In 2015, Toshiba was hit by a systematic financial fraud scandal that had lasted for seven years.
Three consecutive presidents were involved, with the total amount involved reaching over 150 billion Japanese yen.
The firm responsible for auditing Toshiba was none other than Ernst & Young ShinNihon.
For seven years, they issued unqualified audit reports every single year.
A fraud of this magnitude could not have been achieved by a few executives on a whim; it required close coordination across finance, sales, and production departnts, and even more so, the "tacit understanding" of external audit institutions.
Sega's operations are expanding rapidly.
With major markets in North Arica, Europe, and China all advancing in parallel.
Hardware production lines are running at full capacity, and software developnt budgets are often in the millions of dollars.
Tens of billions of yen are flowing through the accounts.
As long as soone manipulates the supply chain or sales channels even slightly, it is not difficult to inflate profits, hide losses, and produce a beautiful financial statent.
Entrusting the company's lifeline entirely to the professional ethics of these local audit firms is too high a risk.
Takuya Nakayama closed the book, reached for the telephone receiver on his desk, and dialed Director Hoshino's extension.
"Managing Director," Hoshino answered.
"Hoshino-san, please co to my office. And bring along Sega's external audit contracts from the past three years."
A few minutes later, Hoshino pushed the door open, carrying a docunt folder.
He sat down in the chair opposite the desk and handed the folder over.
"Here are the contracts you requested. We've always used ChuoAoyama Audit Corporation," Director Hoshino reported.
Nakayama pulled out the contracts and quickly scanned the terms. "The audit fees go up every year, yet the audit reports have beco increasingly templated." He tossed the contract onto the desk. "Hoshino-san, which firm did the Investnt Departnt use when conducting due diligence in North Arica?"
"The team from the PricewaterhouseCoopers New York office," Director Hoshino replied. "Wall Street has extrely rigorous requirents for financial data; we had to use a top-tier team to provide credibility."
"What are the differences in the way the two teams work?"
Hoshino reflected for a mont. "The team in New York is more rigid. They don't listen to explanations of business logic; they only look at the original vouchers and cash flow. If they find any anomalies, they bypass managent and send inquiry letters directly to the Board of Directors. Here in Japan—" He paused, choosing his words carefully, "it's more about interpersonal relationships. When they encounter flaws in the accounts, they first communicate with the head of the Finance Departnt. As long as you can provide a plausible reason, they usually make 'technical adjustnts' in the working papers."
This was precisely what Takuya Nakayama was worried about.
"Technical adjustnts." Takuya Nakayama repeated the phrase. "One technical adjustnt is a flaw; ten technical adjustnts is planting a landmine."
Director Hoshino sat up straight. "Are you implying there's a problem with ChuoAoyama?"
"Whether there's a problem or not, you can't tell just by looking at the reports. But I cannot build Sega's financial security on other people's 'interpersonal relationships'."
Takuya Nakayama tapped his fingers on the table. "The Japanese audit market is a society of acquaintances. Many of those auditors and our finance departnt staff are university alumni, or even forr colleagues who worked at the sa company. This kind of network easily forms a community of shared interests."
Director Hoshino nodded in agreent.
People in finance have an innate sensitivity to risk.
"I intend to introduce a new auditing chanism," Takuya Nakayama said, unveiling his plan. "I'll consult with top-tier Western consulting firms, like McKinsey or Boston Consulting Group. I want to reform Sega's internal audit regulations."
"How exactly?"
"A dual-track system," Takuya Nakayama said, holding up two fingers. "The local auditors will continue their routine audits to et the compliance requirents of the Financial Services Agency. We will bring in an independent team from a Western accounting firm. This team will not report to the Japanese managent, nor even to the Finance Departnt."
Director Hoshino gasped.
This was tantamount to establishing an internal "secret police" that reported directly to the top.
"They will report directly to the Board of Directors, or a newly ford Group Audit Committee," Takuya Nakayama continued. "Any complete audit working papers produced by the Japanese team, and any suspicious findings, must be copied verbatim to this independent team for review. Any attempt to cover up issues will be exposed through cross-referencing between the two systems."
This plan was undeniably ruthless.
It directly severed the paths for subordinates to collude and cheat.
"Pushing this chanism through will et with significant resistance from the Finance Departnt," Director Hoshino cautioned. "No one likes having a pair of eyes watching them all the ti. After you called Yoshimura in for questioning today, the Sales Departnt is already on edge. If we start wielding the knife in Finance too, I'm afraid it will trigger a backlash."
"Backlash is inevitable sooner or later," Takuya Nakayama said, leaning back into his chair. "Right now, Sega is in a growth phase with lucrative profits; everyone has at to eat, so certain managent loopholes are being covered up. The day the market environnt changes, or if market performance during a hardware transition period is underwhelming, these loopholes will beco fatal bleeding points."
"Please go and contact the North Arican partners at PwC and McKinsey. Do not go through the Japan branch; contact their US headquarters directly. I want an audit frawork that ets the highest international standards while simultaneously circumventing any personal interference from within Japan."
Director Hoshino jotted down the key points in his notebook. "How should the budget be approved?"
"We'll put it to a vote at the board eting. I'll initiate the motion. Given our current flourishing montum, I believe the board mbers won't have an issue with chipping in a little extra for security. They should be happy to see a system that ensures everyone follows the rules. As for the consulting fees, let's pull those from my discretionary budget for managing directors first." Takuya Nakayama paused for a mont, then continued, "You handle this personally. Do not make it public at the board eting until the dual-track audit plan is finalized."
Director Hoshino closed his notebook and stood up as well. "Understood. I'll call New York tonight."
Takuya Nakayama glanced at the wall clock: 5:25.
He picked up his suit jacket and briefcase, then walked out of the office with Director Hoshino.
In the hallway, several employees preparing to leave for the day stopped and bowed as they saw Takuya Nakayama.
Takuya Nakayama nodded in acknowledgnt without slowing his pace.
Establishing a system is far more difficult than firing a few people.
In the hallway, several employees preparing to leave for the day stopped and bowed as Nakayama Takuya approached.
Nakayama Takuya nodded in acknowledgent, not pausing his stride.
Establishing a system is far more difficult than firing a few people.
Firing people solves the imdiate problem; establishing a system solves future hidden dangers.
The old man handed over power to him because he valued his ability to lead Sega in conquering the market.
But he knew in his heart that fortresses are often breached from within.
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