Auditors’ blurry picture of Olympus

Hockey93 writes:
I just read this article in the WSJ about the auditors at Olympus. The article states that KPMG Azsa in May of 2009 was so troubled with the transactions it found that they asked the the company’s top executives to resign. The auditors also threatened to notify Japan’s Financial Services Agency, the country’s top financial watchdog, if the company didn’t deal with problems and that it the auditors would resign from being the company’s auditor. Management agreed to write off $914 million of the questioned transactions. KPMG Azsa resigned from the engagement after 2009 after 35 years of being Olympus’ auditor. The company’s new auditors Ernst & Young ShinNihon also failed to uncover the coverup. Both of these auditors are now under investigation by the Financial Services Agency to see if either firm played a part in the scandal by either deliberately or negligently overlooking false financial statements.

Although KPMG Azsa made Olympus write off nearly $1 billion worth of transactions, that fact was never mentioned in the audit report and the company still got an unqualified opinion. This should have never happened. That material of a write off should have been in the audit report and Olympus shouldn’t have gotten an unqualified opinion. I feel that the auditors should have also increased the level of risk for the audit and collected & tested more transaction samples.

Another thought of mine while I was reading this article was, what was KPMG Azsa doing from 1974-2009? The hiding of losses had been going on since the 1990’s. What took the auditors so long to find it? According to the article, KPMG Azsa first raised questions about the books in 1999. In 1999, the auditors discovered information that two members of top management were hiding securities losses off balance sheet. The auditors had the company unwind the transactions, but why would it take another 10 years for the same auditors to raise questions again? It doesn’t seem that after 1999, KPMG Azsa raised the risk level for Olympus audits. I feel that it would be a no-brainer to raise the risk level once you discover that management is hiding losses off balance sheet.

Overall, I think KPMG Azsa dropped the ball and could have and should have uncovered this scandal back in 1999-2000. It seems that they were negligent in taking the proper care to ensure that nothing else was going on off the books. In my eyes, KPMG Azsa is at some fault for this scandal. With their findings in 1999 and 2009, there is no way Olympus should have received an unqualified opinion and KPMG Azsa should have dug deeper into the transactions of the company to find out what was really going on.

What do you think? Here’s the article. http://online.wsj.com/article/SB10001424052970203501304577086351407137104.html

Advertisements

About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

4 comments

  1. I think that KPMG really dropped the ball on this one. Its great that they finally withdrew from the engagement but it appears to me that the fraud just got way too big for them to continue associate with the company. They should have made the proper authorities aware of what was going on behind the scenes years ago.

  2. It seems to me that KPMG Azsa is to blame in this situation. KPMG Azsa should have notified Japan’s Financial Services Agency back in 2009 when they first discovered almost $1 billion in shady transactions. It seems like they just had them write off the transactions, issued them an unqualified audit opinion, and then resigned before the scandal was unearthed.

  3. This goes back to the basic issue of client and accountant relationship. The goal of an auditor should be to provide a 3rd party explanation of their findings and share these findings in the form of an unqualified audit opinion. If they feel they cannot provide this they should either disclose that or end that client relationship. I feel like this line is often crossed in an attempt to please the client, when that should not be the only concern of the auditor or the case.

  4. KPMG Azsa could not be exonerated from the cause of this scandal. They are an experienced audit firm and should have used their professional skepticism and investigate these transactions further. Moreover, the timing of their resignation from serving this client (before the scandal broke) makes me wonder if they realized their error in issuing an unqualified opinion. Maybe they did! Remember as auditors, we are to always issue opinions that truly reflect the financial health of our client – good or bad.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: