Identify major issues that should have triggered additional scrutiny by Ernst and Young ShinNihon before issuing clean audit opinions on Toshibas financials during the period (2008-2014) in which accounting manipulations took place?

Carryovers Grow in Scope and Complexity

The use of carryovers (C/Os) in the Visual Products Business was common and widely known. It was understood that the carryovers needed to be continuously implemented in order to improve the profit and loss for the following periods as the C/O balance (otherwise) leads to deterioration in profit and loss in the following or subsequent periods. These concerns prompted the Visual Products Business to prepare and maintain a C/O monitoring chart (The Report, page 212).

In April 2011, the Visual Products Business (TV business) and the Digital Products & Network Company (PC business) were combined in a reorganizational move that created the Digital Products and Services (DS) Company. As a result, it became necessary to manage the carryover balances by type of business and by region. For instance, on April 28, 2011, Masaaki Oosumi (Company President, DS Company) mentioned to the General Manager of the Finance & Accounting Division: "As I am going to visit Toshiba Television Central Europe I will check the details of the C/Os for Europe. I will verify how much of the 18.0 billion is the actual amount of Debt. We should call a meeting to authorize the C/Os. What are the details of the 10.0 billion for Asia?" In response, General Manager of the Finance & Accounting Division reported a breakdown of the Debt (i.e., the carryover balances) for Asia. After July 2011, the DS Company began reporting the carryover balances in the Visual Products Business and changes therein, at the quarterly reporting meetings as well as the CEO Monthly Meetings.

Due to the increasing complexity of managing carryover balances, the DS Company began to use an informal system in which it started reporting to its management the performance figures after implementing inappropriate carryovers (publicly disclosed amounts) as well as the amounts after removing the profit improvement from implementing carryovers (attainable amounts) (The Report, page 212).

In FY 2012, the DS Company managers discussed and determined the anticipated amounts for sales and profit and loss, etc. to be submitted to the CEO Monthly Meetings. At these meetings, the initial proposal of inappropriate C/Os that had been discussed and formulated by the Regional Department in consultation with the overseas affiliated companies, and the execution program for each item of the inappropriate C/Os was decided. These execution programs were reported to the CP at the monthly meetings of the Visual Product Companyand inappropriate C/Os were executed with the consent of the CP (The Report, pages 211-212).

Finance and Accounting Division, Internal Auditors, and External Auditors

Toshibas Corporate Finance and Accounting Division gathered the actual and expected performance numbers from the Visual Products business. It knew in advance the amounts that the Visual Products Company planned to submit to the CEO Monthly Meetings, was aware of the inappropriate carryovers and advised the Visual Products business about how to manage them. For example, in December 2012, the Corporate Finance & Accounting Division contacted the General Manager of the DS Company to (a) make sure that a repayment (i.e. reduction) of carryover of approximately 5.0 billion was made; and (b) indicate that it was anxious about the situation because the performance of the DS Company would be worse by approximately the same amount (The Report, page 221).

The personnel at the Visual Products Business kept the carryover monitoring charts and the existence of disclosed versus attainable amounts, with the latter hidden from Toshibas external auditors, Ernst & Young ShinNihon, as well as from Toshibas Corporate Audit Division and its Audit Committee. When some staff members of the Corporate Audit Division became aware of the carryover practices, personnel from the Visual Products Company devised creative explanations to dispel suspicion, such as they were technical adjustments due to gaps between reporting periods or the amounts were immaterial (The Report, page 221).

The Report also noted that Makoto Kubo, chairman of the Audit Committee, was Toshibas CFO from June 2011 to June 2014. He likely had a detailed knowledge of the carryovers existing at the Visual Products Company. Kubo, however, did not indicate inappropriate carryovers as an issue after becoming chairman of the Audit Committee in June 2014. This happened partly because it was substantially a self-audit, whereby Kubo as the CFO had tacitly permitted the inappropriate carryovers and thereafter audited the carryovers in his role as the Audit Committee chairman (The Report, page 222).

Unwinding the Carryovers

In January 2014, Toshibas corporate administration began to instruct the DS Company that it should try to refrain from increasing the carryover balances. However, it also exerted pressure on the DS Company to improve operating profits. This prevented the DS Company from immediately eliminating the carryover balances. For instance, the business improvement plan for the Visual Products Business in Europe for Q1 of FY 2014 mentioned that it will discuss with Overseas Affiliated Companies and discover new C/O items and all the existing carryovers were carried out (The Report, page 215).

In April 2014, TLSC [Toshiba Lifestyle Company] was formed to manage the Visual Products business. TLSC's internal report in June 2014 mentioned the business improvement plan for the Visual Products Business in North America. According to the plan, improvement items were classified into (a) attainable improvements and (b) carryovers. Each item of carryover was then ranked into either Rank B: Possible to eliminate, but requires careful deliberation with Overseas Affiliated Companies or Rank C: High risk of not clearing the audit; requires deliberation with Overseas Affiliated Companies and TLSC Finance & Accounting Division.

By the end of FY 2014, TLSC decided to eliminate all carryovers. Going forward, carryovers would be difficult to execute since Toshiba was planning a withdrawal from its overseas Visual Products Business. The reduced size of its business would make it difficult to use carryovers to provide a significant boost to profits. As a result, the carryover balances became zero at the end of FY 2014