Toshiba Corp's (6502.T) chief executive stepped down on Tuesday after an independent investigation found he had been aware the company had inflated its profits, in the country's biggest corporate scandal in years.
CEO and President Hisao Tanaka said he will be temporarily replaced by Chairman Masashi Muromachi, adding that the company was considering appointing outside directors to over half of its board seats.
"I see this as the most damaging event for our brand in the company's 140-year history," Tanaka told a news conference after making a ritual deep bow of contrition to a flurry of camera shutters and flashes.
"I don't think these problems can be overcome overnight."
Muromachi is considered a safe pair of hands to lead Toshiba through its current turmoil before handing the reins to a successor. The company plans to announce next month the delayed business results for the financial year ended in March.
Tanaka's predecessors as CEO of the laptops-to-nuclear conglomerate, Vice Chairman Norio Sasaki and adviser Atsutoshi Nishida, will also step down after the third-party report showed they played a part in the overstatement of profits going back to the 2008 financial year.
Monday's report by an outside panel of accountants and lawyers said Toshiba had overstated its operating profit by 151.8 billion yen ($1.22 billion) over several years, roughly triple Toshiba's initial estimate.
Tanaka and Sasaki pressured business divisions to meet difficult targets knew they were overstating profits and delaying the reporting of losses amid a culture of not going against the wishes of superiors, the report said.
"It's not my understanding that I gave orders for improper accounting, but the reality is that such an observation has been made," Tanaka said. "The new executives and management must take preventative measures accordingly."
The findings are expected to lead to the restatement of earnings, a board overhaul and potentially hefty fines in Japan's worst boardroom scandal since Olympus Corp was found to have covered up $1.7 billion in losses in late 2011.
RISKS TO INVESTOR CONFIDENCE
Japanese Finance Minister Taro Aso said earlier on Tuesday that the accounting irregularities at Toshiba were "very regrettable", coming at a time when Japan is trying to regain global investors' confidence with better corporate governance.
"If (Japan) fails to implement appropriate corporate governance, it could lose the market's trust," Aso told a news conference on Tuesday. "It's very regrettable."
Aso declined to comment when asked if Toshiba would face any kind of financial penalty. Sources have said regulators were beginning their own review of Toshiba's book-keeping, based on Monday's report.
The investigation came just as Prime Minister Shinzo Abe has implemented new guidelines to improve the country's corporate governance.
Shares in Toshiba rose 6 percent on Tuesday on relief the report had few nasty surprises. But they are still down around 23 percent since Toshiba first disclosed cases of accounting irregularities in early April.
Rating Agency Standard & Poor's said on Tuesday that the required restatement of Toshiba's profit could lead to its credit rating being downgraded.
"Institutional investors and other long-term funds have already unloaded Toshiba shares, so currently the stock price is being driven by short-term investors," said Takatoshi Itoshima, chief portfolio manager at Commons Asset Management.
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