of the core firm's auditor. Appendix B shows the connections between auditors and 88 K. Suzuki publicly-held firms belonging to the typical Vertical Series Corporate Groups in Japan. Of the 326 firms in our samples, 161 firms have the same auditor as their core firms. This 49.4 percent identity rejects the null hypothesis at a 0.1 percent level of significance. We can conclude that firms belonging to the Vertical Series Corporate Groups are highly likely to pick the auditor of their core firm as their own auditor.

IV.3. Hierarchy of corporate groups and auditors Each of the Six Large Corporate Groups contains some Vertical Series Corporate Groups in itself. For example, the Mitsui Group, which is one of the Six Large Corporate Groups, contains the Mitsui Corp. Group, the Toshiba Group, the Ito-Yokado Group and the Mitsui Fudosan Group which are classified as the Vertical Series Corporate Groups. The relationship between firms and auditors shows the different styles of the two types of corporate groups. The results from the tests in Section N. 2 make it clear that the auditor of the firms which are the members of a group tends to be the auditor of the core firm in the Vertical Series Corporate Groups. However, the results from the tests in Section N. 1 show that the auditor elected by the main bank tends to be elected by other member firms in some groups, but not in other groups. We can explain these results in two ways. Firstly, this phenomenon seems to arise when some Vertical Series Corporate Groups are included in one of the Six Large Corporate Groups and simultaneously the auditor of the main bank is different from the auditors elected by the core firms in the Vertical Series Corporate Groups. The results from the tests in Section IV.1 support this interpretation. Secondly, we can consider that the connections with members in some of the Six Large Corporate Groups are looser than those of the Vertical Series Corporate Groups. These different interpretations are not mutually exclusive.

V. Taking auditors into corporate groups and the problem of the independence

Members of corporate groups prefer to do business with other members within the group on a continuing basis because the Relationship between Corporate Groups and Auditors in Japan 89 transaction costs are lower, risks can be shared, and it permits efficient adjustment to new circumstances. But this arrangement has its own dangers. By shielding the management of these firms from outside market forces and competition, it may encourage inefficiency, even fraud. Such restriction of competition may cause firms to pursue unreasonable profits and sacrifice the interests of the other parties. A similar argument applies to the relations between auditors and the client firms. A continuing relationship between a firm and its auditors does save costs for both, as we argued in an earlier section. The association of an auditor with a whole corporate group may reduce costs even more. There is the economic rationale for associating an auditor with the group. On the other hand, long term auditing relations exclude competition, and increase the possibility of collusion between the managers and auditors. When an auditor is associated with a corporate group, the auditor's judgment in choosing his opinion on a member firm may be affected by this group membership. For example, when the auditor detects fraud or some other irregularities in a member firm, the auditor may hesitate to reveal them in his opinion for the fear of damaging the credibility of the whole group with which he is associated. This externality is a consequence of other externalities that drive auditors to become associated with the groups in the first place. Furthermore, an auditor associated with a group cannot render independent judgments if he must worry about losing all member firms from his clients as a result of his disagreement about the accounting practices of one member of the group. The loss of so many clients would inflict such a great loss on the auditor that it becomes very difficult for him, as a group member, to maintain his independence. In addition to the substance of the independence discussed above, we must also consider the importance of the appearance of the independence. If the outside users of financial statements doubt the independence of the auditors who are members of a group, which is quite likely, the apparent independence of the auditors is lost. When the auditor expands his business with the members of a group by being introduced by his existing clients, he owes an obligation to such clients. If the outside users of financial statements think so, both the substance as well as the appearance of independence is lost. Even if the auditor 90 K. Suzuki

is in fact independent, if the appearance of the independence is not maintained, the social value of the system of auditing by CPAs decrease.

VI. Conclusion

The Japanese practice of forming corporate groups is based on objectives other than maximizing the profits of individual member firms. These other objectives include the profits of the group of interconnected firms as a whole, the employment stabilization, and the stability of the positions of their executives. The formation of groups has its own negative consequences. Through cross-shareholdings, a large part of the outstanding stock, in effect, becomes treasury stock and monitoring management by shareholders is weakened. Through their tie to the stability of executive positions, cross-shareholdings have also weakened the institution of the KANSAYAKU, who is supposed to inspect the firm under Japanese company law. Monitoring by main banks or by labor unions which are company specific is no substitute for the monitoring system to a company from the point of view of the outside parties. Without outside monitoring, managers are likely to use their discretion to the disadvantage of the outside parties. Restricting such discretion is the main function of the system of the independent audit of financial statements. But, when auditors become members of corporate groups, it becomes more difficult for them to carry out this function. As we have seen in this paper, auditors do get associated with corporate groups. This reduces their independence in both substance and appearance. It does save costs, but what is the purpose of a cheap but ineffective auditing system? How much we should spend on auditing or how much independence we should demand is a matter of social choice. In this paper, we have merely pointed out that loss of auditor independence is the price Japanese people have paid for these cost savings. Are they worth that price? Since the War, the economic standard of living of Japanese people has been improved by industrial growth. Saving costs •concerning auditing over long term has contributed to raising the profitability of Japanese firms. But the importance of corporate governance has come Relationship between Corporate Groups and Auditors in Japan 91

to be recognized by Japanese people recently. The values are shifting from pursuing efficiency to attaining social fairness. Accordingly, we have to consider how to keep the independence of auditors.

