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December 13, 2011 4:10 pm
Olympus’ deadline for submitting revised financial statements on Wednesday poses a challenge not only to the scandal-hit Japanese camera-maker, but also to its external auditors – already under fire for failing to expose the company’s long-running scheme to hide losses.
The uproar at Olympus, which has admitted secretly shifting more than Y100bn of investment-related losses off its books beginning in the 1990s, has hit a Japanese auditing industry that has spent years trying to shake off a reputation for looking the other way at clients’ misdeeds.
It is the most serious setback since Japanese regulators in effect forced the local affiliate of PwC, ChuoAoyama PwC, out of business in 2007 over its involvement in accounting frauds starting with the struggling cosmetics group Kanebo a year earlier.
A number of ChuoAoyama accountants were caught helping Kanebo cover up the fact that the cosmetics maker had become insolvent several years earlier. Four were arrested, and the auditor was disbanded soon afterwards.
In the Olympus case, there is no evidence that the company’s auditors, first KPMG Azsa and then Ernst & Young ShinNihon, were actively involved in designing the off-balance-sheet transactions that spirited bad assets from its balance sheet.
KPMG, which audited Olympus for 35 years until it was replaced in 2009, appears to have battled with company executives on several occasions over their accounting of elements of the scheme.
Yet major questions remain, in particular: why did auditors not make public the findings they brought to executives’ attention in private? In key instances, accountants in Japan signed off on Olympus’ financial statements even after affiliates in other parts of their networks withheld certification from foreign-based parts of the company where losses were hidden.
“If the auditors didn’t think that something strange was going on after more than 10 years, then they weren’t doing their jobs,” says Yoshihiko Miyauchi, chief executive of Orix, Japan’s biggest leasing company, and head of the Japan Association of Corporate Directors, a lobby group for corporate-governance reform.
Nicholas Smith, Japan equity strategist at CLSA, reckons Japanese auditors often do a poorer job than their counterparts in the UK or the US, a problem he attributes to low pay – fees are as low as a fifth of US levels – and overwork. There are 17,000 certified public accountants in Japan, compared with 330,000 in the US.
The collapse of ChuoAoyama aside, punishment for most indiscretions is also lax, he says, with small fines the preferred recourse to business-killing licence suspensions. “Punishment is so minor it can be treated as a business cost, and clearly hasn’t been enough in the past to generate a sense of fear,” said Mr Smith
A report on the Olympus scandal published last week by a panel of legal experts shed some new light on the auditors’ role. Before it was replaced in favour of E&Y ShinNihon in May 2009, KPMG Azsa had objected strongly to the company’s plans to account for acquisitions that Olympus has since admitted using as cover to dispose of its hidden losses.
According to the report, Azsa urged top Olympus executives to step down over the issue and threatened to resign or inform Japanese authorities – but ultimately relented after Olympus agreed to write down the value of the suspicious acquisitions by Y71bn.
The same year, Azsa’s KPMG colleagues in the UK qualified the accounts of Gyrus, a British medical equipment company that Olympus had purchased a year earlier.
According to documents obtained by the Financial Times in October, KPMG said of the acquisition – also used as cover to dispose of hidden losses – that “proper accounting records have not been maintained”. That did not stop Azsa from signing off on Olympus’ group-wide accounts, just as ShinNihon did the following year.
Indeed, Azsa had raised questions about Olympus’ accounting as far back as 1999, when it forced the company to dissolve an off-balance-sheet vehicle to which it had transferred some lossmaking financial investments, last week’s report said.
Azsa and ShinNihon have not commented directly on the report. Last week, ShinNihon set up a committee to examine whether it behaved inappropriately, while Azsa says it audited Olympus in accordance with Japanese accounting rules.
Olympus has established its own committee to look into the role of auditors, and the Japan Association of Certified Public Accountants is also examining the affair.
Should any wrongdoing by Azsa or ShinNihon be found, past experience in other countries suggests any liability would be limited to the local organisations – an intentional product of the loose structure of global auditing networks.
Olympus must submit revised past financial statements by Wednesday to avoid automatic delisting from the Tokyo Stock Exchange. That has put ShinNihon and Azsa under pressure to sign off on the accounts – yet failure to review them strictly would damage their reputations further.
If Olympus cannot win their approval, it could submit uncertified accounts and avoid automatic delisting, according to the TSE. But doing so would leave it at significant risk: separately from Wednesday’s deadline, the exchange must still rule on whether to strip Olympus of its listing because of the extent of its malfeasance. A black mark from auditors would work against it in that decision.
Japan’s Asahi daily reported on Tuesday that auditors planned to sign off on all the statements except for the year ending in March 2007, which they would approve with qualification.
Additional reporting by Jennifer Hughes
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