After Toshiba scandal, foreign investors want tougher governance in Japan

“One of the problems is that audit fees are very low in Japan. It’s nonsense that auditors, on these fees, are doing any proper work,”

The Japanese government, and global regulators, need to do something about the relationships between corporations and their for-hire audit firms. The "big four" seem willing to turn a blind eye to corporate corruption.

I smell a rat in terms of Toshiba in particular in terms of management's relationship with its corporate auditor Ernst and Young, which also happened to be the corporate auditor for Lehman Brothers, Olympus, and now Toshiba.

Didn't these audit firms learn anything after Arthur Andersen's demise following the Enron Scandal?

Japanese usually believe fudging the books is often a necessity and a victim-less crime. THIS must change if Japan hopes to develop into world markets.

And just who is going to introduce "harsher criminal sanctions" into this cozy club? Even when there are legal sanctions the courts generally let off the criminals with weak sentences, even where clear victims are involved and there is clear responsibility. Typically the words are something like (if in English) "it was a vicious crime that undermined trust in business but the defendants have shown remorse and they should be sentenced to two years suspended for 5." The only exceptions are if you are not part of the club and making a few waves, like Horie Takafumi, and then you will be raided without warning and subject to full penalties. The system is rotten but has such good PR within Japan that few people think anything truly amiss. On the contrary, they believe that criticism from outside is due to some kind of envy.

Sue them in the USA. They'll listen.

I don't think stiffer criminal penalties are going to make much of a difference. It might just make the authorities in Japan more reluctant to prosecute. In the end, investors have to decide for themselves whether putting their money into Japanese companies is safe or not. The government can't step in to remove all the risks by holding complex and expensive prosecutions at tax payer's expense. Investors have to take some responsibility and take control of the companies that they actually own. It boils down to trusting the person you decide to do business with.

To an extent you are right, M3. It is partly up to investors. If they cannot trust the companies they shouldn't invest. However, it is not just investors who are losing out when the system is opaque and corrupted. The market economy relies on the free flow of information for efficient use of resources and capital. Hence the economy as a whole and consumers too have stakes in this issue. These companies are no better than parasites on a functioning economy and weaken it in the long run. The top management, which is largely resistant to outside influence, is thriving at the expense of all else. This unfortunately is a narrative which is hard to sell in a country where top management of large companies are regarded as unimpeachable and even working on behalf of the nation itself. It is up to government to set the legal framework and regulation since the market cannot function without them.

How about adopting IFRS all over for a start?

Guy Jean you reading this?

Yes, I agree there are larger interests at stake. I guess the question is who should set up the framework and pay to police the financial system? There are a few different options out there. In the US there are so many legal accounting rules and a massive taxpayer funded bureaucracy (the SEC) which companies have to report and make thousands of disclosures to avoid criminal prosecution, but it's not exactly clear that this approach benefits investors. At the opposite end of the spectrum, the UK has a much simpler and cheaper system where it's left to the private London Stock Exchange listing rules to provide for how companies should be run and what disclosures they have to make if they want their shares to be traded. If there is any fraud or they don't meet the strict standards, they will be delisted by the exchange. I would prefer the UK approach but, as you described, the core of corporate Japan might be a bit too rotten for this type of laissez faire regulation.

“One of the problems is that audit fees are very low in Japan. It’s nonsense that auditors, on these fees, are doing any proper work,” said Robert Medd, a partner at GMT. They get exactly the audit they want/pay for. I wouldnt be shocked in very high percentage of J firms are exactly the same as Olympus and Toshiba, bet there are some nervous g,g's out there right now.

As long as loyalty to the group trumps loyalty to an "abstract" notion of ethics, little change will be possible. Invoking ehical principles to justify action is anathema in this social context, where whistleblowers are viewed as quislings and revealing corporate misbehaviour is tanatmaount to treason. Vis. the Minolta scandal, where the whistleblower, the foreign president of the company, was handed his walking papers for shining a light on illegal accounting practices. The overwhelming majority of Japanese are smply unable to challenge authority, even when doing so is completely warranted.

Easy solution -- investors should all pull out, permanently. It's the only way the other companies will learn.

After Toshiba scandal, foreign investors want tougher governance in Japan

How can we trust anything coming from Japan? Toshiba is not the only one guilty.

Transparency of The Bank of Japan and Ministry of Japanese Finance is somewhat troublesome.. They are not telling the truth that Japan is in a bad shape financially.

These executives all belong to Japan Country Club-you scratch my back, so I scratch your back. And they do not care to burn your hard earned investments. Anyone agree?