What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing in today's video we're going to go over a massive corporate accounting fraud that contributed to the fall of a japanese technology. Giant many large-scale corporate frauds are caused by incentive structures that incentivize managers to hit quarterly goals. This can lead executives to make up revenues or cover up expenses to increase reported profitability. This short-termism frequently leads to cases where executives do things that make numbers look good for one quarter at the expense of future quarters.

For example, we've seen companies report revenues in one quarter. That actually didn't happen until the next quarter or report revenues for deals that haven't been closed. Yet, in these cases, revenues aren't necessarily being truly fabricated but brought forward into the previous quarter other times. Revenue and expense numbers are completely made up in 2015.

It was revealed that the japanese technology and industrial conglomerate toshiba had fabricated operating profit numbers for several years. It was seen as a scandal that threatened japan's global image. The total amount of profits that had faked was around a billion dollars. The scandal was perpetrated by several high up executives at the company, who all knew what was going on and created a company culture pressuring police to go along with it in this video we'll talk about what they did and what it meant for both toshiba and japan.

Toshiba is a large japanese technology company that has come to symbolize japan's technological abilities. It is a diversified business that engages in producing everything from power systems and lighting equipment to semiconductors and batteries to computers and appliances. It was founded in the 19th century as a manufacturer of telegraph equipment in the mid 20th century it expanded rapidly through both organic growth and merges and acquisitions in the u.s. It was especially recognizable in the tv market with their cathode ray tube tvs, but in the early 2000s this business started to die and eventually led to large losses for toshiba.

They closed their crt television business and invested in a flat screen tv technology called sed this technology, never caught on dominated by lcd and eventually led tvs. The tv business was not the majority of the company's revenue, but other parts of the business also started declining in the early 2000s and 2010s. Toshiba was hit hard by the 2008 global financial crisis. It's a highly diversified conglomerate, but nevertheless was very dependent on industrial demand.

Starting in 2007, it made large losses which did not improve at the end of the recession. By 2011, the losses became even harsher. The multi-year slump in business was a major embarrassment to the proud company. It caused an immense amount of pressure within the company to do whatever necessary to maintain the outward profitability of the company in may of 2015.

Toshiba announced publicly that discovered and was investigating an accounting scandal that affected the previous three years of financial statements. In the end, it was found that the company actually inflated profits over the previous seven years. The scandal was wide-ranging and affected many different divisions within toshiba. In the power systems business.

There were seven instances found where major projects had their financial numbers fabricated. One of the earliest such instances occurred with a project starting in 2007.. This project involved producing boilers turbines and generators for a client with a contract worth 54.5 billion. Japanese yen, that's close to a billion dollars, even at the beginning of the project, toshiba estimated that the cost of the project would exceed the proceeds leading to a net loss, but they went ahead with the project anyway.

The losses of billions of japanese yen were inexplicably not recorded for many years. Accounting standards would dictate that a provision for losses on the project be recorded, starting as soon as the deficit was discovered. It was found by the investigation that a high up executive denied approval for recording the loss provisions in order to inflate earnings numbers for several quarters. In another project.

A us-based division of toshiba received a contract for 130 million dollars to provide electric equipment for use in a subway system. Toshiba was to design and manufacture the electric equipment. After a year and a half, it was clear that the project was going to lose money for toshiba. They estimate that the total cost of the project would be 207 million dollars about 80 million dollars more than the 130 million that they were being paid.

The investigation found that the ceo and cfo want to avoid recording a net loss for their project and thus prevented the recording of any provisions for losses. The rest of the company was not doing well at the time. If they took loss provisions, they likely would have had to report a company-wide loss in order to prevent this, they postponed disclosing the large losses on the project in other projects. Toshiba used another financial accounting strategy whereby, at the beginning of a project, they report cost-cutting measures that they took these cost-cutting measures, theoretically improve the profitability of the projects.

This allowed toshiba to use them to report profits during the quarters when the cost cutting was taken. But before the projects were actually completed in many projects, these cost cutting measures were overly optimistic overestimating. The reductions in expenses by hundreds of millions of yen by the end of the projects when the actual costs were recorded, the fake cost cuts would have to be realized. As larger losses, but it was another way for toshiba to delay reporting losses.

A final accounting strategy that toshiba used was overstaying the values of their inventories. They would increase the price of their products at the end of fiscal quarters, even though most of their actual sales were for lower prices before the price increases at the time that the financial statements were prepared. The prices on paper at least, were higher. That allowed them to record higher values of their inventories that effectively gave the impression that they were more profitable during that quarter than they actually were.

In the end, these schemes distort the true costs, revenues and, ultimately, profits of toshiba from 2008 through 2014., starting in 2011. Toshiba used a combination of many schemes to avoid posting losses, but it became increasingly difficult to use these schemes to avoid financial disappointments on wall street. Most of the accounting strategies only delayed reporting losses. Unprofitable projects were put off until future quarters before they were reported by 2015.

The amount of delayed reporting of losses became too much to handle, without risking outside analysts deducing that something was going on so toshiba preemptively announced publicly. That would have to restate its financials. The total amount of profits that had been fabricated came to be 1.2 billion dollars later that year, toshiba's ceo, hisao tanaka stepped down. In addition to tanaka, eight other senior executives also resigned.

This followed the japanese finance minister, saying that toshiba risk causing japan to lose the trust of the international business and finance community in 2017. After several more money losing quarters, toshiba was removed from the tokyo stock exchange's first section and add to the second section. The first section is a designation reserved for the most admired and profitable companies listed on the tokyo stock exchange. One particular hard requirement for being on the first section is having a positive shareholder equity value.

Toshiba at that point had a negative shareholder equity value of more than 5 billion dollars, meaning that the value of all of its debt and liabilities exceeded the value of all of its assets by 5 billion. They also were having problems filing their financial statements on time. Around 2017 toshiba was in the process of selling off its nuclear reactor business, which was losing millions of dollars a year in relation to the divestiture. They were in disagreement with their auditor as to how to recognize the losses on the deal since toshiba doesn't have a great track record of properly recognizing losses.

This was a major point of contention with both the auditor and the tokyo stock exchange in 2017. Toshiba lost 228 billion, japanese yen, or a little less than 3 billion dollars. Last year in 2020, toshiba made something of a comeback to profitability. With a 251 yen profit, after divesting some of its older money losing businesses, it looks like the company may be able to.

Finally, be on the road to return to its glory days during and after the financial crisis, toshiba's highest level executives put immense pressure on the rest of the organization to improve financial results. They were hit hard by the recession and want to do anything necessary to report. Good numbers each quarter, although the ceo hisau tanaka, denied ever explicitly telling a subordinates to fabricate profit numbers, the pressure originated at the highest levels when losses were not recorded. The ceo and cfo knew about it and didn't do anything on paper.

Tanaka didn't technically order. The fraudulent accounting and never faced any charges, but this scandal would go down in history as a case where pride and pressure led executives to do things that ended up blemishing a company's 140 year. History, alright guys that wraps it up for this video. If you like, the content, make sure to smash the like button and subscribe, so you don't miss future videos also leave a comment saying what you think about toshiba's accounting fraud in the meantime.

Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.