Toshiba Accounting Scandal - Case Study Example

Toshiba Accounting Scandal Name Institution Course Date Toshiba Accounting Scandal Toshiba Corporation is a Japan-based company with its headquartering in Tokyo. It is a multinational company that manufacturers diverse products such as telecommunication equipment, electronics, power systems, household appliances, lighting and logistic products and medical equipment among others (Yasu, Mariko and Shiraki, 2011). The company was started in 1938 and in 1978; it was changed name from Tokyo Shibaura Electric K.K to Toshiba Corporation. Toshiba Corporation has made several mergers and acquisitions in its history, such as Westinghouse Electric LLC and Landis and Gyr Company (Yasu, Mariko and Shiraki, 2011). The company is organised in four sections including Electronic Device section, Social Infrastructure section, home appliances and digital products section. The company has been named the fifth-largest computer manufacturer in 2010 and the fourth-largest manufacturer of semiconductors (Yasu, Mariko and Shiraki, 2011). The company has its operations worldwide with about 210,000 employees. In years, it has generated billions or profits and has enjoyed successful operation. However, in 2015, the company was faced with accounting scandal that has threatened to tarnish its brand image (Chambers, 2015). This essay will describe Toshiba accounting scandal that took place in 2015 and will offer an analysis of the methods used to handle the issue. On July 2015, the CEO of Toshiba Corporation, Hisao Tanaka resigned in order to take responsibility of the accounting scandal of the company (Ando, 2015). Toshiba Corporation over the years has been established as a model for corporate governance. However, the accounting scandal has ominously tarnished the reputation of the 140-year-old multinational company and its shareholders (Yasu, Mariko and Shiraki, 2011). Every business is expected to prove its revenues and earnings quarter-over-quarter and year-over-year. However, for many years, companies are faced with the pressure of meeting unachievable targets. This results to many forging their accounting methods (Chambers, 2015). This is the case of Toshiba which flawed its accounting methods to falsify gain and to conceal accounting issues. Toshiba’s accounting irregularities were discovered in February 2015 (Chambers, 2015). The Securities and Exchange Surveillance Commission in Japan uncovered accounting irregularities in relation to percentage of completion estimates that were used on infrastructure plans such as nuclear, air-traffic control, hydroelectric and railway equipment (Du, 2015). According to the investigation, the accounting books of Toshiba Corporation have been altered and distorted for more than six years. For instance, between 2008 and 2014, the company is reported to have overstated its earnings by over $1.2 billion. The company filed its 2014 earnings in the end of 2015 which confirmed the overestimation made (Chambers, 2015). According to investigative report, the company’s CEO’s were not directly involved in the accounting irregularities but placed significant pressure on employees and expected the corporate culture to bear results they wanted (Ando, 2015). The investigative report released by the Securities and Exchange Surveillance Commission indicated that there was a direct evidence of illegal accounting procedures in Toshiba and overstated earnings in several Toshiba business units such as semiconductor unit and the visual products unit (Chambers, 2015). The accounting investigation on Toshiba Corporation started in 2008 under Atsutoshi Nishida as the CEO during the global financial crisis that affected the profitability of the company. The investigation continued under the next CEO and ended with a detected accounting scandal under Tanaka (Takashi and Atsuko, 2016). The accounting irregularities in the company varied between business units. The investigating report established evidence of pushing back losses and charges and booking future profits early among others methods that led to overstated profits (Alpeyev et al., 2015). Even if the methods varied, there was a set of causes that were identified to be the major reason for the scandal. The investigation report highlights how Toshiba corporate governance passed down harsh and almost unattainable profits targets that were termed as challenges (Chambers, 2015). The business unit presidents were pressured to attain these profits targets with implication that failure to deliver expected results would lead to undesirable outcomes (Takashi and Atsuko, 2016). Typically, in the company, the quarterly challenges were given out almost the end of the quarter when it is too late to materially impact the unit performance. In order for the unit presidents to achieve these challenges, they had to use irregular accounting methods that led to the accounting scandal (Chambers, 2015). In addition, the investigation report highlighted that the Toshiba