Running head: TOSHIBA CASE STUDY 1

Toshiba: A Case for Change

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Abstract

On July 21, 2015, Toshiba CEO Hisao Tanaka announced his resignation in the face of an

accounting scandal tied to about $1.2 billion in overstated operating profits. Details of the

scandal emerged the day before when an independent investigative panel released a report

describing the accounting improprieties in detail. Toshiba was an early adopter of the corporate

governance reforms initiated in Japan. The reforms initiated within Toshiba did not prevent this

accounting fraud from taking place. Time and again, multiple cases of corporate governance

failures have provided evidence, that a solid corporate governance structure does not prevent

fraud by itself. Organizational culture also plays a critical role in determining the overall

effectiveness of corporate governance.

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Toshiba: A Case for Change

Introduction

The Toshiba Corporation had been engaged in accounting fraud since at least 2008 to hit

its financial targets. In 2015, the company made a shocking admission, because of its struggles,

Toshiba had committed a multi-year $1.22 billion accounting fraud that culminated in the

resignation of CEO Hisao Tanaka in July of that year. What made this most surprising was that

Toshiba had been perceived as “a totem of strong and virtuous Japanese corporate governance.”

(Toshiba: behind the numbers, Financier Worldwide, October 2015.)

The fraudulent accounting practices would date back to previous CEO’s and appeared to

start during Atsutoshi Nishida’s tenure as CEO in 2008. During an investigation into Toshiba, it

was found that the company overstated profits in multiple business units. The investigators also

found the total number of contract costs were underestimated and contract losses were not

recorded in a timely manner.

How is it possible that a highly regarded brand such as Toshiba could engage in these

fraudulent business practices? What prompted the continuation of these business practices? How

does the company effectively manage and recover from these practices? These are some of the

ideas and questions that I will delve into during this analysis.
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Analysis of Main Issues and Problems

The major concepts within this case are related to overstatement of profits, fraudulent

accounting practices, poor corporate governance, poor auditing principles, and the corporate

culture.

During the investigation of Toshiba, it appeared that divisional executives pressured

managers to reach for unattainable financial targets. This pressure led some of the divisions to

adopt subpar accounting tactics and hiding irregularities from the corporate auditors. The

investigation panel noted when CEO Nishida first heard of the loss of 18.4 billion yen, he

declared the loss was, “so embarrassing that we cannot announce it”. The Toshiba staff falsified

accounting records and deleted the loss from the company’s financial records.

With this background, Toshiba embarked on several years of fraud commencing in 2008.

“This fraud involved a variety of transactions at four divisions and inflated cumulative profits by

¥150 billion” (Toshiba Corporation—Independent Investigation Report 2015, 17-18). Prior to

this financial fraud, Toshiba was known in Japan as one of the main pioneers of excellent

corporate governance. Their board consisted of four external directors. The corporate audit

committee included a few of these external directors. At this time, this was considered a rarity in

Japan. Toshiba made efforts to portray an excellent corporate governance, but in truth, they were

hampered by poor leadership and inadequate accounting experience. Toshiba’s audit committee

was led by the former CFO’s, Muraoka (2011-2014) and Mr. Kubo (2014). The committee did

include three independent directors, but unfortunately, these directors had limited accounting

knowledge and experience.

Another factor that led to this fraud is related to the Japanese culture. Within Japanese

culture, they place a high value of unquestioned obedience to management. This top-down
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culture helped to shape and escalate the fraud within Toshiba. In this system, the corporation

tends to be more responsive to the corporate executives than to the shareholders. This stems from

the tradition of Bushido, the samurai code. Through this cultural belief, social harmony is

achieved through conformity and obedience to authority. Whereas top executives give the orders,

and all lower-level employees are expected to blindly follow without questions. (Morang, 2017)

The only alternative in this case would have been for Toshiba to admit the financial loss

from the beginning instead of attempting to cover up the loss through fraudulent accounting

practices. This would have led to a “loss of face” for Nishida in the Japanese business world and

as such, he could not bring himself to admit the financial loss to the world.

Strategies and Solutions

As I have shown so far, Toshiba’s corporate culture in combination with the Japanese

culture led to multi-year accounting fraud spanning several of its subsidiary companies.

The solution I would choose to enact at Toshiba would be a complete transformation of

the corporate governance to reflect an integrated framework.

