E&Y audit panel says no violations in Olympus handover

A panel reviewing the auditing of Olympus Corp after its $1.7 billion accounting scandal said it had so far not found any problems with the work of Ernst & Young's Japanese arm and questioned the accuracy of a separate investigation critical of auditors.

But the panel, set up by Ernst & Young ShinNihon LLC earlier this month, acknowledged that its powers of investigation were limited. The hurdles include an inability to question prior auditor, KMPG AZSA LLC, which does not want to participate in the probe.

We face certain limitations, Nobuo Gohara, a lawyer and leading member of the panel, told a briefing to give an update on an investigation it is aiming to complete by February. We are not at the stage where everything is clear.

Ernst & Young formed the panel to respond to criticism of auditors in a separate investigation by an Olympus-appointed panel this month that outlined how a handful of Olympus executives orchestrated the decades-long accounting scam.

The Olympus-appointed panel highlighted two issues in the auditing process. It questioned whether the handoff from KPMG to Ernst & Young in 2009 was thorough and whether it was appropriate for Olympus to book as goodwill preferred shares used to pay a massive M&A advisory fee now known to be central to the scandal.

The Ernst & Young-appointed panel said the handover was handled in accordance with accounting regulations that stipulate what questions must be asked and answered about why the switch is taking place. But it has not determined if Ernst & Young did enough to follow up on red flags.

We have found no problems with the handover in terms of the guidelines, said Toshifumi Takada, an auditing professor at Tohoku University and panel member. But we need to make further checks to see if more should have been done.

Gohara raised questions about the thoroughness and accuracy of the Olympus-appointed panel's report. Among other things he said Ernst & Young was questioned only twice for two-hour sessions each and he could not verify that a meeting between the two auditors detailed in the report took place.

I have doubts about the accuracy of certain parts of the report, said Gohara, who grabbed headlines earlier this year when he led an investigation into a scandal at Kyushu Electric and publicly challenged the utility for revising his report.

Ernst & Young and KPMG both face possible sanctions by the country's accounting industry body and financial regulator, which have launched probes into the matter.

In a statement, KPMG AZSA said it handled the handover with Ernst & Young in accordance with regulations and that it was cooperating with an investigation by the Japanese Institute of Certified Public Accountants announced by the industry body last month.

A severe penalty would deal a heavy blow to the industry, which is still reeling from a series of scandals that led to a two-month suspension of ChuoAoyama Pricewaterhouse Coopers in 2006 and the disbanding of its successor firm in 2007.

(Reporting by Nathan Layne; Editing by Michael Watson, Matt Driskill and Vinu Pilakkott)