Mon Jul 20, 2015 | 11:43am EDT

Toshiba inflated profits by $1.2 billion with

top execs' knowledge: investigation

The logo of Toshiba Corp is seen as people are reflected on a window at the company's
Hydrogen Energy R&D Center after its opening ceremony in Tokyo April 6, 2015.
REUTERS/Toru Hanai

By Ritsuko Ando | TOKYO

Japan's Toshiba Corp overstated its operating profit by 151.8 billion yen ($1.22 billion) over
several years in accounting irregularities involving top management, an independent
investigation said in a report on Monday.
In the country's biggest corporate scandal in years, the findings could lead to the restatement of
earnings, a board overhaul and potentially hefty fines at the computers-to-nuclear conglomerate.
Toshiba President and Chief Executive Hisao Tanaka and his predecessor, Vice Chairman Norio
Sasaki, were aware of the overstatement of profits and delay in reporting losses in a corporate
culture that "avoided going against superiors' wishes," the investigating committee said in a
report filed by Toshiba to the Tokyo Stock Exchange.
The overstatement was roughly triple Toshiba's initial estimate. Sources have said Tanaka and
Sasaki would resign in the coming months and most of the board would be replaced to take
responsibility for the shortcomings.
The report said Tanaka and Sasaki had set operating profit targets that the heads of divisions
were required to meet, applying pressure by hinting at withdrawing from areas that
underperformed.
"Within Toshiba, there was a corporate culture in which one could not go against the wishes of
superiors," the report said.
"Therefore, when top management presented 'challenges', division presidents, line managers and
employees below them continually carried out inappropriate accounting practices to meet targets
in line with the wishes of their superiors."
Sources said previously that one of the investigators' theories was that top executives, worried
about the impact of the 2011 Fukushima disaster on nuclear business, set unrealistic targets for
new operations such as smart meters and electronic toll booths.
The report did not mention Fukushima, but said such pressure was particularly strong in fiscal
years 2011 and 2012.
Improper accounting included overstatements and booking profits early or pushing back the
recording of losses or charges, and such steps often led to even higher targets being set for
divisions in the following period.
"This led to a need to carry out improper accounting of an even bigger scale, and as this was
repeated, the scale of the inappropriate book-keeping also expanded," it said.
GOVERNANCE PUSH
The investigation comes as Prime Minister Shinzo Abe is trying to improve the country's
corporate governance in order to attract more foreign investors.

This is Japan's biggest business scandal since camera and medical equipment maker Olympus
Corp's 13-year cover-up of $1.7 billion in losses blew up in late 2011.
The revelations shake one of the stalwarts of Japanese industry. Toshiba remains Japan's 10thbiggest company by assets and market value despite its stock price falling 26 percent since the
scandal surfaced in early April.
The report said much of the improper accounting, stretching back to fiscal 2008, was intentional
and would have been difficult for auditors to detect.

Related Coverage

Toshiba inflated profits by $1.2 billion with top execs' knowledge - investigation

Toshiba's accounting probe

Toshiba has not been able to close its books for the latest year because of the probe, which also
forced the company to cancel its annual dividend.
Toshiba's shares are "almost certain" to be placed under special monitoring, according to a stock
exchange source, who added that he doubted it would be delisted.
The source also said the bourse was considering a penalty for breach of contract, which would be
around 91 million yen based on Toshiba's market capitalization.
Last week, other sources said the company was expecting 300-400 billion yen ($2.4-3.2 billion)
in charges include the overstated profits as well as various writedowns.
In a positive sign for Toshiba, however, its main lender Sumitomo Mitsui Banking Corp
announced that it would continue supporting the company.
Toshiba is due to hold a news conference at 5 p.m. (0800 GMT) on Tuesday, shortly before the
investigating committee is to hold a separate news conference at 7 p.m. (1000 GMT).
(Additional reporting by Takahiko Wada and Taro Fuse; Editing by William Mallard and Mike
Collett-White)

Mon Jul 20, 2015 | 11:43am EDT

Toshiba's accounting probe

Toshiba Corp on Monday announced a summary of an independent investigation into accounting

irregularities.
People familiar with the matter said it could result in up to 400 billion yen ($3.2 billion) in
charges and the resignation of Chief Executive Hisao Tanaka.
Following are key moments in the saga since Toshiba first announced the accounting probe in
April.
April 3 - Toshiba says probing possible improper accounting, may have under-reported costs of
infrastructure projects in the business year through March 2014. Says looking into whether it
adequately spread costs of multi-year projects in its accounts.
May 8 - Expands investigation, plans to set up third-party committee. Cancels dividend payment,
withdraws earnings outlook.
May 13 - Says likely to mark down operating profit for the three years through March 2014 by at
least 50 billion yen.
May 15 - Launches independent committee headed by a former prosecutor to broaden probe.
May 22 - Extends probe to three more business units.
May 26 - Firm likely to seek extension to annual securities filing deadline to avoid being placed
under supervision by the Tokyo stock exchange, sources say.
May 27 - Considers special dividend to compensate investors after skipping year-end payment
due to probe, sources say.

May 29 - Toshiba says accounting probe to end mid-July, gained approval to release annual
report by August-end, first-quarter results by Sept. 14 - one month later than usual bourse
deadline.
June 12 - Says internal investigation found further instances of improper accounting amounting
to 3.6 billion yen. Says that investigation, running parallel to third-party probe, found 12
instances of irregularities, including not making provisions for a canceled contract, postponing
recording of expenses, underestimating material costs.
June 25 - CEO says may appoint more outside board members to improve accounts oversight.
July 8 - Firm talks with banks about up to $4.9 billion credit line to secure funding in case probe
hurts creditworthiness, sources say.
July 9 - Considers selling assets including a stake in Westinghouse Electric, sources say.

