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Auditor puts its foot down over unclear Toshiba finances

The Yomiuri Shimbun

Toshiba Corp. President Satoshi Tsunakawa bows at the start of a news conference at the company’s headquarters in Minato Ward, Tokyo, on Tuesday.

by Miho Yokoi and Shota Mizuno / Yomiuri Shimbun Staff Writers Toshiba Corp. decided to go ahead with releasing its earnings report for April-December 2016 despite not having a seal of approval from its auditor. The earnings announcement had already been delayed twice as talks with the auditing company continued, but the parties were unable to agree on matters such as whether deficiencies in the company’s internal management system affected the earnings report and the losses generated by its nuclear power business.

Toshiba is scheduled to release an earnings report in May for the full fiscal year ending in March, but it could be faced with a similar situation again.

“We sincerely investigated what the auditor pointed out, and responded to everything. After the investigation, nothing happened that would have impacted the [earnings] figures,” Toshiba Audit Committee Chairman Ryoji Sato said at a press conference Tuesday, the same day the earnings report came out.

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  • The Yomiuri Shimbun

Toshiba President Satoshi Tsunakawa also emphasized his “confidence in the figures.”

The conflict between Toshiba and its auditor is over whether Westinghouse Electric Co., a U.S. nuclear power company owned by Toshiba, had influenced the earnings figures. Westinghouse’s auditor had expressed concern that company managers pressured subordinates to underestimate its losses, which could have affected the earnings figures.

In response, Toshiba conducted an investigation lasting more than three months, reviewing more than 600,000 emails and interviewing dozens of people. Yet Toshiba’s conclusion that there had been “no impact” was not accepted by its auditor.

This is partially due to the continuing effects of Toshiba’s fraudulent accounting scandal that came to light in fiscal 2015. The auditing company felt it had to take a hard line with Toshiba, since any further improprieties that are discovered would harm confidence in the auditor, observers said.

Ernst & Young ShinNihon LLC, the company that handled Toshiba’s earnings reports until fiscal 2015, was punished by the Financial Services Agency after the scandal. The punishment included suspension from taking on any new business contracts for three months.

Further confusion?

Despite the lingering tension between Toshiba and its auditor, preparations for its full-year earnings report for fiscal 2016 are proceeding. Toshiba could change auditing companies, but it is uncertain that another firm would be willing to accept the contract. One source with ties to the company called the idea “unrealistic.”

More items need to be disclosed in a full-year earnings report than in a quarterly report, and the scope of the audit is wider.

The Tokyo Stock Exchange Inc. could move Toshiba from its First Section to its Second Section if its liabilities exceed its assets at the end of the fiscal year. Something like that would be a crucial turning point for the company.

If things remain as they are, Toshiba may have to delay the announcement of its full-year earnings report, which is currently scheduled for May. Earnings can be announced even if the audit is not finished. In fact, Toshiba announced its earnings for the year ending in March 2016 before the audit was completed. It then revised the report twice.

However, an auditor’s opinion needs to accompany the annual securities report that must be submitted within three months of the end of the earnings period. Investors treat annual securities reports with great importance, so if Toshiba were to release one without a “fair” indication from its auditor, it could damage the company’s credibility even more.

Will Toshiba be able to resolve its auditor’s concerns over Westinghouse? This is yet another difficult problem the company is facing. Speech

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