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Business

Japan firms finding hidden risks in foreign M&As

TOKYO -- A growing number of publicly traded companies in Japan are becoming involved in accounting irregularities, and are finding themselves facing charges for a variety of financial misdeeds, from inventory manipulation to fabrication of profit figures.

     Hong Kong police on Feb. 3 arrested two executives of DMX Technologies Group, a Singapore-listed information technology business. The company immediately suspended the executives, Chief Executive Jismyl Teo and Chief Financial Officer Skip Tang.

     DMX Technologies is a consolidated subsidiary of Japanese telecom giant KDDI. An investigation found that inappropriate accounting had been made before KDDI acquired a majority of DMX shares in 2009, and that DMX's receivables may not have been fully collected. KDDI posted extraordinary losses of 33.7 billion yen ($274 million) on overseas subsidiaries' business in its consolidated financial reporting for the fiscal year ended March 2015.

     Many Japanese companies are looking for opportunities in mergers and acquisitions of foreign businesses, but an increasing number of such companies find themselves having to deal with accounting misconduct by the acquired business, which often comes to light after the acquisition.

     According to Tokyo Shoko Research, in fiscal 2014, 42 Japanese companies disclosed accounting irregularities, the highest since the research started in 2008. Many of them involved overseas subsidiaries.

     Lixil Group, the Japanese bathroom and kitchen fixture supplier, announced in June that it will likely post additional losses of as much as 66 billion yen over the three years through fiscal 2015. The loss stemmed from accounting fraud by its Chinese unit Joyou. Lixil acquired the German company Grohe, Joyou's parent company, in 2014.

     At the time, Joyou was a German-listed company. An audit certificate was issued by global accounting firm Grant Thornton group, which assured the accuracy of the financial reporting by the company. However, an investigation revealed that Joyou had fooled the auditors by using tricky techniques. When Joyou began bankruptcy proceedings in May, the expected loss ballooned.

     These troubles matter to companies that consider M&As an option to make their business grow further; they matter to investors as well. For businesses that are not financially healthy, the losses arising from such fraud are critical, and could threaten the future of a company.

     For example, until this year, Emori Group Holdings was an established Japanese chemical trading house, listed on the first section of the Tokyo Stock Exchange. It found itself having to confront wrongful transactions made by an executive of its Chinese subsidiary. The company became unable to pay its debts and filed for court-led business rehabilitation proceedings in April. It was delisted from the TSE on May 31.

(Nikkei)

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