Japanese auditors lack sufficient powers to pick up fraud, according
to Yoshinao Matsumoto, a professor of auditing at Kansai University.
Matsumoto told International Accounting Bulletin the Japanese audit
profession is blighted by a combination of relatively low audit fees
and insufficient legal powers to detect accounting irregularities.
Matsumoto’s comments come in the wake of one of Japan’s largest
corporate frauds in which the camera and medical equipment
manufacturer Olympus recently revealed it had hidden large securities
losses by using payments to merger advisers and venture capital funds.
Two of Japan’s largest firms, former Olympus auditors KPMG ASZA and
Ersnt & Young ShinNihon (E&Y), are being investigated by authorities
to determine whether they could have done more to uncover accounting
irregularities.
Matsumoto said it is difficult for audit firms to play a stronger role
in fraud detection due to the relatively weak position they hold in
their relationship with clients.
“The most typical Japanese audit environment is that the power of
business managements is much stronger than CPAs. So CPAs, as auditors,
cannot take a firmer attitude toward these directors and managements,”
Matsumoto said.
“The fact that auditor’s power is weak compared to the management and
that corporate governance, [such as] directors’ mutual monitoring, is
not effective like in Japanese traditional companies, makes fraud and
irregularities easier.
“If the management did the fraud and irregularities in the financial
statements, in general, auditors cannot detect them because the
auditors do not have any legal power like the tax collector”.
Low fees
Japanese audit firms are typically paid a fraction of what US auditors
receive, adding extra pressure.
Following the Kanebo scandal of 2004, the Japanese Financial Service
Agency revised auditing standards, the CPA Law and the Financial
Instruments and Exchange Law, while introducing the Internal Control
Report and Audit, and quarterly financial statement reviews. This
created a great deal more work for auditors but fees have not risen at
a high enough rate to cover the additional man hours, which increases
the likelihood that audit work may not be as thorough.
“For example, since those reforms, audit fee became 1.5 times as high
as 2007. However, comparing it to the US audit fee, the Japanese audit
fee is only about 30% in average,” Matsumoto said.
The Japanese Institute of Certified Public Accountants and Japan’s
Financial Services Agency are investigating KPMG ASZA and E&Y
ShinNihon over their audits of Olympus.
Regardless of the outcome, Matsumoto believes the reputation of
Japan’s Big Three is under threat.
The Kanebo scandal destroyed former auditor PwC’s reputation in Japan
to such a degree the network need to shut down its former member PwC
ChuoAoyama and rebuild from scratch. This led to PwC being much
smaller in size than its traditional rivals, a position it still
holds.
With only three large firms remaining, the Japanese audit profession
can ill afford another major collapse.
to Yoshinao Matsumoto, a professor of auditing at Kansai University.
Matsumoto told International Accounting Bulletin the Japanese audit
profession is blighted by a combination of relatively low audit fees
and insufficient legal powers to detect accounting irregularities.
Matsumoto’s comments come in the wake of one of Japan’s largest
corporate frauds in which the camera and medical equipment
manufacturer Olympus recently revealed it had hidden large securities
losses by using payments to merger advisers and venture capital funds.
Two of Japan’s largest firms, former Olympus auditors KPMG ASZA and
Ersnt & Young ShinNihon (E&Y), are being investigated by authorities
to determine whether they could have done more to uncover accounting
irregularities.
Matsumoto said it is difficult for audit firms to play a stronger role
in fraud detection due to the relatively weak position they hold in
their relationship with clients.
“The most typical Japanese audit environment is that the power of
business managements is much stronger than CPAs. So CPAs, as auditors,
cannot take a firmer attitude toward these directors and managements,”
Matsumoto said.
“The fact that auditor’s power is weak compared to the management and
that corporate governance, [such as] directors’ mutual monitoring, is
not effective like in Japanese traditional companies, makes fraud and
irregularities easier.
“If the management did the fraud and irregularities in the financial
statements, in general, auditors cannot detect them because the
auditors do not have any legal power like the tax collector”.
Low fees
Japanese audit firms are typically paid a fraction of what US auditors
receive, adding extra pressure.
Following the Kanebo scandal of 2004, the Japanese Financial Service
Agency revised auditing standards, the CPA Law and the Financial
Instruments and Exchange Law, while introducing the Internal Control
Report and Audit, and quarterly financial statement reviews. This
created a great deal more work for auditors but fees have not risen at
a high enough rate to cover the additional man hours, which increases
the likelihood that audit work may not be as thorough.
“For example, since those reforms, audit fee became 1.5 times as high
as 2007. However, comparing it to the US audit fee, the Japanese audit
fee is only about 30% in average,” Matsumoto said.
The Japanese Institute of Certified Public Accountants and Japan’s
Financial Services Agency are investigating KPMG ASZA and E&Y
ShinNihon over their audits of Olympus.
Regardless of the outcome, Matsumoto believes the reputation of
Japan’s Big Three is under threat.
The Kanebo scandal destroyed former auditor PwC’s reputation in Japan
to such a degree the network need to shut down its former member PwC
ChuoAoyama and rebuild from scratch. This led to PwC being much
smaller in size than its traditional rivals, a position it still
holds.
With only three large firms remaining, the Japanese audit profession
can ill afford another major collapse.
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