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Audit system failed to detect misconduct at Toshiba
A third-party panel, which investigated the accounting irregularities at Toshiba Corp., said in its report Monday that three successive presidents, including President Hisao Tanaka and his predecessor Norio Sasaki, who is now vice chairman, are responsible for the scandal.
Two major factors – the malfunction of the auditing system and the failure to prevent abuses of the top management that was desperate to improve performances – have led to the overstating its operating profits. Observers believe that the problem is deeply rooted in conflicts among the three presidents.
The panel’s report stipulated that the main cause for the improper accounting was a pattern where the top management presented a numerical goal for earnings improvement, dubbed a “challenge,” to each division chief and strongly urged them to achieve the targets.Atsutoshi Nishida, who preceded Sasaki as president and is now an adviser to the company, reportedly sought to add ¥5 billion (S$55 million) in operating profits as a “challenge” when he was in the post. Sasaki also strongly urged the company to increase the profits by ¥12 billion with just three days left until the end of the settlement term when he was a president.
Pointing out the necessity of working out feasible earnings goals according to corporate ability, the panel said the challenge system was tantamount to putting “improper pressure” on front line employees.
In principle, if a company is about to suffer a loss, it should make this apparent, even if short-term profits are reduced.
However, Toshiba’s front line employees, who were asked by the top management to achieve unreasonable targets, became involved in improper accounting to cover up the losses.
The panel asked Toshiba to abolish the challenge system, saying it was pursued even tough the employees found it difficult to improve the earnings despite every effort to do so near the end of the settlement term.
Accounting irregularities
Toshiba’s accounting scandal has shown that its in-house audit commission was unable to recognise the firm’s routine practice of grossly padding its profits, resulting in a failure to rectify such misconduct.
This lack of supervision was an important enabling factor in the company’s efforts to cover up their long window-dressing operation.
The committee comprises two Toshiba managing directors and three outside board members who are tasked with identifying questionable accounting and business operations. It is also designed to work with a managerial auditing department under the direct control of the president.
The external board members sitting on the audit commission include two former Foreign Ministry bureaucrats. In its report issued Monday, the third-party panel said the firm needs to ensure its auditors include legal, financial and accounting experts.
Another factor in the current scandal is the oversight committed by Ernst & Young ShinNihon LLC, the auditing firm responsible for auditing Toshiba’s accounting.
With this in mind, the third-party panel urged Toshiba to establish an auditing division vested with strong authority independent of the president.
In its consolidated settlement of accounts for the business term ending in March 2009, Toshiba took after-tax losses in excess of ¥300 billion, largely due to an economic slowdown due to the collapse of Lehman Brothers in the autumn of 2008.
Sasaki, who became president in June 2009, was under pressure to achieve a turnaround in his corporation’s business performance as soon as possible.
In trying to achieve this, Sasaki hoped Toshiba’s nuclear power generation-related business would do much to improve its business performance.
However, the East Japan Great Earthquake frustrated this hope. Sasaki had been promoted from a division responsible for manufacturing equipment for nuclear power generation.
Sasaki’s increasing anxiety and impatience seemed to partly reflect his antagonism toward his predecessor, Nishida, according to sources familiar with the affair.
In 2009, Nishida chose Sasaki as his successor. However, he began to openly criticise Sasaki for “solely cutting fixed expenses and nipping growth in the bud.”
Sasaki’s stance is also believed to have reflected his sense of rivalry with Hitachi, Ltd.
This prompted him to exert greater pressure on employees at his firm’s operating divisions, urging them to achieve profits at their departments.
Toshiba Scandal Grew From Numbers ‘Too Embarrassing’ to Show
July 21, 2015 — 8:50 PM SGTUpdated on July 22, 2015 — 9:54 AM SGT
“Get it done like your life depends on it.”
That was the message former Toshiba Corp. President Atsutoshi Nishida delivered to underlings in 2008. And they got it done.
The shame of earnings considered “too embarrassing” to show publicly helped drive an accounting scandal at the Japanese industrial giant that led to the resignations of Nishida and his two successors Tuesday. Now the maker of nuclear reactors, memory chips and home appliances must correct at least $1.2 billion of earnings across more than six years.
