Japan Inc Rocked By Massive Accounting Fraud: Toshiba CEO Quits After Admitting 7 Years Of Cooked Books

Tyler Durden's picture

While Abenomics has been an unmitigated disaster for Japan's ordinary population, where the soaring stock market has benefited the top decile of the population while everyone has been slammed by a record 25 consecutive months of declining real wages and soaring input costs, there had been one bright spot: corporate earnings, which unlike in Europe or even the US, have been growing at a steady double-digit clip. What was surprising is that Japan was perhaps the one place where currency debasement was leading to an immediate flow through to rising EPS.

Then on Friday, a report out of Reuters caught our attention when news hit that 140 year old electronics conglomerate, and "pillar of Japan Inc", Toshiba had inflated profits by a stunning $1.2 billion for a whopping 7 years, with fabricated figures amounting to 30% of the company's "profits" since 2008!

Suddenly we saw Japan's profitability "renaissance" in a very different light as Toshiba's scandal suggested that, if endemic,  Japan Inc's house of soaring profits was built on nothing more than fabricated foundations.

And while we await to see which other companies will admit they too had been cooking their books in the past few years, we will have to do it without Toshiba's CEO Hisao Tanaka, who together with five members of his senior staff, resigned earlier today.

According to the FT, "Tanaka said on Tuesday at a news conference, following a 15-second bow of contrition, that he “felt the need to carry out a major overhaul in our management team in order to build anew our company." “We have suffered what could be the biggest erosion of our brand image in our 140-year history."

Tanaka et al: "Sorry we got caught"

Of course, the only reason Mr. Tanaka apologized and resigned is not because he was actually cooking books the for an unprecedented 7 years, a period during which the CEO most certainly received tens if not hundreds of millions in equity and profit-linked compensation, but because he was caught.

We very much doubt he will have much if any of his generous bonuses clawed back even as "a panel of external lawyers and accountants said on Monday there was a “systematic” and “deliberate” attempt to inflate profit figures amid a corporate culture in which employees were afraid to speak out against bosses’ pushes for unrealistic earnings targets."

The panel said Mr Tanaka, who joined Toshiba four decades ago, and vice-chairman Norio Sasaki were aware that profits were being overstated and did not take any action to end the improper accounting.

The only action he did was bow down to suckers, aka investors, and offer a 15 second apology after which he was most likely on a one-way chartered flight out of Tokyo to some non-extradition island where his millions in ill-gotten comp will buy a lifetime supply of Mai-Tais.

As FT adds, the panel said Toshiba, which makes laptops, memory chips and nuclear reactors, "needed to revise its pre-tax profit figures by Y152bn ($1.2bn) over a seven-year period beginning in 2008, in addition to Y4.4bn in inflated profits estimated by Toshiba for three quarters of the 2014 financial year. The Y152bn accounts for nearly 30 per cent of the total pre-tax profit during the period."

Taro Aso, finance minister, said the scandal highlighted the need for corporate governance reform in corporate Japan. “We could lose trust in Japanese markets and the Tokyo Stock Exchange unless true corporate governance is in place,” he told reporters.

This is not the first massive accounting scandal involving a Japanese corporations: "the government has been seeking to improve investor confidence in Japanese corporate governance since 2011 when Michael Woodford, then Olympus chief executive, blew the whistle on Y117.7bn of covered up losses at the company dating back to the 1990s."

It won't be the last. In the meantime, investors are cautioned to take any numbers out of a country where cooking the books appears to be a daily occurrence with a huge grain of radioactive salt. Take the following example example of "dubious practices" as the company: during a meeting in December 2008 ahead of the third-quarter results for the financial year, the execs were told the operating profit forecast was a Y18.4bn loss, to which Mr Nishida said: “The figure is so embarrassing that we cannot announce it this coming January”. Accountants were forced to manipulate the figures to turn the forecast into a Y0.5bn profit.

The other executives who resigned are vice-presidents Hidejiro Shimomitsu, Masahiko Fukakushi, Kiyoshi Kobayashi and Toshio Masaki, and Keizo Maeda, representative executive officer. All were board members.

Yet despite the changes at the top nothing will change as the same culture of fraud and corruption that tainted the current executive team will persist in the future. The only question is who is next to admit that the only "working" aspect of Abenomics has also been a total fabrication.

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firstdivision's picture

Same thing we've been doing in 'Merica since the 1980's (financial engineering). 

Haus-Targaryen's picture

Good for at LEAST 300 points on the Nikkei 

Stackers's picture

We lose money on every sale but make up for it with volume.

TheFourthStooge-ing's picture

If Toshiba were an 'american' corporation, the FASB would stamp its approval on Toshiba's innovative use of mark-to-fantasy accounting.

pods's picture

This just in, all is forgiven as a spokesman said Toshiba "identified as" a profitable company.

pods

Keyser's picture

Hmm, seems that ritual seppuku is in order... Japanese honor and all that rot...

