[Flashback] Accountants face Kanebo fraud charge


Posted by AMY Chan Wen Yi, Year 4 undergrad at the School of Accountancy, Singapore Management University

Prosecutors are set to charge several certified public accountants at a Japan unit of the PricewaterhouseCoopers group with collaborating with executives at Kanebo Ltd. in an accounting fraud that has humbled the once premier cosmetics and textile company, according to investigative sources.

The sources alleged that the accountants at ChuoAoyama PricewaterhouseCoopers worked with two executives in producing consolidated financial statements that concealed a 81.9 billion yen capital deficit in fiscal 2001 and a 80.6 billion yen deficit the following year.

The two executives are former President Takashi Hoashi and Vice President Takashi Miyahara, according to the sources. They have been indicted for falsifying the company’s consolidated account statements.

Special investigators from the Tokyo District Public Prosecutor’s Office have already searched the Tokyo head office of ChuoAoyama and other locations and questioned at least four accountants who audited Kanebo’s books at the time of the fraud, the sources said.

The accountants have denied these and other allegations concerning doctoring financial statements, saying they did not intentionally overlook irregularities, according to the sources.

According to sources at Tokyo-based Kanebo, some accountants pointed out irregularities when statements for fiscal 2001 were produced in May 2002, but no demand was made to have the statements corrected, resulting in an audit approval.

ChuoAoyama is a major accountancy firm with more than 1,300 CPAs. It was targeted in damages lawsuits filed by shareholders of major companies that collapsed after accounting frauds such as those involving retailer Yaohan Japan Corp. and Yamaichi Securities Co.

Kanebo is currently undergoing restructuring under the government-backed Industrial Revitalization Corp. of Japan.


CPAs in Kanebo fraud avoid prison

The Tokyo District Court handed suspended prison terms Wednesday to three certified public accountants for conspiring to falsify Kanebo Ltd.’s earnings in fiscal 2001 and 2002 to cover up a 160 billion yen capital deficit.

The ruling effectively ensures that no one will do any prison time for one of the biggest accounting frauds in Japanese history.

Now-former accountant Kuniaki Sato, 64, was sentenced to 18 months in prison, while his colleagues, Kazutoshi Kanda, 56, and Seiichiro Tokumi, 59, were handed one-year terms. All sentences were suspended for three years.

Presiding Judge Harumitsu Mouri condemned the three, saying they “damaged the social trust of certified public accountants and the auditing system,” and “the crimes deserve to be severely criticized.”

However, the judge said the reason he suspended their sentences was because the accountants only played a “passive role” in the crime, which was actually perpetrated by the major cosmetics firm’s now-former executives.

The case was the first to put CPAs from a top auditing firm on trial for falsifying a client’s financial statements.

The defendants, who were employed by auditing giant ChuoAoyama Pricewaterhouse Coopers, violated the Securities and Exchange Law by helping Kanebo executives hide deficits of 81.9 billion yen in fiscal 2001 and 80.6 billion yen in fiscal 2002.

Although the three were aware that Kanebo’s liabilities far exceeded its assets, they signed off on the firm’s earnings reports for fiscal 2001, which showed Kanebo had earned a 70 million yen profit and had consolidated net assets of 926 million yen.

The three also approved a fiscal 2002 earnings report that put Kanebo’s consolidated net assets at 510 million yen, by eliminating losses created by the company’s subsidiaries from its consolidated balance sheet.

Judge Mouri said Sato, Kanda and Tokumi had been aware of Kanebo’s history of window-dressing since at least 1998, but could neither expose nor stop the falsifications because Kanebo’s executives threatened to reveal past violations committed by ChuoAoyama Pricewaterhouse Coopers.

Kanebo disclosed that its liabilities exceeded its assets in 1996. When former Kanebo President Takashi Hoashi took over in 1998, his aim was to rebuild the company by 2001.

However, when it became clear his goals were unachievable, Hoashi, 70, decided to doctor the company’s financial statements, the court said.

According to a document from the Financial Services Agency, the falsification of the financial statements began in fiscal 1998 and continued until fiscal 2002.

Hoashi was handed two years in prison in March for colluding with the auditors, while ex-Vice President Takashi Miyahara, 64, received 18 months. Both sentences were suspended for three years.

However, the three accountants, who were arrested last September, had their licenses revoked. They pleaded guilty at their first trial session in March.

Prosecutors had demanded 18 months imprisonment for Sato and a year for both Kanda and Tokumi.

Both firms have suffered severely since the scandal broke. The disgraced auditing giant has halted part of its statutory auditing service since July 1 on orders by the Financial Services Agency and has lost nearly 10 percent of its 800 listed clients. In an effort to remove the taint, ChuoAoyama Pricewaterhouse Coopers will rename itself Misuzu Audit Corp. and is expected to resume regular operations on Sept. 1.


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