Whistleblowing Case: Toshiba’s Fraud Scandal

 In Articles, Asia

The history of Toshiba Corporation can be traced from 1875 when it built its first factory in Tokyo to accommodate the government’s needs of modernization. Throughout its long history including surviving the World War II and several economic crises, Toshiba rapidly increased in sales and expanded its unique and innovative products across the globe. Toshiba received great recognition as the pioneer for a number of Japanese discoveries, including radar, microwave oven, color video phone, MRI system, laptop, and DVD. By 2015, Toshiba had operated business units on a global scale in diverse industries, including semiconductors, electronics, infrastructure, home appliances and medical equipment with net worldwide sales of more than $63 billions and employing more than 200,000 people worldwide. The quality of its products and services put Toshiba in Japan’s 10 biggest company by market value.

A shocking news broke in May 2015 when the company announced that it was investigating an accounting scandal and it might have to revise its profits for the three previous years. The announcement was surprising to all as Toshiba had been perceived as a totem of strong and virtuous Japanese corporate governance. Upon deeper investigation, it was revealed that Toshiba Corporation had been struggling to meet its financial targets since 2008 amid the global financial crisis that cut deeply into Toshiba’s profitability. The enduring struggles finally caused Toshiba to commit a $1.22 billion accounting fraud, claiming numbers that were up to three times the actual level. The inappropriate accounting techniques varied between different business units, which include booking future profits early, pushing back losses, pushing back charges and other similar techniques that resulted in overstated profits.

On 21 July 2015, CEO Hisao Tanaka announced his resignation amid an accounting scandal that he called “the most damaging event for our brand in the company’s 140-year history.” Eight other senior officials also resigned, including two previous CEOs. Toshiba Corp. was removed from a stock index showcasing Japan’s best companies and in the following months, the company’s shares fell to their lowest point in two and a half years with $102 million net losses for the quarterly period. The company also noted poor performances in its televisions, home appliances, and personal computer businesses. By the end of 2015, Toshiba lost about $8 billion off its market value with approximately $4.6 billion annual loss.

A whistleblower in early 2015 was the first to highlight the issue, bringing to an end a seven-year deception by the company’s senior management. The crisis was sparked by the findings of an independent investigation into the company’s finances. According to investigators, the firm’s top executives set unrealistic profit targets which systematically led to flawed accounting practices. Since Toshiba company embraced a principle that failures would not be accepted, divisional heads learned that the only way to achieve these targets was by skillfully hiding data through irregular accounting techniques.

Toshiba’s corporate culture, which demanded obedience to superiors, was an important factor enabling the emergence of fraudulent accounting practices. Toshiba’s corporate governance was proven weak with a poorly functioning system of internal controls at every level of the Toshiba executive. The investigation also reported internal control problems in all its finance, auditing, and risk management divisions, leading to failures in identifying and stopping early inappropriate behaviors.

Although Toshiba’s management and board of directors have made significant efforts to improve internal controls and corporate governance programs since its 2015 admission of fraud, new issues raised in late 2016 and early 2017 show that the organization still struggles with ethical problems and potential side effects of the 2015 scandal.

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