Toshiba Corporation - Accounting Problems - Case Study Example

MC ESSAY Student’s name Course Unit Professor’s name University Date Introduction It is paramount for any business to be socially responsible for its employees and the society at large in the activities that are undertaken in their firm. In the event that a firm fails to take responsibility and an unfortunate event occurs, it would almost be impossible for it to reclaim its position in the business market as loyalty and the reputation once accorded to them will be had to get back. It is worse if the incident was due to negligence on the part of the firm because legal action may be taken by the aggrieved party causing deregistration of the business hence loss of livelihood for the employees. This report will look into a business incident that recently occurred, its cause, how it was handled and any suggestions that could have prevented or remedy the situation. Background Toshiba Corporation was founded in 1938 and belongs to a multinational conglomerate corporation who is of Japanese origin. It has been in the industry for 140 years. It has its headquarters in Tokyo, Japan and has a wide range of diverse products and services that range from technology, information, electronics, medical equipment, household appliances among other things. It has also received recognition for its superior products and services as in 2010, it was ranked as the fifth largest personal computer vendor in the world and came in fourth in the world among the largest manufacturers of semi-conductors (Gandhi, 2015 p.1). All these are based on the revenues earned. In mid-2015, the company faced a major accounting scandal that involved an overstatement of profits for the last seven years that amounted to $ 1.2 billion. This caused the then CEO to resign (Smith, 2015 n.p). Statement of Problem The accounting problems involving Toshiba were primarily caused by the employees who over the years had developed a habit of understating costs on the long-term projects which in turn allowed the company to make an overstatement on their operating profits to $1.2 billion in the years 2008-2014. There were also issues with the inventory as it was not properly valued. The CEO of Toshiba is said to have put undue pressure on his subordinates in order to meet set sales targets following the 2008 global recession. This kind of intense pressure was usually released just before the end of a fiscal year when there was almost no time to substantially meet or affect the unit performance hence pushing the employees to postpone the losses and carry forward some sale on accounting. The CEOs were Atsutoshi Nishida who served between 2005 and 2009 and Norio Sasaki 2009-2013. The employees did not receive any explicit instructions from the CEO. The top management is said to have set unattainable targets for the employees and due to the Japanese culture which requires them to be obedient and loyal in a corporate setting. This made the subordinates to do whatever they felt they needed to do in order to achieve the set targets (Gandhi, 2015 p.1). The intense targets set created a cycle of subordinates manipulating accounts in a bid to meet targets. In part, they also feared that failure to meet the targets would lead to the firm downsizing and hence they would lose their jobs. As a result of fictitiously meeting the set targets, more pressure was added and the targets became even tougher in the subsequent years. When the scandal was being investigated, it proved quite difficult to discover the accounting anomalies. This is because the accounting staff had skillfully used complex accounting techniques that brought about a situation where producing corroborative evidence would be extremely difficult. These included, pushing back losses, early booking of future profits and pushing back charges (Carpenter, 2015 n.p). There was also hiding of material facts from the external auditor and any request for information was vaguely presented creating a completely different picture far from the true factual information. In addition, according to the Japanese governance code, it was a requirement for Japanese companies to appoint at least two independent directors who were not part of the company. This was passed so as to ensure accountability from managers to investors. Toshiba passed this regulations but a look into the company revealed that even though the directors came from outside, they had been long time insiders and this was also a major factor that contributed to the accounting problems. Consequences During the period under review, there was a whistleblower system that existed in Toshiba that received at least twelve reports in a year. The report were not included in those that were undergoing scrutiny. It is either that the staff had no trust in this system or were totally unaware of its existence. This loophole is was led to the discovery of the anomalies in their books. Being one of the most recognized corporations, the consequences suffered were highly significant. Some of which are; i. First, the company suffered huge losses amounting to 37.8 billion Yen for the year ending September 7th 2015 (Kodaira, 2015 n.p). This would mean that the company would sink into a period of recession in order to recover. The losses is projected to continue for at least three more quarters (Huang & Alpeyev, 2015 n.p) ii. The deceptive accounting has also tainted the Japanese stock market’s image. It would be hard to convince key stakeholders to invest in any stock as the thought of fraud is fresh in their minds and the Toshiba incident unfortunately becomes a poor reflection of the Japanese stock market. iii. Investor confidence has been brought down owing to the changes that have occurred in a short period of time. The resigning of top management, introduction of corporate government reforms and announcement of new management does not sit well with the investors. The accounting scandal effect is immeasurable given its publication. Toshiba may face fines of administrative disposition and risk being designated as security on alert. The repercussions cut way deep as it does not only affect the key shareholders but the society at large and the international community given that it has branches globally. As of July 2015, Toshiba had already been taken to court by individual investors following claims of violation of the Federal Securities Act. The investors are demanding for compensation on the losses incurred as a result of the decline in Toshiba shares. This does not mean it is the end of the lawsuits as in coming months, more investors both foreign and domestic are expected to file their cases. In addition, the firm will be forced to sell some of its division since it is expected to have a series of losses