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EPTE Newsletter: Toshiba’s Financial Scandal

Last spring, Toshiba disclosed to its shareholders some accounting irregularities, causing them to delay their earnings report for the first quarter. These accounting irregularities made investors nervous, but not panicked enough to sell off their holdings.  Officials at Toshiba explained the accounting irregularities included hiding some losses during previous years, and they would need to re-state their earnings as soon as possible.  At that time, company guidance pointed to a small profit for the current fiscal year. The updated earnings report was postponed several times, and finally released during third quarter.

In the final report, Toshiba disclosed the company suffered more than 200 billion yen in losses during the last five years. They added that a massive restructuring was necessary to keep the company afloat. Toshiba did not offer any additional information, causing the media to speculate and report on what little information was distributed.

After the global recession in 2008, Japanese electronics companies fell on hard financial times. They were no longer the leaders in the global arena, and needed to make drastic changes to survive. Sanyo was sold to Panasonic, which closed several divisions throughout the company, including the plasma display division. Sony and Sharp have both had their ups and downs over the last few years and Sharp needed financial support due to the huge losses from their LCD division. Hitachi, the main competitor for Toshiba, pulled itself out of the muck by selling their unprofitable disc drive business (this was a drag on earnings). The company reorganized everything from cables to tape circuits, and is now profitable.

Hitachi’s rise to a profitable company did not sit well with executives at Toshiba. Their recovery was slower than Hitachi’s; while Toshiba was posting losses, Hitachi reported profits. That’s when the accounting irregularities were born. A couple of presidents asked their senior divisional vice presidents to become creative and put the company in a positive light. Some creative accounting (illegal accounting) procedures put them back in the black. Toshiba reported a profitable year and their stock price remained steady.

Unfortunately for Toshiba and their shareholders, not too many company officials knew the extent of the fraud. When the bottom fell out, their stock priced dropped instantly. Shareholders suffered huge losses, and several investors from the U.S and Japan immediately filed lawsuits against the company.

The new executive committee at Toshiba is planning to sue three former presidents and vice presidents who were instrumental in the accounting deceit. The prosecutor’s office is also looking into bringing charges against these three.

Toshiba is now in survival mode. They plan to eliminate or sell many divisions within the company, and layoff a substantial amount of their work force. This survival plan may look good, but I think it is like the Dutch boy who put his finger in the dike to stop the flood. The scandal cannot be covered up now or swept under the rug. As more and more news breaks about it, the harder it will be for Toshiba to recover.

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