In the mean time, how many other shoes are about to drop of this same nature, companies cooking the books... 

NoDebt's picture

I think we've reached the "who gives a fuck, nothing matters, do whatever you want" phase of the collapse.

Vampyroteuthis infernalis's picture

What is sad is the "disgraced" executives will go live on lives in luxury. Same as the good 'ol USA!

NoVa's picture

Corporate Japan - where the fish is raw and the books are cooked.

I wonder which Big 4 audit firm is gunna fall on the sword?

 

NoVa

 

rlouis's picture

It looks like Ernst & Young, Shin Nikon LLC in 2009

 

(Auditors opinion on page 107)

 

"In our opinion, except for the omission of segment information discussed in the preceding paragraph, the financial

statements referred to above present fairly, in all material respects, the consolidated financial position of Toshiba Corporation and subsidiaries at March 31, 2009 and 2008, and the consolidated results of their operations and their

cash flows for the years then ended in conformity with U.S. generally accepted accounting principles."

omniversling's picture

+100 for the laff...much needed.

A 15 second 'contrition' bow, would be just long enough for vexed shareholders to swing the sword to their neck bones...

 

Groundhog Day's picture

i can'r wait for amazon to get its hands on the GM inventory all over the world.  Gm gets to clear it's inventory, Amazon gets to lose money on each unit it sells and the stock goes to 700, and the banks get to finance the vehicles at 15% to retards all over the country.  But hey those retards are getting a great deal paying under invoice.

 

WIn WIN WIN

HungryPorkChop's picture

Only 7 years?  This is B.S.  Let me give you a little insight, in the late 1990's I worked for an industrial company that competed against one of their industrial groups.  It was a small niche high tech sector so not mass volume nor consumer goods.

They undercut our (American company) prices everywhere.  Many times they would be 30% and 50% less which we knew was impossible.  We knew what it cost to make the product no matter if you were manufacturing in Japan, U.S., Europe, etc.  We were highly confident they were selling products below cost to gain a competitive advantage but no way to prove.

I could had told you over 15 years ago that something funny was going on with this company at least in some of their industrial groups.  So this is no surprise and looks like the chickens have finally come home to roost. 

 

Jumbotron's picture

Dude....that's been that way since the 70's.

Just imagine the carnage of the upcoming Trans Pacific Partnership.

You remember Ross Perot's "Sucking Sound" when NAFTA was being debated ?  You're soon going to find out what a Black Hole sounds like when it sucks the life out of a Blue Giant star.

https://www.youtube.com/watch?v=rlMK4HmN7IM

max2205's picture

Shocking

 

In the USA accounting scandals must be pre approved before announced 

Haus-Targaryen's picture

I wonder which one of the Big4 gets Arthur Anderson'ed next time one rolls around? 

NoVa's picture

your comment was below my screen & spot on!

it is either Deloite or KPMG

 

bilbert's picture

Toshiba shares are up 6% on the news - that reminds me of something............

bcups's picture

Pfft....

That's f%%% peanuts. Every listed company in the US beats estimates each and every quarter for a decade or more:

EPS by exactly one penny

Reveue within + 0.05% -1%of "consensus estimates

 

No cheating going on here. Lets go investigate some veterans. 

Jumbotron's picture

They got off easy.  Their heads are still on their shoulders.

Of course, if they have any honor, it's a knife to the gut.  Seppaku, bitchez

g speed's picture

the culture of corruption is alive and well in the world--

firstdivision's picture

If I'm not mistaking, seppuku is a big part of their culture.

g speed's picture

the only recourse the human race has is vigilantism --

taking the law (which has been corrupted) and apply the intent of the law to the fact ---making the intent preeminent over the derelict uninforced adjudicated version.

extract retribution commensurate to the violation

delete redundant, overwritten, outdated, sections of laws that give opportunity to abuse--(family law for example or tax codes).

relieve gov't of its burden to regulate and tax private property of persons.

abolish corporate personhood 

nationalize banks and make the fed federal.

set up a lottery draft for service in an Accountant Corps to check the books of multinational corporations operating in the US. Apply the intent and retribution clauses to crimes and corruption found.

abolish all insurance that is manditory.

How am I doing here---its just a game but fun to play--

 

 

 

 

 

 

Tall Tom's picture

the culture of corruption is alive and well in the world--

 

 

Typical. It is just human nature.

 

But people just continue to live in a fantasy, which is also human nature, and believe that themselves and others are basically moral.

 

Well that is just not the way that it is.

 

I am sorry. I have lost faith in humans. I have lost all faith in humanity.

 

They are not moral, they are unprincipled, and power corrupts.

 

What do you expect?

 

This is not just directed at you but is written for everyone's self examination and introspection...Are you one of the delusional idealists that believe that pepole are moral when the culture of corruption is endemic, from the macro societal level and into your own local communities?

 

The evidence is not fitting your desires, are they?

