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Fierce tug-of-war between Toshiba, PwC Arata auditors before settlement

Toshiba Corp. President Satoshi Tsunakawa is seen at a news conference at the company's headquarters in Minato Ward, Tokyo, on Aug. 10, 2017. (Mainichi)

A fierce tug-of-war continued between Toshiba Corp. and its auditing firm before the deeply troubled electronics giant released its financial report for the 2016 business year.

PricewaterhouseCoopers Arata LLC (PwC Arata) was, with critical international attention focused on its efforts, auditing Toshiba's financial results very strictly, while Toshiba itself was desperate to avoid an "adverse opinion" from the auditor that would lead to its stock being delisted.

An official of one of Toshiba's creditor banks was relieved to hear a report from the electronics giant in mid-July that the auditor will largely approve Toshiba's accounting while pointing out some problems.

According to sources familiar with the negotiations, PwC Arata was at one point leaning toward declining to express an opinion on Toshiba's fiscal 2016 accounts on the grounds that the auditor could not conduct a sufficient examination.

However, the Financial Services Agency, which supervises auditing firms, and the Japanese Institute of Certified Public Accountants warned PwC Arata against expressing no opinion on Toshiba's fiscal 2016 accounts, after the auditor did just that for Toshiba's April-December 2016 results. Repeatedly expressing no opinion on the company's accounts would constitute a failure to fulfill an auditor's responsibilities, the organizations said.

A compromise proposal surfaced in negotiations between Toshiba and PwC Arata, under which the auditor would declare that, although there are some problems with figures in the financial report, they do not seriously affect Toshiba's results as a whole.

However, there were subsequently twists and turns in their negotiations. A senior bank official was hardly able to believe their ears when a Toshiba executive explained in late July that "we can't gain a good response from PwC Arata. We're asking the auditor to express no opinion on our accounts rather than conclude that they were inappropriate."

PwC's U.S. unit, which audits Westinghouse Electric Co., Toshiba's former U.S. nuclear unit, apparently refused to sanction such an action, according to sources.

"The authorities are stricter toward auditing firms in the United States because there've been many cases of accounting irregularities in that country. The U.S. PwC unit apparently wanted to avoid criticism for overlooking wrongdoing," says an industry insider.

An executive of PwC Arata flew to the U.S. to coordinate views with the firm's American arm.

The point of contention between PwC and Toshiba was when the electronics giant became aware of losses in its U.S. nuclear power business.

Toshiba attempted to post the losses in its results for the business year ended March 2017, claiming that it recognized the losses after receiving a report from Westinghouse over the October-December 2016 period.

However, PwC Arata raised questions about Toshiba's claim. Pointing to the possibility that Toshiba was aware of the losses sometime in fiscal 2015, the auditing firm demanded that the electronics giant conduct a thorough probe to decide whether Toshiba's results for that year should be amended to include the river of red ink at Westinghouse.

Toshiba then hired outside lawyers in early 2017 to launch an in-house investigation to examine some 2.4 million internal emails. Toshiba then notified PwC Arata that it was unable to find any evidence that the company was aware of the losses in fiscal 2015. After failing to convince PwC Arata, Toshiba released its results for the April-December 2016 period without an opinion from the auditor. Toshiba was also forced to postpone the submission of its securities report that was due in late June.

If Toshiba were to submit its securities report without an opinion from its auditing firm or with an opinion that it was inappropriate, it could encourage Tokyo Stock Exchange to delist Toshiba stock. Toshiba stood at the edge of the abyss.

Less than 10 days before the securities report submission deadline, Toshiba employed lawyers to strongly urge PwC Arata to show specific figures that would be deemed appropriate. Toshiba even threatened to take legal action against PwC Arata.

Ernst & Young ShinNihon LLC, which audited Toshiba's results in fiscal 2015, has taken the position that there was no problem with the firm's accounts. Thus, it was difficult for PwC Arata to gain ShinNihon's cooperation.

On Aug. 9, PwC Arata notified Toshiba that it would issue a report stating that, although there are some problems with Toshiba's financial report figures, they do not seriously affect the results as a whole.

While refusing to compromise its claim that Toshiba should include losses the company suffered from its U.S. nuclear unit in its fiscal 2015 results, PwC concluded that the electronics giant's financial statement is otherwise appropriate. However, the auditing firm declared in its report that Toshiba's internal governance is faulted and does not meet the standards generally deemed fair.

At an Aug. 10 news conference, Toshiba Chief Financial Officer Masayoshi Hirata appeared unconvinced by PwC Arata's opinion.

"We have different views," he said.

Executives of Toshiba's main creditor banks were relieved at the outcome, which they say is barely acceptable.

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