Noah Smith writes:  More than a dozen years ago, the U.S. experienced a rash of high-profile accounting scandals. Now it’s Japan’s turn. Toshiba, one of the country’s largest technology firms and an internationally respected brand, revealed that it had systematically overstated its operating profits to the tune of about $1.2 billion during a seven-year stretch. The company’s chief executive officer, a number of other high-ranking executives and half of the company’s board has resigned.

The Toshiba scandal isn’t the first big case of Japanese corporate fraud to come to light in recent years. In October 2011, CEO Michael Woodford (no relation to the economist of the same name) blew the whistle on accounting fraud at his own company, optical equipment manufacturer Olympus. The fallout from that debacle is still unfolding. 

The first takeaway from these scandals is that there will probably be more of them. The consensus is that they happened because of problems with Japanese corporate culture. In both cases, observers have blamed secretive and autocratic management styles by top executives, as well as the generally hierarchical, closed nature of Japanese business. But the real problem is corporate governance itself. 

In Japanese companies, boards are almost always made up of people who work for the company. This provides a strong incentive for empire building in which managers try to expand market share — and their own perks and privileges — instead of profitability or shareholder value. Basically, Japanese managers can run companies like their own private fiefdoms.  

That style of management looked OK when market share was rocketing upward in the 1970s and 1980s. But since the Japanese economy slowed and international competition intensified, its flaws have taken a heavier toll. Japanese white-collar productivity is horribly low relative to other advanced nations, and its companies have traditionally been far less profitable than those in the West. 

It is worrying to see accounting fraud at a company such as Toshiba. Toshiba is one of Japan’s star performers, an internationalized company that has been disciplined by global competition. 

In the U.S., the accounting scandals of the early 2000s in companies such as Enron and WorldCom resulted in the Sarbanes-Oxley Act, a harsh crackdown that many cite as a reason for the reluctance of companies to list themselves on public exchanges. But in Japan, there is the hope that the response will be a different kind of reform — improvement of corporate governance in general. 

The administration of Prime Minister Shinzo Abe recently introduced a new corporate governance code that requires outside directors on boards and encourages a focus on shareholder value. In parallel to this effort, the government should continue trying to cut ties between Japanese companies and the Japanese mafia. Another thing it should do — which hasn’t, to my knowledge, been proposed — is to stop making entertainment expenses tax-deductible. 

There is the hope that the accounting scandals are a bad sign for the short term but a good sign for the long term. If all goes right, problems that are exposed today will be rooted out tomorrow.