Toshiba accounting irregularities fall into 2 cases; The problem centers on the percentage-of-completion method, used for long-term construction contracts

http://asia.nikkei.com/print/article/99243

June 13, 2015 2:27 am JSTnny numbers

Toshiba accounting irregularities fall into 2 cases

TOKYO — Toshiba‘s iffy accounting came under a brighter spotlight Friday, when details on nine infrastructure-related projects with inflated profits were made public. Half of the profit inflation on a yen basis was posted for fiscal 2013, while many cases already had indications of possible future problems at the time of the order or relied on unrealistic cost-cutting plans. These details all point to lax bookkeeping under increased pressure to make budget or earnings targets.

The problem centers on the percentage-of-completion method, used for long-term construction contracts. Final profit margins and costs are estimated, and profit is accordingly posted for each accounting period. But such estimates tend to be subjective.     Of the 51.2 billion yen profit revision, 7.8 billion yen was recorded for fiscal 2011 and 17.9 billion yen for fiscal 2012, with the figure rising to 25.3 billion yen in fiscal 2013. President Hisao Tanaka took office in June 2013 and pushed for meeting budget targets as his management strategy. This likely could have spurred on improper accounting.

Another factor conducive to winning money-losing projects is Toshiba’s policy of rotating personnel every few years. By the time a project is finished, the person who initiated it is likely gone, leaving the successor responsible for losses. This tends to make immediate gains a priority — seeking orders even at a loss.

A contract landed in December 2011 to manufacture equipment for a local government is a case in point. The cost at the time of the order is said to have already topped the contract price. While drawing up unfounded cost-cutting plans, the company avoided entering loss provisions on the balance sheet. Toshiba “should have revised the total estimated contract cost at the end of every quarter,” the independent panel looking into its books said.

A project to construct an electrical substation overseas, won in October 2008, is another example of exaggerated cost reductions. The company reviewed construction costs in the July-September quarter of 2013 and concluded that 1.7 billion yen could be shed. In reality, costs were cut by roughly 100 million yen. Toshiba should not have gone ahead with the cost review at all, the independent panel said.

“A great deal of discretion was given to business units when it came to cost or margin estimates,” a company official said.

Also on Friday, Toshiba unveiled the results of an internal probe into accounting irregularities. Twelve new cases of questionable bookkeeping were discovered in such units as electric power systems, and profits would be slashed by 3.6 billion yen for five years through March 2014. But the company found nothing more of note, suggesting that the independent panel would keep focusing on four business areas, including infrastructure and personal computers.

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