Japan's Regulators Get Tough

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With a series of crackdowns on stock manipulation, fraud and other forms of malfeasance, Japan's Financial Services Agency (FSA) has gotten tougher on corporate crime. But its latest ruling is a jaw-dropper: on May 10, the FSA announced it was suspending most operations at ChuoAoyama Pricewaterhouse Coopers, one of Japan's largest auditing firms, for two months, due to its failure to prevent accounting fraud at client company Kanebo, a textile and cosmetics firm since broken up in a government-led restructuring.

The suspension is the first ever imposed on a major Japanese accounting firm, and raises questions about ChuoAoyama's future. Some 2,300 of the firm's largest clients, which include giants like Sony and Toyota, will be forced to find replacement auditors before the suspension begins in July. "ChuoAoyama is badly tainted now," says Marc Goldstein, research director at shareholder advisory firm Institutional Shareholder Services in Tokyo. "I think a lot of its clients are just going to quietly migrate somewhere else."

The prospect of large-scale defections has sparked fears that the Japanese company might conceivably collapse. Such a closure could roil a global industry dominated by only four firms. The Financial Times last week reported that PricewaterhouseCoopers CEO Samuel DiPiazza, anxious to head off speculation, sent an e-mail to his firm's managing partners urging them to reassure their international clients that the effects on the parent company would be minimal.

Why did the FSA come on so hard? Although Japan's accounting system has long been criticized as among the industrialized world's most opaque, regulators have been trying to develop what Goldstein calls "an equity culture" to encourage individual and foreign investment. That means sending a strong signal that accounting malpractice won't be tolerated.