Toshiba inflated profits by $1.2 billion with top execs' knowledge: investigation

TOKYO (Reuters) - TOSHIBA (JP6502.TK)Corp overstated its operating profit by 151.8 billion yen ($1.22 billion) over several years in "institutional" accounting irregularities involving top management, an independent committee said in a report on Monday.

The probe sets the stage for a restatement of earnings, a board overhaul and potentially hefty fines at the conglomerate in Japan's biggest corporate scandal in years.

Toshiba Chief Executive Hisao Tanaka and his predecessor, Vice Chairman Norio Sasaki, were aware of the overstatements of profits and delays in reporting losses in a corporate culture that "avoided going against superiors' wishes," the panel said in a summary 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 says much of the improper accounting, stretching back to fiscal 2008, was intentional and would have been difficult for auditors to catch.

The report said Tanaka and Sasaki, who were also successive presidents, 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."

The investigation comes as Japan's Prime Minister Shinzo Abe is trying to improve the country's corporate governance in order to attract more foreign investors.

This is the country'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 scandal also shakes a stalwart 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.

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.

Tanaka and Sasaki will likely step down and more than half of the board will be replaced at a shareholders' meeting in September, sources said.

The committee is to hold a news conference at 7 p.m. (1000 GMT) on Tuesday, according to the filing.

(Additional reporting by Reiji Murai, Taro Fuse and Takahiko Wada; Editing by William Mallard and Mike Collett-White)

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