Setting the Record Straight: The Real Internal Auditors at Olympus Have Not Been Implicated

Like everyone else, I have been following the Olympus financial scandal with great interest. My ears perked up with the first mention in the Western media several weeks ago of potential involvement of the company’s “internal auditor.” However, I was quickly assured by internal audit colleagues in Japan that the individual mentioned was not actually the company’s internal auditor as we know the function in the West.

A recent article published by Bloomberg, titled “Olympus Clears KPMG in Fraud, Faults Internal Auditors,” once again raised the specter that internal audit colleagues in Japan were being accused of wrongdoing. Could I have been mistaken in defending the company’s internal auditors when the first accusations were leveled? I decided that it was important to clear the air about this, so I consulted with a trusted colleague from Japan who was able to help me better understand the Japanese system of corporate governance as it involves a company’s “corporate and internal audit functions.”

It turns out that despite the title of the article, the subjects of the investigation are not internal auditors (“Naibu Kansa” in Japanese) but rather, they are the “statutory auditors” or “corporate auditors” (“Kansa Yaku” in Japanese). It’s not the same thing!

The mix-up may be taking place because a statutory auditor role does not exist in most parts of the world. Japanese statutory auditors occupy a unique niche, separate from both internal auditing and external auditing.

The Japanese Company Code requires listed companies and larger unlisted companies to appoint statutory auditors from among their board members at a shareholders’ meeting. The statutory auditors are charged with attending board meetings, reviewing financial statements, monitoring governance, and performing reviews of internal control. They report at each shareholders’ meeting, and their reports are included in the company’s annual reports. Any violation of duties prescribed by the Code is considered to be a criminal act, with enforcement by the Ministry of Justice. Statutory auditors do not necessarily follow The International Professional Practices Framework, and they have their own professional association.

On the other hand, “internal auditing” in Japan is similar to internal auditing throughout most of the world. The internal auditors are company employees, not directors. Practitioners generally follow the International Standards for the Professional Practice of Internal Auditing rather than performing duties prescribed by regulation, and their reports generally are not public information. My understanding is that internal auditing and statutory auditory auditing are distinctly different in Japan.

As with other groups charged with internal control-related responsibilities, internal auditors, external auditors, and statutory auditors have much in common. All three are honorable professions, and I am proud to say that some Japanese statutory auditors are Certified Internal Auditors and belong to The Institute of Internal Auditors, just as some external auditors are Certified Internal Auditors and members of our Institute.

I was relieved to see that the Olympus headline cleared the external auditors of wrongdoing. But don’t let the headlines fool you: As far as I know, the internal auditors at Olympus have not been implicated either. Despite recent news stories, I believe they deserve the benefit of the doubt. In fact, anyone who is accused of wrongdoing should be considered innocent until proven guilty.