(REUTERS) - The Japanese arm of Ernst & Young said on Thursday it would set up an external committee to investigate its audit of Olympus Corp.

The move follows a separate probe into an accounting scandal at the camera maker that raised issues with its audit and work done by a previous auditor.

Ernst & Young ShinNihon LLC said it has conducted an internal review of its Olympus audit and believes there were no problems, but decided to seek an external opinion given the scale of attention on the scandal.

The impact of this incident on society has been large. It is a problem we are taking very seriously, Kaoru Kashima, an executive board member at Ernst & Young ShinNihon, told reporters on Thursday.

The committee, formed of four or five people including a former prosecutor, may report its findings this month, she said.

This week an independent panel issued a damning report on a $1.7 billion accounting scandal at Olympus, urging legal action against executives responsible for covering up securities losses dating back to the 1990s.

In its report, the panel also raised questions about whether the two auditors involved -- Ernst & Young took over as Olympus's auditor in 2009 from KPMG AZSA LLC -- could have done a better job in monitoring the firm's accounting.

Olympus has lost more than half its market value since the scandal broke nearly two months ago, with the firing of its CEO, Michael Woodford.

It has admitted paying over the odds for three Japanese companies and to inflating an advisory fee for a 2008 overseas acquisition, as part of an elaborate scheme to cover up investment losses.

The independent panel's report specifically took issue with whether the handover of auditing duties from KPMG to Ernst & Young in 2009 was thorough, and the booking of a massive advisory fee as goodwill.

Even when we account for the fact that they have just assumed their position as the auditor, and they lacked knowledge of past events, we cannot conclude this was appropriate, the panel said in its report on Dec. 6.

(Reporting by Nathan Layne; Editing by David Hulmes)