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Mechanism of Toshiba Accounting Scam

Cat: ECO
Pub: 2011
#1526b
Minekazu Homma (本間峰一)
up 15x20
Title

Mechanism of Toshiba Accounting Scam

東芝不正会計のカラクリ

Index
Résumé
Remarks
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0. Introduction:

  • Sept. 2015:
    It is a earth-shaking scandal that accounting scam by Toshiba Corp. the major electronics giant in Japan was reported; once the chairman of the companty had served as the top of Japan Federation of Economic Organization as the prime misniter of business community.
  • Where has gone the corporate governance and ethica issue of the top management of the leading major company?

0. 序文:

  • 2015年9月:
    かつての経団連会長を輩出した東芝の不正会計のニュースは驚天動地の驚きであった。
  • 大手企業トップの企業ガバナンスや倫理問題はどこへ行ってしまったか。
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1. Basic mechanism:

  • In manufacturing accounting, production cost is distributed according to the ratio of the product which was actually sold and the inventory balance at the end of the fiscal term.
    • Say the production cost is assumed as 100, and the sales amount is 80, the inventory balance becomes 20. (Case-1)
    • In case the sales amount is 60 the the inventory balance become 40. (Case-2)
    • Thus, if the inventory decrease, the apparent profit increases.
      • This is a typical way of window-dressing mechanism, only by increasing inventory without increasing sales. In extreme case, the top management order the manufacturing division to increase production and accumulate the inventory neglecting estimated increase of sales.

1. 基本メカニズム:

    Case-1
    Sales amount 200

Production cost
(100-20)

80 Net profit
(200-80)
120
Inventory cost 20 Sales cost 80
    Case-2
    Sales amount 200
Production cost
(100-40)
60 Net profit
(200-60)
140
Inventory cost 40 Sales cost 60
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2. Applied mechanism by fee-based supply materials:

  • Toshiba Corp. probably has pushed to their ODM (Original Design Manufacturing) to supply 'fee-based supply materials'. (Channel stuffing)
    • Fee-based supply materials mechanism is unique in Japanese business practices usually done by major companies.
    • Materials used for production is suppled at fee-basis, not free-supply from the major company, subject to special agreement of repurchasing the assembled product including cost of the fee-based supply materials.
      • Such fee-based supply material could eliminate inventory management of the material.
      • Also the risk of loss and/or failure of materials could be ODM's responsibility.
      • Furthermore, if this fee-base supply material had been valued very high, ODM could not escape from the transaction, as well as such upvalued fee-base supply material could hide the cost mechanism from competitors. (Masking effect)
  • Industrial accounting regulates that 'fee-based supply materials' should be accounted as 'Account receivable', rather than 'Inventory'; if the inventory balance increases, the sales amount of the period decrease, and eventually the profit of the period will increase.
    • In the case of Toshiba, such cost of fee-based supply materials is inflated (from 4 to 8 times larger than the parts cost)
    • Such masking price could be arbitrary; with aiming 1) to increase apparent profit bigger, or 2) to hide real parts cost unknown to competitors, or 3) to make the subcontractor unable to resell the parts to the third party.
    • Norio Sasaki, former CEO (resigned this time) is said to instruct to add the profit by ¥12B in three days. (Lucky mallet to produce profit)
    • The independent research committee points out that accounting process of 'Production cost' was wrong; which should 'Account payable' instead.
    • Even if inflating masking price or channel stuffing were done, the profit could not be increased as long as properly accounting was processed.
    • It seems quite strange why the profession independent accountant (Ernst & Young Shin Nihon LLC) recognized this mechanism of accounting scam.

2. 有償支給による応用編:

  Debit Amt Credit Amt
Part cost
部品支給分
Account recei-vable
未収入金
300 Parts
Inventory
部品在庫
50
Masking amount
マスキング額
Account payable
未払金
250
Total   300   300
Toshiba's case      
Part cost
部品支給分
Account recei-vable
未収入金
300 Parts Inventory
部品在庫
50
Masking amount
マスキング額
Produc-tion cost
製造原価
250
Total   300   300
toshibaaccountingfraud  
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3. News report (by Asahi Shimbun 2015/9/7)

  • Toshiba Corp. posted a net loss of ¥37.8B ($316.5M) for FY2014 after slashing ¥155.2B of inflated net profits over a roughly seven-year period of accounting irregularities. Toshiba fell into the red for the first time in five years, reported operating profits of ¥170.4B for FY2014 ended in March, a 33.7% decline from the previous year.
    • Toshiba had forecast ¥330B in operating profits before the padding scandal started to unfold in April. But even after corrections for the bloated profits, the decline in the value of its U.S. nuclear power, semiconductor and household electronic businesses, including computers and TVs, led to losses that were much bigger than expected.
    • The Securities and Exchange Surveillance Commission under Financial Services Agency will soon be making a full-scale investigation into Toshiba’s books. The SESC will likely fine Toshiba because its revised balances for FY2011 and 2012, also released on Sept. 7, were significantly lower than what the company had originally reported.
    • Toshiba plans to hold an extraordinary shareholders meeting on Sept. 30 to explain the company’s accounting practices and new management policies.
  • The electronics giant had systematically padded its profits for years under the orders of its executives. A third-party panel investigated matter, and the company’s top executives were forced to resign.
    • Toshiba said it had inflated its operating profits by a total of ¥224.8B, or ¥155.2B in net profits, between FY2008 and FY2014 (Apr.- Dec.)
    • It had released revised numbers for the inflated earnings on Aug. 18, but an additional ¥11.8B was found unaccounted for.
    • Toshiba also planned to release its FY2014 earnings report in May, but it was forced to revise its figures in light of the scandal and set a deadline of Aug. 31. That deadline was also missed after additional accounting irregularities were discovered at its subsidiaries.
    • It was also unable to release its securities report, which it had initially planned to submit to the FSA at the end of June.
    • Toshiba officials said the company has refrained from making forecasts for FY2015 because they still need to make “careful considerations.”

