Japan’s Enron Reckoning; Newfangled tech uncovered old-fashioned fraud; Initial searches found Tanaka’s email trail to be puzzlingly short for a man with a reputation for banging out message after message; Single call led to unraveling of Toshiba accounting fraud; Toshiba fraud a deafening wake-up call for better corp governance in Japan

http://asia.nikkei.com/Features/Accounting-scandal/Newfangled-tech-uncovered-old-fashioned-fraud

July 30, 2015 5:00 pm JST

Newfangled tech uncovered old-fashioned fraud

TOKYO — High-tech sleuthing helped experts recover deleted, old or otherwise buried emails that implicate former Toshiba presidents in years of systematic accounting fraud at the venerable electronics maker.A third-party panel has issued a report on its investigation into Toshiba’s accounting scandal involving former company presidents.

On May 15, a third-party panel of experts was formed to investigate the company. Called the Independent Investigation Committee, it employed digital forensics technology to sift through an enormous volume of emails and extract only those deemed relevant to the probe.

Even if someone deletes an email in an attempt to destroy evidence, it does not just disappear; a digital forensics expert can usually find it stored on a computer server somewhere.

Mustering its forces

The committee created a task force of 76 accountants and digital forensics experts, who analyzed a total of 322,000 emails. Their primary focus was on messages from former top executives, including then-President Hisao Tanaka and his predecessor, Norio Sasaki, who is also a former vice chairman. Both resigned last week to take responsibility for the misdeeds.

Initial searches found Tanaka’s email trail to be puzzlingly short for a man with a reputation for banging out message after message. But the experts dug deeper and unlocked a huge volume of emails from the boss. From there, they sifted through the messages for any evidence of wrongdoing, taking down names and making connections.

In doing so, they discovered exchanges between Tanaka and one of his subordinates discussing a loss at Toshiba’s infrastructure unit. “We should report [the loss] in the third quarter,” the subordinate said in one email to Tanaka. In his response, Tanaka asked him if it would be possible to “push it back to the 4th quarter.”

This exchange was used as strong evidence implicating Tanaka in Toshiba’s systematic accounting fraud.

Testimony time

In the days that followed the discovery of that exchange, one Toshiba executive after another was called into the Marunouchi Sogo Law Office, in the heart of Tokyo, to meet with lawyers there who serve on the investigation committee.

The lawyers presented the executives with emails and minutes from Toshiba’s monthly meetings in which Tanaka and former presidents demand quick earnings improvements. Hoping to paint a clearer picture of the reality inside the company, the lawyers grilled the executives over their words and actions, asking them why they did not push back against such unreasonable demands.

Through such sessions, the committee accumulated testimonies from 210 Toshiba officials and others, and used a combination of digital and oral evidence to implicate top management in the fraud.

July 8 marked something of a climax in the investigation. Shortly before 1 p.m., former Vice Chairman Sasaki emerged from a large black car in the parking lot under the building that houses the Marunouchi Sogo Law Office. It was on that day that a panel of four committee members, including its chairman, Koichi Ueda, carried out the final questioning of Sasaki and Tanaka.

The committee members trotted out a large amount of evidence pointing to the pair’s involvement in Toshiba’s systematic accounting irregularities. The men denied the allegations, saying they did not recall ever issuing direct instructions to keep losses off the books.

But the evidence against them was too strong.

When the committee members talked about creating a new leadership structure for Toshiba, Sasaki reportedly said, “I don’t think I will be part of it.”

By sifting through mountains of digital information and gathering oral testimony to find incriminating evidence, the committee has helped rid Toshiba of bad apples and pave the way for a management overhaul.

http://asia.nikkei.com/Business/Companies/Single-call-led-to-unraveling-of-Toshiba-accounting-fraud

July 29, 2015 1:00 pm JSTMurky earnings picture

Single call led to unraveling of Toshiba accounting fraud

TOKYO — When Toshiba received a phone call from the Securities and Exchange Surveillance Commission, Japan’s securities watchdog, in late January about an accounting issue, neither party knew where it would lead.

