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Four ChuoAoyama PricewaterhouseCoopers accountants arrested this week falsified a report in 1998 on a troubled Kanebo Ltd. trading partner, leading Kanebo to agree to a massive bailout of the firm, sources said Wednesday.

The report falsely states that now-defunct Koyo Senshoku Co. had liabilities exceeding assets by 38.6 billion yen, about 7.3 billion yen less than the real amount, according to the sources.

Former Kanebo President Takashi Hoashi, 69, and other company executives had asked for the fraudulent report and used it to get the Kanebo board of directors to agree to provide a huge amount of money to Koyo Senshoku Co. to stop it from failing, the sources said.

The four certified public accountants at the Japanese unit of the PricewaterhouseCoopers Group, based in Tokyo, were arrested Tuesday on suspicion of collaborating with former Kanebo executives in window-dressing Kanebo’s accounting reports.

Hoashi and Takashi Miyahara, 63, former vice president of Kanebo, have also been arrested on charges of falsifying Kanebo’s consolidated account statements.

Osaka-based Koyo Senshoku, which made blankets from acrylic it purchased from Kanebo’s fiber division, was dissolved in January 2004.

When business at Koyo Senshoku took a bad turn in July 1997, company executives sought support from Kanebo.

Kanebo set up a committee headed by Hoashi, who was then senior managing director. Miyahara served in the committee’s No. 2 position.

The ChuoAoyama accountants initially compiled a report saying troubled Koyo Senshoku’s liabilities exceeded assets by 45.9 billion yen, the sources said.

But Hoashi and other Kanebo executives told the accountants to create a report with less negative net worth to get approval for a bailout of Koyo Senshoku from the other Kanebo board members.

The accountants gave a new report to Hoashi in January 1988 showing Koyo Senshoku’s liabilities exceeding its assets by 38.6 billion yen. The Kanebo board subsequently approved a bailout plan.

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