Governance and Fraud: Analysis of Toshiba and Dick Smith Cases

This report provides a comprehensive analysis of two significant corporate fraud cases: Toshiba (2015) and Dick Smith (2016). The report begins by defining fraud and its various types, including asset misappropriation, corruption, and financial statement fraud. It then delves into the specifics of the Toshiba case, highlighting the accounting fraud where senior management inflated profits by billions of yen due to a corporate culture that discouraged questioning authority. The Dick Smith case is examined, focusing on rebate fraud and the company's collapse following over-expansion. The report draws similarities between the cases, emphasizing the involvement of higher management and the impact on company reputation. Furthermore, it explores how these frauds could have been prevented, emphasizing the importance of transparency, ethical corporate culture, and a focus on long-term customer value over short-term financial incentives. The report concludes by summarizing the key findings and emphasizing the devastating impact of fraud on even the most reputable companies.

Running head: GOVERNANCE AND FRAUD – ANALYSIS OF TOSHIBA AND DICK SMITH CASE
GOVERNANCE AND FRAUD – ANALYSIS OF TOSHIBA AND DICK SMITH CASE
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GOVERNANCE AND FRAUD – ANALYSIS OF TOSHIBA AND DICK SMITH CASE
Introduction
The paper aims to analyze the two fraud cases related to governance namely the Toshiba
case of 2015 and the Dick Smith case of 2016. First, the paper will explain fraud and the
different types of fraud. Then, the paper will examine the two cases; find the similarities and the
extent of damage the fraud causes. The paper will also provide views on the way the frauds could
have been prevented.
Fraud refers to the intentional act done to secure an unlawful or unfair gain. In simple
terms, fraud could be stated to be an effort to trick another party to achieve a benefit. Fraud is not
the same as errors because errors are committed unintentionally. A person commits an error out
of misinterpretation of facts, carelessness and oversight. Further insight into fraud will be
presented in the sections below.
Types of fraud
As explained in the introductory part, fraud is any mischief done to gain intentionally,
profit from deceiving others. Now, fraud could be of several types. Some of the types include
asset misappropriation, corruption, financial statement fraud and occupational fraud.
In asset misappropriation, any employee misuses or steals the resources of the
organization. For example, stealing of cash, false billing schemes and so on are the types of asset
misappropriation. Corruption is a type of fraud where the employee misuses her or his power and
position to influence any business transaction for her or his own profit. Conflict of interests and
bribery are the two examples of corruption. In financial statement fraud, an employee voluntarily
causes an omission or misstatement of information in the financial reports of the organization.
To cite some examples, engaging in artificial inflation of reported assets, recording of fictitious

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revenues and such are types of financial statement frauds. Occupational fraud is another type of
fraud that generally involves asset misappropriation and financial statement fraud.
Toshiba fraud case of 2015
On 15 July 2015, Toshiba’s Chief Executive Officer Hisao Tanaka announced his
resignation over the financial accounting fraud that an independent investigation found
(Fortune.com, 2019). The investigation found that the senior management in the company has
been inflating its profits for many years. The report of the investigating agency found that the
Japanese corporate giant had exaggerated its profits by a margin of 151.8 billion yen, which is
close to 1.2 billion dollars since the year 2008 (Fortune.com, 2019). The numbers that were
shown were up three times more than the actual profit. The investigation report found that since
the Japanese company had the culture of employees not allowed to challenge the decisions of the
management, they were forced to do inappropriate accounting. These were done by postponing
the reports of loss or shifting specific costs to later years. The fraud was one of the biggest frauds
owing to the brand associated with the fraud and the amount of accounting that was involved in
it. Toshiba Corporation dates back to 1875 when it was founded and has a glorious history of
providing top quality products to the consumers. The scandal resulted in huge loss in terms of
both finance and reputation.
The Dick Smith Fraud Case of 2016
The Dick Smith fraud took place a year later in 2016 and it was based on the rebate fraud.
Dick Smith was an ASX listed private company that was bought over from Woolworths in 2012
by Anchorage Capital at a price of 115 million Australian dollars. In the year 2013, the company
was floated with market capitalization amounting to 520 million Australian dollars

