Challenges and Prospects for Small-and Medium-sized Entities in Japan

－ Ensuring reliability of financial statements by utilizing the document attachment system －

Abstract

　In finance of Small-and medium-sized entities (SMEs), the ‘information asymmetry’, i.e., information gap between lenders and borrowers, has long been a serious issue. In order to avoid risks caused by the ‘information asymmetry’, financial institutions have required guarantee of an owner and provision of collateral for the real estate when making a loan. In spite of the efforts, loans with ‘information asymmetry’ still exists, which may cause management uncertainty and hinder continuation and further growth of SMEs. Therefore, this research examines the present system to eliminate or at least reduce ‘information asymmetry’ in order to ensure the ‘reliability of financial statements’ in domestic SME finance.

　In Germany, a system, where certified public tax accountants (CPTAs) conduct bescheinigung, exists to ensure the ‘reliability of financial statements’ for SMEs. This custom is a unique system well-established and widely used in which a CPTA (or another) not only prepares a financial statement but also issues a certificate to meet the ‘conditions of the place’ of German SME finance.

　More importantly, the degree of the reliability of financial statements involved with tax agency by a CPTA and an audit certification by an accounting auditor depends on the fact that “the content of the guarantee forms a ‘continuum of guarantee’ with gradation.” Based on the premise, it is plausible to utilize tax accountants and the existing document attachment system to ensure the ‘reliability of financial statements’ for Japanese SMEs.

　The document attachment system is a ‘tax failing guarantee work’ by a CPTA to ensure a certain level of the ‘reliability of financial statements’ based on the principle of final tax returns even though indirectly. In conclusion, this ‘valuable document attachment system peculiar to Japan’, which has been enacted to include strict independence of CPTAs and creditworthiness of tax returns, should be available and widespread in society.