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Ernst & Young Coordinates External Panel to Investigate Olympus Audit

According to the December 8th reuters.com article, “UPDATE 1-E&Y sets up external panel to probe Olympus audit”, the Japanese arm of Ernst & Young is organizing an external panel to investigate its audit of Olympus Corp over questions about whether it, and prior auditor KPMG could have been more stringent in checking the scandal-hit firm’s accounts.

The move follows an independent panel commissioned by Olympus to investigate its $1.7 billion accounting scandal. Following that investigation, issues were raised with the work performed by Ernst & Young ShinNihon LLC, which took over as auditor in 2009, and prior auditor KPMG AZSA LLC.

Although While Ernst & Young ShinNihon says it conducted an internal review of its Olympus audit and found no problems, it made the decision to solicit an external probe given the public attention on the scandal.

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Kaoru Kashima, an executive board member at Japan’s largest auditing firm, was quoted as saying: “The impact of this incident on society has been large. It is a problem we are taking very seriously.”

Olympus has admitted to paying over the odds for three Japanese companies and to inflating an advisory fee for a 2008 overseas acquisition, as part of an elaborate scheme to cover up investment losses that dated back to the 1990s.

In its report, the independent panel raised questions about whether Ernst & Young and KPMG could have done a better job in monitoring the firm’s accounting.

The panel took issue with whether the handover of auditing duties from KPMG to Ernst & Young in 2009 was thorough, and the booking of the advisory fee as goodwill.

The panel was quoted as having said in its report on December 6th that: “Even when we account for the fact that they have just assumed their position as the auditor, and they lacked knowledge of past events, we cannot conclude this was appropriate.”

Ernst & Young named three of the panel members — Takashi Oizumi, Nobuo Gohara and Toshifumi Takada — and said it was still searching for one or two more. The panel will aim to issue its findings as early as this month, Kashima said.

Oizumi, a lawyer who once headed the Osaka High Public Prosecutors Office, will chair the panel.

Gohara is a lawyer who led a third-party investigation into a scandal at Kyushu Electric Power related to the promotion of nuclear energy, while Takada is a professor of auditing at Tohoku University.

Olympus Corporation is a Japan-based manufacturer of optics and reprography products. Established in 1919, the company has an essential monopoly in the gastrointestinal endoscope market. Global headquarters are located in Shinjuku, Tokyo, Japan.

In late 2011, the company fired its newly-appointed British president, which led to a scandal that saw the company’s stock plunge by 75%. The scandal led to admissions by select board members that the company had engaged in one of the biggest scams in the history of corporate Japan.

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