Received September 1, 1995.

References

Caves, Richard E., and Masu Uekusa, Industrial Organization in Japan, Brookings Institution, Washington D.C., 1976. Coase, Ronald H., " The Nature of the Firm," Economica n.s., Vol.4(1937), pp.386-405. Goto, Akira, " Kigyo Group no Keizaibunseki," ( " Economic Analysis of Corporate Groups"), (in Japanese), Keizai Kenkyu, Vol.29, No.2(1978), pp.130-134. Imai, Kenichi, " Kigyo Group," ( " Corporate Group"), in Kenichi Imai and Komiya Ryutaro, ed., Nihon no Kigyo (Firms in Japan), (in Japanese), Tokyo Univ. Press., Tokyo, 1989, pp.131-161. Imai, Kenichi, Hiroyuki Itami, and Kazuo Koike, Naibusoshiki no Keizaigaku, (Economics of Internal Organization), (in Japanese), Toyo Keizai Shinposha, Tokyo, 1986. Keizaichousa Kyoukai, Nenpo no Kenkyu 1995; Daiichibu Joujouhen(Annual Report: Study of Corporate Series: Listed on First Section)Vol.35, (in Japanese), Keizaichousa Kyoukai, Tokyo, 1995. Kozeki, Isamu, Wagakuni Kansahojin no Jisshouteki Kenkyuu (Empirical Study of Audit Corporations in Japan), (in Japanese), Zeimukeiri Kyoukai, Tokyo, 1991. Nakatani, Iwao, " The Economic Role of Financial Corporate Grouping," in Masahiko Aoki ed., The Economic Analysis of the Japanese Firm, Elsevier, Netherland, 1983, pp.227-258. Odagiri, Hiroyuki, " Kigyo Shuudan no Riron—Kigyo Shuudan no Kantenkara— " ( " Theory of Corporate Groups"),(in Japanese), The Economic Studies Quarterly, Vol.26, No.2, 1975, pp.144-154. Toyo Keizai Shinposha, Kigyo keiretsu Souran 95( Y earbook: Corporate Series), (in Japanese), Toyo Keizai Shinposha, Tokyo, 1995. 92 K. Suzuki

Appendix A: The Six Large Corporate Groups and Its Auditors

Companies Auditors Nippon Oil Showa-Ota MITSUI GROUP Toshiba Ceramics Showa-Ota Mitsui Sugar Tohmatsu The Showa-Ota Coca-Cola Bottling Tohmatsu Showa Electric Wire & Cable Showa-Ota Daito Woolen Spinning & Weaving Tohmatsu Toshiba Tungaloy Showa-Ota Daisel Chemical Industries Tohmatsu Toyo Engineering Showa-Ota Toyama Chemical Tohmatsu Toshiba Showa-Ota Harima Chemicals Tohmatsu Tokyo Electric Showa-Ota Chuo Spring Tohmatsu Shibaura Engineering Works Showa-Ota Brother Industries Tohmatsu Showa-Ota Kokusai Electric Tohmatsu Minolta Camera Showa-Ota Mitsumi Electric Tohmatsu Topcon Showa-Ota Tokimec Tohmatsu Mitsukoshi Showa-Ota Nippondenso Tohmatsu Asics Showa-Ota Tokai Rika Tohmatsu The Tokyo Electric Power Showa-Ota Sokkia Tohmatsu Yomiuri Land Showa-Ota Naigai Tohmatsu The Sakura Bank Showa-Ota Mitsui & Co. Tohmatsu & Tohmatsu Nihon Unisys Tohmatsu Raito Kogyo Century The Mitsui Trust and Banking Tohmatsu K urabo Industries Century Keisei Electric Railway Tohmatsu The Green Cross Century Utoku Express Tohmatsu Ibiden Century Kanto Natural Gas Development Asahi Toshiba Machine Century JGC Asahi Century Shinyei Kaisha Asahi Taiheiyo Kouhatsu Century Mitsui Toatsu Chemicals Asahi Senshukai Century Kaneka Asahi Mitsui Marine and Fire Insurance Century Mitsui Mining and Smelting Asahi Inui Steamship Century Noritz Asahi Arai-Gumi Other Mitsui Engineering & Shipbuilding Asahi Toenec Other Alps Electric Asahi Kobe K iito Other Takashima Asahi Kyowa Leather Cloth Other Mitsui Fudosan Asahi Aichi Steel Works Other Mitsui Real Estate Sales Asahi Nikko Other Sagami Railway Asahi Denki Kogyo Other Mitsui O.S.K.Lines Asahi Yuasa Corp. Other . Mitsui Matsushima Chuo Automatic Loom Works Other Haseko Chuo Toyota Machine Works Other Ichiken Chuo Toyota Motor Other Nippon Flour Mills Chuo Toyota Auto Body Other Toyo Suisan Kaisha Chuo Seiki Other Kanebo Chuo Toho Gas Other Toray Industries Chuo Seiki Other Nippon Kakoh Seishi Chuo Daito Kogyo Other Onoda Cement Chuo Sasaki Glass Other Tostem Chuo Taito Other Fujikura Chuo Zenchiku Other Dantani Chuo General Sekiyu Other Chuo Sanwa Shutter Other Ito- Yokado Chuo Sony Other Tostem Viva Chuo Toyo Seikan Kaisya Other Mitsui Mining Showa-Ota Taihei Dengyo Kaisha Other Mitsui Construction Showa-Ota Shintom Other Honshu Paper Showa-Ota Izumiya Other Sanki Engineering Showa-Ota Tokyo Theatres Other Toshiba Engineering & Construction Showa-Ota Kanto Auto Works Other Toagosci Chemical Industry Showa-Ota Other Mitsui Petrochemical Industries Showa-Ota Toshok u Other Fuji Photo Film Showa-Ota Japan l'u Ip & Paper Other Relationship between Corporate Groups and Auditors in Japan 93

