Toshiba: behind the numbers

October 2015  |  FEATURE  |  FRAUD & CORRUPTION

Financier Worldwide Magazine

October 2015 Issue

October 2015 Issue

The Toshiba Corporation has been a mainstay of Japanese business since its inception in 1875. It was recently ranked the second largest technology company in Japan in terms of revenue generation and appeared to be the epitome of good corporate governance. But it would appear that much of the firm’s recent reputation has been built on dubious foundations.

At a press conference on 21 July, Toshiba President Hisao Tanaka, along with two of his predecessors, Atsutoshi Nishida and Norio Sasaki, entered a press conference at the company’s headquarters in Tokyo to announce they were stepping down in the wake of a scandal which suggested the company had falsified its earnings by at least $1.2bn since the onset of the global financial crisis in 2007. The figure by which Toshiba misrepresented its profits during that period is equal to about a third of the pre-tax profits that the company reported during that period. Accordingly, the crisis at Toshiba is the biggest accounting scandal in Japan since the $1.7bn scandal at the Olympus Corporation in 2011.

The revelations at Toshiba came as a surprise to many, particularly given the company’s standing within the Japanese business community. Toshiba was considered a totem of strong and virtuous Japanese corporate governance. The public shaming has rocked the country’s business community and dealt a serious blow to the ‘Abenomics’ programme, named for Japanese prime minister Shinzō Abe, which intended to reform Japanese economics via three main ‘arrows’ – fiscal stimulus, monetary easing and structural reforms. The new focus on improved corporate governance has also targeted an end to the South East Asian tradition of cross-shareholding which often leads to locking up control of companies among longstanding business partners or fellow companies in a conglomerate. Historically, the practice has been particularly popular in Japan and South Korea.

During the press conference Mr Tanaka, Mr Nishida and Mr Sasaki accepted responsibility for the malfeasance which occurred, noting that the company would require new leadership in order to recover. “For the company to rebuild there needs to be a renewal of the management structure,” said Mr Tanaka. Mr Tanaka and Mr Sasaki were due to retire later this year, however their departures were moved forward in light of comments from a government minister who said the scandal at Toshiba had the potential to damage international confidence in Japanese business. In total, nine Toshiba officials resigned their positions. As a result of the widespread nature of the fraud, the company is now considering appointing outside directors to over half of its board seats, according to Mr Tanaka. While Toshiba considers its options, Mr Tanaka announced that he would be temporarily replaced by the company’s current chairman, Masashi Muromachi. “Increasing profits is important,” noted Mr Tanaka, as he resigned, “but it must be grounded in a basis of fair accounting.”

Toshiba was considered a totem of strong and virtuous Japanese corporate governance.

The scale of the departures has not only left the firm scandalised, it has also created considerable gaps in the organisation’s upper echelons. The company will need to move quickly to appoint appropriate and competent replacements. Toshiba intended to announce a new management team in mid-August before their appointment following an extraordinary general meeting of shareholders in late September.

To tackle the challenge and correct the malfeasance within Toshiba’s corporate governance framework, the company has established a six-member panel composed of four of Toshiba’s external directors and outside legal and accounting experts. The panel will include former diplomats, business managers, lawyers, an accountant and a former banker. Yoshimitsu Kobayashi, chairman of Mitsubishi Chemical Holdings, will act as Toshiba’s observer to the panel.

Toshiba also announced that the salary of interim chief executive Mr Muromachi would be cut by 90 percent for the next two months, including previously announced cuts. The salaries of the company’s remaining senior executives will also drop considerably going forward.


The crisis at Toshiba was sparked by the findings of an independent investigation into the company’s finances. According to investigators, the firm’s top executives set unrealistic profit targets which systematically led to flawed accounting practices. Mr Nishida and his successors appear to have applied unreasonable pressure to divisional heads, setting them unattainable targets. It was this pressure which caused a number of divisions to adopt questionable accounting tactics, then ‘skilfully’ hide the irregularities from outside observers. A whistleblower in early 2015 was the first to highlight the issue, bringing to an end a seven year deception by the company’s senior management, described by the panel as both “systematic” and “deliberate”.

Accounting issues were discovered in a number of Toshiba’s units, including infrastructure projects, semiconductors and the television manufacturing division. The company’s PC unit was found to be the most problematic, however, accounting for more than a third of the company’s total inflated profits.

The investigation was initially launched at the beginning of May when the company appointed two lawyers and two certified public accountants to the investigative committee led by Koichi Ueda, a former investigator with the Tokyo District Public Prosecutor’s Office. In mid-May the company widened the scope of the investigation to take in Westinghouse Electric and a number of the company’s other subsidiaries. The panel interviewed more than 200 executives and employees during the course of the investigation.

