Japan Intensifies Scrutiny of Big Four Auditors

Japan’s Certified Public Accountants and Auditing Oversight Board (CPAAOB), part of the Financial Services Agency (FSA), is intensifying its supervision of the Big Four audit firms, replacing biennial inspections with continuous, year-round monitoring.

The CPAAOB’s 2026 Monitoring Report, published in July, cites the evolving environment surrounding audits — including the occurrence of accounting fraud cases, the expanding role of small and medium-sized firms in auditing listed companies, and the advancement of IT and AI in auditing — as the primary driver for a more responsive monitoring approach. Under the new framework, the CPAAOB will appoint dedicated inspectors to each of the local affiliates of Deloitte, EY, KPMG, and PwC to monitor their quality control systems on an ongoing basis.

This marks the first time a year-round monitoring system has been introduced for audit firm inspections in Japan. The approach will be “risk-based,” allowing the regulator to focus resources on areas with a higher probability of problems. The new regime will involve checking audit working papers and verifying the implementation of improvements from previous inspections.

It may also have a significant impact on the business models and internal governance of the Big Four, which increasingly rely on non-audit services such as M&A advisory and IT consulting to drive revenue. With the FSA’s monitoring expected to become more stringent, the independence of audit firms and the separation between their audit and consulting functions may face closer examination.