M itsui-Soko Other Noritake Chuo Fujiko Other NGK Spark Plug Chuo Tokai Other Mitsubishi Steel Mfg. Chuo JDC Other Toho Zinc Chuo Takaoka Electric Mfg. Other Optec Dai-Ichi Denko Chuo Heiwa Real Estate Other Ryobi Chuo Meiji Shipping Other Nihon Kentetsu Chuo Futaba Industrial Co. Other Toyo Kanetsu Chuo MITSUBISHI GROUP Nohmi Bosai Chuo Morinaga & Co. Tohmatsu Hochiki Chuo The Nisshin Oil Mills Tohmatsu Ono Sokki Chuo Wacoal Tohmatsu Graphtec Chuo Toyo Sanso Tohmatsu Tsukamoto Shoji Chuo Tokyo Ohka Kogyo Tohmatsu Ryoyo Electro Chuo Nippon Shinyaku Tohmatsu Sanrio Chuo NGK Insulators Tohmatsu Isetan Chuo INAX Tohmatsu The Tokio Marine and Fire Insurance Tokai Carbon Tohmatsu Chuo Chiyoda Tohmatsu Nippon Yusen Chuo JEOL Tohmatsu Japan Transcity Chuo Omron Tohmatsu Ines Chuo Japan Storage Battery Tohmatsu Kyudenko Showa-Ota Nippon Yusoki Tohmatsu. Nitto Flour Milling Showa-Ota Shimadzu Tohmatsu Ajinomoto Showa-Ota Nikon Tohmatsu Fuji Spinning Showa-Ota Kamei Tohmatsu Mitsubishi Rayon Showa-Ota Mitsubishi Corp. Tohmatsu Nippon Chemical Industrial Showa-Ota Kanaden Tohmatsu Mitsubishi Petrochemical Showa-Ota The Mitsubishi Bank Tohmatsu Nippon Kayaku Showa-Ota Takasago Thermal Engineering Asahi Yoshitomi Pharmaceutical Industries Showa-Ota Kirin Brewery Asahi Nihon Tokushu Toryo Showa-Ota Chukyo Coca-Cola Bottling Asahi Toto Showa-Ota Toyobo Asahi Mitsubishi Kakoki Kaisha Showa-Ota. Tokai Pulp Asahi Mitsubishi Electric Showa-Ota Rohto Pharmaceutical Asahi Mitsubishi Heavy Industries Showa-Ota Takasago International Asahi Showa-Ota Mitsubishi Materials Asahi Motor Showa-Ota Mitsubishi Shindoh Asahi Ichida Showa-Ota Mitsubishi Cable Industries Asahi Ryoden Trading Showa-Ota Okamura Asahi The Mitsubishi Trust and Banking Showa-Ota Sanyo Shokai Asahi Odakyu Electric Railway Showa-Ota Kinsho-Mataichi Asahi Tokyu Construction Century Marui Asahi Nihon Nosan Kogyo Century Kinki Nippon Railway Asahi Tsumura Century Fukuyama Transporting Asahi Dai-Nippon Toryo Century MitsubishiMitsubishiWarehouse&Transportation Warehouse & Trans Sankyo Seiko Century Asah Tokyu Store Chain Century Tokyo Gas Asah The Daimaru Century Nagatanien Chuo Mitsubishi Estate Century Mitsubishi Paper Mills Chuo Tokyu Land Century Nippon Kasei Chemical Chuo Tokyu Corp. Century Mitsubishi Chemical Chuo Taiheiyo Kaiun Century Shin -Etsu Chemical Chuo K yoei Tanker Century Osaka Sanso Kogyo Chuo Sakai Chemical Industry Other Nippon Carbide Industries Chuo Mitsubishi Oil Other The Nippon Synthetic Chemical Industry Akai Electric Other Chuo Toda Other Mitsubishi Plastics Industries Chuo Senko Other Miyoshi Oil & Fat Chuo Chino Other Chugoku Marine Paints Chuo Teac Other Asahi Glass Chuo Miyaji Iron Works Other 94 K. Suzuki

