COOKING THE BOOKS: TOSHIBA CORPORATION’S ACCOUNTING SCANDAL
In Partial Fulfillment
Of the Requirements
In the Subject Audtg 411
Submitted to:
PROF. JANET TAOJO-MATUGUINAS, CPA, MBA
Submitted by:
APARRI, CHRISTINE MAE A.
COSTANTE, KENNETH JAY
ESTONILO, HONEY JAMMY SAMANTHA
MAG-USARA, ERICKA APRIL
MARIJUAN, ROMARIE KHAZANDRA
MAY 2018
TOSHIBA CORPORATION
Rationale
Toshiba is a longstanding and innovative Japanese company that specializes
in making various kinds of electronics and electrical products including infrastructure
systems and home appliances. The company had operated for over 140 years
without a history of scandals and was considered to be an example of good
corporate governance. However, this image was destroyed when the news came out
in 2015 that Toshiba had been “cooking the books” since 2007. Toshiba has suffered
immensely since the news broke and stakeholders are very unhappy.
Prior to the public outrage over Toshiba’s misrepresented financials, it was
considered to be “the epitome of good corporate governance”. The company was a
shining example of Japanese business since it began operating in 1875. It had even
recently been ranked the second largest technology company in Japan, a distinction
now viewed as dubious. While the main contributors to the problem are in
Percentage of Completion (POC) accounting and excess sales of unfinished
production parts, it is thought by many experts that the root of the entire scandal is
company culture. Even companies with excellent policies and structures put in place
to prevent accounting fraud have these kinds of public perception catastrophes.
Toshiba headquarter:
1-1, Minato, Tokyo, Japan
Industry:
Toshiba Corporation is a corporation in a conglomerate industry where it has
different segments and division that offer different types of products and services.
Toshiba’s products include Electronic products, semiconductors, and social
infrastructure.
Key Stakeholders:
The greatest challenge to Toshiba is improving their public perception.
Toshiba’s corporate image has been tarnished and they have lost the public’s trust.
Articles about this scandal have been published by most financial journals and news
pages. Toshiba’s stock prices have already dropped. Toshiba’s reputation is at
stake. Shareholders have the potential to lose a lot of money if the stock price
continues to plummet the way it has. Loyal customers to Toshiba, including the
general public as well as companies purchasing large volumes of industrial products,
could face higher prices that could be implemented in order to make up for a lower
volume of sales. Companies purchasing large volumes of industrial products are
worried about Toshiba possibly reducing the scope of their products to make up for
lost funds and low sales volumes. If Toshiba sustains large enough losses, Toshiba’s
employees might face layoffs to make up for low sales volumes and hefty fees that
must be paid.
The overarching goal is to raise Toshiba’s stock price back up to where it was.
This will not happen until shareholders feel confident enough in the integrity of
Toshiba’s financial statements to continue purchasing stock and investing their hard
earned money in the company.
Fraud risk Factors
1. Global Financial Crisis;
2. Percentage of Completion method depends on estimates and thus easily
falsified or accidentally misrepresented;
3. Toshiba’s toxic company culture
• Upper management had a tendency to announce profit targets
later than necessary and subsequently pressure their
subordinates to commit fraud to meet them;
• Poor internal control
• Lack of integrity displayed throughout the several levels of
management
How Financial Statements Were Manipulated
The improper accounting practices that resulted in the gross over inflation of
profit have stemmed from several ethical issues at Toshiba encompassing various
levels of management. Upper management had a tendency to announce profit
targets later than necessary and subsequently pressure their subordinates to commit
fraud to meet them. An example of this at the highest level of management, as
detailed in the report, is how then-President Sasaki in September 2012 refused to
accept the forecast and told the division to improve its profit by ¥12 billion in just
three days. This behavior was not limited to just one president. In 2013, then-
President Tanaka directly asked his vice president to improve losses by padding the
numbers, booking future profits early, pushing back losses, pushing back charges,
cost were reduced and losses were not recorded. Ever since the release of the
report, Tanaka has denied directly ordering employees to manipulate profits.
Beyond the breaches of integrity, standards of the accounting profession also
contributed to this scandal. Toshiba’s ability to manipulate numbers in their
percentage of completion (POC) accounting affected the reporting of several other
accounts. The POC method depends on estimates and is thus easily falsified or
accidentally misrepresented; in Toshiba’s case, costs were understated and losses
were not recorded when they should have been. Moreover, there is no suitable
alternative to the POC method that would be acceptable for a corporation as large as
Toshiba. This one of the ways Toshiba was able to purposely overstate profits, which
remained unnoticed for over seven years.
The methods that Toshiba employees used to manipulate the accounting varied
throughout different departments. Toshiba’s computer manufacturing had been
outsourced to a partner. Toshiba would sell them the parts and purchase back the
finished products. Toshiba would purposely sell too many parts, increasing the other
company’s inventory and thus allowing Toshiba to inflate its reported profits
Conclusion
Toshiba’s improper and fraudulent accounting, having taken place over seven
years, has severely tarnished the company’s reputation. After the Securities and
Exchange Surveillance Commission launched a probe in February 2015, Toshiba
hired an in-house and subsequently an independent committee to investigate
accounting irregularities. Toshiba’s profits were found to be overstated by 1.2 billion
dollars. Now that the news of Toshiba’s unethical practices has been published
worldwide, the public is now aware of Toshiba’s toxic company culture, the poor
internal controls that allowed for this to happen, and the lack of integrity displayed
throughout several levels of management. Shareholders have lost significant funds
and are wary about continuing their investment with Toshiba. Additionally, potential
investors are wary to invest at all.
Toshiba has recently been making a lot of effort to prove that its changes are
effective. The company submitted a report to the Tokyo Stock Exchange in
September 2016 to explain how its corporate governance has changed. With this
report, Toshiba is aiming to be removed from the watch list. This is a heavy
punishment for a publically traded company, the harshest punishment behind simply
delisting a company, and that is removing it from the stock market. If Toshiba is
removed from the list, this would be something that should be publicized to our
stakeholders.
While the reputation of Japanese business has been damaged as a whole,
Toshiba is dealing with the strongest repercussions. Toshiba’s most pressing
problem is their public perception. While restructuring management will be difficult, it
is certainly feasible. Regaining stakeholders’ trust in Toshiba will take time. The PR
team needs to find the best way to inform the business world of changes Toshiba
has made to their management structure and prove that these changes will prevent
problems like this from ever happening again.
According to Robert Medd, a Partner with GMT Research, “If Abe really wants
to make some corporate governance changes, allow minority shareholders, not
management, to nominate two independent directors”. This is because shareholders
care far more about raising stock prices to bring about shareholder returns while
managers care mostly about performance and pay.
While Toshiba banning dubious methods of accounting through published
newsletters and employment contracts is necessary, Toshiba also needs to develop
a company culture of openness and honesty. Employees must feel safe reporting
breaches of integrity. In large corporations such as Toshiba, it is essential that
internal controls are put in place to limit the power of individual employees and
maintain the integrity of the corporation as a whole. Toshiba had hardly any internal
controls in place to prevent this kind of fraud.