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Independent investigation looks into roles top management played in accounting practices,
sources say.
July 15 - Firm expects to book charges of 300 billion yen to 400 billion yen related to improper
accounting, sources say. Charges include six years of overstated profit and various writedowns,
they say.
CEO, other board members including Vice Chairman Norio Sasaki to step down in September to
take responsibility, sources say.
July 16 - Independent panel finds top executives involved in improper accounting practices,
source says.
July 17 - Toshiba says third-party committee to submit report to the firm on July 20. Says to
release entire report, hold news conference at 5 p.m. (0800 GMT) on July 21.
July 20 - Independent panel concludes Toshiba overstated its operating profit by 151.8 billion
yen over several years.
The report says Tanaka and his predecessor, Vice Chairman Norio Sasaki, were aware of the
overstatements of profits and delays in reporting losses in a corporate culture that "avoided going
against superiors' wishes".
(Compiled by Miyoung Kim; Editing by Christopher Cushing)

Mon Jul 20, 2015 | 10:03am EDT

Toshiba inflated profits by $1.2 billion with

top execs' knowledge - investigation

A logo of Toshiba Corp is seen in Tokyo, Japan, June 25, 2015. T REUTERS/Yuya Shino

Toshiba Corp overstated its operating profit by 151.8 billion yen ($1.22 billion) over several
years in "institutional" accounting irregularities involving top management, an independent
committee said in a report on Monday.
Toshiba Chief Executive Hisao Tanaka and his predecessor, Vice Chairman Norio Sasaki, were
aware of the overstatements of profits and delays in reporting losses in a corporate culture that
"avoided going against superiors' wishes," the panel said in a summary report filed by Toshiba to
the Tokyo Stock Exchange.
The overstatement was roughly triple Toshiba's initial estimate. Sources have said Tanaka and
Sasaki would resign in the coming months and most of the board would be replaced to take
responsibility for Japan's worst corporate scandal in years.
The report says much of the improper accounting, stretching back to fiscal 2008, was intentional
and would have been difficult for auditors to catch.
The committee is to hold a news conference at 7 p.m. (1000 GMT) on Tuesday, according to the
filing.
(Reporting by Ritsuko Ando and Reiji Murai; Writing by William Mallard; Editing by Mike
Collett-White)

July 22, 2015 9:41 am JST

Toshiba scandal
Japan CPA body investigates manufacturer's accounting malpractice

The Japanese Institute of Certified Public Accountants said Tuesday that it has begun
investigating the auditing system used by Toshiba while it was engaged in profit-padding.
The institute will query accountancy Ernst & Young ShinNihon, the company that signed off
on Toshiba's earnings, to ascertain whether the auditing process was properly performed.
"[Toshiba's] accounting misconduct is deplorable from the viewpoint of the reliability of the
capital market," said Kimitaka Mori, chairman and president of the JICPA at a Tuesday press
conference in Tokyo. "We will also investigate whether the accountants properly audited
Toshiba's on-going engineering projects and their estimated costs."

If the work of accountants working for Toshiba is found wanting, the institute will take
disciplinary action against them, including expelling the accountants. In similar cases, the
institute sometimes calls on the Financial Services Agency to take disciplinary action against the
offending auditing firm and accountants.

July 15, 2015 2:00 am JST

Investigating the auditors
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).
(Nikkei)

Toshiba Corp. President and Chief Executive Officer Hisao Tanaka bows at the start of a May
news conference in Tokyo. | REUTERS

Business / Corporate

Toshiba chiefs to quit as panel finds

organized accounting fraud: sources
JIJI, Bloomberg

Jul 16, 2015

Article history

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SHARE

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.
Toshibas 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. Toshibas current state can only be evaluated
negatively and thats 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 managements 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 Toshibas 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.
Toshibas 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 Lifes Nakatani. Concerns are mounting that this will begin to affect the companys
relationship with financial institutions.

Toshibas cooked books

Jul 15, 2015

Article history

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SHARE

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 groups 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 publics 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 groups 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 groups nuclear power plant business.
The third-party panel is said to have examined the records of Toshibas in-house conferences and
email communications to determine whether the groups 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,
Tanakas 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 whats 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 firms management from the viewpoint of outsiders not
tied to its inner interests. Unless its determined why Toshibas existing governance mechanism
failed to prevent the accounting irregularities, theres no guarantee that creating new positions
will work any better.

Toshibas 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
July 17, 2015 Leave a comment

http://asia.nikkei.com/Business/Companies/Toshiba-s-accounting-firm-going-under-themicroscope-next
July 15, 2015 2:00 am JST
Toshibas 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-chargesidUSKCN0PP1FN20150715
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. Thats
more than triple Toshibas 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. Toshibas 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 Japans biggest
accounting scandal in years expands.
The charges include six years of overstated profits uncovered by an independent panel probing
the electronics conglomerates 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.
Toshibas stock price has sunk 27 percent since early April on Japans 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, crossshareholdings 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-quitpanel-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.
Toshibas 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. Toshibas current state can only be evaluated
negatively and thats 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 managements 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 Toshibas 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.
Toshibas 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 Lifes Nakatani. Concerns are mounting that this will begin to affect the companys
relationship with financial institutions.
http://www.japantimes.co.jp/opinion/2015/07/15/editorials/toshibas-cookedbooks/#.VafMBPmqpBd
Toshibas 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 groups 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 publics 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 groups 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 groups nuclear power plant business.
The third-party panel is said to have examined the records of Toshibas in-house conferences and
email communications to determine whether the groups 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,
Tanakas 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 whats 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 firms management from the viewpoint of outsiders not
tied to its inner interests. Unless its determined why Toshibas existing governance mechanism

failed to prevent the accounting irregularities, theres 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 Toshibas 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, Toshibas chief executive, and Norio Sasaki,
vice-chairman are expected to step down following next weeks 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 panels 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 companys 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.
Toshibas 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.
Toshibas 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 Japans 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. Its unhealthy, said Hiroyuki
Kamano, a lawyer who sits on the board of several Japanese companies.

