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Toshiba Accounting Scandal and Lawsuits

March 7, 2017

Toshiba Corporation has its roots in Japan that stretch back to 1875. Its two biggest enterprises in recent years are nuclear reactors and semiconductors. Tokyo-based Toshiba has also expanded into several other lines of business, including software services, light bulbs, memory chips, and even a lettuce-growing factory.  

The company has recently become entangled in a series of financial setbacks amounting to some $6 billion in losses as it seeks to rebound from an accounting scandal and other woes. The issues involved are both deep and broad. Vertically, it has had problems involving everyone from executives to management and accountants. Horizontally, the conglomerate’s problems are affecting profits and production across business units, resulting in shareholder losses and subsequent class action filings. 

Toshiba Accounting Scandal Surfaces

Toshiba’s accounting problems can be traced primarily to company employees understating costs on long-term projects and overstating profits. The misconduct began as early as 2008 and reached a head after an investigation in 2015. Investigators found evidence of the use of techniques such as pushing back charges and losses, and booking future profits too early. 

In particular, Toshiba’s corporate leadership issued “Challenges,” or strict profit targets to business unit leaders. In many cases, the Challenges were released near the end of the quarter when there was little time to achieve them through performance adjustments. In effect, the only way to meet the profit targets was to employ irregular accounting techniques.  

Other factors that contributed to and enabled the accounting scandal include:

  • An overall corporate culture which demanded obedience to superiors
  • Weak corporate governance
  • A poorly functioning system of internal controls in various divisions, including the finance, corporate auditing, risk management, and securities disclosure divisions

Thus, a combination of corporate culture and operational pressures began at the level of the business unit presidents, and filtered its way down to the accountants who ultimately employed the fraudulent business and accounting practices.

Lawsuits Follow

As can be expected, a slew of lawsuits are following in the wake of Toshiba’s accounting scandal. Those set to file, or who are considering filing, include:

  • Mitsubishi UFJ Trust and affiliate Master Trust Bank of Japan (preparing to jointly file a lawsuit at the Tokyo District Court in late March)
  • Japan Trustee Services Bank, an affiliate of Sumitomo Mitsui Trust Holdings and Resona Bank
  • Trust & Custody Services Bank, a subsidiary of Mizuho Financial Group Inc.

Government Pension Investment Fund, the world’s largest pension fund, has already indirectly sued Toshiba with Japan Trustee Services Bank (which holds Toshiba shares on behalf of GPIF). Damages sought are around ¥13 billion (over $116 million in U.S. dollars).

In addition, 50 individual shareholders of Toshiba Corporation have already sued the company, as well as three former chief executives and two chief financial officers, seeking $2.45 million in damages. Shareholders are seeking compensation due to the firm’s stock plunging in the wake of their multi-billion dollar scandal. The total number of plaintiffs is expected to reach around 1,000 over time.  

Toshiba Chairman Steps Down

Toshiba’s chairman, Shigenori Shiga, has recently stepped down. He will, however, remain an executive officer for Toshiba until June, when the ordinary general shareholders’ meeting will be held. He will be focusing on resolving issues related to Westinghouse, which is an American-based nuclear developer owned by Toshiba.

Several other Toshiba executives have also come under scrutiny due to years of flawed financial and business decisions. All of this is on top of other whole-scale house-cleaning efforts that occurred in 2015 as Toshiba’s problems initially began to surface.  

Toshiba to Withdraw from Nuclear Projects Abroad

Toshiba will also likely need to withdraw from its new nuclear projects slated for implementation outside of Japan. British, Indian, and Japanese authorities need to find ways to fill the gaps that the withdrawal will create. 

In particular, plans to build a new nuclear power plant in Cumbria will likely need to be scrapped, which will be a huge blow to the U.K.’s nuclear production strategy. Subsequently, any investors in the project will need direct reassurance from the British government. In the future, both Britain and Japan’s governments will need to work together to address the gaps that would result from the Toshiba withdrawal.  

More Fallout From the Scandal

In addition to these repercussions, Toshiba is undergoing major restructuring. The conglomerate has already sold several of its production units. For instance, it has sold its medical devices division to camera maker Canon, and most of its appliance units to Midea Group of China. 

It is also aiming to sell off its flash memory chip division, which is considered one of its most prized assets. Toshiba is said to be seeking to bring in some $8.8 billion from the sale of its memory chip division; potential buyers may include Apple, Inc. and Microsoft Corp., according to Bloomberg

Increased Governance Awareness in Japan 

An unintended consequence of the Toshiba scandal and the surrounding cloud of uncertainties is that corporate governance in Japan is receiving more attention. For instance, following the 2015 Toshiba accounting scandal, Japan’s Prime Minister Shinzo Abe pushed efforts to revamp corporate governance, such as a requirement that publicly traded companies in Japan have at least two outside, independent directors on their boards. While some have questioned “Abenomics” efforts, the Toshiba incidents have generally served to raise awareness of governance issues in Japan.

One last outcome of the Toshiba events will be its likely demotion to the second section of the Tokyo Stock Exchange (TSE-2). This is a collection of smaller cap stocks, and would definitely mark a change in the conglomerate’s image. However, some analysts are taking note of continual increases in the TSE-2’s index (up 8% since the beginning of 2017). 

Many are attributing the growth and strong performance in the TSE-2 index to better corporate governance practices among small caps. Thus, if Toshiba can enhance its corporate governance policies, it may find that a relegation to the TSE-2 section can provide some opportunities for organizational recovery. 

The many issues surrounding Toshiba highlight the importance of having sound corporate governance policies and practices in place; they demonstrate how deeply entrenched misconduct can be, as well as how far-reaching its effects are. 

Corporate fraud can negatively affect shareholder interests as well as company longevity. If you have any questions regarding issues like corporate governance and shareholder rights, contact us today at Kessler Topaz. Our team has deep experience in using the courts to promote governance reform. By developing strong litigation positions, we are able to compel groundbreaking corporate governance changes.