corporate culture necessitated obedience to people in authority which was another cause of the occurrence of duplicitous accounting practices (Chambers, 2015). The corporate culture was active on every level of authority which was transmitted down the chain to the accountants who are responsible for employing accounting methods in the company (Carpenter, 2015). The pressure from the unit presidents and other employees with authority led to the employment of irregular accounting techniques. The demand for obedience by the superiors affected the operations of other employees and they worked towards accomplishing what they were told to do (Takashi and Atsuko, 2016). In addition, the investigators reported that another cause of Toshiba’s accounting scandal was due to weak corporate governance as well as under the weather functioning system of the internal controls (Carpenter, 2015). For instance, the internal controls in the risk management department, securities disclosure committee and finance and auditing division was not operating well enough to identify and prevent the inappropriate behaviours (Carpenter, 2015). Another cause of the Toshiba’s accounting scandal was the fell of demands for products and services (Carpenter, 2015). As the demands for the products and services went down, the pressure among the employees especially the superiors built up. They wanted to still record better profits and earnings (Carpenter, 2015). Pressure from investors, the government and clients also led to the forgery of the accounting books (Carpenter, 2015). Moreover, two of the four independent directors did not have commercial experience to run the organisation. Some decisions made by these directors were not sound and they did not detect any irregularities although unbalanced accounting techniques have been used for years (Carpenter, 2015). The accounting irregularities surfaced as a result of whistle blowing and investigation by Securities Exchange Surveillance Committee (Takashi and Atsuko, 2016). In addition, the investigation of the scam also involved external lawyers and accountants. The Toshiba’s accounting scandal is considered the biggest scandal in Japan after what befell Olympus (Du, 2015). There were several areas of the accounting that brought about the irregularities. First, the percentage of completion approximations was increases in the infrastructure projects. In spite of the rise in material costs as a result of instability of the exchange rates, there were no adequate reserves created (Takashi and Atsuko, 2016). The deferred tax assets were exaggerated and the losses that resulted from the construction projects were not timely recorded. Also, the medical subsidiary of Toshiba overstated the results for several years (Takashi and Atsuko, 2016). The impact of the accounting scandal was severe. For instance, the share value of the company has lowered by 25% since last year (Du, 2015). The CEO, Hisao Tanaka resigned together with other officials and the board was removed (Takashi and Atsuko, 2016). Furthermore, the Toshiba’s bonds downgraded from the highest investment grade. The dividends have been suspended and the cost of insure debt jumped by more than 60 basis points (Takashi and Atsuko, 2016). As mentioned earlier, the image and reputation of the company has been tarnished which has created lack of trust among the investors and stakeholders of the company (Takashi and Atsuko, 2016). The scandal hit was estimated to be over $1.6 billion since last year. There are some initiatives that were taken by the company to handle the accounting irregularities (Yasu, Mariko and Shiraki, 2011). In response to the irregularities, the company outlined initial actions it would take to respond to the problem in question (Alpeyer et al., 2015). The first step taken by the company was a house-cleaning technique. Since the beginning of the scandal eight board members resigned and more resignations are expected to take place in the course of the year (Yasu, Mariko and Shiraki, 2011). In addition, the company has opted to sell some of its assets in order to raise money to solve the issue. They have sold assets such as securities and real estate which has enabled them raise money that they intend to use in response to the scandal (Alpeyev et al., 2015). This is an important solution since they would be able to repair the image of the company and regain the trust of the stakeholders. It is considered that the Toshiba’s accounting irregularities that was reported to start in 2008 was intentional and was very hard for external auditor Ernst and Young to detect (Du, 2015). The ability of this audit company is still questioned due to their inability to detect accounting errors. In order to avoid future accounting irregularities, Toshiba has resolved to correct the past accounting issues by first verifying the independent investigation committee and then use an external audit company to review the corrections (Carpenter, 2015). The company announced their