Raising money based on false information is fraudulent: Toshiba issued almost 1

trillion yen ($8 billion) of stocks and bonds when it was inflating earnings
statements, leaving the company exposed to possible regulatory fines and
investor lawsuits
July 22, 2015 Leave a comment

http://www.bloomberg.com/news/articles/2015-07-22/toshiba-risks-penalties-for-raising-8billion-on-false-earnings
Toshiba Risks Penalty for Raising $8 Billion on False Profit
by Takahiko Hyuga
July 22, 2015 11:24 AM SGTUpdated on July 22, 2015 3:23 PM SGT
Toshiba Corp. issued almost 1 trillion yen ($8 billion) of stocks and bonds when it was inflating
earnings statements, leaving the company exposed to possible regulatory fines and investor
lawsuits. The Japanese manufacturer sold 333 billion yen of shares in a public offering in May
2009, and issued 640 billion yen of bonds from May 2009 to December 2013, data compiled by
Bloomberg show. Toshiba President Hisao Tanaka resigned on Tuesday, telling reporters that the
company will take seriously a third-party panels findings that executives were involved in
systematic overstating of profit.

Raising money based on false information is fraudulent, said Etsuro Kuronuma, a professor at
Waseda Law School. Toshiba violated the interests protected by the Financial Instruments and
Exchange Act.Toshiba said it will correct at least 152 billion yen of pretax profit, based on
accounting statements stretching back to the year ended March 2009. The panels investigation
found that top executives set unrealistic earnings targets, leading to the flawed financial
reporting.
Toshiba raised money knowing that investors were making decisions based on improper
financial statements, which is deceitful, said Mitsushige Akino, executive officer at Ichiyoshi
Asset Management Co. in Tokyo. Market participants feel resentment toward Toshiba.
Japans Financial Services Agency hasnt alleged any wrongdoing by Toshiba or its management.
Apology Bow
After bowing in apology at a press conference, Tanaka said the company takes seriously the
possibility that investors were misled, while adding that he didnt directly order inappropriate
accounting. Hirokazu Tsukimoto, a spokesman for Toshiba in Tokyo, declined to comment on
any penalties stemming from the misstatements.
Toshibas shares fell as much as 2.7 percent in Tokyo trading on Wednesday, reversing earlier
gains, and closed 1.7 percent lower. The stock has tumbled and its bond risk has jumped since
May, when the maker of personal computers and nuclear reactors withdrew earnings forecasts,
canceled its year-end dividend and widened the internal accounting probe.
Takuji Yano, a spokesman for the FSA, declined to comment on whether the agency will take
action against Toshiba. Financial Services Minister Taro Aso said on Tuesday that the matter was
extremely regrettable.
Japanese Law
Under Japanese law, the Securities and Exchange Surveillance Commission can recommend that
the FSA impose fines against a company that sold securities based on a material misstatement.
For stock offerings, the fine can total 4.5 percent of the amount issued and for bonds it can reach
2.25 percent, according to article 172-2 of the Financial Instruments and Exchange Act.
That would put Toshiba at risk of being fined as much as 30 billion yen, according to Bloomberg
calculations corroborated by Kuronuma. A charge of that size would be the biggest in Japan for
misstating earnings, overtaking the 1.6 billion yen imposed on machinery maker IHI Corp. in
2008.

The FSA fined Nikko Cordial Corp. 500 million yen in 2007 after it inflated profit and later sold
50 billion yen of bonds. The brokerage, the predecessor of SMBC Nikko Securities Inc., said at
the time that it was restating earnings because inappropriate accounting led to errors.
Charges Possible
Separate provisions in the Financial Instruments and Exchange Act carry criminal penalties for
false financial reporting. People who submit false financial statements may face as long as 10
years in prison or maximum fines of 10 million yen. Companies can be fined as much as 700
million yen.
Criminal charges, civil liability and administrative fines are all possible, said Tatsuo Uemura,
who teaches law at Waseda University in Tokyo. I suspect that what Toshiba did was window
dressing, which goes beyond just inadequate accounting.
No criminal charges have been brought against Toshiba or its employees. Toshibas Tsukimoto
said any pursuit of a criminal case is up to Japanese authorities and he declined to comment
further.
Nomura Holdings Inc., which was among arrangers of the bond and stock sales for Toshiba,
declined to comment. Ernst & Young ShinNihon LLC, the manufacturers auditor, will examine
the third-party report, assign more accountants and audit the revised earnings, said spokesman
Hiroyuki Sato.
Padding Profit
Toshiba commissioned the committees investigation in May. The four-member panel of lawyers
and accountants found organized involvement including top executives, and said the
chipmakers improper accounting was conducted for the purpose of padding profit.
Shares of Toshiba have dropped 23 percent this year to 393.1 yen, compared with an 18 percent
gain in the benchmark Topix index. The price compares with the 333 yen that investors paid for
new stock in 2009.
The cost to insure Toshibas debt has doubled since the end of April to 105 basis points, creditdefault swap data from CMA show.
Standard & Poors put Toshibas BBB long-term credit rating on a watch for possible downgrade
on Tuesday, citing the impact of the earnings revisions on its cash flow and leverage.

