September 26, 2020

PwC Japanese Affiliate Has Two of Its Ugly Audits Exposed

Today, Bloomberg's Jonathan Weil wrote his fourth column exposing clients of a Big 4 audit firm whose PCAOB inspection report reveals that the audit performed was less than stellar. This time around, JW exposes two clients of PwC's Japanese Affiliate Kyoto Audit Corp.:

The report [in full, below] said the board’s staff reviewed the firm’s audits for two companies and found serious problems with both. The deficiencies were so severe, it appeared that “the firm at the time it issued its audit report had not obtained sufficient competent evidential matter to support its opinion on the issuer’s financial statements,” the report said. In other words, the companies’ books could have been horribly wrong, and the auditors wouldn’t have known it.
 
Who were these two companies? The report didn’t say, in keeping with the board’s longtime policy of refusing to name the companies where its inspectors find botched audits. In this rare instance, though, it wasn’t hard to figure out their identities.

That’s because Kyoto Audit has only two audit clients with U.S.-registered securities. One is Kyocera Corp., a maker of mobile phones and electronic equipment, which has a stock-market value of $17.2 billion. The other is Nidec Corp., the world’s biggest maker of motors for hard-disk drives, which has a $13.6 billion market value. So there, the cat’s out of the bag. Undoubtedly, the companies and the auditor would have preferred you not know. 

As always, the whole post is worth your time but you almost get the sense the Jon it enjoying himself a little too much in this one, especially this: "it wasn’t hard to figure out their identities." And it's clear who Weil has the beef with here. It's the PCAOB. There's no love lost with the Big 4 themselves, as he has taken them all to task over one thing or another, but in these series of posts, Weil's point is that the PCAOB is acting as enabler through its policy of keeping the identities of the clients secret.

As we all know, the Board has plenty of policies that keep things secret. In addition to the identities of the firms' clients, the disciplinary process is also kept secret. The Board and even a few members of Congress don't like the policy, but finding anyone to champion change in this area isn't exactly easy. This is made even more difficult since the SEC's most recent appointment to the Board is a wild card at best.

Weil wants names. Most people want names. The names of partners, the names of those who settle without admitting guilt, the names of the clients. All these would give the Board's credibility a boost and then we might see some behavioral changes at accounting firms. But the unfortunate reality is that the regulator and policies we have are up against a beast of adversary in the accounting firms. Simply put: not all of these desires are politically feasible and that's what most observers continue to ignore. Sure, we'll probably get the disciplinary proceedings made public at some point and we may even get the partners' names on the audit opinion. But public disclosure of the identities of clients won't happen any time soon. Weil's beloved Buffaloes will probably win another National Title before things change at the PCAOB. You're just going to have to keep digging, Jon.

2011 Kyoto Audit Corporation

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