Toshiba has a prestigious history spanning more than 140 years; it is famous both at home and abroad as an honorable member of the corporate community and a founding member of Japan Incorporated. Its only recent scandal occurred during the Cold War in 1987 when its subsidiary Tochibai Machine sold computer numerical control milling machines to the Soviet Union. This was a violation of rules established under the authority of the Coordinating Committee for Multilateral Export Controls, These rules were an attempt to stop the export of technologies with military applications. These milling machines were used to produce ultra-quiet submarine propellers and significantly increased the chance of a devastating nuclear war. The scandal involved the Norwegian company Kongsberg Defense and Aerospace (Kongsberg Vaapenfabrikk) and also seriously damaged the Japan-U.S. relationship. It ultimately resulted in the arrest and prosecution of two senior Toshiba executives and imposition of economic sanctions by both countries (Seeman, 1987).

In early April of 2014, Japan's business community and the mass of ordinary people were astounded to hear news of serious accounting irregularities at Toshiba Corporation. The news likewise surprised the entire globe, The Financial Times, reported that, Tor years, Toshiba, one of Japan's best known electronics brands, had been a poster child of the country's efforts to police corporate behavior." The newspaper continued to say that the irregularities left "Japan Inc. completely shaken" and created serious "doubts over the nation's corporate procedures" to manage internal controls in Japanese companies (Inagaki, 2015a). The accounting initially was reported to involve as much as US$l.2 billion of earnings manipulation through widow-dressing; it later ballooned to US$2 billion covering a period of seven years from 2008 to 2014. Unlike the Cold War scandal, this time Toshiba announced that it would conduct an all-round investigation of the accounting problem and find its underlying causes. The company promised to take all necessary measures to bring to light all aspects of the irregularities, provide redress to all affected parties, rejuvenate its management structure and establish good corporate governance.

Toshiba's operating profit was inflated by about US$4.l billion over the three fiscal years from March 2012 to February 2015. A large part of the problem stemmed from improper use of an accounting method called "percentage-of-completion", which is commonly used in long-term projects. Under this method, sales and expenses are reported in an accounting period based on the progress toward completion by the project in the period (South Coast Today, 2015). More specifically under this non-cash flow method, the accounting treatment for contract work in a fiscal year is estimated and the income and cost of the contract for the current accounting period is reported on that basis (Independent Investigation Committee or IIC/Toshiba, 2015). Toshiba claimed that the problem was caused by work in electricity generation, railways and related projects; these groups had focused too much on attaining their profit targets by improperly lowering expenses in the near-term periods. Managers did this in the knowledge that it violated the principles of the percentage-of-completion approach. The initial reports of abuse of percentage-of completion accounting were confirmed by the Third Party Panel (IIC), but the number of devious projects was expanded to include fifteen projects.

Specific examples of accounting irregularities that manipulated profits were the logging of more than billion in operating profits in 2008 after the bankruptcy of the New York investment bank Lehman Brothers, overstatement of profits for the home electrical appliance division, intentionally misleading reports in the hope of winning new project orders after the Great East Japan Earthquake in 2011, overstatement of profits for electronic toll collection systems and overseas subway projects in 2011, overstatement of profits by more than *100 billion in the computer chip, PC and TV businesses in 2012, and overstatement of profits for smart meter and overseas electrical substation projects in 2013. Most of these fraudulent accounting events were a result of the chief executive officer's (CEO) refusal to recognize the loss. In some cases, the division managers claimed not to have knowledge of basic accounting principles, though in other cases management admitted that they intended to postpone the losses. The common element in all these cases was that the existing CEO demanded in the strongest terms that division heads meet profit targets (Japan News, 2015a).

(Accounting Irregularities at Toshiba: An Inquiry into the Nature and

Causes of the Problem and Its Impact on Corporate Governance in Japan

Khondaker Mizanur Rahman and Bremer Marc

Global Advanced Research Journal of Ilanagement and Business Studies rot. 5(4) pp. 088-101, April 2016)

Required: -

1. How did Toshiba's accounting scandal come to light? Critically discuss the responsibility for financial reporting in relation to Toshiba's scandal. (5 marks)
2. Where did Toshiba went wrong? Critically explain how accounting improprieties damaged the brand image and worsened the company's performance. (5 marks)
3. Discuss the role of auditors and board composition of Toshiba Company before its crises. What did the investigation revealed? (5 marks)