The 7 Biggest Corporate Scandals in Japan

July 21, 2015 Leave a comment
http://www.bloomberg.com/news/articles/2015-07-21/toshiba-s-accounting-scandal-ranksamong-japan-s-largest-cases
The 7 Biggest Corporate Scandals in Japan
by Dave McCombs
July 21, 2015 10:38 AM SGT
Toshiba Corp.s $1.2 billion accounting scandal, caused by top executives setting unrealistic
profit targets, ranks among the largest for Japanese companies. An industrial group that makes
everything from nuclear reactors to microchips and home appliances, Toshiba said Monday it
must correct profit over more than six years, the biggest such adjustment since Olympus Corp.s
$1.7 billion accounting scandal in 2011. No charges have been filed against Toshiba or its
executives in the case. Here is a list of the biggest accounting scandals in Japan.
1. 1998: In a case that unnerved global financial investors, Long-Term Credit Bank of Japan
underestimated bad loan reserves by $4 billion. Three executives were convicted on fraud
charges, a ruling overturned by the countrys Supreme Court in 2008. The highest court
ruled the three were justified in using old accounting rules. The bank was sold to a group
of investors in 2000.
2. 1997: Yamaichi Securities Co. went bankrupt after reporting a $2.5 billion deficit it had
previously hidden by shunting client losses into paper companies. Former President
Atsuo Miki and former Chairman Tsugio Yukihira were each sentenced to two-and-a-half
years in prison.
3. 2011: Olympus Corp. usedfraudulent takeoversto hide $1.7 billion in losses over 13
years, starting in the 1990s. Former chairman Tsuyoshi Kikukawa and two other
erstwhile executives pleaded guilty in September 2012 for covering up losses. Olympus
was fined 700 million yen ($5.6 million), and the three officials received suspended
sentences from the Tokyo District Court. Nobumasa Yokoo, an adviser to the
company,received a four-year jail term on July 1, 2015.
4. 2005: Kanebo Ltd., a cosmetics maker, had to restate earnings for four of the five years
through March 2004. The restatements raised questions about their auditors including
ChuoAoyama Audit Corp. and its venture with PricewaterhouseCoopers LLP. The
company said it inflated earnings by about 210 billion yen over five years. Former
President Takashi Hoashi received a suspended prison term, as did former Vice President
Takashi Miyahara. A third executive Kazutoshi Kanda, also received a suspended term.

5. 2006: Nikko Cordial Corp. padded profit through an issuance of convertible bonds to
affiliate Nikko Principle Investment Japan. The countrys third-largest brokerage at the
time was accused of padding profit by 13.7 billion yen for the three months ended
September, 2004. The brokerage was sold to Citigroup Inc. in 2007.
6. 2007: IHI Corp., Japans third-largest maker of heavy machinery, corrected earnings for
the year ended March 31, 2007, to a loss of 4.6 billion yen, from a previously reported
15.8 billion yen profit. Chairman Mototsugu Ito stepped down to take responsibility. The
company paid a 1.6 billion yen fine.
7. 2006: Livedoor Co., a fast-growing Internet company, used stock splits, swaps and share
purchases to fraudulently boost its share price. Founder Takafumi Horie was convicted
and served a two and half year prison term.

Pressure to show a profit led to Toshibas accounting scandal; Toshiba auditors say
being investigated by Japan regulators
September 19, 2015 Leave a comment

http://www.japantimes.co.jp/news/2015/09/18/business/corporate-business/pressure-to-show-aprofit-led-to-toshibas-accounting-scandal/#.Vf05ovmqpBc
Pressure to show a profit led to Toshibas accounting scandal
BY KAZUAKI NAGATA
STAFF WRITER
SEP 18, 2015
Manufacturing giant Toshiba Corp.s president and seven other directors were forced to resign
when an investigation revealed in July that the firm had doctored the books and had padded its
profits over the past seven years to the tune of hundreds of billions of yen. The case is one of
Japans biggest corporate scandals in years. The 140-year-old company is set to make a fresh
start on Sept. 30 when it holds an emergency shareholder meeting to approve a new management
team. But what was going on with Toshiba and why was it inflating its profits? Here are some
questions and answers about Toshibas accounting problems.
How did Toshibas accounting scandal come to light?

Suspecting accounting irregularities at Toshiba, the Securities and Exchange Surveillance

Commission under the financial watchdog Financial Service Agency launched a probe in
February.
Realizing the seriousness of the issue, Toshiba decided to set up an in-house investigative
committee in April, when the firm publicly announced its accounting troubles.
The irregularities apparently went deeper than the firm initially believed; thus it handed the
investigation over to an independent outside committee in May and said that it would postpone
reporting its fiscal 2014 earnings.
The committee compiled a nearly 300-page report and submitted it to Toshiba on July 20.
What did the investigation find?
The four-member committee looked into Toshibas accounting practices from fiscal 2009 to 2014
and found a series of inappropriate accounting entries that showed a staggering 152 billion
($1.2 billion) net profit.
The report said the firms top executives, including Toshiba President Hisao Tanaka and his
predecessors Atsutoshi Nishida and Norio Sasaki, were involved in the manipulation and there
were no internal systems in place to stop them.
The report said the priority for the presidents was to secure profits for each quarter, and thus they
set high targets, demanding their subordinates improve the companys results. The business
culture at Toshiba did not allow lower-level managers to go against the bosses, it said.
How did Toshiba manipulate the accounting?
There were several ways and methods, which differed in each division.
In one instance, Toshiba out-sourced the manufacturing of computers to a partner. Toshiba would
sell computer parts to the partner, who would then assemble the computers, which it would then
buy back.
The companys computer division would sell more parts than necessary to the partners, which
increased that companys inventory, allowing Toshiba to inflate its profit figures.
In another example, the report said the infrastructure division purposely understated the costs of
construction projects even though it knew, according to new estimates, the real costs had
increased.

Were the pressures to make a profit that strong?

According to the report, the pressure the presidents placed on their subordinates to show a profit
were immense.
For example, in September, 2012, the digital product and service division of Toshiba, which
includes its computer business, told the then-President Sasaki that it would post a 24.8 billion
operating loss for the first half of the fiscal year.
But Sasaki refused to accept the forecast and told the division to improve its profit by 12 billion
in just three days.
In September, 2013, then-President Tanaka told a senior vice president that he wanted to have a
secret talk. He asked the vice president to improve a loss at the digital product and service
division by padding the numbers.
The vice president told Tanaka he was personally opposed to doing so, but if Tanaka decided, he
would support it.
How did Toshiba react to the committees report?
At a news conference on July 21, then-President Tanaka apologized and resigned from the post.
The company also announced that then-Vice Chairman Sasaki and Adviser Nishida were
resigning, as were six other directors.
Tanaka refrained from commenting in detail on the reports findings but did insist he did not
directly order his employees to manipulate the companys profits.
Toshiba said it will also increase the number of outside directors and strengthen its audit
committee and internal audit systems.
How does the Toshibas scandal compare to similar cases?
In 2005, a probe found that Kanebo Ltd. committed accounting fraud that totaled about 200
billion, which resulted in the arrest of three executives.
Livedoor fabricated 5.3 billion in revenues for the business year through September 2004.
Former Livedoor President Takafumi Horie spent 21 months in jail over the incident.
In 2011, Olympus Corp.s accounting scandal came to light. The firm covered up 110 billion in
losses, leading to the arrest of seven people.

