Toshiba chiefs to quit as panel finds ‘organized’ accounting fraud: sources

JIJI, Bloomberg

A third-party panel investigating accounting irregularities at Toshiba Corp. will declare that the wrongdoing was organized, informed sources said Thursday.

The panel will report the results of its investigations to Toshiba around Monday, the sources said.

Following that, the electronics giant will reshuffle its management. President Hisao Tanaka and his predecessor, Norio Sasaki, current vice chairman, are expected to take responsibility for the findings and resign.

The panel believes the accounting fraud resulted from strong pressure on senior officials to achieve earnings targets and that it was exerted mainly by Tanaka and Sasaki.

Toshiba is known to have padded past operating profits, mainly by delaying accounting for losses. The actions took place at divisions such as its infrastructure, semiconductor, personal computer and television businesses.

The panel appears to have judged that the top management virtually instructed accounting manipulations by pressing business divisions to attain unrealistic targets just before fiscal years ended, according to the sources.

Toshiba’s bond risk jumped to a two-year high on speculation that an internal accounting probe will force writedowns and an overhaul of management.

The cost to insure its debt soared 62 basis points in the past week to 150 on Monday, the highest since July 2013, credit-default swap data from CMA show. That is the worst performance for a Japanese company in the period and compares with the average for technology peers in Asia of 125.

Expected writedowns after the third-party investigation results may total more than ¥100 billion, affecting businesses from infrastructure to visual products, PCs and chips.

“They need to change into a more transparent organization, which could mean the executives stepping down and bringing more outside directors,” said Yoshihiro Nakatani, a senior fund manager at Asahi Life Asset Management. “Toshiba’s current state can only be evaluated negatively and that’s why the spread is widening.”

Toshiba spokesman Hirokazu Tsukimoto declined to comment on credit-default swaps moves or the third-party probe findings ahead of its conclusion.

Toshiba has lost $3.7 billion in market value since May 8, when it withdrew its earnings forecasts, canceled a year-end dividend and widened the accounting probe beyond “percentage of completion” estimates used on infrastructure projects to include the whole company.

“Talk of management’s involvement is forcing long-only shareholders to sell off and buying default-swaps is one way they can hedge,” said Hidetoshi Ohashi, the chief executive officer of Japan Credit Advisory Co.

Toshiba estimated the profit writedown will be ¥55 billion in the five fiscal years ended in March 2014. The impact may be almost double that, rising to more than ¥100 billion, a source familiar with the matter said July 4. Charges over a six-year period may total $3 billion, Reuters reported July 16, citing unidentified sources.

The extra yield investors demand to own Toshiba’s 0.567 percent bonds due 2019 rose 39 basis points in the past week to a record 104 basis points over government debt, according to data compiled by Bloomberg.

Toshiba’s probability of debt nonpayment within one year has jumped to 0.4 percent from about 0.2 percent in early May, according to the Bloomberg default-risk model, which considers factors such as share prices and debt levels. The gauge suggests a credit rating of the lowest investment grade.

“There is an increasing chance of a downgrade and you can see that reflected in bond spreads,” said Asahi Life’s Nakatani. “Concerns are mounting that this will begin to affect the company’s relationship with financial institutions.”