Working Paper written on September 1, 2016 Japanese Management Accounting: An Overview of Current Methods and Practices Susumu Ueno Professor Emeritus, Konan University, Japan (ueno@konan-u.ac.jp) Paul Scarbrough Associate Professor, Brock University, Canada (pscarbrough@brocku.ca) Abstract: This paper provides scholars and practicing accountants a comprehensive and objective picture of current Japanese management accounting methods and practices. The picture is comprised of discussions of three fields related to specific aspects of organizations (corporate-level management methods and practices, front-line management accounting methods and practices and management accounting methods and practices at small and medium-sized enterprises), as well as the pervasive changes to all organizations due to information and communication technology (ICT) and disclosure rule changes. Firstly, we discuss the development and status of corporate-level management methods and practices used by large Japanese companies. Corporate-level management accounting methods and practices discussed include planning and budgeting, hoshin kanri, the balanced scorecard, performance management, and compensation management. Second, we move to topics of front-line management accounting methods and practices often observed in Japan. The topics include the relationship between management accounting and Cost Accounting Standards, JIT production and business continuity management (BCM) and quality control. Third, since a majority of companies in Japan are small and medium-sized enterprises (SMEs), we discuss current use of management accounting methods and practices at SMEs. In the past decades, management accounting practices in Japan have changed markedly by adapting to innovations in information and communication technology (ICT). More recently, revised disclosure rules also caused significant changes to Japanese management accounting practices. Thus, throughout this paper, we examine the impacts of ICT and new disclosure rules to Japanese management accounting practices. The knowledge and analysis in this study provide an insightful basis for the improvement and development of managerial accounting methods and practices. Keywords: management accounting; current methods and practices; Japan; information and communication technology (ICT); disclosure rules 1 Electronic copy available at: https://ssrn.com/abstract=2831068 1. Introduction As each county develops its potential, one of the main tools is clear knowledge of the current status of management accounting usage across the world. There is an extensive research literature that describes Japanese management accounting practices in English, some written by overseas researchers and some by Japanese scholars (e.g., Okano and Suzuki 2006; Baydoun et al. 1997; Ueno and Wu 1993; Ueno and Sekaran 1992). This study aims to delineate what current Japanese management accounting practices are, and provide to (overseas) scholars and practicing accountants an objective and comprehensive picture of the current status. Since our research question is “what is” or “what was,” this is a descriptive study. Descriptive studies are usually the best method for collecting information that will demonstrate relationships and describe the world as it exists. Management and accounting systems and practices have changed over time with the demands of operation strategy, organisational culture, industry and other factors. Different companies in a country select and implement their accounting systems and practices differently because they face different demands. Some empirical studies of Japanese management employed cultural perspectives derived from stereotypes. Overweighting cultural influences in interpreting local practices can lead to this type of bias. Other researchers attempt to generalize their results from limited evidence to all management accounting practices. Although generalizations are the essential basis of all valid deductive inferences, the process of verification is necessary to determine whether a generalization holds true. This study employs a descriptive method and depicts current practices as they exist; we refrain from addressing normative claims and /or prescriptions. Thus, our research can contribute more to improvement and development of methods and practices. The picture in this study is comprised of discussions of three fields, i.e., corporate-level management methods and practices, front-line management accounting methods, and management accounting methods at SMEs. Firstly we discuss the development and current status of corporate-level management methods and practices used by large Japanese companies. One of our main research concerns is: “to what extent are the management accounting methods and practices, described as ‘innovative’ and/or ‘advanced’ and advocated by academics, textbooks and professional institutes, actually employed?” Thus, we discuss planning and budgeting, hoshin kanri, the balanced scorecard, performance management, and compensation management in corporate-level management accounting methods and practices. Second, our discussion moves to the topic of front-line management accounting methods and practices observed in Japan. The topics we include are Cost Accounting Standards, JIT production and business continuity management (BCM) and quality control. Since a majority of companies in Japan are small and medium-sized enterprises (SMEs), we prepare an independent section for reviewing current use of management accounting methods and practices at SMEs. Management accounting practices in Japan changed markedly by adapting to innovations in information and communication technology (ICT) as well as to significant changes in disclosure rules. During the past decades much innovation has occurred within the orbit of ICT (Ueno and Scarbrough 2011; Ueno ed. 2007) whether accountants are positively and or deeply involved or not. The increased affordability of ICT for organizations has created great opportunities for these entities to improve their operations and accounting processes. The management accounting discipline is not immune to concepts and practices developed by modern day digitization forces (Bhimani, A. and Bromwich, M., 2009). We look in particular at the impact of the digital economy on the Japanese practice of management accounting. The digital economy here is defined as the interrelationships and dependencies between emerging communication and information technologies, data transfers along predefined 2 Electronic copy available at: https://ssrn.com/abstract=2831068 channels and emerging platforms, and related contingencies within and across institutional and organizational entities. Since disclosure regulations for publicly traded companies have considerable influence over management accounting practices today, the influence of timely-disclosure rules, internal control and corporate governance are also a focus. The remainder of this paper has the following structure. The next section reviews methods and practices of corporate level management such as planning, management control, performance measurements and compensation schemes used at leading Japanese companies. Section 3 reports front-line management accounting methods and practices. Methods and practices in SMEs are reviewed in Section 4. Section 5 reviews the influence of recent disclosure regulations on Japanese management accounting practices. The last section provides concluding remarks. 