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Business trends

Japan Inc. reports record cases of faulty bookkeeping

Several occurred in China and other offshore locations

Daiwa House Industry President Keiichi Yoshii apologizes with another executive in March over an accounting scandal at a Chinese subsidiary.   © Kyodo

TOKYO -- An all-time high of 64 listed Japanese corporations have reported cases of accounting irregularities so far this year -- a trend pointing to the need for tougher oversight at rapidly expanding multinationals.

The total, based on disclosures released through Saturday, represents a 170% increase over the past decade. Cases include irregular accounting that may impact financial statements, as well as bookkeeping scandals by executives and lower-level employees. Data provider Tokyo Shoko Research conducted the study.

Many of the cases occurred at subsidiaries and affiliates at home and abroad. Nikkei found that 18 of the 64 companies said the book-cooking happened overseas, with eight taking place in China.

In one sobering instance, builder Daiwa House Industry in March discovered discrepancies between the balance of funds at a Chinese joint venture, Dalian Daiwa Zhongsheng Real Estate, and the amounts recorded in the ledgers. An investigation later found that directors installed by the Chinese partner, Dalian Zhongsheng Group, had withdrawn and misappropriated funds.

As a result of the scandal, Daiwa House was forced to book a loss of roughly 13 billion yen ($119 million), stemming partly from a reassessment of the unit's assets.

Japanese materials maker Fujikura Composites reported in June that a Chinese subsidiary had failed to book necessary expenses. A common thread Fujikura shares with Daiwa House is that the headquarters at both companies engaged in insufficient oversight of their units and the accounting firms assigned to the affiliates did not perform their duties as expected.

"It's necessary to invest time and money to establish arrangements, such as dispatching legal and accounting officers from Japan, to prevent recurrences of irregularities," said Takashi Nomura, an attorney based in Shanghai.

The number of Japanese companies reporting faulty accounting practices this year surpasses 2018's full-year count by 10, and tops the previous record of 57 corporations set in 2016. Domestic affiliates also served as a hotbed of the problem.

Retail conglomerate Aeon discovered that Kajitaku, its second-tier housekeeping subsidiary, inflated earnings for several years. Aeon warns that the false reporting will shrink its own net profit by nearly 8 billion yen for the full year ending February.

Cases of accounting fraud began to mount conspicuously around 2015. "Whistleblower processes took hold [in corporate Japan], making it easier to discover improprieties," said Masato Suzuki, a lawyer who once worked for the Securities and Exchange Surveillance Commission, a state watchdog.

More recently, a Japan Display executive who was previously sacked for embezzlement contacted the Apple supplier last month claiming that inappropriate accounting practices were committed under orders from senior management. The company launched an investigation into the allegations and the informant later died of apparent suicide.

Companies are taking corrective measures. Daiwa House will have internal corporate regulations apply to principal joint ventures as well, while Aeon has said that direct subsidiaries holding group companies will be part of its risk-management committee.

But there is still a large margin for improvement when it comes to preventing accounting scandals. "A system that aggressively rewards those who discover irregularities is effective," said Yutaka Suzuki, lead analyst at Daiwa Institute of Research.

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