TOKYO (Reuters) - Japanese regulators criticized accounting groups KPMG and Ernst & Young on Friday for lacking proper operational management controls that allowed Olympus Corp <7733.T> to conceal $1.7 billion in investment losses and ordered the firms to improve their systems by August.
The Olympus scandal, one of corporate Japan's worst, raised questions over the roles of the two audit firms, which signed off on the accounts of the maker of medical equipment and cameras before the 13-year fraud finally surfaced in October last year.
Japan's Financial Service Agency (FSA) said it did not find "any intentional acts or grave negligence" by the two firms in connection with the Olympus fraud.
Rather, the regulator said the two accounting firms lacked operational management systems to ensure proper auditing that would spot and flag dubious transactions.
The FSA ordered the two auditing firms to submit a business improvement plan by August 6 and report on their progress every six months.
Still, an FSA official told reporters he was not sure the accounting fraud could have been spotted and prevented even if the two auditing firms had proper operational management systems in place.
The FSA said KPMG's Japanese unit, KPMG AZSA LLC, which was Olympus's external auditor until 2009, and its current auditor, Ernst & Young ShinNihon LLC, failed to communicate fully when the latter took over the account.
The agency said the firms did not discuss important matters in detail such as massive impairment losses from the acquisitions of three companies and an advisory fee paid for the $2 billion acquisition of British medical equipment firm Gyrus in 2008.
Olympus has admitted using accounting tricks to conceal its massive investment losses under a scheme that began in the 1990s when Japanese stock markets fell and the yen strengthened markedly.
The scandal came to light after Olympus fired its British chief executive, Michael Woodford, in October, prompting him to blow the whistle on the firm's dubious bookkeeping.
(Reporting by Taiga Uranaka; Editing by Matt Driskill)