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Toshiba CEO Hisao Tanaka resigns after $1.22 billion accounting scandal

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Bad bookkeeping never ends well — it nearly got Greece kicked out of the European Union, and it officially cost Toshiba chief executive officer Hisao Tanaka his job. After an independent firm hired by the Japanese tech giant found that profits had been overstated by a staggering $1.22 billion, Tanaka, along with a slew of other executives, announced their resignation. Shin Ushijima, a lawyer and the president of the Corporate Governance Network, a watchdog group, told the The New York Times, “Toshiba has a 140-year history and was like a straight-A student when it came to corporate governance. Toshiba shares are in everyone’s pension plans. Executives’ responsibility is extremely heavy.”

According to the third-party investigation, employees who drastically understated costs on long-term projects and inventory that was improperly valued contributed to the enormous discrepancy in profits, amounting to a total of 151.8 billion yen between 2008 and 2014. In an internal investigation of their own, Toshiba also recognized that they’d overstated their gains, but by a much smaller margin (a third of what the outside hires found). As a result, eight of the 16 current board members are planning to leave the company, and it is expected that a few more will follow, leaving less than 50 percent of the existing board intact.

The magnitude of this scandal has raised serious questions about the legitimacy of the Japanese government’s recently implemented measures that were intended to better regulate corporate governance. Last month, Prime Minister Shinzo Abe instituted a new requirement for publicly traded companies in Japan to maintain a minimum of two external, independent directors on their boards. But Toshiaki Oguchi, a governance expert who helped the government create the guidelines pointed out, “Toshiba satisfied the formalities of the code, but not the quality.”

Now, the biggest question at hand concerns how the company will move forward and overcome this series of setbacks. Damian Thong, a senior analyst for Japan technology at Macquarie, told CNBC, “Toshiba really has spent the last 20 years trying to grow first in electronics, and then when that failed, to go back and try to grow its power systems business. Growth is at something of an impasse at the moment, with both areas running into problems.” And whoever is chosen to solve those problems will have his or her work cut out for them.

“Whoever comes in will have to really bring the morale of the company back up and really fight harder in the real markets outside,” Thong said. “This is a big challenge for them, and I don’t think it will happen overnight.”

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