WACC100: Ethical Issues in Toshiba's Accounting Scandal Case Study

This case study delves into the Toshiba accounting scandal, revealing how the company inflated its earnings by over $1.2 billion between 2009 and 2014 due to internal audit failures and unethical practices. The analysis covers the company's background, the ethical issues that arose from unrealistic performance goals set by executives, and the impact on various stakeholders, including top executives, employees, and shareholders. The study evaluates the ethicality of the decisions made by involved parties, highlighting the negative consequences such as lawsuits, loss of confidence, and organizational stigma. It concludes that the failure to observe internal audit controls led to one of Japan's largest accounting scandals, emphasizing the importance of business ethics and corporate responsibility. Desklib offers a platform for students to access similar case studies and solved assignments for academic support.

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TOSHIBA INTERNAL AUDIT FAILURE CASE
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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
Function through its failure to access the aptness of its accounting processes (Bhattacharyya,

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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

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These are individuals with shares in the company. The falsification of financial
statements had presented them with a wrong impression of the profitability of the company.
Their trust in the Company was immensely affected. It is estimated that more than 1000 investors
were affected by the Scandal (Kunert, 2015). The accounting scandal also caused Investors,
especially foreign institutions damages amounting to $162.3 million (Fujita & Tsukimori, 2016).
Was the decision made by the involved parties ethical? How would the business be
positively/negatively impacted by the decision? Explain your answer.
The decision made by the executives and employees of Toshiba was not ethical. The
decision would give a false impression to potential investors that Toshiba was doing well amid
financial crisis experienced during that period. This would, however, lead to lawsuits and loss of
confidence in the company by investors. Also, the decision would have led to organizational
stigma leading to media mockery of the organization, rejection of charitable donations, the
decline in employee morale and massive employee turnover (Groysberg, Abrahams, Serafeim &
Lin, 2016)
Detail your original view on business ethics. How has your view changed
after attending lessons and completing this case study assignment?
Before attending lessons and completing this case, I was of the opinion that business
ethics could not be managed. I was also of the opinion that Social responsibility and business
ethics are similar concepts. However, this opinion has greatly changed. I have realized that a
difference exists between business ethics and corporate responsibility. I have also learnt that
business ethics can be managed through regulations and controls.
Conclusion
In conclusion, by failing to observe internal audit controls, Toshiba bore one of the
largest accounting Scandals in Japan. The company is a multinational corporation with
headquarters in Tokyo, Japan. Pressure on employees to meet targets set by their executives left
them with no option but to forge financial statements, even though they knew it was an unethical
practice. Some of the consequences of this scandal were the resignation of executives, loss of
jobs for thousands of employees, lack of trust by investors and legal suits. The decision made by

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both the employees was not ethical and could have had various negative consequences for the
Company.

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References
Bhattacharyya, A. (2015). Toshiba - a case of internal audit failure. Business Standard. Retrieved
from
https://www.business-standard.com/article/opinion/toshiba-a-case-of-internal-audit-failure-
115080900760_1.html
Carpenter, J. (2015). Toshiba's Accounting Scandal: How It Happened (OTCBB: TOSBF).
Retrieved from https://www.investopedia.com/articles/investing/081315/toshibas-
accounting-scandal-how-it-happened.asp
Fujita, J., & Tsukimori, O. (2016). Foreign investors sue Toshiba over an accounting scandal.
Retrieved from https://www.reuters.com/article/us-toshiba-accounts-lawsuit/foreign-
investors-sue-toshiba-over-accounting-scandal-idUSKCN12D01W
Groysberg, B., Abrahams, R., Serafeim, G., & Lin, E. (2016). Working for a Scandal-Tainted Company
Hurts Your Future Earnings. Retrieved from https://hbr.org/2016/09/the-scandal-effect
Nagata, K. (2018). Pressure to show a profit led to Toshiba’s accounting scandal. The Japan
Times. Retrieved from
https://www.japantimes.co.jp/news/2015/09/18/business/corporate-business/pressure-to-
show-a-profit-led-to-toshibas-accounting-scandal/#.W82IgXszbIU
Kunert, P. (2015). Scandal-hit Toshiba faces investor cueball over accounting woes. Retrieved
from https://www.theregister.co.uk/2015/12/07/toshiba_lawsuit_accounting_problems/
Warren, T. (2015). Toshiba cuts 7,800 jobs following an accounting scandal. Retrieved from
https://www.theverge.com/2015/12/21/10635070/toshiba-job-cuts-accounting-scandal