PwC can bite the bullet, like it did in Japan

     Print Edition: February 21, 2010

The contours of the Kanebo in Japan are similar to the Satyam fraud, right down to the auditor. The Japanese cosmetics maker, in 2005, accepted that it had inflated revenues by over $2 billion, or Rs 9,285 crore today, over five years from 1999 through 2003. The fraud came to light after the government had taken over the firm's mana-gement and broken it up—separating the cosmetics, the food and textile units. The company, laden with debt, had approached the government for restructuring the previous year— partly to ward off a takeover bid by rival Kao Corp.

The Kanebo revelation ranked as the largest accounting fraud reported in Japan. In May 2006, Financial Services Agency, the Japanese financial regulator, imposed a two-month business suspension on audit and accounting firm Chuo Aoyama PricewaterhouseCoopers over its role in the accounting fraud at Kanebo. Three partners of Chuo Aoyama were arrested and later reprimanded by the Tokyo District Court but were not awarded prison sentences.

PricewaterhouseCoopers International moved swiftly. The same month, while it said that it will help Chuo Aoyama to correct standards and practices, PwC granted its affiliation to a new firm called Aarata. Many of the Chuo Ayoama accountants and partners moved to the new firm. "This new member firm will operate under a new management and governance structure, and will be of a sufficiently large scale to serve its clients," PwC had said at that time.

Less than four months later, in September that year, Chuo Ayoama restarted operations with a new name: Misuzu. But, by then, the damage had been done and the two firms—Aarata and Misuzu—together had 30 per cent less clients than what Chuo Ayoama had before the scandal broke.

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