Control Environment

The control environment entails a set of standards, processes, and structures that provide

the basis for carrying out internal control activities. This environment is dominated by five core

principles. The first is the organization shows a commitment to integrity and ethical values.

Integrity should be at the forefront of all actions by the board of directors and management. This

policy should be clearly understood by all employees within the organization.

The second is the board of directors has independence from management and can provide

oversight of internal controls. The board must always maintain this independence, be able to
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review and evaluate what skills and expertise are needed to maintain an objective body, and to

take decisive action when needed.

The third is the management establishes, with board oversight, clear reporting lines along

with appropriate reporting lines and defines which position has authority in differing situations.

The fourth is the demonstration of a commitment to attract, develop, and maintain

competent employees. This can be an extremely challenging aspect in today’s business world.

We are seeing today that the older generation’s concept of company loyalty has not transferred

into the younger generation. More people today “job” shop than ever before, and this leads to a

constant struggle in retaining competent employees or attracting the best and brightest for these

positions.

The fifth is the ability to hold employees accountable for their responsibilities.

Management must always act decisively to hold employees accountable for internal control

failures and take immediate corrective action as needed. On the opposite side of the coin,

management must recognize positive accountability as well. These can include incentives,

performance measures, and rewards aligned with internal control responsibilities.

Risk Assessment

This idea is related to the corporation’s process to identify and analyze the risks of not

achieving its financial objectives. Identification and assessment of risks relating to objectives

must be one of the components within this section. These objectives relate to operations,

reporting, and compliance. Other areas to review during the risk assessment include, how both

internal and external factors can affect the business, how to implement appropriate risk

mitigations at different levels within the corporation, and a clearly defined process for proper risk

management.
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The final element in risk assessment is considering the potential for fraud to achieve

goals and objectives. Risk mitigation for fraud needs to include differing types of fraud e.g.,

fraudulent reporting, asset loss, and corruption. This assessment must consider Cressey’s theory

of the fraud triangle. This will help the risk assessors understand the motive and drive behind

why employees commit fraud.

Control Activities

Control activities are actions the corporation puts into place to ensure management

directives mitigate risks to the stated objectives. These actions take place within all levels of an

organization and within differing stages of business processes. Control activities must maintain a

balanced approach to mitigate risks. These functions can come in the form of automated

activities e.g., computer-based AI computing financial data, or in a manual approach e.g., human

check and balance system when distributing money.

Another mitigation to focus on is how certain job duties are incompatible within financial

control. The main accountant for the corporation should not be the main financial auditor. These

functions must be separated to provide the oversight and control needed.

If technology is used within the control environment, the organization must ensure that

the access is restricted to authorized users within their job duties, and the system is protected

from outside threats.

Information and Communication

This ideal is necessary for the corporate to carry out the internal control process.

Corporations should be able to identify all required information from internal and external

sources, understand how to process the data and information, and how to accurately interpret the

data prior to communicating it to all stakeholders.

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A main theme of communication in corporations is having an integrity channel or

“whistleblower” hotline. These communication channels serve as the fail-safe mechanism within

the corporation. It provides an avenue for anonymous reporting were the normal communication

channels have failed or are ineffective.

External communication channels must function and allow shareholder, partners,

regulators, and customers a relevant means to communicate as needed. These channels also need

to flow the data to the correct people within the organization so it can be acted on in a timely

manner.

Monitoring Activities

Monitoring is a key element within the internal control framework. This is either ongoing

evaluations, separate evaluations, or a combination of the two. These are used to ensure the

previous five points are effective and functioning to control the financial aspect of the

corporation. Monitoring activities include internal audits, evaluations of the overall internal

control process, and external audits. Any deficiencies found within the system must have

corrective measures applied with the backing of executive management and the board.

These principles not only apply to Toshiba, but to all corporations that want to have a top-

tier financial control system in place. All business leaders need to look to these failures as how

not to maintain financial control over your corporation. Toshiba’s failure not only hurt the

executive management, but it affected all stakeholders within the corporation as well. Stock

prices had a significant price drop, it affected the corporation’s reputation with outside vendors,

and flagged itself with the regulatory agencies for future investigations and interventions.
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Personal Experience

In my own personal experience, I have dealt with corporate fraud once in my career.

