These words were reasonable and logical; no fault could be found with them.
The directors exchanged opinions and discussed in low voices.
Director Hoshino spoke up at the right moment: "The Managing Director's concerns are also pain points that our Investment Department frequently encounters during overseas mergers and acquisitions."
"To solve this problem, we have contacted the PricewaterhouseCoopers New York headquarters team and McKinsey & Company to jointly design a new audit scheme. The representatives from PricewaterhouseCoopers are just outside the door today."
Nakayama Hayao, sitting at the head of the table, nodded slightly. "Let them in."
Director Hoshino pressed the internal communication device on the table.
The double wooden doors of the conference room were pushed open.
Five auditors in dark suits filed in.
Leading them was a white man in his forties, carrying a black briefcase in his hand.
"Good morning, board members. I am Richard Cohen, a senior partner from PwC's New York office." The white man greeted them in fluent Japanese and stood at the empty seat at the end of the conference table.
His assistant quickly connected a laptop to the conference room projector.
The screen lowered, and the slides lit up.
"In collaboration with McKinsey & Company, we have tailored this dual-track audit scheme for Sega." Richard got straight to the point, clicking the remote.
Two parallel lines appeared on the screen, eventually converging on an icon representing the Board of Directors.
"The core logic of the scheme is simple. The local Japanese audit firm will continue to fulfill their regular duties, completing compliance audits to satisfy the Financial Services Agency's requirements. Our team at PwC will act as an independent track, reporting directly and exclusively to the Sega Board of Directors."
Richard pointed to the flowchart on the screen.
"We will review core accounts, overseas transactions, and large capital expenditures. The purpose of this is to make the review process simpler and more intuitive. With both audit results cross-referenced, any unilateral accounting fraud or window dressing will be laid bare."
A director in charge of production raised a question: "With the dual-track system running in parallel, wouldn't the workload for the finance staff underneath double? And how do you account for the extra cost of hiring you, PwC?"
"That's a good question," Richard said, clicking the slide changer. "This is also a key aspect that McKinsey focused on when designing the plan. We won't ask the finance department to redo the accounts. Instead, based on our risk assessment model, we will directly retrieve the audit working papers from the local audit entity for sample review. This won't increase the workload for rank-and-file employees too much."
Richard paused for a moment before continuing his explanation.
"On this basis, the plan also includes an important component: helping Sega design and train a dedicated Board Audit Committee. Through this training, the board will master more professional oversight techniques, reducing its reliance on external audit firms. In the long run, this will not only control the costs of dual-track auditing but also directly improve the quality of internal oversight at Sega."
Through training, the Board of Directors will acquire more professional oversight skills, reducing reliance on external audit firms. In the long run, this not only controls the expenses of dual-track auditing but also directly enhances the quality of internal oversight at Sega.
The clauses regarding training the audit committee and reducing expenses were specific checks and balances proposed by McKinsey & Company when they accepted the mandate from Sega.
Paid to do the job, McKinsey clearly understood Sega's demands.
They designed this aspect specifically to prevent Sega from being led around by the nose by PricewaterhouseCoopers in future collaborations.
The power of supervision must remain firmly in the hands of Sega's Board of Directors.
Of course, Richard would not point out this unspoken truth at the meeting.
Richard switched to the next slide. Several news clippings appeared on the screen.
"Everyone might ask, why must we introduce an external, independent audit? How great exactly is the risk in relying solely on Japanese financial audits?"
Richard's tone became serious.
"Let's look at a few real cases. In the summer of 1991, during a surprise investigation, the National Tax Agency of Japan discovered that twenty-one large securities firms, including Nomura Securities and Daiwa Securities, generally engaged in compensating specific major clients for investment losses."
He read the data from the clippings.
"When these major clients incurred losses on their securities investments, these securities firms would use secret funds or their own capital to cover the clients' losses."
"When major clients' securities investments incurred losses, these securities firms would use secret funds or their own capital to compensate for the clients' losses. The essence of this practice was to conceal true financial results through off-the-book transactions. This constituted extremely serious financial fraud."
Richard looked at the directors present.
"It is worth noting that, before the National Tax Agency intervened, the domestic audit firms of these securities companies issued unqualified audit reports year after year. No one discovered the problem, or perhaps, no one was willing to point it out. This scandal directly exposed severe loopholes in the internal controls of financial institutions and prompted significant amendments to the Securities and Exchange Act in 1992."
Richard pressed the clicker again.
The logo of the Defense Agency appeared on the screen.
"Let's look at another recent case. Between 1994 and 1995, during a special investigation of its suppliers, the Japan Defense Agency uncovered a procurement fraud case. Companies such as Toyo Communication Equipment and Niko Electronics had long been inflating costs and raising prices when selling equipment to the government, defrauding it of huge sums of government funds."
Richard put away the clicker.
"Even for a government project that seems as rigorous as the Defense Agency, its financial audit process has such significant loopholes. This fully demonstrates that under the influence of a relationship-based society and entrenched business practices, a single, local financial audit system carries an extremely high risk of fraud. As a company with global ambitions, Sega cannot entrust its financial security entirely to a single line of defense."
The only sound in the conference room was the hum of the projector's cooling fan.
The board members looked at the case on the screen, each calculating the pros and cons.
These scandals had made a great deal of noise at the time, and the seasoned business veterans present were naturally familiar with the ins and outs.
Richard concluded his case analysis and laid out the terms of cooperation.
"PricewaterhouseCoopers greatly values Sega's forward-thinking approach to financial compliance. We would like to make Sega the pioneer for testing a dual-audit system in the Japanese market. To this end, our team will only conduct a small-scale, dual-review demonstration of the account data for one week. As a special offer for this pioneering partnership, our quote is far below standard commercial rates."
Richard bowed.
"That concludes my presentation. Thank you for listening, board members."
The five auditors packed up their equipment and exited the conference room.
The wooden door closed again.
Takuya Nakayama broke the silence.
"Everyone has heard the presentation from the PwC team. That is precisely why I invited them here today."
Takuya Nakayama picked up the price quote from the table, handed it to Director Hoshino beside him, and signaled for it to be passed around.
"I'd like to add a couple of points. Bringing PwC in this time is purely experimental. It's limited to a review of only a small portion of the accounts, to see whether the dual-track system can actually uncover issues that the single-track system misses. Since PwC wants to use Sega as a benchmark case to facilitate their future business expansion in Japan, this quote is essentially symbolic—more of a giveaway than a real charge."
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