Corruption Case Study

Corruption Case Study: Toshiba Accounting Scandal
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Corruption Case Study: Toshiba Accounting Scandal
Overview of the Case
On July 21, 2015, the CEO of Toshiba, Hisao Tanaka declared his resignation despite an accounting scandal connected to nearly $1.2 billion in exaggerated operating profits (Ferrell & Fraedrich, 2015). The information about the accounting scandal surfaced on the eve of when an independent fact-finding board produced a report explaining the accounting indecencies comprehensively. Inappropriate accounting was determined to have occurred over the period of seven years, involving two ex-CEOs in the scandal together with Tanaka. The fact-finding report discovered that the CEOs failed to directly direct anyone to prepare the books but, instead, put an immense burden on junior staff and waited for the company’s corporate culture to bring out the outcomes they anticipated (Verschoor, 2015). Aside from these facts, it is important to identify a brief history and performance of the organization that relates to the accounting scandal. Toshiba Corporation tracks its origin in Japan to 1875 (Cavusgil, 2016). The firm devolved on the post-war Japanese flourishing in the late 1950s to high expansion and a growing collection of distinct and ground-breaking commodities (Verschoor, 2015). The company started selling items in overseas markets during this era and continued its growth and expansion of its businesses throughout the world during the following years (Cavusgil, 2016).

