What problems (knowledge, monitoring or incentives) led to the Toshiba's accounting scandal ? What would you change to avoid these problems in the future

ILLUSTRATION 5.2 A load of tosh? Toshiba's accounting scandal A determination to meet profit targets results in the leading Japanese company misstating its accounts. Toshiba is one of the largest corporations in Japan, 2011 tsunami and the Fukushima nuclear accident with interests in information technology, power sys- had prompted further large-scale misstatements, Sen- tems, electronic components, consumer electronics, ior management was determined that the company's medical and office equipment, lighting and logistics. various businesses would still meet challenging per- In 2015, its shares were held roughly equally by for- formance targets. An independent panel investigating sign investors, individual Japanese investors and Jap- the accounting scandal explained: 'Within Toshiba, anese financial institutions. The largest investor, with there was a corporate culture in which one could not just under five per cent of the shares, was the Master go against the wishes of superiors. . . . Therefore, Trust Bank of Japan, which is a major asset manage- when top management presented "challenges", divi- ment bank principally owned by the giant Mitsubi- sion presidents, line managers and employees below shi Trust and Banking Corporation and Nippon Life them continually carried out inappropriate accounting Insurance. practices to meet targets in line with the wishes of Toshiba was apparently a model of corporate govern- their superiors." ance. It was one of the earliest adopters of Japanese As it became clear that the misstatements had been corporate governance reforms. In 2001, it had intro- widely known at the top for several years, September duced three external directors, with the formal author- 2015 saw sweeping management dismissals. The com- ity to name top executives and an auditing committee pany's CEO, Hsiao Tanaka, and Makoto Kubo, the audit to monitor company management. In 2013, Toshiba's head, both resigned. Two further senior board members corporate governance was ranked ninth out of 120 resigned also, one a former CEO and the other a former publicly-quoted Japanese companies in a list com- company president. The company's share price, having piled by the Japanese Corporate Governance Network, fallen by 20 per cent on the news of the accounting a non-profit organisation promoting better governance. misstatements, recovered some of its losses. As the One of Japan's biggest law firms, Mori Hamada & Mat- accounting errors were corrected, Toshiba declared at sumoto, even published a case study of Toshiba as an the end of 2015 losses of $4.5bn and cuts to 6,800 exemplar of good corporate governance practices. jobs. Small Japanese investors declared that they However, in early 2015, Seiya Shimaoka, an internal would sue the guilty senior managers for recovery of auditor in Toshiba, began to ask the head of Toshiba's their losses. Regulators fined the Japanese branch auditing committee, Makoto Kubo, to examine the of accounting firm Ernst & Young, Toshiba's auditor, accounts of Toshiba's laptop business. Kubo refused to $17m for its failures. investigate further, warning that doing so would make Sources: BBC News, 21 July 2015 and 21 December 2015, Financial the company miss its deadline for reporting earnings. Times, 21 July 2015. It emerged soon after that the laptop business was sig- nificantly over-stating its profits. Indeed, in a company where the only significantly profitable business was Question : the semiconductor division, overstatements were rife and longstanding. The total misreported was $1.2bn (E720m, 6900m). It transpired that the head of the audit committee What problems (knowledge, monitoring or had known about the exaggerated profits since 2008, incentives) led to the scandal? What would when the company began to come under pressure after you change to avoid these problems in the the global financial crisis of that period. The disrup future? tion to Toshiba's nuclear power business following the