That call marked the beginning of a scandal that has seriously damaged Toshiba’s reputation and cast a pall over the manufacturer’s future

The accounting scandal cost Toshiba President and CEO Hisao Tanaka his job and forced the company to promise sweeping management reforms. Tanaka’s immediate predecessor as president, Vice Chairman Norio Sasaki, also stepped down, along with Atsutoshi Nishida, an adviser who was president prior to Sasaki.

At 5:00 p.m. on July 21, Tanaka faced a media phalanx. “Our brand image has suffered the most serious damage in our 140-year history,” Tanaka said as he announced his resignation.

Initial suspicions

It all started with the January call from an official at the SESC’s disclosure statements inspection division. “We have some questions about your accounting practices concerning the infrastructure business,” said the official. “Prepare the relevant materials.”

The watchdog’s probe into Toshiba’s books was launched in response to whistleblowing, although details remain unknown.

Two weeks later, on Feb. 12, SESC inspectors visited Toshiba’s headquarters in Hamamatsucho, Tokyo. During the meeting in a reception room, the inspectors spent several hours asking questions about the way Toshiba applied the “percentage-of-completion” method in its accounting of long-term infrastructure contracts. The method involves booking the revenues and expenses of long-term contracts for every year as a percentage of the work completed during that year.

After officials pointed to possible irregularities in the company’s bookkeeping practices, the Toshiba executive in charge promised an immediate in-house investigation. The SESC already suspected that there might be similar problems at other in-house Toshiba companies as well.

But it was unclear whether or not these were errors or deliberate misstatements; nor was the scope of the problem known.

The securities regulators were not aware that they were uncovering one of the biggest accounting scandals in Japanese corporate history. Some officials believed a company as large and reputable as Toshiba should be able to deal with the problems on its own.

Widening scope

As the probe brought multiple questionable accounting practices to light in the weeks that followed, Toshiba set up a special investigation committee on April 3. The panel was led by Chairman Masashi Muromachi and composed of outside accountants and lawyers.

Even then, the prevailing thought was that the problems were merely errors in accounting for infrastructure operations. The document announcing the establishment of the special committee showed no signs of serious concern about the problems at Toshiba. It described the matter as “an accounting issue about the reasonableness of estimates concerning certain company projects (on an unconsolidated basis), based on the percentage-of-completion method.”

Around that time, Toshiba executives visited creditor banks and others to reassure them, claiming that the irregularities were simply mistakes, and that the issue would be resolved quickly.

Some board members took the situation more seriously, however, and proposed setting up a crisis management committee and hiring of outside experts to deal with the affair. But their advice fell on deaf ears. One outside director now says that, in retrospect, the company’s response to the problems was too slow from the start.

Spiraling into scandal

Things got uglier in May, delivering a severe shock to Toshiba, which initially tried to downplay the issue.

Muromachi was caught off guard when he received a report from members of the investigation committee that a slew of unseemly emails had been discovered. Those emails contained messages suggesting the use of deceptive accounting practices to postpone booking losses and expenses. That made it difficult for the company to claim the irregularities were simple errors. Now they looked more like intentional manipulations.

If other business units had similar problems, Muromachi thought, the committee would have a tough time uncovering the facts.

Muromachi decided to shift the probe to a new and better-equipped independent committee comprising outside lawyers and accountants. On May 8, Toshiba announced it was setting up the independent committee and pulling its earnings forecasts for the year to March 2015. It also said it would delay its announcement of the financial results for the year.

Senior executives at Ernst & Young ShinNihon, Toshiba’s auditor, were stunned when they were informed of these steps immediately before the announcement.

Toshiba has more than 300,000 shareholders, including foreign investors who account for some 30% of the total. On May 11, the first trading day after the announcement, Toshiba’s stock went limit-down due to growing uncertainty about the company’s future.

At 11:45 p.m. on May 13, Toshiba dropped another bombshell, saying it might cut its operating profit from fiscal 2011 through fiscal 2013 by over 50 billion yen ($400 million) because of improper accounting practices related to its infrastructure business. Up to that point, Toshiba had been disclosing information based on the findings of its own probe. Later, however, the independent panel found the company had padded profits by a total of 156.2 billion yen from fiscal 2008 through December 2014.

