“Auditors lacked/failed in their role as watchdog; a Case Study”;
Auditors lacked/failed in their role as watchdog; a Case Study
Mr John Griffith retired from one of the Big4 auditing firms, KPMG, in 2012 as chairman. Before he stepped down he defended the role of an auditor by saying "they should be a watchdog and not a bloodhound" implying they should offer protection and be looked upon as guardians and not detectives. Though he also believes there are special skills to auditing, "A good auditor will use their nose, like a detective, to figure out when something isn’t right". (Economia 2012)
In my chosen case study of a Japanese based company, The Olympus Corporation, it is evident the external auditors failed in their role as watchdogs when a whistleblower exposed the $1.7 Billion Accountancy Fraud stemming back to 1990’s. They may have used their ‘nose’ at one point but they did not fulfil their role to the very end.
Mr Michael Woodford was an Olympus employee for more than 30 years. He began his career with the company in 1981 and rose swiftly to the executive ranks, managing its UK and European operations with diligence and precision. On the first of October 2011, he was appointed as the first non-Japanese person to be selected as President and CEO of this giant Japanese corporation.
In July he read an article in a local financial journal (FACTA) describing some of Olympus’ suspicious acquisitions. It explained that during 2006 to 2008 the company had bought three minor loss making firms in businesses unrelated to theirs for US$773 million. Mr Woodford confronted the board chairman Tsuyoshi Kikukawa with these allegations which he dismissed as "tabloid, sensationalist journalism".
He also queried the taking over of a UK Medical Equipment manufacturer, Gyrus Group Limited and its cost of $2.2 billion.
He raised concern of the US$600 million that Olympus had issued in shares to a company registered in the Cayman Islands, AXAM / AXES investment Ltd and why Olympus was paying them advisory fees for taking over Gyrus.
Woodford was named CEO in October and was fired two weeks later by Kikukawa because of "Cultural and Management differences" (ACFE 2012). The reality was by his relentless probing he had become aware of the company’s creative book keeping and insisted on answers to his questions.
On Sept 30th 1999 KPMG AZSA LLC discovered ‘tobashi’ was being carried out at Olympus. This translates to ‘fly away’ and means to hide investment losses by falsifying accounts. KPMG requested Yamada (Senior Managing Director) and Mori (Vice President) to cancel this ‘immediately’ and return the proceeds. They denied it at first but when auditors explained if they did not comply by the end of the day they would be forced to expose the illegal transaction in the audit for the half-year term ending Sept 1999.
The refund procedure was finished by 3.00pm that day.
In Dec 2008 KPMG became aware of the three small firms and the unreasonable advisory fees paid to AXAM Ltd. They informed Yamada of their findings and voiced concerns of potential shareholders lawsuits. In April 2009 they stated to him they would process their accounts correctly for the past year but depending on their investigation they may not continue as their auditor for the coming year.
The Board of Auditors announced there were no irregularities based on the Committee report without examining its content.
KPMG were dismissed in 2009 due to a difference of opinion in relation to their money laundering and signed off accounts with an unqualified clean opinion. The public were informed the termination was due to ‘the expiry of accounting auditors’ terms of office’. (reuters). (The Telegraph 2011). Ernest & Young Shinnihon were appointed as their new auditor and continued to give an unqualified but clean closure to accounts in 2010 and 2011.
KPMG did not function adequately as an external auditor. They had a role of responsibility to provide a true and fair view of the Olympus book keeping but choose to keep the hidden losses, hidden. Olympus formed an external committee who sided with the executives in the prevention of the fraud being detected. It was this committees’ report that the Board of Auditors accepted with no further investigation.
Everybody knew of the financial manipulation but remained silent and choose not to disclose the truth. Two of the Big4 auditing firms involved showed no professional ethics or integrity. The Japan Financial Service Agency (FSA) stated that neither of the firms acted negligently but they did lack a management system that would detect suspicious transactions. Indeed the auditors adhered to accounting procedures, but "it would be too far to say there was no problem". (WSJ 2011)
KPMG was appointed auditor to Olympus in 1974 – 2009, over these thirty five years their independence was compromised. This familiar threat allowed the quality of auditing to lower which led to a higher level of fraud. (KimPettersson, 2013) The rotation of auditors should be enforced to eliminate such problems. "Turning a blind eye to fraud makes you complicit" (Woodford 2012)
"If former president Michael Woodford hadn’t raised concerns about the company’s accounting, the loss-hiding may never have been discovered" (WSJ 2012).
Auditors must pursue the truth in transactions and if irregularities are found they have an obligation to express their opinion and disclose their findings. (O’Callaghan 2015)
Books continue to be cooked, fraud and corruption are a real concern in todays market. Only three months ago the Toshiba scandal was exposed as it had exaggerated its income by two billion in the past seven years. The chance of yet another accounting scandal to hit the headlines soon , is a real ur essay in here…
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