Abstract
Audit Quality and Auditor Reputation: Evidence from Japan*
Highlights
High-quality external auditing is a central component of well-functioning capital markets
We study the case of ChuoAoyama, PricewaterhouseCoopers’ (PwCs’) former affiliate in Japan, which was implicated in a major accounting fraud at Kanebo, a large Japanese cosmetics company
SUMMARY AND CONCLUSIONS In May 2006, the Japanese Financial Services Agency (FSA) took the unprecedented step of suspending the operations of ChuoAoyama, the PwC affiliate in Japan, for two months for its role in a major accounting fraud at Kanebo
Summary
High-quality external auditing is a central component of well-functioning capital markets. We study the case of ChuoAoyama, PricewaterhouseCoopers’ (PwCs’) former affiliate in Japan, which was implicated in a major accounting fraud at Kanebo, a large Japanese cosmetics company This case provides a good setting for examining the importance of auditor reputation absent the confounding effects of litigation. Our findings are stronger than those in Weber et al, and exploit unusual features of the Japanese setting to further strengthen the interpretation that these results are driven by reputation There are both similarities and differences between the events at ChuoAoyama and those surrounding the demise of Arthur Andersen in the U.S The two sets of events are similar in that Andersen’s ultimate demise, which resulted from its failed audit of Enron, was preceded by problems with its audits of Waste Management, Sunbeam, and the Baptist Foundation of Arizona.
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