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JAPAN: NEC workers fake orders worth Y2.2bn

by Mariko Sanchanta Financial Times
May 29th, 2007

The revelations deal a further blow to NEC and raise serious questions about the state of its internal compliance and oversight. Last year, the company re-stated its earnings three times after it discovered an employee at a subsidiary had inflated sales figures.

The Tokyo Regional Taxation Bureau discovered the discrepancies, which started in February 2006. It found that 10 employees from five divisions had placed fake orders to subcontractors and received kickbacks from them, which they put in a slush fund.

NEC said last night that seven of the individuals had been dismissed and two were still with the company for questioning purposes. One employee involved in the scandal committed suicide in late 2005, but NEC declined to say whether it was related to Tuesday’s revelations. NEC said it was considering filing a criminal complaint and damages suit against the employees for embezzlement of corporate funds. “The fundamental problem is NEC’s compliance and control system,” said Tatsuya Mizuno, analyst at Fitch Ratings. “We feel that the company’s strategic direction is unclear.”

NEC said the illicit trades would not affect earnings.

The fraudulent transactions, which involved the trading of intangible assets such as services and construction, were not discovered earlier because the system enabled validation of the orders through confirmation by the same employees who had made the orders in the sales and other divisions.

To stop this happening NEC established a system at the end of last year where confirmation is carried out by a third-party administrative division.

“It is extremely regrettable that these illegal trades have occurred and we deeply apologise to all the people that have been affected,” NEC said. The company’s internal investigation, which it also launched in February 2006, is still ongoing.

NEC has raised eyebrows over its numerous accounting issues. Its overseas listing on the Nasdaq exchange is in jeopardy after missing several deadlines to submit its fiscal 2005 annual reports to the US Securities and Exchange Commission.

In spite of a series of deadline extensions, NEC has struggled to provide its auditors with at least 100,000 data points relating to fair pricing of its maintenance service contracts.

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