Olympus panel finds auditors liable

Olympus panel finds auditors liable

A commission investigating the Olympus accounting scandal has added the company’s statutory auditors to a list of officials alleged to be responsible for the affair, though it absolved two global accounting firms, KPMG and Ernst & Young.

The commission of legal experts, one of several set up by the Japanese camera company in the wake of one of Japan’s biggest cases of false financial reporting, said on Tuesday that it believed the past and present auditors were liable for Y8.4bn (US$109m) in damages.

Statutory auditors are non-voting members of Japanese corporate boards who are responsible for legal and ethical oversight, and are unrelated to outside accounting firms that audit companies’ financial statements.

The report concluded that five past and present statutory auditors at Olympus – a group that includes both former executives and nominally independed outsiders – should have picked up on clues to the deception and scrutinised top executives’ behaviour more closely, although it did not suggest they were directly involved in the cover-up.

But it said the false-accounting scheme had been too cleverly hidden for the outsiders at KPMG and E&Y to detect: “The masterminds of this case were hiding the illegal acts by artfully manipulating experts’ opinions.”

Last week Olympus filed suit against 19 current and past executives, including its president, Shuichi Takayama. A separate panel of inquiry concluded that they had either orchestrated or, as in the case of Mr Takayama, failed to prevent the accounting problems. Olympus has acknowledged that managers hid more than Y100bn of investment losses from regulators and investors beginning in the 1990s.

The suit put Olympus in the highly unusual position of taking its own top managers to court, but Tuesday’s report could make the situation stranger still. In accordance with Japanese corporate law, the lawsuit was filed in the name of Olympus’ serving statutory auditors – men who now stand accused of sharing responsibility for the wrongdoing themselves.

The three, Tadao Imai, Makoto Shimada and Yasuo Nakamura, were in place before the scandal broke but failed to sound the alarm, Tuesday’s report said. They stood by even after Olympus’ British former chief executive, Michael Woodford, raised concerns about the company’s accounting. Mr Woodford was sacked in October by a unanimous vote of Olympus’ board, which never debated his claims.

Although auditors cannot vote, they are meant to intervene when a board’s conduct might violate procedural or legal standards.

The report also named two former statutory auditors, Minoru Ota and Katsuo Komatsu, who left the company in 2004 and 2011, respectively. None of the five men accused in the report could be contacted for comment, and Olympus declined to make any officials available. It said it was planning a news briefing on Wednesday to address the responsibility issue.

Although they escaped blame in Tuesday’s report, Olympus’ outside accountants have also come under scrutiny over the scandal. Both KPMG, which oversaw Olympus’ financial reporting until 2009, and its successor E&Y signed off on the company’s accounts even though they found problems in parts of its business that turned out to have been involved in disposing of hidden losses.

The clearest red flag was Olympus’ decision to grant $700m in preferred shares in a UK-listed medical firm it had acquired to an obscure Cayman Islands-based financial firm that has since been implicated in the scandal. Both KPMG and E&Y objected privately to the accounting treatment of the shares, but their qualms were never made public.

The report makes it unlikely that KPMG and E&Y will be sued by Olympus itself, though it does not prevent disgruntled shareholders from targeting them directly. They could still face sanctions from Japan’s accounting industry association or government financial regulators, which are conducting separate investigations.

source: ft.com