On May 14, Tanaka was summoned to the Tokyo Stock Exchange and told to “respond appropriately to the media circus that will now come.” Exchange officials acknowledged that Toshiba had no choice but to delay the announcement of its earnings and the submission of financial statements to the Financial Services Agency. At the same time, the officials urged the company to undertake an exhaustive investigation into the matter.

The ensuing probe by the independent committee revealed the involvement of top executives in the accounting fraud, embroiling Toshiba in a scandal of massive proportions.

http://www.bloombergview.com/articles/2015-07-29/japan-has-an-enron-moment-after-accounting-scandals

Japan’s Enron Reckoning

4 JUL 29, 2015 9:00 AM EDT

By Noah Smith

More than a dozen years ago, the U.S. experienced a rash of high-profile accounting scandals. Now it’s Japan’s turn. Toshiba, one of the country’s largest technology firms and an internationally respected brand, revealed that it had systematically overstated its operating profits to the tune of about $1.2 billion during a seven-year stretch. The company’s chief executive officer, a number of other high-ranking executives and half of the company’s board has resigned.

The Toshiba scandal isn’t the first big case of Japanese corporate fraud to come to light in recent years. In October 2011, CEO Michael Woodford (no relation to the economist of the same name) blew the whistle on accounting fraud at his own company, optical equipment manufacturer Olympus. The fallout from that debacle is stillunfolding.

The first takeaway from these scandals is that there will probably be more of them. The consensus is that they happened because of problems with Japanese corporate culture. In both cases, observers have blamed secretive and autocratic management styles by top executives, as well as the generally hierarchical, closed nature of Japanese business. But the real problem is corporate governance itself.

In Japanese companies, boards are almost always made up of people who work for the company. This provides a strong incentive for empire building in which managers try to expand market share — and their own perks and privileges — instead of profitability or shareholder value. Basically, Japanese managers can run companies like their own private fiefdoms, splurging on trips, bar girls and other entertainment expenses. More ominously, they tend to let their companies stagnate, since stagnation is cozy and comfortable. Since they are their own boards, there is no one to stop them.

That style of management looked OK when market share was rocketing upward in the 1970s and 1980s. But since the Japanese economy slowed and international competition intensified, its flaws have taken a heavier toll. Japanese white-collar productivity ishorribly low relative to other advanced nations, and its companies have traditionally been far less profitable than those in the West.

If your profitability goes south for long enough, eventually there will be consequences. Bank loans may dry up. Workers may be afraid to work for you, knowing that you might not be around in a decade. Eventually, even a company that is governed by its own management will be forced to take action to preserve some remnant of its coddled, hidebound lifestyle. That action could be to raise profitability, but maximum coziness might be achieved by simple fraud. If you fake profits, you can keep bank loans rolling and live as a zombie company without actually having to restructure and make sacrifices.

That’s why it’s so worrying to see accounting fraud at a company such as Toshiba. Toshiba is one of Japan’s star performers, an internationalized company that has been disciplined by global competition. Many of Japan’s companies — traditionally the number is quoted as 80 percent — focus on the domestic market, where they face much less competition, and are usually less productive. If a flagship company like Toshiba was moved to engage in fraud, the impact of Japan’s long economic struggles on the laggards must be even more severe.

But in crisis there is opportunity. In the U.S., the accounting scandals of the early 2000s in companies such as Enron and WorldCom resulted in the Sarbanes-Oxley Act, a harsh crackdown that many cite as a reason for the reluctance of companies to list themselves on public exchanges. But in Japan, there is the hope that the response will be a different kind of reform — improvement of corporate governance in general.

The administration of Prime Minister Shinzo Abe recently introduced a new corporate governance code that requires outside directors on boards and encourages a focus on shareholder value. That is an important step, and its full ramifications have yet to be felt. But the Toshiba scandal — almost surely not the last of its kind — should be an impetus to do even more. “More” would mean stronger enforcement of the governance code, which as things now stand is voluntary. It might also mean increasing the number of outside directors — the current required number is only two — and more disclosure in general.

