Sunday, March 26, 2017

Toshiba Abuses Accounting Policy When Reporting Losses on Long-Term Projects (2015)

Toshiba headquarters in Tokyo, Japan.

Since it was founded in the late 1800’s, the Toshiba Corporation has been lauded for its significant role in the advancement and integration of technology in Japanese culture. Because of the accounting irregularities that surfaced in the Summer of 2015, however, the Japanese power-house now finds itself trying to rebuild its reputation.

In February of 2015, Japan’s Securities and Exchange Surveillance Commission suspected accounting irregularities at the Toshiba corporation and began a probe investigation (Nagata, 2015). They were to investigate Toshiba’s “profit recognition on large long-term projects in the areas of nuclear, hydroelectric, and wind-powered equipment; air traffic control, and other systems” (Verschoor, 2015). Specifically, the Securities and Exchange Surveillance Commission was to investigate Toshiba’s practice of the “percentage-of-completion” accounting principle (Koichi, Hideki, Taigi, & Kazuyasu, 2015, p. 13). 

When the Toshiba Corporation received the report order from the Securities and Exchange Surveillance Commission, it willingly conducted an internal investigation on the matter (Koichi, Hideki, Taigi, & Kazuyasu, 2015, p. 13). It was not until April 2015 that the firm realized the seriousness of the issue and announced its troubles to the public. During this time, the Toshiba Corporation determined that its profits were overstated—it was unknown by how much. After realizing the gravity of the accounting errors, Toshiba established a third-party investigation committee “led by a former top prosecutor and aided by outside lawyers and accountants” (Verschoor, 2015).

The findings of the report prepared by the Special Investigation Committee, released in July of 2015, were astonishing and revealed several wrongdoings of the Toshiba corporation. First, the report “cited Toshiba’s toxic ethical tone at the top as the major cause of the improper accounting practices” (Verschoor, 2015). Second, the report disclosed that Toshiba had inflated profits of at least $1.2 billion (Verschoor, 2015). Furthermore, the Special Investigation Committee determined that the internal control systems at Toshiba did not function correctly or sufficiently. Therefore, the committee cited various forms of internal controls to be the indirect cause of Toshiba’s accounting fraud. 

CEO Hisao Tanaka bows deeply in remorse during public apology. 
In light of the scandal, Toshiba’s chief executive officer, Hisao Tanaka, and vice chairman, Norio Sasaki, resigned in July of 2015 (Soble J. , 2015). Shortly after, Toshiba began exploring ways to prevent this situation from reoccurring. Toshiba’s immediate solution was to “put one of its other independent directors, Hiroyuki Itami, the former head of the commerce department at Hitotsubashi University, in charge of its audit committee” (Soble J. , 2015). Toshiba announced its long-term solution in December of 2015, when it said that would be cutting roughly 7,000 consumer electronic jobs in an effort to overhaul the company and focus on chips and nuclear energy (Reuters, 2015). Additionally, this accounting scandal had an adverse effect on the corporation’s stock price. Between April of 2015, when Toshiba announced its troubles to the public, and July of 2015, when the Special Investigation Committee submitted its report to Toshiba, share price tumbled more than 25 percent (Soble J. , 2015). As Toshiba began reporting their losses in the following months, share prices continued to decline.


A stakeholder is someone who is affected by the actions of a business. The stakeholders in Toshiba’s accounting scandal are: Toshiba stockholders, Toshiba executives, Japan’s Securities and Exchange Surveillance Commission, Toshiba employees in the consumer electronic department and their families, Toshiba’s accounting department, and Toshiba’s customers. Toshiba executives and accounting department employees have an interest in the case because they are directly responsible for the false reporting of project losses. Toshiba’s employees in the consumer electronic department and their families are affected by the case because roughly 7,000 employees from that department were fired so that Toshiba might recover from the scandal. Toshiba stockholders are interested in the case because Toshiba was forced to recognize the losses they failed to record, which caused stock prices to plummet. Toshiba customers are invested in this case because they will no longer be able to purchase consumer electronics from Toshiba. Finally, the Japan Securities and Exchange Surveillance Commission has an interest in this case because they are responsible for catching fraudulent reporting of financial statements.

Hiroyuki Itami was named interim audit director as a result of the scandal. 
Individualism is a broad ethical theory that states that the sole obligation of a business is to maximize stockholder wealth within the constraints of the law. First, Toshiba did not maximize stockholder wealth. Toshiba reported revenue numbers that were much higher than actual numbers. While that may have profited stockholders in the short-run, Toshiba did not profit stockholders in the long run because they were forced to report their losses, which drove stock prices down. Second, Toshiba did not act within the constraints of the law. Not only is it illegal for a corporation to report fake numbers, but it is also illegal for Toshiba is incorrectly use the percentage-of-completion accounting principle. For these reasons, an individualist would declare Toshiba’s actions unethical.

