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Case Study on “Toshiba Accounting Scandal” Course Name: Cost and Control Accounting Course Code: Costcon Section: CostA3

Submitted To Miss Janine Abu Professor

Submitted By Edrianne Nicole Macasadia

I. Summary In the business world, accounting scandals are inevitable to happen whether it is a small or a big company. Toshiba is a Japanese corporation known for manufacturing computer and electronic devices and services. Its history can be traced back from the 1870s to promote Japan’s modernization. On July 2015, the company overstated earnings amounting to $1.2 billion for seven years. This fraudulent accounting activity has been known worldwide. This led to the resignation of Toshiba’s CEO and six board of directors. The improper accounting for seven years was caused by pressure from top executives to achieve unrealistic target profits. This situation caused a huge impact to business circles and had people wonder how could have the giant Japanese corporation messed up. II. The Problem and its Roots The popular Japanese conglomerate, Toshiba, has been caught in the world widely known accounting fraud. The company was discovered to have inflated $1.2 billion in its operating profits. This misrepresentation has happened for several years and the situation worsen as the auditor failed to advise stakeholders, financial market and the managers. Apparently, there is a corporate culture in Japan in which employees cannot act in contradiction with the demands of the top management. Japanese people tend to work in the same company after they graduated up until the time they decided to retire. In order to stay in the company and get to the good level, employees’ natural action is to build better work relationship and loyalty to their superiors. When the top executives set the “challenge”, this is where falsified accounting activities took place in order to attain the unrealistic target profit. Another reason is the use of inappropriate accounting techniques. Toshiba used the “percentage of completion”, an accounting method intended to be used for long-term projects. Revenue, expenses,

and gross profit are recognized each period based on the percentage of work completed or costs incurred (Corporate Finance Institute, 2015). Therefore, division managers of Toshiba used this method to overstate profits from various projects. The auditing company, Ernst & Young ShinNihon, also played a big role in this scandal for they failed to trace the irregularities in Toshiba’s financial reports. Japan’s Financial Services Agency suspended Ernst & Young ShinNihon to take business contracts for three months and fined about $17.4 million. III. The Impact of the Scandal As soon as the accounting scandal has surfaced to the public, Toshiba gained a bad reputation not just in Japan but also internationally. They were perceived by the public with doubt if they can still meet its financial obligations. Subsequently the scandal took a huge toll on falling of share prices and acquired loss of $6 billion. Lawsuits by several companies were also charged to Toshiba. The company also needed to withdraw from their nuclear projects overseas. Shinegori Shiga, the chairman, alongside with other top executives have to step down from their positions. In addition, the company has undergone to a major restructuring and sold some of their production units. IV. Recommendations The best thing that Toshiba could do for this situation is to eliminate the challenge system. This culture puts pressure to the employees to reach their unrealistic target that would probably lead to fraudulent activities. In the corporate scene, healthy relationships should be established not the culture of superiority. The auditing committee should also be renewed with external parties to maintain full honesty in the financial statements. A change in corporate governance would

help avoid – if not prevent wrongdoings before things get worse than or as big as the Toshiba accounting scandal. V. References Global

top

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(n.d.).

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14,

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https://www.global.toshiba/ww/outline/corporate/history.html Percentage of completion method-definition and examples. (2020, December 31). Retrieved

March

13,

2021,

from

https://corporatefinanceinstitute.com/resources/knowledge/accounting/percentageof-completion-method/ Japan fines Ernst & YOUNG Affiliate $17.4 million over Toshiba audit. (2015, December

22).

Retrieved

March

13,

2021,

from

https://www.reuters.com/article/us-toshiba-accounting-ernstidUSKBN0U505S20151222 Soble, J. (2015, July 21). Scandal upends TOSHIBA'S Lauded Reputation. Retrieved March 14, 2021, from https://www.nytimes.com/2015/07/22/business/international/toshiba-chief-and-7others-resign-in-accounting-scandal.html Toshiba accounting scandal and lawsuits. (n.d.). Retrieved March 14, 2021, from https://www.ktmc.com/blog/toshiba-accounting-scandal-and-lawsuits https://www.academia.edu/28866923/Report_of_toshiba_fraud

Case Study on “Volkswagen Accounting Scandal” Course Name: Cost and Control Accounting Course Code: Costcon Section: CostA3

