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Toshiba President Satoshi Tsunakawa
Business

Battle between auditors drove Toshiba's earnings delay

PwC Aarata, ShinNihon disagreed on when nuclear losses could have been recognized

| Japan

TOKYO -- Toshiba's earnings for the year ended in March have seen the light of day at last with a "qualified" endorsement from PricewaterhouseCoopers Aarata -- the product of a monthslong squabble among the Japanese conglomerate, the auditor and its predecessor.

News had broken in late 2016 of massive losses at U.S. nuclear power company Westinghouse Electric, then a consolidated Toshiba subsidiary. But then PwC Aarata learned in mid-January that former managers at Westinghouse stood accused of pressuring underlings to understate those losses.

PwC Aarata asked Toshiba to investigate whether similar conduct had occurred in the past, and the auditor withheld its blessing from the company's earnings in the meantime. Toshiba was forced to seek a one-month extension on reporting earnings for the nine months through December 2016, originally slated for release Feb. 14.

Toshiba's investigation turned up no evidence of past wrongdoing. But with a week left until the extended earnings deadline, the auditor still refused to approve the three-quarter figures, forcing Toshiba to delay the release of its earnings again.

The dispute with PwC Aarata centered on exactly when Toshiba became aware of the losses at Westinghouse, which stemmed from that company's acquisition of an American nuclear construction firm at the end of 2015. The auditor claimed the losses may have been recognizable as soon as the deal closed, and insisted the conglomerate extend its investigation back to the year ended in March 2016.

Ernst & Young ShinNihon, Toshiba's previous auditor, had approved those earnings, and again certified that they had been accurate at the time they were reported. But PwC Aarata insisted that massive losses did not simply materialize out of nowhere. On April 11, Toshiba released the nine-month earnings without its auditor's blessing.

Won't budge

At that point, the relationship between the two companies took a turn toward the acrimonious. PwC Aarata withdrew all its staff from Toshiba headquarters, and the conglomerate weighed a change of auditor. But the other major audit firms active in Japan proved unavailable for various reasons, and it would be impossible for a smaller auditor to get a handle on Toshiba's massive operations, leaving the company locked in its unhappy partnership.

Resigned to their situation, the pair got to work certifying earnings for the year ended in March 2017, aiming to meet an extended deadline of Aug. 10. But the question of Westinghouse's loss-hiding remained a sticking point, though neither interviews with more than 100 people nor a survey of some 2.4 million emails uncovered evidence of wrongdoing.

"They want us to prove the unprovable, that nobody knew about the losses," a Toshiba official complained.

In late July, the auditor told Toshiba it would not issue a full certification of fiscal 2016's earnings unless those from the previous fiscal year were revised, insisting that at least a suitable portion of the conglomerate's Westinghouse-linked losses be booked for fiscal 2015.

"Even if we're sued by investors, we'll at least be able to say we fulfilled our duty as an auditor," a source at PwC Aarata said.

What Toshiba and its two auditors could agree on was that no issues were immediately apparent. PwC Aarata agreed to give the fiscal 2016 earnings its "qualified" approval -- a solid compromise, if not particularly pleasing to any party.

(Nikkei)

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