Toshiba Accounting Scandal - Case Study Example

TOSHIBA ACCOUNTING SCANDAL Student’s Name Name of class Name of professor University Location of city and state Date Introduction Ideally, organizations exist to achieve objectives set It is, therefore, the duty of management to ensure that effective strategies are put in place by in order to ensure that objectives are achieved. Management has a duty of representing the best interest of shareholders. However, there are instances where management acts not to the best interest of the shareholders' who happen to be the real owners of the resource. Therefore, there arises a conflict of interest between the management and the shareholders in as far as the representation of shareholder interest are concerned. Because of the fact that shareholders want maximum return for their investments, management usually gets torn between maximizing shareholders value through profit maximization. Interestingly, shareholders are interested and concerned with maximum returns for their investments, sometimes not even considering how the high returns come about. In Toshiba Inc. agency relationship or conflict contributed to the emergence of the scandal. Management together with employees colluded to alter books of accounts by overstating their annual profits. The company appeared profitable in the eyes of both existing and potential investors but the reality was that the "profit" had been cooked, an action not recommended as per international accounting standards. Besides, window dressing of books of accounts is unethical and goes against International Financial Reporting Standards. This essay, therefore, aims at critically evaluating the Toshiba scandal and also establishing what the organization did to handle the issue. A brief description of Toshiba scandal Toshiba Company is a big Japanese multinational conglomerate that was founded in the year 1938, and whose e headquarters is situated in Tokyo, Japan (Gandhi, 2015). Toshiba has diversified its products and services to include communications equipment and other information technology gadgets. Additionally, it focuses much on electronic components, electronic household appliances, among others. Based on revenue turnover, in the year 2010, Toshibas was named the world's fifth largest vendor of personal computers (Gandhi, 2015). Similarly, Toshibas was also ranked as the world's fourth largest manufacturer of semiconductors. However, amidst all these prestigious ranks, the company had a big scandal cooking. In the year 2015, a major scandal erupted, threatening to break the company and cease the operations of the company (Gandhi, 2015). The company was blamed for overstating its profits by over 151.8 billion yen, equivalent to ($ 1.2 billion) (Gandhi, 2015). It is said that the overstatement was done over a seven year period. Because of the scandal, on 21st July 2015, the company's CEO threatened to resign as the company's scandal (Gandhi, 2015). In fact, other eight officials of the company resigned, including two other CEOs who were still working for the company and attached to various roles within the company. The cause of the Toshiba scandal is mainly rooted in an attempt of the company to understate costs relating to the company's long-term projects (Gandhi, 2015). Understatement of the cost of production leads to overstated gross profit and consequent overstatement of net profit. Toshibas suffered the consequences of its actions when the scandal, at last, came to the limelight, terming it as a major corporate scandal in the Japanese history. Toshiba's accounting control systems were very weak to prevent the occurrence of the scandal. Coupled with weak internal controls, Toshiba's corporate culture led to inflated profits (Gandhi, 2015). However, an investigation was undertaken to establish the root cause of the scandal and the results of the investigation revealed that the Company's CEO had put much pressure to his subordinates to ensure that they meet sales targets (Gandhi, 2015). Results further revealed that the pressure put by the company's CEO happened immediately after the occurrence of the 2008/2009 financial crisis. It appeared that much pressure on employees usually came towards the end of the fiscal year, making employees attempt to postpone losses made, besides also pushing forward sales. In such instances, subordinates never received any implicit form of instructions from the company CEOs (Gandhi, 2015). Therefore, because of lack of implicit instructions from CEOS, the company's management set high, impossible and unattainable targets. Besides, The Company's management also relied much on Japanese culture that is characterized by obedience and loyalty, which consequently led to employee lower in the hierarchy to do anything within their reach to achieve the set target sales. For fear of victimization through downsizing, vicious cycles were created within the company's divisions, with divisions manipulating accounts in order to help them achieve the set targets (Gandhi, 2015). The employees were further given much tougher goals as a result of "attaining or meeting" set targets. It was also revealed that much of the accounting misappropriations went undiscovered