419
CASE 8.3
Kansayaku
Kokai saki ni tatazu [repentance never comes first]
Japanese proverb
Satoshi Hirata served on the audit staff of Asahi, one of Japan’s four largest public
accounting firms.1 Like its three principal rivals, Asahi was affiliated with one of the
Big Four international accounting firms, namely, KPMG. Throughout the spring of
2003, Hirata had been assigned to the audit of Resona, a large metropolitan bank.
The bank was being audited jointly by Asahi and Shin Nihon, the Japanese affiliate
of Ernst & Young. On April 24, 2003, after completing his work for the day on the
Resona engagement, Satoshi Hirata returned to his 12-story apartment building in
central Tokyo, went to the roof of that building, and leaped to his death.
Disloyal Auditors
Although Satoshi Hirata did not leave a note explaining his decision to take his
life, law enforcement authorities subsequently learned that the young auditor was
distressed by his job. At the time, Resona and Japan’s other major banks were
experiencing major financial problems. For well over a decade, Japan’s handful of
“megabanks” had routinely embellished their reported financial health by, among
other means, refusing to provide adequate reserves for their expected loan losses.
In the spring of 2003, Resona’s financial condition had deteriorated to the point that
its independent auditors doubted the bank could survive without a large infusion of
capital from another bank or the federal government.
Hirata, one of the subordinate auditors on Resona’s joint team of Asahi and Shin
Nihon auditors, knew that Resona was technically insolvent and had been for years
despite the fact the bank had received unqualified audit opinions each year on its
annual financial statements. Hirata was apparently concerned that his superiors
would issue a similar opinion at the conclusion of the audit to which he was
assigned. According to one newspaper report, Mr. Hirata’s suicide was intended as a
“dramatic gesture to persuade his seniors that Japan could no longer afford to keep
covering over the cracks.”2 The “cracks” referred to in this quotation were the huge
and unreported financial problems facing Resona and Japan’s other major banks.
Following Mr. Hirata’s death, Asahi withdrew from the Resona audit engagement.
Asahi’s resignation meant that Shin Nihon would be forced to decide the large bank’s
future. Resona’s president, Yasuhisa Katsuta, a prominent political power broker in
Japan, never doubted that Shin Nihon would give his bank a clean bill of health.
But he was wrong. When the Shin Nihon auditors insisted that the bank seek outside
financing to remedy its financial problems, Katsuta accused them of “betraying”
his firm.3 A few days after the auditors refused to give Resona an unqualified
audit opinion, Japan’s federal government announced that an emergency infusion of
government funds equivalent to $17 billion was necessary to rescue the bank from
1. “Kansayaku” is a generic term for “inspector” or “auditor” in the Japanese language.
2. M. Nakamoto and D. Pilling, “Resona’s Downfall,” Financial Times, 13 June 2003, 11.
3. Ibid.
420 SECTION EIGHT INTERNATIONAL CASES
imminent bankruptcy. To fully understand Mr. Katsuta’s reaction to Shin Nihon’s
decision, it is necessary to study the history of Japan’s banking system and its
independent audit function.
Okurasho
By the end of World War II, Japan’s economy was practically destroyed. Over the
following five years, General Douglas MacArthur of the U. S. Army supervised the
post-war occupation of Japan by the Allied Powers. In carrying out his mission to
convert the Japanese nation into a democracy and to establish a free market economic
system within the country, General MacArthur largely succeeded in his attempt
to dismantle Japan’s ancient political and economic infrastructure. But one
important feature of that infrastructure, the secretive and powerful Okurasho, was
left largely unscathed by General MacArthur’s purge.
From the seventh century A.D. through World War II, the Okurasho or “great
storehouse ministry” was responsible for overseeing the economic development
and well-being of the Japanese nation. Often referred to by political insiders as the
“ministry of ministries,” the Okurasho was a tightly knit group of powerful and
wealthy individuals who advised the Japanese emperor on all major economic decisions
facing the country and who effectively controlled the nation’s banking system.
