March 1 (Bloomberg) -- Softbank Corp., Japan's third-biggest wireless operator, may face increased regulatory scrutiny of its financial statements after changing auditors in July, CLSA said in a research report titled ``Confidence Man.'' Softbank shares had their biggest one day fall in the last six months.

The company could face a risk of restating its results given that former auditor ChuoAoyama PricewaterhouseCoopers also signed off on overstated earnings at Nikko Cordial Corp., CLSA said. Softbank said the report was ``based on mistaken facts and speculation,'' in a statement to the Tokyo Stock Exchange today.

``We examined Softbank's complex accounts and found a number of red flags that are so obvious that they could not possibly be ignored by incoming auditor Deloitte Touche Tohmatsu,'' Kieran Calder, an analyst at CLSA Asia Ltd., said in his report dated Feb. 27. ``It must be increasingly probable that the Securities and Exchange Surveillance Commission too would be interested.''

Softbank's subsidiaries and frequent changes of accounting policies are among the red flags, Calder said. Japanese regulators are taking more action against accounting irregularities after publicly traded companies including Nikko, Japan's third-largest securities firm, were found to have overstated earnings.

CLSA is a Hong Kong-based investment bank, whose largest shareholder is Credit Agricole SA, France's second-biggest bank by assets. Calyon is an investment-banking arm of Credit Agricole.

Shares Plummet

Shares of billionaire Masayoshi Son's Softbank fell as much as 9 percent and closed 7.4 percent lower at 2,775 yen in Tokyo today, the biggest one day fall since Aug. 25. The shares fell 5.2 percent yesterday.

``Time will tell whether the concerns outlined in Calder's report come to fruition,'' said Jon Easton, who manages about $100 million in Japanese equities, including Softbank shares sold on margin, at EN Asset Management in Tokyo. ``Regardless of this, Softbank has been bid up, it is a highly indebted company and the weakest of Japan's three mobile telecoms operators.''

Softbank's long-term debt swelled to 2.38 trillion yen ($20 billion) as of Dec 31, from 900 billion yen a year earlier due to refinancing on its acquisition of Vodafone K.K., the country's third-largest mobile phone company.

The cost of insuring Softbank's five-year debt using credit default swaps rose 2 percent today. The cost of protecting 1 billion yen worth of Softbank debt for five years rose to 23 million yen, according to data compiled by Bloomberg. The cost has dropped 27 percent this year, showing an improvement in perceptions of Softbank's creditworthiness.

Softbank last month reported operating profit more than tripled to 84.7 billion yen in the third quarter on lower expenses and additional revenue from the Vodafone purchase.

Calls by Bloomberg News to Calder's office and mobile phone numbers were not immediately returned. Sachiyo Kikuchi, a Tokyo- based spokesman for Deloitte Touche Tohmatsu, declined to comment.

Accounting Crackdown

The Financial Services Agency on Tuesday asked Japan's ruling party to revise laws and give it authority to fine auditors and fire company executives over financial irregularities.

``More accounting irregularities could be found in Japan as the nation's regulators move toward international standards,'' said Yoji Takeda, head of Asian Equity Management at RBC Investment (Asia) Ltd. in Hong Kong, who helps manage $900 million. ``The risk is probably bigger at emerging companies than at established blue-chips.''

The former ChuoAoyama PricewaterhouseCoopers, which changed its name to Misuzu Audit Corp. in September after a two-month suspension for letting cosmetics maker Kanebo Ltd. falsify accounts, expects to be penalized by regulators again for approving inaccurate earnings statements by Nikko Cordial.

``Given the history of Softbank's former auditor, there must certainly be a risk of some level of restatement,'' Calder said in his report.

A Securities and Exchange Surveillance Commission spokesman, who declined to be named, said the agency doesn't comment on the status of individual investigations.

Misuzu Transfer

Misuzu, the nation's fourth-biggest auditor, said Feb. 20 it is in talks with three bigger rivals to transfer all its 3,400 clients, including Nippon Telegraph & Telephone Corp., and 2,400 employees as early as July, as it prepares for punishment from regulators over Nikko's falsified earnings.

Nikko admitted in December to overstating earnings in a scandal that led to the resignation of six top executives, and may cost the brokerage its stock market listing. Nikko has filed lawsuits against three of the executives for damages, after restating earnings for the past 2 1/2 years.

Sanyo Electric Co., bailed out last year by Goldman Sachs Group Inc. and two Japanese banks, said last week regulators are investigating its financial statements. ChuoAoyama was Sanyo's auditor between April 2002 and March 2006.

Sanyo shares rose 7.3 percent to 191 yen in Tokyo today after a report by Kyodo News that regulators will not file a criminal complaint.

To contact the reporter on this story: Mariko Yasu in Tokyo at myasu@bloomberg.net

Last Updated: March 1, 2007 01:48 EST