Toshiba CEO quits as accounting scandal adds up to $1.22 billion

Japan's finance minister warns this latest scandal could shake the market's trust in the country's corporate governance.

Richard Trenholm
Richard Trenholm Former Movie and TV Senior Editor
Richard Trenholm was CNET's film and TV editor, covering the big screen, small screen and streaming. A member of the Film Critic's Circle, he's covered technology and culture from London's tech scene to Europe's refugee camps to the Sundance film festival.
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Toshiba President and CEO Hisao Tanaka announces his resignation at a press conference in Tokyo. Kazuhiro Nogi/AFP/Getty Images

Toshiba President and CEO Hisao Tanaka has quit the company over an accounting scandal that the Japanese government says could shake the reputation of Japanese business.

Between 2008 and 2014, Toshiba over-reported profits by 151.8 billion yen (around £780 million, $1.22 billion or AU$1.6 billion), according to an independent investigation. The affair follows a similar $1.7 billion scandal involving Olympus in 2011, prompting Japan's finance minister Taro Aso to express concern that, "If [Japan] fails to implement appropriate corporate governance, it could lose the market's trust."

Both Tanaka and his predecessor, Norio Sasaki, who is now vice chairman, have quit. Both are reported to have known about the profit overstatement and are reported to have pressured other senior staff to manipulate balance sheets to show a profit.

The company's chairman, Masashi Muromachi, will take over as head of the company on Wednesday.

"Over the last decade, corporate Japan has been making efforts to move towards globally accepted principles of corporate governance such as transparency and board independence," said Loizos Heracleous, professor of Strategy and Organisation at the Warwick Business School. "However challenges remain, particularly with issues such as board composition, where there are fewer outside directors than in other developed markets."

Toshiba's accounting impropriety first surfaced in April. Beginning in 2008, Toshiba mired itself in a vicious circle of fudged figures, recording profits early and pushing losses back. That apparent success on paper led to higher targets being set in the next business period, forcing divisions to massage the figures even more to hit the artificially inflated targets -- and so on and so on, in a spiral of creative accounting.

Toshiba will now have to restate its profits for the period from April 2008 and March 2014. The company faces possible fines for the irregularities.

Naomi Furuya, head of Toshiba's Global Communications Team, says the company takes the findings of the investigation "with utmost gravity". Furuya acknowledges the investigation's conclusions that the causes of the scandal include "a lack of awareness and understanding among top management about appropriate accounting treatment", "an over-riding current profit motive" and "pressure to achieve budget targets".

Toshiba apologised to shareholders, investors, customers, business partners and stakeholders and pledged to build a new governance structure as soon as possible.

"The Toshiba scandal will be seen in the context of the Olympus event," said Heracleous, "with investors wondering whether there is a pattern of account manipulation in corporate behaviour, and observing much more closely. Regulatory authorities will need to reassure the markets that they are casting a watchful eye over Japanese corporations, and also that Japan's corporate culture is moving towards global expectations with respect to robustness of corporate governance."

Toshiba's history goes back to 1873, becoming Tokyo Shibaura Electric in a merger of two engineering companies in 1939. The familiar abbreviation Toshiba was officially adopted in 1984.