By Ritsuko Ando
TOKYO (Reuters) - Japan's Toshiba Corp overstated its operating profit by 151.8 billion yen ($1.22 billion) over several years in accounting irregularities involving top management, an independent investigation said in a report on Monday.
In the country's biggest corporate scandal in years, the findings could lead to the restatement of earnings, a board overhaul and potentially hefty fines at the computers-to-nuclear conglomerate.
Toshiba President and Chief Executive Hisao Tanaka and his predecessor, Vice Chairman Norio Sasaki, were aware of the overstatement of profits and delay in reporting losses in a corporate culture that "avoided going against superiors' wishes," the investigating committee said in a report filed by Toshiba to the Tokyo Stock Exchange.
The overstatement was roughly triple Toshiba's initial estimate. Sources have said Tanaka and Sasaki would resign in the coming months and most of the board would be replaced to take responsibility for the shortcomings.
The report said Tanaka and Sasaki had set operating profit targets that the heads of divisions were required to meet, applying pressure by hinting at withdrawing from areas that underperformed.
"Within Toshiba, there was a corporate culture in which one could not go against the wishes of superiors," the report said.
"Therefore, when top management presented 'challenges', division presidents, line managers and employees below them continually carried out inappropriate accounting practices to meet targets in line with the wishes of their superiors."
Sources said previously that one of the investigators' theories was that top executives, worried about the impact of the 2011 Fukushima disaster on nuclear business, set unrealistic targets for new operations such as smart meters and electronic toll booths.
The report did not mention Fukushima, but said such pressure was particularly strong in fiscal years 2011 and 2012.
Improper accounting included overstatements and booking profits early or pushing back the recording of losses or charges, and such steps often led to even higher targets being set for divisions in the following period.
"This led to a need to carry out improper accounting of an even bigger scale, and as this was repeated, the scale of the inappropriate book-keeping also expanded," it said.
GOVERNANCE PUSH
The investigation comes as Prime Minister Shinzo Abe is trying to improve the country's corporate governance in order to attract more foreign investors.
This is Japan's biggest business scandal since camera and medical equipment maker Olympus Corp's 13-year cover-up of $1.7 billion in losses blew up in late 2011.
The revelations shake one of the stalwarts of Japanese industry. Toshiba remains Japan's 10th-biggest company by assets and market value despite its stock price falling 26 percent since the scandal surfaced in early April.
The report said much of the improper accounting, stretching back to fiscal 2008, was intentional and would have been difficult for auditors to detect.
Toshiba has not been able to close its books for the latest year because of the probe, which also forced the company to cancel its annual dividend.
Toshiba's shares are "almost certain" to be placed under special monitoring, according to a stock exchange source, who added that he doubted it would be delisted.
The source also said the bourse was considering a penalty for breach of contract, which would be around 91 million yen based on Toshiba's market capitalization.
Last week, other sources said the company was expecting 300-400 billion yen ($2.4-3.2 billion) in charges include the overstated profits as well as various writedowns.
In a positive sign for Toshiba, however, its main lender Sumitomo Mitsui Banking Corp announced that it would continue supporting the company.
Toshiba is due to hold a news conference at 5 p.m. (0800 GMT) on Tuesday, shortly before the investigating committee is to hold a separate news conference at 7 p.m. (1000 GMT).