PwC’s "Two Card Monte" Game in Japan Fails – Update

Nothing for me to say. I’ll let the Japanese speak for themselves.

Former ChuoAoyama forced to call it quits
Misuzu Audit Corp., the new incarnation of disgraced accountancy ChuoAoyama PricewaterhouseCoopers, will be effectively forced to disband as the company decides to shift most of its operations to other auditors. Misuzu said Tuesday it has reached a basic agreement with the nation’s three largest auditors–KPMG Azsa & Co., Deloitte Touche Tohmatsu Japan and Ernst & Young ShinNihon–to take on its certified public accountants and other employees.

Misuzu’s approximately 2,500 employees, including about 1,200 accountants, are expected to move to other auditors at the end of July… The question will be whether other auditors can take over Misuzu’s clients.

Tohmatsu audits 856 listed companies, ShinNihon 806 and Azsa 661. PricewaterhouseCoopers Aarata, which was spun off from ChuoAoyama in June, serves about 60 listed companies, many of which are former ChuoAoyama clients.

Other auditors are wary about what might turn up if they take on Misuzu’s old clients.

We cannot take over their clients without careful consideration because we cannot rule out the possibility that they, too, may have scandals of their own,” said an official with a major auditing company…

Funny how there’s not much coverage in the US of this debacle…PwC still had two affiliates in Japan (who knew?), the old one and the new one – the clean one and the dirty one. Reminds me of the old “good bank-bad bank” days when the solution to the bad bank loans was to transfer the bad loans to a run off organization owned by the federal government to protect the good bank’s balance sheet.

I was still at PwC last May, and there was also a news blackout internally of the Japan/Kenebo/Chou Aoyama issue. No information was communicated to the regular staff, only to partners, until the new firm was set up and running, even though the senior management and other specialists were scrambling to address the crisis and calm client’s concerns. When it was communicated, the information was included as a short blurb in an online monthly update from the US leader Gene Donnelly. It was viewed as a “foreign” problem, not of interest to the US staff and nothing for them to worry about.

PwC to shut Japan arm in Nikko scandal
By Michiyo Nakamoto in Tokyo and Barney Jopson in London

PwC, the world’s biggest accounting firm, is to shut a Japanese affiliate because of its involvement in the Nikko Cordial broking scandal, leaving it with a smaller presence than rivals in the world’s second largest economy.

Misuzu, one of Japan’s big four accounting firms, said yesterday it would wind down its operations because of possible penalties stemming from its work for Nikko Cordial, which faces delisting by the Tokyo Stock Exchange because of accounting fraud.

The same affiliate, then called Chuo Aoyama, threatened the credibility ofPwC’s global network last May when regulators ordered it to halt operations for two months after four auditors were arrested for their involvement in fraud at Kanebo, a cosmetics maker.

PwC bosses in New York responded by setting up a new affiliate – named Aarata – that took about 1,200partners and staff from Misuzu and was given fresh management.

Aarata has taken onjust 70 listed audit clients from Misuzu, leaving 600 at its soon-to-be-extinct counterpart. Misuzu said it had asked the other two big global accounting firms to hire its 2,000-plus employees at the end of the auditing season in March. But no agreements have so far been reached.

Samuel DiPiazza, global chief executive of PwC, last year rushed to contain shock waves from the firm’s suspension by urging partners around the world to reassure clients almost as soon as the Chuo Aoyama penalty was announced.

The events revived nagging concerns among regulators and accountants themselves about the structure of the biggest firms. They are organised as networks of partnerships, not unified corporates, which means members have little influence over foreign counterparts yet are exposed to the reputational repercussions of their errors.

Speaking in unusually blunt terms, Mr DiPiazza told the Financial Times yesterday that Aarata’s limited size reflected the availability of staff who met the firm’s performance standards.

“We would have hoped the Japanese profession evolved to a higher level of quality over the years,” he said. “It didn’t.” Cultural differences, he added, “cannot be used as an excuse for lower quality”.

Misuzu audited the accounts of Nikko Cordial, which has been hit with a record Y500m fine for accounting fraud and faces potential de-listing by the Tokyo Stock Exchange as a result.

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