Business | Toshiba’s accounts

A load of tosh

Corporate Japan is reeling after a big accounting scandal at Toshiba

Tanaka’s lost face
|TOKYO

“INCREASING profits is important,” declared Hisao Tanaka, the chief executive of Toshiba, a conglomerate, as he resigned on July 21st, “but it must be grounded in a basis of fair accounting.” The audience might have questioned his right to carry on preaching. The day before, an investigative panel found that Mr Tanaka and two predecessors had incited subordinates to cook the firm’s books and inflate profits by ¥152 billion ($1.2 billion) over seven years to 2014. It is one of Japan’s biggest-ever accounting scandals.

The employees’ techniques hailed from accounts-fiddling 101: overstating profits, booking them too early, and pushing back losses and the recording of charges. Yet what makes their actions unusual in the annals of book-keeping shenanigans is that they received no explicit instructions. Instead, top management set impossible targets and relied on a Japanese corporate culture of obedience and loyalty that led people lower in the hierarchy to do whatever it took to meet them.

The false accounting began under Atsutoshi Nishida, the chief executive between 2005 and 2009, who still wielded power as an adviser to Toshiba until this week. In 2008, according to the panel, he heard that the firm was heading for a loss of ¥18.4 billion, and called the figure “so embarrassing that we cannot announce it”. His underlings allegedly doctored the number into a profit of ¥500m. Mr Tanaka says he did not instruct people to falsify accounts and was unaware it was going on.

The firm’s targets set off a vicious circle: divisions of Toshiba would manipulate the accounts to meet them, fearful of being shrunk if they didn’t, and were then given even tougher goals for subsequent years. The company at first claimed the irregularities were confined to its infrastructure business, but the investigation detected manipulation across the entire sprawl of its semiconductor, personal-computer and television divisions.

In another big accounting scandal, in 2011, Olympus, a camera-maker, was found to have covered up $1.7 billion of investment losses. Its bosses were viewed by many in Japan as having protected a great firm in a largely harmless book-keeping fudge. It will be harder for the bosses at Toshiba to excuse the systematic padding of profits over such a long period. Their fall is also more dispiriting for the corporate establishment. Mr Tanaka’s predecessor, Norio Sasaki, who also resigned from Toshiba’s board, was a vice-chairman of Keidanren, Japan’s main business lobby group, and a member of an economic panel advising Shinzo Abe, the prime minister.

Toshiba’s fall from grace also comes just as foreign investors were shedding some of their habitual cynicism about Japanese corporate governance. Mr Abe is trying to instil a more shareholder-friendly culture, and has brought in a new governance code. Toshiba seemed to tick the right boxes, with, for instance, four outside directors (though at least three of them had little business training). Neither the board’s audit committee nor the external auditor, Ernst & Young ShinNihon, an affiliate of the global firm, detected anything amiss.

Toshiba says it will now add more outside directors, but that may not mean much. The real test, according to a person close to the board, will be whether the firm can for the first time conduct a fair and transparent nomination process for a new boss. In Japan it is considered the prerogative of outgoing bosses to appoint their successors; at Toshiba, the board has been largely bypassed on such decisions, with disastrous results.

Japan’s finance minister, Taro Aso, has warned that the scandal could damage the market’s trust. The deferential corporate culture laid bare this week, after all, is hardly unique to Toshiba. Perversely, Mr Abe’s emphasis on lifting shareholder returns could even increase the temptation for other firms to try to push the accounting envelope, says George Olcott, who sits on several Japanese boards. It would certainly send a helpful signal if Toshiba’s top brass are now held accountable by regulators, owners and by the misled firm itself.

This article appeared in the Business section of the print edition under the headline "A load of tosh"

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