Corporate Governance Law: Analysis of the Toshiba Scandal

This report provides an in-depth analysis of the Toshiba accounting scandal, focusing on failures in corporate governance. The report begins with an introduction to corporate governance and its importance, followed by a detailed examination of the scandal, including the overstatement of earnings by over $2 billion. The main body of the report explores the relevant corporate governance laws and regulations, particularly those related to transparency and stakeholder engagement. The report delves into the reasons behind the scandal, such as inappropriate accounting practices, pressure to meet sales targets, and a poor corporate culture. It also examines the responses of the corporate and governmental bodies to the scandal, and discusses relevant legal issues. Furthermore, the report offers potential solutions to prevent similar corporate governance misconduct, emphasizing the importance of ethical conduct, proper internal controls, and the role of the board of directors in ensuring accountability and transparency. The report concludes with a summary of the key findings and recommendations for improved corporate governance practices.

Corporate Governance
Law

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
The term corporate governance is a set system on the directions are being provided to the
business for implementation of effective controlling measures. corporate governance laws are
general mechanisms and processes through which the corporation is being controlled and
governed in order to maintain sufficient balance in the company in context to its stakeholder.
failure of corporate governance results in
The present essay shows an examination of recent scandal of an organization based on
the failure of corporate governance of the corporate. It includes a detailed examination of the
scandal and determination of major reasons behind the scandal. Further, it examines corporate
and governmental response over the scandal along with the some legal issues relevant with the
issue. In addition, the essay provides appropriate solution regarding corporate governance in
order to avoid happing of similar corporate governance misconduct within the business. For the
purpose of providing the understanding regarding corporate governance misconduct, a case study
of Accounting scandal of Toshiba is being describes in the essay. The company was founded in
the year 1939. It had overstated its financial income by more than $2 billion in recent years that
lead in occurrence of professional misconduct with the company.
MAIN BODY
Corporate governance refers to set of rules and regulations on the basis of which a
business needs to formulate its objectives, strategies and plans for the company in order to
perform various business activities. It enables the company in determining different
responsibilities and rights of the corporations against another party. Furthermore, there are
different laws in the English legal system that makes the company in setting their corporate
governance. Financial reporting council publishes major laws and rules to be comply by the
corporation in order to develop ethical corporate governance within the firm.
Transparency rules is one of the most essential rule that makes the companies to maintain
the transparency in each information provided by it to its stakeholder in order to show its actual
performance to its stakeholders. Moreover, the laws regarding corporate governance also make it
compulsory top include the stakeholder in the meetings conducted by the company in order to
take several board decisions such as for setting remuneration of executives, deciding amount of
dividend to be paid to stakeholders, disclosing company's actual financial position, changing
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corporate structure of the company, etc. This rule ensures elimination of happening of any fraud
or misconduct within the business.
Furthermore, as per the law based on the corporate governance also make it compulsory
for the company to disclose its policies and procedures to the stakeholder. Along with this, it is
also compulsory to disclose how the company is adopting various code of conducts at the time of
performing any business activities 1. This rule helps in ensuring adoption and compliance of each
laws applicable to it and reduction of fraud and misconducts from the business as well.
A corporation performing its business activities within the country needs to comply with
each corporate governance code of conducts provided by the financial reporting council. Any
non-compliance leads in attracting penal provisions towards the country. In addition, failure of
adopting corporate governance may result in happening of financial, ethical and other
misconduct within the firm and may also cause a scandal in the hands of company.
In the recent years, Toshiba started overstating its earnings by more than $2 billions for
over 7 years. The overstated amount was more than 4 times of the investment made by the
company in the year 2. As per the code of conducts relating to the corporate governance, it is
essential for each company to show actual financial position to its stakeholder. As per the rules
based on the transparency, it is required by the business to show each and every financial
transaction made by the company accurately. In addition to this, to provide proper disclosure of
each assumptions, policies and procedures adopted by the company 3. As Toshiba failed to
provide accurate information regarding actual financial performance and transactions made by it
during the year. The misconduct made by the company covered under failure of adopting
corporate governance policies and code of conducts properly. Furthermore, as the company is
performing its business activities in different countries at global level, the misconduct had
relevance with the corporate governance codes at international level.
