National / Crime & Legal

Toshiba case points to whistleblower law's shortcomings

by Anna Kitanaka and Isabel Reynolds

Bloomberg

One of the more intriguing questions stemming from the Toshiba accounting scandal is this: Where was the whistleblower?

Top executives at the industrial conglomerate, which makes everything from refrigerators to nuclear reactors, padded pretax profit by at least ¥152 billion over six years, according to a third-party accounting probe.

The review by accountants and lawyers, led by a former investigator with the Tokyo District Public Prosecutor’s Office, cited “institutional” accounting malpractices and a corporate culture “where it was impossible to go against the boss’s will.”

Even though the accounting lapses covered more than six years, the scandal only came to light in February after the Securities and Exchange Surveillance Commission launched a probe into Toshiba’s accounting related to infrastructure projects.

According to a Kyodo News report, a person related to Toshiba tipped off the securities commission. Toshiba declined comment.

Japan has had a whistleblower protection law in place for more than a decade. Tatsuhiko Kamiyama, a partner at corporate law firm Clifford Chance in Tokyo said that while the law is a good one, corporate insiders willing to go public with incriminating evidence are rare.

“People in this society have a strong loyalty to their organization,” Kamiyama said. “So even if the company is doing something wrong, there is a strong hesitation by the person to accuse his own employer.”

Not everyone fully buys the cultural argument. Lawrence Repeta, a law professor at Meiji University, said the law protecting whistleblowers “has no teeth.”

True, the law prevents companies from firing or reducing the pay of employees as retribution against workers who bring to light illegal behavior at their companies.

In practice, companies can punish employees who get out of line by reassigning them or worse, according to Repeta. You can be working in the accounting department and “tomorrow you’re going to be loading boxes onto trucks,” he said.

Then there are the potential legal costs a whistleblower faces if he or she seeks redress in the court system to settle a dispute with a former employer.

“Your career has been destroyed and now you’re looking for a lawyer to bring a lawsuit just to claim some compensation you think you’ve lost,” Repeta said.

Michael C. Woodford, the former president of Olympus Corp., was dismissed from his post after he went public in 2011 with accounting discrepancies of $1.7 billion. The company later admitted the fraud and Woodford sued the company for unfair dismissal.

Yukiko Miki, head of Access-Info Clearinghouse Japan, which monitors the country’s information access laws, said the whistleblower protection act “basically classifies the leaked information as worthy of protection depending on whether it concerns matters under the penal code.”

That means information about unethical behavior may not be covered. The attitude of companies and local governments, said Miki, is “not to look at the information and try to improve things, it’s merely to see whether they have any legal duties.”

When it comes to leaking information viewed as harmful to national security, Japan is pretty much in line with the United States. In 2013, Japan enacted a state secrets law toughening penalties for leaks, despite opposition from media and lawyers concerned about the impact on freedom of expression.

Yet Repeta said Japan lags when it comes to fighting corporate fraud and the country should place more of the onus on company executives and auditors to police against bad behavior.

“We need laws like Sarbanes-Oxley,” said Repeta, referring to the 2002 U.S. law passed that toughened accounting standards and penalties in the wake of the Enron, Tyco and Worldcom financial scandals.

“There’s a cultural issue, a legal issue and there’s this other issue which accompanies both — the idea of accountability,” he said.

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