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November 10, 2011updated 29 Apr 2022 4:22am

KPMG and E&Y face investigation over Olympus audits

The Japanese Institute of Certified Public Accountants (JICPA) and Japan’s Financial Services Agency (FSAJ) are both planning to investigate KPMG Asza and Ernst & Young (E&Y) ShinNihon over their audits of optical equipment company, Olympus.

KPMG Asza, which was Olympus’s auditor until March 2009 and E&Y ShinNihon, which is the company’s current auditor are accused of not doing enough to follow up on red flags in Olympus’s accounts. Both have declined to comment.

Currently, the FSAJ is investigating whether Olympus broke financial rules, after the firm admitted to hiding large securities losses by using payments to merge advisors and venture capital funds.

The scandal came to light after Michael Woodford, Olympus’s ousted chief executive, prompted questions over the excessive advisory payments ($687m versus investment banking norms of about 1% to 2%) it made in its 2008 acquisition of the UK medical equipment maker Gyrus, worth $2.2bn.

Olympus has since said some of those fees were “used in part” to help hide losses on investment securities.

The Japanese minister of state for financial services Jimi Shozaburo said it is “highly regrettable from the viewpoint of market fairness and transparency, that the Olympus Corporation has been engaged in deferring the posting of losses from securities and other investments”.

“It is troubling to see investors, both domestic and abroad, question the fairness and transparency of the Japanese markets and I would urge all the parties concerned with the markets in Japan to tackle this issue together,” Shozaburo added.

It is unclear why KPMG Asza signed off on Olympus accounts in March 2009 despite the fact it was said to be concerned with the company’s acquisition of Gyrus.

KPMG UK, which audited the subsidiary accounts of Gyrus, also raised questions about the advisory fees and whether Cayman Island-based AXAM Investments, which received a substantial part of the money, was related to Olympus.

Although E&Y ShinNihon raised questions over AXAM as well, it is said to have decided to approve Olympus’s accounts.

Shozaburo also called for Olympus to, “on its own initiative”, explore what actually happened and disclose accurate information as soon as possible to help restore confidence in the Japanese market. On 1 November, Olympus established a third party committee to conduct a rigorous investigation into the scandal.

If the FSAJ finds fault in the audits of both the Japanese arms of KPMG and E&Y they could take disciplinary action against individual accountants and the firms.

The UK Serious Fraud Office also said it is continuing to “review and evaluate” the material it was provided by Woodford.

 

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