1 Elmagrhi, M.H. and et.al., 2018. Corporate governance disclosure index–executive pay
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2 Lombardi, R. and et.al., 2019. Corporate corruption prevention, sustainable governance
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DAX 30 corporations. Journal of Competitiveness, 10(2), p.5.
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Failure in disclosing true and accurate information regarding the financial transactions of
the company is a major failure of its managers in imposition control and monitor over various
business activities. Further, as the disclosure requirement is one of the major legal requirement,
the misconduct of Toshiba regarding overstatement of its earnings is treated as a big failure of its
managers in maintaining inherent control within the organisation. When the company started
facing various accounting problems, it hired some external investigators that made an in depth
investigation of overall internal control system. Through this investigation, the actual
misconducts with the company along with the reason behind it.
The corporate governance can be defined as a method or system of different rules
and regulations, policies, procedures, practices and processes which the different companies need
to follow either directly or indirectly. The scandal was done because of a major reason of
accounting improprieties which the company followed. It was the major reason that improper
accounting practices were used for 7 years. The reports after the investigation revealed that
CEO's of the company didn't instruct anyone properly that how they have to record all the
transactions and entries within the accounting system. There are many reasons for the scandal to
happen at Toshiba. Some various types of reasons are as follows-
According to the investigative report it was found that the company used inappropriate
and irrelevant accounting practices which overstated the profits in different business units
operated under Toshiba. It used accounting practices like booking and recording future profits
too early, pushing back all the losses and different types of charges and many more other
reasons. All these accounting practices results in overstated profits.
Another reason according to the investigation report is that in some units there were
issues relating to quarterly challenges of recording the information at the end of quarter when
there is less or no time left to affect the performance of the units. This recording of transaction
was generally done through use of unethical and irregular accounting practices.
Also, the investigative team and panel outlined the reason that the corporate culture was
not that good and efficient at the company and because of which the use of dishonest and
fraudulent accounting practices came into existence within the company and employees started
using such techniques 4.
4 Ahmed, M. and Naseer, S., 2018. Impact of Personality of Company Directors as a
Behavioral Risk Contributor on Corporate Governance Process. Journal of Research in
Administrative Sciences (ISSN: 2664-2433), 7(1), pp.19-24.
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The investigative panel which investigated the whole Toshiba accounting scandal also
highlighted the fact that there is a very poor system of corporate governance sat the company that
is there is no proper use of rules and regulations, ethics, moral values and this is also another
reason behind the use of unethical and unlawful accounting practices. Because of poor corporate
governance the company has a very poor internal system and functioning is not proper. And
because of low corporate governance only the financial department, auditing department and the
risk management and information disclosure committee did not work properly in effective and
efficient manner.
Another reason revealed by investigative panel is that the CEO of company puts intense
pressure on the employees that they had to meet the sales target after the recession of 2008. So it
was a very pressurized situation for all the employees, so they misinterpreted the information
like they did not record the losses and push forwarded the sales so that the sales for that quarter
is more and enough to meet the targets 5. The employees in order to meet the criteria of increased
sales recorded the sales which in actual did not happen.
Another reason is lack of transparency in the policies used by the company. Lack of
transparency means that which accounting policies are used by the employees are not known to
the company and all the informations are not shared with the company and top management.
This is also a reason behind Toshiba's scandal.
Poor management information system (MIS) can also be a reason behind fraudulent
accounting practices. This is also a major reason because if the information within the company
is not shared properly then there may be chances of miscommunication and misinterpretations of
the information and this may cause problem in sharing information in accounts section so it may
lead to misinterpreting the information.
One more reason which can be said to be behind the use of fraudulent practices is lack of
proper audit. Audit refers to time- to- time checking of all the accounts and related information
and which methods and principle are being used and followed by the company. Audit makes sure
that all the principles and concepts of accounting are properly and efficiently followed and
adhered to. If auditing had been proper then all the mistakes and problems would have been
highlighted and will be addressed so that those problems can be resolved at that time only.
