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You’ve just got to know that something is terrible wrong when eight top executives quit a company and its share price goes up. That’s exactly what happened at Toshiba (TSE:6502) today. And, yes, there was something terribly wrong – $1.22 billion wrong.
While Reuters called it Japan’s “biggest accounting scandal in years,” Fortune magazine called it “one of the biggest-ever accounting scandals in Japanese corporate history.” Former CEO Hisao Tanaka (as of today) admitted at a press conference that he sees this as “the most damaging event for our brand in the company’s 140-year history,” – and he was party to it.
(Note: At this point, the Toshiba scandal is actually the second-biggest accounting scandal in Japanese corporate history. In 2011, Olympus was found to have conducted fraudulent activities amounting to $1.7 billion.)
What Toshiba Did
An investigatory panel found that Toshiba has “systematically” overstated its operating profits by $1.22 billion between 2008 and the present – and the people at the top knew it. The people at the top include Tanaka, his two immediate predecessors and several other high-ranking execs.
The scandal is being blamed, thus far, on a corporate culture of obtaining results mandated by executive management at all costs. At times when it appeared that the company would not be able to meet quarterly goals, company managers would do some creative accounting to “postpone losses or push forward sales to meet the challenge.” In fact, the investigatory panel’s report stated that,
“There was a corporate culture at Toshiba under which it was impossible to go against the intentions of superiors.”
It doesn’t take much for this practice to become habitual to the point that it actually becomes SOP. Much like telling a lie, which it is, it naturally begets telling a long list of lies and other various and sundry forms of manipulation, cover-up and fraud. This was evidenced in part when it was discovered that the company’s power business had not booked project costs correctly from FY 2009 to FY 2013, the incident that prompted an independent investigation into company practices.
What Will Happen Now?
Other than the obvious need to replace the now-departed executives with ones who have more integrity, the rest of the future is still unclear, but we may expect some serious actions in several areas:
- Additional house cleaning to remove subordinates who cooperated in the scheme.
- An increase in the percentage of independent directors on the board.
- An additional delay in reporting results for the fiscal year ending 31 March.
- Publication of a restatement of earning for the past years.
- There could be some hefty fines and penalties.
- There could be some jail time.
- The road to recovery will be a long one.
The Moral of the Story
Unrealistic objectives and undue pressure rarely accomplish their intended purposes. Rather, they drive many people who are short on integrity to fudge, manipulate both sales and accounting numbers, and even fix LIBOR rates. (I’m just sayin’.)
Honesty is still the best policy, but when the chips are down, it is often not considered the best practice until the time comes to pay the piper.
Toshiba shares finished up 6.13%, an increase of 23.10 to 400.00 as investors cheered the executive resignations.