In parallel to this effort, the government should continue trying to cut ties between Japanese companies and the Japanese mafia. Another thing it should do — which hasn’t, to my knowledge, been proposed — is to stop making entertainment expenses tax-deductible. Encouraging companies to splurge on perks is bad for profitability, and creates a long-term incentive for managers to fight tooth and nail to maintain control of their companies.

Unfortunately, the Abe administration has gone in exactly the wrong direction on this issue, increasing the amount that companies can deduct from their taxes for nights of drunken carousing. An about-face on this issue would be welcome.

In general, though, there is the hope that the accounting scandals are a bad sign for the short term but a good sign for the long term. If all goes right, problems that are exposed today will be rooted out tomorrow.

http://www.reuters.com/article/2015/07/29/us-toshiba-accounting-auditor-idUSKCN0Q32OY20150729

Wed Jul 29, 2015 6:03pm EDT

Toshiba scandal puts focus on Japan’s cut-price company audits

HONG KONG | BY MICHELLE PRICE

Toshiba Corp’s years-long practice of inflating its profits has raised questions among accounting experts about whether low fees paid by Japan-listed companies to their auditors mean they do not spend enough time scrutinizing company accounts.

Toshiba chief executive Hisao Tanaka and a string of other senior officials resigned last week after an independent inquiry found the company had padded its profits by $1.2 billion over several years, in one of Japan’s biggest corporate scandals in years.

The committee of external lawyers and accountants probing the computers-to-nuclear conglomerate found “most of the accounting treatment issues that were the scope of this investigation were not noted” by the auditor Ernst & Young (EY) ShinNihon.

It added though that the involvement of top management in the accounting irregularities may have made it harder for auditors to detect problems, noting that the quality of the audit could only be determined by a separate investigation.

EY ShinNihon declined to comment for this article. Tanaka has said he never had any intention of encouraging accounting irregularities but did not dispute the report’s findings.

Some accounting experts say the scandal highlights the low audit fees paid by Japanese companies, which they believe are caused by historical caps, stiff competition and a corporate culture that does not value the audit function or shareholder transparency.

“One of the ongoing problems in Japan is that the fees paid by listed companies to auditors are very low compared to the international average,” said Robert Medd, a partner at GMT Research in Hong Kong.

Because accountants typically charge by the hour in Japan and elsewhere, fees can provide a rough proxy for the time spent on an audit, and can offer a comparable benchmark when measured as a proportion of a company’s overall revenues.

An analysis by GMT of more than 2330 listed companies with $500 million or more in sales found Japanese firms pay their auditors on average 3.2 basis points of turnover, compared with 5.3 in the United Kingdom and 11.8 in the United States, the lowest among the major developed markets. The overall international average was 5.6 basis points.

Toshiba paid EY ShinNihon and other EY entities 1.5 basis points of turnover, or 982 million yen ($8 million), to audit its books for financial year ended March 2014, according to its financial statements.

The six-year average at Toshiba was 1.8, a Reuters analysis of the company’s financial statements shows.

In a statement, Toshiba said EY’s remuneration was “appropriate” and noted that audit fees vary each year due to one-off events. “As a listed company, we recognize that it is not whether the fees are large or small, but that it is important to receive the necessary and sufficient audit.”

A London-based spokeswoman for EY and the two audit oversight divisions of Japan’s main regulator the Financial Services Agency all declined to comment.

A spokesman for the Japan Institute of Certified Public Accountants, the self-regulatory body for accountants, said it will investigate EY ShinNihon’s involvement in the case.

TALENT CRUNCH

To be sure, fees are not a water-tight gauge of audit rigor or competence given some companies can receive discounts, some sectors are less complicated to audit than others, labor costs vary across markets, and accounting rules in some countries can be less onerous.

Audit fees in Japan were low due to historical regulatory caps and although these limits were removed more than a decade ago, fees have struggled to reach developed-market norms, which accountants say can impinge on quality.

