Thursday, 28 March 2019

Ernst & Young in Trouble in Japan… Again

In this second post, we will look at the news that Ernst & Young (E&Y) are facing a massive and highly unusual (for Japan) $9 billion lawsuit for its audit failings that led to investors in Toshiba losing out significantly. As E&Y have already had issues with Toshiba, it is worth examining this current instance to see whether this is a continuation of auditing failings across the globe.

As part of one of Japan’s worst accounting scandals for some time, E&Y were fined $17.4 million in 2015 for ‘failing to spot irregularities’ in its audit of Toshiba’s accounts. The firm were banned from taking on new business contracts in the country for 3 months, and at the end of 2015 the firm’s regional Head resigned. Yet, this week the firm is once again making headlines in Japan for its performance, or lack thereof. The firm is facing a shareholder lawsuit for $9 billion and is accused of being partly responsible for Toshiba’s failure to ‘disclose losses at Westinghouse’ during 2012-13. Westinghouse is an American supplier of nuclear technology, but in 2012-13 was suffering losses that Toshiba was exposed to on account of its investment in the company. The individual investors bringing this claim against E&Y argue that had the losses on Toshiba’s books been made public sooner, then shareholders would have been more knowledgeable and would have been able to prevent Westinghouse from purchasing CB&I Stone and Webber in 2015, a move which compounded the financial distress of the companies involved.

As the case is ongoing it is difficult to suggest what will eventually happen. The case was originally much smaller and related to a separate accounting failure in Toshiba, but the investors have decided to add Westinghouse to the claim. It has been noted that the claim is unusually large for Japan and, as such, there may be a question to be raised as to whether E&Y will ultimately be forced to pay such a fee. Perhaps it hinges on the actions of the auditing firm and its connection to Toshiba; how has the firm performed since 2015? Have the firm been lenient or softer with their audits to repair the damage caused by the scandal in 2015? Have the usual conflicts of interest inherent within the modern auditing business model raised their ugly heads again? The case will either be struck out or settled privately so we may never know, but this represents just the latest in a very long line of supposed scandals that continuously revolve around this industry.

Keywords – Ernst & Young, audit, Toshiba, Japan, @finregmatters

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