5 Lombardi, R. and et.al., 2019. Corporate corruption prevention, sustainable governance
and legislation: First exploratory evidence from the Italian scenario. Journal of cleaner
production, 217, pp.666-675.
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Another reason for the loss is overstating of assets in order to show a stronger position in the
market. So for this the company overstates its asset value so that in market it is at higher position
and the competitors thinks that the company is doing exceptionally well and earning huge
amount of profits.
One more reason is the understatement of expenses in order to inflate the companies
profits into the market. If the company will show that there are fewer expenses then there is the
situation that the profits of company automatically rises. This is majorly because of the reason
that profits is calculated by subtracting expenses from the income so if expenses will be
understated then automatically the profits will be increased.
Another reason is overstatement of revenues. If the company will wrongfully show
higher profits then it will automatically increase the position of company into the market. But
this is a wrong practice because it misguides and misinterpret the profitability of the business and
hence it creates a wrong image and position into the market 6.
One another reason for the wrong accounting practices is understating the liabilities in the
accounting information. This is done by the company in order to display a better picture of the
company in the market competition. This is generally done in order to generate more options of
funding because of the reason that if the liabilities will be less than it interprets that the company
is better in position to clear its liabilities.
Another reason for the lack of use accounting standards and principles and guidelines
used by companies is the lack of knowledge and information which the people and employees of
company do not have. So it is very crucial that if the employees do not have proper knowledge of
the accounting principles then it will create problem for the company.
An effective corporate governance of the company results in setting responsibilities and
rights of each employee and member towards different tasks assigned to them 7. In case any
misconduct happens within the business, with the help of corporate governance, all the
responsible individuals towards the misconduct could be detected effectively 8. In such case,
board of directors of the business needs to improve their policies and procedures in order to
6 Quick, R. and et.al., 2018. The impact of corporate governance on auditor choice:
evidence from Germany. Journal of Management and Governance, 22(2), pp.251-283.
7 Corporate Governance Law: Everything You Need To Know. 2018. [Online]. Available
through : <https://www.upcounsel.com/corporate-governance-law>.
8 Samra, E., 2016. Corporate governance in Islamic financial institutions.
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implement their control and monitor over each aspect of the business and eliminate chance of
fraud from the organization as well.
The legal system of country based on the corporate governance held board of directors as
a responsible person behind happening of any misconduct within the firm. It is the responsibility
of the board to maintain balance among the objectives of the company and interest of
stakeholders. It is one of the best way to maintain effective corporate governance among each
activity of the business.
Corporate fraud of the business have a direct effect over the confidence and trust of the
investors over the company 9. In addition, it also affects economical position of the overall
country. As per the rules mentioned in the companies act, as each major activity of the business
can not be performed without consent of board of directors. In this regard, in case, any
misconduct happens within the business, board of directors of the company are being seen as the
brain storms behind such misconduct.
In order to improve the economic growth within the country, it is essential to maintain
confidence of stakeholders over the companies. It helps the company in generating funds for
their further operations from the small scaled investors. In this regard, it is essential for the
boards and other managers of the company to ensure implementation of each and every corporate
governance codes within the business. It would help the firm in maintaining ethical values within
the company. In addition, it would also lead in maintaining accuracy in the financial disclosures
regarding the business activities through which the company would be able to maintain and
strengthen the confidence and trust of its investors.
In order to monitor the disasters within the company and ensure establishment of right
check over and balance over each business activities, the business laws ask board of directors to
formulate their plans and procedures for the company accordingly. Further, misleading in the
financial statements of the company
In addition, in order to establish response over the corporate governance misconduct, it is
required by the board to establish separate committees of some professionals and experienced
members of the company. The committee should be given a task to maintain their eyes on the
implementation of policies regarding corporate governance within the organization. Audit
9 La Rosa, F., Caserio, C. and Bernini, F., 2019. Corporate governance of audit firms:
Assessing the usefulness of transparency reports in a Europe‐wide analysis. Corporate
Governance: An International Review, 27(1), pp.14-32.
