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Tax, Accounting and Valuation Professionals in Japan
Series 265 "Professionals in Japan"
M&A transactions are now common place in Japan as they not only allow companies to grow, but also to solve issues of succession and inheritance. As a result, corporate valuation has become a key business sector for many accounting firms. Following is an interview with Mr. Yoshiaki Nishimura, tax attorney and founder of United Partners Inc., a company which provides listed companies,large-sized companies and global companies with M&A related "one-stop" services .We asked him about his consulting business and his firm in general.
As can be seen in today's newspapers, the increasing number of M&A transactions is resulting in more audits by accounting firms, tax audits by the National Tax Agency and financial inspections by the Financial Service Agency and Bank of Japan. In order to hedge their tax, accounting and valuation risks, clients need tax and accounting firms that are able to provide them with superior consulting services. United Partners Inc. ("UP"), a company led by Mr. Yoshiaki Nishimura, is aggressively dealing with M&A transactions requiring advanced tax, accounting, valuation, finance and IT solutions. Its clients include financial institutions and private equity funds, not to mention the international and domestic companies in which those institutions and funds have invested in. Significantly, since UP does not accept any audit work, any conflict of interest is avoided, and UP is able to provide clients with a comprehensive range of services ranging from tax and accounting to valuation and IT Packages. Before we delve into UP, let's take a look at the life of Mr. Nishimura. He was born in 1966, the year of Hinoe-Uma (according to superstition, an ominous year in which fires break out frequently and girls who are born in this year "eat" their husbands; accordingly, people are said not to want babies in this year. To be sure, the number of babies born in this year was actually very small). He entered the Commerce Department of Keio University with the ambition of becoming a Tax and Accounting Professional. It was the so-called "bubble economy" and the fact that there were relatively few students meant that it was relatively easy to find employment. Many Keio students were able to find jobs in well known major listed companies. Mr. Nishimura recalls, "It was such a flamboyant age. While many students easily found jobs in major companies, it was only I who intended to enter the Tax and Accounting industry, not an industry known for being glamorous and quite different from any other business. So I was somewhat anxious that I wouldn't be able to settle into such a subdued industry." To be a tax attorney, Mr. Nishimura began a two year "tax attorney" course at TAC while he was a sophomore at Keio. At that time, he seriously wondered about the difference between a CPA and a Tax Attorney. After finishing the book keeping and financial statements related courses in the first year, he also enrolled in the two year CPA course when he was in his third year in Keio. So, he was studying three separate courses, an early indication of his desire to push himself. "I studied very hard back then - not only tax attorney subjects but also CPA subjects. I believed that I would need these subjects in the future. Frankly speaking, I would not recommend studying both Tax Accounting and Financial Accounting at the same time as this can be very arduous. Nevertheless, I struggled along and gradually came to understand the unique characteristics of the accounting industry. I also came to realize how I could best maximize my own potential and what kind of jobs I could gain the most self-satisfaction from?
On entering the job market, Mr. Nishimura was informally offered employment by a major bank, an offer that presented a great opportunity to enter the financial industry and put his financial knowledge to use. Although it was a tempting opportunity, in the end he decided not to accept it as doing so would mean curtailing his studies and betraying himself. Upon graduating from Keio, he continued studying Tax and Accounting and took a part time job at a CPA's office in Urawa in order to experience the Tax and Accounting industry first hand. Although it was nothing more than filing receipts, book-keeping and drafting tax returns, it did turn out to be a worthwhile experience. A young CPA at the office, who had previously worked at Ota Showa Auditors, took him under his wing, telling him about the big 4 International Accounting Firms, and recommending to him a future in international tax planning, not auditing. He told Mr. Nishimura of how, in the U.S., being a Tax Lawyer is a well respected profession, even more so than other legal professions. This was surprising news for Mr. Nishimura and suddenly his studies seemed that much more relevant to the practice of Tax and Accounting. It was now clear to Mr. Nishimura that theory did have a role in the practice of Tax and Accounting, something that had he had been hitherto unsure of. "Realizing the connection between theory and practice was a turning point for me-I resolved to put all my energies into developing my tax and accounting expertise, with the long-term goal of establishing my own boutique-style tax and accounting firm." Continuing with his studies, Mr. Nishimura began studying econometrics and tax lawsuit procedure law as he instinctively felt that expertise in these areas would be useful in practice in the future. Indeed, consulting services, such as valuation, finance and tax planning, especially for listed companies and financial institutions, require detailed knowledge in these areas. To be sure, knowledge of financial engineering such as derivatives (futures, options, swaps and indexes), DCF, BSM, the Binominal Model, and the Monte-Carlo Simulation are now considered as a bare minimum of knowledge for the above consulting services.
