TOKYO: The number of small companies going bankrupt after window-dressing their earnings is on a gradual uptrend in Japan.

Meanwhile, some banks have got their fingers burned, as they provided loans to such firms without conducting adequate screenings at a time when the Bank of Japan's superloose monetary policy is eroding their earnings.

Accounting fraud at client companies is often talked about recently among banking industry people, Hiromichi Tanigawa, president of Nishi-Nippon Financial Holdings Inc., told a recent press conference. The company is the parent of Nishi-Nippon City Bank, which operates mainly in Fukuoka Prefecture in the Kyushu southwestern Japan region, and Bank of Nagasaki, whose main service area is Nagasaki Prefecture, also in the region.

According to Tokyo Shoko Research Ltd., 16 companies went bust due to their accounting manipulation in the first 10 months of this year, double the year-before level. "Many of the firms found it difficult to continue covering up their accounting fraud after conducting the malpractice over a long period," an official of the credit research company said.

Some companies have gone under despite their seemingly good business performances, Kenichi Kawamura, president of Concordia Financial Group Ltd., said, noting that their businesses looked rosy because they covered up their financial difficulties. Concordia Financial has Bank of Yokohama and Higashi-Nippon Bank, a regional bank in Tokyo, under its wing.

Many banks are moving to increase loan-loss reserves, alarmed by a rise in the number of companies collapsing after accounting manipulation.

Accounting fraud cases are increasing partly because of "individual factors," such as a lack of compliance among business managers, according to Ritsuo Sasajima, head of the Regional Banks Association of Japan.

He also noted that some regional banks struggling amid the low interest rate environment and a decrease in local clients extended loans to problematic companies outside their main service areas without knowledge that they were engaged in accounting fraud.

When banks provide loans to companies in areas outside their home prefectures, they may tend to not conduct strict screenings of the recipient firms, a regulatory official warned.

JIJI Press