Toshiba Accounting Scandal

Toshiba’s Accounting Scandal: Business Ethics and the Media
Along with Sony, the Toshiba Corporation is one of the most legendary and famous Japanese technology companies in the world. According to the “History of Innovation” section of its official corporate website, Toshiba boasts a long, proud 135-year technological history. In the past thirty years, the company has given birth to the first laptop computer for the average consumer, the first wireless laptop, and the world’s thinnest widescreen laptop (“History of Innovation,” 2017). It has also boasted groundbreaking innovations in DVDs, televisions, and other consumer products. Yet while Toshiba has been trusted for many years to produce high-quality products, it has also boasted a highly insular culture of loyalty that has fostered a breeding ground of corruption (“History of Innovation,” 2017). Toshiba was recently beset by a serious accounting scandal that tarnished the reputation of the corporate giant. In the wake of the scandal, the company’s internal culture, the external culture of Japan, and the ethical conduct of both employees and its CEO were blamed as the cause.
Toshiba’s accounting scandal is noteworthy for a number of critical reasons. “In other countries where you have corporate governance missteps and failure, many of them are motivated by personal greed, self-interest of some kind,” noted Nicholas Benes, of the Japanese Board Director Training Institute (“Toshiba Crisis,” 2017, par.5). In this particular instance, Toshiba’s accounting irregularities “primarily stem from company employees understating costs on long-term projects” and improperly valuing inventory, which ultimately resulted in an overstatement of the company’s profits (Du, 2017, par.1). According to some analysts, the lack of personal self-interest on the part of the employees responsible is what gives the scandal such noteworthy features in comparison to other corporate scandals.
Article Comparison
While accounting scandals have manifested around the world, most of the news media framed Toshiba’s scandal as an inherently Japanese phenomenon. Rather than manipulating the books to advance personal self-interest, according to the French news agency Agence France-Presse, the employees were more focused upon preserving the reputation of the company above all else. “This allegiance is closely linked to post-war Japan's meteoric rise from shattered nation to the world's number two economy. Employees did not ask questions and devoted themselves to the company's success in return for lifetime employment” (“Toshiba Crisis,” 2017, par. 8-9). Agence France-Presse’s article on the crisis noted that many Japanese employees are hired directly from university in Japan and have been working to get jobs in the corporate hierarchy for their entire lives.
The emphasis on finding a good job in the corporate hierarchy in Japan creates a “yes man” mentality and encourages a desire to please an employee’s superiors, versus act according to objective ethical rules. Japanese corporate culture places an emphasis on saving face versus honesty and reporting facts. The article also noted that the Japanese government has not always been particularly vigilant in policing corporations, due to the close relationship of many government officials with members of powerful corporations in Japan. “Japanese firms are peppered with former bureaucrats given plum jobs in the industries that they once oversaw, despite many having few relevant skills or the incentive to question management” (Toshiba Crisis,” 2017, par. 20). In short, if government officials look the other way, they may be incentivized with the promise of finding a new, more lucrative job in the private sector after they retire from public service. This further fosters a corporate culture of corruption, since there is an assumption that regulators, even if alerted to fraud, will not act upon their knowledge.
Although Japan’s corporate work ethic and many of its management systems (Just-In-Time inventory practices and Total Quality Management both have their origins in Japan) have been much praised in the United States, Europe has been more critical of Japanese workaholic attitudes. The fact that the article was printed by a French news agency may be significant. Although the scandal is relatively recent and the financial manipulation dates back to the world economic crisis of 2008, the article also places great emphasis on the Asian-specific financial crisis of the 1990s as the origin of the crisis. These had a particularly devastating effect on Japan, ultimately resulting in it falling behind China in terms of its growth rate (“Toshiba Crisis,” 2017). Not only was this economically harmful but it was personally humiliating for many Japanese companies whose corporate culture had been praised as unassailable in previous eras.
A Wall Street Journal article on the scandal, in contrast, although it agreed that Japanese business culture was unique in the ways in which it pressured subordinates to comply with company dictates versus the law, was slightly more inclined to place blame on individual corporate leadership versus Japan’s longstanding history. The Wall Street Journal noted that after the 2008 global recession, the company’s CEO was under increasing pressure from shareholders to stay solvent. As a result, employees were incentivized to meet targets at the end of each quarter and fiscal year, “which may have pushed certain employees to postpone losses or push forward sales on accounting” (Du, 2015, par. 2).
In other words, the corporate structure itself may have fed the need to hide losses and make the company seem more profitable than it was. There was a system in place to encourage employees to act unethically that personally rewarded them, not simply the organization itself. “Bonus payments and executive share schemes are often based on short-term business metrics, which can be counter to long-term success” (Laverty & McKee, 2016, par. 4). This is similar to the criticisms leveled at many Wall Street firms during the 2008 crisis, namely that a heavy emphasis on bonuses encouraged employees to overlook normative ethical practices, given that their reputation at the firm as well as their salaries were contingent upon demonstrable profits.