Utilitarianism is the belief that a business' actions should aim to maximize the happiness all conscious beings that are affected by the business action. Utilitarianism allows businesses to pursue the interests of their stakeholders even if every individual action does not directly profit the business. Utilitarians judge the ethicality of an action by weighing the overall happiness of all stakeholders involved.
A laptop is an example of a consumer electronic
Therefore, the first step is to measure the happiness of all the people affected by Toshiba's actions. Overall, Toshiba's stakeholders are unhappy. Specifically, the roughly 7,000 consumer electronic employees who lost their jobs because of this scandal, along with their families, are the unhappiest. Additionally, the customers who bought those consumer electronic products are also unhappy because they will no longer be able to buy Toshiba products. In the long run, Toshiba's stockholders are unhappy because the scandal caused stock price to drop 40 percent over eight months (Reuters, 2015). The Toshiba executives that resigned because of their involvement with the scandal are another example of unhappy stakeholders. Their criminal actions were exposed and they were forced to apologize to their stockholders and customers. Likewise, the employees in the accounting department are unhappy because their seven yearlong scheme was exposed and corrected. The only relatively happy stakeholder related to Toshiba's accounting scandal is Japan's Securities and Exchange Surveillance Commission because they successfully identified and reported Toshiba's accounting errors. Because, overall, the interests of the stakeholders were not met and therefore their happiness was not maximized, a Utilitarian would view Toshiba's actions as unethical.

The basic principles of Kantianism say to always act in ways that respect and honor individuals and their choices. Instead of lying, cheating, stealing, or performing other deceitful actions, businesses should use informed and rational consent from all parties. Kant believes that the only thing that is good in itself is good will. Kantians judge the ethicality of an action on two things: (1) rationality and (2) motivation.
For an action to be rational, it must align with the Formula of Humanity, which states that to act rationally means to “treat all people as ends and never only as means” (DesJardins, 2014, p. 38). This can be interpreted to mean that people “have their own ends and purposes and therefore should not be treated simply as a means to the end of others” (DesJardins, 2014, p. 38). When subjected to the Law of Humanity, a Kantian would view Toshiba’s actions as unethical because Toshiba, specifically upper management, treated their employees as a mean—something that is valuable as a way to get to something else. When told that certain projects had incurred losses, managers and senior management alike instructed employees to postpone the reporting of those losses (Koichi, Hideki, Taigi, & Kazuyasu, 2015).
Kantian principles state that for an action to be rightly motivated, it must come from moral law or duty. Kant believes that “[i]f we are motivated to do the right thing because it is the right thing, then we are performing actions that are not merely in accordance with morality, but are in fact moral” (Salazar Kantian Essay page 13). A Kantian would conclude that Toshiba’s actions are not moral because they stem from motivations of self-interest. Toshiba’s management concealed the losses on long-term projects to protect the reputation of the business they were working for. Additionally, Toshiba’s management had a personal interest in making sure that their salaries continued to be fulfilled. In conclusion, a Kantian would view Toshiba’s actions as unethical because they are irrational and stem from the wrong type of motivation. 

Virtue Theory
Virtue ethics is “a tradition within philosophical ethics that seeks a full and detailed description of those character traits, or virtues, that would constitute a good and full human life” (DesJardins, 2014, p. 41). A virtue is a characteristic that allows something to function properly. A vice is the opposite in that it is a negative characteristic that is likely to lead us to a life of unhappiness. The four main virtues in business are: courage, honesty, temperance, and justice. Toshiba possesses none of these virtues because it did not stand for the right ideas and actions, they lied to the public and stockholders, had unreasonable expectations of their employees, and unfair practices. For these reasons, Toshiba is neither virtuous nor ethical. 

Justified Ethics Evaluation
I view Toshiba's actions as highly unethical. Overall, I agree with the findings of the ethical theories used to analyze this case. Specifically, I am appalled by Toshiba's corporate governance, which did not allow employees to go against the wrongful, illegal intentions of their superiors. One thing I think the ethical theories fail to address, however, is the fact that Tohsiba willingly hired an independent investigation committee to investigate their accounting practices, which they knew were fraudulent. I admire Toshiba for their willingness to come forward with their internal issues, and I think it was an important step to restoring their reputation. Something else the ethical theories overlook is the position of the accounting department employees, who were being asked to choose between acting ethically and keeping their job. This is a position no employee should ever have to be in. For that reason, I do not fault the accounting department employees for the fraudulent activity they were forced to carry out.


DesJardins, J. (2014). An Introduction to Business Ethics (Fifth ed.). New York: McGraw Hill. 
Koichi, U., Hideki, M., Taigi, I., & Kazuyasu, Y. (2015). Investigation Report: Summary Version. Special Investigation Committee. Tokyo: Toshiba Corporation. 
Nagata, K. (2015, September 18). Pressure to show a profit led to Toshiba's accounting scandal. Retrieved from The Japan Times.
Reuters. (2015, December 21). Toshiba Plans to Fire 7,000 Employees in wake of $1.3 billion Accounting Scandal. Retrieved from Venturebeat:
Soble, J. (2015, July 21). Panel Finds Accounting Irregularities at Toshiba. Retrieved from The New York Times.
Soble, J. (2015, July 22). Scandal Upends Toshiba's Lauded Reputation. Retrieved from The New York Times.
Verschoor, C. C. (2015). Toshiba's Toxic Culture: In Japan where it's disrespectful to disobey orders, a poor tone at the top can be detrimental to a company. Strategic Finance, 18+.

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