Following the Toshiba Accounting Fraud, More Scandals in Japanese Companies Expected

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An article in Bloomberg View suggests that the accounting issues at Toshiba and Olympus are just the start of what could be equivalent to the more than dozen accounting frauds revealed in the United States after the Tech bubble burst in 2000. The article expressly indicates that there will probably be more revelations of problems due both to corporate governance and culture in Japanese businesses.

According to the article, most boards of Japanese public companies are made up of employees of the company. The lack of external oversight encourages them to expand employee perks instead of maximize shareholder value. The stagnant economy has allegedly led them to fake profitability in order to keep their lifestyle and bank loans going. The conclusion of this section of the article is that if one of the shining stars of the Japanese economy has been cooking the books, then the less successful companies are likely doing so as well.

The U.S. response to the scandals was the Sarbanes-Oxley Act. Japan’s Prime Minister Shinzo Abe has apparently introduced a new corporate governance code requiring outside directors on boards. The opinion piece indicates it is an important but encourages the Japanese Government to take additional action.

We were contacted last week from a reporter in Japan asking for our opinion of whistleblower law in Japan and the Toshiba scandal. The essential question was why an individual had not come forward to report this scandal before now.

Japan has a law protecting whistleblowers from retaliation that was enacted in 2006. According to our research, the fines in the law are so small that companies would rather just pay the fines than comply with the law.

Japan also hasn’t historically treated its whistleblowers well, so there was probably reluctance to come forward. The whistleblower who brought a case against Olympus under this anti-retaliation law did not fare well. This was the first to reach Japan’s highest court. Additionally, Michael Woodford, the whistleblower in the Olympus accounting scandal, was also fired after blowing the whistle. Until Japan is able to reassure whistleblowers that they will be protected, they won’t come forward to stop scandals like the one at Toshiba.

However, there are options. Employees in Japan of companies listed on a U.S. stock exchange may decide instead to avail themselves of the confidentiality of the Dodd-Frank whistleblower program instead of reporting to either the company or the Japanese government. The SEC whistleblower reward program has provided a financial incentive encouraging thousands to come forward every year to report violations of US securities laws. If the SEC takes action and recovers a monetary penalty of more than $1 million, an eligible whistleblower is due between 10 and 30 percent of the recovery.

There are nineteen examples already of whistleblowers coming forward to this program and helping to put a stop to problems before investors lost all of their money, and receiving an award. The US has received tips from around the globe about violations but since the program is still new, people are still being educated about it. Four people from overseas have received rewards.

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Deutsche Bank to Pay SEC $55 Million Over Portfolio Mispricing

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Deutsche Bank AG will pay $55 million to settle the SEC investigation into whether the bank masked financial losses by failing to update the market value of leveraged super senior trades, a form of credit default swap. Previous media reports have suggested that DB avoided a bailout during the financial crisis because it didn’t mark to market its derivatives position in this product to properly account for the gap risk.

The settlement could very well result in a payout under the SEC whistleblower program, because there are reports that at least three individuals inside the company went to the securities regulator to report the accounting fraud.

The derivatives transaction was complex and hedged, though there was a risk that the value of Deutsche Bank’s losses would exceed the value of the collateral put up by the counterparty when hedged the transaction. This would expose DB to gap risk.

During the height of the financial crisis in 2008 as the markets deteriorated, DB changed the way it measured gap risk and later measured the gap risk for accounting purposes as essentially $0. The internal estimates that were not reported on the financial books, however, put the gap risk at between $1.5 billion and $3.3 billion during that time period.

As a result, the financial institution’s books and records were inaccurate and the bank had inadequate internal accounting controls. The accounting control law is the same one used by the SEC in bribery cases from the Foreign Corrupt Practices Act.

Deutsche Bank neither admitted nor denied the SEC’s findings.

Questions? Contact one of our SEC whistleblower attorneys via our contact form or by calling 1-800-590-4116.

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Are Adjusted Profits Misleading Investors?

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A recent report by the Associated Press of 500 major companies has found the gap between adjusted profits and profits according to general accepted accounting principles has widened in the past five years. According to the report, one of every five company has “adjusted” profits in excess of net income by more than fifty percent.