by the external auditor. How Toshiba handled the situation Having realized the causes of the scandal that threatened to break up the company and deprive it of its prestigious position it has enjoyed over time for being the best vendor of personal computers, Toshiba a to take corrective measures. These are some of the ways the company handled the issue. Resignation After the announcement of the mega financial fiasco, the company management resigned. Of great importance is that the company management accepted the mistake and greatly apologized (DiPietro, 2015). Two of the company directors resigned as a sign of acknowledgment of the mistake done. There is no sufficient evidence or indication that Toshiba's top management together with employees pocketed large sums of money or even received kickbacks from company clients (Kazuo, 2015). Therefore, it is apparent that the people involved in the financial fiasco were motivated by personal greed. The company directors were dearly motivated and driven by the intense desire to make the company appear good to the outsiders, whereas employees in lower ranks were particularly interested in securing their positions in the company(Kazuo, 2015). However, whichever the reason, the company directors resigned as an indication of the acknowledgment of the mistake. Toshiba responded to the scandal by appointing the current board chairman, Mr. Masashi Muromachi to be the company’s interim president, following the willing resignation of the president, Mr. Tanaka (Boyd et al., 2015). The company further ordered a pay cut off of 16 of its executives (Boyd et al., 2015). Internal control system According to Moroney (2016), internal control system refers to the controls put in place in order to ensure that errors ad frauds are prevented. It is always the duty of the management to put in place effective controls in the organization that prevents errors and fraud. Errors refer to the unintentional misstatement of books of accounts and normally happen unconsciously (Hamilton, 2016). However, on the other hand, according to Hamilton (2016) fraud refers to intentional and willingly misrepresentation of accounting statements. It is apparent therefore that whatever took place at Toshiba Inc. is fraud because it is reported that books of accounts were intentionally misstated. According to Moroney (2016) if an organization has poor internal controls, errors and fraud are prone to happen. Toshiba realized that weak internal system prevented fraudulent employees from pursuing their self-interests. If internal control systems were strong enough, the management could not have used subordinates to undertake their ill motives. One thing that Toshiba has done in the recent past is to strengthen the internal control system (Gandhi, 2015). During a conference that was held in Septembers 2015, the incoming president Mr. Muromachi who took over from Mr. Tanaka after his resignation promised his commitment to strengthening the internal control measures that will ensure that a repeat of the same won't be experienced in future (Boyd et al., 2015). Mr. Muromachi cited that the scandal-tainted the organization's corporate image and identity (Boyd et al., 2015). Corporate culture Corporate culture refers to custom and belief held by a certain group of people, and which thrives in a given environment (Mohamad, 2010). The motivation behind the financial improprieties experienced in the company as well as the command chain involved in their plan, implementation, and execution remain totally unclear (Kazuo, 2015). However, the major contributing factor to the financial scandal as per the investigation committee's report is "corporate culture in the organization, where employees cannot act against or contrary to the wishes and commands of the superiors". The report went further to indicate that the corporate culture existing at executives at Toshiba prioritize current accounting period's financial results, consequently placing a lot of pressure on subordinates to try and improves accounting figures for various business units(Kazuo, 2015). Therefore because of pressure exerted and imposed to them by the senior executives, subordinates have no option but cook accounting information as a sign of compliance. Most scandals are normally perpetrated or undertaken by an individual person or group of people. However, the case of Toshiba is unique because the cooking of accounting records was carried out systematically by employees who were being forced to respond to management wishes (Gandhi, 2015). This, however, points out the kind of rot in the organization's corporate culture. To remedy this, Toshiba has ventured into serious employee training and developments, letting the employee understand that at no point in time should they succumb to pressure from senior management to undertake something wrong whose effects are detrimental to both the organizational nd the employee. Similarly, Toshiba has focused to re-cultivate and establish a new corporate culture (Gandhi, 2015). Outside directors After the scandal, the company's corporate image identity was negatively tainted, greatly affecting the goodwill of the company. As a form of restructuring the company with a bid