Notice on Investigate Report Regarding Improper Accounting at an Overseas Consolidated Subsidiary
TOKYO, September 11, 2012 -- As announced in "Notice of Improper Accounting at an Overseas Consolidated Subsidiary and Postponement of Q1 Financial Results Announcement" dated August 8, 2012, OKI (TOKYO:6703, the "Company") had established an External Investigative Committee comprising outside experts to thoroughly clarify the whole picture of the improper accounting at an OKI Group overseas consolidated subsidiary in Spain, Oki Systems Ibérica S.A.U.(OSIB) in an objective manner and to develop preventive measures. The External Investigative Committee reported the results of the investigation to the board of directors today.
Given the results of the investigation, the company hereby announces the summary of the investigative report and overview of the amendments to the previous financial results recognized as of this date.
First of all, the Company offers its deepest apologies to all the shareholders including investors, business partners, and other relevant parties for any inconvenience caused.
According to the investigation by the External Investigate Committee and the findings of re-examination into the collectability of OSIB's accounts receivable by accounting auditors, the Company found that the accumulated total impact on its consolidated financial results due to the improper accounting led by the former managing director of OSIB (disciplinary dismissed from the post as of today), such as overstatement of accounts receivable (cover up of unrecoverable accounts receivable) and non-recording of debt, turned out to be a decline of 7.5 billion yen in net sales, 21.6 billion yen decrease in operating income, 30.8 billion yen in net income, and 24.4 billion yen decrease in net assets, during the 6 years and 3 months (from the beginning of the fiscal year ended March 31, 2007 to the Q1 of the fiscal year ending March 31, 2013). Such improper accounting discovered at OSIB was not found through investigations carried out for other subsidiaries. However, it has been indicated that there are various tasks in the way the Company manages its overseas group subsidiaries.
OSIB is an affiliated company of OKI Data Corporation (hereinafter referred as ODC), an OKI Group company responsible for the printer business. It is a sales company responsible for Spain and Portugal under OKI Europe Limited (hereinafter referred as OEL), the European headquarters for the printer business. (OKI, directly or indirectly owns 100% shares of these companies) Nonetheless the management hierarchy, the Company takes the gravity of the situation seriously in that it could not discover the irregularity for a long time. The Company takes the recommendations from the External Investigative Committee regarding preventive measures seriously and the Company will enforce group-wide governance functions, while executing preventive measures steadily, in order to prevent recurrence of such problems.
2. Summary of investigate report by the External Investigative Committee
This translation of the summary of the investigative report, found below in this press release, is for reference purpose only.
(1) Improper accounting at OSIB
- Improper accounting at printer and consumables businesses
As a result of selling product volume exceeding sales capability of some of the distributors, with the aim to achieve profit target, some distributors' inventory had accumulated beyond their control. When payment from the distributors stagnated, the sale was cancelled by OSIB and then it issued a new fictitious invoice with a new date (recorded fictitious sales). By repeating such accounting process that had the effect to extend payment terms, irrecoverable accounts receivable were forged as sound accounts receivable. In addition to this forgery, inappropriate recording of fictitious sales and accounts receivables have been identified.
OSIB acquired liquidated funds through factoring fictitious accounts receivable which was used to provide financial support for distributors, virtually funding them. The money received from OSIB was paid back to OSIB and as a result, the accounting records were disguised as if OSIB's accounts receivables had been settled, covering up irrecoverable accounts receivable. OSIB's long overdue accounts receivable could not be identified through such reciprocal funding.
- Non-recording of debt and under statement of accounts receivable at TV sales business
OSIB has been selling TVs as its local business since 2006. OSIB engaged in improper accounting for the purpose of financial support to its business partner (Company Q) who had more and more trouble in making ends meet, as a result of severe price competition of LCD TVs. As background for this financial support, OSIB could not stop its TV sales business which had grown to be an enormous business and it wanted to maintain the close relationship with the partner. There were 2 patterns in improper accounting for TV sales business; one is the process to cover up accounts receivable of Company Q and the other is the process to assume Company Q's purchase debt against the TV manufacturer (Company R). The amount of the Company Q's accounts receivable was falsely written-down using non-existing goods in transit, inventory and deposit with banks as well as borrowed money and money received from other companies. Additionally, accounting irregularity was found in assuming purchase debt, as OSIB did not record the debt which made OSIB, in effect, the joint-cosigner.
- Double cashing of the same accounts receivable through factoring and on an exchange
In order to raise funds by liquidating long overdue accounts receivable, OSIB engaged in factoring and on the other hand, it collected the said accounts receivable by way of accepting a bill from the customer simultaneously which was then cashed by the bank. In this way, OSIB engaged in improper accounting by raising duplicate funds from the same accounts receivable.
- Other accounting irregularities
Other than the above, there were cover-ups such as not recording rebate payment to distributors, accounting process of not recording advance payment from a business partner and applying it towards a different business partner's accounts receivable as well as disguising borrowings as decrease in accounts receivable.
