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Accountants Were Steeped in Culture of Corruption

10, 20. 2005

   On September 13, 2005, four certified public accountants (CPAs) at ChuoAoyama PricewaterhouseCoopers were arrested by the Tokyo District Public Prosecutors Office on suspicion of violating the Securities and Exchange Law by directing the window-dressing of accounts at Kanebo Ltd., a venerable name in Japan's textile industry. The case shows that in Japan's accountancy sector, there is still a culture of tolerance of questionable conduct by CPAs.

   An auditing firm can be established by five or more CPAs. Its role is to verify the accuracy of a client company's balance sheets, income statements and other financial documents. The incorporated firm format is chosen because the work is too much for one or two CPAs alone. There are approximately 160 accounting firms in Japan, but the big four-ChuoAoyama, Deloitte Touche Tohmatsu, Ernst & Young ShinNihon, and KPMG AZSA & Co. -do at least 90% of enterprise auditing in Japan. Ranked by gross sales, Tohmatsu leads, followed by ChuoAoyama, ShinNihon, and AZSA (as of March 2005).

Website of ChuoAoyama PricewaterhouseCoopers
Website of ChuoAoyama PricewaterhouseCoopers
 

   ChuoAoyama employs 1,700 CPAs, and audits 5,300 companies. This is the first time CPAs of such a distinguished name in the business have been arrested. The Kanebo audit team had been working at the client company for at least 30 years. In fact, window-dressing of accounts had become an established practice at Kanebo by around 1970, and, at annual general meetings of shareholders, the view was often expressed that this was "appropriate." When the cosmetics and textile company was dragged into red ink on a consolidated basis by massive losses at a blanket-making subsidiary, the auditors advised management to reduce its shareholding in the subsidiary and deconsolidate it. They also turned a blind eye to the booking of fictitious sales to pad the revenue numbers during slack periods.

Book-Cooking Lessons

   The fraud was exposed when Kanebo, burdened by massive debts, went into restructuring under the government's Industrial Revitalization Corporation. Had this not happened, the window-dressing would probably have continued indefinitely. Now ChuoAoyama has been sued by Kanebo, and it and four auditors of Ashikaga Bank were sued by that bank at the time of the irregularity, meaning ChuoAoyama faces compensation claims totaling up to 1.1 billion yen.
   Japanese companies are free to choose whatever accounting firm they like. Therefore, if they are not happy with their auditors' work, they can hire others likely to put a brighter spin on their books in a practice generally known as "opinion shopping." For this reason, accounting firms have tended to identify themselves closely with the interests of client managements. Kanebo paid as much as 100 million yen each year for ChuoAoyama's auditing services. Because ChuoAoyama's management felt it could not afford to lose such a good customer, its auditors not only found it hard to say 'no' to Kanebo, but also aggressively advised on polishing up its books. The idea was that when business conditions improved, enabling Kanebo to bounce back, the fraud would be hidden.
   Observers say that all auditors have experience of being told by their company to come up with ways of making clients' books look better. When companies ask an auditing company about dealing with troubled affiliates and subsidiaries, they are advised to deconsolidate. In truth, whether or not this is illegal is not a clear-cut issue. The basic position is that if there is no clear illegality, companies may do as advised by their client auditors. CPAs would probably feel their fellows in the Kanebo case were unlucky to be considered criminals, as they could not simply say 'no' when asked to make the books look better.

Accounting Sector Failing to Police Itself

   With the discovery of large-scale accounting irregularities at the major US energy company Enron in 2001, the accounting firm involved, Andersen, was forced into break-up.
   To ensure that such an incident does not recur, the US Congress in 2002 passed the Sarbanes-Oxley Act, a piece of revised accounting legislation with more rigorous reporting requirements and sanctions. In Japan too, measures have been launched to revise legislation affecting CPAs, but enforcement within the sector has not been strict. The Japanese Institute of Certified Public Accountants has yet to make a decision on whether to punish the auditing corporations and CPAs guilty of window-dressing at failing companies such as Yamaichi Securities and the Long-Term Credit Bank of Japan in the 1990s. There is no doubt that auditing corporations are fudging their response and are still not policing themselves strictly.
   Akio Okuyama, head of ChuoAoyama, served as chairman of JICPA from 2001 to 2004.

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