To date, prosecutors and the police have not publicly announced they are taking action over the
Toshiba scandal, but some shareholders are expected to file a class-action lawsuit against the
firm.
Some experts said that the case should be scrutinized further, otherwise, the Japanese market will
lose the trust of overseas investors.
Will Toshiba be delisted from the Tokyo Stock Exchange?
Not for now. However, the TSE designated Toshiba a security on alert on Tuesday. The firm
has been given a year to improve its internal control systems and will report its results to the
TSE.
If the firm fails to strengthen its governance, it will be delisted. The TSE also fined Toshiba
91.2 million.
Toshiba auditors say being investigated by Japan regulators
18 September 2015
Reuters News
TOKYO, Sept 18 (Reuters) Japans financial regulators are investigating an Ernst &
Young affiliate over its audit of Toshiba Corp after a $1.3 billion accounting scandal
at the industrial and electronics conglomerate, the auditing firm said on Friday.

Ernst & Young ShinNihon LLC said the Financial Services Agency has been investigating staff
involved with the audit of Toshiba. It said it was also undergoing a routine biennial inspection by
regulators over its governance and overall operations.
The scandal ranks as one of Japans biggest corporate scandals alongside the fraud discovered in
2011 at medical equipment and camera maker Olympus Corp, which was also an Ernst & Young
ShinNihon client.

How Toshiba delayed a $100 million loss with two words: uncorrected
misstatement
August 6, 2015 Leave a comment

http://www.reuters.com/article/2015/08/05/us-toshiba-accounting-auditor-insightidUSKCN0QA2H120150805
Wed Aug 5, 2015 5:09pm EDT
How Toshiba delayed a $100 million loss with two words: uncorrected misstatement
TOKYO | BY NATHAN LAYNE AND EMI EMOTO
As more details emerge about years of accounts manipulation at Japanese conglomerate Toshiba
Corp (6502.T), corporate governance experts say there needs to be more scrutiny of the role of
the companys auditors.Most of the blame for the $1.2 billion profit-padding scandal at the
computer-to-nuclear group has been pinned on its senior management following a review into its
accounts by a panel of independent accountants and lawyers.
The role of the auditors was not part of the investigating panels brief. But lawyers and corporate
governance experts who have analyzed the 294-page report say details of exchanges between
Ernst & Young ShinNihon and Toshiba executives raise questions over whether the audit firm
challenged the companys accounting methods adequately.
The Toshiba case revolves around the accounting of normal, everyday business activities. That
means understanding what the auditor did is critical, said Nobuo Gohara, a lawyer hired by
Ernst & Young ShinNihon to review its audit of Olympus Corp following its accounting scandal
in 2011. Gohara exonerated the auditor from any legal responsibility in that case.
Ernst & Young ShinNihon and a London-based spokeswoman for Ernst & Young Global Ltd
declined to comment on any of the points raised in this story, citing client confidentiality.
Toshiba declined to comment on specific points in the panels report. On the matter of whether
the auditor performed its role sufficiently, a spokesman said the company wanted to make a
judgment after carefully examining the report.
A source told Reuters on Saturday that Ernst & Young ShinNihon has launched an internal probe
of its Toshiba audit, while the Japan Institute of Certified Public Accountants, a self-regulatory
body for the accounting industry is also looking into it.

UNCORRECTED MISSTATEMENTS
One section of the report that is likely to be a focus of those reviews provides a rare glimpse into
the normally private exchanges between a company and its auditor.

On January 28, 2014, two days before Toshiba had to close its fiscal third quarter its then
president, Hisao Tanaka, sent a warning to the head of Toshibas power systems company: there
would be big trouble if it had to swallow the $396 million loss the auditor said it should
recognize on a project run at U.S. nuclear unit Westinghouse.
Chief Financial Officer Makoto Kubo began a flurry of last minute discussions with Ernst &
Young ShinNihon, according to the report released on July 21.
Kubo, who was also head of the companys audit committee, declined to comment through a
Toshiba spokesman, citing his resignation.
The auditors accepted an updated estimate of $332 million from Westinghouse, but were holding
the line there. Kubo wanted to limit the loss to $225 million, though there was no concrete basis
showing why it should be this amount, the report found.
On January 30 Kubo got his wish. The auditor signed off on Toshibas financial statement with a
$225 million loss on the Westinghouse project.
The $107 million discrepancy was classified as an uncorrected misstatement, an accepted
accounting treatment used to address differences in opinion between management and auditors
that is not disclosed to investors.
Some experts say a loss of around $100 million appears a somewhat large amount to be
classified as an uncorrected misstatement. It was equal to about a fourth of Toshibas pre-tax
profit in the third quarter of that year.
The report said Kubo told the panels investigators the treatment was arranged with the auditor as
what he called a special exception based on the condition the company could get costs down to
a certain level by the fourth quarter. Ernst & Young denied this was the case, according to the
report.
Hideaki Kubori, an expert on corporate investigations, said the negotiations as detailed in the
report show the auditor was too quick to yield to the company when there was any difference in
view.
HIDING INFORMATION
Not everyone sees potential issues with the auditors work here, and the panel report found
Toshiba hid information and presented the auditor with materials that created stories different
from the facts.

For example, the report details correspondence in 2012 between Toshiba accounting staff in
which one executive emphasized the need to make sure the auditor remained unaware internal
parts transactions were being used to boost profits in the PC business.
Shin Ushijima, president of the Japan Corporate Governance Network, said the use of
uncorrected misstatements in the Westinghouse case shows the auditor was exercising its
judgment as to what was material.
He also notes the full loss of $332 million was recognized at the end of the fiscal year.
As an auditor it is saying this is a misstatement, though not a material one. Thats the end of it,
Ushijima said.
Japans financial regulator is expected to investigate the audit in the coming months, sources
with knowledge of the matter said.
After Olympus, it ordered Ernst & Young ShinNihon and prior auditor KPMG to make business
improvement plans after finding they lacked management systems to ensure proper auditing.
Experts say its premature to forecast what action, if any, the auditor will face in this instance.