2. Corporate-level Management Methods and Practices For corporate-level management, Japanese publicly traded companies have long used traditional management accounting methods such as planning and budgeting. Our focus in this section is to describe how Japanese companies have used these traditional methods. However, we also discuss why Japanese companies did so. Although US companies have been more aggressive in adopting newly-developed management accounting methods such as the balanced scorecard (BSC) proposed by Kaplan, R. and Norton, D., there is evidence that some Japanese companies have also used them. 2.1 Planning, budgeting and financial performance indicators A new technology often appears and spreads widely. Medium-range business and profit planning, and annual budgeting are pervasive among large Japanese companies. Actually, government timely disclosure rules for financial accounting (described in a later section) request that publicly traded companies to implement these practices. Most large Japanese companies have their own accounting manuals and guidelines. Staff members at corporate, divisional or departmental levels are required to follow these manuals strictly in the processes of financial statement preparation, profit planning and budgeting, cost accounting, and internal control. For the most part, the management methods appear to be very similar to those seen outside of Japan, although the actual use may be somewhat different, as we will see with budgeting. The process of planning and budgeting involves setting a performance target, measuring performance, comparing performance against that target, computing the difference (variance) between measured performance and the target, and taking action if necessary. Horii (2015) surveyed budget practices of Japanese publicly traded manufacturing companies in 2011. The highest ranked roles for budgeting were, “it functions such as an operational goal”, “a control tool” and “a measure for departmental performance.” It is interesting that the “communication and coordination” function was not ranked as high as the other three items (Horii, 2015 p.99). Changes in what managers consider the key performance indicators (KPIs) have occurred over time. Currently, the key metrics for the success of an organisation’s strategies and tactics in planning and budgeting are profits, sales and costs. From the 1960s to the1980s, when Japan enjoyed high economic growth, the growth in sales volume and profit was the supreme goal, thus volume and market share were the most popular metrics in measuring a company’s and division’s performance (Ueno 1993, 1997). Many foreign researchers remarked on this, and people still think it is a characteristic of Japanese business. However, business culture in Japan changed since that time, and the importance of profitability and cash flow has increased markedly. Over the 1990s, Stern Stewart heavily promoted the idea of economic value added (EVA). EVA is almost the same as Residual Income, as used at General Electric since the 1920s. A number of 3 Japanese stock market listed companies such as HOYA Corporation, ORIX Corporation, Krin Company Limited, Asahi Breweries Limited, Asahi Kasei Corporation, Panasonic Corporation , TOTO LTD, Daikin Industries Ltd., Tohoku Electric Power Co. Inc. and TDK Corporation, installed the EVA as a key performance measure in the 1990s and early 2000s (Ueno 2008). However, according Kawano’s survey (2014) conducted between 2011 and 2012, of the companies traded on the Tokyo Stock Exchanges, only 13 companies (7% of all respondents) implemented EVA. The Life Insurance Association of Japan has conducted a survey on “Actions for increasing shareholder value by publicly traded companies (Kabunushi kachi kojo ni muketa torikumi ni tsuite)” every year since 1974. The 2015 survey results indicate that (see Table 1, below) institutional investors (N=84) consider ROE as the most important KPI (79.8% of the respondents), followed by Total Pay-out ratio (48.8%), Dividend Pay-out Ratio (40.5%) and Free Cash Flow (35.7%). Total Pay-out Ratio to Shareholders is calculated by adding dividends and treasury stock acquisitions and dividing the sum by net income for the same period. The Dividend Pay-out Ratio is the percentage of net income that a company pays out as dividends to common shareholders. The results indicate that institutional investors place greater importance on yearly distributions to shareholders. On the other hand, the most frequent disclosed KPI in Mid-term Planning by the surveyed companies (N=568) is Profit & Profit Growth (66.5 % of companies surveyed), followed by Sales & Sales Growth (58.5%), Return on Equity (ROE) (52.3%) and Profit over Sales (49.5%). It should be noted that Dividend Pay-out Ratio and Total Pay-out Ratio to Shareholders, which are thought to be very important KPIs by institutional investors, are lower, 29.5% and 9.0% respectively. Table 1: Key Performance Indicators (KPIs) for Japanese Listed Companies Rank KPIs shown in mid-term planning of listed companies (N=568) KPIs that institutional investors think to be important (N=84) 1 Profit & Profit Growth 66.5% Return on Equity (ROE) 79.8% 2 Sales & Sales Growth 58.5% Total Pay-out Ratio 48.8% 3 Return on Equity (ROE) 52.3% Dividend Pay-out Ratio 40.5% 4 Profit/Sales 49.5% Free Cash Flow 35.7% 5 Dividend Pay-out Ratio 29.5% ROIC 34.5% 6 Stockholders Equity Ratio 19.8% Profit/Sales 32.1% 7 ROA 16.8% ROA 32.1% Source: Actions for increasing shareholder value: 2015 questionnaire survey (Kabunushi kachi kojo ni muketa torikumi ni tsuite : 2015 enquête survey), Tokyo: The Life Insurance Association of Japan. http://www.seiho.or.jp/info/news/2015/pdf/20160323_3.pdf (accessed on July 23, 2016). Since early in the use of ICT, large Japanese companies developed a variety of software solutions such as in-house-based templates for planning and budgeting (e.g., Lotus 1-2-3 and later, Microsoft 4 Excel sheets), as well as entire custom packages. As well, vendors provided applications for mainframes and office computers. Today, large and medium-sized companies use ICT applications for planning, budgeting, and forecasting, and they often use enterprise resource planning (ERP) packages supplied by vendors. Examples of popular accounting applications include ‘NEC EXPLANNER/Ai,’ ‘FUJITSU Enterprise Application GLOVIA smart,’ ‘Oracle Hyperion,’ ‘IBM Cognos Planning,’ and ‘Microsoft SharePoint Server.’ TKC Corporation and OBIC Co., Ltd. are influential local vendors of business intelligence software solutions for small and medium-sized enterprises (SMEs). 2.2 Hoshin kanri, MBO and the balanced scorecard Hoshin kanri (called policy deployment, hoshin planning, or simply hoshin), broadly practiced among Japanese manufacturers since the 1960s, is a management methodology associated with total quality control (TQC; described in a later section). Taking a top-down approach, hoshin kanri focuses the organization, deploys corporate annual hoshin (strategic policy) and plans to all levels and functions, i.e., divisions, department, sections and employees. Hoshin is a complex and sophisticated plan that includes the vision, direction, targets, and plans of the company. It is not just a forecast financial statement. People at all job levels develop their own action plans based on the policy. Then, plan-do-check-act (PDCA) cycles iterate within the action plan of each unit (department) as an example of cross-functional management. All employees and managers report to their superiors with a PDCA process that cascades up from the lowest levels to the highest levels on weekly and monthly cycles. As a company-wide activity, hoshin kanri makes everybody in the company aware of their critical success factors (CSFs) and key performance indicators (KPIs) via face-to-face horizontal and vertical communication sessions (catch-ball). It should be emphasized that hoshin kanri is a practice coupled with nichijo kanri (day‐to‐day management) that manages daily operations and progress by using PDCA cycles. Manufacturing companies such as Bridgestone Corporation, Komatsu Ltd. and Toyota Motor Corporation, developed hoshin kanri in the 1970s. Panasonic Corporation developed it further in the 1970s and also NEC Corporation in the 1980s. Some Japanese companies use management by objectives (MBO) within a hoshin kanri framework. MBO, first outlined by Drucker, P. in 1954 in his book “The Practice of Management,” aims to improve performance of an organization by clearly defining objectives that are agreed to by both management and employees. Some people view hoshin kanri as an innovative, multi-level application of Shewhart’s and Deming’s PDCA cycle to management activity. Others believe that it provides the same integration as the BSC, but through a different path. Hoshin kanri software is not marketed separately. However, ERP and Business Intelligence (BI), in addition to traditional ICT software that supports hoshin kanri, refine the hoshin kanri process and make the scheme more elaborate by providing accurate feedback information and data to all levels of an organization on a timely basis. The Balanced scorecard (BSC), an idea of Robert Kaplan and David Norton, became very popular in the 1990s. Like Hoshin Kanri, the BSC is a framework for defining and communicating strategy, for translating a strategy to operational terms, and for measuring outputs of strategy implementation. It is a management system for planning actions and controlling performance of business units and individuals. Many companies in Japan were active in studying or implementing it, such as the Bank of Tokyo-Mitsubishi UFJ and Kansai Electric Power, Co. Inc., as well as some of the large hospitals and municipal governments. Although the idea of the BSC arrived in Japan in the 1990s, and attracted significant attention, not many companies actually installed it. Several surveys (Kawano 2014; Yokota and Senoo. 2011; Moriguchi, 2010; Ueno ed. 2007; Matsubara 2003) report that only around 10 % of publicly traded 5 companies use the BSC. There are several possible reasons. One is that large Japanese companies, being accustomed to effective traditional management control systems such as budgeting along with hoshin kanri do not have a sufficient reason for replacing their traditional systems with the BSC. Another possible reason is naïve and poor approaches to BSC implementation led to a bad reputation for the BSC, i.e., the BSC designed through a top-down approach. If a staff member lacking sufficient knowledge of front-line operations creates the BSC, it may not make sense, and can confuse managers and employees, who may resist and eventually cause the withdrawal of the BSC. A few companies discontinued the use of hoshin kanri after adopting the balanced scorecards, and others used the BSC along with hoshin kanri. However, as noted above, not many Japanese companies actually use the BSC. Companies, with expertise in the traditional management control schemes such as budgeting and hoshin kanri did not usually believe they would get incremental benefits from replacing their traditional systems with the BSC. To facilitate their implementation, some companies develop BSC software specifically for their own use, and others buy and customise commercial packages. Examples of popular BSC software in Japan are ‘Oracle Balanced Scorecard’ (in ‘Oracle E-Business Suite’), ‘SAP Balanced Scorecard’ (in ‘SAP Strategic Enterprise Management’) and ‘QPR Metrics’. 2.3 Performance management of a diversified company Diversified companies in Japan generally use a divisional organisation structure to run their businesses. The divisional structure serves companies that have distinct products, customers and/or locations. In this section, we review the performance management system of Panasonic Corporation. Founded in 1918, Panasonic (originally known as Matsushita) started using a divisional structure in 1933. As of March 31, 2015, the group employs 254,084 people, and it comprises 468 consolidated and affiliated companies. Currently, Panasonic runs its business by grouping them into five domains, i.e., consumer electronics, housing, automotive, B2B solutions and devices. Each of these domains has distinct R&D, production, and sales functions. To evaluate performance of the company and its business units, Panasonic installed the Capital Cost Management (CCM) in 1999. CCM is a key performance indicator that is similar to residual income and/or EVA. The equation below shows the calculation of CCM metrics: CCM = (operating income plus investment income) - (capital charge for use of assets) The company calculates CCM for each unit (division) on a global consolidated basis. Managers compute CCM by multiplying a uniform cost of capital rate (8.4% at this time) by the value of the business unit’s assets (Ueno 2008). Panasonic will introduce new capital rates in the 2016 fiscal year that can reflect the risk of