In September 1993, Mr. Nishimura secured a job at Ota Showa Ernst & Young, the Tax Division of Ota Showa Auditors (presently Ernst & Young ShinNihon, or "E&Y"). If he had "prepared" to be a tax attorney simply by taking an entrance examination to a "prestigious" university, there would have been many "shortcuts" to getting a decent job. But Mr. Nishimura enjoyed the challenge of deepening his knowledge, and knew that a better kind of job awaited him if he persevered with his studies. In fact, the most important skills that Mr. Nishimura currently possesses were acquired though his extra curricular studies.
Mr. Nishimura was mainly engaged in tax compliance work in his first three years at Ernst &Young. Tax compliance involved book-keeping through the preparation of working papers ("WP") in the E&Y standard format, pay-rolling and preparing tax returns ("TR"). It is not difficult for professionals who have had job experience in the Big 4 to understand that the WP process is "core" and the creation of TRs is simply a result of this process. It was a valuable experience for Mr. Nishimura as he learned to deal with the pressure of preparing painstakingly accurate, timely WPs as well as how to operate as part of an organization. He strongly emphasizes this and tries to install a similar work ethic in the tax compliance staff at UP. And although many of UP's clients are companies ranging from small representative offices to global big names as well as multinational listed companies, these skills are just as relevant. Indeed his own skills were acquired through the preparation of countless TRs and WPs.
Having gained crucial experience during his four years in the compliance department, Mr. Nishimura moved to E&Y's tax consulting department. Although he was still mainly engaged in compliance work, he learned the ropes of consulting and was soon practicing. On reflection, Mr. Nishimura says, "Looking back now, it was a time in which tax consulting work radically changed in character. Originally, tax consulting work basically consisted of preparing tax returns, that is, making adjustments before submitting the final returns based upon past precedent and accumulated practice at E&Y. However, he was able to observe that new tax consulting services (securitization) and financial products (derivatives, transfer pricing) were already becoming more common as a result of the Financial Big Bang. What's more, in his second year at the consulting department, a major Japanese bank went bankrupt. As a result, E&Y established a new business to support banks' disposal of bad loan assets. At that time, about 20 members of E&Y USA came to Japan to develop the business for bad loan asset disposal.
10 members of the Tokyo Office joined this team, and Mr. Nishimura was lucky to be one of them. This kind of due diligence work, that is, dealing with bad loans assets in Japan, was completely new to Mr. Nishimura and the experience he gained in this field had a big impact on his future direction. He enthusiastically sought information from one of the US partners, one Mr. Jack Rodman, about the tax consulting business in the USA. Mr. Rodman told Mr. Nishimura that he admired his initiative and proactivity and that he will surely be successful in this field of business in the future. Mr. Rodman knew what he was talking about as he had written a thesis on the securitization of bad debt loans which, at the time, was probably the most sophisticated piece of writing dealing with the matter in Japan. It focused on and explained the structures and practices involved in the securitization of bad debt loans and reading it also had a profound influence on Mr. Nishimura's future direction. He intuitively felt that this would definitely be the way the tax and accounting industry would move in the future. Certainly, words like "finance", "bad debt loans" and "cross border" were now in vogue. Says Mr. Nishimura, "Looking back, few people knew what securitization meant, and it was considered unthinkable that such a large amount of bad debt loans would come under the administration (gosou sendan-houshiki) of the Ministry of Finance-there were remarkable parallels with the Edo Period just before the opening of the country to the outside world. Few people imagined that banks' debt loans could be securitized as a means of disposing of bad debts." Soon after, in 2000, the so-called "Accounting Big Bang" hit Japan, and suddenly, the Japanese accounting system had been transformed in a great wave of globalization. The number of cross border financial transactions increased dramatically, just as Mr. Nishimura had predicted.