In the Japanese economy, the banking system has historically been very powerful
because the principal source of funds for private businesses has been debt rather
than equity capital. The Okurasho also played a major role in overseeing Japan’s
stock market when it became a significant factor in the Japanese economy during
the twentieth century.
Because senior members of the Okurasho chose each successive generation
of the organization’s leaders, the organization was self-perpetuating. In fact, the
individuals who controlled the organization pressured their children to marry only
members of other Okurasho families. Because General MacArthur was unaware of
the Okurasho’s far-reaching influence within Japan’s social structure and economic
system, members of the clandestine organization resurfaced following World War II
and quickly took control of the Ministry of Finance (MOF), the government agency
that would be responsible for managing the country’s economy when the post-war
occupation of Japan ended.
Despite the democratic political system imposed on Japan by General MacArthur,
the country’s elected officials had only minimal input into the post-war economic policies
established by the MOF. Few of those officials ever questioned the MOF’s heavyhanded,
if not authoritarian, policies since those policies were responsible for the rapid
modernization and recovery of the Japanese economy following World War II. Within
four decades, the MOF’s policies created the second-largest economy in the world and
produced a level of economic prosperity surpassed only by the U.S. economy.
During the 1990s, President Clinton frequently criticized the MOF for its protectionist
international trade policies that resulted in the United States having a huge and
unfavorable trade imbalance with Japan. President Clinton charged that the secretive
agency prevented Japan from becoming a “fully modern state with fair and open
trade.”4 A Business Week report provided a similarly blunt assessment of the MOF’s
role in Japan’s economy. “Japan’s Ministry of Finance is much more than an office of
4. BusinessWeek Online, “The Ministry: How Japan’s Most Powerful Institution Endangers World
Markets,” 25 September 2006.
CASE 8.3 KANSAYAKU 421
government. It is a political, economic, and intellectual force without parallel in the
developed world. It enjoys a greater concentration of powers, formal and informal,
than any comparable body in any other industrialized democracy. In Japan, there is
no institution with more power.”5
By the early 1990s, Japan faced its first major financial crisis since World War II.
Various economic factors and conditions prevented Japan from sustaining the
impressive growth that it had experienced over the previous decades. Suddenly,
Japan’s economy faced many of the same problems that have frequently plagued
the U.S. economy over the past century: volatile interest rates, inflation, and surging
unemployment. These problems caused Japan’s stock market to decline sharply and
eventually led to a startling number of business failures.
The large number of business failures during the 1990s produced huge losses in
the loan portfolios of the major metropolitan banks that were the principal source of
Japan’s investment capital. However, the extent of the loan losses was not reported in
the audited financial statements released periodically by those banks. Pressure applied
by MOF officials on the auditors of Japan’s large banks resulted in those banks receiving
clean audit opinions despite their massive financial problems. Eventually, both the MOF
and the nation’s major accounting firms would be held responsible for the huge government
bailouts that were necessary to rescue Resona and other large Japanese banks.
Japan’s Independent Audit Function
A small number of large accounting firms have dominated Japan’s accounting profession
and independent audit function since World War II. In turn, the MOF effectively
controlled those large accounting firms over most of that time frame, wielding power
over them similar to the power that it wielded over the nation’s major banks. In 1998,
the founder of one of Japan’s major accounting firms told a U.S. journalist that the
large government agency “really controls the accounting profession in Japan.”6 So
complete was the MOF’s control of the accounting profession that it reportedly handpicked
the individuals who were to serve in key executive positions at the country’s
largest accounting firms. In the late 1990s, the chief executives of four of Japan’s six
largest accounting firms had previously worked in some capacity with the MOF. The
close ties between the MOF and the major accounting firms meant that the top executives
of those firms routinely kowtowed to the wishes and demands of MOF officials.