K ikkoman Other Nitsuko Corp. Asahi Nihon Matai Other Toyo Communication Equipment Asahi Pasco Other A nritau Asahi Nitto Chemical Industry Other Tokin Asahi Makino Milling Machine Other Matsushita Communication Industrial Gunze Sangyo Other Asahi Osaki Electric Other Victor Company of Japan Asahi Taiyo Sanso Other Press Kogyo Asahi Nippon Comsys Other Motor Asahi Mochida Pharmaceutical Other Olympus Optical Asahi Katsumura Construction Other Kokuyo Asahi Fudo Construction Other Sumitomo Corp. Asahi Mitsubishi Gas Chemical Other Ilanwa Asahi Scika Other Descente Asahi Tokyu Department Store Other Uchida Yoko Asahi Tokyu Hotel Chain Other The Sumitomo Bank Asahi Meiwa Trading Other The Sumitomo Trust and Banking Asahi Yomeishu Seizo Other The Sumitomo Marine and Fire Insurance Kawai Musical Instruments Mfg. Other Asahi Sho-Bond Other Daibiru Asahi Nakano Other Sumitomo Realty & Development Asahi SUMITOMO GROUP The Sumitomo Warehouse Asahi Kajima Tohmatsu Sumitomo Computer System Asahi Wakachiku Construction Tohmatsu Pharmaceutical Industries Chuo house Food Industrial Tohmatsu Sumitomo Sitix Chuo Takeda Chemical Industries Tohmatsu Ishii Iron Works Chuo Sumitomo Metal Industries Tohmatsu Sanyo Electric Chuo Sumitomo Light Metal Industries Tohmatsu Tamura Chuo Sumitomo Precision Products Tohmatsu Sega Enterprises Chuo I)aikin Industries Tohmatsu Renown Chuo CHD Tohmatsu D'urban Chuo Kyushu Matsushita Electric Tohmatsu Life Corp. Chuo Sumitomo Special Metals Tohmatsu Keio Teito Electric Railway Chuo Daiichi Chuo K isen Kaisha Tohmatsu Sumitomo Coal Mining Showa-Ota The Kansai Electric Power Tohmatsu Yoshihara Oil Mill Showa-Ota Daiho Construction Asahi Tomoegaw a Paper Showa-Ota Marudai Food Asahi Settsu Showa-Ota Asahi Breweries Asahi Yamanouchi Pharmaceutical Showa-Ota Fuji Oil Asahi Shionogi & Co. Showa-Ota Kawashima Textile Manufacturers Asahi Sumitomo Cement Showa-Ota Sumitomo Chemical Asahi NEC Showa-Ota Teisan Asahi Japan Aviation Electronics Industry Sumitomo Bakelite Asahi Showa-Ota Tsutsunaka Plastic Industry Asahi Nagase & Co. Showa-Ota Daiichi Pharmaceutical Asahi Asanuma Century Sakata Inx Asahi Sumitomo Forestry Century Asahi Tomoe Century Nippon Electric Glass Asahi Q.P. Century Shinagawa Refractories Asahi Nippon Valqua Industries Century Tokyo Steel Mfg. Asahi Nippon Paint Century Kanto Special Steel Works Asahi Nippon Sheet Glass Century Sumitomo Metal Mining Asahi Matsushita Refrigeration Century Sankyo Aluminium Industry Asahi Matsushita Seiko Century Sumitomo Electric Industries Asahi Matsushita Electric Industrial Century Nihon Spindle Mfg. Asahi Matsushita-Kotobuki Electronics Industries K omatsu Asahi Century 'l'oci Sumitomo Heavy Industries Asahi Century Mcidensha Asahi Kumagai Gumi Other Nippon Electric Industry Asahi Rengo Other Daihen Asahi Sumitomo Construct ion Other Nissin Electric Asahi Asahi Chemical Industry Other Relationship between Corporate Groups and Auditors in Japan 95