(2) Investigative results on similar case
In confirming whether or not similar accounting practices exist at other subsidiaries, the External Investigative Committee evaluated all OKI Group domestic and overseas affiliated companies based on possible background conditions for OSIB's irregularities (own fund raising, sale of non-OKI Group products and level of internal control from the headquarters etc.) and carried out an investigation in writing that requires submission of evidence for accounts receivable etc. to those subject to the investigation. All sales companies in the printer business were investigated. As an outcome, such accounting irregularities discovered at OSIB was not found through the investigations carried out for all 24 overseas subsidiaries.
3. Impact amount on the Company's consolidated financial statements
(1) Total impact on each fiscal year
With regards to the impact on the Company's consolidated financial statements, accumulated total impact on its income statement up to Q1 of the fiscal year ending March 31, 2013 is as follows; net sales decreases by 7.5 billion yen, operating income decreases by 21.6 billion yen, recurring income decreases by 21.5 billion yen, and net income decreases by 30.8 billion yen.
At the beginning, the Company projected the impact due to the improper accounting made evident by the investigate report to be approximately 8.0 billion yen. However, accumulated total impact up to this term is 15.4 billion yen decrease in net income, due to impact of overstatement of sales increasing to 12.6 billion yen, as a result of recording VAT (value-added tax) and impact of Euro currency exchange in amending past financial results, and 2.8 billion yen of unpaid debt, such as unpaid rebate, made evident by the investigation.
Furthermore, in addition to the revisions due to improper accounting practices made evident by the investigative report, the Company re-examined the collectability of the overall accounts receivable, which overdue term had not been appropriately recognized, as a result of the improper accounting practices; the accumulated total impact for this term is 15.4 billion yen loss in net income due to 7.4 billion yen of unrecognized debt etc. related to TV sales clarified by the investigation and 8.0 billion yen of allowances for other uncollectible receivables. Therefore, the total accumulated impact amount up to this term is 30.8 billion yen decrease in net income.
The impact on its income statement for Q1 of the fiscal year ending March 31, 2013 is 1.0 billion yen increase in net sales, 1.0 billion yen decrease in operating income, 0.8 billion yen decrease in recurring income, and 0.8 billion yen decrease in net income.
The impact on its balance sheet as of the end of Q1 of the fiscal year ending March 31, 2013 is 24.4 billion yen decrease in net assets and 8.1 billion yen decrease in total assets. The difference in net income and net assets is the currency translation adjustment account.
Chart 1: Total impact amount on each Fiscal Year
(million yen, the rate shows the impact amount against post-revision figures:%)
|FY ended March 31, 2006||Net income||—||—||-7,909||—|
|FY ended March 31, 2007||Net sales||718,767||716,967||-1,800||-0.3|
|FY ended March 31, 2008||Net sales||719,677||719,756||79||0.0|
|FY ended March 31, 2009||Net sales||545,680||544,529||-1,151||-0.2|
|FY ended March 31, 2010||Net sales||443,949||442,949||-1,000||-0.2|
|FY ended March 31, 2011||Net sales||432,685||432,651||-34||-0.0|
|FY ended March 31, 2012||Net sales||428,104||423,480||-4,624||-1.1|
|Q1 of FY ending March 31, 2013||Net sales||—||—||1,034||—|
(2) Breakdown of impact amount and impact amount per factors on each fiscal year
The breakdown of impact on the Company's consolidated financial statements are classified as the impact of the improper accounting clarified by the investigate report, the impact of re-examination into collectability of the accounts receivables based on the report, and others. Chart 2 shows the impact on each fiscal year. According to the person responsible for OSIB, the improper accounting practices started from at least 1999 but clear records exists only from 2006 onward so net assets for the beginning of fiscal year ended March 31, 2007 shows the previous total impact amount.
The impact based on re-examination into collectability of accounts receivable for fiscal year ended March 31, 2010 onward is caused by aggressive forced sales even after the economic downturn after the Lehman's fall which then became difficult to collect. Others represents the revised amount which had been failed to revise in the past. The changes have been made to correct the accounting period and items of account.
Breakdown of impact by factors based on investigative report is shown in chart 3.