Japan’s public accounting profession is much smaller than that of the United States.
In the United States, there is one CPA for approximately every 800 citizens, while
in Japan there is one CPA for approximately every 9,600 citizens. In fact, Japan has
fewer CPAs per capita by far than any other major industrialized country. The relatively
small number of CPAs in Japan is due in large part to the onerous requirements
for becoming a CPA. Until 2006, CPA candidates in Japan were required to pass three
rigorous examinations and serve a three-year internship with an accounting firm
before they could become a CPA.
The large accounting firms in Japan that dominate the nation’s accounting profession
also audit the great majority of the country’s public companies, large private companies,
and other important organizations in the private and public sector. Approximately
10,000 Japanese companies must be audited each year, including the approximately
4,000 companies that have securities listed on public stock exchanges. The remaining
5. Ibid.
6. L. Berton, “Japanese Accounting Bites Back,” Accounting Today (online), 9 November 1998.
422 SECTION EIGHT INTERNATIONAL CASES
companies that must be audited include unlisted corporations that have total capital
exceeding 500 million yen and corporations that receive government subsidies.
Similar to the United States, the number of major accounting firms within Japan
has been declining in recent years, principally due to mergers. By 2006, Japan’s
Big Four included ChuoAoyama—an affiliate of PricewaterhouseCoopers, Deloitte
Touche Tohmatsu, Ernst & Young Shin Nihon, and KPMG AZSA & Co. The latter firm
was created in 2004 when Asahi, the firm that employed Satoshi Hirata, merged with
another large Japanese accounting firm.
The nature, purpose, and structure of independent audits are generally very similar
in Japan and the United States. However, there is one significant difference. Audit
fees in Japan are dramatically lower than in the United States. The audit fee for a
large Japanese company is generally one-tenth of the fee for a similar U.S. company.
The much smaller audit fees charged by Japanese accounting firms impose severe
restraints on the scope of independent audits and result in audit services being considerably
less profitable for Japanese accounting firms than for their U.S. counterparts.
In the United States, the business press, financial analysts, and regulatory authorities
maintain that an absence of auditor independence was a key factor that contributed
to the series of high-profile audit failures of such companies as Enron, WorldCom, and
Adelphia Communications, among others. Allegedly, the long tenure of auditors with
their clients, personal relationships between individual auditors and client personnel,
and the large consulting fees that clients paid their auditors for nonaudit services
made it difficult for audit firms to objectively report on major clients’ financial statements.
However, parties familiar with auditing practices and norms around the world
insist that Japanese auditors have historically had much closer ties to their clients than
auditors in any other country, including the United States.
The cordial relationship between Japanese auditors and their clients is at least
partially a cultural phenomenon because the Japanese business community
“emphasizes relationships and harmonious working practices.”7 A critic of the
Japanese public accounting profession suggested that this cultural norm results in
Japanese auditors subordinating their judgment to the wishes or demands of their
clients. “Even when corporate clients ask the auditors to do something that isn’t
allowed under the law, they just do it.”8
By the late 1990s, Japan’s independent audit function faced a growing credibility
crisis. “In the late 1990s, problems with the current audit system started coming to
light—exposed by a series of deplorable events at many corporations, including
fraudulent accounting and the abrupt failure of financial institutions once considered
healthy.”9 Worsening that credibility crisis was the fact that the principal regulatory authority
for the public accounting profession, the MOF, rarely imposed sanctions of any
kind on auditors who had failed to fulfill their professional responsibilities. In 1999,
the MOF revoked a CPA’s license to practice for the first time in more than 20 years.
Mounting frustration with the MOF’s failure to take measures to strengthen Japan’s
independent audit function was one of several factors that resulted in the powerful
agency being stripped of much of its regulatory authority near the turn of the century.
