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Toshiba chief executive steps down over accounting scandal

Eight senior executives at Toshiba, including the chief executive and president Hisao Tanaka, stepped down on Tuesday after they took responsibility for a $1.2 billion (151.8bn yen) accounting scandal. The damning response which removed half of Toshiba’s board came after a team of financial investigators had discovered that the Japanese conglomerate overstated its earnings by more than $1.2 billion over the last seven years. A detailed report on the discrepancies that led to the massive accounting lapses was submitted by the investigators on Monday, pointing to a systematic setback which has its roots in the higher management of Toshiba. The accounting malpractices were carefully and systematically camouflaged under the profit targets, which eventually led to what is seen as one of the largest corporate scandals in Japan ever.

According to the investigators, the accounting irregularities were “skillfully” hidden from outside observers. The investigators wrote: “Within Toshiba, there was a corporate culture in which one could not go against the wishes of superiors. 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. ”

Although the report does not mention Fukushima, it is believed that the 2011 disaster worried the board about the consequences it will have on the company’s nuclear division, which persuaded executives to set unrealistic targets for new projects. The committee said that the implicit pressure was enough to prompt managers to misreport earnings from their divisions, and further accused Toshiba of breeding “a corporate culture where it is impossible to go against one’s bosses’ wishes.”

Seven other board members, including Tanaka’s predecessor and Toshiba’s vice chairman, Norio Sasaki, and Atsutoshi Nishida, a former president who was serving as adviser, also tendered their resignations, after the investigation found them guilty. Toshiba’s current chairman, Masashi Muromachi will take over as the interim president and chief executive until a new chief is appointed in September. No charges have been filed against the company or its executives so far. So much for the corporate culture.

The accounting situation heated up in April, when the securities regulators started investigating possible accounting inaccuracies in its energy division, problems which initially were limited to its infrastructure projects, including nuclear, hydroelectric, wind-power equipment, air traffic control, and railway systems. Things got worse in May, when an independent investigation committee took over the investigation and found reporting discrepancies in virtually all of Toshiba’s major divisions. Toshiba even cancelled its year-end dividends and postponed earnings amid surrounding controversy.

Shares of Toshiba have been dropped by a quarter since the company first disclosed accounting irregularities in April. However, the shares bounced back 6 percent on Tuesday, as the company announced a sweeping reshuffle of its corporate ladder.

“I deeply apologize to all stakeholders for causing these problems,” Mr. Tanaka said in a press conference, though he said he hadn’t been aware of any inappropriate accounting. “This has resulted in the largest damage ever to our 140-year old corporate image.”

The amount of overstated earnings in profits is close to the $1.7 billion in losses that another Japanese company, Olympus Corp. concealed in yet another accounting fraudulence that came to light in 2011. Olympus admitted that it manipulated accounts to cover up investment losses incurred over years. For a company which goes by ‘one of the world’s most recognizable consumer electronics brands’ it’s likely that the governance crisis will incur more damage to the brand and cause further decline in fortunes at a time when the company is far too behind its competitors. The scandal indicates how Japan is still struggling to progress on corporate governance despite recent steps to increase independent oversight of companies.