Toshiba said facing US probe into alleged hiding of US$1.3b in losses, shares plunge

The logo of Toshiba Corp is seen at a building in Tokyo.
The logo of Toshiba Corp is seen at a building in Tokyo.PHOTO: REUTERS

WASHINGTON/NEW YORK (BLOOMBERG) - Toshiba Corp is under investigation by the United States over allegations that it hid US$1.3 billion (S$1.77 billion) in losses at its nuclear power operations, according to two people familiar with the matter. Its shares plunged in Tokyo.

The Justice Department and the Securities and Exchange Commission are looking into whether fraud was committed, said the two, who asked not to be named because the investigations aren't public. The probes, they said, follow one by Japan's securities regulator, which found that Toshiba falsified financial statements and documents involving its issuance of corporate bonds.

In Toshiba's accounting scandal is the largest in Japan since 2011, when Olympus Corp admitted to using takeovers to hide US$1.7 billion in losses. Toshiba, a 140-year-old industrial group that makes everything from nuclear reactors to microchips and home appliances, dropped to a 35-year low in Tokyo in February after widening its annual loss forecast to a record US$6 billion as it restructures in the wake of the scandal.

Toshiba shares fell as much as 8.6 per cent in Tokyo after the probe was reported, reversing earlier gains of as much as 4.9 per cent.

US authorities are scrutinizing allegations made in an internal review published last year by Toshiba, the two people said. The report, a 334-page version of which was published in English on Toshiba's website in December, said management was complicit in padding profits for almost seven years. It led to the resignations of top officials, including Hisao Tanaka, Toshiba' president and chief executive officer.

Until now, the investigation into Toshiba's accounting practices had been limited to its home country, where regulators fined the company US$62.1 million - the largest penalty ever imposed - and fined its former auditor, Ernst & Young ShinNihon, US$17.4 million and barred it from accepting new business for three months. Toshiba President Masashi Muromachi, who took over as the scandal unfolded last year, promised to take steps to overhaul operations and prevent future wrongdoing.

The recent expansion by US authorities, which are known to open cases even when another jurisdiction is already investigating, means Toshiba could face further enforcement action in America. The US can exert jurisdiction in part because the allegations involve its Westinghouse Electric Co unit, which is based in Pennsylvania. The report also names Ernst & Young, which audited the Westinghouse accounts.

Toshiba doesn't comment on any pending investigations, spokesman Eddie Temistokle said in an e-mail. Peter Carr, a Justice Department spokesman, and Judy Burns, a SEC spokeswoman, declined to comment. Ernst & Young said in a statement it's working closely with the Japanese affiliate to "restore the public trust" by making changes to its auditing procedures. The auditor declined to comment on the US probes.

The Justice Department has brought a handful of accounting fraud cases over the past few years. In 2014, it levied a US$30 million penalty on surgical device maker ArthroCare Corp, which it accused of inflating revenue. The former chief executive officer and chief financial officer were convicted of several counts of fraud and sentenced to prison terms of 20 years and 10 years, respectively.

Toshiba said it initially uncovered irregularities related to "percentage of completion" estimates used on infrastructure projects including nuclear, hydroelectric, wind-power equipment, air-traffic control and railway systems. Percentage of completion accounting is a subjective method that relies almost completely on management estimates on the profitability of long-term contracts.

Toshiba in May said it had expanded the investigation to its visual products, personal-computer and semiconductor businesses. Officials sought to delay booking losses, and employees were unable to go against management orders, according to the report.

Toshiba disclosed in November that its Westinghouse unit booked writedowns on new construction projects and automation services in fiscal 2012 and 2013. The value of Westinghouse wasn't impaired by the writedowns and the accounting was accurate, Yu Takase, a spokeswoman for the company, told Bloomberg News at the time of the disclosure.

Westinghouse was purchased by Toshiba for US$5.4 billion in 2006. Toshiba explained to investors in November that Westinghouse's nuclear plant construction business was harmed by the Fukushima nuclear disaster.

Toshiba's internal report describes how the company failed to account for more than US$100 million in Westinghouse losses on its 2013 books involving the construction of a nuclear power plant in Florida. Toshiba officials traveled to the US to meet with Westinghouse executives to discuss findings showing increasing costs of the Florida project.

In October 2013, Mr Tanaka, then Toshiba's president and Makoto Kubo, its chief financial officer at the time, told Westinghouse officials that "there would be no further increases from the estimated increase of US$69 million already submitted," according to the report.

On Jan 28, 2014, as the company edged closer to announcing its financial results, Mr Tanaka told Yasuharu Igarashi, Toshiba's corporate executive vice president, that "it would be catastrophic" if the Westinghouse unit posted a US$396 million loss in the third quarter for the Florida contract, according to the report.

When the time came to report its third quarter results, Toshiba said the estimated loss from the contract work was US$225 million, the report said.