The MOF lost even more of its authority following the election of Junichiro Koizumi
as Japan’s prime minister in 2001. The reform-minded Koizumi hoped to revitalize
7. D. Reilly and A. Morse, “Japan Leans On Auditors to Be More Independent,” post-gazette.com, 18 May
2006.
8. Ibid.
9. The Yomiuri Shimbun (online), “CPA-Client Collusion Must Be Severed,” 10 August 2006.
Japan’s stagnant economy by enhancing the “transparency” of the nation’s capital
markets. To accomplish that objective, Koizumi realized that the arcane regulatory
structure for those markets had to be overhauled.
Under Prime Minister Koizumi’s leadership, a new federal agency, the Financial Services
Agency (FSA), assumed most of the responsibility for monitoring Japan’s capital
markets—including the nation’s banking and financial reporting systems. To assist
the FSA in overseeing the independent audit function and accounting profession,
the new federal agency was placed in charge of the newly created Certified Public
Accountants and Auditing Oversight Board (CPAAOB), which is comparable to the
Public Company Accounting and Oversight Board (PCAOB) in the United States. To
police the securities markets, another new federal agency, the Securities and Exchange
Surveillance Commission, was established and placed under the FSA’s control.
In 2004, Japan’s federal legislative body, the Diet, rewrote the Certified Public
Accountants Law. A major purpose of revising this law was to increase the number
of CPAs in Japan. Among other changes, the revised law requires CPA candidates to
pass only one examination rather than three to become a CPA. The national organization
of CPAs, the Japanese Institute of Certified Public Accountants (JICPA), also
adopted a series of measures to strengthen the profession, many of which focused
on the independent audit function. Among these latter measures was prohibiting
independent auditors from having any direct financial interest in a public client.
Previously, auditors of public companies had been allowed to own a limited number
of shares of a public client’s outstanding stock.
The first major test of Japan’s new regulatory structure for the accounting profession
and independent audit function was posed by a financial scandal involving a
large manufacturing company, Kanebo, Ltd. The nation’s business press often refers
to the Kanebo fiasco as “Japan’s Enron.”10
Kanebo, Ltd: Japan’s Enron
The Tokyo Cotton Trading Company was founded in 1887 on the banks of the Sumida
River that flows through Tokyo. Over the following decades, the company became a
large and prosperous textile and apparel manufacturer—only to have its operating
facilities totally destroyed during World War II. With the help of significant bank loans,
the company, renamed Kanebo, Ltd., resumed operations on a much smaller scale in
the late 1940s. By the late 1990s, the company ranked among Japan’s largest public corporations.
Kanebo’s principal operations included the manufacture and sale of a long
line of cosmetics, apparel, textiles, pharmaceuticals, toiletries, and food products.
In July 2005, Japanese law enforcement authorities arrested three former Kanebo
executives, including Takashi Hoashi, the company’s former president. The three individuals
were charged with violating the Securities and Exchange Law, the principal
federal statute that established the regulatory framework for Japan’s securities markets,
a statute comparable to the federal securities laws passed by the U.S. Congress
in the early 1930s. Allegedly, the former Kanebo executives conspired to conceal
their company’s deteriorating financial health beginning in the 1990s. Throughout
the time frame that the fraud was being perpetrated, Kanebo’s audited financial
statements indicated that the company was in reasonably good financial condition.
However, a criminal investigation revealed that the company was hopelessly insolvent
from 1995 through 2004.
10. Accountancy (accountancymagazine.com), “ChuoAoyama faces £100m Revenue Hit,” 31 May 2005.
CASE 8.3 KANSAYAKU 423
424 SECTION EIGHT INTERNATIONAL CASES
According to a representative of Tokyo’s Public Prosecutor’s Office, Hoashi
ordered Kanebo’s accounting staff to falsify the company’s accounting records.
Hoashi reportedly told the accountants that if they did not cooperate, the company
would fail and its employees would lose their jobs. Hoashi’s two subordinates (who
were also indicted) gave the company’s accountants specific instructions on how to
distort Kanebo’s reported financial data. The accountants were told to record fictitious
sales and to understate various expenses to improve Kanebo’s operating results
and to make the company appear solvent.