It was at this time that Mr. Nishimura again felt that he would like to gain experience in a financial institution. This had been a dream he harbored since his student days at Keio. And as luck would have it, he was asked to go to Mizuho Bank on a temporary transfer. His assignment there was to deal with the tax issues that had been occurring in the Bank amidst the reorganization of its investment and private banking divisions. "Seeing first hand bankruptcies like that of Yamaichi Securities and having had serious bad debt loan problems itself, Mizuho felt a deep sense of crisis and seriously questioned whether it could once again become a profitable enterprise." says Mr. Nishimura, "The specific tasks I undertook at the Bank were providing tax advice on financial products, mainly derivative and cross border transactions focusing on wealth management. But feeling the winds of change blowing in the financial world was incredibly exciting and quite different to anything I had experienced in the accounting world." It is clear that the experience of working at Mizuho was a very special one for Mr. Nishimura as he had finally fulfilled a long held dream.
Mr. Nishimura realized that he was finally in a position to take on "fuel efficient jobs" (that is, jobs in which he would be able to fully utilize his knowledge and experience) as a result of his experiences at E&Y and Mizuho Bank and in 1999 he moved to the finance and tax department of KPMG. An engagement partner in the department told him about KPMG and the Big 4; "In the finance sector, KPMG is the top accounting firm." he said, "Although you will find more attractive jobs here than anywhere else, your theoretical studies are of no use to you here. What is important is that you complete your assignments and provide timely solutions tailored to your clients circumstances." In those days, about half of the top 50 foreign financial institutions in Japan were clients of KPMG and Mr. Nishimura dealt with large scale projects, the likes of which he had never previously imagined. As a result of the Big Bang, it was a time of drastic change and foreign financial institutions were spreading their tentacles into the Japanese market place and establishing new businesses here. Mr. Nishimura was in charge of more than fifty financial institution clients such as banks, trust banks, securities firms and financial advisory firms. His core tasks involved preparing tax returns and responding to tax audits on behalf of his clients. He was also engaged in advanced level cross border financial consulting, such as M&A structuring, tax due diligence, derivatives, global trading (transfer pricing for financial institutions) and securitization of assets (bad debt loans and real estate). Mr. Nishimura was grateful to KPMG as in his 4 years as a manager and senior manager he had had many opportunities to deal with clients, audit companies and law firms on a personal basis and, importantly, built up a robust network of contacts. It was a meaningful time for him in that he felt both pleasure and pressure in his working life-he felt fortunate in being engaged in the business of private equity funds in the latter half of his time at KPMG. However, he keenly felt that in order to completely satisfy the ever changing needs of his clients he would need to constantly learn and refine his skills. What's more, cross border financial tax consulting projects for financial institutions were being replaced by private equity funds - the Age of the M&A had truly arrived in Japan. As ever Mr. Nishimura was at the vanguard.
When KPMG and Andersen decided to merge, Mr. Nishimura finally decided to take the plunge and establish his own business. He says, "Due to the scandal at Enron, I feared that the demand for tax consulting services would dry up at KPMG." However, as he was committed to continuing in the field of client-oriented services, he decided to set up UP in December 2003. In creating his own boutique Tax, Accounting and Valuation professional firm, Mr. Nishimura insisted on a unique strategy. "Typically, a "graduate" of the big 4 would set about establishing an office specializing in small and medium sized clients. But, managing our operational risks through well-organized internal controls, we were determined to stick with the same markets and clients we had dealt with at KPMG.". At UP Mr. Nishimura provides tax and valuation services and Mr. Ishino accounting services. While at KPMG, Mr. Nishimura had worked in the tax division and Mr. Ishino the audit division, and as part of their jobs they had worked closely together on a number of financial due diligence projects, They had worked well together-Mr. Nishimura dealing with cross border financial tax practice, M&A structuring for private equity funds, tax due diligence, and corporate valuation and Mr. Ishino in private equity funds related to due diligence and other accounting consulting, particularly US GAAP and SOX. Accordingly, they expected significant synergies and together resolved never to compromise their standards and provide nothing less than an immaculate standard of accounting. Mr. Nishimura recalls, "When a professional resigns from one of the Big 4 accounting firms and starts his or her own company, they usually have to start from scratch and provide tax compliance services such as book keeping, tax return preparation and payroll services. While CPAs and Tax Attorneys are required to have vast expertise in their respective professional fields, they have to be able to utilize that expertise in tandem with their knowledge of accounting, tax and valuation issues. I definitely felt that I would be able to provide significantly more value-added services to my existing clients".