each unit properly. The CCM is part of the formula used to determine the annual compensation of Panasonic directors and executive officers. To diversified multinational enterprises (MNEs) such as Panasonic, however, determining how far to go in standardising performance management practices and adapting home country practices to foreign subsidiary companies remains a critical issue (Ueno 1996). Internet-technology combined with modern software package development has led to a situation where accounting/performance management is virtually independent of time and space. Diversified multinational enterprises (MNEs) build standardized performance management systems across divisions and countries. ICT applications such as sophisticated ERPs, facilitate control capability for MNE headquarters. However, to many Japanese MNEs that demand their enculturation activity in overseas subsidiaries, installing and customising uniform ERP solutions globally is a challenge 6 since it potentially entails the risk of lessened adaptive capability of these subsidiaries. 2.4 Compensation schemes for employees and executives Employee pay in Japanese companies is composed of two parts, salary and bonus. Most companies pay employee bonus twice a year, usually in early summer and December. Although the bonus has a guaranteed base determined by his/her monthly salary (a multiple of his/her monthly salary), it is determined by reflecting quarterly and yearly performance of the company and the individual. Company and individual performance links to salary to a certain extent, although Japanese companies generally adopt seniority-based pay plans. In most salary systems, the primary basis for pay increases is the employee’s tenure (years in both the company and position). Many people think of seniority-based pay and lifetime employment as Japanese-style management. These employment terms developed in the 1920s with the intention of attracting high quality talented persons into commercial jobs by offering the terms of employment similar to a government official at the time; however, it was not without friction in its development, nor was it universally implemented. In fact, only the very largest companies actually used it, and only for a portion of their managers and employees. General advantages of this Japanese-style management are employees’ high loyalty, commitment and retention. In large companies where Japanese-style management has been practiced, most directors are ‘promoted’ employees. Because of this, many people believe that directors and employees share the same incentive structure. Fixed salaries are the largest part of executive pay in those companies. In times of growth and high consumer demand, this system may be advantageous, however the cost is very high and in a mature market with low growth and low profits, it appears that it will not be sustainable. During past few decades, Japanese companies have had great difficulty in maintaining these stereotypical traditional Japanese-style employment practices because of the high cost. Thus, the change from a seniority-based pay plan to a performance-based pay plan pervades the economy. There is a consensus in academia that top manager and director interests need to align with those of shareholders and that a performance-based pay plan is effective to achieve this. In the US, executives’ base salary accounts for a relatively small part of the total compensation because executive compensation is believed to be a tool for achieving goal congruence, however there is little or no evidence that this hypothesized connection exists. In Japanese publicly traded companies, fixed salaries are the largest part of executive pay, although the proportion of performance-based executive pay has increased. Panasonic Corporation’s compensation plan for directors and executive officers has three parts: basic compensation, performance-based compensation, and stock option (source: Panasonic Corporate Governance Report, updated on November 10, 2015). The basic compensation is a fixed amount. Performance-based compensation is determined based on a single-year performance evaluation. Performance indicators used for this evaluation are net sales, operating profit, free cash flow and CCM (similar to EVA) of the company as a whole and the specific business unit that each executive controls. Stock options are granted so that executives will share the same profit awareness with shareholders and strive to boost corporate value from a long-term perspective. 3. Methods and Practices in Front-line Management Publicly traded manufacturers in Japan use the 1962 Japanese cost accounting standards for their product costing. This section reviews development of the standards and discusses its influences on management accounting methods and practices. In front-line management, Japanese companies have developed unique methods such as target costing, kaizen costing, JIT production and company-wide quality control (CWQC). 7 3.1 Japanese cost accounting standards In 1962, the Accounting Deliberation Committee of the Ministry of Finance released Cost Accounting Standards as an interim report. This standard contains strong US influence as do other regulations set after the Second World War. For example, the standard costing section of the Cost Accounting Standards was edited by referring to “How Standard Costs are Being Used Currently (1951)” released by NAA (National Association of Accountants, which later became the Institute of Management Accountants). Based on the state of the art in 1962, the objectives of the standards were to provide true costs on the financial statements, to provide cost data for pricing decisions, for cost management, for budgeting and budgetary control, and for strategic planning. The standards require companies to use absorption costing for financial reporting and stipulates details of account definitions, support cost allocation procedures, costing methods, product cost valuation and variance accounting. The standards are an integral part of current Japanese GAAP, and is “rule-based.” Since cost accounting systems reflect specific production processes and systems, they are not uniform. The standards aim to provide multiple frameworks for costing used in developing cost accounting procedures and systems. According to the preface of the report, the use of the standards is not mandatory but strongly recommend. In Japan, organisations and individuals usually follow government recommendations because of the great social force. The extreme conservatism of statutory auditors and independent auditors in certifying compliance with GAAP amplify this tendency. All publicly traded companies are thus strongly motivated to comply with the prescribed costing procedures and methods for their financial statement disclosure