in the next three years hence it will be unsustainable to maintain all their divisions. The employees who took part in the accounting malpractice may be suspended or worse laid off. Analysis A look into the scandal, it is becomes quite clear that even in the great number of years that Toshiba has been in operation, it was poor at communication. After suffering the 2008 recession, instead of setting demands for the employees, the top management should have made consultations and make a decision on the best way possible to improve their situation. The use of the techniques the subordinates used to hide information was unethical as this prevented the auditors from giving a correct, true and factual report. Hiding of any material facts in accounting may raise questions on the integrity of the firm as a whole. Business process Re-engineering, turnaround or even six sigma could have been adopted to remedy the situation. A look at the situation at present and Toshiba has definitely moved downwards on the scale in the provision of services. Its competitors will enjoy the benefits as the company works on its restructuring. It is likely to sell some of its divisions to its competitors such as Sony. In the event that the new management changes both cultural and structural succeed, the employees will be the beneficiaries of improved cooperation in between the hierarchical structures. This restructure is meant to create more trustworthy working environment where there is no undue pressure. The future investors are also set to benefit from the new management that analyzes the performance and focuses on more revenue generating activities. The unhealthy environment and work culture has been unethical and unsupportive for great leadership. Under the new administration, it is expected that the employees will be given the freedom to work independently and improve the work culture (Mahidov, 2016 n.p). Problem Solving From the above scenario, it is evident that a lot of things were not set straight and the parties involved in this saga have a share of blame. The government took too long to implement their governance code and allowed the directors to maneuver around the regulations to do scrupulous business activities. The directors and top management committee were wrong to impose unachievable targets especially near the close of the fiscal year when time was limited. The employees were wrong for taking matters into their own hands by altering the books and postponing losses in order to meet targets out of the fear of losing their jobs leading to a $405 billion loss in 2015 (Yan and Wakatsuki, 2015 n.p). It is sad that it took seven years to discover the anomalies in the books when the damage was far gone. The corporate culture that exists for the Japanese that loyalty and obedience comes first should be amended. In an organization, the decision making process should be inclusive of all members so that the achievement of set goals and targets could be uniform. Allowing the subordinates to have a say in the decisions allows transparency as they are not tempted to hide in conducting the organization’s activities or feel the need to alter information to suit the top management’s orders. There’s a line that needs to be drawn when it comes to giving orders and designating orders. The top management should have been in constant and consistent communication with the subordinates on how to achieve the set targets and the required time needed that would be suitable enough to complete the task. The government should also be hands on in the implementation of their policies so as to ensure that the investors achieve a level of trust painting a good image that will attract more investors. Conclusion When a business is platinum, it is important to maintain the position especially when it has been in operation for a considerable amount of time. For Toshiba Corporation, the culture of expecting obedience and loyalty from their employees was the root cause of the problem. Putting high expectations with no time to deliver results is unachievable. Communication was also in lack in this situation as it was one sided given that the top management only gave targets to be achieved while the subordinates did not question or give their opinions. Had they sat down and had a subsequent discussion on the achievable and deliverables, perhaps the employees would not have seen the need to result to the accounting malpractice. Including other members of the organization in decision making may be slower but it would definitely yield better results as they would all be working towards a common goal unlike where managers set goals and the employees result to interfering with the books in order to meet targets while securing their job positions. In the long-run the business is set to flop. Proper management of the core issues in an organization play an important role in determining the success of the business hence aligning of these issues needs to be given priority. References Carpenter, J.W. (2015). Toshiba’s Accounting Scandal: How it Happened. (OTCBB: TOSBF). Retrieved October 13, 2016, from Investopedia: http://www.investopedia.com/articles/ investing/081315/toshibas-accounting-scandal-how-it-happened.asp Gandhi, K. (2015). Emerging Issues-Toshiba Accounting Scandals. Fortune. Retrieved October 13, 2016 from Fortune https://www.toshiba.co.jp/about/ir/en/news/20150725_1.pdf Huang, G., & Alpeyev, P. (2015). Toshiba Adds $3.3 Billion Credit Line After Accounting Probe. Retrieved October 13, 2016, from BloombergBusiness: http://www.bloomberg.com/news/articles/2015-09-30/toshiba-signs-400-billion-yen-credit-line-agreement-with-banks Kodaira, R. (2015). Toshiba Scandal has Consequences for all of Corporate Japan. Asian Review. Retrieved October 13, 2016 from Asian review asia.nikkei.com/Politics-Economy/Economy/Toshiba-scandal-has-consequences-for-all-of-corporate-japan Mahidov, V. (2016). Toshiba Scandal Analysis: An Example of Finding the Best Solution in a Very Complex Situation. Italy online Retrieved October 13, 2016 from Italy online www.vitalyonline.come/vitaly-research/toshiba-scandal-analysis-an-example-of-finding-the-best-solution-in-a-very-complex-situation.html/ Reuters (2016). Toshiba over Accounting Scandal. Fortune. Retrieved October 13, 2016 from fortune fortune.com/2016/10/13/Toshiba-accounting-scandal-lawsuit/ Smith, G. (2015). Toshiba just Lost its CEO to a Huge Accounting Scandal. Fortune Retrieved October 13, 2016 from Fortune fortune.com/2015/07/21/toshiba-just-lost-its-ceo-to-a-huge-accounting-scandal/ Yan, S., & Wakatsuki, Y. (2015,). Toshiba forecasts massive $4.5 billion annual loss. Retrieved October 13, 2016, from CNN Money: http://money.cnn.com/2015/12/21/investing/toshiba-restructuring-accounting-scandal Read More