On October 10th, Itochu Corporation announced that it had paid close to one hundred billion yen in false transactions to Mongolian suppliers for construction machinery and materials. The company started business in 1999 purchasing heavy machinery from a Mongolian supplier and selling it to a local natural resources company, but within one year, when the resources company could not afford to pay, an employee at Itochu began falsifying the transactions in order to make it look as though business was expanding.
A person claiming to be a chartered accountant started a blog entitled Kaikeikansa [会計腐蝕列島] in September, offering views on what is happening in the current financial crisis and at Itochu in particular. In the blogger's first entry, posted on September 14th, they explain:
Although it is a bit late, recently I've been thinking various things about the areas of accounting, auditing, and internal control. I'm going to try to write a bit about these subjects here. I'll probably make occasional digressions, please forgive me for that.
In a later entry titled “What happens when business performance drops?“, the blogger writes on September 29th (still before the Itochu story was reported):
When a company's performance begins to sink, the business manager is struck by various incentives to do wrong. If you think about this a bit, you'll understand why this is so. When placed in a disadvantageous situation, humans do what they can to somehow find a way out of it, and in such cases they do not necessarily limit themselves to honest means. That's is what it is to be human.
It's just like a child telling a lie. If you write up honest financial statements, the severity of the situation becomes obvious to everybody. If they start thinking you're going to go bankrupt, that's the end of it. And if that's the case, then it's better to cover up this situation. As long as you can stick it out until things recover, everything is okay. That would seem to be the thinking.
The question that comes up is, what were the auditors doing when the situation was being whitewashed? Because there are cases where a company that seemed stable from the outside suddenly goes bankrupt, and seen from the inside is actually insolvent. So what in the world were they doing then? Were they just looking the other way? I'd prefer not to think that.
On October 11th, a day after the Itochu story broke, the blogger wrote in part one of a two-part series on the topic:
So this section chief who was fired, what was he doing anyway? [What he was doing was] buying nothing, and selling nothing. It seems that what happened was that payments were made in the role of goods purchased from the supplier, and those funds were diverted to clients, without any goods having ever actually been delivered. In the beginning they were actually making transactions, but then the clients were struck with financial problems, and payment was delayed. At that point, the clients were supported on a temporary basis and deals were allowed to continue, and with this idea, the former section manager reportedly has said that he “did favors in order to expand business”. The loans made out to look like sales continued over a period of 8 years, amounting to a total of close to 100 billion yen [about 1 billion USD].
In part two, the blogger remarks:
Once you start hiding everything, you pretty much can't get yourself out of it again. And then you become paralyzed. You can keep going on forever as long as nobody finds out. From the view of human psychology, there's nothing that can be done about this. I wonder whether there was any atmosphere or mechanisms in the company that would have led people to think, at the initial stage when the amount of losses was not yet so great, that hiding [what was happening] would lead to problems. This is really what the essence of internal control is all about, but I have the feeling recently that discussions are somehow overly fixated on unimportant details.
The blogger then goes into detail explaining what was involved in the transactions scam, concluding in the final lines of the post:
If you look at it this way, I think you'll see that to commit this act of injustice requires clearing an very large hurdle. If it were me in that situation, I would just give my reasons leave it up to my boss to decide whether to cut the losses or convert them into loans. If you don't do that, it's your head that will roll. I really wonder what was going on with that section chief.
Thanks to Akitoshi Abe for the suggestion to translate these posts.