In 2015, the multinational firm ran business branches at a global level in a wide range of diverse sectors, such as personal electronics, semiconductors, home appliances, infrastructure, and medical machinery. For the financial period ending March 21, 2015, Toshiba reported net global sales of above $63 billion. The company has a workforce consisting of more than 200,000 individuals globally (Jennings, 2015).
Discovering the Misconduct
The investigators identified direct proof of improper accounting practices and exaggerated earnings in many Toshiba business branches, such as the PC unit, the visual products division, and the semiconductor branch. The accounting scandal started under CEO Atsutoshi Nishida in 2008 during a worldwide financial calamity that extremely affected Toshiba’s profitability. The deprived profitability of the company continued unrelenting under the next CEO, Norio Sasaki, and ultimately culminated I the misconduct under Tanaka Hisao (Cavusgil, 2016). Furthermore, the improper accounting approaches and system executed at Toshiba differed to some extent between its various business units. Fact-finders obtained proof of recording future earnings early, repulsing the losses, forcing back the expenses, and other related practices that led to exaggerated profits. While the accounting technique differed, the fact-finding board found a single series of indirect and direct determinants to describe how the improper techniques took possession throughout the corporation (Ferrell & Fraedrich, 2015). Also, the detectives explained how Toshiba’s corporate leadership transmitted stringent profit aims, called the Challenges, to its branch presidents, frequently with the suggestion that it will not accept any element of failure. In some occasions, quarterly targets were passed on towards the conclusion of the quarter when there was not chance remaining to impact unit productivity and performance substantially (Shaw, 2016). It immediately turned out apparently within single business units of the firm that the only means to attain these Challenges or profits targets was to do so via the application of uneven accounting practices (Jennings, 2015).
The fact-finding board determined that Toshiba’s corporate culture, which required compliance to seniors, was a significant variable enhancing the rise of false accounting techniques and practices. The culture functioned on the rank of business unit presidents, as well as on every rank of power down the ladder to the accountants, who eventually executed the accounting approaches and methods (Shaw, 2016). What is more, the fact-finding board noted weak corporate governance and an ailing running system of internal controls at each stage of the Toshiba subsidiaries. The internal controls in the finance department, the risk management unit, the corporate auditing segment, and the securities disclosure team did not operate well to find and curb the inappropriate actions and behaviors (Jennings, 2015).
Impact of the Misconduct
The firm remains to be afflicted by investor uncertainties originating from leak hunt of revelations about its accounting. The company reported that its U.S. nuclear operation, Westinghouse Electric Co., reserved nearly $1.3 billion impairment fines, yet it revealed the write-down just after it was announced by Japanese news institutions (Jennings, 2015). Again, 50 individual shareholders prosecuted the business and many ex-CEOs in Tokyo, demanding ¥302 million in compensations rooting from the drop in the firm’s share value or price (Ferrell & Fraedrich, 2015). Other investors in the U.S. also sued the company. Toshiba’s shares have jumped 37 percent to ¥302 million ($2.45 million) from ¥483 million from the time the firm withdrew its profit estimates and called off the year-end disbursement on May 8, 2015 (Jennings, 2015). The Tokyo Stock Exchange has put Toshiba in its log book, thwarting the firm’s chances of raising funds in the capital markets. Toshiba was fined heavily than any other penalties seen in Japan in regards to the accounting scandal. The planned charge is above four times as big as the record in Japanese scandals related to accounting. It is four times the fine charged on the industrial and military corporation IHI Corp. in 2008, which was reported as ¥1.6 billion. IHI Corp. was fined for reporting fraudulent financial statements (Ferrell & Fraedrich, 2015).
Toshiba is one of the largest technology conglomerates in the Japanese economy and globally. Involving in these types of financial frauds affect not only the investors, customers, creditors, employees but also the general public. The investors familiar with the misconduct lose the confidence they have with the company, and this can prevent them from participating in the company’s financial ventures and investment activities (Cavusgil, 2016). Also, the scandal impacts the general public or Japanese society as a whole. The improper accounting practices and dysfunctional auditing and oversight quickly turn out to be a poor depiction on Japan as a whole. As such, the whole world can view the accounting systems and auditing tasks of the Japanese economy as inappropriate to facilitate transparent financial reporting and seamless business performance. Likewise, the company’s existing, potential, and prospective customers can also be discouraged from buying from the company. A company that reports falsified financial reports scares away its clients, which can result in the damage to the customer loyalty (Jennings, 2015). In sum, the scandal interfered with Toshiba’s reputation and public image. These discouraged the investors and financial donors from continuing their contribution to the company’s survival. On the other hand, the customers are also demoralized because they fear that the prices charged on the company’s products and other aspects of marketing, such as quality of electronics sold, can be deprived.
The Misconduct Resolution
The fact-finding report encompassed specific sanctions to deter the recurrence of undesirable business behaviors across the business units of Toshiba (Cavusgil, 2016). The recommendations involve improvement of the corporate culture, removal of the Challenge system targeting the profit, and reinstallation of strong corporate governance and internal controls. Further, the coverage also endorsed the formation and encouragement of a strong whistleblower framework that workers can utilize without being afraid of requital. Similarly, in reaction to the examination, Toshiba produced a statement defining the initial steps it would take in reaction to the report released by the fact-finding panel. The firm had pledged to explore the outcomes of the examination in details and to mirror the report endorsements in its business and accounting techniques and practices continuing (Verschoor, 2015). The company also pledged to publicize the outcomes of its investigation procedure in a timely way. Toshiba’s current President, Masashi Muromachi mentioned that the firm would speed up redesigning attempts in reaction. He noted that the company was considering alternatives to its PC business unit after individual familiar with the circumstance said the business was negotiating with other PC manufacturers about a possible amalgamation (Cavusgil, 2016). Toshiba has already traded apportion of its semiconductor unit to Sony Corp., and Toshiba’s President had earlier reported that he was contemplating selling a stake in the remaining chip business, the company’s largest money-spinner (Addady, 2015). Mr. Muromachi mentioned that his leadership is determined to implement the changes with no constraints. The company was fined, and the penalty was widely expected as the company had earlier reported it had reserved ¥8.4 billion to compensate for possible fines (Shaw, 2016). The Financial Services Agency was requested to levy the charges or penalties on the company. It can also be mentioned that the misconduct was resolved by Toshiba rearranging its management, with three ex-CEOs resigning from their responsibilities and duties with the firm. Toshiba litigated the three former CEOs and two other top executives, demanding ¥300 million or $2.4 million in compensations in regards to the misconduct after an external board determined that excessively hostile management targets were responsible for $1.9 billion in profit exaggerations in the course of seven years (Addady, 2015).

References
Addady, M. (2015). Toshiba’s Accounting Scandal is much worse than we thought.
Cavusgil, S. T. (2016). International Business: The New Realities, Global Edition. Pearson Education Limited.
Ferrell, O. C., & Fraedrich, J. (2015). Business Ethics: Ethical Decision Making & Cases. Nelson Education.Jennings, M. M. (2015). Toshiba Lessons: On not being so Judgmental of the Company or Japan. Corporate Finance Review, 20(2), 36.Shaw, W. (2016). Business Ethics: A Textbook with Cases. Nelson Education.Verschoor, C. C. (2015). Toshiba’s Toxic Culture: In Japan, where it’s Disrespectful to disobey Orders, a Poor Tone at the Top can be Detrimental to a Company. Strategic Finance, 97(5), 18-20.