Toshiba Scandal Case"

Japan is worried that the massive Toshiba accounting scandal could scare away investors

By Jim EdwardsandReuters

Jul. 21, 2015, 1:25 AM

TOKYO (Reuters) - Japanese Finance Minister Taro Aso said accounting irregularities at Toshiba Corp were "very regrettable", coming at a time when Japan is trying to regain global investors' confidence with better corporate governance.

"If (Japan) fails to implement appropriate corporate governance, it could lose the market's trust," Aso told a news conference on Tuesday. "It's very regrettable."

A report by independent investigators released on Monday said Toshiba had overstated its operating profit by 151.8 billion yen ($1.22 billion) over several years, roughly triple Toshiba's initial estimate. President and Chief Executive Hisao Tanaka and his predecessor, Vice Chairman Norio Sasaki, were aware of the overstatement of profits, it said.

The investigators talked to 200 Toshiba staffers,according to the Financial Times:

In a summary of its findings, a panel of external lawyers and accountants detailed what it said were "institutional" accounting malpractices and a corporate culture in which employees were afraid to speak out against bosses' push for increasingly unachievable profits.

"There existed a corporate culture at Toshiba where it was impossible to go against the boss' will," the report said. It highlighted "a systematic involvement including by top management" and "a deliberate attempt to inflate the appearance of net profit".

The scandal dates back to the reign of former Toshiba presidentAtsutoshi Nishida, who set his company "the challenge" in the post-2009 period. The challenge consisted of aggressive, unrealistic, short-term profit targets that the company had to meet. But the company's problems increased after the March 11, 2011, earthquake.

CEOTanakaformer CEO Sasakiknewthat profits were being inflated, the reports said.

Aso declined to comment when asked if Toshiba would face any kind of financial penalty. Sources have said regulators were beginning their own review of Toshiba's book-keeping, based on Monday's report.

The investigation came just as Prime Minister Shinzo Abe has implemented new guidelines to improve the country's corporate governance. This is Japan's biggest business scandal since camera and medical equipment maker Olympus Corp's 13-year cover-up of $1.7 billion (784 million pounds) in losses blew up in late 2011.

Sources have said Tanaka and Sasaki would resign in the coming months and most of the board would be replaced to take responsibility for the shortcomings.

Shares in Toshiba rose 4 percent by midday on Tuesday on relief the report had few nasty surprises. But they were still down around 24 percent since Toshiba first disclosed cases of accounting irregularities in early April.

"Institutional investors and other long-term funds have already unloaded Toshiba shares, so currently the stock price is being driven by short-term investors," said Takatoshi Itoshima, chief portfolio manager at Commons Asset Management.

"The bad news is out. As long as Toshiba won't be delisted, such trade will continue."

Required:

a)What are the main issues in the Toshiba scandal?

b)Discuss the advantage and disadvantage of allowing Mr. Hisao Tanaka to act as both the chairman and chief executives of Toshiba?

c)Explain the role played by accounting standards, efficient capital markets, investor protection, law enforcement, and culture in the Toshiba scandal?

d)What do you believe are the main lessons that can be drawn from the Toshiba scandals?

e)Identify the stakeholders who were most disadvantaged by the Toshiba scandalt?

f)Discuss the proposition that it is not in Toshiba's best interest that institutional investors and other long term funds to unload Toshiba's shares?