Audit system failed to detect misconduct at Toshiba; Toshiba scandal is a lesson for
all directors asleep at the back; Toshiba Scandal Grew From Numbers Too
Embarrassing to Show
July 22, 2015 Leave a comment

http://news.asiaone.com/news/asia/audit-system-failed-detect-misconduct-toshiba#xtor=cs3-18
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 panels 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 shortterm profits are reduced.
However, Toshibas 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
Toshibas accounting scandal has shown that its in-house audit commission was unable to
recognise the firms 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 companys 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 Toshibas 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
corporations business performance as soon as possible.
In trying to achieve this, Sasaki hoped Toshibas 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.
Sasakis 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.
Sasakis 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 firms operating divisions,
urging them to achieve profits at their departments.
http://www.bloomberg.com/news/articles/2015-07-21/toshiba-scandal-grew-from-numbers-tooembarrassing-to-release
Toshiba Scandal Grew From Numbers Too Embarrassing to Show
by Pavel AlpeyevTakashi Amano
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 Toshibas 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
Toshibas 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 Japans Securities & Exchange
Surveillance Commission investigated irregularities related to percentage of completion
estimates used on power and infrastructure projects, including nuclear, hydroelectric, windpower equipment, air-traffic control and railway systems.
Since a typical order was worth billions of yen, the business had a significant impact on
Toshibas 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 didnt 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 companys 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.
http://www.telegraph.co.uk/finance/globalbusiness/11754325/Toshiba-scandal-is-a-lesson-forall-directors-asleep-at-the-back.html
Toshiba scandal is a lesson for all directors asleep at the back
Japans efforts to overhaul its staid corporate culture are taking hold, despite a series of
accounting problems at the biggest firms
Marion Dakers
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, its 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.
Toshibas 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 firms practices.
Japan, home to more than a tenth of the 2,000 largest companies on Fortunes 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 firms 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
yesterdays 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 Abes government drafted
new rules on governance, as part of a much broader push at Japans 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 Toshibas 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 yesterdays 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 Incs 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 firms 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 Japans 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. Toshibas main listing was dropped from the JPX-Nikkei 400 in last months
reshuffle, in a move that analysts said could discourage overseas investors.
Whether Toshiba can stop the rot and return to Japans 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.

Toshiba accounting scandal snowballs to 24 cases, 54.8 billion ($444m); Head of

Japan stock exchanges ashamed over Toshiba woes
June 14, 2015 Leave a comment

http://www.japantimes.co.jp/news/2015/06/13/business/corporate-business/toshiba-accountingscandal-snowballs-to-24-cases-%C2%A554-8-billion/#.VXz_v_mqpBd
Toshiba accounting scandal snowballs to 24 cases, 54.8 billion
JIJI
JUN 13, 2015
Toshiba Corp. has discovered 15 new cases of inappropriate accounting and estimates that the
electronics group will have to revise past operating profits by 3.6 billion. The latest findings
from Toshibas internal investigation have brought the number of accounting irregularities to 24
and the size of its operating profit corrections to 54.8 billion, according to the firms
announcement Friday.
During the internal investigation, which was conducted in parallel with a probe by a third-party
panel, Toshiba found 12 cases of suspect accounting between fiscal 2009 and fiscal 2013. In
these cases, Toshiba failed to appropriately record loan-loss allowances, valuation losses and
other items.

In addition, Toshibas special investigative team, launched soon after it recognized the
accounting problem, has discovered three cases of irregularities concerning projects that had
completed by fiscal 2010.
It also disclosed some of the details regarding the nine problem cases already announced and
requiring corrections to operating profit totaling 51.2 billion.
Among the nine, a project to develop and install a communications system for smart meters for a
utility accounted for 25.5 billion of the corrections. Toshiba won the project in September 2013.
This was followed by a renewal project for electronic toll collection equipment, which accounted
for 14.4 billion.
Due to the accounting irregularities, Toshiba has delayed it earnings announcement for fiscal
2014 ended in March this year. It also plans to cancel the dividend for the latest year.
Head of Japan stock exchanges ashamed over Toshiba woes
13 June 2015
Manila Bulletin
TOKYO The longtime head of Japans stock exchange says he is ashamed over a
recent accounting scandal at electronics and industrial conglomerate Toshiba Corp.

Atsushi Saito, CEO of Japan Exchange Group Inc., said Friday he was puzzled by Toshibas
apparent laxity over its accounting and he hoped auditors and accounting firms would be more
vigilant.
In the case of Toshiba, to be honest I feel very ashamed. Its one of the leading companies in
Japan and they must have been mentors or leaders of Japanese industry, Saito told a news
conference.
Toshiba announced last month that it was expanding a probe into alleged underreporting of
project costs and losses and setting up a committee to investigate further.
This week, the companys CEO, Hisao Tanaka, issued a letter to shareholders apologizing for the
incident and pledging that the company including its subsidiaries would cooperate with the
committee and thoroughly heed its results and recommendations and reflect them in the
companys management and operations.

Toshibas shares fell 0.9 percent Friday in trading on the Tokyo Stock Exchange, recovering
from larger losses earlier in the day triggered by a report in the financial newspaper Nikkei
Shimbun that the company is likely to admit to inadequate internal controls.
Saito became president of the Tokyo Stock Exchange in 2007 and was appointed CEO of the
Japan Exchange Group when it was formed in a merger of the Tokyo Stock Exchange Group Inc.
and the Osaka Stock Exchange in 2013.
A veteran stock analyst who worked many years for major brokerage Nomura Securities, Saito
said accounting standards can be vague when it comes to how the handle costs in long-term
construction contracts.
But he said, I am puzzled why they are so lazy about checking their report system.
The accounting houses recommended that their information was right, he said Auditors and
accounting houses must be more professional and serious.
Saito said that overall, Japanese companies are improving corporate governance in line with
international standards.

