by Brian Mahany
Japan’s Financial Services Agency ordered KPMG affiliate KPMG Azsa to dramatically improve the quality of their audits. The Japanese regulator had similar words for Ernst & Young ShinNihon as well. This action comes on the heels of one of the worst accounting scandals in Japanese history, last year’s revelation that Olympus, a leading manufacturer of cameras, had hidden nearly $2 billion in losses from investors.
KPMG Azsa was the auditor for Olympus during much of the period when the losses were hidden. Ernst & Young ShinNihon would later assume those duties. (The original auditor was Arthur Andersen which collapsed after its role in the Enron scandal came to light.) Although there were some questions raised, the accounting giants gave the company clean bills of health and signed off on the audits according to published reports.
So where were the auditors?
Apparently asleep at the wheel is the only conclusion we can find. Japan asked the same questions immediately after the scandal came to light last year. According to the FSA report, KPMG Asza had a lack of “proper operational management controls.”
KPMG says it fulfilled its duties. There is evidence suggesting that they did later issue warnings, although it was after they had signed off on the books and after they had been terminated by Olympus. (KPMG suggests it was fired for doing its job and questioning the books. In fairness to the company, Japan’s review showed the firm did not act intentionally.)
Experts and civil juries will probably wrangle for months or years as to the role KPMG and Ernst & Young had in not uncovering the massive accounting fraud at Olympus. We believe, however, that these firms should have been able to pick up the fraud much earlier in the process.
Over and over we see failures of audit firms to find fraud. The very reason that audit firms are brought in is to provide business owners, shareholders, investors and lenders some assurance that the books and records of a business reflect an accurate picture.
We are still interested in how so many mortgage lenders were given clean bills of health immediately prior to the mortgage meltdown in 2007 and 2008. Some lenders had a default rate of over 50% meaning that more than half the loans they wrote were bad yet audit firms signed off saying these lenders were complying with HUD guidelines.
How is that possible? We would like to know.
If you were a CFO or in the finance section of a failed bank or lender or were a former auditor working for an outside audit firm, give us a call. We would love to understand how such failures could occur. In certain cases, we may be able to bring a federal false claims action on your behalf and seek compensation for your knowledge.
For more information, contact attorney Anthony Dietz at adietz@mahanyertl. For immediate assistance, contact the author at or by telephone at (404) 704-6731 (direct). All inquiries protected by the attorney – client privilege and are kept in strict confidence.
Mahany & Ertl – America’s Fraud Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine & Minneapolis, Minnesota. Services available in many jurisdictions nationwide.