Taisho Pharmaceutical Other Yamazen Chuo Sumitomo Seika Chemicals Other Credit Saison Chuo Hanshin Electric Railway Other Sapporo Breweries Showa-Ota National House Industrial Other Nichirei Showa-Ota Yuasa Trading Other The Japan Paper Industry Showa-Ota Dainippon Pharmaceutical Other Nippon Sanso Showa-Ota Matsushita Electric Works Other Riken Vinyl Industry Showa-Ota Sumitomo Rubber Industries Other Nihon Cement Showa-Ota Toyo Aluminium Other Daiichi Cement Showa-Ota Chugai Pharmaceutical Other NKK Showa-Ota Tesac Other Toa Steel Showa-Ota Daiken Other Yodogawa Steel Works Showa-Ota Nichias Other Oki Electric Cable Showa-Ota FUYO GROUP NSK Showa-Ota Tobishima Tohmatsu Oki Electric Industry Showa-Ota Takara Shuzo Tohmatsu Kinseki Showa-Ota Katakura Industries Tohmatsu Motor Showa-Ota Suminoe Textile Tohmatsu Kansei Showa-Ota Achilles Tohmatsu Showa-Ota Ishizuka Glass Tohmatsu Tokyo Seimitsu Showa-Ota Nippon Carbon Tohmatsu Tohto Suisan Showa-Ota Juki Tohmatsu Canon Sales Showa-Ota Kyotaru Tohmatsu Shinagawa Fuel Showa-Ota Jujiya Tohmatsu The Fuji Bank Showa-Ota Yamato Transport Tohmatsu The Yasuda Trust and Banking Showa-Ota Taisei Asahi The Yasuda Fire and Marine IrInsurance Taisei Prefab Construction Asahi Showa-Ota Tekken Asahi Keihin Electric Express Railway Showa-Ota Totetsu Kogyo Asahi Joban Kosan Showa-Ota Taisei Rotec Asahi Matsui Construction Century Daimei Telecom Engineering Asahi Penta-Ocean Construction Century Nippon Formula Feed Mfg. Asahi Japan Carlit Century Toho Rayon Asahi Matsuo Bridge Century Dynic Asahi Daiwa Seiko Century Dai-ichi Kogyo Seiyaku Asahi Izutsuya Century Nippon Kinzoku Asahi Kurimoto Other Sanyo Industries Asahi Nippon Conveyor Other Max Asahi Aichi Machine Industry Other Sharp Asahi Tokyo Kikai Seisakusho Other The Nippon Signal Asahi Other Kayaba Industry Asahi Origin Electric Other Corp. Asahi Nishimatsu Construction Other Okura & Co. Asahi Nippon Koei Other Mitsuuroko Asahi Tokyo Tatemono Other Totenko Asahi Toyo Sugar Refining Other Tobu Store Asahi Nisshin Flour Milling Other Tokyo Nissan Auto Sales Asahi Dijet Industrial Other Tobu Railway Asahi Tonen Other Toa Chuo Yamatake-Honeywell Other Taikisha Chuo Nippon Densetsu Kogyo Other Teikoku Sen-i Chuo Showa Highpolymer Other NOF Chuo Morita Fire Pump Mfg. Other Ask Chuo Hayashikane Sangyo Other Enshu Chuo Maruyama Mfg. Other Nippon Denko Chuo Daishowa Paper Mfg. Other Komori Chuo Sakurada Other Yodogawa Electric Chuo Showa Aluminum Other Nichicon Chuo TY K Other Chuo Nippon Hume Pipe Other Calsonic Chuo Yamazaki Baking Other Chori Chuo K urcha Chemical Industry Other 96 K. Suzuki

Showa Line Other I lak uyoshrt Showa-Ota Tokyotokeiba Other Prima Meat Packers Showa-Ota Shochiku Other Ichikawa Century Showa Donk° Other Tokyo Rope Mfg. Century Shoko Other Niigata Engineering Century Nisshinbo Industries Other O-M Century Okamoto Industries Other Iseki & Co. Century Dainichiseika Colour & Chemicals Mfg. Nippon Columbia Century Other Ad vantest Century Mutoh Industries Other Iwasaki Electric Century Nissan Diesel Motor Other Motors Century The Japan Wool Textile Other The Dai-Ichi Kangyo Bank Century Tokyo Denki Komusho Other Kankaku Securities Century DAI-ICHI KANGYO BANK GROUP Nippon Express Century Seikitokyu Kogyo Tohmatsu Tonami Transportation Century Yakult Honsha Tohmatsu Namuco Century Japan Radio Tohmatsu Sato Kogyo Other Star Micronics Tohmatsu Japan Metals & Chemicals Other Nissha Printing Tohmatsu Nihon Nohyaku Other Itochu Corp. Tohmatsu Yokogawa Bridge Other Itochu Fuel Tohmatsu Hokkaido Gas Other Cabin Tohmatsu Ando Other Nagasakiya Tohmatsu Ohkura Electric Other Jusco Tohmatsu Morozoff Other Hazama Asahi Ebara Other Nippon Felt Asahi Nichimo Other Hokuetsu Paper Mills Asahi Nippon Light Metal Other Takiron Asahi Showa Shell Sekiyu Other Takuma Asahi Nikkiso Other Kawasaki Heavy Industries Asahi Citizen Watch Other Japan Aircraft Mfg. Asahi Daiichi Jitsugyo Other Seiko Asahi Fujitsu General Other Nichii Asahi Tokyo Tanabe Other Tokyo Asahi Kyodo Printing Other Shimizu Chuo The Shibusawa Warehouse Other The Nippon Road Chuo Daidoh Ltd. Other The Calpis Food Industry Chuo Showa Sangyo Other The Furukawa Electric Chuo Meiji Milk Products Other NHK Spring Chuo Totoku Electric Other Shindengen Electric Mfg. Chuo Okabe Other The Furukawa Battery Chuo SANWA GROUP Seiyo Food Systems Chuo Unitika Tohmatsu Parco Chuo Nippon Concrete Industries Tohmatsu The Seiyu Chuo Hoya Tohmatsu First Baking Showa-Ota Asahi Kanto Denka Kogyo Showa-Ota Tanabe Seiyaku Asahi Nippon Zeon Showa-Ota Hisamitsu Pharmaceutical Asahi Asahi Denka Kogyo Showa-Ota Kansai Paint Asahi Tohpe Showa-Ota Toyo Tire & Rubber Asahi The Yokohama Rubber Showa-Ota Kobe Steel Asahi Kawasaki Steel Showa-Ota Iwatsu Electric Asahi Furukawa Showa-Ota Nitto Denko Asahi Fuji Electric Showa-Ota Hitachi Zosen Asahi Yasukawa Electric Showa-Ota Fuji Car Mfg. Asahi Fujitsu Showa-Ota Toli Asahi Fanuc Showa-Ota Nissho Iwai Asahi Fuji Electrochemical Showa-Ota Tak ash i maya Asahi I Loki Crebio Show a-Ota I lankyu Department Stores Asahi Kawatetsu Show a-Ota Orix Asahi Fuji Denki Reiki Showa-Ota I I ankyu Corp. Asahi Kawasaki K isen K aisha Show a-Ota N issin Asahi

