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Japan Still Calculating Cost of Defense Firm’s Padded Bills

Auditors Say They May Never Learn Total Overcharge Amount

Nov. 5, 2012 - 09:32AM   |  
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TOKYO — Eight months after investigators began probing endemic overcharging by Mitsubishi Electric Corp. (Melco) and related defense and space companies, new details are still being uncovered and the complete extent of the overcharges may never be known.

The scale of the problem makes calculating the actual overcharge a moving target, the Board of Audit of Japan (BOAJ) said.

A provisional report by the BOAJ released Oct. 25 found Melco has been systematically padding contracts to the Ministry of Defense; the Japan Aerospace Exploration Agency (JAXA); the Cabinet Satellite Intelligence Center, which runs Japan’s spy satellite program; and several other government agencies, possibly as far back as 1970.

Describing the complexity of the investigation, BOAJ spokesman Izumi Honda said that for the period 2007-11 alone, the audit watchdog is investigating some 7,447 contracts worth about 971 billion yen ($12.1 billion). Agreements with the MoD and JAXA account for 6,295 contracts worth 746.4 billion yen, and 869 contracts worth about 171.4 billion yen, respectively, according to BOAJ figures.

The report exposed sophisticated, widespread false accounting of labor and overtime costs through software and accounting systems but has also encountered incomplete and missing paper trails. Honda said the huge number of cases and the extent of dead ends and missing figures were making it difficult to reconcile accounts.

“We are still trying to work out how we can arrive at the correct figures. We are going over the amounts and trying to validate them, but at the moment, we have yet to get a precise figure of the overpayments,” Honda said.

The BOAJ, Japan’s equivalent of the U.S. Government Accountability Office, launched its own full-blown investigation after public, political and media outcry following revelations in January that Melco had been overcharging the MoD and JAXA. Melco issued an initial public apology and admission of guilt Jan. 27. The BOAJ swung into action in February, with Japan’s Parliamentary Upper House also demanding a full investigation, Honda said.

MoD spokesman Takaaki Ohno said the ministry’s own investigations are focused on the last five years for which it has accounts, and about which it feels reasonably confident it can identify and estimate overpayments.

“We are looking at something like 30,000 different items, and it will take some time to estimate the total overpayments, but we will probably manage it by the end of the year,” he said.

JAXA spokesman Tetsuya Sakashita said the agency will not comment on its estimates while the investigations are ongoing because publicizing figures may prejudice the amount of fines, interest payments and repayments JAXA plans to levy once it can confidently identify how much it overpaid.

The MoD, JAXA and other agencies put temporary bans on new contracts with Melco and affiliates, including Mitsubishi Space Software, Mitsubishi Precision, Mitsubishi Electric TOKKI Systems and Taiyo Musen.

But MoD and JAXA also said they have to continue doing extensive business with Melco because it is such an important contractor. Melco supplies a wide array of key technology systems and products, especially missiles, radars and satellites. Last year, it was the Defense Ministry’s third-biggest supplier of systems and weapons, doing 115.3 billion yen of business, and it is Japan’s biggest satellite builder.

Norihiro Sakamoto, a research fellow at The Tokyo Foundation, said that one of the major causes of the overpayments is a common contracting process in the defense and space fields that forces contractors to incur months of unpaid costs, thus opening the temptation to pad bills. Because such contracts offer no extra incentives or rewards, margins are usually very tight, he said.

Such padding had been widespread in the space and defense industries until a massive scandal erupted in 1998 when NEC was caught overcharging on hundreds of contracts, creating front-page news in Japan, and leading to the jailing of several executives and the resignation of NEC President Tadahiro Sekimoto, a prominent captain of postwar Japanese industry.

The practice was widely thought to have stopped at that time, Sakamoto said.

“This practice was not unusual until the NEC scandal of 1998, but following this, most of industry changed its practices. For reasons unknown, Mitsubishi Electric did not. It’s a difficult question to know why Mitsubishi continued,” Sakamoto said.

Sakamoto suggested that the depth and length of Melco’s business probably bred a culture of cozy relationships, but it failed to join the rest of industry in 1998 to clean up its operations.

In a written response to Defense News questions, Melco said it was committed to fully cooperating with the investigations against it and that it has issued a string of apologies, investigations and notices on the issues, including a June 24 announced repayment of 26 million yen to the Ministry of Internal Affairs and Communications for overcharging on a satellite communications technology contract.

The company also said it was beefing up its compliance measures and improving its training, audit and personnel rotation systems and that it has established an Electronic Systems Compliance Department to prevent future incidents.

Sakamoto said the BOAJ investigation was excellent for the industry and sent a clear message about corporate responsibility across Japan.

“Actually, by investigating so thoroughly and publicly exposing the issue in great detail, the Board of Audit’s work shows that Japan does have an independent and credible watchdog, and that our corporate governance systems have reached a high level,” Sakamoto said.

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