April 15, 2017
Toshiba, one of Japan’s oldest businesses, delayed the release of its earnings report for the period April-December 2016 two times, and finally released the report without gaining the external auditor’s approval. If the situation is not cleared up, the company will be delisted from the Tokyo Stock Exchange. Toshiba repeatedly cooked the books in consequence of its profit-oriented policy, provoking public criticism. Furthermore, the company acquired U.S. nuclear power plant maker Westinghouse (WH) and as a result incurred huge debts. Toshiba recently decided to delink WH and sell Toshiba’s most-profitable semiconductor division in order to cover the debts. However, Toshiba’s attempt at business recovery remains uncertain. Without tackling fundamental problems, the troubled electric giant will be unable to regain the public trust.
Management fiasco undermines market trust
Public-listed companies are required to announce their financial statements periodically as a way to allow the public access to their financial state. Long delays in the announcement and a lack of the chartered accountant’s approval for the financial report, known as the audit company’s opinions, will make it difficult for corporations to keep on going public. Toshiba postponed twice reporting the April-December earnings which was originally scheduled for February this year. The company, although making the announcement of the report, failed to obtain the auditor’s opinions. The Toshiba management made a colossal blunder. The electronics maker will lose the trust of investors, including shareholders and banks, and inevitably will face difficulties in settling accounts in the 2016 business year ending March 31.
Toshiba posted a loss of more than 500 billion yen for nine straight months through December. The amount of debt exceeded Toshiba’s equity capital holdings. The reason why the audit firm refused to give the nod to the Toshiba’s financial report is that it sees the possibility of an increase in the WH-related loss, and that investigations into allegations such as inappropriate pressure on relaxing accounting procedures by some board members are underway.
Toshiba in March decided to apply for the U.S. insolvency law in order to separate the massive-deficit-ridden WH from the Toshiba settlement of accounts. Accordingly, Toshiba will likely end up losing as much as one trillion yen, literally facing difficulty surviving.
The biggest reason for Toshiba’s management crisis is that it has repeatedly window-dressed its financial statements. On top of that, the company chose to increase its reliance on nuclear power plant holdings not only at home but also abroad. With the top management’s strong demand, Toshiba made an acquisition of WH despite concern from the very beginning regarding such a costly purchase. In this way, the once mighty Japanese manufacturer hurt itself by favoring the construction of NPPs as an “NPP Renaissance” which promoted the nuclear-related business, in contrast to the global trend toward a departure from N-power generation after the 2011 Fukushima nuclear meltdowns. Toshiba separated WH from itself but still continues to engage in the NPP business at home, having no intention of fundamentally changing its pro-NPP policy.
Toshiba’s areas of strength are electronics products, social infrastructure such as railways, and semiconductors in addition to NPP technology. However, the maker is intending to dispose of its cash cow semiconductor sector in order to make up for the huge losses in the NPP sector, meeting with severe criticism. Many shareholders at the general meeting in late March one after another voiced their complaints about this selloff plan. Refusing to heed the criticism, Toshiba is showing no signs of remorse.
Promotion of NPP at impasse
The ongoing financial crisis at Toshiba represents an impasse that the pro-NPP policy has reached. Successive LDP governments, the business community, and the power industry as well as Toshiba itself, which is now in danger of bankruptcy, have all continued to support and even promote this policy.
The bankruptcy of such a huge corporate entity will have serious consequences for its workers and subcontractors as well as consumers and end users. Toshiba should admit to management responsibility for creating this crisis. The Abe government and the business community should also do something to minimize the negative effects.