Since the days of Enron and Arthur Anderson, US laws (especially Sarbanes-Oxley) have tightened the rules of accounting and made the management responsible for the books to such an extent that any sort of ‘innovation’ in accounting is too difficult and too costly to be worth it. In America.
In Japan, however, it appears things are a little different. It was just discovered that Toshiba inflated its earnings between 2005 and 2014 to the tune of around $1.2 billion. The funnier thing about it all, is the reason they gave for doing it.
In Japan, the culture is such that the words of your boss is almost unquestionable and sacrosanct. It’s considered very bad manners at best, and completely disrespectful at worst, to challenge the views of your superior on a subject. And whereas over here, “your wish is my command” is a figure of speech, in Japanese corporate culture it’s anything but. Your boss’ wish is your command. It’s not explicitly stated so, but it’s how they tend to work. I mean, a new CEO is not elected by the company’s board or promoted as much as the previous CEO simply appoints his preferred successor. Imagine the amount of ass-kissing that mode of advancement inspires.
So sometime in 2008, the then CEO, Atsutoshi Nishida learned that the firm was going to suffer a loss of $146 million for the year. He said the figure was “so embarrassing, we cannot announce it..” His subordinates took that to mean, ‘give me something better to announce’. Now, Mr. Nishida said he didn’t mean it that way, but he’s Japanese and he rose to CEO so I’m not buying it. Anyway, his subordinates come back with a $3million profit. He accepts that, and announces it. Well, the thing is, to add an extra $149 million of income(enough to take them from the loss to profit), you can’t just write it down with a pen and hand it over. The reality is that there’s probably a lot of future revenue they took too early, supplier receipts lowered or boosted, department costs shoved around or hidden and stuff. It’s like Skyler White in Breaking Bad, cooking books takes just as much skill as cooking meth. And once you announce the profit, you can’t just go and uncook them because then you’d have to both restate your previous earnings, and also take a hit in current year earnings. That would not fly for the boss.
Each department had to keep the cooking going. And as they reported better profits, the boss kept setting the targets for them to report better profits. And no one wants to be the one to tell the boss that these profits aren’t coming. Before you know it, they’ve inflated profits from $150m to $1.2 billion.
And now, the kasala has bust. Party is over.
The management is being cleared out, top executives, Mr. Nishida, who stayed on as adviser has resigned. The whole world is now watching to see how they clear through the debris and restore some kind of confidence in the company.
What’s most surprising is that their auditor, Ernst & Young ShinNihon did not detect anything wrong all these years. Either the firm (which is merely an affiliate of the global EY) wasn’t thorough, or the cooks were good. I suspect both.
It’s interesting to see how the ramifications of this scandal play out with regulations and more in an already struggling Japan. Apparently, these kinds of scandals are pretty common. However, with a more multinational company like Toshiba, the expectations are higher.
Hopefully, they come through this okay. And hopefully it adds pressure to the government of Abe to speed up corporate governance reforms in the country.
For now, we just wait and see.