If you are exploring CPAs (CAs) or audit firms to perform audits for your subsidiary in Japan, you’ve come to the right place.
The ideal auditor depends on factors such as your company’s size, the complexity of its transactions, and the nature of its industry. Here, we share essential insights to help you choose the right component auditor for your business.
1. What Are Audits Required?
(1) When the Parent Company Is a Foreign Listed Company
If the parent company is listed overseas and must publish an annual report, its subsidiaries are often required to submit financial results aligned with the parent company’s fiscal year and have them audited by a component auditor.
(2) Joint Ventures Between a Foreign and a Japanese Company
When a Japanese and a foreign company each hold a 50% stake in a joint venture, audits may not be legally required. However, strong requests from the foreign shareholder often lead the Japanese partner to agree—sometimes reluctantly—to undergo audits.
(3) Preparation of Consolidated Financial Statements
Even if the overseas parent is not listed, it may still prepare annual consolidated financial statements. In such cases, the Japanese subsidiary may be instructed to have its financial results audited—particularly when its financial impact on the group is significant.
(4) Strengthening Governance and Oversight
When a parent company places a strong emphasis on governance—such as sending internal auditors to subsidiaries each year—it may view financial statements without an independent third-party review as unreliable, and therefore require audit or review procedures by a certified public accountant.
2. Are There Subsidiaries That Do Not Require an Audit?
Not every consolidated subsidiary or equity-method affiliate is subject to an external audit by a certified public accountant.
In most cases, only subsidiaries with significant financial impact on the group are audited. For entities with lesser impact, an audit may not be necessary.
How is “significance” determined?
Financial importance is often assessed using these indicators:
・Net profit for the period
・Sales
・Total assets
・Retained earnings
If any of the above indicators exceed 10% of the consolidated group’s total, the subsidiary is typically subject to an external audit.
Qualitative importance matters too.
Even if a subsidiary does not meet the numerical thresholds, it may still require an audit if it carries high qualitative significance—for example:
・Japanese subsidiaries engaging in large, non-routine transactions (e.g., real estate or securities investments)
・Subsidiaries holding material balance sheet items based on estimates (e.g., allowance for doubtful accounts)
3. What Is Referred Work?
“Referred work” refers to the audit of consolidated subsidiaries or equity-method affiliates carried out by a certified public accountant (CPA) other than the group auditor, based on the group auditor’s instructions.
This often occurs when a Japanese CPA audits a Japan-based subsidiary of a foreign-owned company at the request of the overseas parent company’s auditor.
The group auditor typically does not perform the audit directly because the subsidiary’s documents—such as vouchers, invoices, and contracts—are in Japanese, making it difficult for foreign auditors to work efficiently.
If the subsidiary represents a significant share of the group’s sales or total assets, the referred work is usually assigned to another office within the same global audit network as the group auditor.
For smaller Japanese subsidiaries, however, it is common to appoint mid-sized audit firms to perform the work efficiently and cost-effectively.
4. Why Are Audit Fees for Foreign Companies Higher?
Even relatively small consolidated subsidiaries can face substantial audit fees.
The main reasons are:
(1) Application of Overseas Accounting Standards
Many overseas parent companies adopt IFRS or US GAAP, requiring Japanese subsidiaries to prepare financial statements under the same standards.
Because there are still notable differences from Japanese GAAP, additional adjustments and reconciliation work are necessary—adding time and cost to the audit.
(2) Shortage of English-Proficient CPAs
Communication with overseas auditors and parent companies is conducted entirely in English.
Qualified Japanese CPAs who can perform high-quality audit work in English are limited, and their rates are correspondingly higher.
(3) Stringent Quality Control in Audit Firms
Major audit corporations follow rigorous internal review procedures before delivering reports externally.
An audit report is first reviewed by the engagement partner, then by a quality control partner.
Since partner rates are high, this multi-layered review process inevitably drives up total fees.
Even for relatively small consolidated subsidiaries, audit fees are not cheap. There are several reasons why audit fees for foreign companies tend to be high, including the following:
5.Who Should Be Entrusted with the Audit?
・When an Mid-sized Audit Firm Is the Right Choice
For subsidiaries of relatively low financial significance, interaction with the parent company’s auditors is often minimal—typically limited to email correspondence, with few, if any, video conferences.
In such cases, appointing a large audit firm with high fees is not always necessary, and the parent company generally has no objections.
Mid-sized audit firms follow the same standardized audit procedures as global network firms, ensuring compliance with the parent company’s instructions.
With smaller, focused teams—often including English-proficient professionals—audits can be completed more efficiently, reducing both workload and costs for the subsidiary
・Limitation of Large Audit Firms
For small consolidated subsidiaries, large firms may assign less-experienced staff, as their most senior auditors are reserved for major clients.
This can lead to high fees without a corresponding increase in service quality.
In contrast, mid-sized audit firms can offer cost-effective, high-quality audits, providing direct partner involvement and responsive communication.
6.Finally
For consolidated subsidiaries with relatively small profit and asset sizes, partnering with a mid-sized audit firm can offer significant advantages in both cost efficiency and procedural flexibility compared to engaging a large firm.
Experienced finance and accounting professionals know that, in the end, client satisfaction often depends more on the skills, responsiveness, and commitment of the engagement team than on the brand name of the audit firm itself.
By considering your subsidiary’s relative size and role within the consolidated group—and the importance of clear, timely communication with overseas stakeholders—we hope this article has provided valuable insight to help you choose the right partner for your referred audit work.