Corporate culture was implicit in the scandal at Toshiba, which thus has implications for other Japanese firms sharing a similar organizational character. So what is at the heart of the issue?
Toshiba had been actively moving to improve its corporate governance system, but the measures it adopted lacked teeth and were more for show than effect. Governance in any shape or form is ultimately ineffective if top management is not committed to implementing it. And if directors and employees are subservient to those above them, nothing can check corporate malfeasance. What is most apparent is the existence of a set of de facto rules placing the will of corporate management ahead of regular accounting standards.
Toshiba Accounting Scandal Highlights Issues in Corporate Governance | alifomte.tk
Under the normal standards, for example, if a long-term power generation project comes to face future red ink due to increased costs and other factors, it is established practice under the accrual-based accounting method to record a charge for the estimated shortfall in the results for the current fiscal period. The affected business unit is supposed to book the estimated red ink as a reserve against future losses.
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But one of the de facto rules at Toshiba requires advance approval for such write-offs from corporate management as well as from the head of the business unit. Faced with the difficult task of meeting such challenges, employees bent rules by postponing losses to subsequent accounting periods. In addition, it inflated profits by boosting prices of products sold to overseas affiliates.
The scandal has forced Toshiba, which employs more than , people worldwide, to embark on a round of restructuring that includes selling its shares in affiliates. The firm has said it will sell its image sensor business to Sony and is expected to announce an overhaul of its home appliance, TV and computer units later this month. In late , Olympus was found to have covered up 1. Topics Toshiba.
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Japan Asia Pacific Technology sector news. Reuse this content. The resulting sense of camaraderie makes it difficult for an employee to correct or question an inappropriate accounting treatment authorized by a colleague. Such a setting compromises the internal system of accounting checks and balances.
Even in the face of unforeseen setbacks in the Japanese economy, many CEOs of major Japanese corporations were sometimes unyielding in their push to meet income targets. And compensation of senior managers was sometimes based significantly on bonuses, which were highly dependent on meeting or exceeding targets. All of these factors can combine to create situations where fraud is more likely to occur. One example of this is the fraud at Olympus, which came to light in Because it relied heavily on exports, Olympus was one of the companies facing pressure from the rising value of the yen in the mids.
Olympus management decided to make up the earnings shortfall by engaging in speculative investments, which appeared promising given the surge in Japanese asset prices. When the asset bubble burst in the s, however, Olympus incurred significant losses on its investment portfolio.
Rather than liquidate its investment portfolio and report the losses, Olympus reported the investments at cost while doubling down and investing in even riskier financial instruments. This high-risk strategy failed spectacularly, and by the amount of unrealized losses had grown to tens of billions of yen.
But a new standard was issued in that no longer allowed historical cost accounting for investments. Instead, it harmonized Japanese accounting with U.
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GAAP by classifying investment securities into three categories and requiring mark-to-market accounting. The standard became effective on or after April 1, Olympus would be required to apply the new standards for the fiscal year ending March 31, Regardless of how Olympus implemented the new standard, the unrealized losses on its investment portfolio would be apparent to investors. But this option was unacceptable to management. Funds required to purchase the securities from Olympus were diverted to these shell companies through a chain of intermediaries based in the Cayman Islands and British Virgin Islands and also through loans from legitimate financial institutions for which Olympus served as a guarantor and deposited large sums of money as collateral.
At the end of the sequence of transactions, Olympus had effectively swapped toxic investments for high-grade Japanese government bonds, held as collateral at the banks, and recorded no loss. A postmortem investigation revealed that several senior officers at Olympus, including the CEO, president, chairman of the board, head of finance, and executive vice president, were all aware of these funds and helped create them.
The scheme unraveled about 10 years later when the shell companies had to repay the loans to the financial institutions. Olympus had to devise a way to transfer excess funds to the shell companies, enabling them to repay the loans. In a scathing letter, he outlined his concerns to the chairman of the board and executive vice president. Three days later he was unceremoniously fired by the board of directors, only six months after having been promoted to the position of CEO and president of Olympus. Another substantial fraud case that shocked the country occurred at Toshiba.
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It primarily involved transactions using the percentage-of-completion method and an unusual transaction known as price masking. Though orchestrated by many mid-level managers, senior management members were cognizant of the transactions and implicitly approved them. Toshiba was among a handful of companies worldwide that had the technical expertise to build and install nuclear power plants.
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It secured multiyear, multibillion-dollar contracts to build power plants all over the world. Revenue from these long-term contracts was recognized using the percentage-of-completion method. A key requirement for using this method is the ability to reliably estimate future costs and to disclose anticipated losses whenever estimated total costs exceed the contract revenue.
Hence, companies undertaking long-term contracts need to ensure proper policies and procedures that require periodic and objective assessments of these estimates. In some cases, the contract losses were evident at the inception of the contract. A provision for contract losses was recorded for the first time in the third quarter of FY
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