Kanebo Ltd. announced Wednesday an internal probe has discovered the firm had a negative net worth on a consolidated basis for five years through fiscal 2003, some of which it failed to report, and plans are afoot to sue former management.
The length of time the firm had negative net worth violates Tokyo Stock Exchange listing rules.
The company said the firm also had a negative net worth for four consecutive years prior to fiscal 1999. They claimed former executives dressed up the company’s consolidated net balance by roughly 200 billion yen in the past, making it one of the largest window-dressings by a nonfinancial firm in Japan.
The company had announced it had a negative net worth in fiscal 1999 and fiscal 2003, but the corrected financial reports show it had the same financial standing for a three-year period from fiscal 2000 to fiscal 2002.
The negative net worth ranged from 153.8 billion yen in fiscal 1999 to 357.6 billion yen in fiscal 2003.
“Based on a report by the management cleanup committee, we reviewed our accounting for five fiscal years back to the year ending in March 2000,” Kanebo Chairman Akiyoshi Nakajima told reporters.
“And we decided we need to correct the improper accounting process (taken during the period).”
Kanebo officials said the firm booked 28 billion yen in bogus profits by padding sales and deferring expenses during the period.
The firm also said the past earnings reports did not reflect the figures of 15 loss-making companies that should have been counted as subsidiaries. As a result, some 66 billion yen in profit was boosted.
It also decided to slash a combined 121 billion yen from the past five years’ worth of profits after applying more realistic values to its assets, including inventory and loans to its group companies.
“I think the management back then wanted to avoid a credit crunch that could have been caused by falling into a negative net worth,” Makoto Yoshitaka, the company’s senior managing executive officer, said at the same press briefing.
Nakajima said the company will take legal action against the past management for the accounting fraud. “As for legal issues, we will take proper and strict measures,” he said.
Nakajima assumed the top position after the Industrial Revitalization Corp. decided to give its support to the struggling company.
Firms are not obliged to gain shareholder approval to correct past financial statements.
But given the extended period of time over which the window-dressing continued, the current management has decided to hold an extraordinary shareholders’ meeting later this month to seek their support, the company said.
IRCJ said that it will continue to support the restructuring of Kanebo despite the window-dressing.
Ryutaro Katayama, an IRCJ member who attended the same news conference, said the state-backed agency has asked the Tokyo Stock Exchange to keep Kanebo listed but has not yet received any response.
The length of time Kanebo had a negative net worth violates the TSE’s listing rules, which state that firms must be delisted if they have a negative net worth for more than three years.
Kanebo launched the probe in November after an in-house committee revealed the previous month that the company had falsified its group net balance by up to 30 billion yen for fiscal 2001 and 2002 by padding sales and underreporting expenses.
Kanebo checked accounting records dating back as far as fiscal 1999 under current accounting standards in cooperation with its auditing firm, Tohmatsu & Co., and ChuoAoyama Audit Corp., which served as its auditor until last year, sources said.
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