The “adjusted” numbers are starting to add up to a potential problem. In total, adjusted profits by the S&P 500 from 2010 to 2014 have led to $583 billion above net income. And the adjusted profits at 15 companies were in reality losses according to GAAP accounting over the five years.

Stricter disclosures to investors concerning how companies arrived at adjusted numbers were supposed to help put a stop to the types of accounting fraud that became popular prior to and during the dot com crash. But there are now concerns that investors aren’t doing enough digging into the numbers provided by businesses. And financial analysts, who are supposed to be doing independent analysis of the companies on behalf of investors, are being accused once again of simply rubber stamping the company numbers.

Businesses use one-time restructuring charges to account for unusual items such as a loss during the divesture of a failing division or other asset. By removing them from the day to day accounting, they could provide a better look at the operations of the company going forward. However, when restructuring write-offs become the norm, the adjustments begin to look as if they are truly just ordinary operating expenses of the company.

The Dow Jones Industrial Average is now about 28 percent higher than it was during the stock market’s peak prior to the Great Recession. Is this increase warranted? Or is it being driven by high frequency trading, adjusted profits and other matters that are disconnected from the fundamentals of the company and the economy?

If you have evidence of accounting fraud at a publicly traded company, contact one of our SEC whistleblower attorneys to discuss your options under the incentive program created by the Dodd-Frank Act. An attorney can be reached by our contact form or by phone at 1-800-590-4116.

Monsanto Pays $80 Million to SEC for Accounting Issues after Whistleblower Tip

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Monsanto, the multinational agriculture company headquartered in the St. Louis area, has agreed to pay the Securities & Exchange Commission an $80 million penalty and retain an independent compliance consultant to resolve charges it misstated company earnings and violated accounting rules.

How Common is Accounting Fraud?

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Accounting irregularities have come up a fair amount recently, from the increase in SEC investigations in this area announced at the beginning of the year to the SEC fine against CSC for $190 million in June. With a wave of new stories hitting the media, it doesn’t seem like this area of securities law is going to slow down anytime soon. Here are the latest areas related to accounting fraud to be getting coverage:


At the end of June, Harry Markopolos, the whistleblower that famously attempted to notify the U.S. Government of the Bernie Madoff ponzi scheme, warned the SEC about accounting and investment reporting issues with the MBTA pension fund. After a six month investigation, Markopolos told the SEC and other agencies that the pension fund may be overstating its books by as much as $470 million out of the $1.6 billion pension.

Among the issues noted in their study of publicly released information by the pension fund:

  • They discovered statistically improbably events, such as a return on investment two years in a row of 17.7 percent.
  • They used a different accounting approach three years in a row to calculate asset valuation.

The Massachusetts Bay Transportation Authority operates the leading share of the bus, subway, commuter rail and ferry system in greater Boston. The pension plan is funded partly by taxpayers and covers the workers and retired employees of the transit system.

Interestingly, Markopolos did not submit the tip to the SEC whistleblower program for a reward.


A former SEC attorney is attempting to crowdsource an investigation into CalPERS. The California Public Employees’ Retirement System is America’s largest public pension plan with over $300 billion in assets.

Earlier this year, CalPERS told its Investment Committee that it couldn’t track how much money it was spending on private equity firms. Given that the SEC has been investigating advisers and the private equity industry for problems with their fee disclosures and hidden fees, we wouldn’t be surprised if a whistleblower emerges with information about how investment banks or private equity firms were fleecing public pension funds and is able to capture a reward in the future.


This Japanese corporation known in America for its personal computers is expected to have to restate profits lower by more than $1 billion due to accounting irregularities. The amount is nearly double the earlier estimates as it has discovered overstated profits in its computer and semiconductor business in addition to the earlier reported problems related to its contract with Tokyo Electric Power for smart grid technology. The company has yet to file its latest annual report due to the need for the accounting restatement.

Will accounting fraud be the next big area for the government to pursue once it wraps up the smaller mortgage fraud cases?  We’ll just have to wait to find out.

