PWC Japan Unit Suspended over Kanebo Fraud

Reviewed by Hitoshi URABE

Article:
PWC Japan Unit Suspended over Kanebo Fraud
(Jonathan Soble) Reuters
http://today.reuters.com/investing/financeArticle.aspx?type=
governmentFilingsNews&storyID=2006-05-10T085751Z_01_T340481_RTRIDST_0
_FINANCIAL-JAPAN-PWC.XML

Comments:

Chuo Aoyama, one of four large accounting firms in Japan and affiliated with the global network of PricewaterhouseCoopers, was ordered by the Financial Services Agency to suspend its statutory auditing service for two months during the coming July and August. This is the first time a major accounting firm was ordered to suspend the core auditing business in Japan.

In October 2004, Kanebo Ltd., a cosmetics and textiles maker, admitted to have falsified financial statements for the five years through March 2004 by bloating its earnings improperly by more than 200 billion yen. The executives of Kanebo involved were arrested and indicted, and the Industrial Revitalization Corp. of Japan (IRCJ), a government affiliated entity, stepped in to assist the troubled firm. Earlier this year, Kao Corp. purchased Kanebo's cosmetics sector, which had popular line of products with consumer support and was the profitable business at Kanebo.

Prosecutors indicted three Chuo Aoyama accountants in October 2005 on charges of falsifying accounting reports of Kanebo Ltd. in conspiracy with the company's executives in fiscal 2001 and 2002. It has been reported that the three accountants not only turned a blind eye to the falsified books and certified them, but they offered their expertise and worked together with the Kanebo executives to produce false consolidated financial statements covering up the losses.

At the time, however, the prosecutors decided not to establish a case against Chuo Aoyama as a firm, apparently because executives of the accounting firm were deemed to have had no knowledge of the specific case or intention to make false claims in the reports. Having thus escaped criminal charges, Chuo Aoyama still remained a subject of scrutiny by the Financial Services Agency having its own administrative authorities. Finally, FSA decided to chasten Chuo Aoyama for the reason that the lack of effective governance in the accounting firm was the major cause for not being able locate and mend the misconduct of the three indicted accountants for years.

Chuo Aoyama, being a large major accounting firm, reportedly audits over 2 thousand companies, including such heavyweights as Toyota, Sony, and Nippon Steel Corp. Aside from the possibilities of those companies' images getting tarnished to have a bad name as their auditors, -- in fact their share prices dropped significantly after the announcement of the suspension of the accounting firm's business -- the companies will have to choose another accounting firm as their auditors, either temporary basis or to switch completely. This is because the law stipulates that the audit contract between a company and an accounting firm becomes void when the accounting firm's business is suspended and the company must find an alternative auditing firm.

The issue may seem less significant than in the case of Enron / Arthur Andersen in the U.S., for Chuo Aoyama is not facing any criminal charges and the firm is deemed to stay intact although with the name somewhat tainted. But in Japan, it marks the changes in business practices and their relations with the authorities. While some feel a longing for the days when business matters were left for the business barons well connected with politicians running the country's economy, Japan has evolved to the state where business is everyone's business, and, accordingly, strict rules must be implemented and applied impartially and transparently.