[Flashback] Nikko Cordial execs aided fraud: panel

Posted by Latha Do NADARAJAN , Year 3 undergrad at the School of Accountancy, Singapore Management University

A special panel looking into accounting fraud at Nikko Cordial Corp. issued a report Tuesday saying top management was involved in inflating profits at the nation’s third-largest brokerage.

The findings by the panel — four outside legal experts led by Surugadai Law School professor Masaharu Hino — contradict the brokerage’s earlier contention that the fraud was perpetrated by a single employee.

In its report, the panel blames Hajime Yamamoto, Nikko Cordial’s chief financial officer from October 2001 to February 2006, for being directly involved in a fraudulent deal allegedly used to inflate profits at the brokerage.

“As the firm’s CFO, (Yamamoto) should have been fully aware of the impact that the deal would have on Nikko Cordial’s consolidated earnings,” the report states.

The panel also said it cannot eliminate suspicions that then Nikko Cordial President Junichi Arimura, who resigned in late December over the scandal and was replaced by Shoji Kuwashima, was also involved in the deal, noting that Arimura was in a position to know about the details of what was happening.

Then Nikko Principal President Hirofumi Hirano, who also resigned over the scandal, was the key figure in the fraudulent accounting, which involved such Nikko Cordial subsidiaries as Nikko Principal Investment Japan Ltd., according to the panel.

“It’s not that Hirano was just receiving reports from an employee who perpetrated (the fraud.) We believe Hirano instructed” his subordinates to improperly pad Nikko Principal profits, panel member Tadashi Kunihiro told a news conference. “Hirano was present at important meetings and took the initiative.”

Hirano, Yamamoto and Arimura have all denied they were the ones who decided to pad profits at Nikko Cordial and Nikko Principal, according to panel members.

Although it has no concrete evidence, the panel believes its findings indicate the men intended to pad the profits, Kunihiro said.

The panel was set up by Nikko Cordial’s new management in late December to determine why the accounting irregularities happened.

On Dec. 18, Nikko Cordial admitted that it padded its profits for fiscal 2004 by manipulating reports detailing transactions between group firms.

The company issued 50 billion yen in corporate bonds in November 2005, and its fiscal 2004 business report was used to give false explanations about the brokerage’s financial condition to prospective investors.

Although Nikko Cordial Chairman Masashi Kaneko and President Arimura stepped down Dec. 26 to take the blame for the scandal, they denied that top executives were directly involved in the wrongdoing.

The company said the accounting irregularities were caused by an employee who made a mistake and then falsified financial documents to cover it up, adding that top management was not aware any falsification had occurred.

Earlier this month, the Financial Services Agency slapped Nikko Cordial with a 500 million yen fine — the largest penalty the watchdog has ever imposed.

The brokerage downgraded its net profit for fiscal 2004 to 35.1 billion yen from the earlier reported 46.9 billion yen, and revised its pretax profit for the year to 58.8 billion yen from 77.7 billion yen.

The company inflated the profits by including proceeds from a deal involving the issuance of exchangeable bonds to Nikko Principal, the investment arm of Nikko Cordial, via Nikko Principal’s wholly owned subsidiary NPI Holdings, which was established as a special-purpose company.

Nikko Principal acquired Bellsystem24, a call center service, through NPI Holdings. It then booked 14.7 billion yen as a valuation profit on Bellsystem24 shares held by NPI Holdings as profit for the business year through March 2005.

Since NPI Holdings also booked an equivalent loss from the deal, Nikko Cordial only included Nikko Principal’s profit while turning NPI Holdings into an unconsolidated affiliate to exclude its losses from the group earnings — even though a special-purpose company like NPI Holdings must be included in groupwide earnings.

The Securities and Exchange Surveillance Commission said NPI Holdings should have been counted as a consolidated subsidiary, which would have evened out the profits from the deal.

Nikko Principal also falsified the date of the issuance of the exchangeable bonds to get more valuation profit out of the deal.

The panel said it believes Hirano gave the go-ahead to falsify the date.

The Tokyo Stock Exchange has placed Nikko Cordial’s shares on the monitoring post for possible delisting since the scandal began.

The bourse will examine Nikko Cordial’s corrected group earnings report for fiscal 2004, which will be submitted by the end of February, to determine whether the company violated its listing regulations.

The special panel’s report is expected to affect the TSE’s decision on whether to delist the firm.

At a news conference later Tuesday, Nikko Cordial President Kuwashima said he will set up an advisory panel internally to discuss how to discipline those responsible for the fraud.

The internal panel, which will include Kuwashima and legal experts, will also consider whether to take legal actions against them, he said.

Kuwashima said the firm will have details by mid-February on how to improve its corporate governance.


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