In March 2006, Takashi Hoashi and one of his subordinates pleaded guilty to falsifying
Kanebo’s financial statements.11 In commenting on the fraud, the judge who
would ultimately sentence the two former executives noted, “It was a vicious and
organizational crime committed by the leaders of a major Japanese company. It was
also unprecedentedly cleverly devised.”12 Despite the judge’s harsh remarks, he gave
the two former executives suspended prison sentences.
ChuoAoyama, the second-largest CPA firm in Japan, served for decades as the
audit firm of Kanebo Ltd. Tokyo’s Public Prosecutor’s Office filed fraud charges
against three ChuoAoyama auditors who had been assigned to the Kanebo audit
engagements. Each of those auditors had worked on the annual audits of that company
for more than 15 years. One of the defendants had been assigned to the Kanebo
engagement team for more than 30 years. In fact, it was common in post-World War II
Japan for the same team of auditors to be assigned to an audit client indefinitely. According
to the prosecutors, the three ChuoAoyama auditors had not only been aware
of Kanebo’s true financial condition but had also recommended additional methods
for concealing the company’s poor financial health. Among these methods was “deconsolidating”
certain Kanebo subsidiaries that were posting large operating losses
each year. The defendants never admitted as much, but the prosecutors speculated
that the three auditors learned of this scheme from reading published reports of the
Enron accounting fraud in the United States.
In the summer of 2006, the case against the ChuoAoyama auditors went to trial in
Tokyo District Court. As one journalist noted, Japan’s public accounting profession
was “turned on its head”13 by the case because it represented the first time in the
country’s history that auditors from a major CPA firm had faced criminal charges for
allegedly falsifying or helping to falsify a client’s financial statements. A few years
earlier, ChuoAoyama had been involved in a precedent-setting civil lawsuit in Japan.
ChuoAoyama had been the longtime auditor for Yamaichi Securities, a large brokerage
firm that unexpectedly collapsed in late 1997. The following year, Yamaichi’s
former stockholders sued ChuoAoyama, charging that the firm had negligently
audited Yamaichi. The lawsuit was the first of its kind filed by Japanese stockholders
against an audit firm. In 2003, ChuoAoyama settled the lawsuit by agreeing to
pay the Yamaichi bankruptcy administrator an amount equal to the total audit fees
it had received for its final five annual audits of Yamaichi. Despite the settlement,
ChuoAoyama officials insisted that the firm had properly performed those audits.
During the criminal trial of the three ChuoAoyama auditors, the defendants testified
that shortly before the Kanebo fraud was uncovered by law enforcement authorities
they had pleaded with Hoashi and his subordinates to make the proper correcting
11. No published report could be found regarding the resolution of the criminal charges filed against
the third Kanebo executive.
12. Associated Press (online), “Ex-Kanebo Executives Sentenced for False Information,” 27 March 2006.
13. International Accounting Bulletin (online), “Japan Confronts Its Audit Problem,” 12 August 2006.
entries in the company’s accounting records. According to the three auditors, the
client executives refused to make those entries. When the auditors pressed the issue,
the Kanebo executives “secured their cooperation by pointing out that ChuoAoyama
had long overlooked the company’s window dressing and said it was pointless to
start complaining after taking a complacent stance for so long.”14
In August 2006, the three ChuoAoyama auditors were convicted of the charges filed
against them. Before sentencing the three individuals, the presiding judge noted that
they had “damaged the social trust of certified public accountants” and that their “crimes
deserve to be severely criticized.”15 The judge also observed, “It is shameful that they
have failed to realize the high professional morality as certified accountants and lost the
true aim of auditing, which is to protect investors.”16 After berating the three convicted
auditors, the judge gave each of them suspended sentences ranging from one year to
18 months. The judge defended the suspended sentences by pointing out that Kanebo’s
executives, not the three auditors, were primarily responsible for the fraudulent scheme.
