Japan’s Oversight Board Faults Operations, Controls at Big Four Firms

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Japan's Certified Public Accountants and Auditing Oversight Board (CPAAOB), a subsidiary of the Financial Services Agency (FSA) with independent investigatory power, asked the FSA on Friday to issue business improvement orders to Japan's Big Four audit firms, Mainichi news reports. The firms are KPMG Azsa &Co, Ernst & Young ShinNihon, Deloitte Touche Tohmatsu and ChuoAoyama Pricewaterhousecoopers, which began a two-month suspension from auditing on July 1 because of its participation in a bookkeeping fraud at Kanebo Ltd., a cosmetics firm.

The CPAAOB had been conducting inspections at each of the firms since last fall and reported that it had found problems with management oversight, quality control and independence at all four. The Big Four affiliates are responsible for auditing 80 percent of listed firms in Japan, Reuters reports.

The recommendation that the FSA issue business improvement orders is the first punitive measure CPAAOB has taken since it was established in 2004.

The FSA will issue the business improvement orders within a week, requiring each of the firms to submit a plan for improving their operations and internal controls, Mainichi news says.

The oversight report did not cite specific examples of problem audits, but the finding could diminish overall confidence in the accounts of Japanese companies, Reuters says. “It is very important to the economy that auditors carry out their duties appropriately," Financial Services Minister Kaoru Yosano said at a news conference.

When the suspension of ChuoAoyama was announced in May, Pricewaterhousecoopers International, (PwC) said that while it would support its affiliate, it would form a new partnership in Japan, PwC Arata. PwC Arata, which has applied for registration with the Public Accounting Oversight Board in the United States, began operating on July 1 and is expected to have 80 partners by year end, AccountancyAge.com reports.

Sam DiPiazza, CEO of PwC International, said that the firm faced “a number of significant challenges in Japan,” according to AccountancyAge.com, but added he was confident that PwC's strategy would improve audit quality and serve the needs of all of their clients in Japan and elsewhere in the world.

Toyota Motor Corp. and Sony are among the companies that have announced they will leave ChuoAoyama for PwC Arata during the suspension period.

In an interview with timesonline.co.uk, Taizio Nishimuro, the president of the Tokyo Stock Exchange (TSE), said that the punishment of ChuoAoyama had caused turmoil in the TSE and predicted a destructive shake-up of the Japanese auditing industry because of the actions of the regulatory agencies.

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