purpose. Cost accounting courses provided by Japanese universities, high schools and vocational schools devote many lessons to interpretation and explanation of the Standards, similar to a legal education. The standards, released in 1962, are a rule-based set of procedures, and part of Japanese GAAP, i.e., they prescribe “accepted” costing procedures and systems for financial reporting purposes based on the understandings of 1962. It is important to differentiate cost accounting education, which is anchored to the past because of this, from cost management education that is very keen to develop and use new procedures and methods from a variety of fields such as engineering, management, industrial psychology, etc. The use of standard costing has a relatively long history in Japan, and it is popular especially among publicly traded manufacturing companies who focus on production cost management. According to Kawano’s survey (2014) conducted between 2011 and 2012, 68% of respondents use standard costing. This ratio is higher than in prior surveys of Japanese publicly traded manufactures. An important part of standard costing is variance analysis, which breaks down the variation between actual costs and standard costs into various components (material variance, labour variance, factory overhead variance, etc.). When asked about the main purpose of their using standard costing, 53 companies (56% of the respondents) answered, “cost control and cost reduction” and 16 companies (17% of the respondents) answered, “budgeting” (Kawano 2014). About direct (variable) costing, the survey by Kawano (2014) reports that 37% of respondents use direct costing. Supporting profit planning, budgeting and cost management is main reasons for their use of direct costing. Since the Japanese cost accounting standards requires companies to use absorption costing for product costs that they disclose in financial statements, product costs calculated by direct costing need to be adjusted to absorption costs prior to disclosure. Because of this, Japanese companies use direct costing as a ‘special cost study’ tool (analysis), but not within a regular costing system. Activity-based costing (ABC) is not popular in Japan, although some companies and organizations tried it for special cost studies as early as the 1990s. One reason for the low penetration is that ABC 8 is not in the 1962 Japanese Cost Accounting Standards. ABC has both different support cost allocation bases and different procedures from those prescribed by the standards. The Cost Accounting Standards actually specify specific accounts and account titles, and how to connect and allocate those accounts to costing units (departments and products). ABC, of course ignores departments to focus on activities. According to Kawano (2014), 13% of the respondents have tried to use ABC as a special cost study tool. Some companies, banks, hospitals and local public enterprises (waterworks, gas, transportation, hospital, electric power, etc.) attempted to use ABC/ ABM for their cost and expense management. But, they sometimes misunderstand the essence of ABC/ABM. Osaka City Waterworks Bureau has disclosed cost information by cost centres (waterworks activities) every year since 2005 and the bureau named its costing ABC. However, the method used is actually a simple cost-aggregation by cost centres, but not ABC (Source: http://www.city.osaka.lg.jp/suido/page/0000017062.html). A variety of local IT vendors such as Hitachi Solutions, and OBIC, etc. provide software for job order costing. However software for process costing is limited. Product cost calculations are contingent upon production processes. The diversity and complexity of process-oriented production motivates companies to develop Excel templates and spreadsheets for process costing in-house. Recently more ERP, business intelligence and data warehouse applications allow companies to combine existing templates and spreadsheets for the process costing with these systems. ‘FUJITSU Enterprise Application GLOVIA smart RTCM’ serves for both job order costing and process costing (http://www.fujitsu.com/jp/services/application-services/enterprise-applications/glovia/glovia-smart /rtcm/ ). 3.2 JIT production and business continuity management (BCM) Just-in-time (JIT) production (manufacturing), a well-known part of the Toyota production system (TPS), is a production model in which items are created to meet demand, not created in surplus or in advance of need. A fundamental principle of JIT is demand-based flow manufacturing. Under certain circumstances applying JIT decreases cycle time, lowers inventory, increases utilisation of facilities and equipment, and increases productivity. Many Japanese companies contributed to the development of the JIT methods in the 1950s and 1960s. They were then transferred to Western industry in the 1980s where it leads to a new term, lean manufacturing in the 1990s. JIT manufacturing, when combined with company-wide quality control (CWQC), is very efficient and can be a strategic source of competitive advantage under normal conditions. However, its supply chain is vulnerable to natural and human disasters (accidents). If one supplier of materials/ components has a breakdown and cannot deliver the goods on time, that supplier can shut down the entire supply chain. Natural disasters such as The Great East Japan earthquake on 11 March 2011 and the flood in Thailand during October 2011 disrupted global and domestic supply chains of manufacturers, causing a shortage of components for electronics, vehicles, etc. and demonstrate the vulnerability of supply chains of Japanese MNEs. In order to improve the resilience of their global supply chain, the Toyota group is preparing for future emergencies by creating a business continuity plan (BCP) that aims at early recovery with limited resources (http://www.toyota-global.com/sustainability/csr/governance/risk_management/ ). The ways a company can improve its resilience include dispersion of key plants, standardisation of parts and materials, and diversification of suppliers. Lean manufacturing and JIT production are often treated as two different phrases for the same thing, but they are not. Lean manufacturing is a broader term spawned within the MIT study on Toyota production system (TPS) in the 1980s that led to the book “The Machine That Changed the World” 9 by Womack, J. P., Jones, D. T. and Roos, D. in 1990. JIT production is focused on the product line, while lean manufacturing usually includes JIT as part of a more encompassing approach to the entire process. Over the years, many names have been used to try and describe the changing understanding of this approach to business processes, including: world class manufacturing (WCM), continuous flow manufacturing, and stock-less