Toshiba’s accounting firm Ernst & Young that signed off on years of inappropriately calculated earnings going under the microscope next by accountants’ association; Toshiba chiefs to quit as panel finds ‘organized’ accounting fraud

http://asia.nikkei.com/Business/Companies/Toshiba-s-accounting-firm-going-under-the-microscope-next

July 15, 2015 2:00 am JST

Toshiba’s accounting firm going under the microscope next

TOKYO — An accountants’ association will soon look into the auditing company that signed off on years of inappropriately calculated earnings at Toshiba.

The Japanese Institute of Certified Public Accountants will interview accountants at Ernst & Young ShinNihon and check documents for major items they may have overlooked, intentionally or otherwise.

The JICPA could admonish, suspend or expel accountants, depending on what it finds. In cases of material wrongdoing, the association could ask the Financial Services Agency to impose administrative penalties on accountants or the auditing company.     The new probe will begin after a third-party investigative committee formed by Toshiba announces its findings next week. That panel has already found that employees gave auditors explanations not reflective of reality, so it does not suspect that auditors are at fault.

But with the problem drawing wide concern, the association has decided to take action. Toshiba is seen having to downgrade past earnings by 170 billion yen to 200 billion yen ($1.36 billion to $1.6 billion).

http://www.reuters.com/article/2015/07/16/us-toshiba-accounting-idUSKCN0PP1K420150716

http://www.reuters.com/article/2015/07/15/us-toshiba-accounting-charges-idUSKCN0PP1FN20150715

Wed Jul 15, 2015 9:06pm EDT

Exclusive: Toshiba faces $3 billion in charges over accounting scandal – sources

TOKYO | BY TARO FUSE

Toshiba Corp (6502.T) expects 300-400 billion yen ($2.4-3.2 billion) in charges related to improper accounting in an expanding probe that is set to force Chief Executive Hisao Tanaka to step down, sources familiar with the matter said on Wednesday.

The Japanese conglomerate has hired a third-party committee to investigate past book-keeping practices which sources say led to profits being overstated by more than 170 billion yen. That’s more than triple Toshiba’s initial estimate of around 50 billion yen.

The charges include six years of overstated profits uncovered by the committee, as well as various writedowns, the people told Reuters. A Toshiba spokesman said it has not yet compiled any estimates of potential charges.

The company has been unable to finalize its accounts for the past financial year and suspended its year-end dividend payout due to the investigation. It was not clear how much of the charges would be booked in the last year. Its net income in the last fiscal year through March 2014 was 51 billion yen.

Other sources with knowledge of the probe have said investigators were looking into the role that top officials played in the irregularities, focusing on whether they had knowingly encouraged wrongdoing. The committee is expected to release its findings next week.

The scandal is a reminder that Japan Inc is still in the early stages of a campaign backed by Prime Minister Shinzo Abe to improve corporate governance. Toshiba’s shares dropped 2.6 percent in Thursday morning trade and have slumped 29 percent since April when the company first disclosed irregularities in its books.

The independent committee is likely to say Toshiba needs a governance overhaul, and more than half of its board including Vice Chairman Norio Sasaki will likely be replaced along with Tanaka at the next shareholders’ meeting in September, sources said on Wednesday. The sources declined to be identified because they were not authorized to speak with media.

Toshiba said it had not yet made any decision on the matter and was waiting for the third-party committee to release its findings.

AGGRESSIVE TARGETS

The laptops-to-nuclear conglomerate first disclosed accounting irregularities in early April, two months after financial regulators ordered a report on past bookkeeping.

Sources said previously that one theory investigators were looking into was that executives, worried about the impact of the 2011 Fukushima disaster on its nuclear unit, set overly aggressive targets in new businesses such as smart meters and electronic toll booths, encouraging the understating of costs and overestimating of revenue.

It was not immediately clear who might replace Tanaka and other directors. The company said last month that it was considering appointing more outside directors to the board.

Ironically, Toshiba was one of the earliest companies in Japan to open up its board to outsiders and a quarter of its current 16 board members are independent. Critics say the independent members, including two former diplomats, likely lacked the skills to contribute to strategy or rigor in oversight.

