Industry background before accepting an audit client story

Assignment Help Accounting Basics
Reference no: EM131069502

Resona, the Auditor, and Japan's Banking Industry
Concept

An auditor must consider company and industry background before accepting an audit client Story

"Auditors shouldn't be allowed to act like God," said Hideyuki Aizawa, a senior member of Japan's major political party the LDP. "Resona should be the first and last time this happens." Mr. Aizawa's comments came in reaction to the government's decision to inject Y2,000 billion ($17 billion, £10.4 billion) into Resona after auditors found that Japan's fifth largest bank was badly undercapitalized. (Pilling 2003)
The Resona filing was the first-ever test of emergency assistance under the Deposit Insurance Law. Resona had already received around Y1,000bn ($8.5bn) from the government in two previous rounds of fund injections.

Auditor Says No

Shin Nihon, one of Japan's Big Four accounting firms, in effect forced Resona to seek government help by refusing to accept the bank's estimate of how much deferred tax assets it should be allowed to include as capital. This was after co-auditor Asahi & Co refused to sign off on the banks accounts. Shin Nihon's move stunned the Japanese business community, which had been accustomed to more lenient treatment from auditors.

Troubles at Resona

Resona Bank was created after the integration of Daiwa Bank and Asahi Bank, and began operating March 3, 2003. Neither bank wanted to merge, but both were forced to do so by the combined efforts of the Ministry of Finance and the Financial Services Agency, which were overseeing the consolidation of Japan's banking industry from 13 large lenders to five mega-lenders. (Ibison 2003)
Resona admitted that its capital-adequacy ratio (i.e. its capital divided by its assets, weighted by risk) had fallen to around 2 percent, half the required minimum for domestic banks that do not have international operations
Resona's Tier 1 capital comprised 70 percent deferred tax assets (DTAs) according to Moody's Investors Service, the credit rating company.

This compares with about 40 percent at Japan's four other largest banks - Mizuho, SMFG, MTFG and UFJ - and is enormous compared with US regulations, which limit banks to using DTAs of just 10 percent of their capital
Deferred tax assets are generated through the losses from taxable bad-loan write-offs by entities such as banks. The losses can be set off against future taxable income. Since the tax burden on the bank is effectively reduced, the deferred amount is counted toward the entity's shareholders' equity

Combined with the dual pressures of a more strict calculation of its non-performing loans and exposure to a declining stock market, the circumstances for Resona's bailout were created. Their solvency was also affected by participation in government development schemes.
Japan's Banking Industry in Early 2004

Resona is an example of the problems that are occurring in the Japanese banking industry. Other major banks staved off a crisis in March 2003 by procuring more than 2 trillion yen in capital from the government, but by year end 2003, they still needed to bolster their capital bases.

At that time Japan's seven biggest banks held around Y6,510 billion ($60.5 billion) as deferred tax assets. Mizuho Holdings held over Y1,500 billion in net deferred tax assets - accounting for over 41 percent of its tier 1 capital - even though it reduced them by 22 percent in March and December 2003. Bank of Mitsubishi-Tokyo Group and Sumitomo Trust Bank have made similar-sized efforts to reduce their deferred tax assets, which at the beginning of 2004 accounted for 30 percent and 26 percent of their tier 1 capital, respectively. Mitsui-Sumitomo Banking Group, Mitsui Trust and UFJ Holdings made virtually no effort to reduce their deferred tax asset levels, cutting them by just single-digit percentage amounts. The most worrying in early 2004 was Mitsui Trust, with deferred tax assets accounting for 77 percent of its capital.

Discussion Questions
¦ If Shin Nihon will not audit Resona in 2004, what concerns would a replacement auditor have?
¦ What kind of industry risks would be encountered by audit firms wishing to audit a Japanese bank in 2004?

Reference no: EM131069502

Questions Cloud

Case study-city side financial services : Retail Operations branch hires mainly African-American employees whereas the External Deposits hires mainly Caucasian, middle-class college graduates.
Process of ethical business decision making : Determine the considerations for and process of ethical business decision making to balance corporate and social responsibilities and address moral, economic, and legal concerns.
What extent were the cost overruns : Provide a comparison of the projects, what extent were the cost overruns and how were the overruns handled by the authorities.
What similarities and differences can you identify between : Explain your answer. Please support your response with a peer reviewed article.
Industry background before accepting an audit client story : "Auditors shouldn't be allowed to act like God," said Hideyuki Aizawa, a senior member of Japan's major political party the LDP. "Resona should be the first and last time this happens."
Discuss the role that race plays for jury selection process : Discuss the role that race plays for the jury selection process. What has previous case law determined regarding peremptory challenges
Career and analyze its impact : Using the "Art of Analysis Model" you will choose a current event or trend in the field you wish to pursue as a career and analyze its impact.
What is the role of management and unions in society today : Explain the value of the various organizational leadership competencies (communication, problem solving, teamwork, analytical skills, legal and ethical practices, strategic approach, and research) that are important to be successful in this type o..
Cryptographic algorithm recommendation : Your organization has asked for a cryptographic algorithm recommendation for a new project that requires high-level security. What algorithm would you recommend and why?

Reviews

Write a Review

 

Accounting Basics Questions & Answers

  Harry hermione and ron formed an s corporation called

harry hermione and ron formed an s corporation called bumblebore. harry and hermione both contributed cash of 25000 to

  What advice do give the boughs

What advice do you give the Boughs?

  Compute the cost of goods sold from the information

Compute the cost of goods sold from the following information: Beginning Inventory, $30,000; Purchases, $70,000; Purchase Returns, $3,000; Ending Inventory, $34,000.

  John fillmores lifelong dream is to own his own fishing

john fillmores lifelong dream is to own his own fishing boat to use in his retirement. john has recently come into an

  Stoner store uses the gross method to record purchase

stoner store uses the gross method to record purchase discounts and uses a perpetual inventory system. stoner engaged

  Lopez company has implemented an employee bonus

For the year ended December 31, 2013, Lopez Company has implemented an employee bonus program equal to 3% of Lopez's net income

  Provision for federal income taxes

Red Corporation, a calendar year taxpayer, has taxable income of $600,000. Among its transactions for the year are the following:

  Prepare a letter why you can or cannot honor his request

Prepare a letter to the potential client explaining the Why you can or cannot honor his request and the reasoning for your decision.

  Dakota manufacturing inc normally produces 10000 units of

dakota manufacturing inc. normally produces 10000 units of product a each month. each unit requires four hours of

  Listed below are several transactions that took place

listed below are several transactions that took place during the first two years of operations for the law firm of pete

  Journalize the entries to record the payroll

Journalize the entries to record (a) the payroll and (b) the employer's payroll tax expense for the month.  The state unemployment tax rate is 3.1%, and the federal unemployment tax rate is 0.8%.  Only $25,000 of salaries are subject to unemployme..

  Beta deposits the check in its city bank account

Mona, an employee of National Corporation (NC), is authorized to use a signed NC check to buy supplies. Mona fills out the check so that it states an amount $500 in excess of the purchase price and cashes it at Office Supply Store.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd