Toshiba Accounting Scandal: Causes, Controls, and Aftermath

This report provides a comprehensive analysis of the Toshiba accounting scandal, detailing the fraudulent practices that led to the inflation of profits and the eventual resignation of key executives. The report examines the application of the fraud triangle (pressure, opportunity, and rationalization) to understand the motivations and circumstances surrounding the misconduct, highlighting the role of the 2008 financial crisis in creating pressure to meet unrealistic profit targets. It explores the lack of effective internal controls and the failure of corporate governance, which allowed the fraudulent activities to persist for several years. The report also provides a detailed account of the investigation's findings, including the specific accounting techniques used to manipulate financial results. Furthermore, the report offers a set of suggestive accounting controls, such as independent internal audits, marginal costing adoption, employee reporting systems, and clear standards, aimed at preventing similar scandals in the future. Finally, it discusses the consequences of the scandal, including fines, management restructuring, and the impact on stakeholders, while questioning whether the punishments served as a sufficient deterrent against future corporate fraud.

TOSHIBA: ACCOUNTING SCANDAL.
MAIN FACTS ABOUT THE CASE:
 Toshiba Corporation regards its legacy in Japan, and is a multinational conglomerate, with
headquarters in Tokyo, Japan and employees over 200000 employees all over the globe.
 The Corporation gained its market share with innovative and pioneering catalog of projects in the
late 1950’s and announced itself as the upcoming technological superpower of the world.
 The conglomerate operates business over a diversified product range and reported net worldwide
sales of more than $63 billion for the fiscal year ending March 31, 2015.
 On July 21, 2015, Toshiba CEO Hisao Tanaka and seven other directors were forced to resign,
when an investigation revealed that the firm had doctored the books and inflated, superseded its
operating profits over the past seven years.
 The Securities and Exchange Surveillance Commission under the financial watchdog were
intuitive of financial and counting irregularities, and subsequently launched a probe into the
corporation in February.
 The gravity of the situation caught hold of the Toshiba Corporation and were required to set-up
an in –house investigative committee in April, when the conglomerate publically announced its
accounting troubles.
 The anomalies seemingly deeper than the firm incapacitated and believed and thus handed the
investigation over to an independent outside committee in May and postponed reporting its fiscal
2014 earnings.
 The four member committee compiled a voluminous report showcasing Toshiba’s accounting
practices from fiscal 2009 to 2014 and found a series of incongruous accounting entries that
showed a staggering $1.2 billion net profit.
 The accounting misconduct began under CEO Atsutoshi Nishida in 2008 amid a global financial
crisis that cut deeply into Toshiba’s profitability. It continued unabated under the next CEO,
Norio Saskai and eventually ended in scandal under Tanaka.
 Investigators found evidence of booking future profits early, pushing back losses, pushing back
charges and other similar techniques.
 Investigator’s describe that Toshiba’s corporate leadership handed down strict profit targets to
business units, with implication that failure wouldn’t be accepted, thus is numerous occasions the
only way to achieve the said targets was through the use of irregular accounting techniques.
 The investigative panel concluded that Toshiba’s corporate culture was the trigger movement for
the emergence of the fraudulent practices within the organization and the subdued corporate
governance was evidently clear and needed immediate rectifications.
 The investigative report includes specific recommendations to prevent the recurrence of
unacceptable business practices across the Toshiba Corporation. The report also indicated the
vital need to a prominent whistleblower mechanism as well as a robust and communicative
corporate governance policy.

FRAUD OPPORTUNITY TRAIANGLE:
American criminologist Donald Cressy developed a theory known as the Fraud Trainagle, that explains
the factors that lead to fraud and other unethical behaviour.
The three factors that make up the fraud traiangle are :
A. PRESSURE:
Pressure contemplates the form of driving force that inhibits the individual to commit a criminal
act. This driving force towards negativity need not make sense to outside observers, but it does
need to be present. It comprises and ranges from a variety of emotions from financial crisis to
greed and is often associated with injustice.
IN RELATION WITH TOSHIBA’S ACCOUNTING SCANDAL
As per the evidence laid down by the investigation report, it is pertinent to the fact that the seeds
to the incompetent accounting policies were laid down during the 2008 global financial crisis,
which prodded the then CEO to take steps that could afloat the corporation during the tough
times. Needless, to say the pressure culminated and forested itself and evidently went out of the
realms of correct policies and procedures and gravitated towards the last resort, which was to
achieve the said target in exchange of anything.
The subsequent CEO and directors were put into the shoes and designations which was not only
gigantic to live upto, but also submerged into the nitty gritty of fraudulent activities, that
continuing in the same direction seems easier than enabling some ground breaking changes, as
always the folk lore of the corporation proved too much to live upto.
B. OPPORTUNITY:
An evident chance to commit the act must be present. In case of a fraud, usually a temporary
situation arises where there is a chance to commit the act without a high chance of being caught.
Thus, the opportunity presents itself in the best possible manner to carry out the desired actions,
without too much of repercussions to face, for the time being.
PRESSURE
OPPORT
UNITY
FRAUD
RATIONA
LIZATION

IN RELATION WITH TOSHIBA’S ACCOUNTING SCANDAL:
The global financial crisis 2008 proved to be a perfect platform to indulge into malpractice, as the
fear on unemployment and laying off loomed in the minds of the workers and employees, it was a
step easier to enforce crude policies that demanded profits no matter what, with the knowledge
that it will eventually lead to fraud policies adaptations and inflated results, and in that particular
moment of time, this was the exact pedigree needed by the conglomerate to afford the global
crisis.
Eventually, it embedded itself as a hardcore system, with little to no room for refinement and
following perpetuators reaped the forbidden fruit.
C. RATIONALIZATION:
The mindset of the person to commit an unethical act is one of rationalization. The individual
manages to justify his course of action and is believed of the reason that, his way is the only way
to overcome the current situation and prosper in the future.
IN RELATION WITH TOSHIBA’S ACCOUNTIGN SCANDAL:
The end goal of any organization is to flourish for centuries, and the difficult prick of the global
crisis became too much of a hurdle for the conglomerate to handle without disposing off its
significant market share, therefore in order to circumvent the same, the CEO found it in the best
interest of the company to ultimately recoup it from the crisis, irrespective to the damage it may
possess on its accounting policies, procedures and practices.
PROBABLE REASONS BEHIND THE CONVICTED IN TOSHIBA’S ACCOUNTING
SCANDAL:
The Toshiba accounting scandal saw the then CEO Hisao Tanaka and seven other directors take forceful
resignation when the scandal was publically brought to light, the report of the investigation committee
clearly points that the initial footprints were laid down during the time of CEO Atsutoshi Nishida at the
crunch of the financial crisis of 2008.
Toshiba Corporations have a 140 year old legacy, and is considered as one of the primitive forces of
technological advancement in Japan. Anyone, associated with this sort of grandeur is under pressure from
the word go and the prestigious CEO designation, that runs the orchestra had to be on the alert at all
points of time, as he cannot afford a indent in the reputation.
Therefore, the global financial crisis of 2008 was the game changer that threw everyone out of their
games, including Toshiba, but the legacy and enormous market share was at risk and at stake, the
situation demanded extra ordinary steps, and exactly that was undertaken by the CEO, who in the
whirlwind of all, forgot where the boundaries stood and in full awareness took steps and enforced policies
which was clear, to be the stepping stones into the fraudulent practices that spread over the entire
conglomerate.
The subsequent leaders and directors were living the glorified hallucination that was pre- established, and
once they came to realizing the truth, the intense attraction of the window dressed financial state of the

