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November 17, 2011

Olympus scandal: Audit fee pressure endangering quality

The latest Japanese accounting scandal has placed the spotlight firmly on audit firms.

The recent International Accounting Bulletin Japan survey reveals the profession is suffering from intense fee pressure, which according to Kansai University professor of auditing Yoshinao Matsumoto is having an effect on auditor’s ability to detect fraud.

KPMG Japan executive board member and Tokyo office managing partner Tsutomu Takahashi told International Accounting Bulletin a few months ago the firm has seen tight fee competition from medium and small accounting firms.

“Audit fees are about the same as last year. Competitors approach our clients and offer a lower fee, and then clients approach us to offer them a more attractive fee,” Takahashi said.

Unlike most other countries, Japan has a Big Three, KPMG ASZA and E&Y ShinNihon and Deloitte Anjin. This is due to the fall out from the Kanebo fraud, which saw the suspension of auditing services for Chuo Aoyama PwC in 2006 and forced PwC to rebuild its entire Japan practice.

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.

If implicated in the scandal, the investigations could cause major reputational damage to the firms involved and Japan’s audit profession.

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