plan to hire another audit firm for this work. This is a more reasonable strategy since the first audit firm missed the irregularities for whatever reason (Coombs, 2007). The decision to do this by Toshiba Corporation will enable it offer additional eyes on the causes of the accounting inaccuracies and it can then directly verify and review the correctness of the reiterated amounts (Du, 2015). According to social judgement theory, a person is able to weigh every option and compare it with present point of view in order to establish where it should be in the attitude scale (Coombs, 2007). The theory illustrates that persuasive messages often succeed when it falls on a person’s latitude of acceptance. In order to be able to persuade others, we need to think about the range of possible attitudes and behaviours that exist (Coombs, 2007). An immediate response to the accounting scandal was a public apology by the company. The well-stated apology together with the other actions taken by the company persuaded the public and the stakeholders into forgiving them (Fortunato, 2008). The stakeholders and investors’ trust enhanced and their image is slowly gaining momentum. Toshiba is reported to having a corporate culture that put intense pressure on employees to attain unrealistic profit targets (Alpeyev et al., 2015). The company is underway in reforming the company’s corporate culture by first eliminating the profit targeting system and re-establishing strong corporate governance (Alpeyev et al., 2015). The company also has undergone restructuring attempts in order to prevent further damage brought about by the accounting scandal. The company has sought $1.75 billion to $2.2 billion in loans in order to cover for the restructuring plans of its electronics and semiconductor units (Alpeyev et al., 2015). This was a good strategy since it was expected to suffer a loss of more than 6.5 billion. Although restructuring idea was very expensive and a lot of capital and time would be utilized, the company will be able to improve its operations and gain the trust of the public and the investors (Alpeyev et al., 2015). In conclusion, Toshiba Corporation has experienced success in the past which has enabled it gain reputation and brand image. However, in 2015, the company was faced with accounting irregularities which threatened to tarnish the reputation of the company. The accounting scam surfaced as a result of the investigation carried out by the Securities Exchange Surveillance Committee. The main cause of the accounting irregularities was due to overstated earnings in different business units. Another major cause of the scandal was the availability of weak corporate governance in the company. The corporate culture of the company also gave the superiors power and they put pressure on other employees to achieve unattainable profit goals. This led to the intentional accounting irregularities. There are several methods used by the company to solve this issue. They first offered public apology and they also acquired loan for restructuring purposes. They also reformed the company’s corporate culture by first eliminating the profit targeting system and re-establishing strong corporate governance. References Alpeyev, Pavel, Amano, and Takashi T. (2015). "Toshiba Seeks $2.5 Billion Credit Line to Pay for Reforms". Bloomberg. Retrieved 18th July 2016 from http://www.bloomberg.com/news/articles/2015-12-29/toshiba-seeks-2-5-billion-credit-line-to-pay-for-restructuring Ando, R 2015, "Toshiba CEO quits over accounting scandal". Reuters. Retrieved 18th July 2016 from http://www.reuters.com/article/us-toshiba-accounting-stocks-idUSKCN0PV0B620150721 Carpenter, W 2015, Toshiba's Accounting Scandal: How It Happened (OTCBB:TOSBF). Retrieved 18th July 2016 from http://www.investopedia.com/articles/investing/081315/toshibas-accounting-scandal-how-it-happened.asp Chambers, R 2015, Lessons from Toshiba: When Corporate Scandals Implicate Internal Audit, Internal Auditor. Retrieved 18th July 2016 from https://iaonline.theiia.org/blogs/chambers/2015/lessons-from-toshiba-when-corporate-scandals-implicate-internal-audit Coombs, W 2007, “Protecting Organization Reputations During a Crisis: The Development and Application of Situational Crisis Communication Theory“, Corporate Reputation Review, Vol.10, No.3, pp.163-176. Du, L 2015, 5 Things To Know About Toshiba’s Accounting Scandal, The Wall Street Journal. Fortunato, J 2008, “Restoring a reputation: The Duke University lacrosse scandal”, Public Relations Review, Vol.34, pp.116-123. Takashi, M and Atsuko F 2016, "Toshiba Announces New Chief Executive After Accounting Scandal". The Wall Street Journal. Toshiba 2015, Moving Progress: Annual Report 2015. Wolfsburg: Toshiba Corporation Yasu, Mariko and Shiraki, M 2011, "Silver lining in sight for makers of solar panels". The Japan Times online. Retrieved 18th July 2016 from http://www.japantimes.co.jp/news/2011/04/22/business/silver-lining-in-sight-for-makers-of-solar-panels/ Read More