production. (http://leanmanufacturingtools.org/34/lean-manufacturing-definition-2). Companies with manufacturing operations must be aware of their supply chain at all times, monitoring the performance of suppliers, transportation partners, global competition, delivery times, changing demand, inventory and customer service. Traditional, non-Lean approaches to supply chain management (SCM) synchronizes demand with a business unit as a whole by using materials/parts and resource capacity and also by considering bottlenecks. This eliminates wastes of business processes and increases the flow from materials/parts supply to product selling. Software vendors offer SCM modules with a complete set of tools, from purchase order software, MRP and inventory management to production and logistics ERP. Traditional top-down organizations use them extensively, however Lean organizations have difficulty with this type of software unless extensively modified. Japanese software appears to be more sensitive to the issues related to Lean-style production, such as ‘FUJITSU Enterprise Application GLOVIA smart PRONES,’ an ERP application with a large installed base among medium-sized manufacturers in Japan. It supports multiple production styles, such as engineering to order (ETO), make to order (MTO, ie, JIT), build to order ( BTO, ie, JIT) and make to stock ( MTS, ie, traditional make based on forecast).The software works under kanban, order control, material requirements planning (MRP) and reorder point (ROP). In 2015, Hitachi, Japanese software vendors, released ‘Hitachi Total Supply Chain Management Solution/IoT’ (http://www.hitachi.co.jp/New/cnews/month/2015/10/1023.html). Accurate and real-time data enables shortening operational and management decision cycles significantly. In the 1990s, the manufacturing operations management (MOM) and manufacturing execution system (MES) began to attract attention, and they gradually spread into Japan since the early 2000s. Fujutsu and NEC supply ‘GLOVIA ENTERPRISE MES’ (http://www.fujitsu.com/jp/services/application-services/enterprise-applications/glovia/glovia-enter prise/glovia-enterprise-mes) and ‘NEC Industrial IoT’ (http://www.hitachi.co.jp/New/cnews/month/2015/10/1023.html) respectively. In September 2016, NEC supplies ‘IFS Applications for MES.’ ICT changed the factory and manufacturing scene significantly. Companies are afraid of digital divide phenomenon, and Japanese manufacturers are interested in ICT investment; some are enthusiastic. 3.3 Company-wide quality control (CWQC) After the Second World War, the first priority of Japan was rebuilding its industries. The quality of Japanese products was very low through the post-war period and 1950s, and improvement was imperative. To reduce faulty and defective products, for example, Toyota introduced statistical quality control in 1949 (https://www.toyota.co.jp/jpn/company/history/75years/data/company_information/management_a nd_finances/management/tqm/explanation01.html). In 1950, the Union of Japanese Scientists and Engineers (JUSE) invited Deming W. E., an American expert in quality control. He lectured on the basics of statistical quality control and its role in management. Deming advocated QC circles, small groups consisting of first-line workers. JUSE promoted and coordinated the QC movement starting in 1962, and QC activities spread rapidly over Japanese industry. QC circles are small groups consisting of front-line employees who continually control and improve the quality of their network, products and services. These small groups operate 10 autonomously, utilizing quality control concepts and techniques. QC circle activities (small group kaizen activities) achieve ‘improved ability and self-realization’ through activities (for oneself); aim to create a positive, worthwhile workplace full of energy (for one’s colleagues); aim to improve customer satisfaction and contribute to society (http://www.toyota-body.co.jp/english/csr/pdf/2012/QC_circle_english.pdf). Total quality control (TQC), comprising three pillars, i.e., QC circles, hoshin kanri and nichijo kanri (day‐to‐day management), became pervasive in the 1960s. A distinctive characteristic of the approach to quality control is company-wide involvement (company-wide quality control, CWQC) that requests organisation-wide efforts by all levels of employee to install, and make permanent, a climate in which a company as a whole continuously improves its ability to deliver high-quality products and services to customers. Quality focused thinking considers culture, people, production processes, and products holistically, rather than as independent factors. This differs from typical US approaches to quality control, which depends mainly on experts rather than on widespread use of the tools. In the US and other western countries, however, there has been a move to a company-wide approach over the last few decades. Total quality management (TQM), developed in the USA by the US Navy in the 1980s, is a process improvement methodology based on a ‘customer satisfaction quality-driven process’ with guidelines set by management. Ford Motor, one of the enthusiastic promoters of TQM, started TQM activities in the 1980s when “Quality Is Job 1” was their slogan. Although TQM takes top-down approach, in a TQM effort, all members of an organization participate in improving processes, products, services and the culture in which they work. Since the early 1990s when the asset bubble burst, the Japanese economy suffered slow growth coupled with price deflation. AISIN SEIKI Co., LTD. and other manufacturers in Japan expanded TQC activities to the total quality management (TQM) at this time due to the changed environment. Today, quality standards such as the ISO 9000 series and quality award programs such as the Deming Prize and the Malcolm Baldrige National Quality Award specify principles and processes that comprise TQM. 4. Management Accounting Methods and Practices in Small and Medium-sized Enterprises In Japan, as in most countries, small and medium-sized enterprises (SMEs) outnumber large companies by a wide margin, and provide jobs to more people. Although some SMEs are innovative and competitive, this does not mean that large companies and SMEs have management accounting practices with similar quality and sophistication. Roughly speaking, the quality and level of management accounting of a company are proportional to the number of staff and employees of the company. Accounting skills and ability to produce accurate financial statements within a reasonable period are essential to all companies regardless of their size. However, small companies generally lack a capable accounting person. To prepare daily, weekly or monthly accounting records and reports, management and business owners of such companies must depend