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Toshiba CEO Satoshi Tsunakawa bows during a news conference in 2017.   © Reuters
Toshiba in turmoil

Penalized Japanese auditor struggles to regain ground

EY ShinNihon fulfills obligations to regulator in wake of Toshiba scandal

TOKYO -- Ernst & Young ShinNihon, the auditing firm hit by administrative penalties over Toshiba's financial window-dressing, has completed its statutory obligations imposed by the Japanese regulator.

For over a year, the Tokyo-based accounting firm has taken a series of measures, such as reshuffling its management team and urging poorly performing accountants to retire, to improve its audit quality and regain public trust. Although the completion of the penalty process could be seen as a milestone for the auditor's regeneration, it still has many problems, including losing corporate client contracts.

EY ShinNihon was prohibited from making new service contracts for three months and hit with a fine of 2.1 billion yen ($17.5 million) under administrative penalties imposed by the Financial Services Agency in December 2015. At the same time, the accountant was obliged to submit a report on progress in improving its operations every three months. Since concrete results of the audit company's improvement efforts are difficult to gauge from outside, the regulator's evaluation was the focus of attention among client companies and investors with regard to the accountant's improvement.

According to people familiar with the matter, the FSA had agreed by January that EY ShinNihon "no longer needs to submit reports." As the regulator has given a nod, the firm has stopped reporting its improvement efforts on its website as well.

However, it is not an easy task for EY ShinNihon to regain the confidence of companies and investors. The previous chairman resigned to take responsibility for the firm's failure to detect accounting irregularities at Toshiba, and a new management team composed of mostly younger executives was formed. The firm also changed its personnel system enabling it to urge certified public accountants to retire if their audit quality remained below standard. Despite these moves, corporate clients from various fields of business kept on leaving.

Companies' disclosures of a change in auditor often simply cite "expiry of the contract" as the reason, making it difficult for outsiders to know the real motive behind their moves, but the list of departures includes the Uniqlo operator Fast Retailing, major insurance company Dai-ichi Life Holdings, Mitsubishi Heavy Industries and more.

EY ShinNihon says it will continue with its reforms and plans to change its corporate name later this year. It also hopes to find overseas corporate clients in cooperation with its international partner Ernst & Young to revitalize its operations.

The FSA is considering introducing a system that requires companies to replace audit firms after a certain period, thinking cozy relationships between auditors and companies are one reason why accounting scandals, such as the Toshiba case, continue to happen.

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