Even the accounting-specific press was shocked by the Toshiba revelation and heaped scorn upon the company. In the official online publication of the CFA Institute, Singh (2015) attributed the scandal to “a massive failure in corporate culture, candor, and governance. And it came as a surprise to many, as Toshiba had been lauded not that long ago for its ethical culture and corporate governance practices” (par.2). Unlike some previous articles, the CFA article noted that the failure of Toshiba’s governance was far from inevitable, although it might have seemed to be so on paper. In theory and on paper, its structure appeared to be sound but in actual practice, this was not the case. Similar to the other articles, a mixture of corporate culture and a CEO’s willingness to bend the rules is cited as the cause of Toshiba’s woes. No matter how stringent policies may be in words, if the company is unwilling to enforce them and internal and external regulatory bodies fail to immediately enforce sanctions, profits above adherence to such guidelines are inevitably emphasized.
Business Ethics and Theories
One debate specific to the profession of accounting is the question of rules versus principles. Rules-based accounting stresses the need for hard and fast guidelines to dictate how actors should behave. “Many accountants favor the prospect of using rules-based standards, because in the absence of rules they could be brought to court if their judgments of the financial statements were incorrect” (Sargeant, 2017, par.2). However, as noted by Singh (2015), within the Toshiba Corporation’s official governing policies, there were ample rules governing sound financial practices. The trouble was a failure to adhere to these rules in practice and to create statements that presented an inaccurate portrait of the company to shareholders. In fact, “precise requirements can sometimes compel managers to manipulate the statements to fit what is compulsory” and even give managers the tools to create false profits that technically conform to the rules (Sargeant, 2017, par.2). In short, the problem with a system of accounting ethics solely based upon rules is that unethical accountants often keep ahead of the rules and find ways to use them to their advantage.
In contrast, advocates of principles-based economic systems stress that the ultimate aim of accounting is to honor the principle of the discipline, which means that transparency is essential. “A simple set of key objectives are set out to ensure good reporting,” with the ultimate aim that an accurate portrait of the company’s financial situation is depicted (Sargeant, 2017, par.3). In other words, regardless of whether the Toshiba company followed current rules and guidelines, its actions were wrong because they mislead shareholders and created an inaccurate portrait of the company’s profits.
Changing an ethical culture is a long and arduous endeavor, particularly when the national ethical culture does not place a high priority on accuracy, as is allegedly the case in Japan. In the wake of the scandal, Toshiba fired half of its board of directors and a new law was passed that all companies must have at least two independent directors on every governing board, to foster greater independent oversight of Japanese corporate actions (Du 2015). But this alone is unlikely to instate a seismic change in corporate governance in Japan. Hiring practices, in which there is relatively little job mobility, creates an entrenched mindset early on in an employee’s career, and a culture where there is little tolerance of dissent coupled with a willingness to reward compliance, is unlikely to create a new ethical culture any time soon.
But it is essential for Toshiba to remedy the breach of trust it has created. Particularly since the company was previously respected within the international financial community at large, mere reassurances that it will attempt to adhere to its previous guidelines are unlikely to allay fears that it will abandon its old ways. Ethical changes must take place from the inside out, beginning with how employees perceive their duties in relation to the company. If employees see their ultimate ethical obligation as obeying managers, versus honoring the long-term interests of shareholders, obeying the law, and upholding the principles of their profession, similar ethical crises are likely to result in the long-term.
Similarly, if managers believe that demonstrating the firm’s profitability is paramount, versus honoring ethical guidelines, they are equally unlikely to change. Yet the Toshiba scandal has created suspicion about the entire system of Japanese corporate governance and Japanese corporate culture as a whole not simply in Japan but in the world community. If employees and managers alike continue to confirm these suspicions, ultimately the company’s interests will not be served.
Conclusion
The degree to which managers, individuals, regulators, or a corporate culture may be blamed in the scandal continues to be debated. But what is clear is that all must experience a shift in perspective to prevent such scandals from occurring again. While a lack of regulation may have fostered the notion that financial irregularities would be overlooked, the willingness of employees to act in unethical ways and managerial encouragement and even incentivizing of such behavior are also to blame.



References
History of innovation. (2017). Toshiba. Retrieved from:
http://us.toshiba.com/company/history-of-innovation/
McLaverty, C. & McKee, (2016). What you can do to improve ethics at your company. Harvard
Business Review. Retrieved from: https://hbr.org/2016/12/what-you-can-do-to-improve- ethics-at-your-company
Sargeant, N. (2017). What is the difference between principles-based and rules-based
accounting? Investopedia. Retrieved from: http://www.investopedia.com/ask/answers/06/rulesandpriciplesbasedaccounting.asp
Singh, M. (2015). Toshiba accounting scandal: A corporate culture problem. CFA Institute.
Retrieved from: https://blogs.cfainstitute.org/marketintegrity/2015/10/30/toshiba- accounting-scandal-a- corporate-culture-problem/
Toshiba crisis shines on Japan’s corporate culture. (2017). Agence France-Presse. Retrieved
from: https://www.rappler.com/business/164144-toshiba-crisis-shines-light-japan- corporate-culture