Some background on myself at the time, I was working for an international oil exploration

company as a senior health and safety manager for the global operations. I had travelled to

Mexico to conduct the annual health and safety audits of all the assets and operations within the

regions. I was scheduled to be in country for approximately six weeks. I would travel between

the company’s offshore oil rigs and the main office. During one of my rig visits, a national

employee had a conversation with me about a concerning issue. Since I was the only corporate

officer they interacted with, they felt comfortable speaking with me.

The situation that he brought to my attention was the national human resources director

was running a pay for placement scam on our local work force. He was charging each employee

he hired, a twenty percent fee, paid monthly, for one year. This was in violation of multiple

corporate policies, so I opened an investigation into the complaint while I was in the office. As I

visited more of our assets in the region, I asked the local workforce if anyone else was paying

this “work tax” to the human resource director and found that roughly thirty-five precent of the

staff were in fact paying this price.

At this point, I notified the chief compliance officer to express my concerns about the

situation and to provide what information I had gathered so far during my investigation. She was

receptive to the investigation findings, and also directed me to see if the fraud went any further

within the regional office.

I expanded my investigation into other areas of the internal finances of the region, and I

was shocked at what I found. The regional director owned a temporary employment service that

was providing employment services to the regional office. He was the only one that signed off on
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the contract to utilize his own company in this fashion. I also found multiple irregularities within

the bookkeeping. These irregularities turned out to be kickback payments to local government

officials and the national oil company.

After my investigation, I presented the facts to the CEO, COO, CFO, and CCO via

teleconference as they were in London. Within three days of the presentation, the corporation had

a full forensic auditing team onsite at the regional office to conduct a more through investigation

than what I was able to complete. In addition to the auditing team, the CEO, Sr. VP for the

hemisphere, and replacement management arrived at the office. All parties that were involved in

any of the findings were immediately escorted from the building and terminated from the

company.

Since this all took place in Mexico, no criminal charges were brought against the

offending parties, and none of the money was recovered from the fraud. The corporation did

make changes to how contracts were enacted as the Sr. VP for the hemisphere now had to sign

off on all labor contracts and service provider contracts as a check and balance to prevent this

situation from happening again.

Biblical Integration

The main biblical principle that I took away from Toshiba’s case is the need for integrity

and honesty within business. The thought of honesty and integrity is as old as the ten

commandments. When God spoke to Moses on Mt. Sinai and provided him with the ten

commandments for all His people one of His commandments was “You shall not steal”. (Exodus,

20:15, NIV) As Proverbs 10:9 says, “Whoever walks in integrity walks securely, but whoever

takes the crooked paths will be found out” (Proverbs, 10:9, NIV). I feel that God is speaking to

us as leaders, reminding us that we should always walk the path of integrity because if we walk
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the other path others will eventually find out about our deceitfulness. As Jesus points out in the

Parable of the Shrewd Manager, “Whoever can be trusted with little can also be trusted with

much, and whoever is dishonest with very little will also be dishonest with much” (Luke 16:10,

NIV). Jesus further explains to His disciples that, “if you are not trustworthy of worldly wealth,

who will trust you with true riches?” (Luke, 16:12, NIV) These passages in Luke provide a

greater clarity about God’s plan for business leaders. He has placed us into a position to glorify

Him and He puts his trust in us to handle the “worldly wealth” he has placed in our care. If we

cannot handle the pressures of honestly handling business finances, then how can He trust us

with His riches in heaven.

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References

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Summerfield, Richard. (2015). Toshiba: behind the numbers, Financier Worldwide

Morang, Steve. (2017) In Toshiba's scandal, blame samurai code. Fraud Magazine.

https://www.fraud-magazine.com/article.aspx?id=4294997970

Erbuga, Gokce. (2019). Yes, But Was It A Real Audit? The Toshiba Case. ResearchGate.

https://www.researchgate.net/publication/336892371_YES_BUT_WAS_IT_A_REAL_AUDIT_

THE_TOSHIBA_CASE

D’Aquila, Jill. (2013). COSO’s Internal Control – Integrated Framework. The CPA Journal.

Ueda, Koichi. (2015). Investigation Report. Independent Investigation Committee for Toshiba

Corporation.

Caplan, Dennis. (2019). Unmasking the Fraud at Toshiba. Issues in Accounting Education.

ResearchGate.

Biegelman, M. T., & Bartow, J. T. (2006). Executive roadmap to fraud prevention and internal

control: Creating a culture of compliance. ProQuest Ebook

Central https://ebookcentral.proquest.com

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