We study events surrounding ChuoAoyama’s failed audit of Kanebo, a large Japanese cosmeticscompanywhosemanagementengagedinamassiveaccountingfraud. ChuoAoyama was PwC’s Japanese affiliate and one of Japan’s largest audit firms.In May 2006, the Japanese Financial Services Agency (FSA) suspended ChuoAoyama for two months for its role in the Kanebo fraud. This unprecedented action followed a series of events that seriously damaged ChuoAoyama’s reputation.We use these events to provide evidence on the importance of auditors’ reputation for quality in a setting where litigation plays essentially no role. Around one quarter of ChuoAoyama’s clients defected from the firm after its suspension, consistent with the importance of reputation.Larger firms and those with greater growth options were more likely to leave,alsoconsistentwith the reputation argument.(From Author)
eBook Contents
Introduction – The Downfall of Chuoaoyama And Empirical Predictions - Empirical Analysis - Summary and Conclusions
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