 

Wed Jul 15, 2015 8:26am EDT

Toshiba to book $2-$3 billion losses over accounting scandal

TOKYO | BY TARO FUSE

Toshiba Corp expects to book charges of 300 billion to 400 billion yen ($2.4-3.2 billion) related to improper accounting, people briefed on the matter said on Wednesday, as Japan’s biggest accounting scandal in years expands.

The charges include six years of overstated profits uncovered by an independent panel probing the electronics conglomerate’s accounting irregularities, as well as various writedowns, the people told Reuters.

It was not clear how much of that amount would be booked in the business year that ended in March of this year. Toshiba has been unable to close its books for the latest business year due to the scandal, and suspended its year-end dividend payout.

A Toshiba spokesman declined to comment.

The company will file its earnings in late August, the sources said.

Toshiba’s stock price has sunk 27 percent since early April on Japan’s biggest accounting scandal since camera maker Olympus admitted in 2011 that it used M&A deals to conceal investment losses.

The third-party panel, appointed by Toshiba after the accounting irregularities emerged, has found 170 billion yen in overstated profits, the sources said. This is far above the 54.8 billion yen the company initially disclosed in June.

In addition to a charge on the overstated profits, the sources said, Toshiba is expected to post writedowns on the value of chipmaking facilities and on deferred tax assets, or credits that can be used to reduce future tax bills.

Toshiba, which has 1.2 trillion yen in capital, is considering the sale of unused facilities, cross-shareholdings and non-core businesses to shore up its capital, the sources said.

http://www.japantimes.co.jp/news/2015/07/16/business/corporate-business/toshiba-chiefs-quit-panel-finds-organized-accounting-fraud-sources/

Toshiba chiefs to quit as panel finds ‘organized’ accounting fraud: sources

JIJI, BLOOMBERG

JUL 16, 2015

A third-party panel investigating accounting irregularities at Toshiba Corp. will declare that the wrongdoing was organized, informed sources said Thursday.

The panel will report the results of its investigations to Toshiba around Monday, the sources said.

Following that, the electronics giant will reshuffle its management. President Hisao Tanaka and his predecessor, Norio Sasaki, current vice chairman, are expected to take responsibility for the findings and resign.

The panel believes the accounting fraud resulted from strong pressure on senior officials to achieve earnings targets and that it was exerted mainly by Tanaka and Sasaki.

Toshiba is known to have padded past operating profits, mainly by delaying accounting for losses. The actions took place at divisions such as its infrastructure, semiconductor, personal computer and television businesses.

The panel appears to have judged that the top management virtually instructed accounting manipulations by pressing business divisions to attain unrealistic targets just before fiscal years ended, according to the sources.

Toshiba’s bond risk jumped to a two-year high on speculation that an internal accounting probe will force writedowns and an overhaul of management.

The cost to insure its debt soared 62 basis points in the past week to 150 on Monday, the highest since July 2013, credit-default swap data from CMA show. That is the worst performance for a Japanese company in the period and compares with the average for technology peers in Asia of 125.

Expected writedowns after the third-party investigation results may total more than ¥100 billion, affecting businesses from infrastructure to visual products, PCs and chips.

“They need to change into a more transparent organization, which could mean the executives stepping down and bringing more outside directors,” said Yoshihiro Nakatani, a senior fund manager at Asahi Life Asset Management. “Toshiba’s current state can only be evaluated negatively and that’s why the spread is widening.”

Toshiba spokesman Hirokazu Tsukimoto declined to comment on credit-default swaps moves or the third-party probe findings ahead of its conclusion.

Toshiba has lost $3.7 billion in market value since May 8, when it withdrew its earnings forecasts, canceled a year-end dividend and widened the accounting probe beyond “percentage of completion” estimates used on infrastructure projects to include the whole company.

“Talk of management’s involvement is forcing long-only shareholders to sell off and buying default-swaps is one way they can hedge,” said Hidetoshi Ohashi, the chief executive officer of Japan Credit Advisory Co.

Toshiba estimated the profit writedown will be ¥55 billion in the five fiscal years ended in March 2014. The impact may be almost double that, rising to more than ¥100 billion, a source familiar with the matter said July 4. Charges over a six-year period may total $3 billion, Reuters reported July 16, citing unidentified sources.

