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quicktake

How Scandal-Hit Japan Inc. Turned to Data-Faking: QuickTake Q&A

For the business world, 2017 will be remembered in part as the year when venerable Japanese companies got nabbed for falsifying data about their products or using unqualified personnel to inspect them. The corporate chicanery was carried out in the face of tough quality standards and in some cases had been going on for decades. Kobe Steel Ltd. made the first revelations in October, sparking a series of admissions that have tarnished Japan’s reputation as one of the world’s most prestigious manufacturers.

1. How many companies faked data?

Three were caught or admitted to doing it, and two carmakers said they used unqualified personnel to inspect vehicles in Japan. More cases may follow. According to a survey by the Japan Association for Chief Financial Officers, 73 percent of CFOs have seen or heard about inappropriate action such as fraudulent accounting or embezzlement at their companies. Japan’s business federation, the Keidanren, has asked members to check for quality fraud.

2. Why did these companies turn to deception?

Although each case is different, analysts and academics agree that increasing competition pressures from countries such as China played a part. Some of the pressure may be self-inflicted: Diego Oliva-Velez, an analyst at BMI Research, says companies have set unrealistically high product-quality standards for themselves to meet the global perception of superior Japanese manufacturing.

3. Is this unusual for Japan?

Corporate scandals are hardly new, but most of Japan’s murkiest ones have related to falsifying data on the balance sheet rather than on the production line. Toshiba Corp.’s $1.2 billion accounting scandal in 2015 was blamed on top executives setting unrealistic targets.

4. Why are so many companies coming forward now?

One view is that Japan’s corporate governance measures are improving because of the increased sway of foreign investors. “Compliance is finally becoming a familiar concept to employees in Japan,” said Ben Fouracre, Japan representative and managing director for FTI Consulting. He says companies have been forced into greater transparency and for the first time are questioning their own practices in light of the scandals. A more cynical view is that Kobe Steel bore the brunt and others rushed to follow. While the public will long remember Kobe Steel’s announcement, “they may more quickly forget some of the many follow-on announcements, making this an ideal time to come clean,” said David G. Litt, a professor at Keio University Law School in Tokyo.

5. Will the affected companies weather the crisis?

Nissan Motor Co.’s domestic sales fell by more than 50 percent in October from a year earlier after its revelations prompted the company to halt production. Subaru Corp. also suffered setbacks in sales. Analysts expect a gradual recovery in the coming months.

6. Should consumers be worried?

Nissan and Subaru recalled vehicles, but there have been no reported safety issues with the cars. Data falsification at Kobe Steel, Mitsubishi Materials Corp. and Toray Industries Inc. didn’t lead to any recalls or safety-related ramifications. At this point, it seems the lasting impact of the scandal is more likely to be corporate reputations blemished by corner-cutting and skirting of contracts specifications.

7. Are customers and shareholders looking for retribution?

Most companies that buy products from the miscreant firms have kept quiet and appear to be sticking with their suppliers. They realize that alternative suppliers -- in Japan or elsewhere -- might do no better and could even do worse, Keio University’s Litt says. Kansai Electric Power Co. is considering seeking repayment from Kobe Steel after delaying the restart of its nuclear reactor by a few months to carry out checks. Four individuals in Canada who own cars that contain Kobe Steel materials are suing for an unspecified amount in damages.

8. What’s the government doing?

Beyond reinspecting some facilities, urging affected companies to take preventative measures and reviewing the vehicle-inspection system, with an eye to greater supervision, the government has mostly distanced itself from the scandals. Japan’s trade minister, Hiroshige Seko, doesn’t see the nation’s reputation being affected, taking the view that this is a problem for individual companies -- not a systemic issue.

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