Nidec’s accounting misconduct. An Excel file built around JPY 580 million said “The number of people is arbitrary”

In fiscal 2016, some domestic group companies were told to revise their business plans so that performance targets would be achieved earlier. Meeting records include concerns that forcing profit into the first quarter could undermine sound management, but the plan revisions still moved forward.

An email from one subsidiary CFO submitting a revised plan preserved an internal term for profit that had been added without concrete measures to support it.

Profit added to a plan without a concrete way to produce it was called a “white box”; some people called it an “empty box.”

The committee says the email helps show that some domestic group companies submitted plans that formally matched the requested target even though they did not have concrete measures to produce the profit.

The committee says that, under top-down targets regarded as unrealistic, some domestic group companies separately prepared a more realistic plan based on their actual business conditions and used that plan to run the business.

The report describes a double structure: a “for-show” business plan for Nidec headquarters and a separate “real” business plan used internally.

The headquarters-facing plan could be restricted to senior managers, and some companies made it appear that they were considering action items they did not actually plan to carry out.

Nidec used a practice known internally as the “124% item” process. Action items were ranked from A to E by likelihood of realization, then weighted. The total had to reach 124% of the monthly operating-profit target, while A- and B-ranked items alone had to reach 80%.

The mechanism asked for action items worth 124% of a target in order to deliver 100%.

Domestic group companies were expected to complete the exercise by the fifth of each month. One CFO told the committee that when they could not, they were pushed to keep producing items even overnight and sometimes resorted to accounting measures such as delaying expenses, reconsidering valuation losses, or capitalizing costs.

Poor-performing domestic group companies could face performance-follow-up meetings almost every day. If no sufficient action plan came out of a daytime meeting, another meeting could be set for the same evening.

One CFO gave the committee a concrete explanation of how some monthly performance reports were handled under that pressure.

The CFO said operating profit that did not yet exist could be reported in months one and two because suffering in the follow-up process only in month three seemed preferable to suffering for all three months.

This is interview testimony from a specific person. The committee separately says that reported monthly performance figures at some poorly performing domestic group companies were not infrequently detached from actual results.

By the time quarter-end financial figures showed that operating profit was below target, generating additional sales was no longer a realistic solution. The report says the resulting pressure could shift toward accounting measures such as delaying expense recognition, revisiting valuation losses, changing asset valuation methods, or capitalizing costs.

These temporary measures for squeezing out operating profit were sometimes called “One Timer” or “one-off action items.”

Minutes from a 2022 internal meeting also show executives discussing the gap between management figures and financial-accounting figures and treating the monthly reporting problem as something that needed correction.

Performance pressure was not limited to formal meetings. The report reproduces an email sent by the president of one domestic group company to other executives.

The email described repeated calls from the representative, messages arriving every hour, and being told in substance that a lack of motivation could mean being pushed out.

The same section also reproduces another email pressing for results by invoking executive terms and personnel decisions.

From around 2011 to June 2020, Nidec also used a process referred to as “special audit” to investigate accounting misconduct, embezzlement and similar matters. A specially assigned employee conducted investigations, sometimes after reports were sent to founder Shigenobu Nagamori.

The special audits were conducted in secret, and their contents were initially shared only with Nagamori and a limited group of senior executives.

The committee says that in some large accounting-misconduct cases, the response was structured so that the issue would be processed over multiple periods rather than corrected immediately, in part to avoid a sharp drop in subsidiary operating profit. The committee also says Nagamori learned through those reports that such planned processing occurred and accepted it.

After an asset-health project began, however, lists of problematic assets were shared with the executive overseeing internal audit. A special-audit report discovered through a later external law firm’s forensic investigation was also shared with PwC Kyoto.

In one Nidec Precision matter, the company sought to recognize JPY 580 million of revenue on the basis of technical support provided to an outside contractor. The contractor initially resisted signing an agreement, saying among other things that it could not substantiate the reality of the transaction or the amount.

The committee later found an Excel file intended to show personnel dispatched for technical support.

The file said, in our translation, “The number of people is arbitrary,” and also indicated that more personnel would have to be inserted to reach JPY 580 million.

The committee considered that the technical support had no substance. Nevertheless, JPY 580 million in service revenue had been recorded without supporting evidence in the second quarter of fiscal 2016. A later supplemental agreement confirming that no receivable or debt existed for the services was not provided to PwC Kyoto.

A foreign subsidiary wanted to recognize roughly JPY 1.25 billion in government grants as revenue at once, but the local audit firm maintained that the accounting was not acceptable. During that process, Nidec headquarters’ accounting director contacted a CPA at PwC Kyoto.

Plan A meant confronting and persuading the local auditor directly; Plan B meant having PwC Kyoto take over the government-grant audit procedures.

The accounting director told the committee that he considered this alternative after hearing that PwC Kyoto might ask the local auditor to exclude the grant from its audit scope.

In the same government-grant matter, the local government said it would issue an additional notice if Nidec provided a letter stating, among other things, that the notice would be used for internal accounting purposes and not external submission.

On May 11, 2022, the local government sent an additional notice backdated to March 30, while Nidec sent a corresponding letter backdated to March 29.

Nidec gave the additional notice to PwC Kyoto but did not tell PwC Kyoto that it had provided the corresponding letter to the local government.

The accounting director later told the committee that he regarded the letter as unnecessary information and did not want to share it with PwC Kyoto. PwC Japan told the committee that, had it known of the letter at the time, it believed Nidec’s explanation would not have been coherent.

In purchase accounting for TAKISAWA, acquired in 2023, Nidec learned that land held by a Taiwanese subsidiary could have a large fair-value gain. An early outside-adviser estimate indicated a gain of roughly JPY 9.3 billion, which could require a retrospective change to Nidec’s fiscal 2023 consolidated accounts.

Accounting personnel told the committee they wanted to avoid the restatement because making fiscal 2023 a record operating-profit year would raise the hurdle for the goal of record operating profit in the second half of fiscal 2024.

The land was later excluded from the valuation scope. The committee concluded that Nidec improperly avoided recognizing JPY 3.34 billion of gain on bargain purchase by arbitrarily excluding the land from the purchase-price-allocation valuation.

Accounting misconduct continued to surface after fiscal 2019, and the internal-audit function carried out special investigations. The committee says internal audit understood that excessive performance pressure from headquarters was contributing to recurring misconduct but avoided challenging the management style built around very high targets and strict achievement demands.

In one subsidiary interview, executives blamed severe pressure from a Nidec headquarters executive officer for the misconduct. The final interview record removed that portion, and the resulting investigation report did not mention the pressure.

One internal-audit person said the executive was one of Nagamori’s “favorites” and that raising the issue too readily could result in the auditors themselves being targeted.

The pre-deletion interview record had also been shared with PwC Kyoto, whose engagement partner added a comment indicating that excessive pressure from Nidec headquarters appeared to point toward a root cause of the improper accounting.

PwC Japan replied that the partner directly edited the records to quickly clarify differences between earlier company explanations and the interview records under time constraints. It also said the partner had earlier told the statutory auditors that digital forensic work was needed. The committee received written responses but could not inspect audit workpapers or interview the engagement partner, and did not evaluate the external auditor itself.