on outside service provided by tax accountant firms and CPA firms. Management accounting in Japanese SMEs is subservient to financial accounting, i.e., SMEs do not normally have a management accounting unit. Tobita (2011) examined the use of budgets and cost accounting at manufacturing SMEs in Kumamoto prefecture, Japan. In the case of 17 companies with less than ten employees, only three companies use budgeting (17%), and seven companies use cost accounting (41%). On the other 11 hand, among fourteen companies with between 51-100 employees, six companies use budgeting (43%), and eleven use cost accounting (79%). According to his survey, actual costing is far more popular than standard costing in Japanese SMEs. Since the response rate is low and the sample size is very small, the survey does not represent Japanese SMEs, however, the results allow us to assert that the degree of management accounting use is roughly promotional to a company size. Of course, some companies are exceptions for institutional reasons. SMEs that belong to a large company group (keiretsu) and supply parts and products to the group, generally have better management control due to their connection with the group, regardless of their company size. SMEs with their own accounting units prepare financial statements in-house for filing taxes, financing, performance evaluation, etc. These companies implement management accounting practices such as conventional budgeting, cost-volume-profit (CVP) analysis and ratio analysis. Regarding operational management, front-line managers and supervisors rely more on simple and easy to collect non-financial and financial measures. Popular non-financial measures used by SMEs are on-time delivery, product defects, number of customer complaints and number of new customers. ICT venders in Japan have provided SMEs bookkeeping and accounting software packages, being similar to QuickBooks and Peachtree, at reasonable prices for the past decades. In the early days, their main products were stand-alone business packages for bookkeeping and financial accounting (recording transactions, reporting, etc.), filing taxes, human resource management, inventory management and business process management. Recently, ERP packages and modules have been supplied to medium-sized companies also. Services by an application service provider (ASP) on cloud hosting server have also become available to SMEs at affordable prices. An ASP runs a business that delivers application functionality and associated services across a network to multiple customers using a rental or usage-based transaction-pricing model. Cloud computing provides great benefits to many Japanese SMEs that usually have poor human and financial resources. Using Cloud services means no need to install either expensive computer equipment or servers. This enables them to cut hardware, software and energy costs and also, more basically, saves space. The service provider does updates to software and hardware automatically, so the technology is always up-to-date. This reduces total cost of ownership (TCO). Switching accounting to the cloud among Japanese SMEs is increasing pushed by services brokerage and enablement vendors and service providers such as TKC, OBIC, NEC, and Fujitshu. SAP provides ‘Business by Design,’ ERP targeted primarily at medium-sized companies. TKC is a locally influential SME software vendor. The company reports that its accounting software is used by 225,000 Japanese clients (https://www.tkc.jp/cc/fx, accessed on August 20, 2016). It offers FX2 to small companies a solution for their accounting, financial management and tax-preparation, and FX4 to medium-sized companies. The ICT world is evolving at such a rapid pace that it is important to be comfortable with changes. However, the ability of the SMEs to use the ICT is fairly different. Some SMEs use ICT very effectively to support their management control, however, the degree or level of sophistication in ICT use is contingent basically upon the owner's enthusiasm, and whether there is a talented and knowledgeable person on staff. 5. Influence of Disclosure Regulations on Management Accounting Practices Japanese disclosure-related regulations were changed recently. This section examines the influences of changes in timely-disclosure rules, internal control report and corporate governance on management accounting practices. 12 5.1 Timely disclosure rules In Japan, the Companies Act (enacted on May 1, 2006), the Financial Instruments and Exchange Act (FIEA: enacted on September 30, 2007) and other laws, as well as rules in the Tokyo Stock Exchange's Securities Listing Regulations constitute what are called the timely disclosure rules. The timely disclosure rules request that companies disclose annual/interim reports, sustainability/integrated reports, environmental reports and corporate governance reports. Japanese publicly traded companies generally disclose these reports in the Investor Relations (IR) library on their websites. These disclosure requirements compel companies to maintain reliable internal control systems and articulated management accounting practices, in addition to behaving as a good corporate citizen in a global society. Timely disclosure rules also request that companies prepare a forward-looking statement (a forecast) within annual/interim reports. A forward-looking statement provides information for next year’s sales, profits and financial ratios. The rules ask companies to disclose differences in their estimates and actual earnings promptly as an “Amendments to Performance Estimates.” To respond this request, publicly traded companies must maintain systems that enable them to disclose the information in a timely and appropriate manner. In other words, companies must maintain effective accounting systems that can provide relevant information on time across business units. 