Accounting Scandal Upends Toshibas Lauded Reputation; 2 bosses rivalry helped

fuel Toshibas bad accounting; Toshiba may face shareholder lawsuits
July 21, 2015 Leave a comment
Accounting Scandal Upends Toshibas Lauded Reputation
Jonathan Soble
22 July 2015

TOKYO Few companies in Japan convey respectability like Toshiba, the sprawling industrial
conglomerate that, to the surprise of many here, has found itself at the center of one of the
countrys largest accounting scandals.
Toshibas chief executives have for decades sat at the apex of Japans establishment civic
leaders as much as business managers, in many peoples eyes. One boss from the 1990s went on
to run the Tokyo Stock Exchange, then the national postal system. The company features on a
prominent index of businesses thought to combine profitability with clean, modern corporate
governance.On Tuesday, in defiance of that image, the chief executive and two of his

predecessors resigned their positions at the company, along with several lesser executives, over
accusations that they drove the company to overstate its earnings by $1.2 billion over the past
seven years. The figure is equal to about a third of the pretax profits that Toshiba reported during
that period.
Toshiba has a 140-year history and was like a straight-A student when it came to corporate
governance, said Shin Ushijima, a lawyer who serves as president of the Corporate Governance
Network, a watchdog group. Toshiba shares are in everyones pension plans. Executives
responsibility is extremely heavy.
At a news conference at Toshibas headquarters attended by several hundred journalists and
financial analysts, Hisao Tanaka, the current chief executive, bowed deeply in a show of
remorse. I apologize from my heart to all our stakeholders, he said. He acknowledged that the
company had engaged in inappropriate accounting but said it had not done so intentionally,
and that he had not told subordinates to exaggerate the profitability of their divisions.
The resignations removed half of Toshibas 16-member board of directors. Along with Mr.
Tanaka, Norio Sasaki, Mr. Tanakas immediate predecessor as chief executive, who is now
Toshibas vice chairman, is also stepping down, the company said. So is Mr. Sasakis
predecessor, Atsutoshi Nishida, who will relinquish his nonexecutive position as senior adviser.
Toshibas chairman, Masashi Muromachi, will take over as president and chief executive until a
new leader is appointed in September, Toshiba said.
Doubts about Toshibas financial reporting have grown since April, when the company, prompted
by an investigation by financial regulators, said it was examining possible accounting
inaccuracies in one of its divisions. An internal investigation initially found several tens of
millions of dollars worth of bookkeeping discrepancies and the amount quickly ballooned.
On Monday, a committee of independent experts hired by Toshiba said it had found an additional
151 billion yen, or $1.2 billion, of overstated earnings, with problems in virtually all corners of
its business, which encompasses products stretching from refrigerators to nuclear power plants.
Senior executives were singled out for blame: The committee said it had discovered systematic
involvement, including by top management, with the goal of intentionally inflating the
appearance of net profits. Toshiba financial officials, it said, had deliberately provided
insufficient explanations to auditors, with the intention of carrying out a systematic cover-up.
Toshibas share price had tumbled more than 25 percent since the admission in April. It rose
more than 6 percent on Tuesday, as the resignations appeared to draw a line under the crisis.

Japan has experienced plenty of accounting scandals, but only a handful have been larger, mostly
involving financial institutions at the height of the countrys banking crisis in the 1990s.
The Toshiba scandal has raised questions about efforts by the Japanese government to improve
standards of corporate governance, mostly with a new set of guidelines for managers and
institutional investors introduced last year. Superficially, at least, Toshiba met or surpassed most
of its provisions, which cover things like the number of independent directors companies are
expected to employ. Yet that did not prevent its apparent reporting discrepancies.
Toshiba satisfied the formalities of the code, but not the quality, said Toshiaki Oguchi, a
governance expert who helped advise the government in formulating the guidelines. He noted
that two of Toshibas four outside directors twice the number the code recommends are
former diplomats, with little to no experience overseeing commercial enterprises. Its not about
quantity, he said.
Toshiba said it was only beginning to look at ways to reshape the company to prevent a
recurrence, but in an initial step the company said it would put one of its other independent
directors, Hiroyuki Itami, the former head of the commerce department at Hitotstubashi
University, in charge of its audit committee. Critics, including the investigating panel, have
pointed to the fact that the committee had been headed by longtime Toshiba insiders as
potentially contributing to the accounting problems.
Mr. Oguchi said the drive to improve corporate governance had been focused less on preventing
malfeasance than on increasing profitability. Japanese companies, especially big and established
ones like Toshiba, have long been seen to tolerate low profits in the name of social harmony, by
putting off painful decisions such as closing down or selling money-losing divisions. The code,
Mr. Oguchi said, was intended in part to change that tendency, by making managers more
accountable to investors.
The stock index that touted Toshibas supposed strengths the JPX Nikkei 400 was
introduced last year, emphasizing what it said was mutually support between strict oversight of
management and high investor returns.
Toshibas executives may have felt pressed, but failed, to better satisfy shareholders.
The companys problems, the investigative panel found, date to the economic slump set off by
the global financial crisis in 2008. Even as demand for Toshibas products fell, top executives
insisted that managers meet increasingly difficult profit goals, according to its report. Under
pressure, many resorted to accounting gimmicks and shortcuts, the committee said.

