Japanese regulators slightly criticize Olympus auditors then say the corrective action plan they require wouldn’t have found the fraud anyway

Reuters reports that the Japanese regulator, Financial Service Agency, criticized KPMG and Ernst & Young for their audits of Olympus. Then they partially retracted their criticism.

The Reuters article, Japan regulator raps KPMG, Ernst & Young for Olympus work, says the two firms

…lacked operational management systems to ensure proper auditing that would spot and flag dubious transactions.

The regulators didn’t find any “intentional acts of grave negligence” according to the article.

I guess that means they should have had the foresight to develop some unidentified management system that would have identified the fraud.

The two firms have to develop a business improvement plan and report on their progress every six months.

An official then essentially retracted the criticism. Check out this comment:

Still, an FSA official told reporters he was not sure the accounting fraud could have been spotted and prevented even if the two auditing firms had proper operational management systems in place.

So if I’m reading that right, the regulators believe that the two audit firms should have had some procedures in place, type unknown, and needs to develop those unidentified procedures knowing that they wouldn’t have detected the fraud anyway.

I hope there is more to the story than Reuters reported or more background on the culture of Japan than is visible to me as an American, because that approach doesn’t make a lot of sense to me.  “You should have found it somehow” is not a particularly helpful way to regulate.  I hope I’m missing something.

The only bona fide criticism the Reuters article discusses was insufficient conversation by E&Y when they took over from KPMG.

I did a search for other stories on the issue but only found that lots of sites have repeated the Rueters report.

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