The extra yield investors demand to own Toshiba’s 0.567 percent bonds due 2019 rose 39 basis points in the past week to a record 104 basis points over government debt, according to data compiled by Bloomberg.

Toshiba’s probability of debt nonpayment within one year has jumped to 0.4 percent from about 0.2 percent in early May, according to the Bloomberg default-risk model, which considers factors such as share prices and debt levels. The gauge suggests a credit rating of the lowest investment grade.

“There is an increasing chance of a downgrade and you can see that reflected in bond spreads,” said Asahi Life’s Nakatani. “Concerns are mounting that this will begin to affect the company’s relationship with financial institutions.”

http://www.japantimes.co.jp/opinion/2015/07/15/editorials/toshibas-cooked-books/#.VafMBPmqpBd

Toshiba’s cooked books

JUL 15, 2015

The accounting irregularities that engulfed Toshiba Corp. have developed into a major scandal that appears likely to result in the resignation of its president and his predecessor over their responsibility for the padding of the major electronics group’s profits to the tune of ¥200 billion over five years to the business year that ended in March 2014. A third-party panel of lawyers tasked to probe the improper accounting will disclose its findings as early as Friday, and Toshiba itself is scheduled to explain the outcome later. The company needs to get to the bottom of the structural problems that allowed accounting irregularities of this magnitude to take place. This, along with clarifying the responsibilities of its top management, will hold the key to its efforts to prevent future problems and regain the public’s trust.

The irregularities came to light in February when the Securities and Exchange Surveillance Commission launched its probe in response to a whistle-blower report. Toshiba acknowledged the problem and began its own internal investigation in April. It set up the third-party panel the following month as the scope of the irregularities appeared to be much wider than initially believed. Toshiba was meanwhile forced to postpone the announcement of the financial results for its latest business year.

Toshiba initially said it confirmed that its group operating profit had been overstated by at least ¥54.8 billion over the five years, mainly in its infrastructure business division. However, the third-party probe has reportedly uncovered that the padding of profits will reach up to ¥200 billion, with improper accounting also discovered in the group’s other mainstay sectors such as semiconductors, personal computers and televisions. The scope of the problem raises suspicions that the illicit accounting — which is said to have involved understating or deferring the reporting of costs and manipulating profits by failing to properly booking appraisal losses — may have been carried out in an organized manner within the giant group.

A focus of the third-party probe has been the motives and background to the irregular accounting. One probable explanation would be that the company tried to make its performance look better than it really was after its profits fell short of target. The period when the reported improper accounting took place coincides with tough times for Toshiba, including the global recession following the 2008 collapse of Lehman Brothers as well as the shock from the March 2011 Great East Japan Earthquake and the Fukushima nuclear crisis, which spelled trouble for the group’s nuclear power plant business.

The third-party panel is said to have examined the records of Toshiba’s in-house conferences and email communications to determine whether the group’s top management was either aware of the profit padding or ordered it. Media reports of the probe suggest that the top executives — president Hisao Tanaka, who took up the post in June 2013, and vice chairman Norio Sasaki, Tanaka’s predecessor as president since 2009 — put pressure on their junior officials to achieve the targeted business performance, and that the panel is moving toward determining that such pressure effectively led the junior officials to pad the profits in an effort to meet the targets.

Both Tanaka and Sasaki are reported to be considering tendering their resignations to take responsibility for the fiasco. But what’s more important will be for the company to put in place a mechanism to ensure that the same problem does not happen again. Toshiba is reportedly considering the creation of a new in-house surveillance body to beef up corporate governance and forestall wrongdoing. Some reports say that it may increase the number of outside directors so they comprise a majority of its board members. But Toshiba already had four outside directors in its board, supposedly to monitor the firm’s management from the viewpoint of outsiders not tied to its inner interests. Unless it’s determined why Toshiba’s existing governance mechanism failed to prevent the accounting irregularities, there’s no guarantee that creating new positions will work any better.

http://www.ft.com/intl/cms/s/0/b209abac-2bc0-11e5-acfb-cbd2e1c81cca.html#axzz3g7WlHEcC

July 16, 2015 6:55 pm

Accounting scandal set to shake up Toshiba

Kana Inagaki in Tokyo

Anonymous tips about Toshiba’s accounting to Japanese securities watchdogs have ignited a scandal that stretches back at least five years and is expected to lead to a sweeping management shake-up as soon as next week.