If you have evidence of accounting fraud at a publicly traded company, contact one of our SEC whistleblower attorneys to discuss reporting it to the U.S. Government. An attorney can be reached by our contact form or calling 1-800-590-4116.

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Another Example of the SEC Accounting Fraud Pursuit: Weatherford

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The SEC has announced a $140 million settlement with Weatherford International over the use of deceptive income tax accounting to inflate its earnings. Weatherford is one of the largest oil and natural gas companies internationally and is now a repeat player in settling government investigations. They were fined a few years back by the SEC for a violation of the Foreign Corrupt Practices Act.

Overview of SEC Issues with Financial Disclosures and Auditors

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In a speech this week, SEC Enforcement Chief Andrew Ceresney discussed the types of wrongdoing the SEC has seen over the past few years in financial disclosures and auditing. As the securities regulator has been winding down its prosecution of the financial crimes from the Great Recession, or lack thereof according to some, the SEC has returned to its fight against accounting fraud. The SEC has more than doubled its enforcement actions for issuer reporting and disclosure since fiscal year 2013.

Accounting Fraud Continues with Bankrate Settlement, Toshiba Announcement

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At the beginning of this year, the Wall Street Journal wrote an article about how the Securities and Exchange Commission was investigating a surge of cases involving accounting fraud. It looks like we might be seeing the outcomes of some of those cases soon, as suggested by the Bankrate settlement today. Bankrate, best known for its online comparison tool for mortgages and other types of bank lending, agreed to settle charges of accounting fraud brought by the SEC for $15 million.

The allegations by the SEC involved a scheme to meet analyst estimates by inflating revenue and underbooking expenses in the second quarter of 2012. The insurance and credit card divisions were asked to book additional, unjustified revenue. When the credit card division balked at the full amount, additional revenue was booked to two mortgage clients. Bankrate also had an expense account to manipulate financial results for at least a year.

Bankrate is by no means the largest company to have announced problems with its books right now. Toshiba, although a Japanese corporation, is also undergoing scrutiny by investors around the world. In fact, it has been the prime example since May, when the company withdrew its net profit estimate of $1 billion for the last fiscal year, ultimately posting a net loss of $318 million. Toshiba announced revised earnings statements for seven years today, noting that it overstated revenue by approximately $1.9 billion and profits $1.3 billion over the time period at issue.

The Japanese conglomerate’s accounting issues reportedly stemmed from divisions within the company fudging numbers in order to meet the high quarterly targets set by Toshiba’s management. There has been speculation by at least one commentator that if the practice is going on at the company, which had an excellent reputation, then it may also be going on at other companies in Japan. Some of those may be listed on a U.S. stock exchange and subject to a possible fine by the SEC for providing materially misleading information to investors.

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Accounting Fraud Cases Up in 2014

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Allegations of accounting fraud in securities class actions or SEC enforcement actions were up in 2014 compared to the prior two years, according to a report by Cornerstone Research. These cases involved auditing violations, weaknesses in internal controls or allegations of failing to follow US Generally Accepted Accounting Principles.

Class actions involving accounting issues grew 47 percent on a year over year basis and there was a similar increase in the number of enforcement actions filed by the Securities & Exchange Commission between the 2013 and 2014 fiscal years.  The increase in accounting cases was remarkable because the number of securities class actions filed remained roughly the same in 2013 and 2014.

A large number of the cases dealt with the restatement of financials. The percentage and number of these cases was at their highest level in seven years.

Accounting issues can be the basis for whistleblower tips to both the SEC and the Internal Revenue Service because they result in either inadequate disclosures to investors or the nonpayment of taxes to the government.  The government whistleblower programs may pay between 10 and 30 percent to eligible individuals for tips after a successful enforcement action and qualifying information which meets the rules for a reward.

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Ethics Code Now Guides Accountant Whistleblowers


The International Ethics Standards Board for Accountants (IESBA) has revised the Code of Ethics for Professional Accountants to address ethical concerns about how to handle a client’s suspected non-compliance with laws and regulations (frequently referred to as “NOCLAR”). The changes to permit whistleblowing in the Ethics Code, which serve as guidance for professional accountants around the world, will be effective on July 15, 2017, although early adoption is permitted.

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