Chart 2: Breakdown of impact amount on each fiscal year
|Based on investigative report||Re-examination into collectability of A/R||Others||Total|
|FY ended March 31, 2006||Net income||-7,909||—||—||-7,909|
|FY ended March 31, 2007||Net sales||-1,800||—||—||-1,800|
|FY ended March 31, 2008||Net sales||81||—||-2||79|
|FY ended March 31, 2009||Net sales||-1,153||—||2||-1,151|
|FY ended March 31, 2010||Net sales||-1,000||—||—||-1,000|
|FY ended March 31, 2011||Net sales||-34||—||—||-34|
|FY ended March 31, 2012||Net sales||-4,624||—||—||-4,624|
|Q1 of FY ending March 31, 2013||Net sales||1,034||—||—||1,034|
(million yen)(ref:million Euro)
|Net income (total)|
|Cancellation of fictitious sales and accounts receivable etc.||-12,555||(-96)|
|Cancellation of sales and accounts receivable which do not meet the criteria to record as sales or accounts receivable||-667||(-5)|
|Cancellation of sales and accounts receivable related to non-recording of rebate payment to distributors||-2,062||(-19)|
|Impact based on investigative report||-15,381||(-120)|
|Impact of re-examination into collectability of accounts receivable||-15,443||(-128)|
4. Analysis of improper accounting
4-1 About OSIB
- Motivation behind the improper accounting
According to the former managing director of OSIB, the motivation behind the improper accounting practices is, by providing financial support to sales channels that were facing funding problems would in turn, make OEL and ODC profitable. Furthermore, bonus was paid as a reward to the former OSIB managing director in conjunction with the performance each year. The former OSIB managing director started up OSIB and accelerated its printer business by developing unique partners. It is possible that he tried to achieve the budget amidst the shrinking printer business in order to maintain his charismatic position in ODC and OEL. However, the real reason could not be found.
- The reason OSIB's independent actions could not be stopped
The environment given to OSIB such as its external warehouse, its own fund raising (factoring etc.), enabled improper accounting which is one of the factors for this occurrence. The warehouse was used inappropriately for false sales that actually had no shipments. Also, its own fund raising was the cause of delay in discovering and expanding the irregularities. Furthermore, nobody at OSIB could voice one's opinion to the former managing director. Distributors are in the position to receive products from OSIB so the Company presumes they could not act against the managing director's intentions.
4-2 About ODC
In order to meet OKI's expectations, ODC prioritized securing profit by drawing a proactive sales plan without fully considering the economic trend or fluctuations in the printer market. ODC instructed OEL to achieve high targets and in turn, OEL set high sales targets, exceeding their capability for sales subsidiaries under OEL, especially OSIB, its influential sales subsidiary. The former OSIB managing director vigorously pushed to achieve the targets with the motivation to uplift the managing director's position and reward through achieving them. The Company thinks this is one of the factors that induced the accounting irregularities.
OSIB was permitted to have its own warehouse, its own fund raising, customized accounting system, and sales of products other than printers, which are not allowed in other sales subsidiaries. Various permissions may have been deemed rational at the time but its rationality should have been examined as time went by which ODC or OEL failed to perform. This is thought to have induced the accounting irregularities and is one of the factors that expanded the scope.
Furthermore, ODC had an internal control system which was not functioning sufficiently due to limited resources. OEL did not have such internal control functions. Additionally, although OEL has a whistle-blowing system, it is not thoroughly implemented which may also be one of the factors the irregularities were not discovered for a long time.
4-3 About OKI
OKI was reported on the problems regarding OSIB from ODC June 2011 onward and had instructed ODC to take hold of the situation and to develop improvement measures. However, the Company did not consult auditors etc. with regards to the appropriateness of accounting practices, which consumed time to resolve the problems.
OKI has a department that supports the evaluation of effectiveness over internal control for its financial reporting within Internal Audit Division. OSIB is classified as an influential company to OKI's consolidated financial statements. For this reason, OKI's management has to perform not only the overall internal control but also internal control over important operation processes such as sales, purchase and inventory. However, although the TV sales business occupied approximately half of OSIB's sales, its status, which had different risk characteristics from the printer business, was not informed to the Internal Audit Division. Effectiveness of internal control continued as a consequence which may be one of the factors the irregularities was not discovered.
5. Development of measures to prevent recurrence
While continuing to clarify the whole picture into the case, the Company has been reviewing preventive measures from the below perspective. However, the Company takes the preventive measures recommended by the External Investigative Committee seriously and has decided to promptly consider a fundamental preventive measure in order to ensure that such issues described above never recur and has set up a preventive committee with the President as the chairman, effective today. The Company plans to disclose the preventive measures as soon as the details are finalized.
- Thorough implementation of compliance consciousness
- Review of subsidiary management system
- Enforcement of auditing and monitoring system over affiliated companies
- Re-establishment of internal control appropriate for business and risk characteristics
- Review of personnel system
(1) Announcement of Q1 financial results for the fiscal year ending March 31, 2013
The Company plans to announce its Q1 financial results for the fiscal year ending March 31, 2013 on September 14, 2012, upon receiving the quarterly review statement by its auditing firm.
(2) Disciplinary action for those involved
Apart from the former managing director of OSIB, the Company is currently reviewing disciplinary action for those involved. It plans to disclose as soon as the details are finalized.
With a steadfast determination that this type of misconduct will not recur, all OKI Group will work together regain the public's trust. The Company humbly asks for your understanding and support.
About OKI Electric Industry (OKI)
Founded in 1881, OKI Electric Industry is Japan's leading telecommunications manufacturer. Headquartered in Tokyo, Japan, OKI provides top-quality products, technologies, and solutions to customers through its info-telecom systems and printer operations. Its various business divisions function synergistically to bring to market exciting new products and technologies that meet a wide range of customer needs in various sectors . Visit OKI's global website at http://www.oki.com/.
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