3. 朝日新聞 (2015/9/7)

  • 東芝は、2014年度決算で378億円の赤字を計上。過去7年間で1552億円の利益水増し。この結果、過去5年間で赤字を記録し、2014年度の経常利益は前年比33.7%下落の1704億円に。
    • 東芝の経常予想は当初は3300億円だったが、米国の原発、半導体、民需用電機、コンピュータ、TVなどの損失が予想外に大きかった。
    • 証券取引等監視委員会は、東芝の経理の本格的調査に入る。その結果、2011, 2012年度および9/7公表の決算に関して罰則適用となる見込み。
    • 東芝は9/30に臨時株主総会を開催し、新体制など発表予定。
  • 電機大手のトップによる不正な利益水増しに対しては、第三者委員会もこれを重視しており、トップの引責辞任は免れない。
    • 東芝は2008年度から2014年度(4-12)の間で経常利益2248億円、純利益で1552億円に水増ししていた。
    • 東芝は、8/18は水増しを公表したが、更に118億円あることが判明。
    • また東芝は2014年度決算を5月に発表予定だったが、不正発覚で8/31に提出する予定だったが、これも子会社決算の不正があり再度遅れる予定。
    • 規制当局は決算の6月末の提出を求めていたがこれも遅れる予定。
    • 東芝は2015年度の決算見通についても、慎重な調査を理由に公表を控えている。
 
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4.
Comment
  • This systematical incident could be a pathological defect of Japanese industries; life long employment of regular employees, regular wage increase, and concentration of powers to top management, including authority over personnel issue; and even internal accounting or auditing division could not resist against intention or climate of the top management.
  • Japanese popular proverb says 'Better bend than break'; and COO under CEO is cynically abbreviated as Chief Obedient Officer.
  • 本組織的な事件は日本企業の病理的な欠点とも言える。即ち正社員の永年勤続、定期昇給、企業トップへの権力集中、特に人事権。また社内の経理部は監査部もトップの意向には逆らえない風潮がある。
  • 日本のよく言われる諺は"長いものには巻かれろ"であり、CEO直下のCOOもChief Obedient Officerと揶揄されることがある。
Comment
II
  • The origin of the accounting scam was probably when Toshiba merged WH at ¥540B in 2006, later total amount became ¥660B. First MHI offered this about ¥200B, but finally declined this M&A. MHI has promoted to construct PWR, while Toshiba BWR with GE. Westinghouse (WH) is the specialist of PWR, and it was observed MHI has the reason of M&A of WH.
  • In around 2006, Atsutoshi Nishida, then CEO, proclaimed that the nuclear related business should attain 3-3.5 time increase by FY2015, and then in 2008, target the goal of order of 33 nuclear plants.
  • The successor Norio Sasaki, then CEO, proclaimed new order plan of 39 nuclear plants by FY2015 amounting ¥1T in Aug. 2009, when the Lehman Shock caused severe economic recession.
  • In Mar. 11, 2011, the Fukushima nuclear plants meltdown occurred, but 2 months later, the CEO again emphasized the goal of order of 39 nuclear plants with ¥1T in FY2015.
  • As of Aug. 2015, the new order of Toshiba is 4 nuclear plants in China, and 4 in US; the total is only 8 plants.
  • Toshiba published its deficit of ¥343.6B in Mar. 2009; the accounting scam may have started to cover this deficit, as pointed by the independent research committee.
  • In Sept. 2011, Siemens announced to withdraw from nuclear business. French AREBA has fallen into three consecutive deficit years, requiring financial support from French government. The nuclear business of US GE attains $1B, sharing only 1% of the total sales. Only Toshiba dreams the future of nuclear business.
  • 今回の会計不正の原因はおそらく東芝によるWH買収(2006年、5400億円、後の追加を入れると6600億円)であろう。当初は三菱重工が2000億円で買収予定だったが結果的には買収断念した。三菱重工はPWRだが、東芝はGEと組んでBWRを推進している。WHはPWRの専業であり、三菱重工の買収が当然視された。
  • 2006頃、当時の西田厚聴社長が2015年度までに原発受注を3-3.5倍の33基に増やすと2008年に宣言。
  • 後継者の佐々木則夫社長は2015年度までに39基、1兆円の目標を2009年8月に掲げた。当時はリーマンショックでの深刻な景気停滞期であったが。
  • 2011/3/11に福島原発事故が発生したが、その2ヶ月後には再び2015年度中に39基1兆円の受注を強調した。
  • 2015年8月時点で、東芝の原発の新規受注は中国4基、米国4基の合計8基に過ぎない。
  • 東芝は2009/3に3436億円の赤字を公表。会計不正はこの頃から開始されたと第三者委員会は指摘している。
  • 2011/9にはシーメンスが原発事業から撤退。仏のアレバも3期連続の赤字で仏政府に資金援助要請。米国GEの原発関連は$10億で売上全体の1%に過ぎない。東芝だけが原発ビジネスの未来の夢を見ている。

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