“In these highly competitive fee environments, it is always a battle to keep up the consistency of detailed service,” said Chris Devonshire-Ellis, chairman of accountancy firm Dezan Shira & Associates.

Japan’s government has tightened audit regulation, but low fees and overwork make it tough for firms to attract and retain quality staff, said Yoshinori Kawamura, professor in the Faculty of Commerce, Waseda University, specializing in accounting.

“The number of experienced certified public accountants is limited. Each senior auditor signs the auditor’s reports for a good number of companies,” he said.

http://asia.nikkei.com/Business/Companies/Unhappy-140th-birthday-for-Japanese-tech-pioneer

July 28, 2015 7:00 pm JST

Toshiba scandal: Unhappy 140th birthday for Japanese tech pioneer

TOKYO — Toshiba‘s debilitating accounting scandal could not have come at a more awkward time for the Japanese industrial conglomerate.

This year marks the 140th anniversary of Toshiba’s foundation. But the time-honored company is in anything but a festive mood now that its social credibility is in tatters.

Toshiba has been found to have overstated its operating profits by more than 150 billion yen ($1.2 billion). Toshiba President Hisao Tanaka and his two predecessors were forced to resign to take responsibility.

The company did not seem destined for such a mess. It won customer confidence through its technological prowess and no-nonsense approach to business, and its group sales have grown to 6 trillion yen a year.

     What went wrong?

Bad omens

There had, in fact, been signs of trouble before. The possibility of inappropriate accounting practices emerged in September 2013, when Toshiba won a contract to supply a smart meter communication system to Tokyo Electric Power Co.

News of the deal drew significant attention within the industry, not because of the technology involved but because of the unexpectedly low price. Toshiba acknowledged that it “had been aware of a possible loss” when it received the order.

One former senior official at a Toshiba subsidiary blamed the group’s current woes on a monthly meeting headed by the Toshiba president.

“During the Sasaki era, [the meetings] became a place for the top management to give orders to achieve budget targets. I did not want to attend such gatherings,” he said. By “top management,” he meant Norio Sasaki, who served as president between 2009 and 2013.

While it is natural for top executives to pursue profits and encourage their subordinates to work harder, Toshiba went too far, resulting in the manipulation of accounts.

As it turns out, the uneasiness that the former official at the Toshiba unit felt about the monthly meetings was not unfounded.

The system was created around 2001, when Tadashi Okamura was president. He is now an adviser to the board. The monthly meetings have been an important regular event for the company, as they are where monthly results and other key information is reported by the various business units and major subsidiaries.

Initially, the gatherings were used for setting budget targets for individual subsidiaries through discussions based on figures proposed by the parent. The arrangement was designed to encourage constructive dialogue between the parent and its subsidiaries — a place where the units could have their voices heard.

The meetings began to attract vice presidents, and transform into a place where the parent would present subsidiaries with unrealistic profit-improvement targets, referred to within the group as “challenges.”

Pressure tactics

This new style emerged under Atsutoshi Nishida, who served as president between 2005 and 2009, and was taken to new levels under Nishida’s successor, Sasaki. It was Sasaki and the man who took the reins from him, Tanaka, who put excessive pressure on their subordinates to achieve profit targets, resulting in accounting irregularities across the company.

In one episode exemplifying how strong the pressure was, Sasaki demanded at a meeting on Sept. 27, 2012, that the PC business “improve operating profit by 12 billion yen within three days.” His order came only three days before the company closed its books for the first half of fiscal 2012.

Toshiba’s image was long that of a company in touch with the average person and with an easygoing corporate culture. “In the past, there was no excessive competition to get ahead within the company,” said a former Toshiba official. But changes in the company’s business structure and leadership in recent years have drastically altered the atmosphere there.

Toshiba once focused on generating steady profits through its heavy electric machinery business. But it later began emphasizing the PC and semiconductor businesses, which destabilized earnings. In addition to that, fierce competition among the various business units to post the best results created a culture of placing profits above all else.

Things were not helped by Toshiba’s 2006 acquisition of U.S. nuclear power company Westinghouse, which ended up backfiring. The Japanese company hoped the takeover would make it the leading player in the global market for nuclear facilities. But those ambitions were all but snuffed out by the 2011 Fukushima nuclear disaster.

Toshiba’s capital ratio tumbled to less than 9% at one point amid the global financial crisis triggered by the collapse of Lehman Brothers in autumn 2008. It was around that time that the company plunged into a vicious cycle of low bid prices and profit padding.

During the same period, Toshiba also saw its product competitiveness erode, said one senior company official.

Tough road ahead

Toshiba is known for pioneering many products, not least of all the notebook PC and NAND-type flash memory. But the company’s knack for technological innovation has faded in recent years. It increased its capital through public share offerings as a quick-fix solution to its weakened financial base, while pushing forward with window-dressing activities.

At a July 21 conference to formally announce his resignation as Toshiba’s president, Tanaka acknowledged his responsibility and said the scandal has dealt the Toshiba brand its worst blow in the company’s 140-year history.

Toshiba won over consumers with its trailblazing technologies and products, and a no-nonsense corporate culture. But its social credibility has crumbled. Rebuilding its battered image is going to be a tough job.

http://www.ft.com/intl/cms/s/0/b4647c44-3122-11e5-91ac-a5e17d9b4cff.html#axzz3hADcpfeK

July 27, 2015 12:25 pm

The universal dangers shown by Toshiba’s failings

Andrew Hill

The causes and consequences of the long-running inflation of profits by Toshiba reflect some uniquely Japanese cultural norms. So, inevitably, did the 2011 scandal at Olympus , where successive leaders covered up accounting manipulation.

But the genetic traces of those debacles are visible in plenty of other countries and companies. Self-satisfied boards of non-Japanese companies should examine the flaws that are common to all corporate cultures — almost certainly including their own.

After all, there are only so many ways of cooking the books, however varied the details of each case. In the introduction to his indispensable anthology of creative accounting, Michael Jones, a professor of financial reporting, identifies just four main strategies — increasing income, decreasing expenses, increasing assets and decreasing liabilities. Toshiba was doing the first, according to an independent report — but so, for example, was WorldCom, one of the most notorious US cases of accounting fraud, back in the early 2000s.

Control failings are one common theme. The audit committee at Toshiba includes executive directors — a red flag to UK governance purists. But directors, auditors and risk managers can succumb to capture or groupthink anywhere. It took the financial crisis to enshrine the idea that UK banks’ chief risk officers should be more independent, for instance.

As for lack of objective supervision, the UK principle that chief executives should be overseen by an independent chairman is widely ignored in the US. When boards do split the roles, it is often to give the former chief executive a stepping stone to retirement, an echo of the way former Toshiba and Olympus executives clung on to influence over their companies after they left. Even in the UK, companies are only one emergency decision or succession crisis away from appointing an executive chairman.

Unwillingness to challenge authority, a trait attributed to employees at Toshiba and Olympus — and often given an “only in Japan” spin — is a recurring problem everywhere, from Royal Bank of Scotland under Fred Goodwin to Fifa under Sepp Blatter.

The assumption that non-Japanese companies benefit from the protection of more advanced governance codes is broadly true. But such armour can be paper-thin if not reinforced in practice. Enron was technically in line with US boardroom practice. Toshiba was itself held up as a model of governance. It started appointing outside directors to its board long before the Olympus fiasco prompted wider corporate reform in Japan.

The most important lesson is about the malign impact of top-down pressure

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The most important lesson from Toshiba is about the malign impact of top-down pressure to meet unrealistic targets. Toshiba’s ex-chief executive denies having given direct instructions to staff to inflate profits. But the investigating panel said he told executives to “use every possible measure to achieve profitability” and added that Toshiba’s corporate culture did “not allow employees to go against the will of their superiors”.

