Empty Profits

Under inappropriate orders from top managers, a major electric appliance manufacturers, Toshiba, has been manipulating its financial balance for years. The company included ¥200 billion of fictitious profit in its financial report for five years until 2014, pretending to be stable in its management. Toshiba is losing its credibility as one of the appliance giants such as Panasonic, Hitachi or Sony.

Toshiba announced that it added ¥50 billion of fictitious profit from infrastructure business on its balance for three years until March 2014 and its president apologized to stockholders in its annual general meeting last month. After internal investigation, inappropriate accounting swelled up to ¥200 billion and the company established investigation committee consisted with third-party experts. The committee is submitting a report mid-July.

The most responsible for the scandal is former president and current deputy chairman, Norio Sasaki. After taking the seat of president in 2009, Sasaki promoted business on nuclear generation. He led the project of taking over Westinghouse in 2006 and targeted ¥1 trillion of sales by 2015. The goal was abolished, however, after the great earthquake and serious accident in a nuclear plant in Fukushima in 2011. To hide the damage of it, Toshiba committed inappropriate accounting in every part of its business.

According to investigation by the committee so far, Sasaki broadly ordered to manipulate the accounting in internal meeting or through e-mails. Then vice-presindent and current president, Hisao Tanaka, is also suspected as deeply committed in the process of the order. Fictitious profit was found in major sections, including semiconductor, Regza-brand television or laptop computer named Dynabook.

With declined credibility as a company, Toshiba might as well be facing a difficulty of money procurement from banks. There is a possibility of uneasiness of procurement through corporate bond in the market. Toshiba is going to ask its main banks to set a framework of accommodation as big as ¥500 billion. Meanwhile, the company considers selling out a part of its assets and cutting off its unprofitable sections. While the situation is not very fatal for Toshiba, its management will face unusual disadvantage.

The greatest mistake Toshiba committed was that its leadership thought they could operate their business within the closed community. Their way of thinking is close to that of the residents in “atomic village,” which occupied information about nuclear power generation. The great earthquake revealed underground nature of Japanese economy.