TOSHIBA’S ACCOUNTING SCANDAL

In partial fulfillment of the requirements in GEETH01x - Ethics

Submitted to Ms. Azelle Charese A. Tayson, Subject Professor

Abando, Janella
Alacantara, Alejandro
Cabrera, Elijah
Canaria, Mary
San Juan, Cenea
Soto, Kristine
I. Background

Toshiba Corporation is a well-known Japanese company that produces

electronics and computers for both consumer and business use. In 1875, the Toshiba
Corporation was established in Japan. Embracing the wave of post-war Japanese
prosperity in the late 1950s, the company experienced rapid expansion and an
increasing range of distinctive and innovative goods.

Hisao Tanaka, the CEO of Toshiba, announced his resignation on July 21, 2015,
adhering to an accounting scandal involving $1.2 billion in falsified operating profits. It
was discovered that improper accounting had occurred for seven years, entangling
Tanaka and two previous CEOs in the fraudulent activity. According to the investigative
study, the CEOs applied tremendous pressure to their subordinates and waited for the
corporate culture to produce the desired outcomes, instead of giving direct orders to
cook the books.

The corporation assigned two attorneys and two certified public accountants to
the inquiry committee headed by Koichi Ueda, a former investigator with the Tokyo
District Public Prosecutor's Office, at the beginning of May 2015, sparking the start of the
investigation. Investigators discovered concrete proof of improper accounting
procedures, overstated profits and pushing back charges and losses, and early booking
of future gains in several Toshiba business units. The investigation panel determined a
single set of direct and indirect causes to explain how the improper activities spread
throughout the company, despite the disparities in the methodologies used.

Investigators detail how the presidents of Toshiba's business units were given rigid
profit objectives, or "Challenges," by the company's corporate leadership, frequently with
the warning that failure would not be tolerated. Quarterly Challenges were occasionally
given out close to the end of the quarter when there was no longer any opportunity to
significantly impact unit performance. Within individual business units, it quickly became
evident that using irregular accounting practices was the only option to meet these
challenges. The investigation panel also highlighted inadequate corporate governance
and an ineffective internal control mechanism that failed to recognize and stop the
improper actions.
 The investigators concluded that a major contributing cause to the rise of misleading
accounting methods at Toshiba was the company's corporate culture, which required
loyalty to superiors. The presidents of the business units and all other levels of authority,
all the way down to the accountants who used the accounting tricks, were part of the
culture.

Toshiba inflated its profits by $1.2 billion in a scandal that caused controversy in
the business community and led to the divergence of the company's CEO. Furthermore,
it is alarming given that Toshiba's company culture requires workers to submit to
management and disregard unethical accounting practices. These inappropriate means
of completing the "Challenges" seem worth investigating to discover more about.

The accounting fraud began in 2008, during the global financial crisis, under
CEO Atsutoshi Nishida, and seriously harmed Toshiba's financial position. It continued
uninterrupted under the next CEO, Norio Sasaki, until erupting in a scandal under
Tanaka. Ernst & Young ShinNihon, Toshiba Corporation's auditor, made a negligent
contribution. A significant amount of the fraud was made possible by the auditor. The
auditor has only received light punishment despite its role in the billion-yen loss. There is
no desire to raise governance, accounting, and auditing standards in Japan as a result
of the lack of identical, fair, and prohibitive obligations.

II. Problem

How did Toshiba respond to the 2015 Toshiba Accounting Scandal, and how did
this scandal affect the trust of the stakeholders for the company and its current and
former CEOs?

III. Viewpoint

The case is viewed through the point of view of the investigators. It consists of
professionals with backgrounds in finance, corporate governance, and internal controls.
Their role is to conduct an unbiased examination and evaluate the situation. This
includes examining evidence, interviewing, and preparing a detailed incident report.
They also provide insights and recommendations to the company for solving issues so
that Toshiba can regain trust, and build stronger internal controls.

The investigation made by the investigators shows that the Challenge system,
which established strict profit targets, put pressure on higher-ups as well as employees
to meet financial targets, resulting in the emergence of fraudulent accounting practices.
The investigators consider these factors when assessing Toshiba’s overall ethical and
decision-making environment. As a result, it had an effect on Toshiba’s profitability and
brand image.

IV. Case Setting

Time: The case set on July 21, 2015, Former CEO of Toshiba Hisao Tanaka
declared his resignation in response to an accounting scandal involving overstated
operating profits of $1.2 billion.

Place: The main topic of discussion is the seven-year accounting scandal at

Toshiba, which was made public in 2015 and severely damaged the company's finances
and reputation.

V. Objectives

1. Explore and examine the case of Tokishiba’s fraudulent accounting in 2015.

2. Address the ethical issues associated with Toshiba’s Accounting scandal.
3. Provide an alternative course of action to address ethical issues that align with
accounting standards.

