Australian Prime Minister Tony Abbott and Japanese Prime Minister Shinzo Abe
IN PHOTO: Australian Prime Minister Tony Abbott and Japanese Prime Minister Shinzo Abe (R) are pictured during a tour of the Rio Tinto West Angelas iron ore mine in the Pilbara region of Western Australia, July 9, 2014. Reuters/Alan Porritt

Toshiba, one of the leading companies in Japan has been caught in an accounting scandal that forced its CEO Hisao Tanaka to quit after an independent investigation found that he was in the know of inflated corporate profits in the last seven years. The inquiry found accounting irregularities involving $1.22 billion having been done with the involvement of top management. Announcing his resignation, Tanaka said he would be temporarily replaced by Chairman Masashi Muromachi. “I see this as the most damaging event for our brand in the company's 140-year history," Tanaka said at a news conference.

Toshiba adds to one more Japanese accounting scandals in recent times after Olympus admitted that it has been hiding $1.7 billion in losses. According to Tanaka, Toshiba will appoint outside directors to fill more than half of its board seats. Besides the CEO, several other executives and board members also stepped down. They include vice-presidents Hidejiro Shimomitsu, Masahiko Fukakushi, Kiyoshi Kobayashi and Toshio Masaki.

Toshiba has said it will adjust its financial statement in which the operating profit of the corporation for 2009-2014 was overstated by nearly 152 billion yen, which is equivalent to more than $1.2 billion. The investigation has found that in the last seven years, Toshiba employees were pressurised by top managers to overstate company’s performance that finally led to glaring distortions in the financial statements. The already detected overstatement is three times the actual estimate made by Toshiba at 55 billion yen.

Global Financial Crisis

According to sources, Toshiba’s reasons for overstating the profits included deteriorated earnings due to the global financial crisis, the earthquake off the Pacific coast of Tohoku in 2011 and the Fukushima meltdown. The company also lost $3.6 billion in market value after it withdrew the earnings forecasts, and cancelled the year-end dividend in May, says Bloomberg. In a new update, the news agency said, Japan’s Financial Services Agency has not alleged any wrongdoing by Toshiba or its management, so far. But the company is still under risk of getting slapped with penalty for faking the profits. Toshiba’s action of issuing almost 1 trillion yen ($8 billion) of stocks and bonds after inflating its earnings statements, may expose it to possible regulatory fines or litigation from investors for having misled them with false financial statements. The accounting investigation in Toshiba has come, close on the heels of Prime Minister Shinzo Abe’s new measures to improve Japan’s corporate governance.

Reputation Harmed

According to a report in New York Times, the doubts on Toshiba’s financial reporting have been growing since April, when the company said it was examining possible inaccuracies in one of its divisions. Later the internal investigation found discrepancies that ran into millions of dollars in faulty bookkeeping. In the latest disclosure, the amount just ballooned.

The committee of independent experts, who conducted the investigation on financial reporting said they could discover “systematic involvement including those in top management with the goal of inflating the appearance of net profits.” Toshiba’s financial officials were blamed for “having deliberately provided insufficient explanations to auditors, with the intention of carrying out a systematic cover-up.”

(For feedback/comments, contact the writer at k.kumar@ibtimes.com.au)