Toshiba PDF

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ACCG100 Case study - toshiba improper accounting in society...

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The Toshiba Corporation is an electronic products and systems manufacturer with over 140,000 employees and is based in Japan with the company headquarters in Tokyo. The name Toshiba comes from the original name from its incorporation in 1939, the “Tokyo Shibaura Electric Company, Ltd”, a merger of “Tokyo” and “Shibaura” (The Editors of Encyclopaedia Britannica, 2019). It currently employs over 125,000 employees and had net sales of $49.7 billion AUD in the last financial year (Toshiba Corporation, 2019). The ethical issue that arose within the Toshiba Corporation was involvement in a massive accounting scandal from 2008-2014, involving 2 former CEOs of the company, deceiving investors and customers by overstating profits “by at least 151.8 billion yen” (over $2 billion AUD) (Du, 2015).

According to a report by an independent investigative panel, improper accounting had taken place over the period after employees were placed under immense pressure from a trio of successive CEOs, Atsutoshi Nishida, Norio Sasaki and Hisao Tanaka (Carpenter, 2015). The improper accounting began in 2008 under Nishida in the aftermath of the Global Financial Crisis, himself under pressure after seeing the GFC cut deeply into the corporations profits as a globally connected business reliant on international trade. As such, he issued so called “Challenges”, mostly in the form of profit targets, to various business units in the company (Carpenter, 2015). These often came at the end of financial quarters or years where there was no time to possibly legitimately reach these targets. As the report states, this lead to future profits being recorded early, pushing losses and back charges further and further and other such techniques. An article in Investopedia states that; “Although the techniques varied, the investigative panel identified a single set of direct and indirect causes to explain how the inappropriate practices took hold across the conglomerate” (Carpenter, 2015).

Nishida’s successor, CEO Norio Sasaki, allowed the accounting inconsistencies to “continue unabated [sic]” (Carpenter, 2015). Investigators speculated that this was because Sasaki, who championed Toshiba’s takeover of US nuclear plant maker Westinghouse came under pressure when he estimated that Westinghouse would build 39 reactors worldwide and thus paid more than twice the price Toshiba initially sought for the company (Sugimoto, 2018). By comparison, Westinghouse has just 8 plant orders as of 2018. This projection was viewed as far too optimistic by analysts and the Fukushima disaster only served to compound the

pressure placed on Sasaki. After being pushed aside to Vice President in 2013, Sasaki was replaced by Hisao Tanaka, a CEO who would later admit to having also known about the accounting practices employed by the corporation under his predecessors (Sugimoto, 2018). Tanaka would go on to resign a day after the report’s release.

The major stakeholders impacted by Toshiba’s unethical accounting practices are investors, shareholders, customers and employees. In overstating profits, Toshiba willingly lied to stakeholders by creating an image of a company in far greater financial stead than it actually was. Responsible accounting is particularly important for large companies of this sort, as the corporate data that the company makes public is the main source of information for investors and shareholders, particularly when making investment decisions. By inflating profits over such an extended period of time, Toshiba gave investors much higher performance expectations than was actually occurring, depriving them of credible information on which to base their investment decisions with the company. The revelations of this accounting coupled with the record $1 billion AUD fine imposed by Japanese regulators sent the share price of Toshiba tumbling, directly proportional with the loss in profit, which also meant that shareholders were made significantly worse off as a direct result of the dodgy accounting practices not only in terms of capital but also in terms of dividend payouts (Fukase, 2015).

The decisions made by Toshiba employees at almost every level of corporate governance, from the CEOs at the top of the management structure to the business unit presidents tasked with impossible profit goals to the accountants themselves responsible for the misrepresentation of profits was completely unethical and a complete failure of internal corporate governance systems. While in the short term Toshiba Corporation was positively impacted by this issue, as on paper it was more impressive to potential investors and shareholders than it otherwise would have been, in the long term the ethical decisions made within the corporation have proved to have been detrimental to the company’s public image and reputation with stakeholders and the business community. The financial impact of this decision is also clearly visible in the revised profits after the scandal broke, the record fine imposed and the falling share price, the latter of which shown in Figure 1 below.

Toshiba’s unethical conduct had extensive repercussions on the company. The negative effects on shareholders and the resultant reduction in share prices was directly proportional to less profit for the company. Shareholders were also involved in multiple lawsuits against Toshiba. As a result, Toshiba had to pay for costs involved in the lawsuits and over $60 million in fines (Reuters 2016), resulting in heavy losses for the company and immense negative publicity. As many consumers lost confidence in Toshiba, their sales rates decreased, resulting in losses of revenue. The sudden resignation of CEO Hisao Tanaka in relation to the scandal forced the business put effort and expenditure into dealing with sudden changes in leadership. This used time and resources from Toshiba which could be spent elsewhere. Multiple negative implications of Toshiba’s behaviour led them to downsize and in turn, reduce revenue. Toshiba’s unethical conduct and violation of ethical principles caused various negative consequences to the business, directly and through stakeholders. Toshiba was subject to heavy losses in revenue and negative publicity. The composure of this assignment has prompted a development and change in my original view of business ethics. I originally viewed ethical behaviour as a moral obligation with little benefits for the business. In addition, it was my understanding that behaving ethically would consume time and expenditure, resulting in negative financial impacts on the business.

Therefore, I believed that businesses engaging in ethical behaviour did so because of moral influences, rather than profitable ones. Through analysing this case and the consequences of Toshiba’s unethical conduct, I learnt that ethical conduct has significant direct effects on a business and has significant impacts on the stakeholders which also heavily affect the company. Toshiba overstated their profits, resulting in a loss of consumer positioning, reduction in share prices and lawsuits against it and thus, direct loss of sales and profits. I also learnt that ethical behaviour is important because of its considerable impacts on stakeholders of the business. The effects of false financial security on shareholders, downsizing on suppliers, and loss of jobs on employees are considerable negative impacts on stakeholders. By learning of the consequences faced by Toshiba and their stakeholders as a result of Toshiba’s unethical behaviour, I understood the importance of behaving ethically and the extensive repercussions that can result from a disregard to it. In conclusion, ethical conduct in a business is both a moral obligation and a significant measure for the benefit and functioning of the company and its stakeholders. Ethical behaviour has extensive impacts on business and its stakeholders.

References Carpenter, JW, 2015, Toshiba’s Accounting Scandal-How It Happened, Investopedia, accessed 13 September, .

CPA Australia, 2014, AN OVERVIEW OF APES 110 CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS, CPA Australia, accessed 15 September, .

Du, L, 2015, 5 Things To Know About Toshiba’s Accounting Scandal, The Wall Street Journal, accessed 11 September 2019.

Reuters, 2016, Foreign Investors Sue Toshiba over Accounting Scandal, Fortune, accessed 13 September, .

The Editors of Encyclopaedia Britannica, 2019, Toshiba Corporation, Encyclopedia Britannica, accessed 13 September, 2019.

https://www.toshiba.co.jp/worldwide/about/corp_data.html

https://asia.nikkei.com/Spotlight/Toshiba-in-turmoil/How-internal-power-struggles-putToshiba-on-a-dangerous-path

https://www.wsj.com/articles/toshiba-accounting-scandal-draws-record-fine-from-regulators1449472485

Writer’s note: The report written by the independent investigative panel is in Japanese and thus I can only reference media sources reporting on the report, who incidentally do not mention the panel’s name. Apologies for any confusion or inconvenience caused....