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committee, remuneration committee, nomination committee, etc. can be established by the board
of directors. This step of boards can lead in maintaining effective control over those specific
performance for which a separate committee is being framed.
Further, for the purpose of establishing response over the failure of company in
implementation of policies and procedures regarding corporate governance within it business n
context to financial reporting of the company, the board needs to establish a separate committee
in this regard 10. It would help the board in establishing effective control and monitors over
summarizing each activity performed by the company.
As per the corporate governance 2018, a business organisation needs to establish their
focus over application of different principles and rules required by different rules and regulations
mentioned in the laws relating to several business activities 11. As per the code of conduct, a
business organisation needs to disclose each principle adopted by the firm along with the way of
applying those principles over the business activities. This requirement enables the company in
maintaining confidence of its investors by maintaining transparency between them.
Along with the boards, as per the rules mentioned in the companies act, managers are
also responsible for ensuring compliance of each rules and regulations applicable over the
company. They are responsible for formulation of different plaqns and strategies for the
company in order to improve the ability of company in achieving each goals and objectives of
the company 12. As per the provisions of business law and corporate code of conduct, managers
of the business are responsible top analyse and evaluate rach law applicable top the company and
all principles adopted by the firm as well 13. They are required to formulate their plans and
procedures for the company accordingly.
Talking about the legal issues of corporate governance, it does not limit upto the
establishment of effective controlling measures for the company. Rather, it is also effects the
10 Hansmann, H. and Kraakman, R., 2017. The end of history for corporate law.
In Corporate Governance (pp. 49-78). Gower.
11 Blair, M.M. and Stout, L.A., 2017. A team production theory of corporate law.
In Corporate Governance (pp. 169-250). Gower.
12 Goshen, Z. and Squire, R., 2017. Principal Costs: A New Theory for Corporate Law and
Governance. Colum. L. Rev., 117, p.767.
13 Malecki, C., 2018. Corporate Social Responsibility: Perspectives for Sustainable
Corporate Governance. Edward Elgar Publishing.
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legal requirements of the business. As per the legal requirement, a company is responsible
towards its stakeholders in order to fulfil their needs and expectations from the company along
with fulfilment of different objectives of the company 14. As per the legal requirements of
corporate governance, each company is required to discliose each income and expenses of the
business incurred by it within the specific time. This requirement of corporate governance is
being established in order to maintain transparency with stakeholders and build their trust
towards the company. In addition, with the help of proper disclosure regarding corporate
governance policies procedures and their application within the business, a company can
improve its attractiveness for its investors.
Corporate governance also makes the company to comply with each accounting standards
applicable to it. Accounting standards provides guidelines regarding preparation of various
financial reports of the company 15. It includes a range of legal requirements that a company
needs to comply at the time of formulating various financial statements and prepare financial
reports in order to provide accurate details to the users. In addition, the accounting standards also
contains several disclosure requirements that a company needs to fulfil at the time of showing its
financial reports to its stakeholders.
Legal issues arises within the firm in case the company fails to record all the financial
transactions of the company in its financial statements. Failure of company in disclosing each
principles, procedures and transactions made by the company as per the requirement of
accounting standards applicable over the business 16. The company law makes it complusory for
the company to get its books of accounts audited within a specific time in order to ensure
compliance of each legal requirement.
Furthermore, in case of an international business organisation, the company needs to
comply with the international accounting standards and international financial reporting
standards. These standards has been developed in order to maintain competitiveness among the
14 Corporate Governance Law. 2019. [Online]. Available through :
<https://bestlawfirms.usnews.com/corporate-governance-law/overview>.
15 Choudhury, B. and Petrin, M., 2018. Corporate governance that ‘works for everyone’:
promoting public policies through corporate governance mechanisms. Journal of
Corporate Law Studies, 18(2), pp.381-415.
