Japan fines Ernst & Young affiliate $17.4 million over Toshiba audit

TOKYO (Reuters) - Japan’s financial regulator has fined an Ernst & Young affiliate 2.1 billion yen ($17.4 million) after the firm’s audit of Toshiba Corp’s accounts failed to spot irregularities in the country’s worst accounting scandal in years.

A Japanese national flag flies in front of the building of Japan's Financial Services Agency in Tokyo August 7, 2014. REUTERS/Toru Hanai

The Financial Services Agency (FSA) said on Tuesday it would also suspend Ernst & Young ShinNihon LLC from taking on new business contracts for three months.

Toshiba disclosed earlier this year that it had overstated profits from around 2008 and on Monday said it would cut thousands of jobs and book a record net loss this year.

Toshiba said on Tuesday that Ernst & Young ShinNihon would not renew its contract to audit Toshiba’s books from the fiscal year starting next April.

The FSA said the fine was equivalent to two years’ of auditing fees paid to ShinNihon by Toshiba.

“There was a grave breach of duty,” an FSA senior official said at a news briefing. “The accountants were in charge of Toshiba for many years and they had built a misplaced sense of confidence that Toshiba would not do such things,” the official, who declined to be named, said.

ShinNihon is the biggest accounting firm in Japan, with about 3,500 certified accountants and more than 4,000 clients.

Koichi Hanabusa, chairman and CEO of ShinNihon said in a statement he would take responsibility for the affair and step down at the end of January, when the accounting firm is expected to compile a business improvement plan demanded by the FSA.

“It is very regrettable that we have come to this situation,” he said.

Earlier this month, Japan’s securities watchdog recommended Toshiba be fined a record 7.37 billion yen for its violation of accounting rules.

Reporting by Taiga Uranaka and Takahiko Wada; Editing by Jane Merriman and Greg Mahlich