Since the collapse of Arthur Andersen over the Enron case, recently there is another big accounting fraud which badly hit Chuo Aoyama, one of four large accounting firms in Japan, affiliated with the global network of PricewaterhouseCoopers.

Chuo Aoyama, reportedly audits over 2 thousand companies, including such heavyweights as Toyota, Sony, and Nippon Steel Corp. This fraud might lead to the collapse of Chu Aoyaman leaving only 3 accounting firms in Japan.
What is this accounting fraud all about?
The accounting fraud relates to the Chuo Aoyama’s PricewaterhouseCoopers’ three auditors abetting with the top executives of Kanebo Ltd to falsifying earnings of 200 billions yen for the four years from 2002 to 2005. It has even been reported that the three auditors not only turned a blind eye to the falsified books and certified them, but they offered their expertise and worked together with the Kanebo executives to produce false consolidated financial statements covering up the losses.
 

As a result of this fraud:

• The three (3) ex Accountant from Chuo Aoyama PricewaterhouseCoopers, Kuniaki Sato, 64, was sentenced 18 months in prison, Kazutoshi Kanda, 56, and Seiichiro Tokumi, 59, received one year in jail;
• Chuo Aoyama PricewaterhouseCoopers was ordered by the financial watchdog, Japan’s Financial Services Agency  to halt its statutory auditing services for its largest clients for two months from July. This rules applies for listed companies and those capitalized at ¥500 million (US$4.56 million) or more, affecting some 2,300 client companies. This is the first time a major accounting firm was ordered to suspend the core auditing business in Japan. The choice of July and August for the suspension appeared to have been aimed at minimizing the impact on major companies’ earnings reports. Most big Japanese companies end their financial year in March.
• ChuoAoyama PwC’s chairman and chief executive Akio Okuyama has announced he will resign to take the blame for the firm’s role in the Kanebo scandal and
• Earlier in March 2006 the same Tokyo court handed suspended jail terms to a former Kanebo president and his deputy in the same conspiracy.

Background as follows:

• In October 2004, Kanebo Ltd., a cosmetics and textiles maker, admitted to have falsified financial statements for the five years through March 2004 by bloating its earnings improperly by more than 200 billion yen or $1.37billion. Instead of reporting net assets of 926 million yen(7.9 million dollars) in the year to March 2002 and 502 million the year after when Kanebo was actually over 80 billion yen in debt;
• Kanebo’s overstatement means that the company actually had a negative net worth for fiscal years 1999 through 2003;
• The move caused the company’s stock price to plunge and sparked an investigation by the Tokyo Stock Exchange, whose rules require a firm to be de-listed after posting a negative net worth for more than three years;
• Kanebo was placed in rehabilitation under the state-run Industrial Revitalization Corporation of Japan(ICRJ) in March 2004.
• The cosmetics business was later split off from the food, drugs and daily products divisions and sold to a group led by Japanese toiletries and household goods maker Kao.