Staff at target-chasing western banks before the credit crunch or at WorldCom ahead of its collapse in 2002 may recognise that picture. Bernie Ebbers, the telecoms group’s chief executive, “created, and the [then] board permitted, a corporate environment in which the pressure to meet the numbers was high, the departments that served as controls were weak, and the word of senior management was final and not to be challenged”, a WorldCom board investigation found in 2003.

If the Toshiba report were just a snapshot of how some Japanese companies are fossilised relics of what corporate governance used to look like elsewhere, the rest of the world could rest easy. But the rest of the world should not be so smug. A new survey suggests that internationally, 37 per cent of management accountants, who help companies seek out investments and control risks, have felt under pressure from managers or peers to compromise corporate ethics. The percentage has risen over the past three years in most places polled, including the UK and the US.

When aggressive targets, irresistible management pressure and weak controls coincide, misconduct can spread quickly. Rival companies see the inflated numbers and strain to match them. To suggest such weaknesses are confined to one corporate or national culture is a first step into dangerous complacency.

http://www.businesstimes.com.sg/opinion/toshiba-fraud-a-deafening-wake-up-call-for-better-corp-governance-in-japan

EDITORIAL; Toshiba fraud a deafening wakeup call for better corp governance in Japan

31 July 2015

Business Times Singapore

THE sense of deja vu as findings about Japan’s latest corporate scandal came to light in recent weeks was all the more dismal for the fact that the company involved is one of the country’s biggest conglomerates, a respected multinational that’s a household name in many parts of the world and, to boot, a corporate governance pioneer of sorts back home.

Coming more than a dozen years after a rash of high-profile cases of corporate malfeasance in America led to sweeping regulatory reforms, the discovery that Toshiba had “systematically” overstated operating profits by US$1.2 billion over a stretch of several years is remarkable in many respects, beyond the sheer audacity of a no-holds-barred management mindset, sans scruples, driven to meet targets. And the Toshiba fraud – the biggest since the Olympus fiasco in 2011 – will almost certainly not be the last, observers say.

In one sense, the findings unearthed by a panel of external lawyers and accountants – whose initial probe into Toshiba’s construction projects was later widened to cover the entire group – were not entirely surprising: browbeaten division heads pressured by top management to misstate numbers and inflate profits is symptomatic of a corporate culture marked by unquestioning loyalty and reluctance to question authority on the part of lifelong career executives. Toshiba’s auditing – both internal and external – was also found wanting, with its audit committee including two former diplomats who weren’t particularly financially savvy, with apparently no background in financial reporting. The episode has also put the focus on the audit industry in Japan, with questions about whether the low audit fees paid by Japanese companies affected the quality of the audits.

Yet the diversified consumer and industrial electronics company (whose origins date back to 1845) had been for years a poster child of Japanese corporate governance, one of the country’s top- ranked for good governance practices in 2013, and was even featured as a case study in a recent book that detailed its multiple layers of compliance checks. Toshiba’s financial irregularities have also come to light just over a month after a new corporate governance code – aimed at making companies more open to investors, and part of Prime MinisterShinzo Abe’s reforms to boost Japan’s competitiveness – took effect in June. Yet Toshiba was by all accounts a seemingly enlightened early adopter of corporate governance best practices – it brought in external directors back in 2001 when Japanese boardrooms were still dominated by long-time company insiders.

The silver lining, if it can be seen as such, is that some remedial actions came fast and furious soon after the scandal broke. Eight top Toshiba executives, including the president and two predecessors, resigned, while the interim chief executive will have his pay slashed by 90 per cent for the next two months. Eight other senior executives will take a 40 per cent pay cut for three months. The company – which has lost about US$4 billion in market capitalisation since May – has promised measures to stem the irregularities, including the hiring of more independent directors. Change (especially in long-entrenched cultural practices) may not come quickly or dramatically – but real internal changes within Japanese boardrooms are needed to spur governance reforms in the country.

The sense of deja vu as findings about Japan’s latest corporate scandal came to light in recent weeks was all the more dismal for the fact that the company involved is one of the country’s biggest conglomerates, a respected multinational that’s a household name in many parts of the world and, to boot, a corporate governance pioneer of sorts back home.

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