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Scandal Upends Toshiba’s Lauded Reputation

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Toshiba C.E.O. Resigns Amid Scandal

Toshiba’s chief executive, Hisao Tanaka, apologized on Tuesday after an investigation found that the company inflated its profits.

TOKYO, JAPAN (JULY 21, 2015) (REUTERS - ACCESS ALL) SOUNDBITE (Japanese) Hisao Tanaka, Toshiba CEO and President: ++CONTINUATION OF SHOT 1++ “I am Tanaka. Yesterday, 20 July, we received the investigation results from the Independent Investigation Committee. It referred to the necessity to amend the figures in the operating profit over 151.8 billion yen (1.2 billion US dollars) during the period of 2008 to Q3 2014. Additionally, it pointed out that this was due to a systematic cover-up led by the managers and a lack of knowledge in business management. I deeply apologise to all stakeholders.” // AP TELEVISION - AP CLIENTS ONLY SOUNDBITE (Japanese) Hisao Tanaka, Toshiba CEO and President: “The responsibility lies in the management, including myself. As a response, I am stepping down from the post as the CEO and President.”

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Toshiba’s chief executive, Hisao Tanaka, apologized on Tuesday after an investigation found that the company inflated its profits.CreditCredit...Franck Robichon/European Pressphoto Agency

TOKYO — Few companies in Japan have conveyed respectability like Toshiba, the sprawling industrial conglomerate that, to the surprise of many here, has found itself at the center of one of the country’s largest accounting scandals.

Toshiba’s chief executives have for decades sat at the apex of Japan’s establishment — civic leaders as much as business managers, in many people’s eyes. One boss from the 1990s went on to run the Tokyo Stock Exchange, then the national postal system. The company features on a prominent index of businesses thought to combine profitability with clean, modern corporate governance.

On Tuesday, in defiance of that image, the chief executive and two of his predecessors resigned, along with several lesser executives, over accusations that they drove the company to overstate its earnings by $1.2 billion over the last seven years. The figure is equal to about a third of the pretax profits that Toshiba reported during that period.

“Toshiba has a 140-year history and was like a straight-A student when it came to corporate governance,” said Shin Ushijima, a lawyer who serves as president of the Corporate Governance Network, a watchdog group. “Toshiba shares are in everyone’s pension plans. Executives’ responsibility is extremely heavy.”

The Toshiba scandal has raised questions about efforts by the Japanese government to improve corporate governance and culture.

Last year, the government introduced a new set of guidelines for managers and institutional investors. Superficially, Toshiba met or surpassed most of its provisions, which cover things like the number of independent directors companies are expected to employ.

“Toshiba satisfied the formalities of the code, but not the quality,” said Toshiaki Oguchi, a governance expert who helped the government create the guidelines. He noted that two of Toshiba’s four outside directors — twice the number the code recommends — were former diplomats, with little to no experience overseeing commercial enterprises. “It’s not about quantity,” he said.

Doubts about Toshiba’s financial reporting have grown since April, when the company, prompted by an investigation by financial regulators, said it was examining possible accounting inaccuracies in one of its divisions. An internal investigation initially found tens of millions of dollars of bookkeeping discrepancies — and the amount quickly ballooned.

On Monday, a committee of independent experts hired by Toshiba said it had found an additional 151 billion yen, or $1.2 billion, of overstated earnings. There were problems in virtually all corners of its business, which encompasses products stretching from refrigerators to nuclear power plants.

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Toshiba's chief executive, Hisao Tanaka, center at table, and other executives bow at the beginning of a news conference on Tuesday announcing the resignation of Mr. Tanaka and seven other senior officials.Credit...Kazuhiro Nogi/Agence France-Presse — Getty Images

Senior executives were singled out for blame. The committee said it had discovered “systematic involvement, including by top management, with the goal of intentionally inflating the appearance of net profits.” Toshiba financial officials, it said, had “deliberately provided insufficient explanations to auditors, with the intention of carrying out a systematic cover-up.”

At a news conference at Toshiba’s headquarters attended by several hundred journalists and financial analysts, Hisao Tanaka, the current chief executive, bowed deeply in a show of remorse. “I apologize from my heart to all our stakeholders,” he said. He acknowledged that the company had engaged in “inappropriate accounting,” but said it had not done so intentionally, and that he had not told subordinates to exaggerate the profitability of their divisions.

The resignations removed half of Toshiba’s 16-member board. Along with Mr. Tanaka, Norio Sasaki, Mr. Tanaka’s immediate predecessor as chief executive, who is now Toshiba’s vice chairman, is also stepping down. Mr. Sasaki’s predecessor, Atsutoshi Nishida, will cede his nonexecutive position as senior adviser. Toshiba’s chairman, Masashi Muromachi, will take over as president and chief executive until a new leader is appointed in September.

Toshiba’s share price had tumbled more than 25 percent since the admission in April. Shares rose more than 6 percent on Tuesday.

Toshiba said it was only beginning to look at ways to reshape the company to prevent a recurrence. As a first step, the company said it would put one of its other independent directors, Hiroyuki Itami, the former head of the commerce department at Hitotsubashi University, in charge of its audit committee. Critics, including the investigating panel, have pointed to the fact that the committee had been headed by longtime Toshiba insiders as potentially contributing to the accounting problems.

Mr. Oguchi said the drive to improve corporate governance had largely focused on increasing profitability, rather than preventing malfeasance. Japanese companies, especially big and established ones like Toshiba, have long been seen to tolerate low profits in the name of social harmony, by putting off painful decisions such as closing down or selling money-losing divisions.

The code, Mr. Oguchi said, was intended in part to change that tendency, by making managers more accountable to investors. The stock index that promoted Toshiba’s supposed strengths — the JPX Nikkei 400 — was introduced last year, emphasizing what it said was mutual support between strict management oversight and high investor returns.

The company’s problems, the investigative panel found, date to the economic slump set off by the global financial crisis in 2008. Even as demand for Toshiba’s products fell, top executives insisted that managers meet increasingly difficult profit goals, according to its report. Under pressure, many resorted to accounting gimmicks and shortcuts, the committee said.

The committee accused Toshiba of breeding “a corporate culture where it is impossible to go against one’s bosses’ wishes.”

Mr. Muromachi, the chairman, said at the news conference that Toshiba “may have gotten carried away with its focus on the quarter at hand.”

A version of this article appears in print on  , Section B, Page 3 of the New York edition with the headline: Toshiba Quickly Loses a Spotless Reputation. Order Reprints | Today’s Paper | Subscribe

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