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
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.
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.
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.