The suspended prison sentences for the three auditors meant that no one involved in
the large-scale Kanebo fraud would serve any time in prison for their misdeeds.
In May 2006, the FSA announced that the three ChuoAoyama auditors involved
in the Kanebo fraud would have their CPA qualifications revoked. The FSA also
announced that ChuoAoyama would be forced to suspend its operations for the
two-month period July 1–August 31, 2006. The announcement of the suspension
stunned Japan’s public accounting profession. Japan’s Securities and Exchange Law
requires each listed company to have an independent audit firm at all times. The
suspension of ChuoAoyama meant that the firm’s approximately 800 clients that had
securities listed on a stock exchange would be forced to either retain a temporary
auditor for the two-month suspension period or dismiss ChuoAoyama and retain a
new audit firm.
14. Japan Economic Newswire (online), “Japanese Editorial Excerpts,” 11 August 2006.
15. J. Hong, “CPAs in Kanebo Fraud Avoid Prison,” Japan Times (online), 10 August 2006.
16. Agence France Presse (online), “Ex-Accountants Found Guilty in Japanese Fraud Case,” 9 August 2006.
17. In February 2007, Misuzu announced that it was disbanding. The remaining three members of
Japan’s former Big Four hired the majority of Misuzu’s employees.
E P I L O G U E
To prevent Kanebo Ltd. from being forced to
liquidate, the Japanese federal government
placed the company in a “rehabilitation” program
under the direction of the Industrial Revitalization
Corporation of Japan (IRCJ). The
government-sponsored and government-funded
IRCJ had been created in April 2003 to help
financially distressed companies obtain the capital
they needed to survive and to provide them
with “turnaround” advice from professional
business consultants. Under the leadership of
the IRCJ, Kanebo sold off its large cosmetics
subsidiary and received more than $1 billion in
government-guaranteed loans and waivers of
outstanding loans. In 2006, a large investment
fund purchased a majority of Kanebo’s stock and
took over control of the company from the IRCJ.
ChuoAoyama lost approximately one-third
of its audit clients, including more than 200
publicly listed clients, during the two-month
suspension imposed by the FSA. These companies
included ChuoAoyama’s two highest-profile
audit clients, Sony Corporation and Toyota
Motor Corporation. While serving the suspension,
ChuoAoyama underwent an extensive
internal review to strengthen its quality control
functions and changed its name to the Misuzu
Audit Corporation.17
CASE 8.3 KANSAYAKU 425
426 SECTION EIGHT INTERNATIONAL CASES
18. Japan Economic Newswire (online), “FSA to Inspect 4 Biggest Auditing Firms,” 25 October 2005.
Shortly after the FSA announced that it was
suspending ChuoAoyama’s operations for
two months, the accounting firm’s U.S. affiliate,
PricewaterhouseCoopers, revealed that it
would be creating a new Japanese accounting
firm known as Aarata, a name that means “new
and fresh” in Japanese. Aarata commenced operations
on July 1, 2006, and in the subsequent
weeks acquired dozens of ChuoAoyama’s former
clients, including Sony and Toyota. In
addition, nearly one-fourth of ChuoAoyama’s
employees left that firm to join Aarata.
The Kanebo audit failure prompted the FSA to
investigate the audit practices of each of Japan’s
four large accounting firms. These investigations
were carried out by the newly created CPAAOB
that had been placed under the authority of the
FSA. The stated purpose of the investigations
was to “regain public trust in certified public
accountants damaged by ChuoAoyama auditors’
involvement in Kanebo’s falsification of
its financial statements.”18 The CPAAOB issued
a report on the six-month long investigations in
July 2006. That report criticized the operating
policies and procedures of the four accounting
firms. As a result of the CPAAOB’s report, the
FSA issued “business improvement orders” to
each of the four firms. Exhibit 1 includes an
excerpt of the business improvement order
issued to ChuoAoyama.
