On 30 September 2026, Nidec Corporation filed its annual securities report, Japan’s rough equivalent of a 10-K, for the fiscal year ended March 2026. Its auditor, PwC Japan, issued a disclaimer of opinion. It was the second fiscal year running, and the third time overall once the interim review for April to September 2025 is counted.

Most of the coverage has focused on whether Nidec can keep its listing on the Tokyo Stock Exchange. I want to look at a different question, from the auditor’s side of the table: when should an auditor disclaim, and when should it walk away? I have no visibility into what PwC’s engagement team saw, and I am not second-guessing their judgement. My interest is in the principle.

The auditor is paid by the company it audits

Every statutory audit rests on an awkward arrangement. The opinion is written for investors, but the fee is paid by the company under audit. Professional codes of ethics, both the IESBA Code and its Japanese counterpart issued by the Japanese Institute of Certified Public Accountants (JICPA), name this plainly as a self-interest threat to independence.

An audit opinion therefore carries weight only as long as the market believes the auditor is prepared to tell the client what it does not want to hear. According to press reports, Nidec’s third-party investigation committee found that the company had regarded its auditor as easy to handle. Few details illustrate more clearly how much strain this arrangement can come under.

Where a disclaimer sits among audit opinions

An auditor can reach one of four conclusions: an unmodified opinion, a qualified opinion, an adverse opinion, or a disclaimer of opinion. An adverse opinion is not simply the strongest form of criticism. It requires the auditor to have enough evidence to conclude that the financial statements are materially and pervasively misstated. Saying the accounts are wrong takes evidence, just as saying they are right does.

When that evidence cannot be obtained, the standards point elsewhere. Japan’s Auditing Standards, set by the Business Accounting Council, an advisory body to the Financial Services Agency, state that an auditor who cannot perform significant procedures, and so lacks a sufficient basis for an opinion, must not express one. JICPA’s Auditing Standards Report 705, the Japanese equivalent of ISA 705, makes the same point in more detail. Where the auditor cannot obtain sufficient appropriate audit evidence, and the possible effects of undetected misstatements could be both material and pervasive, the auditor is to disclaim.

PwC’s stated reason was that some of the officers and employees who had been involved in the misconduct, or had given false explanations to the auditor, still held responsible positions in the financial reporting process. At a press conference, the firm added that it had asked those individuals to step back into supporting roles, and that this had not always been observed. If you cannot trust the people giving you explanations, no number of additional procedures fully restores the reliability of the evidence. Under the standards, declining to call the accounts either fair or unfair is a defensible conclusion.

Why it still looks like a way out

Even so, some observers read a disclaimer as the auditor stepping away from its responsibility. I think there are two reasons for that.

The first is information value. Market participants quoted in the Japanese press have been blunt: an annual report without a clean opinion is of little use to them. An audit report that says neither yes nor no leaves investors with close to nothing.

The second is precedent. If “we could not obtain enough evidence, so we disclaimed” becomes a familiar outcome, it risks hardening into “when in doubt, disclaim”. The auditor’s job is to gather the evidence and reach a conclusion. A disclaimer should remain the last word, used only when a conclusion is genuinely out of reach.

The profession’s own tone has shifted. In December 2025, JICPA’s chairman described the first disclaimer as appropriate, given that sufficient evidence could not be obtained. This time, JICPA issued a press release calling the situation regrettable from the standpoint of confidence in the capital markets. The two statements are not inconsistent: one assesses an auditor’s judgement, the other the state of affairs. Read together, though, they show how differently a second disclaimer lands.

Two years in a row, and the option to resign

This is where my unease lies.

Report 705 (paragraph 12 in the Japanese standard; paragraph 13 of ISA 705) deals with scope limitations imposed by management after the engagement has been accepted. Where the possible effects are material and pervasive, it sets out a sequence. The auditor should withdraw from the engagement where that is practicable. Only where withdrawal before issuing the report is not practicable should the auditor disclaim. The auditor must also report the relevant matters to those charged with governance before withdrawing. In other words, the standards treat a disclaimer as the fallback, not the first resort.

A related standard is also instructive. Report 210, the Japanese counterpart of ISA 210, says an auditor must not accept or renew an engagement where management has written a scope limitation into the terms that would lead to a disclaimer. Nidec’s situation does not involve a contractual limitation, so the rule does not apply directly. The logic behind it is still worth noting: an audit that is expected to end in a disclaimer is not one the standards want auditors to take on.

Outsiders should be careful about how the auditor has classified the underlying cause. But the root cause lies in management’s own personnel decisions, and it was not resolved between the first disclaimer and the second. That looks close to the situation in which the standards contemplate withdrawal. A first disclaimer is understandable. A second one for the same reason should, in my view, have prompted a more open debate about whether to stay or to resign.

The case for staying

There is, to be fair, a serious argument on the other side. PwC has said it intends to remain Nidec’s auditor, and its leadership has said the firm wants to see its responsibilities through.

A listed company whose auditor resigns can struggle to find a replacement, and Japan has seen companies left without one. An auditor walking away could leave investors with even less information than a disclaimer provides. There is a reasonable case that an auditor who knows the history best should stay, set clear conditions such as a genuine overhaul of the people involved, and lay out a path back to a clean opinion. The unusual sight of the company’s newly appointed president and PwC’s leadership sharing a press conference platform reads as a signal of exactly that intent.

The Business Accounting Council’s 2019 opinion on revising the Auditing Standards supports this kind of openness. It states that explaining the audit to users of the financial statements is part of the auditor’s duties, and constitutes a legitimate ground for setting aside confidentiality. Fronting up to the press is consistent with that view.

Certified Public Accountant point of view

A disclaimer of opinion is a legitimate procedure. Used repeatedly, however, it loses its weight as the auditor’s last word. A second disclaimer should have come with a fuller explanation: why the auditor is choosing to stay rather than resign, and what it expects staying to achieve.

Nidec has been designated by the Tokyo Stock Exchange as a “Security on Special Alert”, and press reports indicate that the deadline for improving its internal controls is only weeks away. Now that PwC has chosen to stay, the real test is whether the company and its auditor can reach a point where the next audit ends in an opinion, one way or the other. That is a challenge for Nidec, and equally a test of public confidence in the audit itself.

This article reflects the author’s personal views, based on publicly available information and the applicable auditing standards. It does not constitute investment advice or a recommendation regarding any security.

References

• Business Accounting Council, Auditing Standards (in Japanese) – Financial Services Agency
• Business Accounting Council, Opinion on the Revision of Auditing Standards, 3 September 2019 (in Japanese) – Financial Services Agency
• JICPA, Auditing Standards Reports 705 and 210 (in Japanese) – JICPA
• JICPA, press release on the disclaimer of audit opinion in a listed company’s annual securities report, 2 October 2026 (in Japanese) – JICPA
• Nikkei, coverage of PwC Japan’s explanation at Nidec’s press conference (in Japanese) – Nikkei
• Nikkei, JICPA chairman’s comments on the first disclaimer, December 2025 (in Japanese) – Nikkei