NEC Details Major Fraud

Fake orders resulted in $4 million in kickbacks. Meanwhile, internal investigations continue.

Officials at NEC Corp. said the company discovered that fraudulent transactions had been carried out by 10 employees taking part in a tax assessment during the seven-year period ending March 31, 2006. The Japanese company, which is already embroiled in a major accounting scandal, said that fraudulent transactions amounted to roughly $18 million, according to its U.S. regulatory filing.

The company explained that NEC employees instructed contractors to create fictitious orders using the names of subcontractors. NEC’s employees received about $4.1 million in kickbacks from the subcontractors, and used it for personal purposes, noted the filing. Altogether, 17 contractors and subcontractors were involved.

NEC said it has been carrying out internal inquiries with the assistance of external lawyers since it was informed of the situation by the Tokyo Regional Taxation Bureau. As a result, the company said it has been taking disciplinary action against the employees involved in the fraudulent transactions. In addition, the company is conducting further internal inquiries, and will evaluate whether it will seek compensatory damages or filing a criminal complaint.

The fraudulent transactions involved the trading of intangible assets such as services and construction. The company explained that the fraud was not discovered for some time because the system enabled validation of the orders through confirmation by the same employees that made the orders. In response to the controls deficiency, NEC established a system at the end of last year by which confirmation is carried out by a third-party administrative division, it added.

In addition, NEC is ensuring investors that “all of its employees are aware of and placing maximum priority on compliance.” The company also said it has established a variety of training opportunities, highlighting examples of misconduct. “NEC will continue to take every action possible to further strengthen countermeasures … to prevent a recurrence of these kinds of fraudulent transactions,” said the filing.

Reuters pointed out that last year the company restated its earnings three times. The first revision was required after the company discovered that an employee at a subsidiary had inflated sales figures, according to the wire service.

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