of improving the corporate image identity besides also trying to recover the lost goodwill, Toshiba responded to the case by bringing in external directors to be part of the directors of the company (Boyd et al., 2015). The company management saw it fit that having unattainable directors to the company would increase management surveillance and reduce instances of collusion directors to mismanage the resources of shareholders. The reasoning behind having external directors beef up the current composition of internal directors was guided by the theory of profit maximization. The theory states that organizations exist in order to maximize profit and increase shareholder value. This also explains why the eruptions of the scandal threatened to even bring down the giant electronics vendor (Gandhi, 2015). Governance It is a new discipline of management which evolved in the last quarter of the 20th century. Though relatively new in the management circle, the issue of corporate governance is one of the leading issues in leadership and management (Gandhi, 2015). The emphasis is laid on the role that the board plays in guiding management towards corporate success on the other hand; emphasis is placed on the role of independent directors or similar bodies in ensuring that corporate executives or directors are themselves made accountable and supervised (Gandhi, 2015). Corporate governance can also be understood by defining it in terms of organizational outcomes. Corporations are created to achieve the desired outcomes of their "creators" it, therefore, follows that if these objectives are met then the corporation is well governed. Toshiba's case was a result of weak corporate governance in the company. However, to remedy the situation, Toshiba reacted to the scandal by restructuring its corporate governance. New directors were brought, and even employees involved laid-off. In fact, according to Kollewe (2016), laid-off more than 3000 jobs. This was done in order to give the organization a new corporate image identity and give it a competitive edge once again because it had lost its competitive advantage to a competitor in the industry. One of the major factors that contributed to corporate management in Toshiba is the nature of Japanese culture. As from of restructuring of corporate governance, Toshibas decide to change its auditor (Gandhi, 2015). Conclusion It is evident that Toshiba scandal that threatened the company's corporate image and goodwill was intentional. However, the motives have not been clearly established but reports from investigations indicate that the scandal was as a result of a poor corporate culture where employees blindly follow the requirements of executives for fear of victimization. Additionally, poor governance in the company led to the development of the scandal. Corporate governance can also be understood by defining it in terms of organizational outcomes. Ideally, Corporations are created to achieve the desired outcomes of their "creators" it, therefore, follows that if these objectives are met then the corporation is well governed. Toshiba's case was a mixture of poor internal controls, corporate governance as well as polluted corporate culture. To remedy the situation, Toshiba acted by first acknowledging the occurrence of the scandal by letting responsible management resign. Additionally, internal controls were strengthened by the management. In conclusion, therefore, Toshiba’s scandal was in-house since management forced employees to meet un-attainable targets, leading to falsified books of accounts. References Boyd, J., Ali, S., Smith, E., Smith, E. and Smith, E 2015, Toshiba promises to change corporate culture and governance in aftermath of scandal | Financial Director. [Online] Financialdirector.co.uk. Available at: https://www.financialdirector.co.uk/financial-director/analysis/2420357/toshiba-promises-to-change-corporate-culture-and-governance-in-aftermath-of-scandal [Accessed 7 May 2017]. DiPietro, B 2015, Crisis of the Week: Accounting Problems Hobble Toshiba. [Online] Available at: http://www.kalbassociates.com/WSJExpertPanel7Toshiba.pdf [Accessed 7 May 2017]. Gandhi, K 2015, Toshiba Accounting Scandal. [Online] Available at: https://www.ethicsboard.org/system/files/meetings/files/Agenda_Item_F-2_-_Toshiba_Accounting_Scandal_0.pdf [Accessed 7 May 2017]. Hamilton, E 2016, Evaluating the Intentionality of Identified Misstatements: How Perspective Can Help Auditors in Distinguishing Errors from Fraud. AUDITING: A Journal of Practice & Theory, vol. 35, no. 4, pp.57-78. Kazuo, M 2015, Toshiba Accounting Scandal Highlights Issues in Corporate Governance. [Online] nippon.com. Available at: http://www.nippon.com/en/in-depth/a04802/ [Accessed 7 May 2017]. Kollewe, J 2016, Toshiba confirms SEC investigation as accounting woes spread to US. [Online] the Guardian. Available at: https://www.theguardian.com/business/2016/mar/18/toshiba-confirms-sec-investigation-as-accounting-woes-spread-to-us [Accessed 7 May 2017]. Mohamad, S 2010, Ethical Corporate Culture and Guidelines for Ethical Leadership. International Journal of Trade, Economics and Finance, vol. 1, no. 2, pp.151-154. Moroney, R 2016, AUDITING. 1st ed. Melbourne: Wiley. Read More