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Toshiba's 151 billion-yen scandal sends top executives packing

For the second time since 2011, the image of blue-chip firms in Japan's corporate sector has taken a battering, as senior executives at electrical giant Toshiba stepped down on Tuesday following the uncovering of major accounting irregularities.


FOR the second time since 2011, the image of blue-chip firms in Japan's corporate sector has taken a battering, as senior executives at electrical giant Toshiba stepped down on Tuesday following the uncovering of major accounting irregularities.

Calling the scandal "very regrettable", Japanese Finance Minister Taro Aso said on Tuesday: "If (Japan) fails to implement appropriate corporate governance, it could lose the market's trust."

A report by independent investigators released on Monday said Toshiba had overstated its operating profit by 151.8 billion yen (S$1.6 billion) over several years; the amount was roughly triple Toshiba's initial estimate.

Toshiba president Hisao Tanaka resigned on Tuesday to take responsibility for accounting irregularities that systematically overstated profits over several years, under pressure from the top management.

His predecessors Norio Sasaki and Atsutoshi Nishida also stepped down as vice-chairman and advisor respectively, the company said following a board meeting. Chairman Masashi Muromatchi will double as president for the time being.

Meanwhile, Mr Sasaki, a member of several government advisory panels, will leave the company's board and quit his posts on government panels, Japan's Minister of Economic and Fiscal Policy Akira Amari announced on Tuesday.

The scandal at Toshiba, a world-renowned manufacturer of products ranging from computers to nuclear reactors, echoes a similar incident at camera-maker Olympus Corp, which rocked Japan's corporate sector in 2011.

Back then, the maker of cameras and medical equipment admitted to covering up US$1.7 billion in losses over 13 years; the scandal came to light when the company's chief executive Michael Woodford was ousted for having been a whistle-blower.

The incident comes at an awkward time for Prime Minister Shinzo Abe's government, which recently introduced a corporate governance code and other measures aimed at ending abuse.

Loizos Heracleous, Professor of Strategy at Warwick Business School said: "The Toshiba scandal will be seen in the context of the Olympus event, with investors wondering whether there is a pattern of account manipulation in corporate behaviour, and observing much more closely."

Some analysts said on Tuesday that Toshiba's hidden losses being brought into the open was likely to prove salutory for Japanese financial markets; indeed, Tokyo share prices continued an upward march despite the day's dramatic events.

Japan strategist Jesper Koll, formerly of JP Morgan Bank in Tokyo, told The Business Times: "The fact that this issue is out in the open and is being pushed as a showcase for what Japan Inc has tolerated and gotten away with under its traditional governance makes me very hopeful that real change is afoot.

"What we've got is a new corporate governance code combined with a new stewardship code; and now a showcase for bad practice... I cannot think of a much more powerful combination of forces to guarantee that Japan Inc will change for the better."

He added that boardrooms in corporate Japan were now on the alert and cleaning up their act so this will not happen to them.

The report by the third-party investigation panel, which criticised the conglomerate for failing to exercise proper internal controls, said Toshiba's leading executives had pressured the company's senior management to meet ambitious profit targets, Kyodo news agency reported.

And Toshiba's "corporate culture" was one that brooked no opposition by subordinates once their bosses gave directives. Mr Tanaka and Mr Sasaki had set operating profit targets that the division heads had to meet, and applied pressure by hinting that the company would withdraw from under-performing areas.

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 the targets."

Improper accounting included overstatements and booking profits early or pushing back the recording of losses or charges. These practices led only to even-higher targets being set for the divisions in the subsequent periods.

"This led to a need to carry out improper accounting on an even bigger scale, and as this was repeated, the scale of the inappropriate book-keeping also expanded, the report added.

Kyodo also quoted sources as saying that Japan's Securities & Exchange Surveillance Commission would consider a recommendation to the Financial Services Agency to impose a fine on Toshiba; the Tokyo Stock Exchange is expected to put the company's stock under special monitoring to alert investors.