Sony Corp. and the Mystery of the Lousy Audit

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By Jonathan Weil

If you can't trust an audit of a company's books, can you trust the company's numbers?

Probably not, given that the whole point of an audit is to boost investors' confidence. One of my favorite subjects in the world of accounting is the ridiculous amount of secrecy that shrouds the regulation of audit firms.

The U.S. Public Company Accounting Oversight Board says it has discovered hundreds of audit failures over the years. It publishes inspection reports about its findings at the firms. In those reports, however, the board does not disclose the names of companies where it has found botched audits. The board could divulge the names if it wanted to. But it chooses not to. The firms would scream bloody murder if it ever changed its policy.

All of which brings me to an inspection report the board published this week on Tokyo-based PricewaterhouseCoopers Aarata, an affiliate of the Big Four accounting firm PricewaterhouseCoopers. The fun part about reading the board's inspection reports, as I've noted in several previous columns, is that occasionally you can figure out the clients' identities.

Bottom line: It seems Sony Corp., Japan's biggest consumer-electronics exporter, may have gotten a lousy audit. I just figured the company's shareholders might want to know.

Here's how I arrived at that conclusion. According to the report, the board's inspectors conducted their review in late 2010 and early 2011 and found deficiencies at one company where PwC Aarata was the principal auditor.

The problems included "the failure to perform sufficient audit procedures to test revenues" and "the failure to perform sufficient audit procedures to test the existence of investments." The report said the problems were so significant, it appeared that the firm "had not obtained sufficient competent evidential matter to support its opinion on the issuer's financial statements."

In other words: Yikes.

Now for the process of elimination. The report said PwC Aarata, at the time of the inspection, had two audit clients with U.S.-registered securities where the firm was the principal auditor. So I searched through Securities and Exchange Commission filings and found out those companies are Sony and Toyota Motor Corp.

Thankfully, in its response letter to the board, PwC Aarata was kind enough to say that "investments in loans" represented approximately 4 percent of total assets at the company in question, and that "investment securities" represented approximately 38 percent of total assets. The firm's letter said those percentages were "as of the balance sheet date," but didn't specify when that was exactly.

Those figures didn't match the numbers in Toyota's financial statements at all. They did match some of Sony's numbers.

PwC Aarata's May 2010 audit report on Sony covered the company's year-end balance sheets for two fiscal years: 2009 and 2010. Sony had a line item for 4.56 trillion yen ($46 billion) called "securities investments and other" on its March 31, 2009, balance sheet. That was 38 percent of total assets. A year later that line item had risen to 5.07 trillion yen, which was 39 percent of assets.

The company also showed "housing loans in the banking business" of 468.3 billion yen at the end of fiscal 2009, which was 4 percent of assets. That figure rose to 555.1 billion yen at the end of fiscal 2010, still 4 percent of assets.

Yasuhiro Nakajima, chief quality control officer for PwC Aarata, declined to confirm whether Sony is the mystery client. "We take the comments of the PCAOB very seriously, and as a result we performed some additional procedures, the completion of which did not result in changes to either our audit report or the issuer's financial statements," he said. A Sony spokesman, Jim Kennedy, declined to comment. So did a PCAOB spokeswoman, Colleen Brennan.

In its filings with the SEC, Sony said it paid about 4.2 billion yen in audit fees for fiscal 2010, equal to about $52.6 million today. Shareholders shouldn't have to work so hard to learn what they got for their money.

(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)

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-0- Aug/16/2012 19:05 GMT