On February 14, Japanese conglomerate Toshiba announced that one of its subsidiaries, Toshiba IT-Services Corporation, was found to have booked ¥43.5 billion ($391.6 million) in fictitious sales. Those fictitious sales pertained to 26 transactions recorded only on paper.
The Japan Times reported that “according to information mainly from a report about an in-house survey involving lawyers and certified accountants,” nine companies, including Toshiba IT-Services, “were found to have been involved in ‘round-tripping transactions’ that did not involve any commercial goods or end users.” The report, according to the Japan Times article, also stated that the fictitious transactions “related to sales of information technology equipment, such as personal computers, [that] were booked between November 2015 and July 2019.”
Those transactions “are believed to have been masterminded by a former sales manager” at Japanese company Net One Systems Co. “who received help with the paperwork from Toshiba IT-Services officials.” Toshiba, however, said that it “’confirmed there was no evidence’ that any employees of Toshiba IT-Services or a manager of the subsidiary directly in charge of the transactions initiated the fictitious deals.” Toshiba also reported that the subsidiary “was involved ‘without realizing that the transactions were illusory or circular’.”
A Toshiba executive vice president admitted that the company failed to recognize the problem until it received information from “an outside party,” but stated that it would “introduce a system to analyze transactions to detect any irregularities speedily.”
Note: It almost defies belief that a company of Toshiba’s statute and reputation – particularly after it had been caught up in a 2015 accounting scandal involving its overstating its revenues by $1.2 billion over a seven-year period – would need to admit such fundamental defects in its recordkeeping and internal controls. This latest development involves a substantial expansion on Toshiba’s admission last month that Toshiba IT-Services had booked ¥20 billion in fictitious sales in April-September 2019.
The full details of this fictitious-sales scandal will likely be emerging for some time. Even so, corporate compliance officers should promptly report on the Toshiba situation to C-level executives, and use it as an opportunity to review the accuracy and reliability of their own recordkeeping and internal controls.