organization was too difficult to interpret in any other way, and mere resting point depicting the
incapability’s of the workers to raise their voices against the management, was motivation enough to steer
the conglomerate in the direction it was heading in contemplate of the financial crisis of 2008.
It is difficult to believe that there were no early signs that did not indicate towards the building scandal or
misappropriation that had the full potential to blow up in faces of the top management. The accumulating
profit of Toshiba Corporation, while it colleagues ran in losses or a lateral decline should have raised
some red flags. Moreover, the wide spread faulty accounting practices over the period of 2008 to 2015
makes it crystal clear that the next to throne indulged themselves further into the pit rather than bringing
the matter onto light, way before, it actually came into spotlight.
Also, it shows either sheer negligence or purposeful negligence on the part of the security controller or
the exchange of Japan, as they stood up way too late to point fingers at a situation which had already gone
beyond the exaggerated proportions.
SUGGESTIVE ACCOUNTING CONTROLS TO AVOID ANOTHER TOSHIBA SCANDAL:
 Independent Internal Audit: Ensuring stringent internal control is a must for every organization as
it not only helps in internal check, it also highlights the areas that need further improvement or
assistance. But if the regulating committee comprises of individuals that have direct interest in the
functions of the organization, it won’t reap the required result. Therefore, it is of extreme
importance, that the internal check imposed in an organization is subjected to independent third
party audit, which can sincerely put forward the result in front of the management, with the
desired course of action which deems to be suitable for that point of time.
 Marginal Costing: Marginal costing or management accounting is the buzzword in today’s
accounting world, as evidently and time and again, Marginal costing had proved to be efficient
and result oriented methods to achieve desired result, without compromising standard rules or
accounting policies. Being a new concept, the marginal costing is viewed skeptically and many
organization resorts to old techniques that have loopholes and can eventually attract fraudulent
scenarios. Marginal costing is less tedious and more effective in approach and on ground and
should be adopted by organizations.
 Employee Reporting Systems: In today’s cut throat competition, it becomes very important to
have full knowledge and access to employee’s information. Their reporting, working hours,
capacity, result orientation and their level of interest in the organization should be known to the
superiors and accounting managers, as it’s the change in perspective of one of the employees that
develops the landslide for the fraud to grow and foster within the organization, thus, it is impotent
to have a functional employee reporting system in build in the organization and have full
monitoring over it.
 Clear and Understandable Standards: The most important for any organization is to have clear,
understandable and workable standards set for every department and function, putting up
ambiguous , intangible standards with heavy penalties, will only result in utter confusion and
adopting of ways that are crude to the organization and can develop into potential threats. The
standards set should act as a motivator, and not as a threat, because the difference between the

two, changes the mindset of the employees working to achieve the same. Therefore, it is
important to have clear cut understandable standards.
CONVICTION IN TOSHIBA’S ACCOUNTING SCANDAL:
The Financial Services Agency, Japan imposed a fine of Yen 7.37 billion on Toshiba Corporation for
falsifying financial reports, the CEO’s and almost complete board of directors resigned in awake of the
accounting scandal.
Though the fine imposed was the largest by the Financial Services and the corporation faced an white
wash of its board of directors, it cannot be compelled to say that justice prevailed in the above scenario.
The Aftermath of the scandal gave the conglomerate a revamp of the management, job –cuts all over the
world in the name of financial restructuring and an apology to Japan’s Prime Minister and to the
stakeholders and investors’ for the company. But, does it set a hard example for other corporates all
around the world, foregoing them to indulge in fraudulent activities, may be not.
Monetary implications are often huge in the event of a scandal, and one can trace few convictions as well,
but for the common investor, all is left is another disclaimer, as to how, one should invest wisely. There is
none to nothing examples where the investors have been compensated for the management’s fault, nor the
action taken by governing authorities are so stringent , that the future corporations think twice before
letting the thought of inconsistencies lead to their minds.
Therefore, more powerful examples need to be established.
REFERENCES
Pitney, B. W. (n.d.). Investopedia - Sharper Insight. Smarter Investing. | Investopedia. Retrieved
September 25, 2016, from http://www.investopedia.com.
The Japan Times. (n.d.). Retrieved September 25, 2016, from http://www.japantimes.co.jp/.