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Toshiba Accounting Scandal

post date : 2015.09.18

Toshiba Accounting Scandal

 

・Hiroshi Kawabata, “The true culprit behind Toshiba’s ‘cycle of fraud,’” Bungeishunju, September issue

・Nobuo Gohara, “Toshiba’s ‘inappropriate’ accounting—third-party committee report that completely missed the root of the problem,” Sekai, September issue

 

■Distance between Corporations and the Government

Toshiba, a well-known Japanese electronics company, repeatedly overstated profits, and in July of this year the current president and his two predecessors apologized and resigned. A report on an investigation by a third-party committee revealed that Toshiba executives well known in financial circles gave direct orders to carry out the inappropriate accounting. Journalist Hiroshi Kawabata wrote in his article “The true culprit behind Toshiba’s ‘cycle of fraud’” in the September issue of Bungeishunju that the root of this problem was with Toshiba’s almost purchase of Westinghouse, an American nuclear reactor maker, in 2006.

 

At the time, Westinghouse was valued at 200 to 300 billion JPY, but Toshiba purchased it for 5.4 billion USD (660 billion JPY with exchange rates at the time). Nuclear power was receiving attention worldwide as a way to reduce carbon emissions and fight global warming, and the Japanese government was encouraging nuclear technology exports. The president at the time was former chairman Atsutoshi Nishida, who is said to have started the inappropriate accounting. “’We have plans to build 39 nuclear reactors around the world by 2015.’ When purchasing Westinghouse, Nishida made this bold declaration in an interview.... The public applauded Nishida’s determination.... The general opinion seemed to be that ‘660 billion yen was a very good deal.’”

 

Nishida then became chairman, and in 2010 he showed interest in the position of chairman of Keidanren (Japan Business Federation), but relented as a result of the agendas of various interested parties. Kawabata’s analysis is that “The ‘excess’ that began when the post of Keidanran chairman seemed feasible sent Toshiba into an even worse negative spiral.” He writes that the 2011 Great East Japan Earthquake and accident at Fukushima Daiichi Nuclear Power Plant compounded the issue. “Since the hydrogen explosion at Fukushima Daiichi, almost all the plans to build nuclear power plants worldwide were cancelled or suspended. Building 39 reactors was no longer remotely possible.”

 

Mr. Kawabata states that the Toshiba executives, who maintained an aggressive stance, had “lost any sense as normal business operators,” and points out that part of the reason they got away with this kind of management is due to Toshiba’s “position as a ‘national policy company’” and “... the gigantic structure of vested interests forming the backbone of the Japanese electronics industry.” In other words, power companies such as Tokyo Electric Power Company can acquire excessive profit by freely setting fees, and this profit can then be used for capital investment that ensures stable income for general electronics manufacturers such as Toshiba. He explains that this setup “... tends to lead to a dependent structure where the company can just go crying for help if it loses.”

 

Mr. Kawabata also mentioned how the three presidents, with their close connections in the government, maintained influential positions in the financial world even when no longer president of Toshiba. He concluded with “How much meaning is there to influence in the business world for Japanese companies today, which have no choice but to compete globally? The unnecessarily close connection with the government is what twisted the executives’ decisions in the first place, possibly leading indirectly to this scandal.”

 

■Insufficient Third-Party Committee Report

There are also those who question the content of the third-party committee report. In the September issue of Sekai, lawyer Nobuo Gohara wrote an article called “Toshiba’s ‘inappropriate’ accounting—third-party committee report that completely missed the root of the problem.” In it, he points out that despite “the root of the problem being the auditing company acting as the accounting auditor,” in the report “... harsh criticisms of Toshiba executives stand out, but there is no indication of any specific proof of systematic ‘inappropriate accounting’ that would justify those criticisms.”

 

Mr. Gohara compared this scandal to the 2011 Olympus scandal of hiding losses, in order to explain the nature of Toshiba’s inappropriate accounting. The Olympus scandal, which escalated into a criminal case, was “An issue of inappropriate accounting where losses were hidden off the books, which wouldn’t be discovered unless you looked into it assuming the management was lying.” In contrast, the Toshiba case was “An issue of day-to-day accounting practices, which if the auditing company had performed regular auditing practices ... would have revealed some kind of problem.” Therefore, a major point for the Toshiba accounting scandal is “... how the auditing company evaluated and decided on the appropriateness of accounting practices, as well as how the Toshiba executives were involved and provided the documents to the auditing company.”

 

However, regarding the report Mr. Gohara writes that “Problems with the auditing company were not included in the investigation, and all that is said is that Toshiba’s handling of the auditing company was extremely lacking. As a result, almost none of the root of the ‘inappropriateness’ can be seen.” With this insufficient report, he warns that even if the current president and his two predecessors resign it will not be a fundamental solution, writing that “... in the near future, an even bigger problem may surface. It is essential to carry out a thorough investigation, including issues with the auditing company.”

 

 *This page was created independently by Foreign Press Center Japan, and does not reflect the opinion of the Japanese government or any other organization.

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