VI. Areas of Consideration

1. Uphold Professional and Ethical Standards. Implementing values and standards

in the workplace is a must. It makes the company execute the key components
 which are transparency, integrity, and accountability that become a great asset in
building trust among stakeholders.
2. Public Trust and Confidence. Gaining trust from the public as well as stakeholders
benefits the company. Word-of-mouth methods reach a wide variety of audiences. It
strengthens the image of the brand in the market.
3. Long-Term and Short-Term Benefits and Consequences. Wise thinking from the
decision maker avoids a high chance of putting the company at risk. The comparison
between short-term benefits and long-term consequences serves as a guide to
decision-makers.
4. Corporate Culture. Setting proper rules and regulations improves the company’s
management. Freedom to not obey the authorities when it comes to doing bad deeds
shall not be fired and harm the employees. For the betterment of the company, all
voices must be heard and respected.
5. Challenges or Goals. Goals put pressure on the workers of the company resulting
in manipulation. Failed challenges provoke the management to achieve it in an
unethical way.

VII. Alternative Courses of Action

1. Provide Settlement and Penalties: Recouping victims caused by errors and

endured financial losses due to fraudulent practices. Negotiate settlements with
Regulators as well as Involved Stakeholders. Implicate the reimbursement of losses
to investors, coincided with regulatory actions including paying fines.

2. Internal Investigation: Compliance of regulators requirements and co-operate with

Authorities. Unveiling behind accounting scandals that implement corrective actions
and rebuild trust with Stakeholders. Involved in inspecting financial records, Interview
of Employees as well as assessment of internal controls to avoid future occurrences.

3. Reformation of the Corporate Culture and Governance: The board of directors of

the company should have more independence and more oversight over the
company’s financial reporting in every month, year, and business transaction within
the company. By taking this alternative course of action, they will regularly receive
 updates on the company's financial report, which will result in a more strong and
precise financial report for the business. Additionally, because the board of directors
is in full charge of the financial report, employees of the company are afraid to falsify
it.

4. Establishing and Improving a Strong System for Whistleblowers: A system

where the employees of Toshiba should feel secure and have the comfort to speak
up about corruption or malpractice without fear.

Note: The criteria used in the table are benefit, cost, risk, and ease of implementation,
with a score range of 1-4, with 4 being the highest.

RANGE
3,51-4,0 BEST
2.51-3.5 BETTER
1.51-2.5 GOOD
1.0-1.5 FAIR
VIII. Recommendation

Upon analysis of the problem, it is recommended to implement ACA 3, the

reformation of corporate culture and governance. The reformation of the previous
corporate culture and establishing healthy corporate governance is a transformative step
to prevent further recurrence of business malpractices across Toshiba’s business units.

Changing the corporate culture, which demanded obedience to superiors and

was a driving force enabling the emergence of fraudulent accounting practices, is a great
start to ending the superiority culture of the CEOs that pressured their accountants to
employ unethical accounting techniques for the company’s performance to turn out the
way they wanted.

In contrast to the other courses of action, ACA 3 guarantees a high potential to

bring positive changes within the company. This course of action is not only effective for
the Toshiba company but also feasible and adaptable.

In conclusion, the reformation of the corporate culture and governance of the

Toshiba company not only serves as a band-aid but also a long-term solution that will
improve its reputation and earn public trust and confidence. Through reformation, the
company can start over, this time, fostering a culture of transparency, honesty, and
accountability.

IX. Action Plan

Activity Person/Office Time Frame Key Performance

Responsible Indicator (KPI)

Create a Management 2 months Ensure that the

Proposal Plan proposal is 100%
approved by the
management.

Implement a Management 6 months Ensure that the plan will

Pilot Testing be successful
for the changes
in the
management

Launching of Board of 1 month Achieve a 100%

 the plan Directors successful system
launching

This action plan aims to ensure that the reformation of the current management
system will be successful. Beginning with conducting a proposal plan that should be
done by the Company’s Management within 2 months. Followed by implementing a pilot
testing of the proposed changes. It will take place for not more than 6 months and is also
led by the Company’s Management. Lastly, the launching of the changes proposed in
the proposal plan. This must be accomplished within a month and to be led by the
company’s Board of Directors and Stakeholders.

References

Banks (2018). Toshiba Accounting Scandal: A Case Study in Corporate Governance

Failure. International Conference on Human Rights, E-Commerce, Marketing, and
Management (HREMM-18).

Becheanu (n.d.). Toshiba: Accounting Fraud Case Study. Hayek Global MBA.

Carpenter (2021). Toshia Accounting Scandal: How It Happened. Corporate Finance,

Accounting.

Financier Worldwide Magazine (2015). Toshiba: Behind the Numbers. Financier

Worldwide, Feature, Fraud & Corruption.

Rahman (2018). The Implication of the Toshiba Accounting Scandal for Auditors in
Japan.

The Editors of Encyclopedia Britannica (2024). Toshia Corporation. Japanese

Corporation. Article History, Banking and Business.