Prosecutors arrested former Kanebo President Takashi Hoashi and two other former executives of the firm Friday on suspicion of submitting falsified financial statements to authorities.

Hoashi, 69, former Vice President Takashi Miyahara, 63, and former executive Kenzaburo Shimada, 59, were held after being questioned by the Tokyo District Public Prosecutor’s Office. They apparently wanted to show the firm was still making a profit despite its massive debts, investigative sources said.

The arrests follow allegations that the trio covered up more than 70 billion yen in capital deficit in fiscal 2001 and 2002, and 5.7 billion yen in net loss on a consolidated basis in fiscal 2001, the sources said.

The falsified reports for the years claimed Kanebo had a capital surplus of 900 million yen in 2001 and 500 million yen in 2002, and a net profit of 70 million yen.

The three have owned up to the charges, the sources said.

Prosecutors searched the houses of Hoashi and Miyahara, both located in Tokyo’s Setagaya Ward, and ChuoAoyama PricewaterhouseCoopers, a Tokyo-based auditing board that audited Kanebo’s financial statements.

The window-dressing, which involves a violation of the Securities Exchange Law, came to light during an in-house probe launched after the company asked the Industrial Revitalization Corp. of Japan, the government-backed bailout body, for rehabilitation assistance in March last year.

Hoashi, who became president in 1998, resigned in March 2004 to take responsibility for the firm’s financial troubles.

Based on Hoashi’s demands, other executives allegedly ordered the accounting division to cook the books by inflating sales and underreporting expenses, the sources said.

They also ordered its accountants to exclude losses incurred by its subsidiaries and affiliates from its consolidated results, the sources said.

The orders were allegedly backed by indirect threats from Hoashi, who was quoted by accountants as saying, “Do you want to make our employees jobless?”

The falsified financial statements were approved by Miyahara, who wielded enormous influence at Kanebo’s board meetings at the time. In fact, his influence was so powerful that the meetings became a mere formality, the sources said.

In April, the household products maker announced it had faked its statements to show it was in the black despite a consolidated loss of 26.1 billion yen in fiscal 2001 and 21.8 billion yen in fiscal 2002. In fact, the company had a negative net worth on a consolidated basis for nine years from fiscal 1995 through fiscal 2003.

Over 10 Japanese and foreign firms have said they will take part in tenders to sponsor Kanebo’s rehabilitation.

“We will fully cooperate with the investigative authorities to clarify the details of the allegations and will do our utmost to regain the public’s trust,” Akiyoshi Nakajima, a Kanebo executive, said after the arrests.

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