Relationship between Corporate Groups and Auditors in Japan 97

Daisue Construction Chuo Toyo Electric Mfg. Showa-Ota Sanko Metal Industrial Chuo Uniden Showa-Ota Toa Wool Spinning & Weaving Chuo Sogo Showa-Ota Fukusuke Chuo Daiwabo Century Osaka Cement Chuo Mory Industries Century Nisshin• Steel Chuo NTN Century Nakayama Steel Works Chuo Motor Century Kyocera Chuo Nichimen Century Kasumi Chuo Toyo Umpanki Other The Sanwa Bank Chuo Tsukishima Kikai Other The Toyo Trust and Banking Chuo Iwatani International Other Daikyo Chuo Nippon Gas Other Fujita Kanko Chuo Tokuyama Soda Other Toyo Information Systems Chuo Bandai Other Obayashi Showa-Ota Toyo Construction Other Obayashi Road Showa-Ota Fujisawa Pharmaceutical Other Sekisui House Showa-Ota Sekisui Jushi Other Daiso Showa-Ota Shokusan Jutaku Sogo Other Showa-Ota Mitsuboshi Belting Other Sekisui Chemical Showa-Ota France Bed Other Sekisui Plastics Showa-Ota Cleanup Other Teijin Seiki Showa-Ota

Note: Sourse: Keizaichousa Kyoukai (1995)

Appendix B: Vertical Series Corp orate Groups and Auditors Companies Auditors Nippon Kasei Chemical Chuo * TAISEI GROUP Kawasaki Kasei Chemicals Chuo * Taisei Prefab Construction Asahi* The Nippon Synthetic Chemical Industry Taisei Rotec Asahi* Chuo * Yuraku Real Estate Asahi* Mitsubishi Plastics Industries Chuo * MISAWA HOMES GROUP Nitto Kako Chuo * Misawa Ceramics Chuo* Taiyo Sanso Takada et al. Misawa Ceramic Chemical Chuo* Tokyo Tanabe Meiji Misawa Resort Chuo* SUMITOMO CHEMICAL GROUP Toyo Bosuifu Mfg. Chuo* Sumitomo Bakelite Asahi* Tokyo Misawa Homes Chuo* Shinto Paint Asahi * Tohoku Misawa Homes Chuo * Sakata Inx Asahi * Hory Chuo* Inabata & Co. Asahi* Misawa Van Showa-Ota Kyoto Die-Casting Miyoshi et al. Ishii Precision Tool Taiyo Sumitomo Seika Chemicals Mizuho KIRIN GROUP Taoka Chemical Seiwa Kinki Coca-Cola Bottling Asahi * NIPPON OIL GROUP AJINOMOTO GROUP Nippon Hodo Showa-Ota * The Calpis Food Industry Chuo Koa Oil Tohmatsu Kumazawa Seiyu Sangyo Chuo Japan Oil Transportation Asahi Mercian Nihonbashi JAPAN ENERGY GROUP TORAY GROUP Toho Titanium Chuo* Towa Orimono Yukou Koyo Iron Works & Construction Chuo* ASAHI CHEMICAL INDUSTRY GROUP Tatsuta Electric Wire and Cable Century Fuji Titanium Industry Showa-Ota Maruwn Transport Lida et al. Asahi Organic Chemicals Industry Century et al. NIPPON STEEL GROUP Tensho Electric Industries Matsui et al. Taihei Kogyo Chuo* MITSU13ISIII CHEMICA I. GROUP Nippon Tetrapod Chuo * 98 K. Suzuki

