The accounting fraud, and Itochu’s rescue share issue (1967)

What was bent was not the judgment but the yardstick

What produced the falsification was an order from the top — secure the work first, worry about margins after the rival has been beaten — and for a latecomer that could not reach Organo in equipment, that was one of the few available moves. The error lay in not letting that strain show in the accounts, under percentage-of-completion recognition. The heart of this affair is better located not in the judgment itself but in the bending of the yardstick by which the judgment’s results were measured.

It would be premature, though, to read the successful rebuilding as proof that the mechanism was fixed. As late as 1975 Kurita was still using the same percentage-of-completion method and was suspected of stretching it. What erased the ¥2.6 billion of accumulated losses was the profit from chemicals and the sudden expansion of the pollution-control market, not any correction of accounting practice. The verdict of the time — seven parts effort, three parts the tide of the era — was another way of saying that Itochu’s share issue and president Kaiishi Shinzo’s policy of opening the books arrived just in time to catch that tide.