[Provisional Translation]

August 28, 2000
Financial Services Agency

Toward the Establishment of Further Effective Internal and External Audit Functions of Financial Institutions

The Financial Services Agency (FSA), which envisages to enhance effective internal and external audit functions of financial institutions, has determined to establish the ''Working Group on Internal and External Audit Functions'' (hereinafter referred to as the ''Working Group'') within its Inspection Department. The objective of setting up the Working Group is to revise the existing inspection manuals for deposit-taking financial institutions and for insurance companies (hereinafter ''inspection manuals'') which include the descriptions related to internal and external audit functions of the institutions/companies. The followings are the basic concepts and the schedule of the Working Group.

1. The Purpose of Establishing Effective Internal and External Audit Functions

Financial inspection assumes internal controls (including internal audits) by the financial institution itself based on the principle of self-responsibility and rigorous external audits by external auditors. With the assumption that such internal controls and external audits fully work, financial inspections seek to complement these functions. Revising the inspection manuals in terms of internal and external audits is expected to encourage financial institutions to enhance their own internal and external audit functions based on the self-responsibility principle, while adding further effectiveness and efficiency to the FSA inspections. It is also expected to contribute to the establishment of further transparent financial supervision.

2. Setting up the Working Group on Internal and External Audits

The FSA will form the ''Working Group'' whose participants mostly include staffs from all the three departments of FSA (i.e. the Planning and Coordination, the Supervisory, and the Inspection Departments). The Working Group will be set up in the Inspection Department with the aim of conducting a thorough and technical study to revise the inspection manuals where the descriptions of the manuals are related to financial institutions' internal and external audit functions. In addition, a professor of commercial code and CPAs, who have been employed by the FSA, will participate in the Working Group as well as some other professionals from the Japanese Institute of Certified Public Accountants (JICPA).

3. The Schedule

The Working Group, on the basis of hearings from individual institutions as well as opinions from various bodies such as the Japanese Bankers Association (Zenginkyo), will initially draft the revision of the inspection manuals. The task to revise the inspection manuals is to be completed by end-December, 2000.