Letter from... Japan

Attempting to draw a line under the scandal that has engulfed the company for the last 11 months, ChuoAoyama PricewaterhouseCoopers has submitted a report to Japan’s Financial Services Agency detailing how it intends to pull its corporate socks up.

Two weeks before a two-month business suspension order kicked in on 1 July for a firm that has been one of the pillars of Japan’s accounting industry, ChuoAoyama promised to reinforce its internal monitoring system and clarify the qualifications of review partners.

It also vowed to ensure that partners are independent, while it will also set up a new review partners division.

The improvements were forced upon ChuoAoyama after the arrest of four certified public accountants for allegedly collaborating with executives at Kanebo Ltd to falsify accounting reports to show that the cosmetics firm’s assets exceeded its liabilities in fiscal 2001 and 2002. In reality, Kanebo’s liabilities exceeded its assets by ¥81.9bn in 2001 and by ¥80.6bn the following year.

The scandal has inevitably rung alarm bells in corporate headquarters across the country, and at least 50 firms have terminated their auditing contracts with ChuoAoyama, including Shiseido, Toray Industries and Konica Minolta Holdings.

And while others have vowed to stand by the beleaguered firm - notably Sony Corp and Toyota Motor Corp - there are question marks over whether the company can survive.

“I’m not convinced that they will make it, at least in their present form,” said an expert in regulatory law at an international legal firm in Tokyo. “This has been hugely damaging to them and this is just another hit to professional services in Japan.

“It is not good to see accountants, who are normally seen as a pillar of society, being hauled over the coals but, of course, business will have to continue.

“To be honest, ChuoAoyama has been stung this time, but it could just as easily have been one of the other international accounting firms that are operating here,” he said. “They don’t have their houses in order, [but] they need to have their houses in order, and I imagine they are running around trying to do just that as fast as they can right now.”

The organisation that oversees Japan’s accounting industry is more positive, however, and believes that an order that member companies of the Japanese Institute of Certified Public Accountants (JICPA) should not poach clients or staff from ChuoAoyama has been effective.

“Can ChuoAoyama survive? According to reports in the newspapers, [it] may lose between 10% and 15% of [its] clients after the business suspension is lifted,” said Gen Ikegami, a member of the executive board of the JICPA.

“This is not on the same scale as Enron or the Arthur Andersen scandals, and we at JICPA are confident that the fundamental environment is in place here to ensure the public interest is met. I think companies will continue to use ChuoAoyama as their accountant.”

If PricewaterhouseCoopers goes ahead with a plan to set up its own independent company in Japan, however, corporate clients may opt to sign up with that firm and, conceivably, ChuoAoyama may be relegated to the tier below the Big Four accounting firms in Japan. We may soon be talking about Japan’s “Big Three”.

Julian Ryall is a freelance journalist who has lived in Japan for 13 years, covering business, politics and social issues.