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Thursday, May 25, 2006

ChuoAoyama faces uncertain future as clients defect to rivals


Staff writer

More and more clients of major auditing firm ChuoAoyama PricewaterhouseCoopers are switching to rival outfits after the Financial Services Agency ordered ChuoAoyama to suspend its business for two months starting in July.

News photo
Akio Okuyama (center), chairman of the board of ChuoAoyama PricewaterhouseCoopers, faces reporters in Tokyo on May 10 about the business suspension order the government issued to the auditing firm.

Cosmetics giant Shiseido said it will switch to KPMG Azsa & Co., one of four major auditing firms in Japan.

A Shiseido spokesman claimed the company had been debating a change before the FSA imposed the penalty on ChuoAoyama, but added that the auditor's role in falsifying the financial statements of fellow cosmetics maker Kanebo Ltd. contributed to its decision.

The switch is expected to be formally approved at a shareholders' meeting June 29.

The suspension order, the first for a major auditing firm, is expected to affect about 2,300 of ChuoAoyama's 4,535 corporate clients. On July 1, the affected companies will have to cancel their contracts with ChuoAoyama and find replacement auditors for at least two months.

After the suspension ends, they may sign on with ChuoAoyama again or find other auditors.

ChuoAoyama said it does not know how many clients it has lost so far. To restore its tainted image, current chief executive Akio Okuyama will be replaced by Hideki Katayama, the current head of one of its auditing divisions, sources said Wednesday.

But it isn't just clients ChuoAoyama is losing: The day the FSA ordered the suspension, U.S. auditing giant PricewaterhouseCoopers, ChuoAoyama's business partner, announced it is setting up a new auditing firm in Japan.

The announcement prompted speculation that many of ChuoAoyama's accountants will defect to the new PricewaterhouseCoopers' unit, taking their clients with them.

PricewaterhouseCoopers said in a statement that it will continue to assist ChuoAoyama, but it also vowed its new firm "will be of a sufficiently large scale to serve its clients."

Shinji Hatta, a professor at Aoyama Gakuin University's graduate school of professional accountancy, said the important thing is to avoid causing problems for ChuoAoyama clients.

ChuoAoyama's suspension "should not trigger confusion among corporate clients and investors who have nothing to do with the incident. We need to come up with an emergency measure," Hatta said.

He proposed setting up a new auditing firm that would act as a safety net for clients of troubled auditing firms. Given ChuoAoyama's woes, the new PricewaterhouseCoopers unit would be a good candidate for the job, he said.

Although the financial fraud abetted by ChuoAoyama auditors, which came to light in 2004, shocked the industry, Hatta said it has served as a wake-up call for the auditing industry, as well as for the FSA, which is responsible for monitoring auditing firms.

In April, an FSA panel on the certified public accountant system met to discuss changes, including imposing criminal penalties on auditing firms that break the rules.

Under the current system, criminal penalties are imposed only on individual accountants who violate the law. The panel is expected to compile a report that will serve as the basis for a change in the law governing accounting rules that is to be submitted to the Diet next year.

The move mirrors similar developments in the U.S., where monitoring of accounting firms has become stricter in the wake of the Enron Corp. meltdown.

The U.S. government set up the Public Company Accounting Oversight Board, an independent body that monitors accounting firms, after Arthur Andersen LLP accountants were arrested for destroying documents in the Enron scandal.

The board can revoke a firm's certification, barring accountants from participating in audits of public companies, or impose fines.

Hatta of Aoyama Gakuin University said that Japan, like other countries, is allowing companies greater freedom to conduct business, while at the same time imposing stricter penalties when they violate the law.

The government's new approach is reflected on the FSA's partial suspension of Aiful Corp., a major consumer lender, for alleged illegal loan-collection tactics, Hatta said.



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