Corporate Fraud in Japan

Corporate Fraud in Japan Corporate Fraud in Japan: Risk Management and Governance By Takashi Yasuoka Corporate Fraud in Japan: Risk Management and Governance By Takashi Yasuoka This book first published 2019 Cambridge Scholars Publishing Lady Stephenson Library, Newcastle upon Tyne, NE6 2PA, UK British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Copyright © 2019 by Takashi Yasuoka All rights for this book reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright owner. ISBN (10): 1-5275-3425-1 ISBN (13): 978-1-5275-3425-4 CONTENTS Foreword .................................................................................................... ix Preface ........................................................................................................ xi List of Contributors .................................................................................. xiii Acknowledgments ................................................................................... xvii Introduction ................................................................................................. 1 Chapter One ................................................................................................. 3 Corporate Governance and Risk Management in Japan 1.1 Japanese companies’ corporate governance ..................................... 3 1.2 Japanese corporate risk management and corporate fraud ............... 8 1.3 Limitations of risk management .................................................... 15 Chapter Two .............................................................................................. 21 The Toyo Tire & Rubber Data Falsification Scandal 2.1 Incident summary........................................................................... 21 2.2 Falsification details and causes ...................................................... 24 2.3 From whistle-blow to publication .................................................. 28 2.4 Content of improvement measures................................................. 29 Chapter Three ............................................................................................ 33 Technical Problem: Fake Labels at the Fukumusume Sake Brewery 3.1 Outline of the case ......................................................................... 33 3.2 Technology problem ...................................................................... 36 3.3 Process and material management ................................................. 38 3.4 Cause analysis ................................................................................ 40 3.5 Measures to prevent recurrence and issues .................................... 41 vi Contents Chapter Four .............................................................................................. 45 Data Fabrication at Kobe Steel 4.1 Overview of the incident ................................................................ 45 4.2 Risk management of Kobe Steel .................................................... 47 4.3 Quality problem ............................................................................. 50 4.4 Outline of fraud and management responsibility ........................... 53 4.5 Cause analysis and measures to prevent recurrence ....................... 56 4.6 Three lines of defense .................................................................... 58 4.7 Challenges for recovery of trust ..................................................... 60 Chapter Five .............................................................................................. 63 Factory Inspection Issue: JXTG Energy Mizushima Refinery Fraudulent Inspection Records 5.1 Case outline .................................................................................... 63 5.2 Ambiguous corporate culture ......................................................... 65 5.3 Fraud discovery and violations content .......................................... 69 5.4 Root cause and its preventive countermeasure .............................. 70 Chapter Six ................................................................................................ 75 Performance Evaluation Fraud: Mitsubishi Motors’ Fuel Consumption Fraud 6.1 Overview of the case ...................................................................... 75 6.2 Risk management relied on compliance ........................................ 77 6.3 Fuel economy measurement system and three defense lines ......... 78 6.4 Method of fuel economy measurement .......................................... 82 6.5 Irregularity contents and indication from within the company ...... 84 6.6 Corporate philosophy and preventive measures ............................. 87 Chapter Seven ............................................................................................ 91 Circular Transactions at Tsubakimoto Kogyo 7.1 Summary of the case ...................................................................... 91 7.2 Organization that is prone to fraud................................................. 92 7.3 Circular transaction ........................................................................ 93 7.4 Sequence of fraud .......................................................................... 98 7.5 Causes and prevention of recurrence ........................................... 100 Corporate Fraud in Japan: Risk Management and Governance vii Chapter Eight ........................................................................................... 103 Management Fraud: Olympus Accounting Scandal 8.1 Fraud caused by management team ............................................. 103 8.2 Limitation of risk management .................................................... 106 8.3 Accusation by a new president ..................................................... 108 8.4 Problem of governance and internal control ................................ 110 8.5 Responsibility of directors ........................................................... 113 Chapter Nine ............................................................................................ 115 Fraud at Operating Departments Pressured by CEO: Toshiba’s Accounting Scandal 9.1 Background of the scandal ........................................................... 115 9.2 Violation of Financial Instruments and Exchange Act ................ 119 9.3 Corporate governance and risk management at Toshiba .............. 121 9.4 Problems with the investigation by the Third-Party Committee .. 126 9.5 Directors’ liability and preventive measures ................................ 129 9.6 Improvement report of internal control system ............................ 132 Chapter Ten ............................................................................................. 137 Summary of Corporate Fraud Incidents Index ........................................................................................................ 141 FOREWORD YB DR. MASZLEE BIN MALIK MINISTER OF EDUCATION, MALAYSIA I recall the moments of my talk to a group of Malaysian students in Tokyo, Japan during the Golden Weeks of 2002. In the discourse, my advice to these “young hearts” was to strive for the pinnacle of academic excellence whilst not neglecting the importance of mingling with locals and assimilating the positive features of the Japanese culture, spirit of competitiveness and nation-building. As the privileged few who were fortunate enough to study abroad, it was also their duty to bring home enabling value systems as well as the varsity scroll. Where better than Japan, an exemplar in rising from the ashes following Hiroshima and Nagasaki to developed-nation status and a global superpower—largely due to enormous amounts of best practice, discipline and kaizen. It is indeed a pleasant surprise that those very “students” have come back to me recently. This time around, it is to write a foreword on this superb piece of work entitled Corporate Fraud in Japan: Risk Management and Corporate Governance, a Japanese-to-English translation project with their sensei, Professor Takashi Yasuoka of the Shibaura Institute of Technology. Alhamdulillah, my advice had yielded fruition 15 years later in no better a time than in Malaysia Baru, which further emphasizes and revisits the “Look East Policy” initiated by our current prime minister, Tun Dr. Mahathir Mohamad, back in 1981. x Foreword The book is unique since the contents highlight the lessons learned from the fraud cases of Japan’s big corporations, such as Toshiba, Olympus and Mitsubishi, presenting invaluable knowledge and inputs for readers worldwide about business management, risk management and corporate governance. Malaysians are constantly reminded of the dire consequences—to taxpayers’ pockets—of money laundering and serious governance issues. Academic-wise, I have a keen interest in governance and have had a fair chance to publish a few books on the subject; namely from the perspectives of religion. Last but not least, I hope this constructive collaboration between a professor and students of two different countries will further foster and enhance bilateral ties between Japan and Malaysia. I also hope and pray that readers find this work beneficial. EDUCATION IS HAPPINESS, LOVE AND MUTUAL RESPECT YB Dr. Maszlee Bin Malik PREFACE In recent

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