TOKYO -- Accounting irregularities have cropped up at a number of Japanese companies' Chinese affiliates, revealing struggles with corporate governance as the businesses expand abroad.
Large sums look to have been misappropriated at the Chinese joint venture of homebuilder Daiwa House Industry and a production arm of timepiece maker Rhythm Watch appears to have been systematically underreporting cost prices.
With a shrinking domestic market forcing Japanese companies overseas in search of growth, issues of oversight as well as dissatisfaction with pay and poor morale have led to unexpected trouble.
Daiwa House may book roughly 11.7 billion yen ($106 million) in equity-method investment losses after a discrepancy of about $212 million emerged between the account balances and ledgers of its Chinese venture for developing and selling condominiums.
"We didn't suspect any problem with the account balances because we were receiving regular reports" from the Chinese branch, a Daiwa House representative said.
Three Chinese employees, including at least one director from the local joint venture partner, are suspected of embezzlement, said Daiwa House. A local firm appointed by the Chinese partner was in charge of looking over the accounts as part of auditing the venture.
Rhythm Watch, meanwhile, had to lower its operating profit forecast for the year ending this month to 700 million yen from 1.3 billion yen after its Chinese production unit was found to have underreported costs by about $4 million over two years. President Koji Higuchi has said he will resign to take responsibility.
Such issues appear to be cropping up because companies are combing over assets and inventories as the fiscal year nears its March 31 end, and many problems are turning up in China due to the sheer number of Japanese enterprises doing business there. China was the locus of 41% of accounting improprieties at overseas branches of Japanese companies in the five years through March 2018, said the Japanese Institute of Certified Public Accountants.
"In many cases, Japanese businesses entrust lots of duties to local personnel," said Takashi Nomura, a Shanghai-based partner with Japanese law firm Nishimura & Asahi.
The issue may also stem in part from the slowing Chinese economy. Employees and officials are more likely to misbehave "if falling earnings drive down pay or morale worsens," said an official at a major auditing firm.