One of the irregularities highlighted by independent investigators was Toshiba’s practice of selling personal-computer parts to Taiwanese contract manufacturers at a higher price than what Toshiba paid suppliers.
While that was initially to hide manufacturing costs from rivals, the company abused the practice to temporarily inflate profits, and the costs were repeatedly carried over into subsequent quarters, the committee said.
When the PC business was poised to report losses amid the global financial crisis in 2008, Nishida stepped up the pressure on subordinates to remain profitable with his decree, according to the investigators’ report released Tuesday.
Management Renewal
Toshiba’s unit presidents, business executives and accountants were under relentless pressure to achieve profit goals, or what were known internally as “challenges,” the report said.
“I was shocked by the fact that one of the leading companies organizationally conducted such a thing,” said Koichi Ueda, who led the investigating committee.
Improper practices continued under Norio Sasaki, who took over in 2009, and his successor, Hisao Tanaka, according to the report. All three men resigned from the 140-year-old pillar of Japan Inc.
“I have no recognition of directly ordering” inappropriate accounting, Tanaka said Tuesday.
The accounting irregularities were “skillfully” hidden from outside observers, and subordinates were unable to stand up to their superiors, according to the investigation.
No charges have been filed against Toshiba or executives. The company is taking the findings of the probe seriously and wants to regain the trust of stakeholders by creating a new company culture, it said in a statement Tuesday.
Nuclear Plants
Tanaka appeared before about 400 journalists and analysts Tuesday after his resignation was announced. Tanaka, Chairman Masashi Muromachi and Vice President Keizo Maeda bowed extensively to apologize.
“For the company to be rebuilt there needs to be a renewal of the management structure,” Tanaka said.
Muromachi will become interim president, and the company will announce a new management team in mid-August. Its 2014 fiscal year earnings will be released Aug. 31.
The accounting issues came to light in February when Japan’s Securities & Exchange Surveillance Commission investigated irregularities related to “percentage of completion” estimates used on power and infrastructure projects, including nuclear, hydroelectric, wind-power equipment, air-traffic control and railway systems.
Since a typical order was worth billions of yen, the business had a significant impact on Toshiba’s profit.
Toshiba is sold a $947 million stake in Finnish elevator and escalator maker Kone Oyj to bolster its balance sheet, the Tokyo-based company said Wednesday. The stake, which represents about 4.6 percent of the outstanding shares in the Helsinki-based company, generated a gain of about 113 billion yen ($913 million).
‘Every Means’
The company ran into trouble when expected cost reductions didn’t materialize or fluctuations in foreign exchange caused projects to lose money, the report said. Under pressure from the top brass, unit managers resisted booking loss provisions as required by accounting rules, it said.
On May 8, Toshiba withdrew its earnings forecasts, canceled the year-end dividend and widened the accounting probe to include the entire company, with about $2.8 billion of market value vanishing since. The company has now agreed to correct its earnings statements by an amount equal to about 27 percent of pretax profit posted for years since fiscal 2009.
The investigation found that Tanaka and Sasaki, who between them have led the company for the past six years, sought to delay booking losses, and employees were unable to go against management orders.
When the company’s unprofitable visual products segment came under particular stress, Tanaka delivered a blunt instruction to employees.
“I made a public promise to return the TV business to profit in the second half,” Tanaka said at a meeting in September 2013, the committee said. “Use every conceivable means to achieve profitability.”
Toshiba scandal is a lesson for all directors asleep at the back
Japan’s efforts to overhaul its staid corporate culture are taking hold, despite a series of accounting problems at the biggest firms
9:24PM BST 21 Jul 2015
A global conglomerate has shocked the corporate world by failing to face up to its own shortcomings over several years, leading to a multi-million pound accounting bombshell and a clear-out of senior staff. Questions are now being raised about the wisdom of such a sprawling business model, which seemingly discouraged insiders from raising problems before they turned into crises.
