Use reform of auditing system to prevent corporate accounting fraud

The Yomiuri ShimbunHow can an auditing system be created that will prove worthy of people’s trust? What is needed is to promote reform, while recognizing no sacred cows.

Following a series of scandals, including inappropriate accounting practices at Toshiba Corp., that have lowered trust in auditing, the Financial Services Agency has embarked on a review of the auditing system.

The Business Accounting Council has also launched full-fledged discussions on the issue. The biggest pillar is how to improve the content of the auditor’s report, which serves as an endorsement of approval for financial statements.

Only evaluation results such as “appropriate” or “inappropriate” are entered, in principle, in auditor’s reports, which large corporations and the like are obliged to make. It has been pointed out that it is impossible to truly know, merely by reading through these reports, the possible risks of accounting fraud or financial problems that surfaced during the auditing process.

Because of this, it has been suggested that the risks to which auditing firms have paid particular attention should be entered in the report as important matters. To be specific, things that could happen in the future, such as impairment, should be included. This course of action is considered reasonable.

If realized, it is expected to enhance the value of information of an auditor’s report, thus helping to deepen the understanding of investors and others regarding a company’s financial conditions. Should it lead to a discovery of accounting fraud or to the prevention of such acts, it could also play a part in recovering trust in auditing.

The important thing is to plainly present useful information for shareholders and investors.

Write reports plainly

Should it merely become a long list of stereotyped phrases and technical terms, the significance of reform will be critically damaged. Auditing firms need to come up with ways to write reports as plainly and substantially as possible, so as to help general shareholders understand them easily.

An auditor’s report could offer an opportunity to invigorate dialogue to improve corporate governance as shareholders ask companies — with the report as a starting point — about their true financial situation.

Corporate managers should make efforts to respond sincerely to what shareholders and others inquire about or point out, and improve their public disclosure of information.

In the case of Toshiba, the same auditing firm has been in charge for as many as 47 years, which is considered one factor behind the accounting fraud.

Another necessary task related to auditing is whether to introduce a system to have auditing firms replaced without fail after a certain period of time, so as to prevent collusion between an auditing firm and a client firm.

Some have pointed out that through a periodical replacement of auditors, there will be a sense of tension created on both sides, within the auditing firm and the company to be audited, thus helping prevent fraudulent acts from being overlooked.

However, some have expressed concern that by having a company’s auditing shifted to an auditing firm unfamiliar with that firm’s accounting, the quality of the auditing could deteriorate or it could take too much time. The potential merits and demerits of replacing auditing firms should be sufficiently assessed.

European countries and the United States are in front with reform of their auditing systems. It may also be useful to study overseas cases regarding the status of their implementation and the possible impact, to apply them to reform here.

(From The Yomiuri Shimbun, Nov. 6, 2017)Speech


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