Accounting Irregularities and Japanese Consolidated Financial Statements

Abstract

This paper reviews the Japanese accounting standards regarding consolidated financial statements as a means to prevent fraudulent financial reporting. The standards originally defined a parent as a company who owned a majority of the voting power.

The standards were then revised to define it as an entity that in substance controls the decision-making body of the other entity. The establishment of accounting standards on financial instruments as well as on consolidated financial statements resulted in the decrease of accounting irregularities.

Olympus Corporation had built up around ¥95 billion in losses since 1990 through the dealing of financial instruments. Olympus used the ‘tobashi scheme’, a procedure by which loss-making portfolios are shifted from Olympus to another fund with a pledge from a financial institution that incurred losses will be covered. In addition, Olympus acquired three national companies for on excess amount of money and it amortized the purchased goodwill immediately.

In order to prevent accounting irregularities, the consolidation of quasi-subsidiaries is important. Accounting standards should be encouraged to converge internationally in order to have all involved parties mutually understand any accounting situation.