Financial regulators are expected to launch a probe into improper accounting that inflated profits at the Japanese industrial conglomerate, which makes laptops, memory chips and nuclear reactors, by at least $1.4bn, according to people familiar with the matter.

Several board members — including Hisao Tanaka, Toshiba’s chief executive, and Norio Sasaki, vice-chairman — are expected to step down following next week’s planned release of a report by an investigative panel, the people said.

Shares in Toshiba have fallen 28 per cent since it revealed in early April that it had uncovered accounting problems and then appointed a four-member panel of lawyers and accountants to investigate.

The company has been unable to report results for the financial year that ended in March and has warned it would need to trim its operating profit by nearly Y55bn ($443m) for the fiscal years of 2009 to 2013. People familiar with the panel investigation say the inflated figure in operating profit is likely to be more than Y170bn.

The panel is looking into the roles played by Mr Tanaka, Mr Sasaki, who was president from 2009 to 2013, and his predecessor Atsutoshi Nishida, who headed the company from 2005 and remains an adviser to the company, one of the people said.

The panel is said to have uncovered emails showing Mr Tanaka and Mr Sasaki instructing employees to delay the booking of costs to make the financial figures look better, according to local media reports.

Toshiba said all three individuals could not comment until the panel’s investigation was completed. No executives have been charged with wrongdoing.

Initially, Toshiba said an internal probe had found that construction costs on certain infrastructure-related projects had been underestimated and that losses from the construction work were “not recorded in a timely manner”. Its findings later showed that about half of the Y55bn in overstated profits is due to an order Toshiba won in 2013 from Tokyo Electric Power to supply its smart metering system for 27m homes.

One former employee who worked in the power systems division said pressures came not only from bosses but also from clients, especially for government-linked domestic projects. Those pressures escalated after the Fukushima nuclear disaster in 2011 with employees forced to work under extremely tight budgets.

“There were pressures from clients in making sure everything was being done according to plan. Those pressures were real and very harsh,” the former employee said.

The person added the problems were worsened by reporting procedures for projects that were time-consuming and old-fashioned. Some of the paperwork was being done by junior employees in their first few years at the company.

Experts say the accounting issues at Toshiba also expose concerns around Japanese corporate governance practices including the weak role of external directors and the extensive power that many former chief executives continue to exercise.

At Toshiba, the rivalry between Mr Nishida, who is credited with building the PC business, and Mr Sasaki, who spent his career in the nuclear business, had been widely known, especially after they publicly sparred in front of reporters at a news conference in 2013.

Government officials complain the company’s problems were aggravated by the poor relations between the two men. They say current and former employees split into two factions that blamed each other for overlooking what now appear to be company-wide accounting irregularities.

Toshiba’s accounting problems could not have come at a worst time for Prime Minister Shinzo Abe, who has aggressively campaigned for corporate governance reform. Toshiba was one of the early adopters of the reforms — it not only appointed external directors, but also became one of the few companies to give them the authority to name top executives.

Toshiba’s 16-member board included two former diplomats, one former Morgan Stanley banker and a university professor. All four outside directors declined to comment.

Despite a structure that met governance standards, Toshiba watchers say in reality former chiefs continued to hold sway over the heads of the company.

“The biggest cause that ruins Japanese companies is governance led by former executives,” said Kazuhiko Toyama, a contributing author to Examining Japan’s Lost Decades, who was also involved in drafting the corporate governance code.

The problem is not unique to Toshiba. Japanese chiefs often complain former chief executives and chairmen impede their efforts to abandon underperforming businesses. At Sony, former executives continue to write public letters criticising the policies of Kazuo Hirai, the current chief executive.

“Governance problems occur when multiple powers are at play. It’s unhealthy,” said Hiroyuki Kamano, a lawyer who sits on the board of several Japanese companies.

 

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