One of the UP's core businesses is valuation. An essential part of any M&A transaction is a third party's valuation report. Indeed, UP conducts a number of valuation services for globally recognized corporations including valuation of preferred stocks, common stocks, stock options, loan assets, goodwill, enterprise value, trade-marks, brand value and intellectual rights (patents, utility model patents, design rights). In any M&A valuation, fair and accurate valuations are essential, and just one wrong assumption can carry heavy consequences. UP, though, is confident that it is able to make all the correct assumptions and therefore accepts the high risks involved. Nevertheless, Mr. Nishimura feels that in order to maintain a high standard of valuation, UP needs to improve its macro-economic analytical abilities and consistently review the appropriacy of its assumptions.
Mr. Ishino, as the accounting consultant, is in charge of accounting due diligence, international accounting consulting, internal controls and IT related matters. Says Mr. Ishino, "We have to view Japanese accounting issues though either US GAAP (the Generally Accepted Accounting Principal standards from the USA) or European International Financial Reporting Standard (IFRS)-basically we have to clarify and state the difference between them." He continues, "First of all, we prepare the financial reports in accordance with Japanese tax accounting standards (or do the same in accordance with Japanese GAAP) and then we explain to the client any differences between Japanese GAAP and US or European GAAP. We have to convert rough accounting standards already applied to our clients into something more rigid by analyzing and understanding the situations specific to our clients. This kind of audit process is very much the same as M&A due diligence. We also provide internal control services, particularly, J-SOX standards, and ISMS standards (Information Security Management System). These services are critical in today's IT environment and have applied for a review of ISO27001. Whichever type of business a company engages in, the first step is to recognize what kind of information related assets it has and how to protect them. We are now taking steps to build our own internal control systems so that they exceed all minimum requirements by a significant margin. Since we specialize in the M&A business, we simply have to treat this matter with the utmost care."
UP currently has 15 professional members, including in-house tax attorneys, in-house CPAs, external tax attorneys, external CPAs and IT engineers. Mr. Nishimura talks about the future: "We have no choice but to ride the waves of M&A and financial restructuring that can only become more dynamic and pervasive over time. As part of that, not only the most advanced knowledge but also English language skills are essential to us." Indeed UP pays particular attention to training. Every week, UP has English language training for its professional staff and seminars are held on issues such as accounting, tax practices, valuation, finance, and IT. He continues, "In order to be able to deliver the ultimate in "one-stop" service, each UP member strives to expand their skill set. My goal is to create the ultimate consulting service-focused accounting firm, a place where we can enhance our abilities and be financially successful at the same time.
UP has no aspiration to world domination. Our ideal size, in terms of people, is still 15, give or take a few. As far as UP is concerned, it is not true that more employees equal more business. UP, as a group of professionals, aims at providing value-added services which satisfy the needs of our clients. Each UP member gains a sense of self-satisfaction through satisfying even the simplest of client's requirements. As a result of clients recognizing our attention to detail in the course of our M&A consulting services, we also prepare standard tax returns, including for our big corporate clients. This is also a very important business for us and we use our uniform WP since we need to be sure that our clients are in the best possible position to deal with any sudden Tax Audits.
Under the new Company Law, created May 1, 2007, "triangular mergers", where a foreign listed company can purchase a Japanese company by issuing stocks in the foreign company, are now possible. It is designed to stimulate foreign company acquisition activity in the Japanese market place. As a result, cross border transactions requiring professional services have increased markedly. As any business related to these transactions is carried out in English, we are focusing on enhancing our English language skills.
Mr. Nishimura left with the following message: "I think many young people aim at taking certifying examinations or getting jobs merely to satisfy their desire to earn respect. Of course this is natural. However, once these students enter highly competitive professional businesses, such as Tax and Accounting Professional Firms, as they have no clear sense of direction after passing the certifying examinations, they can easily become disoriented. Don't just be satisfied with passing examinations. You need to gain a much higher level of knowledge, knowledge that you can employ in your professional life. Being able to make use of your knowledge and expertise for the benefit of your clients can be a very satisfying and fulfilling experience. You need to leverage your qualifications, as gaining them can mean much sacrifice. You need to realize how valuable your qualifications are, how much more attractive you are to employers than those without equivalent qualifications. In the past 20 years, sometimes "common sense" has been revealed as nothing but "nonsense" and as a result, new "common sense" has been arrived at. Now, it is important for us to develop the capability to understand the true meaning of events and react to them appropriately." Mr. Nishimura concluded with this, "The most important thing is being able to enjoy change". He is certainly a Tax and Accounting professional who is helping to build the next generation of professionals in Japan.
Born December 1966,
graduated from Department of Commerce,
Keio University.
Before establishing United Partners Inc.
worked for Shin-Nihon Ernst & Young, KPMG.
