Grace Technology inflated up to 41% of sales, fooled its auditor and was delisted

Grace Technology wrote operating manuals for complex equipment such as construction machinery and semiconductor tools. It listed on the Tokyo Stock Exchange's Mothers market in December 2016 and moved to the First Section in August 2018, and its sales grew about 2.5 times in just over five years. A special investigation committee's report in late January 2022, summarised by Nikkei Business on 18 February 2022, found that 30–40% of the sales had been inflated, shocking finance staff and accountants.

The fraud was run by the founder with some executives and sales staff. It started with booking revenue early, such as recognising it for part-delivered digital manuals, and escalated to booking revenue on mere prospects or on no customer enquiry at all. The inflated share of sales was 2.78% in the year before listing, 0.15% in the listing year, then 28.5% in fiscal 2018, 33.5% in fiscal 2019 and 40.9% in fiscal 2021.

To hide it from the auditor, EY ShinNihon, the founder paid in money raised from selling his own shares so that sales looked real, and had cash wired in counterparties' names from banks near their head offices. Staff intercepted the auditor's balance-confirmation letters, stamped them with forged seals and returned them, and showed machine-translated unrelated Japanese manuals as if they were English deliverables. The fraud surfaced in early November 2021 after an outside tip, and the company set up the investigation committee that month.

The founder met investors constantly, with about 250 investor-relations meetings in fiscal 2019 and 308 in fiscal 2020, promising 20–30% yearly sales growth and an operating margin above 50%.

The report quotes the founder shouting at executives in July 2018, as the company approached a First Section move, that institutional investors pressed him every quarter.

Stock options exercisable on reaching ¥1.3 billion in sales were issued, and the target was 'achieved' in fiscal 2018 through the inflated sales.

The company had a whistleblower system but its compliance manual listed no law-firm contact and employees were not told about it.

Managers followed a loop of an excessive target, accounting fraud to meet it, a rising share price, share sales by the founder and cover-up deposits, per Nikkei Business.

When a founder promises investors growth every quarter, fraud grows to fit the promise. An auditor deliberately deceived can't rescue controls that management disabled.

Grace Technology was delisted at the end of February 2022. The founder had died in April 2021, more than six months before the fraud was detected. Nikkei Business noted that EY ShinNihon missed the fraud, that experts say it is hard to detect when management conceals it deliberately, and that the target-setting pressure matched the 2015 Toshiba accounting scandal.