5.2 Internal control report In Japan, the main sources of internal control rules are the Companies Act and the Financial Instruments and Exchange Act (FIEA). The Companies Act requires “Large Companies” (companies with capital of JPY500 million or more or with total debts of JPY20 billion or more) with a board of directors to establish a basic policy regarding the internal control system. The internal control system is, in this case, a system designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance by an entity's board of directors. The Companies Act applies to both public and private companies. FIEA requires publicly traded companies to disclose issues relating to corporate governance by way of filing annual securities reports or quarterly reports. Companies must submit an internal control report once every fiscal year to the Financial Service Agency with an assessment of the internal procedures designed to ensure the credibility of their financial statements and information. The section of FIEA relating to internal control, along with its subordinate regulations, are commonly called the J-SOX act because of the similarity of the underlying ideas to provisions of the US Sarbanes-Oxley act which is often referred to as SOX. The introduction of the J-SOX forced companies to maintain always-up-to-date business process documentation and increased record-keeping and reporting requirement significantly. This revealed to companies the poor state of development of corporate databases and management accounting systems. Some companies overhauled their business processes and integrated them into enterprise-wide systems. Others accelerated the digitalization of business operations. Companies contain the spiralling costs of complying with J-SOX by utilizing computer solutions such as ‘StarOffice X Audit Manager (NEC),’ ‘Microsoft visio’ and ‘QPR J-SOX ’ (Innovative Technology Lab Co). 5.3 Corporate governance Corporate governance broadly refers to the mechanisms, processes and relations by which companies are controlled and directed. The Tokyo Stock Exchange (TSE) and the Financial Services Agency (FSA) released the Corporate Governance Code on March 5, 2015. Adopting a principles-based approach, this code offers fundamental principles for effective corporate governance of publicly traded companies. It adopts a “comply or explain” approach for 13 implementation. TSE regulations require that publicly traded companies submit a corporate governance report that includes the outline of the corporate governance system, basic policy regarding the internal control system, and the relationship of the directors, statutory auditors and executive officers with the company. The presence of a relatively high proportion of outside directors is not always effective in preventing accounting scandal, especially for abuses carried out by a company’s chief executive officer (CEO). An example is the recent accounting scandal at Toshiba Corporation. Toshiba, founded in 1875 in Tokyo, is a huge industrial group that makes everything from nuclear reactors to microchips and home appliances, and has been a leader in introducing formal corporate governance to Japan. Even so, the company announced a retrospective reduction of JPY224.8 billion in its pre-tax income for the period from April 2008 through December 2014. 6. Concluding Remarks We sketched out an overview of current Japanese management accounting practices in order to expand the availability of knowledge about the use of management accounting, worldwide. Interpreting and describing current methods as they exist, this study draws an objective picture, i.e., an unbiased reference, for the (overseas) scholars and practicing accountants of management accounting. We refrain from addressing normative claims and /or prescriptions so that our research stance contributes to improvement and development of disciplines and practices broadly and effectively. Management and accounting methods and practices have changed over time with the changing demands of operations, markets, competitors, industrial and organisational culture, regulations, etc. Locally developed and unique Japanese practices such as hoshin kanri, kaizen and target costing and CWQC, all sometimes called strategic management accounting methods, have a relatively long history and have, of course, been modified over time. Budgeting, using the worldwide model, also has a long history, as does the unique implementation style of ‘catch-ball’. Hoshin kanri also uses the ‘catch-ball’ style for the complex and sophisticated general strategy implementation system. During the 1980s Kaplan, in his review of “The Evolution of Management Accounting”’ (1984), and with Johnson in “Relevance Lost: The Rise and Fall of Management Accounting”’ (1987), levelled criticism at the management accounting practices of the day. Since then a number of new and novel management accounting methods and practices such as ABC, strategic management accounting (SMA) and the BSC have been developed and publicized internationally. Scholars refer to these as new and novel methods and practices. “Management Accounting Practice Statement Number 1,” released by the International Federation of Accountants (IFAC) in 1998, defines four stages of management accounting evolution. Stages 1 and 2 focus on the information provision function, and stages 3 and 4 move their focus towards resource management. Abdel-Kader and Luther (2006) attempted to operationalize the four-stage conception of the evolution of management accounting. In Stage 1 (Cost determination and financial control) and Stage 2 (Provision of information for management planning and control), they say, traditional practices such as cost accounting and budgeting are among the main players. Activity costing is a representative tool used in Stage 3 (Reduction of waste in business resources). Target costing, EVA, shareholder value analysis are main tools in Stage 4 (Creation of value through effective resources use). One of our research concerns is “to what extent are the management accounting methods and practices, called as ‘innovative’ and/or ‘advanced’ and advocated by academics, textbooks and professional institutes, actually employed?” In Japan, new methods such as ABC and the balanced 14 scorecard have not penetrated much. Other new methods such as life cycle costing (besides target costing), throughput costing and material flow costing also have not become very popular as noted above. Japanese companies tend to use traditional practices, but in a very intense and mindful manner. Some people may feel that the Japanese have a passive/negative attitude to ‘so-called innovative/advanced’ practices such as ABC/M or the BSC. We would like to raise a question whether the term evolution, with its implication of progress, is an appropriate description of what may be just change (Abdel-Kader and Luther 2006). As everyone knows, and also contingency theory asserts, different companies adopt different management techniques, and some companies adopt different management techniques at different lifecycle stages. There exist no universal management technique that works effectively in all environments and ages. We believe that change is one thing, progress is another. Management accounting practices cannot be studied apart from ICT (and its context). However, not many prior studies in management accounting discussed methods and practices in the context of ICT. This is because accounting academia has in general a limited understanding of the current developments in the accounting-ICT interface. This knowledge gap has important implications as regards what should be studied in the area (Granlund 2007). 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