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Toshiba withdraws earnings guidance over accounting irregularities

June 2015

Japan’s Toshiba Corp. expects to reduce its reported operating profit by at least ¥50 billion for fiscal 2011 through fiscal 2013 in order to deal with accounting irregularities uncovered at three of the company’s units.

Though most widely known for its consumer electronics, Toshiba’s main business lies in nuclear power and long-term infrastructure projects, where the problems have occurred.

An investigative panel is examining the past profits calculated with the “percentage of completion (PoC)” method in three project areas: nuclear power and other electricity systems; railway equipment and other infrastructure; and elevator and building maintenance. 

The company uses PoC accounting for large complex projects that may last for several or more years. The method enables income to be recognized in the accounts based on the percentage completion of long-term projects.

The company hasn’t disclosed how many projects have accounting problems or where they are. Toshiba said it has also found cases where expenses may not have been recorded in the proper period and accounting for the value of inventory may not have been appropriate. It didn’t give details.

Toshiba said the review was continuing, and the JPY 50 billion figure could be revised later.

So far, it is not known whether the irregularities were an attempt at window-dressing or whether accounting irregularities have been made in other projects. Results of a further probe by a third-party committee to be set up soon could deal Toshiba a further financial bad news.

An unnamed official of a securities company was quoted in the media saying that the irregularities are attributable to a lack of internal control and failures in cost management.

There have been no suggestions of intentional fraudulent practices.

The Tokyo Stock Exchange plans to consider its response to the matter based on the results of Toshiba’s probe.

Toshiba has withdrawn its earnings guidance for the fiscal year ending March 2015 and postponed an announcement of earnings for the following period.

Previously, the company announced an operating profit of JPY 692 billion in total for fiscal 2011 through fiscal 2013, the three years for which it now expects to restate its results.

Toshiba must race to meet a 30 June deadline to file revised earnings reports. Failure to do so could cost the company its place in the JPX-Nikkei Index 400 which is supposed to identify Japan’s most appealing companies for investors. Delisting would be another blow to the company. 

Asia | Corporate governance

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