16 Du Plessis, J.J., Hargovan, A. and Harris, J., 2018. Principles of contemporary corporate
governance. Cambridge University Press.
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financial reports of all the international business organisations. Moreover, compliance of these
standards also leads in ensuring adoption all ethical code of conducts and corporate governance
policies of each country in which the company is having its business.
Moreover, as per the code of conducts of corporate governance, the business organisation
to get its financial reports audited by the professional auditors 17. This requirement ensures that
the business has prepared its financial reports free from any error or mistake. The auditor analyse
each financial transaction of the company and check positing of each transaction in the books of
accounts accurately. Further, auditors re also responsible to check weather each requirement in
context to accounting standards of the company has been fulfilled by the company.
In case an international business organization fails to maintain accuracy in the financial
statements of the company, as per the legal compliance, the auditor of company can also be held
responsible for it, as they are responsible to ensure compliance of each legal requirement relating
to financial reporting of the company. Therefore, it is essential for the auditors to make an in
depth study of each financial transactions and their proper recording in appropriate books of
accounts and financial statements of the company.
Accounting fraud i.e. fraud made through showing wrong incomes or expenses of the
company with a view to either overstate or understate the profits generated by the company. It
leads in misguiding the investors in order to take their decisions for the company. The
accounting fraud affects overall culture of the organisation. Further, it is the most difficult task to
detect the accounting fraud as the accounting fraud is a result of internal mismanagement and
fraud. Generally, in case of accounting fraud , internal key persons such as board of directors,
managers, etc. are being included. In this regard, detection of this fraud is quite difficult, as an
auditor takes and relies upon each information provided by the board of directors and managers
of the company. Although. the law has given them a power to make more inquiry regarding the
books and disclosure requirements apart from the information provided by the boards and
managers in case they detect any chances of fraud within the books of company. This right leads
in establishing more surety and trsust of investors towards the audited financial statements of teh
company.
17 Bano, S. and et.al., 2018. Ownership Concentration, Corporate Governance and Firm
Performance: Evidence from Pakistan. Indian Journal of Public Health Research &
Development, 9(10).
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The major issue in the Scandal of Toshiba was its corrupted managers, boards and other
top level key managerial persons. It resulted in inclusion of corruption within the internal
management and controlling system of the company. In this regard, the auditors of the company
failed to detect fraud in the books of accounts of the company. Further, the another major legal
issue in the Toshiba was incentive based system adopted by the company in order to make
payment to its managers. For increasing the amount to be generated as an incentive from the
company, they started overstating the amount of revenue. It resulted in increasing the amount of
incentives for managers. At the same time, it also resulted in development of corporate
governance misconduct within the business.
Thus, it can be said that in order to avoid the happening of corporate governance
misconduct within the firm, it is essential for boards to establish their more effective strategies
and improve their existing plans and procedures for the company as well in order to improve the
internal control system of the company 18. With the help of an effective internal control system, a
company becomes able to reduce the probability of happening of any ethical misconduct with the
firm.
Moreover, the boards can also establish their policies to conduct internal audit along with
external audit of the books. It would help the company in maintaining effective control over the
preparation of books along with ensuring compliance of each laws, standards and code of
conducts by the company at the time of preparing their financial reports.
In addition to this, for the purpose of elimination of fraud and misconduct within the
firm, they can categorise several activities of the company into different parts. Further, they can
also develop different teams and divide various activities regarding summarization of financial
accounting transactions 19. This policy can help the company in ensuring compliance of each
legal requirement and preparation of books of accounts and financial reports free from errors.
Along with this, it also lead in preparation of financial statements as per the requirement of
international accounting standards and IFRS as well.
18 Koirala, S. and et.al., 2018. Corporate governance reform and risk-taking: Evidence from
a quasi-natural experiment in an emerging market. Journal of Corporate Finance.
19 AZHAR, K. and Mehmood, W., 2018. Does Corporate Governance Affect Performance?
Evidence from the Textile Sector of Pakistan. Journal of Southeast Asian Research, pp.1-
14.
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