The committee accused Toshiba of breeding a corporate culture where it is impossible to go

against ones bosses wishes.
Mr. Muromachi, the chairman, said at the news conference that Toshiba may have gotten carried
away with its focus on the quarter at hand.
* Toshiba Inflated Earnings by $1.2 Billion, a Panel of Experts Says
http://asia.nikkei.com/Business/Companies/2-bosses-rivalry-helped-fuel-Toshiba-s-badaccounting
http://asia.nikkei.com/Business/Companies/Toshiba-may-face-shareholder-lawsuits
http://asia.nikkei.com/Business/Companies/Toshiba-intentionally-deceived-panel-says-execsseen-resigning
July 21, 2015 3:40 am JST
Office politics writ large
2 bosses rivalry helped fuel Toshibas bad accounting
TOKYO Frictions between a former president and his predecessor played a part in
encouraging accounting irregularities at Toshiba.
When Vice Chairman Norio Sasaki was president from 2009 to 2013, then-Chairman Atsutoshi
Nishida was adamant about meeting budget targets. To thwart Nishidas influence, Sasaki
apparently ended up instructing subordinates to cook the books.
This came after Toshiba had switched to a new governance system, allowed under a 2003 legal
change, that vested oversight authority in the chairman and executive authority in the president
to achieve separation of powers. The stock market welcomed the shift as a sign of an eagerness
to strengthen corporate governance. But in the end, the step seems to have been largely cosmetic.
When current President Hisao Tanaka took the helm in 2013 with Nishidas backing, he ended up
following in his predecessors footsteps instead of addressing the inappropriate practices. This,
too, was motivated by a spirit of rivalry: Tanaka did not want earnings to fall below those of the
Sasaki era. Nishida is now an adviser.
Toshiba seeks to rejuvenate its leadership team with younger blood to uproot its top-down
culture, a fundamental cause of the inappropriate accounting. Tanaka and Sasaki are expected to

announce their resignations in a news conference Tuesday. More than half of the boards 16
members will likely step down at a special shareholders meeting in September.
Corporate governance will also get an overhaul. The company will set up as early as this month
an expert committee of accountants and lawyers to offer advice on the boards roles, the selection
of directors, and decision-making mechanisms.

July 20, 2015 10:23 pm JST

Scandal fallout
Toshiba may face shareholder lawsuits
TOKYO In addition to paying a potentially hefty fine to regulators for improper
accounting, Toshiba may also have to face angry shareholders, who could opt to file lawsuits
against the company and responsible managers.
With the third-party panel set up by Toshiba having reported its findings, Japans Securities and
Exchange Surveillance Commission will pursue its own investigation and, depending on the
outcome, may urge the Financial Services Agency to levy a monetary penalty.
The commission could file a criminal complaint against Toshiba to prompt prosecutors to bring
charges. But that is usually reserved for more nefarious cases of accounting embellishment, as
was the case with Olympus. So Toshiba is likely to be spared criminal charges.
But the company may face a fine exceeding the record 1.6 billion yen ($12.7
million) that IHI forked over in 2008 for accounting irregularities. Toshiba issued 460 billion yen
in bonds in the five years through fiscal 2013, to individuals and other investors a factor that
could lift the amount of financial penalties.
Based on the commissions decision, the FSAs Certified Public Accountants and Auditing
Oversight Board will also probe Ernst & Young ShinNihon, the auditing company that signed off
on Toshibas earnings. The Tokyo Stock Exchange is expected to place Toshiba on a watch list as
a company with weak internal controls after Toshiba releases its earnings report, expected by the
end of August.
In lawsuits from shareholders, investors could seek damages for the drop in the stock price,
which has tumbled 26% since April 3, when the company first disclosed the accounting issues.
Attorneys could organize a large number of shareholders to bring the matter to court.

A class-action suit in the U.S. is a possibility given that American depositary receipts had been
issued for the Japanese company, says Ken Kiyohara, an attorney versed in U.S. securities
litigation.
Toshiba as a company could also sue management, demanding compensation for the 1 billion
yen or so cost of setting up the third-party investigative committee, and for the expected financial
penalties. If the company does not take action against responsible managers, shareholders could.

July 21, 2015 2:04 am JSTcounting scandal

Toshiba intentionally deceived, panel says; execs seen resigning
TOKYO Top members of Toshibas management took part in an organized effort to delay
booking business losses, an investigative panel wrote in a scathing report Monday.
Management made a business decision to practice deceptive accounting, with three successive
presidents pressuring business divisions to perform, according to a summary of the panels
findings.
President Hisao Tanaka and other senior executives are expected to announce their resignation at
a news conference Tuesday evening, after the company publishes the full report. The
management shake-up is likely to remove the two ex-presidents named in the report, Vice
Chairman Norio Sasaki and Atsutoshi Nishida, now an adviser to the board of directors.
Chairman Masashi Muromachi, who will lead efforts to craft safeguards against a
recurrence, may take on the role of president as well.
Inflated profits
The Japanese electronics and electrical equipment groups manipulated profits add up to 156.2
billion yen ($1.25 billion) from fiscal 2008 through December 2014. The independent panel, led
by a former Tokyo district chief prosecutor, identified 151.8 billion yen of this amount while
Toshiba found the remaining 4.4 billion yen through its own review. The total accounts for nearly
30% of the companys stated pretax earnings for the period in question.
Toshiba used the percentage-of-completion method of accounting, normally intended for longterm projects, to postpone booking losses. The company consistently engaged in such
misreporting in line with managements aim of inflating profits, the panel concluded.
Seeking causes for this lapse, the panel found such instances as top management imposing
unrealistic profit goals, called challenges, on the personal computer division. To achieve these

targets, the company-like business division was forced to cook the books by bringing forward
future earnings, for example the report contends. A corporate culture where it is impossible
to go against ones superiors proved a contributing factor. Toshiba gave inaccurate explanations
to auditors and used tricks to conceal its fraudulent accounting, the report alleges.
The panel also faults Toshibas internal controls not only its risk management team, but also
its board of directors and audit board failures in oversight. It calls on the company to rebuild its
hollow governance, take steps to prevent reoccurrences of accounting fraud, such as abolishing
challenges, and discipline senior managers after determining their involvement in the
wrongdoing.
Fines possible
Toshiba, which competes with the likes of General Electric, will finalize its results for the year
ended March 31 and restate past earnings. It may book 70 billion yen in write-downs, primarily
for fiscal 2012, reflecting the noninflated profitability of certain businesses including
semiconductors and PCs.
Japans Securities and Exchange Surveillance Commission and Financial Services Agency are
weighing fines against Toshiba for improper accounting. The Tokyo Stock Exchange is expected
to designate the company as on alert, a label warning investors of problems with internal
controls.