Toshiba Internal Audit Failure Case

Running Head: TOSHIBA INTERNAL AUDIT FAILURE CASE 1
TOSHIBA INTERNAL AUDIT FAILURE CASE
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Institutional Affiliation

TOSHIBA INTERNAL AUDIT FAILURE CASE 2
Introduction
Internal audit is one of the most important aspects of modern organizations. Through the
internal audit function, organizations can assess their operations, review their governance,
control and risk management processes. Cases of internal audit failures are increasingly
becoming common for modern organizations especially due to the lack of effective control
measures. Toshiba Internal Audit failure case is one great example of what damage the failure of
internal controls can cause an organization. Reports from findings indicated that Toshiba had
inflated its earnings for periods between 2009 and 2014 by more than $1.2 Billion
(Bhattacharyya, 2015). This essay presents a detailed analysis of Toshiba Case.
Overview of the company’s background
Toshiba is a Japanese Multinational Corporation founded in 1875 and headquartered in
Tokyo. The company offers a wide range of products and services including office equipment,
medical equipment, household appliances, consumer electronics, Infrastructure systems, power
systems, electronic components and materials, ICT Systems and equipment. Toshiba Company
offers Cost effective and Innovative solutions for various industries (Carpenter, 2015). The
Company has approximately 187,809 employees working in its various subsidiaries in America,
Europe, Canada, and Germany, etc. It acquired its current Name Toshiba Corporation in 1978.
What ethical issue has arisen? Clearly explain the ethical dilemma faced by the
involved parties.
Toshiba’s Accounting Scandal witnessed in 2015 has been described as the biggest the
company has ever experienced in it’s over 140 years of operation and the largest in Japan since
Olympus Corp Scandal of 2011(Bhattacharyya, 2015).As a consequence of the adoption of a
rotational staffing model for its internal audit function the Company’s ability to meet its specific
auditing needs was limited. This model created multiple pitfalls for the company’s auditing
function. It affected the ability of the company to carry out effective audits and created
competence and resources vulnerabilities. Based on its governance structure, the Company’s
internal audit neglected its responsibility of offering assurance for the company and focused on
consultation service. The department, therefore, failed to pay attention to the accounting

TOSHIBA INTERNAL AUDIT FAILURE CASE 3
Function through its failure to access the aptness of its accounting processes (Bhattacharyya,
2015). Despite its little focus on audits, the department identified two cases of irregularities in its
accounting processes, but these were dismissed as insignificant basically because the company’s
auditors lacked the necessary expertise. As a result of unrealistic performance goals set by the
Company’s executive, their subordinates including employees, line managers, and divisional
managers resulted in improper accounting practices to fulfill executive’s wishes. According to
investigations carried out in 2015, it was found out that the company used inappropriate practices
such as early booking of future profits, pushing back charges, pushing back losses and other
techniques that led to an overstatement of profits by over $ 1.2 Billion (Carpenter, 2015).
Pressure to show profits, therefore, caused the Scandal.
The Toshiba Executives did not allow their directives to be questioned. Their
subordinates, therefore, had to oblige to such directives even when they were convinced that
doctoring profits were not an ethical practice. For example, in one instance the president had
instructed his vice president to improve loss in one of the divisions. Although he was opposed to
it, he had to do it because it was coming from the senior-most executive (Nagata, 2018).
Identify and evaluate the stakeholders that were impacted by the ethical issue.
Top executives
Following the revelations of accounting malpractices at the company, the top
management was particularly blamed for setting unrealistic targets and issuing directives. They
were placed at the middle of the scandal. As a consequence of the scandal, two former executives
Norio Sasaki and Atsutoshi Nishida resigned from their posts (Warren, 2015).
Employees
They were people directly involved in the actualization of the fraud due to immense
pressures put on them by the executives. After the revelation of the scandal, approximately 7800
employees lost their jobs in a major restructuring exercise. The majority of the affected
employees were from the Consumer electronics division (Warren, 2015).
Shareholders/Investors