The Japanese arm of Ernst & Young is setting up an external panel to probe its audit of Olympus Corp amid questions over whether it and prior auditor KPMG could have been tougher in checking the scandal-hit firm's accounts.

The move comes after an independent panel commissioned by Olympus to investigate its $1.7 billion accounting scandal raised some issues with the work of Ernst & Young ShinNihon LLC, which took over as auditor in 2009, and prior auditor KPMG AZSA LLC.

While Ernst & Young ShinNihon says it conducted an internal review of its Olympus audit and found no problems, it decided to solicit an external probe given the public 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 Japan's largest auditing firm, told reporters on Thursday.

Olympus has admitted to 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 dating back to the 1990s.

In its report, the independent panel raised questions about whether Ernst & Young and KPMG could have done a better job in monitoring the firm's accounting.

The panel took issue with whether the handover of auditing duties from KPMG to Ernst & Young in 2009 was thorough, and the booking of the 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 December 6.

Ernst & Young named three of the panel members -- Takashi Oizumi, Nobuo Gohara and Toshifumi Takada -- and said it was still searching for one or two more. The panel will aim to issue its findings as early as this month, Kashima said.

Oizumi, a lawyer who once headed the Osaka High Public Prosecutors Office, will chair the panel.

Gohara is a lawyer who led a third-party investigation into a scandal at Kyushu Electric Power related to the promotion of nuclear energy, while Takada is a professor of auditing at Tohoku University.

(Reporting by Nathan Layne; Editing by Mike Nesbit)

Japan