Last week, the American Accounting Association published findings of its corporate treasury research that found for-profit companies are more likely to hire someone that shows a willingness to manipulate financial data for the purpose of making a corporation’s books seem more appealing to investors.
Toshiba has now become the face of such a trend for Japan. For years, the technology company manipulated financial data and overstated profits by more than $1 billion. Analysts say the scandal is bringing to light how Japan’s corporate culture reinforces such questionable behavior, and how regulators’ efforts to heighten corporate transparency have so far made little progress.
The Scandal Unravels
Late last month, independent analysts found that Toshiba had significantly overstated its operating profit – by as much as $1.22 billion, in fact. It was a revelation that unraveled years of accounting manipulation, and one uncovered after the nation’s Securities and Exchange Surveillance Commission first probed Toshiba’s books, forcing the company to commission an in-depth investigation several months ago.
Investigators found that the company first began managing profit figures following the financial crisis, and, according to reports in the BBC, Toshiba will now be required to revise its profit reports for the period between April 2008 and March 2014.
“It has been revealed that there has been inappropriate accounting going on for a long time,” the company said in a statement, “and we deeply apologize for causing this serious trouble for shareholders and other stakeholders.”
According to investigators, Toshiba’s corporate culture was largely to blame for the ongoing financial misrepresentation. “Within Toshiba, there was a corporate culture in which one could not go against the wishes of superiors,” the report said. “Therefore, when top management presented ‘challenges,’ division presidents, line managers and employees below them continually carried out inappropriate accounting practices to meet targets in line with the wishes of their superiors.”
In the wake of these revelations, the corporation’s chief executive has resigned, replaced by chairman Masashi Muromachi, and eight other high-level executives have similarly left their posts.
Regulators’ Role In Changing Corporate Culture
While reports of Toshiba’s accounting mismanagement has been making headlines since April, the news is only just beginning to generate shockwaves in the west. Analysts have since begun mulling about what the case means for corporate culture in Japan, and the role of federal regulators in shaping that culture.
According to the Japan Times, the scandal could put a roadblock in Prime Minister Shinzo Abe’s efforts to attract more foreign investment in the country. Last month, the government made moves to strengthen trust in the nation’s corporate climate through a new corporate governance code, an initiative that hoped to boost transparency between corporations and their shareholders.
“The [Toshiba] scandal is definitely a big hit for the Abe regime and Abenomics, since reformed corporate governance is a key element of Japan’s growth strategy,” said Rikkyo University school of policy studies professor Andrew DeWit in a recent interview with The Guardian.
According to IDC Japan research vice president Tomoaki Nakamura, Toshiba should be “afraid” of criminal action by the U.S. Securities and Exchange Commission. In Japan, reports said regulators may impose hefty fines on the corporation, which will also have to overhaul its executive team, reports said. Officials are reportedly launching their own inquiry into the matter.
Meanwhile, critics are beginning to question how Toshiba’s accounting misrepresentations could have endured for so long, even with whistleblower laws in place that should have encouraged faster discovery of the matter. Experts say that even with these laws in place, corporate culture largely prevents anyone from actually blowing the whistle.
“People in this society have a strong loyalty to their organization,” said Tatsuhiko Kamiyama, a partner at Clifford Chance in Tokyo, to The Washington Post. “So even if the company is doing something wrong, there is a strong hesitation by the person to accuse his own employers.”
Reports said Japan has been looking to leave behind a long past of corporate account manipulation and a deeply imbedded culture in which the corporation rules. But, according to Keio University professor of management Yamato Sato, corporations and government regulators will have to do far more to change a longstanding corporate culture that supports some of the questionable activities that have come to light at Toshiba.
“[Japan’s] corporate culture encourages you to take the same actions as others, and makes you believe that maintaining the status quo is the right thing to do,” he said in an interview with the Japan Times. “It’s really hard to change.”