 

 

g speed's picture

well Tom I may be one of the few around who is happy in his work--sounds trite I Know but it how it is---makes a world of difference in how you look at things--lets me be the arbritur in my sphere of influence --lets me excell or not, lie to myself or not, admire or detest my result. It's a choice thing and I get to choose. not a lot of corruption in that---On the other hand if I were forced or conjolled or fooled into doing what made me misserable then my life would be corrupt.  I hope you get where I'm comming from here. Humans have a choice--IMHO they are not predisposed to corruption, the precepts of organized religion from the christian persuation not withstanding. However in the end I can only speak for myself--I insist I am not submerged in the culture of corruption.

Implied Violins's picture

It's not humans that are doing this...psychopaths have a known mutation that keeps them from feeling empathy for anything, and they have no sense of culpability for any of their actions, nor do they ever care what anyone thinks of them. They just do what they want with no remorse - and because of that, these bastards always - ALWAYS - wind up in positions of power and control.

Arnold's picture

It's the American way.

 

I've never been prouder.

Ex Cathedra's picture

Where were the auditors?

Irishcyclist's picture

Of Dogs and Demons is a must read book about Japan and Japanese financial shennanigans.

Ministry for Finance is one example, but the Japanese private sector is almost as bad.

I'm amazed Toshiba admitted their wrong doing.

williambanzai7's picture

Cesium seaweed crackers anyone?

silverer's picture

Point, William.  Where are the capitalists on that leaky mess?  Must be some way to make a profit.

AUD's picture

he was most likely on a one-way chartered flight out of Tokyo to some non-extradition island where his millions in ill-gotten comp will buy a lifetime supply of Mai-Tais.

So he didn't disembowel himself, then have a junior executive slice his head off then?

FrankieGoesToHollywood's picture

I laughed at this part.  As if the 1% have to fear any reprocussions from their actions.  Shows a little bit of ignorance by the author.

NoWayJose's picture

Next thing you know, the Japs will be selling us faulty airbags.... No wait...

silverer's picture

This company is sure to get some kind of fine (paid for by the shareholders).  And that CEO?  I'll bet they might even discuss that possible pension cut.  All cool.  Just have an average person try to steal a loaf of bread.

Irishcyclist's picture

Latent profit is a very interesting and very Japanese concept.

Handful of Dust's picture

Honesty and non-fraudulent accounting is so out of fashion in the corporate world and politics.

Tinky's picture

This is entirely consistent with what I and others have been suggesting recently. 

The collapse is already underway, and accelerating. Confidence in paper promises, be it stocks, bonds, or fiat currencies, will increasingly be shaken until there is an inflection point at which there will be an unimagineable scramble for tangible assets and good collateral.

If forced to hold for a year, I'd prefer to own physical bullion than stocks or bonds worth twice as much today. Make that six months.

overmedicatedundersexed's picture

the model for a ceo is J corzine, do you need to understand anything else? If you are even close to honest you are not ceo matterial for a major bank or international corp..the whole economy is based on crime writ large.

justice is a word without meaning except for ave joe citizen..modern economics=corrupt crime and lies.

now  apply economic models to that..the whole system is beyound logic of any type (keynes theory and mises theory lol) ..it is a crime house-

williambanzai7's picture

Clearly the prevailing business ethic is lying goes with the territory. The temptation to lie has always been there. But there is now the notion that lying to save a sinking ship is justifiable and to be caught doing so will not lead to personal accountability.

Oldwood's picture

The disease of corruption is prevalent from top to bottom in today's societies. Those that most openly embrace it have seen the greatest success, which only incentivizes it further. Those at the top make the greatest contribution to this example but it is well metastisized throughout. You now cannot kill the corruption without killing the patient. We are all dependent upon it regardless of how apparent and how obviously destructive it is.

Embrace the horror....it is us. This IS what "winning" looks like.

BuddyEffed's picture

"Clearly the prevailing business ethic is lying goes with the territory. "

Lets objectively review about how some of the richest people in the world acted through their corporations to cheat in big ways that were unethical.  Many of them got caught and their unethical actions were exposed.  

Didn't they in a way Biff their own worlds and encourage others at all levels to then try to cheat and bend the rules for money or power just because of the example of the super rich doing so?

Just like in the Back To The Future Movie, when the Biff of the future world is rich and his casino has sucked dry all the goodness from the rest of the world, the actions of the super rich to cheat also encourages others to cheat their fellow men, and to cheat the future too.

 The logic goes :

"Hey, look at those super rich cheaters making all that money unfairly, and sometimes even getting away with it.  I want to be more rich too.  If they can cheat, I can cheat too"

And some of the rationale gets pretty serious too.   "Hey, we can make some big money if we start a war over here, or take over a government over there.  It's ok, we've seen other rich people doing things that were less than honorable to get extra money.   We can do it too."

Would anyone like to reply with an example of a corporation and super rich person who set a bad example for the rest of the business/governmental world?