According to investigators, Toshiba’s staff were guilty of a litany of accounting crimes, from overstating profits to booking them too early and everything in between. This impropriety appears to have been considerable, endemic and longstanding. Much of the false accounting is believed to have begun under Mr Nishida during his tenure as chief executive between 2005 and 2009. The investigative panel noted that in 2008 Mr Nishida got word that the company was heading for a loss of around ¥18.4bn, and declared that the scale of the loss was “so embarrassing that we cannot announce it”. Accordingly, Toshiba’s staff falsified the records and expunged the loss. The company instead recorded a profit of around ¥500m. For his part, Mr Tanaka has denied any wrongdoing, noting that he did not instruct people to falsify accounts and was wholly unaware that the practice was going on.

Mr Tanaka’s protestations do not appear to have carried much weight with the investigative team or the company’s board of directors. In an 82-page summary of its findings, the panel of investigators alleged that there was a culture of “institutional” accounting misconduct at the firm, and that in turn created an atmosphere in which employees were afraid to speak out against senior executives. “There existed a corporate culture at Toshiba where it was impossible to go against the boss’ will”, the report said. Furthermore, the panel’s report drew attention to “a systematic involvement including by top management” and “a deliberate attempt to inflate the appearance of net profit”. While the global financial crisis of the late 2000s had a significant impact on the profitability of Toshiba, the pressure to succeed at the company was magnified in March 2011 by the Fukushima nuclear incident. According to the report, fiscal 2012 was the biggest single year for profit overstatement in the wake of the Fukushima disaster. The committee noted that the company overstated its profit by ¥85.8bn.

Wider implications

In the short term, the Toshiba scandal has been extremely detrimental to the company and its stakeholders. Since it first became known in April, Toshiba has seen its stock price tumble by around 26 percent. The company has been quick to act, with the resignation of Mr Tanaka and others going some way to soothing angry stakeholders. Furthermore, the statements and apologies issued by the company appeared to be both forthright and sincere. In the immediate aftermath of the resignations, shares in Toshiba rose by around 6 percent.

But the resignation of implicated individuals is merely the first step. Where the company goes from this point will be more important. Toshiba has been held as a paragon of good corporate governance in the Japanese economy, and will look to reform its corporate culture to avoid any repeat of this scandal. Perhaps one of the biggest ironies of the whole affair is that Toshiba may have to accept significantly diminished profits in the short term as it looks to rebuild its tarnished reputation. Consumers, partners and shareholders are likely to be sceptical about the organisation and its perceived lack of transparency. The company will be required to make deft and significant changes if it is to regain its solid standing in the Japanese, and global, business communities.

The Toshiba case could also have implications for the Japanese economy. The investigation and subsequent fallout come in the wake of Mr Abe’s attempts to improve corporate governance in Japan and attract more foreign investors. Since 2013, the Japanese government has initiated a swathe of reforms designed to internationalise the country’s business practices. The government has proposed including new corporate codes of conduct, moved to increase corporate transparency and attempted to introduce external board members to Japanese companies. The scale of Toshiba’s corruption will have been particularly galling for Mr Abe’s government, particularly given that the firm was one of the early adopters of the reform packages, having appointed four external directors and given them the scope to name top executives. At the time of writing, it is not clear whether Japanese authorities will launch their own probe into the Toshiba scandal, although that seems inevitable.

The response of Japan’s legal system will also be significant. There have been some calls for Mr Tanaka and the company’s other disgraced former executives to face criminal charges and even custodial sentences for their part in the scandal. But the chances of arrests being made in the Toshiba case appear unlikely.

If the government is serious about truly revolutionising corporate governance in Japanese organisations, full and serious accountability among top level executives must be a key consideration. Furthermore, the undoing of cross-shareholding structures should also be prioritised. If corporate governance is to be improved, a move away from the ‘old boys club’ shareholding structure is a must.


Toshiba, which went to great lengths to hide its corporate losses, has been forced to divulge the financial impact of the scandal. It was announced on 18 August that the company would likely record a $1bn net loss for last year in impairment charges for its nuclear and semiconductor businesses, incurred following an investigation into accounting malpractice. According to the company, it will record an asset devaluation loss of $1bn and costs of $386m.

In an accounting scandal almost unparalleled in its magnitude over the course of six years, Toshiba appears to have practised widespread, institutionalised fraud. If the company is to clear some of its tarnished reputation, its reorganised board must focus on reinvigorating its corporate governance program. Establishing a robust and ethical culture requires setting the right tone from the top. The deep bow of contrition performed by Mr Tanaka and his former colleagues on 21 July was the first gesture on a long road back.

© Financier Worldwide


Richard Summerfield

©2001-2016 Financier Worldwide Ltd. All rights reserved.