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Business

Scandal's roots go back to dot-com bubble

TOKYO -- Accounting irregularities at Toshiba were effectively masterminded by its top management, a third-party panel investigating the scandal at the Japanese company concluded in a report released Monday.

     "There could be a considerable amount of tax refunds if past profits are revised down by more than 150 billion yen ($1.2 billion)," an expert said.

     So why was Toshiba so eager to log nonexistent profits that led to tax payments?

     Antagonism among top executives is one possible reason. But could antagonisms endure for so many years? Is it possible there was a cause for the irregularities unique to Toshiba? The investigation panel, led by Koichi Ueda, a former superintending prosecutor at the Tokyo High Public Prosecutors Office, was vague on this matter in its report.

Triple whammy

Another possible cause is the business environment for Japanese electrical and electronic equipment industry over the past 15 years. The growth of South Korea's Samsung Electronics and Apple of the U.S. has brought major changes to the industry. In addition, the dot-com bubble in 2000, the great financial crisis and the 2011 earthquake and tsunami in Japan have all caused problems.

     At each of these junctures, banks and supervisory government offices reportedly had to pay close attention to certain major electrical and electronic equipment companies, including Toshiba.

     When, for example, businesses found it difficult to raise even short-term funds in the autumn of 2008 following the bankruptcy of Lehman Brothers in the U.S., a government agency presented the office of the prime minister with an unofficial report listing more than 20 big companies likely to face fundraising difficulties at the end of the year. A few electrical and electronic equipment makers were among the corporations on the list, which also included automobile and aviation companies.

     Toshiba was one of them. A retired Toshiba official admitted that the company was in a financial bind at that time because it had to pay back funds invested in the semiconductor business and big corporate acquisitions.

     Accounting irregularities at Toshiba accelerated after Lehman's bankruptcy.

     In June 2009, Norio Sasaki, now vice chairman of Toshiba, became president, succeeding Atsutoshi Nishida, an adviser at present. Toshiba's presidents serve for five years.

     Toshiba denied that management changes were related to its financial condition. But Toshiba made a major shift in its management mode from Nishida's aggressive stance under Sasaki.

     Results in fiscal 2008 to March 31, 2009, deserve close attention. Hitachi, which Toshiba sees as its archrival, booked a net loss of 787.3 billion yen in the year. The staggering loss, which is said to be the largest for a Japanese manufacturer on record, offers clues to the differences between Hitachi and Toshiba.

     A tax asset write-off in expectation of worsening earnings accounted for 390 billion yen of the loss. Deferred tax assets are accounting assets equivalent to prepaid taxes. A company that faces unstable earnings or anticipates a drop in projected profit is allowed to register deferred tax assets on the assumption of bigger refunds than prepaid taxes if its earnings forecast is accepted by tax authorities.  In the reverse case, it is required to draw down deferred tax assets.

     Hitachi's accumulated past profits allowed it to post a conservative earnings outlook on the back of its strong financial base. 

Weak financial base

Toshiba "would have logged a net loss similar to Hitachi's if it had adopted a similarly tough earnings outlook," an expert said.

     But Toshiba avoided doing so. Actually, Toshiba had its hands tied because such a loss would be too big for it, stock market players said. In other words, Toshiba's financial foundations are not as strong as Hitachi's.

     Profit pursuit at all costs by top Toshiba executives can be understood as a result of the company's relatively weak financial base. It is no exaggeration to say that the top management wanted to avoid drawing down deferred tax assets by any means.

     Top management fear is traceable to the collapse of the dot-com bubble. Amid chaotic developments after the bubble burst in the early 2000s, Resona Bank was placed under virtual state control because it fell into a state of negative net worth. A change in rules at the auditing office led to a sharp drop in deferred tax assets the bank had planned to book.

     Resona's fate affected the electrical and electronic equipment industry, because it put the bottom lines of leading manufacturers into the spotlight. In particular, Toshiba and Hitachi came under scrutiny because market players believed they would fall into negative net worth if deferred tax assets were subtracted.

     Toshiba barely remained in positive territory, while Hitachi was said to be the sole company with relatively strong financial leeway in the industry.

     The electronics industry has long been fraught with financial problems. "Financial needs" possibly lay behind Toshiba's accounting irregularities.

     The reinforcement of corporate governance is indispensable for eliminating scandals like Toshiba's.  At the same time, companies in the industry badly need to work to reinforce their financial foundation.

 

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