No, it’s not Tesco, but the Japanese group Toshiba that has found itself in the spotlight for using accounting vagaries to flatter its operating profits that it made from selling everything from laptop speakers to nuclear equipment.
Toshiba’s chief executive and two of his predecessors have bowed out, apologising to the world for the second major accounting scandal to hit Japan in the space of four years. More than half of the board have now been felled by the Y151.8bn profit overstatement that can be traced as far back as 2008.
The bosses, under pressure from the global financial crisis and then the 2011 earthquake and subsequent Fukushima nuclear disaster, held back losses and impairments from the books in order to inflate profits and hit targets over seven years. The exaggeration was three times larger than Toshiba had first thought, an independent panel found on Tuesday.
“That a company that represents Japan, to be doing something like this institutionally, was shocking,” said Koichi Ueda, the lawyer who led the panel investigating the firm’s practices.
Japan, home to more than a tenth of the 2,000 largest companies on Fortune’s global index, was already searching for a way to improve corporate behaviour. before this latest scandal erupted. A £1.1bn boardroom cover-up at the camera-maker in Olympus that emerged in 2011 served to accelerate a government push to improve stewardship.
The Olympus scandal came to light when its then-boss Michael Woodford was dismissed from his post for daring to challenge his chairman about the practices – a move that was seen as evidence that he did not understand Japanese corporate culture.
The fraud at Olympus, like the problems at Toshiba, was not centred around directors trying to sneak bags of cash out of the firm for personal gain. Directors at Olympus were instead found to have covered up losses on ill-judged investments that had gone awry years earlier, by gradually taking them off the books as written-down goodwill to spare the firm’s reputation. The board, stacked with long-serving company men, did not challenge this behaviour; nor did the firms’ various accountants. Shareholder meetings were likened to Kabuki theatre by Mr Woodford, referring to the traditional Japanese charade.
This collision of scandal and corporate overhaul is peculiarly Japanese, as displayed by yesterday’s carefully-choreographed show of executives bowing in contrition. But it is a vivid example of how corporate governance, an abstract notion that often strays into dusty concepts and meaningless buzzwords, is wielded in the real world.
Shortly after the Olympus scandal emerged, Prime Minister Shinzo Abe’s government drafted new rules on governance, as part of a much broader push at Japan’s moribund economy. Since June 2015, large Japanese firms have had to appoint at least two independent directors to their boards, or explain why they failed to do so.
All of which is encouraging, although as Toshiba’s outgoing boss Hisao Tanaka said yesterday, problems of this sort cannot be solved overnight.
Toshiba already had four external directors, including two former diplomats with global experience, before yesterday’s clearout. The average age of a director was 63, and just one of the 16-strong board was a woman. This is an above-average showing in a country with the worst boardroom diversity in the industrialised world.
Change could also come from Japan Inc’s increasingly vocal shareholder base. Toshiba investors have seen their shares lose a fifth of their value since the accounting probe was announced in May, even if they did enjoy a 6pc rally yesterday.
After the revelations at Olympus, investors lodged a $240m lawsuit relating to the accounting issues in 2012. That year, one frustrated investor in the banking group Nomura tabled a motion to change the firm’s name to Vegetable Holdings. The plan won support from 5.4pc of the shareholder base.
Activist investors, comparatively rare in closely-held Japanese firms, have also been pushing for corporate overhauls. Daniel Loeb of Three Point sold out of Sony last year, booking a 20pc profit, after more than a year of agitating for job cuts and spin-offs. Yoshiaki Murakami, the man credited with making Japan’s first hostile takeover bid in 2000, has recently returned to the market following a conviction in 2007 for insider trading.
The Japanese Exchange has also joined the fray, nudging companies into more profitable structures by creating a new index for firms with strong returns on equity and corporate governance. Toshiba’s main listing was dropped from the JPX-Nikkei 400 in last month’s reshuffle, in a move that analysts said could discourage overseas investors.
Whether Toshiba can stop the rot and return to Japan’s new index for good-looking companies remains to be seen. That firms should be trying to reach that standard at all is no longer in doubt.
AsianExtractor: Unearthing Accounting Fraud in Asia 