Submitted To Miss Janine Abu Professor

Submitted By Edrianne Nicole Macasadia

I. Summary For the past decades, one of the leading matter worldwide is conservation and sustainable environment. This involves all sort of pollution, for the automobile industry, emission is the utmost concern for environmental protection. On September 2015, it has come to light that the company, Volkswagen, has been unethical. Volkswagen is founded on the year 1937 from Germany and simply named as “The People’s Car”. Volkswagen is one of the most well-known automobile manufacturer worldwide. In the course of testing for emissions, Volkswagen cars are automatically programmed to be under the maximum Nitrogen Oxide (NOx) limit. In reality, the cars are said to have 40 times higher than allowed in the law. Despite all the accounting regulations from previous scandals, Volkswagen was still able to be caught in one of the biggest accounting scandals in the vehicle industry. II. The Problem and its Roots In the year 2015, it has been a shocking news to find out that Volkswagen equipped this so-called defeat devices in the engines during emission test to make it seem like their diesel vehicles release fewer pollution which in reality is above the maximum level. Later that year, Chairman Hans-Dieter Pötsch admitted the reason behind this cheating scandal. He revealed that a group of Volkswagen engineers has resorted to cheat on 2005 emission tests to comply with the tightest

emissions standard enforced by the United States Environmental Protection Agency (EPA). It became an obstacle for the engineers to meet the regulatory standards within the given time frame and budget. Subsequently, the engineers discovered a solution to face the emission standards but they still chose to continue with their fraudulent act that the executing the method. When the EPA tested this “defeat devices” it has been revealed that the emissions of the diesel vehicles are actually 40 times higher than the legal limit. Other significant reason behind this cheating scandal is the distinctive corporate culture present in the company. In Volkswagen, employees work in a highly centralized environment wherein they must meet the expectation and demand of the company irrespective of how employees perform it. The working environment in the company is known for preventing disagreement and discussion if the employees want to maintain their job. It is also revealed that employees rather not say anything about the rigging of defeat devices is the company’s bonus and rewarding system. The company is generous in giving rewards from the lowest to highest positions not only for work performance but also to not have a dissenting opinion. III. The Impact of the Scandal Before the scandal happened, Volkswagen is the world’s second biggest in the automotive industry next to Toyota Corporation. However, as a result of the cheating scandal in 2015 the company had its crisis. The company went under a huge amount of burden and their image was also tainted. This case is huge since VW caters around the world, they had to deal with regulations from different companies. These unethical standard became a threat to the health of the people since the diesel cars emit a toxic pollution. The nitrogen oxide from the cars is harmful, could cause disease and endanger lives of people. The scandal also resulted to a crucial impact on the sales of the cars and a significant drop in share

value. Since the public know the truth, the company gained bad reputation making customers switch to different brands. In situations like this accountants and auditors must be able to trace fraudulent activities. It is their job on being familiar with the natures and operations of the business. However, Volkswagen still found a way to go behind their auditors. This accounting scandal has caused the firm to face charges and settlement. IV. Recommendations The root of this scandal was the corporate culture present in Volkswagen. In order to prevent unethical issue like this, the working environment in VW must be changed. Employees play an important role in every business, they must not be pressured to perform work and meet the company’s goals regardless if it is an ethical work or not. It is also important in every company to have the democracy in sharing their opinions and ideas. No matter how tough the regulatory standards are employees must still comply with it morally. The strict standards of EPA has caused a great pressure not only to Volkswagen but also to other automobile manufacturers. The EPA should have guided the companies and imposed a more feasible standard to prevent fraudulent activities like this to happen in the future. After all, this standards are made for the sake of the safety of the people and to protect the environment. V. References Jacobs, D., & Kalbers, L. (2019, August 08). The Volkswagen diesel emissions scandal

and

accountability.

Retrieved

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15,

2021,

from

https://www.cpajournal.com/2019/07/22/9187/ Volkswagen is founded. (2009, November 13). Retrieved March 15, 2021, from https://www.history.com/this-day-in-history/volkswagen-is-founded

Jacobs, D., & Kalbers, L. (2019, August 08). The Volkswagen diesel emissions scandal

and

accountability.

Retrieved

March

15,

2021,

from

https://www.cpajournal.com/2019/07/22/9187/ https://www.researchgate.net/publication/323998958_Case_Study_The_Volkswage n_Emission_Scandal https://www.researchgate.net/publication/303797234_A_Case_Study_of_Volkswag en_Unethical_Practice_in_Diesel_Emission_Test...