Sanko Metal Industrial Chuo * P.S. Show a-Ota Nippon Steel Chemical Chuo * HITACHI GROUP Kurosaki Chuo * Hitachi Plant Engineering & Construction Nisshin Steel Chuo * Century * Godo Steel Chuo * Hitachi Chemical Century * Takasago Tekko Chuo * Hitachi Metals Century * Sanyo Special Steel Chuo * Hitachi Construction Machinery Century * Pacific Metals Chuo * Jidosha Denki Kogyo Century * Nippon Denko Chuo * Hitachi Electronics Century * Nittetsu Shoji Chuo * Nippon Columbia Century * Tokai Kogyo Chuo * Hitachi Century * Nittetsu Semiconductor Chuo * Hitachi Medical Century * Nippon Concrete Industries Tohmatsu Nissei Sangyo Century * Daido Steel Tohmatsu Hitachi Sales Century * Nippon Kinzoku Asahi Hitachi Credit Century * Nichia Steel Works Asahi Hitachi Transport System Century * Nittetsu Mining Showa-Ota Hitachi Software Engineering Century * Harima Ceramic Showa-Ota Hitachi Information Systems Century * Daido Steel Sheet Showa-Ota Kokusai Electeic Tohmatsu Nittetsu Kokan Showa-Ota Hitachi Koki Asahi Suzuki Metal Industry Century Chuo Japan Metals & Chemicals Kyoritsu Nakayo Telecommunications Showa-Ota Fudo Construction Toyo Shin Maywa Industries Showa-Ota SUMITOMO METAL INDUSTRIES GROUP Yagi Antenna Hitomi et al. Chuo Denki Kogyo Tohmatsu * Karasawa et al. Nippon Pipe Manufacturing Tohmatsu * Kokusan Denki Suzuki et al. Sumitomo Light Metal Industries Tohmatsu * Japan Servo Inoue Sumitomo Precision Products Tohmatsu * Hitachi Kiden Kogyo Yuko Daikin Industries Tohmatsu * TOSHIBA GROUP Sumitomo Special Metals Tohmatsu * Toshiba Engineering & Construction Daiichi Chuo K isen Kaisha Tohmatsu * Showa-Ota * Kokura Enterprise Tohmatsu * Toshiba Chemical Showa-Ota * Sumik in Bussan Tohmatsu * Toshiba Ceramics Showa-Ota * Kanto Special Steel Works Asahi Showa Electric Wire & Cable Showa-Ota * Sumitomo Sitix Chuo Toshiba Tungaloy Showa-Ota * KOBE STEEL GROUP Shibaura Engineering Works Showa-Ota * Shinko Wire Asahi * Nishishiba Electric Showa-Ota * Shinko Engineering Asahi * Topcon Showa-Ota * Shinko Pantec Asahi * Tokyo Electric Showa-Ota * Shinko Elecrtric Asahi * Toshiba Machine Century Shinko K osan Asahi * NEC GROUP Kokoku Steel Wire Chuo NEC System Integration & Construction Amatei Chuo Showa-Ota * Suncall Yamato Japan Aviation Electronics Industry Nippon Koshuha Steel Inoue Showa-Ota * Shinsho Corp. Kyobashi Tama Denki Kogyo Showa-Ota * Nabco Kaida et al. Nippon Electric Glass Asahi Osaka Chain & Machinery Sakai et al. Nippon Electric Industry Asahi M ITSU BI Sill MATERIALS GROUP N itsuko Asahi Mitsubishi Construction Asahi * Toyo Communication Equipment Asahi Mitsubishi Cable Industries Asahi * A n ritsu Asahi M itsubish Shindoh Asahi* Tokin Asahi Relationship between Corporate Groups and Auditors in Japan 99

Ando Electric Asahi Nippondenso Tohmatsu Nippon Avionics Price Waterhouse Tokai Rika Tohmatsu FUJITSU GROUP Owari Precise Products Tohmatsu Fuji Electric Showa-Ota * Aisan Tohmatsu Fujitsu Showa-Ota * Kayaba Industry Asahi Fujitsu Kiden Showa-Ota * Jeco Asahi Fanuc Showa-Ota * Koyo Seiko Chuo Fuji Electrochemical Showa-Ota * Hino Motors Showa-Ota Shinko Electric Industries Showa-Ota * Trinity Industrial Century Fujitsu Business Systems Showa-Ota * Daihatsu Motor Century Kanda Tsushin Kogyo Asahi Shiroki Century Advantest Century Futaba Industrial Midori Towa Electron Inoue Toyoda Gosei Midori Takamisawa Electric Nihonbashi Tokyo Sintered Metals Koujimachi Fujitsu General Yaesu Koito Manufacturing Mizuno et al. MATSUSHITA Kanto Auto Works Tanaka et al. ELECTRIC INDUSTRIAL GROUP NISSAN MOTOR GROUP Wakayama Precision Century * Unishia Jecs Showa-Ota * Matsushita Refrigeration Century * Kansei Showa-Ota * Matsushita Seiko Century * Tsuchiya Works Showa-Ota * Matsushita-Kotobuki Electronics Industries Yamakawa Kogyo Tohmatsu Century * Kiru Machine Mfg. Asahi Asahi National.Lighting Century * Asahi Kyushu Matsushita Electric Tohmatsu Chuo Matsushita Communication Industrial Nissan Shatai Chuo Asahi Hashimoto Forming Industry Chuo Victor Company of Japan Asahi Calsonic Chuo Miyata Industry Chuo Fuji Univance Chuo National House Industrial Seiwa Ikeda Bussan Chuo Matsushita Electric Works Seiwa Yorozu Chuo National Securities Kyobashi Nippon Cabureter Chuo SONY GROUP Tachi-S Chuo Sony Chemicals Price Waterhouse * Nihon Plust Chuo Bytec Tohmatsu Jidosha Denki Kogyo Century USC Asahi Ichikoh Industries Century et al. Sony Magnescale Chuo Nissan Diesel Motor Meiji Sony Music Entertainment(Japan)Entertainni in) Chuo Fuji Heavy Industries Meiji Aiwa Nakanishi et al. Tochigi Fuji Industrial Meiji MITSUBISHI HEAVY INDUSTRIES;TRIES GROUP Kinugawa Rubber Industrial Meiwa Toyo Engineering Works Showa-Ota * Fuji Kiko Meiwa Mitsubishi Motors Showa-Ota * Aichi Machine Industry Ito TOYOTA MOTOR GROUP Akebono Brake Industry Kainan Toyoda Boshoku Ito * Tosok Ichihara et al. Kyowa Leather Cloth Ito * Sanoh Industrial Shisci Aichi Steel Works Ito * Kasai Kogyo Hijiribashi Toyoda Automatic Loom Works Ito * Daikin Manufacturing Maeda et al. Toyoda Machine Works Ito * SNT Ohtemae Toyota Auto Body Ito-* Tokico Karasawa et al. Aisin Seiki Ito * Oki Works Ohyu Toyota Tsusho Ito* HONDA MOTOR GROUP Chuo Malleable Iron Tohmatsu Showa Showa-Ota * Chuo Spring Tohmatsu Yachiyo Kogyo Showa-Ota * 100 K. Suzuki

