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How did Toshiba get away with padding profits for 6 years?

The pattern of fraudulent accounting at Toshiba stemmed from unrealistic earnings targets and a fear of upper level management.

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Toru Hanai/Reuters
Toshiba Corp President and Chief Executive Officer Hisao Tanaka (R) and Chairman of the Board Masashi Muromachi attend a news conference at the company headquarters in Tokyo on Tuesday. Tanaka, who stepped down on Tuesday after an independent investigation found he played a role in accounting irregularities, said his replacement by the company's chairman would be temporary.

Toshiba’s president Hisao Tanaka bowed his head in repentance at a news conference Tuesday as he announced he’d be stepping down after the company was found to have been overstating profits for years.

For now, Chairman Masashi Muromachi will replace Mr. Tanaka as interim CEO while the company recruits a new management team to be announced in mid-August, reported Bloomberg. Tanaka’s predecessors, Vice Chairman Norio Sasaki and adviser Atsutoshi Nishida, also resigned.

An independent committee found Monday that from a period of 2008 to 2014, the company had reported fraudulent earnings of 151.8 billion yen ($1.2 billion) higher than its actual estimate.

The reported profit was roughly triple Toshiba’s initial estimate, reported Reuters.

As he stood beside Chairman Muromachi and Vice President Keizo Maeda, Tanaka said the committee “pointed out that this was due to a systematic cover-up led by the managers and a lack of knowledge in business management. I apologize from my heart to all our stakeholders.”

The Japanese conglomerate has been under investigation for its “accounting irregularities” for three months now. In May, Toshiba announced that it would have to delay the filing of its annual report by two months, reported The New York Times.

The panel had then said that profits were likely to be overstated by at least 50 billion yen, or $415 million.

According to The Associated Press, the committee described the culture of fraudulent accounting at Toshiba as an intentional and “systematic cover-up.”

“The reason that they could carry on for six years overstating profits like this is because they were carefully and skillfully, and I quote, ‘hidden,’” said Bloomberg correspondent Pavel Alpeyev. “Tanaka and Sasaki have created an atmosphere at the company where the pressure to book immediate profits was tremendous, and lower level management could not go against the will of the top management.”

Toshiba first began doctoring its accounts in 2008, as its sprawling business was reportedly hit hard by the global financial crisis and managers set unrealistic earnings targets.

Its announcement this week represents Japan’s biggest accounting scandal since Olympus Corp. was found in 2011 engaged in a $1.7 billion fraud scheme, and “highlights how Japan is still struggling to improve corporate governance,” reported the AP.

Eight officials resigned in total on Tuesday, according to Reuters, and the company is considering appointing outside directors to take over more than half its board.

“For the company to rebuild there needs to be a renewal of the management structure,” said Tanaka, who has been with the company for 42 years. “I see this as the most damaging event for our brand in the company's 140-year history. I don't think these problems can be overcome overnight.”

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