NEC workers faked orders, took kickbacks

A group of 10 employees at NEC Corp. ran up $18 million in fraudulent costs over seven years, the company announced Tuesday, about a year after reporting a similar incident in 2006.

Stopping the scam allows NEC to reduce payments to contractors and boost income. However, the Tokyo-based company does not plan to issue new profit statements because there was no change in revenue, said NEC spokesman Kosuke Yamauchi.

Likewise, instead of paying extra taxes, the company will reduce the amount of loss listed on its asset sheets by a total of $32 million, in accordance with its agreement with the Tokyo Regional Taxation Bureau.

The news is another blow against the company as it struggles to meet accounting standards set by the U.S. Securities and Exchange Commission (SEC) and to ward off a threat by regulators to remove its stock from the Nasdaq Stock Market. NEC recently announced it would begin to calculate its earnings with Japanese generally accepted accounting principles (GAAP), since the company was not able to file its fiscal 2005 annual report to the SEC under U.S. GAAP guidelines.

NEC also had to make accounting changes in 2006 after workers created fake transactions at its NEC Engineering Ltd. division last year.

The latest scam was discovered when tax investigators looked at the company's books between fiscal 1999 and fiscal 2005, which ended in March 2006. They found that the accused employees had convinced 17 contractors to pad their orders or create entirely fictitious orders for the software, maintenance and installation purchased by NEC, the company said in a statement. In return, the workers collected $4.1 million in kickbacks.

NEC has taken "strict disciplinary actions" against the employees through an internal inquiry that could eventually lead the company to file criminal complaints or seek compensatory damages from the workers. However, Kosuke said he did not know whether the workers had been fired. He also declined to name the contractors or to say whether NEC planned to continue doing business with them.

The company also launched a plan to prevent future fraud with stricter oversight. The workers in this scam avoided detection for seven years because they were allowed to confirm the validity of their own orders, which later turned out to be fraudulent. NEC will now require a third-party department to confirm all orders as part of a reformation of business practices in its order and sales recording and materials procurement departments.

"NEC deeply regrets the occurrence of these fraudulent transactions at a time when strengthening of corporate compliance and the improvement of internal controls is being strongly sought after," the company said in a statement. "NEC will continue to take every action possible to further strengthen countermeasures ... in order to prevent a recurrence of these types of fraudulent transactions."

Copyright © 2007 IDG Communications, Inc.

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