<html> <head><style type ="text/css">body { font-family: "Bloomberg Prop Unicode I", Verdana, sans-serif; font-size:125%; letter-spacing: -0.3pt; color: #FF9F0F; background-color: #000000; text-align: left; } p {line-height: 1.25em; max-width:900px; width:expression(document.body.clientWidth > 900? "900px": "auto" );} h1, h2, h3 { text-align: left; font-weight: normal; color: #FFFFFF; } h1 { font-size: 130%; } h2 { font-size: 115%; } h3 { font-size: 100%; } #bb-style { font-size: 90%; max-width:900px; width:expression(document.body.clientWidth > 900? "900px": "auto" ); } b, strong { font-weight: bold; } i, em { color: #FEC54A; } pre { font-family: "Andale Mono", "Monaco", "Lucida Console"; letter-spacing: -0.3pt; line-height: 1.25em; } table { border: 0; font-size: 90%; width: 100%; margin-left: auto; margin-right: auto; } td, tr { text-align: left; } td.numeric { text-align: right; } a:link { color:#53B2F5; text-decoration: none; } a:visited {color:#53B2F5} a:active {color:#53B2F5} a:hover {color:#53B2F5} </style> </head> <body> <p>By Jonathan Weil</p> <p>It seems Olympus Corp. isn't the only Japanese company that got clean audit reports from KPMG where investors may have reason for concern. It would be nice to know which companies those are. Unfortunately their identities are being kept secret.</p> <p>Last year the U.S. Public Company Accounting Oversight Board released its first-ever <a title="Link to KPMG inspection report" href="http://pcaobus.org/Inspections/Reports/Documents/2010_KPMG_AZSA_Co.pdf">inspection report</a> on Tokyo-based KPMG AZSA LLC, Olympus's former auditor. (The firm is the Japanese affiliate of Big Four auditor KPMG LLP.) While the inspectors reviewed only two clients' audits, both had serious problems.</p> <p>"The deficiencies identified in both of the audits reviewed included deficiencies of such significance that it appeared to the inspection team that the firm did not obtain sufficient competent evidential matter to support its opinion on the issuer's financial statements," the June 2010 report said, without naming the companies. Shortcomings included failing to test revenue properly at both companies. KPMG in a response letter said neither company had to restate its financial reports.</p> <p>This much is certain: Olympus wasn't one of the two companies. The maker of cameras and endoscopes isn't registered with the Securities and Exchange Commission, although its shares and depository receipts do trade over the counter in the U.S.</p> <p>A PCAOB spokeswoman, Lucy Harvey, said the agency inspects audits only of companies with SEC-registered securities and that, therefore, Olympus couldn't have been one of the clients referred to in the report. She declined to name the companies. The board's policy is to keep clients' identities confidential, in spite of its mission "to protect the interests of investors."</p> <p>Olympus replaced KPMG in 2009 with Tokyo-based Ernst &amp; Young ShinNihon LLC. As previously reported, KPMG had raised doubts about some of Olympus's accounting practices. However, Olympus didn't disclose any disagreements with KPMG when it switched auditors, a point now under investigation by Japanese regulators.</p> <p>Harvey said the board has conducted an inspection of Ernst &amp; Young ShinNihon. That report hasn't been released, and Harvey said there's no word on when it will be. The report on KPMG AZSA said inspectors conducted their field work in 2006 and 2007, but didn't explain why the board delayed its publication for so long.</p> <p>For what it's worth, here are the U.S.-registered companies audited by KPMG AZSA, according to the firm's 2011 <a title="Link to KPMG's annual report filings to the PCAOB" href="https://rasr.pcaobus.org/Firms/FirmSummaryPublic.aspx?FirmID=2027E6443DCF1ACF94E3A0CF4679C100">annual report</a> with the board: Orix Corp., MS&amp;AD Insurance Group Holdings Inc., Sumitomo Mitsui Financial Group Inc., Ricoh Co., Komatsu Ltd., Makita Corp., Honda Motor Co., Konami Corp., Nippon Telegraph and Telephone Corp., NTT Docomo Inc. and Panasonic Corp.</p> <p>Ernst &amp; Young ShinNihon listed these U.S.-registered audit clients in its latest <a title="Link to E&amp;Y annual report filings to the PCAOB" href="https://rasr.pcaobus.org/Forms/FormSummary.aspx?ID=DD944FC20614D0F729EB28A0F88F4278">annual report:</a> Advantest Corp., Canon Inc., Hitachi Ltd., Mizuho Financial Group Inc., JX Holdings Inc., Nomura Holdings Inc. and NKSJ Holdings Inc.</p> <p>(Jonathan Weil is a Bloomberg View columnist.)</p> </body> </html>