(Bloomberg) Toshiba Corp. President Hisao Tanaka and his two predecessors quit after investigators found that the Japanese conglomerate inflated earnings by at least $1.2 billion since the global financial crisis.

Along with Tanaka, Vice Chairman Norio Sasaki and adviser Atsutoshi Nishida also resigned to take responsibility for accounting irregularities that occurred under their watch. The Tokyo-based company said Tuesday it will correct earnings by at least 152 billion yen, based on the results of an independent investigation of its books stretching back about six years.

“For the company to rebuild there needs to be a renewal of the management structure,” Tanaka, a 42-year veteran, said during a briefing in which he, Chairman Masashi Muromachi and Vice President Keizo Maeda all bowed in apology.

Muromachi will take over as interim president, and Toshiba will announce a new management team in mid-August. No charges have been filed against Toshiba or its executives in the case.

The resignations come after a report showed that top executives set unrealistic profit targets that systematically led to flawed accounting. The accounting irregularities were “skillfully” hidden from outside observers, according to the investigation.

Exchange Watchlist
“I was shocked by the fact that one of the leading companies organizationally conducted such a thing,” said Koichi Ueda, who led the investigating committee.

Toshiba, a 140-year-old pillar of Japan Inc., is caught up in the country’s biggest accounting scandal since 2011. Tanaka and Sasaki, who between them have led the company for the past six years, sought to delay booking losses, and employees were unable to go against management orders, according to the report.

Japan Exchange Group, which runs the Tokyo Stock Exchange, will examine whether Toshiba’s internal management systems need improvement, and if a strong need is seen, the company could be designated a “security on alert,” a spokeswoman, Miwa Aonuma, said by phone.

The requested improvements must be made within 18 months or the security can be delisted, according to exchange rules.

Toshiba surged 6.1 percent, the most since June 2013, to 399.90 yen in Tokyo trading Tuesday. The stock has declined 17 percent since Toshiba initially announced its accounting probe on May 8, compared with a 7.6 percent gain for the Nikkei 225 Stock Average. Toshiba has a market capitalization of $13.6 billion.

Potential Downgrade
“The amount of fraudulent profits, the involvement of top management and their subsequent resignation have already been priced in,” Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co. in Tokyo, said before the resignation announcements. “If the management structure responsible for this is dealt with accordingly, things will return to normal.”

Toshiba said it is considering selling assets, including securities and real estate, to raise money. The company will file its fiscal year 2014 earnings on Aug. 31.

Ratings & Investment Information Inc. on Tuesday put Toshiba on “monitor” for a possible credit-rating downgrade. R&I has an A- issuer rating on Toshiba.

The company has large interest-bearing debts, R&I said. Writedowns and the drawing down of deferred tax assets could increase risks, it said.

The amount of earnings revisions is almost triple the 55 billion-yen writedown Toshiba had previously estimated.

Investor ‘Uncertainty’
In May, the company named two lawyers and two certified public accountants to the committee headed by Koichi Ueda, a former investigator with Tokyo District Public Prosecutor’s Office.

That followed the decision to withdraw forecasts and cancel the year-end dividend and widen the accounting probe.

At least eight analysts suspended their ratings on the company’s shares amid uncertainty about the probe’s scope.

The company initially uncovered irregularities related to “percentage of completion” estimates used on infrastructure projects, including nuclear, hydroelectric, wind-power equipment, air-traffic control and railway systems. Toshiba then appointed the third-party panel to expand the investigation to its visual products, personal-computer and semiconductor businesses.

Toshiba had previously projected operating income of 330 billion yen on sales of 6.7 trillion yen for the year ended March.

“This leaves foreign investors with a vague feeling of uncertainty toward Japanese corporate earnings,” Fujiwara said. “It impacts all Japanese companies going forward, and we may see a lack of buying.”

—With assistance from Grace Huang in Tokyo, Suresh Seshadri in Bengaluru and Robert Fenner in Melbourne.

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