TOKYO -- When

Yamaichi Securities

, one of the world's largest investment banks, collapsed in November 1997, its employees weren't the only ones wondering what could trigger the demise of such a huge institution. How did Yamaichi, which was officially declared bankrupt in June 1999, manage to hide liabilities totaling 510 billion yen ($4.8 billion)?

Yamaichi executives bowed furiously and apologized for their lenient management practices to a packed pressroom when announcing their decision to close up shop. As soon as the focus shifted from the tears streaming down the president's face, however, the public learned that those "lenient" practices were more accurately a form of accounting manipulation known as "tobashi."

Tobashi, which means "flying capital," is the practice of shifting unrealized losses from a parent company to a subsidiary with a different financial calendar. While the practice is more or less proscribed, Yamaichi's collapse and subsequent problems at developer

Towa Real Estate Development

and trading firm

Nissho Iwai

have prompted a raft of regulatory changes.

On Mar. 31, the last day of fiscal 1999 for Japan, the

Japanese Institute of Certified Public Accountants

will enact new accounting laws that are intended to force Japan Inc. to clean up its books, prompt more stringent business strategies and focus on return on investments. The increased transparency should make some investors less hesitant to put money into Japanese stocks.

"The new accounting rules are definitely going to clarify a lot of the major misunderstandings of Japanese companies. That could push investors to take a more aggressive buying stance for certain shares," says fund manager Minoru Takata, who oversees the

J-Open Fund

, up 139.9% over the past year, for

Partners Asset Management


The new rules will also make fund managers' jobs easier -- they won't have to worry as much that what's on a company's books is not quite the truth. In essence, the adoption of accounting standards that more closely follow the international norm will mean funds like



Japan Fund, up 87.7% over the past year, and

Goldman Sachs'


Japanese Equities Fund, up 56.9% over the same time period, can spend more time picking stocks and less time worrying about half-baked numbers.

Companies will be required to file both consolidated and unconsolidated statements for the fiscal year ending March 31. This differs from prior years when firms traditionally filed unconsolidated financial statements, where earnings for parent and affiliate are separated. In Japan's case, that often meant endless pages of footnotes offering scant explanation of the relationships between the parent and subsidiary firm. Yamaichi took advantage of the muddle and "window-dressed" its financial statements by transferring its mounting debt to affiliates. Manufacturing companies also do this, moving inventory to subsidiaries as internal sales. At the group level, of course, no appreciable change has happened in terms of the corporate financials.

"We have noticed many cases in which the bulk of questionable assets or accumulated losses is kept on financial statements of subsidiaries or affiliated companies," says Yoshio Takizawa, an analyst at

TheStreet Recommends

Moody's Investors Service

, acknowledging the widespread practice.

The accounting overhaul will also affect securities held in corporate accounts. As of March 2001, companies will have to adopt mark-to-market appraisal for tradeable securities, which requires the adjustment of holdings to reflect current market values. That will be extended to their cross-shareholdings in corporate affiliates in March 2002. In the past, companies have been free to choose between mark-to-market and mark-to-book, allowing them to hide losses on holdings that had slid in value.

The short-term effect of these new rules won't be pretty for some companies. Many firms will be disclosing dud loans and assets for the first time, which could erode investor confidence and lead to a drop in share prices. Bankruptcies, which are already steadily rising, could jump further. As a result, several firms are expected to post huge losses for this fiscal year, including realtor

Mitsui Fudosan

and developer

Tokyu Construction


The upside, says Kathy Matsui, strategist at Goldman Sachs, is that clearing the clutter from the accounting paperwork will uncover previously overlooked gems. She calculates parent-only operating profits could rise by 15.3% in fiscal 1999 and 13.6% in fiscal 2000.

"Sectors that could benefit the most include shipbuilding, nonferrous metals, glass, ceramics, iron, steel and real estate," Matsui says. Among her favorites:



Furukawa Electric



Mitsubishi Cable Industries


Keihin Electric Express Railway


Meanwhile, accounting firms are under immense pressure to not let another case like Yamaichi come forth.

Chuo Audit

, one of Japan's largest accounting firms, is being sued by former Yamaichi bankruptcy administrators for ignoring the firm's tobashi deals.

The pressure on accountants suits some just fine, including former Yamaichi executive Megumu Motohisa, who now serves as COO of discount brokerage

Matsui Securities


"I can vividly recall every moment of that day when we said we were bankrupt," says Motohisa, who worked at Yamaichi's headquarters. "But what happened to Yamaichi was possibly the greatest wake-up call to the government and financial community to adopt international business practices. And that is a good thing."