In the aftermath of the Kanebo audit failure,
leaders of the Japanese accounting profession
spoke out about the need for additional
reforms to strengthen the nation’s independent
audit function. One such individual was
Tsuguoki Fujinuma, the chairman and president
of the JICPA. Fujinuma issued a public
statement in which he compared the Kanebo
incident to the Enron debacle in the United
States.
The Enron affair was not an isolated
problem of one accounting firm. To the
contrary, it was regarded as a failure of the
entire CPA system and provoked a barrage of
criticism against audits and auditors in
the U.S. public. This affair ultimately led to
the passage of the Sarbanes-Oxley Act,
legislation imposing severe controls on CPAs.
As a result of inspecting ChuoAoyama PricewaterhouseCoopers, the firm-wide management to
ensure audit quality control was deemed insufficient . . .
Specifically, its [measures for ensuring] compliance with laws/regulations and its
implementation of auditors’ independence [mandates] were found to be insufficient, and its
system [for] training, etc. was deemed partially insufficient.
In addition, its risk assessments at the time of engagement acceptance/continuance,
the performance of audit work by each audit team and the documentation/retention of
audit working papers were deemed partially insufficient. In terms of internal reviews of
audits, although a multi-tiered review system has been implemented, reviews rely on those
[provided] by review partners and some are deemed to lack depth. In this context, its internal
review system [for identifying problematic] issues of each audit and [for confirming] the
appropriateness of the judgments and dispositions [with regard] to such issues were partially
insufficient. Its monitoring of the quality control system was deemed partially insufficient,
and joint audits were deemed insufficient.
Furthermore, its control system for branch offices was deemed insufficient.
Source: Financial Services Agency (www.fsa.go.jp).
EXHIBIT 1
EXCERPT FROM
THE BUSINESS
IMPROVEMENT
ORDER ISSUED TO
CHUOAOYAMA BY
THE FINANCIAL
SERVICES AGENCY
(FSA)
Questions
1. Research online news services to identify recent developments impacting
the accounting and auditing profession in Japan. Briefly summarize these
developments in a bullet format.
2. As noted in this case, Japanese companies typically rely more heavily on debt
capital than U.S. companies. Explain how this fact may cause the independent
audit functions in the two countries to differ.
3. The much higher barriers to enter the public accounting profession in Japan
(as compared with other major industrialized countries) has resulted in a
relatively small number of CPAs in that nation. Identify and briefly discuss the
comparative advantages and disadvantages of high barriers to entry for a given
profession.
4. In both Japan and the United States, a small number of accounting firms audit
the great majority of large public companies. Identify the advantages and
disadvantages of this “market structure” for independent audit services.
5. In both Japan and the United States, external auditors have frequently been
accused of failing to maintain a proper degree of independence from their
clients. What measures have and should be taken to promote the independence
of auditors from their clients?
19. T. Fujinuma, “On the Alleged Fraudulent Accounting at Kanebo,” website of Japanese Institute of
Certified Public Accountants (www.hp.jicpa.or.jp/), 16 September 2005.
20. Reilly and Morse, “Japan Leans On Auditors.”
I urge all JICPA members engaged in audits to
make efforts to ensure the public confidence
in auditing practices, together with the JICPA
itself. As they do so, I further urge them not
to regard the Enron affair as a distant or unrelated
failure to the accounting system, nor
to regard the Kanebo incident as an isolated
problem involving only one auditing firm.19
Despite such statements and the actions of
the FSA and other regulatory authorities in
response to the Kanebo affair, many third parties
doubted that there would be major changes
in Japan’s independent audit function. As one
skeptic noted, “cultural mores” will likely prove
to be “sand in the gears of change.”20
CASE 8.3 KANSAYAKU 427