The audit framework applicable to a school corporation variably depends on factors such as the size of the corporation, whether an accounting auditor has been appointed, and whether the corporation receives private school subsidies. All school corporations are subject to audits by statutory auditors. In addition, certain school corporations are required to undergo audits under the “Private Schools Act” by an accounting auditor and audits related to private school subsidies under the “Private School Promotion Subsidy Act”.
A key point in understanding the current system is that audits by statutory auditors form the foundation, while audits by external professionals are added depending on the circumstances of the school corporation. Audits not only enhance the reliability of a school corporation’s accounting information but also serve as an important mechanism supporting governance, accountability, and information disclosure.
Figure 1 Overview of the Current Audit System for School Corporations
1. Audits by Statutory Auditors: The Basic Audit Applicable to All School Corporations
School corporations are required to appoint statutory auditors, who audit matters such as the performance of duties by directors and the status of the school corporation’s assets. Audits by statutory auditors are a fundamental governance mechanism for all school corporations, regardless of their size or whether they receive private school subsidies.
Statutory auditors also play an important role in relation to the board of directors and the board of councilors. Because their responsibilities include confirming not only accounting matters but also whether the school corporation’s operations are conducted in accordance with laws, regulations, and its articles of endowment, routine information sharing and proper preparation of documentation are important.
2. Audits under the Private Schools Act by an Accounting Auditor
At school corporations that appoint an accounting auditor, the accounting auditor independently audits the financial statements and related documents. In particular, school corporations under the jurisdiction of the Ministry of Education, Culture, Sports, Science and Technology, and certain other corporations are required to appoint an accounting auditor. Through third-party assurance over the school corporation’s financial information, the accounting auditor supports the corporation in fulfilling its accountability obligations.
The principal subjects of an audit under the Private Schools Act include the financial statements, supplementary schedules to the financial statements, and the inventory of assets. School corporations subject to such audits are expected to maintain appropriate accounting records, supporting documents, fixed asset records, and documentation concerning borrowings and basic funds on an ongoing basis, rather than addressing these matters only during the year-end closing process.
3. Audits under the Private School Promotion Subsidy Act When Private School Subsidies Are Received
A school corporation receiving private school subsidies may be required to undergo an audit under the Private School Promotion Subsidy Act. The purpose of such an audit is to help ensure the proper allocation and effectiveness of subsidies, and its objectives and subject documents differ from those of an audit under the Private Schools Act conducted by an accounting auditor.
In an audit under the Private School Promotion Subsidy Act, the auditor confirms whether the documents required to be submitted under the Act and the documents designated for audit by the competent authority have been properly prepared. Where both an audit under the Private Schools Act and an audit under the Private School Promotion Subsidy Act are required, it is important to clarify the scope of each audit and ensure consistency among the documents submitted.
4. How to Determine Which Audits Are Required
To identify the audits required for a particular school corporation, first confirm whether it has appointed an accounting auditor and then whether it receives private school subsidies. Using these two factors makes it easier to determine the required combination of audits.
• If an accounting auditor has been appointed and private school subsidies are received, both an audit under the Private Schools Act and an audit under the Private School Promotion Subsidy Act are required.
• If an accounting auditor has been appointed but no private school subsidies are received, the audit under the Private Schools Act will be the principal external audit.
• If no accounting auditor has been appointed but private school subsidies are received, an audit under the Private School Promotion Subsidy Act is required.
• If no accounting auditor has been appointed and no private school subsidies are received, there is no external audit, and the audit by statutory auditors is the principal audit.
In all cases, an audit by statutory auditors is required. Accordingly, in preparing for audits, it is important for statutory auditors, accounting auditors, certified public accountants or audit firms, directors and other management personnel, and accounting staff to understand their respective roles and establish a system for preparing the necessary documents at the appropriate time.
5. Practical Systems to Establish for Audit Readiness
Effective audit readiness requires accounting procedures and document organization to be carried out throughout the fiscal year rather than collecting documents only at year-end. School corporations face many accounting matters unique to their activities, including expenditures for education and research, subsidies, donations, fixed assets, basic funds, and borrowings. Maintaining well-organized accounting records on an ongoing basis helps reduce the burden of audit procedures and ensures consistency in explanations.
Information sharing among the board of directors, statutory auditors, and the accounting auditor is also important. Significant matters that may affect accounting treatment or disclosure should be shared with the relevant parties at an early stage so that the necessary consideration can be undertaken. An audit is not merely a retrospective review; it is also an ongoing process for improving the reliability of a school corporation’s financial reporting.
The audit system for school corporations supports corporate transparency and public confidence. Correctly identifying the audits required for the corporation and establishing appropriate systems for document preparation and explanations will facilitate a smooth audit process.
6. Audit Services for International Schools and Schools for Foreign Nationals
International schools and schools for foreign nationals may be required not only to address school corporation accounting and audits under the Private Schools Act and the Private School Promotion Subsidy Act, but also to provide explanations in English and reports to overseas stakeholders.
At HLS Global, bilingual Japanese-English professionals provide practical support for financial statement audits, reviews, and other assurance engagements.
In addition to assisting with audits based on Japanese school corporation accounting, we can provide support that takes into account the need for English-language explanations to foreign directors, overseas headquarters, parents, and relevant institutions.
We also draw on our experience in auditing Japanese subsidiaries of foreign companies and handling reporting to overseas parent companies to communicate clearly with school corporations that require international coordination.
We provide audit support tailored to the circumstances of international schools and schools for foreign nationals in Japan, including review of English-language materials, organization of audit issues, and communication with overseas stakeholders.
Where there are concerns about compliance with school corporation accounting or the audit system, we provide careful support from both regulatory and practical perspectives.
Disclaimer: All views expressed in this article are solely for informational purposes and should not be construed as legal advice. This information is for reference only and is bound to change in case of any amendments or changes to applicable laws. We do not assume any responsibility or liability for any errors or omissions in the content of this article, and do not make any warranties about the completeness, reliability and accuracy of the information expressed in this article.