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(Theconversation.com, 2019). With such a high margin of profit in just one year, the company
came in the eyes of the investigators and it was found that it had been involved in “the greatest
private equity heist of all time” (Theconversation.com, 2019). It was revealed that the company
announced the requirement need of 60 million Australian dollars on 30 November 2016 whereas
three months prior it was found that there were no adverse findings in its inventory. The
company’s management wanted rebates to make the company float and CEO Nick Abboud knew
that in the face of declining sales, rebates were the only options left for the company to ease
away the tension of low level of profitability (Afr.com, 2019). Within four years of acquisition
by Anchorage Capital, the retailing company went down on 4 January 2016. Nick Abboud
resigned on 12 January 2016.
Similarities between the two cases
Both the cases have both similarities and differences in the way the two companies were
involved in fraud. While Toshiba’s fraud was a case of asset misappropriation, Dick Smith’s was
more of a case of corruption. The divisional heads inflated the profit margins of the company not
by double but triple margins thus engaging in fraudulent activities. The CEO and other higher
officials at Dick Smith were involved in rebates fraud, which is kind of corruption because it
involved misuse of power and position. However, in both the cases, the higher management was
involved in the fraud rather than the lower level employees. Both the companies were big in
terms of assets and brand image. It seemed impossible that the companies with such huge assets
and global presence would collapse in the face of such scandals. The two companies eyed
expansion of their business especially Dick Smith. The retailing giant went from Woolworths to
Anchorage Capital with the hopes to expand its reach. However, it deviated from its goal and

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became greedy. Toshiba on the other hand, was engaged in deception for seven long years in
order to expand in terms of finance.
Views on how the fraud could have been prevented
The frauds in my view could have been prevented had the higher management been more
transparent and honest. In Toshiba’s case, it was the higher management that forced the
employees to forge the accounting reports. The management needed to be more flexible in
allowing the employees to question and challenge the decisions of the superiors. The corporate
culture of Toshiba needed to be stronger to avoid such activities. In Toshiba, the culture has
always been to oblige the superiors and abide by their commands. The lower level employees
had no say in the decisions of the company. The independent investigation reported the internal
control issues in all departments of the company including auditing, finance, and risk
management. These issues could have been stopped from occurring if early identification was
done. In Dick Smith’s case, the fraud could have been stopped by ensuring that the new
shareholders were transparent in their approach in dealing with the company’s shares. Apart
from that, the management must have limited their ambitions on expanding the company and
lessen their reliance on rebates from suppliers. Furthermore, the management must have taken
decisions from the perspective of the customers rather than profit because the customers are the
ones who could bring actual and long-term benefits not the rebates that are attached to the
products or stock. The greed of increased rebates blinded the Dick Smith management that was
driven towards short-term incentives. Owing to these short-term incentives, the company focused
on preferring a certain supplier and certain product that had more rebates. The reason was that
rebates would increase the profit of the company in the same month the product is purchased by
the company and not on the month, the product is sold to the customers. All these could have

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been prevented had the company focused on the quality of the products, its advertisement and
promotion rather than on unethical ways of profiting.
Conclusion
To conclude, it could be stated that the fraud cases of both Toshiba and Dick Smith show
that frauds could mar the image of any company does not matter how big or reputed it is. In the
essay, the explanation of fraud has been provided. It was found that fraud and error are two
different things. While fraud is an intentional deception for the motive of profit, error is the
unintentional harm or mistake done out of carelessness or misinterpretation. The essay also
analyzed the four types of frauds that include asset misappropriation, corruption, financial
statement fraud and occupational fraud. The two cases that were analyzed were put under asset
misappropriation (Toshiba Corporation) and corruption (Dick Smith). Toshiba was involved in
accounting fraud where the top management had been found engaged in the scandal for more
than seven years. The company’s profit statements were found inflated. Dick Smith was involved
in fraud related to rebates.

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References:
Afr.com (2019). Dick Smith collapse a case study in electronics retailing. [online] Australian
Financial Review. Available at: https://www.afr.com/chanticleer/dick-smith-collapse-a-case-
study-in-electronics-retailing-20160713-gq54s0 [Accessed 14 May 2019].
Fortune.com (2019). Toshiba just lost its CEO to a huge accounting scandal. [online] Fortune.
Available at: http://fortune.com/2015/07/21/toshiba-just-lost-its-ceo-to-a-huge-accounting-
scandal/ [Accessed 14 May 2019].
Theconversation.com (2019). The ugly story of Dick Smith, from float to failure. [online] The
Conversation. Available at: https://theconversation.com/the-ugly-story-of-dick-smith-from-float-
to-failure-55625 [Accessed 14 May 2019].