Toshiba shares fell more than five percent in early trade on Wednesday after media reported the security watchdog suspects the Japanese conglomerate of misreporting profits by 40 billion yen (A$466 million) over three years.
The revelations add to a series of accounting troubles swirling around Toshiba, which was downgraded by ratings agencies last week after it admitted it may face a multi-billion dollar writedown over its US nuclear business.
The Asahi Shimbun newspaper reported on Tuesday, when Tokyo markets were closed, that the Securities and Exchange Surveillance Commission would present allegations of accounting fraud to prosecutors, who had previously declined to investigate due to a lack of evidence.
The watchdog found that Toshiba had reported profit gains in its computer operations during the 2012-2014 financial years, when the section had not generated any profit, the newspaper reported citing unidentified sources.
Toshiba's two CEOs and a chairman at the helm of the company during that period were involved in the alleged cheating, it added.
The investigation could open the way to formal criminal charges against the company and its former executives.
Officials at Toshiba were not immediately available for comment.
Toshiba shares traded at 288.40 yen, up 1.9 percent, at 0138 GMT, after sliding to 263.05 yen in earlier trade. They have tumbled 35 percent since last week.
(Reporting by Hideyuki Sano and Naomi Tajitsu; Editing by Stephen Coates)