The Strategist

$3 billion accounting scandal now haunts Toshiba

07/16/2015 - 16:33

Way back in April Toshiba had reported accounting malpractices. Thanks to these irregularities, the company is unable to finalize its books of accounts nor is it able to distribute any dividend. Half of its board is set to resign.

As per sources familiar to the story at hand, Toshiba Corp has been accused of improper accounting to the tune of 300-400 billion yen which amounts to $2.4-3.2 billion. Heads will naturally roll and the first victim has been its Chief Executive Officer Hisao Tanaka.
Toshiba has now hired a third party to investigate into its past bookkeeping practices. Confirmed sources reveal that the company has overstated its profits by as much as 170 billion yen. This is thrice more than its initial estimate when the company first became aware of the problem.
Toshiba has supposedly overstated its profits for the last six years. Assets written-off by it in these previous years have also come under scrutiny. A spokesman from the company said, they have yet to arrive at a final figure vis-à-vis the proportion of this problem.
Because of this scam, Toshiba has not been able to finalize its Books of Accounts for the previous financial year. Naturally, it has also withheld the payment of dividend. Its net income in the previous fiscal year was $51 billion yen.
Investigators are looking into the role played by top officials and are checking whether any willful wrongdoing was committed by the top management. The findings of the investigation committee is set to be released next week.
The scandal is a reminder as to why Japanse Prime Minister, Shin Abe, is pushing for improved corporate governance. With the news of this scan breacking out, the price of its shares in the stock market fell by 2.6%.
The report of the committee will most likely recommend an overhaul of the corporate governance and it is very likely that half of its board, including ts vice chairman, Norio Sasaki, will be replaced in its next shareholder’s meeting in September.
The sources of this story preferred the blanket of anonymity as they were not authorized to speak or comment on the matter. 
In April itself, Toshiba has first disclosed the accounting irregularities, two months after which financial regulators had ordered a fact finding report on its past accounting methodologies.
One theory that investigators are looking into is, Toshiba’s executives had set too high sales targets which overestimated revenue and underestimated costs. This was right after the Fukushima disaster in 2011 when new businesses were set to install smart meters and electronic toll booths. This may have largely contributed to artificially inflated profits.
Although Tanaka and the other directors are set to resign, it is not yet clear who will replace them. Toshiba may even consider appointing more directors from outside.
Interestingly, Toshiba was an early adopter to the concept of an outsider sitting in their board. A quarter of its 16 member board are independents. Critics says, independents lack the rigor of oversight and the necessary skills to positively contribute to its strategy.

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