I lirata Showa-Ota * Seiyo Food Systems Chuo* Keihin Seiki Mfg. Chuo Credit Saison Chuo* Stanley Electric Chuo Saison Information Systems Chuo* FCC Yasumori Paruco Chuo et al.* CANON GROUP Yoshinoya D & C Tohmatsu Nippon Typewriter . Showa-Ota* ORIX GROUP Copyer Showa-Ota * Orix Interior Asahi * Canon Electronics Showa-Ota * MITSUI FUDOSAN GROUP Canon Sales Showa-Ota * Mitsui Real Estate Sales Asahi * Canon Aptics Showa-Ota * Mitsui Home Asahi * Canon Copyer Sales Showa-Ota * Mitsui Construction Showa-Ota MITSUBISHI CORP. GROUP TOKYU GROUP Diamond City Tohmatsu * Tokyu Construction Century * Fuji Coca-Cola Bottling Tohmatsu * Tokyu Car Century * Chukyo Coca-Cola Bottling Asahi Tokyu Store Chain Century * Kinsho-Mataichi Asahi Tokyu Land Century * Kanro Chuo Izukyu Century * Nitto Flour Milling Showa-Ota Tokyu Tourist Century * Kentucky Fried Chicken Japan Century Shiroki Century * Tokyo Sangyo Takeno Japan Air System Showa-Ota Meiwa Trading Yoshishima et al. Seikitokyu Kogyo Tohmatsu Nihon Shokuhin Kako Hagiwara Nagano Tokyu Department Store Asahi MITSUI CORP. GROUP Tokyu Recreation Kainan Shin Nippon Air Technologies Tohmatsu * Sotetsu Transportation Toyo Mitsui Sugar Tohmatsu * Tokyu Department Store Fuji Mikuni Coca-Cola Bottling Tohmatsu * Tokyu Hotel Chain Fuji Nihon Unisys Tohmatsu * KINKI NIPPON RAILWAY GRGROUP F-One Tohmatsu * Mie Kotsu Isuzu Utoku Express Tohmatsu * Fukuyama Transporting Asahi* Toyo Officemation Tohmatsu * Kinki Nippon Tourist Asahi * M Service Tohmatsu * Kinki Eiga Gekijyo Tohmatsu Takasaki Paper Mfg. Chuo Kyoto Kintetsu Department Store Asahi * Tokyo Kotetsu Chuo The Kinki Sharyo Asahi* Honshu Chemical Industry Showa-Ota et al. Dai Nippon Construction Sakae Chuo Build Industry Isozaki et al. HANKYU & TOHO GROUP Taito Shisei Kobe Electric Railway Aokirintaro Asia Air Survey Shinohara Hankyu Realty Asahi * Hakodate Seimo Sengu Century Hotel New Hankyu Asahi * DAIEI GROUP Koma Stadium Asahi * The Volks Tohmatsu * Mori-Gumi Asahi* Jujiya Tohmatsu * Hankyu Department Store Asahi * Daiei OMC Tohmatsu * Hankyu Kyoei Bussan Asahi * Ichiken Chuo Tokyo Rakutenchi Tohmatsu * The Maruetsu Asahi Enterprise Tohmatsu * Recruit Cosmos Showa-Ota Toho Real Estate Tohmatsu * ITO-YOKADO GROUP OS Asahi Seven-Eleven Japan Chuo* Kokusai Hoei Izumi York-Benimaru Chuo* NIPPON YUSEN GROUP Denny's Japan Chuo * Taiheiyo Kaiun Century SAISON GROUP Kyoci Tanker Century Mikasa Coca-Cola Bottling Chuo* Tokyo Scnpaku Kaisha Meiwa FamilyMart Chuo * Shinwa Kaiun Kaisha Showa-OLa

Relationship between Corporate Groups and Auditors in Japan 101

TOKYO ELECTRIC POWER GROUP Companies of which the auditor is the same as K an denko Inoue the core company: 161 Takaoka Electric Mfg. Meiji Ratio of companies audited by the same auditor Toko Electric Meiji as the core company: 49.4%

Total: 326